Deflation or Inflation?
By Barry Ritholtz - August 19th, 2009, 11:45AM
The one question I seem to get more than any is on (Hyper) Inflation versus Deflation. As previously noted, we clearly are in a Deflationary party of the cycle now.
While inflation may occur ion the future, and the possibility exists for Hyper-Inflation, these are merely potential issues down the road.
As these two charts show, we now have Deflation, are likely to see it continue for some time into the future:
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Near Record Deflation Rates At All Levels
click for larger charts
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US capacity utilization leads core inflation by about a year
Chart source: Albert Edwards, Society General
August 19th, 2009 at 11:46 am
But no deflation in commodity markets. I wonder where all the gov’t-injected liquidity is going? Gee…I wonder…..
August 19th, 2009 at 11:50 am
Job losses = demand destruction
credit contraction = demand destruction
…fill in the blanks
August 19th, 2009 at 11:52 am
But yet, oil still at ~$70 a barrel is totally justified. Insane.
August 19th, 2009 at 11:55 am
I wouldn’t be surprised to see some sort of correction in commodities, perhaps sooner than later. Jeff Saut posted this chart on Monday and it seems the Shanghai index is leading the SP5 by a couple of weeks. If that relationship holds, we could see a larger decline in US markets, bringing commodities along with it.
http://image.minyanville.com/assets/FCK_May2009/Image/LisaCatch/BLOOMBERG1.jpg
August 19th, 2009 at 11:56 am
The people who jumped on the inflation bandwagon will prove to be correct – they will just be off on the timing by a few years. Unfortunately most people are not patient and cannot see past the next trading day or week. Once the realization of deflation occurs (i.e. mainstream media are reporting the obvious) they will get out of their inflationary positions and jump on the deflationary bandwagon. This will cause the commodity markets to crash. At this point deflation will be hyped and talked about until it is too late and inflation will become a beeeotch cira early ’80’s. This has been my position for months and while the markets and commodities have taken off I have yet to see a piece of evidence to sway me from this belief. The fact no one I have spoken to has taken my belief seriously and/or dismiss immediately only gives me comfort.
August 19th, 2009 at 11:56 am
……And the markets reverse/rally today. What a farce.
August 19th, 2009 at 11:57 am
Deflation wins hands down…those talking inflation or at worst hyper inflation are lost.
IMO, commodity prices are rising because, like China purchase of iron, copper, etc. investors want something physical that has value even if they are expensive. Other reason, what else is one going to speculate in?
August 19th, 2009 at 12:02 pm
@JohnnyVee
I think China is seeing the big picture down the road. They are storing huge amounts of commodities expecting inflation – however many years away. I believe they will continue to do this on any significant dip – which is to be expected sooner or later.
August 19th, 2009 at 12:02 pm
Deflation for awhile with a whipsaw to inflation ( and possibility Hyper-Inflation )
August 19th, 2009 at 12:04 pm
It’s worth drawing a distinction between CPI and commodity prices.
August 19th, 2009 at 12:05 pm
LB came around to this as well some time ago, after noting that Mish and Gary Shilling just kept on being correct.
Peter Schiff may be entertaining and intelligent but has been dead wrong on a number of issues.
Commodity specs will get burned by another dollar rally when we play the Fall Classic: Deleveraging, Part Deux™.
Although you can be sure that oil traders will try to game the hurricane season as they did a few years ago….
August 19th, 2009 at 12:08 pm
We have deflation now, but if we are ever to regain growth, it will only be via inflation (if for no other reason than that’s all fiat monetary systems and fractional banking can do). There is not enough cash to offset the world’s debt, no matter how fast that cash cycles (and right now the deflation we’re seeing is due to the fact that the cash isn’t cycling). If there’s a deflationary scenario that will ever balance debt and growth (other than universal default or debt forgiveness) , I’d like to hear it.
August 19th, 2009 at 12:11 pm
Barry, did you see Eric Janzen’s Argentina 2001 comparison? He acknowledges that the dollar is unique, but makes some thought-provoking points. Like the fact that Argentina had deflation just months before they had 120% annualized inflation. And that the scale of our problem is much larger by many measures.
http://www.itulip.com/forums/showthread.php?p=106493
August 19th, 2009 at 12:15 pm
@Marcus and BearishNews
Exactly – timing is going to be the issue in the switch from deflation to inflation/hyper-inflation.
With declining revenues does anyone care to predict what the outcome of $70-plus will be on large businesses/corporations? What about small businesses and consumers barely hanging on?
August 19th, 2009 at 12:16 pm
* “….. outcome of $70-plus (oil that is)…”
August 19th, 2009 at 12:18 pm
I think there needs to be a clear distinction between 70’s style high inflation and zimbabwe style hyper inflation. I see that word “hyper inflation” thrown around like candy – does anyone really expect us to have 1000% inflation a month?
August 19th, 2009 at 12:24 pm
This is the big question. The surprise for the Fed so far is that pushing dollars out the door has only created small bubbles (the stock market aneurism) because the dollars have not been redistributed. No liquidity whatsoever has one to the general public – excepting a few construction workers and some clunker traders. It is not enough for the Fed to print money, apparently. Their pals were the big banks, and now they live or die with them.
There appears to be absolutely nothing on the horizon that would give pricing power to individual wage earners. Nothing. There may be price increases, but it is hard to make those stick when the buyers have no money.
I won’t say we will never have inflation, but without a lot more dollars in general circulation – or a lot more credit on the books (which also is not in the cards for anybody but government), it will not happen now.
August 19th, 2009 at 12:28 pm
Shiller expects another Housing bubble in the next five years. Most homeowners are still living in their surreal world. I see inflation as a huge problem in a year or two.
Buffet said we are going to crush under mountain of debt. Eventually China and others will stop buying our debt.
http://finance.yahoo.com/tech-ticker/article/306287/Buffett-We%27re-Going-to-Be-Crushed-Under-Mountain-of-Debt?tickers=tbt,tlt,udn,uup,brk-a,brk-b,spy
BTW, we don’t have any job producing economy in the near horizon.
August 19th, 2009 at 12:30 pm
LB is to trademarks what cvienne is to all caps.
The PPI and CPI are mostly meaningless for teasing out inflation. Too much monkeying with the data. Measured against a metric that doesn’t change or is subject to government manipulations, we have inflation right now, or as Mannwich pointed out, please explain $70/barrel oil and oil supply increasing while demand decreases worldwide. Or copper, or any of the other basket of commodities that have recently made a run. Across-the-board increases in commodities prices with a very few exceptions for market-specific dislocations, is the essence of inflation.
August 19th, 2009 at 12:31 pm
Other blogs draw comparisons to past events; I’ve seen the claim that the Great Depression is the only modern example of true deflation.
Almost all the inflation examples of modern times are for a single country, and the currency goes haywire relative to standards that remain stable elsewhere. This recession is worldwide and lots of countries are trying to inflate at once. The unknown is: is it inflation if everybody has it? Or is the Great Depression the better yardstick after all?
August 19th, 2009 at 12:34 pm
Inflation and hyperinflation are two entirely different things that are frequently confused; while hyperinflation is sometimes thought of as “high inflation”, its not.
Hyperinflation is what happens when you have a currency crisis. What causes currency crises? Sovereign defaults. Janzen’s itulip piece posted above is thought provoking in this regard.
Persistent deflation means business and consumer defaults = decrease in business activity with subsequent loss of tax revenues, accompanied by increasing demands for safety net services. I think FY2009 tax receipts are running behind the combined costs of just mandatory federal expenditures, DOD, and interest costs. http://www.zerohedge.com/sites/default/files/images/Deficit.PNG
Persistent deflation springs the debt trap. I don’t expect it imminently, but a hyper will come. The FED is in checkmate :
Sovereign default = hyperinflation.
Printing our way out = hyperinflation.
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Some unconventional thoughts based on Martin Armstrong’s ideas – the Waterfall Effect
http://fofoa.blogspot.com/2009/08/waterfall-effect.html
“The deflation that Prechter sees (as well as Mish, Denninger, Ackerman, Weiss and many others) is very real. It is the collapsing economy and paper financial structure. It is real deflation in real terms. But unfortunately for them, the dollar is not the true base of the pyramid, and it will only benefit temporarily as a “pass through level”. (See “All Paper is STILL a short position on gold”).
Hyperinflation (a currency event as Jim Sinclair so eloquently tells us) is always concurrent with deflation (economic malaise) when measured in real terms (gold). The dollar is only paper, and it is being printed like crazy. So to measure things in dollars becomes very confusing when looking to the future. The above-mentioned deflationists cannot imagine the hyperinflation event that I describe because they are stuck on their cycles and technical analysis that has always been measured in dollars. But in this crisis, the currency itself is the key. All else is noise.”
August 19th, 2009 at 12:35 pm
It should be of interest to some that Warren Buffet declared in the NYT today against the greenback tidal wave. No political ability to fix the problem means market will discipline excess dollar creation. I think also this will be a different kind of inflation, not likely to follow the historical correlations with capacity utilization. It will be more the international dollar overhang coming home to roost in the form of dollar denominated asset price inflation.
August 19th, 2009 at 12:37 pm
Oil and some other commodities are not a good stable measure because pricing systems have evolved that are not true market systems; they are quasi-monopolies or monopolies of agreement and consent.
Prices may collapse if these cartel systems fall apart, but until then they can maintain per-unit profits at low production levels… which is fine for them, short-term.
August 19th, 2009 at 12:39 pm
@The Curmudgeon
If looking at m/o/m, yes inflation. If looking at y/o/y, then deflation. We’ve come a long ways down since this time last year.
