Inflation

[JohnDe]

More fuel but what will burn, China's or the US's economy, world economies, inflation ?

Interesting times we live in, there is always opportunity. Anyone care to offer their thoughts on which industry's to keep an eye on? I'm not convinced that inflation is going to cause an issue just yet, but one just in case I am looking at industries that are not affected by it.

When Chinese President Xi Jinping addressed the World Economic Forum this week he could not have realised that US bond holders were about to sell down and push up interest rates. In addition, he did not know that Microsoft was planning a takeover that would have long term implications for China and world technology.

The US bond sell down raised yields on the US 10 year bond to a two year high and triggered a Wall Street fall that naturally hits Australian shares.

Xi not only urged the US not to lift official interest rates in that speech but suddenly a new China trading line emerged. If it is maintained Australia stands to benefit.

Accordingly, it is important to understand the dilemma facing the Chinese President and isolate the forces that are causing his new approach and why the US bond sell down and Microsoft strategy form part of the matrix.

China is not only being hit by the Omicron variant of Covid but its property development mess is much deeper than the well-publicised problems of Evergrande. A lot more developers are on the brink of collapse and their difficulties compound the problems of many of the local Chinese governments and the banking system. A very large of proportion of Chinese wealth is in property.

This comes at a time when the communist party is restricting Chinese freedoms, discouraging the display of wealth and making fundamental changes to the education system while curbing the role of the gaming industry which has been propelling Chinese technology.

Even in a totalitarian regime like China to implement such fundamental changes requires community prosperity as the trade-off. The alternative to delivering prosperity is to rally national unity via military action which is China’s case would be the invasion of Taiwan.

That may still happen but at least for the moment China has reverted to the strategy that it has always embraced when threatened with an economic reverse – it stimulates its economy with lots of spending on infrastructure and rescues of troubled enterprises.

But it will also need the US – its major trading market – to continue its strong demand for Chinese products. So, China is now preaching a free world trading system and urging the US not to curb its economy at this time. China has reduced its interest rates and is urging the US Federal Reserve not to lift official rates.

The thrust of these remarks sit oddly in the wake of its clamps on imports from Australia. China will clearly need our minerals and there is just a chance, and I am not making a forecast, that if we are able to keep our mouth shut for a while then China will relax some of the bans.

In this context, China will be concerned at the rise in the US bond interest rates because they impact the world. On Tuesday US time, the US 10 year bond rate rose to a two year high of 1.87 per cent. A year ago the rate was around one per cent having risen sharply in the previous six months.

The excess liquidity in the US has so far muted the share market impact of such a big rise in US bond rates but there is now clear deep nervousness in the share market.

Bond holders in the US are seeing inflation at between six and eight per cent or three to four times the bond rate so are selling their bonds and forcing up the yields. At the same time the US Federal Reserve has reduced its bond purchases and forecasts further reductions bond buying. Any country that stimulates its economy at a time when inflation is rising sharply is taking an enormous risk.

Nevertheless, China needs a strong US economy to boost its exports and help it through this difficult economic time so Xi wants a lid on official rates so American demand for Chinese goods remains strong. It also wants the US to reduce the protection mechanisms that were introduced in the Trump era. If America had a strong President this would represent an unprecedented opportunity.

The practical outcome is that China is now stimulating and that will maintain strong demand for our iron ore coal gas and agricultural products. Markets will need to balance that boost with the turmoil being created by the US bond market and the impact of Omicron on the trading of companies not just in Australia but around the world.

Our high vaccination rates give us the opportunity to contain those impacts.

But then comes the wild card – the Microsoft plan to buy video game company Activision Blizzard for nearly $US70bn ($A97.43bn). Microsoft has seen how China has used its gaming technology to advance it‘s technology in the internet and artificial intelligence. In addition the gaming boom has been greatly boosted in the pandemic and Microsoft believes that video games will become an increasingly central part of people’s digital lives.

Activision franchises include the massive Call of Duty and Candy Crush. The company has encountered employee revolt over accusations of sexual harassment and discrimination.

But Microsoft has a deeper agenda. It wants to be a bigger player in the metraverse world of virtual and augmented reality. Its early days but it look like the internet is headed in that direction and Microsoft needs to be a player and will gain extra knowledge via gaming technology.

China and Xi’s concern about the impact on gaming on the population may cause China to fall behind in this new development.

