Bitcoin and other crypto-The CR thread

[GRHorn 105]

3 minutes ago, Biff Tannen said:

Hey man, my investment is looking great right now.  I blame my outrage on diabeetus.  But your avatar still sucks.

You said you had a tiny amount?

It’ll be interesting to follow how crypto rich utilize their newfound riches. A lot of people with more libertarian streaks so they’ll prioritize funding different projects/charities.

[Biff Tannen 45769]

1 hour ago, GRHorn said:

You said you had a tiny amount?

It’ll be interesting to follow how crypto rich utilize their newfound riches. A lot of people with more libertarian streaks so they’ll prioritize funding different projects/charities.

I'm just a simple country boy. You might say a cockeyed optimist, who doesn't want to get himself mixed up in the high stakes game of world diplomacy and international intrigue.

[Guest Lobo]

CIO and then his alternative asset portfolio manager, of ERS just said on this zoom call (it's off the record)...said that they are done waiting for the regulatory framework to take shape.  Their I/C is now developing a IPS criteria for digital assets/Crypto investments at the fund level (not converting assets to Crypto obviously).  Once public institutional funds start investing in stuff like this, that's a sign the fight to invalidate them is coming to a draw.  

[GRHorn 105]

5 minutes ago, Lobo said:

CIO and then his alternative asset portfolio manager, of ERS just said on this zoom call (it's off the record)...said that they are done waiting for the regulatory framework to take shape.  Their I/C is now developing a IPS criteria for digital assets/Crypto investments at the fund level (not converting assets to Crypto obviously).  Once public institutional funds start investing in stuff like this, that's a sign the fight to invalidate them is coming to a draw.  

What, are you in the military? What's with all the acronyms? I know CIO but after that I'm lost.

[Guest Lobo]

When talking about Investments, I/C usually means Investment Committee.  IPS is Investment Policy Statement.  

I thought everybody in Texas knows TRS and ERS.  Teacher's Retirement System and Employee's Retirement System.  Everybody knows somebody who is either a public school teacher or works for the state.  
 

I wasn't trying to be cryptic, on a thread that deals with investments, sometimes there'll be investment acronyms.  

[GRHorn 105]

21 minutes ago, Lobo said:

When talking about Investments, I/C usually means Investment Committee.  IPS is Investment Policy Statement.  

I thought everybody in Texas knows TRS and ERS.  Teacher's Retirement System and Employee's Retirement System.  Everybody knows somebody who is either a public school teacher or works for the state.  
 

I wasn't trying to be cryptic, on a thread that deals with investments, sometimes there'll be investment acronyms.  

I didn’t think you were being cryptic. I just didn’t recognize those. Thanks. 
 

For the purposes of the CR thread on this topic and relating to your post. It’s becoming irresponsible for institutional investors like pensions to have zero allocation to Bitcoin. The old school 60/40 portfolio is going to go by the wayside. See fiscal irresponsibility thread. So how does that 40% to bonds get altered? It seems like a natural to move at least small amount to a high performing, non correlated asset like bitcoin. 
 

So when entities like the Harvard Endowment and Calpers and Texas ERS start holding some and it performs well just another roadblock in the way of “banning” Bitcoin. 

It’s already happening.

https://finance.yahoo.com/news/harvard-yale-brown-endowments-buying-213404726.html

To go even further CR, then the real question is when does it become irresponsible for global central banks to not be holding some? Starting with the smaller ones. 

Edited March 15, 2021 by GRHorn

[Guest Lobo]

I don't think we're close to seeing institutional funds "holding" the currencies.  What we were talking about this morning was them investing in companies in the crypto-space like custodians, brokers, et. al.  I think that's their first toe in the water, then you'll see them actually convert some assets to crypto-currencies, after that---large banks (primarily those who hold the cash/cash equivalents of said public funds) will go in as well.  Anyway, volumes have been written on this, even on this site. 

But just threw that out there this morning because when a group like ERS or UTIMCO says they're starting to put real due diligence parameters on how to underwrite crypto-deals...that's a big move for three reasons.  1---that's a massive capital pool, 2---smaller endowments and pension funds look to groups like ERS, TRS, and CalPERS for how to sculpt their own asset allocations, 3---groups like these have massive government oversight at the state level (typically the board members not only have to have expertise but also political connectivity) and if you start seeing both Red and Blue states not giving a fuck about the Federal Government dragging its feet on digital currencies...you're gonna see a couple dozen state-level investment funds (Pension, Thrift, et. al.) get into this space by the end of the decade (likely much sooner).  At that point, it won't really matter what the SEC/FINRA/Federal Reserve/CFPB decides to do. Shit, the OCC (Office of the Comptroller of the Currency---the regulator for federally chartered banks) has basically told our bank that we're only 3 years away from being able to bank digital currencies, and a year away from being able to recognize them as collateral for traditional loan platforms.  
 

The real reason the feds will get worried about what I'm describing is the amount of cash and cash equivalents that sits in large banks who are part of the Federal Reserve banking system that these state-level public investment funds (there's hundreds of them nationwide) total in the hundreds of billions, if not trillions.  I'm talking about just the ~5% in cash.  They start putting chunks of that into digital currencies, that's gonna be a slightly bigger deal than a few thousand rich people putting $1m each into bitcoin.  

