Warren Buffett seeing 'substantial inflation' and raising prices | Hacker News Reader

Warren Buffett seeing 'substantial inflation' and raising prices

cnbc.com

52 pointslisper36 comments

I found his comments on the Fed policy and its affect on big tech's stock performance interesting and wrote about them over the weekend [0]. In short, according to him a big reason the largest tech companies are up 60+% since beginning of 2020 is due to low interest rate policy of the Fed. Low rates juice equity returns and the biggest beneficiaries are large tech companies with really strong cashflow and low capital requirements. The 5 largest tech companies now comprise nearly 25% of the S&P500.

This was the single largest line item of covid spending. $3 trillion of the $12 trillion has gone directly into asset purchases (treasuries and mortgage backed securities) [1]

Another interesting thing I read about is how companies work around inflation. You see this in candy bars where the company shrinks the size of the bar rather than raise prices, eventually creating a "king size" to accommodate higher input prices. Other examples of include cutting corners and using cheaper material.

[0] https://mleverything.substack.com/p/where-did-the-12-trillio...

[1] https://www.covidmoneytracker.org/

Reminds of the pressure to do away with big candy a few years ago. Instead of having one "King Size" candy bar, we'll cut it in half & provide 2 "Sharing Size" candy bars. [1]. Instead of getting fat by yourself, stay skinny with your friend, unless you are your own best friend.

[1] https://www.npr.org/sections/thesalt/2012/02/15/146929211/go...

> Low rates juice equity returns and the biggest beneficiaries are large tech companies with really strong cashflow and low capital requirements.

Shouldn’t it really juice okay companies with high debts? Or with high capital requirements because the interest cost on capital projects just went down?

They would have to refinance to benefit from lower interest rates. And you have this additional credit variable. It would definitely cause some companies to change their capital structure, essentially increase leverage to benefit from lower rates. But I don't think this would help companies with existing debt more than less levered companies

Low interest rates also raise company valuations due to a lower discount factor in the DCF model.

http://reddit.com/r/shrinkflation

I love all the excuses for why inflation is spiking other than insane amounts of money printing. “Supply chain issues!” “Temporary demand increases!” When every single commodity and financial asset are rising at absurd levels month after month, it’s pretty clear what the cause is.

It does seem like the most obvious cause. Though inflation is really really weird, I had a professor explain the feds tools to control inflation back in college. According to her, the #1 tool they have to control inflation is announcing what inflation will be before it could even happen. Companies write it into their contracts, and that sets the bar for corporate spending and expectations.

It's going to be interesting to see how well that holds up when the amount being printed is this extreme. We're definitely going to learn something about the fundamental truths of our economy/global economy/modern monetary theory.

I don't think it's necessarily absurd. Clearly more cash has flushed into the system and that is inherently inflationary, but that alone doesn't tell you how to look forward.

Part of the cash that came in has circulated through the lowest level of the financial system (extended unemployment -> rent continues to be paid, tacos eaten etc). Because of the demand shock I think that got sponged up by that level; you see it here in the Bay Area and in NYC: in both cases rents have fallen.

Part of the cash has been handouts to large players and a lot of that ends up in the market due to low interest rates.

And that in turn funds people who were employed through 2020 to drive other asset prices up (in other words: home sales).

But in a demand shock the whole system collapses: commodities aren't purchased, factories furlough etc. When that comes back to life you get inflation for the opposite reason: there's a demand pickup that can't be satisfied by the suppliers so the suppliers can get away with asking for more cash (and the cash has been accruing unspent for the last year).

That price rise will bring in other players (house builders, air conditioner manufacturers etc) which will drive the prices down. Plus the government is trying to increase demand by increasing people in jobs by fixing bridges and hiring child care (so more people can go to work...).

Who knows which (my first paragraph or last two) will dominate? Nobody! It's pretty hard to complain about the cash that was flushed in because people have to eat and, thanks to gravity, have to sleep somewhere. It's like surgery: you cut a hole in someone which isn't good but you have to do it to try to get to something that isn't working properly. You have to wait to see if the patient recovers.

Except for China, the US has done very well actually economically in COVID. It probably is the second best performing economy from March 2020 (when COVID started) to March 2021.

Look at India for example - it's economy is in tatters and given the currently horrific second wave - years of economic progress has been wiped out.

Sometimes Reddit or HN is too deeply invested IMO in the US bubble to look out at the bigger world. Countries would kill for slightly higher inflation to have a healthy functioning economy right now.

I suspect it's because the US printed money while other countries did not.