August 19th, 2009 at 12:40 pm
@Marcus Aurelius 12:08 pm
“If there’s a deflationary scenario that will ever balance debt and growth (other than universal default or debt forgiveness) , I’d like to hear it.”
How about if we had erased the banksters, applied a similar amount of money/credit/debt to managing the collateral damage instead of trying to keep the banksters alive, and buried the banksters’ toxic debt hoard in the same grave as the banksters and their egregious compensation and risk-taking?
Then the newly-minted debt would be in the support of viable businesses whose goals were not opposed to the well-being of the rest of the nation/planet, and we would have an excellent moral hazard lesson to reinforce proper behavior? Might even be able to apply some dearly-needed reforms to the system, without so many pesky lobbyists being funded by out own bailout money.
Oh wait — I see — you said “other than universal default or debt forgiveness”. I guess this sorta fits into those general shoes, in that it wipes away a ton of debt instead of adding debt to the debt we already have (which is all that our bailouts are doing).
Never mind.
August 19th, 2009 at 12:41 pm
Markets reverse this morning on the oil news…ok…but which side of schizophrenia should we listen too?
http://finance.yahoo.com/
“Stocks turned positive on Wednesday as energy shares gained after a government oil inventory report showed a huge drop in crude supplies last week.’…..
or
http://www.nasdaq.com/asp/EconodayFrame.asp
Highlights
“Supplies are a little less bloated in the Aug. 14 week. Stocks of crude fell 8.4 million barrels to 343.6 million with stocks of gasoline down 2.1 million and distillates down 0.7 million. Oil prices shot nearly $1 higher in instant reaction to the results. Nevertheless, stocks are still swollen and demand is still surprisingly weak.”
….evalutation of spins is harder than figuring out why the twins didn’t come back from the Mother Country when Lefty returned….
August 19th, 2009 at 12:42 pm
wally:
So, in your analysis, what’s the end game? General default?
Financially, the result of no velocity in the supply of money will kill everyone involved. Our economy is a pyramid scheme — no money from the bottom means no money to the top.
Before the Central Bank/Pseudo-government lets the system die on the vine, they’ll apply fertilizer to the roots. Why wouldn’t they? It costs them nothing and if they’re devious enough about doing it, they can stay on top forever.
We’ll inflate, or we’ll perish (not saying that’s what we have now, but that it’s the only tool in the box).
August 19th, 2009 at 12:44 pm
Japan is probably a better comparison than the Great Depression, because Japan was the Poster Child for QE, Zombie Banks and other Central Bank Interventions of the kind with which we are now all too familiar. The Japanese asset deflation was accompanied by substantial waves in the equity market before the N225 hit bottom.
Crude making a third approach to $72. Anyone who believes there isn’t a glut of oil and all of its products is clearly hallucinating, or more likely, is long crude for the day. This is quite obviously a leveraged carry trade, sell $ and buy all the commodity futures. When it suits GS and other trading desks to turn around and sell it, you name it, oil/copper/gasoline/gold will retreat sharply, like last year.
mcHAPPY is right. y/o/y we are now seeing the deflationary effects of last fall’s oil price crash. That will stay in the y/o/y PPI numbers for a while.
August 19th, 2009 at 12:46 pm
jr Says:
Persistent deflation springs the debt trap. I don’t expect it imminently, but a hyper will come. The FED is in checkmate :
________
Yes, indeed.
August 19th, 2009 at 12:50 pm
First, to me, inflation is a rise in the “cost of living.” Which is also, a devaluation of the currency in “local” terms (as opposed to international terms). If you had a dollar you saved from last year, it will buy less value when spent on your living expenses. That’s what I’m calling inflation.
I am seeing important basic business and household items rising in price. These are not discretionary items. I’m seeing this increasingly common in my daily routine. Others I ask see it also. Something is going on here. My dollar is buying less of the everyday discretionary items for home and business. Sometimes I can get a much lower quality item for the same price as a higher quality item was available before, but I’m still getting less value for my dollar when the quality is lower and the price is the same.
Then, there are opposing forces, housing has been going down, wages are going down. But, I don’t see this as the determining factor of the value I can get for my dollar.
The price increases I’m seeing in stores and suppliers are so reminiscent of the 70s, that I have only recently decided the erosion of buying power is starting, and it will accelerate.
Inflation vs deflation? I don’t care what statistics you use. The reality is, I’m seeing less and less value for my dollar over time.
August 19th, 2009 at 12:50 pm
Looking at how the day has unfolded I am convinced this is orchestrated to get average people back in the stocks and commodity rally so GS/JPM/etc. can unwind their positions. I really agree with Robert Prechter at this moment – the markets are poised for a mother of a crash but don’t be surprised to see S&P at 1100 before it happens. If you leave a few tankers out to sea for a week longer there is your shortage of 8.4 million barrels.
August 19th, 2009 at 12:51 pm
The india breakout imho kept us afloat for may june and july, fwiw, india is about to close a huge gap in a major index, imho, the dollar, copper and the velocity of this down move in india should tell a tale of what is in store………………
August 19th, 2009 at 12:52 pm
Marcus Aurelius,
I don’t suppose there is ever truly an end game, but it is very hard for me to see a world where an elite chugs along making money off each other (can’t do that in a zero-sum system). Your suggestion that they will fertilize the roots may be the only option. When they did that last time, I think they called it WWII. So much fertilizer has already been shipped off to people who hoard it or play speculative stock investing with it, that making new fertilizer to give to the masses would certainly blow everything to to the moon. I think, though, that we have to go through a lot of suffering before the political will is there to bestow largesse anybody but the elite. Take health insurance, for example…
I’ll bet the French Revolution was an utterly impossible idea to the minds of Louis and Marie.
August 19th, 2009 at 12:52 pm
Correction to above – my doillar is buying less of the everyday NON-discretionary items…
August 19th, 2009 at 12:53 pm
The Euro put in a lower high and backed off. Hope it sticks.
The FED is indeed trapped. They cannot use QE if they want to keep interest rates low. We would be infinitely better off allowing asset prices to fall than adding to an already enormous national debt. Given the fact that the FED, like the FDIC is approaching insolvency, one suspects that a new wave of the credit crisis may lie ahead of us.
August 19th, 2009 at 12:54 pm
@Hope “The price increases I’m seeing in stores and suppliers are so reminiscent of the 70s”
I’m not seeing any price increases here in LA at all. My grocery bill has gone down, eating out has as well. Clothing is cheaper now than it was a year ago, I’ve also seen prices at both Home Depot and Lowes in my area decline. What price increases are you seeing and where?
August 19th, 2009 at 12:57 pm
@mcHappy (cool handle)…
agreed…inflation just started rearing its head along about the time the stock markets turned around. The crash in commodities prices reflected two things: demand destruction and credit/money destruction. Their resurgence for the most part does not reflect demand increases. China’s vast purchases of copper and other commodities of late appear to be an inflation hedge. China got burned in the commodities boom, and looked silly for having outsourced their monetary policy to the fed.
August 19th, 2009 at 1:00 pm
Here in NY eating out is as expensive as it was 2 years ago. In fact most places have raised prices on food and drinks within the past year.
But I agree grocery bill has been pretty stable for me as well. I use milk and eggs prices as an indicator of food price inflation. Both seem to be same or slightly less than a year ago.
August 19th, 2009 at 1:02 pm
How much more copper and such is China buying this year compared to last year and how long, in an inflationary environment, would those extra purchases be affective as a hedge?
August 19th, 2009 at 1:03 pm
There are solid signs of deflation. Potato chip makers recently increased the weight of their product, but not the prices ( just Google ‘Bigger bags of chips’). Fast food joints are advertising their $99 menus. The price of milk is down:
http://www.forbes.com/feeds/ap/2009/08/17/ap6785646.html
Housing prices are still declining, wages are declining.
That said, there’s only one way to pull us out of this (and it’s not to make dollars more scarce).
August 19th, 2009 at 1:04 pm
@Thor
I’m in Rochester NY.
I’m seeing food prices rise. Not the mass produced stuff from off-shore, but the local produce in the groceries and at farm stands.
Also, have a big garden. Basically a year around activity. Supplies I bought in the spring are generally higher in price right now (unless they are on clearance). Energy (admittedly volatile) is up.
Driveway sealing supplies are higher (if you are in that business).
Also, like I said, I factor in quality. If I could get jeans for $20 last year that would last for 1 year, and this year the “same” jeans are $17, but they last 6 months, I’m paying more (getting less value).
This is new. It may not be widespread enough yet to show up. Prices were not rising like this previously. They were rising slower, almost imperceptibly.
August 19th, 2009 at 1:05 pm
@lefty
This move back from from 978 (towards 1,018) is starting to have the “look & feel” of the move back in June…
Where the market did a retrace from 889 to 956 and stopped EXACTLY at 61.8% (or, 931)…
If that’s the case, there’s room to 1,003…
Interestingly…261.8% of 1018-978 = 914…
Wherein lies a GAP DOWN & GAP UP to fill from back in June…(and would incidentally be within a few points of the WEEKLY close of the first week on ‘09)
Just saying…
August 19th, 2009 at 1:06 pm
Oops: $.99 menus. Mortons has the $99 menu.
August 19th, 2009 at 1:09 pm
Re: Commodity Price Inflation
I’ve said this a million times…
If China, indeed, wants to diversify its holdings out of dollars, and into commodities like copper, oil, & iron ore… What good does it do them to BID AGAINST THEMSELVES as the marginal accumulators of these raw goods? (Unless someone sees REAL demand that I don’t see)…
You’d think it would be wiser to do it in waves… Keep the dollar from collapsing for awhile & tank commodities price speculators, then reverse the trade…
August 19th, 2009 at 1:10 pm
I also want to add that my maintenance and energy cost have gone up a lot since last year. I heard MTA is planning another price hike (currently at $2). Not complaining so much as I rarely take subway in the city. And what about education cost? Has anyone checked how much Business schools are asking these days?