So I think you'll see them investing at the VC/alt. levels in the space, but the actual holding of assets in bitcoin/etc. won't be for several more years.  Because state governments can't print their own money.  That's why so many states have balanced budget amendments.  They can't monetize their own debt.  But a crypto-currency for state retirement funds, rainy day funds, municipal capital funds, etc.  5% of that starts leaving the banking system, that's gonna raise some eyebrows in Washington.  They're not worried about deep web drug dealers using bitcoin or day trader speculators not paying enough in taxes.  They're worried the world's reserve currency won't be toppled be another foreign government, they're worried it'll be usurped by its own 50 states.  

Then again, it's Monday morning and I don't start thinking until well after a 2-martini lunch.  

[GRHorn 105]

46 minutes ago, Lobo said:

Shit, the OCC (Office of the Comptroller of the Currency---the regulator for federally chartered banks) has basically told our bank that we're only 3 years away from being able to bank digital currencies, and a year away from being able to recognize them as collateral for traditional loan platforms.  

These things are already happening with at least one publicly traded, Federal Reserve member bank, Silvergate. Small, but they're at the forefront of the industry.

 

57 minutes ago, Lobo said:

but the actual holding of assets in bitcoin/etc. won't be for several more years.

Again, already happening if reports with anonymous sources are to be believed and in the CR I believe they are, without questioning. See the article I linked in prior post.

[wildcat09 29453]

On 3/14/2021 at 9:14 AM, GRHorn said:

It came up again in the fiscal irresponsibility thread. Here’s a good column I found a couple weeks late regarding possible government attacks on Bitcoin. Just trying to help you out @Biff Tannen It’s not too late.  

 

Quillette? What's next, links on why phrenology is real science?

[GRHorn 105]

24 minutes ago, wildcat09 said:

Quillette? What's next, links on why phrenology is real science?

oh noes, did i link to an unapproved outlet?

[Dahobbs 17812]

In other news:

Quote

 

Report: Indian government is planning outright ban on cryptocurrency

The government of India is planning to introduce legislation banning cryptocurrency, Reuters reports. The law would impose fines on anyone who trades, mines, or even holds cryptocurrency. The government has a comfortable majority in parliament, giving the proposal a good shot at becoming law.

This would make India one of the most cryptocurrency-hostile jurisdictions in the world. China, for example, has imposed a number of restrictions on trading and mining cryptocurrency, but it hasn't banned ownership of cryptocurrencies outright.

 

https://arstechnica.com/tech-policy/2021/03/report-indian-government-is-planning-outright-ban-on-cryptocurrency/

Good think for @GRHorn that "the incentive to attack Bitcoin is dwindling."

[workswithseed 2140]

2 hours ago, Dahobbs said:

In other news:

https://arstechnica.com/tech-policy/2021/03/report-indian-government-is-planning-outright-ban-on-cryptocurrency/

Good think for @GRHorn that "the incentive to attack Bitcoin is dwindling."

"Officials seem to be worried that ordinary Indian consumers could make bad cryptocurrency bets and lose their savings as a result. Bitcoin's price rose above $60,000 for the first time over the weekend—double its value at the start of the year. But there have been periods in the past where bitcoin has lost more than 80 percent of its value in a few months."

I hope you don't want gambling to come to Texas if that's the reason.

[Dahobbs 17812]

17 minutes ago, workswithseed said:

"Officials seem to be worried that ordinary Indian consumers could make bad cryptocurrency bets and lose their savings as a result. Bitcoin's price rose above $60,000 for the first time over the weekend—double its value at the start of the year. But there have been periods in the past where bitcoin has lost more than 80 percent of its value in a few months."

I hope you don't want gambling to come to Texas if that's the reason.

I don't know what Texas and India have to do with each other in this context. 

 

[workswithseed 2140]

1 minute ago, Dahobbs said:

I don't know what Texas and India have to do with each other in this context. 

 

It's a shitty reason to get rid of something.

[GRHorn 105]

2 hours ago, Dahobbs said:

In other news:

https://arstechnica.com/tech-policy/2021/03/report-indian-government-is-planning-outright-ban-on-cryptocurrency/

Good think for @GRHorn that "the incentive to attack Bitcoin is dwindling."

It’ll be interesting to see how well they are able to enforce liquidation of crypto. I’m assuming they make the exchange cited in the story provide info on all clients. Then they go door to door? Not going to be easy.

Let me show you how I could and would work around it. You seem to have a limited knowledge of the system. I pull my coins off the exchange into a hardware wallet (cold storage). If the Indian Feds track me down I say l lost my hardware wallet and the recovery phrase in a fire. Damn the luck. Will they put you in jail for that? It just said fines in the article. Could they even prove a crime? You don’t “own” them anymore. They’re lost, as far as they can tell. 
 

Let’s say I want to buy Bitcoin after this law is passed. Get a vpn, go on foreign exchange and buy some. Pull it offline. Voila. 
 

All that said, comparing India and USA in anything crypto related is a little misleading. More holders are in the US  than anywhere else. Larger institutions and powerful individuals are becoming advocates. The snowball is getting bigger as it’s rolling down the hill. 

[Dahobbs 17812]

46 minutes ago, workswithseed said:

It's a shitty reason to get rid of something.

What does that matter? The point is India is doing it, whether it is for the reason stated or to elimate competition with its own proposed digital currency. 

