India’s Unexpected Interest Rate Rise ‘Sign of Things to Come’
March 20 (Bloomberg) -- India’s central bank will probably raise interest rates again next month as the first increase in two years is only the initial step in the battle against inflation, BNP Paribas SA and Standard Chartered Plc said.
I have argued in the past that China would have to raise rates before we did, since inflation tends to hit food first and poor countries cannot afford to let that go unchecked. India is even poorer.
Inflation is politically sensitive in a country such as India, where the World Bank estimates three-quarters of the nation’s 1.2 billion people live on less than $2 a day.
The beatings will continue until the morale improves?
Gold tumbles after India rate hike, ends week flat
(Reuters) - Gold fell toward $1,100 an ounce on Friday, losing nearly 2 percent after an interest rate hike in top gold consumer India, and investors cashed in gains from earlier this week ahead of the weekend.
Oil was also spanked.
ReplyDeleteNYMEX-Crude down nearly 3 pct on stronger dollar
An interest rate increase in India added to concerns of monetary policy tightening earlier speculated over China's recent moves and added to oil traders jitters about potential impact on global oil demand.
The $80 line in the sand continues to hold for the most part, at least so far.
No crap but if you have been following the money creation and where it comes from debate on my site and others I think all this will resolve soon.
ReplyDeleteMark,
honest question:
-will SP500 be 2000 and gold $200
-will SP500 be 2000 and gold $20000
If the masses figure out how money (credit/debt its all the same) are made we are going to have a problem.
Either way I have toilet paper and I have Au/Ag.
I am beginning to think that I may not even care regardless.
GYSC,
ReplyDeletehonest question:
-will SP500 be 2000 and gold $200
-will SP500 be 2000 and gold $20000
I would not guess either of the two options you have given me.
OK.
ReplyDeleteGYSC,
ReplyDeleteI have been following the debate. There are inflationary pressures but...
This is deflationary.
http://research.stlouisfed.org/fred2/series/CONSUMER?cid=100
This is deflationary.
http://research.stlouisfed.org/fred2/series/BUSLOANS?cid=100
This is deflationary.
http://img.photobucket.com/albums/v354/Bug_muldoon/20041210_226_grua2.jpg
GYSC,
ReplyDeleteYou may be right about gold but I do hope you at least continue to question it. I get the feeling you might be taking what I am saying a bit personal. It is certainly not my intent.
Gold has quadrupled in price. All things being equal, it is 4 times more dangerous now. The risk investors have is that it is becoming its own self-fulfilling prophecy. As you know, I have no interest in buying gold at these levels. I could be wrong but that's what I think. We've seen this before in real estate and dotcom stocks of course.
Had I invested in gold in the late 1970s, I would have been convinced that it was a sure thing too. Fortunately, it was before my time.
You know how much I love TIPS. I do. There's no denying it. Most of my nest egg sits in TIPS and I-Bonds. That did not stop me from selling TIP in November though.
It was 105.401. I argued that it was overpriced. It's now 104.18. It has paid 66 cents in distributions over the last 4 months. Cash outperformed it.
If you can't tell me at what price gold would be overpriced, then you are at risk of being too emotionally attached to it. That's all I am saying.
It's a risk.
There are enormous inflationary pressures but there are also enormous deflationary pressures too. Most seem to dwell on just one side of that equation.
India bought a boxcar load of gold last year. I remember bubblevision touting the news.
ReplyDeleteNow, they do something to whack the value of gold?
Stag, help me to understand.
GYSC,
ReplyDeleteBankers have been creating credit out of thin air for centuries. It's nothing new. Reserves have been irrelevant for a LONG time, especially since the Basel Accord in the late 1980s which based the banking system on risk weighted assets.
Here's a key point (imho anyway):
They don't create "money" out of thin air, they create DEBT out of thin air! WHY CAN"T PEOPLE SEE THIS?
Debt is an obligation. It's very easy for bankers to create obligations. Obligations (debts) are created whenever a borrower signs a loan agreement with a bank.
So what's the problem? Creating obligations is simple, fulfilling obligations is another matter. I see NO way that our current WAGE structure can support all the obligations that bankers created. And NO way can our current obigations be met with more debt oligations that inflate assets based on finding a greater fool.
The jig is up. Deflation is upon us. Just look at the big picture. Credit is contracting even with mark to fantasy accounting. Prices are also falling, especially if asset prices are included. The sugar high from trillions in Government stimulus and bailouts barely moved the needle.
Bernanke and Greensham championed a wealth extraction swindle by crooks on Wall St. As if people could get rich overpaying for stocks and houses - obsurd. Overpaying for gold is unlikely to make people wealthy too.
I would only be a fan of gold and silver if I thought the U.S. was going to pull a Zimbabwe. I just don't see it happening. The dollar is a very valuable franchise especially for the wealth extractors/creditors. As I see it, they are calling the shots.
