5 ms·

Warren Buffett seeing 'substantial inflation' and raising prices

52 points by lisper 6y ago

deleted 6y ago
[deleted]
nabla9 6y ago
The Fed has new inflation target policy so they are not going to act for a while. There should be transitory spike 3% or more (core PCE price index) then slow down to 2.5% or so for most of 2021. (PCE can jump to 4% temporarily). Then it will slow down again and Fed will again struggle to maintain desired level of inflation. --- Even journalists seem to understand terms only syntactically. Assent inflation is not related to price inflation. They have completely different mechanisms. Asset inflation does not increase wages or anything like that.
LatteLazy 6y ago
Respectfully, he's an expert at individual companies, not macro trends. He's done a lot for the average man by inspiring people to invest and recommending appropriate literature. But he isn't an actual prophet...
- missedthecue 6y ago
  He's not predicting macro trends. He runs one of the worlds largest industrial companies, and he's saying that they are seeing skyrocketing input costs. He's not prophesying anything. He's sharing facts that have already happened.
- halotrope 6y ago
  I think you are confusing Buffett with Burry. Keep in mind that he chairs a massive conglomerate and has insights in a lot of industries. His remarks where observations, not predictions.
bko 6y ago
I found his comments on the Fed policy and its affect on big tech's stock performance interesting and wrote about them over the weekend [0]. In short, according to him a big reason the largest tech companies are up 60+% since beginning of 2020 is due to low interest rate policy of the Fed. Low rates juice equity returns and the biggest beneficiaries are large tech companies with really strong cashflow and low capital requirements. The 5 largest tech companies now comprise nearly 25% of the S&P500. This was the single largest line item of covid spending. $3 trillion of the $12 trillion has gone directly into asset purchases (treasuries and mortgage backed securities) [1] Another interesting thing I read about is how companies work around inflation. You see this in candy bars where the company shrinks the size of the bar rather than raise prices, eventually creating a "king size" to accommodate higher input prices. Other examples of include cutting corners and using cheaper material. [0] https://mleverything.substack.com/p/where-did-the-12-trillion-of-covid-5e8 https://mleverything.substack.com/p/where-did-the-12-trillio... [1] https://www.covidmoneytracker.org/ https://www.covidmoneytracker.org/
- Scoundreller 6y ago
  > Low rates juice equity returns and the biggest beneficiaries are large tech companies with really strong cashflow and low capital requirements. Shouldn’t it really juice okay companies with high debts? Or with high capital requirements because the interest cost on capital projects just went down?
  - bko 6y ago
    They would have to refinance to benefit from lower interest rates. And you have this additional credit variable. It would definitely cause some companies to change their capital structure, essentially increase leverage to benefit from lower rates. But I don't think this would help companies with existing debt more than less levered companies
  - smabie 6y ago
    Low interest rates also raise company valuations due to a lower discount factor in the DCF model.
- 6y ago
randomopining 6y ago
Yet he doesn’t invest in Bitcoin. Why?
- permalac 6y ago
  Same reason took him years to invest in tech, he only invest where his understanding makes him confortable.
  - taberiand 6y ago
    Seems to me he understands Bitcoin, and thinks it is hot garbage
    - cbozeman 6y ago
      I've been mining Bitcoin since the early 2010s. It is hot garbage... but it's hot garbage people will pay for, and I see no reason to sell now. I legitimately think BTC will hit $1m per coin, although I couldn't say when, and I definitely cannot say why. I myself don't understand the attraction to it. I understand the arguments on a logical level, and even an emotional level, but they're not good arguments, imo.
      - randomopining 6y ago
        Have you hodl’ed the whole time? Tbh it makes sense on an individual level but on a societal level it’ll lead to inefficiencies.
        brtkdotse 6y ago
        On a societal level it would lead to a burning planet. (Yea, yes, I know NOT A CRYPTO Spews out a months worth of car riding per transaction)
      - valuearb 6y ago
        You expect BTC to reach $20 trillion market cap, nearly the size of the US GDP?
seibelj 6y ago
I love all the excuses for why inflation is spiking other than insane amounts of money printing. “Supply chain issues!” “Temporary demand increases!” When every single commodity and financial asset are rising at absurd levels month after month, it’s pretty clear what the cause is.
- nscalf 6y ago
  It does seem like the most obvious cause. Though inflation is really really weird, I had a professor explain the feds tools to control inflation back in college. According to her, the #1 tool they have to control inflation is announcing what inflation will be before it could even happen. Companies write it into their contracts, and that sets the bar for corporate spending and expectations. It's going to be interesting to see how well that holds up when the amount being printed is this extreme. We're definitely going to learn something about the fundamental truths of our economy/global economy/modern monetary theory.
- gumby 6y ago
  I don't think it's necessarily absurd. Clearly more cash has flushed into the system and that is inherently inflationary, but that alone doesn't tell you how to look forward. Part of the cash that came in has circulated through the lowest level of the financial system (extended unemployment -> rent continues to be paid, tacos eaten etc). Because of the demand shock I think that got sponged up by that level; you see it here in the Bay Area and in NYC: in both cases rents have fallen. Part of the cash has been handouts to large players and a lot of that ends up in the market due to low interest rates. And that in turn funds people who were employed through 2020 to drive other asset prices up (in other words: home sales). But in a demand shock the whole system collapses: commodities aren't purchased, factories furlough etc. When that comes back to life you get inflation for the opposite reason: there's a demand pickup that can't be satisfied by the suppliers so the suppliers can get away with asking for more cash (and the cash has been accruing unspent for the last year). That price rise will bring in other players (house builders, air conditioner manufacturers etc) which will drive the prices down. Plus the government is trying to increase demand by increasing people in jobs by fixing bridges and hiring child care (so more people can go to work...). Who knows which (my first paragraph or last two) will dominate? Nobody! It's pretty hard to complain about the cash that was flushed in because people have to eat and, thanks to gravity, have to sleep somewhere. It's like surgery: you cut a hole in someone which isn't good but you have to do it to try to get to something that isn't working properly. You have to wait to see if the patient recovers.
CharlieMunger 6y ago
This inflation question was asked by one of the members of Reddit's most active Berkshire Hathaway subreddit: https://old.reddit.com/r/brkb/ https://old.reddit.com/r/brkb/ We have full coverage of the meeting, including a video dissection of the Q&A session. Thousands of active members, dozens of value investor moderators, join us!
- ephbit 6y ago
  Off topic remark: your comment has my upvote already for just linking to old reddit.

