Is The Bottom Almost Here?

[Intelligent_Investor]

1 hour ago, Gregmal said:

https://www.cnbc.com/2023/01/24/greedflation-food-brands-may-be-profiteering-from-price-hikes.html

 

Just more anecdotal evidence of whats really the root of remaining inflation. Some of my favorite inflation litmus tests while strolling through the stores are frozen French fries, and canned soup. Check the generic, and the name brands and how the prices move around. Its all pretty fascinating. Both follow very similar patterns now going on 6+ months. Regular everyday price is maybe 10-20% higher than pre covid. Maybe $3-3.50 for each on the name brand side and $2-2.50 for generic. Generic never moves. Randomly the name brand goes up for a bit to about $4-4.30. It holds there for a week or two, and then like clockwork you have these massive inventory blowout sales, $1.99 for the fries and like 4/$6 on the soup. Supply and demand. 

Definitely higher than 10-20% of pre covid prices, where I live most stuff is at least 40-50% more expensive than pre covid, eggs for me are up 200+%

Edited January 24, 2023 by Intelligent_Investor

[Dinar]

It is very area and product specific.  For instance, NYC real estate prices seem to be unchanged vs 2019, yet in the suburbs real estate prices rose 20-40%?   In Florida probably 50%+?  Although property taxes and maintenance at co-ops and condos up 30%+  in NYC.  Private school and nursery school tuition in NYC is probably up 5-15% vs 2019 for 2023-2024 season.  Healthcare probably up 20%+ since 2019.  Haircuts are up 50% in Manhattan since 2019 and the same on Staten Island.  Food is probably up 30-50% vs 2019, restaurants up 20-50%, the more expensive ones - Michelin up closer to 20%, the Chipotle up 50%.  

 

So what is the inflation rate?  

[Guest]

10 minutes ago, Intelligent_Investor said:

Definitely higher than 10-20% of pre covid prices, where I live most stuff is at least 40-50% more expensive than pre covid, eggs for me are up 200+%

 

Was at the store the other day. Probably within the past year or two, eggs were like $0.88 a dozen. Now around $4.55. That is wild. 

[Gregmal]

Yea most grocery is higher but fries and canned soup I like because those markets have both real inflation inputs, plus also monopoly like characteristics, which should really present a nice window into the worst of the worst as far as “inflation + price gauging” is concerned. Hence the regularly fluctuating prices being so drastic, $1.50-$4.50 is quite the price range to see repeatedly show up on the shelves.

[MikeL]

another round of consumer product price increase might come soon, even though cost of goods might not increase, but companies are all greedy, they want to take this opportunity to make more money, same as retailers, that's why consumers got double hit...at least that's the case in Canada

[mattee2264]

Not sure I completely buy the "inflation added 20% to nominal earnings" and therefore by implication justifies an extra 600-800 points on the SPY argument compared to pre-pandemic levels.

 

We are already seeing some discounting and while firms were very proactive about increasing their prices early on taking advantage of pricing power and a relatively strong economy they are also going to find their costs go up and a lot of costs e.g.. wage costs show a lagged response to inflation. And willingness to pay higher prices is going to decline once layoffs start to hit and people adjust to higher prices by looking for cheaper alternatives or economizing and revenues are equal to price x quantity sold so if quantity sold starts to slide in a recession earnings will fall even if prices remain elevated.

 

 

[Ulti]

34 minutes ago, Gregmal said:

worst of the worst as far as “inflation + price gauging” is concerned.

 G; I worked at grocery stores in high school, college and grad school. all departments including meats, produce, stocking etc. ( use to get tipped in the "70s" at Christmas with booze and cash!  )  I certainly pay attention to unit pricing etc everytime I shop; more than the average person I suspect. A few observations:

There is certainly some inflation going on at the wholesale level... Talking with folks in the fish department for example... labor shortages, fuel cost, feed... antibiotoic cost for farmed raise... not to mention transportation particularly international....this is thruout all depts. I suspect that this will continue into the future.  I also suspect that gauging ..Non organic \organic switching etc is going on ( why not lie and double your price). Will see how much pricing power Whole Paycheck ..etc has on the retail side.

Volumes \traffic is already down at W. P.  Pay has been flat hard to find workers shelves are poorly stocked for some items ... and expensive items are discounted and not replensished. Publix has seen to have held up better but they are dealing with the same issues....If I had to break it down, I would guess

about 50% inflation 50% ripoff......and both levels...

