It is hitting with a vengeance today as seen in the interest rate spread between treasuries (non-inflation protected yields are falling substantially), their inflation protected counterparts (real yields are rising substantially), and the implosion at Bear Stearns.
My short-term deflationary mood (as seen in the upper left corner of my blog and in my most recent post about the possibility of a commodity crash) is kicking in it seems. I'm still stagflationary long-term. I expect I'll be mostly alone in the coming months though. It is what happens after this (probable) recession that concerns me most. The 1970s saw many recessions that temporarily eased inflation short-term.
Once again, as a saver I hope I'm wrong about future inflation (and real yields). It will be far easier to protect myself (even in inflation protected treasuries) if inflation stays tame (and real yields stay positive) over my lifetime.
Your not alone Mark, that is what it looks like to me also. I think we ge a few quartes of deflation but by the end of the year all hell is going to break loose, expecialy in the things a person really needs.
ReplyDeleteKevin
Stag,
ReplyDeleteAnother Mad Money classic:
http://www.redlasso.com/ClipPlayer.aspx?id=ae47b67d-2523-4946-a2ad-aadc68176f67
In other news, Goldman Sachs has announced that Abbey Joseph Cohen will no longer be making S&P 500 price predictions. Good thing Cramer is still offering "free" advice.
Kevin & MAB,
ReplyDeleteI'm thinking of changing my blog's name to Illusion of Stability!
The irresistible force of deflation is being met by the immovable wall of inflation. The tightrope is looking a bit like a heavily stressed piano wire (of the thinner higher note variety) these days.
Wen confident China can control inflation pressures
http://www.guardian.co.uk/feedarticle?id=7393065
I'm not. Our "helicopter" Fed combined with the "free" money tax rebate checks will allow us to ship even more inflation their way. We'll stay the course and everything will be just fine. Woohoo!
(I feel like a grasshopper cheerleading during a locust swarm.)
Inflation is Americans' top economic concern
ReplyDeleteAhead of the Fed's rate cuts, nine in ten Americans say they are concerned about rising prices, according to a new poll.
http://money.cnn.com/2008/03/18/news/economy/cnn_poll_inflation/index.htm
Mark,
Maybe your a contrarian.
Kevin
Stag, Kevin,
ReplyDeleteI have yet to see deflation. All my monthly bills are increasing. Everything. Milk, gas, insurance, my morning coffee, the tolls around Manhattan. Just name it. Even the NJ state sales tax was recently raised from 6% to 7%. Just great, I get to pay higher sales taxes on higher prices. Compound growth baby - a real wealth builder.
Don't tell me about tvs, cars & computers either. I've had enough of that koolaide.
Mish is citing the collapse of Bear Stearns as proof of deflation. He's missing the point, imo. Sure, Bear Stearns' equity value decreased $10 billion or so. But their $289 billion of outstanding debt actually increased in value after the fed backstopped it. I guess that qualifies as a "credible" threat of running the printing presses.
Next up, nationalization of bad mortgages. No doubt a path to prosperity.
In all seriousness, I'm not sure we can afford another period of the sacred 6% nominal growth. The last five years of "growth" pretty much broke us.
Cheers!
Kevin,
ReplyDeleteI do tend to have contarian tendencies it seems. I've been a stagflationist for 3+ years while few were talking about it.
Times are changing though.
9,000+ news articles on "stagflation" as seen in Google. There are now just 866 news articles on "deflation".
I've semi-joked in the past that I might have to rename myself Deflationary Mark at some point.
Gross: Demon is deflation, not inflation
http://www.reuters.com/article/bondsNews/idUSNYG00098620080318
We have so much STUFF as a country. It makes it very hard for me to protect my wealth by buying even more stuff unfortunately (other than what I will truly need). I do think toilet paper is still a good buy though. No harm, no foul.
MAB,
Mish is citing the collapse of Bear Stearns as proof of deflation. He's missing the point, imo.
I can't read Mish. He lost me twice.
First was that he calls himself a deflationist but wishes to hoard gold. His analysis completely missed the point. In my opinion, you hoard gold if real interest rates are negative (1970s) or you think they will turn negative. You don't hoard gold if real interest rates are positive (1980s and 1990s) or you think they will turn positive.
Second was his "running a car on saltwater" article. Good grief.
http://globaleconomicanalysis.blogspot.com/2007/06/running-car-on-saltwater.html
I am not a physicist so I simply do not know. But I am convinced...
That's exactly what's wrong with our country (i.e., not knowing but being convinced). For what it is worth, I'm convinced of very little. I think it will be harder to make money off of money though. I also think we're looking at hard times. One need simply extrapolate the price of oil, the weakness in the economy, and a massive trade deficit to see that business as usual will eventually break (and most likely already has).
That last one is a real bear. In order for the trade deficit to truly balance, the American worker and the Chinese worker will someday be paid about the same. Why do I somehow suspect protectionist policies will be in place to stop that? And what will protectionist policies do to the price of goods? Or oil?
