Best performing assets against inflation(the-investing-desk.com)
the-investing-desk.com
Best performing assets against inflation
https://www.the-investing-desk.com/blog/best-investments-for-inflation
111 comments
> it’s still unclear what a fair price for Bitcoin looks like
Note that if Bitcoin replaces the U.S. dollar as the global reserve currency (or even as a functioning currency), the fair price for Bitcoin is infinite. Dollars will be worthless; we'll be pricing everything in Bitcoin. We can get rough estimates of what price levels will be by dividing total $USD supply by total BTC supply: there are $20T USD within the M2 money supply, there will be a max of $21M BTC ever minted, so you'd expect 1 BTC = roughly $1M USD. A satoshi will be worth roughly 1 cent, so a Big Mac would be around 400 satoshi, a nice restaurant meal out would be maybe 5K satoshi, etc.
Bitcoin's volatility is because it's not at all clear that the USD will be replaced as a currency, and even if it is, it's not clear that BTC will be the replacement. You can actually compute the probability that the market ascribes to complete monetary collapse from the ratio between BTC's actual market price to its predicted equilibrium price based on money supply, much like you can compute inflation expectations from the spread between TIPS and T-bills. Right now BTC is trading at about $30K, fair market value on a money-supply-parity basis is about $1M, so the market is assuming about 3% chance that the dollar will be replaced by Bitcoin.
Note that if Bitcoin replaces the U.S. dollar as the global reserve currency (or even as a functioning currency), the fair price for Bitcoin is infinite. Dollars will be worthless; we'll be pricing everything in Bitcoin. We can get rough estimates of what price levels will be by dividing total $USD supply by total BTC supply: there are $20T USD within the M2 money supply, there will be a max of $21M BTC ever minted, so you'd expect 1 BTC = roughly $1M USD. A satoshi will be worth roughly 1 cent, so a Big Mac would be around 400 satoshi, a nice restaurant meal out would be maybe 5K satoshi, etc.
Bitcoin's volatility is because it's not at all clear that the USD will be replaced as a currency, and even if it is, it's not clear that BTC will be the replacement. You can actually compute the probability that the market ascribes to complete monetary collapse from the ratio between BTC's actual market price to its predicted equilibrium price based on money supply, much like you can compute inflation expectations from the spread between TIPS and T-bills. Right now BTC is trading at about $30K, fair market value on a money-supply-parity basis is about $1M, so the market is assuming about 3% chance that the dollar will be replaced by Bitcoin.
When Money Dies is on my to-read list, but haven't gotten to it yet. However, there's some interesting stuff available that may be of interest in this matter:
> Weimar is often mentioned as if it were the only case of post WWI currency collapse. In fact, as the CATO working paper by Hanke and Krus (2012) points out, it was one of 6 cases: Germany, Austria, City of Danzig, Russia/USSR, Hongary Poland.
> Now think about that – did 6 different governments, all within a 4 year time period, and all bordering each other and/or in the same post WWI region and intellectual/political climate (with the seeds of the some of the farthest right and farthest left regimes in all of history within them that would lead to WWII just ~18 years later)—
> Did all of a sudden this little world region and precise time period and intellectual milieu decide to just start spending like crazy? At the same time? While the rest of the world did not?
* https://clintballinger.wordpress.com/2021/01/12/the-myth-of-...
> The Weimar Republic is the most notable hyperinflation. But it was not the only case of hyperinflation that occurred in Europe at the time. In fact, several European nations were ravaged by the war, war reparations and regime changes that ensued. In the case of Weimar the country was already in a fragile state after Germany lost WWI. To add insult to this injury the allied nations demanded punitive war reparations resulting in foreign denominated debt.
* https://www.pragcap.com/hyperinflation-its-more-than-just-a-...
> In this paper I will argue why the common misconception that “inflation is always and everywhere a monetary phenomenon” cannot be used to explain most historical hyperinflations. I will argue that “money printing” is often the response to exogenous and unusual events and not the direct cause of the hyperinflation.
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1799102
In Germany, the argument goes, it the problem wasn't necessarily that printing money was the cause of inflation, but rather the printing of money was the effect of something else.
> Weimar is often mentioned as if it were the only case of post WWI currency collapse. In fact, as the CATO working paper by Hanke and Krus (2012) points out, it was one of 6 cases: Germany, Austria, City of Danzig, Russia/USSR, Hongary Poland.
> Now think about that – did 6 different governments, all within a 4 year time period, and all bordering each other and/or in the same post WWI region and intellectual/political climate (with the seeds of the some of the farthest right and farthest left regimes in all of history within them that would lead to WWII just ~18 years later)—
> Did all of a sudden this little world region and precise time period and intellectual milieu decide to just start spending like crazy? At the same time? While the rest of the world did not?
* https://clintballinger.wordpress.com/2021/01/12/the-myth-of-...
> The Weimar Republic is the most notable hyperinflation. But it was not the only case of hyperinflation that occurred in Europe at the time. In fact, several European nations were ravaged by the war, war reparations and regime changes that ensued. In the case of Weimar the country was already in a fragile state after Germany lost WWI. To add insult to this injury the allied nations demanded punitive war reparations resulting in foreign denominated debt.
* https://www.pragcap.com/hyperinflation-its-more-than-just-a-...
> In this paper I will argue why the common misconception that “inflation is always and everywhere a monetary phenomenon” cannot be used to explain most historical hyperinflations. I will argue that “money printing” is often the response to exogenous and unusual events and not the direct cause of the hyperinflation.
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1799102
In Germany, the argument goes, it the problem wasn't necessarily that printing money was the cause of inflation, but rather the printing of money was the effect of something else.
Inflation hysteria.
Ask yourself how much of current inflation is speculative (eg. Blackrock buying single-family homes, Glencore buying copper, Zhongda Group buying aluminum). Now ask yourself what these folks are doing as they watch Fed reserve rates climb, reverse-repos skyrocket, PBOC/CCP order reduced commodity speculation, and 4 months of declining US home sales, falling lumber prices. The inflation shock is/was temporary and could well be followed by a deflationary shock if the powers that be overreach (as they usually do).
