RPI to 6% !

[dealtn]

Why anyone would want to do that would be beyond me.

If you wanted to demand, or needed to demand more money to maintain a standard of living, doesn't that point to RPI?

No, because things such as substitution effects, and formula effects, such as drift (Google Carli or Jevon and look at the differences between geometric and arithmetic averaging) show RPI to be a (very) poor measure of standard of living changes. As does the fact it excludes so many goods and services, and certain sections of the population, meaning it might not even include your standard of living in the first place!

[MDW1954]

I have an economics degree, but was never employed as an economist.

Me too. Several in fact. And never employed as an economist. First "real" job was running 24x7 production lines in an engineering factory. I'd finish a 12-hour night shift at 6am, and head to the library to work on my PhD. I stayed in industry before moving to consultancy.

I've downloaded the document, and will read it tomorrow. Thank you for the link. At first glance, it looks very interesting.

MDW1954

[GoSeigen]

Are there any central bankers who seem competent?
I can't think of any for decades.
They all apply too much stimulus for too long, which leads to distortions which causes boom and bust cycles about once per decade.

This point has been debated many times. Competence is one thing, but the idea that central bankers' policy has been too loose is a logical error IMO. Over the period discussed the mandate of CBs was to bring down inflation by applying tight monetary policy. This they succeeded in doing. One must therefore interpret monetary policy as having been tight, not loose, else inflation would have risen (or stayed the same) rather than falling. In fact policy was so tight that inflation was driven to practically zero or negative at times; this produced a problem for Central Banks (but recently not decades ago) where they had to reverse their strategy and try to raise inflation back to their targets. So yes, perhaps policy is loose or even too loose now, but that is a recent phenomenon.


GS

Globalisation and technological advances helped with the disinflationary forces.

It should never be the case that lending money is a loss-maker in real terms. Lenders need to be rewarded for their capital being tied up for a period of time and for the risk that some or all of it might not be paid back due to defaults.

Oh very much agree. Try not to be a lender when you're going to make a loss in real terms!!

GS

[tjh290633]

On portfolio management everyone uses the FTSE 100 and similar capitalisation weighted indexes with the geometric based FTSE 30 index having been abandoned .

As the FTSE100 did not exist when I started, I have continued to keep an eye on it. One of its features is that constituents are only removed in exceptional circumstances, not by reference to their capital value. Also certain sectors were excluded because they were not "industrial" in its early days.

I am not at home at the moment, so cannot look at my comparison of the FT30 and the FTSE100. My recollection, though, is that the reactions to the dot-com hiatus of 1999-2003 were quite different. The chart at https://uk.investing.com/indices/ft30-advanced-chart can be manipulated to give an idea, showing the fall from December 1999 to its low point in 2003 quite dramatically.

TJH

[BT63]

I am not at home at the moment, so cannot look at my comparison of the FT30 and the FTSE100. My recollection, though, is that the reactions to the dot-com hiatus of 1999-2003 were quite different. The chart at https://uk.investing.com/indices/ft30-advanced-chart can be manipulated to give an idea, showing the fall from December 1999 to its low point in 2003 quite dramatically.
TJH

The FTSE also had a significant weighting in pharmaceuticals which were highly rated during the dotcom years.
I seem to recall FTSE heavyweights Astra and Glaxo on P/E ratios around 30 - 40x in 1999 which was a large factor in their poor share price performance for the following decade.
I remember tobacco and utility shares being very cheap at the time as they were 'old economy' (insignficant % of the FTSE 100, some were relegated to the FTSE 250) The utility and tobacco shares performed quite well during the 2000 - 2003 bear, especially when their dividends were included.

[1nvest]

This point has been debated many times. Competence is one thing, but the idea that central bankers' policy has been too loose is a logical error IMO. Over the period discussed the mandate of CBs was to bring down inflation by applying tight monetary policy. This they succeeded in doing. One must therefore interpret monetary policy as having been tight, not loose, else inflation would have risen (or stayed the same) rather than falling. In fact policy was so tight that inflation was driven to practically zero or negative at times; this produced a problem for Central Banks (but recently not decades ago) where they had to reverse their strategy and try to raise inflation back to their targets. So yes, perhaps policy is loose or even too loose now, but that is a recent phenomenon.

GS

Globalisation and technological advances helped with the disinflationary forces.

It should never be the case that lending money is a loss-maker in real terms. Lenders need to be rewarded for their capital being tied up for a period of time and for the risk that some or all of it might not be paid back due to defaults.

Oh very much agree. Try not to be a lender when you're going to make a loss in real terms!!

