Monday, January 17, 2011

Mood: Fed Up!

January 14, 2011
Risk of U.S. Deflation Ebbs as Fuel Costs Climb, Economists Say

Jan. 14 (Bloomberg) -- Federal Reserve policy makers may be relieved fuel costs at two-year highs are prompting consumers and investors to worry about rising prices, according to economists like Michael Feroli and Dean Maki.

Over the last decade we've worried about the September 11 attacks, several wars, the bursting of the dotcom bubble, the bursting of the housing bubble, our ongoing debt crisis, our ongoing trade deficits, and the ongoing surge in oil prices. The Fed has chosen to concentrate our fears mostly on that last one. This should come as a great relief to all of us.

“From the Fed’s perspective, strictly speaking, it’s good that year-ahead inflation expectations are increasing,” said Feroli, chief U.S. economist at JPMorgan Securities LLC in New York and a former Fed economist. “The point of maximum risk is most likely behind us,” he said, referring to the threat of deflation.

The point of maximum risk is behind us now. Rising fuel prices have saved us all. I think it pretty much goes without saying that a cheap energy source to fuel our urban sprawl would be just too terrifying for words.

File:Revised petrol use urban density.JPG

24 comments:

getyourselfconnected said...

Mark,
One does have to consider that not all have significant nest eggs that just need protecting. Some of us need or want to make some money. We all do what we can.

Stagflationary Mark said...

GYSC,

"Some of us need or want to make some money."

But what about the little guy? This fellow always feels pressured to "make money." And in return he's always pressuring the market to "do something" for him. But sadly, the market isn't interested. - Richard Russell

You can find the full article on his website. It's a great read.

Dow Theory Letters Inc.

It's the "Rich Man, Poor Man (The Power of Compounding)" link within.

Here's a bonus reason to read it.

Richard Russell: Forget everything you've heard about a gold bubble

I differ with him on this but time will tell. I do think he's a smart guy.

So if gold is in a bubble, it's a bubble in the minds of those who have completely missed the gold bull market.

It is in my mind but I did not completely miss it. I owned gold from 2004 to 2006. It did very well for me.

Stagflationary Mark said...

Watchtower,

Here's a bonus thought for you. You mentioned that you recently made double your money on gold. That's certainly better than I did.

At today's 0.27% interest rate on 1-Year Treasuries, it would take 257 years to double your investment.

1.0027^257 = 1.9996

Here's the amusing part. We haven't even been a country that long, lol.

Nicely played! :)

getyourselfconnected said...

Mark, I would think we both know where we are coming from. Normal folks really dont have much in the markets, and thats probably for the best!

getyourselfconnected said...

I told you guys, double your money, just fold it!

Stagflationary Mark said...

GYSC,

My point was that if the typical investor "needs" to "make money" in the markets, then there is probably trouble afoot. I'm especially concerned when I hear about retirees looking to boost yields. As is seen over the last decade, the markets could care less what the typical investor "needs".

I told you guys, double your money, just fold it!

I've always liked that one. And if that doesn't work...

"Double your intelligence or no money back." - Gary Larson

That was probably my second favorite Far Side comic of all time.

"Beware of Doug" was probably my favorite, lol.

Stagflationary Mark said...

As a side note, it just dawned on me that it is probably not a coincidence that the "Beware of Doug" comic was my favorite.

I generally plan my life around worst/bad case outcomes. It really isn't a bad way to live. Life is full of pleasant surprises that way. :)

G.H. said...

I'm looking at those clouds on the chart and I'm thinking...does the fact that Europeans pay more per gallon for gas than we do, combined with the fact that they're driving fewer miles than we do, equal out to about the same cost-per-commute as ours?

And I wonder...did somebody set that up?


(Off topic...I'm sure appreciative of the short word verifications on this blogger software. I just finished registering my MS Visual Studio 2010 software tonight and I had some "opportunities" working through the "Live ID" login. Damn, the word ver's they kept throwing at me were about 45 chars long!! WTF?)

