Deflationary Trend (Temporarily) Masked by Free Lunches
By Barry Ritholtz - November 20th, 2009, 10:30AM
The Quote of the Day comes to us via Bloomberg’s Alice Schroeder:
“We’re in the midst of a deflationary trend that is temporarily being masked by inventory restocking and free lunches like Cash for Clunkers. Consumers are done with borrowing. They’ll keep refueling the deflation by going through their attics and garages to find stuff they can sell on Ebay to raise cash.”
November 20th, 2009 at 10:45 am
My wife and I were just talking the other day about how “Yard Sale” signs have replaced “Home for Sale” signs as the most common yard art in vogue.
November 20th, 2009 at 11:08 am
Craigslist is the real place to buy and sell used items. Ebay has been overrun by professional sellers.
Permanent job losses and wage stagnation in the US is inherently deflationary. The Feds are basically trying to stop the tide (good luck with that).
November 20th, 2009 at 11:37 am
time to buy gold was in 2003. gold hasn’t gone as much since late 2007, http://bit.ly/2JVBYd. what will happen to gold when the dollar rallies due to deflation?
November 20th, 2009 at 11:50 am
Wes Schott Says:
November 12th, 2009 at 8:29 am
gold, silver and platinum have significant volatility, the miners even more so…with that -the numbers speak for themselves – against major currencies – from James Turk – this is not a change in trend, this is an 8, now 9-year trend
Gold % Annual Change
USD AUD CAD CNY EUR INR JPY CHF GBP
2001 2.5% 11.3% 8.8% 2.5% 8.1% 5.8% 17.4% 5.0% 5.4%
2002 24.7% 13.5% 23.7% 24.8% 5.9% 24.0% 13.0% 3.9% 12.7%
2003 19.6% -10.5% -2.2% 19.5% -0.5% 13.5% 7.9% 7.0% 7.9%
2004 5.2% 1.4% -2.0% 5.2% -2.1% 0.0% 0.9% -3.0% -2.0%
2005 18.2% 25.6% 14.5% 15.2% 35.1% 22.8% 35.7% 36.2% 31.8%
2006 22.8% 14.4% 22.8% 18.8% 10.2% 20.5% 24.0% 13.9% 7.8%
2007 31.4% 18.6% 10.4% 23.0% 17.9% 17.5% 24.7% 21.5% 29.2%
2008 5.8% 32.5% 32.4% -1.1% 11.9% 30.4% -14.9% 0.2% 44.3%
Annual Average 16.3% 13.3% 13.6% 13.5% 10.8% 16.8% 13.6% 10.6% 17.1%
31-Oct-2009 17.7% -8.7% 4.0% 17.8% 11.3% 13.7% 16.7% 13.1% 4.8%
November 20th, 2009 at 11:53 am
Gold is a amazing hedge against bad central bank policies that one we are in. I hope people will understand this before filling up pages.
November 20th, 2009 at 12:03 pm
Several, one might say “Big Picture” points that are being missed by the gold-bugs-go-splat:
1) You cannot have inflation in prices with a deflation in the money/credit supply.
2) We are experiencing a very real, and protracted, deleveraging in terms of credit.
3) The money being printed up or ‘borrowed’ by the Fed (with vague implications of repayment) is only really being used to keep zombie bank doors open. This money is not being ‘fed’ into the general money supply, as these same going-out-of-bidness banks have an ongoing experience in proctology that prevents them from free-wheeling and lending like they used to.
4) Gold is fairly useless as a form of currency. Go put a Canadian Maple Leaf in your local soda machine and see what comes out. Or try to buy groceries, etc. About the only thing you can buy with hard gold is another gold bug (-go-splat).
November 20th, 2009 at 12:25 pm
aye pity the fool, the Mr. T Gold Indicator http://bit.ly/79I3l0
November 20th, 2009 at 12:27 pm
Well, I wouldn’t call myself a gold bug, but I own a decent amount of IAU and all I know is that since it is going up every day – I really, really like it!
