What's the problem with inflation?

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jacob
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Re: What's the problem with inflation?

Post by jacob »

zbigi wrote:
Sat Jun 25, 2022 4:13 pm
1991 was hyperinflation caused by transition to market economy (251% in 1990, 585% in 1991). Totally wild, but got squashed fairly quickly by Chicago-inspired ("hawks") economists at Polish central bank. Thanks to them, in 2003 the inflation was barely there at 0.8%.

The prevailing attitude during hyperinflation was to just buy dollars or german marks as durable store of value. Spending it all was probably also a popular strategy, but I was only 10 at that time, so wasn't very privy to financial decisions.
Wow, I didn't know the numbers.

In 1991 we went with the school (9th grade). We were told to bring USD cash in order to exchange it only at official "exchange offices". Exchanging at unofficial (black market?) offices or spending the USD directly was explicitly deemed verboten. We had to fill out a customs form on entry stating how much currency we were bringing in and to expect a similar form on exit (this never happened). I remember merchants sometimes quoting a cheaper "dollar price" for their wares.

In 2003, I was with my [Polish] GF who handled the money-side of things, so I forget the details in terms of what cash we brought in---probably DKK. This was the early years of my ERE journey, so I was asking naive questions about savings, etc. Was even looking at housing. A newly built home of 150m2 could be had for around 20k USD. But the most encountered attitude was still that "small luxury" items were preferred because money couldn't be trusted. Of course me being a young EREling could not understand why one would spend money on razors and perfumes?! "Well, it's something that can be enjoyed today ... you never know what tomorrow brings!" So the legacy of the 1990s carried on culturally in some parts of the population. Also I remember some snide comments about "the local 'new rich' guy" when walking around town. Must have been very interesting times.

zbigi
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Re: What's the problem with inflation?

Post by zbigi »

jacob wrote:
Sun Jun 26, 2022 9:03 am
Must have been very interesting times.
Yep, it was all rather fun to grow up in. Probably less fun for my parents, who had to support a family in such crazy circumstances. BTW seeing how it went down in Poland, I believe that, if one is not affraid to take risks, a good ways to make millions fairly quickly is to go to a country that is currently undergoing similar upheaval as Poland had in 1990. Just go there with some starting capital and you're already way ahead of the locals who start their businesses from nothing. The biggest problem would be finding some trustworthy local partner.

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Re: What's the problem with inflation?

Post by guitarplayer »

@zbigi, what countries would presently be good candidates for this? Some mention Cuba, also Montenegro seems to be joining the EU in the coming 5-10 years (though this is more like the 2004 transition).

I agree it must have been an incredible time to be in as a young productive adult.

zbigi
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Re: What's the problem with inflation?

Post by zbigi »

guitarplayer wrote:
Mon Jun 27, 2022 12:15 am
@zbigi, what countries would presently be good candidates for this? Some mention Cuba, also Montenegro seems to be joining the EU in the coming 5-10 years (though this is more like the 2004 transition).

I agree it must have been an incredible time to be in as a young productive adult.
I don't follow world news enough to know this. Such opportunities may be rather rare to be honest, though. It's best if it is a country that has some level of GDP (because very poor country means very poor customers) , but one in which economic activity was severely restricted, up until now.

The alternative is to go to a country which is poor, but is currently booming - something like China until recently, or perhaps some African countries today. With growth at 10%, there should be plenty of opportunities in B2B (serving growing businesses) and higher-end B2C targeting the newly-affluent citizens. Or just plain old outsourcing sweatshop, which is what some young and entreprenurial Westerners have set up China over the past decades.

WFJ
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Re: What's the problem with inflation?

Post by WFJ »

chenda wrote:
Fri Jun 24, 2022 4:46 pm
I'd suggest covid and ukraine are the primary reasons for inflation. Circa 2010 austrian economists kept claiming we were on the verge of hyperinflation and they were very wrong, and the keynesians called it right.

Now over a decade later and inflation finally materialises for unrelated reasons they are trying to claim some kind of retrospective vindication. Any predication will come true if you wait long enough.
COVID destroyed demand, Stimmy checks and "American Recovery Act" were throwing grease on a grease fire. Inflation was roughly 0% in January 2021, and 7% in January 2022, Ukraine invasion, has, if anything, reduced the slope of inflation as it's "only" at 8.5%. In a developed economy, inflation takes 10+ years to get ingrained in the system and why it is so painful to stop once ingrained.
Last edited by WFJ on Thu Jun 30, 2022 2:28 pm, edited 1 time in total.

