Fed rate increase = lower hifi prices?

Soix, you are right on the money.   I bought new speakers, used preamp , and ordered a new amp in the height of Covid.   I got a great deal on my preamp , bought new speakers when they were first released , before the real supply chain issues.   I amp still waiting on amp but it’s right around the corner.  I don’t think I could have built this system now , a year later without spending a lot more

Just to bring this back around to the original subject, given the supply constraints wrought largely by China shutting down operations to control Covid, both new and used audio gear prices are likely to be high until things loosen up.  If you can wait you’ll likely find better prices in both markets a year or so from now, or whenever more “normal” supply returns to the market.  

Thanks @ideal8592 I know I’m in the minority among the financial talking heads, but IME and as mentioned before, significant financial/economic downturns are caused by four factors: Recession, over valuation/significant bubble, high inflation/interest rates, or some major exogenous geopolitical event or environmental disaster. Our current situation was obviously caused by Covid shutting down supply lines and Russia’s war on Ukraine raising food and energy prices. Before those exogenous events inflation was all but non existent due to global competition and technology containing and/or driving prices lower. In lawyer speak, “but for” those two exogenous variables we were looking at continued low inflation, low interest rates, and good economic growth, which is the perfect environment for stocks. I still view our current environment to be an anomaly (albeit a very potent one) and once the two exogenous variables subside — and they will probably sooner rather than later — inflation and interest rates will tumble and stocks will once again take off. This assumes the Fed doesn’t do something monumentally stupid like continuing to hike rates into the stratosphere to try to tame this temporary spike in inflation and sending our economy into a completely unnecessary recession. As I mentioned to my B-school buddies, I’d much rather have a job and complain about high prices than not have a job and pay lower prices. We do agree that if you have the fortitude to stay the course and/or average down into particularly good stock values now you’ll be very happy you did so a year from now, but there’s likely to be a lot of noise and volatility between now and then so hold on for the bumpy ride. Bottom line and as counterintuitive as it sounds now, the base case of low inflation and moderate growth is still there under the surface and should prevail once the temporary exogenous variables subside. Just my take FWIW.

The stock market may cause a few potential buyers to sit on the sidelines. 
 

Maybe a larger issue is shipping cost. People have a value in mind for a piece of gear and if shipping has doubled or tripled… especially hundreds of dollars, it could be an issue to those thinking delivered price. 
 

As usual though, well reviewed gear and rarely resold gear will hold its value a little better. 

@soix excellent points. You make far more sense and have much better logic than the talking heads on the financial/business news - and most all on the Street. Please feel free to update on your economic insights and analyses as you see fit.

I wanted to revive this thread,  I traded my CJ Classic 2se toward a DAC.  The dealer had it on his site by the time I got home.   I clicked on the ad this morning, less than 24 hours later and it was gone .   I clicked on several other items I saw in store yesterday and there were gone too.   They got $250 more than what I was trying to sell it for locally and gave me all the money for it.   Just shows that some brands retain decent value used.   

@deludedaudiophile hey, just as a rough idea and from a quick, off-the-cuff look, there might be some useful info from the real earnings yield. What I failed to realize initially, because I’m just not that smart, is that by using the real earnings yield you are inherently taking into account market conditions — duh. It appears that when the real yield goes negative it might be a good sell signal, and when it climbs back to 3% or so it might be a good buy signal. Could be wrong, but it sure seems like something worth looking into. The biggest problem is you’re beholden to current earnings estimates (or next year’s estimate if you’re using forward earnings), so any earnings revisions could lead to false buy/sell signals. Such is investing. Anyway, thanks for making me think. BTW, as a coincidence I used to work directly with Ed Yardeni — he was our economist when I was market strategist at Deutsche Bank.

@soix ,

You have nothing to apologize for. If anything, hearing from you was educational and sobering.

All the best,
Nonoise

@deludedaudiophile

I find if you push smart people, it makes them think more and you learn more from them.

