Credit deflation and the reflation cycle to come (part 2)

[Talking Monkey]

35 minutes ago, HousePriceMania said:

When I went to India I got the feeling they hated the British.

 

Nah they like us, obviously some are going to hate us but most like us I reckon in India. 

[Noallegiance]

41 minutes ago, HousePriceMania said:

When I went to India I got the feeling they hated the British.

 

Yeah but what about the English takeaways?

I'll have the blandest thing on the menu!

[nirvana]

3 hours ago, Noallegiance said:

DHs melt up. It's on!

not whilst the dollar won't die.....and it's closer to 93 today than it is to 92 

someone loves them dollars! and the fucker ain't dying just yet

[DurhamBorn]

40 minutes ago, Agent ZigZag said:

That is the key statement for this thread. With the bond market so huge when the sell off happens and it starts looking for a home then the only place in town with be the equity markets especially those areas discussed in this thread. As a question what signs do you look for in your macro analysis that this is happening or is  going to happen and with vigour.

Fed stopping QE ,most see that at bullish for bonds,but it isnt because it means the Fed thinks there is enough inflation in the system to work through.Lag on that could take the whole cycle given how much there is sat there.Bonds sold to buy inflation assets,or to buy goods that are inflating means the same thing for holders of those areas.

[HousePriceMania]

44 minutes ago, Talking Monkey said:

Nah they like us, obviously some are going to hate us but most like us I reckon in India. 

https://historiesofcolour.com/THE-BRITISH-RAJ

That's like saying the Irish love the queen.

[HousePriceMania]

6 minutes ago, DurhamBorn said:

Fed stopping QE ,most see that at bullish for bonds,but it isnt because it means the Fed thinks there is enough inflation in the system to work through.Lag on that could take the whole cycle given how much there is sat there.Bonds sold to buy inflation assets,or to buy goods that are inflating means the same thing for holders of those areas.

Their next meeting is next week, two fed members sold out last week.

People think they wouldn't be so corrupt as to sell just before taper was announced.

These are bankers.

Tapering announcement next week I think. 

[nirvana]

the ECB is going full moron lol

https://www.bloomberg.com/news/articles/2021-09-16/ecb-to-scrutinize-banks-trading-books-to-expose-climate-risk

so at this rate the Yuro is gonna die long before the USD and the DXY is never gonna get anywhere near 85 never mind 80 

[JMD]

2 hours ago, belfastchild said:

There will be a new variant out soon. 95% mortality rate. Good news is that it is inactive above 17C and in the dark, so turn down the heating and turn off the lights...

I can (kinda) believe that about the next Covid variant. Perhaps in future, they may look into integrating the track+trace app. with peoples smart meters - job done!! (complete 360 control policy!!)

[nirvana]

you guys been reading about Evergrande? The most indebted company in the world by a factor of at least 2x lol

If those fukkers default, well they have already really methinks, what impact is that gonna have?

And maybe that's why the dollar is appreciating at the moment cos it smells danger....and this time the danger is no good for yer gold n silver

might liquidate some stuff to be on the safe side, could be an exciting weekend 

[Sugarlips]

Silver taking a fresh pasting today, could be an opportunity for those who want in, I’ll keep adding here.

[Noallegiance]

What really causes inflation? Here’s what prices since 1970 tell us | MoneyWeek

[sancho panza]

5 hours ago, ThoughtCriminal said:

Well he doesnt invest, too lazy by his own admission, so thats where some of our forum gurus come in.

 

Any ideas anyone?? 

I think this would have me looking at the Scottish play tbh as they will hoover up the accounts of the failed companies.Can't believe I've sjut said that given how muc i the red we are on them.

 

Always nice to see the thoughts of people in the industry TC

3 hours ago, DurhamBorn said:

Looking at things this morning i think the FED will stop printing in Jan or Feb.Thats what the numbers are saying,outside of a BK.Bubble stocks should top out between now and the end of the year,then enter a big long bear.