ROBERT GOTTLIEBSEN BUSINESS COLUMNIST

NoCookies | The Australian

www.theaustralian.com.au

 

[Smurf1976]

While I do not disagree, improved productivity, in the face of a pernicious and (probably) increasing inflation, is not an easy task in the majority of sectors. All of the factors of production (land, resources, labour and capital (technology)) are all trending in the wrong direction.

Another issue there is where improving the productivity of one thing comes at the expense of lower productivity of something else.

The example I'm most familiar with being improving the productivity of energy use at the expense of having to invest more capital, sometimes a lot more, and in some cases also increasing labour costs. If energy's the only thing becoming more costly then the decision to use it more efficiently tends to stack up financially but if labour and especially capital is also becoming more costly then that isn't necessarily the case, the least bad option may well be to just pay the increasing energy cost.

No doubt there's many more examples like that, energy's just the one I'm personally most familiar with.

 

[divs4ever]

from my experience in an inflation climate ( but then nothing i have studied has paralleled this one )

the best 'bang for the buck ' fighter of inflation is reduced regulation ( now i mean simple and stream-lined , but that never seems to be the final outcome )

i very much doubt this strategy will be used widely , but i will throw it out there because i am an optimist

 

[over9k]

More fuel but what will burn, China's or the US's economy, world economies, inflation ?

Interesting times we live in, there is always opportunity. Anyone care to offer their thoughts on which industry's to keep an eye on? I'm not convinced that inflation is going to cause an issue just yet, but one just in case I am looking at industries that are not affected by it.

NoCookies | The Australian

www.theaustralian.com.au

Anything which provides that which is inflating

(energy)

 

[ducati916]

Another issue there is where improving the productivity of one thing comes at the expense of lower productivity of something else.

The example I'm most familiar with being improving the productivity of energy use at the expense of having to invest more capital, sometimes a lot more, and in some cases also increasing labour costs. If energy's the only thing becoming more costly then the decision to use it more efficiently tends to stack up financially but if labour and especially capital is also becoming more costly then that isn't necessarily the case, the least bad option may well be to just pay the increasing energy cost.

No doubt there's many more examples like that, energy's just the one I'm personally most familiar with.

As Europe is finding out, the Greenies massively underestimated the energy green energy could produce relative to the baseload demand. Energy being roughly equivalent to life, cannot be reduced without significant losses in quality of life for all. The lower on the totem pole that you are, the more egregious will be your losses.

Productivity in the West is being suppressed due to:



China has pretty much used up its 'low wage' advantage re. productivity and have zombie issues of their own.

Africa is nowhere near replacing China as a 'low wage' producer, thus no productivity gains remain to labour.

Capital investment across all resources has been massively under CAPEX for probably a decade, hence the supply shortages that are engulfing the supply chains currently. With the politics associated around permits, regulations, low prices, etc, no new supply will be anytime soon.

The capital allocation system, due to CBs and governments, is so badly broken due to the suppression of the 'natural rate of interest', that getting capital to where it is actually needed is not and has not been happening since 2008.

Productivity, as a suppressor of inflation, is simply a non-starter. The 'answer' lies elsewhere.



jog on
duc

 

[JohnDe]

As Europe is finding out, the Greenies massively underestimated the energy green energy could produce relative to the baseload demand. Energy being roughly equivalent to life, cannot be reduced without significant losses in quality of life for all. The lower on the totem pole that you are, the more egregious will be your losses.

Productivity in the West is being suppressed due to:

China has pretty much used up its 'low wage' advantage re. productivity and have zombie issues of their own.

Africa is nowhere near replacing China as a 'low wage' producer, thus no productivity gains remain to labour.

Capital investment across all resources has been massively under CAPEX for probably a decade, hence the supply shortages that are engulfing the supply chains currently. With the politics associated around permits, regulations, low prices, etc, no new supply will be anytime soon.

The capital allocation system, due to CBs and governments, is so badly broken due to the suppression of the 'natural rate of interest', that getting capital to where it is actually needed is not and has not been happening since 2008.

Productivity, as a suppressor of inflation, is simply a non-starter. The 'answer' lies elsewhere.



jog on
duc

Somewhat true. Yes cheap labour is not the way to productivity in the 21st century, yes 'zombie' companies are an issue. However, there are multiple means in achieving productivity.

