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Here we go, again?
September 11, 2009
Commodity Inflows Reach August Record, Barclays Says (Update1)
Sept. 11 (Bloomberg) -- Investments in commodity products advanced to $2.63 billion last month, at least double the amount recorded for any August, with investors favoring Europe over the U.S., Barclays Capital said.
September 9, 2009
George Washington Fund Adds Commodities as Protection (Update1)
Sept. 9 (Bloomberg) -- George Washington University is increasing holdings of commodities such as oil and natural gas out of concern that a return to inflation rates last seen in the 1970s may ravage the value of its $1 billion endowment.
All it takes to have higher inflation is for investors to assume higher inflation is coming. It will then be a self-fulfilling prophecy.
September 11, 2009
U.S. Import and Export Price Indexes
The U.S. Import Price Index increased 2.0 percent in August, the U.S. Bureau of Labor Statistics reported today, driven primarily by a 9.8 percent advance in fuel prices.
Meanwhile, over in India...
September 11, 2009
Ration officials seize 15 tonnes of illegal rice stock
It may be noted that the Dy CR authorities are on their toes to check black marketing and illegal stock piling of essential commodities in the wake of the recent huge increase in prices of food grains and their household essential commodities like kerosene. The officials have also been clamping down on malpractices in the distribution of such commodities through the Authorised Ration Shops (ARS) under the PDS.
And lastly, the inflation adjusted real rate on the 5 Year TIPS has dropped to just 0.85%. A low real rate environment primes the pump for more commodity investing. It hit 0.01% on March 10, 2008 and we know how that worked out. Three months later we were looking at $140+ oil.
This is not investment advice. Heck, what advice would I even give? Load up on commodities before they crash again? Load up on commodities in case they don't crash again? You tell me and we'll both know.
I can say that the lower real yields are helping my TIPS investments in the short-term and hurting them in the long-term (as I roll over maturing TIPS into the lower yields). Further, the lower real yields go back to a long standing theory of mine. It is going to be more difficult to make money off of money in the future. That was the whole thinking behind my many The Death of Real Yields posts from the past.
For the past three months (April to July), the seasonally adjusted CPI has been running at a 3.4% annual rate. Based on what I'm reading here, it may actually be sustainable.
It's been a LONG time since I have done this, but I am now changing my short-term inflation mood (as seen in the upper left hand corner of my blog) from neutral to holy crap, something wicked this way may be coming again. Nothing is locked in stone but my gut tends to be driving my analysis right now. I very much tend to trust my gut as it always tends to gurgle when the propaganda is flowing in the financial news.
Real Estate Newsletter Articles this Week: Existing-Home Sales Increased to
4.15 million SAAR in November
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At the Calculated Risk Real Estate Newsletter this week:
[image: Existing Home Sales]*Click on graph for larger image.*
• NAR: Existing-Home Sales Increase...
11 hours ago
14 comments:
I've mentioned before that the gold to toilet paper price seems extremely out of whack to me.
Either gold is overpriced and/or toilet paper is underpriced.
Since I am a stagflationist by nature and am back to embracing stagflation a bit more than I have been in recent years, I'm now willing to offer more of an opinion on that.
Toilet paper is underpriced. This isn't investment advice, but now might not be the worst time in the history of mankind to stock up.
Just a theory.
I would agree that toilet paper is "under" priced. It's only when you do not have any that you appreciate it. Use leaves, and you might get poison ivy! Not fun.
Mark,
A good part of tonights post was inspired by our "Field of Dreams" interplay, so I hope you check it out and chuckle.
On a more serious note, the bond market says deflation/economic troubles; the stock market says good times are here to stay, and the dollar says who got the license plate of the truck that hit me since I peaked at 86 on the index.
In other words, I hane ZERO idea what the heck is going on right now. And neither do most "experts".
GYSC,
I think it is somewhat like listening to an engine that's making very weird noises.
You just know it is going to seize up but you just don't know when.
Therefore, do you "bet" that the car will continue down the highway just like it has been or do you "bet" that the motor will stop functioning? Both bets are technically correct.
It works to bet on the forward progress until it doesn't work to bet on the forward progress.
If the bond market is shrugging off inflation because it expects another crash if inflation picks up, then I would argue that the bond market could be quite rational. That's EXACTLY what happened last time.
If the stock market traders are shrugging off an upcoming crash because the trend is up and they are profiting off of that trend, then I would argue that the stock market could be quite rational. They HAVE made a lot of money so far.
All bets change once the party stops though, much to the dismay of the late comers to the party.
Mark,
Thanks so much for your addition to the movie quote line. I think you way out performed me!
