Inflation continues to fall

[+ augustus]

What @stevenkesslarhas done here is go along a graph, pick the peak to trough that suits his argument, and then argue that the inflation rates in the USA and Switzerland have been about the same for the past 3 years, when OBVIOUSLY they have not.  SMH.

Edited July 25, 2023 by augustus

[+ stevenkesslar]

2 hours ago, augustus said:

in no way did Switzerland have an inflationary surge like the US and other places ...  You see! I was right all along.  And Switzerland imports 100% of its oil too.

I love your logic, Auggie.  Let's run with it.  You are 1000 % correct.  In no way did Switzerland have an inflationary surge like the US.  And in no way did the US have an inflationary surge like Argentina.  Everything is relative.  Problem solved.  Unless you live in Argentina, inflation ain't a problem at all.  Pan comido.

People in Switzerland are basically confused in thinking that they had the highest inflation in 30 years.  Equally, people in Japan are very confused in thinking they had the highest inflation in 40 years.  30 % increase in energy costs?  That's not inflation.  I think we finally have a plausible theory about why the Swiss and Japanese suck at finance and investment.  They just kind of suck at math.  😉

Quote

What @stevenkesslarhas done [is] argue that the inflation rates in the USA and Switzerland have been about the same for the past 3 years, when OBVIOUSLY they have not.  SMH.

Just to clear up any confusion, I did not argue that 3.5 % = 9 %.  I argued that a 5 % surge in inflation in Switzerland and Japan was similar to an 8 % surge in inflation in the US.  And that in all three cases it was caused by COVID, with the invisible hand of Vlad pushing it along.

But I get your point.  Calling a 5 % surge in prices that tops out at 3.5 % "inflation" is just silly.  

So you just solved America's inflation problem, too.   First, by definition, 3 % inflation is not really inflation.  So we don't have an inflation problem today in the US.  Woo hoo! 

Nor did we last year, as I've come to learn.   Inflation peaked in the US in 1947 at 20 %.  In 2022 it peaked at 9 %.  Everything is relative.  The difference between peak inflation of 20 % versus 9 % is way bigger than the difference between peak inflation of 9 % and Switzerland's measly 3.5 %.  So not only are the Japanese and Swiss bad at math.  Turns out the Yanks are, too.  Compared to 20 % inflation in 1947, in no way did the US have an "inflationary surge" in 2022 like the US in 1947.  Why did we even worry?

Really, when you get down to it, the only nation that has an inflation problem is Argentina.  Oh, and maybe Turkey.

On 7/13/2023 at 6:30 AM, EZEtoGRU said:

Inflation in 2021/2022 was a global phenomenon driven primarily by the consequences of COVID. 

 

On 7/14/2023 at 12:40 PM, augustus said:

Untrue.  Inflation is caused by excessive money printing.  Switzerland and Japan have kept their inflation rates between 2-3% all through Covid and they have to import 100% of their oil.  

Not to take away from your impressive contributions in Mathematics and Moving Goalposts,  Auggie.  But I'm still gonna go with the idea that COVID did cause huge inflation surges all over the world.  And that brought inflation to 30 to 40 years highs, from Japan to Switzerland to South Dakota.  

Gas prices hitting new records daily in South Dakota

There is some good news, though.  If we could just agree to measure and move goal posts like you do, people in South Dakota were also very confused about this whole pain at the pump thing, too.  They were ornery about inflation when gas prices supposedly "surged" to $4.59 a gallon last July.  Meanwhile, in places that were not impacted by inflation, like Switzerland, gas prices in US gallons rose mildly, from $5.67 in 2020 to $9.12 a gallon at the peak in July 2022.  So you were right about that, too.  To paraphrase, in no way did Switzerland have an inflationary surge like South Dakota, or other places.  And in no way did COVID have anything to do with it.  It was those darn South Dakotans, and all their excessive money printing.  😉

So we agree on that.  Plus the fact that excessive debt could slow down the US economy, and fuck up a record long bull stock market.  I'm lovin it!

Edited July 25, 2023 by stevenkesslar

[+ augustus]

6 minutes ago, stevenkesslar said:

If we could just agree to measure and move goal posts like you do

Give me a break.  Only you could call US inflation about the same as Switzerland's when the link you provided clearly shows otherwise LOL.  @bigjoeywas right all along.   

[EZEtoGRU]

I think we can all agree there is really no inflation problem in the US right now.  The trend has been towards lowering inflation for more than a year.  The Fed may raise rates one more time this week just to finish the job.  I see no further rate increases this year (since there is no longer an inflation issue) unless there is another oil crisis or a major COVID resurgence.  Hard to predict.  

[BSR]

5 hours ago, EZEtoGRU said:

I think we can all agree there is really no inflation problem in the US right now.  The trend has been towards lowering inflation for more than a year.  The Fed may raise rates one more time this week just to finish the job.  I see no further rate increases this year (since there is no longer an inflation issue) unless there is another oil crisis or a major COVID resurgence.  Hard to predict.  

I disagree.  I keep hearing 2 more rate increases, 1 this month + 1 in September, because Jerome still sees inflation as a problem.  While inflation has declined to 3%, the Consumer Price Index remains stubbornly high at 4.8%

I've also heard that Powell doesn't plan to drop the rate until 2025 because, again, he still sees inflation as a problem.  Granted, what one hears Powell will do and what he actually ends up doing might be 2 very different things.

