Is The Bottom Almost Here?

[changegonnacome]

2 hours ago, Spekulatius said:

While the 2% target was deliberately  chosen, it is a number that makes a lot of sense.

 

Doubly so I might add that a low 2% inflation target is the 'right' number in a 'mature' economy like the USA where real growth at best is perhaps 2ish%........this is an economy where its days of big YoY productivity & output growth are well behind it.

 

I think we all accept that a good/exceptional outcome for the USA would be to have its economy grow perhaps 3-ish%....reality is more 2ish......this type of growth would be exceptional for a country this developed, this size and this technologically advanced. Well you take that 2-3ish%.....you've 1-2% real growth and 2% nominal growth and its about right.....I personally think of a country's inflation target as being actually constrained by your underlying real output/growth ability. Its less of a choice and more an acceptance around the reality of where you are in your economic development cycle. 

 

An emerging economy - one where large productivity and output gains in a single year could be 8-10%.......well you've got a little more latitude inside there to run inflation hotter. Why? Simple  - the pizza pie is getting bigger, so much quicker, because your making such large strides in growing real output & by extension real incomes. Infrastructure, P&E investments in these economy's have high incremental marginal output returns you can take a little higher inflation as there is less harm being done by inflation destroying incomes, cause incomes are growing so much faster in real terms.....the problem as I've talked about before in my USA Widget World Inc examples earlier in the thread......is that this is not the case here.....the pie (output) is growing slowly, much slower than nominal income/spending is right now hence why we have inflation.....so changing the amount of money moving around doesn't change the amount pizza to be eaten....it simply changes the quoted price per slice while hurting those most unable to bargain for nominal pay increases to maintain their purchasing power or their share of the pie.

 

In this respect one can think of an economy & its monetary base.... a little like a stock split....which everybody here gets  implicitly I think....issuing more stock doesn't change the underlying aggregate economic value being created by an enterprise....it simply divides it up into smaller chunks/claim checks, there is no extra pizza, only extra claim checks on the pizza....well an economy is no different its REAL aggregate output that matters most....you can increase nominal income all you want with 8-10% pay increases........but its chasing the same number of REAL domestic goods/services.

[Gregmal]

Come on Spek, lighten up. How funny would it be to see the reaction from all these arrogant academic lecturers currently preaching rate hikes as the only salvation, from their high horses? Spouting theories that have almost zero structurally significant supporting evidence?

[Dinar]

Why shouldn't target inflation = 0%?  Switzerland has basically done that over the past several decades and is doing very well.  

 

Datapoint on inflation - large accounting firm (several hundred professionals) asked for a price increase (did not raise fee in 2020 or 2021) of 10%, so accounting bill would be up 10% vs 2021 level.  I would have fought, but given zero price increase in 2020 or 2021, figured that it was fair.  

[TwoCitiesCapital]

On 12/4/2022 at 7:05 AM, stahleyp said:

 

It would do far, far more damage to the stock market, I suspect than the labor market.

 

Yup. 2% was chosen deliberately for a host of reasons. The stock market does best when inflation is stable AND in the 2-4% range.

 

Any higher or any lower has historically been paired with equity multiples significantly lower than average. 

 

On 12/4/2022 at 11:54 AM, changegonnacome said:

It’s one thing to change the target rate in the context of achieving said target…….quite another to change it when you’ve failed so objectively at your stated aim…..if you think Central Bank credibility matters in a fiat currency system ( and I do) then it’s not quite as simple as it might seem to change the goalposts

 

In a world of fiat/unbacked currencies, central bank credibility is ALL that matters. It's a game of confidence and once confidence is lost, it takes a LONG time to come back. 

 

The Fed has lost some credibility by not hitting their 2% target over the last decade. But that is far less damaging and egregious of an error than letting inflation sit @ 5+% for an extended period of time. 

 

US is still the cleanest dirty shirt at the moment though, so capital flows will likely continue helping the Fed in it's fight against inflation and the Treasury in its issuance. 

