I live in the USA and I am concerned about the future. I created this blog to share my thoughts on the economy and anything else that might catch my attention.
This is the End and a New Beginning
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I've been thinking about this for some time.
After 21 years of writing this blog almost daily, I've decided to stop
writing the daily updates on the blog.
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Silver Deep Dive
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Silver had a memorable year (+148%). Some of this can be explained by a
decline in the dollar. I decided to do some ML analysis to look for other
insights....
March 8 (Bloomberg) -- Crude oil rose for a second day on speculation improving world demand and OPEC supply restrictions will help slow growth in stockpiles.
If we can get oil to $80 with actual ongoing job losses, then just imagine what the price of oil will be once the economy fully recovers.
This shows the ratio of crude oil (Cushing, OK WTI Spot Price FOB) to natural gas (U.S. Natural Gas Wellhead Price) over the years. I have also added recession bands.
Look at that long-term trend. It's as flat as the earth was once thought to be. For whatever reason, it seems to like 10.
Question: Will the crude oil to natural gas price ratio return to historical levels?
Conclusion: No, although at times the historical ratio will seem to apply, if only by coincidence.
It will never return to the historical level again. You heard it here first folks. Even if it miraculously drops down to 8 and hangs out there for a bit someday wildly contradicting the claim, then rest assured that it would just be a coincidence.
She uses data that goes all the way back to mid-2006 to make her point. Oh the things that can be done with 3 1/2 years of historical data. I could probably predict the next ice age if I set my mind to it.
It's based on energy equivalent. So, basically, if you burn a barrel of oil, you get about 6 million BTUs of energy out of it. If you burn one Mcf of gas, you get about a million BTUs out of it. So the assumption has been that 6 Mcf of gas is, therefore, equivalent to one barrel of oil, which makes sense on an energy equivalent basis.
In the ultra long-term, I'm thinking the ratio has fundamental reasons to come back down to 10. I guess you could say that I just don't think it is different this time. I'm no expert though.
If only I could remember what this ratio did during the last housing bust in the early 1990s to see if spikes like this were even remotely normal. Sadly, that would require my eyes to drift back up to the chart again. I'm just too lazy. Sorry. Do let me know if you spot anything that looks like a massive spike though. Rumor has it that oil hit $36 a barrel in October 1990. In hindsight, I'm told it was an awful time to back up the truck (pun intended).
First, let me put that recent climb in perspective. From 2001 to 2009 these postage rates have gone up at an average annual pace of just 3.3%. That's it. I'd say that is pretty good considering that delivering mail requires fuel. We know what fuel has done over the period.
Second, it is almost as cheap to deliver mail now as it was in the early 1800s. I'm not even factoring in inflation over the last 200 years to make my point. Just imagine what it would look like if I did that. The words "productivity miracle" come to mind. So why are we complaining?
Third, look what I am doing right now. You are reading what I am writing and other than a monthly fee to connect to the Internet, it is 100% free. How is the Postal Service expected to compete with that? Here's some bonus free words. Free, free, free, free! It's the ultimate deflationary concept.
Fourth, I can put a letter in my mailbox. A man will come to my house and pick up that letter. Many men will transfer that letter 1,000 miles away. A man at the other end will deliver that letter to a mail box of my choosing. This costs me a grand total of 44 cents. It's a frickin' miracle. That's what I think. According to the IRS, I couldn't even drive one mileround trip to deliver it myself, and that's assuming I'd want to work for free.
Fifth, I've lived in my house for 13 years. I can count the number of missing recurring bills on one finger. That's a frickin' miracle too.
All things considered, I'm happy with our Postal System. I'm happy with my mailman. Let's cut them all some slack.
Oh yes, there is another alternative: kill the Postal Service and leave it to the private sector to fill the gap.
Yes, by all means kill the Postal Service. The private sector will do a much better job. Perhaps Comcast could do it. In the past 10 years they have visited my house many, many times to fix problems. Let's start with them. They are often here anyway!
No, wait. I've got a better plan.
Let's let the private banking system deliver my mail. Nothing ever gets lost there, other than perhaps a trillion dollars every now and then. No big deal.
Disclosure: I own many forever stamps due to a lack of investment alternatives. They are for long-term personal use. I do not intend to resell them. I therefore will not be paying taxes on any inflationary gains that might accumulate.
Repeated good outcomes provide us with confirming evidence that our strategy is good and everything is fine. This illusion lulls us into an unwarranted sense of confidence and sets us up for a surprise (usually negative).
In most day-to-day decisions, cause and effect are pretty clear. If you do X, then Y will happen. But in decisions that involve systems with many interacting parts, causal links are frequently unclear. For example, what will happen with climate change? Where will terrorists strike next? When will a new technology emerge? Remember what Warren Buffett said: “Virtually all surprises are unpleasant.” So considering the worst-case scenarios is vital and generally overlooked in prosperous times.
