Where Does the Global Economy Go From Here?

[Gregmal]

I mean we don’t recall when March/April 2020 rolled around and folks were flabbergasted there was soup can and toilet paper shortages? Prices went through the roof. Where were the academic studies calling for rate hikes because of insidious inflation? Were we still waiting on Fred Mishkin and the like to ink their consulting contracts before taking our short positions? Or maybe we just realized it was a product of the time and would pass in time….

[Dinar]

I think people underestimate the impact of high prices on demand, as well as tech  companies cutting perks.

 

a) Many people are aggressively hiking prices, and will find out too late that demand collapsed, not because people can no longer afford the service/good, but because they decide it is no longer worth it.   For instance, I was at a barber shop this morning, the barber used to charge $12 per haircut in 2012, $14 in 2018, and then raised it to $18 in 2020, $20 in 2021, and $25 in 2022.  Normally by this time on a Saturday, the barber would have gone through a dozen clients, today he got through six.   My brother in law, who makes excellent money as a computer programmer cut his haircuts from monthly to quarterly.  He can afford to go monthly, but he says it is not worth it.  My wife and I stopped getting take out, instead we go a couple of times a month to a Michelin restaurant, because we decided that take out was no longer worth it given price increases.   We wanted to hire a driver to take us to the airport, he used to charge $70 this time he asked for $120, I said why?  He said well gas prices went up.  So my father drove us.   I used to get croissants & pastries every Friday.  In the last four years, the price doubled.  I no longer get them.  I just do not want to buy a croissant for $5, it is not worth it to me.  A number of my friends are very wealthy, but they are all self-made, mostly immigrants.   A number of them have stopped using drivers, or getting take out and in a couple of cases fired cleaning women after demands for large wage increases.  As the wife of one of them put it, I remember making $200 a week, and I am not paying someone $250 to clean my 3000 sq foot house.  

b) There are a lot of tech companies that pay for everything and pamper their workforces, including in crypto.   I think that is going the way of the Dodo and that will significantly impact demand for services.  

 

If the Biden administration continues on the path of giving trillions of dollars in welfare, then yes, inflation will continue to increase as there will be no incentive to work.  However, if the government starts behaving like Bill Clinton in the 1990s, then I think inflation on a measured basis will go to 2-4% per annum, and 3-5% in reality.   

[Gregmal]

^^ Yup. People forget that this was the first summer much of the country was fully free and open again. Theres an immediate rush. You'll pretty much pay any price to go do those experience/lifestyle things again that were taken away from you, and then you get over it and revert to how you lived pre covid. Especially when prices in the long run are exaggerated to the upside. This is like capitalism and economics 101. I would have paid $1000 to go to a baseball game in 2020. When I was able to again, I did. Then it was out of my system and I haven't been back even for $250.

 

Im at Crystal Springs this weekend with the family for Oktoberfest. No joke crowds are like triple what they were when they had it last year as a scaled down half assed event. Probably a little bigger than 2019. Its again, normal and expected human behavior to want to play rather than work after the past 2 years. But eventually they'll need to pay for it consistently, or stop. The free money stopped last year. Probably by Spring '23 things across the country look like 2019, IMO. 

[changegonnacome]

 

11 hours ago, Gregmal said:

The notion that higher wages = inflation is academic and unsubstantiated.

 

I could rewrite the above as -

 

"The notion that higher input costs = inflation is academic & unsubstantiated "

 

Once you take your inflation bias out of the sentence....you can see how nonsensical it is.

 

I think Greg that your problem might be that you look at too many GREAT publicly listed businesses to realize that the real world of private SMB's are populated with mediocre ones with low single digit margins......of the type I've described above.

[Gregmal]

17 minutes ago, changegonnacome said:

 

 

I could rewrite the above as -

 

"The notion that higher input costs = inflation is academic & unsubstantiated "

 

Once you take your inflation bias out of the sentence....you can see how nonsensical it is.

