Assessing the Carnage

[Freedom56]

I guess you would have to define price gouging. No one likes to pay higher prices (and I would tend to agree that generics took a big jump in price without the excuse that they actually develop the drugs.) But, in general, prices have been suppressed for a long time by global competition. Given the chance to grab a little extra profit, most companies will do so. Not saying I like it but I don't call it gouging. YMMV

We had private equity firms buying up small generic drug manufacturers with the sole purpose of raising prices. They even bought physicians practices with the sole purpose of pulling the groups out of network and charging patients whatever they want. Yes they do it because they can get away with it. At some point people just stop buying or using their services. Two thirds of the population are financial disasters who live paycheck to paycheck. It they learned to separate their "wants" from their "need", prices would plunge.

 

[Magus]

As before inflation takes care of itself on it's own as demand drops off sharply. Most of the inflation is due to corporate gouging and eventually consumers will pull back on spending.

This is simply not true as PPI is running hotter than CPI virtually everywhere. Most companies have passed on smaller increases than they have seen in input costs. That’s actually the exact opposite of gauging, as Walmart, target and many many others have illustrated recently. My company’s input cost is up 20% currently with prices we charge up 9% and it would be way higher than 20% if we hadn’t hedged so much last year. Next year, as things currently sit, is looking even worse.

 

[Fermion]

This is simply not true as PPI is running hotter than CPI virtually everywhere. Most companies have passed on smaller increases than they have seen in input costs. That’s actually the exact opposite of gauging, as Walmart, target and many many others have illustrated recently. My company’s input cost is up 20% currently with prices we charge up 9% and it would be way higher than 20% if we hadn’t hedged so much last year. Next year, as things currently sit, is looking even worse.

Most, but not all. Record profits in oil and gas and lumber industries. By a lot.

 

[Taco]

Most of the inflation is due to corporate gouging and eventually consumers will pull back on spending.

One recent anecdote is that Walmart reported sales that beat expectations, earnings that missed expectations.

Profitability was down. It seems pretty clear that inflation hurt their profitability.

It also seems to me to be the opposite of price gouging - they were not able to pass all of their higher costs on to their consumers.

 

[Magus]

Most, but not all. Record profits in oil and gas and lumber industries. By a lot.

1) Cherry picking a couple of sectors out of a LOT of sectors to try to prove a point about price gauging is stretching....by a lot. Most companies in the US are struggling masively with inflation.

2) That has nothing to do with price gauging. You do realize that those markets are the epitome of supply and demand where buyers and sellers are free to trade every second of every day at the price they find best for them? It's not like someone trying to evacuate new orleans that has one store open for 100 miles that's charging $25 for a 20oz bottle of water. And importantly, it works the other direction for them too. I bet you were not shedding any tears for Exxon when oil prices briefly went negative and they had record losses and sent a huge number of smaller firms into bankruptcy in 2020? Commodities always do a boom and bust cycle -its the nature of the business. It has nothing to do with price gauging.

 

[USGrant1962]

Most, but not all. Record profits in oil and gas and lumber industries. By a lot.

The inflationary "record profits" at ExxonMobil and others is a media narrative. If you look closely, most articles that bring it up say "for the last 7 years" or something similar. XOM had higher net income and profit margins in 2011-2012 when inflation was under 3%.

Their current (1Q22) profit margin is ~8%, on the high end of the historic range of 3% to 9%. Perhaps the profit increase from average 6% to 8% is gouging? OK, take 2% off of wholesale gas - it goes down 6 cents a gallon at the pump. "Most" inflation solved, brilliant!

https://www.macrotrends.net/stocks/charts/XOM/exxon/net-profit-margin

"Inflation is caused by price gouging" is a talking point, mostly from one politician who makes a career out of attacking American companies. We'll see a lot of media reports suggesting that record* prices and profits caused inflation. Nope, they don't cause inflation, they are inflation. As are record wages, record tax collections, record real estate prices...

*they always neglect to inflation-adjust these numbers

 

[Exchme]

Look what was going on in the technology sector and GPU pricing. They restricted supply and took advantage of a market that normally sees price erosion rather than 300% price increases. Manufacturers raised MSRP prices to keep up with scalpers. Now there is an oversupply and lower demand and prices are collapsing. Mega cap names like NVIDA have collapsed by over 50% along with retailers like Best Buy who played along with their gouging game. Price gouging has been going on with generic drugs for years with little to no consequences. The situation we have now is other sectors have joined in to the price gouging game.