Here's a look at the seasonally adjusted food index on a log chart. Once again, this means constant exponential growth will show up as a straight line. I'm seeing three lines. We are firmly on line #3.
I am posting this because my local QFC is allowing me to buy 12 cans of Progresso soup on sale for 99 cents per can this week. My hoarded soup supplies are turning into something of a joke. I am not complaining though. I'll happily laugh at myself while buying more reasonably priced food.
I remain stagflationary long-term, but the data is leaning much more towards the stagnant growth part of the story and not so much the inflation part of the story. As a saver, I'm fine with that.
Each year I brace for the inflationary financial pain to hit my conservative treasury inflation protected securities (TIPS). It never seems to come. I'm fine with that too.
Rising worldwide food inflation is surprising and puzzling economists. They don’t understand why it is happening (they didn’t see the credit crisis or the bursting commodity bubble coming either). Next month, as food inflation continues to grow worse and consumers around the world start stockpiling food, these economists will really start to worry, and, in about two months time, with food inflation truly spiraling out of control, they start panicking, their deflation predictions completely forgotten.
It is one year later. So where is the inflationary death spiral? I was at Costco the other day. The dry spaghetti I like is now cheaper than it was when I first began to hoard it a few years ago. They even had someone offering free samples with the Prego sauce I also like. In my opinion, food prices in general are not "spiraling out of control" in America.
I cannot say what the future will bring, but there's a decent chance that we're getting more hysteria than actual inflation, at least so far.
The Baltic Dry Index "will be less responsive to shifts in demand as the oversupply of vessels becomes more pronounced," said Plamen Natzkoff, dry bulk and freight strategist at Citigroup in London. While the index "will still reflect the supply-demand balance in the freight market," its worthiness as a wider-ranging indicator will be limited, he said.
The index for sanity checking global overcapacity is now itself suffering from global overcapacity.
There was a banking panic, starting August 9, 2007.
I jumped on this like a rabid weasel. 22 days later I launched this blog. I probably could have acted quicker, but once the initial euphoria about describing the end times as we know it abated, apathy and procrastination once again became the norm. That's just my nature. Sorry.
The panic in 2007 was not observed by anyone other than those trading or otherwise involved in the capital markets because the repo market does not involve regular people, but firms and institutional investors.
Fortunately, I am not a regular person. What regular person would want to be called Stagflationary Mark? It's like something out of a comic book. Only a true nutcase would do that!
Outstanding subprime securitization was not large enough by itself to have caused the losses that were experienced. Further, the timing is wrong. Subprime mortgages started to deteriorate in January 2007, eight months before the panic in August.
I know! It's so silly. I mean, sure, there were cracks in the dam. Water was starting to leak out but there really wasn't that much. So why would the dam fail so much later? There weren't even sirens until the last possible minute.
Holding loans on the balance sheets of banks is not profitable. This is a fundamental point. This is why the parallel or shadow banking system developed. If an industry is not profitable, the owners exit the industry by not investing; they invest elsewhere.
I always wondered how my checking account could be free. I just thought I was one of the lucky ones though.
How big was the repo market? No one knows. The Federal Reserve only measures repo done by the 19 primary dealer banks that it is willing to trade with. So, the overall size of the market is not known. I roughly guess that it is at least $12 trillion, the size of the total assets in the regulated banking sector. The fact is, however, that the repo market was never properly measured, so we will likely never know for sure how big it was.
I like it. I like it a lot. It adds an air of mystery van.
The crisis was not a one‐time, unique, event. The problem is structural. The explanation for the crisis lies in the structure of private transaction securities that are created by banks. This structure, while very important for the economy, is subject to periodic panics if there are shocks that cause concerns about counterparty default.
That's great news. I think there's a bull market in counterparty default concerns! I'd hate to think that my blog would become obsolete.
Mishhas somechartsup today that look pretty bad. I'm taking a closer look at one of them in particular.
He put up a short-term chart of revolving credit. Here's the long-term data plotted on a log chart.
Constant exponential growth on a log chart looks like a straight line. The line in the chart above is not straight though. It is curving downwards and has been doing so fairly consistently for 40 years. That means that the exponential growth rate in revolving credit is clearly slowing and has been slowing for a long, long time.
We may actually be seeing the first signs of peak revolving credit. Now imagine how much worse it would look if I adjusted it for inflation over the years. Hey, guess what? You don't have to imagine it.
In inflation adjusted dollars, total revolving credit is currently no higher than it was in early 2001. For those keeping track at home, that was two recessions ago.
Credit is the lifeblood of market economies, and the damage to our economy resulting from the constraints on the flow of credit has already been extensive.
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