Kuppy on Inflation

[Gregmal]

Yea 2018 December was great. A bunch of fools sold their stock because of a hint of a 25 basis point rate hike and then the bots took over. 2018, pretty much all year, people knew we were getting rate hikes and even after them well into 2019 it had no effect beyond some of the stupid 2-3 day panic attacks. Markets were at all time highs starting off 2020, so its not really every time the Fed gets hawkish stocks go down.

 

Sure, we could get some volatility, but its going to be financial dork driven and not real world economy driven if it happens. Yes, stock market and economy are totally different, SOMETIMES. Most of the time I ve heard one make that claim its always cuz theyre missing something and then later on it turns out the market was pricing in stuff they just missed. Such as all the "how comes tha stock markets 10% off all time highs? Impossible! Euphoria" back in summer 2020. Turns out for good reason. So I agree, be nimble. But I mentioned earlier, in 2018 NVR sold off from ~$3000 to $2000 and now its at $5500. Maybe those sellers get to buy it back at $4500 on the next knee jerk panic sell. IDK. But 5% rates scaring people is absolutely crazy to me. 5% rates dont wipe out civilization. 5% rates dont wipe out demand for goods that people simply cant get right now. 5% rates dont wipe out demand for liquid assets that people could afford if they could get them. 

 

So again, HOW DOES IT HAPPEN? Just saying "rates go up" to me is lazy and already historically disproven. Everyone and their mom has been talking about rates going up and the Fed has been white glove smooth transparent in coddling the market into a stupid 100 basis point hike...what kind of idiot is going to get blindsided by it and sell BAC at 12x NTM or XOM at 9x and anything like that? SO if we're talking about AAPL at 40x or PLTR at 80x sales, thats one thing. Even the QQQ. But theres so much of the market that does well its surprising to me to hear all the doom and gloom. 

[Gregmal]

Unless we're talking, placing a bet that the Fed goes completely off script, haywire, and rogue? Which I think is a very, near zero probability, level event. It seems like thats what you guys are alluding to?

 

We just sat through probably the most insane yearly inflation everyone has ever seen. And NOT ONE rate hike. If they do 3-4 this year, we're at like 1-1.5% fed funds rate? LOL Or they go rogue in response to what is almost certainly LESS inflation in 2022 than there was in 2021....and push the envelope to 2%? Or does inflation go higher in 2022 than 2021 and CL futures go to $200 and a 3/2 1500 sq/ft SFH costs $1.5M? There's so many opportunities to win with these setups. Just as there has been. These guys dont REALLY care about inflation and the status quo for everyone is to not rock the boat too much. They rather say they did 3 predicted hikes and deal with some rich people applauding more asset value increases and poor people grumbling like they always do. If the Fed gave a shit about inflation they would have started hiking rates in summer/fall of 2020 when I started screaming about it. It was clear as day to anyone who looked. 

[Gregmal]

From the PCYO call today:

 

Mark Harding

I -- yes, intuitively, that's true. But honestly, that's not what we suffer from. We don't suffer from enthusiasm in our market. I think the price point that we're in, the entry level where I would say when we started this product. There were Taylor Morrison and KB, some of their first home. They were selling at $360,000. You can't buy a home out on our site for less than $500 now.

 

5% rates dont change demand for something people want and just cant get. The sub $400k home is gone pretty much anywhere semi desirable. Any buying opportunity in the future will easily be swallowed and then when we're talking $600k starter homes people will yearn for pullbacks and disruptions so they can hopefully buy them at $500k. 

[Spekulatius]

21 minutes ago, Gregmal said:

From the PCYO call today:

 

Mark Harding

I -- yes, intuitively, that's true. But honestly, that's not what we suffer from. We don't suffer from enthusiasm in our market. I think the price point that we're in, the entry level where I would say when we started this product. There were Taylor Morrison and KB, some of their first home. They were selling at $360,000. You can't buy a home out on our site for less than $500 now.

 

5% rates dont change demand for something people want and just cant get. The sub $400k home is gone pretty much anywhere semi desirable. Any buying opportunity in the future will easily be swallowed and then when we're talking $600k starter homes people will yearn for pullbacks and disruptions so they can hopefully buy them at $500k. 