But if Powell does act as predicted, that would disprove your assumption, "we can all agree there is really no inflation problem in the US right now."

[+ stevenkesslar]

8 hours ago, BSR said:

But if Powell does act as predicted, that would disprove your assumption, "we can all agree there is really no inflation problem in the US right now."

Wordsmithing and goal post moving are fun things.  Your statement, and this whole issue, really lends itself to it.  Auggie is correct in saying a certain member was "right all along."  I can be a bitch about facts.  Like I think it is clearly a fact that there was a global inflation surge due to COVID.  Including in Japan and Switzerland.  And including wildly inflationary spikes in energy and food prices in those nations.  And now it is clearly receding.  Those are facts.  But then we can move goal posts and wordsmith and say truly an inflationary surge of even 20 % is nothing compared to the extinction of the human race.  Most people would probably agree with that.

On this issue, for a few years most people have said we are in a recession in poll after poll.  It's not true.  At least in the technical sense of a recession.  But it is true that most people feel that way.  I assume they are really referring to inflation, and saying it feels like a recession.  Even if it ain't.  Most people also say the jobs situation is good today.  So I'll be curious to see what happens if we actually do have the shallow and brief recession some predict.  The irony would be that people might kind of like it.  If it helps bring down inflation, but they don't lose their job, it might actually be better than having an overheated economy with high inflation for most people.

According to Harvard/Harris, one thing that has changed recently is that most people do not feel their personal financial situation is getting worse.  That peaked in Summer 2022, when inflation peaked, and almost 2 in 3 Americans said their personal financial situation was getting worse.  Right now 47 % of Americans feel their personal financial situation is getting worse. So if I want to move goal posts I could argue it is true that "there is really no inflation problem in the US right now."  Because right now, for the first time in a few years, a majority say their personal financial situation is either improving, or staying the same.  But that would be an exercise is wordsmithing, not explanation.

If the goal is to understand, that is probably the single best explanation around.  If people feel we've been in a recession for the last few years, that's probably why.  Inflation has been particularly hard on low-income families. There's another chart in this Gallup study on inflation that measures financial confidence by income.  For upper income people it is +28 right now.  For lower income people it is -43.  The time series goes back to 2004.  So for 20 years upper income people have been mostly confident, and lower income people have mostly not been confident.  It is always the best of times for one group, and the worst of times for the other.  But the last few years have been even worse than the worst, to play word games.

Americans’ buying power rose for first time since March 2021 amid falling inflation

That headline from last month probably explains why a majority of Americans, for the first time since 2021, believe their personal financial situation is either improving, or staying the same.  I've seen several different measures that basically all say the same thing.  Some time this Spring or Summer we reached a pivot where personal incomes started to grow quicker than inflation.  That is particularly true for people at the low end of the income scale.  In large part precisely because the job market is tight.  If that continues, we'll probably get back to where we were in Summer 2021, before the inflation surge, when there were more Americans who said their personal financial situation was better off rather than worse off.

Another lesson we can take from all this is that it's human nature to focus on the immediate and obvious.  And when we do that, we are probably right.  Most people correctly sensed they were worse off when inflation surged.

That said, my opinion is that the benefit of all the loose monetary policy and stimulus was that we avoided a very painful recession, or even depression.  The danger now is the opposite.  It would be nice if everybody could agree that if we don't focus on the long term debt problem, we are inviting inflation to come roaring back.  But, as we know, it is always harder to focus on the long term.

 

 

Edited July 26, 2023 by stevenkesslar

[Thelatin]

I’ve enjoyed watching my nephews dreams of student debt loan forgiveness vanish (them wanting more free stuff) as they also are buying their first homes and wondering why interest rates are higher.  Crazy uncle attempts to explain that there might be a correlation involving how money works….

[samhexum]

No triskaidekaphobics on Wall Street...  Dow positive for 13th day in a row... first time since 1987.  🤑😎🤑😎🤑😎🤑😎

 

Edited July 27, 2023 by samhexum
because he's bored as hell

[samhexum]

Me & my big mouth!  Another positive day for the Dow would've tied its record, set in 1897  However, the market plummeted in the afternoon.

[+ stevenkesslar]

3 hours ago, samhexum said:

Me & my big mouth! 

That's okay.  I'm grateful.  It's nice to know for once it wasn't me!   😉

Anyhoo, the Fed and CBO just said the recession that was MIA actually won't be arriving in 2023 at all. Boo hoo!   I added to some positions. 

Quote

In February, the agency (CBO) projected that the unemployment rate would jump to 5.1%. It currently stands at 3.6%. The CBO now estimates that rate will end the year at roughly 4.1%.  (CBO now estimates it will climb to 4.7 % by the end of 2024.)

Obviously at some point there will be a correction.  But the idea that a recession is what drives a big correction, while possible, is looking less likely.

Edited July 28, 2023 by stevenkesslar

[samhexum]

16 hours ago, stevenkesslar said:

Anyhoo, the Fed and CBO just said the recession that was MIA actually won't be arriving in 2023 at all. Boo hoo!   I added to some positions. 

Obviously at some point there will be a correction.  But the idea that a recession is what drives a big correction, while possible, is looking less likely.

The Fed’s Preferred Inflation Metric Falls Again, to 4.1% Annual Rate
The Federal Reserve’s preferred inflation gauge climbed at a 4.1% annual pace in June, marking a sizable step down from May’s 4.6% annual rate and bringing price growth to its slowest pace in nearly two years. The core personal consumption expenditures price index rose 0.2% in June from a month earlier, the Commerce Department reported on Friday, compared with a 0.3% climb in May. Economists had expected prices to rise 0.2% in June from May and fall to a 4.2% rate. 

