Where Does the Global Economy Go From Here?

[Jaygo]

12 hours ago, stahleyp said:

I'm not overly concerned with inflation. I'm a simple guy but it certainly seems like it's slowing down.

 

As area that I am more concerned with is deflation. I do not think the market is pricing that in. 

How do you think the would the market price that in?  Any semblance of growth would get rebid?

[Spekulatius]

4 minutes ago, Jaygo said:

How do you think the would the market price that in?  Any semblance of growth would get rebid?

Luckily, we can have either inflation or deflation, but we can't have both at the same time. 

 

One thing that people don't realize that as far as economic growth was concerned in the US and Europe, the 70's were actually better than the last decade.

 

the issue was that the growth was extremely uneven and short burst of growth were followed by sharp recessions. just look at the economic indicators during 1978-1981 if you want to have some fun. You literally had 180deg turns in the economy several times back to back during this short time period, basically a wild roller coaster ride.

[SharperDingaan]

The US Fed is not going to stop raising rates for a while yet. While the EU is currently matching the rate hikes, comes the winter energy situation, it will not be able to - and EU/GBP devaluation against the USD will worsen.

 

EU goods are getting cheaper, but the reality is that with no energy the incremental supply is limited. Goods on-shored to the US are primarily to improve supply chain robustness/resiliency; foreign cost + transport cost has relatively little to do with it. Even with the greater distance, China is still going to be a cheaper source than the EU, and for quite some time.

 

Every former treasurer, knows that to nullify FX risk; fund the foreign asset with a liability in the same currency.

Long time ago we deliberately mismatched by mortgaging in GBP to buy laddered Canada's at 1 GBP to 1.69 CAD. Today, as those Canada's mature, CAD proceeds convert into GBP at 1.49 CAD to 1 GBP or better. We end up with no GBP mortgage, and a bump in GBP equity resulting from the FX gain. While we had the GBP mortgage we lowered our UK tax bill, and used the Canada's to support tax deductible margin borrowing. The result was sizeable enough o/g gains to fund the down payment on the next property.

 

Fortune and glory!

 

SD

[LC]

Easy to say the Fed will keep raising by looking at the headlines. And I don't think the Fed cares about credibility (do they really care what the peons think?).

 

In fact I think they're actually reasonable at their jobs, or at least at what they think their jobs are. IMO they will raise until inflation recedes and then stop and reassess. 

 

It's working to an extent. A friendly low-income housing developer here in Colorado is planning to halt all new projects citing rising rates. They can't make it work. They are also a bit unsophisticated and don't bother hedging rates but that's another story. 

 

So rising rates are definitely going to slow economic activity, but they may be counterproductive to other societal goals (affordable housing). 

[Spekulatius]

1 hour ago, LC said:

Easy to say the Fed will keep raising by looking at the headlines. And I don't think the Fed cares about credibility (do they really care what the peons think?).

 

In fact I think they're actually reasonable at their jobs, or at least at what they think their jobs are. IMO they will raise until inflation recedes and then stop and reassess. 

 

It's working to an extent. A friendly low-income housing developer here in Colorado is planning to halt all new projects citing rising rates. They can't make it work. They are also a bit unsophisticated and don't bother hedging rates but that's another story. 

 

So rising rates are definitely going to slow economic activity, but they may be counterproductive to other societal goals (affordable housing). 

I do think the interest rate rises will slow down. maybe 50bps or 25 bps next. The first interest rate rises just started a bit  ore than 6 month ago and start to have an impact now.

 

Biggest mistake would be to ease to early. The 70's was the time when inflation was flaring up again and again, partly because the Fed never held course. Better to slay the inflation dragon once and for all and keep the interest rate at a certain level for a while, even if economy weakens.

 

As for inflation, if prices for let's say houses go up by 30% and then go down by 10-15%, is this deflation? I don't think so. Same with energy, food prices, cars, steel and many other goods.

Edited September 28, 2022 by Spekulatius

[Gregmal]

14 minutes ago, Spekulatius said:

 

As for inflation, if prices for let's say houses go up by 30% and then go down by 10-15%, is this deflation? I don't think so. Same with energy, food prices, cars, steel and many other goods.