You have a series of posts with the overarching theme that somehow all the price increases are companies gouging, but even within your posts, the market seems to have the last laugh. Companies try all the time to increase prices, but if the market is oversupplied, some competitor takes market share and the price raiser has to back off or lose more and more business to competitors.

Here you claim with zero evidence that GPU producers restricted supply. I have no idea, I was never in that business, but that would be foolish management in the extreme. What sounds more likely to me is that the rapid rise of crypto led to a sudden demand increase for crypto optimized processors. It turned out that video processors could be used for that and that was a market that NVIDIA was a leader in. So video processor chips rose in price as crypto miners scooped up the supply. It took years to design chips and build fab shops for more, better and faster devices but now that those fabs are on line and crypto is hurting, the video processor market is oversupplied, so prices are falling. Yawn.

As for gouging in generic drugs, you have that upside down. Generic drugs are the ones not protected by patents, so anyone can produce them and prices inevitably fall. I think you mean patented drugs where no one has discovered good alternatives. Patent protection encourages R&D so that new products come to market in the first place. Maybe there's a world where producers incur the costs of R&D but never get a benefit - but it's not this one.

There was an infamous situation where a drug company bought up patents on orphan drugs (small market, no available substitute, some of the drugs were life-saving) and hugely raised prices. But this caused a public relations backlash, including documentaries seen by millions. That damaged the company's reputation beyond repair, so I doubt that other managers looking in from the outside want to repeat that.

 

[Freedom56]

You have a series of posts with the overarching theme that somehow all the price increases are companies gouging, but even within your posts, the market seems to have the last laugh. Companies try all the time to increase prices, but if the market is oversupplied, some competitor takes market share and the price raiser has to back off or lose more and more business to competitors.

Here you claim with zero evidence that GPU producers restricted supply. I have no idea, I was never in that business, but that would be foolish management in the extreme. What sounds more likely to me is that the rapid rise of crypto led to a sudden demand increase for crypto optimized processors. It turned out that video processors could be used for that and that was a market that NVIDIA was a leader in. So video processor chips rose in price as crypto miners scooped up the supply. It took years to design chips and build fab shops for more, better and faster devices but now that those fabs are on line and crypto is hurting, the video processor market is oversupplied, so prices are falling. Yawn.

As for gouging in generic drugs, you have that upside down. Generic drugs are the ones not protected by patents, so anyone can produce them and prices inevitably fall. I think you mean patented drugs where no one has discovered good alternatives. Patent protection encourages R&D so that new products come to market in the first place. Maybe there's a world where producers incur the costs of R&D but never get a benefit - but it's not this one.

There was an infamous situation where a drug company bought up patents on orphan drugs (small market, no available substitute, some of the drugs were life-saving) and hugely raised prices. But this caused a public relations backlash, including documentaries seen by millions. That damaged the company's reputation beyond repair, so I doubt that other managers looking in from the outside want to repeat that.

The GPU market is a perfect example of price gouging gone wild. Manufacturers were doubling MSRP prices and retailors were 50-70% margins on top of that. People just stopped buying and the crypto bubble started to implode as China banned mining. Now we have a situation where prices are imploding and starting to sell below the original MSRP.

Generic drug price gouging is real and has been ongoing for the past decade. Consider generics like Epinephrine, Estradiol, and many others. Price gouging has been rampant. In Canada the cost of these generics is a fraction of what they are here. We had isolated cases such as the "Pharma Bro" who increased prices of a rare generic 5000% overnight but nobody talks about mainstream generic price gouging.

https://www.fiercepharma.com/pharma...years-but-there-hasn-t-been-a-controversy-why

Inflation is self correcting. Retailers were already on a tailspin down prior to the pandemic due to online shopping. Malls were dying and that trend has not changed. They are holding far too much inventory and prices are about to collapse. The markets discount the future and Target did not drop 25% in one day because of a slight miss in earnings but it was looking ahead to the rise in inventory that will have to be discounted to move product. Retailers have a serious problem with excess inventory. They have inventory that they can't sell.

https://qz.com/2167268/target-cant-keep-up-with-its-customers-changing-shopping-habits/

 

[splitwdw]

I think you missed the question. Not "if you are 100% equities, what do you buy on the dips?", but "if you are 100% equities, with what do you buy on the dips?"?

IOW, 100% equities means you have nothing to buy with that isn't equities. Do you have income? And if you've saved it up for the dips, you aren't 100% equities.

We are just curious.


-ERD50

kgtest is still working and in the accumulating stage according to their post. Their signature says they will retire in 2031.

