Main street inflation is here.

[Castanza]

13 minutes ago, Spekulatius said:

 

@CastanzaSome of the above is transitory. I have not noticed much inflation with groceries. Restaurants are getting more pensive for sure, but it seems to be more in the 5-10% range than 50% range. The long term driver for inflation will be wages, not lumber or other commodities.

 

I think we are done with trickle down economics if this thinking goes into action:

 

Interesting times for sure. Thanks for sharing that Twitter thread. But do we know it is transitory at this point? I was always under the assumption that  this view needs to be held in hindsight? I think everyone is hoping it’s transitory while clutching their pearls.
 

By no means am I well versed in anything macro, but perhaps someone could share examples of things that were alluded to being “transitory” in the past yet ended up simply staying inflated? 

[SharperDingaan]

Talk to your wife, and ask her where everyone is buying their groceries from today, why, and how. The almost universal answer is that everyone has shifted 'down market' by a market grade (good store vs a whole foods), and 75%+ of the purchases are sale items. Pantry refilled as/when the sales occurr - and the entire purchase 'price driven'. Inflation.

US fruits/veggies are typically grown where water availability is an issue. Most all growing areas are experiencing material water and/or labour shortfalls, transportation costs are also rising, and it is increasingly cheaper to simply import fruits/veggies, vs grow it domestically. Higher costs now, and going up further as the US starts bidding up the price of global supply. Next time you're in the grocery store, look at the 'source of origin' labels on those fruits/veggies.

The offset is that the current 'mass distribution' model (US strawberries) typically prices out LOCAL fruits/veggies. As prices rise, LOCAL production becomes more prevalent, reducing the speed of further price increases. Local spending returning to the local economy doesn't hurt either.

Point? A great many US prices are not just 'inflating' - they are ALSO returning to their more 'normal' price levels, after years of glabalization and artificially low price levels (ie: strawberries). Gasoline to electric cars within X years is not just about global warming - at 3x the current gas price, folks also cannot afford to keep them on the road.

SD

 

 

Edited May 30, 2021 by SharperDingaan

[wabuffo]

Over a third of the April CPI print was due to used car price inflation.   That feels.....uhhh....transitory. 
 

The rest is due to y-o-y comparisons to the bombed-out energy sector (which had a negative price per bbl, last year IIRC -- LOL).

Of course - more CPI freak-out may be coming as used car prices continued to ramp in May.  (hmm - maybe time to add a bit of NICK to the portfolio?)

wabuffo

Edited May 30, 2021 by wabuffo

[fareastwarriors]

Corn at $0.15 per ear.

Cherries at $3 for 2 lbs.

Chicken quarters/legs/drumsticks for $0.88/lb

Pork spare ribs at $1.69/lb

Ground beef at $1.77/lb

Tri Tip at $2.88/lb

Eggs at $1 a dozen

Not organic though

 

With McDonalds, use the app. It has free large fries promo constantly. Or use coupons...

This is all from HCOL - SF Bay Area. Definitely inflation out there but deals can be found!

[LearningMachine]

1 hour ago, fareastwarriors said:

Corn at $0.15 per ear.

Cherries at $3 for 2 lbs.

Chicken quarters/legs/drumsticks for $0.88/lb

Pork spare ribs at $1.69/lb

Ground beef at $1.77/lb

Tri Tip at $2.88/lb

Eggs at $1 a dozen

Not organic though

 

With McDonalds, use the app. It has free large fries promo constantly. Or use coupons...

This is all from HCOL - SF Bay Area. Definitely inflation out there but deals can be found!

Any non-commodity food product that you will not substitute for another similar product even if price went up faster than general inflation, either for yourself or your kids?  Could be a store-owned brand or an established packaged brand?