Read in Barron's: https://apple.news/AZmiDDH2gRxanGiLyEUzGQw

 

 

 

[EZEtoGRU]

All is good.  Americans continue to feel better about inflation and the economy:

Americans continue to feel better about inflation and the economy | CNN Business

WWW.CNN.COM

---

US consumers have been feeling a whole lot better this summer as inflation has continued to slow.

 

[+ augustus]

4 hours ago, EZEtoGRU said:

All is good.  Americans continue to feel better about inflation and the economy:

Americans continue to feel better about inflation and the economy | CNN Business

WWW.CNN.COM

---

US consumers have been feeling a whole lot better this summer as inflation has continued to slow.

 

All is NOT good.  A Big Mac meal was $7 two and 1/2 years ago.   Now it's $12.  The damage has already been done.  People have a lower standard of living.  

[+ FrankR]

2 hours ago, augustus said:

All is NOT good.  A Big Mac meal was $7 two and 1/2 years ago.   Now it's $12.  The damage has already been done.  People have a lower standard of living.  

Where do you get your numbers? 2050?

The average Big Mac costs $5.17 in 2023.

https://www.zippia.com/advice/how-much-big-mac-costs-states/

 

[+ augustus]

10 minutes ago, FrankR said:

Where do you get your numbers? 2050?

The average Big Mac costs $5.17 in 2023.

https://www.zippia.com/advice/how-much-big-mac-costs-states/

 

I said Big Mac MEAL.  Things are not good as @EZEtoGRUalleges.  Everything has skyrocketed the past two and 1/2 years.  Millions of people are going to have their power cut off soon because they can't afford the utility bill.  Wages have been stagnant and definitely not keeping up with the inflation of the past two and 1/2 years.  Now car insurance and home insurance premiums are skyrocketing.  It's terrible!  

[Kevin Slater]

Gents, let's get this forum back to personal finance and investing, and away from political bickering.  If you have a take about how to invest in a given environment, post it here.  If your post is simply to laud one administration or blame another, don't.  The investing forum is not your cudgel for political spats.

[KeepItReal]

Regardless of the fuzzy math, the prevailing question is...now that inflation is showing real signs of getting under control and we expect the Fed to stop raising interest rates in the next 6 months...is it a good time to start buying bonds to lock in yields and perhaps benefit from the premium that will emerge in the future when rates start to drop. 

[+ stevenkesslar]

16 hours ago, KeepItReal said:

Regardless of the fuzzy math, the prevailing question is...now that inflation is showing real signs of getting under control and we expect the Fed to stop raising interest rates in the next 6 months...is it a good time to start buying bonds to lock in yields and perhaps benefit from the premium that will emerge in the future when rates start to drop. 

Let's see.  Oh yeah.  There's a chart just for that.

 

I'll spend one long paragraph saying things that are mostly factual and clear.  Then I'll go off into the fuzzier math of Fed policy and investing crystal balls.  By the way, does anyone own an investing crystal ball that actually works?  😉

What the red line in the chart above shows, as a fact, is that it's better to invest in stocks than bonds almost all the time.  Last year of course was one of those rare periods when both sucked.  That in itself argues that after a bad year, or two, the pain tends to go away.  Certainly the pain has gone away with stocks so far this year.  To choose stocks over bonds for the long term and fuck it up, you really have to have horrible timing.  So if all you had was $1 million and you invested it all in stocks and all in the year 2000, you made a big mistake, according to the chart above.  That chart says over a 12 year period you cut your annual return by 7.5 % or so over what you would have made with bonds.  But if you just waited until 2002, and invested the same $1 million, your return would have been significantly better if you chose stocks rather than bonds.  It's clear that most of the time, investing in stocks - like an S & P index fund - is better.  And if it is one of those rare bad times, like at the peak of a stock bubble in 2000 (or, possibly the peak of a stock bubble in 2022???) what that chart above says to me is just wait a few years.  If you are instead investing $100,000 a year over ten years, and every year you choose stocks over bonds, that chart suggests in the long run it will always pay off.  Even though in a few of those years bonds may have been the better choice.  Assuming your crystal ball works better than mine.

You of course didn't ask whether to invest in stocks versus bonds.  You asked whether now is a good time to invest in bonds.  My crappy investing crystal ball says yes, for the reasons you said.  After it is done getting worse, it usually gets better.  😉   Same with stocks.    I believed the bears, like Mike Wilson and his S & P 3500 call for 2023, and sold lots of tech stocks at a small profit earlier this year.  Now I'm buying them back.  If I were doing bonds, I'd do it the same way.  Incrementally, and cautiously.

So there will probably be a premium for investing in bonds as rates start to fall.  But I agree with Kevin, that if you want to invest it helps to "have a take about how to invest in a given environment."  So there are some big variables.  If the post-GFC bull market in stocks really has ended, which I doubt, bonds will almost certainly be better.  Which is Hussman's main argument.  As that chart above suggests.  But if these fabulously rich people like Stanley Druckenmiller I cited above are correct in arguing inflation may be sticky because we have a huge fucking debt problem we refuse to deal with, that could definitely impact your 12 year return on bonds.  