5% risk free interest rates would probably mean ~5% mortgages which is actually less than I paid for my first mortgage in 2002. That rate back then was 5 7/8% and it was considered a bargain back then because rates in 2001 were higher.

Higher mortgage rate would probably reduce demand a bit, but if inflation runs at 7%, it would still free money at effective -2% interest rate considering inflation.

 

I honestly have no idea what happens and if any of the above is realistic, but I think it’s within the realms of the possibilities. I don’t think the chiefs in the Fed know either, they’re probably make it up as they go.

 

I do think at some point the Fed might accept that they may need to deflate asset prices to get inflation under control. I know they caved before , the last time in 2018. However, back then inflation wasn’t really an issue and now it is.

 

Edited January 12, 2022 by Spekulatius

[ERICOPOLY]

5% rates won't mean much.  Wages are rising and the principle component of the mortgage payment decreases a good deal with higher rates.

Edited January 12, 2022 by ERICOPOLY

[Morgan]

2 hours ago, Spekulatius said:

 

If we continue to run at a 7% inflation rate by the middle of this year, the Fed will have to step up the interest rates much more than is currently anticipated. I am talking 5% or something like this.

7%? That is definitely not what I’m seeing. Everything I buy is up at least 15-20%. Building, HVAC supplies, tools, etc are up 35-100%. As we all know lumber went up 300%, but now it’s probably only up 100%. Oh joy. 
 

Even Egg McMuffins are up 35% in my area. A Subway footlong is up 60%. (Don’t judge my eating habits too much lol)
 

From my perspective there has been a 20% decrease in quality of life. 
 

It seems like with all the shipping delays and shortages, we will have another year of substantial price increases. 
 

 

Edited January 12, 2022 by Morgan

[Viking]

@Gregmal  “HOW DOES IT HAPPEN” 

 

My read is we have seen central banks pump an unprecedented amount of liquidity into the economy starting in 2008. Initially it was done get the economy out of recession and ensure disinflationary/deflationary forces did not become permanent. QE + ever lower interest rates. The liquidity being pumped into the system reached a climax in 2021.  
 

14 years later we have asset bubbles forming in bonds (most now have large negative real yields), stocks (Tesla, Bitcoin, ARC, SPAC are just a few of the poster children today), and real estate (just getting started in US but far along in other countries like Canada).
 

So if unprecedented levels of liquidity drive asset prices into the stratosphere then it makes sense to me that simply turning the tap off will challenge asset valuations.  The real problem is when the liquidity REVERSES. That is when the fireworks happen. Maybe not right away (the first rate hike). But when the Fed TRIES to hike rates AND do balance sheet run off at the same time i think the stock market will sell off and steeply = tantrum.
 

THE NEW NEWS is the Fed will likely do nothing in response. At least initially. And that is because it is fighting a new war today called inflation; the playbook to fight inflation says you need to slow economic activity.

 

The key will be where inflation goes from here (no one really knows). IF INFLATION IS CONTINUING TO RIP AT +6% INTO JUNE THEN THE FED WILL HAVE TO IGNORE A STOCK MARKET TANTRUM. And that is perhaps when we enter a brave new world for equity investors.

 

i am not saying this WILL happen. However, I do think the risks are elevated in 2022 especially as the year progresses. Especially if inflation continues to run hot. I am not saying build a bunker, buy some spam and a generator and get ready (like i was when the Covid tsunami was coming in Feb of 2020). While it is always more fun (and usually more rewarding) to play offense, sometimes it pays to focus a little more on defense. (Buffetts first rule: don’t lose what you got. He made it rule #1 for a reason  )

 

Now if i was younger i would likely be fully invested and hoping for a shit storm (so i could invest more $ in cheaper stocks). But i am older and have enough - so capital preservation is near the top of my list (if i really think about it).

