the strong usd

[touchring]

Re: the strong usd

the rates themselves will not generate inflation. they are a symptom of the need for inflation, and a harbinger of the essentially unfundable enormous fiscal spending to come. that is what will generate inflation.

Let's try to think out of the box. Maybe monetary policy (lower rates) cannot generate inflation since China exports deflation.

Perhaps Trump's tariffs will generate the inflation you need? Think about it, US raises tariffs, China devalues yuan, but while Trump can raise tariffs 100%, China can't devalue the Yuan by 50% without jeopardizing domestic consumption.

Trump has levied 25% tariff on half of Chinese goods. Has inflation increased? Barely I believe. So it can go much higher before it has an impact. In the meantime, it's free money for the Federal government.

[dcarrigg]

Re: the strong usd

If anything, I'd suspect that Chinese imports are the last things that would push inflation. Rich people don't buy them, at least not in any significant portion of income. And everyone else when pennies get tight cuts back on Chinese imports way before food, healthcare, Ed, insurance, debt service, energy, rent or mortgage etc.

Seems to me really cranking up tariffs even on the entirety of Asia might pass some cost increase (not all) onto consumers. But that will just lead to crap revenues for companies selling that stuff as people cut back and sales drop. If it goes on long enough, maybe it puts downward pressure on rents etc. as disposable income is reduced.

But I guess that's my working theory now. It's like a seesaw. FIRE and Healthcare on one side, consumer products on the other. One goes up, the other goes down. As a society we've swapped constants and variables too. Used to be labor's share of national income was constant and wages were variable with national product. Now wages are constant and labor's share of national income floats, decreasing as national product rises. How did the constants switch? Laws, norms, and other practices that came about probably around the rise of human resources departments. Either way, that's the bones of my going theory. It ain't complicated. But when I look at the numbers and I see labor's share dropping all over the west and wages stagnant all over the west and fire exploding all over the west with rents going nuts and Chinese imports going nuts and all the rest while inflation stays slow despite zirp, I can't think of another way to get my head around it. The seesaw and the variable switch. That's the story I think.

[GRG55]

Re: the strong usd

the rates themselves will not generate inflation. they are a symptom of the need for inflation, and a harbinger of the essentially unfundable enormous fiscal spending to come. that is what will generate inflation.

Is it when this epiphany finally occurs in at least one major economy perhaps the inflation starting gun really goes off? The realization a sovereign debt can't/won't be repaid, a loss of confidence in that specific currency, the only bid for its sovereign bonds coming from the applicable Central Bank? Is Japan not already there in some respects?

Given how much sovereign debt in Europe (as one example) is negative yielding or low yield (hello Greek and Polish 10-yrs), I am surprised the Euro continues to hold up as well as it has. I would have thought there would have been a stampede of private capital out of those debt markets long ago, rushing off to inflate some other "object of desire" (maybe that's already been happening; see the penultimate sentence of the next paragraph?). Is the Euro being propped by the combination of the ECB (whatever it takes), mandatory European banking sector reserves + mandatory pension fund allocations to "safe" sovereign bonds (as Gavekal has noted result in guaranteed pension fund capital losses) that is keeping the game going?

Odd thing I've contemplated in recent years is why not more deflation? One industry after the next was shipped overseas to where factory workers in factory dorms ear factory scrip and basically work for nothing. And the prices of goods they build predictably has dropped a lot. But every time finance, insurance, real estate, healthcare, and education costs have risen to balance the equation. For every manufacturing job lost in America, we gained a healthcare job. Before the boomers hit hospice en masse. So in the end of the day, between that, inequality, and downward pressure on wages, the quality of life for most people deteriorated despite plunging prices. There are weird second order effects. My guess is a huge part of the crime drop is that nothing is worth anything now. TV isn't even a week of work at minimum wage. Car radio is less. There's nothing worth stealing, since a TV is worth less than a week of rent on a one bed apartment or a week of health insurance premiums. So some things inflate despite the drop in chattel prices. But how do you possibly get massive inflation when chattels are worthless and rents and premiums are so outrageously expensive?