Edited May 30, 2021 by LearningMachine

[Gregmal]

Agree on phone carriers. I finally had to ditch my iPhone 5. Sprint and TMUS merged and as of Jan 2022 are shutting down old networks which means my beloved iPhone 5 won't work anymore. I absolutely detest the big retard sized phones, so by default had only one option, which was the iPhone 12 mini. Tough pill to swallow going from a phone I loved to one I still dont like and paying $750 vs $80 for it. But what am I gonna do? Well, anyway, the new phone has all these dumb features that I dont want or need, but one of them is unsolicitedly springing old pictures on me...attached below, inflation reminders indeed. Last March 22(2020) I got an 8.5 lb lobster. Dont know if I was celebrating the fact that I'd be more than tripling my net worth over the next 12 months or simply eating well in anticipation of the end of civilization as we knew it....but anyhow, now? That 8.5 pound monster which cost $64 in March 2020 is now $193, ON SALE! 

That said, you can still navigate prices at grocery stores but it is definitely more expensive and I agree with Castanza, its not like "oh shit, 4% increase!"...its generally 20-30% and in some cases much more. A 12 pack of Coke is now $7.99...WTF?

Also attached was the menu at the Tex-Mex place I was eating at while reading the posts about restaurant price increases....everyone knows they can bump prices, whether its by necessity or not, its happening. If people are willing to pay it, I doubt they come back down for a while.

[JRM]

6 minutes ago, Gregmal said:

Also attached was the menu at the Tex-Mex place I was eating at while reading the posts about restaurant price increases....everyone knows they can bump prices, whether its by necessity or not, its happening. If people are willing to pay it, I doubt they come back down for a while.

 

I took my son to get some Mexican food yesterday and they had white-out over all of the old prices on the menu and wrote in the new prices.  

[Castanza]

Stumbled upon this article that was interesting. 
 

https://www.project-syndicate.org/commentary/fed-sanguine-inflation-view-recalls-arthur-burns-by-stephen-s-roach-2021-05

 

When Chinese and Mexican food are getting expensive you know there’s a problem. If Top Ramen goes up....well, better head for the hills 

Edited May 30, 2021 by Castanza

[Spekulatius]

6 hours ago, Castanza said:

Interesting times for sure. Thanks for sharing that Twitter thread. But do we know it is transitory at this point? I was always under the assumption that  this view needs to be held in hindsight? I think everyone is hoping it’s transitory while clutching their pearls.
 

By no means am I well versed in anything macro, but perhaps someone could share examples of things that were alluded to being “transitory” in the past yet ended up simply staying inflated? 

I believe the commodity side of inflation is transitory, the labor side will not be. If you read the transcript of Biden‘s speech in the Twitter thread I linked in above, they are actually trying to create labor inflation. That would be the end of trickle down economics and probably not good for most equities.

 

Thats a total regime change from the economical framework we have been seeing for 40 years, if it indeed occurs.

Edited May 30, 2021 by Spekulatius

[Castanza]

8 minutes ago, Spekulatius said:

I believe the commodity side of inflation is transitory, the labor side will not be. If you read the transcript of Biden‘s speech in the Twitter thread I linked in above, they are actually trying to create labor inflation. That would be the end of trickle down economics and probably not good for most equities.

 

Thats a total regime change from the economical framework we have been seeing for 40 years, if it indeed occurs.

Sounds like something unions and pension funds won’t like 

[boilermaker75]

My daughter just bought a new condo. It was built in 1981 and hasn't been updated. She's replacing floors, tearing down walls etc. Sheets of plywood that would have been around $30 six months ago are costing her around $150.

[Gregmal]

I am not unconvinced that the end of a big cycle is near. Rates cant really go much lower, the fanboys around big tech are now value investors thinking AMZN is a no brainer after a 3000x run, and that PTON is worth $100B...energy is hated and has been for almost a decade now, commodities were beaten to death for a nearly similar stretch, housing was dormant for a decade following GFC(now things go up 10-20% in a year and the novices are screaming BUBBLE! much like broader stock market in 2013)...banks are massively under owned. If I ask myself what allows the current long term trend and popular shit to continue producing returns, I dont really have an answer other than maybe rates stay around here longer than a couple years...but even then, I think they underwhelm. But it seems apparent to me that the table is set for a new chapter in the boom and bust cycle story of the stock market. As I mentioned recently somewhere else, I think yin/yang or equal and opposite reaction type stuff happens often with the market...which if anything, would imply a very long, and brutal downturn cycle for the stuff thats been fawned over for the past decade. 