 

[Love This Community]

Agree. I am in the same boat as kgtest and in accumulation phase as well. I’m investing money from paycheck into buying stocks. I’m staying put since the last month accumulating dry powder. DCA’ing through 401k so that is on auto pilot. Waiting for some opportunities to pick up good stocks. Eyeing MSFT, AAPL, AXP, DIS, CSCO, TGT

 

[Time2]

This week has been such a head-spinning event that I decided to balance the books today so I can get a grip on where things are.



Measuring the bleeding I came up with the following:

Year to date, down 15%.

From my all time high, down 20%.

From my total on the day I FIRED in August 2016, down 2%.

I'm down 18.5% from all time high.
But, I'd much rather look at from the date I retired Oct 2018, then I'm up 8.5%.

 

[mistermike40]

... How soon folks forget, carnage would be another 30 to 50% drop. It ain't gonna happen. Enjoy the roller coaster.

I hope you're right. Isn't the Japanese stock market still down ~40% from it's all-time high, from over thirty years ago? That's a scary scenario.

 

[COcheesehead]

Average bear market is a 35% decline over 289 days. So if we are average, we have more pain ahead.

 

[Freedom56]

Many people still don't understand that bond funds are not the same as bonds. Bond funds do not protect you from market risk and the losses these funds realize when they sell securities in a down market are passed onto the fund holder. The strategy behind investing in high grade bonds is capital preservation and earning interest income. It is not that different from buying CDs. Bonds are a debt obligation between the investor and the corporation issuing the bonds. When you buy individual bonds, your income stream is fixed for the term of the bond. You don't have that guarantee with bond funds. Bonds are not designed to be bought frequently like stocks. There is no central exchange for bonds to trade. Bond funds are a bad idea for investors but great for the fund manager who collect a fee for poor performance and they do buy bonds high and sell low. This is the reality and the reason they perform so poorly as compared to a portfolio of selected bonds from profitable companies. Yes it's more work, but the rewards are much better as you live off an predictable income stream and roll your maturities onto one of many secure fixed income options (bonds, notes, treasuries, CDs, preferred stock) depending on the best yield at the time of maturity. If you are not comfortable buying bonds, then buy CDs.

 

[COcheesehead]

Many people still don't understand that bond funds are not the same as bonds. Bond funds do not protect you from market risk and the losses these funds realize when they sell securities in a down market are passed onto the fund holder. The strategy behind investing in high grade bonds is capital preservation and earning interest income. It is not that different from buying CDs. Bonds are a debt obligation between the investor and the corporation issuing the bonds. When you buy individual bonds, your income stream is fixed for the term of the bond. You don't have that guarantee with bond funds. Bonds are not designed to be bought frequently like stocks. There is no central exchange for bonds to trade. Bond funds are a bad idea for investors but great for the fund manager who collect a fee for poor performance and they do buy bonds high and sell low. This is the reality and the reason they perform so poorly as compared to a portfolio of selected bonds from profitable companies. Yes it's more work, but the rewards are much better as you live off an predictable income stream and roll your maturities onto one of many secure fixed income options (bonds, notes, treasuries, CDs, preferred stock) depending on the best yield at the time of maturity. If you are not comfortable buying bonds, then buy CDs.

Well said.

 

[daylatedollarshort]

Retailers were already on a tailspin down prior to the pandemic due to online shopping. Malls were dying and that trend has not changed. They are holding far too much inventory and prices are about to collapse. The markets discount the future and Target did not drop 25% in one day because of a slight miss in earnings but it was looking ahead to the rise in inventory that will have to be discounted to move product. Retailers have a serious problem with excess inventory. They have inventory that they can't sell.

https://qz.com/2167268/target-cant-keep-up-with-its-customers-changing-shopping-habits/

I was walking around a strip mall the other day waiting for some car work to be done and ran across a store that was only Amazon and Target returns. The owner told me he buys returned merchandise from those two stores by the pallets in multiple truck loads every week. He told me 47% of the Amazon items bought during the pandemic were returned. When he brings in new truckloads, he said there were often 200 people lined up. A lot of the customers looked like flippers so that merchandise will end up on Ebay and flea markets at lower prices than they are on Amazon and Target.

 

[ERD50]

Many people still don't understand that bond funds are not the same as bonds. ....

Actually, I think most people on this forum are well aware of the difference.

... When you buy individual bonds, your income stream is fixed for the term of the bond. You don't have that guarantee with bond funds. ....

Or, put another way... "When you buy individual bonds, your income stream is fixed for the term of the bond, even if interest rates are going up. You are stuck with the low interest rate, and if you try to sell to get the newer higher interest bonds, you will get less for your bonds - no one wants them at par, since they can get higher rates on a new bond."

IOW, it's not all gravy. Bond funds have advantages as well.