Tesla is proof, they found an obvious way to design and manufacture vehicles at a fraction of the cost and time that all the other major vehicle manufacturers have not been able to do. Read the book Power Play: Tesla, Elon Musk, and the Bet of the Century

Keep an eye out for investments in artificial intelligence, robotics, energy storage, DNA sequencing, and blockchain technology.

Technology will and is bringing new measures of productivity.

Manufacturing is in the midst of a profound period of change, characterised by dramatic gains in productivity powered by technology. It’s seen small and medium sized manufacturers gain access to innovations previously available only to their heavily capitalised enterprise competitors, levelling the playing field and bringing new and better products to consumers.

The Technologies that Improve Manufacturing Productivity

We look at affordable new technologies lifting productivity for manufacturers, from robotics and cloud apps, to ERPs and networked PLCs – and see how they’re used

www.unleashedsoftware.com

 

[JohnDe]

"We are living in a time of exciting technological innovations. Digital technologies are driving transformative change. Economic paradigms are shifting. The new technologies are reshaping product and factor markets and profoundly altering business and work. The latest advances in artificial intelligence and related innovations are expanding the frontiers of the digital revolution. Digital transformation is accelerating in the wake of the COVID-19 pandemic. The future is arriving faster than expected.

The new technologies hold great promise. They create new avenues and opportunities for a more prosperous future. But they also pose new challenges. While digital technologies have dazzled with the brilliance and prowess of their applications, they have so far not fully delivered the expected dividend in higher productivity growth. Indeed, aggregate productivity growth has slowed in the past couple of decades in many economies. Consequently, economic growth has trended lower.

Firms at the technological frontier have broken away from the rest, acquiring dominance in increasingly concentrated markets and capturing the lion’s share of the returns from the new technologies. While productivity growth in these firms has been strong, it has stagnated or slowed in other firms, depressing aggregate productivity growth. Increasing automation of low- to middle-skill tasks has shifted labor demand toward higher-level skills, hurting wages and jobs at the lower end of the skill spectrum. With the new technologies favoring capital, winner-take-all business outcomes, and higher-level skills, the distribution of both capital and labor income has tended to become more unequal, and income has been shifting from labor to capital.

One important reason for these outcomes is that policies and institutions have been slow to adjust to the unfolding transformations. To realize the promise of today’s smart machines, policies need to be smarter too. They must be more responsive to change to fully capture potential gains in productivity and economic growth and address rising inequality as technological disruptions create winners and losers..........."

How digital transformation is driving economic change | Brookings

Zia Qureshi introduces a new book that examines the implications of the unfolding digital metamorphosis for economies and public policy agendas.

www.brookings.edu

 

[mullokintyre]

Tesla is proof, they found an obvious way to design and manufacture vehicles at a fraction of the cost and time that all the other major vehicle manufacturers have not been able to do. Read the book Power Play: Tesla, Elon Musk, and the Bet of the Century

I know you are a tesla owner, and thus may be a little biased, but i fail to see how you can justify that statement about cost.
I looked up some US car prices, so they are in USD.
The base price for Tesla Model 3 is given as $44,990, with the "fully loaded " at $58,490
A Chevvy bolt, which is also electric, comes in at $32,495
A regular gas powered Equinox comes in at $26,995.
Geez, even a base model Camaro is $26,195.
Even the time aspect is a tad questionable.
We are still waiting for the Cybertruck, the EV semi big truck.
Ford and Rivian have both beaten them to it in terms of production and delivery, and there is a good chance that GMC will as well.
Tesla may have done some great things from a technology perspective, but productivity improvements in building cars is not one of them.
Mick

 

[sptrawler]

I know you are a tesla owner, and thus may be a little biased, but i fail to see how you can justify that statement about cost.
I looked up some US car prices, so they are in USD.
The base price for Tesla Model 3 is given as $44,990, with the "fully loaded " at $58,490
A Chevvy bolt, which is also electric, comes in at $32,495
A regular gas powered Equinox comes in at $26,995.
Geez, even a base model Camaro is $26,195.
Even the time aspect is a tad questionable.
We are still waiting for the Cybertruck, the EV semi big truck.
Ford and Rivian have both beaten them to it in terms of production and delivery, and there is a good chance that GMC will as well.
Tesla may have done some great things from a technology perspective, but productivity improvements in building cars is not one of them.
Mick

Has Tesla car division turned a profit from selling cars yet? If it hasn't it appears it soon will. My guess is Tesla's dominance in the EV space will fall as other manufacturers gear up, the question is can Tesla stay ahead of the pack.
With regard inflation, legacy car makers are pushing up the price of their ICE vehicles obviously to improve the profit margin to subsidies EV development, but the side effect is it is another source of inflation as people still need cars and there isn't the ability to make enough EV's to fill demand.
Tesla’s lofty stock performance — up 743% in 2020 — makes it one of the most valuable US companies in the world. Yet the 500,000 cars it sold in 2020 were a sliver of more than 70 million vehicles estimated to have been sold worldwide.

