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Inflation

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odysseus2000
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Inflation

#412752

Postby odysseus2000 » May 17th, 2021, 3:23 pm

For the first time since the 1970's we are seeing serious inflation. The price of lumber is up over 400% this year:

https://www.nbcnews.com/politics/white- ... s-n1267475

I was buying some wood in my local wood store and the guy next to me was complaining that the price of wood was massively up since a few weeks ago. The store man said they had to update wood price every morning. This is classic 1970's inflation where prices went up day by day.

Copper too has been strong:

https://twitter.com/0_ody/status/139429 ... 40706?s=20

There have been queues for gas following pipeline problems and there is a belief in some circles that Prez Biden's spending regime is so large that it can only be tamed by some 1970's style inflation.

Many argue that gold is the only safe place now, but on a 20 year chart it has not moved much:

https://twitter.com/0_ody/status/139429 ... 86210?s=20

By contrast Bitcoin has massively outperformed gold even after the last months sell off:

https://twitter.com/0_ody/status/139429 ... 81634?s=20

It is far from clear to me if this is all opportunist price gouging or the beginning of a huge rise in commodities.

If we really are about to see serious inflation the last place to be would be Fiat currencies that are likely to be effectively de-valued, but a return of inflation would also send yields on gilts and deposit accounts sky rocketing up. Yields on gilts in the 70's were for a period well over 15% giving a great rate of return and when the anti-inflation policies hit, a nice capital gain too. Hence investments in gilts may in the future become attractive although as gilt prices rise they are for now dangerous.

Equities also will in general do very well.

Are other investors concerned and if so what are they doing to defend against inflation?

Regards,

odysseus2000
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Re: Inflation

#413259

Postby odysseus2000 » May 19th, 2021, 4:05 pm


NotSure
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Re: Inflation

#413263

Postby NotSure » May 19th, 2021, 4:26 pm



Indeed. Crypto behaving like 'risky asset' rather than 'store of value'.

Everything seems red today except the yield on Italian bonds :|

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Re: Inflation

#413264

Postby murraypaul » May 19th, 2021, 4:37 pm

NotSure wrote:Indeed. Crypto behaving like 'risky asset' rather than 'store of value'.


Well, it is just a store of 37% less value than a week ago.

NotSure
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Re: Inflation

#413278

Postby NotSure » May 19th, 2021, 5:35 pm

murraypaul wrote:
NotSure wrote:Indeed. Crypto behaving like 'risky asset' rather than 'store of value'.


Well, it is just a store of 37% less value than a week ago.


Are you 'buying the dip'? ;)

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Re: Inflation

#413293

Postby murraypaul » May 19th, 2021, 6:25 pm

NotSure wrote:Are you 'buying the dip'? ;)


No, far too boring to gamble on such things.

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Re: Inflation

#413307

Postby 1nvest » May 19th, 2021, 7:02 pm

odysseus2000 wrote:Many argue that gold is the only safe place now, but on a 20 year chart it has not moved much:

Gold is a relatively small sized/value market, could be manipulated, or clumped in with crypto and legislated against.

Equities also will in general do very well.

Subjectively. If accumulating and adding savings into relatively lower prices. For a 1969 retiree applying a 4% SWR then by 1974 their portfolio was down at 37% start date levels (21% of start date portfolio value remaining in inflation adjusted terms), whilst inflationary increases applied to that income would be well into double digits of a percentage of the ongoing portfolio value. In effect comparable to starting at a 18% SWR type figure. Pretty strong rebounds however did see that sustain out to 17 years before all was spent, so provided you died before 17 years into retirement then it succeeded (leaving nothing for heirs/surviving partner).

If accumulating then stick with accumulating (cost averaging) more shares. If starting retirement then look to have accumulated more/spend less. 3% SWR for instance was still uncomfortable, but endured.

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Re: Inflation

#413311

Postby 1nvest » May 19th, 2021, 7:13 pm

Owning a home can do well. With a chunk of the housing market backed by mortgages, then fixed rate, perhaps 3% 5 year term mortgage rates when inflation then runs up into double digits sees the debt being eroded by inflation. As such there can be higher demand (and hence higher prices) to 'buy' that high 'inflation hedge'.