Case in point, you’ve got me thinking about the value of using the real earnings yield as part of an indicator. The thing is, you really can’t just use the earnings yield alone as an indicator because it’s always in the context of the current economic environment (i.e. an earnings yield of 5% with rates at 3% is completely different from a 5% yield with rates at 8%). So, to take that into account you need to view it relative to something like bond yields to see what it’s really signaling. I use nominal bond yields in our model so that’s why I’m using a nominal earnings yield, but if you’re up for it I’d highly encourage you to explore using the real earnings yield in some fashion to see if it offers useful predictive abilities. I’d certainly be interested in anything you find.

It's the internet @soix, no worries. I find if you push smart people, it makes them think more and you learn more from them. I meant it quite honestly. I have no ego in this area and I did read everything you said looked deeper into some things I have not followed as closely as I could, etc. I have a financial advisor, I regularly talk to our economists and analysts are work because how and what we build is so tightly tied to related commodities, and do my own research.  My advisor encouraged me to invest more after the initial pandemic drop and he was absolutely right and I followed his advice. He thought I was taking too much of a risky position w.r.t. commodities late last year, but that turned out very well. I didn't follow his advice as well as I could w.r.t. Covid medical investments.  Any time human nature can play a huge role in the outcome, nothing is easy.

Whose crystal ball is best?

That is an EXCELLENT question. In all my years of experience the answer that seems most likely to me is NOBODY’S. And that certainly includes me. Any model can make someone a hero at a point in time, then the market shifts and you’re a dinosaur. Anecdotal note: after Elaine Garzarelli called the crash in 1987 she was on top of the investment strategy world, but she was absolutely paranoid after that because she knew her rep would be tied to calling when to get back INTO the market. She’d call me monthly (she was a client of ours) to see if our models were supporting what hers were saying to give her peace of mind that she wasn’t missing the boat. Point is, even the best know their crystal ball is right only some of the time.

Anyway, It seems I’ve come across as an arrogant ass here, and for that I apologize. The fact is, the longer you do this and if you’re a realist and smart, the biggest thing you learn is humility. My crystal ball is possibly no better than anyone else’s, although I’ve had the benefit of unlimited data and the ability to test and refine it over time. And I agree with many of the insightful points that have been made here. The only difference is I’ve had the opportunity to test my models and refine them into fairly reliable predictive buy/sell indicators over close to 40 years. If you believe in your assertions made here, I’d encourage you to track your own models against the market and try to create upper and lower bounds bounds that denote reliable buy or sell signals over time. Then you’ll be able to put your ideas to work for you in a truly objective and quantifiable way if you really believe in them. I’ll warn you ahead of time, it’s not quite as easy as it sounds, but it can be well worth the effort. I’ll just leave it there and say peace out. Best of luck!

Market is still not happy. Sometimes the best stock investment advice is not to invest.

https://fortune.com/2022/05/02/morgan-stanley-stocks-fall-sp-500-earnings-growth-slows/

@deludedaudiophile I concede there are other aspects on the demand side unique to hifi without going into details. Plenty. What you are thinking about is actually different markets. That's a significant aspect.

Except to point out that elasticity is a marginal (in the economics meaning of the word, incremental) concept. Its quite a neat thing to understand in a variety of contexts - being a ratio, it is almost unit invariant.

Maybe a bit like gain in electronics?

@noske , purely IMHO at this point, but I would think the high high end is pretty inelastic since for the people buying this, it is chump change. I expect the middle-bottom end of the audiophile world to be rather elastic. $100K on a hobby with a $1M+ equivalent salary is "reasonable". There is a lot of disposable in $1M+.  $20K on a $200K salary, or $10K on a $100K salary is a much bigger chunk out of disposable income. For "family" people, there will be an expectation to maintain other aspects of life, including vacations, etc. especially as the pandemic ends, so I could see audio dropping down the list of spends.

@headphonedreams I just looked at speakers and many brands have increased or is increasing their prices with 20-40% !
I have a distinct feeling these new prices will not go down much the next 2 years.

At a basic level, input prices have increased. How much wood (mdf) goes into a speaker? In America, wood/lumber prices have tripled or quadrupled since 2020. That must hurt a little bit.

