RE:RE:RE:RE:RE:Oil up, Oil stocks down: Consider a pairs tradeAppreciate the textbook explanation Tj but again, i just cant see it working out that way.
Its a different world today with massive immigration adding more consumers for goods, housing and more candidates for the workforce.
After the automakers settle with the UAW, prices are going up, they have to.
If recession kicks in as you mention and new auto sales tank, there will be layoffs but prices arent coming down. Existing inventory may be discounted to clear them out but they are not going to produce any new goods to sell at a loss.
As written about here by many, grocery store prices havent come down after how many rate increases now? Utilities like hydro, its not coming down.
As for price of Oil?.... producers will layoff and cut production but longterm prices likely not coming down much.
Torontojay wrote: Hi Matt.
You are describing the price/wage spiral which is difficult to break. The way to break the price/wage spiral is the following:
1) increase the productivity rate
2) increase the labour force participation rate
3) increase unemployment
4) deleverage
Let me talk about Canada for a sec. The current productivity rate is abysmal and "gdp per capita" is already in recessionary mode with real gdp contracting in the latest quarter. Back in the day when I studied Economics, I was always told that 2 consecutive quarters of negative gdp is considered a recession. It has become a bit more nuanced nowadays with the Nber looking at a variety of different metrics to arrive at this conclusion. For instance, they may look at gross domestic income in addition to gross domestic product. Btw, Gdi has declined in 2 out of the last 3 quarters in the US. Always remember that the labour market and inflation are lagging indicators and always the last shoe to drop. It's very important that people understand this point because it's frequently ignored by the typical investor. It's like turning the faucet in the hot position and having to wait a minute for the water to get warm. This is precisely how monetary policy works with a lag.
If more people enter the workforce then this is disinflationary and could help to drive prices lower. The problem with this argument is that we're almost at pre-pandemic levels and unlikely to make a major contribution to inflation.
History has shown that an increase in unemployment decreases core inflation. It is not a coincidence that inflation ex food and energy has not even budged in the last 6 months and that is because unemployment rate has remained low. If people begin to lose their jobs, then business will have no choice but to drop prices to entice buyers to buy. This basic concept is very simple to understand and has proven to be an effective cure at bringing down inflation.
The last point I'd like to make is regarding the amount of credit in the system. With more and more people resorting to their credit cards and the Federal government running larger deficits, it is going to be difficult to drive prices lowers if the country is not deleveraging. This keeps the price/wage spiral alive. In other words, inflation is not well anchored and is out of control until households begin to feel some pain.
I hope some of this makes sense to you.