Piper Sandler: Deflation is already here

[GenXguy]

On the other hand, as more auto manufacturers sell more electric cars, the petroleum industry may see a surprising drop-off in demand.

In a few years, when electric cars are half of the new cars sold, there will still be gas stations ... but we won't need as many gas stations, and there will be less demand for gasoline.

These are the types of comments I've been reading from some people for many years. What we find is that these changes happen much slower than most people think... as the decades continue to pass with little change.

 

[GTFan]

It includes a quote from Charlie Munger - "This has been unbelievable. There's never been anything quite like it. We're in very uncharted waters. Nobody has gotten by with the kind of money printing now for a very extended period without some kind of trouble. We're very near the edge of playing with fire."

Nobody else is the USA with the world's reserve currency, either. The dollar is stronger now than it was before all the magic.

 

[ERD50]

On the other hand, as more auto manufacturers sell more electric cars, the petroleum industry may see a surprising drop-off in demand. I am aware that in general, the price of things like electricity tends to rise, so years ago I put solar panels on my roof. (I also heat with wood that I cut myself.) If you really want to, there are ways to generate your own energy, so you don't have to worry about price increases.

How could it be a surprise? Sales of EVs are public information. Trends are pretty easy to (roughly) estimate.

Also, gasoline isn't the only product of the "petroleum industry".

-ERD50

 

[madatrub]

In 2020, total gasoline consumption accounted for about 59% of total transportation sector energy consumption and 44% of total petroleum consumption.

Look at the chart I provided. Gasoline consumption isnt simply passenger car consumer consumption. On the contrary, its a very small portion of it. I've worked in this business for decades. Demand destruction isnt going to be significant in the next 5 years.

 

[Chuckanut]

On the other hand, as more auto manufacturers sell more electric cars, the petroleum industry may see a surprising drop-off in demand. I am aware that in general, the price of things like electricity tends to rise, so years ago I put solar panels on my roof. (I also heat with wood that I cut myself.) If you really want to, there are ways to generate your own energy, so you don't have to worry about price increases.

I think this is an over simplification for many people. Not everybody has a house on their own land where they can put a solar array, windmill or whatever. Apartment dwellers and condo owners come to mind.

As far as cutting wood from a tree is concerned, that depends on the city you live in. Many cities now require a permit so as to protect the tree canopy. And a small lot only has so many trees on it, then what happens? The city certainly isn't going to allow cutting down trees at the local parks, watersheds, green belts,etc.

Don't misunderstand me. I am glad those who can add a solar array or harness other forms of green power are doing so. But, not everybody, probably most of us, don't have those options.

Answers to hard problems that don't take into account how other people live are not going to do the trick.

 

[Walt34]

6.3% is still high inflation - prices are still going up. I just got groceries last night - more price hikes, much more than 6 or 8%.

Today for the first time in my life I paid over $5/gallon for gasoline - $5.159. Granted this was the ethanol-free variety that normally is priced higher than the others. Still, that sort of thing gets people's full and undivided attention, and it's not good attention. And while I also realize that there is generally little that the current officeholders of whichever party can do about it they are the ones that will feel the collective wrath. It will be interesting to see what the fallout is.

 

[jollystomper]

Diesel and Jetfuel are king, and they will continue to be so for the next 5 years. All gasoline usage only accounts for 16% of total US energy consumption. Having a small amount of the consumer portion isnt going to put a dent in demand.

Can you point me to the source for this chart? It is information that I rarely hear discussed, and I am always interested in factual sources of data.

 

[madatrub]

Can you point me to the source for this chart? It is information that I rarely hear discussed, and I am always interested in factual sources of data.

https://afdc.energy.gov/data/


Under Average Annual Fuel use by Vehicle Type

 

[Koolau]

To be fair, even when an economist accurately predicts what will happen, he/she cannot tell exactly when it happens. If anything, he/she tends to be too early. And what the market does is something different than what the economy does.

An economist's prognosis is not easily turned into a market timing aid. There are too many weird random things going on at the same time. It's like watching the waves of the ocean, you may miss the tide going in or out.

Yeah, I predicted current inflation a long time ago. Then again, it didn't happen until now. YMMV

 

[NW-Bound]

I still remember the late Bogle lamenting that he had not seen such a tough condition for investors.

Stock P/E was high relative to the norm and might revert to the mean anytime, meaning stocks were going down. Interest rate was low relative to the norm, and might go up anytime, meaning bonds were going down. He said this in 2012 or so, and that was 10 years ago already.