Stag,
ReplyDeleteIn my opinion, you hoard gold if real interest rates are negative (1970s) or you think they will turn negative. You don't hoard gold if real interest rates are positive (1980s and 1990s) or you think they will turn positive.
I tend to agree. However, our history of inflation and negative real interest rates is relatively short. I think of gold as more of insurance than an investment.
An older gentlemen I know had truly unique life experiences. As a boy, he was a Hitler youth. After Germany lost the war, he and his family were starving. Their main source of food was road kill (dead rabbits mainly). In an attempt to leave the country and join family abroad, they made their way to Berlin. No Germans were allowed out of the country without approval of the Americans, the English and the Russians. With the Russians terrified under the Stalin regime, nobody could leave. The only people who escaped, did so because of their bribes (gold or jewels). He got out alone, by the graces of an American officer who bent the rules at the pleadings of his mother. To this day, he buys his wife gold and/or jewelry for Christmas, birthdays and anniversaries.
Buffett has a jewelery business (Borsheims if I recall). Probably just a coincidence though.
MAB,
ReplyDeleteGold sure got spanked in the last few days.
http://www.kitco.com/charts/livegold.html
Commodities in general also got spanked.
http://stockcharts.com/charts/gallery.html?$CRB
Then there is oil (which is the "driver" of much of this, pun intended).
Oil Falls on Weak Demand Report
http://biz.yahoo.com/ap/080319/oil_prices.html
The market's reaction to the tepid demand data marked a change from its recent focus on the falling dollar, with investors looking more closely at oil supply and demand fundamentals. Prices have jumped sharply in recent weeks as investors looked to the dollar for direction and ignored evidence of rising supplies, falling demand and a weakening economy.
Too many inflationists/stagflationists lately. That's my short-term concern.
In my opinion, gold at any price is not a decent hedge against inflation any more than real estate at any price or oil at any price is a decent hedge against inflation.
That's what my gut thinks.
Toilet paper at a decent price is to inflation blah blah blah though. ;)
And lastly, probably best not to bet against Boone Pickens these days. Few believed him all the way up and few seem to believe him on the way down?
Pickens Expects Oil, Natural Gas Prices to Fall
http://www.cnbc.com/id/23272368
After correctly predicting oil's climb to more than $100 a barrel, legendary oilman Boone Pickens said Thursday he is shorting both the oil and natural gas markets in the belief that oil will stage a short-term pullback.
The key here is "short-term" and as you can guess I tend to agree. In order for the market to inflict maximum pain (which it loves to do in bear markets), it needs to convince a few short-term (temporary momentum driven) stagflationists that they were wrong. Then, once they are convinced greener pastures are elsewhere, the market can resume stagflation in all its glory. Just a theory though.
Here's another (maximum pain) theory to describe yesterday's stock market surge: sucker's rally.
Stag,
ReplyDeleteThere is definitely NO deflation in the number new mutual funds. For example:
Nymber of Small cap core funds: 837
Small cap core funds with at least 10 yrs of results: 161 (only 57 had returns above LT treasuries over the last decade)
Number of international large cap core funds: 238
International large cap core funds with at least 10 yrs of results: 125 (of which 22 out-performed their Lipper index of 7.28%/yr over the last 10 years).
Given the poor results against the bench marks, we definitely need more funds. Lots more apparently.
I over-heard two guys at starbucks last weekend talking about "seeding" new funds. Here's the gig. An investment house sets up five or so new funds in several asset categories. Each fund gets a nominal amount of money, say 100K to a few million. Over the next few years, the "successful" funds are handed over to the sales and marketing group. Very "careful" selection is used to make sure only the "best" performing funds are marketed and sold to the firm's clients. No investment firm wants its clients buying into a bad fund. Based on the outperformance, high fees and loads are an easy sell. It's a win win scenario.
Another example of Say's law - supply creates its own demand. Supply of fools and unscrupulous operators that is. The hedge fund scam is even worse.
The greatest story never told!
MAB,
ReplyDeleteThe greatest story never told!
Your story reminds me of a similar story.
You send out 12,800 free newsletters. You dwell on one particularly volatile stock. In 6,400 of the newsletters you predict that the price will rise in the next month. In the other 6,400 you predict the price will fall in the next month.
A month passes. You stick to the 6,400 potential clients that you made the correct prediction and ignore the rest. You send out another 6,400 newsletters reminding them how well you did with your last prediction. In 3,200 of them, you predict the price of another volatile stock will rise. In 3,200 of them you predict the stock will fall.
Rinse and repeat. 1,600 newsletters, then 800 newsletters, then 400 newsletters, then 200 newsletters, then 100 newsletters.
Those last 100 people should be very interested in what you have to say. In their eyes, you've made seven straight accurate predictions and can show them exactly how much money they would have made following your free advice. Further, where's the risk? You were never wrong!
As to the other 12,700 people who may be far less impressed with your accuracy, well, those are the greatest newsletters never sent! ;)