-ERD50

 

[ERD50]

... He told me 47% of the Amazon items bought during the pandemic were returned. ...

I simply don't believe that. Almost half were returned? That just doesn't makes sense to me. That's just too huge of a number to not show up in a bunch of reports.

-ERD50

 

[daylatedollarshort]

I simply don't believe that. Almost half were returned? That just doesn't makes sense to me. That's just too huge of a number to not show up in a bunch of reports.

-ERD50

I'm not sure I believe it either, but I'm just repeating what the guy told me. I got the feeling he was making a lot of money and was excited to share his good fortune story.

 

[daylatedollarshort]

I found this article online that says the average online return rate is 21%. Amazon has a program called Prime Wardrobe, where customers can try clothes before they buy and return what doesn't fit, so it is possible their return rate could be even higher than average - How Amazon plans to fix its massive returns problem (cnbc.com)

 

[NW-Bound]

Actually, I think most people on this forum are well aware of the difference.

Or, put another way... "When you buy individual bonds, your income stream is fixed for the term of the bond, even if interest rates are going up. You are stuck with the low interest rate, and if you try to sell to get the newer higher interest bonds, you will get less for your bonds - no one wants them at par, since they can get higher rates on a new bond."

IOW, it's not all gravy. Bond funds have advantages as well.

-ERD50

People who hold individual bonds say "but I am not selling my bonds, and will hold till maturity and I get all my money back".

True, but with high inflation, your principal suffers severe shrinkage. By the time you get your money back, it's worth a lot less.

Here's an example. From Jan 1970 to Jan 1980, the dollar lost 1/2 its value, as everything became twice as expensive.

 

[daylatedollarshort]

True, but with high inflation, your principal suffers severe shrinkage. By the time you get your money back, it's worth a lot less.

It depends on the bonds. Individual TIPS and I-bonds are inflation adjusted.

 

[NW-Bound]

It depends on the bonds. Individual TIPS and I-bonds are inflation adjusted.

Of course. I have held a 6-figure I bond since 2003.

I was talking about the same traditional bonds that ERD-50 talked about, when he said "your income stream is fixed for the term of the bond, even if interest rates are going up." These are the bonds that suffer shrinkage of the principal, because the interest they pay is too low relative to the higher inflation rate.

My I bonds earn me a puny 0.5 and 1% above inflation rate. The currently sold I bond only keeps up with inflation, but at least it does not lose.

 

[Freedom56]

People who hold individual bonds say "but I am not selling my bonds, and will hold till maturity and I get all my money back".

True, but with high inflation, your principal suffers severe shrinkage. By the time you get your money back, it's worth a lot less.

Here's an example. From Jan 1970 to Jan 1980, the dollar lost 1/2 its value, as everything became twice as expensive.

Bond funds certainly don't hedge you from inflation and their return are far lower than a portfolio of individual bonds. There is no guaranty that your principal is returned. In fact many bond and preferred stock funds still have not recovered from the crash of 2008. Look at BND. In January 2008 it was yielding 5.5% and was trading at $78 and over 14 years later today it yields 2.4% and trades at $76.09 in a rising rate environment. The fund is a complete joke with 67% of assets in government debt. Why don't people just go to Treasury Direct and buy directly from the government? PFF the largest preferred stock fund was issued at $50 in 2007 and plunged to the low 20's in 2009 and after 15 years it never saw the light of the initial $50 inception price and today sits at $33.10. Wall Street is known for running many scams but fixed income funds are by far their most lucrative.

Most people who buy fixed income, ladder their investment. I never go beyond 12 years duration on bonds and most are 2-6 years. Here's an example, while the markets tanked in 2000, 2003, 2008, 2018, 2020, and 2022, I continued to accrue interest and my capital was preserved. While bond and equity fund investors crawled out of their holes over years, I never fell into one and continued to compound from a higher capital base. Just rolling five year CDs compounded annually, over the past 22 years outperformed the vast majority equity and bond funds.

 

[NW-Bound]

Well, perhaps I gave the impression of preferring bond funds over individual bonds. The fact is, I don't like either of them.

I was just pointing out that holding individual bonds does not really keep one from losing in high inflationary periods.

I have never had much in traditional bonds, and outside of stocks I keep money in I bond, stable value fund (SVF), and short-term Treasury fund. Other than I bond, the other holdings all trail inflation. There's no place to hide.

PS. I have a 7-figure holding in the above assets I called cash (because the principal does not drop with rise in interest rate). If they don't keep up with high inflation of 10% year-over-year, it means I am losing $100K/year just on my so-called cash. It hurts, but what can one do?