I remember at about the same time or a bit later, interest rate went up a bit, bonds dropped and people panicked. At that time, Bernstein said that it was OK for bond holders to give back some of the past gains that they enjoyed, because they did not deserve it in the 1st place. He meant the low interest rate up to that point was unprecedented, hence the bond gains could not be justified.

Then, interest rate stopped rising and even went back down a bit. People went back to ignoring Bernstein and kept on partying.

 

[MichealKnight]

Higher P/Es

I'm not into the high flying, we'll be profitable someday, but until then we're gonna have cute modern offices and energy drinks and work from home and eat extra guac at Chipotle stocks. I do admit, I'm burned on one - I got into MTTR at 10 and it's 5 now. While my "get off my lawn" account - yes - I call it that - full of stocks I see in my cupboard and kitchen and medicine cabinet - is actually holding up fine.

Anyhow, I'll play the resident simpleton - it's an easy part for me to play.

Higher PEs.....

Could it be, that America's population has GROWN compared to 20- 30 years ago? In that there's more people buying the same stocks- thus pushing up multiples?

Also, due to communication and technology - is it possible that the investor classes abroad, especially *growing* investor classes abroad - have more money, and ACCESS to buy American equities?

Could these factors push up PEs a little bit?

 

[Gumby]

Inventory overhang was one of the deflationary factors mentioned in the video that opened this thread. Seems like they were right about that.

https://www.cnbc.com/2022/06/07/target-markdowns-plan-to-cut-inventory.html

 

[CaptTom]

Inventory overhang was one of the deflationary factors mentioned in the video that opened this thread. Seems like they were right about that.

https://www.cnbc.com/2022/06/07/target-markdowns-plan-to-cut-inventory.html

I was wondering when I was going to hear about all those pandemic-related products we see filling the shelves and discount racks. I expect any business with an excess of masks and disinfectant wipes is going to have to reduce that inventory.

But that's not the same as the inventory reduction strategies common before all the supply-chain disruptions.

I never worked in retail, but I've had relatives who did. It must be hard to try to predict future demand. So many factors to consider!

 

[NW-Bound]

Inventory overhang was one of the deflationary factors mentioned in the video that opened this thread. Seems like they were right about that.

https://www.cnbc.com/2022/06/07/target-markdowns-plan-to-cut-inventory.html

After Walmart and Target get rid of the overstocked merchandise, what will be the cost of the new batch of orders?

Only then will we know more about the effect of inflation, or lack of it.

 

[Magus]

After Walmart and Target get rid of the overstocked merchandise, what will be the cost of the new batch of orders?

Only then will we know more about the effect of inflation, or lack of it.

Bingo - these folks have never been in merchandising and procurement for retailers, that much is obvious.

 

[Christine]

I found this interesting.


Cathie Wood is out with a new video about the FED, macros, fiscal policy and indicators.

Her opinion is that the FED has panicked. Causing lots of additional problems. Since we are in a global recession already. Interest rates up 7 fold is unheard of. We have never seen that before.


Deflation is the much bigger risk:

• Credit Default Swaps are up dramatically
• The Yield Curve is inverting and recession is already here
• Consumer Sentiment has never been lower! And it goes back to the 40's.
• Employment layoffs are happening.
• Housing showing weakness on almost all metrics.
• Consumers have shut down. Walmart and Target feeling this and cutting prices.
• 2 consecutive months of negative GDP growth is the technical definition of a recession - and we are there now.
• The CPI and PPI that the FED looks at is lagging indicators. Copper is a better forward indicator. It peaked in March.
• The ISM Supply Chain Report peaked in March last year - orders are down into negative territory.
• Shipping Indexes are down more than 50% since the peak.
• Used car prices has started going down.

And in the Markets:

• Worst YTD in bonds in anyones lifetime - worst since 1788!
• Stocks are down. Worst YTD since 1962
• Crypto down a lot even after becoming more mature

The full video is here:

I am a noob so any mistakes in my highlights are my own.

 

[aja8888]

At a lot of the financial blogs I read, she is called "Cathie Woodshed" as that's where her funds have been taken to.

She'd love nothing better than a FED interest rate cut so her funds wouldn't be further smacked around.