 

 

 

[Gregmal]

8 minutes ago, Ulti said:

 G; I worked at grocery stores in high school, college and grad school. all departments including meats, produce, stocking etc. ( use to get tipped in the "70s" at Christmas with booze and cash!  )  I certainly pay attention to unit pricing etc everytime I shop; more than the average person I suspect. A few observations:

There is certainly some inflation going on at the wholesale level... Talking with folks in the fish department for example... labor shortages, fuel cost, feed... antibiotoic cost for farmed raise... not to mention transportation particularly international....this is thruout all depts. I suspect that this will continue into the future.  I also suspect that gauging ..Non organic \organic switching etc is going on ( why not lie and double your price). Will see how much pricing power Whole Paycheck ..etc has on the retail side.

Volumes \traffic is already down at W. P.  Pay has been flat hard to find workers shelves are poorly stocked for some items ... and expensive items are discounted and not replensished. Publix has seen to have held up better but they are dealing with the same issues....If I had to break it down, I would guess

about 50% inflation 50% ripoff......and both levels...

 

 

 

Totally. I can’t think of a better category for pure inflation than wild caught fish.

[Castanza]

Edited January 24, 2023 by Castanza

[changegonnacome]

3 minutes ago, mattee2264 said:

We are already seeing some discounting and while firms were very proactive about increasing their prices early on taking advantage of pricing power and a relatively strong economy they are also going to find their costs go up and a lot of costs e.g.. wage costs show a lagged response to inflation.

 

Yep - early stages of inflationary cycle feel & look quite good flattering financial results.......firms push price, those prices land without hurting volume, margins expand & increased revenue drops to the bottom line.......so you get a peaking of margins in the initial stages of an inflationary cycle.............but peak margins are now firmly in the rearview mirror........2021/ 2022 will be something of historical peak on that metric for SPY......https://www.barrons.com/articles/stocks-profit-margins-fall-51674239840

 

Margins start falling because soon after you've successfully pushed price, your suppliers/employees start demanding pay/unit increases due to the wider inflationary pressures they themselves are feeling........Central banks having observed inflationary pressures, start to raise interest rates hurting credit creation and by extension spending, then incomes...........customers feeling cost of living pressures/credit contraction start trading down to lower margin products (own brand/non-organic) and/or reduce volume.....pushing price, growing/maintaining volume becomes discounting & failing volume...........and you get to about where we are now and things start to roll over - Which is 2023 earnings downgrades are at fastest pace since 2009 (see vid).

 

I expect consistent with this thesis that many companies will just barely 'make the quarter', many will probably miss in this earnings go round .....lots of management games & one-time levers being pulled like Apple releasing iPhone's a few weeks earlier than usual to pretty up Q4 numbers........then the oldest tricks in the book come out to keep the show on the road ..which is cutting advertising budgets.............first budgets to go are the marginal non-core advertising buckets those that go to the likes of SNAP/TWTR/CDLX etc., but eventually you have to cut into core budgets.... digital advertisers like GOOGL, META.....you then also start layoffs..........but as I've said before in a circular economy with everybody in unison attempting to tighten their belt....ultimately NOBODY achieves said belt tightening because aggregate demand across the economy falls........the 'paradox of thrift' in action.

 

 

 

[Saluki]

Inflation is a notoriously tough thing to measure. When I was a law student I did some research for a professor who wrote articles on that. The number is hard to pin down because a computer today does more than a computer 10 years ago, and does it for a smaller price, so that's deflationary.  But before the 1980s no one had a home computer, so if you are trying to measure inflation over long periods of time, you can track the price of gold back to roman times, but not for other things that are a bigger part of our lives.  Houses cost more now, but they are bigger and more energy efficient. A car costs more now than it did 100 years ago, but a Ford Focus is nothing comparable to a Ford Model T. And if there is, say a sudden spike in beef prices, it looks like food costs went up for everyone, but consumers faced with 2x the cost of beef will probably buy pork or chicken instead, so if the amount they spend on food didn't increase did they suffer from inflation? Also, policy makers like to talk about core inflation when deciding policy, which doesn't include energy or food prices, which isn't useful unless you are person who doesn't eat or require heat/A/C in your home and don't drive a car. 

 

A book I'm reading now, The Price of Money, warned that metrics "imitate science but resemble faith". I've seen that housing prices shot up 50% last year in the part of Florida where my parents live.  But where I live on the mid-atlantic, Zillow says my house is down 10% from last year. 

