What kind of inflation are we experiencing?

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Re: What kind of inflation are we experiencing?

Post by Pointedstick » Fri May 27, 2022 5:22 pm

Interesting and telling that in terms of returns, the 100% stock portfolio was the best overall (at least in the USA; negligible difference in the UK example). This pretty much supports my thinking over the past couple of years that the best long-term portfolio is 100% stocks. If you don't want to or can't touch the money for 20, 30, or 40 years, the drawdown this year, or over 2 years, or even 5 years or 10 years is irrelevant--at least to your final balance, maybe not to your stomach. :) Obviously this wouldn't be an ideal portfolio for short or medium term savings, or a retiree with a relatively small portfolio that just barely supports their withdrawal rate.
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Re: What kind of inflation are we experiencing?

Post by doodle » Fri May 27, 2022 9:37 pm

Pointedstick wrote:
Fri May 27, 2022 5:22 pm
Interesting and telling that in terms of returns, the 100% stock portfolio was the best overall (at least in the USA; negligible difference in the UK example). This pretty much supports my thinking over the past couple of years that the best long-term portfolio is 100% stocks. If you don't want to or can't touch the money for 20, 30, or 40 years, the drawdown this year, or over 2 years, or even 5 years or 10 years is irrelevant--at least to your final balance, maybe not to your stomach. :) Obviously this wouldn't be an ideal portfolio for short or medium term savings, or a retiree with a relatively small portfolio that just barely supports their withdrawal rate.
I don't know why but I have this feeling that the next 100 years will be significantly different in terms of economic growth than the previous 100.

-All industrialized nations are static to shrinking demographically

-We are hitting ecological limits to continued compound growth

-The most productive mines, soils and fossil fuels have already been exploited.

-technoligical progress in the last 100 years has been truly exceptional basically vaulting the world from agarianism to walking on the moon in a half a century.

- globalization of supply chains has expanded multinational profitability and seems to be waning.

Can't predict the future... but why the continued optimism in economic growth and corporate profits? What are you seeing that is causing your optimism?
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Re: What kind of inflation are we experiencing?

Post by Pointedstick » Sat May 28, 2022 8:29 am

Couple of things:

1. If the stock market doesn't do well on a global basis for an extended period of time--multiple decades--it's a sign the economy and nation-states themselves aren't doing well, so no other asset classes will do well either. If stocks are consistently in the shitter, it means that overall people are getting poorer or their standard of living is stagnant, or the quality and quantity of goods and services are becoming lower or staying stagnant. Such a scenario of increased scarcity generates instability and war as people fight over what's left. Everyone has bigger things to worry about than their investment portfolios. Bonds of any sort won't do well because long-term contracts often can't be honored. Gold won't do well because it will be too much of a security risk to have, and also its lack of actual utility will become more pronounced in a world of scarcity, driving down demand for it. Nobody will be able to afford useless lumps of metal when they have to worry about how they're going to eat! Real estate will become too risky due to the rising risks of destruction, appropriation, or devaluation as the neighborhood it's embedded degrades. Cash is probably the best but will be repeatedly devalued by inflation due to dumb government policies that cause it by desperately expanding the money supply during a time of economic scarcity, which they can never resist doing.

This would be a world where mere survival once again becomes a regular concern. What investment portfolio you have becomes a non-issue because no investment portfolio will do well.

All investment portfolios are inherently a bet on continued prosperity. This is ultimately the source of my conclusion that "100% stocks" is the best long-term portfolio. There isn't a scenario where you can personally be wealthy while the world crumbles to ashes around you. Those of us who have financial assets worth preserving ought to be the most concerned and active about ensuring the continued sustainability of economic and political institutions.

---

2. Luckily, I don't see the above happening because I'm extremely bullish about energy. The renewable energy revolution is currently making electricity too cheap to meter at various points in time. This isn't theoretical, it's a fact on the ground: in places with a huge renewable installed base, generation routinely needs to be turned off when supply overshoots demand, due to a lack of storage potential (storing large amount of electricity over a large period of time is extraordinarily difficult, expensive, and resource-intensive.) What does this mean? That means generally renewables get over-built so that when there's enough to meet the period of highest demand during their lowest output, there's an absurd excess during their period of highest output. Right now we humans turn them off, wasting that excess generation capacity.