 

I think Greg that your problem might be that you look at too many GREAT publicly listed businesses to realize that the real world of private SMB's are populated with mediocre ones with low single digit margins......of the type I've described above.

Those are indeed mediocre; they can’t really compete with big established ones, and most were either destroyed or put on life support with COVID. 
 

I’ve mentioned before all the great little toy stores my kids loved pre COVID. They were on life support before, obliterated during, many left, and what’s left is hanging on by a prayer and currently getting hammered by their higher end customer pulling back because of fears of the “great reset”.
 

Perception after a while matters. Especially with such a narrative consuming MSM. If you don’t think do, see how many financial firms were harmed during GFC on little more than rumor.

[Gregmal]

Maybe it’s Toll or Lennar short term, but long term those getting fucked and going out of business are the ones like my buddy who’s a three man construction shop seeing demand in his are go to zero because his market is folks who think the system is about to shut down 

[SharperDingaan]

5 hours ago, changegonnacome said:

 

If you cant see the problem here at the micro level and how it scales to the macro..........I can assure you the Fed does.......and are going to act accordingly.

 

Just to add to some of the commentary ....

 

Lot of craft brewers are budgeting variable cost and wage hikes of 3-5%, alongside overhead hikes of 10-15%; to maintain margins, expect to pay 10% more per can. The higher price means a lot less beer sold, closures across the board, larger quantities of fewer beers, and a lot of people on layoff. 

 

JIT supply chains only work if the chain is both robust and reliable. Currently, neither are true; inventory is piling up everywhere, and order cancellation is common place. Even our own brewery is jammed with enough packaging, cans and hops to take us through winter and the spring ramp up. And our inventory is not going obsolete ....

 

The sooner, and the quicker, the Fed/BoC drops the economy, the better off we all will be. Sure, we will lose money to higher interest rates - but we will more than make it back on higher volumes of cheaper beer, labor/material savings, and have people back at work. Different PoV.

 

Post Covid cabin fever has run its course. Now it's the great rethink, and widespread disruption in historic buying patterns, as higher prices force changes. Expect widespread lower volumes of activity, and a lot more focus on the value add. Not a bad thing.

 

At the macro level, it is essentially a wash. Less business activity, lowering overall earnings, and reducing prices. Offset by earnings discounted at lower rates, raising prices. But to get the lift ... the Fed/BoC needs to beat down inflation as ruthlessly and aggressively as is practical.

 

The good news is that they will get a lot of deflationary help from business failures, a drop in the market level, and taught supply chains unwinding as new orders cancel. Interest rates will not have to go as high as might otherwise have been the case.

 

SD

Edited September 18, 2022 by SharperDingaan

[Spekulatius]

@SharperDingaan I haven’t seen craft beer pricing going up. At least the larger regional craft beer players product still can be bought in my local supermarket for  $13.95 per 12 pack. That’s surprising given the higher packaging transportation and input (hops) cost. I am guessing that margins here are shrinking.

 

I do see some movement up for wine prices, especially at the premium side.

[Dalal.Holdings]

On 9/17/2022 at 8:10 AM, changegonnacome said:

The fact the labor market hasnt really been hit yet is not good news and shows how we are no where near the end of this rate hiking cycle.......unfortunately we are still at the beginning....which is a function of what I've been saying for a few months now......the Fed, even now, remains accommodative when you inflation adjust to get real interest rates. There is STILL a major labor shortage. Aggregate demand CONTINUES to exceed aggregate supply in the United States.

 

This is not even close to being over yet.

 

I'd be careful using the labor market as an indicator of where we are. Employment is a well known LAGGING indicator.

[changegonnacome]

2 hours ago, Dalal.Holdings said:

I'd be careful using the labor market as an indicator of where we are. Employment is a well known LAGGING indicator.

 

For sure - non-farm payrolls though are MoM and relatively contemporaneous…this is the data I watch most closely to see ‘where we are’…..its a good indicator of labors leverage/bargaining power to secure pay increases….it speaks to both the labor shortage AND aggregate demand. This will be the first data to turn IMO….IF….inflation is being brought under control via a reduction in aggregate demand.

