Author Topic: 1999 again?  (Read 47643 times)

Cigarbutt

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Re: 1999 again?
« Reply #270 on: August 07, 2020, 05:58:48 AM »
Ok, now that we've had a few responses, what about the another scenario.
Instead of 5% per annum, inflation is now 15% per annum. Interest remain @ the lower bound. Do equities continue to do well due to low interest rates? Or do they crater due to negative real rates?
Imagine running a pension fund in this scenario. Liabilities increasing by 15% annually and bonds get zip interest. There is no alternative but to yolo.
The pension CIO job these days is quite challenging it seems (if one is into scenarios (alternative) analysis).
How to determine the "discount" factor for liabilities will likely be very challenging. Instead of the typical questioning between the market-based approach and the expected return-based approach, some actuaries have started to suggest a probability-of-ruin approach. i think they should change the name because it's an approach that makes a lot of sense conceptually and is not necessarily all doom and gloom. It's simply an approach that tries to integrate how various scenarios could impact the capacity to pay future (and promised) benefits in the reality that the return on various assets is far from promised (especially at this point).
Anyways, some pension CIOs have been looking into investment postures that are specific to a low interest/high inflation environment:
http://pensionpulse.blogspot.com/2020/06/calpers-80-billion-leverage-plan.html
"SWIB {Wisconsion public pension} officials discovered that, like many pension funds, Wisconsin's exposure to equity risk comprised 90% of the fund's volatility. The pioneering change also would position the fund to endure a period of high inflation and low economic growth, a scenario of growing concern for many investors."
The Calpers' CIO, for various reasons, recently left and interesting times suggest that Calpers will not do well going forward.
At least, in an inflationary environment, the rise in future benefits is usually capped unlike the deflationary scenario where (at least with present rules) CPI-derived calculation cannot give a negative number.


SharperDingaan

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Re: 1999 again?
« Reply #271 on: August 07, 2020, 07:23:36 AM »
Inflation is just incremental $ chasing the same TOTAL quantity of goods.
$100 spent over 10 items is an average $10/item, $105 (5% inflation on $100), over the same 10 TOTAL items, and the average price/item is $10.50 (105/10). Pretty straight forward.

So where's the inflation?
Covid-19 and the global trade war, have reduced the TOTAL quantity of goods. Current spending (Covid-19 related) is clearly higher than it was months ago. If total spend is up 15% ($115)  and total quantity is down 10% (9), the average price/item should be $12.78 (115/9) - and inflation should be 27.8%/yr (((12.78-10)/10)x100). ie: very high.

There are only 3 possibilities ....
1. Current spend is not that much higher than it was under successive rounds of QE. Sure, there IS large incremental spend - but divided over the very large (QE spend inflated) base spend? % wise, it's just not that much.
2. The current total quantity of goods available is HIGHER than it was. Very unlikely, as there are shortages of goods all across the US and Canada. The US/Canada border has been closed for some time, and anything non-essential can only be met from existing inventory.
3. The inflation has been absorbed in global foreign exchange devaluations. If the US, and the Euro debase at the SAME rate, the RELATIVE US/Euro FX rate doesn't change much (what we see), if the compared country is debasing faster - we see a worsening in their FX rate (3rd world currencies)

Gold is often viewed as a hedge against fiat currency debasement.
Pick a date, as to when you think the adverse Covid-19 lock-down effects started. March-31-2020?
The closing price of gold, 3/31/2020 was USD 1583/oz. The closing price yesterday was USD 2069/oz. If the total supply/demand of gold available for trading over the 4 months (Apr, May, June, July) did not change significantly - the price change must be due to inflation About 31% PTD ((2069/1583)-1)x100 - guess where the inflation went!

If PTD debasement is this large - shouldn't you have heard about it elsewhere, as well?
You have - all the discussion on US loss of reserve currency status, and any cursory scan of 3rd world FX rates over the last 6 months. The real question is why is it that 'retail' can see this - when apparently institutions cannot?

SD
 

« Last Edit: August 07, 2020, 08:56:05 AM by SharperDingaan »

Broeb22

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Re: 1999 again?
« Reply #272 on: August 07, 2020, 07:58:25 AM »
Inflation is just incremental $ chasing the same TOTAL quantity of goods.
$100 spent over 10 items is an average 10/item, $105 (5% inflation on $100), over the same 10 TOTAL items, and the average price/item is $10.50 (105/10). Pretty straight forward.