The liquidity like we thought looks like its going to be sucked up by energy and labour.Lots of liquidity out of bonds and bubble into value and cyclical over the cycle.

I think the crash at the end of this next cycle is looking likely to be the worst ever.Time for that later though.

I did some research a while back and it showed that teh market leaders into 2000 were falling heavily well before the Oct 2000 drop kicked in and sent it into BK territory.

S&P peaked in Mar 2000,started crashing Oct 2000,Microsoft peaked in Dec 1999 and was down nearly 50% by May 2000.There were other examples but I don't want to bore on.There is precedent for what you're saying here DB.

1 hour ago, DurhamBorn said:

Fed stopping QE ,most see that at bullish for bonds,but it isnt because it means the Fed thinks there is enough inflation in the system to work through.Lag on that could take the whole cycle given how much there is sat there.Bonds sold to buy inflation assets,or to buy goods that are inflating means the same thing for holders of those areas.

It's the old Buffet saying about 'if you can't see the patsy..'

These bond holders will be the fall guys and that's the bulk of the NEST pensions type and all the other people invested in 60/40 type situations

[kibuc]

24 minutes ago, Sugarlips said:

Silver taking a fresh pasting today, could be an opportunity for those who want in, I’ll keep adding here.

So many opportunities to buy here in silverland, and hardly ever an opportunity to sell...

[DoINeedOne]

17 minutes ago, Noallegiance said:

What really causes inflation? Here’s what prices since 1970 tell us | MoneyWeek

No paywall

https://imgur.com/a/YghXFrX

 

[jamtomorrow]

16 hours ago, Majorpain said:

https://www.navytimes.com/congress/2021/09/15/new-pact-with-the-us-and-uk-is-set-to-sink-australias-historic-submarine-buy-from-france/

I'm afraid I think that's just been turned on its head, Australia is getting Nuclear submarines with UK/US tech.  Beijing will properly throw its dummy out the pram about this, and as an added bonus Macron has just been "Torpedoed" as well since they won the original contract!

Mixed week for Macron.

On the one hand, he just had a submarine contract stuffed back up his wazoo.

On the other, he can peer across the channel at the unfolding UK energy crisis, knowing France can still generate 70% from nuclear if need be.

[Sidd]

The drop in silver and gold is reminiscent of March 2020. The dollar seems to be trending the opposite of what Hunter (and maybe more recently @DurhamBorn said?) and sooner than expected. What in the world is going on, has the BK arrived already?

[sancho panza]

Wolf covers the inflation data in a much more laymen's style than Shaun Richards(who gets into some extremely technical issues at times) but the overall point remians that the inflation people expereince isn't the one that's being measured.

In bold for skimmers

https://wolfstreet.com/2021/09/14/inflation-whac-a-mole-new-vehicle-prices-spike-as-used-vehicle-prices-dip-while-housing-inflation-which-exploded-in-reality-barely-budged-in-the-cpi/

Inflation Whac-A-Mole: New Vehicle Prices Spike as Used Vehicle Prices Dip, while Housing Inflation, which Exploded in Reality, Barely Budged in the CPI

by Wolf Richter • Sep 14, 2021 • 81 Comments

CPI inflation remains at 12-year high.

By Wolf Richter for WOLF STREET.

What caught the media’s attention in today’s CPI inflation data was that the expectations by economists had finally risen enough to where CPI came in a notch “below expectations,” after having exceeded expectations for months, and often by a lot.

The Consumer Price Index for all Urban Consumers (CPI-U) rose 0.3% in August from July, and 5.3% compared to August last year, the third month in a row of 5%-plus year-over-year increases after having risen 5.4% year-over-year in July and June. The three months were the fastest increase in CPI since June 2008 (5.6%), and all four months were the fastest since January 1991, according to data released by the Bureau of Labor Statistics today:

The 0.3% month-to-month increase in the overall CPI reflected:

A decline of 0.2% for the month in the CPI for durable goods, which was still up 12.8% year-over-year, after having been up by 14.6% at the peak in June, the biggest year-over-year spike in the data going back to 1957 (red line in the chart below).