 

But unemployment figures yes will be lagging…….but getting inflation under control does fundamentally require unemployment to tick up and reach at LEAST the non-accelerating inflation rate of unemployment (NAIRU)…..and the sad reality is most inflationary cycles require a period of time where the economy sits for a time below its equilibrium output levels….i.e slack is re-introduced….and this allows for a period of re-anchoring expectations. In practice what it means is that employees are happy to HAVE a job versus demanding wage bumps at every performance review and threatening to leave.

 

My other contemporaneous anecdotal indicator is from Howard Hughes corporation which just tried to open a food hall near me here in NYC down near the Seaport - Tin Building by Jean-Georges……they’ve been desperately trying to recruit staff for this expensive piece of infrastructure since March/April 2022…….and have failed to get a full complement…..the Tin Building opens Thursday to Sunday only (11am - 7pm). Trust me the business plan for this thing didnt have it operating a measly 40hr a week……they literally cant hire the people…..cause aggregate demand is exceeding aggregate supply in the economy…..when the Tin Building opens up 7-days a week I’ll know the Fed has started to get a handle on things.

[Dinar]

3 hours ago, Spekulatius said:

@SharperDingaan I haven’t seen craft beer pricing going up. At least the larger regional craft beer players product still can be bought in my local supermarket for  $13.95 per 12 pack. That’s surprising given the higher packaging transportation and input (hops) cost. I am guessing that margins here are shrinking.

 

I do see some movement up for wine prices, especially at the premium side.

Spek, I know that Heineken said that they will push prices through to recapture the absolute amount of cost inflation, but that will still result in margins declines (revenues go up while EBIT stays unchanged) and also the company is in the midst of a major cost cutting drive.  So that agrees with your datapoint, at least for Heineken, price hikes will not be as high as inflation.

[SharperDingaan]

4 hours ago, Spekulatius said:

@SharperDingaan I haven’t seen craft beer pricing going up. At least the larger regional craft beer players product still can be bought in my local supermarket for  $13.95 per 12 pack. That’s surprising given the higher packaging transportation and input (hops) cost. I am guessing that margins here are shrinking.

 

I do see some movement up for wine prices, especially at the premium side.

 

For the most part, the distribution channels lock in the selling price for the summer. The brewer hopes for a hot summer, and the margin on incremental volume making up for cost increases through the summer. Summer was great, but with too many brewers there wasn't the necessary volume lift to adequately compensate for cost increases.

 

Next summer is when you are going to see the higher prices, along with lots of promotion to move product. The brewers themselves clubbing together to brew their best lines in much larger contract brews that lower costs; one brewer brewing the base beer for everyone, each partner adding their own post production adjuncts, and the packager packing to partner specific specs.

 

Joe six-pack still gets his thanksgiving pumpkin spiced ale - but it comes with different flavor shots, in different containers, and in different branded packaging. 

 

SD

Edited September 18, 2022 by SharperDingaan

[Dalal.Holdings]

18 minutes ago, changegonnacome said:

 

For sure - non-farm payrolls though are MoM and relatively contemporaneous…this is the data I watch most closely to see ‘where we are’…..its a good indicator of labors leverage/bargaining power to secure pay increases….it speaks to both the labor shortage AND aggregate demand. This will be the first data to turn IMO….IF….inflation is being brought under control via a reduction in aggregate demand.

 

But unemployment figures yes will be lagging…….but getting inflation under control does fundamentally require unemployment to tick up and reach at LEAST the non-accelerating inflation rate of unemployment (NAIRU)…..and the sad reality is most inflationary cycles require a period of time where the economy sits for a time below its equilibrium output levels….i.e slack is re-introduced….and this allows for a period of re-anchoring expectations. In practice what it means is that employees are happy to HAVE a job versus demanding wage bumps at every performance review and threatening to leave.

