In monetary economics, the quantity theory of money is the theory that money supply has a direct, positive relationship with the price level.
That is one scary inflationary chart.
In aluminum economics, the quantity theory of aluminum is the theory that aluminum supply has a direct, negative relationship with the price level.
That is one scary deflationary chart.
Nothing is ever easy, is it? Inflation? Deflation? We should all be thankful that the debate can continue.
In my last post I showed why I believe aluminum appears to be very cheap relative to silver. That does not necessarily mean aluminum is cheap relative to dollars though. In fact, I think there's at least a decent chance that there is more deflation to come.
November 23, 2009
Aluminium bubbles away as surplus grows
Warehouses holding enough aluminium to build 69,000 Boeing 747 jumbo jets are why Peter Sorrentino says the most abundant metallic element in the earth’s crust is too expensive.
“I don’t see why the aluminium price has gotten so high,” said Sorrentino, a fund manager at Huntington Asset Advisors in Cincinnati. “There’s plenty of supply around and demand is still quiet. There’s a disconnect between the price and reality.”
I forgot to supply source data information for the aluminum chart.
ReplyDeleteYou can find that here...
http://minerals.usgs.gov/ds/2005/140/
"Trick Question
ReplyDeleteA man is sitting on his front stoop staring morosely at the ground when his neighbor strolls over. The neighbor tries to start a conversation several times, but the older man barely responds. Finally, the neighbor asks what the problem is.
"Well," the man says, "I ran afoul of one of those questions women ask. Now I'm in the doghouse."
"What kind of question?" the neighbor asks.
"My wife asked me if I would still love her when she was old, fat and ugly."
"That's easy," says the neighbor. "You just say, 'Of course I will'".
"Yeah," says the other man, "that's what I meant to say. But what came out was, 'Of course I do.'"
That was a good one.
What's the story with copper? I recall a story a while back about Chinese farmers hoarding copper. If there is a disconnect between copper and aluminum that would be interesting.
GYSC,
ReplyDelete"Copper Rally Defies Reality"
http://online.wsj.com/article/SB10001424052748704533904574548293154995428.html?mod=WSJ_hpp_sections_markets
"Copper's continuous rally in the face of swelling inventories -- a sign of weak consumption -- has perplexed many in the market."
...
"For now, the market is looking beyond the warehouses. The combination of an anticipated economic recovery, concern over labor disruptions and a weaker U.S. dollar has overwhelmed the bearish effects of the buildup of copper, analysts say."
I feel no great need to hoard copper or Chinese stocks.
Mark,
ReplyDeleteI think you may be onto something with this copper/aluminum angle. Strange indeed.
My friend Dave has a different take on silver tonight:
ReplyDeletehttp://tinyurl.com/yct2ex2
For me it's all about the mountain of private debt (a parabola that's rolling over btw). Private credit demand is now negative (a historic inflection point) and people are forecasting hyper-inflation. I just don't see it. And where are the wage gains to support this high or hyper inflation? Where is the ability to take on more credit? Where is the demand (we have too much stuff already)?
ReplyDeleteGiven the above, the notion that you can (or even need to) protect purchasing power with over-priced commodities makes no sense to me.
We're clearly facing strong deflationary headwinds and people are bracing for high inflation. At least in the 1970s, the move to commodities was actually based on some logical reasoning - we had persistenly high inflation and we had just abandoned the gold standard.
Silver was unloved for two decades and now that it has gone parabolic people can't get enough of it. It's par for the course. Where have we seen this before? Housing, stocks, tulips. I can't wait until all these commodity bubble investors try and cash in their "gains".
Investing in parabolas is dangerous to ones wealth. That should be obvious to everyone at this point.
Simple and obvious investments get creamed after they have gone parabolic.
mab,
ReplyDeleteWe're clearly of the same mindset. All I care about is protecting my nest egg.
The gold and silver markets are small. They can go to the moon and it really wouldn't affect me much.
If aluminum and copper go to the moon and stay there then it would affect me. I just don't see it though. We're doing all we can to fight deflation right now.