G.H. said...

"...if the typical investor "needs" to "make money" in the markets, then there is probably trouble afoot. I'm especially concerned when I hear about retirees looking to boost yields.

Word

Stagflationary Mark said...

G.H.,

I'm looking at those clouds on the chart and I'm thinking...does the fact that Europeans pay more per gallon for gas than we do, combined with the fact that they're driving fewer miles than we do, equal out to about the same cost-per-commute as ours?

I think you are spot on.

In my opinion, hindsight is showing that the taxes the Europeans placed on gasoline was a smart move.

I would also add that a one dollar increase in the price of United States gasoline can affect us MUCH more than a one dollar increase in the price of European gasoline.

The Europeans have already planned their lives around expensive gasoline. We have not.

China is in this same boat (Titanic?) with us.

From 2006:

What does gasoline cost in other countries?

By comparison, the U.S. has the lowest tax on gasoline of any industrialized country: about 15 percent at current prices.

And then there is China.

China, which recently raised fuel prices, still keeps them well below international market rates. Chinese drivers — and farmers — still pay the equivalent of less than $2 a gallon.

Good luck on that one long-term!

Stagflationary Mark said...

Based on the chart, I think Europeans must spend far less on gasoline than we do (even with their higher prices).

There are also other benefits. Cars don't require as much maintenance, they tend to last longer, and less driving means fewer traffic fatalities.

Note the difference between the United Kingdom and the United States per 100,000 inhabitants.

List of countries by traffic-related death rate

As a side topic, sort from highest to lowest. It would seem Iraq and Afghanistan are not safe places to be driving. Who knew?

Also note that China and India have more auto deaths per person than we do. This is fairly impressive since most people in those countries do not own cars!

Stagflationary Mark said...

G.H.,

I flipped on the radio this evening and guess what the topic was? Urban sprawl! Go figure.

The guest mentioned the work of Charles Courtemanche in particular. He claimed that higher gasoline prices might actually help us long-term. I am partly a believer. However, the cheap gasoline prices of the 1990s have done their damage. We built where hindsight tells us we shouldn't.

Rising Gas Prices Could Cure Obesity

According to Charles Courtemanche, an assistant economics professor at the University of North Carolina in Greensboro, rising fuel prices are the ultimate crash diet for a nation that grew fat on cheap gas.

Pestilence can also offer a cure for obesity of course. So we've got that going for us too.

Courtemanche can soon test his hypothesis. The national average for a gallon of gas was $3.22 when he wrote his paper last year. It’s now at $4.10. He’s planning a follow-up study.

I should mention that this article was written at the height of 2008's oil bubble. I think many optimistic theories were tested in the months to follow. Sigh.

dearieme said...

If you assume that the average distance driven should vary with the square root of the area per capita, then the US cities should average roughly double the per capita energy consumption of the Euopean cities. But in fact they average about 4 times.

Tech note: many European cars burn diesel fuel, not gasoline. I assume that the figures allow for that, though it's not actually what the diagram says.

Anonymous said...

Retirees looking for yield when interest rates are at 1% for CDs seems very reasonable to me. The problem is not that they need yield. The problem is why do we have 1% interest rates.

Meanwhile certain civil servants in Taiwan can get bank accounts with special 18% interest rates. You double your money every 4 years...sweet.

Finally, on urban sprawl, while some of it may relate to gas prices, its mostly by consumer choice to have a nice home with a yard. The price of land is probably the biggest factor there.

Coba

Stagflationary Mark said...

dearieme,

You remind me of my favorite Murphy's Law. A project will always take twice as long as you think it will. If you factor that in then it will take 4 times as long. ;)

Good point about the diesel fuel. It would be interesting to know if that is indeed factored in.

In any event, I strongly suspect that cheap gasoline encouraged our sprawl.

Stagflationary Mark said...

Coba,

For what it is worth, my girlfriend may be getting a job in Seattle. We live here in Renton. That's a 20 mile commute each way.