GS

Anyone else seeing 10 year projections of broadly flat/negative nominal stock, bond, gold outcomes with house prices being the better prospect? And even cash deposits lagging in net real terms.

[scrumpyjack]

Anyone else seeing 10 year projections of broadly flat/negative nominal stock, bond, gold outcomes with house prices being the better prospect? And even cash deposits lagging in net real terms.

Cash is virtually certain to lag in real terms, interest rates are so far below inflation. IMO bonds are not a good place to be either as rates rise (modestly). The rest is pure guesswork but perhaps cash in a stronger currency than GBP is one of the least worst options? I'm happy to stay predominantly in equities with not too much exposure to the UK economy. Everything is relative and with higher inflation and ultra low interest rates equities don't look overvalued. Essentially I can't see an alternative to equities, certainly not crypto or NFT for me!

[BT63]

Anyone else seeing 10 year projections of broadly flat/negative nominal stock, bond, gold outcomes with house prices being the better prospect? And even cash deposits lagging in net real terms.

Over the next ten years I think stock markets will give poor real returns. Most likely the US markets will give significantly negative real returns due to very stretched valuations. The unloved UK market looks like it has a better chance than most to give some kind of real return.

Bonds are a tricky one. I don't like them due to negative real yields but I see a significant chance that QE + low rate addicted economies and stock markets will not cope well when QE is withdrawn and interest rates raised, so it could lead to a sudden and severe downturn which rapidly cools inflation.

Gold I think will at least hold its value in real terms.

Houses are already stretched. Raising rates will be bad for them, as would a recession caused by withdrawal of QE. Rates can't fall much further so that limits further improvements in affordability of mortgages.

Cash is also a tricky one. It could be awful if inflation continues to run away, but cash could be useful for bargain hunting if central banks cause asset markets to crash.

[1nvest]

Gold is also possibly relatively high and on a stock/gold = house type measure

Houses are already stretched. Raising rates will be bad for them

Not if wages up, inflation up, interest rates not up as much, i.e. lenders lose out/borrowers benefit and 'bricks and mortar' are more favoured given everything else being relatively poorer choices.

[ADrunkenMarcus]

Over the next ten years I think stock markets will give poor real returns.

I wouldn't be too averse to that, personally, if I am still accumulating. Stagnant share prices (whether in real or nominal terms) present an opportunity to accumulate. A period of poor returns followed by a period of better returns, once I've accumulated more shares, would suit.

As someone with a fixed rate mortgage at 1.2% and a short-term personal loan at 2.8%, I'm equally aware that inflation is eroding the real value of my debts.

Best wishes


Mark.

[BT63]

Gold is also possibly relatively high

I agree that gold isn't cheap, but there are so many financial risks ahead and it has a tendency to do well when other assets are doing badly, so I think it will perform better than most assets.

In the late 1970s and early 1980s inflation it took less than 100oz of gold to buy an average UK house and about 100oz to buy an average US house. If anything, housing supply has increased more than gold supply since then, so it could cost more like 75oz in the future.

Average UK house is currently £270k and US is around $375k, both being around 200oz at current prices. If economies and inflation go bad, gold has room to at least double relative to house prices.

[BT63]

Over the next ten years I think stock markets will give poor real returns.

I wouldn't be too averse to that, personally, if I am still accumulating. Stagnant share prices (whether in real or nominal terms) present an opportunity to accumulate. A period of poor returns followed by a period of better returns, once I've accumulated more shares, would suit.

As someone with a fixed rate mortgage at 1.2% and a short-term personal loan at 2.8%, I'm equally aware that inflation is eroding the real value of my debts.

Best wishes


Mark.

Yes, falling prices are a good thing for those looking to buy. Even for holders the price doesn't matter until it's time to cash out.
However, many people become scared of losing money when prices are falling, so they sell at a loss or they become too scared to add new money.

[1nvest]

Gold is also possibly relatively high

I agree that gold isn't cheap, but there are so many financial risks ahead and it has a tendency to do well when other assets are doing badly, so I think it will perform better than most assets.

In the late 1970s and early 1980s inflation it took less than 100oz of gold to buy an average UK house and about 100oz to buy an average US house. If anything, housing supply has increased more than gold supply since then, so it could cost more like 75oz in the future.

Average UK house is currently £270k and US is around $375k, both being around 200oz at current prices. If economies and inflation go bad, gold has room to at least double relative to house prices.

Dow/Gold of around 20 recent levels (in effect 20 ounces of gold to buy one Dow stock index share) is by no means as high as the 40 ounces it took back in late 1999, but way more than the near 1 ounce in 1980.