52 points by lisper 6y ago

deleted 6y ago

[deleted]

The Fed has new inflation target policy so they are not going to act for a while. There should be transitory spike 3% or more (core PCE price index) then slow down to 2.5% or so for most of 2021. (PCE can jump to 4% temporarily). Then it will slow down again and Fed will again struggle to maintain desired level of inflation. --- Even journalists seem to understand terms only syntactically. Assent inflation is not related to price inflation. They have completely different mechanisms. Asset inflation does not increase wages or anything like that.

LatteLazy 6y ago

Respectfully, he's an expert at individual companies, not macro trends. He's done a lot for the average man by inspiring people to invest and recommending appropriate literature. But he isn't an actual prophet...

missedthecue 6y ago
He's not predicting macro trends. He runs one of the worlds largest industrial companies, and he's saying that they are seeing skyrocketing input costs. He's not prophesying anything. He's sharing facts that have already happened.
halotrope 6y ago
I think you are confusing Buffett with Burry. Keep in mind that he chairs a massive conglomerate and has insights in a lot of industries. His remarks where observations, not predictions.

bko 6y ago

I found his comments on the Fed policy and its affect on big tech's stock performance interesting and wrote about them over the weekend [0]. In short, according to him a big reason the largest tech companies are up 60+% since beginning of 2020 is due to low interest rate policy of the Fed. Low rates juice equity returns and the biggest beneficiaries are large tech companies with really strong cashflow and low capital requirements. The 5 largest tech companies now comprise nearly 25% of the S&P500. This was the single largest line item of covid spending. $3 trillion of the $12 trillion has gone directly into asset purchases (treasuries and mortgage backed securities) [1] Another interesting thing I read about is how companies work around inflation. You see this in candy bars where the company shrinks the size of the bar rather than raise prices, eventually creating a "king size" to accommodate higher input prices. Other examples of include cutting corners and using cheaper material. [0] https://mleverything.substack.com/p/where-did-the-12-trillion-of-covid-5e8 https://mleverything.substack.com/p/where-did-the-12-trillio... [1] https://www.covidmoneytracker.org/ https://www.covidmoneytracker.org/

