Demand is temporarily outpacing our production(supply). Due to covid shut downs and supply chain disruptions. Ex. Lumber prices were inflated, now they are correcting themselves.

Once our supply chains are back up to full capacity, the added demand created by the stimulus will not cause long lasting inflation.

Our productive capacity is so high, in fact, I believe our biggest fear should be deflation, not inflation. Our productivity growth is not disappearing any time soon. The inputs to production are 1. Technological advancements and 2. Increase in labor force. Our computing power doubles every 18 months. Clearly this growth will not disappear.

It's no accident that we have continued to spend more and more throughout the last several decades with little to zero long term negative consequences.

In fact, the fed has struggled the last decade to maintain their inflation level goal of 2%. This even Despite massive spending in 2008 and artificially low interest rates.


Another reason we should not be concerned by the massive spending is that $1 in government spending = greater than $1 in gdp growth.
Gdp growth = 1/ the propensity to save
The propensity to save is currently ~ 20%
Therefore every dollar spent today grows our gdp tomorrow by $5

This $5 of gdp growth then increases tax revenue by $5.
This increase in tax revenue is used to service the debt.

Basically, we can spend as much as we want with little to zero negative consequences. Long term inflation is not on the way.

Be sure to allocate portfolios accordingly.

Outdoorag011 said:

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Explain asset prices the last decade.

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Asset prices increased because:

1. An Increase in corporate earnings was created by an increase in production - production was increased by an increase in technological power. There also must be an equal increase in demand. We had both increase - so earnings increased, investors expected higher future cash flows, they raise their valuation, and buy the stock, which drives stock price higher.

2. Investors also consider the WACC. WACC is lower partly because the risk free rate is near zero. Lower WACC results in higher stock valuation. (Obviously the technicals to this get a lot deeper and their are many inputs into the WACC and the DCF in general)

3. There is no other place for investors to park capital. There is too much dry powder. All investors need somewhere safe to park their money. The safest place to do that is here in the US. There is no alternative.

Of course they were selective. Everyone is selective in what they show. Trailing P/E is the correct way to show the trend of the P/E. What good is a forward P/E in this scenario if the trailing P/E for years and years is flat or negative and the company shows no signs of growth. The companies aren't showing growth so instead they take on more debt. Do the use that money on CapEx? No they don't. They use that money to buy back their own stock and the CEOs love it because they get bonuses when the stock price reaches certain milestones. You don't think CNBC, Fox Business, yahoo finance and Bloomberg aren't selective?? You still give me no reason to not trust the data. Seeing how it came from the S&P.

Show me a graph/chart or statistic that shows that the "investor" had enough money to make stocks boom like that.

If companies bought back their stock because they thought their stock was undervalued, corporate buybacks wouldn't have ever been illegal. They were illegal for a long time because it was seen as manipulating your stock price. Why would a company think it's stock was "undervalued" when the companies earnings are continuously terrible. They purchase their own stock because rates are at 0 and they need some way to stay afloat until the earnings actually pickup. But they really haven't picked up across the board in over a decade.

Outdoorag011 said:

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Of course they were selective. Everyone is selective in what they show. That's a given. You don't think CNBC, Fox Business, yahoo finance and Bloomberg aren't selective?? You still give me no reason to not trust the data. Seeing how it came from the S&P.

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I don't care what CNBC, Fox Business or Yahoo Finance say either. But they are all data points to my thesis and are all inspected/adjusted for what I believe are flaws/bias.

The P/E used is one of many P/E methodologies. It typically is the most overstated early after a recession. The other P/Es I mentioned are a portion of other methodologies which directly refute your pint. If you haven't seen JP Morgan's economic slide deck, download it, they will be summarized in the best format I've seen.

Beyond that, Cap Rates can't even compare all types of real estate. You need cash-flowing properties, and ideally long-term holds to use effectively. Cap rates do not translate to an inverse of P/E of the stock market as the article you quoted suggests. It isn't done. It is completely flawed.

Even if we wanted to loosely use Cap Rate as a proxy, no attempt was made to account for leverage or differing growth rates between the asset types.

The P/E historical benchmark of 15.5 a century+ old number. It is widely viewed that P/E data pre-2% inflation targeting is not relevant to today's landscape. More commonly a 25year average is appropriate for comparison, which further brings current P/Es in line with expectation.

You said earnings didn't grow over the period depicted in the graph in the cited article. That is flat wrong. They slightly more than doubled over the last decade (leading into 2020).

Hope you find this useful as you consider if any of it make a valid point.

Please show me a statistic from 2010-2020 or 2010-2019 where the earnings doubled. It doesn't exist. I'm sure you'll say.. why don't you add 2009 into the earnings report. Well you said your self that P/E ratio is the most overstated metric right after a recession. So that throws out 2009 since it was the year we came out of the recession.

Outdoorag011 said:

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Show me a graph/chart or statistic that shows that the "investor" had enough money to make stocks boom like that.

If companies bought back their stock because they thought their stock was undervalued, corporate buybacks wouldn't have ever been illegal. They were illegal for a long time because it was seen as manipulating your stock price. Why would a company think it's stock was "undervalued" when the companies earnings are continuously terrible. They purchase their own stock because rates are at 0 and they need some way to stay afloat until the earnings actually pickup. But they really haven't picked up across the board in over a decade.

