*Investors Blog*

[PWMDMD]

So the definition is were better off today than we expected to be at this instant in time? Sounds like a political slogan not a economic definition - Are you better off now than you were a year ago?

I'm just being pragmatic and not letting perfect be the enemy of good. The historical average for inflation between 1913 and 2019 isn't 2%, it's 3.10%, and so by definition "normal", and to some extent 2% is an arbitrary goal, and if we made it 3% or 2.5% or 2.2% or some other relatively low number, it would make little difference.

 

[RAVL]

I'm just being pragmatic and not letting perfect be the enemy of good. The historical average for inflation between 1913 and 2019 isn't 2%, it's 3.10%, and so by definition "normal", and to some extent 2% is an arbitrary goal, and if we made it 3% or 2.5% or 2.2% or some other relatively low number it would make little difference.

This is a fair point. The concern I have is you look at the inflation rate since 72 or so, when Nixon took us off the gold standard, inflation runs closer to 4 percent or so annually. So I am making your point to some degree but bear in mind (1) small increments of additional inflation have more of an impact over time then those numbers suggest visually; (2) real rates today, in practical terms. - what you can earn risk free in an FDIC insured account — is much lower than say in the late 1970s - early 1980s when we last had a bad bout of inflation - this really hurts those on a fixed income; and (3) the higher rates since the early 1970s make it more important for the Fed to have credibility on the strong dollar. On this last point, there are intelligent arguments for and against shifting the target upwards a bit but the time to make those adjustments should be seen to be free of any convenience or cuteness if that makes sense.

Interesting points here overall.

 

[SC Maintenance]

I'm just being pragmatic and not letting perfect be the enemy of good. The historical average for inflation between 1913 and 2019 isn't 2%, it's 3.10%, and so by definition "normal", and to some extent 2% is an arbitrary goal, and if we made it 3% or 2.5% or 2.2% or some other relatively low number it would make little difference.

That is true, but from 1913 to 2019 we didn't have $35T in US sovereign debt, or $400T in global debt. If inflation is 3% that historically implied average bond yields around 5%, which with $35T in debt which over time implies $1.75T in interest payment, which we simply can not afford - nor can anyone else in the world.

So the fed will not allow this to play out in a normal way - like they might have in 1913. Or even 2019. They need to keep interest payments low for the treasury. You saw this last Christmas when the 10 year approached 5%, so Powell abruptly went on TV, said were likely going to ease, closed the reverse repo and the treasury went from historically issuing 85% long notes to 85% T-bills. Because they had funding problems. The market priced in 7 cuts. But we didn't ease till September.

So with 2% inflation they can convince the masses its "essentially zero", banks can pay nothing on deposits and continue expanding the money supply, and interest is bearable for the treasury. This keeps the dollar stable and the rest of the world muddles through.

Vs 3.5% inflation which makes rates too expensive to fund the debt, so everyone's global printing press goes brrrrrr - and you want to hold a very different asset mix.

 

[PWMDMD]

That is true, but from 1913 to 2019 we didn't have $35T in US sovereign debt, or $400T in global debt. If inflation is 3% that historically implied average bond yields around 5%, which with $35T in debt which over time implies $1.75T in interest payment, which we simply can not afford - nor can anyone else in the world.

So the fed will not allow this to play out in a normal way - like they might have in 1913. Or even 2019. They need to keep interest payments low for the treasury. You saw this last Christmas when the 10 year approached 5%, so Powell abruptly went on TV, said were likely going to ease, closed the reverse repo and the treasury went from historically issuing 85% long notes to 85% T-bills. Because they had funding problems. The market priced in 7 cuts. But we didn't ease till September.

So with 2% inflation they can convince the masses its "essentially zero", banks can pay nothing on deposits and continue expanding the money supply, and interest is bearable for the treasury. This keeps the dollar stable and the rest of the world muddles through.

Vs 3.5% inflation which makes rates too expensive to fund the debt, so everyone's global printing press goes brrrrrr - and you want to hold a very different asset mix.

We’re at 124% debt to GDP, France is 111%, England 104%. How does Japan keep their economy at 254% debt to GDP? I don’t know much about Japan’s economy.

 

[SC Maintenance]

We’re at 124% debt to GDP, France is 111%, England 104%. How does Japan keep their economy at 254% debt to GDP? I don’t know much about Japan’s economy.

Excellent question!

70% of that debt is actually held by the Bank of Japan - ie they monetized it. Comparatively the BoJ has done 5.5X more QE than the fed relative to overall debt / GDP.

As well, Japan has some significant advantages.