Edited May 30, 2021 by Gregmal

[SharperDingaan]

The fed measures 'after the fact', but has to predict outcomes 'before the fact'. The predictions are based on (very good) models, and what cannot be explained - refered to as 'transitory effects'. Why transistory? 'cause it isn't showing up in the 12 month YOY comparatives (CPI methodology) yet, and if we're not picking it up in our metrics - it doesn't exist! A measurement problem, combining with a 'bias' problem.

Used car prices are up, 'cause new ones cant be built - shortages of the microchips going into them. Yet despite microchips being high-value items (affordable to fly them to end-users), shortages have persisted for MONTHS, and are WORSENING. The chip shortages (end product) are just reflecting the shortages in their supply chain - and those shortgages are rapidly getting worse. A common issue, accross almost all supply chains, that is NOT going to correct quickly.

We make beer, and we will raise prices to cover our higher costs - the same as everyone else. But if materials costs suddenly came down tommorrow? we (& the industry) would NOT roll back our prices. That extra margin would simply go to higher wages instead; either to make up for wages given up during Covid, or to keep our talent. Point? These price changes are permanent, and big (30%+ spread over 3+ price hikes of 10%+). NOT transitory.

Most don't recognise that for commodity companies, inflation is your friend - it's only a problem for the fixed income securities. Anyone applying the Gordon model in their valuation is dividing FCF by k-g; in a commodity company k-g gets smaller 

SD

 

Edited May 31, 2021 by SharperDingaan

[Spekulatius]

9 hours ago, LearningMachine said:

Interesting that in the most inflationary decade we know, it was better to be in CASH from Nov 1968 to July 1982 then to be in S&P 500, which lost 64% during that time.

Cash was fine, because you could generate interest rates parking cash.

Now, however, the real interest rates are negative ( after accounting for inflation) so it is not likely to do well.

Inflation to some extend is good for stocks, but if it goes above a certain  point (3-5%),  it becomes very damaging to equity multiples.

https://youtu.be/HLuiKOllVDY?t=2100

 

Another thing I would like to point out to those claiming that higher interest rates are not possible, because we can’t afford them. Well, what we can’t afford is real interest rates in excess of inflation, but a 5% interest rate and having 5% inflation is not a problem for the nation. In fact, since it would massively devalue the existing longer duration treasury bonds issues at lower interest rates, it would be a positive from the debt perspective.

 

[Castanza]

1 hour ago, Spekulatius said:

Cash was fine, because you could generate interest rates parking cash.

Now, however, the real interest rates are negative ( after accounting for inflation) so it is not likely to do well.

Inflation to some extend is good for stocks, but if it goes above a certain  point (3-5%),  it becomes very damaging to equity multiples.

https://youtu.be/HLuiKOllVDY?t=2100

 

Another thing I would like to point out to those claiming that higher interest rates are not possible, because we can’t afford them. Well, what we can’t afford is real interest rates in excess of inflation, but a 5% interest rate and having 5% inflation is not a problem for the nation. In fact, since it would massively devalue the existing longer duration treasury bonds issues at lower interest rates, it would be a positive from the debt perspective.

 

So where do you put your money? Gold? Property? Equities? Bitcoin?

[stahleyp]

2 hours ago, Spekulatius said:

Cash was fine, because you could generate interest rates parking cash.

Now, however, the real interest rates are negative ( after accounting for inflation) so it is not likely to do well.

Inflation to some extend is good for stocks, but if it goes above a certain  point (3-5%),  it becomes very damaging to equity multiples.

https://youtu.be/HLuiKOllVDY?t=2100

 

Another thing I would like to point out to those claiming that higher interest rates are not possible, because we can’t afford them. Well, what we can’t afford is real interest rates in excess of inflation, but a 5% interest rate and having 5% inflation is not a problem for the nation. In fact, since it would massively devalue the existing longer duration treasury bonds issues at lower interest rates, it would be a positive from the debt perspective.