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Re: What's the problem with inflation?

Post by WFJ »

It is interesting to hear some stories from other countries as most in the US were too young to have been around when inflation was present here. My inflation perspective is a little skewed as I was very young in the 70's, one set of grandparents had an urban farm and grew a lot of their own food, the other set of grandparents were raised extremely poor during the depression, maintained that lifestyle and it was life as usual for them. Inflation stuck around for a very long time and required rates (18%) to finally tame in the US. We can only look at stats to understand the pain, the PE on the S&P 500 was below 7 and mortgage rates were about 20%. Calculate the S&P 500 at a PE of 7 (S&P 500 at 1,500) or your mortgage payments at 20% rates on a $400k house ($6,000/month compared to $1,700 at 3% mortgage rate last year) to estimate the pain.

Good inflation discussion from Cam Harvey, a well-known professor. He also just did an interview on Bloomberg TV that should be available shortly. His opinion on inflation and Fed actions were not uplifting.

Below is written for mass consumption and not an academic paper.

https://www.researchaffiliates.com/publ ... -recession

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Sclass
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Re: What's the problem with inflation?

Post by Sclass »

I thought the Ukraine war was pushing up energy prices. I turn on the news and all the commoners are griping about not being able to afford gasoline and how vendors are passing diesel fuel costs on to customers. It’s odd how the data is saying something different. That’s what is happening so for whatever reason it’s reality.

Some asset classes were causing a wealth effect during the pandemic. I spoke to a few people who were convinced they were retiring soon because of a stock and crypto windfall. These were pretty young people and their retirement would have been considered extreme early. They sought advice about how I retired early and said they had the means to do the same. This kind of thing has to cause a bit of inflation. The more money than goods type or money for nothing variant chasing goods normally worked for. I guess that all ended a month ago…and the inflation is still there.

I definitely saw the inflation as a kid in the 70s. My parents stopped buying ice cream for us at this shop in LA when the price of their chocolate dipped bars doubled twice. My parents were motivated to buy a home because they said their rent was rising every year. They used that example on me for years as they nervously watched me perpetually renting. “Sclass you need to stabilize your housing costs or else you won’t have anyplace to live when there’s inflation .” It really got into their heads. In the 90s “Sclass you better buy a new car, inflation has been flat and we’re due a bout and you’ll be best getting a car now.”

A lot of their financial advice for me over the last twenty years came from their experiences with inflation in the 70s. It turned out to be very wrong till now.

My wife has a funny way of putting it. She says if people competing with us don’t have any better means for paying the rising prices the inflation is meaningless. It has to be driven by actual rising incomes or else it becomes kind of a stagflation where people raise prices but markets don’t clear. So I only get concerned when wide swaths of the society get raises or windfalls that I do not for some reason. Prices may rise but if markets don’t clear the prices are kind of meaningless.

This comes up in our discussions about inflation when I start channeling my parents’ inflation fears. If I say we should buy a home wife says why will rent go up? Will the residents of our town who compete for our flat offer our landlord more than normal rents? Where will they get the money? This was an ongoing issue in the Bay Area where tech employees from the dot com till present had big incomes to snatch up the limited vacancies on the Peninsula. I called it inflation but my coworkers who’d bought Silicon Valley homes called it asset appreciation. I chose to cut to the source of the “asset appreciation” and just buy the stocks driving the local housing boom. I ended up with no Bay Area home and a lot of stock for what it’s worth. House in Cupertino or Apple stock in 1999?

Currently in my side hustle my cost of goods has gone up. But my clients cannot pay even at current prices. Sales fell of a cliff last month. No way am I raising prices. It’ll just make things worse. My clients don’t have the money to buy my goods anymore. Plain and simple. Channeling my wife’s inflation philosophy my clients cannot drive a price increase in my market.

