Deflation hedges

[TwoCitiesCapital]

Any updates on deflation/inflation marks for the EU and the US?  Any suggestions as to where this quote can be viewed?

BLS does the index in the U.S.

https://www.bls.gov/cpi/

[petec]

That will show whether the contracts are in the money, but not what they could currently be sold for.

[wisowis]

US CPI out this morning for April, -0.8%, following a -0.4% for March.

https://data.bls.gov/timeseries/CUSR0000SA0?output_view=pct_1mth

Sitting at 256.4 right now. More details by category:

https://www.bls.gov/news.release/cpi.t01.htm

Many of the categories with large weights haven't budged, like Shelter, interestingly.

[StubbleJumper]

US CPI out this morning for April, -0.8%, following a -0.4% for March.

https://data.bls.gov/timeseries/CUSR0000SA0?output_view=pct_1mth

Sitting at 256.4 right now. More details by category:

https://www.bls.gov/news.release/cpi.t01.htm

Many of the categories with large weights haven't budged, like Shelter, interestingly.

Thank you for posting that.  I knew the release was coming, but I probably would not have thought to look for it for a few more days. 

It's interesting that Residential rent bumped up a shade, as did imputed rent for an owned residence.  Does that make any sense to people?  Are people in your circle currently being served a rent increase by their landlord?  Are people in your circle currently seeing their house increase in market value (which ought to be the driver of the imputed rent)?  I would say that this is not happening in Canada right now, but maybe the US is different?

As McLiu noted earlier in the thread, the options are OTM at the moment, but would require a ~10% CPI decrease from Feb to become ITM.  If the counter-party is valuing this by model for the purposes of its financial reporting, this could begin to show up as a considerable liability on its Q3 financials if we see a few more months like this (the derivatives do not need to be ITM for modelled valuation to rapidly grow).  Depending on what's happening in the counter-party's business, perhaps they will want to get the liability off its books?


SJ

[kilroy04]

Word around office space is starting to sound as if rents will be going down.  More people working from home - with a trend for this on a long term basis. Less office space need.  Don't know what will happen with residential rent.  I'm inclined to think that will trend down as well.  If you don't have a job or have less income, you move in with somebody else.  Vacancy created.  Who is going to rent that and at what price? This all seems to be deflationary pressure.  In the 2008 crisis, some of the cds gains could be seen before it showed up in the stock price.  I wonder if the same could occur here.

[StubbleJumper]

One of the things that is happening in Canada is that the AirBnB market has collapsed, which is forcing a certain number of apartments and condos into long-term rentals.  Some of the AirBnB operators had rented an apartment and were simply re-renting it through AirBnB to make a profit.  Others had made the investment to put a down-payment on a condo (or multiple condos) and were using them for AirBnB short term rentals.  Clearly, that market will be dead for the foreseeable future, and there are a few people desperately seeking long-term tenants, which seems to be pushing rental rates a bit lower.  But, does it make a difference in the CPI?

Those hedges could become interesting if prices keep dropping for another 6 months or so...


SJ

[stahleyp]

Might be a silly question, but what has to happen for them to get $100 billion?

[petec]

Might be a silly question, but what has to happen for them to get $100 billion?

Notional is actually $87bn as some contracts have expired. They pay out 1% of notional for every 1% that CPI is below the strike CPI level on the day of expiry. So for them to be worth $87bn, the price of everything in the CPI basket has to go to zero in each relevant territory. Not zero growth, zero absolute. If that happens, I’m going shopping.

Given average expiry is 2.9 years away, and they’re not currently in the money, you’ve got to have quite a rapid deflation for them to be worth $1bn at expiry, let alone $100bn.

That said, they can be sold to a greater fool, if one can be found who will pay a significant sum. And 2.9 is the average, so some of the contracts may be significantly longer. But I’d be very wary of pencilling in a best case valuation greater than a few hundred million.

[stahleyp]

Might be a silly question, but what has to happen for them to get $100 billion?

Notional is actually $87bn as some contracts have expired. They pay out 1% of notional for every 1% that CPI is below the strike CPI level on the day of expiry. So for them to be worth $87bn, the price of everything in the CPI basket has to go to zero in each relevant territory. Not zero growth, zero absolute. If that happens, I’m going shopping.

Given average expiry is 2.9 years away, and they’re not currently in the money, you’ve got to have quite a rapid deflation for them to be worth $1bn at expiry, let alone $100bn.

That said, they can be sold to a greater fool, if one can be found who will pay a significant sum. And 2.9 is the average, so some of the contracts may be significantly longer. But I’d be very wary of pencilling in a best case valuation greater than a few hundred million.

good to know. Thanks!