[Dahobbs 17812]

26 minutes ago, GRHorn said:

It’ll be interesting to see how well they are able to enforce liquidation of crypto. I’m assuming they make the exchange cited in the story provide info on all clients. Then they go door to door? Not going to be easy.

Let me show you how I could and would work around it. You seem to have a limited knowledge of the system. I pull my coins off the exchange into a hardware wallet (cold storage). If the Indian Feds track me down I say l lost my hardware wallet and the recovery phrase in a fire. Damn the luck. Will they put you in jail for that? It just said fines in the article. Could they even prove a crime? You don’t “own” them anymore. They’re lost, as far as they can tell. 
 

Let’s say I want to buy Bitcoin after this law is passed. Get a vpn, go on foreign exchange and buy some. Pull it offline. Voila. 
 

All that said, comparing India and USA in anything crypto related is a little misleading. More holders are in the US  than anywhere else. Larger institutions and powerful individuals are becoming advocates. The snowball is getting bigger as it’s rolling down the hill. 

I mined bitcoin early on. I understand it well enough. I'm just pointing out the very danger that I mentioned previously, governments outlawing the currency, is starting to happen.

[GRHorn 105]

10 minutes ago, Dahobbs said:

I mined bitcoin early on. I understand it well enough. I'm just pointing out the very danger that I mentioned previously, governments outlawing the currency, is starting to happen.

Fair enough. And I pointed out the easy ways to work around the laws described. 
 

Governments try to ban lots of things people want. Drugs, sex, uninflatable and uncensorable money. These things are still available and in fact they thrive. In the case of Bitcoin, the fact that governments are scared of its competition should be a sign that the average person should look into it more closely. 

[GRHorn 105]

 

[RPM 26430]

XVG is the highest it's been since 6/2018 and it's steady climbing.  Cheap buy in on a longshot.

[956 Worldwide 34939]

On 3/16/2021 at 2:03 AM, GRHorn said:

Fair enough. And I pointed out the easy ways to work around the laws described. 
 

Governments try to ban lots of things people want. Drugs, sex, uninflatable and uncensorable money. These things are still available and in fact they thrive. In the case of Bitcoin, the fact that governments are scared of its competition should be a sign that the average person should look into it more closely. 

“Bitcoin can be the next drugs” is a weird flex for someone who started out arguing that Bitcoin is going to be the next money. Your arguments seem all over the place with the only constant being “Bitcoin is the answer.”
 

Although, cocaine’s value has been pretty stable for almost 30 years and in a lot of ways is a pretty good medium of exchange. 

[GRHorn 105]

4 minutes ago, 956 Worldwide said:

“Bitcoin can be the next drugs” is a weird flex for someone who started out arguing that Bitcoin is going to be the next money. Your arguments seem all over the place with the only constant being “Bitcoin is the answer.”
 

Although, cocaine’s value has been pretty stable for almost 30 years and in a lot of ways is a pretty good medium of exchange. 

I said nothing of the sort. It’s fascinating that is what you synthesized from my post.  

[956 Worldwide 34939]

6 minutes ago, GRHorn said:

I said nothing of the sort. It’s fascinating that is what you synthesized from my post.  

You laid out the parallels pretty explicitly. “Yes, governments can try to ban Bitcoin just like they tried to ban drugs. But the laws will be circumventable (also true of drugs). Drugs are available and thrive, so will Bitcoin. The average person should be interested in it because the government wants to ban it.”

[washparkhorn 9939]

3 hours ago, GRHorn said:

 

You are measuring inflation incorrectly. Asset bubbles = no economic goods are directly produced. Asset bubbles are sensitive and volatile, possibly creating the illusion of growth 

The Fed and Treasury are hoping we get at least 2% inflation by 2023.  Deflationary headwinds pose a much greater risk to this economy.

Deflation = 

Deflation is the looming specter threatening our economy, not inflation. Don't know what you Casino boys are squawking about. 

[GRHorn 105]

37 minutes ago, 956 Worldwide said:

You laid out the parallels pretty explicitly. “Yes, governments can try to ban Bitcoin just like they tried to ban drugs. But the laws will be circumventable (also true of drugs). Drugs are available and thrive, so will Bitcoin. The average person should be interested in it because the government wants to ban it.”

So that equals “Bitcoin can be the next drugs”? Cmon 

 

Yes when the government wants to ban an asset like Bitcoin you should be interested. They’re scared of the competition essentially. Why are they? Is it better money? 
 

20 minutes ago, washparkhorn said:

You are measuring inflation incorrectly. Asset bubbles = no economic goods are directly produced. Asset bubbles are sensitive and volatile, possibly creating the illusion of growth 

The Fed and Treasury are hoping we get at least 2% inflation by 2023.  Deflationary headwinds pose a much greater risk to this economy.

Deflation = 

Deflation is the looming specter threatening our economy, not inflation. Don't know what you Casino boys are squawking about. 

Rising commodity prices are not asset bubbles. They are signs of inflation. 
 

[washparkhorn 9939]

20 minutes ago, GRHorn said:

Rising commodity prices are not asset bubbles. They are signs of inflation. 

No offense, but incorrect. Commodities tend to reflect changes in the dollar's relative strength in international markets rather than domestic inflation pressures.

[washparkhorn 9939]

The irrational fear of non-existent inflation is the graveyard for public investment in humans. It's part of the austerity handbook. 

