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So much consensus out there on inflation, quite remarkable. Haven't seen this much consensus since the fear bottom in March 2020 when many of mine "long term in

So much consensus out there on inflation, quite remarkable. Haven't seen this much consensus since the fear bottom in March 2020 when many of mine "long term index fund investor" friends told me they liquidated (some of) their holdings. Almost as if this was the (local) inflation top. As usual, time will tell. The CPI and PPI are indeed hot, the tbond and stock markets are still calm (both will be massively damaged if inflation really is to come, and frankly even gold and Bitcoin are likely to suffer, due to the resulting liquidity drain).

omalleyt 6y ago
Inflation dynamics are not like stock-market dynamics. Widespread stock-market optimism is a self-denying belief. Investors reach peak optimism, fully invest, and then the market can only go down. Widespread inflation expectations is a self-fulfilling belief. People dump dollars for physical goods, increasing the price of those goods. This causes more inflation, leading to further dumping of the dollar, and further price increases. This is why runwaway inflation / hyperinflation occurs.
- H8crilA 6y ago
  You're right but people aren't dumping their "dollars", vast majority of which aren't the base money that the Fed prints but are financial assets (it's like a 1:100 ratio[1]). Look at all asset classes, there's no selling going on. [1] yes it's not exactly 1:100, if you feel like correcting a stranger on the internet please go on and pull the data from Fed datasets; i only meant to be accurate up to the order of magnitude.
  - omalleyt 6y ago
    Financial assets going up is precisely a sign of inflation. Argentina has 40% inflation and the best performing stock market (if you denominate in Argentinian currency)
    - H8crilA 6y ago
      How does it do priced in some basket of goods that people actually consume?
      - omalleyt 6y ago
        Bad. That’s why you don’t hold equities during hyperinflation. You hold physical assets, like gold and real estate.
        H8crilA 6y ago
        Yeah but this doesn't necessarily work. I actually investigated Argentinian real estate not long ago and it's declining (in real terms, let's say in USD which experiences very low inflation), quite obviously due to it being overvalued and the real GDP decline + deleveraging.
        omalleyt 6y ago
        What about gold?
        throw0101a 6y ago
        Holding gold is less useful that you may think: > Gold objects have existed for thousands of years but for many investors gold has only recently become a tradable investment opportunity. Gold has been described as an inflation hedge, a “golden constant”, with a long run real return of zero. Yet over 1, 5, 10, 15 and 20 year investment horizons the variation in the nominal and real returns of gold has not been driven by realized inflation. The real price of gold is currently high compared to history. In the past, when the real price of gold was above average, subsequent real gold returns have been below average. Given this situation is it time to explore “this time is different” rationalizations? We show that new mined supply is surprisingly unresponsive to prices. In addition, authoritative estimates suggest that about three quarters of the achievable world supply of gold has already been mined. On the demand side, we focus on the official gold holdings of many countries. If prominent emerging markets increase their gold holdings to average per capita or per GDP holdings of developed countries, the real price of gold may rise even further from today’s elevated levels. As a result investors in gold face a daunting dilemma: 1) embrace a view that “those who cannot remember the past are condemned to repeat it”, there is a “golden constant” and the purchasing power of gold is likely to fall or 2) embrace a view that “this time is different” and the “golden constant” is dead. * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2078535 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2078535
  - briefcomment 6y ago
    Aren't dollars and assets fundamentally different things? Land would keep up with inflation, while dollars wouldn't for example.
    - H8crilA 6y ago
      > financial assets Also, many real assets are very dependent on real rates, for example real estate or gold. Imagine the mortgage rate tripling from today's levels (definitely possible), what do you think this will do to prices? I.e. what would happen if all mortgage payments increased 3x for new mortgages? With gold the story is actually similar, because gold is like an very long duration ultra high quality bond.
      - omalleyt 6y ago
        Real rates become more negative with inflation though. US can’t afford high real rates, debt is 130% of GDP and Social Security is unfunded by $35T
        H8crilA 6y ago
        This could actually happen (deep negative real rates), but by no means is guaranteed. There are far, far more indebted large governments out there. If it happens yeah pretty likely getting real estate and preferably on mortgage will do splendidly.
- lamontcg 6y ago
  That isn't what is happening, and it says right in the article that this is a commodities boom. Those are absolutely cyclical and act as a brake on the economy similar to rising interest rates. They don't runaway. I swear everyone has turned into a 2003-era Gold Bug blogger and sees Zimbabwe everywhere. Eventually the average person and the average business gets overleveraged and spending contracts, then the bubble pops and deflation rips through the economy again. What we're seeing here is a lot of pent up demand due to the pandemic being unleashed. This is not runaway hyperinflation. And eventually bitcoin is going to pop and Millennials that have been using a basketfull of cryptocurrencies as their retirement 401(k) are going to be desperate for cash.
tasuki 6y ago
How does increased inflation lead to liquidity drain?