 

My other contemporaneous anecdotal indicator is from Howard Hughes corporation which just tried to open a food hall near me here in NYC down near the Seaport - Tin Building by Jean-Georges……they’ve been desperately trying to recruit staff for this expensive piece of infrastructure since March/April 2022…….and have failed to get a full complement…..the Tin Building opens Thursday to Sunday only (11am - 7pm). Trust me the business plan for this thing didnt have it operating a measly 40hr a week……they literally cant hire the people…..cause aggregate demand is exceeding aggregate supply in the economy…..when the Tin Building opens up 7-days a week I’ll know the Fed has started to get a handle on things.

 

Just because a piece of data is reported MoM does not make it a coincident or leading indicator...

 

Quote

This will be the first data to turn IMO….IF….inflation is being brought under control via a reduction in aggregate demand.

 

Please feel free to defend this statement with evidence that NFP is the "first data to turn" in economic cycles/inflationary times. I remain unconvinced.

 

As to the Tin Building, sounds like anecdata to me...

Edited September 18, 2022 by Dalal.Holdings

[Gregmal]

18 minutes ago, changegonnacome said:

 

My other contemporaneous anecdotal indicator is from Howard Hughes corporation which just tried to open a food hall near me here in NYC down near the Seaport - Tin Building by Jean-Georges……they’ve been desperately trying to recruit staff for this expensive piece of infrastructure since March/April 2022

This again though is where it’s like ok wait a minute, can we apply some common sense here….look at that time line…is it really shocking that in city like NY, which only went full open around…March or so, that demand is off the charts for restaurant and entertainment? This is unhealthy and needs to be stopped? I mean I’m sure you recall that even as recently as December and January the city was forcing closures and carding 5 year olds. Now these businesses get to have their day and the academics say it must be stopped? Look at the reporting segments at MSGE or if you know anyone in the restaurant space ask them…and tell me the labor shortage is really hurting business. These business are finally open and able to literally charge whatever they want for the time being, after enduring absolutely ridiculous circumstances, and folks want to take that away too? Again, some of this shit is just beyond comprehension.

[Gregmal]

All you need to do to see how this plays out without some sort of academically inspired interference is look at tech and see what happened to all those companies that 12-18 months ago totally misread the COVID inspired demand surge and hired way too many people only to start laying them off a mere 3-6 months later. Before rate hikes and all. Peloton and Zoom certainly didn’t need the Feds help with anything. Supply and demand usually work on their own if given appropriate time. 

Edited September 18, 2022 by Gregmal

[Viking]

Interesting interview. First i have heard of Palantir (software company). The interview is a bit of an advertisement for the company. But there are some interesting things discussed. A few take aways:

1.) the economic model of the last 40 years is dead

- pretty much impossible to predict what China does moving forward because you have to get inside the head of one man (Xi)

2.) where the globe goes from here (economically and politically) is an open canvas

3.) the US looks well positioned (adaptability; cheap energy)

 

 

[changegonnacome]

1 hour ago, Dalal.Holdings said:

Please feel free to defend this statement with evidence that NFP is the "first data to turn" in economic cycles/inflationary times. I remain unconvinced.

 

Your right was being slightly hyperbolic…….transmission mechanism for an engineered slow down is the following (1) Money Supply followed by (2) Credit creation followed by (3) Income/Spending. The jobs market gets hit kind of last but it is where all this has to go.

 

Money supply contraction has occurred . Job Done. This only effects financial assets.

 

Credit creation is actually ‘the first data to turn” that will show the Fed is engineering the slow down required….mortgages have clearly been hit but 

 

I watch credit markets next……I can still borrow 7-year money at 2.95%…..in an economy with Core PCE of 6%…..thats negative 3% REAL for anyone doing the math….with that money I can demand cars, restaurants etc etc etc….…credit remains both too cheap and too abundant for it to effect (3)…..yet…..but it will……..my little anecdotal 2.95% rate is my canary in the coal mine here……this needs to get to 6-7% for me to start belvieing what the Fed’s doing has transmitted to the real economy sufficiently for it to achieve its aims.