There may also be issues regarding speaker/transducer availability - I’ve seen stories here about folk having some difficulties securing those round things.

And that is all I know about speaker construction! As for all that air inside, well, its like a bag of chips, innit?

I’d reckon that the market for speakers is fairly competitive, manufactured both in America and internationally, together with "cottage" (independent) outfits - although international shipping costs have also increased substantially.

That’s my simple take on the supply side. The demand side (buyers) - is another story, but my intuition suggests that demand for audiophile kit is pretty inelastic which does allow dealers to take advantage of any supply issues to bump up prices if stock availability is a bit hard to come by, without suffering much loss in turnover.

I reckon 20 - 40% is quite explainable in the circumstances.

In the meantime, estimates of official monthly inflation figures due out on Wednesday in the US are around 0.2% or so. Yeah.

Some here sound like they're boning up on economics by reading anything they can and regurgitating talking points so as to sound relevant and further a conversation that's going to go nowhere. For all the goldbugs out there, if and when it starts to get really bad, how finely does one have to grind up the gold and how do you season it to make it palatable?

All the best,
Nonoise

@ghasley  thank you I knew some true colors would show up. 

Regards

Gold was not a great investment during the pandemic. It was not awful, but it and silver until recently totally under-performed. Real estate did well due to lack of supply caused by a whole host of issues in some countries, not just pandemic or China, but general immigration, zoning blocking construction, policies that provided "false" affordability, etc. However, in some countries, said real-estate is declining (Canada for instance), and could be headed for correction leaving those most vulnerable to holding assets worth less than the debt they hold against that asset. It’s the 80’s all over again. People 8+ year into ownership with mortgages worth more than the house. It’s fine if you can weather it for another 10 year.

@retiredfarmer 

No need for unverifiable phallic measuring contests about whose net worth moved more during a pretty narrow timeframe. You guessed right on real estate and gold during that window. You are also fortunate that the Canadian dollar tracks so nicely with the US dollar. Rather than searching for someone to admire the paper gains you seem to be enjoying, you are hopefully implementing a strategy to secure and hedge against the coming unwind of Canadian real estate gains pushed (until recently) by the arms open policy toward the monied class of China so prevalent in Canada in recent years. 

A key purpose of Central Banks raising interest rates is to tame inflation. But macroeconomic measures are akin to turning an oil tanker - they take time to have an effect. Rate rises also tend to have the effect of strengthening the currency, making imports more expensive. Currency markets react much faster than consumer price setters do. In a globalised economy exchange rates are heavily influenced by what other players do. So for example, the Euro fell against the Dollar recently because the ECB did not mirror the FED's actions. The indications now are that the ECB will begin raising rates, so that will affect the Euro dollar exchange rate. In any event, consumer price inflation has happened for a whole host of reasons - supply chain shortages, labour shortages, winding down of quantitative easing etc. In short, I would not expect interest rates in and of them selves to have any appreciable effect on the price of hi fi.

@soix  well we can ask you a few questions on something I might have an idea about. First off do you know how many days worth of food supply the world has at any given time? Do you know how big of percentage of the food supply comes from the Ukraine? Do you know how many countries are net food exporters? When you answer those you will understand what a big deal it is if there is a crop disruption in the Ukraine. There is a difference in not being able to afford gas and not being able to buy food. People are so far past even thinking that there food doesn't get made in the super market it is scary.  Now secondly if I am so simple what percentage did your net worth rise the last two year? 

Regards

@mikeydred "price gouging"....lol......as if printing money endlessly, massive deficit spending and handicapping domestic energy have nothing to do with it.

The Fed has just recently (in the last weeks or so) reverted to no net increase in its "money printing" (quantitative easing, QE) campaign.

QE is designed to flush the economy with liquidity, for financial institutions to spend on buying shares and real estate and to lend it out if they feel like it to audiophiles not wishing to miss out.

Some countries ceased QE last year, eg, New Zealand in July, and are now going the reverse and reducing their bond holdings.

+1 @noske 

I just looked at speakers and many brands have increased or is increasing their prices with 20-40% ! 
I have a distinct feeling these new prices will not go down much the next 2 years.