Now I'll careen off into some of the verbose and (ugh!) chart- and fact-infested debates I have with my nephew.  Who mostly subscribes to the idea that the Fed and Jay Powell are incompetent.  I'd buy that idea if he blamed Greenspan, who believed in the fairy tale that capitalism always knows best and self-regulates.  Until AIG and Countrywide and much of the global economy self-regulated themselves into an abyss 15 years ago.  To me, Powell is less ideological and more pragmatic.  He tinkers.  Right now it is hard to make a case that he got the tinkering wrong.  If you agree with me, it's bullish for both stocks and bonds.  But check back with me in a few years.

If you are a masochist, here's a great idea.  Read this unending diatribe, from fund manager John Hussman, who created that chart (and many others like it) above.   His main point, to simplify, is that the Fed totally sucks.  And he makes some good points, which my kinda libertarian nephew likes.  If you can bear the misery of reading them.  Me being a shitty uncle, I did one of my annoying fact checks.  Turns out Hussman used the same theories and same charts to predict the bull market was ending in 2014.  He literally said 2014 was comparable to 1929, right before the crash.  Oops!  If you'd listened to him and bought bonds rather than stocks back then, it would have been a very bad call.

To be clear, my main intent in clubbing poor Hussman with facts is to prove just how hard it is to have a good crystal ball.  If you want an even bigger headache, look at the 10 year return on his fund, compared to the S & P 500.  I'm guessing, based on his flawed analysis, he ignored stocks and focused on bonds.  Oops!  I told my nephew of course Hussman blames the Fed.  He sure needs somebody to blame for his crappy crystal ball.  

So now that I have set up the complicated context, my nephew was arguing that maybe this decade will turn out to be one of those decades where it is better to invest in bonds rather than stocks.  My main reason for agreeing with him would be if I bought the idea that we will keep building a debt bomb that will eventually explode, kinda like the bomb that went off in 2008.  Even though that would harm the returns on bonds, it would probably hurt the returns on stocks (a secular bear market) far worse.  I'm an optimist in that I just don't think people are that stupid.  Hard as we may try.  So I think Hussman got his facts right, and his analysis totally wrong.  My nephew and I agreed that Hussman's logic works best if you are the kind of investor, like my Mom was, who just buys and holds forever.  But if the question is whether 2023 or 2024 is a good time to buy bonds, as opposed to 2025 or 2026 or the whole next decade, it's probably a good time to buy bonds.

That said, I'll close by mentioning that actions speak louder than words.  At the same time my nephew was scaring me with these doomsday arguments, and arguing maybe the 2020's are the decade of bonds, he took more risk than his uncle.  He kept buying tech stocks.  His problem now is that all the SOXL shares he bought at like $8 last October have tripled or even quadrupled.  He is praying to God the bull  market continues.  So he either doesn't sell, or at least pays capital gains at the long term rate after holding them for a year.  Three months to go.  You ain't gonna get returns like that on bonds.  Even if it turns out to be a great time to buy them.

Edited July 29, 2023 by stevenkesslar

[KeepItReal]

33 minutes ago, stevenkesslar said:

Let's see.  Oh yeah.  There's a chart just for that.

 

I'll spend one long paragraph saying things that are mostly factual and clear.  Then I'll go off into the fuzzier math of Fed policy and investing crystal balls.  By the way, does anyone own an investing crystal ball that actually works?  😉

What the red line in the chart above shows, as a fact, is that it's better to invest in stocks than bonds almost all the time.  Last year of course was one of those rare periods when both sucked.  That in itself argues that after a bad year, or two, the pain tends to go away.  Certainly the pain has gone away with stocks so far this year.  To choose stocks over bonds for the long term and fuck it up, you really have to have horrible timing.  So if all you had was $1 million and you invested it all in stocks and all in the year 2000, you made a big mistake, according to the chart above.  That chart says over a 12 year period you cut your annual return by 7.5 % or so over what you would have made with bonds.  But if you just waited until 2002, and invested the same $1 million, your return would have been significantly better if you chose stocks rather than bonds.  It's clear that most of the time, investing in stocks - like an S & P index fund - is better.  And if it is one of those rare bad times, like at the peak of a stock bubble in 2000 (or, possibly the peak of a stock bubble in 2022???) what that chart above says to me is just wait a few years.  If you are instead investing $100,000 a year over ten years, and every year you choose stocks over bonds, that chart suggests in the long run it will always pay off.  Even though in a few of those years bonds may have been the better choice.  Assuming your crystal ball works better than mine.

You of course didn't ask whether to invest in stocks versus bonds.  You asked whether now is a good time to invest in bonds.  My crappy investing crystal ball says yes, for the reasons you said.  After it is done getting worse, it usually gets better.  😉   Same with stocks.    I believed the bears, like Mike Wilson and his S & P 3500 call for 2023, and sold lots of tech stocks at a small profit earlier this year.  Now I'm buying them back.  If I were doing bonds, I'd do it the same way.  Incrementally, and cautiously.

So there will probably be a premium for investing in bonds as rates start to fall.  But I agree with Kevin, that if you want to invest it helps to "have a take about how to invest in a given environment."  So there are some big variables.  If the post-GFC bull market in stocks really has ended, which I doubt, bonds will almost certainly be better.  Which is Hussman's main argument.  As that chart above suggests.  But if these fabulously rich people like Stanley Druckenmiller I cited above are correct in arguing inflation may be sticky because we have a huge fucking debt problem we refuse to deal with, that could definitely impact your 12 year return on bonds.  

