Is inflation coming and how to invest accordingly?

EDIT: I changed the topic of this thread to reflect more the direction the discussion has gone to.

Have you heard that the Fed has discontinued publishing the M1 & M2 money stock data?

What are your thoughts? Are they just not able to calculate it anymore? Or are they planning to print so much more, that the chart would look pointless? How can you increase the supply so much in such a short time without seeing hyperinflation? Do you think we will see it sooner or later?

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The second result on google for [m1 fed] points to M1 Money Stock (M1SL) | FRED | St. Louis Fed

They seem to have just changed the definition slightly.

If you like that stuff you can read the Q&A: The Fed - Money Stock Measures - H.6 Release - Technical Q&As

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So, false alarm, as it seems. Still, I wonder if inflation does come.

Do let us know if you manage to predict future inflation. I’m sure the Fed themselves have more hypotheses than real understanding of the state of things.

I’m with the theory that new money has been printed but didn’t reach the real economy as of yet and hence, no big inflation. Last time I’ve checked, food and other consumables had some inflation while energy was dragging the average down (because of canceled travel is my guess). Energy seems to be picking up and inflation in the U.S. is reaching 1.7%: CPI Home : U.S. Bureau of Labor Statistics

More reopening and an increase in travel and entertainment expenses may bring it over the 2% target, or (much) higher.

The 10Y Treasury bonds yield has been rising since August last year, which probably points at the market expecting inflation (bonds loose value when the dollar does so bond holders expect better yields on them to buy them, thus buying them cheaper since the rates haven’t changed): United States Government Bond 10Y | 1912-2021 Data | 2022-2023 Forecast | Quote

I’m personally on the side of Ray Dalio when he says we’re at the end of a long debt cycle. I think there has been close to no inflation because the assets have concentrated in the hands of those who can afford not to spend them, thus increasing social inequalities on a worldwide level (some countries are suffering more from the Covid crisis than others). As long as the U.S. manage to maintain their position as world leaders and the USD as the world currency, they’re safe, but that we (as western developed countries) are spared the brunt of the crisis and can print money without consequences may encourage challenges to the world order, while the fact that some people suffer more in our own countries may channel domestic social unrest.

In short: we may very well not be headed for any significant inflation as central banks keep monitoring the situation, which could lead to a complete shuffle of the world order and our societies so, way more change than we were willing to handle and deeper consequences than facing consequences of raising rates would have meant.

One of the many Dalio interviews on the topic: https://www.youtube.com/watch?v=yrxYhv2O3wU

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I don’t know if the Fed is better than the Swiss National Bank, but look for example at the image in the article linked below. They almost never got it right!

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I’m not sure how this reflects reality. I mean, ok, big corpo bailouts, low cost bonds, there the money goes straight to the business owners. But covid benefits? A lot of these new Biden programs are aimed directly at giving money to the poor. But still, giving money to the people who don’t need it will result in them saving more, or investing more. This would suggest a bubble in real estate and stocks.

Also, regardless of where the money is going, printing a lot of money benefits the borrower (e.g. holder of a fixed rate mortgage loan) and hits the lender (e.g. pensioner or his pension fund, which has a lot of fixed income investments). Thus, I think this kind of irresponsible government intervention, is deeply unfair and always screws someone.

Lol, it looks like the SNB always predicts inflation spike and then it never comes.

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Regarding failed government policies and the way to correct them, I’ve recently stumbled upon an interesting video, where they created a simulation, in which the citizens and the government are controlled by two adversarial neural networks. The goal of the citizens is to maximize income, the government’s goal is equality. This is the result.

I find it fascinating and think that a well-designed simulation would do a better job than politicians. At least, their ideas should be first tested in a simulation and not in real life! That being said, I’m not sure I agree with the goal of maximizing equality. I think minimizing poverty should be the goal, or minimizing unfair monopolistic advantages.

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Interesting article from FT on the UK this week which points in the direction of higher inflation. Key points in bold. I assume similar applies in CH i.e. people with salaries accumulated a lot of savings

I saw another headline that Barclays Bank are predicting the UK economy will grow at its fastest rate since 1948 due to the accumulated savings that people are itching to spend and vaccine programme

https://www.google.ch/amp/s/amp.ft.com/content/e651bff7-8211-4aa6-9b22-4ac968fe6675
"UK household wealth has risen to record levels during the coronavirus pandemic on the back of rising house prices, increased value of defined benefit pensions and government support, official figures showed on Thursday.

Households’ net wealth rose to £11.4tn, the equivalent of £172,000 per person in the UK. The Office for National Statistics said this resulted from a rise in house prices of 8.5 per cent in the year to December 2020, improved pension wealth and higher savings, as richer and older people were shielded from the financial effects of Covid-19 by the government, which saw its balance sheet slip further into the red.

The UK government’s liabilities have exceeded its assets since 2008 with the negative net worth of both local and central government estimated by the ONS to have deteriorated by £350bn last year to stand at minus £1.35tn.

The rise in housing wealth at a time of increasing public sector indebtedness will fuel questions about the intergenerational fairness of the UK’s economy.

Ashley Seager, co-founder of the Intergenerational Foundation, a campaign group promoting the interests of younger and future generations, said the figures demonstrated two issues that were being placed on younger people.

“The first comprises the housing wealth transfer from younger borrowers to older homeowners. The second is the mountain of government debt, which has ballooned thanks to Covid-19, that will be passed on to younger generations to bear along with lower standards of living, more precarious employment and far lower pensions in old age,” he said.

The ONS figures showed that the household balance sheet improved by £950bn to reach the total net worth of £11.4tn — a figure that is more than four times as high as in 1995, when the balance sheets were first published, while the cash size of the economy rose only 2.5 times.