Edited January 12, 2022 by Viking

[Spekulatius]

The Feds goal is employment and price stability , probably in that order (The German Bundesbank actually had price stability as the first priority with employment a second but those days are gone),

 

What is different in my opinion that the labor market is so saturated  that the Fed may be able induce a recession and really not impact employment all that much. That would be a soft landing for the economy, but probably not for the stock market and asset prices.

 

I am fully aware that what I am stating here is speculation and nothing like this might happen, but I think we are a very strange time and I think monetary policy may change for what we have seen the last 30-40 years. One the other hand maybe we go full MMT or project Zimbabwe as Kuppy calls it. I think that’s a possibility too.

 

I am older too and if I sort of keep what I have, the Spek family will be fine. I am leery of swinging for fences in any direction. I do think that a healthy gold allocation may be a good hedge.

 

 

[scorpioncapital]

For me the higher and higher ownership of stock by the middle class either direct or via pension funds somewhat ensures a desire not to tank the market. What's the right balance and will an accident happen are the questions I am not sure about.

[Gregmal]

Yea I think this is worth kicking around(which is why we're doing it LOL) but I just dont buy liquidity and a point or two on rates as the reason XOM gets buried. Inflation and higher oil prices will likely high near perfect correlation. So....this is in a danger zone because its making more money under the "crash" scenario? Or housing, on fire because of inflation protection and a huge supply/demand imbalance, gets walloped because? The current admin will never do anything but make it easier to get financing, not harder. Then there's still the issue of all those folks currently waiting on the sidelines to buy. BAC too, people just dump this on liquidity concerns? Cuz its traded perfect yo-yo style to the higher rate song. Every time we see rates rise so does BAC. 

 

If we're worried about volatility, arent VIX calls the way to take care of that? Or are we worried about a cliff that leads to flat pastures? The former I dont generally care about. We keep talking about a 2 week crash in December of 2018 but I mean come on. It was a 2 week algo driven flash crash. A year later with tapering and rates hikes we were at all time highs. But I would be worried about a crash of decent magnitude and then just a flatline because obviously that takes longer to recover from.

 

Or phrased a little more differently. I'll put it like this. @Viking mentioned playing offense and defense. I agree. But also the best defense can be a good offense. No need to go Prem Watsa or David Einhorn psycho, but if you are predicting this sort of turbulence....HOW DO YOU MAKE MONEY FROM IT?

 

My suggestion is pretty lazily and boringly VIX calls. But I am positive theres other and perhaps better avenues. 

[fareastwarriors]

14 hours ago, Morgan said:

 Everything I buy is up at least 15-20%. Building, HVAC supplies, tools, etc are up 35-100%. As we all know lumber went up 300%, but now it’s probably only up 100%. Oh joy. 
 

 

I know you're a pro managing 100s of units but for the benefit of others, there are some ways to reduce the cost at home improvement stores.

 

-Buy the 10% off coupons for Home Depot and Lowe's

-Pay with gift cards bought from grocery stores using the 6% cash back credit cards (like Blue Cash Preferred) or from Staples with the 5% cash back Chase Ink Business Cash card

-If paying with credit card, at least pay with BofA cc with Platinum Honors for 5+% cash back for home improvement stores

-sign up ProRewards for Home Depot (or even share 1 account to boost savings faster)

 

I'm sure I missed some stuff but with the coupons and gift cards, etc, my margins are instantly better than the average landlord/contractor paying with regular credit card/cash. 

 

 

14 hours ago, Morgan said:

Even Egg McMuffins are up 35% in my area. A Subway footlong is up 60%. (Don’t judge my eating habits too much lol)

 

This is probably not worth the squeeze but I never pay retail for fast food or chains out of principle! I collect all the flyers with coupons and leave it in my truck and/or  wait for promos on the apps.   My Subway flyer has coupon for $6 footlong.

 

Edit: I'm in California so definitely not low cost area! 

Edited January 12, 2022 by fareastwarriors

[Longnose]

6 minutes ago, fareastwarriors said:

This is probably not worth the squeeze but I never pay retail for fast food or chains out of principle! I collect all the flyers with coupons and leave it in my truck and/or  wait for promos on the apps.   My Subway flyer has coupon for $6 footlong.