As you said earlier and I'm now expanding on, if WE can't afford aluminum, copper, and oil right now then how the heck can the average Chinese consumer afford it?
If the Chinese government thought the Chinese economy was really doing so well, then why wouldn't they want to end their dollar peg? They'd still have amazingly cheap labor compared to us. I would argue that they are terrified. They know exactly how their economy is holding up right now and they are using every smoke and mirror trick in the world to show it as something it is not (the video you shared of the empty city is an example).
I was watching the TV the other day and someone summed up my thoughts pretty well. He said that he found it VERY hard to believe that the Chinese economy miraculously managed to transform itself from an export economy into a domestic demand economy in the brief amount of time since the crisis hit.
GYSC,
ReplyDeleteFrom your link...
"Make no mistake about it, at some point in the future, and possibly starting this month with the December deliveries of gold and silver, it will become apparent to all involved that the physical demand for gold and silver are going to completely blow up the Comex."
Make no mistake about it? So it is a sure thing? Possibly next month?
Conspiracy theories involving silver have been in circulation long before I was born and they will continue long after I am dead and buried. Some will be end up being true. Some won't.
I would simply offer this. Silver has gone up in price a LOT. Just be sure you are on the right side of the conspiracy trade if there is one.
From 1982...
US group sues over silver slump
http://news.google.com/newspapers?id=qTARAAAAIBAJ&sjid=VpQDAAAAIBAJ&pg=5218,2707688&dq=comex+silver+conspiracy&hl=en
The article is on the far left. It too mentions conspiracies and Comex. Just sayin'.
Mab said:
ReplyDelete"For me it's all about the mountain of private debt (a parabola that's rolling over btw). Private credit demand is now negative (a historic inflection point) and people are forecasting hyper-inflation. I just don't see it."
It is Sunday and I am a bit tired so I do not want to rehash what inflation/deflation means. Mab is right, too much debt and the only way to roll it over is to play games and print money. Are gold and silver in blowoff tops? Maybe, or maybe the very idea of money is coming into question and central banks want some tether to reality instead of all the paper games.
Hyper-inflation and mega-deflation end up feeling the same to the average joe, either way you ain't got any money and everything is too expensive!
Mark,
ReplyDeleteconspiracy theory's usually lack supporting evidence:
"As an example, JP Morgan and HSBC combined (and it's mostly JPM's short) have a short position which represents 199 million ounces. This is nearly 4 times the amount of silver currently listed as "registered," or available for delivery."
That is a monster short position, no tin foil hat needed.
GYSC,
ReplyDeleteI can only offer this. I doubt you know all there is to know, and that's what makes a good conspiracy theory.
What does JPM know that you do not? More than likely, we'll never know.
Here's some proof that copper investing can be risky.
ReplyDelete"Man Electrocuted Stealing Copper"
http://www.newschannel9.com/news/eldridge-986742-electrocuted-substation.html
"What does JPM know that you do not? More than likely, we'll never know."
ReplyDeleteGuided by JPM's awesome moves short silver, long MBS, and fully insured by AIG I would venture JPM may not know as much as they think they do. Of course I am clueless as well so its all a wash.
For what it is worth, JPM was one of the few to sidestep most of the pain.
ReplyDeletehttp://money.cnn.com/2008/08/29/news/companies/tully_dimon.fortune/index.htm?postversion=2008090208
"A classic Dimon manic moment, the call is significant for two reasons. First, it marked the beginning of a remarkable strategic shift that helped J.P. Morgan, virtually alone among the big diversified banks, sidestep the worst of a historic credit crisis."
There aren't many banks trading at 2004 levels right now. Compare to Citigroup.
http://finance.yahoo.com/q/bc?s=JPM&t=5y&l=off&z=m&q=l&c=c
That said, I don't think anyone knows as much as they think they do. There's probably a Murphy's Law that covers this.
Murphy's Law of Knowing
You only know half as much as you think you do. If you factor that in, then you only know 1/4th as much, and so on.