 

[OldShooter]

She is amazing. And very calculating. The purpose of this video is to acquire and retain buyers for the smoking wrecks of her funds. From day one she has been in this to maximize her fees and here, at the end stage of the ARK game, she is still working on maximizing them. She will retire a rich woman.

 

[aja8888]

She is amazing. And very calculating. The purpose of this video is to acquire and retain buyers for the smoking wrecks of her funds. From day one she has been in this to maximize her fees and here, at the end stage of the ARK game, she is still working on maximizing them. She will retire a rich woman.

Agree. She is in her 60's and already rich!

 

[Gremlin]

She'd love nothing better than a FED interest rate cut so her funds wouldn't be further smacked around.

This! Inflation has run amok. The FED should be raising interest rates, Ark Investment Management funds be d*mned. (With sincere condolences to those who have money invested in those funds)

Gremlin

 

[milford]

She is amazing. And very calculating. The purpose of this video is to acquire and retain buyers for the smoking wrecks of her funds. From day one she has been in this to maximize her fees and here, at the end stage of the ARK game, she is still working on maximizing them. She will retire a rich woman.

+1 her PR team is amazing in keeping her image as an "investing guru" as they say perception is reality.

The first time I heard about her was about 2 years ago from a friend that's a pharmacist who had no prior investing knowledge. Him his pharmacist friends were talking about this Cathie Wood savant that they would just buy the dip and wait for ARK funds to shoot up in a few days and then sell. That was the moment I knew the stock market was already in a bubble or very close to the top.

 

[Christine]

OK I get that you may not buy any ARK funds soon. I don't have any either btw.


But since you are dismissing her ideas would you say that these numbers and indicators all are irrelevant to the current inflation vs recession debate?


And if so - what are you looking for to indicate that things are changing and the inflation would be coming down?

 

[DrRoy]

Disclaimer: I haven't watched the video, but will.

Having stated the above, let me guess: We will soon be in a recession causing inflation to cease.

The first quarter GDP was negative. Presuming that the second quarter is also, then we are already in a recession. It is usually like that.

 

[Chuckanut]

But since you are dismissing her ideas would you say that these numbers and indicators all are irrelevant to the current inflation vs recession debate?

As I said, I became suspicious when she talks about a 7x increase in interest rates. Its' true in relative terms. But in absolute terms, starting from our historically very very very low interest rates, I don't think the current rates are that high.

Housing shows weakness? Technically correct , but only compared to an extremly strong seller's market of the last few years. On an absolute basis, it is still a strong market.

Consumers have shutdown? Target and Walmart are cutting prices. Well... yes on some things. But, that is because of lot of previously ordered stuff arrived late to the party and people no longer want to buy winter coats in Spring and Summer.

Employment layoffs are happening. Yes, at some places. In my area anybody who wants a job can find one.

Crypto down - Please........ That was always a wild speculation. I noticed she called it 'more mature'. Well, a 2 year old is more mature than an 18 month old. But, they are still closer to each other than to a 40 year old.

IMO, her reasoning is flawed.

 

[OldShooter]

... since you are dismissing her ideas would you say that these numbers and indicators all are irrelevant to the current inflation vs recession debate?

Well, before we talk about economic forecasting, lets talk about a much simpler problem: a trout stream:

Assemble your favorite team of experts along the shore and have them give you a prediction of what the ripples, whorles, and splashes will be along a line across the stream an hour from now. Impossible, right? But we have all the mathematics of incompressible flows nailed. If we can't even predict a simple trout stream when have the math, what can we reliably predict? Answer: not much.

Now consider economic forecasting. No mathematics pertains. Literally billions of actors. External events like the weather, man-caused events, ... When you consider this, you can easily conclude that economic forecasting is, like the trout stream, impossible.

"The only function of economic forecasting is to make astrology look respectable.” Often attributed to John Kenneth Galbraith but apparently actually from Ezra Solomon, a member of the Council of Economic Advisors during the Nixon administration. Nothing has changed in the half-century since Dr. Solomon made this observation.

For further research, I recommend that you read "the signal and the noise" by Nate Silver, particularly the chapter titled "How to Drown in Three Feet of Water."

...And if so - what are you looking for to indicate that things are changing and the inflation would be coming down?

Same way I check to see how my garden is doing. I take a look out the window. Getting today's numbers is as close as I can get to knowing anything useful. Listening to thousands of chattering monkeys, each making credible-sounding predictions, is a waste of time. Cathy is actually worse than the average chattering monkey; she is a monkey with an agenda.