 

the two areas that excited him the most were energy and gold...in 2016. 

[SharperDingaan]

2 hours ago, LearningMachine said:

@SharperDingaan, well said that it is not transitory.  Any specific commodity companies you're looking at?  I've always liked oil companies most among commodity companies.  Then, Berkshire threw in the idea of Barrick Gold last year, but then BRK got out of Barrick Gold completely, and also got out of some oil companies completely because they probably realized they couldn't predict with certainty.

Our preference is o/g. Talking our book a bit, but it is pretty hard to go wrong with a CVE - triple benefits as both a high volume heavy oil producer, enviro friendly SAGD production, and a number of assets on the block following the Husky merger. At current WTI pricing, CAD B1+  FCF/quarter, debt reduction and a 10% buyback (COP shares) a priority, and a nominal dividend. We own both warrants and common, bought most of the position in Q1-2021, and expect an annual 40%+ cash yield on our common - once debt/buybacks are over and the focus shifts to dividends.

We also own WCP, OBE, PD, ESI, and one other. All Canadian, all the longer term view, and each playing a different aspect of the industry. All expected to become either merger targets or big dividend payers as the cycle moves along.. 3-4 year target dividend cash yield of 25%/yr, and we own a lot of stock in each. Should inflation play out as we hope, it will be life changing.

We live in hope!

SD

 

 

Edited May 31, 2021 by SharperDingaan

[Spekulatius]

6 hours ago, Castanza said:

So where do you put your money? Gold? Property? Equities? Bitcoin?

I have some property stocks and a bit of gold. I am thinking of upping gold and probably invest in a gold miner or two as well.

The best inflation hedge may still be owning good business with pricing power. Biden’s talk Cleveland from 5/27 ( linked above in this thread) really got me thinking that this time in fact could be different, so I will be watching for broad inflation based on wages rather than those commodity price spikes.

Edited May 31, 2021 by Spekulatius

[Gregmal]

On 5/31/2021 at 1:29 PM, Castanza said:

So where do you put your money? Gold? Property? Equities? Bitcoin?

Select RE, Energy/commodities, and banks.

Interestingly enough, many of these were cheap on absolute terms(and some still are), destined to do well regardless, and trade at discounts to NAV. Oh how glorious it is owning reasonably priced, well managed assets that trade at a discount going into an inflationary environment. Some are scared, I say, bring it!

[LearningMachine]

27 minutes ago, Gregmal said:

Select RE, Energy/commodities, and banks.

Interestingly enough, many of these were cheap on absolute terms(and some still are), destined to do well regardless, and trade at discounts to NAV. Oh how glorious it is owning reasonably priced, well managed assets that trade at a discount going into an inflationary environment. Some are scared, I say, bring it!

@Gregmal, what are you thinking is still cheap for putting in new money (not from perspective of holding)? 

[Gregmal]

I think Alico is great risk/reward. Gone nowhere for a decade. New management has done a solid job over the past few years. Its got a good enough(not great by any means) operating business with inflation protection via the Trop contract. And its nearing(if it hasn't already gotten there) a tipping point where HBU for most of land is sales to developers. 

One of your faves BAC I think is also reasonably priced and soundly positioned. 

Berkshire is good enough if you cant find anything else.

APTS I really like but its a jungle of a mess navigating that one and enough to scare off most.

FRP Holdings is a monster thats well managed and under leveraged. Good MF and the mother of all royalty assets. Its potentially got 1/4 of its EV in hidden assets as well. Kind of a no brainer(still even after run up) IMO. 

MSGE/S are both in excellent shape and cheap. S is safer E is more upside potential 

I am a horrible energy analyst but thats been beaten to hell and sentiment sucks so I just own XLE there but if one knows what they are doing there I think its fertile ground for hunting. 

CLF/MSB too long a story but CLF is outstandingly managed and now kind of in oligopoly territory after consolidation and MSB is purely a royalty company who gets checks from CLF as they own the best positioned IO mine in the US.