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The data is on a log chart so that a constant growth rate is indicated as a straight line. I included two trend lines. One is peak to peak. The other is trough to trough.
The volatility in the PPI's range of movement has clearly moderated greatly over the last century. It has been confined to a channel that has narrowed over time.
The Great Moderation
The Great Moderation was a phrase sometimes used to describe the perceived end to economic volatility created by 20th century banking systems. The term was coined by Harvard economist James Stock.[1] The validity of this concept as a permanent shift has been questioned by the economic and financial crisis that started in 2007.
The Great Moderation no longer seems to apply to our economy as a whole, but it does still seem to apply to producer prices. Although past performance is no guarantee of future results, it is something worth thinking about.
Here's something else to think about, but it comes from a place not so brightly lit. One feature of the chart is not moderating. The time from peaks to troughs and troughs to peaks was generally 10-20+ years. You can see it right in the chart. Our recent financial crisis managed to send producer prices from peak to trough in just one year though. That's unprecedented.
I believe it is an indication of the extreme leverage being applied in this grand banking experiment. The beast being moderated continues to grow, but so do the heavily leveraged control knobs.
DJ BIS: Exchange-Traded Derivatives Grew In Fourth Quarter
Turnover in all exchange-rate derivatives measured by notional amounts went up by 5%, to $444 trillion, between October and December.
That's 22% higher than the trough seen in the first quarter, but still well below the $690 trillion peak seen in early 2008.
A few hundred trillion dollars spent on control knobs here, a few hundred trillion dollars spent on control knobs there, and at some point we're talking real money.
Update: Based on the comments of "jus me", I have added a new purple trend line to show what would happen if we threw the 1920 peak out. It still converges, just not as much.
See Also:
Trend Line Disclaimer
Source Data:
St Louis Fed: Producer Price Index: All Commodities
19 comments:
If you ignore the 1920 peak, and the lines don't converge much.
(This is still one of the greatest blogs, though)
-jus me
Mark,
help me out...what am I looking at?
jus me,
I've updated the chart to show what it would look like if we threw the peak in 1920 out.
In my opinion, now we just need to define how much "much" is. :)
GYSC,
Constant exponential growth on a log chart will end up looking like a straight line. The overall long-term trend in the PPI is not alarming to me. It's pretty much growing as one might have predicted many decades ago. There are no signs of long-term deflation or long-term hyperinflation.
It could be argued that the PPI is becoming more stable and predictable. It grows at an ever increasingly predictable pace long-term. It deviates less and less from its long-term average growth rate. You can see this by looking at the peak to peak trend and noting that it is not as steep as the trough to trough trend. The amplitude of the changes between the peaks and the troughs is shrinking.
I guess the analogy would be something like a dampened spring. The amplitude of the changes are shrinking over time. In other words, the system is becoming more stable, at least in theory.
I say in theory, because there is another analogy here too.
The "Great Moderation" was also used to describe a banking system that was supposedly becoming more and more stable. One day, recently, that banking system nearly failed utterly and completely. Without unprecedented bailouts and stimulus it would have. That is not a sign of stability. It is the sign of an illusion of stability.
The same thing may be happening to the PPI. It may simply appear to be more stable. I would argue that many, many bets are being placed upon it in both directions. That's not stability.
Alan Greenspan's book was titled the "Age of Turblence". I think he too was a believer in illusion theories, mainly because he put many of them into practice, lol.
What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so. - Alan Greenspan, 2003
Apparently AIG wasn't nearly as capable of taking on that risk as Greenspan was led to believe. Thank goodness the US Taxpayer stepped in. He's probably not capable either of course, but he certainly appears capable (if one ignores the unemployment rate anyway).
In other news...
I have an anecdotal report from Costco.
There's been a toilet paper price change and we all know how much I like to report on that. :)
The old price was $21.89 for 45 rolls of 500 sheets each.