So where's the inflation?
Covid-19 and the global trade war, have reduced the TOTAL quantity of goods. Current spending (Covid-19 related) is clearly higher than it was months ago. If total spend is up 15% ($115)  and total quantity is down 10% (9), the average price/item should be $12.78 (115/9) - and inflation should be 27.8%/yr (((12.78-10)/10)x100). ie: very high.

There are only 3 possibilities ....
1. Current spend is not that much higher than it was under successive rounds of QE. Sure, there IS large incremental spend - but divided over the very large (QE spend inflated) base spend? % wise, it's just not that much.
2. The current total quantity of goods available is HIGHER than it was. Very unlikely, as there are shortages of goods all across the US and Canada. The US/Canada border has been closed for some time, and anything non-essential can only be met from existing inventory.
3. The inflation has been absorbed in global foreign exchange devaluations. If the US, and the Euro debase at the SAME rate, the RELATIVE US/Euro FX rate doesn't change much (what we see), if the compared country is debasing faster - we see a worsening in their FX rate (3rd world currencies)

Gold is often viewed as a hedge against fiat currency debasement.
Pick a date, as to when you think the adverse Covid-19 lock-down effects started. March-31-2020?
The closing price of gold, 3/31/2020 was USD 1583/oz. The closing price yesterday was USD 2069/oz. If the total supply/demand of gold available for trading over the 4 months (Apr, May, June, July) did not change significantly - the price change must be due to inflation About 31% PTD ((2069/1583)-1)x100 - guess where the inflation went!

If PTD debasement is this large - shouldn't you have heard about it elsewhere, as well?
You have - all the discussion on US loss of reserve currency status, and any cursory scan of 3rd world FX rates over the last 6 months. The real question is why is it that 'retail' can see this - when apparently institutions cannot?

SD

I would push back on bullet point 2. In industries where there have been capacity constraints, like toilet paper, companies such as KMB and PG have intentionally reduced SKUs to enable their factories to produce more, and one representative from KMB said they saw 10-15% production increases from limiting SKUs. In POST's earnings release this AM they noted a reduction in SKUs to limit capacity constraints on machines.

wabuffo

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Re: 1999 again?
« Reply #273 on: August 07, 2020, 08:43:13 AM »


One of the things about currency debasement is that most folks (even educated PhD Economist folks) get confused about is that they think what's going on now with the USD and gold is a reflection of the US's monetary policy and the US Dollar's role in the world.   They look at the forex value of the USD vs the Euro, the Yen, the Canadian dollar and talk about a slight "weakness" of the dollar - as if the other currencies are stable.

The analogy I make is that forex rates are like riding a carousel and looking across the carousel to another seat or to the seat in front of you only -- and not sensing much relative movement.  But pick a stationary object off in the distance and you realize, you are all spinning.   That's what gold is.  Leaving aside all the emotion, gold supply is INCREDIBLY STABLE - all the gold ever mined is still in above ground stocks (in some form) and so it has the most stable supply/inventory ratio of just about anything mankind can know.  Mining supply grows the total global amount of gold inventory by 1.8% per year, every year.   So that's what the gold price is telling you (over the medium and long run).  If it is rising in price, it really means there are too many dollars being created by the US Treasury vs the amount of gold being discovered.

Back to other currencies, then.  Guess what, they are all weakening vs gold - every single one.  They look stable to us when viewed from a forex POV (just like if they are riding the same carousel with the USD).  But they are all weakening much like the USD is.   This is a global phenomenon.

Here's the Canadian dollar vs gold (over the same time frame - 2020 ytd):

Now the Euro:

and the Japanese Yen:

finally, here's the British Pound:

Don't these charts all show the same trend?  I think its because all central banks (and sovereign governments) follow the same advice from the same economics textbooks.