Lead-times on goods remain long. This induced reversion to the mean won't happen overnight, but I believe it is well under way.
Ask yourself how much of current inflation is speculative (eg. Blackrock buying single-family homes, Glencore buying copper, Zhongda Group buying aluminum). Now ask yourself what these folks are doing as they watch Fed reserve rates climb, reverse-repos skyrocket, PBOC/CCP order reduced commodity speculation, and 4 months of declining US home sales, falling lumber prices. The inflation shock is/was temporary and could well be followed by a deflationary shock if the powers that be overreach (as they usually do).
Lead-times on goods remain long. This induced reversion to the mean won't happen overnight, but I believe it is well under way.
The debt to gdp ratio is higher than it’s ever been.
https://fred.stlouisfed.org/series/GFDEGDQ188S
I don’t see us cutting back spending any time soon, so it doesn’t seem crazy to me that we inflate our way out of this, especially since after this pandemic a lot of countries are in a similar situation, making inflation more politically viable
https://fred.stlouisfed.org/series/GFDEGDQ188S
I don’t see us cutting back spending any time soon, so it doesn’t seem crazy to me that we inflate our way out of this, especially since after this pandemic a lot of countries are in a similar situation, making inflation more politically viable
> The debt to gdp ratio is higher than it’s ever been.
Have a look at Japan:
* https://fred.stlouisfed.org/series/DEBTTLJPA188A
Japan's inflation:
* https://fred.stlouisfed.org/series/FPCPITOTLZGJPN
There was only one published paper that I'm aware that had any debt-GDP-inflation link (Reinhart-Rogoff) and it was retracted:
* https://en.wikipedia.org/wiki/Growth_in_a_Time_of_Debt
Have a look at Japan:
* https://fred.stlouisfed.org/series/DEBTTLJPA188A
Japan's inflation:
* https://fred.stlouisfed.org/series/FPCPITOTLZGJPN
There was only one published paper that I'm aware that had any debt-GDP-inflation link (Reinhart-Rogoff) and it was retracted:
* https://en.wikipedia.org/wiki/Growth_in_a_Time_of_Debt
FWIW, I seem to remember that taxation is also a pretty good instrument against inflation.
When was the last time we've raised tax rates appreciably? The graph I found shows the top marginal tax rate hovering around 30-40% since 1986, and the last major tax increase (> ~10%) being 1949.
https://bradfordtaxinstitute.com/Free_Resources/Federal-Inco...
With a 50-50 Senate split and Manchin committed to bipartisanship, I don't see much chance of successfully passing significant tax increases.
https://bradfordtaxinstitute.com/Free_Resources/Federal-Inco...
With a 50-50 Senate split and Manchin committed to bipartisanship, I don't see much chance of successfully passing significant tax increases.
Don't forget Hauser's law [0]: "No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP."
0: https://en.wikipedia.org/wiki/Hauser%27s_law
0: https://en.wikipedia.org/wiki/Hauser%27s_law
An interesting idea from Matthew Yglesias was to not care about maximizing revenue as a primary goal of raising tax rates:
> The Laffer Curve — the idea that tax cuts can sometimes increase tax revenue — is one of the most influential and widely debated ideas in the past two generations of American politics. Beloved by the right and despised by the left, one thing that both sides have tended to agree on is that knowing what side of the curve we're on should be a key driver of tax policy.
> But in an era of surging inequality, it's time to revisit that assumption. Maybe at least some taxes should be really high. Maybe even really really high. So high as to useless for revenue-raising purposes — but powerful for achieving other ends.
> We already accept this principle for tobacco taxes. If all we wanted to do was raise revenue, we might want to slightly cut cigarette taxes. And since cigarettes are about the most-taxed thing in America, we certainly would want to cut out all our other anti-smoking initiatives. But we don't do that because we care about public health. We tax tobacco not to [primarily] make money but to discourage smoking.
* https://www.vox.com/2014/4/18/5620702/case-for-confiscatory-...
> The Laffer Curve — the idea that tax cuts can sometimes increase tax revenue — is one of the most influential and widely debated ideas in the past two generations of American politics. Beloved by the right and despised by the left, one thing that both sides have tended to agree on is that knowing what side of the curve we're on should be a key driver of tax policy.
> But in an era of surging inequality, it's time to revisit that assumption. Maybe at least some taxes should be really high. Maybe even really really high. So high as to useless for revenue-raising purposes — but powerful for achieving other ends.
> We already accept this principle for tobacco taxes. If all we wanted to do was raise revenue, we might want to slightly cut cigarette taxes. And since cigarettes are about the most-taxed thing in America, we certainly would want to cut out all our other anti-smoking initiatives. But we don't do that because we care about public health. We tax tobacco not to [primarily] make money but to discourage smoking.
* https://www.vox.com/2014/4/18/5620702/case-for-confiscatory-...
Always look at the 30 year bond yields. If they are out of control, then I get worried
From a practical perspective, doesn't inflation naturally destroy large capital accumulations and debts? From a policy perspective this would seem like a viable remedy to the current extreme income inequality and debt burden.
Only if wages rise accordingly. There is some sign it may happen given the still-high levels of unemployment combined with companies actively seeking workers, but it’s too soon to really tell.
Assets like housing and land have certain intrinsic value to them. The intrinsic value doesn't change because the amount of money circulating doubles, but the price of the asset in the inflated currency rises.
Since wealthy people hold more of their wealth in assets, this insulates them from inflation more than those who hold their wealth in savings or who live paycheck to paycheck and see their cost of living increase.
On paper it does reduce the burden of certain debts, but people on the lower socioeconomic end of the spectrum are often already paying debts at much higher or variable interest rates.
Since wealthy people hold more of their wealth in assets, this insulates them from inflation more than those who hold their wealth in savings or who live paycheck to paycheck and see their cost of living increase.