That really hurts me, because I already know I don't know all that much in the grand scheme of things. That means I might only know 1/16th as much as I think I do, lol. ;)
Mark,
ReplyDeleteThe baloney of JPM and the NY FED is well documented. Sidestepped? Try layed off loser positions at the FED/Treasury. At this point I am convinced the big bankers are not smarter than you or me, just better connected.
GYSC,
ReplyDeleteHere's something to consider. "Printed" central bank dollars and commercial bank credit are basically equivalent (even in times of severe financial distress). They both spend like cash. Now, admittedly, the Fed's purchasing of mortgage assets is a new twist, but at the end of the day, a private entity is still taking on debt with interest.
The key point is not the "printed" money, but rather the fact that a private entity is willing to assume debt obligations. I strongly believe that the willingness of private entities to take on debt has peaked. Incomes just cannot support more debt.
Presently, commercial bank credit is contracting, consumer credit is contracting and mortgage credit is contracting.
Let me stress here that mortgage credit is contracting despite the Fed's actions. The Fed is bailing out the banks for sure, but it is also tryng to salvage as much mortgage debt as possible by lowering interest rates. That's not inflationary in my mind.
Uncle Sam is assuming trillions in debt only out of necessity (the private sector won't/can't). Absent the historic government borrowing, we would be experiencing the mother of all credit contractions. Our credit system is designed for expansion. Contraction would be very painful, especially given all our ponzi debt.
Imo, private demand is the fundamental driver of inflation. If Govenment demand competes with private demand, then the inflation is even worse. Right now, I don't see a competition for credit between the Government and the private sector. I see triage.
Can the Government drive inflation all by itself? Possibly, but to what end? And it won't be easy if the private sector keeps deleveraging. Japan's Government and central bank have tried for 20 years and haven't gotten any traction.
Our future looks Japanese to me, but with more austerity at the household level.
Here's some bonus info showing that aggregate mortgage interest and mortgage interest rates are still declining.
http://www.bea.gov/national/xls/mortfax.xls
The above gives us an early read on what the Q3 Flow of Funds data will look like for mortgages.
GYSC,
ReplyDeleteI'm not defending JPM. I'm just pointing out that they did sidestep much of the pain, unlike most of the other banks. Citigroup was also well connected I'm sure. It didn't help them much.
You also don't see me agreeing with everything JPM has to say. Take this nugget for example.
"China’s Goldilocks Economy"
http://yelnick.typepad.com/files/china_goldilocks_economy.pdf
The latest economic indicators support our view that China’s economy is back on a strong, sustainable growth path set to extend through 2011 and beyond, with inflation trending up, but at a slow pace.
Goldilocks? Are we already comfortable using that word again?
Market nervousness and dips on account of this should prove to be buying opportunities for those who can cope with the volatility.
I would wager there will be many "buying opportunities" in the months and years to come if I am even remotely right on China's prospects going forward.
mab,
ReplyDelete"Our future looks Japanese to me, but with more austerity at the household level."
I would be willing to entertain a more stagflationary outlook only if I believed in the China story. That just looks like one giant unsustainable bubble to me, and if it blows so will global commodity prices.
"Taking a Contrarian Look at China's Incredible Economic Rise"
http://network.nationalpost.com/np/blogs/fpmagazinedaily/archive/2009/11/26/taking-a-contrarian-look-at-china-s-incredible-economic-rise.aspx
"While China has earned strong admiration for its stimulus program because of its scope and ability to deliver some immediate results (whereas the US stimulus program has only delivered a third of its promised commitments), some are questioning if China is just going to make things worse for itself in the long run. For example, the Chinese steel and aluminum industries are plagued by massive overcapacity and yet the stimulus program has induced more additions to these industries. Chinese steel prices are down 20% since August while Chinese net exports of steel have dropped from over 40 million tons in 2008 to just barely above 3 million this year. Yet, there is still another 58 million tons of steel capacity under construction despite efforts by the government to try to reel these excesses in."