1) They were first at this experiment, which has its benefits. So they had the rest of the world to export their deflation to. Also Japanese companies built factories all over the globe, so they could make money there and send it home.
2) The Japanese culture is very homogenous. The government tells them to go work hard, and buy government debt for the good of Japan, and people do. Do you imagine that working here?
3) They have been in a period of very low growth for a long time. The median household income in Japan is like 40% less than here. Surprising for such a modern country I think.

So they muddled through for a long time. The yen recently fell to a low not seen since the 90's and inflation set in. The BoJ started raising rates which helped, but it also partially unwound the carry trade. The new Prime Minister has seemed to reverse some of this, so the yen has started to drop again. Unsure which direction from here?

China is in a similar situation to Japan in 1987. There housing market has imploded, and there population is aging / declining. There trying to reflate it. Where that goes I don't know.

Anyway, all this macro stuff is too much for my puny brain. What I do know is 2% inflation is very different than 3.5% inflation from an investing standpoint. It doesn't sound like a lot of difference until you compare it to the massive debt service required globally.

3.5% is likely much better for investors, but as @RAVL pointed out its much harder on the working class, which leads to unrest type problems.

 

[RAVL]

We’re at 124% debt to GDP, France is 111%, England 104%. How does Japan keep their economy at 254% debt to GDP? I don’t know much about Japan’s economy.

One observation: the Japanese don’t like immigration. Here, while it has become controversial, it lowers the average age, increases the number of working people, and has helped control inflation. One of the reasons why I would always advocate for lawful and orderly immigration, and think demonizing it is not helpful. The issue is the lack of process and chaos, and the uncontrolled numbers, not immigration itself. In my opinion, immigration would help Japan.

 

[JeffKeryk]

So the definition matters a lot to investors. .

I would only say that while this is true, it is mixing the market with the economy.
Soft landing refers to a cooling off of the economy without triggering a recession.

I promise to not mention that the vast majority of economic thought on this forum and on this post had us into recession, market crash, end-of-the-world scenario since post #1.

"The Recession Monitor keeps climbing"

 

[SC Maintenance]

One observation: the Japanese don’t like immigration. Here, while it has become controversial, it lowers the average age, increases the number of working people, and has helped control inflation. One of the reasons why I would always advocate for lawful and orderly immigration, and think demonizing it is not helpful. The issue is the lack of process and chaos, and the uncontrolled numbers, not immigration itself. In my opinion, immigration would help Japan.

I don't think its that simple. Canada has had the most friendly immigration policy on earth for 30 years, and while its helped them a lot its also blown a huge bubble in their housing market - since its mostly adult immigrants and they all need somewhere to live. Also it hasn't helped their birth rate - the immigrants aren't having kids either and its stuck at like 1.4. At least Canada is a diverse country of immigrants, so absorbing them hasn't been an issue, but they will need a never ending supply of new immigrants to keep from being Japan.

However more homogenous countries like Germany, Sweden and France have tried it, and now have huge social issues.

The complaint here is it has over-taxed the infrastructure - like schools especially, and suppressed wages especially at the entry level.

There is no free lunch. Japan has chosen to manage it there way.

 

[RAVL]

I don't think its that simple. Canada has had the most friendly immigration policy on earth for 30 years, and while its helped them a lot its also blown a huge bubble in their housing market - since its mostly adult immigrants and they all need somewhere to live. Also it hasn't helped their birth rate - the immigrants aren't having kids either and its stuck at like 1.4. At least Canada is a diverse country of immigrants, so absorbing them hasn't been an issue, but they will need a never ending supply of new immigrants to keep from being Japan.

However more homogenous countries like Germany, Sweden and France have tried it, and now have huge social issues.

The complaint here is it has over-taxed the infrastructure - like schools especially, and suppressed wages especially at the entry level.

There is no free lunch. Japan has chosen to manage it there way.

I hear you. Common sense and moderation in all things.

 

[JeffKeryk]

I hear you. Common sense and moderation in all things.

Well, I say go big or go home. Each to their own...

 

[RAVL]

Well, I say go big or go home. Each to their own...

 

[gfh77665]

Older affluent folks doing very well and not worried about money.

28 year old male, married with 2 kids struggling to keep head above water with crazy inflation, unaffordable care act family insurance plan, exponential increase in everything you need to live a basic lifestyle.

Stagnant wages hurt everyday people and they worry how they can keep up supporting a family, not everyone doing good because the media says inflation trending downward.

This. It just depends who you are. The nation is clearly being polarized with have and have nots. Not much middle ground.

 

[gfh77665]

Gee, another record close? Who'da thunk it.

Dow jumps 400 points to a record on Friday, S&P 500 closes above 5,800 for the first time:​

JP Morgan calls it: A Soft Landing

400 points sounds like a huge move, but with the DJIA over 40K, its less than 1%. The SPY moved 0.6%, the Naz 0.3%.