 

This is the FIRST place I’ll actually see Fed having achieved something that looks like a slow down in credit creation…..which is to make credit actually have a REAL cost.

 

But I mean I’m not trying to exactly pick bottoms here (monkeys do that)…..I can just see in the data and anecdotally that we aren’t there yet by a long shot….in terms of really tackling the underlying inflation problem…….and so I remain positioned for the pain to come as Fed gets aggresive and talks tough. There is always a danger in these types of things to look for precision where none actually exists………a half blind monkey can see that financial conditions remain too loose to get the desired effects the Fed wants/needs. I dont need 40 year time series of perfect academically accepted conincident/leading data to diagnosis/recognize an overheating economy with an inflation problem where financial conditions remain too loose, the jobs market too strong….. to engineer the slow down required to ‘get back to 2’. If you want my take on where we are it that we are the end of the beginning…..the market believes we are getting close to the end. The market is wrong IMO and we’ll find out who’s right in a few months.

 

I’ll take my shorts off when I can longer borrow money at 2.95%, the Tin Building is open 7 days a week and BLS MoM data shows 2% annualized wage increases Just kidding but you get my point.

Edited September 18, 2022 by changegonnacome

[Gregmal]

Outside the box thought. NYC specifically has a pretty big labor shortage problem and a pretty big homeless problem….hmmmm. I don’t think you need a Ron De Santis to solve this.

[Spekulatius]

1 hour ago, Gregmal said:

Outside the box thought. NYC specifically has a pretty big labor shortage problem and a pretty big homeless problem….hmmmm. I don’t think you need a Ron De Santis to solve this.

Florida seems to have worse inflation than the US in general, so I don’t think De Santis knows how to solve the problem either.

https://www.bls.gov/regions/southeast/news-release/consumerpriceindex_miami.htm

 

Consumer Price Index, Miami-Fort Lauderdale-West Palm Beach — August 2022

Area prices up 10.7 percent over the past 12 months

[changegonnacome]

1 hour ago, Spekulatius said:

Florida seems to have worse inflation

 

Of course it does - its had the largest influx of consumers but not producers (workers ) of good & services = inflation.

 

Ironically NYC should, if you believe the narrative, have the lowest state inflation.....its had an exodus of consumers (millionaires/billionaires) against a relatively flat labor supply.....yet my Howard Hughes friends cant staff up a hundred million dollar food hall in lower Manhattan such that it operates 7 days a week......... even though they've been diligently trying for months & months to hire..........THIS is what monetary inflation looks like my friends.......the economy is overheating......its operating beyond its capacity to produce goods and services equal to demand.....labor shortages/prices rising....christ what more evidence do you need....its staring you in the face.

 

As I stated before......economy at full full employment for sure .............nominal spending growth of 10% .........lousy productivity growth of 3-4%.........= 6-7% price inflation.

 

This is not sustainable.....and the Fed knows it. I expect a market event post Jay Powell's 75bps rate rise and his remarks that follow will indicate a Fed that will go 75bps at the next meeting in November......and if they have to they'll keep going so that Jay-P isnt an Arthur Burns character (who's Arthur Burns, you say - he's the guy who didnt have the balls to kill to inflation in the 70's, you never heard of him, Why? because he lacked courage)

Edited September 19, 2022 by changegonnacome

[Gregmal]

https://www.homedepot.com/p/2-in-x-4-in-x-96-in-Prime-Kiln-Dried-Douglas-Fir-Stud-785326/202046915

 

Not long ago these bad boys were $12 and people thought it was because….well, I don’t know what they thought but apparently the supply chain getting fixed wasn’t enough, until it was.

 

Shortly thereafter most were convinced used cars were appreciating assets. 
 

Target and the like then shocked the world ordering wayyyy too much stuff that couldn’t be produced in an overheated economy…until it was.

 

Inflation is sinister because it’s like looking for something that keeps changing.