Maybe the 2nd hand market will get some more items for sale which may push the prices a bit lower but they could just as easily start by going higher if new items are prices higher.

"price gouging"....lol......as if printing money endlessly, massive deficit spending and handicapping domestic energy have nothing to do with it......same old political shill

The USA had negative GDP growth Q1. Russia had positive Q1 GDP growth. The Euro is now trading at 1.06 to one usd. Look at a one year chart for the euro. The times they are a changin. 

Oh my feelings are just fine. My questions about your reasoning are quite valid since the Real Earnings Ratio is the worst it has been in 80 years hitting almost -4% and it almost always is a leading indicator of a recession and stock market decline at least near term. Your assumptions seemed based on a rapid return to lowish inflation? However many disagree with a near term (<1 year) chance of that happening say like Bank of England economists.  As well due to the unusual conditions of the last two years there is a larger than normal differential between operating earnings and core earnings suggesting the Real Earnings Ratio is effectively worse. Then again I could read 50 analysts predictions for this year and all would be different the only consistency that a recession with inflation will be bad for valuations. Whose crystal ball is best?

Sorry, I meant to say hurting your feelings was not my intent at all.  To answer your question, you can’t just look at growth and inflation and hope to predict where stock prices are going.  We use seven proprietary models that track the economy, the Fed. stock valuations, bonds, technicals, etc.  It’s not until we pull all those factors together that we get a clearer picture of the stock market.  This is why I’m saying just looking at inflation and growth and saying stocks will collapse just isn’t sufficient information to draw that conclusion.  And no, I will not share more details about our models as they’ve been developed over many years.  I will say that when the disparity between the earnings yield and bond yields is this high, betting against stocks is rarely a good idea.  Again, FWIW. 

Honestly, feelings are not hurt at all. I really do want to see the basis of you analysis so I can understand it better.

Please poke as big of holes as you feel is appropriate in anything I say. I won't take it personally. Is that earnings yield not based on growth?  Since you have done the research are you able to share some simple math for discussion?

Look man, I spent many years doing primary research, quantitative analysis, and market strategy on Wall Street, so yeah when you throw some BS generalities out there with no justification that contradicts my experience I’m gonna say so.  Sorry if that hurts your feelings.

We can't even predict a narrow set of critical commodities to battery manufacturing 6 months out, how one could accurately predict the world economy out a decade seems open to competence questioning.

@ghasley No, and I thought it was rather absurd and useless so I didn’t even address it. In my business we had some of the best economists in the biz and I ran all manner of econometric models that generated pretty respectable numbers (high R-squared, low autocorrelation/heteroskedasticity, etc.), and I found just trying to forecast the next year to be at best a crapshoot much less 13 years out.

In your entire career or experience, has any reputable firm EVER made such a forecast? I don’t recall ever seeing anything like that…even doomsday cults stopped using exact dates.

That sounds like something I see from people trying to get me to buy stock newsletters.

That’s just simply not true.  Using a 2022 S&P500 earnings estimate of 230 the current earnings yield is 5.5%, which leaves quite a bit of leeway for rates to rise before putting pressure on stocks (yes, I’ve done the research).  My expectation is after the dust settles we’ll head back down more to the 3% inflation range given our base rate for years has been stuck at less than 2%, but we’ll see.  

Please poke as big of holes as you feel is appropriate in anything I say. I won't take it personally. Is that earnings yield not based on growth?  Since you have done the research are you able to share some simple math for discussion?

I do feel you are correct, I can't see 8 years of high inflation. Gov debt will end up debilitating as there will be matching interest rates to help keep inflation down (in theory).

@soix

The new member (as of today) making an unatrributed reference to an “economic forecasting service” who happens to predict a worldwide depression 13 years from now seems “suspect”.

In your entire career or experience, has any reputable firm EVER made such a forecast? I don’t recall ever seeing anything like that…even doomsday cults stopped using exact dates.