It seems to me FIRE prices expand to consume all available disposable income. So without wage hikes, and without even cheaper labor inputs for chattels, they're constrained. And I've already gone over how wages won't go up without big changes. I'm straining to see how the inflation comes about, even with insane fiscal deficits. You could print a hundred trillions right now, and what would happen? It won't trickle down. It never does. Maybe inflation in luxury assets and investment bubbles, but we already see that. Consumption won't budge In a major way. Because wages won't budge.

Unless the fiscal deficits are shunting money down to the bottom 90% directly, it's pushing on a string.

To dcarrigg's point, are we attempting to judge inflation by the measures used in the 1970s; should we really expect wage (service sector) and consumer price (goods sector) inflation again? Or is the coming inflation going to be of an entirely different nature...perhaps non-trade, non-consumer inflation caused by enormous investment capital flow shifts instead? I don't think it's any accident companies with breathtaking losses and massive valuations (Tesla, Uber, Snap, etc) exist, and continue to receive capital market support. Ben Bernanke's global savings glut writ large?

Its this latter thought that has me considering perhaps precious metals, oil, base metals and agricultural commodities (maybe with a preceding rise in the US$ exchange rate?) might be the leading indicators of the poom? Are the attached charts indicating the ka before the poom, or an "endless ka"?

[vt]

Re: the strong usd

Too much debt is deflationary. The bond market confirms this.

[jk]

Re: the strong usd

the generals always fight the last [previous] war. in the u.s. the bugaboo is deflation: no one wants to repeat the great depression. right now we are in a mildly deflationary spiral, offset as dc pointed out by rises in healthcare, education, housing - things that can't be imported. manufacturing is turning down. auto sales are turning down. the pmi is turning down. the fed is about to cut rates in spite of supposedly low unemployment and record highs in the stock market. meanwhile the fiscal deficit is rising to records during this so-called boom economy. when we go into outright recession [or recognize we already have] counter-cyclical stabilizers like unemployment will push deficits higher. x thousand boomers turn 65 every nano-second, for some x i've forgotten, but it means rising medicare costs and social security outlays now or soon. this will push deficits still higher.

foreign cb's stopped buying treasuries in '14 iirc. foreign private buyers can no longer hedge their currencies and still get a positive carry on treasuries. the long end is being bought by private u.s. buyers, mom and pop, who as usual will be left holding the bag within a few years, but not yet. the short end is getting stuffed into primary dealers who can't unload it all, and whose inventory has to be financed by repo, pushing ffr above ioer.

the key part of the fed announcement to soon arrive will not be the expected 25bps cut [a shock if something else]. the key part is what about qt? and when do we go back to qe or, to obscure the embarrassing turnabout, a guaranteed reverse repo facility so that the fed can - via slight of hand with the the primary dealers- finance the increased treasury issuance.

qe didn't cause inflation because it went onto the banks' balance sheets as excess reserves, and ioer kept those reserves segregated from the real economy.

the new qe or guaranteed reverse repo facility as outlined above will funnel money in a different direction. that money will not go the banks, but will be funneled by the pd's to the u.s treasury which will use it to pay the medicare bills, to fund the social security checks and, god knows, maybe someday to pay for some long-needed infrastructure upgrades. i.e. this newly printed money will enter the real economy. this is what will cause inflation.

we're perhaps 1-3 years away from officially recognized inflation, imo. first we have to see a recession and further rises in deficits. the abolition of the debt ceiling for the next 2 years should make the process easier.

remember, too, that it is possible the inflation will arrive overnight, like fdr revaluing gold, like nixon announcing the closing of the gold window on a sunday night. or like the plaza accord announcing that the dollar was going to weaken significantly over a period of years.

trump met this week to discuss how to weaken the dollar, but no action so far. "so far" is the key phrase in that sentence.

some monday morning withint the next few years we may awaken to a new announcement of some kind, an announcement of a policy which will create instant inflation.