I see Gold as an inflationary protection tool. However, I have to admit, I don’t see much inflation except for cell phone plans, insurance, internet access, movie ticket prices, food, gas, car prices, etc.,etc.
November 20th, 2009 at 12:39 pm
Wait, so the Gov’t is buying stuff on Ebay? Awesome… Call it TARP II – Toxic Attic (stuff) Relief Program
November 20th, 2009 at 12:44 pm
the Dow, Nasdaq, S&P, oil just about every commodity, except for ag commodities have been going up everyday, too, since March — much more so than IAU. is that inflation, deflation or reflation?
November 20th, 2009 at 12:52 pm
@hue: It’s stampede effect. Expect it to turn right around the other way as the cliff appears.
Based on the fractal signals that I’m reading, I’ll say it here and now: Gold has topped. So have the markets.
You’re welcome.
November 20th, 2009 at 1:08 pm
thanks uno,
i like the deflation, inflation debate. your printed dollar is buying you less either way, so does it really really matter with ation it is? i guess it does affect your investment strategy.
gold does have a practical purpose, nice jewelry, and nice bars to club people with when they come for your stuff.
November 20th, 2009 at 1:11 pm
1) You cannot have inflation in prices with a deflation in the money/credit supply.
——————
Who says?
What if supply of products (actually needed) starts to drop faster than supply of money?
November 20th, 2009 at 1:17 pm
What if supply of products (actually needed) starts to drop faster than supply of money?
that should be oil. but what is the true value of oil, based on which currency, by which speculator?
November 20th, 2009 at 1:17 pm
4) Gold is fairly useless as a form of currency. Go put a Canadian Maple Leaf in your local soda machine and see what comes out. Or try to buy groceries, etc. About the only thing you can buy with hard gold is another gold bug (-go-splat
————-
Go tell that to the farmer who sold his farm at the beginning of the Great Depression and bought gold with the proceeds.
Do you think the farmer ever told others what he did with his money?
November 20th, 2009 at 1:22 pm
but what is the true value of oil, based on which currency, by which speculator?
————–
It’s a commodity. Price = cash flow break even or else companies go under.
Cost of production will determine minimum price.
November 20th, 2009 at 1:25 pm
Speaking of oil (at least take the time to read the excerpt better to click the link):
http://incakolanews.blogspot.com/2009/11/must-read-on-oil.html
Otto Rock provides a link to a pdf titled: The Tragedy of 21 Darts
Excerpt:
“This is a long article on the subject of oil & gas reserves and due diligence.
My purpose is to alert you to revision of SEC Regulation S-K and Regulation S-X effective January 1, 2010. Concealed in a handful of benign new regs is a financial truck bomb that’s going to blow away “proved reserves” as a meaningful metric of oil company assets.
Old definition: Proved Reserves are those quantities which can be estimated with reasonable certainty to be commercially recoverable from known reservoirs under defined economic conditions. Proved quantities arelimited by the lowest known hydrocarbon as seen in a well penetration unless otherwise indicated by definitive geoscience, engineering, or performance data. Seismic data alone is not sufficient to define fluid contacts. Undeveloped locations may be classified as Proved in undrilled areas of a reservoir that can be judged with reasonable certainty to be commercially productive.
New definition: Industry is no longer constrained by the criterion of certainty. An operator can book incremental proved reserves from planned enhanced recovery projects (gas injection, acid fracturing) based on a pilot project. Coal seam gas, bitumen, oil shale and other unconventional resources can be booked as Proved Reserves. Estimated reservoir properties in the aggregate is a departure from the old rules. The new SEC definition does not require that an analogous reservoir has to be in the immediate area or in pressure communication. Seismic analysis and reservoir models are sufficient to book Proved Reserves.
Hold on to your shorts, it gets worse.