But what if we kept them on and did something useful and profitable with that electricity that can't be sold on the instantaneous retail market? For example: use it to power energy-hungry desalination machines. Boom, cheap and effectively unlimited fresh water and a new revenue stream for owners of electrical generation capacity. Another example: use it to power energy-hungry electrolysis machines to produce hydrogen fuel, which can be sold on a market, yielding yet another revenue stream for owners of electrical generation capacity. Cheap hydrogen fuel means cheap and environmentally sustainable (burning hydrogen produces only water) aviation, nautical shipping, cement production, brickmaking, etc. So we'll be seeing a lot more of those. This is to say nothing of what we can do with electricity that is becoming cheaper all the time due to it being essentially free to produce in the first place, after capital costs. A solar pane is basically a rock that generates electricity for half a century. Once it's installed, it sits there doing useful work and producing someone a profit at practically no cost. This is a crazy thing to wrap your mind around!

We are on the brink of having effectively unlimited and environmentally stable sources of energy, fuel, and water. I think few people truly understand just what a titanic effect this is going to have on the human race.

Yes, other resources will become more limited. Labor will become more expensive as the world population levels off and begins to drop as continuously rising standards of living in the developing world suppress birthrates there too (which is already happening). Non-renewable resources like metals will probably become more expensive too. Of course this will make recycling more economically attractive, which will somewhat blunt that trend. With the global human population stable or falling, I expect the pressure to generate more food and farmland will abate, eventually allowing soils to begin regenerating. This will take a long time of course, and in the meantime the situation with farmland ecology is likely to get worse. I'm not trying to say that everything is going to be perfect. Just that I see very encouraging trends in certain fields that I believe will have positive ripple effects on the course of human civilization. I certainly don't believe that we've reached peak everything and it's just going to be downhill from here. I think that's unrealistic doom porn.
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Re: What kind of inflation are we experiencing?

Post by doodle » Sat May 28, 2022 9:04 am

I'm not as optimistic about renewables as you are. I'm sort of in the camp that fusion is our best option with maybe nuclear as a bridge.

Wind and solar are intensive in terms of input energy for mining, manufacturing, installation, and come with a host of highly polluting processes in production and disposal, limited lifecycles, not suitable for all areas and land intensive....not to mention similar issues related to storage and the tech involved in making that possible. I don't see the present crop of renewables creating a world of abundant free energy at the scale you suggest. What makes you think these hurdles can be overcome so easily for 8 billion people?

I think there is a reasonable likelihood that things don't end in a bang but rather a whimper. Sort of a slow grind sideways a la Japan. This seems to be the norm for human civilization anyways. The last 100 years have been a massive deviation away from historical trend. It's all our grandparents, parents and us have known though and it has produced this idea that this sort of change and growth is somehow normal and to be expected.

I sort of envision a world of less consumption where closets and garages aren't overflowing with crap, shorter work hours and a reevaluation of priorities as to what makes us happy. That isn't a horrible mad max scenario or some futuristic sci Fi world. It's just lower or slightly negative growth...and a recognition that that's ok.
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Re: What kind of inflation are we experiencing?

Post by Pointedstick » Sat May 28, 2022 10:18 am

I would have been super in favor of nuclear 30 years ago when wind and solar were economically uncompetitive. But now they are, and they're outcompeting nuclear, because they are faster to build, cheaper to build, cheaper to operate, require dramatically less labor and effectively no oversight or regulation, don't depend on a fuel supply chain, don't pollute, and can be scaled down to the point where individual property owners and businesses can install them privately. They're just better, really.

Fusion would be great, yeah. Hopefully it eventually works.

Renewables are land-intensive compared to legacy generation technologies, but they can be located in the middle of nowhere where the land has no real value anyway, and the power can be transported elsewhere with an expanded grid. In this way, valueless land is given value and becomes profitable, attracting investment. And indeed this is what we see happening already. It's been happening on a massive scale for 20 years or more.

The production has ecological consequences, yes, but this is true of everything including legacy generation technologies and especially nuclear. It's not a question of whether we'll cause some ecological damage or not, but whether we'll cause some ecological damage in exchange for cheap and clean electricity, or expensive electricity that pollutes on an ongoing basis and is limited by a fragile and/or economically volatile fuel supply chain. There isn't an option for no environmental damage during the production process.

There is also no real technical problem; we don't have to invent anything. We don't need petawatt storage; we just need to overbuild the generation of renewablews, and couple that with an expanded grid and stable and adjustable baseline generation from hydro, geothermal, and nuclear. This isn't a future pie-in-the-sky ideal; we already have all the tech we need, at prices that are already affordable. It is already happening all around us. This is why when I first moved to New Mexico in 2014, the fraction of electricity generation from renewable sources was typically 3-5% on any given day, but today in 2022 it's 30-60%. Neighboring Texas has seem similar crazy growth. California too. The whole US has, to a lesser extent. It isn't super obvious if you're not actively looking for it, but it's happening. Right now we're still building out this new generation capacity, and that built-out is expensive, as any build-out is. But once it's done, the ongoing costs are exceptionally low compared to legacy generation methods.