[GRG55]

Re: the strong usd

...we're likely a few years away from inflation, imo. first we have to see a recession and further rises in deficits.

further, it is possible the inflation will arrive overnight, like nixon announcing the closing of the gold window on a sunday night. or like the plaza accord announcing that the dollar was going to weaken significantly over a period of years.

trump met this week to discuss how to weaken the dollar, but no action so far. "so far" is the key phrase in that sentence.

some monday morning within the next 1-3 years we may awaken to a new announcement of some kind.

Which means we are likely a few years away from any serious weakening of the US$ exchange rate as well.

I don't see the international collaboration in place required to repeat the Plaza Accord at this time. This Administration is on its own, but has taken the logical step of discouraging the holding or buying of more US Treasuries by other countries, threatening them with "currency manipulation" status.

If there is eventually a "some Monday morning" event, I almost have to believe it will be some form of capital controls...designed to stem the inflow of capital into the US$, not capital flight as the Chinese are dealing with these days.

[dcarrigg]

Re: the strong usd

Is it when this epiphany finally occurs in at least one major economy perhaps the inflation starting gun really goes off? The realization a sovereign debt can't/won't be repaid, a loss of confidence in that specific currency, the only bid for its sovereign bonds coming from the applicable Central Bank? Is Japan not already there in some respects?

Given how much sovereign debt in Europe (as one example) is negative yielding or low yield (hello Greek and Polish 10-yrs), I am surprised the Euro continues to hold up as well as it has. I would have thought there would have been a stampede of private capital out of those debt markets long ago, rushing off to inflate some other "object of desire". Is the Euro being propped by the combination of the ECB (whatever it takes), mandatory European banking sector reserves + mandatory pension fund allocations to "safe" sovereign bonds (as Gavekal has noted result in guaranteed pension fund capital losses) that is keeping the game going?

And are we attempting to judge inflation by the measures used in the 1970s; should we really expect wage (service sector) and consumer price (goods sector) inflation again? Or is the coming inflation going to be of an entirely different nature...perhaps non-trade, non-consumer inflation caused by enormous investment capital flow shifts instead?

Its this latter thought that has me considering perhaps precious metals, oil, base metals and agricultural commodities (maybe with a preceding rise in the US$ exchange rate?) might be the leading indicators of the poom?

Seems to me that the only other way in, if not wages, is commodities. In the US since 2000 (same general idea usually applies to most other developed countries), we watched labor's share of national income (wages as percent of GDP) fall from about 64% to 56%, and the steep parts of the drop were in each of the last 2 recessions. There could be a 3% drop (since aggregate wages stay more or less constant but positions are shed as national income collapses).

So you combine constant wages with declining employment and GDP and a run-up in commodities and what can you expect?

1. Proportion of wage income spent on commodities increases, leaving less disposable income for rents, knick-knacks, and premiums, etc.
2. Hot capital on the run exacerbates that problem, might blow bubbles
3. Government revenues plunge (lots of commodities exempted from sales taxes, income tax receipts drop as jobs are shed)
4. Government looks to stimulate (so spending increases and sovereign debt grows fast as rates are cut or QE-type schemes are hatched)
5. Politics get even more intense, maybe a lot crazier.

Given that one obvious point of cascading failure several of us have pointed to for probably years now is the corporate debt bubble, we might also figure that:

1. As BBB bonds turn junk, and institutions drop them, the knife can fall fast.
2. Panic fleeing out of bond funds gives hot capital few "safe spaces" to go.
3. Most might just get shunted to US Treasuries with lower returns, happy for any port in the storm.
4. But some might reach for higher returns, and then commodities probably are a play on the table.
5. Financial institutions are on the hook for the biggest portion of BBB debt. But the sectors with the most BBB- debt right on the edge are tech, media, and utility sectors. They're liable to stumble first and earlier than the banks.

Finally, we've still got an inverted yield curve, with indicators flashing red. What does that do?

1. In the short term, it lowers mortgage rates and raises home prices. Ditto for other long term debt, including the corporate stuff.
2. The mere fact of inversion causes at least some folks to seek safe havens for at least some of their capital.
3. The bet is at least partially that things will go to hell and the fed will cut rates between now and the maturity date.
4. More demand for long treasuries.
5. But no guaranteed fiscal policy to match (in fact, it's pretty unlikely at least in the short term).