__________________________________________

[GRHorn 105]

12 minutes ago, washparkhorn said:

No offense, but incorrect. Commodities tend to reflect changes in the dollar's relative strength in international markets rather than domestic inflation pressures.

They can be a leading indicator and have been in the past. 

 

12 minutes ago, longhornmatt said:

Did you really post that if the government makes a currency illegal, that’s a sign that the average person should look more closely at investing in it?   Come on, man.

Yes. A strong government and currency doesn’t need to ban competitors.
 

People in India and Nigeria should be, and in Nigeria have been, looking into Bitcoin as an alternative or hedge to their own shitty currency. There’s a reason those countries are pursuing bans. 

[washparkhorn 9939]

10 minutes ago, longhornmatt said:

Hey, I wonder if there is any non-inflation related reason why oil and gas commodity prices are much higher than they were in March 2020? That’s a puzzler.

Never let a statistical anomaly (the onset of Covid) go to waste.  ~ Debt Fetish Austerity Ghouls

[GRHorn 105]

 

[GRHorn 105]

He sounds pretty positive here. Maybe McCarthy has a bag. Anyway, it’s the right approach to try to embrace it IMO. 

[RPM 26430]

So funny story... In 2018 I was playing cheap crypto looking for a quick jump. I chose Verge XVG at .12 and it promptly fell to <.01. In the process of swapping USD for BTC so I could buy XVG (geekspeek) I left $500USD in Bitcoin in a wallet. I randomly checked my crypto accounts which I thought was all XVG and found the $500 BTC had grown to almost $3K USD. Now Do I let it ride (house money) or take the money and run? Is BTC in a bubble or is it going to grow 4 fold again?

[GRHorn 105]

 

[GRHorn 105]

On 4/15/2021 at 12:23 PM, RPM said:

Is BTC in a bubble or is it going to grow 4 fold again?

I see 200k happening this year, but I’m an optimist. 

[wildcat09 29453]

Bitcoin miners should be executed.

[GRHorn 105]

38 minutes ago, wildcat09 said:

Bitcoin miners should be executed.

 

[elfenix 34387]

so who made a shitton on doge?

[Biff Tannen 45769]

1 hour ago, GRHorn said:

 

Well this is fantastic.  I'm sure our electrical grid will hold up just fine, as we definitely don't have any problems with that.  God dammit.

[GRHorn 105]

1 hour ago, Biff Tannen said:

Well this is fantastic.  I'm sure our electrical grid will hold up just fine, as we definitely don't have any problems with that.  God dammit.

The vast majority of Bitcoin mining in Texas will be off of flared gas from oil wells. 
 

In any case, these are great developments for Texas. Looking forward to the state actually devoting some of its own funds to Bitcoin. It would be a wise move to strengthen our financial position. UTIMCO held (still holds?) gold bullion in NYC vaults. Why not do hold some of this store of value that’s going to appreciate?

It would help further establish Texas and Austin specifically as a burgeoning tech/Bitcoin hub. There’s already a large contingent of prominent bitcoiners in Austin to build on.
 

From a competitive standpoint Miami is making a similar push as well. 

[Biff Tannen 45769]

9 minutes ago, GRHorn said:

The vast majority of Bitcoin mining in Texas will be off of flared gas from oil wells. 

Against my better judgement, I'm going to ask.  How?

[Dbeasy 15235]

On 3/24/2021 at 6:02 PM, washparkhorn said:

You are measuring inflation incorrectly. Asset bubbles = no economic goods are directly produced. Asset bubbles are sensitive and volatile, possibly creating the illusion of growth 

The Fed and Treasury are hoping we get at least 2% inflation by 2023.  Deflationary headwinds pose a much greater risk to this economy.

Deflation = 

Deflation is the looming specter threatening our economy, not inflation. Don't know what you Casino boys are squawking about. 

 Can you explain a bit more why you are so confident on inflation not being a threat? We have not seen these types of price increases on so many commodities and non-commodities since the 70’s. 

[GRHorn 105]

Actually missed this a while back. 

 

[GRHorn 105]

33 minutes ago, Biff Tannen said:

Against my better judgement, I'm going to ask.  How?

Your curiosity is appreciated. 

Edited May 5, 2021 by GRHorn

[Biff Tannen 45769]

1 hour ago, GRHorn said:

 

Ok that is actually pretty cool.  Not sure how many people have the means for this, but ok.

[GRHorn 105]

Just now, Biff Tannen said:

Ok that is actually pretty cool.  Not sure how many people have the means for this, but ok.

My understanding is that the economics of it are a slam dunk. The energy would be lost anyway. It also supposedly lessens the environmental impact with the way it’s captured. Of course that comes from its proponents. 

[washparkhorn 9939]

39 minutes ago, Dbeasy said:

 Can you explain a bit more why you are so confident on inflation not being a threat? We have not seen these types of price increases on so many commodities and non-commodities since the 70’s. 

A nice article from Forbes on commodity prices and inflation:

On the surface, it looks bad. Commodity prices are way up. The media is on alert. Inflation worries have dominated the headlines for months. (This weekend even Warren Buffett joined the outcry: “Buffett Warns on Inflation Amid Red Hot US Recovery” - The Financial Times, May 3.) 

And isn’t it obvious? Don’t rising prices constitute inflation by definition? 

