2022 investing thread

GatorCatsi

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If we knew the degree to which the higher CPI numbers were embedded in the economy maybe we could all make a 100% accurate call. Not everyone’s sold on the idea inflation is as much of an issue as it’s been made out to be. A number of economists are already predicting a softening this year as the economy continues to expand. Translation: an easing of supply-chain interruptions. It’s transitory more than money supply related.
I don't understand the need for rate hikes if it's transitory.

I think the Fed and White House are praying you're correct and it is transitory. Because if inflation's endemic, the Fed's in a precarious place. We'll see if they can taper into a slowdown (and US Balance of Payments problem) without tanking the economy.
 

78

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Yesterday’s December CPI print was 38% below the previous month’s. This morning, December wholesale prices came in well under expectations at 0.2%.

An abatement? Too early to tell but conventional wisdom has to make you wonder.
 

78

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I don't understand the need for rate hikes if it's transitory.

I think the Fed and White House are praying you're correct and it is transitory. Because if inflation's endemic, the Fed's in a precarious place. We'll see if they can taper into a slowdown (and US Balance of Payments problem) without tanking the economy.

A rock and a very hard place.
 

Detroitgator

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Son #1 did a lot of container tracking over the last two years (in real time). Price of a container has gone from roughly $15K to near $50K in a year, regardless of how full it is. One of the things he has been making money on is writing reorder algorithms that maximize a container fill rather than just ordering what one needs. It's a rethinking of the standard Economic Order Quantity" where you go ahead and order things you won't need until further out (but basically "up next") in order to completely maximize the fill of the container. Change in price of product hasn't been bad, but companies are getting their "margins" eaten alive on transportation, especially container costs.
 
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GatorCatsi

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Son #1 did a lot of container tracking over the last two years (in real time). Price of a container has gone from roughly $15K to near $50K in a year, regardless of how full it is. One of the things he has been making money on is writing reorder algorithms that maximize a container fill rather than just ordering what one needs. It's a rethinking of the standard Economic Order Quantity" where you go ahead and order things you won't need until further out (but basically "up next") in order to completely maximize the fill of the container. Change in price of product hasn't been bad, but companies are getting their "margins" eaten alive on transportation, especially container costs.
That's awesome. Technology is deflationary, for sure.
 

GatorCatsi

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Change in price of product hasn't been bad, but companies are getting their "margins" eaten alive on transportation, especially container costs.

When you say change of price of product hasn't been bad, what products do you mean? The products being shipped or the price of "shipping as a product"? (Assuming the former.)
 

Detroitgator

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When you say change of price of product hasn't been bad, what products do you mean? The products being shipped or the price of "shipping as a product"? (Assuming the former.)
Finished paper goods from Asia and South America. In this case, it is a packaging company in Tampa that supplies paper products packaging to a ton of restaurants (e.g., biggest supplier to Chili's, Popeye's...). The guy is a graphic designer at heart who started this business. He designs, all product manufactured overseas. He's growing, so he engaged Son #1 to tie all his data sources together, due analytics, build out dashboards for internal and external (e.g., Chili's gets a dashboard to see all their order status). The idea is to drive decisions with data. The dashboards are pretty damn cool because you can drill down to anything and everything. If you have a PO for something, you can click on the PO, down to the items, there is a map of the world and if that item is in a container, it tracks exactly where in the world the container is in real time. Pretty nifty.
 

GatorCatsi

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That's so cool!

Now here's what I'm wondering.

If I understand you, you're saying this business hasn't raised the prices on their finished paper goods, even though their inputs have risen.

So at what point do they find it necessary to raise prices?
Do they feel their pain is transitory and just trying to ride it out?

Another thing this brings up is to invest in companies with pricing power.
If a business can be easily replaced, then things could get tough.
Also makes what your son's doing quite valuable!
 

Detroitgator

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That's so cool!

Now here's what I'm wondering.

If I understand you, you're saying this business hasn't raised the prices on their finished paper goods, even though their inputs have risen.

