Thursday, April 23, 2009

Overcapacity and I-Bonds

The chart clearly shows the slack and the long-term trend of increasing slack. Much to my relief as a saver, it does not exactly scream that hyperinflation will soon be upon us. Further, this overcapacity problem isn't just limited to the United States nor do I see how the governments' solutions can fix it. In other words...

It is improbable that the governments of the world can prop up the "unpropable".

S&P: Govt Incentives For Autos Might Impede Indus Recovery

"Government funds do not address the structural problems the industry is facing, including global overcapacity, the need for industry-wide consolidation, high capital intensity, and automakers' fixed-cost structure," Standard & Poor's said in a report.

Japan reels under massive slide in exports

From consumer products, raw materials, to airports and other infrastructures to name but a few, saving the banks does not address the problem of overcapacity and the simple truth is a lot of the growth that took place in the past years will have to be scaled back. Given Japan's experience, it is possible to see that no government can always spend its way out of economic problems. The best thing a government can do is create a stable economy that encourages people to spend without worrying too much about the future.

Chinese industry still in deep trouble -vice min

"We can not easily conclude that the economy has bottomed out. The industrial situation remains serious," he cautioned.

Lou said overcapacity, including in the steel and auto sectors, was intensifying because of weak domestic and global demand.

He said companies, especially smaller ones, still faced acute funding shortfalls because of rising inventories. Beijing has tried to address their financing difficulties by leaning on banks to give more credit to small- and medium-sized enterprises.

Challenges And Opportunities In The European Manufacturing Sector

Almost all of Europe’s manufacturing industry has felt the impact of the recent financial crisis. Overcapacity is increasingly apparent as demand slows, and executives across the continent are now under pressure to adjust workforces and realign their businesses to recent market developments.

I continue to ride this crisis out in TIPS and I-Bonds. In hindsight, I'd have done better without the inflation protection. However, in an environment that destroyed wealth in the trillions, not losing purchasing power was still a relatively good strategy. I'd do it again. In fact, I am doing it again and will continue to do it again.

The I-Bond rate resets on May 1st. The bonds currently pay a locked in rate of 0.7% above the CPI, tax deferred for up to 30 years. That's good enough for me in this environment. I have this sinking suspicion we'll be seeing 0.0% above the CPI at some point. What's my reasoning?

1. We've already seen it once (May 2008).
2. The "smart" economists want
negative real interest rates.

I also want to point out that I-Bonds do not need to be held the full 30 years. In one year they can be sold (with a three month interest penalty). Check this out though. I-Bonds bought today earn 5.64% for the first six months. The following six months will most likely be 0.0% (thanks to deflation). What's a three month penalty on 0.0%? Not much, lol.

Savings I-Bonds Update: New Inflation (err… Deflation) Rate Announced

This would leave you with a 5.64% return on your money for 6 months, and then nothing for 5 months. Overall, that’s a 3.08% annualized return, and you will be exempt from state income taxes on the interest as well. This is very competitive with current bank CD rates.

This is not investment advice. I'm simply stating what I am doing. Further, I won't be selling my I-Bonds in a year. I'm holding them the full 30 years. They can't lose money during deflation (as good as cash). During periods of high inflation, they are somewhat protected from both it and the taxes on that inflation. Only serious hyperinflation can absolutely ruin them as an investment, but in that environment we're all... well, you know.

I told friends in 2000 that I'd have put all my money in I-Bonds if the government would have let me. They paid 3.4% over inflation. The government limits how much we can buy in any given year though. They recently lowered it from $30k to $5k (although we can actually buy $10k if we purchase $5k through Treasury Direct and $5k in paper form from a local bank).

See Also:

Trend Line Disclaimer

Source Data:
St. Louis Fed: Capacity Utilization: Total Industry


mab said...


Much to my relief as a saver, it does not exactly scream that hyperinflation will soon be upon usLow inflation (or even deflation) is indeed a relief. $4/gal gasoline and a 5% yoy CPI was a bummer. And the near term trend for CPI inflation looks favorable to savers too. Aggregate demand has dropped as is evidenced by the role over of household credit.

The thing that bugs me is the fed's stated commitment to purchase $1.25 trillion in GSE mortgages and $300 billion in treasuries. That looks a lot like printing, something I thought we wouldn't do (at least at that magnitude). On one hand, that's a big pile of base money that can be levered through the fractional reserve system. On the other hand, the system, especially households, seems to have too much debt already. All that new cash could CONceivably just sit at the fed as "excess" reserves. Who said there was no such thing as too much money?