Same 1969 retirement date and by 1974 house values were up around 50% in real terms.

odysseus2000
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Re: Inflation

#413372

Postby odysseus2000 » May 19th, 2021, 11:08 pm

An interesting day with numerous talking heads doing their best to talk the market up.

Trying to argue logical scenarios in a market that is now running on emotion, very like the 2001 crash.

This 5.08 minute video being typical of many of the talking heads:

https://www.youtube.com/watch?v=_cOuyLMH4Ds

I heard several describe the action as rotation, but certainly not a rotation into gold or crypto and if one looks at the S&P sectors one sees that all sectors are down, some like Tech much more than others such as health:

https://twitter.com/0_ody/status/139513 ... 96801?s=20

The most likely place that all of this selling has gone is into cash and the talking heads repeatedly remind us that with inflation cash is not a good place and so this cash is likely to go somewhere. It seems possible that the defensive industries will get some but investors may just decide to have the cash themselves rather than see yet more of it vanish as happened in 2001.

However, the fundamental difference between now and 2001 is the large amount of money that the politicians, particularly in the US, are putting into the economy and the potential that triggers serious inflation and at least short term we are seeing that as mentioned in the opening post.

I have no idea what will happen, there are way too many differences between now and historical examples. For now I am just watching and seeing if any clues emerge.

I am far from complacent as the potential for a very serious sell off exists, as the market as become very emotional with only price action of interest to me and the talking heads so clueless that to give them any weight is imho foolish.

Regards,

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Re: Inflation

#413541

Postby dealtn » May 20th, 2021, 1:38 pm

odysseus2000 wrote:
The most likely place that all of this selling has gone is into cash and the talking heads repeatedly remind us that with inflation cash is not a good place and so this cash is likely to go somewhere. It seems possible that the defensive industries will get some but investors may just decide to have the cash themselves rather than see yet more of it vanish as happened in 2001.



So with every seller requiring a buyer, where is that buying coming from? It is likely for every "seller into cash", there is a "buyer from cash". In aggregate these are just valuation changes, the switching from asset to asset across classes is minimal. Few assets get "destroyed" in such transactions, they continue to exist but the marginal buyers and sellers merely adjust prices (and aggregated sector valuations).

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Re: Inflation

#413554

Postby odysseus2000 » May 20th, 2021, 2:01 pm

dealtn
So with every seller requiring a buyer, where is that buying coming from? It is likely for every "seller into cash", there is a "buyer from cash". In aggregate these are just valuation changes, the switching from asset to asset across classes is minimal. Few assets get "destroyed" in such transactions, they continue to exist but the marginal buyers and sellers merely adjust prices (and aggregated sector valuations).


Yes, absolutely true, but its the strength of the buyers and sellers that matters. In a bear market prices go down.

If we consider a very simple situation.

Bull Phase: I buy x at 50, it then goes to 100.

Bear Phase: If I sell x at 100, then I have 100, the buyer has x

if the price of x drops to 90 and I don't buy back then I still have my 100, but the buyer (b1) has a value of 90.

If buyer b1 sells he/she loses 10 and the new buyer (b2) has 90.

If the price drops further to 80 and I don't re-buy, and b1 doesn't re-buy then I have 100, b1 has 90 and b2 has 80 (10 down on the entry price)

In all of these transactions, the early sellers build cash, the later buyers lose cash.

Looking at the lack of rotation it looks to me that folk are selling and sitting on the cash. Bargain hunters come in, then realise the price is still going down and sell at a loss.

In all cases for each seller their is a buyer, but in a bear market the price still goes down and the folk who sold as the bear market started and didn't re-buy build cash.

Perhaps there are other explanations, if so please post.