Yea this is one of the more amusing aspects of this whole thing. 95% of the people squawking about inflation have no clue what they’re even talking about. How many times I’ve heard “prices need to come down” ….stopping inflation would simply mean that prices no longer go up. So no they don’t need to go down, that’s deflation. If everything price wise just froze for 12 months inflation is 0. Even though you still think prices are “high”. High prices aren’t inflation. Is a Ferrari or Patek “inflation”?

[Gregmal]

It just another laughable annual trend. In 2020 everyone became infection disease experts. 2021 they were home flippers and crypto experts. 2022 they’re inflation experts. What will 2023 bring?

[ERICOPOLY]

16 minutes ago, Gregmal said:

High prices aren’t inflation. Is a Ferrari or Patek “inflation”?

 

Well, I think it makes more sense to look at the cheapest available and see if prices have moved up.  For example, the Walmart store brand beans labeled "Great Value" (kidney, pinto, black, great northern) were only 50 cents a can two years ago.  I know because I buy them for my chili.

 

Now they are 78 cents per can.  50 to 78 in two years.

 

 

[Spekulatius]

2 minutes ago, ERICOPOLY said:

 

Well, I think it makes more sense to look at the cheapest available and see if prices have moved up.  For example, the Walmart store brand beans labeled "Great Value" (kidney, pinto, black, great northern) were only 50 cents a can two years ago.  I know because I buy them for my chili.

 

Now they are 78 cents per can.  50 to 78 in two years.

 

 

Clorox bleach prices have doubled since before the epidemic. A can went from $2.5 to ~$5. The only thing in the super market that never went up in price is beer, especially the larger regional craft beers.

[tede02]

I swung through a Dairy Queen last weekend for the first time in probably a year. Thought a small blizzard sounded good. I was stunned when the total, including tax, was just shy of $6! I don't know exactly but I would guess that price is up 50% over the last 24 months. 

[Gregmal]

4 minutes ago, Spekulatius said:

Clorox bleach prices have doubled since before the epidemic. A can went from $2.5 to ~$5. The only thing in the super market that never went up in price is beer, especially the larger regional craft beers.

Well, we know who to thank for promoting bleach. Clorox should be sending Trump and Fauci stock option packages.

 

I agree on the smaller stuff like beans, and am partially being facetious, but at the same time these are scale things. Can’t afford groceries is bull shit. Just work the math. Spek I think you even said the same thing a bit back on gas prices when you really break down what that cost is for most people.

 

If it costs an extra 10c per mile to drive to the store and you pay 40c more for bread and then 20c more for beans on top of $1 extra for the frozen pizza and $3 a pound more for the chopped meat….like come the fuck on. The biggest things to worry about really are the commodity inputs. Those getting out of hand will hurt. What’s funny now though is for instance lumber….crushed. Should help make housing more affordable right? Nope, thanks Fed!

 

The stuff we see in services is entirely our choice, whether it’s Dairy Queen or Disney, no one says you need to pay that. If you can afford to and think it’s worth it, maybe you do. If not, you don’t. Certainly not life or death inflation barometer calling for an economic nuke. 

[ERICOPOLY]

13 minutes ago, Gregmal said:

What’s funny now though is for instance lumber….crushed. Should help make housing more affordable right? Nope, thanks Fed!

 

I'm a bit interested in what will happen with rents.  There is a shortage of housing and your option to buy is gone with the rates going up and prices not coming down enough to compensate.  So your only option is to rent, so won't rent go up?

[Gregmal]

4 minutes ago, ERICOPOLY said:

 

I'm a bit interested in what will happen with rents.  There is a shortage of housing and your option to buy is gone with the rates going up and prices not coming down enough to compensate.  So your only option is to rent, so won't rent go up?

There’s still a good amount of new supply coming to market over the next few years. Much more of an institutional product than SFH so I think you’ll see stabilization rather than big increases or decreases.