Scoundreller 6y ago
> Low rates juice equity returns and the biggest beneficiaries are large tech companies with really strong cashflow and low capital requirements. Shouldn’t it really juice okay companies with high debts? Or with high capital requirements because the interest cost on capital projects just went down?
- bko 6y ago
  They would have to refinance to benefit from lower interest rates. And you have this additional credit variable. It would definitely cause some companies to change their capital structure, essentially increase leverage to benefit from lower rates. But I don't think this would help companies with existing debt more than less levered companies
- smabie 6y ago
  Low interest rates also raise company valuations due to a lower discount factor in the DCF model.
6y ago

randomopining 6y ago

Yet he doesn’t invest in Bitcoin. Why?

permalac 6y ago
Same reason took him years to invest in tech, he only invest where his understanding makes him confortable.
- taberiand 6y ago
  Seems to me he understands Bitcoin, and thinks it is hot garbage
  - cbozeman 6y ago
    I've been mining Bitcoin since the early 2010s. It is hot garbage... but it's hot garbage people will pay for, and I see no reason to sell now. I legitimately think BTC will hit $1m per coin, although I couldn't say when, and I definitely cannot say why. I myself don't understand the attraction to it. I understand the arguments on a logical level, and even an emotional level, but they're not good arguments, imo.
    - randomopining 6y ago
      Have you hodl’ed the whole time? Tbh it makes sense on an individual level but on a societal level it’ll lead to inefficiencies.
      - brtkdotse 6y ago
        On a societal level it would lead to a burning planet. (Yea, yes, I know NOT A CRYPTO Spews out a months worth of car riding per transaction)
    - valuearb 6y ago
      You expect BTC to reach $20 trillion market cap, nearly the size of the US GDP?

seibelj 6y ago

I love all the excuses for why inflation is spiking other than insane amounts of money printing. “Supply chain issues!” “Temporary demand increases!” When every single commodity and financial asset are rising at absurd levels month after month, it’s pretty clear what the cause is.

nscalf 6y ago
It does seem like the most obvious cause. Though inflation is really really weird, I had a professor explain the feds tools to control inflation back in college. According to her, the #1 tool they have to control inflation is announcing what inflation will be before it could even happen. Companies write it into their contracts, and that sets the bar for corporate spending and expectations. It's going to be interesting to see how well that holds up when the amount being printed is this extreme. We're definitely going to learn something about the fundamental truths of our economy/global economy/modern monetary theory.
gumby 6y ago
I don't think it's necessarily absurd. Clearly more cash has flushed into the system and that is inherently inflationary, but that alone doesn't tell you how to look forward. Part of the cash that came in has circulated through the lowest level of the financial system (extended unemployment -> rent continues to be paid, tacos eaten etc). Because of the demand shock I think that got sponged up by that level; you see it here in the Bay Area and in NYC: in both cases rents have fallen. Part of the cash has been handouts to large players and a lot of that ends up in the market due to low interest rates. And that in turn funds people who were employed through 2020 to drive other asset prices up (in other words: home sales). But in a demand shock the whole system collapses: commodities aren't purchased, factories furlough etc. When that comes back to life you get inflation for the opposite reason: there's a demand pickup that can't be satisfied by the suppliers so the suppliers can get away with asking for more cash (and the cash has been accruing unspent for the last year). That price rise will bring in other players (house builders, air conditioner manufacturers etc) which will drive the prices down. Plus the government is trying to increase demand by increasing people in jobs by fixing bridges and hiring child care (so more people can go to work...). Who knows which (my first paragraph or last two) will dominate? Nobody! It's pretty hard to complain about the cash that was flushed in because people have to eat and, thanks to gravity, have to sleep somewhere. It's like surgery: you cut a hole in someone which isn't good but you have to do it to try to get to something that isn't working properly. You have to wait to see if the patient recovers.

CharlieMunger 6y ago

This inflation question was asked by one of the members of Reddit's most active Berkshire Hathaway subreddit: https://old.reddit.com/r/brkb/ https://old.reddit.com/r/brkb/ We have full coverage of the meeting, including a video dissection of the Q&A session. Thousands of active members, dozens of value investor moderators, join us!

ephbit 6y ago
Off topic remark: your comment has my upvote already for just linking to old reddit.