Now I'll careen off into some of the verbose and (ugh!) chart- and fact-infested debates I have with my nephew.  Who mostly subscribes to the idea that the Fed and Jay Powell are incompetent.  I'd buy that idea if he blamed Greenspan, who believed in the fairy tale that capitalism always knows best and self-regulates.  Until AIG and Countrywide and much of the global economy self-regulated themselves into an abyss 15 years ago.  To me, Powell is less ideological and more pragmatic.  He tinkers.  Right now it is hard to make a case that he got the tinkering wrong.  If you agree with me, it's bullish for both stocks and bonds.  But check back with me in a few years.

If you are a masochist, here's a great idea.  Read this unending diatribe, from fund manager John Hussman, who created that chart (and many others like it) above.   His main point, to simplify, is that the Fed totally sucks.  And he makes some good points, which my kinda libertarian nephew likes.  If you can bear the misery of reading them.  Me being a shitty uncle, I did one of my annoying fact checks.  Turns out Hussman used the same theories and same charts to predict the bull market was ending in 2014.  He literally said 2014 was comparable to 1929, right before the crash.  Oops!  If you'd listened to him and bought bonds rather than stocks back then, it would have been a very bad call.

To be clear, my main intent in clubbing poor Hussman with facts is to prove just how hard it is to have a good crystal ball.  If you want an even bigger headache, look at the 10 year return on his fund, compared to the S & P 500.  I'm guessing, based on his flawed analysis, he ignored stocks and focused on bonds.  Oops!  I told my nephew of course Hussman blames the Fed.  He sure needs somebody to blame for his crappy crystal ball.  

So now that I have set up the complicated context, my nephew was arguing that maybe this decade will turn out to be one of those decades where it is better to invest in bonds rather than stocks.  My main reason for agreeing with him would be if I bought the idea that we will keep building a debt bomb that will eventually explode, kinda like the bomb that went off in 2008.  Even though that would harm the returns on bonds, it would probably hurt the returns on stocks (a secular bear market) far worse.  I'm an optimist in that I just don't think people are that stupid.  Hard as we may try.  So I think Hussman got his facts right, and his analysis totally wrong.  My nephew and I agreed that Hussman's logic works best if you are the kind of investor, like my Mom was, who just buys and holds forever.  But if the question is whether 2023 or 2024 is a good time to buy bonds, as opposed to 2025 or 2026 or the whole next decade, it's probably a good time to buy bonds.

That said, I'll close by mentioning that actions speak louder than words.  At the same time my nephew was scaring me with these doomsday arguments, and arguing maybe the 2020's are the decade of bonds, he took more risk than his uncle.  He kept buying tech stocks.  His problem now is that all the SOXL shares he bought at like $8 last October have tripled or even quadrupled.  He is praying to God the bull  market continues.  So he either doesn't sell, or at least pays capital gains at the long term rate after holding them for a year.  Three months to go.  You ain't gonna get returns like that on bonds.  Even if it turns out to be a great time to buy them.

I will admit...I am looking for an opportunity to diversify a little, more so than just a desire to acquire bonds. My portfolio is very heavy in stocks and cash.  You know what they say... diversification is the only free lunch in finance.

[+ stevenkesslar]

 

Sorry.  I know.  Verbose.  Every night I go to bed wishing that I could become filthy rich just following Elon Musk's one sentence investment advice on Twitter.  Instead, I have to contend with the ugly reality of charts and graphs like the ones above.  Not to mention a nephew who is smarter than me.   Ugh!

Your chart on diversification makes the point nicely, @KeepItReal .  And that first chart I posted above is a nice simple image about some of the data points on Hussman's chart.  About choosing stocks versus bonds.  2000 was the end of a secular bull, and a good year to pick bonds.  2002 was the end of a massive bear correction, and a good year to pick stocks.  What is interesting to me is that even 2006 and 2007, which I would describe as the end of a cyclical bull market, still turned out to be good years to choose stocks rather than bonds for the long term according to Hussman  So, again, as your chart also shows, most of the time stocks win.  

I call the game I play with my nephew Spirograph.  Which I used to like as a kid.  So we spend an inordinate amount of time in emails playing with charts and graphs.  And we waste a lot of time throwing shit at the wall to see what sticks.  Knowing that most of it will turn out to actually be shit.

The chart we are playing with now looks kind of like the first one.  I bought tech stocks last Fall and moved into cash earlier this year because I thought we were in a bear market rally.  I was clearly wrong.  My nephew's main point has been that the S & P has been, and still is, on a long term bull trendline.  Which starts in 2009 and in the chart above goes to 2020. So the long bull market is probably still on, he has argued.  With some short-term distortions based on COVID that now mostly played out.

Here's something you can try safely at home.  Look at the S & P on log scale since 2009.  It is easy to draw a channel with 90 % + of all the activity inside it.  The main exceptions are the start of COVID, when the index crashed below the channel, and the top of the COVID stimulus bubble, when the index briefly surged above it.  My point, which I can't find a recent graph that illustrates, is that what happened in late 2022 and early 2023 looks like a retest of the bottom of the trend line in this long term bull market trend.  So like in other retests, such as 2012 and 2016 on the first chart above, a reasonable assumption is that if the S & P 500 retests and doesn't crash through - like the bears said it would, to 3500 or lower - it will probably go higher.  With some peaks and valleys along the way. 

