Saturday, September 15, 2007

Certainty vs. Uncertainty (animated)

Click on the chart to see it how the average price of selected metals (aluminum, copper, iron (steel), lead, nickel, palladium, platinum, silver, tin, titanium, and zinc) has moved over time (it won't animate unless you click on it).

One of the goals of the Fed is price stability. Right? While watching the chart animate would you say they are succeeding? Wouldn't you agree that the price moves in the chart appear to be growing less stable over time? Things clearly started breaking down in the early 1970s (once we fell off the gold standard, go figure). This data doesn't even include the most recent bull market in metals. Imagine how that would look.

I'd argue leverage is the cause. On the one hand there is too much debt. A small change can push people over the edge and into the deflationary abyss (bankruptcy). On the other hand, there is too much money. A small reduction in expected returns can push people into hoarding hard assets (gold, silver, houses, oil, ...). The Fed attempts to control these two very powerful forces even as both continually get stronger over time. I would also argue that the people who might head into the deflationary abyss aren't necessarily the same people who would think of hoarding. That just makes it that much harder to play one force against the other.

It may simply reflect our overleveraged society and the fact that people are carrying more debt on everything and it doesn't take a lot to affect a small percentage of them in terms of moving them from homeownership to not. - Bob Curran, Fitch Ratings analyst, April 2005

In my opinion, that's the reason the Fed walked on egg shells when it last raised interest rates (17 baby steps). It didn't want to risk breaking anything. So here we sit. Interest rates are fairly neutral in my opinion. Are we breaking anything yet? Where will metal prices head next? Up? Down? I couldn't say. Just look at the chart again. I'd have better luck using a dartboard to predict it. If a butterfly so much as flaps its wings, well, you know. Predicting order out of chaos isn't easy, and chaos is what I think we're stuck with. The days of low volatility are over. We're all gamblers now and nothing is safe. I do, however, continue to lean towards stagflation and suspect I'll be leaning that way for many years to come.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. - Alan Greenspan, 1966

I once again want to point out that this is not investment advice. I'm just a deeply concerned American. We seem to be heading down the wrong path and I do believe we will live to regret it.

Source Data:
Certainty vs. Uncertainty

1 comment:

Stagflationary Mark said...

If you cannot see the animation know that you are not alone. At least one other person can't see my "gif" animate when clicked.

There are also 2+ million results in Google for "gif not animating". Oh well!

If you can't see it animate and would like to, here's one thing you might try if you are using Internet Explorer:

Animated GIF Images on Commerce Server 2002 Web Sites Do Not Appear As Expected