 

23 hours ago, Dinar said:

@Gregmal, with all due respect, I disagree that 5% inflation on a consistent basis is not a problem.  It confiscates the wealth of most people in society, except for the those able & willing to be long the stock market, and long property on a leveraged basis.  

+1 

 

The moment 5% inflation becomes ingrained is the moment the CAPE multiples drop to 10-15x where most historical observations have occurred for inflation in that range. 

 

We're currently @ 29. Down from a high of 37 from a combination of equity performance and stronger earnings now than 10-years ago. Still a long way to go down to 15x though. 

Edited December 5, 2022 by TwoCitiesCapital

[Cigarbutt]

22 hours ago, Dinar said:

@Gregmal, with all due respect, I disagree that 5% inflation on a consistent basis is not a problem.  It confiscates the wealth of most people in society, except for the those able & willing to be long the stock market, and long property on a leveraged basis.  

Somehow 'we' should strive for stable prices which could mean mild deflation or some inflation and what counts is the real income growth related to rising standards of living. 

In the above, i made an adjustment to align the two curves and the message is that 'people' will tend to do better when there is a growing gap (real income rising) between the two curves. After WW2 (not in this graph), there was some inflation and then low inflation and then significantly rising inflation in the 60s and early 70s and then 'we, the people' did quite well because 'we' kept getting ahead. An additional feature (comparatively) during those glorious years was that the real growth was more inclusive (From reading some of your posts, i realize you may not like the word inclusive but just replace with "associated with more widespread opportunities"). Anyways, a lot has been said about how Mr. Volcker slashed the inflation dragon but there were other factors including that rising inflation ahead of nominal income growth contained the seeds of its own destruction and maybe this means that the recent divergent trend between real income (basically flat) and inflation (rising ++) will tend to support what was really meant by transitory.

[Gamecock-YT]

The 2% figure was arbitrarily chosen by the kiwis back in the in late 80s. 

[changegonnacome]

1 hour ago, Gamecock-YT said:

The 2% figure was arbitrarily chosen by the kiwis back in the in late 80s. 

 

Think the point being made is a simple one.....in a fiat currency system, where confidence in your monetary regime is key...... you pick an inflation target that is low enough to be imperceptible to the population & of little concern for those making forward investment decisions in any 12-24 month period......2 is a good number, so would 2.5, so would 1.5%.

 

However the whole point of having a target like that is to STICK to it & more importantly hit it so you can demonstrate some level of competence at the monetary authority level........and this is why this debate is so stupid......to move the inflation target now when your missing it.....is to admit you are no longer fully in control of your monetary regime......and when your monetary regime is backed by nothing but the confidence in it.....well you can see how retarded this type of talk is.....but its exactly what you would expect at this point in a tightening cycle.......lets call it a version of the.....no pain, all gain workout dream......the 6 minutes ab infomercial......the "is there not any easier/shortcut way to do this that involves no work and no sacrifice" idea.....have your cake and eat too thinking. 

 

 

Edited December 5, 2022 by changegonnacome

[Ulti]

2 hours ago, Cigarbutt said:

d about how Mr. Volcker slashed the inflation dragon but there were other factors incl

 I think Currie from GS touched in this and said that energy infrastructure buildout also helped tame the dragon

[changegonnacome]

3 hours ago, Cigarbutt said:

Mr. Volcker slashed the inflation dragon but there were other factors including that rising inflation ahead of nominal income growth contained the seeds of its own destruction and maybe this means that the recent divergent trend between real income (basically flat) and inflation (rising ++) will tend to support what was really meant by transitory.