That's why I've been buying tech stocks back.  But even if I am right, we'll have some scary corrections.  Maybe soon.  As you note, @KeepItReal, diversifying into bonds after the shittiest year on record for bonds may be a good idea.

The second chart is from Glenn Neely.  Two things about him.

First, he was awfully cute, in a nerdy way, back in the late 1980's.  Guys like Druckenmiller admit they were stunningly wrong in predicting a Depression after the Black Monday 1987 crash.  Neely predicted a massive bull market.  He of course turned out to be right.

That second chart was Neely's prediction last year based on a theory I will call Spirograph On Steroids.  I was a skeptic.  But he has been mostly right, so far.  He uses his own wave theory.  Which he of course sells to people who want to get rich.  He said that in late 2022 and/or early 2023 the S & P 500 would test bottoms.  Check.  Then Neely said after that the most likely direction was up, in a big way.  Check, so far.  Honestly, when my nephew sent me this stuff last year I kind of dismissed the idea.  But it's partly because I'm older now and I take less risks.  He's younger and he takes more risks.  As I indicated above, his risk taking just paid off in a big way.  I'm delighted to have lost the debate.

If you want to do a deeper dive into voodoo wave theory, here's a video of Neely in September 2022 which has aged well.  As any good salesman or investor would, he hedged his bets.  He said the most likely scenario is the S & P does some retesting and churning, but ends up taking off in a huge bullish move in 2023.  Back then he predicted (at about 11:00 in that YouTube video) that the less likely scenario was a much deeper dive down, to like S & P 3150.  In the ballpark of what Morgan Stanley's bearish Mike Wilson was saying at around the same time.    Lions and tigers and bears! 

By December 16 of last year Neely was saying that his bullish view is looking correct.   And pretty soon we'll be headed to an all time high.  At 12:00 in that second YouTube interview he predicted the new ATH would be S & P 5500 or so, which would be reached by "late 2023 to mid-2024."  Last December that seemed almost insane.  And, again, even Neely was hedging against himself.  But now it doesn't look so crazy. A very easy way to visualize it is that what the S & P has to do is repeat the surge off the trendline from early 2016 to early 2018 as shown in that first chart above.  That bullish surge now looks modest compared to the 2020/2021 COVID surge to S & P 4800.  The 2016 surge went from S & P 1810 to S & P 2870.  That's about a 60 % surge in roughly two years. If you start at the Fall 2022 S & P bottom of 3490 and add 60 %, you get to right around S & P 5500.  Maybe bullish Neely will be right, again.

I wouldn't bet on it.  But I would not bet against it.  Or, in a word, diversify.  I'm guessing now is probably a good time to buy either stocks or bonds.

Then again, it is so much easier to think of this problem by putting my whore hat on.  As anyone who's ever chosen between two escorts knows, the correct answer is, "Don't chose.  Try both.  Maybe even at the same time."  😉

 

Edited July 29, 2023 by stevenkesslar

[pubic_assistance]

My wealth is primarily from real estate holdings.

The pandemic-panic challenged every landlord in NYC. People left the city in droves and rents plummeted. As the panic slowly subsided, landlords struggled to stay above water with non-payment isses and an attidute that we should absorb the financial disaster of every person who lost his job.

What I noticed quickly were the Real Estate agent-buzzards circling offering to take this disaster off my hands. So my attitude was there is a light at the end of this very dark tunnel if big-money clients are eager to buy.

So I refinanced at the extraordinarily low rates in 2020 and rode out the storm.

Now I have low mortgage rates, emergency cash in the bank ( pulling a little extra in by packaging it into the mortgage ) and rental income that has soared upward due to inflation and increased demand.

So for land-barons this kind of crash-the-market and wait for the rebound really benefits the pocketbook if you can ride out the storm. Your mortgage stays in old dollars while inflation changes your income to new (higher) income because you now need more dollars to match value.

My income is up 40% from 2019.

Edited July 30, 2023 by pubic_assistance
Additional

[+ stevenkesslar]

On 7/26/2023 at 11:45 AM, Thelatin said:

I’ve enjoyed watching my nephews dreams of student debt loan forgiveness vanish (them wanting more free stuff) as they also are buying their first homes and wondering why interest rates are higher.  Crazy uncle attempts to explain that there might be a correlation involving how money works….

That's nice to know.  😉

7 hours ago, pubic_assistance said:

So for land-barons this kind of crash-the-market and wait for the rebound really benefits the pocketbook if you can ride out the storm.

My income is up 40% from 2019.

So this is a post about housing inflation.  I'll make two main points.  A broad generational point.  Which is that Baby Boomers like me were lucky with housing inflation.  And Millennials and Zoomers aren't so lucky.  And then a specific point about the short term deflationary impact of the challenges Millennials and Zoomers are about to face.

Most of my wealth is in real estate, as well.  My income did not got up 40 % after COVID, if I refer to rental cash flow.   But that's because I'm stupid.  Instead of raising rents when COVID hit, I actually dropped them 5 % for a few years.  I raised them back to where they were before COVID last year, and am back to small annual rent increases.  It got me very loyal tenants, but not more income. 