Anyway, I'm sure wall street can find something to do with all that cash. If nothing else, there is always year end bonuses. :(

I will say that most wall street tomfoolery depends on easy money, falling rates and and leveraging inflation (senseless credit expansion). Lower leverage, lower rates and lower inflation should limit the non-eCONomic foolishness (the engine of wall street).

Here is something to CONsider. By deciding to artificially lower long term interest rates such as mortgages, the fed is chaining the economy to low rates well into the future. Similar to Japan imo. Any recovery would cause interest rates to rise and the system won't be able to tolerate that.

The above are just guesses of course. And all are jaded to a life long savers point of view.

Here's to hoping the savers get a fair shake. Inflation is stealing. And stealing is immoral. Thou shall not steal!

Hey, it looks like I found religion. Mom would be so happy.

Stagflationary Mark said...


"Who said there was no such thing as too much money?"

I guess that as long as the money doesn't actually make it to the consumers then it probably isn't all that inflationary. How many trillions of dollars is it going to take to get the price of canned soup to go up substantially? The one flaw in the printing plan is that we seem intent on sending cash to China so that they can buy oil though.

"Anyway, I'm sure wall street can find something to do with all that cash. If nothing else, there is always year end bonuses. :("

If they funnel the money to only those people on the top of the pyramid scheme who only wish to grow their money through the stock market then that should also keep the pressure off the price of canned soup. 1,000,000,000,000 DJIA here we come. Hurray. Sigh.

"Similar to Japan imo. Any recovery would cause interest rates to rise and the system won't be able to tolerate that."

Eerily similar.

September 6, 2007Let Them Eat Cake!

"In 2000, then-BOJ Governor Masaru Hayami was widely derided for raising rates from zero to 0.25 percent. Pundits called him Japan's answer to Herbert Hoover."

We're not there yet, but we're clearly working on it. When I turned bearish in 2004 some were planning to wait until interest rates hit 15% before they sold their silver and bought government bonds (expecting an exact replay of the 1970s). It was my belief that the economy couldn't handle even half of that 15%.

Our economy seems very dependent on constantly falling interest rates.

15% inflicted serious pain in the early 1980s.
8% inflicted serious pain in the early 1990s.
6% inflicted serious pain in the early 2000s.

Will 4% inflict serious pain in the early 2010s?

There seems to be a Murphy's Law situation that forms around the early part of decades.

The Great Depression

All of these things worked together to start a global downturn that caught the entire world up in its vertical spiral downward.Early 1950's Recession

False highs, this time in the form of a large inflationary period, came crashing down as the war came to a close and more funds were put into national security than were ever before.Early 1960's Recession

These all worked together to cause consumer confidence in the system to plummet, and caused a downward spiral to develop that swallowed many businesses. This in turn caused unemployment to rise, and so the cycle began again.Late 1960's Recession

The Late 60s recession, though not nearly as problematic as its predecessor in the early sixties, was characterized once again by unemployment and unhealthy amounts of inflation.That one started in December of 1969. Most of it was actually in the early 1970s.

1980's Recession

This forced the price of oil up. The United States enacted a tight monetary policy in the States to control inflation, and this led to another recession.1990's Recession

The early 1990s recession was caused by a lot of different adverse financial stimuli on the economic environment of the early 90s United States.Early 2000's Recession

A false high, created in the initial, money-making wave of the internet that swept the world, finally came crashing down to a realistic level.I have a theory. Perhaps 9 is an optimistic number. We put a man on the moon in 1969. 1979 was one of the least worst years in the 1970s (the recession didn't hit until January of 1980). 1989 was a pretty good year (the recession didn't hit until July of 1990). So was 1999. I'm told 2009 is too.

Meanwhile, 0 must be a pessimistic number. I'm basing this on one simple idea. If I have zero in my wallet I tend to be more pessimistic.

Further, I sometimes like to see my odometer roll over from nines to zeroes. It feels like I'm hitting a peak.

2010 here we come! Sigh.

Stagflationary Mark said...

Good grief, they really need to fix the formatting on blogspot. It used to work and now it really messes things up.

I stopped using italics to counter it but forgot that bold doesn't work either. Sorry about that.