Under the new SEC rules you don’t have to drill a well and actually produce oil. An operator can establish levels of lowest known hydrocarbons and highest known oil through “reliable technology” other than well penetrations. It doesn’t have to be 90% reliable or widely accepted by industry peers…”
November 20th, 2009 at 1:27 pm
Just make a list of all producing countries and convert their cost of production into US dollars.
Use a few scenario:
1. US dollar tanks some more vs. that currency
2.US dollar stays falt vs. that currency
3. Who will cut or increase production depending on the strength of the dollar.
November 20th, 2009 at 1:30 pm
Why is there so little talk about velocity? This all seems like more of a velocity problem than a supply/demand problem. This deflationary pressure isn’t due to a lack of supply of dollars, but a lack of those dollars being moved through the economy. In the grand scheme of things, it seems the bigger problem would be the increasing size of the rainy-day funds of the 90% of us who are still employed not the 10% who are hocking their wares on eBay to make ends meet while they look for a new job. This is evidenced by the fact that the banks seemed to be able to refill their coffers in record time after taking huge write-offs.
Once people are confident they won’t lose their jobs, they’ll tap into that fund (as if they won the lotto) and have money to buy with. Also, secondhand prices are more supply driven than new items, since outside of used car lots and pawn shops, most people aren’t buying to resell. As supplies become more scarce, prices will rise and people will look to buying new again as the cost gap between used and new closes. Human nature dictates that once people aren’t so worried about getting the axe, spending that rainy-day fund on a fat down payment on a new car/computer/TV/whatever with or without low payments will sound so much better than paying too much for a used one that you can afford to buy outright. Does this make “cash for clunkers” genius? Forcing used supply off the market while propping up new supply prices until confidence returns seems about right. I didn’t like it that much at first, but in hindsight that program might have been better than it gets credit for.
November 20th, 2009 at 1:33 pm
Gold’s inflationary protection is a bit overdone, eh?!?! In 2008, as gold peaked, deflation ensued. In the early 1980’s as gold peaked inflation was squashed. In other words, it’s not a great predictor of inflation.
To me and the small amount of gold exposure I have, it’s more reflective of instability in the system. In the early ’80’s, after inflation was rampant, no one knew whether or not Volcker was going to be able to tame inflation and clean up after Jimm-ah. Once his plan was implemented, stability was restored, inflation was subdued, and gold fell off a cliff.
Last year, the system had become so instable during the commodity bubble, gold obviously participated. Then, as the perception of stability (and deflation) set in, gold fell (not of a cliff). Now, post-Lehman, it’s made its way all the way back up. Again, I think it’s more of a concern about potential instability (fiat currencies, louder saber rattling between nations, etc.) versus any inflation prediction.
In addition, with the central banks being net purchasers of gold, as others have commented, a bit of floor seems to be building at around that $1,050 range.
My question for the board is this: how do you best buy gold bullion with the thinnest mark-up? For armageddon, owning a paper representation (i.e. GLD and the like) of gold may not serve it’s intended purpose. Therefore, if we want the physical commodity, what’s the most efficient way for an individual investor to get it besides panning for it ourselves?
November 20th, 2009 at 1:36 pm
“It’s a commodity. Price = cash flow break even or else companies go under.
Cost of production will determine minimum price.”
So oil at $147 in July 08, then $35 in Jan. 09, reflected the cost of production? i’m quibbling but can we ever determine true value with inflation, deflation, speculation, manipulation? surely ExxonMobil and Newmont etc. prefer higher commodity prices.
November 20th, 2009 at 1:41 pm
MRegan:
Reserves also need to be economically extractable. Don’t forget that just a few years ago the price of oil averaged between 18-22$. When doing forecasts, reserve evaluation firms would typically increase this with inflation (peanuts) over time.
At over 50$, a lot more barrels of oil have become economical. So although I believe we have reached peak oil, I also believe there is still a lot of oil to extract. The thing is it’s going to be expensive and there will need to be a shakeout in the economy to account for this new reality. And many people will not be able to afford the new price.