A final anecdote I’ll mention is my other hobby. Vintage sewing machines from the 70s. I collect Elna and Viking which were coveted european makes when I was a child. They cost a lot. More than a small Honda motorcyle which I followed the prices on in 1975-80. Mom never got her Elna. We did get a Honda Cub though which helped us fight high gas prices during the two fuel crises. Dad parked the cars and rode the scoot to work. Anyhow, I’m in this Facebook vintage sewing machine club and there are these arguments about how much money our 1970s Elna and Viking machines retailed for. Prices range 2x from $400 to $1000 for the same machines. The old ladies argue and argue that the prices people are quoting are wrong. The variation in quotes is as widespread as Alzheimer’s in the FB group. They remember because they bought their machines with their own money. Old members show scans of their receipts for their machines dated in the 70s to prove they recall the price. Some of the price discrepancy can be attributed to dealer markups but it’s clear to me that the prices and dates correlate. During a period from 75-79 the prices on the Elna SU62 machine doubled from $350 to $700. Same machine. I think it was combination of inflation, markup and exchange rate with the Swiss franc. Long story short, I’m seeing a strong signal in those receipts.

Inflation was really burned into my folks’ memories. Like WW2. They made a lot of decisions in the years that followed based on those experiences. And as I said, up to now they made the wrong decisions.

My paid asset manager called last night. His jobs is to hand hold the boomer clients during financially tumultuous times. He wanted to assuage any fears of inflation. I said, “why should I care about a few percent of inflation after you doubled my money over the last four years?” The call ended there.

So where does all this geezer ramble leave us? Will the price of things fall again? Those ice cream bars my parents stopped buying are now 10x as much as in 1975. The shops is still operating. Somehow $4 for the bar seems kinda cheap. Prices rise and stay high if people can pay. Hopefully one of those people is me.

zbigi
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Re: What's the problem with inflation?

Post by zbigi »

Sclass wrote:
Thu Jun 30, 2022 8:18 am
So I only get concerned when wide swaths of the society get raises or windfalls that I do not for some reason.
This is sort of what happened recently, though? SP500 quintupled, housing market valuations rose by 100-200% if I'm not mistaken. So, anyone who didn't have much networth in US stocks, US housing or a couple other asset classes with similar growth (or anyone without any networth) was being screwed in the past decade without really knowing it - the effect will only be felt now, with inflation (at least in some scenarios) making rich people normal, and normal people poor.

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Re: What's the problem with inflation?

Post by Sclass »

Yes. Everyone cannot be rich. Or “rich” loses its meaning

rref
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Re: What's the problem with inflation?

Post by rref »

Sclass wrote:
Thu Jun 30, 2022 8:18 am
I collect Elna and Viking which were coveted european makes when I was a child.
Would a cheap Husqvarna Viking 21E be an ok choice for a beginner?

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Re: What's the problem with inflation?

Post by Sclass »

Yes. A “cheap” Viking 21e is a great machine for a beginner as long as it works. Verify function with cloth and thread before buying and check all the settings. These machines were a few hundred dollars in the 1960s. That was serious coin back the.

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Re: What's the problem with inflation?

Post by rref »

Sclass wrote:
Thu Jun 30, 2022 2:10 pm
Yes. A “cheap” Viking 21e is a great machine for a beginner as long as it works. Verify function with cloth and thread before buying and check all the settings. These machines were a few hundred dollars in the 1960s. That was serious coin back the.
Sorry, "cheap" as in a bargain compared to new plasticky machines. The one I was looking at is 85$ (and was bought for 200$ in 1965).

Are there any other used models you would recommend?

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Re: What's the problem with inflation?

Post by WFJ »

SoCal/NorCal inflation and Prop 13 create some odd outcomes. Remember seeing a story about Balboa Island property taxes where houses that had values $10+ million were paying $2,000 in property taxes while $600,000 shacks in Riverside were paying $6,000 and tends to create a positive bias to real estate to protect against inflation.

Inflation also has massive impacts on labor. Compare a teacher to an insurance salesman during inflation. A teachers pay will typically increase 1% a year based on some table, while an insurance salesman pay will increase at roughly the rate of inflation as premiums will increase with the value of the assets insured. A $40k car costs twice as much to insure as a $20k car and insurance premiums will increase without any extra effort from the agent. The teacher (or nurse or other fixed pay worker) will work as hard and make less or have to work twice as hard to maintain the same lifestyle.

