Piper Sandler: Deflation is already here

[razztazz]

I'm in the camp that inflation won't be beat, and that while we may see "moderation" in it, the easiest path for politicians is to try to inflate our way to prosperity. (sarcasm alert)

Having said that, I always want to read and understand theories that are conflicting with my view or can be used to adjust my view.

Luke Templeman (Deutsche Bank) a year ago predicted we will see a bullwhip effect:

https://www.bloomberg.com/news/news...s-you-need-to-know-to-start-your-day-koc2tr5n

Perhaps that is what we are starting to see (now showing up in general merchandise inventory levels)? What are your thoughts on this?

Definition of Bullwhip Effect: https://en.wikipedia.org/wiki/Bullwhip_effect

So much for efficiency in the marketplace.

 

[razztazz]

I really don't understand the obsession with "energy independence". Autarky is rarely achievable and generally not desirable. Free trade almost always results in stronger, wealthier economies. Moreover, if there is a limited resource like oil, wouldn't you rather use up the rest of the world's oil first and save ours for last?

It will never happen because when we produce American oil for American's usage, energy independence, it doesn't go like that. All we do is pump oil then sell it on the regular world markets that are always there, not some special domestic usage market for.... the highest price ! It all goes out the window and we buy the fungible oil that's comes from anywhere else like we always do. And the idea of doing so adding so much more oil in the world markets that the price goes down so low that we "win" something like energy independence, is just out to lunch. It's the same old same old. But telling people we are or could be "energy independent" (We don't need YOU PEOPLE, ha ha ha!) sounds so groovy and powerful to everybody involved.

 

[audreyh1]

I watched the video. Nancy Lazar cited the overstocked inventories at Walmart and Target as proofs that supply has outstripped demand, and will lead to lower prices in the near future.

She also mentioned Cisco's bad outlook, who recently lowered next quarter projection from +5.9% sales growth to possibly as bad as -5% decline, due to poor spending by businesses.

I will not complain if the prognosis turns out to be correct, but there are other factors to consider. The high price of fuel and commodities such as metals and agricultural minerals drives up the cost of everything and contributes to inflation too. What if this means a stagflation rather than a deflation?

Parts shortages are still rampant at this point, and creating scarcity of automobiles, cameras, computers etc. Also causing rising component prices. It’s driving the costs of the end products way higher in markets like automobiles that support the higher prices. I don’t see this changing until China is back to full production, and that could take quite a while.

 

[copyright1997reloaded]

It will never happen because when we produce American oil for American's usage, energy independence, it doesn't go like that. All we do is pump oil then sell it on the regular world markets that are always there, not some special domestic usage market for.... the highest price ! It all goes out the window and we buy the fungible oil that's comes from anywhere else like we always do. And the idea of doing so adding so much more oil in the world markets that the price goes down so low that we "win" something like energy independence, is just out to lunch. It's the same old same old. But telling people we are or could be "energy independent" (We don't need YOU PEOPLE, ha ha ha!) sounds so groovy and powerful to everybody involved.

While the above is true (oil is a world market), there are transportation costs. In addition, there are military and security reasons to be energy independent...the history of Japan (e.g. WW II) is a prime example, and why (after the US Oil Embargo of Japan in 1941), they went after places like Borneo and other oil zones.

 

[thod]

My wife worked in the oil industry. Oil is a lot more complicated/varied than you think.
There are a variety of different grades of oil that emerge from the ground. Depending on what it contains or does not contain, it might be more or less valuable. (Think of it as more or less useful or requires more or less processing.)

Most of the refineries in the US can handle just about any grade, but the US happens to contain many oil fields with the better stuff.

Naturally the better stuff sells at a premium. Many foreign refineries can only handle the better stuff, so they will buy better US oil and then the US can buy the not as good foreign oil.

My wife's job involved extracting sulfur from the crude before processing. When you hear the term 'sweet' crude, that is referring to low sulfur content, which means less processing for the refinery.