It’s not just oil or the credit bubble that will slow us down. There is a confluence of elements which will force us into a shakeout. It’s non-linear and most people have a lot of trouble grasping multi-dimensional equations.
November 20th, 2009 at 1:47 pm
hue:
IMO at 147$ it was speculation.
Last year, I looked at the Cdn oil producers and the cost of production + finding costs was over 50$ CAD for many.
When I started in the oil sector in 1991 it was 18-20$. Equal to the selling price. Imagine that!
Low cost oil has been used up, we’re burning 50$ oil now. Since prices shot up, countries around the world have been subsidizing oil to keep growth going. But that won’t last forever. At one point the new cost of oil will get reflected in the economy and it won’t be pretty.
November 20th, 2009 at 2:02 pm
Gold is most commonly and highly consumed material among households in some countries. It is common to people buying gold for occasions and festivals. Once they buy gold, people never give up their gold. It is not paper to worry about the value. This trend is even more pertinent in illiterate.
November 20th, 2009 at 2:05 pm
At one point the new cost of oil will get reflected in the economy and it won’t be pretty.
———-
For example, in Quebec a lot of new houses are on the electrical grid for heating. Since the price of oil has shot up, the cost of heating using gas or oil has been extravagant when compared to electric.
Hydro-Quebec, a public utility, has been trying to raise its rates but I don’t think it has been that successful. Why should it sell its energy cheap so the population can overuses when it could sell for twice as much to the US?
With the mounting provincial deficit, I have trouble believing those power rates will stay low.
In a few years, Quebeckers are going to feel some pain.
And that is just one example. The adjustments have yet to begin.
November 20th, 2009 at 2:08 pm
Hi Danm,
You are spot on about countries around the world subsidizing oil. Most of the oil companies are owned by government in these counties. They will try to keep oil prices as low as possible in order to keep the voters happy. These governments are running massive debts on the books of these oil companies. If one includes this debt to the national debt, it is lot lot worse for these countries. Actually that is how it should be.
November 20th, 2009 at 2:09 pm
Think of gold in this manner and your thinking about where gold is going may change. The last thing that Bernanke wants to see is the price of gold decline, as that means he is impotent in regards to reinflating the economy. If gold prices fall, we are probably deep in horse manure.
November 20th, 2009 at 2:39 pm
Another example… Norway
Have you seen in the news that their oil field declines are up markedly?
This is a country with so much money that they’ve hired a philosopher to determine how to distribute their wealth.
They have been investing their sovereign funds in US treasuries and MBS which took a licking.
Well, if I were Norway, I’d cut my production too, keep my barrels in the ground before buying anymore of those paper assets.
November 20th, 2009 at 2:43 pm
@tCA: To paraphrase a poster from the other day, if we get to the point where I need gold to buy food, my shotgun will be worth more than your gold. You don’t need to be an alchemist to make lead into something more valuable than gold in that extreme of a scenario! If you’re not worried about that, then gold certificates, or even better, a basket of other currencies will do the same thing. For the second time today, I will point to Iceland as evidence that futile war will not break out in developed countries as a result of a collapse of currency, as much as that fantasy excites people. This reminds me of how “shocked” people were that New Yorkers could be civil during a major blackout a few years back, like they were expecting the place to turn into the Thunderdome or something! Had you been an Icelander who bought gold, U.S. dollars or Euros prior to the collapse of their currency, you’d be in roughly the same position with all three options. So why the need for gold bullion?
