Sunday, May 15, 2011

Altered Inflation States

November 9, 2009
I'm Deflationary

That doesn't mean that I think oil can't make it to $100. Who knows? I don't think it will stay there if it does though, any more than it could stay at $140 the last time.

April 1, 2011
Inflation Mood

My mood is subject to change. For example, there is serious risk that $107 oil is not sustainable and that deflation will once again enter the headlines when we least expect it. Who really knows for sure?

Oil is now just under $100, the household survey shows 190,000 jobs were lost in April, food services and and drinking places sales declined in April (showing that discretionary spending is on the ropes), and housing prices continue to fall.

I'm therefore switching back to a deflationary mood. I'm not entirely comfortable with my decision since it means I am basically betting against Soros.


May 4, 2011
Soros’ Fund: Selling Gold

While many who buy gold do so to protect against future inflation, Soros Fund Management bought gold to protect against the possibility of the opposite — debilitating deflation, or a sustained drop in consumer prices.

But now the $28 billion Soros firm, which is run by Keith Anderson, believes chances of deflation are reduced, eliminating the need to hold as much gold, according to people close to the matter.


It took me more than a few years to warm up to this theory. I think the key here is that the Fed has little power over wage inflation. It can't seem to stop the deflation in housing. It can apparently get investors to speculate and hoard commodities as a feeble attempt to make things better though.

On the one hand you have people like me who are fine holding cash if deflation strikes again.

On the other hand you have people who want to ride speculative bubbles and make a killing. Soros is and has been one such person. If commodities can be inflated (even if only temporarily) then clearly there is money to be made there.

In the long-term, I think commodities will do what every other speculative bubble has done and I point to the silver to aluminum ratio as my evidence. Few appear to be speculating on aluminum in my opinion. Let's just put it that way.

You're supposed to be reputable scientists! Not two dorm kids freaking on Mexican mushrooms! - Mason Parrish, Altered States (1980)

I've never claimed to be a reputable economic scientist. Do any even exist? ;)

24 comments:

getyourselfconnected said...

There is no reputable economic anything, cannot exist!

The last speculative bounce aluminum had was probably in the mid to later 80's when after market cylinder heads for hot rod chevys/fords became priced so that the regular guy could buy them.

Mr Slippery said...

So much packed into this post. Yes, gold is a great hedge against currency weakness, whether that is high inflation or high deflation. The deflation part is hard for people to get, and never mentioned in the MSM, but has to do with erosion of the economy upon which the currency is based.

As for Soros, I really like him and his investing philosophy. And who can't love someone who broke the Bank of England. I love reflexivity. I've been reading his essays recently and will probably dig into Popper. That he may be selling now is of some concern to me, but I am holding my gold for a better pay off. It is likely to drop in the short term for seasonal factors and the end of QE2, but the fundamentals are still favorable.

Jessup: And I'm trying to tell you this is an all-bets-are-off sort of thing! We may be opening a black box that could scrap our whole picture
of space-time!


Gold is an all-bets-are-off sort of thing.

Stagflationary Mark said...

GYSC,

An image of the economic house of ill repute can be found here.

Stagflationary Mark said...

Mr Slippery,

Gold is an all-bets-are-off sort of thing.

I would argue that it is a most-bets-are-off sort of thing.

I reserve all-bets-are-off for when ammunition, toilet paper, and canned goods become much more important than gold.

Put another way, if 99.999% of the population suddenly and unexpectedly died off due to an alien invasion, then I would not expect to see gold hold its value.

Mr Slippery said...

Mark,

No question about it. Gold loses in an alien invasion. And if global society dissolves. I am not betting on that. I am betting that the current global dollar reserve system dissolves. We will pick up the pieces, start a new system, and carry on with life, just as we have done before. Or I could be stuck holding my cold, lifeless metal.

In Emily's arms, Jessup's form THROBS and CRACKS and RESONATES, as he SCREAMS his primal SHRIEK. His eyes stare blindly at some unspeakable horror.