There are other things that can differentiate different oils, so the industry can be a lot more complicated than you think.

 

[razztazz]

While the above is true (oil is a world market), there are transportation costs. In addition, there are military and security reasons to be energy independent...the history of Japan (e.g. WW II) is a prime example, and why (after the US Oil Embargo of Japan in 1941), they went after places like Borneo and other oil zones.

I agree totally. I wasn't coming out against energy independence in some way. One thing relevant to your post though. I no longer have the link nor remember the source. Not long ago, and I mean maybe a few months back, I was reading a more detailed explanation of why we can't really pump it from Texas then sell it or it's components, gasoline, kerosene et al to Pennsylvania, Florida, Arkansas.... It had to do with transportation and shipping and how it's just easier, and therefore cheaper, to pool it (world market), and have the nearest boats go to the nearest ports for processing and distribution.



Japan in WWII and most people's operational understanding of "energy independence" maybe worked in the old system. But in the modern era of "free trade" I guess the show runners have different concerns.

 

[NW-Bound]

Parts shortages are still rampant at this point, and creating scarcity of automobiles, cameras, computers etc. Also causing rising component prices. It’s driving the costs of the end products way higher in markets like automobiles that support the higher prices. I don’t see this changing until China is back to full production, and that could take quite a while.

Agree.

And then, even prior to the stupid stunt pulled by Putin, the US and Europe were already shifting away from dependence on China's production. It was because of the latter's bellicose attitude towards other Pacific countries and its claim to own nearly the entire South China Sea, which is actually the ocean between Vietnam and the Philippines.

One thing I just learned recently by chance: Samsung has had its cell phone production in Vietnam for quite a few years. And just now, Apple wants to shift its phone production to outside China too.

When Western countries want to start making their own "stuff" again or merely to buy from other countries, it is going to take a while and things may get a bit pricier.

 

[OldShooter]

... Samsung has had its cell phone production in Vietnam for quite a few years. ...

We saw their plant in Hanoi. 50,000 employees bused in from all over the region. The amount of rice they serve for lunch each day is quoted in tons. Apparently per agreement with the government 100% of the production is exported. A Vietnamese wanting a phone gets one shipped in from outside the country.

I agree, this is a harbinger of a much more distributed supply chain. The pandemic and now the Ukraine adventure have made companies realize that diversified supply chains are more important that squeezing the last penny out of COGS.

 

[Gumby]

We saw their plant in Hanoi. 50,000 employees bused in from all over the region. The amount of rice they serve for lunch each day is quoted in tons. Apparently per agreement with the government 100% of the production is exported. A Vietnamese wanting a phone gets one shipped in from outside the country.

I agree, this is a harbinger of a much more distributed supply chain. The pandemic and now the Ukraine adventure have made companies realize that diversified supply chains are more important that squeezing the last penny out of COGS.

Perhaps they might also reconsider "just in time" inventory control.

 

[Christine]

Looks like inflation might be slowing down - April numbers are out:


https://www.marketwatch.com/story/u...-could-be-near-peak-11653655258?mod=home-page

U.S. inflation rate slows to 6.3%, the fed-favored PCE index shows, in sign that price pressures may have peaked

 

[GenXguy]

Looks like inflation might be slowing down - April numbers are out:


https://www.marketwatch.com/story/u...-could-be-near-peak-11653655258?mod=home-page

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%.

 

[eytonxav]

Coming out of the pandemic and given all the $s pumped into the economy by the gummit while simultaneously trying to shut down the fossil fuel industry, which caused cascading detrimental effects in all other sectors, seems to have led to this predicament. Plus when inflation reared its ugly head last fall, the FED failed to act in a timely manner. Given all of that my concern is like a few others, stagflation may be the end result. Unfortunately, most of this was self inflicted by bad policy.

 

[38Chevy454]

Problem is that the things many people spend on, fuel and food are still much higher than the official fed rate. That personal inflation rate is still way too high.

Until price of oil gets back to more normal costs, the problems will continue. I agree with DFW_M5, bad govt policy has made it worse.