Tesla’s dirty little secret: Its net profit doesn’t come from selling cars

Eleven states require automakers sell a certain percentage of zero-emissions vehicles by 2025. If they can’t, the automakers have to buy regulatory credits from another automaker that meets t…

www.mercurynews.com

From the article:
Tesla posted its first full year of net income in 2020 — but not because of sales to its customers.

Eleven states require automakers sell a certain percentage of zero-emissions vehicles by 2025. If they can’t, the automakers have to buy regulatory credits from another automaker that meets those requirements — such as Tesla, which exclusively sells electric cars.

It’s a lucrative business for Tesla — bringing in $3.3 billion over the course of the last five years, nearly half of that in 2020 alone. The $1.6 billion in regulatory credits it received last year far outweighed Tesla’s net income of $721 million — meaning Tesla would have otherwise posted a net loss in 2020.

“These guys are losing money selling cars. They’re making money selling credits. And the credits are going away,” said Gordon Johnson of GLJ Research and one of the biggest bears on Tesla shares.

The company reported 2020 adjusted net income, excluding items such as $1.7 billion stock-based compensation, of $2.5 billion.
Its automotive gross profit, which compares total revenue from its car business to expenses directly associated with the building the cars, was $5.4 billion, even excluding the regulatory credits sales revenue. And its free cash flow of $2.8 billion was up 158% from a year earlier, a dramatic turnaround from 2018 when Tesla was burning through cash and in danger of running out of money.

 

[JohnDe]

I know you are a tesla owner, and thus may be a little biased, but i fail to see how you can justify that statement about cost.
I looked up some US car prices, so they are in USD.
The base price for Tesla Model 3 is given as $44,990, with the "fully loaded " at $58,490
A Chevvy bolt, which is also electric, comes in at $32,495
A regular gas powered Equinox comes in at $26,995.
Geez, even a base model Camaro is $26,195.
Even the time aspect is a tad questionable.
We are still waiting for the Cybertruck, the EV semi big truck.
Ford and Rivian have both beaten them to it in terms of production and delivery, and there is a good chance that GMC will as well.
Tesla may have done some great things from a technology perspective, but productivity improvements in building cars is not one of them.
Mick

That's ok Mick, simple mistake made by a few investors while they research.

My quote "found an obvious way to design and manufacture vehicles at a fraction of the cost and time" relates to the 'technical design' and the 'manufacturing of components and assembly'.

The usual practice in designing a new vehicle model is to have a team of 100 engineers, Tesla reduced the bureaucracy and created an engineering team of about 45. They then designed and created factory with new ideas in assembly manufacturing to reduce the number of processes required, also new materials to stiffen core components, and so on.

Read up, you'll find all the information.

Just to be clear - Tesla implemented technology to improve manufacturing and at the same time increase productivity. Tesla was the first out of all the current vehicle manufacturers and Tesla is now building cars faster and at a lower cost than their competitors.

PS as for pricing, well it's not as simple as comparing apples and oranges, a comparable EV to the Tesla M3 is the BMW, which requires a lot of options which increases the base price -

 

[JohnDe]

 

[mullokintyre]

That's ok Mick, simple mistake made by a few investors while they research.

My quote "found an obvious way to design and manufacture vehicles at a fraction of the cost and time" relates to the 'technical design' and the 'manufacturing of components and assembly'.

The usual practice in designing a new vehicle model is to have a team of 100 engineers, Tesla reduced the bureaucracy and created an engineering team of about 45. They then designed and created factory with new ideas in assembly manufacturing to reduce the number of processes required, also new materials to stiffen core components, and so on.

Read up, you'll find all the information.

Just to be clear - Tesla implemented technology to improve manufacturing and at the same time increase productivity. Tesla was the first out of all the current vehicle manufacturers and Tesla is now building cars faster and at a lower cost than their competitors.