If we do endure a Bunny decade forward time then 33% each in home value, small cap value stocks (being more volatile = better for volatility capture/trading) and gold might be a reasonable asset-allocation. Imputed rent from the home, some stock dividends, some volatility trading capture (rebalancing between stock and gold). US gold/SCV since 1972

Given 33% £ (home value), gold (global/non-fiat commodity currency) then US$ for the SCV holdings would seem appropriate, three currencies (2 fiat, one commodity), three assets (land, stock, commodity).

As direct buying of US ETF's such as VISVX is nowadays pretty much a no-go, I see BMO (who also manage FCIT, formerly foreign and colonial) also have a BGSC small cap investment trust product (recently -10% discount to NAV, 4% gearing). Not being familiar IT's however striking is that its largest holdings contain other IT's so some multi-layering of costs involved. Maybe as the FT250 already has around 50%+ of earnings foreign sourced, and it contains 50 odd IT's (and is small in US scale), the likes of VMID might suffice.

[scrumpyjack]

I am reminded of JK Galbraith's quip:

There are two kinds of forecasters: those who don't know and those who don't know they don't know

[1nvest]

A bad plan is better than no plan

A man who does not plan long ahead will find trouble at his door. – Confucius

[scrumpyjack]

A bad plan is better than no plan

A man who does not plan long ahead will find trouble at his door. – Confucius

We certainly seem to be living in 'interesting times', per the ancient chinese curse!

[SimonS]

A bad plan is better than no plan

A man who does not plan long ahead will find trouble at his door. – Confucius

We certainly seem to be living in 'interesting times', per the ancient chinese curse!

A factor in price rises in the rise in China's rare earths business. China mines / refines a very large proportion of the world's rare earth products ( resources are estimated at 38% of the world total but many countries, like Britain, have little or no production of their own yet.

Not unnaturally, decreeing a deadline for the fossil fuelled energy and transport created a spking demand for rare earth products such as batteries and electric motors. China coincidentally decided to improve its control of strategic rare earth products to protect its longer term revenue and as leverage in the Sino-US trade disputes. Prices in some products have risen by 750%, overall by 25% over the year and exports have fallen.

Just as the '73 Oil Shock had an impact on the UK economy, the Electric Shock of the 20's is likely to bite too.

And in addition to the 40% rise in the energy cap, we will see a 4% above CPI rise in many (ie: 10 % or more in total) on most telecommunication products in March/ April.

Any bets on MPs wanting at least a 10% increase in their salaries ( My favorite gauge of the increase on the cost of living) this year?

[westmoreland9]

It's reasonably well known hereabouts that I'm Motley Fool columnist (and paid-for-service analyst) Malcolm Wheatley. I've been writing publicly since the summer saying that the Bank of England have got inflation wrong, and were being far too sanguine about it. Andrew Bailey disagreed with Andy Haldane, and has been proved wrong.

I've been expecting CPI to exceed 6% in the next couple of months, and have been saying so.

This is the disastrous 2007 fantail projection all over again.

The sad thing is this: what do I know? My PhD is in the field of microeconomics, not macroeconomics. I'd say I was pretty rubbish at macroeconomics. But you don't need to be good at it to remember the 1970s and early 80s.

MDW1954

i remember saying about 6 months ago on advfn that inflation was through the roof, and that 1% or whatever the official figures were at the time was total nonsense.

households and the economy are very different since the last crisis of 2008. poor households usually rent now, so no mass auctions or forced sale of property occurred this time. add about £400bn so far of stimulus, and the fact many households have saved money, and production is hugely down is a recipe for a spike in inflation. production remains hampered by lockdowns and staff absences, and the cost of shipping and traded commodities is in some cases up a few multiples. the expectation now is for further significant price rises (maybe 5-6%)n ext tear.

[scrumpyjack]

There's a story on Bloomberg at the moment about US pundits saying 'cash is trash' and Billionaires Are Embracing Crypto in Case Money ‘Goes to Hell’

The BoE etc have been far too complacent about inflation IMO and there is a severe danger of continuing rising inflation for many years once it gets into people's psyche. It is clearly an international problem though, not just us.

[westmoreland9]

There's a story on Bloomberg at the moment about US pundits saying 'cash is trash' and Billionaires Are Embracing Crypto in Case Money ‘Goes to Hell’

The BoE etc have been far too complacent about inflation IMO and there is a severe danger of continuing rising inflation for many years once it gets into people's psyche. It is clearly an international problem though, not just us.

historically, low inflation has been helped by importing extremely cheap goods from the far east. shipping costs are up about 8-9 fold on the pre pandemic levels which will feed through to the price of every import.