@danm: long term escalating prices can only result if there are no substitutions for oil at a given price. What is the price of substitution? I’d argue we’re pretty close to that price now. If an electric car (or plug in hybrid) with sufficient range for most daily tasks (say 50 miles), equivalent to gas car that gets 25 real-world mpg, costs $10K more than the gas car equivalent and lasts only 100K miles while driving on electricity (meaning you’re only getting 2000 cycles out of the battery, which is pretty conservative with a decent BMS), and the cost of fuel is 2 cents per mile (assuming 3-4 miles/kWh at 6-8 cents per kWh on a time-of use program), then your gasoline replacement cost is about 12 cents per mile (10 for the batteries, 2 for the fuel), or about $3/gallon at 25mpg. That’s roughly where we’re at now, with oil at roughly $60/bbl. Therefore this probably pretty close to the long-term sustainable cost. These cars are coming to market for early adopters even at this price. Even if the price of power doubles, your break even point only moves to $3.50/gallon. Batteries will only go down in price, making things less favorable to oil. Thanks to laptops and cell phones, the big cost, the batteries, has come down enough to make economic sense and remove oil’s stranglehold without the development cost burden being placed on cars. This wasn’t true 10 years ago. The bottom line is that oil is not sustainable in the long term at economy crushing prices. There’s no lack of experienced automotive laborers or manufacturing infrastructure in America to make it happen. So, while oil could cause short term disruptions, there’s no reason to think oil will drive the entire economy for very long.
November 20th, 2009 at 2:55 pm
@danm
No real disagreement with your notions, but I want to make it clear that the important aspect of the analysis is that proved reserve numbers after Jan 2010 will become de facto unreliable due to the rules under which they will be generated. The point is that those valuing oil&gas companies will confront an indefinable risk vector. I strongly recommend one read the analysis.
November 20th, 2009 at 3:04 pm
“…They’ll keep refueling the deflation by going through their attics and garages to find stuff they can sell on Ebay to raise cash.”
Except… Ebay sales are not going up.
http://www.businessweek.com/technology/content/jan2009/tc20090121_143541.htm
November 20th, 2009 at 3:08 pm
Brendan just performed a great analysis there for us. We are coming to a point, soon, where the world simply beleives that oil for transportation is archaic. There is a potential for huge economic incentive for all of the dinosaur burning vehicles to be replaced with electric cars, and the effect on industry can’t be understated. Of course, the oil companies and drillers will still be needed, as many vehicles on the road will still need to be powered by something other than electric batteries. Diesel will probably become a more refined product in the far-future. The oil producing nations that send the world the greatest supplies better learn to diversify, or move back to the stone ages.
I really don’t expect a lot of wholesale changes to what I see on the road in the next 35-40 years of my life, but it won’t be status quo. Just as horses and bicycles were replaced by gas burning vehicles and oil production ballooned, those gas burners will gradually fade away over a longer period of time until they are relics from the past.
November 20th, 2009 at 4:09 pm
The bottom line is that oil is not sustainable in the long term at economy crushing prices.
————–
Maybe it’s the opposite. Maybe it’s the economy that is not sustainable at high oil prices.
The cost to extract a barrel of oil is 50$ CAD whether it crushes the economy or not. And companies will not produce cash flow negative barrels for very long.
Maybe you can get some switching but I doubt the power grid will maintain it for long. There will a some tipping point where you’ll get a huge increase in power costs.
Let’s be logical here. According to the second law of thermodynamcis, if I recall correctly, systems are said inefficient and lose energy. So if I understand correctly, we will be feeding hydrocarbons to generators so they can generate energy which will be lost all along the power grid to motor cars instead of injecting those same hydrocarbons directly into the car?
My god, England had trouble with its power grid when everybody turned on their plama TV to watch a soccer game! I have trouble believing they could plug in their batteries also.
I guess those living on one side of the street will be allowed to recharge their batteries at 2am and those on the other side at 3am. Or maybe charge times will be alloted by licence plate?
My point is the entire system would need a shakeout to make place for such a substitution.
November 20th, 2009 at 4:25 pm
My theory is that oil at 50-100$ a barrel (among many other things) is slowly destroying the economy.