Preserving the value of the wealth extracted by banksters is not the same as "printing" money and using it to purchase goods and services as happened in Zimbabwe.
G.H.,
ReplyDeleteIndia loves gold. There's no denying that. Howver, food is even more important. India cannot just sit by and watch food hyperinflate.
India’s Food-Price Inflation Slows to Four-Month Low (Update2)
http://www.businessweek.com/news/2010-03-18/india-s-food-price-inflation-slows-to-four-month-low-update1-.html
I read the headline and thought all my assumptions and commentary must be utter crap. No joke. I then read the contents.
An index measuring wholesale prices of lentils, rice, vegetables and other food articles compiled by the commerce ministry rose 16.3 percent in the week ended March 6 from a year earlier after a 17.81 percent gain the previous week, according to a statement in New Delhi today.
Ouch.
mab,
ReplyDeleteMy dad was a bank manager in a small farming community. One day a farmer paid off his large loan with his large savings. My dad lost two accounts in one day.
His superiors were not at all happy about it. Their only solution was that he should have tried harder to talk the farmer out of it. My dad did not, could not, would not. It was beyond silly to even try. Even as a kid, I didn't see what he could have done.
Further, it was clearly never in my dad's interests to approve loans that he knew could not be paid. Just look how much grief he got when one loan was. I assure you that having it default instead would have been MUCH worse.
I remain deflationary, at least in the short-term. If China fights property inflation and India fights food inflation, then watch out below. As hard as this is to believe, deflation can happen with even 0% interest rates.
Stag,
ReplyDeleteMy father worked on the Verrazano Narrows Bridge. When they were building the Staten Island abutment foundation (massive hole in the ground), a hurricane flooded the excavation. The flood cost the company a pile of dough.
One of the company's top executives flew in and raised hell that they hadn't purchased hurricane/flood insurance. He directed the project manager to purchase insurance immediately.
The project manager commented that buying insurance after the flood was like buying a cow after it had been milked. The project manager's bonus was no doubt linked to the project's profitability.
As directed, insurance was indeed purchased. Good thing too as another hurricane blew through and flooded the excavation(s) again!
They said deflation couldn't happen. It did. Now that deflation has happened I'm supposed to believe it can't happen again? Bah! It IS happening. And Bernanke is insuring the wrong part of the eCONomy imo.
People still can't meet their debts. Low interest rates help, but it's not enough as I see it.
Come June and July of this year, CPI is likely to be lower than it was 2 years ago! And the biggest asset on the American household balance sheet (houses) is at 2003 prices. The debt levels aren't at 2003 levels though.
Mab has it right re debt creation.
ReplyDeleteMark, come on I know its not personal so no worries.
I have always agreed deflation has been here is is going on; no debate there all the data backs it up.
While not a "its different this time" argument I think I covered the risk pyramid a while back and we are now on the last part of it; sovereign risk. That really has never happened before on a scale that we are seeing. I do not think that is in question.
Re gold and at what price is it overpriced? Who can say? Money is fungible. Gold could be $50 next year or it could be $50,000; I have no idea. What I do know is that gold will alwyas have a relative value to goods/services that will be retained. This has been true for all time. Maybe it is different this time and if so I hope my cans of SPAM can get me through the future, HA!
mab,
ReplyDelete"They said deflation couldn't happen. It did. Now that deflation has happened I'm supposed to believe it can't happen again? Bah! It IS happening."
Deflation: Making Sure "It" Doesn't Happen Here Forever
The new speech is awesome. It's exactly the same speech as the last one but it includes an Apocalypse Now soundtrack. You can almost feel the helicopters almost dropping money to those who almost need it most. Almost.
GYSC,
ReplyDelete"What I do know is that gold will alwyas have a relative value to goods/services that will be retained."
I can disprove that. It's not personal though! :)
Today's gold buys FAR more toilet paper (and most other goods and services, including real estate in its bubble) than it bought 10 years ago. The relative value has clearly not been maintained.
As a side topic, if you could guarantee me that gold's value relative to other goods and services would be exactly maintained into the distant future then I would still not buy gold.
1. It costs roughly 6% to buy and sell physical gold. You therefore lose 6% the instant you invest. (Or alternatively, you can pay ongoing fees through a fund like GLD.)
2. Any inflationary gains are taxed at 28%. That's a pure loss of purchasing power.
In order for me to want to buy a one ounce coin for $1100, I'd therefore have to believe that it would appreciate far faster than most goods and services OR I'd have to believe in economic disaster of nearly biblical proportions. I say nearly because Mad Max was not scrounging for gold. He was scrounging for food, fuel, and ammunition.
Clarification
ReplyDelete6% to buy and sell gold means it costs about 6% in total once you've bought AND sold it (say 3% to buy it, another 3% to sell it).