An increase of 0.5% for the month in the CPI for non-durable goods (mostly food and energy), which pushed the index up 7.4% year-over-year, matching the multi-year record of May (green line).

An essentially unchanged-for-the-month CPI for services, which was up 3.0% year-over-year (purple line). The services CPI is dominated by the CPI for housing costs, which accounts for nearly one-third of total CPI, but it barely ticked up, despite soaring actual housing costs – more on that phenomenon in a moment.

CPI understates services CPI by massively understating housing costs.

Homeownership costs and rents, not including utilities and other housing-related costs, are the largest and most crucial category, accounting for 31% of the overall CPI, but it hardly inched up despite home prices that have surged at historic rates.

“Rent of primary residence” weighs 7.6% in the overall CPI, and it ticked up just 0.3% for the month, after having been stuck at a monthly increase of 0.2% all year. For the 12-month period, it rose 2.1% for the year, up from the 1.9% year-over-year increases in prior months. This CPI for rent had been running in the 3.5% to 4% range since 2016 until it softened in the spring last year. There are big urban areas were rents have sagged over the past year; but in many other cities, rents have spiked. Depending on where tenants live, their personal rental inflation is going to look a whole lot different.

The CPI for “Owners’ equivalent rent of residences,” which stands in for the costs of homeownership and weighs nearly one quarter in the overall CPI, inched up just 2.6% year-over-year. But measures that attempt to track reality have exploded. The national median price of existing homes spiked by 23% year-over-year, according to the National Association of Realtors. And the Case-Shiller Home Price Index spiked by a record 19%.

The Case-Shiller Home Price Index tracks the price changes of the same house and is therefore a measure of house price inflation. The disconnect between the record double-digit home price increases of the Case-Shiller Index (purple line) and the CPI’s homeownership component’s puny increase of 2.6% (red line) is due to the CPI’s structure.

The CPI for “Owners’ equivalent rent of residences” doesn’t track actual home-price inflation or home prices, but is based on surveys that ask homeowners what they estimate their home might rent for. So the CPI for “Owners’ equivalent rent of residences” is a measure of rent as seen by the homeowner.

The effect is that the entire services CPI, thereby the overall CPI, is artificially kept down by the way housing cost inflation is measured.

Food costs, which weigh 13.9% in the overall CPI, rose 0.4% for the month and 3.7% year-over-year. The CPI for meat rose 8.0% year-over-year.

Nearly half of the food CPI is “food away from home,” which rose 4.7% year-over-year, the biggest increase since 2009, not spiking but working its way higher as restaurants are carefully raising their prices to meet the higher costs they’re now facing.

Energy costs spiked 2.0% for the month and 25% year-over-year. Energy accounts for 7.3% of the overall CPI. Within the category, motor fuel spiked 2.8% for the month and 42.5% year-over-year. The price of natural gas pumped to the home jumped 21% year-over-year. The CPI for electricity service rose 5.0% year-over-year.

The CPI for used vehicles fell by 1.4% in August from July, the first decline from the ridiculous spike as some price resistance is finally starting to crop up. It pushed down the durable goods CPI, shown above. Retail prices follow wholesale prices, and used vehicle wholesale prices started ticking down in June from their equally ridiculous spike, but prices remain ridiculously high. The CPI for used vehicles is still up by 32% from a year ago.

This chart shows the index value (not year-over-year percent change), which essentially hadn’t increased in two decades despite large price increases on dealer lots, thanks to aggressive “hedonic quality adjustments” (see below). It took the pandemic price spikes to break the stranglehold that “hedonic quality adjustments” had on the index:

The CPI for new vehicle spiked the most since June 1981. Month-over-month, it spiked by 1.2% and year-over-year by 7.6%. Inflation Whac-A-Mole: even as the used vehicle CPI starts ticking down, another index spikes, which is how inflation works, circling from category to category.