The answer is no. Commodity prices and consumer inflation are quite different phenomena. The idea that commodity price increases will drive up consumer prices is plausible – but it is incorrect. Basic commodity prices no longer have any significant effect on long-term inflation.  

In fact, over the past 10 years, the correlation of major commodity prices and consumer price inflation is negative (except for crude oil, which is only slightly positive). Over the long term rising commodity prices have been associated with falling inflation rates. This statement holds whether we look at broad trends or at individual commodity-to-product linkages, like steel and autos, or wheat and bread. (It’s true. Read on.)

Spoiler

My previous column – “The Inflation Scare Does Not Match Reality” – drew a lot of pushback from readers who cited recent large price increases for a wide range of basic commodities, as a sign of inflationary pressure just around the corner.  

Commodity Price Increases Since March 2020

 CHART BY AUTHOR; FATA FROM THE FEDERAL RESERVE, AND BLOOMBERG

 

On the surface, it looks bad. Commodity prices are way up. The media is on alert. Inflation worries have dominated the headlines for months. (This weekend even Warren Buffett joined the outcry: “Buffett Warns on Inflation Amid Red Hot US Recovery” - The Financial Times, May 3.) 

And isn’t it obvious? Don’t rising prices constitute inflation by definition? 

The answer is no. Commodity prices and consumer inflation are quite different phenomena. The idea that commodity price increases will drive up consumer prices is plausible – but it is incorrect. Basic commodity prices no longer have any significant effect on long-term inflation.  

In fact, over the past 10 years, the correlation of major commodity prices and consumer price inflation is negative (except for crude oil, which is only slightly positive). Over the long term rising commodity prices have been associated with falling inflation rates. This statement holds whether we look at broad trends or at individual commodity-to-product linkages, like steel and autos, or wheat and bread. (It’s true. Read on.)

Definitions & Explanations

Consumer inflation figures are based on the prices consumers pay for the things they ordinarily buy directly. Consumers do not buy commodities directly. They buy manufactured consumer products. Consumers do not buy cotton as a commodity. They buy clothing. They do not buy aluminum ingots. They buy Reynolds Wrap. No consumer buys crude oil; gasoline is a manufactured product. Even agricultural commodities like corn and wheat are processed into the manufactured food products that consumers actually buy.

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Commodity prices affect consumer prices only indirectly, and only partially. For many of the products people buy today, commodities constitute a very small percentage of the manufactured cost, and an even smaller percentage of the retail price. Basic commodities – like steel or glass – comprise just a tiny part of the price the consumer pays for, say, a computer, or an iPhone. 

But what about the non-digital segment of the economy? Isn’t it more likely to be sensitive to commodity price movements? 

Cars & Steel: A Case in Point

The main commodity input for an automobile is steel, said to be perhaps 10% of the manufacturing cost. From Automotive News: 

 

• “Raw materials in a typical North American-built vehicle cost $2,000. Four commodities account for the bulk of a vehicle's raw material cost: steel, aluminum, plastic resin and copper.…”

 

Steel is priced today at something like $1300-1400 per ton (for the hot-rolled benchmark). A typical car uses about 900 Kg of steel. So, the cost of the steel is probably less than $2000 per vehicle. Toyota built about 2 million cars in its North American plants in 2018. The consumer price of those vehicles at retail, at an average of, say, $30,000 per vehicle, would equate to something over $60 Bn. The company spent $1.8 Bn on steel for North American production that year. Less than $1000 per vehicle. Less than 3% of the retail value. A 100% rise in the price of steel might impact the final price of the car by a few percentage points, assuming the cost is fully passed through and there are no design adjustments.

The manufacturer may choose to absorb some or all of a commodity price increase, if it is viewed as temporary. Most manufacturers do their best to smooth out commodity price fluctuations, absorbing some costs during periods of rising prices, and enjoying margin improvements during downward moves, keeping the prices to their customers more stable. As a result, commodity prices are much more volatile than the Consumer Price Index (CPI).  

 

Steel Prices Are Much More Volatile Than New Car Prices

 CHART BY AUTHOR; DATA FROM THE FEDERAL RESERVE

The correlation of New Car prices with the price of Steel over the last 10 years is negative 4.6%.

This pattern shows up in other comparisons of the prices of other key commodities with manufactured goods derived from them. For example, the price of Breakfast Cereal (a manufactured product, and a component of the CPI) is essentially uncorrelated with the prices of commodities like wheat (-1.1%), corn (4.7%), and sugar (0.5%). Bread prices, a consumer product, is much less volatile than wheat prices. 

  

Wheat Is Much More Volatile Than Bread

 CHART BY AUTHOR; DATA FROM THE FEDERAL RESERVE

 

Manufacturers have learned how to buffer consumers from commodity fluctuations. Most consumer products now create value through technology, design, packaging, processing, brand equity. The issue here is not whether commodity prices rise or fall, but whether and how much they are translated into price impacts on the finished goods that consumers actually buy.

Commodity Prices vs Consumer Prices

What about the inflationary impact then? 

The Federal Reserve Bank of St Louis maintains and publishes a huge number of data series tracking commodity prices. Some price series date from the 1920s; others were started more recently. The Consumer Price Index dates from 1958. (We’ll use the version of the CPI that excludes volatile food and energy costs, which is generally accepted today as the best measure.)