 

[GenXguy]

Inflation reared its ugly head way before last fall. But early on, they tried to say it was transitory. Some even said prices would go back down - deflation. Of course, they were all wrong.

 

[daylatedollarshort]

This article has a really interesting chart that shows just how large the money supply has been recently compared to long term interest rates - https://seekingalpha.com/article/44...tor-warning-is-why-we-are-buying-higher-yield

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."


(I don't know anything about the article author's investing advice, but was interested in reading Charlie Munger's perspective.)

 

[eytonxav]

Inflation reared its ugly head way before last fall. But early on, they tried to say it was transitory. Some even said prices would go back down - deflation. Of course, they were all wrong.

Yep, it did start before then and we all heard the transitory explanation coming from DC and a few other pundits. However, the elephant in the room was there for all to see last fall when it became obvious inflation was not transitory. Still the FED procrastinated and waited too long to act as it continued to increase.

 

[aja8888]

Yep, it did start before then and we all heard the transitory explanation coming from DC and a few other pundits. However, the elephant in the room was there for all to see last fall when it became obvious inflation was not transitory. Still the FED procrastinated and waited too long to act as it continued to increase.

The history of the FED is that they react to past conditions. Their 400+ PhD's and economists are book people and have very little, if any, boots on the ground experiences. Policy setting is done at the moment with wild guesses as to outcomes of that policy. Computer models are good, but not for the future.

Fed funds interest rate setting is done using a scatter plot of the FOMC member's guesses. How can anyone expect success?

The current FED has ignored the Taylor Rule for interest rate determination for the last decade or so.

There is also no personal accountability for performance at the top levels. Up until recently, FED bank members who traded equities in their personal portfolios and probably made a fortune with the inside information were not held accountable for this, other than them retiring once disclosed (very rich, of course).

 

[dheb]

It all goes back to gas and oil. Who sees that improving over the next three years? This time is different in my opinion.

“We” chose to NOT be energy independent. Gas is over $6 a gallon in California that will not change while policies remain on their current trajectory.

Prices on goods and services will not go down with transportation costs high. The printing press is not helping either and that’s not stopping either. The piper needs to be paid and we are all gonna have to pay.

Is this pessimistic, yes, but I just don’t see change coming soon enough to save us.

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.

 

[madatrub]

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.

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.

 

[MC Rider]

I kind of feel like I have seen this movie before.
Then again each sequel seems to get more scary than the last.


I'll just go with this.

My approach to the economy is based on a copilot checklist:
1) Sit down.
2) Shut up.
3) Hang on.

 

[aja8888]

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.

There are 280 million cars on the road in the US. About 1.5% of those are electric. It's going to be a long, long time before gas stations disappear here.

 

[dheb]

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.

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

 

[dheb]

There are 280 million cars on the road in the US. About 1.5% of those are electric. It's going to be a long, long time before gas stations disappear here.

I didn't say gas stations would 'disappear.' But in 2019 2.5% of new cars sold were electric. That rose to 9% of all new cars in 2021. Automakers are looking to sell more electric cars to meet fuel efficiency and pollution requirements. 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.

 

[braumeister]

I didn't say gas stations would 'disappear.' But in 2019 2.5% of new cars sold were electric. That rose to 9% of all new cars in 2021.

It's still important to distinguish between completely electric (BEV) and hybrid.

Here is one breakdown I found:

 

[eytonxav]

I didn't say gas stations would 'disappear.' But in 2019 2.5% of new cars sold were electric. That rose to 9% of all new cars in 2021. Automakers are looking to sell more electric cars to meet fuel efficiency and pollution requirements. 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.

What percent of the total number of vehicles on the road do EVs represent? If flash cut to all EVs as the present WH seems to be wanting, what sort of overhaul would be needed to the various electrical grids and what would be the cost of this transition? How long realistically will that take? The bottom line, don't drive the primary source of power in the US into oblivion before getting the alternatives in place.