Coming Inflation, Stagflation and the Housing Market

Discussion in 'MKJ Off-Topic' started by 901 Club, Jan 18, 2021.

  1. GaryB

    GaryB Junior Member


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    Jan 18, 2021
    #21
    Denial: I sent your post to friend. He wrote back that you don't understand what a hedge is and why real estate is a hedge. Using my friends numbers, here is an example. The idiot and you have $100,000.00 to spend in 1989 (base year). The idiot buys a car and a pickup truck for the $100k and you buy a property for the same amount.

    Based on the PPI (Purchasing Power Index) it would take $209,910.82 (109% inflation since 1989) to buy the same items now. In order to be a hedge against inflation, the 1989 purchase will be worth approximately $209,910 (perfect hedge) today. What is the probability that the idiots vehicles are worth $209k today? What is the probability that the land that you bought is worth $209k today?

    In the 20th century, there were only two years when land were not perfect hedges against inflation. In 1978 and 1997, overall home prices increased faster than the rate of inflation.

    Hope this info helps.
     
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  2. CFB Fan

    CFB Fan Junior Member


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    #22
    Back on April 21, 2020, oil fell below $0 a barrel. Yes they were paying people to take it. Why?
    • It has been caused by a surplus in supply and a significant drop in demand, due to the coronavirus pandemic.
    No mention of the US dollar valuation. While the US dollar valuation has a strong correlation with oil prices, it has absolutely nothing to do with the balance between supply and demand.

    Why has oil risen to $52 since then? The exploration and production firms cut back on their drilling (i.e. supply). U.S. rig count dropped from 772 back in January 2020, to 323 as of January 15, 2021. It took awhile to work through the surplus production and stored oil and eventually the promise of renewed demand resulting from an expected increase in commerce due to Covid vaccines had oil rising to its current price level.

    Existing shale formation wells have operating break even costs ranging from $21 to $35 per barrel depending on the play. New wells have a break even cost of $40 to $50+, depending on the play. They estimate the number of drilled, uncompleted wells (require a smaller amount to complete to production) at 4,000 wells in the U.S. These represent significant readily available supply once oil demand and prices warrant their completion.

    USD valuation is nowhere in that mix of supply vs demand.

    I’m really impressed that you were a trader of CLOs...NOT! I was the guy putting the CLOs together for you to trade. We generally considered traders to be the dumbest of the lot and they were never allowed into the deal kitchen. Again, please explain how USD valuation impacts either the supply or demand for oil.
     
    Last edited: Jan 18, 2021
  3. GaryB

    GaryB Junior Member


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    #23
    I didn't write that I traded CLOs. I wrote that I packaged CDOs. I have never heard of a CLO being traded, so you will have to educate me. The last time I checked (August 2020) there were $104b in AAA CLOs with JPM, WF, and Citi holding $83 of the $104b.

    As I understand it, you sell the tranches as notes and you (the securitizing firm) take back an equity position. I'm curious as to the leverage used? Are any of the securities synthetic? What's the tranche quality? What is the yield arbitrage?

    In all countries that are not oil producers or maintain a futures exchange, they must use US dollars to buy oil futures or purchase oil on the spot markets. Thus, the countries must first convert their currency to US Dollars. The more valuable the dollar relative to other currencies, the more a barrel of oil costs. Since oil is highly price elastic, when the dollar appreciates the demand for oil declines in countries denominating their currency in US dollars.

    This is really basic stuff and I'm surprised that someone who securitizes business loans CLOs would certainly understand how the dollar impacts global oil prices and demand.

    Actually, according to the IEA supply increased 4.5 mb/d in 2020, while demand declined for the first time. Iran, Libya and Venezuela all returned to full production levels. Your "balanced supply and demand" theory isn't working.

    The rest of your post is just gibberish.

    Sorry, I don't think that you have the slightest notion what you are talking about...
     
  4. CFB Fan

    CFB Fan Junior Member


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    Jan 19, 2021
    #24
    Since the U.S. currency is the dollar, I challenge you to show an instance were demand for oil in the U.S. declined because the dollar appreciated?

    Thank you for confirming my point exactly. I was never saying anything about balanced supply vs demand. In fact we saw supply greatly exceed the Covid impacted demand. And again, U.S. dollar valuation had nothing to do with it.

    Sorry I was posting on the iPhone and misread that as CLOs. A typical CLOs will have debt tranches rated from AAA down to B and an equity tranche. No leverage. The packaged loans are already leveraged. Current risk retention regs require the issuer to hold 5% of the CLO.

    Stand by my comments on traders. They were never involved in the deal making process and to this day are not the sharpest tools in the shed.
     
  5. GaryB

    GaryB Junior Member


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    #25
    CFB - As I wrote previously, the USD is inversely related to the price of the dollar in the US. The USD has devalued from 102 to 89 under Trump, which has resulted in oil prices appreciating.

    Again, if the supply greatly exceeded the demand, why did the price of oil increase?

    I understand how CLOs are structured, I was asking what you are packaging? BTW - The Dodd-Frank regulation requiring the issuer to retain 5% of the equity was overturned by the courts in 2018.

    I suggest that you not respond. The thread is off topic and we are not getting anywhere.
     

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