[Ulti]

19 minutes ago, ERICOPOLY said:

'm a bit interested in what will happen with rents.  There is a shortage of housing and your option to buy is gone with the rates going up and prices not coming down enough to compensate.  So your only option is to rent, so won't rent go up?

https://www.apartmentlist.com/research/national-rent-data

I like their monthly reports; kinda "just the facts"

[Ulti]

Also Bill McBride gives periodic info

https://calculatedrisk.substack.com/p/pace-of-rent-increases-continues-601

[Gregmal]

I guess part of the thing too that’s baffled me on the inflation front is how much of the complaints circle around things that are 100% discretionary items. Restaurants have to be like the number one example of how “out of control” inflation is, and it’s like ok step back a minute. When TF did everyone become entitled to restaurant dining? And I guess whenever they felt it a basic human right, when did they decide that it should be cheap?

 

Restaurants are the prime example of shut down/start up/ shut down/start up crap that went on during COVID and the varying effects of such on the business. Does anyone remember the kind of antics that went on early with COVID and hospitality? Total shutdown. Now bring back 20%. Pay as always shit. Ridiculous restrictions, masks, distancing. Waiters don’t make money at 20% capacity. Prices had to go up because of all the meddling and interference. So many people in that line of work just tired of it and moved on to other fields. But now we thinks it’s because of inflation? 

[ERICOPOLY]

1 hour ago, Gregmal said:

I guess part of the thing too that’s baffled me on the inflation front is how much of the complaints circle around things that are 100% discretionary items. Restaurants have to be like the number one example of how “out of control” inflation is, and it’s like ok step back a minute. When TF did everyone become entitled to restaurant dining? And I guess whenever they felt it a basic human right, when did they decide that it should be cheap?

 

Restaurants are the prime example of shut down/start up/ shut down/start up crap that went on during COVID and the varying effects of such on the business. Does anyone remember the kind of antics that went on early with COVID and hospitality? Total shutdown. Now bring back 20%. Pay as always shit. Ridiculous restrictions, masks, distancing. Waiters don’t make money at 20% capacity. Prices had to go up because of all the meddling and interference. So many people in that line of work just tired of it and moved on to other fields. But now we thinks it’s because of inflation? 

restaurant inflation is worse than it looks because they have replaced service with technology — QR code menus, order from an ipad at the table.

 

when is the Fed going to factor this into inflation?  They adjust computer prices to account for technology when it lowers the CPI.

[ERICOPOLY]

Same with scanning and bagging our own groceries.  The cpi does not impute the wage for doing your own work.

[Parsad]

1 hour ago, Gregmal said:

I guess part of the thing too that’s baffled me on the inflation front is how much of the complaints circle around things that are 100% discretionary items. Restaurants have to be like the number one example of how “out of control” inflation is, and it’s like ok step back a minute. When TF did everyone become entitled to restaurant dining? And I guess whenever they felt it a basic human right, when did they decide that it should be cheap?

 

Restaurants are the prime example of shut down/start up/ shut down/start up crap that went on during COVID and the varying effects of such on the business. Does anyone remember the kind of antics that went on early with COVID and hospitality? Total shutdown. Now bring back 20%. Pay as always shit. Ridiculous restrictions, masks, distancing. Waiters don’t make money at 20% capacity. Prices had to go up because of all the meddling and interference. So many people in that line of work just tired of it and moved on to other fields. But now we thinks it’s because of inflation? 

 

Don't forget the inflation on tipping now too!  Frickin' starts at 18% and 20% is normal now.  What do you tip for bad service?  15%.  Sheesh!

 

Cheers!

[Xerxes]

A nice steak + few drinks cost me $145 (1 person) in Montreal in a steakhouse with friends. 

tax/tip included. The streak wasnt that good. 

 

Next time, i ll go back to TheKeg

[Parsad]

2 hours ago, Gregmal said:

I guess part of the thing too that’s baffled me on the inflation front is how much of the complaints circle around things that are 100% discretionary items. Restaurants have to be like the number one example of how “out of control” inflation is, and it’s like ok step back a minute. When TF did everyone become entitled to restaurant dining? And I guess whenever they felt it a basic human right, when did they decide that it should be cheap?