 

I think with regard to making financial decisions, whether stocks or real estate, we have better outcomes when we do bottom up than top  down.  

[Gregmal]

18 minutes ago, changegonnacome said:

 

Yep - early stages of inflationary cycle feel & look quite good flattering financial results.......firms push price, those prices land without hurting volume, margins expand & increased revenue drops to the bottom line.......so you get a peaking of margins in the initial stages of an inflationary cycle.............but peak margins are now firmly in the rearview mirror........2021/ 2022 will be something of historical peak on that metric for SPY......https://www.barrons.com/articles/stocks-profit-margins-fall-51674239840

 

Margins start falling because soon after you've successfully pushed price, your suppliers/employees start demanding pay/unit increases due to the wider inflationary pressures they themselves are feeling........Central banks having observed inflationary pressures, start to raise interest rates hurting credit creation and by extension spending, then incomes...........customers feeling cost of living pressures/credit contraction start trading down to lower margin products (own brand/non-organic) and/or reduce volume.....pushing price, growing/maintaining volume becomes discounting & failing volume...........and you get to about where we are now and things start to roll over - Which is 2023 earnings downgrades are at fastest pace since 2009 (see vid).

 

I expect consistent with this thesis that many companies will just barely 'make the quarter', many will probably miss in this earnings go round .....lots of management games & one-time levers being pulled like Apple releasing iPhone's a few weeks earlier than usual to pretty up Q4 numbers........then the oldest tricks in the book come out to keep the show on the road ..which is cutting advertising budgets.............first budgets to go are the marginal non-core advertising buckets those that go to the likes of SNAP/TWTR/CDLX etc., but eventually you have to cut into core budgets.... digital advertisers like GOOGL, META.....you then also start layoffs..........but as I've said before in a circular economy with everybody in unison attempting to tighten their belt....ultimately NOBODY achieves said belt tightening because aggregate demand across the economy falls........the 'paradox of thrift' in action.

 

 

 

My pushback is that you had a lot of things priced in last year. Whats left of the bear case, is basically just regular old, run of the mill, call it 50x a year every year until it works, recession guessing. And valuation shorting which at this point, everyone in the world should know is a horrible idea. Individually, its probably the difference between shorting Tesla, or shorting Google/Apple. One is really capital intensive and deteriorating, while the others are great businesses... its simply an arrogance exercise of "I disagree with the market's multiple" type thing. 

[Ulti]

https://www.reuters.com/business/retail-consumer/walmart-raise-wages-us-workers-2023-01-24/
It seems like

Whether we are talking about fish chicken pasta… old economy items like oil metals materials….demographics , retirements and the need for labor… is going to keep inflationary pressure going for awhile longer…..

27 minutes ago, Gregmal said:

One is really capital intensive and deteriorating, while the others are great businesses

Having been an investor in tobacco during inflationary times… I wonder if

Google/Apple are the modern day equivalent 

[changegonnacome]

Yeah I think as I’ve laid out - we had multiple contraction last year…..now it’s earnings contractions turn….for the reasons I stated….don’t think you need an economic recession per se…..for earnings to take a significant tumble….in fact I’d argue the Goldilocks scenario requires the corporate sector to absorb pain enough to bring us “back to 2”….pain enough that actual employment holds up and GDP doesn’t go negative….frankly we should all be hoping it’s the E that’s acts as the shock absorber for the Fed’s disinflationary zeal. Inflation is solved by depressing aggregate demand to bring it back in alignment with supply. Better the demand destruction occurs only in the corporate sector…..for sure zombie companies through bankruptcy puking out labor such that it’s allocated to more economically productive activities is one answer to growing supply….likewise big tech trimming the fat and reducing America’s population of full time foosball & air hockey players and recycling that human capital back into actually writing code to make insurers/banks/factories more efficient. This is all good stuff in the productivity and aggregate supply battle.
 

Something is gonna get it the neck from all this financial tightening & consumer weakness, better it’s the corporate sector and not the household sector.

Edited January 24, 2023 by changegonnacome

[changegonnacome]

1 hour ago, Saluki said:

Inflation is a notoriously tough thing to measure.

I tend to skip all the hedonic adjustments nonsense….and all the broad measures….I think about what Joe six pack buys each week….and so I look at nominal food & housing services + some measure of domestic services inflation…..energy matters but is volatile and requires sustained periods of elevation to really really start to matter.