On paper it does reduce the burden of certain debts, but people on the lower socioeconomic end of the spectrum are often already paying debts at much higher or variable interest rates.
It's a complicated relationship. The prices of assets are related to the price of debt (the cheaper the debt, the more expensive the asset). Housing is an asset that pays a coupon (rent), so it acts a bit like a bond. Bonds have been riding the coattails of decreasing interest rates for the last 40 years - if interest rates increase then stocks, houses, bonds etc are going to deflate.
While inflation with low interest rates might increase the value of assets - inflation that leads to higher interest rates might actually do the opposite. So it ends up being a choice of the central bank which way to push this thing (although there is a lean towards keeping interest rates lower for longer because of the size of the U.S. government debt interest payments)
While inflation with low interest rates might increase the value of assets - inflation that leads to higher interest rates might actually do the opposite. So it ends up being a choice of the central bank which way to push this thing (although there is a lean towards keeping interest rates lower for longer because of the size of the U.S. government debt interest payments)
So yes, there is a huge transitory supply shock that's inflationary. At the same time, there are structural labor and energy issues that in my view will contribute to longer term price strains but not of the 70s variety.
[deleted]
These type of "Yes men" are going to be the ones hurt the most for going along with the script.
Interest rates can never be normalized because we can't afford the interest on our debt. That's going to continue to distort the market for the foreseeable future.
Blackrock etc. will get bailed with your money when their speculation fails.
Everything is a mess and I'm having a hard time figuring out what are the reasonable investment options available to an average person like myself.
Blackrock etc. will get bailed with your money when their speculation fails.
Everything is a mess and I'm having a hard time figuring out what are the reasonable investment options available to an average person like myself.
The Fed pumped almost $6 trillion into the money supply. That is 3 times more than was done for the 2008 crash. I do not think it is hysterical (which is loaded and gendered term, btw) to worry about the impact that could have on the value of my hard earned savings.
But they are not using it in a gendered way, and doesn't that actually help us recover a term that has legitimate uses?
Deposits are liabilities for banks and much of the injected money has found its way back into the Fed's balance sheet, exchanged for Treasuries the banks need(ed) to maintain collateral requirements (offset deposit liabilities). It may have made passes through the 'normal' economy, but is now caught in a repo loop that has little to a negative impact on velocity, but is inflation negative.
> Inflation hysteria.
And it doesn’t help that there is a strong financial incentive in spreading inflation fears now.
And it doesn’t help that there is a strong financial incentive in spreading inflation fears now.
Do tell. What are the strong financial incentives, and who has them?
Advertising cryptocurrency as a "hedge against the imminent inflation" helps the holders of a given cryptocurrency to increase the value of their holding.
Ah, I see. Yes, it does. (Ditto for holders of gold, but that's nothing new.)
The author completely misunderstands the value proposition of both gold and Bitcoin. Neither of them is valuable because of “intrinsic value” - both derive approximately all of their value from monetization. If gold was only valuable for its physical uses, it would be worth a negligible fraction of its current value.
Also, comparing the price of gold to the rate of inflation doesn’t make any sense. The derivative of the price of gold should be compared with the rate of inflation, or the price of gold vs some adjusted value of a dollar.
Also, comparing the price of gold to the rate of inflation doesn’t make any sense. The derivative of the price of gold should be compared with the rate of inflation, or the price of gold vs some adjusted value of a dollar.
37% of all gold minded each year is used in electronics despite it’s current price. Which means if gold stopped being used as a currency or jewelry it’s value would crash in the short term, but still remain high long term.
In a very real way it’s inherently worth more than copper or steel. Though that only makes it valuable as a hedge not an investment.
In a very real way it’s inherently worth more than copper or steel. Though that only makes it valuable as a hedge not an investment.
Exactly, I would argue that gold having some meaningful value to anchor the price is what allows it to function as a means of exchange.
Ideally though, we should use something else so that gold can be cheaper for electronics.
Bitcoin is an entirely different creature with absolutely zero intrinsic value, and only successful due to the momentum of being the first mover.
Of all the major cryptos in distribution, Bitcoin is one of the least advanced and most limited in functionality.
Ideally though, we should use something else so that gold can be cheaper for electronics.
Bitcoin is an entirely different creature with absolutely zero intrinsic value, and only successful due to the momentum of being the first mover.
Of all the major cryptos in distribution, Bitcoin is one of the least advanced and most limited in functionality.
> I would argue that gold having some meaningful value to anchor the price is what allows it to function as a means of exchange.
Then please argue it; all evidence suggests otherwise.
> Ideally though, we should use something else so that gold can be cheaper for electronics.
Imagine if we had a form of money that didn’t permanently tie up a nonrenewable commodity… it could be based on, say, electricity consumption instead of permanently removing metal from usage!
> Bitcoin is an entirely different creature with absolutely zero intrinsic value, and only successful due to the momentum of being the first mover.
“Intrinsic value” is a totally economically nonsensical concept. Gold is also not valuable due to “intrinsic value”. They are both valuable due to monetization. Yes, this is based on “momentum”/impredicativity. No, that’s not a problem.
> Of all the major cryptos in distribution, Bitcoin is one of the least advanced and most limited in functionality.
There is literally no charitable interpretation of this statement that is true.
Then please argue it; all evidence suggests otherwise.
> Ideally though, we should use something else so that gold can be cheaper for electronics.
Imagine if we had a form of money that didn’t permanently tie up a nonrenewable commodity… it could be based on, say, electricity consumption instead of permanently removing metal from usage!
> Bitcoin is an entirely different creature with absolutely zero intrinsic value, and only successful due to the momentum of being the first mover.
“Intrinsic value” is a totally economically nonsensical concept. Gold is also not valuable due to “intrinsic value”. They are both valuable due to monetization. Yes, this is based on “momentum”/impredicativity. No, that’s not a problem.
> Of all the major cryptos in distribution, Bitcoin is one of the least advanced and most limited in functionality.
There is literally no charitable interpretation of this statement that is true.
