Current Economy

[rukawa]

You are right, the timing is impossible to predict or forecast. Think Kyle Bass.

The description was only to convey that this complex financial structure is based on trust.

The Imperial Palace will not disappear overnight but confidence can vanish.

Some people thought the Berlin Wall would never fall.

The model did not consider that as a viable option.

I may be wrong but we clearly are in uncharted territory.

 

I think rb is right. If you look at all hyperinflations they basically end up being the result of massive supply disruptions combined with political chaos and large foreign debts. Japan is the exact opposite of this. Zero political chaos, no supply disruptions and debt is both denominated in yen and held by japanese citizens.

[Guest Cameron]

since the topic has shifted to hyperinflation, here is a nice list of the last 56-57 hyperinflation's in modern history for those interested.

 

http://sites.krieger.jhu.edu/iae/files/2017/04/Venezuela_Enters_the_Record_Book.pdf

[rb]

Well and economy is a big and complex thing which means that you have multiple of these scenarios happening all the time. We're out of crisis mode so 1 isn't really happening so much anymore. You don't really want to have a lot of 2 because that weakens aggregate demand (AD) and in turn investment (I). We seem to have moved away from that for now. So what's going on is that you have a mixture of 2, 4 and now finally some sort of 5.

 

The economy looks to be chugging along and investment is picking up. Keep in mind that I responds to AD. If AD is depressed there's no need to invest so I is depressed. AD right now looks like it is somewhere in the vecinity of where it should be -unemployment is low, though lowish inflation is a bit of a worry. In response to this I is increasing. I is about 2% of GDP too low, so let's say that I increases by 1% of GDP C can go down by 1% of GDP. This means that households can pay down 1% of GDP nominal without affecting AD and in turn without hurting the economy. Throw in some inflation and productivity gains and the result is that households can reduce their debt to GDP by about 3-4% per year without bad things happening. That's actually not bad and that's kinda sorta what's going on right now.

 

 

AD - what are the determinants of AD?  I would think AD is determined by access to credit.  The general public is essentially spending their future income to make luxury purchases today.  Over time, I would expect to see AD decline as access to debt becomes more difficult.  If this is indeed the case, then what would be the leading indicators of such a scenario? 

 

a. Declining GDP?

b. Slowing money velocity?

c. Increasing defaults- credit card, home, auto.

d. Rising interest rates?

e. Declining Asset prices - ie. homes.

 

In my mind, there is no question that this will happen as the debt burden continues to grow and the interest payments consume increasingly more income.  This is inevitable.  The question is the time line.  I understand that governments and the fed will try and ease sudden movements, but ultimately - the debt has to be reduced and to do this with a debt fueled AD system seems to be impossible.  Also, much of the increase in debt has been to fund over inflated asset prices rather than to improve consumption.  As such, there is very little bang to the buck - regarding debt improving AD.  Hence the loss of effectiveness of each additional round of QE.

Ok, I've been posting a lot on this thread today on number of vectors and I'm a little tired so you'll excuse if I make some oversight somewhere. Let's get a couple of disclaimers out of the way. I know you're Canadian but at this post I'm looking from a current US perspective (in Canada we have a whole different can of worms). Now AD is aggregate demand. It's like this AD=C+I+G+X-M. where

C=household consumption

I=economic investment (think equipment and inventories not stocks)

G=government consumption

X=exports

M=imports

 

Access to credit and level of credit most definitely impact AD. That is why monetary policy is a thing. But it's not so much of a thing that any change in monetary policy will lead to either a raging boom or a massive bust. Central banks actually try to moderate the business cycle through variations in credit. AD gets too strong, take some of the punch bowl away. AD gets too weak add a little vodka to it.

 

There are many things that impact AD that have nothing to do with credit. And there's no set amount of credit that makes it too much or too little it's up to the people to decide. But you want to smooth movements in AD so if I goes up because strength in C then C can pull back a little and let I take over for a bit. Then households can delver - basically scenario 5.

 

None of the factors you've listed from a to e are leading indicators of AD. Except maybe rates (but not so much). They're all lagging indicators. As far as indicators of AD you're looking primarily at inflation and secondarily at unemployment in a context of where you think full employment is. If AD is too strong you should see advancing inflation.