So at what point do they find it necessary to raise prices?
Do they feel their pain is transitory and just trying to ride it out?

Another thing this brings up is to invest in companies with pricing power.
If a business can be easily replaced, then things could get tough.
Also makes what your son's doing quite valuable!
Finished goods and inputs have risen for sure, but you can "bake that in" to the price at the time of quoting/issuing POs. You usually don't lock in transportation quotes until very close to time of shipping due to what's available to ship and receiving any necessary approvals. No transportation company will give you a quote that doesn't have language that states "quote is subject to actual market conditions at time of booking." This makes the transportation piece very hard to estimate at the time of issuing a quote to a customer. Even for me, I only quote the transportation as a ROM (rough order of magnitude) based on actual quote at time of quoting, and get terms from the customer whereby I only charge them transportation at cost (no mark up/profit) at the time of shipping. If you are forced to give firm fixed pricing on transportation, there are things you can do to hedge, but as you can see, it's hard to anticipate the tripling or quadrupling of something like the cost of a 20' container, and that's where people get eaten alive right now. For most of these restaurants (especially fast food) buying the packaging or dealing with the rising cost of things like chicken, they've tried to hold prices, but it gets impossible to make money without raising prices. With the advent of electronic menu boards for most fast food places, Son #1 has actually farted around with using the "gas station model" of pricing gas... why can't the electronic menu board at mcdonald's update in real time with real time input pricing like gas does?

I'm being REALLY general here with all this...
 

Concrete Helmet

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Yesterday’s December CPI print was 38% below the previous month’s. This morning, December wholesale prices came in well under expectations at 0.2%.

An abatement? Too early to tell but conventional wisdom has to make you wonder.
:rotfl::rotfl::rotfl:
 

Concrete Helmet

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The way I see it is inflation is not going to go away any time soon.....value, energy, materials and commodities will outperform growth/tech. This isn't to say the bigger tech companies won't price in increases in interest rates. Chip makers will help that some but it's going to be up and down until investors as a whole aren't as nervous about the market as a whole.....this will begin to happen after the mid terms and looking into 2024 kinda like the whole thing started to turn a little in Obummer's last 2 years.

But to 78's point the current administration might start to pressure Powell to "readjust"(lower) the rates around summertime because the coming meltdown in the midterms will be looming larger and larger(think of what Trump did in late 2018-2019 after the taper tantrum)....Ironic to think that we went from having too little liquidity to having too much in less than 3 years...

One thing that is certain though as it has been since the beginning of fiat currency is that the credit market will ultimately determine where we land.
 

78

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BTW PPI index of wholesale prices rose 10% yesterday.....the highest since 2010

10% for 2021 but only 0.2% for December, a noticeable deceleration. It’s what’s happening of late that matters most.

Retail sales dropped 1.9% in December as consumers digested higher prices. The economy is adjusting organically.
 

Bernardo de la Paz

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If we knew the degree to which the higher CPI numbers were embedded in the economy maybe we could all make a 100% accurate call. Not everyone’s sold on the idea inflation is as much of an issue as it’s been made out to be. A number of economists are already predicting a softening this year as the economy continues to expand. Translation: an easing of supply-chain interruptions. It’s transitory more than money supply related.

The higher prices have been caused by temporary breakdowns in supply chains, a temporary burst in consumer spending and the temporary tail on the dog, higher labor costs. Minus Nos. 1 and 2, No. 3 can’t and won’t sustain itself.
Let's rewind the tape a bit because it seems like this is missing something.

The economy was humming along pretty nicely when the pandemic hit. The government wildly overreacted by making it illegal for most people to work for a few weeks followed by a period where the central committee picked which businesses got to succeed and which were screwed. Somewhere around 8 million jobs were eliminated.

To prevent catastrophic impacts to gdp the government passed almost 6 trillion in various stimulus packages (for context we only bring in around 3.5 trillion a year in taxes). The vast majority of the stimulus of course didn't go to the people most impacted by the draconian government overreach, but instead to curry favor from various voting blocks.

