Inflation

[frogger]

What do you do to hedge against to inflation now?  I mentioned to DH we should buy land back in January but we were so busy but we have no excuse. We knew this was coming.  We can't afford rental properties but we might be able to afford vacant land. You snooze you lose I guess. 

Gold is high.

Stocks are high.

Wages are high.

Building materials are high.

Housing is high.

Maybe MV=PQ is actually correct. 🙄

 

 

 

 

 

[Bootsie]

Japanese yen?

And I think we are only at the tip of the iceberg

[saraha]

I don't know either, but it is apparently where all of my covid stress has moved to now that we have had it and I am not worrying about that anymore. 🙄

[Bootsie]

As far as wages being high, many people I know have actually had a pay CUT in the past year--and are doing more work.  So, it is very uneven.

[Bootsie]

perhaps Boeing stock

[frogger]

55 minutes ago, Bootsie said:

perhaps Boeing stock

Are you thinking there is war ahead? I think it would give me the willeys to profit off war. 

I can't help but think people don't know what to do with their money feel there is no other place but stocks and stocks are overvalued. I could be wrong but...

I know individual stocks might be undervalued but I'm not knowledgeable enough to pick and choose. I'm more of an investor in diversified funds (although, I'm sure that makes me a Boeing stock holder). 

I'm so glad we have a few decades before retirement. I feel bad for those who are a couple decades older than me.

[Bootsie]

14 minutes ago, frogger said:

Are you thinking there is war ahead? I think it would give me the willeys to profit off war. 

I can't help but think people don't know what to do with their money feel there is no other place but stocks and stocks are overvalued. I could be wrong but...

I know individual stocks might be undervalued but I'm not knowledgeable enough to pick and choose. I'm more of an investor in diversified funds (although, I'm sure that makes me a Boeing stock holder). 

I'm so glad we have a few decades before retirement. I feel bad for those who are a couple decades older than me.

Oh, I wasn't thinking that (but I can see why you jumped to that.)

I was just looking at stocks--and while the overall market is HIGH, Boeing has suffered tremendously--so I was just trying to think of things that are not at all time highs.  

Even the diversified funds are a bit concerning--not only are they at highs, but if you are holding a S&P500 Index fund about 11% is tied to two stocks Apple and Microsoft; Add in Google, Amazon, and Facebook and Google--and that is over 20% of the portfolio.  I don't think they provide the same type of industry diversification they once did.

[Sneezyone]

3 minutes ago, Bootsie said:

Oh, I wasn't thinking that (but I can see why you jumped to that.)

I was just looking at stocks--and while the overall market is HIGH, Boeing has suffered tremendously--so I was just trying to think of things that are not at all time highs.  

Even the diversified funds are a bit concerning--not only are they at highs, but if you are holding a S&P500 Index fund about 11% is tied to two stocks Apple and Microsoft; Add in Google, Amazon, and Facebook and Google--and that is over 20% of the portfolio.  I don't think they provide the same type of industry diversification they once did.

I was ‘arguing’, nicely, 🤣 with DH about this two months ago. I finally got him to consider protecting some of the gains by moving some into the federal employee equivalent of TIPS and money market funds (basically bonds and fixed income funds). We also decided to invest in our current house (which we blessedly bought before the market exploded) and hold our rental.

[Bootsie]

1 minute ago, Sneezyone said:

I was ‘arguing’, nicely, 🤣 with DH about this two months ago. I finally got him to consider protecting some of the gains by moving some into the federal employee equivalent of TIPS and money market funds (basically bonds and fixed income funds). We also decided to invest in our current house (which we blessedly bought before the market exploded) and hold our rental.

But see, those scare me some, too.  If interest rates rise, then bond prices fall.  With the increase in the money supply we have already seen, I just can't see how inflation, and nominal interest rates can't start risisng. 

I ahve moved a lot to short-term money market funds that are earning next to nothing right now--more for risk management and to have liquidity if something does start falling (and simply because I don't see a lot of good options right now)

[frogger]

Having the rental and home from before the boom is probably good but yes on Bootsie's post.

 

Yellen is also so focused on employment and  with the unemployment bonus, I think she is going to overshoot. Around here, people are desperate for workers. It's not demand that is the problem. 

[Bootsie]

If you go back to MV=PY  ==> an increase in the money supply, by itself can be inflationary.  But, this situation is even worse.  A large increase in M when there is a drop in GDP (so a drop in Y). Mathematically either P must rise tremendously and we have massive inflation. Or, V has to drop, and I just don't think velocity is that volatile.  