 

Employment is secondary because you have an idea where NAIRU should be but the labour market can get really weird. For example we think that NAIRU for the US is somewhere in the 5% range. But right now we have unemployment around 4.5%. At this level we would expect to see significant inflation pressure but we don't. So there's two options: either there has been a structural change in the economy or there's something funky going on in the labour market.It's probably the latter.

 

You are right that monetary policy looses it's teeth as you get to the lower (zero) bound. So QE wasn't that effective. Fiscal stimulus works very well there. But the gov't adopted a contractionary stance, so the Fed was the only game in town and they (rightly) floored it. Now monetary policy at that point is not so effective but it is somewhat effective. Apparently just enough to do the trick. One thing to keep in mind is that what is true in forward is also true in reverse. And while monetary policy wasn't that effective (most QE went in excess reserves) as they taper the same thing will be true. Most of the taper will come out of excess reserves.

 

There is a chance of gross incompetence as there always is. But let's not jump to conclusions that it will come to pass. The Fed has been spot on on it approach throughout the mess (despite even valied threats of bodily harm). Maybe it was luck or maybe it's an organization of people that show up to do their best.

 

[rb]

since the topic has shifted to hyperinflation, here is a nice list of the last 56-57 hyperinflation's in modern history for those interested.

 

http://sites.krieger.jhu.edu/iae/files/2017/04/Venezuela_Enters_the_Record_Book.pdf

I don't think think this topic has shifted to hyperinflation. Someone is just trying to take it there for no reason. Going through the list in the article none of the countries were demand constrained and borrowing in their own currencies which is what we're talking about here.

[Cigarbutt]

So, our current economy is said to be business as usual as we are going through an unprecedented monetary experiment that has nothing to do with 2017 Japan which is trapped in a vicious circle and from which it can no longer disentangle.

 

True enough, because of the absolutely unusual parameters, you need to look far and between for historical comparables.

 

Didn’t a recent Chairman, full of good intentions, have answers for Japan in 1999-2000 (17-18 years ago)?

 

http://www.sistematikrisk.com/wp-content/uploads/Japanese-Monetary-Policy.pdf

 

Perhaps, since then, in a case of self-induced paralysis or lack of resolve, Japan has not done whatever it takes. ???

 

In simple terms, it is said that 1- the goals were currency depreciation and inflation 2- those goals should be relatively easy to attain if you understand the monetary logic that precluded a result that would be a manifest impossibility in equilibrium.

 

Forward to 2017. The JPY/USD exchange rate and Japan inflation are essentially the same.

 

So money printing is effective?

 

From the great powers that be, who can explain that?

 

Any side effects?

 

In the same time frame, gross public debt went from 140% of GDP to 250%. :o

 

And there is now no end in sight as a vicious liquidity trap circle has been initiated.

 

What’s the relevance as one may be reading note 22 in the financial statements of a US manufacturing firm?

Because, the same recipe is being applied in the US (and elsewhere).

 

There have been recent talks of an attempt at quantitative tightening but, in a very recent talk given by Janet Yellen, it is clearly explained that the full unconventional armamentarium will be rapidly re-deployed in the event of even a run of the mill recession.

 

https://www.federalreserve.gov/newsevents/speech/yellen20171020a.htm

 

Vicarious learning, anyone?

 

[ICUMD]

Thanks rb for the detailed explanation.

 

Its an interesting time - on the surface it seems to be business as usual as you say.  However, the unprecedented cycle of debt accumulation has led us into an uncertain financial period.  There are many schools of thought (I myself believe the Kondratieff cycle) that an unraveling of this debt may lead to a liquidity crisis.  Certainly, there is a general unease that is reflected among many conservative investors.  Savers are being punished with low interest rates, yet to invest potentially places risk into over inflated investments with historically high PE values.  Its a damned if you do, damned if you don't scenario, with no resolution in sight.  I think this situation could go on for many years - especially with Governments sitting ready to 'bail out' financial distress at its earliest signs and with their 'Too big to fail' philosophy, using tax payer money.