That said, I don't feel like I had to ride out a storm.  When COVID hit, the value of all my homes soared.  If that's a storm, I want more storms.  Meanwhile, as rents in all the West Coast cities I own homes in soared I gave my tenants a huge incentive to stay put and pay the rent.  They did.  If that's a "very dark tunnel," where do I find more tunnels like this?  😉

I did sell two homes that were rentals, one last year and one last month.  I sold them both for roughly 30 % more than they worth in early 2020 when COVID hit.  What storm?  And that 30 % was chump change, in terms of how housing inflation (or appreciation, if you prefer) helped me.  I bought both homes during the GFC at fire sale prices.  So one was sold for just over 2.5 times what I paid for it.  And the other more than triple what I paid for it.  I may be stupid.  But I'm still a capitalist.  If I count my income that way, as one off capital gains, it went up way more than 40 % from my normal income.  

My generational point is that the housing inflation game has worked out very well for Baby Boomers like me.  Or, if I go by my Gen Y nieces and nephews, it also worked out well for that cohort.  Especially if you went to college and work as an executive for a big accounting firm or biotech company.  One of the Gen Yers just bought a second vacation home, for cash I think.  Woo hoo!  Another pays more each month to board his daughter's horse than any of my tenants pay me in rent every month.  Ain't it wonderful?

For Millennials and Baby Boomers, not so much.  It's easier to make an argument that they had the wind at their face, rather than their back.  The nephew I have referred to several time rents.  He and his wife could probably afford a home, especially after what he's likely to make in the stock market this year.  But his focus now is convincing his Mom to sell her home, since she's of that certain Baby Boomer age.  When she does, she'll make a huge windfall compared to what she bought the home for decades ago.   In addition, my nephew just made something like $100,000 for her on stock market bets.  Which will make it much easier for her to transition into renting a place she actually likes in a pricey suburb.  I'd argue she is a typical Baby Boomer, like me, who had the wind at her back when it came to home prices and housing inflation.  Her son, not so much.

He's not an easy one to scapegoat as the lazy Millennial who wants a free ride.  He chose not to go to college.  And both he and his wife work for local small businesses, in his wife's case a family-owned one.  Typical Main Street capitalism.  He loves to trash the waste of academia.  But we both agree the smartest thing we could do is send everyone to school for free to get engineering degrees, like China does.  It turns out that engineers can usually afford to buy homes, even pricey ones. And they tend to be good for GDP growth.

Bottom line is I feel lucky to be a Baby Boomer.  I didn't ride out a storm.  My whole life, I have had the wind at my back. Especially when it comes to real estate inflation.  Did I mention that of every large city in America, just by chance I happened to live and buy homes in Portland, where prices appreciated the most?  Please, make it rain more.  😉 

Now on to my short term point.  My best guess is that the related problems of student debt repayment and housing (un) affordability will now be deflationary.  But probably not cause a recession.  

If I wanted to argue we're about to enter a recession, I think the single best argument is that chart above.  When you look at all those charts on home price (and rent) inflation, it sure looks a lot like where we were right before the GFC.  That said, instead of being a nation awash in predatory loans with teaser adjustable rates that are ticking time bombs, we're a nation awash in stable and very affordable fixed rate mortgages. As you noted @pubic_assistance.  So I'm not holding my breath for a housing crash.

What's amazing to me is that, if anything, lack of supply seems to be trumping wavering demand.  At least for now.  In addition to just selling a home I own, I also just helped one brother sell a house by hooking him up with a realtor that teams up with investors who do gut rehabs and tear downs.  We were both surprised that he got more than either of us expected from a local flipper, based on what the comps for the last year were.  I'm now conspiring with my nephew and his Mom to do the same thing.  It's almost bizarre given how high mortgage rates are.  But I have to conclude that homes are selling for surprisingly high prices because of the lack of supply.  This is not 2008.  So I don't think housing is going to drive a recession.

Resuming Student Loan Payments May Exacerbate Affordability Crisis and Pressure Retail Sector

That's not a report on housing inflation, per se.  But it provides a very clear shorter term picture of some deflationary pressures.  Moodys says the upcoming resumption in student debt payments may shave 0.25 % or so off GDP.  Which is equivalent to the bonus GDP growth we just got, that drove up the stock market more.  So a little pain among maybe 5 million Millennials does not a recession make.  

That said, it will put downward pressure on rents, and retail.  Some Millennials and older Zoomers may have to move to less expensive digs to save money on rent, as that report argues.  Since rent is about one third of CPI, it helps drive CPI down, too.   I have to mention that I found it funny that even the Wall Street Journal labeled these huge increases in items like rent "greedflation."  But, as they noted, capitalism eventually solves the problem somehow.  That's the next chapter in our COVID recovery program.  😉

It doesn't help that, thanks to inflation, many borrowers with student debt payments restarting soon already have levels of non-student debt higher than before COVID. The stimulus checks are long gone.  And as prices, especially rents, rose higher than wages Millennials probably made up the difference with credit cards.  Or, in some cases, they may have decided since I can't buy a home at least I can have a nice pair of designer shoes. So this is mostly bad news for Millennials who want affordable housing, ideally that they own.  And mostly good news for Baby Boomers who own pricey homes, or a lot of cash from selling them, and just want low inflation.

If the idea is to create a long term investment environment that grows generous returns from either the S & P 500 or bonds, it's not clear this makes a whole lot of sense.  Here's the core problem as stated in the Moodys report above:

Quote

Our worldviews are shaped by the events that take place during our lifetime. Individuals born from 1979 through 1998 endured the Global Financial Crisis, lived through the ensuing recession, and now must get ready to resume student loan payments while balancing other increases in the cost of living partially due to persistent and high inflation. 