>> I would argue that gold having some meaningful value to anchor the price is what allows it to function as a means of exchange.
>Then please argue it; all evidence suggests otherwise.
Gold value is uncorrelated from its means of exchange, sure
>> Ideally though, we should use something else so that gold can be cheaper for electronics. >Imagine if we had a form of money that didn’t permanently tie up a nonrenewable commodity… it could be based on, say, electricity consumption instead of permanently removing metal from usage!
So Bitcoin scarcity is a strength and commodity scarcity is a weakness? Let’s put aside the electricity needs commodities to, y’know, exist in the first place
>> Bitcoin is an entirely different creature with absolutely zero intrinsic value, and only successful due to the momentum of being the first mover. >“Intrinsic value” is a totally economically nonsensical concept. Gold is also not valuable due to “intrinsic value”. They are both valuable due to monetization. Yes, this is based on “momentum”/impredicativity. No, that’s not a problem.
Valuable due to monetisation is a creative babble, I’m not sure what it’s supposed to mean.
>> Of all the major cryptos in distribution, Bitcoin is one of the least advanced and most limited in functionality. >There is literally no charitable interpretation of this statement that is true.
Bitcoin’s value to you is what you can convert it to later, after convincing others and yourself to keep buying; your logic is tainted by this very conflict of interest. Good luck
Gold value is uncorrelated from its means of exchange, sure
>> Ideally though, we should use something else so that gold can be cheaper for electronics. >Imagine if we had a form of money that didn’t permanently tie up a nonrenewable commodity… it could be based on, say, electricity consumption instead of permanently removing metal from usage!
So Bitcoin scarcity is a strength and commodity scarcity is a weakness? Let’s put aside the electricity needs commodities to, y’know, exist in the first place
>> Bitcoin is an entirely different creature with absolutely zero intrinsic value, and only successful due to the momentum of being the first mover. >“Intrinsic value” is a totally economically nonsensical concept. Gold is also not valuable due to “intrinsic value”. They are both valuable due to monetization. Yes, this is based on “momentum”/impredicativity. No, that’s not a problem.
Valuable due to monetisation is a creative babble, I’m not sure what it’s supposed to mean.
>> Of all the major cryptos in distribution, Bitcoin is one of the least advanced and most limited in functionality. >There is literally no charitable interpretation of this statement that is true.
Bitcoin’s value to you is what you can convert it to later, after convincing others and yourself to keep buying; your logic is tainted by this very conflict of interest. Good luck
Yes, there's certainly a floor on the price because it's a useful and rare element. But how much higher would it be than the $10/lb that bismuth sells for because it's also useful and rare.
If gold stopped being used as a store of value, we could use the gold uselessly stored in vaults (~80% of all potential mineable gold on Earth) to make things. Even if 1% of gold reserves were sold off each year that's far greater than the current industrial demand and the price would crater.
In theory that could happen in the short term yes, but the rate of gold used in electronics isn’t fixed. Crater the price and usage skyrockets which could eat up the supply within a lifetime. At which point the price increases again.
Which means gold is a long term store of value, which prevents extreme cratering of it’s value. Thus preventing the situation described.
Which means gold is a long term store of value, which prevents extreme cratering of it’s value. Thus preventing the situation described.
If gold’s monetization demand disappeared overnight, 37% of its current demand is not sufficient to keep the price nearly as high as it is now.
> In a very real way it’s inherently worth more than copper or steel.
Can you explain what you mean by this? Usually when people say things like this they haven’t thought it through.
> In a very real way it’s inherently worth more than copper or steel.
Can you explain what you mean by this? Usually when people say things like this they haven’t thought it through.
Gold is valuable because of its chemical properties, it is almost completely inert/rust-proof and one of the best conducting materials. It's a very useful material for electronic conductors for that reason.
Do you think most gold investors are hoping to turn their bullion into conductors?
Incidentally, Bitcoin is also rust-proof.
Incidentally, Bitcoin is also rust-proof.
Gold has intrinsic value because it has uses (like conductors and jewelry). Bitcoin has no intrinsic value.
[deleted]
But without rust it is unsafe
Gold is very inert, yes, but it still gets beaten by copper when it comes to conductivity [0] which is why conductors are rarely ever made out of gold instead of merely gold-plated.
Gold's industry use remains negligible in the great scheme of things and only a very small fraction of its value is derived from its industrial uses. It's valuable but not that valuable.
[0] https://www.bluesea.com/resources/108/Electrical_Conductivit...
Gold's industry use remains negligible in the great scheme of things and only a very small fraction of its value is derived from its industrial uses. It's valuable but not that valuable.
[0] https://www.bluesea.com/resources/108/Electrical_Conductivit...
Gold’s industrial use is low because of it’s high price not it’s utility. Drop it’s price by say 95% long term and it’s use by industry would dramatically increase, and mining would tank. Eventually after the already mined gold was used up it’s value would shoot back up.
Conversely, this means it’s value as a hedge is also going to stay. Some can take gold today burry it in a hole and know it’s going to still be valuable when they or their descendent pulls it out of the ground in 50 years. It’s not going to appreciate they way stocks do, but it’s also not going to 0 the way stocks occasionally do either.
Conversely, this means it’s value as a hedge is also going to stay. Some can take gold today burry it in a hole and know it’s going to still be valuable when they or their descendent pulls it out of the ground in 50 years. It’s not going to appreciate they way stocks do, but it’s also not going to 0 the way stocks occasionally do either.
The gold lease rate is not nothing. Gold is valuable as collateral. Bitcoin is literally bits ready to be piped into /dev/null but gold is not that.
Theoretically, gold could be piped into a black hole which is the physical equivalent of /dev/null. :-)
Gold’s value as a financial instrument does not come from its physical properties, except insofar as those properties can be emulated by Bitcoin (e.g. corrosion resistance).