A Tip On TIPS
ReplyDelete"...and I think this could be the final pullback before an upside breakout occurs."
http://tinyurl.com/y9egonk
Mark,
ReplyDeleteI did type "a relative value" and not "a fixed relative value".
watchtower,
ReplyDeleteFascinating link! Chartists! You have to love them, lol.
"Since the November 2009 top, TIPS have moved sideways into a triangle formation."
I sold TIP in November 2009. Triangle formations never even entered my thoughts. I'll tell you what did enter my mind though. A TIP investor took half off the table and his post was beaten up on Yahoo's message board. It seems most thought he was nuts. I thought they were nuts for thinking he was nuts and opted to join him.
"This is also called a continuation pattern, meaning that prices are technically expected to continue higher once the consolidation phase has completed."
Yeah, right. Investors are just loving the recent distributions no doubt. They add up to 66 cents over the last 4 months. That's a whopping 0.6% to you and me.
Further, investors are no doubt salivating over the February CPI. It came in extremely hot, well, if you count 0.0% inflation as hot that is. All things being equal, that was worth about another 10 cents to TIP investors.
"The outcome looks bullish..."
The outcome on the chart looks "toppy" to me, but I'm no expert clearly.
"Prices have been turned back from overhead resistance for a third time, and I think this could be the final pullback before an upside breakout occurs."
A breakout to where? TIP pays all its inflationary gains and interest as distributions. Over the long-term TIP's price therefore cannot rise much. Further, the 5-Year TIPS pays just 0.3% or so. There's very little upside left to extract. 0.0% is the absolute floor.
"Before that you can see the strong advance, coinciding with people's belief that prices on everything would rise forever."
Long-Term TIP Price
If prices on everything rise forever, then TIP should trade somewhere around $102 per share forever. (Once again, TIP pays out all inflationary gains and interest as distributions.)
Upside breakout my @$$. It could make it back to $110, maybe, if oil was to hit $145 again soon. Maybe. Barring that, this ride is about over in my opinion.
TIP: Silver Bullet Or Steel Trap?
Clearly, investors are concerned about inflation. And clearly, many think they’ve found the solution in the form of inflation-protected bonds. But those investors who are counting on TIP to protect their portfolio may be set up for a colossal disappointment.
I'm not. I have very low expectations. I can point to one investor on Yahoo's message boards though. He was pretty sure he'd be making 12% this year. This is what I told him.
Yahoo Commentary
You are dreaming if you think you are going to make 12% on TIP this year.
...
Get ready for disappointment.
GYSC,
ReplyDeleteI did type "a relative value" and not "a fixed relative value".
In that case, land always has a relative value to toilet paper and other goods and services too then. It's just that sometimes it has a very poor relative value (like during the top of a housing bust).
Silver has also had a long-term non-fixed relative value. It's just that it has been in a 600 year bear market thanks to the miracle of modern mining equipment.
The 600 Year Silver Bear Market
You know that I do not dislike gold and silver. I have owned them in the past. It was mostly because so few others liked them at the time though.
I'm just not at all convinced that gold and silver investors of today are getting a bargain, so we'll just have to once again agree to disagree.
Neither of us really knows where gold and silver are headed. It's all just opinions anyway.
Its all relative, didn't Jerry Lee Lewis marry his cousin? HA! I am leaving the silver thing alone. Think consumption and silver lined socks!
ReplyDelete12% on TIPS in deflation? I think that guy is pretty lost.
I set up my new grill today and built a small patio for it out back. I have pictures up tonight if interested.
GYSC,
ReplyDeleteThe non-seasonally adjusted CPI has risen a grand total of 0.05% in the last 21 months.
2008-05-01 CPI-U: 216.632
2010-02-01 CPI-U: 216.741
If you bought $10,000 worth of 5-Year TIPS in May 2008 that paid 0.79% over inflation, then it is now worth $5 more adjusted for inflation.
That's not all though. Just think of all that juicy interest!!
12% returns from here. That's what I'm talking about. Baby needs new shoes!
One more thought on TIP breaking out to the upside, spoken from a chartist/fundamentalist hybrid standpoint.
ReplyDeleteIf inflation expectations drive the price of TIP, and TIP is expected to breakout to the upside, then one would expect inflation to breakout to the upside. Right?
I'm not the best of chart readers (probably because I think it is akin to tea leaf reading), so maybe someone could point out any indications of an upside surprise breakout forming in the following chart.
Seasonally Adjusted CPI-U
To my admittedly untrained eye, it would seem there's a decent risk it might just roll over instead.
In any event, I would argue that TIP is not priced for a gradual rise in inflation. From what I can see, TIP investors are generally braced for much worse, just like they were back in early 2008.
I know I was but I was wrong. It really didn't hurt me that much though, since TIP did eventually fully recover.