With 4-5% inflation without compensatory growth, that would suggest a potential for significant decline of the stock market total asset valuation

That’s just simply not true.  Using a 2022 S&P500 earnings estimate of 230 the current earnings yield is 5.5%, which leaves quite a bit of leeway for rates to rise before putting pressure on stocks (yes, I’ve done the research).  My expectation is after the dust settles we’ll head back down more to the 3% inflation range given our base rate for years has been stuck at less than 2%, but we’ll see.  

Thought on the Bank of England predicting inflation could reach 10% by the end of the year and that could be coupled with a recession?

@greenngoldcheesehead 

Name the firm please.

@daveyf, the reason I have used this economist for 15 yrs is because they did make my business a fortune so I don't have to rely on Vegas :)  They don't forecast the stock market either.  And, yes, no one has a crystal ball and they didn't predict covid or Ukraine or any other black swan event that comes our way.

The real gist of this thread is prices are high and maybe or hopefully they will come down.  All I am saying is that the input costs into these products including labor are not forecasted to go down anytime soon.  We may be waiting awhile to see it happen.  So if a reader is holding back on purchasing something, consider that the price could go up 20% over the next 4 yrs so you'll need a 20% reduction just to get to the same "high" price point as today.  Of course 4 yrs from now, todays price will be a "deal" and won't be considered "high".

I told my sales team this week:  The best time for a customer to purchase our industrial equipment at the lowest forseeable cost is today.

I'm not sure if the rate increases will drastically impact the Cost of Goods Sold.

There have been some specific triggers to increased Cost of Goods Sold over the last 24 months or so:

1. Supply is less than demand in the logistics area resulting in all companies having increased inbound/outbound transportation costs
2. Numerous commodities have been supply constrained - increased demand, reduced capacity or combination of the two.  Prices has increased significantly for metals, computer chips and many other specific items.
3. Many companies have increased their sales prices.  

I recognize there are bad actors; I think pressure to keep pricing constant was removed due to the significant fall and return of demand and the financial liquidity pressures immediately following the 'shut down'.

I think prices will be more influenced by demand than interest rates.

Our business subscribes to an economic forecasting firm. Growth will slow into 2023 but no recession. Minor recession in 2026. Inflation will stay in 4 to 5% range for rest of this decade. Major depression around 2035 - worldwide.

With 4-5% inflation without compensatory growth, that would suggest a potential for significant decline of the stock market total asset valuation in constant dollars. An expected matching rise in interest rates will play havoc on government budgets and/or ability to deliver services.

Did it also predict GDP growth in constant dollars?

Sorry I have to catch up on other posts. This take me longer to absorb vs some others here.

Our business subscribes to an economic forecasting firm.  Growth will slow into 2023 but no recession.  Minor recession in 2026.  Inflation will stay in 4 to 5% range for rest of this decade.

Although forecasting is rarely accurate due to unforeseen variables, this seems like a very reasonable forecast to me.  We’ll see. 

@greenngoldcheesehead  I would definitely take the folks at the economic forecasting firm to Vegas with you. Should be able to make you a fortune!

@cd318 I had a lot of time for Keynes, I particularly liked his suggestion of burying bottles full of pound notes and letting folks dig them back out as a way of easing mass unemployment.

Our brains are hardwired differently.

The owner of the pound notes could have kept them in the bank earning interest and then at a time of unhealthy levels of unemployment allowed willing folks to clean toilets or care for the elderly for which they will be paid with those pound notes.

Our business subscribes to an economic forecasting firm.  Growth will slow into 2023 but no recession.  Minor recession in 2026.  Inflation will stay in 4 to 5% range for rest of this decade.  Major depression around 2035 - worldwide.

@noske,

I studied, a loose term I'll admit, economics for 3 years as part of my degree and whilst macro economics may have made a little sense, micro made no sense at all.

In fact it was mindnumbingly dull. I remember discussing it with a postgrad student who admitted that it was only the sight of the Swedish lecturer's legs in her knee length skirts that kept him awake during those periods.

Let's not kid ourselves, economics is an extremely complex and largely unpredictable social science. The Keynesian v monetarist debates made the analogue v digital ones look like small potatoes.