You can drive a truck to a vault and pick up your gold. Try emulating that with bitcoin. You can't use burned computer cycles as a door stop or to make jewelery. Just because people speculate in gold doesn't give bitcoin legitimacy because they speculate in that. Gold has value as a financial instrument because it is tangible, it is something bitcoin can never be.
> You can't use burned computer cycles as a door stop
Is your understanding that people value gold because they can use it to fashion a door stop?
Is your understanding that people value gold because they can use it to fashion a door stop?
If the price of gold hit zero, you would still have a lump of pretty, malleable metal.
When bitcoin hits zero, what exactly will anybody actually have? At least with other manias like tulip bulbs you could grow a flower.
You can't even wipe your bum with bitcoin.
When bitcoin hits zero, what exactly will anybody actually have? At least with other manias like tulip bulbs you could grow a flower.
You can't even wipe your bum with bitcoin.
And? Do you think the fact that having a “lump of pretty metal” if demand disappears is what makes gold valuable?
Yep. Bitcoin value is nothing more than a collective illusion. I especially like the marketing aimed at rubes who think "proof of work" means value creation in the same way as ore mining. Its an elaborate scam without parallel in history. When its over and the illusion disappears, people will still value gold but will delete their wallets.
Well I’m glad you’re so smart that you can see through the illusion that’s fooled all the rubes :)
After all, it’s inconceivable that your model is incomplete - you’ve given such a good argument for where gold derives its value, after all - you can make door stoppers out of it!
> "proof of work" means value creation in the same way as ore mining
You’re at least as silly as your own strawman, because ore mining doesn’t “create value” at all. You’ve fallen into the same trap that a lot of people with folk economics fall into - https://en.wikipedia.org/wiki/Labor_theory_of_value
After all, it’s inconceivable that your model is incomplete - you’ve given such a good argument for where gold derives its value, after all - you can make door stoppers out of it!
> "proof of work" means value creation in the same way as ore mining
You’re at least as silly as your own strawman, because ore mining doesn’t “create value” at all. You’ve fallen into the same trap that a lot of people with folk economics fall into - https://en.wikipedia.org/wiki/Labor_theory_of_value
If I was smart I would have stopped under-estimating the stupidity of the average rube and bought a pile of useless Bitcoin back when it first became a meme. I don't consider myself to be particularly smart but I do know a scam when I see one. If somebody already mined the first coins everybody getting involved afterwards is either getting ripped off or will have to rip somebody off to get out before the realisation hits that what you are trading in is burned computer cycles and promises of a "new means of exchange" that doesn't actually work except for criminals activities.
What happens when a country abandons a fiat currency or devalues it via inflation, you end up with wheelbarrows full of worthless paper and nobody to take it. yet at some point it was valued highly and people hoarded in mattresses and were happy to exchange goods for it.
I like to think about it this way: People stop worshipping a particular god and the whole religion disappears, leaving nothing but stories. Nobody makes material sacrifices to that god any more, the temples fall into ruin, the high priests run out of money since their temples are no longer supported and followers move on to something else.
c.f. https://en.wikipedia.org/wiki/Zurvanism
Gold however has been sought after for thousands of years and still has uses outside of being a very inefficient currency (super compact boat ballast? why not). Bitcoin does not, can not and never will.
What happens when a country abandons a fiat currency or devalues it via inflation, you end up with wheelbarrows full of worthless paper and nobody to take it. yet at some point it was valued highly and people hoarded in mattresses and were happy to exchange goods for it.
I like to think about it this way: People stop worshipping a particular god and the whole religion disappears, leaving nothing but stories. Nobody makes material sacrifices to that god any more, the temples fall into ruin, the high priests run out of money since their temples are no longer supported and followers move on to something else.
c.f. https://en.wikipedia.org/wiki/Zurvanism
Gold however has been sought after for thousands of years and still has uses outside of being a very inefficient currency (super compact boat ballast? why not). Bitcoin does not, can not and never will.
Certain asset classes have inflated dramatically and may continue to do so. Further, we may indeed have a "blow off top" in inflation across all asset classes as policy makers desperately attempt to stave off deflation.
For that reason it is very difficult to hedge properly against short and medium term inflation rates.
Make no mistake, however - the world is in a massively deflationary state. Birth rates across the rich, global north have crashed - including the US, ex-immigration. The population of China will shrink by hundreds of millions over the next few decades. Further, it is the imperative of youth, globally, to pursue a "modern" life script of delaying and minimizing childbirth, etc.
In addition to these very long term, basic drivers of inflation there are now new and interesting factors like work-from-home that serve to further minimize resource use. When people stay home to netflix instead of going out to a movie, that's not inflationary.
Again, very difficult to gauge near-term (Don't Fight the Fed, etc.) but on a longer horizon (but within my own lifetime) I would expect to see significant deflation and/or wild economic gyrations stemming from desperate attempts to stave off said deflation.
For that reason it is very difficult to hedge properly against short and medium term inflation rates.
Make no mistake, however - the world is in a massively deflationary state. Birth rates across the rich, global north have crashed - including the US, ex-immigration. The population of China will shrink by hundreds of millions over the next few decades. Further, it is the imperative of youth, globally, to pursue a "modern" life script of delaying and minimizing childbirth, etc.
In addition to these very long term, basic drivers of inflation there are now new and interesting factors like work-from-home that serve to further minimize resource use. When people stay home to netflix instead of going out to a movie, that's not inflationary.
Again, very difficult to gauge near-term (Don't Fight the Fed, etc.) but on a longer horizon (but within my own lifetime) I would expect to see significant deflation and/or wild economic gyrations stemming from desperate attempts to stave off said deflation.
“ or wild economic gyrations stemming from desperate attempts to stave off said deflation.”
Seems certain as it’s already begun and once it has begun there’s nothing stopping it.
Seems certain as it’s already begun and once it has begun there’s nothing stopping it.