The Long View

Over longer time periods, the correlations of commodity prices with the CPI are generally quite low, some are negative. The relationship between the two sets of price data is quite weak. Even the 27% correlation for iron and steel is a rather poor predictor.

Correlation of Long-Term Commodity Prices with the CPI

 CHART BY AUTHOR; DATA FROM THE FEDERAL RESERVE

 

The Last Decade

If we consider just the past decade, the picture clarifies. All the major commodities (except crude oil) show negative correlation with the CPI.   

Correlation of Commodity Prices with the CPI Over a 10-Year Term 

CHART BY AUTHOR; DATA FROM THE FEDERAL RESERVE

The Secular Decline of Commodities as a Driver of Consumer Pricing

Over the last 50 years, the U.S. economy has been “de-commoditizing.” In the 1960s, commodity prices like steel and oil drove consumer prices, quite strongly. Today, most of the value-added by companies is in the form of differentiated products and services, and the assets that support that differentiation – brand equity, design, intellectual property, data. The importance of physical commodities in the cost structure has greatly diminished. The products we buy – the prices of which determine the CPI – are no longer heavily commodity-based. In the 1960s, if you tracked the price of steel or crude, you could predict consumer price inflation quite accurately. Today, these price series are uncorrelated, even negatively correlated. 

Correlation of Commodity Prices with the CPI, By Decade

 CHART BY AUTHOR; DATA FROM THE FEDERAL RESERVE

The world has changed. Commodities are not longer the major drivers of consumer prices.

Average Correlation of Major Commodities with the CPI, by Decade

 CHART BY AUTHOR; DATA FROM THE FEDERAL RESERVE

Even a supply-chain relationship as closely linked as Wheat to Bread shows a secular trend of a weakening relationship between commodity pricing and consumer pricing. 

 

Correlation of Bread and Wheat Prices, By Decade

 CHART BY AUTHOR; DATA FROM THE FEDERAL RESERVE

The Relevance for Inflation Forecasts

Recent increases in commodity prices probably do not imply a sustained rise in inflation. The consumer economy is simply much less sensitive to commodity prices than it once was. 

As well, the price series for all these commodities are full of spikes and surges over the last decade which are similar to, and sometimes more extreme than, what we see today – and which did not ignite sustained inflation.

 

• Copper was 10% more expensive in 2011 than it is today, and the inflation rate averaged less than 2% from 2011-2015. 
• Crude oil prices doubled between 2007 and 2011. Inflation declined from 2.7% to 1.6%. 

 

Fed Chairman Powell – in his recent press conference – also alluded to “bottlenecks” as a source of transitory price spikes. A bottleneck condition is a (temporary) imbalance between supply and demand, usually caused when demand surges more quickly than industry can respond. And yes, the price may then rise – often dramatically. But producers are able and eager to respond to the increase in demand, sell more, enjoy the higher profits. Supply ramps up. After a delay, prices typically fall back again to their “normal” level. 

The pandemic disrupted all the trends in economic activity. The graph of retail sales – which is the game board on which inflation plays out – is extraordinary. 

 

Retail Sales -- The Great Glitch

 CHART BY AUTHOR; DATA FROM THE FEDERAL RESERVE

The plunge in consumer spending, followed by a surge of postponed purchases, has thrown many industries into severe supply/demand imbalances. (It has also thrown off the calibration of all the standard inflation metrics, like the CPI. Which is a story for the next column.) Bottlenecks are to be expected and will impact consumer pricing somewhat. But producers will respond by increasing the supply. The price effects will be temporary, not structural.  

The other big factor in this is technology. “Digital” is crushing cost structures everywhere, in every industry. It is changing the locus of competitive advantage and value-creation. Commodities are not important for digital (and digitalizing) businesses. Consider the design shift that has taken place in the automotive industry. A new car today embeds dozens of microprocessors. A high end BMW or Mercedes has over 100 computer chips, and millions of lines of software. The MIT Technology Review reported that the “typical new-model vehicle comes with 100 million lines of code…” — and that was in 2012. That is where the manufacturer’s value-added is. It has nothing to do with the price of steel. Reflecting this, the correlation of Steel prices with with New Car prices has gone from strongly positive before 1989, to negative (– 11%) since then. The car business is no longer about bending metal. 

Correlation of Steel Prices with New Car Prices

 CHART BY AUTHOR; DATA FROM THE FEDERAL RESERVE

Digital product evolution plays havoc with simplistic pricing metrics like the CPI. The broad impact of technology is strongly deflationary, which neutralizes the significance of commodity prices. In trying to forecast inflation trends, and to predict the policy responses to them (i.e., the Fed’s moves), it is simply a mistake to focus on commodity prices. They may not be completely useless, as far as short-term effects are concerned (the bottlenecks), but they no longer predict sustained consumer inflation.

Which brings us to the crux of the matter. “Inflation” itself is fundamentally a problematic concept. It arose from and applies mainly to prices for undifferentiated physical commodities. It was relevant in the era of industrial economies that dominated the 19th and much of the 20th centuries, when those commodities made up the lion’s share of the cost structure for most consumer goods. It may not be relevant any longer in a technology-driven digital economy, where intangible assets matter more. The disconnect between commodity prices and consumer prices is an important symptom of this change.