You bring up great points about the bond market. I really think that nobody thinks the rally is real, but like a moth to a flame, they have to play it. Sad really, I think we used to have principles, but maybe they are extinct.
Great stuff.
Mark,
I think dollar down, commodities up, stocks up, and bonds up is pretty easy to explain when the banks are sitting on almost a trillion in reserves and consumer credit is falling like a rock as the banks aren't lending and anyone in their right mind isn't borrowing, What we have here is the dollar carry trade, kind of like the yen carry trade that developed in Japan when they did the same stupid thing as we are doing now that we told them not to do. The banks are simple gambling with the money of future generations and any luck at all the Oh-man plan is to bailout the boomer's and give the bill to their kids and grandkids.
http://quotes.ino.com/chart/?s=NYBOT_DX.Z09.E&v=d12
Inverted Bucky would match the rise in the stock market blip for blip, it'll be interesting when it gets down to the all time low line in the sand.
Kevin
Kevin is back! Great to see you.
Kevin & GYSC,
"Inverted Bucky would match the rise in the stock market blip for blip, it'll be interesting when it gets down to the all time low line in the sand."
http://en.wikipedia.org/wiki/Action_in_the_Gulf_of_Sidra_(1986)
Let's hope we can defend the "Line of Death" better than Libya could.
Mark,
Here's a look at the line in the sand anything past that 70.70 is surly the line of death,
http://tinyurl.com/qzcqu7
That is until gas back over 4, unemployment is 15% and the whole thing collapses in a deflationary spiral and shoots Bucky into orbit.
I think this is going to be like watch an inflation / Deflation tennis match being the problem is too much debt and no ablility to pay.
Stag,
I don't see inflation in the near term, but who knows for sure. I will say that despite all the Fed's actions, mortgage debt does not seem to be increasing. We'll know more later this week when the Q2 Flow of Funds is released.
Falling real estate prices and decreasing aggregate private wages don't seem to supportive of inflation.
The following reports from Freddie Mac have interesting charts and info and illustrate the lack of mortgage credit growth.
http://www.freddiemac.com/investors/pdffiles/investor-presentation.pdf
http://www.freddiemac.com/investors/volsum/pdf/0709mvs.pdf
Freddie's total portfolio (both what they guarantee and what they hold as investments) is flat yoy, despite all the Fed's buying. Delinquencies on Freddie backed paper are WAY up too. That means the Fed is taking on credit risk - scary.
Here's something else scary. Basel banking rules allow banks to count credit default swaps as bank capital. Good thing CDS's are unregulated!
Absent the FRE/FNM/AIG bailouts, "this sucker" was going down!
The only way the Fed and other regulators couldn't see the fraud and CONflicts of interest is because they chose to be willfully ignorant.
Anonymous,
"That is until gas back over 4, unemployment is 15% and the whole thing collapses in a deflationary spiral and shoots Bucky into orbit."
We're certainly trying to reflate the beast (again, like we did in 2004) to the point it could all come crashing back down again.
That's kind of how I lean right now.
"Like in the 1970s the Fed is denying the inflation risk due to its loose monetary policy. The longer the Fed waits, the higher the inflation will peak. When inflation starts to accelerate, it would cause panic in financial markets. To calm the markets, the Fed has to tighten aggressively, probably excessively, which would lead to a massive dollar rally. This would be the worst possible situation: a strong dollar and a weak US economy." - Andy Xie, August 3, 2009
mab,
"Falling real estate prices and decreasing aggregate private wages don't seem to supportive of inflation."
And yet for the past 3 months, we have had inflation at a 3.4% annual rate.
Here's what concerns me. There are a lot of Americans who are not in financial trouble. They've built up substantial nest eggs. In 2005, 8.9% of Americans were millionaires (probably less now).
The commodity markets are too small to support them if they choose to abandon dollars in favor of hard assets. I then look at my bonus pantry (a part of a bonus room I now consider part of my pantry). I just installed three shelving units and they are packed with canned goods and what not. Had I been willing to leverage up that "harder to make money off of money than off of canned goods inflationary price appreciation" bet, I could have poured nearly 100 times that much into the commodity markets directly. MILLIONS of other Americans could do even more than I can do.
The problem as I see it is relates to savings and income inequality. From 1980 to 2000, a LOT of people were able to make a LOT of money off of money. That money still exists for the most part (if I am any indicator). It continues to slosh around the global markets looking for a home.
I've chosen relatively benign TIPS because I am not much of a risk taker. Some of that "risky money" chased oil all the way up to $140+ though and from what I can see is still willing to chase it again.
That said, I do not think we are even remotely done with deflation. If that money continues to chase commodities, we'll simply come crashing back down again.