[Sneezyone]

32 minutes ago, Bootsie said:

But see, those scare me some, too.  If interest rates rise, then bond prices fall.  With the increase in the money supply we have already seen, I just can't see how inflation, and nominal interest rates can't start risisng. 

I ahve moved a lot to short-term money market funds that are earning next to nothing right now--more for risk management and to have liquidity if something does start falling (and simply because I don't see a lot of good options right now)

We don’t have access to any funds expressly labeled ‘money market’ within our 401k- like plan but the fixed income asset portfolio is about as close as it gets. The bonds in the bond fund are low yield but long term so the yield is protected against rapid declines. I was only able to get him to consider moving 15%. It’s hard to know what to do with our limited options.

Edited May 3, 2021 by Sneezyone

[Bootsie]

I haven't kept up with what is going on with commercial property but I can't say how it hasn't been severally hurt during the last year.

[Frances]

I was just reading about this. I’m trying to decide what if anything to do with our work based retirement funds. Mine has more options than my husband’s for some relatively safer, low yield investments. Right now we are using target date index funds which are primarily a mix of stocks and bonds. 

https://www.investopedia.com/articles/investing/081315/9-top-assets-protection-against-inflation.asp

[Bootsie]

17 hours ago, Sneezyone said:

We don’t have access to any funds expressly labeled ‘money market’ within our 401k- like plan but the fixed income asset portfolio is about as close as it gets. The bonds in the bond fund are low yield but long term so the yield is protected against rapid declines. I was only able to get him to consider moving 15%. It’s hard to know what to do with our limited options.

I know a lot of retirement plans have decreased the number of options available in recent years. The argument is that it makes it simpler and less risky for participants; I hadn't seen one that did not have some type of money market--short term investment 😞  Those are generally not the best long-term investment but sometimes they can make a lot of sense.  I don't think concern that there will be a rapid decline in yields is very high in these market conditions--but I've thought that for a while now.  

[Bootsie]

"“Toilet paper and Clorox were in short supply at the outset of the pandemic, but manufacturers eventually increased supply, and those items are no longer scarce. Many of the factors raising prices this spring are also likely to be similarly short-lived,” Rosengren (Boston Federal Reserve President) said.  

Does he not think that increasing the money supply leads to inflation?????  I don't see how that is temporary.  

 

[AnotherNewName]

On 5/5/2021 at 12:01 PM, Bootsie said:

"“Toilet paper and Clorox were in short supply at the outset of the pandemic, but manufacturers eventually increased supply, and those items are no longer scarce. Many of the factors raising prices this spring are also likely to be similarly short-lived,” Rosengren (Boston Federal Reserve President) said.  

Does he not think that increasing the money supply leads to inflation?????  I don't see how that is temporary.  

 

Inflation is caused by too much money chasing too few goods.  If manufacturing levels/production of services expands with the money supply the effect of the increase is muted.  The Fed also has mechanisms through the banking system that will help it drain off excess money supply if needed.

Rosengren is correct that some of the high inflation spikes we are seeing are likely transitory due to issues in those supply chains.  The timber market was in a decline prior to 2020 for a variety of reasons (ranging from tariff battles to the softening demand of a mature business cycle) , leading to less lumber in production. The demand fell further in early 2020 and now with a surge in demand you have the expected price increases. We also now have timber operators expanding production which will (in time) reduce prices to a more sustainable level.

[Bootsie]

3 minutes ago, AnotherNewName said:

Inflation is caused by too much money chasing too few goods.  If manufacturing levels/production of services expands with the money supply the effect of the increase is muted.  The Fed also has mechanisms through the banking system that will help it drain off excess money supply if needed.

Rosengren is correct that some of the high inflation spikes we are seeing are likely transitory due to issues in those supply chains.  The timber market was in a decline prior to 2020 for a variety of reasons (ranging from tariff battles to the softening demand of a mature business cycle) , leading to less lumber in production. The demand fell further in early 2020 and now with a surge in demand you have the expected price increases. We also now have timber operators expanding production which will (in time) reduce prices to a more sustainable level.

But production levels have fallen over the past year.  Real GDP is almost 1% less in the US now than it was in the the quarter of 2019.  The M2 measure of money supply is about 33% bigger.  (M1 measure is MUCH bigger) So, we have 33%  more money and chasing 1% fewer goods.  

The FED can increase the discount rate to drawn off money supply, but the speed and quantity at which that can drain off money is limited and does not occur without impacting the financial markets.

Yes, there are supply chain issues in some industries leading to more pronounced effects.  

