Friday, July 16, 2021

Interest Rates, Inflation, and Shipping Containers

If the news says interest rates are rising, that's a forward looking opinion. It is not a fact. It is a prediction. In sharp contrast, if the news says interest rates have been rising, that’s a verifiable backward looking fact.

As examples, when the temperature recently hit 110 at my home, I would never have said that the temperature is high and rising. 110 was the peak. When a submarine reaches the surface of the ocean, no sane person ever says that the submarine is high and rising. The submarine is obviously done rising.

So why does the news do it with interest rates? It’s subtle. It’s biased. And I wonder if anyone else notices that an opinion often sneaks in there where a fact should go.

If it was so easy predicting where interest rates were truly headed then we could all become heavily leveraged bond day traders and never lose money. And yet, plenty of bond traders do lose money. I suspect most money is lost betting on what the news implies is obvious, while the professionals and algorithms take the other side of those trades.

One would think that since interest rates had been falling for 40 years, the burden of proof would be on those predicting the long-term reversal to rising interest rates. And yet, for at least the past 20 years, the burden of proof has always been on the “Japanificationists” as they continue to simply predict more of the same.

And on that note, I offer my opinions and predictions of more of the same.

1. Although inflation is running temporarily hot, we are not returning to 1970s style interest rates anytime soon, if ever, at least in my lifetime. Bet on long-term interest rates north of 3% over the long-term at your peril.

2. The recent growth of inbound loaded containers into Los Angeles and Long Beach (as seen here) is ridiculously unsustainable over the long-term. The recent growth of shipping costs into Los Angeles and Long Beach is therefore also ridiculously unsustainable over the long-term. Any price inflation seen inside those fully loaded containers due to extreme growth in the number of containers and their associated shipping costs is therefore also ridiculously unsustainable.

3. I don't want to sell anything, buy anything, or process anything inside those shipping containers when a sustainable reality hits. I don't want to sell anything bought or processed, or buy anything sold or processed, or process anything sold, bought, or processed, or repair anything sold, bought, or processed. Yes, I'm having a Say Anything moment. Pent-up demand can easily lead to pent-up demand destruction. I want no part of the latter. We did overshoot to the downside as the pandemic hit. We are overshooting to the upside now. We can easily overshoot to the downside again (like a pendulum with little dampening), especially if the Fed feels the need to fight transitory inflation.



This is obviously not fantastic investment advice. If it was so easy giving fantastic investment advice then we could all become heavily leveraged traders and never lose money. Right? Seriously.

Sorry to bring up heavily leveraged traders twice in the same post. I guess I just have historic margin debt as a percentage of GDP on my mind. Shouldn't be a problem in a temporarily overheating economy filled with sure things like SPACs, NFTs, cryptocurrencies, and Tesla though. What's the worst that could happen?

11 comments:

Who Struck John said...

One caution: your prediction assumes that policies that have produced the last 40 years of reducing inflation remain in place. There are signals that this is no longer true on the left.

Stagflationary Mark said...

For what it is worth, my predictions here certainly don’t have “sure thing” 100% confidence levels. Perhaps 66%?

That’s like two bullets in the revolver for a game of Russian investment roulette.

Further, I might add that if we do return to a 1979s style stagflation event, it probably won’t end there. Next stop hyperinflation?

On the other hand, more deflationary robots are coming. Way more. Manufacturing. Packing boxes. Delivering. Providing security from angry dystopian mobs. *cringe*

Stagflationary Mark said...

Bonus risks to these predictions: large-scale terrorist attack(s), historic natural disaster(s), widespread electric grid failure(s), future pandemic(s), and/or anything else that could disrupt fragile energy and/or consumer goods supply chains.

Anonymous said...

Come for the blog posts, stay for the sunny commentary! Lol.

Stagflationary Mark said...

Yes! Very sunny. I can see all obstacles in my way.

https://youtu.be/g_rB4v75jqU

Hahaha! ;)

Stagflationary Mark said...

Bonus sunny song:

https://youtu.be/KQetemT1sWc

Here comes the sun! Woohoo!

Washington health officials want people to prepare for wildfire smoke

Most of the West Coast is facing extreme or exceptional drought, which is creating a grim outlook for wildfire season.

D’oh! ;)

Mr Slippery said...

I'm also in the US following Japan's lead camp. While there are differences in the countries, the debt is a boat anchor on both and has so far led to similar results.

That doesn't mean the US can't break its economy more. Fiscal spending created an inflation impulse we haven't seen in a long time. Biden wants to spend an additional $3.5 trillion on Great Society social welfare programs that remind me of LBJ. That kind of spending, with central bank accommodation (and a war) led to the inflation monster of the 1970s. I'm not saying it is likely, but possible. All we need is bad policies in place long enough.

Stagflationary Mark said...

Mr Slippery,

In other words, never underestimate the ability of a sufficiently determined government to create a currency crisis. It’s very easy to accomplish. Barely takes any thinking at all. Just bad decisions.

Japan hasn’t been sufficiently determined yet, nor have we. Yet. The risk is nontrivial each year, and if I were an immortal betting man then I’d bet all that I own that a currency crisis is coming in my lifetime. I’m not immortal though, so it’s all about the odds each year versus my remaining lifespan. *shrug*

Who Struck John said...

An alternate inflation index: Campbell's Tomato Soup
https://politicalcalculations.blogspot.com/2021/07/absence-of-discounts-confirms-tomato.html

Who Struck John said...

Mr. Slippery left out one factor: oil price shock. Well, thanks to the new administration's policies, we got that: Brent and West Texas Intermediate over $65 a barrel. They were always going to rise from the pandemic low, but stifling US and Canadian production certainly doesn't help.

Stagflationary Mark said...

As an added bonus:

https://www.google.com/amp/s/mobile.reuters.com/article/amp/idUSKBN1IB0HL