No doubt Jessup caught a glimpse of the complete, unaltered Fed balance sheet.

Stagflationary Mark said...

Mr Slippery,

If Soros is right about gold being the "ultimate bubble" due to deflation but is wrong that deflation is behind us, then he might have been wrong to sell when he did.

You know where I stand on the value of gold and silver at these prices, but there's no way I would try to predict a top in the gold to toilet paper ratio. (And when I say toilet paper, I don't mean dollars. I mean toilet paper, lol. Sigh.)

getyourselfconnected said...

I think we are getting to a turning point right now. Paper promises like Greek debt are just that, promises and ponzi. Geez, the IMF head just had forced head and will go to jail or something. My bullish case for the metals has always been a simple paper (notional) vs. real ( metals are money for last 3000 or so years). Nothing I see roght now makes me think that will not hold. If QE 3 rumors don't start by July I may change my mind.

Stagflationary Mark said...

I don't see debt being the driving force here. I see negative real interest rates causing commodity prices to rise (just like they did in the 1970s).

If I am right to think this way, then many gold and silver investors will be holding way too long. They will assume that gold and silver prices cannot decline because our debt won't (or can't).

I don't think we'll hit our limit as easily as Greece did. One reason they are in so much trouble is because they can't cough up Euros. In sharp contrast, we do not need to cough up Euros any more than Japan does.

I would also point out that silver has not held its value over the past 650 years. Not even close. I would point to the innovation within the mining industry for a reason why that is true. We've come a long way from pickaxes.

Gold and Silver Through the MacroScope

The article tries to put a positive spin on gold and silver for the long-term, but just look at that second chart.

One can argue that silver production looks to be peaking or one could argue that silver demand was so low in the 1980s and 1990s that silver production merely stalled. I tend to think the latter. If so, then silver production will eventually pick up as prices rise.

These are all just opinions of course.

Troy said...

yup, wage inflation is key.

What people don't understand about the 1970s was the baby boom was bumrushing adulthood starting in 1970.

We think of the 1970s as a time of high unemployment, but it was really a time of falling unemployment.

http://research.stlouisfed.org/fred2/series/UNRATE

unem was lower in 1969 than it has ever been since, and the womens were also joining the labor force in vast numbers, which juiced household income and raised household borrowing power.

The Fed reacted to this by killing the economy 3 times with interest rate hikes of 1969, 1973, and 1979:

http://research.stlouisfed.org/fred2/graph/?g=ua

which stopped growth and temporarily increased unemployment.

That was how we got a wage-price spiral in the 1970s.

These days of course, everything is different. The internet has made millions of jobs obsolete, China has made millions more obsolete, it's a wonder we even have an economy any more.

I don't think we do, really, which is why we have a $1.5T structural deficit.

Stagflationary Mark said...

May 15, 2011
Consumer Corner: Is there a food truck in your future?

This year is shaping up to be the best since 2007 for the industry, said Hudson Riehle, senior vice president for research for the National Restaurant Association, and innovation is the key.

The April retail report showed a DECLINE in seasonally adjusted food services and drinking places sales from March to April. I think the jury is still out on how well restaurants will be doing in 2011.

Stagflationary Mark said...

Troy,

These days of course, everything is different. The internet has made millions of jobs obsolete, China has made millions more obsolete, it's a wonder we even have an economy any more.

I don't think we do, really, which is why we have a $1.5T structural deficit.


I'm just glad that I am not a politician looking for easy fixes to our problems. I can't even see any difficult fixes to our problems. And when I say "our" I mean the entire global economy.

In the real world, George Jetson would be desperately trying to find work. A 9 hour work week would have been a reason for despair. Or perhaps his mortgage was at 0.000001% interest rates and he managed to gain extra income due to home equity extraction?

If so, perhaps the series should have continued as a warning to us all.

Stagflationary Mark said...

One more thought.

This year is shaping up to be the best since 2007 for the industry...

Why does that make me cringe so much? Perhaps it has something to do with what happened in December 2007.

MaxedOutMama said...