August 19th, 2009 at 1:11 pm
It’s possible vendors in some areas where there is less competition (and less of a depression) may actually try to increase margins to prop up the business. In general, wherever there is saturation of the market (NYC/LA) there seem to be signs of price stability or even decreases. There is a lot of store brand and other forms of trading down.
Strongly suspect that another downdraft in energy prices will cement the deflationary trend this winter.
August 19th, 2009 at 1:13 pm
manhattan: LB can tell you that MTA is already $2.25 and talking about another hike. The rats are healthy though.
August 19th, 2009 at 1:14 pm
“I also want to add that my maintenance and energy cost have gone up a lot since last year.”
Natural gas is the cheapest in 7 years; I expect a cheap winter here in Minnesota. The huge disconnect between oil prices and natural gas illustrates my point about cartel control of oil. It is not a market price; it is a managed price.
August 19th, 2009 at 1:15 pm
Cvienne – Thank you for making the point I was trying to get across .
August 19th, 2009 at 1:15 pm
Re: Milk and egg prices.
Some farmers are losing money, many are switching to garbage feed for animals. Mass produced eggs are cheap, but not very good.
Big operations have huge fixed costs, and must sell at a loss for a while to stay in business (hoping for higher future prices, or lower costs). What I think is coming, is a wave a farm bankruptcies (or closings). This has happened before.
August 19th, 2009 at 1:15 pm
Of course Manhattan is seeing prices rise. Where do you think most of the bonuses are being spent?
August 19th, 2009 at 1:18 pm
“BTW, we don’t have any job producing economy in the near horizon.”
that’s the gist of it
this commodity play is such a scam- gas prices over $4 a year ago based on specualtion alone- what is wrong with that picture?
if it defaltion- and we are looking at decreased world production- than why the increase in commodities? It would seem there would be less demand- thus lower prices- economics 101-
unless the bet is that the $ will crash- a true currency crisis- and everyone running to get their hands on real assets-
lb makes a good point re Mish and Shilling- but Schiff may be right in the end-
and maybe Jim Rogers is ulimately correct- isn’t he the one who said invest in farmland
August 19th, 2009 at 1:18 pm
Is there really deflation yet? See this chart from John William’s Shadow Government Statistics site: http://www.shadowstats.com/imgs/sgs_cpi_home.gif?m=Nov2008. Real CPI is +1%, but the government adjusts it down to -2% (to keep social security payments down).
I haven’t seen prices go down, except for home prices oand going out of business sales.
August 19th, 2009 at 1:18 pm
I was in the deflation camp, I’m not so sure anymore. Inflation may be a year or two out, but I think it will be serious when it gets here, and it will possibly be masked initially by asset and commodity deflation.
I reserve the right to re-evaluate this position at any time.
August 19th, 2009 at 1:22 pm
Collapse in any and everything nonessential.
Until the dollar dies.
China, is I believe, buying hard assets and likely laundering their worthless Bennie Boy IOUs.
United States of Zimbabwe with Mugobama.
August 19th, 2009 at 1:23 pm
Difference between asset classes that can or would be financed versus the rest.
Consumption continues to consume commodities which are paid typically on terms akin to “2/10 Net 30″ whereas anything financed (RE) or has expected cash flows (businesses) is heavily discounted.
I don’t make a call on commodities, just the velocity of money is different between consumables versus investments.
August 19th, 2009 at 1:24 pm
@ahab
“we are looking at decreased world production- than why the increase in commodities?”
Why?
So the “geniuses” at the City, JPM, GS, & Morgan Stanley trading desks can get their fat b0nuses!
August 19th, 2009 at 1:29 pm
@Manny,
I do not believe oil at $70 can be called confirmation of no deflation in commodities. Oil dropped faster last year when deflation took hold than it ever had before, roughly 80% over just several months. The action now is very speculative, not demand driven, and that can help be fueled here in the short term by all the optimism out there.
Maybe someone can help me clear up to the two but I think there is confusion about the money supply and then that vs the fact that the total stock market value that is held in cash right now is still very high, so that money is in fact finding a home, not the “new printed money” Faber had a chart of this in his last letter. Can someone poke holes in that idea for me?
As for the govt injecting liquidity, it’s been a complete failure from my view and is not anywhere near enough to cause inflation. Money is $52T in credit and only roughly $2T in actual cash/banknotes as I’m to understand it. The Fed’s growth in the Fed’s balance sheet from $900 billion to $2t nothing more than a rounding error when this is considered. They are expanding the balance sheet by buying up crap from the banks and what seems to still be going on is the collateral that underlies this debt is still losing value. As a result the reduction in the aggregate value of dollar-denominated debt is deflation, which is now occurring.
What can cause the market to completely crash as well as all this credit is delevers so fast that the Fed will not even have the time to try to stop it, they can’t print fast enough.
In any event, even if that never plays out, for me it seems that we’ve got a long long way to go with the credit deflation, it has hardly started.
Thanks for the post BR, was really curious where you were at with this right now.
Also, since there is so little actual cash vs. credit, if it continues it should be good for the dollar.
August 19th, 2009 at 1:30 pm
@ahab
Yes..Jim Rogers mentioned that Fund managers and Investment bankers should go into Farming because there is a shortage of farmers. He is referring to the fact there are too many I-bankers these days.
My take on it is that at least Farmers are producing something. What are I-bankers doing anyways?
August 19th, 2009 at 1:34 pm
@hopeI’mwrong
“I was in the deflation camp, I’m not so sure anymore. Inflation may be a year or two out, but I think it will be serious when it gets here, and it will possibly be masked initially by asset and commodity deflation.”
Exactly! Too many people have aligned themselves with inflation. Very few win in the markets as everyone can’t be a winner (ie. for every buyer, there is a seller). Inflation has been talked about endlessly for months and months. Deflation is the short term issue, inflation is the long term issue. How many people look long term and HAVE THE GUTS TO STICK IT OUT? How many people change strategy mid-course? How many people jump in to the stock market AFTER a 50% gain? How many people do trading institutions screw based on behaviours, emotions (greed and fear), and good ol’ volatility? Each jump higher in the markets and commodities loses a few more short to long until soon the longs lose – again.
August 19th, 2009 at 1:34 pm
““same” jeans are $17, but they last 6 months”
Wow, hope, you must be pretty tough on jeans. I haven’t gone through clothes like that since I was 10.
August 19th, 2009 at 1:37 pm
this has been said before but like the 90% of economists that say now that the recession is over, the VAST MAJORITY are betting on inflation and if for no other reason this will most likely not happen the way people think as a result.
When my joe retail clients come and tell me they are concerned about all the inflation we are going to get something is up.
August 19th, 2009 at 1:40 pm
@onlooker – Try gardening. Wear and wash each day.
August 19th, 2009 at 1:41 pm
[...] And why focus on deflation? Ritholtz looked at the same report from Rosenberg and posted this on his blog: [...]
August 19th, 2009 at 1:41 pm
@manhattanguy
“My take on it is that at least Farmers are producing something. What are I-bankers doing anyways?”
I’ll tackle that…
The I-bankers are at lunch scraping the 3 little corn niblets that came as a garnish to their $75 appetizer off their plate…
The niblets were left over from the acres & acres of the rest of the crop that mostly went to ethanol production… Next year, there won’t be any ethanol, OR niblets because the the I-bankers dusted them off by bidding up fertilizer prices too high.
So they’ll have to call I-Man to see if his edamame is fruiting yet…
August 19th, 2009 at 1:43 pm
@OT
onlooker was referring from the “belt size” going from 34-36-38-40…
jk-onlooker
August 19th, 2009 at 1:43 pm
LOL…
This debate is so old hat. See? Not even karen got involved in this one today…
August 19th, 2009 at 1:43 pm
I meant “hope”
August 19th, 2009 at 1:44 pm
“What are I-bankers doing anyways?’
grabbing the last last pieces of wealth and hitting the life rafts before the ship goes down?
but really- i don’t think those guys are even that smart- they will pobably be still be rolling aound in the their chest of money when the water blows through the hatchway to their stateroom
August 19th, 2009 at 1:44 pm
@I-Man
I know…I’m just trying to stay on topic while this thing does it’s FIBO back to 1003…
Edamame anyone?
August 19th, 2009 at 1:45 pm
@ahab
I doubt any of then will get high schools named after them…
August 19th, 2009 at 1:46 pm
Today’s rally comes to you courtesy of PUMPCO, as Bill Gross decided to talk down the dollar this morning. The resulting rally in the Euro, sell-off in Treasuries and interesting interpretation of the oil inventory reports were all inevitable consequences of that initial event – a butterfly flapping its wings in Newport Beach. Nonsense rally.
August 19th, 2009 at 1:46 pm
Speaking of inflation vs deflation…
Feeling the cold steel old chap?
This week of USO is starting to look like the SPX during the week of 7/17… all over again.