Input prices have to be lower than the output prices for an economy to work. Oil costs 50$ min to produce so everything else must go up.
1. Governments will print, print, print.
2. This will squeeze out the private side.
3. All sectors will go through a shakeout.
4. Capacity and supply in all sectors will dwindle.
5. Companies will gain pricing power
6. General prices will be above the oil price.
7. Problem solved.
Now how are househoulds going to fare through all this? That’s another issue.
November 20th, 2009 at 4:53 pm
I’ve been saying for years, The World Wide Economy was built and planned based on cheap oi, period, end of story. Thus, right now you have massive budgeting problems with everything, what do you put donw on your spread sheet, 50 dollaor oil, 85, 150, 200………etc…………q2 good earnings direct result of 100 a barrell less in oil, now we are at 75 ish…………since it is budget time now what do you put down…….since no one can you swag it, and invest in nothing just in case and do the best with what you got in sales etc…………growth, yeah you’d like it, but since you have no clue what it costs growth could kill you…………
The way I see it, solar is the only way out, yes, it will take 30 years, yet on an a comparible basis to cell phones or computers in general we are at an inflection point. Cell phones deisgned in 1955, hit the maass market, albeit big expensive brick ones in 1985, 1996 hit mass pricing, and boom in 20 years you go from 10% penetration too 90% worldwide. PC’s same story and time frame.
Solar deisnged around 1960, first commercial ones 1990, 30 years, in 2000 or so they ipo’d em, what is the percentage take up 2%…………how long too 10% inflection on the S curve ??????????
I don’t know……….right now 35k for 2k house for panels, saves you 1500 a year, a 17 year payback, if you can get it too 20k you got a shot at solarizing homes, that’s not unrealistic yet probably 15 years away.
IMHO, solar dishes, like the old behemoth satelite TV’s will be the tipping point, if you could get a solar dish installed for 8k, save a grand a year, or use it for you’re electric car, now you’re talking
This is a 30 year change to save energy, and imho, sustain a certain standard of living, going forward. 30 years from now solar will be on all homes and just as common as ac/heating units built into price of homes
November 20th, 2009 at 5:03 pm
torrie-amos :
The issue I have with all these alternative energy sources is that they take A LOT of energy to get built.
I’m not sure, net net, how much more energy we get out of them than what it takes to build them up.
And with the rest of the world growing and vying for the energy that naturally came to us, how easy will it be to build up all these alternative energy systems?
November 20th, 2009 at 5:10 pm
I suggest everyone go to Google Books and locate the achieve of Kiplinger magazine. It dates back to 1948. Go read it. When think you’ve had too much, read some more.
Then, after you’ve read enough to span 60 years of financial advice / theory / ect, turn off your computers and go spend time with your family or friends. Frankly, we are spending too much time worrying about what Bernanke is doing or not doing. People were worried about debt in the 50’s. They were worried about debt in the 60’s. They were worried about inflation / debt in the 70’s. They were worried about debt in the 80’s. And on and on.
The secret to get through the next 10 years:
Goddammit, spend less than you make, save the difference.
Put in a honest days of work.
Be kind – The social mood is going to turn south but that doesn’t mean we have to participate.
You hate this advice because it’s too simple. The rest is all nonsense. The proof is in those damn magazines.
“What has been will be again,
what has been done will be done again;
there is nothing new under the sun. ”
- Ecclesiastes 1
November 20th, 2009 at 6:46 pm
the reason we use oil is because it’s the most efficient and cost effective,(i’m not talking about the waste products. for electric cars, don’t some power cos. burn oil to generate electricity? you either burn oil products in your car or by your power generator.
it’s like switching from paper grocery bags to plastic. save the trees, and create another environmental problem. unintented consequences.
November 20th, 2009 at 9:14 pm
Well laid out piece by Alice yet, she still does not believe in the conclusion she reached. I would like to know when she buys as that will surely indicate a top in gold. Or Armageddon.