Raven Prop P Discussion Threads

[kenny] 06/4/2021 01:49

"A second misconception is that inflation is a consequence of excessive money creation. Here too the evidence points the other way."

[pogue] 05/4/2021 15:37

Cassini
depending on who you read the statements of central banks etc there are plans afoot to increase the velocity of money. As I said earlier digital currency is coming but before that there will be negative interest rates, all the central banks are preparing for them just look at what they are saying and doing, that will drive money out of banks and create inflation, inflation is the objective right now. The problem is that its not controllable.
On top of that at some point a universal basic payment will become the norm thus putting more velocity on money as the poor will spend it as fast as they can to improve their living standards. Again listen to what politicians are saying and doing as they raise the minimum working wage and even the Tories are handing out money like water just now, and I cant see how they can stop as there is going to be large parts of the population ruined by the lockdowns people are becoming dependent on handouts. We are moving to a whole new world where inflation is perceived as good by the central banks and governments and a way out of the massive debts they are running up.
Yes I do see the great reset coming, I see the words being said by central banks and government increasingly proving this.

Kenny
the consensus of opinion in the places you look, if you choose to believe them fine I tend to read a lot wider. I expect inflation way above 2% from the simple fact that you cannot print infinite amounts of money and not get inflation unless all laws of economics are suspended. I dont see that happening as in the past all fiat currencies have collapsed why is it different this time? Regards the actual rate of inflation that is irrelevant as once it starts going its going to be difficult to stop anyone predicting the actual number is guessing and I cant be bothered doing that.

[cassini] 05/4/2021 14:16

pogue,

I wasn't implying higher interest rates were necessarily a problem - they are too low at the moment, screwing over savers and encouraging people to run up/roll over debt. I'm only interested in what direction interest rates will actually go and what that means.

I'm still betting they will stop going up fairly soon and settle back under that 40 year trendline.

One important parameter to keep an eye on is the real rate of inflation - interest rates minus inflation. If inflation is above the interest rate we are still losing money on savings for instance. Gold does well when the real rate of interest is negative.

Stocks do OK with a little bit of inflation, in the 2-3% region (according to a scatter plot I saw of returns versus inflation rates) but perform progressively worse as inflation gets higher.

All this money printing does not necessarily lead to inflation unless it ends up being spent, by which I mean the velocity of money must rise, otherwise the money just sits around building up bubbles in things (property, bitcoin, shares etc). I heard that the money injected into the system for the Financial Crisis in 2009 didn't lead to inflation as the velocity of money crashed. Last I saw (recently) the velocity of money is still declining.

Not that that necessarily means the stimulus money won't find its way to the surface one day. More immediately, I wonder if all that pent up savings money people have found difficult to spend over the lockdown period may find its way into the economy more rapidly and be the cause of a rise in the velocity of money and hence inflation?

Perhaps we really will have a Great Reset and a new Bretton Woods X agreement where all the main countries sit around a table one day and agree to shaft us all by some coordinated revaluation of money (default) or whatever. Borrowers get lucky, savers, not so much. I still think gold has a part to play in a modern day portfolio (or BitCoin, if you don't mind the rollercoaster ride).

[kenny] 05/4/2021 13:46

As I stated in post 895 above:

“The consensus in current commentary is that we will have inflation. To read the majority of articles, you would get the impression that we are going to have roaring inflation like the 1970’s.

While this commentary gives the above impression, very few state an actual projected rate of inflation. One that did, very recently, talked about inflation potentially reaching 2% in the UK by the end of this year.”


Many are writing about “inflation coming” or “high inflation coming” but very few quantify what that rate of inflation will likely be. If, for example, inflation reaches the heady highs of 3%, I am quite happy to continue to hold all of my fixed income holdings. I have got quite a lot of fixed income yielding just under 6% and would be happy to hold all of that even if inflation reaches 6% or slightly more.

The other problem with current commentary, is that no one opines whether this predicted inflation is going to be a) a blip or, b) how long it is going to last.

I am a long-term holder of fixed income; therefore, I am not going to be easily convinced to sell some of my holdings. Indeed, it was interesting to read that in February the highest amount of money flowing into funds, was invested into funds specialising in fixed income.

[pogue] 05/4/2021 12:09

cassini
interest rates are not the problem inflation is. Why would you buy fixed interest if inflation is raging, you buy shares as fixed income is losing you money. The question you must ask is unlimited QE going to make a difference to inflation? Some believe the laws of economics are broken and we wont others think hyperinflation is a possibility and all things in between. Personally I expect high inflation though we will avoid the hyper part as what is happening just now is all part of the move to digital currency issued by central banks and that is not a pleasant outcome if you do some research. The FED are talking about going digital more and more so it is coming.