August 19th, 2009 at 1:46 pm
= = = Leftback = = = =
you are an idiot
August 19th, 2009 at 1:47 pm
@ahab:
> i don’t think those guys are even that smart
Agreed completely… Like with every profession, there are very few truly exceptional financial professionals. Perhaps John Paulson deserves every penny he’s earned. But for the run of the mill bankster in a bailed out company, imho, they pretty much “deserve” to be paid nothing more than an average accountant. And if more than that, certainly not several million dollars a year more…
HCF
August 19th, 2009 at 1:50 pm
http://finance.yahoo.com/tech-ticker/article/306287/Buffett-We‘re-Going-to-Be-Crushed-Under-Mountain-of-Debt?tickers=tbt,tlt,udn,uup,brk-a,brk-b,spy&sec=topStories&pos=9&asset=&ccode=
Buffett: We’re Going to Be Crushed Under Mountain of Debt
…The longer he keeps at the investing game, the less I understand him. We are basically a year since the treasury started the bailout game, and what, 6 months or so since we knew Bernanke was going to really start QE…so why state this now? This late?
….Reminds me of how he missed making money in the tech bubble…because he said he didn’t understand how to value tech stocks…(Yeah, I know….)…
but it does seem a tad odd, that he would mention this now….
August 19th, 2009 at 1:51 pm
To add onto my comment about bankers above:
Bankers, lawyers, accountants, etc. to me are considered “friction” to me. In the physical world, friction is necessary or nothing at all would hold together. However, as we’ve all seen, friction can make everything grind to a halt when there is too much.
In other words, it would be chaos to have no bankers, lawyers, accountants, etc., but we could probably do better with maybe 1/10 of what we have. Society as a whole would do better with an excess of scientist, engineers, craftsmen, carpenters, farmers, and the such.
HCF
August 19th, 2009 at 1:53 pm
Left,
You have more haters than Mike Vick bro- so you must be doing something right!
August 19th, 2009 at 1:53 pm
lb-
making friends again?
August 19th, 2009 at 1:55 pm
@cvienne – Belt size inflation is a bear. The answer is the same: try gardening.
August 19th, 2009 at 1:55 pm
I think that even most (clearly not all though) of the inflationistas acknowledge that we’re liable to see some more deflation in the short run, maybe even a severe bout. So the question is timing, as usual. It will be a bitch to be holding commodities and such through that, even if the end result is severe inflation. Kind of like last year. I suppose it argues for a modest insurance allocation of gold maybe, then wait to see how things shape up; again.
hope
Oh I do plenty of gardening and such. But I’m strictly a shorts guy for the most part. Still, I’ve never gone through clothes like that. You wearing the same ones every day? That would do it, I suppose.
cvienne
“@OT
onlooker was referring from the “belt size” going from 34-36-38-40…
jk-onlooker
”
Huh? You lost me there.
August 19th, 2009 at 1:55 pm
please excuse my egregious spelling and basic sentence structure errors- its really my typing skills that suck in conjunction w/ no spell check here at the office- but maybe- just maybe- I am not very bright
August 19th, 2009 at 1:56 pm
Bruce says:
so why state this now? This late?
Bruce, he’s saying it now for the same reasons he’s been chriping about a second stimulus plans. When you own that many banks, well….. I wonder if some day, WB will be the one exposed when the tide (of debt) goes out.
August 19th, 2009 at 1:56 pm
@Bruce in TN
Re: Warren B
Perhaps some “weather balloons” being launched here (as WB & Bill Gross came out in harmony this morning on that topic)…
The dollar is lower today, but overall, it seems to be taking it in stride…
Maybe WB actually wants to buy a few dollars or T-Bills here…
August 19th, 2009 at 1:57 pm
Left,
You have more haters than Mike Vick bro- so you must be doing something right!
Yeah, what was that all about?
August 19th, 2009 at 1:59 pm
@1001: Eloquent. Are you a gold bug, a China bull or some other variety – just a random hater?
Look, there are so many dollar bears it is an incredibly crowded trade, and the EUR is massively overbought.
There are quite a few fellow “idiots” like Dave Rosenberg who think that the $ and the Treasury market is not dead.
Here is the PIMCO dollar story. Over the long term they may be right, but not necessarily in the short term:
http://www.bloomberg.com/apps/news?pid=20601170&sid=aLW8jvysIe5k
August 19th, 2009 at 2:05 pm
I’m really thinking I should short here. I expect a bear trap 1000-1008 on the S&P, 1600-1612 on the NDX. Or maybe we don’t break 1000 nor 1600.
August 19th, 2009 at 2:11 pm
@hopeImwrong
1003 would be a 61.8 FIBO retrace back to 1,018…
Right now it’s NEON BOGEY as 998 (where we are right now) is a 50% FIBO…
Then, you have a trendline that catches 1008 just about the point where the current wave would intersect…
It’s ripe for a ramp to 1003 into the close (make the shorts sit on that overnight)…Scare ‘em up to covering into 1008 tomorrow morning, then gettin the hell out of Dodge…
I’m just a spectator…
August 19th, 2009 at 2:12 pm
Bruce
Indeed it is rather head scratching to try to follow old Warren these days. But the most transparent reason for this recent stance is that he got his bail out so now it’s time to tighten things up. But that doesn’t square with his other call for more stimulus. I don’t know what to think, but one thing I’m clear on is that he’s got his own interests in mind. He demonstrated that already. It surely has to be some kind of short term tactic (maybe to help assuage the bond market), because if the market takes another dive, his stock will take another big hit, as it’s a leveraged play on the market, with all that insurance biz.
And this saintly good guy image is being eroded quickly; although not amongst the hard core cult. I’m sure they’ve got plenty of rationalizations in mind, as long as their stock pulls out of the doldrums.
August 19th, 2009 at 2:18 pm
1001 is really just Dennis Kneale.
August 19th, 2009 at 2:20 pm
my take is 1001 is short the $ or maybe long foreign currencies/gold-
Schiff disciple possibly
August 19th, 2009 at 2:21 pm
@cvienne
If things are that fixed why hasn’t some disgruntled employee blown the whistle< or written a book?
Zero Hedge is the only one who comes to mind.
August 19th, 2009 at 2:25 pm
My take is 1001 is just some douche bag who’s feeling a little extra insecure today…
But anyways…
Must say I’m a bit impressed by the power of the clowns in USO today, I wouldnt have thought they could push it up past 38.44…
I feel bad for anyone who got short AHEAD of inventory numbers this morning… I’m feeling pretty rotten about shorting it afterwards. I forgot the feeling of cold steel on I and I balls. Might have to dump half of my SCO depending on the close. Already getting uncomfortable.
August 19th, 2009 at 2:32 pm
The people who jumped on the inflation bandwagon will prove to be correct – they will just be off on the timing by a few years.
————-
I always seem to see the change 2-3 years in advance. So in my book inflation in 1-2 years.
August 19th, 2009 at 2:33 pm
I-man – I used out of the money SCO puts to limit my risk.
August 19th, 2009 at 2:34 pm
Just added to my index shorts
August 19th, 2009 at 2:36 pm
This short squeeze action today reminds me a lot of the later stages of last summer’s crude oil bubble. Lots of abusive oil bulls showed up on TBP and then disappeared overnight when the bubble popped. These specs will run for the hills as soon as the $ bears dump all their leveraged commodity trades. Then Cold Steel™ will be reversed.
August 19th, 2009 at 2:36 pm
I see that word “hyper inflation” thrown around like candy – does anyone really expect us to have 1000% inflation a month?
—–
Well if you consider that the fed has taken maybe 1 trillion in bad loans off the banks books and exchanged them for freshly “printed” cash and that this could be leveraged 10X…
And that it will probably do some more when CRE hits the fan.
Anything is possible.
August 19th, 2009 at 2:37 pm
Came within one point of my stop on srs today. That doesn’t happen too often.
August 19th, 2009 at 2:38 pm
Anyone who says they are selling rips, should have sold some this afternoon.
August 19th, 2009 at 2:39 pm
There appears to be absolutely nothing on the horizon that would give pricing power to individual wage earners. Nothing. There may be price increases, but it is hard to make those stick when the buyers have no money
———
I don’t understand why so many are stuck on wage inflation. I don’t think there was much wage inflation in the Weimar Rep. nor in Argentina…
August 19th, 2009 at 2:39 pm
Where would you like your oil, Mr. Blankfein? You are going to take delivery, right?
August 19th, 2009 at 2:40 pm
Picked up some DTO at ~72.
August 19th, 2009 at 2:41 pm
The PPI and CPI are mostly meaningless for teasing out inflation
—-
I just bought a litre of paint. Used to be 10$ not long ago, now it came to 21$.
The deflation just seems to come from lower interest rates (sustainable?) or stuff that you don’t really need.
August 19th, 2009 at 2:42 pm
It still appears to me that this move off of 998 could finish at 994, and set up a run to 1003 into the close…
A 994 print here would look like a reverse H&S and give some incentive to gun it higher into a mini 5 wave and 61.8 retrace (at 1003)…
Just casually watching… No new bones in the game…
August 19th, 2009 at 2:42 pm
deflation followed by hyperinflation, for anyone who didn’t live through the 70s and early 80s….
August 19th, 2009 at 2:43 pm
Sometimes, thats the best way to watch.
August 19th, 2009 at 2:43 pm
1008 is definitely a possibility as well…
It’ll probably happen because that’s where my stops are… LOL
August 19th, 2009 at 2:44 pm
danm @ 2:39
good point- i think jr had a good post earlier re hyperinflation
August 19th, 2009 at 2:45 pm
I’m not seeing any price increases here in LA at all. My grocery bill has gone down, eating out has as well. Clothing is cheaper now than it was a year ago, I’ve also seen prices at both Home Depot and Lowes in my area decline. What price increases are you seeing and where?
——–
How many companies have vanished? Not many. When bankruptcies increase and supply dwindles, that’s when inflation will pick up.
August 19th, 2009 at 2:46 pm
“Left,
You have more haters than Mike Vick bro- so you must be doing something right!”