Of the increase in net worth, households gained from large increases in the value of the housing stock, increased value of final salary pensions and higher cash savings as people spent less than their incomes.

Torsten Bell, director of the Resolution Foundation think-tank, said: “The nature of the Covid-19 crisis has meant households had their balance sheets protected while the government balance sheet took a pasting.

Homeowners and the rich did well, while younger people will be left having to take decisions in future about how to deal with higher public and private debts,” he added.

Kate Barker, a housing expert and former member of the Bank of England’s monetary policy committee, said: “I’d have much preferred to see household balance sheets improve because there were more houses than because house prices have risen”.

The UK government is rare among rich countries in having a negative net worth because it went further than most others in selling off assets over the past 40 years.

Its total non-financial assets stood at £842bn in 2020 with another £858bn in financial assets, but these figures were dwarfed by its total financial liabilities, mostly in the form of government debt, which amounted to £3tn at the end of 2020. "

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This statement is misleading - the home you live in, even if it appreciates like crazy, is not an asset but a liability, and does not make you wealthier, it only inflates your net worth maybe on paper. You can’t sell the home and get a larger one, 'cause those have inflated as well. Also I’m guessing you can’t sell the home and live off the proceeds either, 'cause rents will also rise proportionally.

The only thing you can do in these circumstances is cash out and go live in Spain or Thailand, but that’s quite the move.

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Are you quoting Kiyosaki here? I think that’s an overstatement. If you own a house without mortgage then it reduces your liability as you don’t need to pay rent. But I agree that if this is the only house you own, it’s hard to profit from it’s appreciation.

But you didn’t mention one obvious way. Prices don’t go up equally even within Switzerland. So if you own a house close to a city, you could sell it, move to the countryside and retire.

I’m not sure if that’s true. Generally, countries with higher inflation/interest rate have higher rental yields. For example 10-15 years ago it was not uncommon to have 8% rental yield in Poland, but it’s been steadily falling. In Switzerland it’s as low as 2-4%.

With falling interest rates and bond yields, the capital is willing to accept lower and lower yields (it has no other option) so it invests in less profitable endeavors, pumping up the price of real estate.

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How do you calculate the rental yield? I’ve seen a lot of calculation on the business case.

In order to rent our property I’ve run 2 calculations
the return based on the down payment and the cost versus the earnings
They re both above 7% so case is done until the rates for mortgage will raise

Not in Switzerland, as far as I know you got the index and it is somehow regulated. So it will not be like Spain that you renew your contract every X years (normally yearly) and the landlord can increase easily 1000 from one month to the other.

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A topic of discussion in UK is people selling up in London then moving and bidding up prices in rural areas, or just buying 2nd homes. The flip side is that young locals cannot afford to buy or rent in the place they were brought up.

In the stereotypical way of living your kids leave home before you retire. You have an asset to pay for care homes, or you candownsize, or perhaps remortgage and give the money to your kids « to get them on the housing ladder »

Most common definition would be gross rental yield: gross rent divided by market value of property. I think what you described is yield on investment

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Even if you own a house (rather a flat) fully paid, you need to pay utility and common costs, need to budget for upkeep and renovations, etc. Unless you actively rent a property (when it becomes a money generating asset), it’s a liability.

You could argue it’s also a (slowly) appreciating asset, but it has its upkeep costs.

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This.
Plus what increases in value is the land underneath, not the house itself.
The house itself deteriorates (and depreciates) as everything else we use daily.

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that’s a tricky one, especially in Eastern-Europe where housing prices have skyrocketed 4-5x in the last 5-10 years.

If you’ve put in 50k EUR for a flat that is bringing 5k a year, but the property is now worth 200k EUR, what’s your gross yield if you’re not selling, 10% or 2.5%? :slight_smile:

2.5% would be the gross rental yield. Income / market value, similar to how dividend yield is defined for shares.

10% would be yield on historical
investment

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I meant the unleveraged yield. I think you’ve touched upon an important point. I think if you take mortgage into account, it bridges the yield gap between different countries. But I only have any idea about mortgage availability when it comes to private ownership of a place you live in. But many rental properties are financed by insurance companies and pension fund money. I don’t know to which extent they use leverage. And I also don’t know the share in the market between cash & credit.

If you think like this then everything you own generates some kind of cost (taxes, maintenance, protection). So a real estate will be a mixed bag of asset+liability, but the asset side usually is far bigger, as the return generated by a house is much higher than the sum of its costs (not everywhere, see Detroit). I would really be against saying that something you OWN is a liability, because by definition, liability is something you OWE to someone else.

That’s true and very important. I think most houses slowly lose their value (unless building materials & labor costs go up in price significantly). And the value of a similar house is similar, regardless of where the house is in Switzerland. It’s the land that you’re paying a premium for. Out in the countryside of canton Zürich you pay 500 CHF / sqm, in Kilchberg it’s 3000 CHF.

Where would that be? Not in Poland, especially not when taking inflation into account. 2x would be the max. In 2006 we bought a flat in Warsaw for 1000 CHF / sqm, now it’s 2000 CHF. What went up is definitely land value. My parents bought land to build a house 20 years ago for 2 CHF / sqm (!) and now it’s 50 CHF.

You see, even in your example you’ve raised the property price but not the absolute rental yield. And this is what happens when the property prices are inflated by cheap credit. Value goes up, but rent stays the same. That’s because with low interest you can achieve the same return on investment as before, even if the property costs more.

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Where would that be?

Check prices of real estate in Prague, Bratislava, or other major cities in former Czechoslovakia … I am not sure if these are the places user137 meant as I do not consider them Eastern Europe (Neither Hungary or Poland even though these countries have their “issues”)

Same in Budapest - 3-5x (in HUF) over the last 5-6 years.

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