 

But really forget all that..….in a full employment / output economy……like we have now…….where there’s little question USA Inc. is at its productive capacity with no slack or capacity on the sidelines to be brought on…..it’s very easy to get a descent gauge of inflation & inflationary pressures…..and that’s by looking at % productivity growth against MoM increases in non-farm payrolls from BLS and then annualize…..the delta between those numbers in excess of 2 (the Fed’s inflation target) is a very good ballpark for undesirable inflation.
 

I’m anxiously waiting for January’s figures to come out in early Feb….I’m getting some sense that there was a modicum of wage restraint in EoY 22…due to inflation expectations remaining anchored…..but as I’ve said a billion times I don’t worry about the journey from 9% to 4-5% inflation prints….it’s a zinch and a slam dunk….it’s 4% down to 2% that will disappoint many with its persistence & stubbornness as well as the time it takes.

 

Using my methodology above - 1.5% productivity growth met by ~5% increase in non-farm payrolls (or aggregate income growth) lands you with ~3.5% inflation….you can see how even with wage restraint & modest-ish increases in incomes…you overshoot the Fed’s inflation target by a lot….no wonder the Fed is counseling for rates to remain elevated for longer than what’s priced in in the bond market.

[Spekulatius]

5 hours ago, Dinar said:

It is very area and product specific.  For instance, NYC real estate prices seem to be unchanged vs 2019, yet in the suburbs real estate prices rose 20-40%?   In Florida probably 50%+?  Although property taxes and maintenance at co-ops and condos up 30%+  in NYC.  Private school and nursery school tuition in NYC is probably up 5-15% vs 2019 for 2023-2024 season.  Healthcare probably up 20%+ since 2019.  Haircuts are up 50% in Manhattan since 2019 and the same on Staten Island.  Food is probably up 30-50% vs 2019, restaurants up 20-50%, the more expensive ones - Michelin up closer to 20%, the Chipotle up 50%.  

 

So what is the inflation rate?  

Well, the Burrito at Chipotle next to my work went from ~$7.5 in late 2018 to $11.4/7.5 - up 52% so that's about right.

 

Edited January 24, 2023 by Spekulatius

[dealraker]

38 minutes ago, changegonnacome said:

I tend to skip all the hedonic adjustments nonsense….and all the broad measures….I think about what Joe six pack buys each week….and so I look at nominal food & housing services + some measure of domestic services inflation…..energy matters but is volatile and requires sustained periods of elevation to really really start to matter.

 

But really forget all that..….in a full employment / output economy……like we have now…….where there’s little question USA Inc. is at its productive capacity with no slack or capacity on the sidelines to be brought on…..it’s very easy to get a descent gauge of inflation & inflationary pressures…..and that’s by looking at % productivity growth against MoM increases in non-farm payrolls from BLS and then annualize…..the delta between those numbers in excess of 2 (the Fed’s inflation target) is a very good ballpark for undesirable inflation.
 

I’m anxiously waiting for January’s figures to come out in early Feb….I’m getting some sense that there was a modicum of wage restraint in EoY 22…due to inflation expectations remaining anchored…..but as I’ve said a billion times I don’t worry about the journey from 9% to 4-5% inflation prints….it’s a zinch and a slam dunk….it’s 4% down to 2% that will disappoint many with its persistence & stubbornness as well as the time it takes.

 

Using my methodology above - 1.5% productivity growth met by ~5% increase in non-farm payrolls (or aggregate income growth) lands you with ~3.5% inflation….you can see how even with wage restraint & modest-ish increases in incomes…you overshoot the Fed’s inflation target by a lot….no wonder the Fed is counseling for rates to remain elevated for longer than what’s priced in in the bond market.

change, I haven't seen it posted elsewhere....but Grantham is out with yet another paper!  Let that active economist mind of yours rip right on through it and let us know what you think!

[Ulti]

https://apnews.com/article/tipping-fatigue-business-c4ae9d440610dae5e8ff4d4df0f88c35?utm_source=homepage&utm_medium=TopNews&utm_campaign=position_11
 Talk about inflation 

[Gregmal]

23 minutes ago, Ulti said:

https://apnews.com/article/tipping-fatigue-business-c4ae9d440610dae5e8ff4d4df0f88c35?utm_source=homepage&utm_medium=TopNews&utm_campaign=position_11
 Talk about inflation 

I don’t get this at all. Just don’t tip for those things. If people don’t have the balls to click a button they deserve to be taxed. 