Pick your pain. Andy Xie offered us choices in October. I might be wrong, but I do agree with him.
ReplyDeletehttp://www.ritholtz.com/blog/2009/10/andy-xie-here-we-go-again/
"The inflation-fear bubble will burst in due course. Paper money loses value over time at the rate of the difference between inflation and interest rates, so if the inflation rate is 6% and the bank deposit rate is 2%, paper money loses 4% per annum, or 0.33% per month. Stocks and properties in China may be 100% overvalued, with only two decades of relatively high inflation justifying their prices. However, persistently high inflation leads to currency devaluation, which triggers capital flight and, eventually, an asset market collapse. This story simply won’t hold together for long."
...
"When something seems too good to be true, it is. World trade — the engine of global growth — has collapsed. Employment is still contracting throughout the world. There are no realistic scenarios for the global economy to regain high and sustainable growth.
China is an export-driven economy. Bank lending can support the economy for a short time, however, stocks are as expensive as during the heydays of the last bubble. Like all previous bubbles, this one, too, will burst."
Stag,
ReplyDeleteDid you read Hussman's piece today? Slowly but surely, his stuff is starting to read like so many of my rants, lol. Maybe he's a voyeur here.
More and more people are becoming totally disgusted and disenfranchised with the inequity of the system. It's not just the tens of millions that are insolvent either. We have an immoral system that rewards fraud and idiocy and penalizes productive endeavors. I can't stand it.
"More and more people are becoming totally disgusted and disenfranchised with the inequity of the system. It's not just the tens of millions that are insolvent either. We have an immoral system that rewards fraud and idiocy and penalizes productive endeavors. I can't stand it."
ReplyDeleteHere, here!
I'm a little disgusted myself with the still self-serving types out there.
It's sort of a hobby of mine now to find houses currently on the market which were sold new in late 2005 to mid 2006. Then I take the original purchase price and using Case/Shiller and others extrapolate a value were the house is likely to reside.
It's easy to find people, who in light of the fact that house prices have dropped 10, 20, or 30% in various places, somehow believe that their house has appreciated by 14%!!!!
G.H.
Mark,
ReplyDelete"is it? Inflation? Deflation?"
Mark I think it's "kick the can".
Here is the new national anthem and dance for the US.
Kick The Can Dance
http://tinyurl.com/yckzpgw
What do you think?
LOL
Kevin
mab, G.H., and Kevin,
ReplyDeleteYou guys are on a roll today!
Disgusted? Absolutely!
Easy to find house price denial? You bet!
Kick the can? With trillion dollar boots, baby. With trillion dollar boots!
About the inflation-deflation debate...
ReplyDeleteThis weekend I was on Amazon picking up some bike accessories for the bike outings I do with the kids. A lot of these items were already chosen and in my cart since March 22.
Amazon's got this feature that let's you know the price difference of anything left in your cart. Well, everything in my cart decreased in price since March 22. Not by much... An example: a $30 26-function bike tool decreased by about $1.
In contrast, a gallon of gas since March 22 has increased by about $.60. (http://www.fuelgaugereport.com/)
I only need one 26-function bike tool, which has gone down about $1. Compare this to the $.60 increase multiplied by double digits each time I go to the pump!
Food prices, I think, haven't moved much either way since March 22. If they moved I haven't noticed. But according to this article, (http://www.michiganfarmer.com/story.aspx?s=32397), food prices have dropped slightly since then.
We use natural gas for heat, the clothes dryer, and the water heater. What we pay for natural gas hasn't moved much either since March 22 – maybe down a little - but it's way down from what it was a year ago. (http://tonto.eia.doe.gov/oog/info/ngw/historical/2009/04_02/ngupdate.asp) (http://tonto.eia.doe.gov/oog/info/ngw/historical/2009/11_19/ngupdate.asp) We just turned on the heat a couple weeks ago.
(Anyone here got money in natural gas?)
Without really delving deeply into data, I think that inflation has the upper hand right now - at least in my little world - because of the price at the pump. Otherwise, I think deflation would be the winner, but by very little, at least since March 22.