 

Inflation left unchecked in some respects will indeed burn itself out.......because spending/incomes having been hurt by diminished purchasing power will induce recession type consumer behavior - increased savings, lower nominal spending growth, rising unemployment which left to play out will indeed stabilize prices....problem here is a dimwitted Central Bank trying to 'help' then stimulates too early and starts the whole inflationary cycle off again which is what happened in the 70's and to some extent is what you would expect a dimwitted Fed to do in 2023 once the pressure mounts to 'rescue' the economy/politicians....look at the calls already to 'pivot' & look at the macro-conditions driving those calls......SPY is off only 16% YTD, unemployment hasn't budged an inch & at records lows & the economy has slowed but is still growing....imagine the squeals in 23 with unemployment inching towards 5%, SPY off 30%, economy/companies printing negative numbers...it aint easy being a Central Banker once your predecessors have used up all the easy choices on you.....JP curses Greenspan, Bernanke, Yellen every day....they got to be heroes, he has to be a villain (or does he??  )..........but back on the point - the difference between this option (non-intervention) and Fed tightening...is kind of the difference between knowingly letting a random bomb go off in Times Sq. or having a controlled explosion of a discovered device.

 

One is chaos, the other is prudence.

 

Edited December 5, 2022 by changegonnacome

[Cigarbutt]

2 hours ago, Ulti said:

 I think Currie from GS touched in this and said that energy infrastructure buildout also helped tame the dragon

Yes, for several reasons, the very unusual inflationary period in the 1970s was likely bound to peter out over time and the unusual supply-side effects of oil and commodities as well as the 1970s capex boom may have been instrumental but for the capex boom part, a larger historical perspective does not tend to strongly support that specific factor as a significant independent variable:

Apologies for the space taken linked to this macro (and potentially irrelevant) topic.

[changegonnacome]

Genuine goods news on how inflation gets fixed - that doesn't involve tanking the economy & jobs market

 

 

I'm not saying its enough - but surprises to the upside on productivity growth is what we need.

 

Democrats and Republicans doing comprehensive immigration reform in Q1 2023 would also be another.......I included that wish however in my letter to Santa  

 

Edited December 7, 2022 by changegonnacome

[Red Lion]

2 hours ago, changegonnacome said:

Democrats and Republicans doing comprehensive immigration reform in Q1 2023 would also be another.......I included that wish however in my letter to Santa  

 

 

Wholeheartedly agree with this sentiment. 

[Gregmal]

 

 

Sticky icky, icky. 

[Libs]

As usual, Wabuffo is on to something. Prof Siegel says it too. Housing costs are being overstated, which massively distorts the picture. 

[Spooky]

New Howard marks memo just dropped, talks about the effects of declining interest rates over the last 40 years on investment returns and how there is a sea change happening:

 

https://www.oaktreecapital.com/docs/default-source/memos/sea-change.pdf?sfvrsn=a69a4066_7

 

Ends on the note that his base case is rates in the 2-4% range and doesn't see them dropping back to 0-2% any time soon and the investment strategies that worked best over the past 13 years may not be the ones that outperform in the years ahead. I think he is correct.

 

[Gregmal]

That’s 100% it. It wasnt the inflation hoax…but the accompanying rate floor going forward which changes a lot of the strategy viability going forward. The decade of carrying Googles, Mastercard/Visa and Costcos on margin cuz 1-2% carry cost is basically free is done. That’ll take a while to unwind. But there’s plenty of other stuff to buy anyway so who cares.

[Luke]

31 minutes ago, Spooky said:

New Howard marks memo just dropped, talks about the effects of declining interest rates over the last 40 years on investment returns and how there is a sea change happening:

 

https://www.oaktreecapital.com/docs/default-source/memos/sea-change.pdf?sfvrsn=a69a4066_7

 

Ends on the note that his base case is rates in the 2-4% range and doesn't see them dropping back to 0-2% any time soon and the investment strategies that worked best over the past 13 years may not be the ones that outperform in the years ahead. I think he is correct.

 

A reason why i shifted in stock picker, value investing type buisnesses lately. BRK, Markel, bit of Fairfax.

[Parsad]

5 hours ago, Gregmal said:

 

 

Sticky icky, icky. 

 

Don't quite agree with this. 

 

Agree that inflation is coming down.  Don't agree that you can take out Food and Energy.  It's like people using EBITDA all the time.  Not completely accurate in showing what is going on with consumers. 

 

Just like FED was slow in noticing inflation, this would give the opposite inaccurate picture.  

 

Cheers!

