rossington wrote: ↑
Fri Feb 21, 2020 4:36 am
SimpleGift wrote: ↑
Thu Feb 20, 2020 9:11 pm
In the short term, a serious unexpected inflation shock is not hard to envision (e.g., a simple blockage of the Strait of Hormuz).
What country is capable of this with the inevitiable U.S. response? Not going to happen.
You don't have to close the Straits, so much as disrupt. For example if tankers cannot get insurance. In a world of commercially available drones, this is quite possible.
Any threat like that could send the price of oil shooting up.
We are in an age of disruption. New technologies like UAVs/ drones (and there are submersible drones) can disrupt the strategic balance in new ways. Hezbollah is in many ways a prototype for modern "4th Generational" (or 5th?) warfare.
Whether that would lead to a repeat of the 1970s I doubt, because the western world no longer has trade unions in critical parts of the economy, able to bring them to a halt*. We have left the world of CPI indexed labour cost contracts.
The 1970s also had a food price boom. The USSR's harvest failed, and to avert unrest, it sent its buyers scrambling into world markets, just as the oil price shock hit. The real price of grain probably reached a level it had not seen since 1910 (when it was at an all time historic peak).
Food was a much bigger part of the household budget in the 1970s - around 30% from memory in UK, Canada and USA (largely, we have halved the cost of store bought food, and supplemented our spending with far more eating out "casual dining" and fast food). So that price shock (and grain is of course bread, cereal, baked goods, meat, milk) really hit the consumer.
But again you could see severe disruptions of food supply, likely due to weather related conditions, cause a shortage of key foodstuffs & soaring prices. Or even just a nasty plant blight - we are critically dependent on a rather small genome in terms of core foodstuffs (which are wheat related, chiefly, globally). If something goes wrong in the weather in the US Midwest, Ukraine, Argentina and Australia, then the world grain supply is sharply curtailed.
In the longer term, government debt overhangs are expanding rapidly worldwide — and while these debt loads are sustainable at today's low sovereign rates, even modestly higher rates could easily tip toward fiscal crisis, and/or debt monetization with higher inflation.
What in the foreseeable future will cause rates to rise? There is no evident rationale for this to happen.
We are assuming the major Central Banks continue with their anti inflation stance (and anti inflation DNA). That there could never be political tampering with the Central Banks.
In short, it seems short-sighted today to abandon portfolio inflation protection — especially for portfolios heavy in bonds — even if market inflation forecasts are currently quite low. Just my two cents.
Agreed here, although I think a TBM return is worth the additional risk over TIPS in this environment.
US inflation protection at least pays a positive real yield. The UK equivalent is trading at minus 1.9% real. Unless inflation exceeds expectations by 1.9% pa you are guaranteed to lose money in real terms.
* the UK truck drivers' blockade of petrol refineries in 2000 is a counterexample. And indeed the CIA in Chile made sure that the truckers struck. So there are still some choke points. But the dock workers, say, are no longer capable of stopping international commerce.