Seeking Antidotes to a Global Plague
Round the world, a growing number of jittery investors have lost confidence in the value of paper money and are rushing to get rid of their cheapening dollars, pounds, francs and yen by buying things that they feel have solid and tangible value: land, art, antiques, farm commodities, metals...
Investors seeking tangible value have speculated wildly in wheat...
In practice, the commitment has meant that governments, using the tools of Keynesian economics, react to anything but the briefest and shallowest downturn by increasing spending and pumping up the money supply in order to get the economy moving again....
As prosperity increased, so did people's expectations—for more varied diets, bigger houses, more travel, better education, more skilled medical attention. To get those good things, workers went deeply into debt and counted on rapid wage increases to keep them solvent....
Yet another major inflationary effect of affluence is a matter of sheer numbers: the growing pressure of world demand on the resource base of raw materials. Observes Canadian Economist Carl Beigie, "What is happening is that the fondue pot of the world is being attacked by more people with bigger sticks...."
I should probably mention that this article was written in 1974. It is well worth a read.
Stag,
ReplyDeleteGreat article. Talk about trends and expectations!
My best guess is that inflation will continue to creep higher, but will not get out of control as it did during the 1970's. American workers just don't have the barganing power anymore.
The upside risk to inflation is from abroad. Global demand for commodities and rising wages and prices in China for instance.
Something has to give in China. Big time negative real interest rates and increasing inflation! Yuck!
Seems odd that they have such an inflation problem when Bernanke claims their citizens save too much.
MAB,
ReplyDeleteMy best guess is that inflation will continue to creep higher, but will not get out of control as it did during the 1970's.
That was sort of my thinking on unemployment. Yet there's December's pop from 4.67% to 4.98% staring me right in the face. I gotta tell you. Even as a bear, it surprised me. Maybe staring isn't quite the right word. It was more like a cold hard slap (seeing as how my girlfriend is still unemployed).
The problem is that slow steady creeps can eventually end in sheer abject terror.
One Year Trailing Inflation Rates
December 1976: 4.86%
December 1977: 6.70% (1.84% higher)
December 1978: 9.02% (2.32% higher)
December 1979: 13.29% (3.27% higher)
Parabolic curves tend to start slow and then build momentum. Economics seems to love them.
As long as there is some doubt, then inflation is still somewhat under control. I still have plenty of doubts. Should most truly start believing in the slow creep theory (i.e., they are watching it play out and come to believe in it), then I'd suggest the parabola would be the next logical step. When investors came to believe dotcom stocks only creeped higher, they began to "hoard" dotcom stocks. When investors came to believe housing prices only creep higher, they began to "hoard" real estate. When investors came to believe gold only creeps higher, they began to "hoard" gold. Better hope I'm the only one thinking toilet paper is next. It looks relatively cheap (and risk free) to me and I'm still in a "hoarding" mood.
Heck, even if I'm only 50% convinced I'm right (a coin toss) it would still be in my best interest to pick TIPS over nominal bonds (at these yields). By comparison, I'm only 1% convinced my house might burn someday. I still have fire insurance though. Go figure!
Oops!
ReplyDeleteDecember 1976: 4.86%
December 1977: 6.70% (1.84% higher)
December 1978: 9.02% (2.32% higher)
December 1979: 13.29% (4.27% higher)
That's 4.27% higher, not 3.27% higher.
Those are monster increases.
ReplyDelete1.05(.019/.065)**1/4-1+(.019+.065)/2 = -18.6% annualized return.
Just a guess where stocks could head over a similar four year period. Assumes 10 yr treasury matches inflation rate (3.8% today and 13% four years from now) and keeps dividend yield at 50% of 10 year treasury. Dividend growth at historical 5%.
Ugly to say the least. Can you say Dow 6000!
We've had runaway inflation for years but it's been camoflaged. What is a housing bubble except hyperinflation in the housing market?
ReplyDeleteAnd what about tuition, gas, etc? Now that using credit as income-subsidy is starting to pile up on people, they'll start cutting back on luxuries only to realize that they can't even afford 'regular' stuff on just their incomes. They will realize then that it isn't just them -- that something is very wrong with the system.
That's Time Magazine all over: two years late or 33 years early.
ReplyDeleteKen,
ReplyDeleteWe've had runaway inflation for years but it's been camoflaged.
I went to Target today to hoard Suave shampoo among other things.
It was the cheapest I've seen it in years (on sale). I'm at a loss for words on how $90 oil has yet to trickle in much yet. I still don't think the inflation is quite here yet but I still think it is coming.
When buying even more Gold Toe socks at Wal-Mart today the price was just SO darned low. I didn't even know Wal-Mart sold Gold Toe socks!
We semi-apologized for our hoarding ways in the checkout line. The checker said and I paraphrase, "I'm doing it too. The economy is horrible. I think higher prices are coming."
It shall be interesting to see play out. Why was I even at Wal-Mart today? Took one look at our three quarters of a trillion dollar annual trade deficit and figured I better lock in even more low prices while I can.
I have a loset full of TP :)
ReplyDeleteoops - that should be closet, with a c!
ReplyDeleteYou should feature Jimmy Carter's speech from 1979. Take a look:
ReplyDeletehttp://tinyurl.com/79cj9
http://www.pbs.org/wgbh/amex/carter/filmmore/ps_crisis.html
Anonymous,
ReplyDeleteThanks for the link. It was a fascinating read.
For the first time in the history of our country a majority of our people believe that the next five years will be worse than the past five years.
In other news:
Confidence Sinks to Record Low
http://ap.google.com/article/ALeqM5jax0dTfUiADcnyc9e-g03FqSUuxAD8U3KJLG2
According to the RBC Cash Index, confidence tumbled to a mark of 56.3 in early January. That compares with a reading of 65.9 in December — and a benchmark of 100 — and was the worst since the index began in 2002.
Stag,
ReplyDeleteRegaring hoarding and parabolas, consider:
"No! He covets. That is his nature. And how do we begin to covet, Clarice? Do we seek out things to covet?"...
"No. We begin by coveting what we see everyday." (Hannibal Lecter, Silence of the Lambs, 1991)
Perhaps this insight into human nature applies generally as in keeping up with the Joneses.
Dot-com stocks, houses, Euros, emerging markets, last years winning stocks or funds, bling, fancy cars, Paris Hilton, tulips, bad lending practices, wall street bonuses, hedge funds, private equity, cabbage patch dolls, pet rocks, Tickle- me-Elmos.
What's next to enter the radar field of the covetors's eyes. Gold, TIPS, commodities, financial prudence, debt repudiation?
The media tells you what train to get on, but you have to tell yourself when to get off.
Just thoughts
Stag,
ReplyDeleteJust wanted to give you some gravy to put on top of your COF concerns. Check out ticker COH (Coach).
To me, COH epitomizes the credit bubble, financial foolishness and wealth inequality like no other stock.
I can't tell you how dis-heartening it was to witness the rise of a 20 billion dollar market cap hand bag company.
MAB,
ReplyDeleteThat is an interesting observation on Coach (and an eerily similar six month chart compared to COF).
http://finance.yahoo.com/q/bc?t=6m&s=COF&l=on&z=m&q=l&c=coh
Perhaps Capital One and Coach could merge.
What's Left in Your $140 Wallet?