[cassini] 05/4/2021 04:40

I saw a chart today showing the US 30Y Treasury bond and the decline in its interest rate since about 1980.

One can draw a couple of pretty convincing straight declining trendlines on the chart of the 30Y, the top and bottom of the channel.

The 30Y has just hit the top trendline of the channel. It'll be interesting to see if rates will continue up much further or bounce back off the trendline. A few tenths of a percent more rise won't mean much but any more than that would mark a sea-change.

Personally I think the trendline will pretty much hold - it's very hard to break a 40 year trend. Plus, for all the reasons given in the last post.

So, if rates start to retreat again but inflation rises, shares (and gold) should benefit.

[kenny] 04/4/2021 00:38

The above linked article, also has some interesting comments after it. I was particularly interested in the author's reply to a question about interest rates rising, reproduced below;

Phibion Makuwerere says:
25 March 2021 at 22:32
Interesting read. I suppose that is why lately there has been a fixation on inflation creeping up. The sustainability of debtism, as interest rates start to rise, will be tested.

Reply
Sebastien Canderle says:
26 March 2021 at 10:01
Thanks for your comment, Phibion.

You are absolutely correct that a meaningful rise in interest rates would change the rules of engagement.

However, because so many governments, not just in the West but also in Japan and quite a few emerging markets, are heavily in hock, unless they ask central banks to cancel a sizeable portion of the government bonds they own, it will be very difficult for these central banks – most of them being controlled by their respective state – to raise interest rates. Governments would be shooting themselves in the foot, as raising interest rates would increase the cost of servicing the public debt.

In summary, interest rates will not rise substantially, and debtism will not go away, until the pile of global sovereign debt is made to shrink considerably. Whether this occurs through gradual deleveraging or sudden write-off probably requires a decent level of coordination.

Otherwise, the first government to cancel its debt could have a credibility issue among the international community. And the first one to adopt austerity measures would risk entering recession. A real dilemma!

[igbertsponk] 01/4/2021 08:36

All those thruppences dropping into all my accounts this morning, lovely jubbly.

[kenny] 31/3/2021 12:55

This article suggests that high national debt is now a permanent feature in all developed nations - unless governments across the world collaborate to engineer the Great Deleveraging or the Great Write-Off. This seems highly unlikely, as does any indebted nation deciding to hike interest rates in isolation.

"Capitalism Is Dead, Long Live Debtism"


Well worth a read.

[montyhedge] 30/3/2021 14:29

Payday tomorrow, reinvestment coming up.

[kenny] 30/3/2021 00:28

A long but very good article. Includes a history of inflation in the 1970's and various monetary policies, both before and since that time, by Martin Wolf (26.03.2021).

"The return of the inflation spectre"


You may need a subscription to the FT to read.

[pogue] 29/3/2021 09:09

MRF
All part of a long term plan to stop having a non debt backed currency and have central banks issue digital, not blockchain backed, currency. You need to listen, he literally wrote the book on this and the steps, which the central banks are taking, to get there and the extreme consequences. It will help you understand why many people are buying bitcoin and gold in large amounts.

[pogue] 28/3/2021 19:07

The real way forward, this man wrote a book 10 years ago on how the world economy will play out, so far his book has been right. This is him translating the latest FED broadcast.

[cassini] 27/3/2021 13:51

There's definitely inflation about - often in the guise of 'shrinkflation' - just go and look how they shrank the size of a tin of tuna last year, from 180g to 140g without dropping the price. That's just one example.

However, looking at the long term (from 1980) trend in interest rates we are still firmly in the down channel. I believe any move upwards in interest rates is a temporary phenomena, until or if rates break up out of that channel. There's a ways to go yet for that to happen...

I still don't believe the official rate(s) of inflation though.

[kenny] 27/3/2021 11:30

As an investor in RAVP my focus is on interest rates and their likely future trend. Inflation is an input in that thinking. However, I am not clever enough to predict anything as inevitable.

I do know that the world has never faced a scenario where every developed nation now has debt at record levels; when compared to GDP. Therefore, this is not like 1920’s Germany, when hyperinflation was confined to that one country.

Take, for example, currency exchange rates between the USD and Sterling. An investor could come to the conclusion that the pound will dive relative to the USD because of the massive debt to GDP that the UK has and will continue to increase because of Covid. Investing in the world’s only reserve currency may seem smart but the US debt situation is no better. The same goes for the Euro and Japan relative to any comparable currency.