She could be making $25 an hour. The IRS claims that it costs 50 cents per mile to operate a vehicle.

If the math is right, she'll be working one of those hours every day just to fund her commute. Crazy inefficient mixed up world!

Now picture what it would be like if she was earning minimum wage. Ouch.

Anonymous said...

Mark,

Or, more likely expensive housing encouraged the sprawl. Consider that people commute from California's central valley to San Jose or SF. Sure cheap gas helps them do that, but the fact that housing in the bay area is crazy expensive is probably more fundamental.

No one chooses a 2 hour commute because gas is cheap. They choose it because a house near their job is crazy expensive. Sure if you increase gas prices enough, they will opt for the 800 sq. ft. house in Palo Alto that costs 750k. I bet you can even calculate when that decision would happen.

Also, people like living space. Try living in a population dense city in Asia for a while and you will crave urban sprawl.

Coba

Anonymous said...

OK, so 50 cents per mile.

House in Stockton costs
http://www.trulia.com/home_prices/California/Stockton-heat_map/

77k - 179k

House in Palo Alto
http://www.trulia.com/home_prices/California/Palo_Alto-heat_map/

780-1.8 million

Let's just take the low end...800K minus a high end 200k = 600k difference.


Commute is 1 hour and 30 minutes each way. 3 hours driving per day. 85 miles x 2 = 170 miles.

170x0.5X50weeksx5 days = $21,250 annual commute bill.

600,000 savings in housing / 21,250 = 28 years of commuting.

I guess you need to add in the 3 hours per day of commute as "lost wages or lost leisure"

Note, also, you might lose some leisure by living in Palo Alto - no backyard to throw the football in, no other kids to play with, etc.

Coba

Anonymous said...

http://www.carnegieendowment.org/publications/index.cfm?fa=view&id=42262&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+CarnegieEndowmentForInternationalPeaceGeneralPublicationsAndEvents+(DC+-+General+Publications+and+Events)&utm_content=Google+Reader

Very interesting article.

Coba

p.s. the word verification was "login."

I stared at the screen for two minutes before realizing that was the actual word, not a command.

Stagflationary Mark said...

Coba,

I certainly live in the urban sprawl myself. I know where you are coming from.

I lived in downtown Seattle once in a small apartment overlooking the water. I sometimes miss it. I'd sit on my balcony some days and just watch the ship traffic.

However, I do not miss the noise. I do not miss having to clean the black (from vehicle exhaust) off the chairs on my balcony every time I wanted to sit. I do not miss the music of my neighbors at 3:00am.

dearieme said...

"I do not miss the music of my neighbors at 3:00am." If you want to live in a civilised way at high density, you need either old buildings with thick stone walls (e.g. Edinburgh) or you need Swiss standards of regulation.

Charles Kiting said...

In any event, I strongly suspect that cheap gasoline encouraged our sprawl.

I've looked into this in the Chicago area for decades.

My findings: it's mostly about taxation. Which means Coba is much closer to the correct answer. (In the 1930's my grandmother had a two hour commute to her job - and she didn't drive. That wasn't my only data, but it was the impetus to question my prior beliefs that commute times were getting longer with automobiles.)

So you are somewhat correct that Europe's high petrol taxes affect their commuting decisions. But my guess is there are even higher taxes than that which are driving the results.

Stagflationary Mark said...

dearieme,

When my sister opted to buy a condo quite a few years ago, I suggested "concrete and steel".

There was one condo I looked at that was once an apartment complex. No matter where you were in that building a symphony of power tools could be heard. Needless to say, I did not see myself living there, lol.

Stagflationary Mark said...

Charles Kiting,

So you are somewhat correct that Europe's high petrol taxes affect their commuting decisions. But my guess is there are even higher taxes than that which are driving the results.

Could be.

Overall, our population density is very low. That might even play the biggest role in how much we are able to sprawl. For example, our population density is nearly an order of magnitude smaller than the United Kingdom.