We'll see how this all turns out - but the Fed is hinting at a major September policy announcement.  I think they will leave the short-term rate they control at close to zero for a long time.  They are saying that they will leave it there even if inflation overshoots and goes to 4% (their thinking is like a hedge fund manager who's underperformed their target - they will take risks to get their CAGR back to their 2% cumulative CAGR target over the recent past that they undershot).  They will also probably make some attempt at yield curve control - which means they will try to buy enough long-term Treasury bonds to create a shortage. The Fed's balance sheet will grow and thus bank reserves will grow to a high level.  The huge Fed balance sheet will smother the US commercial banking sector's balance sheets with an extremely high percentage of bank total assets in cash stuck on deposit at the Fed.   None of this will work, won't affect inflation, and will be a drag on economic growth (the opposite of what the Fed claims is its goal).  The only thing that stokes inflation is what the US Treasury is doing in its very high deficit spending.   And no - the Fed buying Treasuries doesn't help the US Treasury with their massive debt issuance at all - its a non-event.

wabuffo
« Last Edit: August 07, 2020, 08:59:19 AM by wabuffo »

SharperDingaan

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Re: 1999 again?
« Reply #274 on: August 07, 2020, 08:44:05 AM »
I hear you, but for Canada/US border crossing purposes, TP is classified as an essential product along with food, medical, some manufacturing, minerals, and energy. Everything else is non-essential, even if it is a Canadian good (or imported into Canada) for Canadian use, just passing over US Rail as the most efficient way of getting from A to B. Try getting your hands on quantity of either cedar or pressure treated dimensional lumber, east of Manitoba - trees everywhere, yet shortages of wood!

SD

K2SO

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Re: 1999 again?
« Reply #275 on: August 07, 2020, 08:50:02 AM »
OK here's my contribution to the thought experiment here.

High inflation, low rates. Hugely negative real interest rates.

At this point, no private investor will buy bonds. The only buyer of the newly issued debt is the government, in the form of printed money.

They keep this up for any length of time, and hyperinflation results. I don't care if you're a reserve currency.. there is only so much money printing the system can bear.

In this scenario I want to own hard assets, including gold.  I also want to own companies with pricing power.

I also want to own global companies that can move assets and HQ around because at a certain point you need to worry about expropriation of their property.  In this case you prefer companies whose value lies in their intellectual property rather than buildings or mines (which kinda goes against the hard asset argument... not sure how to balance this).

SharperDingaan

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Re: 1999 again?
« Reply #276 on: August 07, 2020, 11:24:32 AM »
The best, and most anti-fragile asset, is you - the IP in your head, and your remaining length of time in the workforce.
If inflation comes back - simply collectively withhold your labor until you are better rewarded. If the economy craters en-mass, there is little choice for the authorities other than mass stimulus (make-work projects, benefit reliefs, skills upgrading, etc.) - free money to go back to school, and upgrade. Put bluntly - you have a long straddle on the economy, and the more volatile the economy, the more the straddle is worth to you. Fortunately, very few realize that  ;)

SD


mattee2264

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Re: 1999 again?
« Reply #277 on: Today at 03:26:35 AM »
 Also interesting that base metal prices such as copper and iron ore have not only fully recovered but are well above 2018 and 2019 lows. Also suggestive of currency devaluation from all the money printing.

 I think modest inflation isn't going to worry central banks and will be somewhat helpful in easing the debt overhang from Covid-19. The danger of course is that historically inflation has a habit of getting out of control. But things are different from the 70s.

 Firstly, there is a deflationary impact from COVID-19 for some time. Once it fades away and there is a meaningful economic recovery then the Fed will be able to raise rates and that is already priced in (10 year treasury yields below 1% but S&P 500 earnings yield still around 3-4%)

 Secondly, cost-push inflation is unlikely to be a major worry. Wage pressure is very muted and unions aren't a big factor any more. We are also a lot less reliant on commodities.

 Thirdly, there is massive inequality in society both at a corporate and individual level. Rich companies and individuals are saving not spending. Poor companies and individuals are having to operate on a shoestring.

 

SharperDingaan

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Re: 1999 again?
« Reply #278 on: Today at 07:08:39 AM »
A useful exercise is to download the Nymex WTI and Gold price history, from Mar-2020 onwards.
Set the gold price at the Apr-17 close (day before the WTI price collapse), and recalculate the WTI history after PTD devaluation (using gold prices as the inflation proxy).

Adjusted WTI peaked at USD 39.70 on June-05, and has been in DECLINE ever since.
As at close of trading yesterday (Aug-07), the adjusted WTI price is DOWN 14% - which implies that incremental demand is drawing down inventory. The unadjusted WTI price (Aug-07) since June-05 is UP 10% - a 24% price gap! 124% of adjusted WTI, as at close of business yesterday, was USD 42.57. The closing WTI price of USD 41.22, implies that the sizeable global inventory of oil is lowering price by roughly 3.2%.

Do the same thing with the leading economic commodities.
Very different views  ;)

SD