Posted on 08/29/2021 3:15:19 PM PDT by blam
Rents (surge) are about to impact PCE and CPI. A surge in PPI is flowing into CPI.
History will record that during the present time the most used word was “inflation” and the second most used word was “temporary.”
What isn’t in this life transitory? But if inflation lasts three years because of a demand shift caused by a zero-carbon emissions goal consensus, then call it what you will, we at The Bear Traps will allocate capital accordingly. It reminds us of Marty Zweig not caring if the down stock market was a correction or a bear market. Either way, he didn’t want to be long stocks. We don’t really care if inflation ends a year or three from now. We want to be long energy and metals.
By insisting on the word “transitory” all the Fed is signaling is that it is ignoring and will continue to ignore prices of goods and services. It’s brilliant in its own way because if six months from now prices are still going up, the Fed will merely say that, aha, now, surely, inflation is transitory. And it will play that game every six months for years if it can. It will only change its tune when things get so bad it has to change. As we have pointed out several times in the past, even Volcker didn’t fight inflation until he saw directly that inflation was increasing unemployment.
Some things are different now, of course than in Volcker’s day, the primary one being the Fed owns such a large portion of the treasury float that the treasury market has lost most, not all, of its signal value. This type of thing is not without precedent, by the way. The early 1930s devaluation of the dollar caused gold to go from just above $20 to $35, where it remained fixed into Nixon’s administration. That was a long time.
What is clear is that US bond yields have a negative real return. If you own treasuries, you are pretty much guaranteed to lose money in real terms. This should cause borrowing to increase, which in fact has happened. Mortgage debt is above $10 trillion, surpassing the pre-Lehman crash peak. An expansionary monetary and fiscal policy assumes that by extending credit, people will still by everything at increasingly higher prices no matter what. The reality is somewhat different. At first it goes along that way, true enough, but then comes a sticker shock pause, followed by a hoarding panic buying spree.
Normally this last phase causes a run on the currency which is akin to throwing nitroglycerin into a raging fire. At this point, central banks cave, raise rates, and accept the stock market selloff and economic recession. Unless, of course, yours is a reserve currency. That can, but doesn’t have to, change the game theory. Bottom line: Fed and Treasury probably figure they can get away with whatever they want to do. Of course, if they are wrong, it’s an unmitigated disaster. And yet, of course, something like a 9% weaker greenback would probably be welcomed by Fed and Treasury.
A further nuance is the fact that the Central Banks coordinate monetary policy. This is of necessity. When foreign banking systems are in trouble, it is the Fed that extends emergency swap lines to provide eurodollar liquidity to other Central Banks. Under such a circumstance, it would be unthinkable for monetary policy not to be coordinated on a global scale. So monetary policy is loose on a global scale, such that trillions of debt trade at negative nominal yields. Inflation just adds insult to that injury. But adding to inflation is supply constraint, not short term supply disruption, but long term supply absence altogether. There has been little mining activity to find new sources of metals for over a decade. As build local becomes the imperative, we note that not only has our industrial base not grown, it has shrunk, and in dramatic fashion. If any infrastructure bill passes, the drama will only become that much more accute. A negative supply shift away from China paired with a positive demand shift in infrastructure is the very stuff inflationary nightmares are made of.
Additionally, we have stressed the dawn of the age of the power of labor. Labor is harder to find and more expensive. And after decades of getting shafted, it is only fair the pendulum is finally swinging the other way. But labor inflation is difficult to cure for the simple reason that a majority of the voting population doesn’t see getting paid more money as a problem.
And finally, we have the problem of more money supply. At this point, money creation is no longer the immediate risk. No. The immediate risk is an increase in the velocity of the money that has already been created. Velocity has collapsed to such an extent that simply to mean revert to its downward regression line of old would be massively inflationary. But of course the velocity of money will increase as transactions increase in a global synchronized post Covid scenario. And finally, once the global economy kicks into high gear for several quarters, then, and only then, will banks start to aggressively lend thereby increasing the money supply magnificently.
So sustainable inflation seems fairly inevitable at this point even if years from now it proves “transitory.”
Won’t rents specifically go down sharply if there are mass evictions?
Now after a few short months of Biden and the Dems, everything is an overwhelming sh*tshow, a complete fuster cluck.
The day a loaf of bread costs $20,000.00, I’ll skip buying that loaf and pay off this property.
Probably not for some time, People have lost a great deal over months of this lunacy and will be tempted to charge whatever the market will bear as a means to recoup some of that loss. Once the market gets used to the extra cost, it will be hard to take it back down.
And it’s intentional.
I think the mass evictions will be section 8 projects and some slums.
It will be a short lived media blitz...very short lived since leftists are running the show and we can’t let them be the boogeyman.
The big money is still certain there will be no inflation. 10yr treasuries are still yielding 1.3%.
If you believe the market is wrong and we are in for 5 or 10% inflation for the next decade there is a fortune to be made.
Read David Stockton (admittedly he is wrong a lot, at least with timing), and he made a pretty damn good case that inflation has been kept in check due to durable goods manufacturing mostly moving overseas (China) starting in 1995. So over last 25 years there has been deflation in that sector of the economy despite the low interest rates, which has offset services and real estate inflation. Fast forward to now, and it really looks like that durable goods deflation is dead going forward, so even after transitory covid effects go away, we’ll still have inflation well over 2%. I think Stockton is right on this one.
Once deadbeat tenants are removed, renters cannot assume eviction moratorium won't be reinstated. People who rented out single family homes will sell. Apartment buildings will be converted to condos. Good luck finding anyone wanting to rent to you.
“rents specifically go down sharply”
Not if you never know when the little dictators will shut off evictions again.
Section 8 renters made out well. They got their rent money direct from the government without interruption.
https://www.achsng.com/FAQlandlords.asp
Very interesting. I think he is right on the cause, but why does he think it is dead?
China average wage is still about 10% of the USA one. Even Trump’s tariffs don’t close that gap. Any CEO who fires an American worker and hires a Chinese one will still increase his bonus.
Long before that, the Banking industry will have coerced/bribed Congress into passing a law to index loan balances to inflation.
The day a loaf of bread costs $20,000.00, I’ll skip buying that loaf and pay off this property.
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Only to lose it to the tax man.
He posted a chart showing prices increasing on imports from China. Plus there are demographic issues in China. Rice field to manufacturing line transition is over. Average age in China is near 40 years old now. Don’t get me wrong, the corporations will do everything in their power to keep slave wages going, but the extreme deflationary impacts of that China trade since 1995 appear over.
Where would you put your money? REITS? Commodities? Gold?
“Where would you put your money? REITS? Commodities? Gold?”
If I believed inflation was going to average 10% for the next decade?
The three you listed should maintain their value, but why settle for that?
I would buy inflation swaps (derivative contracts that protect against inflation). They are selling for pennies on the dollar and if inflation hits 10% you can turn a few million dollars into a few billion dollars.
Is that what you meant? Actually, no one can be confident that an eviction moratorium won't be reinstated. But landlords stand to lose in that case and so will tend to get out of the game. I take it that is your point.
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