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Whew! Finally, a voice of reason!
Treasury Yields Hint Market Losing Faith In Fed On Inflation
"I can't see a reason to buy an investment with a negative rate of return," said Tom di Galoma, head of U.S. Treasury trading at Jefferies (NYSE:JEF) & Co.
US Stocks: Keeping up with inflation this year? Nope.
Chinese Stocks: Keeping up with inflation this year? Nope.
European Stocks: Keeping up with inflation this year? Nope.
Treasury Bills: Keeping up with inflation this year? Nope.
Real Estate: Keeping up with inflation this year? Nope.
Commodities: Keeping up with inflation this year? Yes, but possible bubble.
Toilet Paper: Keeping up with inflation this year? Yes! (at Costco anyway)
Behold the inflation tapeworm. It appears to be eating much more than it is giving back, as is the case with parasites in general. Perhaps Tom has a cunning plan to protect ourselves from it that I am missing.
For the record, Tom di Galoma began his career in 1985. For what it is worth, we fell off the gold standard in the 1970s. Hey, I'm just saying that it may or may not be affecting his eyesight. That's all. If you can't buy an investment that keeps up with inflation and you can't sit in cash because it can't keep up with inflation, that only leaves you with a paradox. Right?
And lastly, I have three reasons to suspect that commodities may be in a bubble.
1. We appear to be heading into a recession (possibly even globally).
2. Commodities are all the rage these days on the TV.
3. Commodities are parabolic, again. Parabolas are not sustainable (unless we hyperinflate).
That doesn't mean there wouldn't be another parabola after they crash (if indeed they do crash, which is not a given). I'm still stagflationary long-term and see little reason to change my mind.
Sunday Night Futures
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12 comments:
Stag,
I've been struggling with valuations in stocks, bonds and real estate for years. I considered investing in commodities, but decided against doing so (with some short term regret obviously).
Commodities are volatile, lack current income, and have storage costs. Absent scarcity, their intrinsic value doesn't change let alone increase. I see NO lack of supply, including oil. To me, commodities are a bet on either a strong economy or money printing. I definitely don't see a strong econmomy in the face a massive credit bubble. I do think we will see some money printing, but only in response to credit destruction and a weak economy. The likely hood of EXCESSIVE money printing seems about the same as the likely hood of another Volcker period. Either way, high commodity prices are their own undoing. I like to sail after the storm, not before it.
Its hard to believe that all assets classes are overvalued, but only if you believe cedit & money are the same. IMO, banks/Americans didn't properly equate credit with work. We need an adjustment. Since I'm arguing the big credit bubble will slow or deflate, I think actual money will have increased ASSET buying power in the future, but lower CPI buying power. As painful as the sidelines are, right now it seems the least worst option.
Central banks are trying to force more irrational investment decisions. No thanks. I'm still advocating patience.
As for rising CPI inflation - welcome to pain city. The prospects for wage gains in the U.S. are poor, so that makes money printing less of an option. The coming pain will be widespread, just like the credit bubble.
Safe harbors for me.
MAB,
Since I'm arguing the big credit bubble will slow or deflate, I think actual money will have increased ASSET buying power in the future, but lower CPI buying power.
At the very least, I expect to see the CPI being propped up to some degree if only based on how it is calculated.
I might add that actual money may continue to have lower foreign buying power. We're seeing that in the import prices. Strangers no longer wish to give us as much kindness it seems. It is what one might expect if you keep borrowing from strangers I suppose (through a massive trade deficit).
To All,
In other news, email notification (when people leave comments) is once again broken for me. If I fail to respond it probably means I just didn't see it. Sorry!
Stag,
At the very least, I expect to see the CPI being propped up to some degree if only based on how it is calculated.
Could you elaborate?
I might add that actual money may continue to have lower foreign buying power.
That's the trend. Except for inflation, I don't see how it affects individual Americans though. That wealth comparison link I posted the other day has a neat historical currency tool. Some of the data on that link goes back eight hundred years.
From what I can see, there is not a lot of rhyme or reason to major currencies. The emerging market currencies seem to come and go every decade or so. Literally. Mexico, Brazil, China, Eastern Europe - all have had multiple currencies.
I'm really glad that kind of thing can't happen anymore. International investing is where the big returns are.
MAB,
Could you elaborate?
I was just talking about the part of the CPI based on housing costs. The CPI didn't track the price increases of houses much, so I don't expect it to track the price decreases of houses much (since it uses rents instead, which should hold up better in theory).
Stag,
http://www.bloomberg.com/apps/news?pid=20601087&sid=aVl4JGYmkX0M&refer=home
We've got balance sheet problems. This is playing out just as many knew it would.
Banks recognize the Greenspan put.
Banks issue credit that can't be paid back. Banks show huge paper profits during the false boom.
Based on the huge paper profits, bankers pay themselves ever larger bonuses.
The boom turns to bust. The fed and the financial services industry go through all sorts of financial gymnastics to maintain asset values. Eventually the asset prices fall. The banks become insolvent. The fed bails out the insolvent banks. The losses are spread across the economy via inflation and negative real interest rates.
Rinse, recycle, repeat.
I covered the same topic recently:
Parabolic Commodities: The End is in Sight
Ben,
Buffett seems to be way ahead of the curve more often than not. This link is from early 2006 (when commodities were MUCH cheaper).
http://money.cnn.com/2006/05/05/news/newsmakers/buffett_050606/index.htm
Buffett: "I don't think there's a bubble in agricultural commodities like wheat, corn and soybeans. But in metals and oil there's been a terrific [price] move. It's like most trends: At the beginning, it's driven by fundamentals, then speculation takes over. As the old saying goes, what the wise man does in the beginning, fools do in the end. With any asset class that has a big move, first the fundamentals attract speculation, then the speculation becomes dominant.
Once a price history develops, and people hear that their neighbor made a lot of money on something, that impulse takes over, and we're seeing that in commodities and housing...Orgies tend to be wildest toward the end. It's like being Cinderella at the ball. You know that at midnight everything's going to turn back to pumpkins & mice. But you look around and say, 'one more dance,' and so does everyone else. The party does get to be more fun -- and besides, there are no clocks on the wall. And then suddenly the clock strikes 12, and everything turns back to pumpkins and mice."
I suspect pumpkins and mice time is near. I continue to believe that if you want to hoard something, pick toilet paper. There has been no orgy in it. If anything, it has underperformed the CPI for the past few years.
Stag, Ben,
http://www.oftwominds.com/blogmar08/leverage-harun.html
It's not just the high prices, it's the high leverage.
Mark, before this is all said and done the bond market bubble, currency market bubble and commodity market bubble will all get their turn in the woodshed, in which order is the only question.
Kevin
MAB,
This is why the Fed, the Treasury, and the banks are in abject panic.
It isn't just panic, it is abject panic. I tend to believe that.
Kevin,
There must be an "abjective" to describe just how horrible the woodshed can be. ;)
Stag,
http://www.briefing.com/Investor/Public/Calendars/EconomicReleases/ppi.htm
Running hot! Nothing a recession won't cure. Unless of course the off button is broken on the printing press.
Maybe it's a good thing we don't actually produce much.
Stag,
http://www.briefing.com/Investor/Public/Calendars/EconomicReleases/ppi.htm
Running hot! Nothing a recession won't cure. Unless of course the off button is broken on the printing press.
Maybe it's a good thing we don't actually produce much.
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