 

I'm skeptical about conventional economic theory applying in extreme circumstances - such as the extreme debt loads we are seeing, and unprecedented government intervention. Of course, I'm not an expert in any of this so can only offer a personal observation.

 

 

 

 

 

 

[Dynamic]

Just catching up with this thread, but I think there's some chance of governments and central banks slowly unwinding the cycle of increasing debt by very gradually increasing interest rates (as the Fed has signalled and only gradually begun to implement, I believe), meaning that many corporations could need to plan to reduce their debt load before they next need to refinance if interest rates (and particularly longer-term rates) are trending higher.

 

However, governments and central banks, don't only have corporate debt, worryingly high stock prices and similar excesses to worry about, so if price-inflation, unemployment or housing affordability became a problem for some reason, they could have a very tricky decision to make to fix one problem but which may have an undesired effect elsewhere.

 

I'm sure something will go wrong at some point and we'll have a bear market and/or a recession, but I struggle to guess when or how badly.

[Cigarbutt]

Few more comments.

 

Maybe this all benign. Maybe not.

 

For those interested:

http://www.libertylawsite.org/2017/10/31/giant-qe-gamble-how-will-it-end/

https://www.stlouisfed.org/publications/regional-economist/third-quarter-2017/quantitative-easing-how-well-does-this-tool-work

 

The questions:

-Is this just about splitting hairs?

-Was QE effective?

-Will this be an uneventful symmetric unwind?

 

I submit that nobody really knows and we have history in the making.

 

My opinion: this is a colossal gamble.

Bias: always worried when some play with other People's money.

 

Certainly a topic worth re-visiting at some point.

 

 

[mrholty]

I generally hate antecdotal crap and maybe this should go in the Amazon thread. 

 

In addition to my day job (I work Corp Finance for a mfg company in middle America) I also sell on Amazon.  I started selling books and then flipped stuff from Walmart/Target/Kohls to Amazon.  My goal was always to make more than beer money - it was to cover my kids daycare expenses.  I've done this in various amounts for just over 3 years now.  Its absolutely not a full-time gig but it helps.  I track my time spent on it and I make over $20/hour but its come down as more software has entered the market which reduces margins for sellers.  To give you an idea I sold over $100k on Amazon and my profits were about $15k.  I'm a small seller but I have gotten to know about 5 guys very well who are doing $1-$5M/year on Amazon by themselves or with small teams. 

 

While there has been some variance within the group and what they sell (we don't share exactly what we sell) Sales for all of us were up in 1H of this year.  Most of us have rolled our profits into larger inventory each year.  I'd say that most of us have inventory 25% larger than last year.  Several saw a slowdown in the summer before back to school and generally our sales for October were below everyones expectations.  This is in the face of Amazon continuing to take share. 

 

None of us are too worried and we're not pulling out but it seems that the consumer is being more cautious than 6 months or 12 months ago.

 

 

[Cigarbutt]

Interesting.

No wonder the retail space is being clobbered.

 

If you can answer, how do you choose a supplier and how do you decide if a supplier is reliable?

Do you specialize in only a few items?

Your turnover seems quite high but do you store the inventory in your home?

 

Maybe you are on your way to become a leading indicator. :)

[mrholty]

Interesting.

No wonder the retail space is being clobbered.

 

If you can answer, how do you choose a supplier and how do you decide if a supplier is reliable?

I'm a weird mix.  Half of my business is buying textbooks (and some other books) locally via Facebook groups, Craigslist, other ways to sell on Amazon and spikes 2x a year. 

I have a deal with one local business where I sell for them on Amazon.  I buy like I am regular store.  I pick it up in my wife's minivan and then I sell at Amazon.  There are other sellers who do the same and I have been talking with the mfg about becoming their exclusive person on Amazon.  They hate sellers who drop the price and piss off their retail customers.  (I am officially the only one who sells on Amazon but they believe a few of their other customers sell in store and on Amazon)

The vast majority of the other part of my business is I use a piece of software which I run each night and it goes through listings for a store (say Walmart.com) and compares it to Amazon.  Then I go and buy a dozen or whatever.  It gets delivered to my house.  I repack it and send it right into Amazon.  I had lunch this week with one guy who has 0 wholesale accounts and only flips stuff from stores, etc on Amazon and has $2.7M worth of Amazon inventory that day. 