Not sure I agree with the real estate conclusion in this market. I think there is a lot of uncertainty on how real estate values will change post-COVID as how we use places for shopping, working, and travel change (or dont)
Real estate might be the best play for the average joe. Where else can you borrow a ton of money at low interest rates for 30 years with a real asset (the house) as collateral? It is like a free call option, with government policies. If you overpay you can always turn in the key or get the bank to write down your loan to fair value for the home. You make money on the debt, paying back in dollars with lower purchasing power, you do not need the home price to go up.
Real estate might be the best play for the average joe.
I agree with your general analysis, but I'm also seeing that it's becoming harder and harder for the average joe to get into the real estate market. Unless you can make a hefty down-payment banks just won't talk to you. The big driver of inequality going forwards is going to be between those who managed to get on the property ladder and those who didn't.
I agree with your general analysis, but I'm also seeing that it's becoming harder and harder for the average joe to get into the real estate market. Unless you can make a hefty down-payment banks just won't talk to you. The big driver of inequality going forwards is going to be between those who managed to get on the property ladder and those who didn't.
I think that will be a big topic that government will try to solve. I think they will offer policies that help inequality directly in housing, giving away homes to those that qualify, further pushing up home prices ultimately.
As a home owner, I'm really hoping that the government gets involved in helping with first time buyer down payments. Each $1,000 of government assistance will be a ~$15,000 higher sale price. Would also benefit those renting out units as well as the overall market would surge upwards
REITs are your friend.
You can't get a mortgage to invest in REITs. Also you can't live in your REIT investment, so you still have to pay rent.
Of course if you have an investment portfolio adding an RETI is probably a good idea, but it's not really comparable to investing in actual real estate.
Of course if you have an investment portfolio adding an RETI is probably a good idea, but it's not really comparable to investing in actual real estate.
I can invest in a lot more rental markets and manage idiosyncratic risk. Plus I don't have to deal with maintenance issues with physical property upkeep.
I have also invested in vehicles (private offerings) that fund residential construction especially in housing constrained markets. Very nice reliable returns
I have also invested in vehicles (private offerings) that fund residential construction especially in housing constrained markets. Very nice reliable returns
All this is assuming you have liquid funds to invest or have some other access to credit. The only realistic shot your "average joe" has at any sort of reasonable leverage is getting a mortgage and buying some property.
Obviously if you're already rich then you have lots of better options to become even richer (like the ones you've mentioned), but they're not really open to your "average joe", if for no other reason than that most of them require you to be an accredited investor or require a high minimum investment.
Obviously if you're already rich then you have lots of better options to become even richer (like the ones you've mentioned), but they're not really open to your "average joe", if for no other reason than that most of them require you to be an accredited investor or require a high minimum investment.
Valid points, but also you don't have to pay maintenance expenses or property taxes on your REIT.
How do you make money on the debt? Rent it out?
If inflation hits 4% and your mortgage is 3.5% you would be making 0.5% a year off the mortgage interest + the tax deduction you get from it. If inflation picks up to 70s levels, current homeowners will have a great time assuming they do not have a variable rate
> If inflation hits 4% and your mortgage is 3.5% you would be making 0.5% a year off the mortgage interest
This ignores the rates-price and inflation-rates nexuses. When inflation goes up, ceteris paribus, rates rise. When rates rise, all else held equal, the price of leveraged assets like real estate falls.
TL; DR this trade is an arbitrage only if you've perfectly hedged the price of your underlying asset, the house.
This ignores the rates-price and inflation-rates nexuses. When inflation goes up, ceteris paribus, rates rise. When rates rise, all else held equal, the price of leveraged assets like real estate falls.
TL; DR this trade is an arbitrage only if you've perfectly hedged the price of your underlying asset, the house.
Agreed this is an overly simplified model. Another thing to keep in mind would be population dynamics. Are people moving out of the area the home is in (Chicago) or are people moving in (Nashville).
The hedge is refinancing out any market appreciation, like a piggy bank, keeping debt high while interest rates are low, you can always hand back the key if it goes south.
I’m skeptical that there will be dramatic changes post-COVID.
We’ve been bombarded with news stories and think pieces about how COVID is changing everything about how we work and how we live, but most people are excited to return to their pre-COVID normal life ASAP.
There are scattered anecdotes about people using COVID to move out of big cities and take up simpler lives working remote, but I also have scattered anecdotes of people taking advantage of the situation to move to big cities and get high paying jobs due to the post-COVID job boom. Housing and rent prices are skyrocketing and lumber prices are up because demand for housing and new construction, including in big cities, continues to increase rapidly.
The articles about how we were all going to flee bug cities and work remote jobs after COVID were premature.
We’ve been bombarded with news stories and think pieces about how COVID is changing everything about how we work and how we live, but most people are excited to return to their pre-COVID normal life ASAP.
There are scattered anecdotes about people using COVID to move out of big cities and take up simpler lives working remote, but I also have scattered anecdotes of people taking advantage of the situation to move to big cities and get high paying jobs due to the post-COVID job boom. Housing and rent prices are skyrocketing and lumber prices are up because demand for housing and new construction, including in big cities, continues to increase rapidly.
The articles about how we were all going to flee bug cities and work remote jobs after COVID were premature.
> lumber prices are up
Lumber futures fell 2x from $1670.9 peak (in 2021-05-07) down to $884.3 (2021-06-23):
https://www.tradingview.com/symbols/CME-LBSN2021/
Lumber futures fell 2x from $1670.9 peak (in 2021-05-07) down to $884.3 (2021-06-23):
https://www.tradingview.com/symbols/CME-LBSN2021/
The following is as I understand it, but I’m no expert. In Australia where house prices are at very high levels, a lot of that price is driven by the availability of cheap loans. Lower interest rates have increased the ability of people to service larger loans, so we Australians have borrowed and paid more for a home.
Presumably an increase in inflation reduces how much money people can affordably borrow, and therefore also directly slows or even reverses real estate growth. Conversely, if wages also increase in an inflationary era, that increases affordability of loans.
Overall, I have no idea what real estate would do with inflation and wage growth, but in the absence of wage growth I’d guess real estate values would plummet, at least in Australia.