“Hedonic quality adjustments” hold down the CPIs for new & used vehicles. CPI attempts to measure price changes of the same item over time. When the price increases because the product gets better, then the portion of the price increase related to the improvement of the product isn’t considered inflation (loss of purchasing power). And this makes sense.

These “hedonic quality adjustments” are an attempt by the BLS to account for improvements in vehicles over the years. For example, over the decades, the estimated added costs each step along the way of migrating from a three-speed automatic transmission to a 10-speed electronically controlled transmission are removed from the CPI.

In reality, the hedonic quality adjustments have been way too aggressive, with the political purpose of concealing from the public the true loss of the purchasing power of the dollar, and the purchasing power of their earnings. Every government over the past few decades has toed the line on this strategy.

I illustrated the aggressiveness of the hedonic quality adjustments in my F-150 and Camry price index going back to 1989, which shows how prices have soared even as the CPI for vehicles remained nearly flat. The recent spike in prices was too much too fast and overpowered the hedonic quality adjustments.

This loss of purchasing power is “permanent.” The only event that can undo tiny fragments of decades of losses of purchasing would be a period of deflation when prices on average are dropping, as the dollar is regaining some purchasing power that had been lost in prior months. In the US, the is an extremely rare event that happened only a few quarters during my lifetime.The rest of the time, inflation ruled.

This is the loss of purchasing power of $1 starting in January 2000. Note the brief episode of deflation during the Financial Crisis, when consumers found that they could buy just a little more with their money. But the fun didn’t last. In July and August, it was below 62 cents:

Enjoy reading WOLF STREET and want to support it?

[JMD]

15 hours ago, DurhamBorn said:

Yes and another bullseye for the thread.Canada will be next and India will end up doing similar but more likely for ground attack capability.This was one of the threads main themes,but we havent talked about it much but its great to see this now happening and its clicked into gear other areas of the roadmap now.It means more production returning from China,and more energy use and China also ramps up to compete.Great news for our BAE and Babcock holdings of course.Hunter Killer subs are crucial because you can blockade even China with half a dozen of them.Hope they name one Conqueror.

I should add i actually visited BAE in Barrow when they were building a sub and it was huge.It had a huge tarp draped over the bit sticking out of the bay doors.Incredible out of the water just how big they are,and powerful.

And the root cause of the looming China-US Cold War 11 is Chinese nationalism.

I've mentioned this guy before. But the everyday things he posts about are insightful and i think really highlight the arrogance (and desparation?) of the Chinese authorities; The speed of authoritarian change happening is alarming. He has youtube channel with lots of interesting content, new posts and posts from when he lived in China for many years, before he and his Chinese wife were forced out earlier this year.          

 

[JMD]

2 hours ago, Agent ZigZag said:

That is the key statement for this thread. With the bond market so huge when the sell off happens and it starts looking for a home then the only place in town with be the equity markets especially those areas discussed in this thread. As a question what signs do you look for in your macro analysis that this is happening or is  going to happen and with vigour.

Yes, and most estimates are that the bond market is around twice the size of equities, in dollar value. Though if the bond market were to crash perhaps that would solve this 'sizing problem'?... I don't know enough about bonds, perhaps someone who does might be able to provide insight here?

However, the 'new home for bonds' will mainly be in assets carrying low debt, non-speculative, defensive, ideally producing a stable long-term income. So the options in reality are even smaller, talk about trying to fit a quart into a pint pot!!

[Harley]

5 hours ago, belfastchild said:

Yes, but when entire output for December is 50kWh and the best day in may produces 30kWh then you can see its pretty much useless in December.
I havent been home in 4 days, only thing running is 4 freezers, 2 fridges and a few other small things and battery is currently at 24% (20% is 'empty')

I got in just before the ROCs finished so 5 years ago to the month, battery system half of it about 18 months later (was at a conference about Brexit and energy supply, shit myself listening to them and came home and bought the system that afternoon!) and doubled the capacity about 6 months later when it looked like prices would go up and supply could be curtailed. ASHP was a cheap chinese one - as in the Q+A thread. Only really use it in spring/summer/autumn.