omalleyt 6y ago

Inflation dynamics are not like stock-market dynamics. Widespread stock-market optimism is a self-denying belief. Investors reach peak optimism, fully invest, and then the market can only go down. Widespread inflation expectations is a self-fulfilling belief. People dump dollars for physical goods, increasing the price of those goods. This causes more inflation, leading to further dumping of the dollar, and further price increases. This is why runwaway inflation / hyperinflation occurs.

H8crilA 6y ago
You're right but people aren't dumping their "dollars", vast majority of which aren't the base money that the Fed prints but are financial assets (it's like a 1:100 ratio[1]). Look at all asset classes, there's no selling going on. [1] yes it's not exactly 1:100, if you feel like correcting a stranger on the internet please go on and pull the data from Fed datasets; i only meant to be accurate up to the order of magnitude.
- omalleyt 6y ago
  Financial assets going up is precisely a sign of inflation. Argentina has 40% inflation and the best performing stock market (if you denominate in Argentinian currency)
  - H8crilA 6y ago
    How does it do priced in some basket of goods that people actually consume?
    - omalleyt 6y ago
      Bad. That’s why you don’t hold equities during hyperinflation. You hold physical assets, like gold and real estate.
      - H8crilA 6y ago
        Yeah but this doesn't necessarily work. I actually investigated Argentinian real estate not long ago and it's declining (in real terms, let's say in USD which experiences very low inflation), quite obviously due to it being overvalued and the real GDP decline + deleveraging.
        omalleyt 6y ago
        What about gold?
      - throw0101a 6y ago
        Holding gold is less useful that you may think: > Gold objects have existed for thousands of years but for many investors gold has only recently become a tradable investment opportunity. Gold has been described as an inflation hedge, a “golden constant”, with a long run real return of zero. Yet over 1, 5, 10, 15 and 20 year investment horizons the variation in the nominal and real returns of gold has not been driven by realized inflation. The real price of gold is currently high compared to history. In the past, when the real price of gold was above average, subsequent real gold returns have been below average. Given this situation is it time to explore “this time is different” rationalizations? We show that new mined supply is surprisingly unresponsive to prices. In addition, authoritative estimates suggest that about three quarters of the achievable world supply of gold has already been mined. On the demand side, we focus on the official gold holdings of many countries. If prominent emerging markets increase their gold holdings to average per capita or per GDP holdings of developed countries, the real price of gold may rise even further from today’s elevated levels. As a result investors in gold face a daunting dilemma: 1) embrace a view that “those who cannot remember the past are condemned to repeat it”, there is a “golden constant” and the purchasing power of gold is likely to fall or 2) embrace a view that “this time is different” and the “golden constant” is dead. * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2078535 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2078535
- briefcomment 6y ago
  Aren't dollars and assets fundamentally different things? Land would keep up with inflation, while dollars wouldn't for example.
  - H8crilA 6y ago
    > financial assets Also, many real assets are very dependent on real rates, for example real estate or gold. Imagine the mortgage rate tripling from today's levels (definitely possible), what do you think this will do to prices? I.e. what would happen if all mortgage payments increased 3x for new mortgages? With gold the story is actually similar, because gold is like an very long duration ultra high quality bond.
    - omalleyt 6y ago
      Real rates become more negative with inflation though. US can’t afford high real rates, debt is 130% of GDP and Social Security is unfunded by $35T
      - H8crilA 6y ago
        This could actually happen (deep negative real rates), but by no means is guaranteed. There are far, far more indebted large governments out there. If it happens yeah pretty likely getting real estate and preferably on mortgage will do splendidly.
lamontcg 6y ago
That isn't what is happening, and it says right in the article that this is a commodities boom. Those are absolutely cyclical and act as a brake on the economy similar to rising interest rates. They don't runaway. I swear everyone has turned into a 2003-era Gold Bug blogger and sees Zimbabwe everywhere. Eventually the average person and the average business gets overleveraged and spending contracts, then the bubble pops and deflation rips through the economy again. What we're seeing here is a lot of pent up demand due to the pandemic being unleashed. This is not runaway hyperinflation. And eventually bitcoin is going to pop and Millennials that have been using a basketfull of cryptocurrencies as their retirement 401(k) are going to be desperate for cash.

tasuki 6y ago

How does increased inflation lead to liquidity drain?