Presumably an increase in inflation reduces how much money people can affordably borrow, and therefore also directly slows or even reverses real estate growth. Conversely, if wages also increase in an inflationary era, that increases affordability of loans.
Overall, I have no idea what real estate would do with inflation and wage growth, but in the absence of wage growth I’d guess real estate values would plummet, at least in Australia.
I saw an analysis by the LA Times showing that LA traffic was nearly at pre-pandemic levels already. I suspect most people will be going to the office at least part of the week still.
Similar for other cities.
Also bus and train ridership is still down, and I believe a lot of the road traffic is single person rides that would have taken public transportation pre-pandemic.
Also bus and train ridership is still down, and I believe a lot of the road traffic is single person rides that would have taken public transportation pre-pandemic.
There is an assumption too for the long term that you will pick the right market and time it right. Things looked amazing in Buffalo, Cleveland and Detroit for places to invest if you bought in the 50s. Same with New York City. If you had to unload your property in the late 70s, it didnt seem like a great investment. If you could buy and hold in the 70s, and unload 2006, looks good :)
Lost me at lemonade stand "capital expenditure" being lemons... that's COGS, not capital.
I like the idea of the lemonade stand representing different parts of a business.
COGS are the parts of a product that can be relatively easily tracked per unit. So lemons, water, sugar are your COGS (cost of goods sold).
If you sell lemonade at $1, your revenue is $1 per lemonade bottle.
If your COGS is $0.40, your gross profit is $0.60, also known as "gross margin", or a 60% margin (IIRC, I always kind of forget how these things are calculated)
Operating profit gets trickier: you add in all the bits of your business that you're amortizing over every sale. If you have a $10,000 juicer that squeezes lemons for you, and you EXPECT the juicer to last for 1-million units of lemonade, that's $0.01 per lemonade, so you subtract that out of operating profits.
This $10,000 juicer, is what Nick87633 calls "capital expenditure", or CapEx as it is sometimes known. You need to buy this to "start" the business. In theory, you can sell the juicer for a depreciated value if your business goes under. (Ex: If you sell 500-thousand lemonade and then go out of business, you could make the argument that you can sell the juicer for $5000 as your business goes bankrupt).
As you can see, Operating Profit has a lot of "opinion" in it: you estimate the value of your equipment if it were sold and/or the cost of replacement if it were damaged. (Ex: hurricane wipes away your lemonade stand and juicer. How much will it cost to replace the juicer?)
COGS are the parts of a product that can be relatively easily tracked per unit. So lemons, water, sugar are your COGS (cost of goods sold).
If you sell lemonade at $1, your revenue is $1 per lemonade bottle.
If your COGS is $0.40, your gross profit is $0.60, also known as "gross margin", or a 60% margin (IIRC, I always kind of forget how these things are calculated)
Operating profit gets trickier: you add in all the bits of your business that you're amortizing over every sale. If you have a $10,000 juicer that squeezes lemons for you, and you EXPECT the juicer to last for 1-million units of lemonade, that's $0.01 per lemonade, so you subtract that out of operating profits.
This $10,000 juicer, is what Nick87633 calls "capital expenditure", or CapEx as it is sometimes known. You need to buy this to "start" the business. In theory, you can sell the juicer for a depreciated value if your business goes under. (Ex: If you sell 500-thousand lemonade and then go out of business, you could make the argument that you can sell the juicer for $5000 as your business goes bankrupt).
As you can see, Operating Profit has a lot of "opinion" in it: you estimate the value of your equipment if it were sold and/or the cost of replacement if it were damaged. (Ex: hurricane wipes away your lemonade stand and juicer. How much will it cost to replace the juicer?)
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The best performing assets used to be Lego:
https://www.cnet.com/news/lego-bricks-outshine-gold-bars-as-...
https://www.cnet.com/news/lego-bricks-outshine-gold-bars-as-...
Many assets such as real estate, stocks, bitcoin are overvalued. So they can return to a fair value and make a loss against inflation.
"How do bubbles burst?"
Real estate prices are sky high, but what can bring them down?
The taxes on corporations and the rich is sufficiently low that they can't spend all their money, and what is most safe for pension funds to invest in? What don't we make more of (with rare and expensive exceptions) ?
Land!
The taxes on corporations and the rich is sufficiently low that they can't spend all their money, and what is most safe for pension funds to invest in? What don't we make more of (with rare and expensive exceptions) ?
Land!
> What don't we make more of (with rare and expensive exceptions)?
Land isn’t made, but more land becomes legally available all the time. The scarcity argument is overestimated given the immense surface area available and the actual limiting factor being zoning laws (and logistics).
Land isn’t made, but more land becomes legally available all the time. The scarcity argument is overestimated given the immense surface area available and the actual limiting factor being zoning laws (and logistics).
The Netherlands beg to differ, 17% of it is reclaimed/created land and more than half is on life support thanks to dikes, dunes and pumps. Singapore's Marina Bay area is reclaimed land. There's an airport in Japan that's also made on reclaimed land.
On the other hand, nobody is re-zoning Central Park anytime soon, Monaco is unlikely to expand its borders, and the imperial palace in Tokyo is unlikely to move out and allow new developments on its grounds.
Nobody wants to live in Wyoming even if it's cheap. And Japan is literally giving away houses in villages to try to slow the decay of the countryside.
Maybe some industrial zone or office space might be re-zoned to inhabitation, pushing the industrial zones out. I guess gentrification is some way of making more value out of the same land.
But generally new developments or gentrification doesn't degrades the value of earlier developments.
On the balance, there are more people, with the rich having more money that they don't know what to do with except park it in real estate with deleterious effects on the affordability for less fortunate people (for example Vancouver and London where investments are kicking the middle class and the rest of the classes out of the cities, or Black Rock paying 20% / 50% above market rate for houses).
The scarcity applies to places people want to live or work, not to land in general.
On the other hand, nobody is re-zoning Central Park anytime soon, Monaco is unlikely to expand its borders, and the imperial palace in Tokyo is unlikely to move out and allow new developments on its grounds.