My profit margins are similar to others in that I want to make 30% after AMZ fees but before returns and inbound postage.  Often it doesn't exactly work as some items will tank in price from when I purchase it. 

I've started to deploy some capital with a guy who buys liquidation closeouts.  I provide the capital and he finds the deals and we split the profits 50/50.  We just bought 700 units of something that cost us $8.  Sells on AMZ for $32 (Amazon will take about $7 in fees).  leaving us with $24 - $8 buy cost = $16 (200% Return).  We expect it will take a full year to ship thru which is slow for us.  We usually want to each make 10%/month.

 

Do you specialize in only a few items?

Your turnover seems quite high but do you store the inventory in your home?

 

My turnover is pretty low in that I get about 3-3.5x turns per year. I know 2 brothers who are closer to 8-9x.  They sell $100-$150k in candy/month at 10-15% margin.  After all expenses they are about 8%.  Halloween is their big month so they bought $300k of Halloween Candy.  There are tons of people doing different things.

 

Maybe you are on your way to become a leading indicator. :)

[Cigarbutt]

Great stuff. Interesting economics.

It's good to hear from the real world.

 

It seems to me that Amazon takes a large bite.

Maybe when you reach a certain volume, you may obtain a better rate?

At any rate, good luck.

 

Your customers are probably part of the group who feel tight (disposable income, savings rate) so keep us informed.

Thx.

 

 

 

[Jurgis]

Interesting.

No wonder the retail space is being clobbered.

 

If you can answer, how do you choose a supplier and how do you decide if a supplier is reliable?

I'm a weird mix.  Half of my business is buying textbooks (and some other books) locally via Facebook groups, Craigslist, other ways to sell on Amazon and spikes 2x a year. 

I have a deal with one local business where I sell for them on Amazon.  I buy like I am regular store.  I pick it up in my wife's minivan and then I sell at Amazon.  There are other sellers who do the same and I have been talking with the mfg about becoming their exclusive person on Amazon.  They hate sellers who drop the price and piss off their retail customers.  (I am officially the only one who sells on Amazon but they believe a few of their other customers sell in store and on Amazon)

The vast majority of the other part of my business is I use a piece of software which I run each night and it goes through listings for a store (say Walmart.com) and compares it to Amazon.  Then I go and buy a dozen or whatever.  It gets delivered to my house.  I repack it and send it right into Amazon.  I had lunch this week with one guy who has 0 wholesale accounts and only flips stuff from stores, etc on Amazon and has $2.7M worth of Amazon inventory that day. 

My profit margins are similar to others in that I want to make 30% after AMZ fees but before returns and inbound postage.  Often it doesn't exactly work as some items will tank in price from when I purchase it. 

I've started to deploy some capital with a guy who buys liquidation closeouts.  I provide the capital and he finds the deals and we split the profits 50/50.  We just bought 700 units of something that cost us $8.  Sells on AMZ for $32 (Amazon will take about $7 in fees).  leaving us with $24 - $8 buy cost = $16 (200% Return).  We expect it will take a full year to ship thru which is slow for us.  We usually want to each make 10%/month.

 

Do you specialize in only a few items?

Your turnover seems quite high but do you store the inventory in your home?

 

My turnover is pretty low in that I get about 3-3.5x turns per year. I know 2 brothers who are closer to 8-9x.  They sell $100-$150k in candy/month at 10-15% margin.  After all expenses they are about 8%.  Halloween is their big month so they bought $300k of Halloween Candy.  There are tons of people doing different things.

 

Maybe you are on your way to become a leading indicator. :)

 

Interesting. I've done all of this in online games for virtual currencies. Same flipping principles and opportunities. Have not done it IRL though. I can see how it works on Amazon where some products that are not available through Amazon directly sell by third party merchants for 2x-3x the prices on Walmart.com or local store.

 

If I had time, I'd probably try it.  ;)

 

Good luck  8)

[Jurgis]

Your customers are probably part of the group who feel tight (disposable income, savings rate) so keep us informed.

 

Not necessarily. I am pretty sure I buy some products from flippers on Amazon. Sometimes you can feel that as a customer.