The new price is $21.89 for 40 rolls of 563 sheets each.
My first reaction was, "Hey! 5 rolls are missing! Inflation!"
My second reaction was, "Hold on, I see more sheets per roll."
Here's the math. Toilet paper prices have deflated by 0.09%. All things being equal, which they are, that hoarded $21.89 toilet paper of mine is now 2 cents cheaper. Deflation!! Cash is king!!!
Okay, okay, maybe it's not king. Maybe it's just the court jester. In any event, as a saver I'm not complaining. As one who has a healthy respect and fear of high inflation happening at some point in my lifetime, I'm also not complaining.
Score one for gold. My ongoing bet that toilet paper would appreciate faster in price than gold at $1000 an ounce continues to go against me. Once again, I'm not complaining. This is exactly how I would like to lose! To the gold bugs, more power to you! :)
Mark,
Yeah that helps a ton. PPI is managed as well as many other data sets.
My cousin sold me quite a bit of junk silver dimes and quarters today. Very glad to take them.
GYSC,
It wouldn't surprise me if "real time data" is one of the biggest reasons the PPI's growth rate has stabilized.
Let's face it. The Fed does a horrible job at predicting the future. The sooner information moves into the rear view mirror the better, lol. ;)
jus me,
One more thought.
If we throw out the 1920 peak based on its commodity driven irrational exuberance then we might also wish to throw out the recent 2008 peak based on its commodity driven irrational exuberance as well.
That would once again cause the convergence to be more pronounced. Just sayin'.
I also want to add that I appreciate you keeping me on my toes! I've thought about this quite a bit for the past hour. :)
Of course...
I could throw out the early 1980s peak as well. One could easily argue that it too was a commodity driven irrational exuberance event too.
That's it. Everybody out! :)
Its called "hedonic adjustment" just throw ou the stuff you dont like. Wundaful.
Its called "hedonic adjustment" just throw ou the stuff you dont like. Wundaful.
double post sorry.
GYSC,
No need to apologize. You gave me a +3 comment count for just one thought, and here I am commenting on it. That's +4!
I need to find a way to get paid for this someday that doesn't require spam, advertisements, or a tip jar! ;)
Mark,
If a person put on his 'hypothetical hat' (not unlike a tinfoil hat?), what would happen to the chart if the peak oilers are correct and we have indeed globally peaked this last couple of years.
Would the chart still continue on it's current path because higher prices leads to demand destruction, which usually leads to lower prices?
Of course I am 'assuming' that prices for crude will skyrocket in the future if the peak oilers are correct.
But you know what happens when you 'assume' something : )
http://tinyurl.com/ykmm5h2
watchtower,
Perhaps demand destruction is just a euphemism for consumer destruction?
Hi-Tech Robots + Less Oil = Fewer Consumers
I saw it once in a movie!
Of course, that "assumes" real life will mirror the movies. Perhaps humans and robots will coexist peacefully if and when it all hits the fan instead. Could happen.
SARCOS half human half robot
http://www.youtube.com/watch?v=sJ4J69EEpu4
Peaceful coexistence!
This robot just wont fall
http://www.youtube.com/watch?v=KNxxLm4sPys
Hey!! First a human was inside the robot and now the human is hitting and taunting the robot? I don't like the trend here!! ;)
And you all made fun of me when I predicted that the next bubble will be in robots! Whose laughing now gentlemen???
To Skynet and beyond!
GYSC (& watchtower),
I have never made fun of you for your robot thoughts. I have them myself!
From 2007...
Automation and Inequality
http://illusionofprosperity.blogspot.com/2007/09/automation-and-inequality.html
If one was to keep extrapolating this trend to its logical conclusion, at some point there will be just one farmer. He'll have all the wages and will simply press the "harvest" button on his desk.
Here's what the automated harvesters might have for companions, you know, just to keep the peasants away.
http://www.youtube.com/watch?v=W1czBcnX1Ww
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