My concerns about stagflation are therefore very dependent on what rich people do to protect their nest eggs. I don't think anyone really knows.
I'm reminded of when I first turned bearish. Another bear said he was owning silver until interest rates hit 15% and then he was going to sell it to buy long-term bonds. At the time, I said that our economy is SO leveraged that I doubt it would take even half of that interest rate before things came crashing down. This isn't exactly the 1970s all over again.
If history is any indicator then IF there is money to be made chasing commodities right now THEN we should all keep in mind that there is VAST money to be made using leveraged money to chase commodities right now. Leveraged money chasing commomdities is only inflationary short-term, then it is very deflationary.
It all comes down to timing and percentage chances. I lean that stagflation will reappear in the relatively short-term (next year or two) if we stay on the path we're on. At any point along the way though, there could easily be another deflationary crash (again).
Obama's Tire Tariff on Chinese tires really ups the ante on my long-term stagflationary thoughts by the way. There's no telling how deep into protectionism we will sink.
Stag,
Leveraged money chasing commomdities is only inflationary short-term, then it is very deflationary.
That sounds right. But I'd argue that we have been witnessing the inflationary short term part already. Oil has doubled from $35/bbl to $70/bbl. The end demand just isn't there, especially with higher prices. What's worse, there is no shortage of oil or other commodities as many had feared. Heck, natural gas is in excess supply.
I think stocks, real estate and commodities are over-valued. Bonds look better especially given all the gov't guarantees. I see lower rates ahead for longer term bonds. I also see weak end demand well into the future.
I think Hussman and the rest of the "experts" have the 70s inflation all wrong. From the data I've studied, it wasn't government debt & spending that drove the 70s inflation it was increasing household demand for goods and credit. Government debt and spending rose as a result of increasing private demand not the other way around. I think uncertainty about going off of the gold standard was also a factor. People the world over tried to protect themselves with hard assets and they became the bubble of the day. Remember that government debt expansion in the 80s was far greater than in the 70s yet inflation fell (partially due to OER).
Household debt was ~ 45% of GDP in the 1970s. Household debt levels and wages rose in the 1970s. Today household debt levels are ~ 100% of GDP and FALLING. Wages are falling too. I just don't see persistent inflation in the face of falling household demand. $1/hr Chinese wages won't drive inflation either. Same with falling collateral values (real estate).
Maybe the final bubble is the end of the inflation protection game. If you think about it, that game has gone on for decades - cpi goods (commodities) & real estate in the 70s, stocks in the 80s & 90s, real estate, stocks and commodities in the 2000s. I think that game is over, but you never know for sure. I do believe that we issued more credit than the future can afford.
IMO, the damage is done, we have too much bad credit in the system. I see Japan.
The above aside, I do sleep better having some insurance. Bernanke seems very serious about preventing deflation. I truly believe Bernanke is an educated idiot who is as interested in papering over his own mistakes as he is in "saving the system". That dingbat could easily set off another leveraged bubble.
mab,
I think we are pretty much in total agreement on all of this.
The only factor that we simply can't know is what other people will do with other people's money.
It's funny. It was like trying to predict just how many more dotcom stocks people were going to buy in 1999.
Back then it was just a game. It didn't really mean anything. If massive amounts of dollars flowed into dotcom businesses with questionable long-term business models then it really didn't affect me one way or another. The same cannot be said of the commodity markets though.
Further, it is impossible to know for sure if we shouldn't be investing in commodities.
"That dingbat could easily set off another leveraged bubble."
For example, he could hint that we can't possibly pay off all of our debt over the long-term. Heck, even believe him. The first thing I'd probably do is build MORE shelving units for hard assets.
That what must not be said, must not be said!
Crazy world. Isn't it?
mab,
A Jobless Recovery Part Three
http://www.ibtimes.com/articles/20090909/jobless-recovery-part-three.htm
"However, what has occurred since the early 1990's is that we have had to wait until the economy was able to build an asset bubble before significant job growth was able to be realized. The truth is that a substantial percentage of GDP growth and job creation has surrounded the financial services industry and real estate-bubbles that were wrought upon the consumer thanks to the Federal Reserve and financial institutions. This is the direct result of imbalances that have occurred from the false signals caused through inflation."
In other words, in order to get job growth the markets need to be tricked into thinking this time it is different.
Bubble #1: It's safe to hire people!
Bubble #2: You can hire people again!
Bubble #3: No really, this one is for real. It's not an illusion of prosperity. Hire people!
I wonder how many more times investors can be tricked?
"There is no housing bubble to go bust." - Ben Bernanke, 2005
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