[AnotherNewName]

4 minutes ago, Bootsie said:

But production levels have fallen over the past year.  Real GDP is almost 1% less in the US now than it was in the the quarter of 2019.  The M2 measure of money supply is about 33% bigger.  (M1 measure is MUCH bigger) So, we have 33%  more money and chasing 1% fewer goods.  

The FED can increase the discount rate to drawn off money supply, but the speed and quantity at which that can drain off money is limited and does not occur without impacting the financial markets.

Yes, there are supply chain issues in some industries leading to more pronounced effects.  

And the money supply increase/production decline is why we are seeing higher inflation, and why many believe it is transitory.

If inflation becomes larger than expected (possible), then the Fed's reaction likely will affect financial markets in the short term. No surprise there and I am not sure anyone is saying otherwise.

If the money supply increase/inflation increase relationship is as tightly correlated as you believe, then we would be seeing much higher prices across the board.  M1 is also not the best measure of the money supply as it is very narrow.  Over the same period of time that M1 has increased M2 remained relatively stable.  Without getting too in the weeds here is an explanation which can explain it better than I can.

https://fredblog.stlouisfed.org/2021/01/whats-behind-the-recent-surge-in-the-m1-money-supply/

[Bootsie]

2 minutes ago, AnotherNewName said:

And the money supply increase/production decline is why we are seeing higher inflation, and why many believe it is transitory.

If inflation becomes larger than expected (possible), then the Fed's reaction likely will affect financial markets in the short term. No surprise there and I am not sure anyone is saying otherwise.

If the money supply increase/inflation increase relationship is as tightly correlated as you believe, then we would be seeing much higher prices across the board.  M1 is also not the best measure of the money supply as it is very narrow.  Over the same period of time that M1 has increased M2 remained relatively stable.  Without getting too in the weeds here is an explanation which can explain it better than I can.

https://fredblog.stlouisfed.org/2021/01/whats-behind-the-recent-surge-in-the-m1-money-supply/

Below is the increase in M2.  It has not increased as much as M1, but I wouldn't consider M2 to be remaining relativley stable.  From 15,000 to 20,000 is a 33% increase.  

Most of the reserves in the banking system are excess reserves.  The way for the FED to drain those off is to sell US Treasury bills to banks.  The FED cannot make banks purchase those; the FED can simply offer them at a very favorable (low) price, which translates to higher interest rates.  Higher interest rates will translate to increased costs to the US Treasury as it refinances the massive debt it is taking on.  

[AnotherNewName]

2 minutes ago, Bootsie said:

Below is the increase in M2.  It has not increased as much as M1, but I wouldn't consider M2 to be remaining relativley stable.  From 15,000 to 20,000 is a 33% increase.  

Most of the reserves in the banking system are excess reserves.  The way for the FED to drain those off is to sell US Treasury bills to banks.  The FED cannot make banks purchase those; the FED can simply offer them at a very favorable (low) price, which translates to higher interest rates.  Higher interest rates will translate to increased costs to the US Treasury as it refinances the massive debt it is taking on.  

Relative to M1, yes.

[Bootsie]

1 minute ago, AnotherNewName said:

Relative to M1, yes.

I am not sure what this means.  If you are saying that M2 has been more stable than M1, yes that is true.  But, the fact is that M2 has grown about 33% over the past year, which is a HUGE increase in the money supply.  

M2 includes everything in M1; so the fact that M1 has been more volatile than M2 is an indication of the differences of the way in which people are holding money, with a movement ot a more liquid holding.  

[AnotherNewName]

1 minute ago, Bootsie said:

I am not sure what this means.  If you are saying that M2 has been more stable than M1, yes that is true.  But, the fact is that M2 has grown about 33% over the past year, which is a HUGE increase in the money supply.  

M2 includes everything in M1; so the fact that M1 has been more volatile than M2 is an indication of the differences of the way in which people are holding money, with a movement ot a more liquid holding.  

I initially misread your first post and thought you were only discussing the massive increase in M1 relative to M2.

But going back to why the increase in the money supply is not a harbinger of massive inflation on the horizon, the reason many are not concerned about inflation well beyond current expectations is that velocity of money is still slowing.  Money not being turned over isn't going to spike inflation. The lack of velocity is offsetting money supply growth.

Velocity of M2 Money Stock (M2V) | FRED | St. Louis Fed (stlouisfed.org)

 

[Bootsie]

8 minutes ago, AnotherNewName said:

I initially misread your first post and thought you were only discussing the massive increase in M1 relative to M2.

But going back to why the increase in the money supply is not a harbinger of massive inflation on the horizon, the reason many are not concerned about inflation well beyond current expectations is that velocity of money is still slowing.  Money not being turned over isn't going to spike inflation. The lack of velocity is offsetting money supply growth.