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The term investor that I am referring to is all encompassing. It includes foreign governments, institutions, and individuals

Tomas Hermensa said:

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The replacement "inflation is not happening" bots appear to be worse than the old ones.

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It's a good chance they are the same ones

Scimitar said:

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I've said it before elsewhere, but last year's "recession" was actually a government-induced shutdown. So, by extension, the higher prices were seeing now, with some exceptions, are also government-induced (particularly in labor with unemployment "kickers" that pay you more to stay home, and also reflecting tax policy fleeing high tax apartment cities to low tax home ownership suburbs).

Good article in this weekend's Barron's On the Crisis and Inflation that draw parallels from coming out of WWII rationing (and increased spending and inflation fears)with coming out of this pandemic. Remember, similar and identical are two different words. The idea is we apply some principles of the past to inform the present and future. For example,

Quote:

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Despite the inflation fears shared by Holden and other economy watchers, these unspent funds didn't finance a postwar consumption boom

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Even Milton Friedman wrote in 1980 that

Quote:

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The reported price increases in 1946 and 1947 were not really inflation, but merely "the unveiling of price increases that had occurred earlier.

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Investors really fear higher interest rates because technology development will get more expensive. But, I'd argue technology is actually deflationary. As we continue to automate, and get more efficient, it eventually brings costs down.

In the interim, you could look at companies that have a long history of increasing their dividends and whose yields outpace inflation. Like a few others, I like deep value stocks here too.

The one caveat in the article, with which I agree, is

Quote:

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Perhaps instead of worrying about a temporary uptick in inflation after the pandemic ends, Americans should focus more on the danger posed by weak consumer recoveries abroad that could hit U.S. exporters and widen the trade gap.

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Keep in mind that people have been fearing runaway inflation since 2008.

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The only time our debt to GDP ratio has been worse than it is currently is the time period after WW2. The difference between then and now is that it skyrocketed quickly then due to funding the costs of war. Now? We've beengrowing debt significantly for decades, with an explosion recently. This wasn't a sudden phenomenon because of a world event. The modern world event made is quadruple down on already historically high debt to GDP. This isn't going to be a post WW2 recovery where pent up demand and explosion of supply normalize the markets. We've outsourced a significant chunk of our production capabilities and borrowed from our grandchildren's grandchildren to pay for it. Our 2021 GDP would be 10%+ each quarter in a free un-manipulated market. Instead, we're punching ourselves in the balls while amputating our fingers to reduce the pain.

$30,000 Millionaire said:

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OP did you graduate in 2020?

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Finance class of 2020. I did not learn Keynesian style only at TAMU. I learned both views. There was a very balanced view by a majority of my professors.

jh0400 said:

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Scimitar said:

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Yea and we've been using that argument since 2008-09.

The economy is different. Companies, especially "tech companies", don't operate with the level of assets companies once did. Welcome to the "gig" economy where everything is leased and everyone is a 1099

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I'm more worried about the long-term sustainability of the bifurcated economy than anything the fed is doing.

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Indeed

Saw this in the wsj today. Doesn't look like anybody needs to worry about deflation in the near future. Also looks like the infallible fed somehow screwed up another prediction.

https://www.wsj.com/articles/higher-inflation-is-here-to-stay-for-years-economists-forecast-11626008400?mod=mhp



"Economists surveyed this month by The Wall Street Journal raised their forecasts of how high inflation would go and for how long, compared with their previous expectations in April.

...

That would mean an average annual increase of 2.58% from 2021 through 2023, putting inflation at levels last seen in 1993."

To the OP's point

https://www.cnbc.com/2021/07/11/ron-insana-the-bond-market-agrees-with-the-federal-reserve-inflation-is-temporary.html?utm_source=facebook&utm_medium=news_tab&utm_content=algorithm

Deputy Travis Junior said:

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Saw this in the wsj today. Doesn't look like anybody needs to worry about deflation in the near future. Also looks like the infallible fed somehow screwed up another prediction.

https://www.wsj.com/articles/higher-inflation-is-here-to-stay-for-years-economists-forecast-11626008400?mod=mhp



"Economists surveyed this month by The Wall Street Journal raised their forecasts of how high inflation would go and for how long, compared with their previous expectations in April.

...

That would mean an average annual increase of 2.58% from 2021 through 2023, putting inflation at levels last seen in 1993."

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Perspective is everything. Actually had this discussion with a buddy this morning.

IMHO,

The pre-Covid economy was humming along nicely and just under that 2% benchmark the Fed clung to.

The current deflation/reflation we're seeing is directly tied to government intervention...that would be the transitory leg. When you artificially shut down the economy, and then reflate it, you're gonna see an outsized bounce.

2020 vs 2021 comparisons are meaningless. Look at 2019 vs 2021 to see if anything outsized develops (if it does/did, then my stance could change, depending on severity, duration, etc.)


From the article,

Quote:

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The respondents on average now expect a widely followed measure of inflation, which excludes volatile food and energy components, to be up 3.2% in the fourth quarter of 2021 from a year before. They forecast the annual rise to recede to slightly less than 2.3% a year in 2022 and 2023.

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So, when we normalize, we go back to the prior path. A little inflation isn't bad.