I was really happy to see that Vick got out and got a job. At least now we don’t have to buy him three hots and a cot everyday just because of a bunch of dogs.
Dante Stallworth killed someone, plead to it (DUI manslaughter), and got a slap on the wrist by the judicial system and the league.
Apparently the lives of a few dogs far outweighs the life of a fellow human. In essence, this is why I don’t believe there is much hope for the long-term viability of Western culture and society, and why this housing cum financial crisis is just the first shot over the bow of its ultimate destruction. No society that treats dogs better than humans is long for this world. But I didn’t mean to open a can of worms. Let me just say: Go Eagles! (No, I’ve never been a fan before). I bet if Vick and Donovan bring home a trophy this year, it’s what all the Eagles fans that are now deriding the young Mr. Vick (that deserves a shot, like anyone, at redemption) will be saying, too.
August 19th, 2009 at 2:47 pm
@danm 2:32 pm
“I always seem to see the change 2-3 years in advance. So in my book inflation in 1-2 years.”
I think that the size of this movement dwarfs all others, and will thus play out over a longer time frame. Think of a huge tidal wave, with the tide going WAY out for longer than anyone believes possible, and then ….
Therefore, I think it will be more like 3-4 years — unless we truly do follow the Japanese yellow brick road to perdition, in which case we will see bouts of persistent deflation for 20-30 years, with no substantial bouts of inflation along the way. By far the uglier scenario, IMHO.
Interesting that the way to resolve either persistent deflation or inflation is the same — abandon the currency and renounce (default on) all debts. When you kill your currency, just dump it in a back alley and adopt a new one.
Of course, you’re going to find it difficult borrowing money afterwards, but I’d kind of like for it to be difficult for my government to borrow money. It’s too damn easy for them now.
August 19th, 2009 at 2:48 pm
donna-
i did live throught the 70’s and 80’s- not what i would consider hyperinflation though-
i see it as catastrophic collapse of a currency- oil shocks and wage inflation was a huge part of the inflation of the 70’s and 80’s
August 19th, 2009 at 2:50 pm
@TC
That was definitely a can of squiggly worms…
I get in too much trouble as it is, so I’m not going near that one…
except to say that I think the Eagles definitely have a shot at the SB this year…
August 19th, 2009 at 2:53 pm
Actually…
To bring it back onto the DEFLATION/INFLATION debate…
I’ve really been fascinated by the contract negotiations going on in all sports this past year…
It seems even Scott Boros is reducing his ridiculous demands, and it “feels” to me like a lot of players are getting counseled to lock in reasonable offers instead of holding out…
I’m wondering which league is going to fold first… My bet is the NBA…
August 19th, 2009 at 2:54 pm
@ cvienne:
How about the NHL? The NBA has more international (i.e. China and Europe) appeal.
HCF
August 19th, 2009 at 2:55 pm
Maybe 1001 and bubba are aliases of cvienne, he likes to mess with our heads sometimes.
Hyperinflation is what happens when a SINGLE economy AND currency collapses (Zimbabwe/Weimar). The chances of this happening to the US (a depression in a booming world) are so remote that I wonder about the sanity of anyone who promotes such a scenario.
The Japanese scenario is in play here, until we depart radically from the playbook. Moderate inflation in food and energy appeared periodically in Japan, but slack in the labor market will prevent inflation from taking hold.
August 19th, 2009 at 2:55 pm
@donna 2:42 pm
“deflation followed by hyperinflation, for anyone who didn’t live through the 70s and early 80s….”
When did we have deflation in the 70’s and 80’s? All I can recall is the inflation. I suppose that when Volcker cranked up Fed rates to upwards of 20%, there might have been some deflation there …
The size of the future rate increase to stem the rise of the possible future inflation boggles the mind, it will be a whiplash event of Biblical proportions. I think I’d rather that we just flushed everything and started over.
August 19th, 2009 at 2:56 pm
@cvienne: I think it will be the NHL that folds first, followed by the NBA. There will likely be several lockouts/strikes in the coming years too by all the professional sports leagues.
August 19th, 2009 at 2:57 pm
@HCF
NHL, Perhaps yes…
I’ll tell you though, I go to a lot of CAPS games and they are always sold out at the Verizon Center…
I would bet that the NHL might “scale down” (eliminate franchises rather than outright fold the league)…
The thing about the NBA is that people might not really miss it (as many are more entertained by college hoops)…
August 19th, 2009 at 2:59 pm
tc says-
“Dante Stallworth killed someone, plead to it (DUI manslaughter), and got a slap on the wrist by the judicial system and the league.”
the big difference between the Stallworthe and Vick is the intention-
Stallworth accidently killed someone- not intentional-
Vick’s abused and killed his dogs intentionally
August 19th, 2009 at 2:59 pm
“Of course, you’re going to find it difficult borrowing money afterwards, but I’d kind of like for it to be difficult for my government to borrow money. It’s too damn easy for them now.”
Amen to that. Somebody needs to cut us off from our drug supply. Because this junkie just won’t quit. Much too hard, you know.
August 19th, 2009 at 2:59 pm
@LB (2:55)
“Now why would anyone want to do a thing like that”?
Clint Eastwood
High Plains Drifter
August 19th, 2009 at 3:03 pm
LB – 1001 probably went all it with sco late yesterday.
August 19th, 2009 at 3:03 pm
Guesstimates would be appreciated by any competent and knowledgeable souls on how long oil will be strong for — days, weeks, months or minutes?
August 19th, 2009 at 3:04 pm
The chances of this happening to the US (a depression in a booming world) are so remote that I wonder about the sanity of anyone who promotes such a scenario.
———-
LOL. For me a 5% rate increase would constitute hyperinfaltion (although I know it isn’t)!
Why?
Because everybody around me is mortgaged to the hilt. I can just imagine what would happen to everyone around me if their mortgage went from 3% to 8%.
I’m willing to bet that it would be much worse than what we saw in the 70s and 80s!
August 19th, 2009 at 3:06 pm
@constantnormal
If I give you my oil trade (which, by the way, is NADA), but hypothetically…if I do…
Be sure you do the EXACT OPPOSITE of what I say…
I suck at oil trading more than I suck at life!
August 19th, 2009 at 3:09 pm
994!
Here’s their perfect chance if they want to gun this thing into the close!
August 19th, 2009 at 3:11 pm
“I don’t understand why so many are stuck on wage inflation. I don’t think there was much wage inflation in the Weimar Rep. nor in Argentina…”
In those cases, one country had the problem; commodities sellers still had the rest of the world as a market. Today, many countries have been on the bailout trail; you can’t sell if the whole world can’t afford your product. What may matter today is relative strength or relative marginal taxing ability or some other obscure condition.
August 19th, 2009 at 3:11 pm
The law reckons Stallworth had the intent to kill by his reckless endangerment of other humans when he stepped behind the wheel, else it wouldn’t be a crime. Being drunk is no excuse.
God help him if he’d run over a dog.
August 19th, 2009 at 3:13 pm
@cvienne – no gunning. I’m short.
August 19th, 2009 at 3:18 pm
“LB – 1001 probably went all it with sco late yesterday.”
LOL. If that’s the case 1001 is a tool. That’s why you step into those trades a piece at a time. Most of these trades evolve over 3-5 days anyway. LB added to the trade today and thinks this will look very different by next week. Remember this is op ex week and all kinds of crazy stuff happens before Friday lunchtime.
“Guesstimates would be appreciated by any competent and knowledgeable souls on how long oil will be strong for — days, weeks, months or minutes?”
Not one minute longer than the beginning or the resumption of a dollar rally. Fundamentals of supply and demand do not support this price and it’s going to be fire in a crowded theatre before too long. Labor Day is traditionally the end of the spike in oil prices so absent a major hurricane in the Gulf, this trade is toast.
“Because everybody around me is mortgaged to the hilt. I can just imagine what would happen to everyone around me if their mortgage went from 3% to 8%.”
Most peep still have fixed rate mortgages. We do have a lot of Alt-A resets coming up though. That will be fun.
August 19th, 2009 at 3:18 pm
We keep beating this dead horse. Deflation now, inflation later. Hyper-inflation? Depends on if and how fast the dollar gets dumped. And I want to refreshen everyone’s mind about a link that I left here a week or so to a FED (BB) study that arrived at the conclusion that U.S. capacity utilization, lack thereof, the output gap or slack in the economy has no, nada, zip effect on keeping inflation in check. This is in your mind. Think the ’70s which is where we find ourselves again. They called it stagflation. Remember?
August 19th, 2009 at 3:19 pm
Pro sports shouldn’t and won’t go away entirely. There will always be a place for it and demand to a certain level. But they will surely shrink back down to previous size before the rampant expansion that was coincident with the debt bubble era. And player and coach salaries will shrink (at least in real terms) to levels that can be sustained by the new smaller revenue flows resulting from lower ticket prices and smaller TV contracts. The inexorable forces upon us make that inevitable, surely.
Think about what they were like in the first half of the last century. Much smaller leagues and more modest revenues. Salaries will be better relative to those times due to the structural effects of free agency.
Of course if they resist the pressure to reduce prices and salaries too much, the restructuring will be more dramatic and painful as they go through a bankruptcy-like process, tearing the whole thing down before building it back up again.
August 19th, 2009 at 3:21 pm
@Curmudgeon:
You’re not getting all John Grishamy on us are you?
August 19th, 2009 at 3:23 pm
What are the alt-a resets going to reset TO? I see a lot of articles on this big wave of resets coming, but are they all going to jump 5% How many of them will stay about the same given interest rates are still relatively low?