[fareastwarriors]

54 minutes ago, changegonnacome said:

yet my Howard Hughes friends cant staff up a hundred million dollar food hall in lower Manhattan such that it operates 7 days a week......... even though they've been diligently trying for months & months to hire.

 

Maybe they just need to pay a bit more and have consistent hours and schedules.. There are plenty of service workers working at other restaurants/markets clearly. HHC can't do better than some random mom-and-pop operators? Woe is me. 

 

I've been working as a line cook for past 3 months. The place churned through dozens of dishwashers and 7/8 cooks.  I'm in Bay Area, Ca. The dishwasher base is $17/hr + 10% share of of tips. I get the bountiful $18/hr.  

 

People were getting scheduled for 5/6 hours only when they wanted 7-8 hours or full time. Some weeks they get 30-40 hours and then next they are only scheduled for 20-30 hours. No consistency. 

 

Then our schedules keep changing almost every week. Some weeks, I'm working Sun-Wed.  Next week, I'm scheduled for Wed-Sun. I see others with opening shifts one week and then next week, they are on closing shifts. No consistency. 

 

With the constant changes, how can employees plan their lives? How can they work a 2nd job, go to school, or take care of their families? The hours and schedules are way too inconsistent. It's too hard. 

 

We were maybe fully staffed for like 2 weeks but now we constant staff shortage. I went from working 2/3 days per week to 4/5 days to help cover. 

This is not a  mom-and-pop company. The restaurant group has dozen of units and a Michelin star at one of their place. 

 

Luckily for me, I'm basically fun-FIRE so I can be extremely flexible. But I'll probably work another few months and move on. 

Edited September 19, 2022 by fareastwarriors

[changegonnacome]

On 9/18/2022 at 2:04 AM, Dinar said:

Many people are aggressively hiking prices, and will find out too late that demand collapsed, not because people can no longer afford the service/good, but because they decide it is no longer worth it.  

 

Yes indeed.......in some ways, as much as I talk about what the Fed is going to do, stagflation left unchecked is its own destroyer of aggregate demand ultimatley......I talk about the three sources of funds in an economy ala Bridgewater (1) Money (2) Credit (3) Income/Spending...........stagflation as you correctly point out ultimately hits income/spending all by itself over time.....however it is more optimal, given directed unemployment supports we have, to proactively hit a smaller number of people (unemployment) via moderating demand via monetary tightening......versus allowing monetary inflation to do it via hitting millions upon millions who sit outside established unemployment supports......the 'working poor' is the alternative reality that a Fed sitting on its hands would result in.

 

What we have right now is a Hobson's choice re:inflation.....there are no good options.....only less bad ones.

[Gregmal]

8 minutes ago, fareastwarriors said:

Maybe they just need to pay a bit more and have consistent hours and schedules.. There are plenty of service workers working at other restaurants/markets clearly. HHC can't do better than some random mom-and-pop operators? Woe is me. 

Let’s be fair here, there isn’t a whole lot Howard Hughes can do competently, outside of maybe the MPC game. Even there, they sat on some of the most desired locations and markets going into COVID and have produced significant per share losses in value. If you want to see what the real players in the NYC restaurant game do, I can probably make some introductions. But it’s certainly not HHC you want to use as a bell weather.

[changegonnacome]

4 minutes ago, fareastwarriors said:

Maybe they just need to pay a bit more and have consistent hours and schedules.. There are plenty of service workers working at other restaurants/markets clearly. HHC can't do better than some random mom-and-pop operators? Woe is me. 

 

HHC aren't dummies.......I'm sure they've tried it.....considered it......clearly something in the model 'breaks' if they do as you say.....perhaps they are foolish and from pure pig headedness have invested a couple of hundred million dollars that they dont care about......& are just happy to utilize this asset at 20% (32hrs) of its theoretically max capacity (24hr x 7 days = 168hrs).......I dont think so......i think the economy is overheating........the inflation figures agree with me.