ECB printed plenty and the block is not doing that great. Obviously bad vaccine rollout didn't help.

This inflation question was asked by one of the members of Reddit's most active Berkshire Hathaway subreddit:

https://old.reddit.com/r/brkb/

We have full coverage of the meeting, including a video dissection of the Q&A session.

Thousands of active members, dozens of value investor moderators, join us!

Off topic remark: your comment has my upvote already for just linking to old reddit.

The Fed has new inflation target policy so they are not going to act for a while.

There should be transitory spike 3% or more (core PCE price index) then slow down to 2.5% or so for most of 2021. (PCE can jump to 4% temporarily).

Then it will slow down again and Fed will again struggle to maintain desired level of inflation.

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Even journalists seem to understand terms only syntactically. Assent inflation is not related to price inflation. They have completely different mechanisms. Asset inflation does not increase wages or anything like that.

Yet he doesn’t invest in Bitcoin. Why?

Same reason took him years to invest in tech, he only invest where his understanding makes him confortable.

Seems to me he understands Bitcoin, and thinks it is hot garbage

I've been mining Bitcoin since the early 2010s.

It is hot garbage... but it's hot garbage people will pay for, and I see no reason to sell now. I legitimately think BTC will hit $1m per coin, although I couldn't say when, and I definitely cannot say why.

I myself don't understand the attraction to it. I understand the arguments on a logical level, and even an emotional level, but they're not good arguments, imo.

Have you hodl’ed the whole time?

Tbh it makes sense on an individual level but on a societal level it’ll lead to inefficiencies.

On a societal level it would lead to a burning planet.

(Yea, yes, I know NOT A CRYPTO Spews out a months worth of car riding per transaction)

You expect BTC to reach $20 trillion market cap, nearly the size of the US GDP?

Same reason he never invested in Beanie Babies.

I am long in Pet Rocks

Have you heard of gourd futures?

The intersection of HN and WSB is both amusing and horrifying. I like it.

Because contrary to popular belief, Bitcoin is not any more a "hedge against inflation" than any speculative stock?

>"Cryptocurrencies basically have no value and they don't produce anything. They don't reproduce, they can't mail you a check, they can't do anything, and what you hope is that somebody else comes along and pays you more money for them later on, but then that person's got the problem. In terms of value: zero."

- Warren Buffett

I hold 6 figures in cryptocurrencies but it's really hard to argue with Buffet on this. After over a decade they're still almost entirely used for speculation. The only major real world use outside trading is on the black market. Unfortunately there's no signs of that changing anytime soon. How many more decades do we have to wait for cryptocurrencies to revolutionize how we transact?

Having been in it from the beginning, I can tell you that it isn't crypto that is failing to "revolutionize how we transact" - it is the existing system both moving at a slow pace and actively fighting the loss of control. The slow roll is understandable in one regard, but the delaying tactics are pretty transparent at this point. What is more frustrating are the instances of regulators killing exciting developments. I'd written Forex related software years before bitcoin, and I was very familiar with the way trading data is sold in tiers for stupid prices, so when I saw bitcoin exchanges dumping live - full order books through websockets... I was totally blown away. Then we started seeing really clever implementations of decentralized lending for margin accounts with market set interest rates... it was an amazing couple of years. Obviously such freedom is not to be tolerated, and what remains is a marginal improvement to the preexisting system.

How is that not "failing to revolutionize how we transact"? A promise of cryptocurrency was precisely that regulators and entrenched interests wouldn't be able to fight it effectively.

Finding out that they in fact can do so, and that the result is only incremental/marginal improvements to the system, is a falsification of that premise.

How? Well, you can start with the fact that it isn't over. If the objective had been to "revolutionize how we transact in less than 10 years" then you'd have a point. Now consider the reason why we're talking about delay instead of outright ban. States and institutions seem to know (in so far as large organizations are capable) that a crypto currency will inevitably be required in the somewhat near future, and a ban would be a massive strategic handicap. Hence the delaying tactics, like refusing to issue tax guidance for a ridiculous length of time.

Next, let’s look at a $100 bill. Or a diamond.

Respectfully, he's an expert at individual companies, not macro trends. He's done a lot for the average man by inspiring people to invest and recommending appropriate literature. But he isn't an actual prophet...

He's not predicting macro trends. He runs one of the worlds largest industrial companies, and he's saying that they are seeing skyrocketing input costs.

He's not prophesying anything. He's sharing facts that have already happened.

I think you are confusing Buffett with Burry. Keep in mind that he chairs a massive conglomerate and has insights in a lot of industries. His remarks where observations, not predictions.

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