August 19th, 2009 at 3:24 pm
@cvienne 3:06 pm
too late — I have been in canroys for the past few weeks and am dithering about whether to stick around for the dividend, or collect my profits and go home … not huge profits, but that’s a refreshing change from the huge losses I took foolishly trying to ride out this bear rally in short positions … whooda thunkit that stocks would float along on (nay, SOAR over) a cushion (?) of lousy sales and dismal outlook.
I guess there was no place else for money to go … and there still isn’t, IMHO. Other than cash, which doesn’t yield a lot nowadays.
August 19th, 2009 at 3:25 pm
Pat G: I respect your positions which are well thought out – but must disagree.
NO. This is NOT the 1970s. There is no oil supply shock. We are not raising rates to curtail wage-price spirals.
NO NO NO. It’s the 1930s/1990s Japan. We have passed the point of Peak Credit and there is no velocity of money.
August 19th, 2009 at 3:27 pm
@Pat G
Stagflation is what I am thinking as well. But first Deflation.
On other news, S&P might put a huge doji candle today if it closes slightly negative which is what I am gunning for.
August 19th, 2009 at 3:30 pm
@leftback 3:18 pm
“Not one minute longer than the beginning or the resumption of a dollar rally.”
That’s the way I’ve been viewing it thus far. Got terrified this am when I read Bloomberg and saw a big drop in China’s stock markets, and another story about Chinese buying lots of long Treasuries. I figgered I was toast.
But then I notice that Bloomberg tends to run contradictory stories, covering every base imaginable. Something for everyone. Not the sort of thing one should make investment decisions on, better to wait and see. And of course, today turned out not so bad for me (so far).
August 19th, 2009 at 3:31 pm
@ leftback–I respect your positions which are well thought out – but must disagree.
Deflation is a collapse in prices NOT credit. Velocity of money will occur once the USG reinflates the economy and the banks start lending out all those reserves they have stashed OR foreigners, like us, get tired of the financial games being played in this country and start liquidating their vast holdings of U.S. Treasuries and dollars.
August 19th, 2009 at 3:32 pm
Thor
It’s not the resets that will hurt, it’s the recasts. Many of these things (Alt A, Option ARM) are structured in such a way as to be neg am, and they will be triggering a recast soon which means the payment is restructured with a new amortization schedule, and they payment goes up significantly as a result, regardless of the interest rate.
See this Dr. Housing Bubble post for more explanation:
http://www.doctorhousingbubble.com/the-truth-about-option-arms-pick-a-pay-mortgages-and-alt-a-loans-looking-at-wells-fargo-bank-of-america-and-jp-morgan-we-are-in-the-eye-of-the-469-billion-toxic-mortgage-hurricane-and-silence/
You can also search CR for better explanation of recasts vs. resets, and the ramifications coming down the pike.
August 19th, 2009 at 3:38 pm
@Pat: Your logic is correct given certain assumptions. However, here are some counter-arguments:
“Velocity of money will occur once the USG reinflates the economy and the banks start lending out all those reserves they have stashed”
They will not and can not do this, for they are almost all insolvent without creative accounting games. The amount of fiscal stimulus that would be required to refloat the housing market is unlikely to find popular support.
“foreigners, like us, get tired of the financial games being played in this country and start liquidating their vast holdings of U.S. Treasuries and dollars.”
In Japan domestic buyers of JGBs supported the bond market and we will see a similar shift as Americans increase their savings rate, reject the stock market and buy Treasuries, thereby also stabilizing the dollar.
August 19th, 2009 at 3:39 pm
@ Left:
Here’s something for you to brighten your day:
http://goal.blogs.nytimes.com/2009/08/14/epl-on-espn-in-the-us/
August 19th, 2009 at 3:48 pm
@BnT…just venting. I don’t even like Grisham’s novels.
You people still arguing deflation v. inflation?
They are simply monetary phenomenon. They are a change to the unit used to account for activity, they are not a change in activity per se.
There are three factors that determine the price level: The money/credit supply and its velocity and the level of output. Prices go up if output stays the same and money/credit, or velocity increases. Prices go down if the reverse happens. In a fiat monetary system, it really doesn’t matter which obtains, so long as the change is accounted for. In the Great Depression, under the gold standard, it mattered greatly that gold flowed out of the country everytime there was a run on the banks. It left less gold, which also had less velocity because people wanted to hold onto it, which meant prices cratered. But the deflation was a symptom, not the cause, of the GD. Oversupplied demand as a result of the industrial revolution was the problem. This is partly our problem today, (due to technological innovations) but it is also the result of excessive supply in some markets because of inflation-induced illusions of demand.
Can the Fed print its way of any deflationary spiral? Of course it can in a fiat monetary system. Will that change anything real? Only at the margins, not in the true trajectory of the system. The system will do what it wants, never mind the money. Is there likely to be hyper-inflation? Not so long as we’ve got enough nukes to blow up the rest of the world.
August 19th, 2009 at 3:49 pm
@Pat G. 3:31 pm
I gotta go with lb on this one — the banks will not (ever) lend out their stashed reserves, because they are also holding tons of toxic crap that the bailout reserves are insulating/countering. They won’t write down the toxic crap, because there is too much of it — even now, and prefer to milk the Fed while waiting for the (unsalable) toxic stuff to mature, when it must finally be written down.
But that will be spread across some period of time, as not all the junk matures at the same time. And it will definitely occur on some future management team’s watch. Once that valueless toxic junk is gone, those stashed reserves will be all that they have. You kinda have to take this on faith, as due to the advent of mark-to-”fantasy market” valuations, none of this is apparent in their balance sheets, except in the inconsistency with which they value themselves. There was a decent blog post somewhere over the past couple of days that talked about this, but I cannot seem to locate it at the moment.
August 19th, 2009 at 3:49 pm
Pat G. at 3:31 pm
“Deflation is a collapse in prices NOT credit.”
Why do prices collapse? Is it not because potential buyers (a) choose not to spend money or use credit lines they have or (b) have no money and cannot get credit?
August 19th, 2009 at 3:51 pm
@Pat G.
found it …
http://blogs.reuters.com/rolfe-winkler/2009/08/17/americas-japanese-banks/
August 19th, 2009 at 3:52 pm
tc Says-
“Being drunk is no excuse.”
undoubtedly- but-
if Vick was drunk and ran over his dog- still an accident in my mind
August 19th, 2009 at 3:54 pm
Deflation would be the ABSOLUTE wort possible outcome for a nation of debtors. At this point, it (deflation) should be considered the “path of greatest pain for most,” even Warren Buffett, whose entire business is tied to inflation.
Note: Markets often follow the path of greatest pain for the most number of people.
August 19th, 2009 at 3:55 pm
@ leftback
At one point weren’t the banks levered up to 30-40:1? It’s not the banks who are as insolvent as it is the USG who has soaked up a lot of their toxic assets. The USG will continue to allow “creative accounting” to occur so those losses will have little if any effect on their bottom line. They don’t need stimulus to refloat the housing market just forgiveness of a certain amount of principal whose idea is already being floated around. Besides, they now let homeowners refinance at 125% of their homes value. Why can’t they make that 150% or 200%. There is no way that Americans, the Japanese or any other group of people that you want to include will balance out the account deficits this country has and worse, what it will have going forward through saving. They don’t make that kind of money. The only reason that the USD is somewhat stable now, is because people perceive it as a flight to safety. That illusion is possible because the USD is the reserve currency of the world. But make no mistakes, other nations have been in our position before and NO fiat currency given our current account deficits ever stood the test of time.
August 19th, 2009 at 3:57 pm
The deflation v inflation debate is remarkably interesting. Lots of deflationists in March, more inflationists now.
Bear in mind that another downturn in energy prices would cement deflation as defined in BR’s graphs above.
Weird day, but we’ve seen stranger ones – especially during op ex week.
LB is out tomorrow. The cricket. England v Australia, for all the marbles. Have fun.
August 19th, 2009 at 3:58 pm
Troy – thanks for that! I read drhousing bubble but not as often as I should given I live in SOCAL.
——–LeftBack——–
I think you are one bright limey!
August 19th, 2009 at 4:02 pm
Gold is going to $3,000 an ounce. But, it will hit $300 first.
August 19th, 2009 at 4:02 pm
@Curmudgeon 3:48 pm
I find it entertaining to imagine what might be done to goose the velocity a bit … sure, the “easy” (or maybe not so easy) thing to do to crank up velocity is to drain credit from the system (resulting in higher rates) until the remaining credit is circulating at the desired speed. But in a beaten down economy like we have, that is the sort of medicine that just might kill the patient.
But how about if purchases were rewarded? Maybe a negative consumption tax, something that would go over the top of the smothering of (seemingly ineffectual) rebates and sales that are out there today. Or perhaps they could couple the negative consumption tax with a checkbox on your tax returns that dictates what part of the government does not get funded, in order to pay your “negative tax”?
THAT might be a big winner — people might spend themselves blind. It certainly beats bailouts for the banksters.
I like thinking outside the box
August 19th, 2009 at 4:10 pm
Did you see that the “Skank Banks” (C, BofA) were down on a rally day today? Time is running out.
August 19th, 2009 at 4:12 pm
@lb: I did notice that, actually. Also noticed that SRS was up slightly today, which hasn’t happened on too many up days during this run.
August 19th, 2009 at 4:12 pm
But Ahab, it’s not even a crime to take your dog out back and intentionally shoot it dead. There’s no such thing as “canine” murder.
It is a crime to unnecessarily be cruel to an animal, and should be–something that even the ancient Talmud rabbis recognized–giving explicit instructions on how to humanely slaughter animals for sacrifice and food.