Mark - well, in bad time spending shifts down the restaurant scale. Subway gets too pricey and exclusive, Mickey D's does well.

Of course, Mickey D is now trying to go upscale. This made me think of Walmart.

Yeah, I'd call deflation overall in non-economically linked assets, but the real world picture is more complex.

Gold as Indians like to buy it is going to have a market. Stuff you can buy that will generate a cash flow or is needed to generate a cash flow will probably inflate. Lord knows at these oil prices food is going to go higher.

So we are in an inflationary-spending, deflationary-asset cycle. The gold binge is funded by billions of consumers who aren't able to save in currency, most especially in China and India. When that changes, gold will be a tragic investment.

There is not much sign of that changing, is there? I think the top has been in since silver, though. By which I mean that the Indians and Chinese want REAL gold, not ETFs.

Stagflationary Mark said...

MaxedOutMama,

Of course, Mickey D is now trying to go upscale. This made me think of Walmart.

Perhaps Sam's Club will launch Sammich Club. Sorry. Just more gallows humor.

Stagflationary Mark said...

MaxedOutMama,

Lord knows at these oil prices food is going to go higher.

A reader recently asked my thoughts through an email about the claim that the rising price of gasoline was nearly half of the increase in the CPI for April. Although gasoline is only about 5% of the CPI (motor fuel is just over 5%), the claim is fairly accurate.

Gasoline rose 3.3% in April (according to the CPI report) and 0.05 x 3.3% = 0.17%.

Continuing that logic further, gasoline rose 33.1% over the past 12 months and 0.05 x 33.1% = 1.66%.

This is just the direct exposure our economy has to gasoline. As you point out with food, I would guess that the indirect exposure is even higher.

This explains my current somewhat cautious but deflationary stance. I thought in November 2009 that oil would have a tough time staying at $100 per barrel. I still do. It was my belief that there would be itchy "sell" trigger fingers if we approached that $145 level again. That may or may not be true.

It sure would be easier to determine what the CPI will do in the future if there wasn't so much oil speculation (both to the upside and to the downside).

Mr Slippery said...

It sure would be easier to determine what the CPI will do in the future if there wasn't so much oil speculation (both to the upside and to the downside)..

Ah, but what is left of the empire but speculation and gambling? The speculators and gamblers are gods now and they have built a world in their image.

In their honor, I had another successful day speculating as a silver jihadist. Small bets and small profits, but if you can't join them, beat them.

Stagflationary Mark said...

Mr Slippery,

In their honor, I had another successful day speculating as a silver jihadist.

Two words: Silver Satan

To be a good horse namer you must also think about your horse's nickname.

Hahaha!

Stagflationary Mark said...

Oil Industry Profit Margin Ranks #114 out 215

Silver is at #3.

If I knew an industry was selling me goods at an extremely high profit margin then I would tend to feel like I was being, well, you know.

Perhaps that is why I don't own closed-end funds either (coming in at #1 and #4).

Stagflationary Mark said...

This is not an endorsement of the site I just linked to by the way.

I'm basing my next sarcasm report on another post found there.

Stagflationary Mark said...

One more thought. I see that "Publishing - Periodicals" comes in at #2.

If not for local kids coming by my house to support their schools, I'd have no magazine subscriptions.

It has been at least 10 years since I bought a full priced magazine in a grocery store. I think it was a sailing magazine not long before the economy imploded. Future sailboats are pretty much off my wish list now.

nanute said...

Mark,
Buy the boat. I heard talk there is another "flood" coming.

Stagflationary Mark said...

nanute,

Cash for Floaters! ;)

jamesneo said...

Hi how do we check if soros is not actually taking physical delivery of the gold? He could be abandoning paper gold for physical gold?

Stagflationary Mark said...

jamesneo,

Both GLD and IAU hold physical gold. They even provide a complete list of every single gold bar in their possession.

Soros did buy 301,300 shares of Freeport-McMoRan and 7,600 shares of Goldcorp. It was a drop in the bucket compared to how much GLD and IAU he sold though.