Deflation Revisited

Watching Ringside for Round Two

We've now observed a dot-com bubble, a techology bubble, a general bubble in equities ending in 2000 but "echoing" to rich valuations in recent years (especially on the basis of normalized profit margins), a bubble in housing, a bubble in private equity and low-grade debt, a mini-bubble in Shanghai (which has lost about half its value in recent months), and now a bubble in commodities that is well underway. When, when will we learn to recognize these for what they are?

He makes a good point. I would also point out that I finally capitulated on my short-term deflation stance. Meanwhile, gold and silver are losing their luster lately. I have also argued that hoarding toilet paper seems a much better plan than hoarding goods that have increased four fold or more.

In case we need a red herring to suggest that the end is nigh, last week saw the debut of a little Denver fertilizer company, which promptly jumped 58% above its IPO price on its first day of trading. The company: Intrepid Potash (IPI). Hand in hand with the surge in grain prices has been a surge in the price of this fertilizer (basically water-soluble potassium), and the frenzy for potash has increased in step with the speculative hoarding of foodstuffs. Clearly the company is a direct “play” on potash prices. But this is interesting – according to the company's own prospectus, “ Fertecon Limited, a fertilizer industry consultant, expects global potash fertilizer consumption to grow 3.7% annually from 2007 to 2011.” On that growth rate, and on the basis of elevated earnings due to high potash prices, the companies in this group are selling at P/E multiples of 40-60.

Perhaps the end is nigh. As he points out in the rest of the article, that does not mean the days of economic pain are behind us though.

Source:
Hussman Funds