Regards,

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Re: Inflation

#417944

Postby NotSure » June 7th, 2021, 3:24 pm

Research based article on 'preparing portfolios for inflation' here:

https://www.marketwatch.com/story/inflation-is-rising-how-to-reposition-your-retirement-accounts-11623075273?mod=mw_latestnews

TLDR: commodities, and to a lesser extent real estate. Linkers if you are very rich, and, if it is 1979, gold.

richfool
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Re: Inflation

#427507

Postby richfool » July 13th, 2021, 10:06 pm

odysseus2000 wrote:The most likely place that all of this selling has gone is into cash and the talking heads repeatedly remind us that with inflation cash is not a good place and so this cash is likely to go somewhere. It seems possible that the defensive industries will get some but investors may just decide to have the cash themselves rather than see yet more of it vanish as happened in 2001.
Regards,

I've just been giving some thought and doing some research on "where to hide" or how best to protect oneself from a market crash. Maybe I'm taking your comments a bit out of context, but I don't see that holding cash is a bad thing in such situations. Whilst cash will lose some value in periods of high inflation, it is certainly going to protect against large falls in the capital value of one's equity holdings.

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Re: Inflation

#427538

Postby 1nvest » July 14th, 2021, 1:56 am

richfool wrote:
odysseus2000 wrote:The most likely place that all of this selling has gone is into cash and the talking heads repeatedly remind us that with inflation cash is not a good place and so this cash is likely to go somewhere. It seems possible that the defensive industries will get some but investors may just decide to have the cash themselves rather than see yet more of it vanish as happened in 2001.
Regards,

I've just been giving some thought and doing some research on "where to hide" or how best to protect oneself from a market crash. Maybe I'm taking your comments a bit out of context, but I don't see that holding cash is a bad thing in such situations. Whilst cash will lose some value in periods of high inflation, it is certainly going to protect against large falls in the capital value of one's equity holdings.

Start of 1919 to end of 2020 and 50/50 hard US$ cash ($ bills) and gold stuffed under a mattress (yearly rebalanced) ... has maintained the same purchase power. Volatile along the way though, early 1930's bought twice as much stuff, late 1990's only bought half as much stuff. Somewhat inversely correlated to stocks.

End of 1974 when stock total returns (dividends reinvested) where down to a third of the inflation adjusted end of 1968 levels, $/gold over the same period rose from buying the same amount of stuff to buying 1.35 times more stuff, so given stocks were down a lot by comparison it potentially bought a shed load of stock shares.

Inadvisable to have US$'s stuffed under a mattress though, better if deposited somewhere safer and earning some interest. T-Bills are considered near as good as hard cash, fully protected no matter how much you deposit, liquid even during crises when other assets may see liquidity dry up.

A factor I like with my broker ii is that you have access to multiple markets/countries and can hold cash in a range of currencies. Can be relatively expensive to convert smaller amounts, but once converted you can just leave it in US$ or whatever. Buy US stocks and source that from $ cash holdings, $ dividends add to the $ cash value. Something like 1.5% FX fee for smaller amount, 0.5% for £100K+ Unfortunately you can't hold foreign currencies in ISA, so any US$ stock purchases or US$ dividends would get caught by FX conversion costs, and twice if US$ dividends were being reinvested back into US$ stock.

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Re: Inflation

#428814

Postby odysseus2000 » July 19th, 2021, 3:24 pm

richfool wrote:
odysseus2000 wrote:The most likely place that all of this selling has gone is into cash and the talking heads repeatedly remind us that with inflation cash is not a good place and so this cash is likely to go somewhere. It seems possible that the defensive industries will get some but investors may just decide to have the cash themselves rather than see yet more of it vanish as happened in 2001.
Regards,

I've just been giving some thought and doing some research on "where to hide" or how best to protect oneself from a market crash. Maybe I'm taking your comments a bit out of context, but I don't see that holding cash is a bad thing in such situations. Whilst cash will lose some value in periods of high inflation, it is certainly going to protect against large falls in the capital value of one's equity holdings.


Cash is always good as it can be converted into what ever asset becomes attractive.