I’m not defending what Vick did. It was wrong. He was a kid with too many dollars and not enough sense, and got carried away with stupidity. But he’s paid his debt to society. I’m saying he ought to have a chance at redemption. I think this will make him a better man, and incidentally, also a better quarterback. Which won’t be such a bad thing for the Eagles, nor for the kids that might have made stupid mistakes and hope for another chance. I’m glad they took a chance on him.
August 19th, 2009 at 4:14 pm
I’ll leave you all with this from Wikipedia:
“Monetarists, including Milton Friedman and Ben Bernanke, argue that the Great Depression was caused by monetary contraction, which was the consequence of poor policy making by the FED and continuous crisis in the banking system. By not acting, the FED allowed the money supply to shrink by one-third from 1930 to 1931. Friedman argued the downward turn in the economy starting with the stock market crash would have been just another recession. The problem was that some large, public bank failures, particularly the Huntly NY Bank, produced panic and widespread runs on local banks, and that the FED sat idly by while banks failed. He claimed if the Fed had provided emergency lending to these key banks, or simply bought government bonds on the open market to provide liquidity and increase the quantity of money after the key banks fell, all the rest of the banks would not have fallen after the large ones did and the money supply would not have fallen to the extent and at the speed that it did. With significantly less money to go around, businessmen could not get new loans and could not even get their old loans renewed, forcing many to stop investing.”
Viewed M1, M2 or M3 lately. Oh yeah, the FED doesn’t publish M3 anymore. Wonder why? You can be sure that our money supply has not shrinked. And if the FED is providing all these reserves through a variety of programs to the big banks and they continue to refuse to lend, why does the FED continue to provide them with reserves? To buy Treasuries?
August 19th, 2009 at 4:15 pm
pat g Says-
“Besides, they now let homeowners refinance at 125% of their homes value. Why can’t they make that 150% or 200%. ”
pat- this is a non-starter- someone would have to be colosally stupid to refinance substantially over their balance- the banks would be ecstatic since they do not have to take a principal reduction and you are agreeing to finance over and above the home’s value- here is what should happen-
jingle mail- send you keys back to the bank- go rent someplace else for cheaper and let the bank eat the loss
August 19th, 2009 at 4:20 pm
And a year or two down the road, when we do start to see some inflation, those inflationary squealers will say, “See, I told you we needed to worry about inflation!” No matter that they were living in another world when they said we really needed to worry about it. Timing is the bane of forecasters!
August 19th, 2009 at 4:23 pm
“With significantly less money to go around, businessmen could not get new loans and could not even get their old loans renewed, forcing many to stop investing”.
Uh-huh. Talked to any small business people lately? This is a slow-motion train wreck and the media are filtering the news because “the only thing we have to fear is fear itself”, that’s why we can’t see all the pieces falling down.
August 19th, 2009 at 4:25 pm
@Constant
Good ideas. I think eliminating friction (armies of lawyers and accountants, for example) would help. I think velocity depends, more than anything, on the economic infrastructure. Good, clear rules and expectations give people confidence that spending and investing will yield results they can reasonably count on.
Of course, there are some negative consumption taxes in place now. Consider the $8,000 first time homebuyer tax credit, and the cash for clunkers program. These seem to be more or less working as intended to juice the turnover rate of money. But the fed’s paying interest on bank reserves for the first time ever, which is having the opposite effect.
August 19th, 2009 at 4:27 pm
@ ahab–”this is a non-starter- someone would have to be colosally stupid to refinance substantially over their balance-”
This happened between 2003 and 2007 so why can’t it happen again? Besides, the USG, strike that, the world wants/needs U.S. consumers to spend, despite the debt they take on and that’s what our policy makers are angling to make happen, again. With governments around the world coming to the rescue, morale hazard is no longer an impediment either publicly or privately.
August 19th, 2009 at 4:29 pm
tc says-
“But he’s paid his debt to society. I’m saying he ought to have a chance at redemption. I think this will make him a better man, and incidentally, also a better quarterback. Which won’t be such a bad thing for the Eagles”
you and i are actually in agreement- my only observation was that what Stallworth did was accidently (though drunk) and what Vick did was intentional-
it was my only point-
i mentioned to my son’s the other day that Vick did his time (excessive punishment in my mind) and deserves to be able to make a living in his profession- so we are on the same page-
as usual
August 19th, 2009 at 4:31 pm
@ deanscamaro
The CPI has been tweaked several times over the last four decades. Compare the price components that were used to calculate the CPI in 1970 to those used today. There is plenty of inflation.
August 19th, 2009 at 4:33 pm
pat g-
the 125’s that were out there several years back were to roll credit card debt all into one loan with their mortgage- thereby reducing their outgoing payment/s-
now- there is zero incentive to refinance above your balance- why would someone do it? would you? why would anyone else-
better to rent a similar home and let the banks sell your home at a loss
August 19th, 2009 at 4:40 pm
@ ahab–”better to rent a similar home and let the banks sell your home at a loss”
You would still be responsible for the difference between what you owed on the house and what the bank actually sells it for. And you’d still have your rent payment… How is that better?
August 19th, 2009 at 4:44 pm
@Pat G: I may be wrong but I don’t believe that’s true. There’s always the nuclear (excuse me, nuk-u-lar) option of declaring BK.
August 19th, 2009 at 4:51 pm
@ Manny
Yeah, if I had to dump a house, that’s what I would do–get rid of it all and start fresh again. Ahab made no mention of that option, just letting the bank sell your house.
August 19th, 2009 at 4:52 pm
Pat G. — You might want expand your scope outside of Wikipedia. There are alternate views that explain credit/debt/money creation better than the neoclassical/monetarist theories which do not stand up to statistical analysis. You may have read in textbooks (I know I did in B-school) that the Federal Reserve increases the base money supply and then through the fractional reserve banking system more money is created in the system…I’m sure you’ve seen the neat and tidy charts of Bank #1 holding 10% reserves and then lending 90%. Of that 90% that gets lent there is some other bank that holds that 10% and lends out 90% as well, etc, etc. Well, it turns out that is NOT how money/credit is created in our economy AT ALL. If it were, we would have NO WHERE near the amount of debt we currently have. There is an alternate explanation….
At some point in the last century we turned into into a “credit based” economy where financial institutions, whom we entrusted to be the agents of credit, could expand the credit/money supply FIRST and then seek out primary reserves later (base money supply). They acted this way out of financial self interest. The more money they could lend, the more money they made. They (NOT the Fed) created money/credit out of thin air. It was only after credit was expanded they would seek out reserves to back up the lending.
Of course, I’m no expert in monetary economics, but this fellow does a fine job of explaining the situation. I’ve posted this link several times. It’s lengthy and semi-academic but it’s an “eye opener.”
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
August 19th, 2009 at 4:53 pm
pat g-
not true my friend- most states are “no-recourse” when it comes to a mortgage- the only thing the bank can do is take its collateral back-
they have no recourse to secure a judgment against you for losses incurred on the sale of the home-
and thus- you would have to be a fool to refinance for more than its worth
August 19th, 2009 at 5:05 pm
@Andy T
Thanks I will take a look at it. I am always interested in anything which contradicts my philosophies and then makes me question or rethink them. You never stop learning until you are dead…
@ ahab
To my point. I’ve never head of no-recourse. But when you say “collateral” I assume you to mean what a mortgage holder still owes on the principal. Right?
August 19th, 2009 at 5:09 pm
i mentioned to my son’s the other day that Vick did his time (excessive punishment in my mind) and deserves to be able to make a living in his profession- so we are on the same page-
That’s funny because my son and I had the same conversation after his history teacher had filled his brain with mush about how if Vick were an accountant his job wouldn’t have been waiting for him when he got out of jail. I told my son it would be if he was one of the best accountants in the business, and hadn’t gone to jail because of his accounting…
The moral for my son being that it’s easy to take the popular, moralizing position, but it’s harder to actually think and do what’s right, but that should always be your aim…
…wise old dads, us, eh?
August 19th, 2009 at 5:11 pm
@ ahab
Should have read; never heard of no-recourse. So, I took out a $200K loan to buy a house. I owned it for a few years and paid $15K on the principal, leaving me a $185K loan balance. I lose my job, the bank forecloses on my home and sells it for $150K. I still owe the $35K difference right?
August 19th, 2009 at 5:15 pm
Andy T @ 3:54
“Markets often follow the path of greatest pain for the most number of people”.
Not so for politicians.
(IOW, they’ll inflate, rather than permit significant deflation).
August 19th, 2009 at 5:17 pm
pat g-
the collateral is the home itself- you give that back and literally walk away- there is nothing else the bank can do-
from Wiki- pretty much sums it up-
“Nonrecourse debt or a nonrecourse loan is a secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable. If the borrower defaults, the lender/issuer can seize the collateral, but the lender’s recovery is limited to the collateral. If the property is insufficient to cover the outstanding loan balance (for example, if real estate prices have dropped), the difference between the value of the collateral and the loan value becomes a loss for the lender.”
there we have it- so- as i said- you would have to be a colossal fool to refinance above the value- better to give up the home and rent some place
August 19th, 2009 at 5:22 pm
@AT: Sounds like financial fraud to me, no? I mean, that’s what it is, right? Let’s face it – “financial innovation” is just a euphemism for “fraud”.
