Something Works until There’s a Tipping Point — Inflation is Transitory

I try to travel to Marbella in southern Spain at least once a year to visit my family. Something that isn’t looking very likely this year…

If you’ve never heard of Marbella, it’s a small touristy town. A great place to live, visit and even retire.

The weather is great as Marbella has a microclimate. It enjoys about 320 days of sun a year, and winters include plenty of 20 degree-plus days.

And similarly to Australia, property has always been a hot topic. Property was hot during the mid-2000’s property boom and bust.

And then again, a few years ago in 2018.

While I was there visiting, everyone was talking about the hot investment of the moment, buying a property and renting it on Airbnb as a holiday home.

And things got a bit crazy.

If you looked at the rental properties for the area on Airbnb, you were spoilt for choice. So much so, that it pushed rental prices up and people were struggling to find long-term rentals.

That investment idea wasn’t so hot the next year I visited. In 2019, it was losing steam. There were too many rental properties, too much competition, and rental income from tourists wasn’t as easy to come by.

And then of course in 2020 the pandemic hit, killing tourism.

The point I’m trying to make is that something works until there’s a tipping point, and then things change.

It’s something that happens time over time. Nothing lasts for too long, something works until it doesn’t.

Change is constant. Once you get used to something, it will change again.

The overarching idea for growth and wealth creation in the last couple of decades has been to take on more cheap debt. Abetted by low interest rates and quantitative easing, assets and property have pushed higher, and so has global debt.

And it’s worked, for many.

Don’t worry about inflation or interest rates, low for longer was all we heard.

I mean, who can forget Bloomberg Businessweek’s cover in 2019?

Port Phillip Publishing

Source: Bloomberg

[Click to open in a new window]

But let’s not get too comfortable, things could be reaching that tipping point.

2021 hasn’t been your typical year. We’ve had plenty of stimulus along with supply disruptions. We’ve seen a reversal of globalisation, and we’re already starting to see inflation in commodities like timber, oil, iron ore and even in cars…after years of low inflation.

Inflation is also showing up in China.

Bloomberg reports:

Surging costs of imported commodities drove China’s factory-gate inflation to its highest level since 2008, raising the odds that exporters will begin passing on higher prices and boost inflationary pressures in the global economy.

Intense competition among manufacturers in China, which is the world’s top exporter, has had a deflationary impact on global consumer prices since the 1990s. Now, rising costs and surging export demand mean some factories could soon start hiking prices due to low margins, just as inflation starts to pick up in the U.S. and elsewhere following vaccination roll-outs that have allowed economies to re-open.

None of this will really show up in inflation measurements, says Bloomberg, as things imported from China make up a small percentage of the basket of goods used to calculate inflation.

Of course, estimating inflation has also been a challenge during the pandemic with more people locked in at home. They’re no longer spending money on the typical things like tourism, restaurants, and transport.

But the Fed isn’t worried, they say any inflation is transitory.

Could be.

Then again, not sure if you noticed the rhetoric around interest rates is also starting to change…

About a month back, US Treasury Secretary Janet Yellen said:

It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy. It could cause some very modest increases in interest rates to get that reallocation, but these are investments our economy needs to be competitive and to be productive [and] I think that our economy will grow faster because of them.

After markets spooked, she downplayed her comments.

But Yellen suggested something similar again last Sunday during an interview while talking about US President Joe Biden’s spending plans:

If we ended up with a slightly higher interest rate environment, it would actually be a plus for society’s point of view and the Fed’s point of view. We’ve been fighting inflation that’s too low and interest rates that are too low now for a decade.

The idea of higher interest rates is slowly seeping in as we see more signs of inflation.

So no one really knows what will happen next, not even the US Fed.

It may be that inflation is transitory…then again, things change.


Selva Freigedo Signature

Selva Freigedo,
For The Rum Rebellion

Selva is also the Editor of New Energy Investor, a newsletter that looks for opportunities in the energy transition. For information on how to subscribe, click here.

Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

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