Which brings us to the crux of the matter. “Inflation” itself is fundamentally a problematic concept. It arose from and applies mainly to prices for undifferentiated physical commodities. It was relevant in the era of industrial economies that dominated the 19th and much of the 20th centuries, when those commodities made up the lion’s share of the cost structure for most consumer goods. It may not be relevant any longer in a technology-driven digital economy, where intangible assets matter more. The disconnect between commodity prices and consumer prices is an important symptom of this change.

https://www.forbes.com/sites/georgecalhoun/2021/05/05/commodity-price-increases-do-not-create-inflation/?sh=2685dd4e57cb

[washparkhorn 9939]

57 minutes ago, Dbeasy said:

 Can you explain a bit more why you are so confident on inflation not being a threat? We have not seen these types of price increases on so many commodities and non-commodities since the 70’s. 

@Dbeasy - a nice measurement to follow for how the Fed measures inflation risk:

[Dbeasy 15235]

Thanks for those posts. I had seen some similar articles about commodities. I understand the points being made. 

Here are the reasons I’m still concerned:

1. Multiple people have correctly shown that the official inflation numbers posted by the government deviate dramatically from what people actually put for the goods and services they buy every year. Many of these studies show actual inflation to the consumer of 5-8% annually. For years, consumers just sucked it up and didn’t demand enough higher pay to offset the increases. A tight labor market will put pressure on wages, in my opinion, for the first time in a very long time  

2. As the article correctly points out, a big portion of the economy is now driven by services and digital. Both of those categories have a difficult time absorbing cost increases. It’s one of the reasons health costs go up every year as much as they do. We are now seeing regular price increases in almost all services and digital services. Netflix, doctors, etc. 

3.  With 1 and 2, I see prices rising at the consumer level and it has nothing to do with bottlenecks. 

that’s why I’m still concerned. 

[washparkhorn 9939]

7 minutes ago, Dbeasy said:

Thanks for those posts. I had seen some similar articles about commodities. I understand the points being made. 

Here are the reasons I’m still concerned:

1. Multiple people have correctly shown that the official inflation numbers posted by the government deviate dramatically from what people actually put for the goods and services they buy every year. Many of these studies show actual inflation to the consumer of 5-8% annually. For years, consumers just sucked it up and didn’t demand enough higher pay to offset the increases. A tight labor market will put pressure on wages, in my opinion, for the first time in a very long time  

2. As the article correctly points out, a big portion of the economy is now driven by services and digital. Both of those categories have a difficult time absorbing cost increases. It’s one of the reasons health costs go up every year as much as they do. We are now seeing regular price increases in almost all services and digital services. Netflix, doctors, etc. 

3.  With 1 and 2, I see prices rising at the consumer level and it has nothing to do with bottlenecks. 

that’s why I’m still concerned. 

If concerned about inflation, TIPS are one hedge:

https://www.forbes.com/advisor/investing/treasury-inflation-protected-securities-tips/

Treasury Inflation Protected Securities, or TIPS, are bonds issued by the U.S. government that offer protection against inflation plus modest interest payments.

“Many investors save and invest so they can spend in the future,” says Wes Crill, head of investment strategists at Dimensional Fund Advisors in Austin, Texas. “For investors prioritizing preservation of purchasing power, TIPS can contribute to that goal by mitigating the impact of unexpectedly high inflation.”

How Do TIPS Work?
As fixed income securities, TIPS work a lot like the bonds you’re already familiar with. You purchase debt issued by the U.S. government, and receive regular interest payments on the face value, or the par value, of the securities. When the TIPS’s term is up, you are repaid the original amount loaned to the government.

TIPS, however, come with inflation protection baked in. Each year, the U.S. Treasury adjusts the par value of TIPS based on the Consumer Price Index (CPI), a measure of inflation determined by price changes in a basket of leading consumer goods. This helps preserve the purchasing power of your TIPS investment . . .

Spoiler

 

• The value of ordinary bonds, with a fixed par value, is eroded over time by inflation. That is, unless the bond’s interest rate exceeds the approximate 2% average U.S. inflation rate.
  • “Indexing the bond’s value to inflation helps protect investors from an erosion in purchasing power,” says Crill. This means regardless of how much prices change over the five, 10 or 30 years in a TIPS term, you’ll maintain the purchasing power your par value had when you first bought the TIPS—plus any interest payments you’ve earned.
• What’s more, interest payments are also adjusted for inflation each year. While the interest rate remains constant over the duration of your TIPS term, the interest payment you receive every six months is based on your TIPS’ current par value, meaning they effectively increase with CPI inflation.
  • Note that deflation will reduce the par value of TIPS. It’s very rare, but it remains possible that the value and interest payments of your TIPS may be adjusted downward to reflect negative CPI rates. You never receive less than the original par value of the TIPS upon maturity.

TIPS and Taxes

• As with most investments, TIPS earnings are subject to taxes, at least on the federal level. Earnings are generally exempt from state and local taxes. However, you have to be careful with TIPS because their earnings encompass their interest payments and any inflation adjustments that increase their par value.
  • “In any year when the principal value of a TIPS bond increases due to the inflation adjustment, that gain is considered reportable income for the year, even though the investor won’t receive the inflation-adjusted principal until the security matures,” says Robert Johnson, professor of finance at Heider College of Business at Creighton University. If you don’t plan for this in advance, this may create a small unexpected tax burden, as you won’t have received the updated par value back yet but are still expected to pay income taxes on it.
• In the event that deflation occurs, reducing the par value of TIPS, you may be able to use it to offset other income gains. You generally will only be able to do this if the adjustment exceeds the amount of TIPS interest you earned that year. Speak with a tax professional to determine how TIPS may affect your taxes.