Those with assets enjoyed the asset inflation on the way up and if assets were wisely invested in income producing activities (Education in skills that have value, cash flow positive businesses, stocks with dividends) will do well during the goods and service inflation. If temporary windfall was wasted on magic beans, collectibles, or to just increase leverage (too common) they will feel the pain and get crushed. For those that did not have assets during the inflation, or worse, have some kind of fixed income job, they are totally screwed and make up the largest portion of most societies' populations (see Germany for what happens when these people are impoverished). Nobody says "Gas, chicken breasts, crackers have appreciated recently".

Had I been Fed chair, would have raised rates to 3%-5% in 2010 and avoided all this mess, but Yellen wanted to become Treasury chair and needlessly maintained ZIRP for 6 more years. We are now stuck with this mistake.

It is similar to warning someone not to jump off a 3-story building. Anyone with a brain understands that gravity and electromagnetism will break the jumper. The jumper doesn't listen and proclaims "This time is different" as they accelerate to the ground, until spalt. The economy is currently crashing to the ground as we relearn the power of gravity and electromagnetism. It will be a few days (months on an economy) before the damage can be estimated and a recovery timeline established (my opinion is 5-10 years). A hangover strength is relative to the amount of alcohol consumed and the duration of the binge. US had ZIRP for roughly 12 years, more alcohol for a longer period in the history of the US, buy aspirin.

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Re: What's the problem with inflation?

Post by Laura Ingalls »

@WFJ

Prop 13 makes for some weird scenarios. Had an older relative pass last winter while living in a house her father had bought in the 1940’s. Her property taxes where ~$1k per year. The house just sold for just under $1mil. She didn’t have anyone that was eligible to transfer the Prop 13 to. Cute little house by the beach no longer in the family. oh well.

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Re: What's the problem with inflation?

Post by Sclass »

@rref I like the Elna SU 62 machines and their variants. Supermatics, TSP, SP. very smooth running machines with great stitch quality. @Savingwithbabies picked up an Elna TSP a few years ago and it was beautiful. He’s probably still using it. The Viking has the advantage of its unique two speed transmission which allows slow sewing with very high torque. $85 is cheap for that Viking. It’ll flip for $200 if it’s clean.
Laura Ingalls wrote:
Thu Jun 30, 2022 3:52 pm
@WFJ

Prop 13 makes for some weird scenarios. …She didn’t have anyone that was eligible to transfer the Prop 13 to. Cute little house by the beach no longer in the family. oh well.
Doesn’t matter. They got rid of the Lebowski loophole a couple of years ago. No more prop 58 tax transfers to children and grandchildren. I set up my late mother’s house this way. It feels wrong paying 1970s taxes on the place.

zbigi
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Re: What's the problem with inflation?

Post by zbigi »

15.6% inflation for Poland today! I've just gotten myself a new coding contract, thus ending perhaps the shortest ERE stint in history (I lasted 4 months). I have no idea how much my assets will be worth when the dust settles, so it just makes more sense to keep making money for now.

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Re: What's the problem with inflation?

Post by guitarplayer »

The UK has it at 9.1% as of May 2022.

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Mister Imperceptible
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Re: What's the problem with inflation?

Post by Mister Imperceptible »

classical_Liberal wrote:
Sun Jan 05, 2020 3:59 pm
My question was leading, obviously, if one is going to make future assumptions based on doomer situations, it seems to me that person must believe doomer will be reality. In that case it makes very little sense to stay the course with investments that are going to lose real value. I know for a fact, some here, like @BSOG and @MI, put their money where their mouth is, so to speak. My question is for anyone who believes it to be enough of a future possibility they feel they need to act on it in daily actions and discount their entire portfolio this way. Yet take no action to their portfolio to rectify the situation as best possible. IOW, say the sky is falling, then run outside to bask in the sunshine.

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Re: What's the problem with inflation?

Post by jacob »

@MI - In risk management that's called concentration.

prudentelo
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Re: What's the problem with inflation?

Post by prudentelo »

"It's very likely that if a reversion to mean CAPE takes place, other assets will infate (or at least remain inflated) during the equity losses."

Why?

I am not sure anything was not overpriced and the reason was systemic: problem comes from money supply not equites.

One can of course xchange sequence risk for timing risk by shorting the market which is basically just sequence risk but with a bigger downside and possibly a bigger upside.

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