Ed G.
Ed G.,
ReplyDeleteYou make great points and I would not argue with any of it.
However, my deflationary stance is based on the following (just opinions of course).
1. Massive overcacity in China.
2. Oil is having difficulty breaking through $80, and for good reason. So where does oil go next?
3. Rental prices are coming down (rents are a major component of the CPI).
4. Too much inflation fear and nearly zero deflation fear, as seen in 0.16% 5 Year TIPS yields.
5. Further deterioration in Christmas spending. There's still a lot of season left and the heavy mall traffic with reduced spending on Black Friday doesn't bode well. Many Americans might be done shopping now. Who knows?
My girlfriend was at Albertsons last night buying groceries. It was a ghost town. The employees were actually talking about it when she entered.
The theory? It was the end of the month. Consumers ran out of money shopping for Christmas and needed to put off buying groceries until the next paycheck.
My girlfriend said it was Sunday evening though. Isn't traffic always light? They told her that many families normally restock on Sunday nights for the week ahead. This time it was different though.
Anecdotal at best, but concerning just the same.
"I only need one 26-function bike tool, which has gone down about $1. Compare this to the $.60 increase multiplied by double digits each time I go to the pump!"
ReplyDeleteWell put.
I only need one auto insurance policy which is virtually unchanged in the past 3 years after slight but steady increases prior.
Who is it at Progressive that doesn't understand total miles driven in the US has fallen off a cliff and that there are thousands less cement mixers, rock haulers, contractors, and lumber rigs on the roads?
At Big Picture:
ReplyDeleteConsumer Prices: Inflation or Deflation
Ed G.,
ReplyDeleteI posted this before, but I'll share it again since it pertains to the inflation/deflation debate.
By far, my biggest monthly expense is the house. About a month ago, I received notification that the interest rate on my adjustable rate mortgage was dropping from 5% to 3%. The ARM is from 1995 and is indexed to the 1yr treasury. The new monthly payment will be lower than the initial monthly payment I had almost 15 years ago. And the new, lower monthly payment accounts for/includes significant increases for real estate taxes and home-owers (pun) insurance over the past 15 years.
Also, I was at Best Buy Saturday night. It was very crowded, but the store manager told me sales were off 0.6% from last year. They had already done over $2million of sales at that particular store and over half a billion of sales in the territory! Anyway, I can now buy a computer that has ~ 4X the capacity of my existing computer for ~ $150 less than I paid three years ago).
Electronics are a very small part of my budget, but housing is not. The key point is both are deflating, at least for me. And like you, my gas bill has gone down.
FWIW, I tend to believe that the Fed CAN prevent a big deflation. I can live with that. As a saver, it's a big inflation that keeps me up at night. I'm sleeping better lately, but still vigilant.
G.H.,
ReplyDelete"Who is it at Progressive that doesn't understand total miles driven in the US has fallen off a cliff and that there are thousands less cement mixers, rock haulers, contractors, and lumber rigs on the roads?"
Just think about how much safer it will be riding bicycles and mules to work once everyone is doing it. You won't even need Progressive then! I think I'm half-joking. I think.
mab,
ReplyDeleteI think the ultimate goal is to push all the inflation into tuition costs, you know, just to balance things out a bit.
If you are young and don't have a job, then you probably don't have much debt yet. We need to push as much debt on to you as possible since credit is the lifeblood of the economy.
If you are old and don't have a job, then we'll pay the tuition for you. We'll assume you already have more "lifeblood" than you can handle. Who will ulimately pay for it? That would be your grandchildren of course. They don't have hardly any "lifeblood" yet, at least compared to the rest of us.
I think I'm half-joking again. I think.
Stag,
ReplyDeleteI think the ultimate goal is to push all the inflation into tuition costs, you know, just to balance things out a bit.
I like it. It's biblical - the meek (and unborn) shall inherit the debt.