Advantages of TIPS

• For inflation-conscious investors, TIPS have some big advantages.
  • Easy Inflation Insurance
  • TIPS can provide an easy way to engineer an inflation hedge in your portfolio. “This is particularly important for more conservative or income-focused investors,” like those in retirement often are, says Matt Dmytryszyn, director of investments at Telemus, an investment advisory firm in Southfield, Mich.
• In high-inflation environments, TIPS performance may greatly exceed that of traditional government bonds, whose fixed interest payments effectively become smaller over time.
  • Backed by the Full Faith and Credit of Uncle Sam
  • While many investments may outperform inflation over time, TIPS are the only one guaranteed to do this that also have all of the benefits of standard Treasury bonds.
  • “They’re supported by the full faith and credit of the U.S. government and are traded in a deep and very liquid market,” says Frederick Miller, founder of Sensible Financial Planning and Management, LLC, in Waltham, Mass.
  • In other words, it’s highly unlikely the U.S. government will fail to pay you back—that hasn’t happened yet in U.S. history—and, should you need to sell your TIPS before their term ends, you should be able to do so relatively easily. This makes TIPS great low-risk investments.

Disadvantages of TIPS

• TIPS aren’t without their disadvantages. Here are a few of the risks you might encounter if you invest in TIPS.
  • Poor performance during deflation or low inflation. While TIPS have an edge over traditional bonds when inflation runs hot, they perform poorly when deflation strikes or there is low inflations. That’s because deflation or low inflation drags down their par value, shrinking interest payments. In these conditions, TIPS fail to keep up with market interest rates.
  • Unpredictable cash flow. Because their payments are dependent on inflation, it’s hard to estimate in advance what your income might be. This may not be a huge deal if payments end up being more than expected, but during periods of lower inflation or deflation, you could end up with less money coming in than you need.
  • Anticipatory taxes. Because you must pay income taxes on any increases to par value, you could end up owing “phantom taxes” on money you haven’t actually earned until your TIPS mature. You can combat this by holding your TIPS in tax-advantaged retirement accounts.
  • Liquidity. In general, it’s pretty easy to cash out or resell your U.S. Treasuries before their maturity date. TIPS don’t trade as much as other bonds in secondary markets, which may make it harder to sell yours quickly. During periods of unstable inflation, you also may end up selling your TIPS at a loss, especially if their par value has been adjusted to lower than what you paid.
  • CPI may not match your personal inflation rate. TIPS are tied to CPI, and if your spending habits don’t completely align with the averages used to measure CPI, inflation adjustments may not compensate you for your spending patterns. “The CPI is a basket of goods and the composition of each of our baskets of goods will vary in some way from the composition CPI basket,” says Dmytryszyn. TIPS may not keep up with your personal rate of inflation.

How to Buy TIPS

• You can buy TIPS through your online brokerage account or directly from the U.S. Treasury at TreasuryDirect.
• If you choose to buy TIPS on the secondary market, be sure to compare how much the current inflation-adjusted par value differs from the original par value. Remember: You are only guaranteed to receive payment up to the original face value of a TIPS. If its price is above the issue price, you could lose money if deflation drags the par value to less than you paid.
  • That means you’ll probably only want to buy TIPS on a secondary market if the current par value is less than the issued par value. Otherwise, your safest bet may be purchasing TIPS directly from the Treasury.
• You can also buy shares of mutual funds and exchange-traded funds (ETFs) that contain diversified mixes of TIPS. While buying into a TIPS fund may make certain aspects of TIPS ownership easier, such as allowing you to reinvest earnings or buy odd-dollar amounts of shares, keep in mind you’ll be paying expense ratio fees, which can negatively impact your returns.

Should You Buy TIPS?

• If you’re a safety-minded investor who wants some government-backed protection against inflation, TIPS can make good sense.
• “TIPS matter to Main Street investors because they can help you protect your buying power from rising inflation,” says Tom Preston, who spent 30 years as a Wall Street trader and is a market strategist for Tastytrade, a Chicago-based digital finance and investment marketplace. “When inflation increases the price of things you need to buy, the extra return from a TIPS can offset that.”
• Before buying your TIPS, though, be sure to compare current bond yields to expected inflation rates. Because they adjust for inflation, TIPS interest rates tend to be much smaller than non-TIPS bonds. For instance, if bonds are yielding 3%, inflation is only 2%, and TIPS interest is 0.5%, you would only expect to earn the equivalent of 2.5% on your TIPS each year. This could make it an inferior choice to the non-TIPS Treasury. Conversely, if non-TIPS bonds were only yielding 2%, TIPS would give you an extra half a percent over traditional bonds.
• According to Raymond James, the average breakeven point has been around 2.5% since the mid-1990s, meaning a non-TIPS bond must yield at least that much to hypothetically outperform a TIPS.

 

Certainly not investment advice - by any stretch of imagination. Just pointing out one of many inflation hedges.

Good luck.

[Dbeasy 15235]

Just now, longhornmatt said:

I don't think TIPS are an appealing investment option for someone who thinks the Consumer Price Index is a faulty measure that understates true inflation.  

Ya that’s the problem with them.