[changegonnacome]

36 minutes ago, dealraker said:

change, I haven't seen it posted elsewhere....but Grantham is out with yet another paper!  Let that active economist mind of yours rip right on through it and let us know what you think!

 

Thanks @dealraker had a quick look - he doesnt go into much on the economic side inflation etc.......more on historic market parallels to previous busts but funnily enough and @Gregmal will hate this , he makes a point similar to Greg which is, perhaps, just perhaps the big moves have already happened and he's less certain now on the predictability of next move down or up!

 

So while Im sure its uncomfortable for @Gregmal to sound like Grantham!......its doubly uncomfortable for me to more bearish than Grantham (although he does talk about SPY 3000/3200)......

 

I'm coming around to the following thesis based on anecdotal evidence (but waiting for BLS data in early Feb to back it up) that were going to have continued linear falls in inflation into the year to about ~3.75% to 4%....but then find ourselves stuck in the mud around there with disappointing MoM flattening, maybe some annoying flare ups........then only serious weakness in the economy/labor market will be shown to be capable of moving us below this.......Grantham does talk about excess savings and chimes with what Jamie Dimon has said about these savings running down and then OUT by the middle of this year.......H2 2023 feels to me like the real wiley coyote moment....excess savings run out, dis-inflationary MoM progress stalls out, the Fed doubles down on its resolve to remain higher for longer to get us from 4 to 2%, the economy weakens, unemployment moves up AND most importantly the Fed just sits there doing nothing talking about the risk of doing too little being greater than doing too much........... all while the corporate sectors ability to pull levers to 'make the quarter' run out.......and you just start getting horrible earnings prints. Let's see. It's the best show on earth to see how it all plays out and then you've got all the unknown unknown's out there waiting in the wings.

 

I'm hiding out in companies mainly outside the US where valuations aren't so challenged, companies that are the beneficiaries of consumers trading down & companies where higher rates for longer are a good thing. I'm a slightly less than a fully invested bear right now......as some trimming on gains has been recycled into short duration bonds where I can live with 4%+ 'safe' returns and wait for some fat pitches to show up.

[changegonnacome]

49 minutes ago, Gregmal said:

I don’t get this at all. Just don’t tip for those things. If people don’t have the balls to click a button they deserve to be taxed. 

 

Yep love the way Toast, Clover & Square's go-to-market strategy & value prop to merchants is that our fancy PoS terminals can get morons to tip your staff, where they didn't before, & so all things being equal you the employer wont have to pay them as much.

 

Its genius on their part to use social pressure/proof as way to fuel their growth........and as a result I expect to see the things everywhere over time. Incidentally its reminder for me to look more into Fiserv (owner of Clover) its an awesome business and those three seem to have captured the bulk of these types of payment systems.

 

 

Edited January 24, 2023 by changegonnacome

[vinod1]

Read Grantham's latest. His fair value for S&P 500 is 3200. His assumption on required return is 6.5% real (not stated in article but I have been following him for 20+ years and understand his methodology). So about 9% nominal. Change to 8% and fair value ends up being 3600-4000 range which is my estimate.

 

Vinod

[Gregmal]

^ yup that’s the problem with these guessing exercises and “I disagree with the valuation” games. One or two minor things are off, and it’s rubbish. 

[Ulti]

2 hours ago, Gregmal said:

I don’t get this at all. Just don’t tip for those things. If people don’t have the balls to click a button they deserve to be taxed. 

I handle this the old fashion way… I ask for the tip jar and put a little cash in … tell the employees I wanna make sure they and not the company gets the cash… and I usually will tip 10% or less if I’m picking up/ drive thru

[Gregmal]

Yea my rule of thumb varies but you don’t tip for a coffee or any sort of pickup food unless it’s an exceptionally unique situation. That sort of crap is a cash grab. Maybe ice cream where it’s a family business and high school kids working the counter…sure. But not stuff like Starbucks or whatever. Delivery which is never high end, it’s usually just a flat $5-10. If you sit down to eat, even a pizza joint, if someone is serving you, the greater of $20 of 25%. If you can afford to eat at a $400 a dinner place, you should be able to afford to tip $100. That’s how I think about it. Bar is $1 a drink. I’ve never seen a cocktail that takes longer than 3 minutes to make.

Edited January 25, 2023 by Gregmal