I think every prediction that we will reduce our consumption has generally been wrong. I see it in a different way: our actual wants and needs are not in fact infinite, and can be met. A person without air conditioning will consume more energy and resources once they get it; a person with effectively free energy will consume even more... until they are cool enough in the summer. Beyond that, they won't go any lower because it wouldn't make any sense. So the demand for AC is not actually unlimited. I think it's the same for everything. We're not going to return more modest ways of living; we're going to get our needs and wants satisfied and be faced with the question of what to do with ourselves as a result. We will have to invent artificial challenges for ourselves to avoid boredom and ennui. So we get hobbies and interests that consume new resources... but these too are not infinite. A person with their basic needs met and a good stable job that provides enough income who takes up playing the guitar may end up buying 3 guitars, or 5, or maybe even 10... but 50? 100? Almost certainly not. Even a typical guitar fanatic gets no real utility from the 51st guitar. I've taken up astronomy and I see this in that hobby too: most people don't end up with 20 telescopes. Most people end up with maybe 1-4. It was pretty much the same thing with guns and shooting as a hobby.

But if you're right and the whole world ends up like Japan, wouldn't we be ecstatic? Japan is a wonderful place: politically stable, high income, high standard of living, high life expectancy, good education, good health care, reasonably affordable, advanced transportation infrastructure, ease of access to the natural world, a strong exporter of goods and culture, a strong military. Who wouldn't want that? It would be marvelous.
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Re: What kind of inflation are we experiencing?

Post by doodle » Sat May 28, 2022 11:14 am

Pointedstick wrote:
Sat May 28, 2022 10:18 am

But if you're right and the whole world ends up like Japan, wouldn't we be ecstatic? Japan is a wonderful place: politically stable, high income, high standard of living, high life expectancy, good education, good health care, reasonably affordable, advanced transportation infrastructure, ease of access to the natural world, a strong exporter of goods and culture, a strong military. Who wouldn't want that? It would be marvelous.
Yes, that's the scenario I was referring to in response to your comment as to why 100% stocks makes sense...

"If the stock market doesn't do well on a global basis for an extended period of time--multiple decades--it's a sign the economy and nation-states themselves aren't doing well"

Japan's stock market hasn't made new highs in 30 years yet their society isn't falling apart. Isn't this possible on a global basis....just a slow unwinding of over a century of compound annual growth to something more reasonable and sustainable? I see US stock market returns outperforming as a short term phenomenon that has spanned a few generations...I don't see this as something that necessarily will continue for another 100 years

That isn't to say that investing in individual corporations in an active sense like Warren Buffett won't outperform...simply that indexing the market and riding a growth wave might not if we live in a world where demographic and economic growth slows to a trickle..
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Re: What kind of inflation are we experiencing?

Post by coasting » Sat May 28, 2022 4:16 pm

Tyler wrote:
Fri May 27, 2022 3:52 pm
I thought you guys might enjoy this one:

Proven Ways to Protect Your Portfolio From Inflation
Great article Tyler, thanks for sharing!
Tyler wrote:
Fri May 27, 2022 3:52 pm
Spoiler alert -- Harry Browne knew what he was doing. 8)
When I first encountered the Permanent Portfolio, it seemed like a crazy idea to me. Then over time I came to appreciate that Harry Browne indeed knew what he was doing.
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Re: What kind of inflation are we experiencing?

Post by Pointedstick » Sat May 28, 2022 6:37 pm

It's often suggested that Japan is 10 years ahead of us, but if that's the case, we can look forward to some pretty good stock returns for at least a little while longer as the Nikkei has been generally rising for 10 years. :) And this a time when their demographic issues have gotten even worse; deaths have been outpacing births at an accelerating rate for every one of those years. So it's not quite as simple as "demographics are destiny." Maybe that's all just asset price inflation... but regardless of the reason, not being in the stock market during that time would have left a lot of money on the table.

Regardless, are there any other Japanese assets that have done significantly better? I admit this is getting past the limit of my knowledge. I do know that Japanese real estate prices have been deflating for decades.
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Re: What kind of inflation are we experiencing?

Post by Kbg » Tue May 31, 2022 12:07 pm

I'm reading "Investing Amid Low Expected Returns: Making the Most When Markets Offer the Least" by Antii Ilmanen and gold actually gets a reasonably positive plug for being a good diversifier. He is a quant PhD and is a researcher (the senior researcher?) at AQR.

Quantitatively the evidence is gold is correlated to real interest rates. I don't have the book with me right now so I can't post the specifics.

In any event...he wouldn't have put this in his book if it didn't have some solid evidence behind it. If you've read either of his books you'll know what I'm talking about.
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