I had a lot of time for Keynes, I particularly liked his suggestion of burying bottles full of pound notes and letting folks dig them back out as a way of easing mass unemployment.

However, with Keynes, as everyone else, a lot depends upon sustainable growth.

Given this need for constant growth, perhaps it would not be too far fetched to imagine that this little trouble in Ukraine is related to the search for growth, would it?

@retiredfarmer 

"Nazi Germany printed money to pay the war  reparations"

Isn't that one of the reasons why WW2 is often called a  Bankers War?

"Within the first two months of the pandemic I knew what the outcome as far as money value was going to be and brought hard assets real estate gold and silver. I didn't want any amount of cash on hand as I was sure this was on its way."

Now that's an impressive display of keeping a clear head and pragmatic thinking.

Some of us sort of went into mild shock watching that footage from Wuhan.

On the other hand it now seems some of us were already getting ready to roll out their experimental jabs.

Some others were already planning to drive governments into increasingly more dangerous amounts of debt.

As they sometimes say, follow the money, and if we do that we can see that big pharma and big banks have certainly done very very well from the Plandemic.

Without growth the rest of us will have to increasingly suffer one of the 2 great certainties of life - taxes.

Someone is going to have to pay, and it's not going to be them.

@daveyf nobody is condoning anything that is illegal. That would have been contrary to any emergency regulations that were swiftly put in place. Perhaps not by the letter, but at least in spirit. Judges are not amused by those antics.

What I’m seeking is some non-emergency examples of pricing irregularities in hifi that cannot be explained logically. Coz people just say stuff and say, oh, price gouging, huge profits.

I understand that respected tube sellers rationed recently, and kept prices not too far away from normal. Because reputation and credibility. Think.

@ghasley good to see some micro economic principles discussed, and usually people can agree on the logic as hand-waving and speculation is kept to a minimum.

The politics of water are pretty ordinary - sensible economists have left the building..  In my country it is bureaucrats who administer the politics.  The Nth Koreans could probably plan better.

@ghasley When Covid first hit, I saw a report of a young lad who decided he was going to buy up huge supplies of hand sanitizer. Apparently, he did succeed in this and was able to temporarily impact the supply of hand sanitizer. This bad actor then released on a limited basis these hand sanitizing bottles at prices that were 10-20 times what the typical cost had been before the onset. This was found to be price gouging and the Feds shut this fellow down. I guess you have never been the target or the subject of price gouging, otherwise you may not be justifying those actions...no??

@noske 

I believe in free markets so I am equally opposed to price ceilings and/or price subsidies.

It was intended to provoke thought. Its unfair to limit someones profit potential if you are unwilling to limit their losses. I don't support this way of thinking, Its why I am opposed to price caps or floors.  Its a problem I have with releasing the strategic oil reserves so car trips to Wallyworld remain affordable.

I hear it frequently said that the price of oil/gasoline is too high at a given point in time and that the industry is "gouging". No one whines when prices are so low that it actually stimulates other industries. We hear it frequently from industries who have no pricing power or who are experiencing a demand/supply imbalance, especially if they believe their product deserves subsidies.

Once again, understanding human nature helps us all place these data points in proper perspective. Lets take western states and water for example. There are numerous examples of communities that were/are subsidized with cheap water and the inherent waste of that precious resource is quite visible. Vegas? Palm Springs? LA?  Water has been too cheap as evidenced by its waste. Food and water are the only commodities which cant be substituted. There are subsets of food which can be substituted for other subsets so the free market can work, sortof(regional, climate induced scarcity occurs all the time). Water on the other hand is interesting...you have good/safe water or you don't.  Of course, we live in a world where we take perfectly average tap water from one region, run it through a filter, slap a label on it and then ship it around the globe in a plastic bottle with an exorbinant markup. Doesnt matter to me...as long I have access to safe water to substitute. If the cost of hifi gear became prohibitive, maybe people substitute it for a cooperatively funded live performance? Who knows...

The good news is not only are we not burdened with solving these problems of demand/supply imbalance, they inevitably take care of themselves if humans keep being humans.