At least that's the rough sketch of it, I think. There are certain places that are more or less insulated from from investment flows. To go back to my Connecticut example, Greenwich is a hell of a lot more sensitive to them than Thompson. But conversely, Thompson is a lot more sensitive to commodity price inflation than Greenwich. You get major capital outflows hot on the run into commodities, and they're both gonna bleed. Their loss is probably North Dakota's gain. Makes me wonder if that is the direction things go if it's not worth stocking up on things denominated in loonies and dollarydoos etc.

[GRG55]

Re: the strong usd

One thought to add after reading your post...there's probably real potential for the commoditization of "renewable" energy as well. Massive capital inflows seeking scale opportunities, able to compete with the regulated utility companies, because the private cost of capital has been depressed to equivalent of 20 year utility bonds.

If anybody thinks this is farfetched, check out the price trend of Lyft shares compared to its financial performance. Defies any logic whatsoever, and shows how inexpensive and disposable our Central Banks have made capital.

The whole world seems upside down.

...When logic and proportion
Have fallen sloppy dead
And the White Knight is talking backwards
And the Red Queen's off with her head
Remember what the dormouse said
Feed your head
Feed your head

"White Rabbit", Jefferson Airplane, 1967

[dcarrigg]

Re: the strong usd

One thought to add after reading your post...there's probably real potential for the commoditization of "renewable" energy as well. Massive capital inflows seeking scale opportunities, able to compete with the regulated utility companies, because the private cost of capital has been depressed to equivalent of 20 year utility bonds.

If anybody thinks this is farfetched, check out the price trend of Lyft shares compared to its financial performance. Defies any logic whatsoever, and shows how inexpensive and disposable our Central Banks have made capital.

The whole world seems upside down.

...When logic and proportion
Have fallen sloppy dead
And the White Knight is talking backwards
And the Red Queen's off with her head
Remember what the dormouse said
Feed your head
Feed your head

"White Rabbit", Jefferson Airplane, 1967

We've seen some of this locally with de Shaw getting in on wind and the Danes moving to take over some work offshore. Problem is lease areas got snapped up following the last downturn. Much of the areas remains undeveloped. And load balancing requires a good chunk of natural gas. But solar too has impressed me and gotten a lot cheaper in real practical ways (although lifespans don't seem to add up as advertised, lots of inverter and other failures just a year or two in, never mind 25, so watch the warranty stuff). Could be substantially more utility scale ppas looking for long term stable returns, sure.

[jk]

Re: the strong usd

when the corporate bond market detonates money will rush to treasuries and usd's while spreads open wide.

anyone have thoughts on the best way to invest in commodities for the intermediate-longer term?

[touchring]

Re: the strong usd

when the corporate bond market detonates money will rush to treasuries and usd's while spreads open wide.

anyone have thoughts on the best way to invest in commodities for the intermediate-longer term?

Commodities as in base metals, precious metals, oil or farm land?

Gold has gone up quite significantly. A lot of base metals have already risen.

[jk]

Re: the strong usd

Commodities as in base metals, precious metals, oil or farm land?

Gold has gone up quite significantly. A lot of base metals have already risen.

agriculture [production or products] in particular, also broad commodities but not so overweighted to energy as those indicies based on trading volume.

[touchring]

Re: the strong usd

agriculture [production or products] in particular, also broad commodities but not so overweighted to energy as those indicies based on trading volume.

With trade war, won't this be risky?

[jk]

Re: the strong usd

With trade war, won't this be risky?

what isn't?
between what i expect to be generalized inflation and the likelihood of more 500-1000 year floods every couple of years, food is likely to get more expensive even without exports. bwtfdik?

[kbird]

Re: the strong usd

anyone have thoughts on the best way to invest in commodities for the intermediate-longer term?

I wonder what European central banks might have to say about this question.

https://www.bullionstar.com/blogs/ro...y-to-buy-gold/