COP is a made up number, like inflation figures, percentage co2 rise, corona estimates. It bears no relevance to the outside world. My biggest problem with the ashp is that I had to place it in probably the worst place for it (north facing wall) due to planning restrictions! When the temp drops below 5C (i.e. when you need it most) the data ends and thats the point the external heaters kick in (to stop the external box freezing). At lower temps I would calculate most of the UK versions have a COP of less than 1 when you take that into consideration.

The ASHP will provide enough heat in the winter months, if you crank it up but as above you would probably be better off with a 2kw bar fire and a fan! (slight exaggeration but you get the idea).

My ASHP is blown air, not for hot water or central heating, where I live Id be better off burning fivers for heat in winter. Panels wont touch the ASHP from about now through to March.

I'll repeat, my entire output from the solar panels for each month of December is around 50kWh. Thats running a 2 bar electric fire for 24 hours.... What you are going to do for the other 30 days in December is anybodys guess.

Im more eco/green than most people I debate this with. The numbers just dont add up. We get something like 60 days a year in the UK when wind output is minimal. So it doesnt matter if you install 10 times the wind (I think the UK can theoretically install about 3-4x what they already have maximum) 10 x 0 is still 0.

Thanks.  I really appreciate the feedback.  I was keen on renewables (all kinds) several years ago but struggled to make it add up.  The log burner was the best after insulation. Things don't seem to have moved on that much.  I will buy a power pack that I can charge via the mains, generator or solar for backup (mainly the freezers).  I don't have the right roof orientation to max panel output and permenant ground mounted ones would be an issue but temporary ones in an emergency would work.  Again, many thanks.

[Harley]

4 hours ago, DurhamBorn said:

 

I think the crash at the end of this next cycle is looking likely to be the worst ever.Time for that later though.

"End of this next cycle"?  So not the current one, to end with the BK, or indeed yes, this one?  Is there really "time for that later" or should I be losing it now?!  That is, how long have I got doc? 

[Harley]

4 hours ago, HousePriceMania said:

When I went to India I got the feeling they hated the British.

 

Funny but I have lived all over the world and got to know several expat Indians who were, without exception, really great people.  India's brightest and best folk mind you.  I could see India itself being different as it's quite a place.

[Harley]

3 hours ago, Noallegiance said:

Yeah but what about the English takeaways?

I'll have the blandest thing on the menu!

We used to go to an Indian restaurant in Germany which was an odd experience. German tastes are somewhat different.  The waiter used to smile and ask us if we wanted it (translate) "Englisher Hot", which of course we did!

 

[Harley]

1 hour ago, kibuc said:

So many opportunities to buy here in silverland, and hardly ever an opportunity to sell...

Great time to sell if CGT is going up?  Buy back, but something different enough to avoid roll over (deemed no disposal) or stay out long enough.

[Harley]

1 hour ago, JMD said:

However, the 'new home for bonds' will mainly be in assets carrying low debt, non-speculative, defensive, ideally producing a stable long-term income. So the options in reality are even smaller, talk about trying to fit a quart into a pint pot!!

Trouble is those non-speculative, defensive, income generating companies typically carry a lot of debt and/or negative equity net of intangibles (particularly goodwill).  That is, they have been hollowed out.   Not just the utilities, by a long way.

More of the Asian and Russian ones tend to be better on this score, as do several energy companies generally, but it's going to be tough in the US in particular if people do care (which a few solvency blow ups would encourage). 

Again, potentially points to a stock pickers market if going that way (some sages say just stay out and trade the options).  At least I hope so because I've passed on enought profits on fundamentally weak companies bid up by those who don't care!