Nice, but all are nominal gains.

 

[gfh77665]

Don't look now, but the 10 year treasury just hit 4.02%. Thats what, 35bps since the fed "cut" rates.

The 10yr will tick back down as more cuts are metered out. Check back in 6-12 months.

 

[Pablo]

The 10yr will tick back down as more cuts are metered out. Check back in 6-12 months.

Started to flatten out on Friday

I think the uptick was just the bond market telling the Fed who really sets rates.

 

[SC Maintenance]

Z

The 10yr will tick back down as more cuts are metered out. Check back in 6-12 months.

Longer rates may go up , or may go down. It will have little to do with the fed funds rate either way.

 

[JeffKeryk]

400 points sounds like a huge move, but with the DJIA over 40K, its less than 1%. The SPY moved 0.6%, the Naz 0.3%.

Nice, but all are nominal gains.

Just rubbing it in to the naysayers... Ha! (Kidding, of course.) I'm thankful the economy has avoided a recession and that people can work.
Your investment nest egg is sound, at least as compared to many predictions.

 

[PWMDMD]

Older affluent folks doing very well and not worried about money.

28 year old male, married with 2 kids struggling to keep head above water with crazy inflation, unaffordable care act family insurance plan, exponential increase in everything you need to live a basic lifestyle.

Stagnant wages hurt everyday people and they worry how they can keep up supporting a family, not everyone doing good because the media says inflation trending downward.

Is this any different than it's ever been? I'm 46 and grew up in a squarely blue-collar town on a lake in NYS about an hour north of NYC. There were giant and expensive weekend and summer homes on the lake, mostly owned by people from NYC who you never met, and then there were the other 98% of the town residents who worked +60 hour weeks in the trades or factories or retail and constantly struggled to make ends meet. Most worked those hours because they had to until the day they died (my father included) with absolutely nothing saved for "retirement".

Sometimes I think we are to some degree rewriting how good "the good old days" really were. Life is and has always been tough for most. At least, this has been my experience in my life. Now, I'm not discounting inflation and wage growth pressures on people but I also think some of it is people are just tired of living their lives this way, and I get that, but I do not think struggling is anything new. One difference between when I was a kid and now is the average number of hours worked has consistent gone down. I wonder if there is a correlation between average hours worked per week and changes in socioeconomic status over time?

 

[SC Maintenance]

Is this any different than it's ever been? I'm 46 and grew up in a squarely blue-collar town on a lake in NYS about an hour north of NYC. There were giant and expensive weekend and summer homes on the lake, mostly owned by people from NYC who you never met, and then there were the other 98% of the town residents who worked +60 hour weeks in the trades or factories or retail and constantly struggled to make ends meet. Most worked those hours because they had to until the day they died (my father included) with absolutely nothing saved for "retirement".

Sometimes I think we are to some degree rewriting how good "the good old days" really were. Life is and has always been tough for most. At least, this has been my experience in my life. Now, I'm not discounting inflation and wage growth pressures on people but I also think some of it is people are just tired of living their lives this way, and I get that, but I do not think struggling is anything new. One difference between when I was a kid and now is the average number of hours worked has consistent gone down. I wonder if there is a correlation between average hours worked per week and changes in socioeconomic status over time?

All you need to do is look at the income ratio's of median income to median home price, median new car price, median used car price, average apartment rental price, average 401K value increase, etc. and its pretty easy to see the change. The change happened in the last 5 years predominantly. Significant numbers of people would not qualify for a loan to buy the house they currently live in if they bought it before 2019.

*** Edit - corrected "average" typo to median - per post 4767

So yes, there have always been rich and poor, but its way harder now to just get to even the lower middle class. Numbers don't lie.

So last I will say on that topic. Math is just math, its not anecdotal.

 

[PWMDMD]

All you need to do is look at the income ratio's of median income to average home price, average new car price, average used car price, average apartment rental price, average 401K value increase, etc. and its pretty easy to see the change. The change happened in the last 5 years predominantly. Significant numbers of people would not qualify for a loan to buy the house they currently live in if they bought it before 2019.

So yes, there have always been rich and poor, but its way harder now to just get to even the lower middle class. Numbers don't lie.

So last I will say on that topic. Math is just math, its not anecdotal.

Why? It was an honest question, you gave me a reasonable answer, thank you, so no need to get your panties in a wad.

I guess what I'm asking is are income to all of those averages down purely because wage growth is down or is it wage growth plus hours worked? My father worked +70 hours per week because if he had worked 40 hours per week we would've been homeless. I don't know anyone personally who works more than 50 hours per week now. I'm also not advocating everyone should need to work themselves into an early grave to live a reasonable life - I'm just asking questions.