 

 

14 hours ago, Morgan said:

Even Egg McMuffins are up 35% in my area. A Subway footlong is up 60%. (Don’t judge my eating habits too much lol)

 

My Costco Hotdog is still only a $1.50! Boom, now you can afford your 3x lumber 

[gfp]

With HVAC prices in my area rising (and the cost of R22 freon basically becoming cost prohibitive to keep old systems), I have been using these heat pumps from Mr. Cool (usually with a better discount than is offered at the moment.)  They come with pre-charged line sets so it is up to you if you want to use a professional to put them in (not all pros will work with you on a self purchased system, I have a younger guy who is trying to get established - he'll work on anything).  The only drawback I have found so far is that they don't have a central air handler unit that works for down-flow vertical installations yet - but one is supposed to be coming after some delay.  These systems work great even without an electric heating coil (at least in the south).  DC inverter, like a mini-split, so they scale up and down smoothly - a much better system than a typical all-or-nothing basic central air conditioner.  And extremely efficient.

 

https://hvacdirect.com/mrcool-universal-36-000-btu-heat-pump-mdu18036.html

[Longnose]

6 minutes ago, fareastwarriors said:

This is probably not worth the squeeze but I never pay retail for fast food or chains out of principle! I collect all the flyers with coupons and leave it in my truck and/or  wait for promos on the apps.   My Subway flyer has coupon for $6 footlong.

 

 

14 hours ago, Morgan said:

Even Egg McMuffins are up 35% in my area. A Subway footlong is up 60%. (Don’t judge my eating habits too much lol)

 

My Costco Hotdog is still only a $1.50! Boom, now you can afford your 3x lumber 

[fareastwarriors]

3 minutes ago, Longnose said:

 

 

My Costco Hotdog is still only a $1.50! Boom, now you can afford your 3x lumber 

Morgan operates in WV  so probably not too many Costco's nearby.  Personally I go for the chicken bake since I find it way more filling! 

[Gregmal]

22 minutes ago, gfp said:

With HVAC prices in my area rising (and the cost of R22 freon basically becoming cost prohibitive to keep old systems), I have been using these heat pumps from Mr. Cool (usually with a better discount than is offered at the moment.)  They come with pre-charged line sets so it is up to you if you want to use a professional to put them in (not all pros will work with you on a self purchased system, I have a younger guy who is trying to get established - he'll work on anything).  The only drawback I have found so far is that they don't have a central air handler unit that works for down-flow vertical installations yet - but one is supposed to be coming after some delay.  These systems work great even without an electric heating coil (at least in the south).  DC inverter, like a mini-split, so they scale up and down smoothly - a much better system than a typical all-or-nothing basic central air conditioner.  And extremely efficient.

 

https://hvacdirect.com/mrcool-universal-36-000-btu-heat-pump-mdu18036.html

Oh yea, HVAC stuff in general is the biggest scam. For shits, go into HD and Lowes and ask the guys at those stands how come its the only thing in the entire store where they dont tell you what it costs! They'll of course give you some scripted bullshit about each house being different, to which you ask them to just tell you what the standard equipment costs, and they cant answer. Or just Google 5 HVAC companies nearest your ZIP and ask for a ballpark estimate for a 1.5 ton unit. Again, a good chunk will refuse to give you a figure unless they can come out to your place and the rest, holy shit get ready to be amused. Probably anywhere from $4500-$9,000. Then go look up what you can buy a 1.5 ton for through one of the HVACdirect type places and laugh at these fraudsters. 

[Morgan]

41 minutes ago, fareastwarriors said:

-Buy the 10% off coupons for Home Depot and Lowe's

-Pay with gift cards bought from grocery stores using the 6% cash back credit cards (like Blue Cash Preferred) or from Staples with the 5% cash back Chase Ink Business Cash card

-If paying with credit card, at least pay with BofA cc with Platinum Honors for 5+% cash back for home improvement stores

-sign up ProRewards for Home Depot (or even share 1 account to boost savings faster)

 

I'm sure I missed some stuff but with the coupons and gift cards, etc, my margins are instantly better than the average landlord/contractor paying with regular credit card/cash. 

