28 Oct 2021

Why inflation is headed back down to zero

Eric Basmajian makes a good case that an aging population will drag down productivity, growth and inflation.
He has a lot of charts which are certainly suggestive that he’s right. The outlier of Japan suggests that he’s onto something.

Will this really happen? I think it depends on whether governments buy into MMT. MMT says you can keep spending until inflation starts to bite, then you can just dial up taxes to rein it back in. It also says that they natural rate of unemployment, which clears the asset markets and output markets, is actually very close to zero, and so a job guarantee is the right policy. I think this may all be correct, but I don’t think the MMT brigade recognize the scale of the political cost of raising taxes. Politicians are well aware that increasing spending on public services is popular with the voting public. This makes sense. Most people are poor, and nearly all spending on public services has a distributional effect which benefits the poor. What is odd, is that the bottom ninety percent seem to have been kept in ignorance of what is actually good for them. But once the spending has been started, it will be very difficult to stop, at least for a government that needs votes. Which is all of them, at least in the West.

Is Eric right? Maybe. Inflation as a phenomenon is hard to understand, but my money is on him being wrong.

Inflation basket

This article from SA gives some inflation-busting stocks. In theory, any stock with an exposure to real assets will benefit, but some of these might benefit especially.

Stocks identified by BofA with a 95% confidence level of a positive correlation to inflation include Mosaic (NYSE:MOS), National Oilwell Varco (NYSE:NOV), Freeport-McMoRan (NYSE:FCX), Advanced Micro Devices (NASDAQ:AMD), Incyte (NASDAQ:INCY), Western Digital Corporation (NASDAQ:WDC), Apache Corporation (NASDAQ:APA), Qualcomm (NASDAQ:QCOM), Micron (NASDAQ:MU), NetApp (NASDAQ:NTAP), Halliburton (NYSE:HAL) and Pioneer Natural Resources Company (NYSE:PXD).

Mostly minerals, and related services, but quite a few IT plays. Western Digital is interesting, as it always seems to me like an ‘old tech’ stock. Who uses mechanical disks now? Presumably, a lot of real server farms do.

The value of being wrong

“The Secret to my success is that I’m always wrong. I’m ALWAYS wrong. And I try to correct my mistakes. That’s the secret of my success.”

“My approach works not by making valid predictions, but by allowing me to correct false ones.”

– George Soros

I used to do calculations of “theoretical values” of options and other derivatives for a living. Well, I wrote software which would do such calculations. It sometimes involves complicated mathematics. One underlying idea is that risk-free arbitrage exists only fleetingly, and so (for example) a strip of short-dated futures will predict a long-dated one. E.g. a strip of short sterling futures can be used to predict the price of the short gilt contract. The example doesn’t matter. What matters is the idea that with enough market and other data, a ‘fair’ value for a security can be calculated to an arbitrary accuracy and that a profit can be locked in by buying or selling the security depending on whether its market price is higher or lower than this value.

People don’t trade like this, but I don’t think they use other approaches because they don’t think that the idea is fundamentally flawed. I think that traders assume that the fair value calculation is just too complicated, or some inputs are not known with sufficient accuracy. I think that it’s worse than this. I believe that you simply can’t make money this way for a fundamental reason: because the idea of what a security is worth is too important an input into it’s value for the for the idea that there exists a ‘fair value’ to make sense.

It may be that this is what Soros was thinking about when he came up with the idea of ‘reflexivity.’ I really don’t know. I read his book on the topic, and didn’t feel that I had any better understanding of it after than I had before. Well, at least after reading the brief summary on the back cover.

Fraud at warp factor five

SPACs are the railway shares of our age. In due course, most money invested in them will be lost. Some people will get extremely rich, although mostly these will be the promoters. A few lucky investors will close their positions at the top of the market. Far more will cling on, far beyond the point when they know they should have sold. White Diamond on Momentus ($MNTS) reveals an egregious fraud. Is this the most fraudulent of SPACs? Probably it is not. But it’s pretty bad.

At some point, investors will wake, as if from a dream and realize that they are a lot less rich than they thought they were. This is the way of the world.

Build back better corporations

This post from The Daily Poster sums up the problem with US politics. Both parties have been captured by corporations, so they can never enact any measures that redistribute resources from corporations and their C-suite executives to the rest of the country. Many commentators make the same points, but this is a good collection. I don’t really care about the USA, but I have noticed that they set the tone for the rest of the developed world. The influence of corporate donors is not quite so egregious in the UK, but the success of K Street will not have escaped the attention of corporate lobbyists here.