All faith based systems require unquestioning faith in a few tenets. Come to think of it, our tenets need a few million more paying tenants.
mab (& Kevin),
ReplyDelete"I like it. It's biblical - the meek (and unborn) shall inherit the debt."
I think we're ready to start the Church of Kickthecantology. :)
Stag,
ReplyDeleteI think we're ready to start the Church of Kickthecantology. :)
I think that church already exists. If memory serves, it was founded buy a guy named L. Ron Empty Cupboard.
Today, the press will concentrate on analyzing Black Friday sales results. Already, The Wall Street Journal has rendered its verdict: more shoppers; fewer sales.
ReplyDeleteIf the initial reports are correct, the traffic wasn’t bad on Friday. But retail outlets were only able to snag sales by offering discounts. It’s a deflationary world, after all. Shoppers want lower prices to make up for the fact that they have less money to spend. And they’ll get lower prices too. Because this is a de-leveraging cycle. The world has too much debt, too many factories and too many workers…at least for the real, available purchasing power. Prices will go down naturally until excesses are absorbed…dismantled…or converted to other uses.
But wait…there are also unnatural forces at work. Governments are bailing out bungled companies. They’re supplying zombie industries with fresh blood from the taxpayers. They’re standing in the way of the de-leveraging progress. They’re creating “money” out of thin air.
It’s this last point that is most explosive. As long as government is just stalling the correction, it doesn’t cause too much distortion or volatility. But when it fiddles with the money…oh la la; that’s where it gets interesting.
Traditionally, people buy gold when they think the monetary authorities are up to something. Throughout the world, investors are getting edgy…they’re wondering how it is possible to add so much cash and credit to the economy without sending prices to the moon.
We’ll tell you how it’s possible: there’s a depression. In a depression, the flow of cash and credit coagulates. Even if you increase the cash in bank vaults, it doesn’t circulate into the real economy. Banks don’t lend. People don’t borrow. Consumers don’t consume.
It just sits there…waiting for the end of the depression…like a teenager waiting for Friday…
Regards,
Bill Bonner,
The Daily Reckoning
http://tinyurl.com/yf6yf2k
Mark, My word verifacation is "SUBPRING" I wonder if that is some kind of an omen
Kevin
mab,
ReplyDelete"L. Ron Empty Cupboard."
Too funny! And tragic. And true. Sigh.
mab
ReplyDeleteI’m with you. I prefer a little deflation to inflation because I’ve saved. I prefer deflation, too, because I just plain hate inflation. I don’t like inflated anything unless it’s a tire!! I’m happier with a down-to-earth state of affairs because I can trust that. But I also have this queasy feeling about deflation. I see it as one of those be-careful-what-you-ask-for type deals. For some time now, I’ve actually hoped for it.
Who would have ever thought that an ARM would work in your favor? Not me. That’s outrageous! Made me grin…
Ed G.
Kevin,
ReplyDeleteSUBPRING?
It sounds like an omen. Could have been worse though.
SUBDEJAVU
"Dubai debt crisis likely contained"
http://www.theglobeandmail.com/report-on-business/dubai-debt-crisis-likely-contained/article1380867/
"Consensus, so far, is that the problems in Dubai are likely to remain largely confined to the Persian Gulf."
It's contained. Consensus says so. Woohoo!
The wise words from "The Princess bride":
ReplyDeleteContainment: I do not think that word means what you think it means!
My word verification is "faings" which is an obvious Twilight advertising plant! Damn commercials!!
GYSC,
ReplyDeleteThe advertising plant is worse than you thought!
FAINGS is an acronym! They've gotten to you too! Don't believe the propaganda!
FAINGS - Fortunately, America Increases Needed Government Subsidies!
It is an active brainwash campaign!!! Unreal.
ReplyDeleteBRAINWASH - Bailouts Really Aid Individual Nesteggs When Avoidable S**t Happens
ReplyDeleteI... am... doing... so... much... better... now.
Whoa! Where did that come from? Sorry, I spaced out.
http://www.youtube.com/watch?v=-Qg0w8qbBQo