In a world where every major economy has very high debt, I am not astute enough to figure out which will suffer higher inflation than another. I am also not shrewd enough to devise which country will step out of line, or be forced to, and increase interest rates at a steeper rate than all the others. I suspect that no country will step out of line with the consensus because although a higher interest rate normally supports a currency, it might instead be viewed differently.

I will finish where I started, with my concentration on the trend in interest rates.

In this respect, another factor I keep a close eye on is the rate of interest on other UK quoted preference shares. These are permanent preference, mainly issued by banks and insurance companies, some of which I also have holdings in for the long term.

The average effective interest rate on the 16 other preference shares I monitor is a little under 6%. This is close to the level they were at pre-Covid. These are not predicting high inflation or interest rates in the future. If that was the UK’s future, I think that, being permanent issues, they would be factoring this in well in advance of it transpiring.

[pogue] 26/3/2021 11:11

By devaluing fiat currency you decrease its purchasing power therefore to buy a loaf of bread you have to pay more fiat hence inflation, its got very little due to the inflation due to post lockdown spending sprees. The world has been printing like mad and will continue to do so there is only one way for inflation to go and in the past no country has been able to keep it under control. This time it will be different off course....dont think so.

[renewed1] 26/3/2021 11:02

cc2014: On current logic we just print more and buy them back.....now why did no one think of that before...Hmmm.

[kenny] 26/3/2021 10:46

The consensus in current commentary is that we will have inflation. To read the majority of articles, you would get the impression that we are going to have roaring inflation like the 1970’s.

While this commentary gives the above impression, very few state an actual projected rate of inflation. One that did, very recently, talked about inflation potentially reaching 2% in the UK by the end of this year.

Let’s accept that it does reach 2% by the end of this year because people, like me, once released from lockdown, will pay any price for things like a pint in the pub or a foreign holiday. This they refer to as pent-up demand creating inflation.

However, I have yet to see any commentator suggest a reason why this inflation will be sustained going forward e.g., in 2022, 2023 or beyond. Indeed, most just talk in a general sense about inflation arriving but give no commentary about whether it is going to be sustainable or a one-off adjustment due to the effects of lockdowns.

Until someone can clearly state cogent reasons for sustainable inflation being possible over the next few years, I do not regard a one-off blip upwards as a cause for assuming inflation in now something that central bankers will need to address in any meaningful way.

[cc2014] 26/3/2021 09:28

Whilst it's approximately true we are prining as much money as we are borrowing that's only this year. There's all the other money from all the years before Covid we have interest to pay on as well

(where the interst bill is actually falling at the moment as one bond expires it is replaced with another one at a lower rate. The issue starts appears when the rate for new bonds starts becoming more than the rate on the expiring bonds and then the chancellor is somehow going to have to find a way to explain to the public that he needs to tax us more and more to pay a larger and larger interest bill)

[renewed1] 26/3/2021 09:03

Given we have and are purchasing most of the debt we issue....if interest rates go up what we pay out comes back in....the magic money tree ...so seems to me Suni can do pretty well what he likes with the rates.

[pogue] 26/3/2021 08:52

Saying you wont raise interest rates and not raising interest rates when inflation is rampant are two completely different things. Plenty of words from governments about no rate rises but we dont have inflation so they can say what they want.
Meanwhile fixed interest investment rates rise as inflation rises regardless as the purchasing power of money becomes less.

[cc2014] 26/3/2021 08:39

So, I agree UK cannot afford it's debt if interest rates go up too much. And I agree they will let inflation run hot.

And in the end I do expect rates to rise but not significantly. A trip from 0.1% to 0.25% just puts the public on notice of what's coming. Then a further rise to 0.5%.

Perhaps after that they reverse say 20% of the QE and then move to 1.0%. Normalisation they might call it.


But the thing no-one addresses in these articles is tax and this in the end is what I think will keep inflation from getting overexited in the long term. Sure, we will see 3% inflation for maybe 3 years, maybe even 4% but all the extra taxes pull inflation down because it reduces disposable income.

The challenge for the government is how to do this against what is likely to be significant demands for wage inflation. And there we run into social issues because people won't want 10 years of tax rises and 10 years of low wage growth.


Edit: Not that it bothers me either way with regard to RAVP. Even if we get rising interest rates which means I lose 3% of my capital every year in perpetuity, I'll still be making a very decent return.
(which is actually the problem with low interest rates in that I'm investing my capital in Russia rather than the UK, thus creating no jobs in the UK. Not exactly a great long term macroeconomic policy)