 

 

 

This is probably not worth the squeeze but I never pay retail for fast food or chains out of principle! I collect all the flyers with coupons and leave it in my truck and/or  wait for promos on the apps.   My Subway flyer has coupon for $6 footlong.

 

Edit: I'm in California so definitely not low cost area! 

 

Yea we have the store CC's with the 5% discounts. It helps of course, but I still want cheaper prices (and to complain! lol) 

 

I agree on the food savings; not really worth it unless the coupons come to me with no work. I use them though. 

 

 

[Morgan]

33 minutes ago, Longnose said:

 

 

My Costco Hotdog is still only a $1.50! Boom, now you can afford your 3x lumber 

 We have Sams club and two slices of pizza and a drink for $2.50 deal, but as designed, I usually spend a small fortune in there on other mildly unnecessary stuff. 

 

 

[Gregmal]

I have no clue why anyone eats at McDonalds anymore. My kids love that kind of crap but Burger King is the clear cheapest and Wendys the best quality/value. MCD is garbage food and now its basically on par with diner food in terms of price. A(yes, 1) fuckin hash brown is $2 and a Big Mac meal is near $10. Screw that. 

[Castanza]

8 minutes ago, Gregmal said:

Oh yea, HVAC stuff in general is the biggest scam. For shits, go into HD and Lowes and ask the guys at those stands how come its the only thing in the entire store where they dont tell you what it costs! They'll of course give you some scripted bullshit about each house being different, to which you ask them to just tell you what the standard equipment costs, and they cant answer. Or just Google 5 HVAC companies nearest your ZIP and ask for a ballpark estimate for a 1.5 ton unit. Again, a good chunk will refuse to give you a figure unless they can come out to your place and the rest, holy shit get ready to be amused. Probably anywhere from $4500-$9,000. Then go look up what you can buy a 1.5 ton for through one of the HVACdirect type places and laugh at these fraudsters. 

Yup it's crazy. Had a friend put in a new furnace and ac system this past summer. Changed me unit cost and a case of beer. Came to 3,100 for both...Mid range systems that would have easily cost me 8k if I hired someone. 

 

@Morgan I agree that inflation is way higher than 7% in real terms. I've reduced product spend and my budget is still up like 15% this past year. CPI is fudged to no end. 

[Morgan]

5 minutes ago, Castanza said:

Yup it's crazy. Had a friend put in a new furnace and ac system this past summer. Changed me unit cost and a case of beer. Came to 3,100 for both...Mid range systems that would have easily cost me 8k if I hired someone. 

 

@Morgan I agree that inflation is way higher than 7% in real terms. I've reduced product spend and my budget is still up like 15% this past year. CPI is fudged to no end. 

 

CPI is totally fudged. They've made so many changes on how they calculate it over the years. It needs to stay within a certain range to make the politicians happy. I wouldn't be surprised if it gets modified over the next 1-3 years to put inflation back in 2% range. 

[Gregmal]

2 minutes ago, Morgan said:

 

CPI is totally fudged. They've made so many changes on how they calculate it over the years. It needs to stay within a certain range to make the politicians happy. I wouldn't be surprised if it gets modified over the next 1-3 years to put inflation back in 2% range. 

Thats just what they do. Any idiot could see inflation ramping hard a year ago. Dont know why all of a sudden everyones worried about it. Unless they listened to the.....

[Morgan]

46 minutes ago, gfp said:

With HVAC prices in my area rising (and the cost of R22 freon basically becoming cost prohibitive to keep old systems), I have been using these heat pumps from Mr. Cool (usually with a better discount than is offered at the moment.)  They come with pre-charged line sets so it is up to you if you want to use a professional to put them in (not all pros will work with you on a self purchased system, I have a younger guy who is trying to get established - he'll work on anything).  The only drawback I have found so far is that they don't have a central air handler unit that works for down-flow vertical installations yet - but one is supposed to be coming after some delay.  These systems work great even without an electric heating coil (at least in the south).  DC inverter, like a mini-split, so they scale up and down smoothly - a much better system than a typical all-or-nothing basic central air conditioner.  And extremely efficient.