You suggest Tesla is now building cars faster and at a lower cost to their competitors without actually providing any proof of that statement. I will stick to some data.
If your statement above is true, and looking at the prices charged for the Tesla vehicles versus other vehicles, one would assume that Tesla must be making an absolute killing on their sales margins.
As sptrawler pointed out, revenue does not back up that sales margin call.
So what do we have left to support your statement?
Mick

 

[JohnDe]

Just to be clear, I am not saying that we don't have an issue with inflation. What I am sharing is that there are many ways that inflation can be distorted and controlled. One is technology.

While the news cycle is doom and gloom, inflation and fear, there are people and organisations quietly achieving great things. Who here purchased shares in the beginning of companies such as PayPal, Google, Apple, Amazon, Tesla, Afterpay? These companies where ignored by most but they created something that people wanted which contributed to productivity.

There is more to investing than just finding a few mining companies. Inflation will affect many investments but some will thrive. an investors job is to find them.

 

[JohnDe]

You suggest Tesla is now building cars faster and at a lower cost to their competitors without actually providing any proof of that statement. I will stick to some data.

Mick

Dear Mick, I have given you proof, it just that you do not want to see it.

I gave you the name of the book which has documented all the facts. I gave you a video with a well known US engineer discussing some of the achievements of Tesla's technology.

What proof have you given to your statements?

 

[JohnDe]

Inflation is not playing ball.

Covid has caused a massive disruption with the transport of goods, cargo ships have been stuck out at sea and unable to unload, this has caused some shortages of goods and prices to rise. But those ships are starting to unload, and during the shortage there was some panic that caused larger orders which will flow through in the next cycle.

Have a listen to Cathie Wood from the 19:14 minute mark -

For Mick, more proof.

 

[mullokintyre]

Dear Mick, I have given you proof, it just that you do not want to see it.

I gave you the name of the book which has documented all the facts. I gave you a video with a well known US engineer discussing some of the achievements of Tesla's technology.

What proof have you given to your statements?

I never questioned the technology, I questioned your ability to understand economics.
You said that Tesla builds cars cheaper and faster than anyone else.
I quoted car prices from the US that show that is a questionable statement at the very least.
Mick

 

[Dona Ferentes]

May as well throw something minor into the mix. Bond Markets; Bond Yields. Big dump on market valuations, I'd reckon, especially for the 10 Years

Early December 2021

• 2 year yield: US 0.69% ; Australia 0.66%
• 5 year yield: US 1.25% ; Australia 1.34%
• 10 year yield: US 1.48% ; Australia 1.64% ; Germany -0.38%

and a little over 6 weeks later

• 2 year yield: US 1.03% ; Australia 0.84%
• 5 year yield: US 1.62% ; Australia 1.63%
• 10 year yield: US 1.83% ; Australia 1.99% ; Germany -0.02%

 

[JohnDe]

I never questioned the technology, I questioned your ability to understand economics.
You said that Tesla builds cars cheaper and faster than anyone else.
I quoted car prices from the US that show that is a questionable statement at the very least.
Mick

As I have repeatedly mentioned to your comments in relation to me - read the facts. And then get back to me.

However, to add to the discussion - Economics and technology is now fully connected in almost every aspect. And that is why looking for companies that are using technology to improve and create can help an investors portfolio.

As for building a car cheaper than your competitors and then setting a price; what are you saying?

Your statement makes no sense, in an economic manner - "I quoted car prices from the US that show that is a questionable statement at the very least."

The GM's and Mercedes of the world have the power of size on their side, they can get the price of a bolt down by ordering triple the amount compared to their smaller competitors. Add that to every part used and the savings is considerable.
Where Tesla has managed to get pricing down to compete is by reducing the time it takes to design and then build. This has allowed Tesla to compete against every major vehicle manufacturer and stay viable, something that no one has been able to do since Chrysler - June 6, 1925

 

[JohnDe]

Mick, which manufacturer is adding to the price inflation of their product -

 

[Dona Ferentes]

May as well ..

Ah yes; BOND MARKETS. an excerpt from the Fed's Beige Book published on 12 January.

“Tightness in labor markets drove robust wage growth nationwide, with some Districts highlighting additional growth in labor costs associated with non-wage benefits. While many contacts noted that wage gains among low-skill workers were particularly strong, compensation growth remained well above historical averages across industries, across worker demographics, and across geographies.”

You can read the full report: https://www.federalreserve.gov/monetarypolicy/beigebook202201.htm