[UK]

https://www.wsj.com/articles/inflations-cold-case-11670949172

 

Moreover, that gain was driven by an increase in shelter costs. These largely reflect rents, since the Labor Department measures homeowners’ housing costs by calculating what it would cost them to rent their homes. Lately rent prices have been cooling, with data from rental marketplace Apartment List showing them falling during each of the past three months, for example. But because the Labor Department’s rent measures reflect not just newly signed rents but existing leases, it is slow to pick up such shifts. So the Labor Department’s shelter-cost measure seems destined to slow in the months ahead—something of which the Fed is well aware. Exclude shelter costs and core prices fell by about 0.1% in each of the last two months. Those were the first declines since May 2020. Meanwhile, the combination of easing supply-chain problems, cooling consumer demand, weakness overseas and many retailers’ still too-high inventories should continue to put downward pressure on goods prices. And while there is some worry that rising labor costs could lead to protracted services inflation, services prices excluding rents have eased in each of the past two months. It isn’t a given that every inflation report in the months ahead will show such unambiguous signs of cooling as Tuesday’s, but inflation’s temperature will keep dropping all the same.

 

[Spooky]

1 hour ago, Luca said:

A reason why i shifted in stock picker, value investing type buisnesses lately. BRK, Markel, bit of Fairfax.

 

Same. BRK and Constellation Software - companies with low debt and cash flow to deploy in volatile times.

[UK]

 

[fareastwarriors]

Inflation buster

 

 

[Gregmal]

Dude the amount of people who fell for this is hilarious, and also, the amount of people who fell for this is way smaller than one would think. Half the folks pushing this hoax were finance people with bets on higher rates and recessions. It was a clear covid related digestion issue. Once the turd passed through the intestinal tract, it was over. Just a matter of time. 

[Spekulatius]

16 hours ago, UK said:

https://www.wsj.com/articles/inflations-cold-case-11670949172

 

Moreover, that gain was driven by an increase in shelter costs. These largely reflect rents, since the Labor Department measures homeowners’ housing costs by calculating what it would cost them to rent their homes. Lately rent prices have been cooling, with data from rental marketplace Apartment List showing them falling during each of the past three months, for example. But because the Labor Department’s rent measures reflect not just newly signed rents but existing leases, it is slow to pick up such shifts. So the Labor Department’s shelter-cost measure seems destined to slow in the months ahead—something of which the Fed is well aware. Exclude shelter costs and core prices fell by about 0.1% in each of the last two months. Those were the first declines since May 2020. Meanwhile, the combination of easing supply-chain problems, cooling consumer demand, weakness overseas and many retailers’ still too-high inventories should continue to put downward pressure on goods prices. And while there is some worry that rising labor costs could lead to protracted services inflation, services prices excluding rents have eased in each of the past two months. It isn’t a given that every inflation report in the months ahead will show such unambiguous signs of cooling as Tuesday’s, but inflation’s temperature will keep dropping all the same.

 

The chart really shows that 3 month worth of data isn't worth much imo. I actually agree that it looks like the worst is over, but we could still have a 5% inflation run rate right now. We cant use monthly data and I think YoY data is the right way to go about this. When you want to control something with a lot of noise, the last thing you want to do is react to every high frequency input.

[maplevalue]

5 hours ago, Spekulatius said:

The chart really shows that 3 month worth of data isn't worth much imo. I actually agree that it looks like the worst is over, but we could still have a 5% inflation run rate right now. We cant use monthly data and I think YoY data is the right way to go about this. When you want to control something with a lot of noise, the last thing you want to do is react to every high frequency input.

 

I am not sure I would agree with your statement that CPI has a lot of 'noise' right now. Instead, the way I look at it is that the underlying trend of inflation has fluctuated quite a lot recently, and there great uncertainty about the path going forward (despite what confident 2023 year ahead pieces would say!).

 

To me this makes each recent datapoint extremely important as it gives us a better understanding as to what the 'true' inflation level is in an economy emerging from all the disruption of the last few years.

 

If we get a couple more prints like this the question will become when does the Fed restart QE.