 

https://hvacdirect.com/mrcool-universal-36-000-btu-heat-pump-mdu18036.html

 

R-22 has had some pretty intense prices swings in the last 2 years or so. A 25lb can was $700 two years ago, $350 last summer and $500 now.

 

Personally I'm not a huge fan of the ductless mini-split systems or heat pumps, but I think that is because my area is too cold. Basically they stop working below 15F or maybe 0F. No heat is of course a problem in the coldest days of winter. Anyways, as supplemental AC, it is probably a good solution. 

 

I have also found that pros will not work on self purchased ductless mini-split systems. Frankly I think they don't know how to fix them. I don't either though. 

 

 

19 minutes ago, Gregmal said:

Oh yea, HVAC stuff in general is the biggest scam. For shits, go into HD and Lowes and ask the guys at those stands how come its the only thing in the entire store where they dont tell you what it costs! They'll of course give you some scripted bullshit about each house being different, to which you ask them to just tell you what the standard equipment costs, and they cant answer. Or just Google 5 HVAC companies nearest your ZIP and ask for a ballpark estimate for a 1.5 ton unit. Again, a good chunk will refuse to give you a figure unless they can come out to your place and the rest, holy shit get ready to be amused. Probably anywhere from $4500-$9,000. Then go look up what you can buy a 1.5 ton for through one of the HVACdirect type places and laugh at these fraudsters. 

 

True. No one wants to quote over the phone. In their defense quoting an entire system without actually seeing it is probably too hard. A 1.5 ton AC unit or 100k Btu furnace has a set price though. I buy from wholesalers like the installers do so prices are decent. I'd say HVAC companies charge 4-8x the cost of the parts, but parts really aren't everything. Having all the tools, work vans, knowledge, licenses, insurance, administrators, and inventory on hand, does cost money. 

 

[Spekulatius]

29 minutes ago, Gregmal said:

Oh yea, HVAC stuff in general is the biggest scam. For shits, go into HD and Lowes and ask the guys at those stands how come its the only thing in the entire store where they dont tell you what it costs! They'll of course give you some scripted bullshit about each house being different, to which you ask them to just tell you what the standard equipment costs, and they cant answer. Or just Google 5 HVAC companies nearest your ZIP and ask for a ballpark estimate for a 1.5 ton unit. Again, a good chunk will refuse to give you a figure unless they can come out to your place and the rest, holy shit get ready to be amused. Probably anywhere from $4500-$9,000. Then go look up what you can buy a 1.5 ton for through one of the HVACdirect type places and laugh at these fraudsters. 

May be one off , but when I had my HVAC replaced in Long Island, Costco was the most expensive quote from the four I got surprisingly. The cheapest one was a bid I got from Angi's list contractor and I went with that. Those fellows were pretty good. I never again got a good quote from Angi's list again for other jobs.

Edited January 12, 2022 by Spekulatius

[gfp]

Yeah I'm not sure I would want a heat pump in a northern climate, but the newer heat pumps are way better than they used to be.  Up north you would want back up electric heat strips in the unit, which would be an expensive way to heat a house if they got used very often.  Down here in Louisiana these inverter (variable) systems are way better than a basic (usually oversized) a/c system because they don't short cycle, they run more continuously dehumidifying the air, which is more important to comfort in New Orleans than the actual temperature of the room.  They also barely make a sound.  And I can run the whole house plus the central a/c system during a power outage off my champion 100416 generator using natural gas.  Couldn't do that with the old-school 4-ton compressor it replaced.

 

I'm not a fan of mini-splits in most applications either, but they are also extremely quiet and energy efficient.  Inverter technology (variable cooling power / speed) is definitely the future of Air conditioning.  But a lennox variable system costs a fortune and most old-timers in the business don't get trained up on the new technology.  At least down here.

 

edit: forgot to mention, in a spray foamed attic these heat pump air handlers eliminate two roof penetrations each, since you need fresh combustion air plus exhaust for each nat. gas furnace in a foamed attic.  another plus.  you do need 240v line to the air handler though.

Edited January 12, 2022 by gfp