August 19th, 2009 at 5:34 pm
@ ahab
Like I said, never too late to learn a thing or two. But that’s insane. And coupled with liar and NINJA loans no wonder the foreclosure situation in this country is such a mess. I’m glad I didn’t grow up that way. I’ve got to go now…
August 19th, 2009 at 6:10 pm
@Mann. Well, not sure it’s “fraud” per se. Not sure you can prove “mens rea.” Essentially, “we” simply put our trust in the people who create the credit. Obviously, with the level of debt to reserves that exists, someone out there was circumventing the “spirit” of reserve requirement laws. But, hey, when an auto company dishes out ZERO % loans for six years and someone else bundles that up to sell to hedge/pension funds around the world, it’s actually those funds that helped create the bad credit/debt. There’s no reserve requirement for the shadow banking system that has imploded.
Also, there doesn’t seem to have been any reserve requirements for the gigantic credit pushing organizations the U.S. government created that helped sew the seeds of the housing bubble (See: FNM/FRE)
August 19th, 2009 at 6:20 pm
@AT and Manny -
It was also called the Shadow Banking System, no?
Greenspan knew what was going on – they were “helping” the Fed
…and with 30+:1 leverage!
August 19th, 2009 at 6:37 pm
@ ahab
It would not surprise me If people take 125% of value loans. Most people that we think would do it if they can keep ” their house as if nothing happened. Never be surprised by human stupidity. There are so many examples: tech bubble, with p/e higher than 200x and people kept buying, housing bubble in Nevada and Arizona, too much overpriced but people kept buying because credit was cheap and they were going to miss the opportunity, just last year oil at $150 and you can find a lot more examples in just the last 10 years. I am pretty sure that the financial gangsters would find a way to convince many people to finance 125% of their value. They are pretty good at figuring out ways to make people believe in their fairy tales.
August 19th, 2009 at 7:07 pm
The chart makes it obvious why Greenspan kept rates so low for so long back in 02 to head off an extraordinary bout of dreaded deflation — NOT!
August 19th, 2009 at 8:06 pm
are some of you mad saying that this discussion doesn’t matter or is old???
For any investor, and that’s what probably 95% of the people out there are, this is probably THE most important question to answer now when determining an overall strategy. If some of you have already put this to rest please enlighten me.
August 19th, 2009 at 8:30 pm
Leftback or anyone who is Big on Japan, any book recs re: the Lost Decades?
August 19th, 2009 at 9:12 pm
Ben22 – I agree this is an important question, and an important debate.
August 19th, 2009 at 9:26 pm
Been on vacation for a few days and I just read Buffett’s OpEd piece on the demise of the Dollar and excessive debt. I would hate to question Grandpa Warren and all his wisdom, but for me it almost feels like a bell-ringing moment. It would not surprise me if 8/18 signaled an imminent low on the Dollar Index–the day Warren B. lamented the Greenback’s decline in an editorial!
August 19th, 2009 at 10:44 pm
@Andy T:
He probably wants a dollar rally to pump up GS’s trading revenue. So many $ bears and commodities bulls to slaughter…
August 20th, 2009 at 12:35 am
nobody is going to read my usual late night (early morning) late thread posts, but see this: http://www.ritholtz.com/blog/2009/04/top-10-things-the-letters-gm-stands-for/#comment-159166
My theory relies upon the assumption that the dollar will fall in value from the printing presses and increase in available money supply, so we have to rely on supply and demand to calculate what will continue to be stable or rise in price. In actuality, I think we will have a bifurcated economy in which things that have a somewhat constant demand or can control the supply, ie food, energy, oil, basic first produced resources (like metals, timber, etc), and perhaps medicine will result in staying up or rising with the devaluation of the dollar, and other things that do not have the constant demand, such as housing, discretionary consumer products, capital expenditures, etc. will fall. It would be good to look at the factors behind elasticity of demand in evaluating any asset you wish to hold currently, imho.
Because the US Dollar is a Fiat Currency, the government can do anything they want including the recent bailouts and “quantitative easing”. Basically, they are saying they don’t care about the current deficit they are racking up and skyrocketing national debt, because they are going to print more money to devalue the currency relative to the debt outstanding. This might work for a while until producing countries and resource rich countries have the ability to stop it and force the issue of an international reserve currency to replace the US Dollar as the world’s form of money. Therefore, what the government is trying to do is covertly tax the public and screw all creditors in the process, while keeping the whole game from crashing.
“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”
John Maynard Keynes (English economist, journalist, and financier, 1883-1946)
“Inflation is the one form of taxation that can be imposed without legislation.”
Milton Friedman quotes (American Economist, b.1912)
(Que Obligatory fall to S&P 474 beginning October reiteration)
August 20th, 2009 at 12:46 am
also, RE: Marcus A and Wally, see this: http://www.ritholtz.com/blog/2009/04/keynes-vs-friedman/#comment-162033
I believe, in actuality it is a simple reflection of disequilibrium in the disparity of wealth getting out of hand and the consequences of the shenanigans created to keep up that disparity.
Free Market Capitalism is in theory based upon the market forces to over time allocate the capital to it’s best and highest purpose, but in the real world, inefficiencies prevent this from occurring at times. Add to this the human factors of greed, corruption, and myopia in political, legislative, and market systems and the whole thing gets thrown out of whack.
Our real economy has positive feedback loops inherent in the complex system that have concentrated money and power into increasingly small groups that has created a disparity which under normal circumstances would cramp the system and force a return to more equitable distribution. This time, however, those with the capital and the power set up the system to concentrate the profits at the top and not “trickle down” the money to the proletariat via wages enough to support the 70% consumer spending based GDP in the long run, so they devised a plan to keep the game going a little while longer via credit.
(add tv, and cultural consumerism, and zombifying drugs to the mix and ya got yer happy oblivious consumers spending away for years racking up the so called debt bubble!) This is what created the credit bubble. . . those with the concentrated money and power letting greed and stupidity get a hold of them to the point where they started creating ways to suck more money and power out of their oblivious consumer slave society, and in the process wrecked the whole thing.
In the long run, the way to fix this mess isn’t the deleveraging of the massive credit bubble (although that is what is immediately apparent). It is fixing the system as a whole so that we as a society and economy become more efficient in general, less concentrated on materialism and consumer spending, and more equitable and less corrupt in the aspects driving the disparity of wealth and the economy as a whole.
In reality, a system based upon the aspects of competing forces and equilibrium will always fail if the system has inherent flaws that do not allow this to occur and create feedback loops causing it to gradually skew. You can only keep up the charade going while you loot for so long until it resets, and sometimes, it resets in a catastrophic manner via war, revolutions, or civilizational collapse.
Just some tinfoil hat bs, but you might want to check out some
http://wonkroom.thinkprogress.org/2008/03/17/1928-resemblances/
http://elsa.berkeley.edu/~saez/saez-UStopincomes-2006prel.pdf
must have had a bad day at work and got hammered that night, haha!
August 20th, 2009 at 9:38 am
[...] Here is his take on the inflation versus deflation argument (short & charts): http://www.ritholtz.com/blog/2009/08/deflation-or-inflation/ A thoughtful argument for why the recession isn’t over [...]
August 20th, 2009 at 11:10 am
DiggidyDan, when I was growing up we would say “Hot Diggity Damn” I don’t know if that was similar saying in your neck of the woods, but whenever I see your handle that is what comes to mind.
As I read more I learn more and as I am learning more the clearer I can see certain things, I have always shunned debt, have hated it in fact, why should I work to pay someone else? Over the past 3-5 years I found it increasingly difficult to NOT be in debt, I would always blame it on “Well we have one off to college……” or this or that, but then I read things like you posted “so they devised a plan to keep the game going a little while longer via credit.” And look back at the last few years and Hot Diggity Damn, my rate of pay did not increase much over the past 10 years, nor did my wife’s we were not even coming close to matching inflation so we could not have maintained our lifestyle without getting into debt (And here I was trying to blame the kids)
Now whether this was a scheme devised by a small group of sneaky bastards or just the evolution of how our system is setup is anybody’s guess………And BTW your tinfoil hat is on crooked.
August 20th, 2009 at 5:37 pm
haha
I know it is crooked. That’s why I approach some of these discussions a little tongue in cheek. You should have seen the discussion I had with my friend who is an electrical and systems logic engineer about the meaning of the universe the other night when we were both shitfaced! LOL.
By the way, I don’t mean “they devised a plan” like the illuminati and Goldman Sachs board all got in a smoke filled room and made the decision to procede in this manner. The capitalistic system within our democratic republic and corporate structure evolved evolved as a whole to the point where they knew the average consumer was tapped out, so they had to get that 70% from a promise on the future ie credit. But those who were in power and rich, while not actively perpetrating such a scheme, nonetheless sure as hell took advantage of it while it was happening!
August 20th, 2009 at 5:41 pm
i wish we could edit for bad proofreading and spelling, oh well. nobody’s reading. . . move along. nothing to see here. I’ll carry on my inane ramblings to my ceiling fan while wrapped in christmas lights and eating a popsicle.
August 21st, 2009 at 10:35 pm
As the man said, in a social democracy with a fiat currency all roads lead to inflation. Governments and central will keep printing money and extend credit because they can. While that might not help keep prices of some goods up, particularly those that require financing, most people will not see their daily cost of living decline much, if at all. If I were forced to make a quick bet I would still be buying oil, gold and silver. And while I am weary of the base metals if government plans to spend on infrastructure are actually implemented we could see prices for iron, copper, zinc, nickel, etc., at levels that are significantly higher than where we stand today. Although we would expect these to collapse it is important to note that many of the larger mines are nearing the end of their economic lives thanks to a lack of investment during a two year bear market and high grading practices that have left behind marginal reserves unused and unavailable at the current low prices. (And let us not forget things like uranium, potash and the REEs that will be required to grow food and transition to a new energy economy.)