Velocity of M2 Money Stock (M2V) | FRED | St. Louis Fed (stlouisfed.org)

 

Mathematically, the velocity of money had to fall.  MV = PY.  The money supply times mutlipled by velocity has to equal the amount of money spent (the price level multiplied by the goods purchased).  Historically, velocity is not extremely volatile, and is based more upon habits.  The recent fall in velocity is highly unusal, and is probably not sustainable.  As V begins to move back to a more normal level, something else in the equation is going to have to give.   I just can't imagin Y growing anywhere near 33%.  I cannot see M falling by 33%, so that leaves P, which is inflation.  

[BusyMom5]

https://seekingalpha.com/article/4426754-investing-with-inflation-150-years-data

This is an article my husband and I have been digesting this morning- its really long.  

I think we are going to have more inflation than I have witnessed in my life.  Some is transitory, but not all.  I think this is going to take a few years to shake out.

[Mona]

On 5/3/2021 at 2:36 PM, frogger said:

What do you do to hedge against to inflation now?  I mentioned to DH we should buy land back in January but we were so busy but we have no excuse. We knew this was coming.  We can't afford rental properties but we might be able to afford vacant land. You snooze you lose I guess. 

Gold is high.

Stocks are high.

Wages are high.

Building materials are high.

Housing is high.

Maybe MV=PQ is actually correct. 🙄

 

 

 

 

 

You can now buy gold in smaller increments. (Grams) You may find physical silver to be more affordable. The prices of silver are artificially low right now. Do not buy silver certificates. 

[Bootsie]

A change in regulation can explain there was a sudden change in the size of M1 relative to M2.  That simply shows a difference in the way people are holding their money, or a change in the way certain types of bank accounts are classified.  However, M2 has grown significantly in the past 1 1/2 years, and now M1 is significantly larger than even M2 was at the beginning of 2020.  

[Ausmumof3]

Chip manufacturing company shares?  I have no clue.  The property market is insane here and they are introducing yet another gov bonus/stimulus.  Maybe worth investing in construction short term?

[frogger]

3 hours ago, Mona said:

You can now buy gold in smaller increments. (Grams) You may find physical silver to be more affordable. The prices of silver are artificially low right now. Do not buy silver certificates. 

It is interesting to me trying to read inflation adjusted prices for silver. I just know gold prices like an American knows English or a Frenchman knows French since I grew up on a gold mine but I have to go find inflation adjusted silver prices. Overall, they didn't appear low. Maybe as a ratio to gold but  individually over the long term, they looked high. 

[AnotherNewName]

5 hours ago, Bootsie said:

Mathematically, the velocity of money had to fall.  MV = PY.  The money supply times mutlipled by velocity has to equal the amount of money spent (the price level multiplied by the goods purchased).  Historically, velocity is not extremely volatile, and is based more upon habits.  The recent fall in velocity is highly unusal, and is probably not sustainable.  As V begins to move back to a more normal level, something else in the equation is going to have to give.   I just can't imagin Y growing anywhere near 33%.  I cannot see M falling by 33%, so that leaves P, which is inflation.  

Velocity has been on a steady downward decline since 2010.

And inflation will increase. The debate is by how much.  I am in the camp that after we move the transitory period we will possibly go over 2% but it is certainly containable.

[Bootsie]

7 minutes ago, AnotherNewName said:

Velocity has been on a steady downward decline since 2010.

And inflation will increase. The debate is by how much.  I am in the camp that after we move the transitory period we will possibly go over 2% but it is certainly containable.

Velocity declined by less than 20% over the entire 2010 decade.  It has declined by about 21.2% over the past year alone.  That is a huge deceleration in one year.  Even at 2% inflation, that exceeds the current rate on 10-year Treasury notes and is much higher than the current rate on US Treasury bills.  If people are only willing to lend to the US government if they are earning a postiive real interest rate, the rate on government debt will have to increasse significantly.  

[Carol in Cal.]

Stockpile supplies.  Grow/preserve food.  Become less dependent on energy whether it is for heating, transportation, cooling, or whatever, including transportation of purchased goods.  These are small but  helpful in curbing discretionary spending and smoothing price variations for customer products.  

Edited May 11, 2021 by Carol in Cal.

[vonfirmath]

My job at work consists partially of pricing up change orders on work.

The price of material is increasing so quickly that I was told today every change order going out starting immediately needs to have a quote for materials. We can't depend on our database of standard prices anymore.

 

[Bootsie]

The CPI change from a year ago is over 10%, which rivals the increases in 1980 and 2008.