Nobody wants to live in Wyoming even if it's cheap. And Japan is literally giving away houses in villages to try to slow the decay of the countryside.
Maybe some industrial zone or office space might be re-zoned to inhabitation, pushing the industrial zones out. I guess gentrification is some way of making more value out of the same land.
But generally new developments or gentrification doesn't degrades the value of earlier developments.
On the balance, there are more people, with the rich having more money that they don't know what to do with except park it in real estate with deleterious effects on the affordability for less fortunate people (for example Vancouver and London where investments are kicking the middle class and the rest of the classes out of the cities, or Black Rock paying 20% / 50% above market rate for houses).
The scarcity applies to places people want to live or work, not to land in general.
Land is rarely made.
It happens naturally occasionally and man made at great expense, like in the UAE
It happens naturally occasionally and man made at great expense, like in the UAE
We actually used to do a lot of it even in the US. Compare San Francisco or Boston to their original boundaries.
(I also think we should resume: https://www.jefftk.com/p/make-more-land)
(I also think we should resume: https://www.jefftk.com/p/make-more-land)
Plus, look at an aerial photograph of a non-metropolitan area and see how much of it is covered by buildings. Not a whole lot. With the current global population, real estate is generally scarce only because there is local democratic consensus for maintaining scarcity. (NIMBY)
Land is rarely made, but in the US there are vast areas of lands that are federally owned that the government would be happy to find uses for.
We could get a lot of new land from a Mars colony
That's not really how it works. House prices are high because of very low interest rates, and even a (by historical standards) small increase would mean people could borrow less, causing prices to decrease sharply. Also we're not actually short of land except in the most densely populated countries like HK and Singapore which are exceptional for other reasons. The US has plenty of land to build on.
Yes to the land part, but low rates are not the only reason prices are this level of crazy. The raw building materials shortage, old fashioned NIMBY, zoning laws are all culprits here.
We shouldn't succumb to easy answers here since many factors influence it.
We shouldn't succumb to easy answers here since many factors influence it.
There's also a supply shortage: http://www.freddiemac.com/perspectives/sam_khater/20210415_s...
This seems like it ignores condominiums? Instead of building one house at 1200 sqft, you can build a house with 2+ units and sell them individually.
(The graph they have lines up quite well with condos becoming a thing)
(The graph they have lines up quite well with condos becoming a thing)
Agree, the question to ask is compared to what? Compared to gold, which hasn't had a run up like the other assets, comes to mind. What others?
I own some (paper) gold because I think it's been neglected. The market and real estate have produced outsized returns for 20 years (even factoring in the 2008-9 recession), and investors haven't really gotten spooked. Popular stocks are still trading at 100+ (or even 1000+) P/E ratios, and everybody's kid sister is now a stock wiz.
I don't know what it's going to take to scare retail investors out of stocks, but when it happens, metals will benefit.
I don't know what it's going to take to scare retail investors out of stocks, but when it happens, metals will benefit.
> Unproductive assets like gold and commodities are not like Bitcoin for a simple reason: they have intrinsic, underlying value. There are industrial uses for gold
I don't understand how this guy is going to claim that the value of gold is strongly based on its industrial utility with a straight face. My take-seriously-o-meter went from 60 to 0 on this one.
I don't understand how this guy is going to claim that the value of gold is strongly based on its industrial utility with a straight face. My take-seriously-o-meter went from 60 to 0 on this one.
Not all government bonds are worthless against inflation!
You can purchase up to $10k in Series I bonds every year that carry a fixed rate (currently 0) + a variable rate set by inflation (CPI) that is adjusted semi-annually. I bonds purchased right now are yielding 3.5% (due to recent CPI data) for the next 6 months. They are an excellent place to park some cash/emergency fund with some caveats (no redemption for 12 months, lose 3 months of interest if you redeem before holding for 5 years)
You can purchase up to $10k in Series I bonds every year that carry a fixed rate (currently 0) + a variable rate set by inflation (CPI) that is adjusted semi-annually. I bonds purchased right now are yielding 3.5% (due to recent CPI data) for the next 6 months. They are an excellent place to park some cash/emergency fund with some caveats (no redemption for 12 months, lose 3 months of interest if you redeem before holding for 5 years)
The TIPS spread, the difference in price between regular and inflation protected bonds, is even a standard measure of the market's expectations of future inflation.
>Let's say you have a lemonade stand, and your capital expenditure is mostly lemons. In the first year, you buy 1,000$ lemons to produce 1,100$ worth of lemonade that you sell.
>That's a 10% margin on regular days. Next year, you can choose to reinvest and expand your business, buying 1,100$ worth of lemons to sell 1,210$ of lemonade.
>This is an oversimplification
Of course it is!
haha, what the ... 10% margin on lemonade?
I'd say that lemonade margin (in restaurant) is closer to something like 700-1000%
>That's a 10% margin on regular days. Next year, you can choose to reinvest and expand your business, buying 1,100$ worth of lemons to sell 1,210$ of lemonade.
>This is an oversimplification
Of course it is!
haha, what the ... 10% margin on lemonade?
I'd say that lemonade margin (in restaurant) is closer to something like 700-1000%
No mention of federal I Bonds, which would be a decent low risk investment if inflation actually does get high for the first time in 40 or so years. I guess TIPS work roughly the same way.
'Best performing assets against inflation'
...here's a list of things that don't work.
...here's a list of things that don't work.
Early in the process people were exuberant since the markets were rising and their paper net worth was increasing, so they were selling valuable assets like pianos for money that would quickly become worthless. Eventually the farmers became extremely powerful since they had the one thing everyone needed.
Also worth mentioning that Bitcoin’s volatility makes it a poor inflation hedge, but this is for different reasons than the author of the article suggests. It’s more because the Bitcoin ecosystem is highly manipulated and it’s still unclear what a fair price for Bitcoin looks like.
https://www.amazon.com/dp/1586489941/ref=cm_sw_r_cp_awdb_imm...