If I go by my own nieces and nephews, there is really no problem to be solved.  Most went to college.  Most own at least one home.  Even if they didn't get an engineering degree, they got good jobs in corporate America, or started or work for small businesses.  That's a good recipe for wealth creation.  In my family it worked well for my parents' generation, my generation, and the next generation.  But it's very clear that for lots of Millennials and Zoomers who are trying to follow the same path but don't work in Silicon Valley, it ain't working so well.  At some point, like our massive debt bomb,  this hurts the goose that keeps laying the golden eggs.

 

Edited July 30, 2023 by stevenkesslar

[Thelatin]

Disinflation is when the pace of price increases slows. 

For instance, goods and services sold in the United States cost 9.1% more last June compared to June 2021. The most recent Consumer Price Index report found that prices rose by 4% compared to last year. 

That is to say that goods and services are still more expensive than they were a year ago. But the price increases are smaller than a year ago.

[+ stevenkesslar]

21 hours ago, stevenkesslar said:

But it's very clear that for lots of Millennials and Zoomers who are trying to follow the same path [of getting an education and buying a home] but don't work in Silicon Valley, it ain't working so well.  At some point, like our massive debt bomb,  this hurts the goose that keeps laying the golden eggs.

I was reading Lyn Alden's Twitter feed last night and came across a retweet of an interesting chart that relates to my point.

 

Just from eyeballing it, the divergence between average rent and income starting in 1999 was maybe 25 % right before COVID.  As of that chart it's now 58 % since 1999, with increases in average rent far outpacing increases in income.  Add renewal of student debt repayments this Fall and younger renters who went to school are going to be under a lot of financial pressure.  My guess, almost my hope, is it leads to actual rent deflation.  Meaning rents come down from their wildly elevated levels.  I don't think it's good for an economy when young capitalists have a harder and harder time buying a home and starting a small business.  Not everybody can become young and filthy rich by creating the hottest new app.

Meanwhile, if you check in that website on home price trends I posted above, the Case Shiller home price index for an average price home in the US went from 100 in 2000 to 293 now.  So landlords and home owners won.  Tenants lost.  As an oversimplification, I do think it means Baby Boomers won and Millennials lost.

You can supplement that with these two charts:

It should be no surprise that during a period of a few decades when rents and college education costs have been soaring, home ownership among younger Americans who are far more likely to rent has declined.  Even for White college graduates with bachelor's degrees.

Anecdotally, I know as a landlord this is not because they don't want to own homes.  They can't afford them.  One of my Portland tenants told me during COVID he had to eat into his down payment savings, even though as I said above I cut his rent 5 %, mostly as a symbolic gesture.  Everything else cost more, he said.  And his income got dinged during the worst of COVID.  Another family I rent to in Portland, a couple with two kids, used their COVID stimulus to start a small business.  If it were the Portland of 1990 when I moved there, they could afford to buy an inexpensive home like I did.  Today they are simply priced out.

My point is I see this as a bomb we are building that in some way and at some point will explode.  It's not good for the economy.  For some of us I guess the good news is we won't have to worry about it, since we'll be living in the great retirement home in the sky when the bomb goes off.  😉

P.S.  It's a tangent.  But kudos to Lyn Alden for modeling what Twitter actually could be, rather than a hate-based dumpster fire.  I posted a one hour deep dive interview with her about inflation trends above.  Which is obviously what I prefer.  But she uses Twitter to make these pithy data points about the economy, usually with a graph or two.  Who knew Twitter could actually make us smarter?  😀

[+ stevenkesslar]

On 7/30/2023 at 4:29 AM, pubic_assistance said:

So I refinanced at the extraordinarily low rates in 2020 and rode out the storm.

Very smart move.

I was curious.  Because what you experienced and what I experienced as landlords was almost the exact opposite.  So I went searching for data on rents in NYC and found this really interesting chart:

What's interesting is that landlords in NYC had almost the exact opposite problem of most of the US.  Including, I'm guessing, landlords in most of the US.  The basic COVIDflation problem has been that surges in demand were met with constraints in supply.  Manhattan had exactly the opposite, briefly, as that chart from Sept.  2020 shows. 

In effect, NYC briefly solved the Great Millennial Housing Affordability Problem.  At least for a year or so.  I checked what Zillow says about rents on the suburbany homes I rent in places like Sacramento and Palm Springs.  If they are correct, even by Fall 2020 rents were higher than Spring 2020 when COVID started. The massive rent surge happened in 2021, when everybody wanted to move to the burbs suddenly.  Supply and demand.

A brief eyeball check on Bloomberg says average apartment rents in Manhattan were $3700ish in early 2020, right before COVID.  And they dipped at low as maybe $2700, a $1000 price cut, by the end of 2020.  Ouch!  Bloomberg says they recently reached an all time high of about $4150.

It's also an interesting example of what seems to be almost a universal.  With some big exceptions, like working from home, COVIDflation did not change any long term trends.  It simply distorted them temporarily.  So the S & P 500 had a huge spike up when inflation boosted corporate profits.  That now seems to have mostly balanced out.  And the index is seemingly back on pre-COVID trend.  Same with Manhattan rents.  They had a scary (for landlords) drop down, but are now seemingly back on trend. 

Unfortunately for many West Coast renters, they have not experienced declines from the massive spikes in rent of 2021.  All this suggests the three main problems are supply, supply, and supply.

 

Edited July 31, 2023 by stevenkesslar