On top of that, the Fed jumped in to pump money into the economy going beyond a target rate of zero, adding loads of longer term securities like mortgage backed securities to its balance sheet and artificially reducing the risk premium on those investments. All in the Fed added more than $4 trillion to its balance sheet, figuratively printing money to pay for the massive stimulus packages.

All of that extra money in the economy and historically low interest rates combined with government imposed restrictions on consumption drove up assets like real estate, precious metals and crypto.

Initially the supply side pressure on inflation from the productivity impacts of job losses was balanced by the lack of demand which was both government imposed, but also organic from fear of covid. As people have started to get over their fears and restrictions have loosened, demand has recovered faster than supply and inflation has followed. Not surprising given all of the stimulus and easy money.

The real question of course is what happens next. There are still around 4 million fewer people working than there were in January of 2020. There are still millions of people hiding in their closets with three masks on. As life returns to normal does growth in demand continue to outpace growth in supply?

If I were a betting man (and we've established that I'm not), I would bet that the Fed will have to continue to take action to stave off inflation. I expect rates to go up, especially for mortgages. I expect softening in real estate and pull back in precious metals. Maybe a collapse in crypto. Probably time to sell bonds and buy them back when the Fed finishes tightening. If the Fed doesn't act though, I would guess none of that happens.
 

78

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The Fed has already begun unwinding its balance sheet and will further the fight by raising the overnight lending rate 25 basis points in March. At present, as many as three or four rate hikes are forecast in 2022. How many actually occur will become a function of the inflation numbers as they are released. I’ve heard calls for as many as seven, part and parcel so that the Fed can create a reverse tool after it inevitably throws the economy into recession. You’re looking for how much the market and economy discount the future not just from action, but from jawboning as well. Everyone’s blowing the interest rate hike horn and it’s spooking the markets.

I don’t see it happening to the degree forecast. I don’t see it as necessary. The unwind of the balance sheet coupled with a natural ease in consumer spending and a return to normal for supply chains will see to that.

The globe is far different than it was in 1982, when monetary policy was much, much tighter. We’ve normalized loose spending over a period of decades and under both political parties against a backdrop of heavy manufacturing moving overseas. It’s how we’ve learned to stave off the wolves. We play kick the can. We’ve actually WISHED for reflation that didn’t happen due in large part to a dramatically expanded global labor force.

There’s nothing in my mind that says the future is going to deviate sharply from that.
 

Bernardo de la Paz

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The Fed has already begun unwinding its balance sheet
The Fed has started to reduce the rate at which the balance sheet is growing.
How many actually occur will become a function of the inflation numbers as they are released.
True
The unwind of the balance sheet coupled with a natural ease in consumer spending and a return to normal for supply chains will see to that
Consumer spending has been lower than normal and saving has blown away historic highs. A return to normal would mean increased spending.
We’ve normalized loose spending over a period of decades
To some extent, but the only precedent for the massive stimulus and easing is the housing crisis. That occurred at a time when the housing bubble had burst and significant wealth had been wiped away. This time wealth is at an all time high and the only things holding back demand are government regulations and fear.

The Fed has plenty of ammunition to fight inflation. The need to use it will largely be a function of how quickly the American psyche recovers from the pandemic.
 

Concrete Helmet

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From an investor point of view I see it playing this way....
The first 6 to 8 months of the year will be a rising interest environment. For most part that also is a rising dollar scenario. Hence Financials/Energy/Value will be the safest(and has been over the last 18 months)place with the highest most consistent returns along with some commodities even though they will be working against the dollar. If you're going to play small caps stay away from ones who are highly leveraged(many in the mining sector are stuffed with cash).......once the Powell pivot happens pick up platinum, silver and add to your gold as the PM's will see 30-100% beginning at that point.....make sure you some mining stocks and hold your copper.....dump half your oil and financials and you'll be set for the rest of the year.
 

BMF

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The 10-year is up to 1.83% this morning, stocks down big at the opening.
 

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