Looking at what investors seem to have been doing:

Panic that inflation is about to take off, sell growth (Mid April to first week in May)
Panic that inflation is not going to take off, buy growth back (2nd week of May till end of June)
Panic that inflation is taking off (1st week of July to current)

NB this is a weekly chart

https://twitter.com/0_ody/status/141712 ... 37069?s=20

Regards,

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Re: Inflation

#428819

Postby dealtn » July 19th, 2021, 3:37 pm

odysseus2000 wrote:
richfool wrote:
odysseus2000 wrote:The most likely place that all of this selling has gone is into cash and the talking heads repeatedly remind us that with inflation cash is not a good place and so this cash is likely to go somewhere. It seems possible that the defensive industries will get some but investors may just decide to have the cash themselves rather than see yet more of it vanish as happened in 2001.
Regards,

I've just been giving some thought and doing some research on "where to hide" or how best to protect oneself from a market crash. Maybe I'm taking your comments a bit out of context, but I don't see that holding cash is a bad thing in such situations. Whilst cash will lose some value in periods of high inflation, it is certainly going to protect against large falls in the capital value of one's equity holdings.


Cash is always good as it can be converted into what ever asset becomes attractive.

Looking at what investors seem to have been doing:

Panic that inflation is about to take off, sell growth (Mid April to first week in May)
Panic that inflation is not going to take off, buy growth back (2nd week of May till end of June)
Panic that inflation is taking off (1st week of July to current)

NB this is a weekly chart

https://twitter.com/0_ody/status/141712 ... 37069?s=20

Regards,


You might be confusing investors with traders, and not for the first time.

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Re: Inflation

#428820

Postby scrumpyjack » July 19th, 2021, 3:38 pm

I'm not sure about 'all this selling going into cash' because on the stockmarket in principle there are 2 sides to each transaction - a buyer and a seller, so for every seller having more cash, there's a buyer with less cash. It is all cash neutral overall. Obviously there are complications to that but not enough to substantially change the notion that it is all cash neutral.

Personally I have high cash holdings but that is mainly due to not earning and at my age wanting the security of many years expenditure covered.

If I thought inflation in the UK was to return in a very substantial and long lasting way, which has been the norm since WW2, I think I would move it to another currency, probably Swiss Francs. I think that is more secure than the dollar which has also had periods of high inflation.

I think it is quite probable that we will have a return to high inflation, much the same whichever government we have.

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Re: Inflation

#428824

Postby GrahamPlatt » July 19th, 2021, 3:55 pm

scrumpyjack wrote:I'm not sure about 'all this selling going into cash' because on the stockmarket in principle there are 2 sides to each transaction - a buyer and a seller, so for every seller having more cash, there's a buyer with less cash. It is all cash neutral overall. Obviously there are complications to that but not enough to substantially change the notion that it is all cash neutral.


If the overall value of 'the market' falls, it's not because of buying and selling per se - it's because equities have been re-priced downwards; there is less overall value. Same with the housing market but in the opposite direction; it's on the rise despite there being fewer sellers around.

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Re: Inflation

#428826

Postby scrumpyjack » July 19th, 2021, 4:03 pm

GrahamPlatt wrote:
scrumpyjack wrote:I'm not sure about 'all this selling going into cash' because on the stockmarket in principle there are 2 sides to each transaction - a buyer and a seller, so for every seller having more cash, there's a buyer with less cash. It is all cash neutral overall. Obviously there are complications to that but not enough to substantially change the notion that it is all cash neutral.


If the overall value of 'the market' falls, it's not because of buying and selling per se - it's because equities have been re-priced downwards; there is less overall value. Same with the housing market but in the opposite direction; it's on the rise despite there being fewer sellers around.


For equities that is of course quite true, and overall no cash has been taken out or put in.

For the housing market, as much of house price purchase is usually financed by mortgages, there can be a considerable amount of cash moving into or out of the market. For example most older people selling, or on death, will have paid off their mortgages whilst the younger buyers will usually have borrowed the money to buy with.

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Re: Inflation

#428841

Postby odysseus2000 » July 19th, 2021, 4:49 pm

dealtn
You might be confusing investors with traders, and not for the first time.


You might be confusing 21st century investors with mid 20th century ones.

Things have changed significantly since the mid 20th century when there was a clear divide between investors and traders made strong by the large commissions that were charged and the lack of real time data feeds and the absence of derivatives.

In the current environment folk who may call themselves investors are far more active than was the case for the investors of the mid 20th century, often investors will actively swing trade their positions and the divide is more between day traders and longer than day traders.

Regards,


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