 

 

When I was a kid, restaurants (even McDonalds or A&W) were a treat for us.  Full-service restaurant dining was a once a month (if that) experience...usually only on special occasions.  

 

Today, I take my niece and nephew out to Whitespot probably once a week, plus a fancy dinner at least twice a month.  It's still nice, but loses some of the cachet of that "special occasion" experience.  The food tastes better if you go less.

 

Then you have things like DoorDash or Ubereats...now you don't even have to leave your house to spend a small fortune on fancy dining.  They'll send it to you house cold and in plastic containers at any time with a ton of additional fees...so much for saving the planet!

 

Cheers!

[Castanza]

31 minutes ago, Parsad said:

 

Don't forget the inflation on tipping now too!  Frickin' starts at 18% and 20% is normal now.  What do you tip for bad service?  15%.  Sheesh!

 

Cheers!

 

Wife and I went out to a local place last week. Waitress told us there was a mandatory 18% gratuity that goes to everyone.  Then she said they would appreciate a tip on top. I jokingly asked if there was a discount for mixing your own drinks and got a stone cold look lol...I mean c'mon...40% on top of the already raised prices is nuts. 

[Parsad]

12 minutes ago, Castanza said:

 

Wife and I went out to a local place last week. Waitress told us there was a mandatory 18% gratuity that goes to everyone.  Then she said they would appreciate a tip on top. I jokingly asked if there was a discount for mixing your own drinks and got a stone cold look lol...I mean c'mon...40% on top of the already raised prices is nuts. 

 

That's nuts!  And are they going to be paying taxes on that 40% additional income?

 

Cheers!

[Gregmal]

No business got fucked around by everything more than the hospitality biz did. Staff were all let go. Then some came back. Then let go. Hours were part time and inconsistent. Certain regions of the country didn’t allow it or even if they did have demand. Basically the entire space employment wise got nuked. It many regions it was like this for almost two years! This is before vaccine requirements and all that which guess what, doesn’t really work with businesses that rely so much on undocumented labor!
 

Places that were open, especially early, it seemed there was almost a civic duty acknowledging the hardships and I remember standard early in the pandemic was tipping 30-50%. You knew it sucked for the employees and all you had to do was open your eyes while eating. Even delivery guys got 10%.
 

Then things opened back up and eventually demand exploded and these places ain’t stupid, they saw they could raise prices as much as they wanted because most had multi month reservation lists. And they deserved to after the hardship.
 

But the worker situation is most severe on the lower/middle end of the spectrum. Never underestimate the incompetency of Howard Hughes but I haven’t seen one higher end dining joint with a help wanted sign up. On the lower end it’s every friggin store.
 

However even this, is easily solvable and that’s just by letting people exhaust themselves paying these absurd prices. Eventually folks will run out of money or find better uses for it than $75 a person meals. It’s so baffling how most can’t see the other side already….the cycle already played out with big tech. Super charged demand gets wildly misread and they can charge whatever they want and hire a million people and then demand naturally wanes and whoops now they’re firing and cutting costs lol. 

[Spekulatius]

3 hours ago, ERICOPOLY said:

 

I'm a bit interested in what will happen with rents.  There is a shortage of housing and your option to buy is gone with the rates going up and prices not coming down enough to compensate.  So your only option is to rent, so won't rent go up?

I personally think we are getting to the point where owning a single family home will be the exception not the rule. the building codes and lack of available land make sure of this. Short of a  trend where many  move back to the countryside which would reverse hundred of years of urbanization. the result is probably more multi family and apartments down the road.

 

In a way housing demand is a bit flexible too - yes you need a roof over your head, but a family can live with 1000 Sqft of 300 sqft and the amount of living space is a lifestyle choice to some extend.

 

Then there are factors impacting demand like institutional buying of single family homes which I actually think will lead to a higher possibility of a crash down the road, or the AirBnB trend which could run into trouble with city/town regulations.