The Sarcasm Report v.38

Will the China property bubble pop?

Beijing, China (CNN) -- When Crystal Zhang decided to buy a house last August, it seemed like a no-brainer.

For years, she had been spending a big chunk of her salary renting a studio apartment in Beijing, where she works as a mid-level executive in a multinational company. But her landlord kept hiking the rent, so she found a second-hand apartment and plunked 640,000 RMB (nearly US$100,000) as 52 percent down payment for a new home. She now lives in a cozy, one-bedroom flat and sets aside 25 percent of her monthly salary to pay for mortgage. "I hope to pay all up in five years," says Zhang. "By then I can start making some other investments."

Zhang, 30 and single, is one of the fortunate ones. The upwardly mobile professional has ample disposable income--and a good sense of timing. In just five months since she bought her 85-square-meter apartment, it has already appreciated by 38 percent. "I'm glad I bought this one when I could still afford it, even though its price was already high," she said. "Now the price is ridiculously high."

85 square meters is 915 square feet.
$100,000 x 1.38 = $138,000.
That's $151 per square foot.

Update: G.H. spotted a math error here. It's roughly twice as expensive. See below.

When I bought my home (just outside of Seattle, WA) in 1997 I paid less than $100 per square foot. It's a fairly nice house on 1/3rd of an acre. It has two fireplaces and a three car garage. It is currently assessed at about $170 per square foot, down from its $200 peak.

I had no idea I was competing with upwardly mobile Chinese professionals on such a level housing playing field. I'm still slightly in the lead, but I'm really losing some ground here. This is truly embarrassing. I'm going to lose to a second-hand apartment. I can feel it in my bones. I need to step up my game.

My only hope is that China continues to build more 85-square-meter apartments to the point that prices come down. For the life of me I can't figure out what to do to make my own house price go up any more. That's for sure. Mowing the lawn no longer seems to be offering any bang for the buck. It's as if I mow it simply to partially maintain the existing price. What an exercise in futility that is becoming!

If only I lived in China. I'd still be competing with a billion people, sure, but there also seems to be a billion "no-brainer" investments to match. How could I lose?

Nobody ever loses betting on China!

Update: G.H. has pointed out in the comments that my math was way off. I thought $100,000 was the purchase price. That was just the down payment though. That means the apartment cost roughly twice as much and I have already lost the race. Big time! Wow!

Monetary Printing Press vs. Mining Equipment

Inflationists point to the overcapacity of money as proof that inflation is coming. They generally don't want to hear about the impact that modern mining equipment has had.

Deflationists point to the overcapacity of hard assets as proof that deflation is coming. They generally don't want to hear about the impact that modern printing presses have had.

I think that the truth lies somewhere in between. I'm a bit deflationary, but perhaps mainly out of stubbornness. I think there are way too many people who see severe inflation as a "sure thing".

Gold was $606 in 2006 and was directly on that red line (an average). M3 should be about 25% higher now than it was then (using M2 as a proxy since M3 was discontinued). About 6% more gold should have been mined (extrapolating). This would imply that the fair value of gold is roughly 19% higher now than it was then. That would be roughly $721 an ounce.

Gold is actually trading at $1,102 though. If you can believe in what this chart is trying to say, then gold may be roughly 50% overvalued.

I think it is worth noting that the increase in gold production is slowing but so is the increase in the money supply. M2 is up just 3.7% from December 12, 2008 to December 7, 2009. It is only up 0.4% in the last 6 months.

I have ignored credit and a possible China bubble in this analysis. I would argue that these topics could only help the deflationary case.

And lastly, here's a peek at aluminum.



Aluminum prices rose over the last 50 years, but not fast enough to keep up with inflation (as seen in the CPI). The sheer volume of aluminum mined is responsible for the upward trend in the chart. Aluminum prices are actually about 15% cheaper now than they were in 2006.

Source Data:
St. Louis Fed: M2
St. Louis Fed: M3
USGS: Historical Statistics for Minerals
Kitco: Gold
Kitco: 5 Year Aluminum Spot Price Chart

Predictions for 2010-2019

Bad decade for U.S. stocks but not world's worst

Here are the last decade's notable winners (average annual return):

Gold bullion: 15.26%
India: 13.68%
Crude oil: 11.78%
Commodities (S&P MSCI index): 10.26%
China: 9.65%
U.S. long-term Treasury bonds: 8.28%

Here's my prediction for the next decade. At least one of these six things will lose its "sure thing" status.

I know, I know. It is not a very gutsy call. What can I say? I'm not a big risk taker.

I figure there are at least three ways I can be right.

1. Deflation hurts commodities and/or Chindia.
2. Stagflation hurts Treasuries and/or Chindia.
3. "Real Prosperity" replaces the "Illusion of Prosperity".

Don't heckle that last one without first considering the unexpected appearance of magical pixie fairy dust, an endless pot of leprechaun's gold, and/or the invention of Mr. Fusion. Could happen!

A Christmas Miracle!

At 6:00am this morning I opened this gift from my mom. After playing around with it for a few minutes I realized that the puzzle was not at all easy. At about 6:10am I started thinking that perhaps randomly placing the pieces together just wasn't going to work. I needed a plan.

There are 9 pieces. I had no idea which piece was even supposed to be the middle piece. I decided that I'd start with each one as the middle piece in turn and work from there. I could see the hours piling up. The combinations and permutations seemed nearly endless. It was especially daunting because all the pieces look so much alike. It was going to be difficult just keeping track of them.

I chose the first piece at random and put it in the center. I then put a piece above it that fit and a piece below it. I then moved to the upper left and put a piece there and then one just below it.

At one point, I swapped two pieces but other than that everything just sort of fell into place. Puzzle solved at 6:15am.

I've never believed in luck, but if you can believe the packaging ("Perhaps the World's Most Challenging Puzzle!") then this was pretty much a Christmas miracle.

There was certainly no skill. I think I could have claimed that after a few hours perhaps, but it never actually got to that point.

The lucky person passes for a genius. - Euripides

That's certainly the risk you run in reading this blog!

Luck is what happens when preparation meets opportunity. - Seneca

Merry Christmas! (Musical Tribute)

Gold vs. Copper

We can't seem to stop talking about either gold or copper, so clearly they are both important. Many would argue that they are the two most important metals on the planet and have been for centuries. Who am I to argue? So, let's do a comparison.

In the charts that follow I am trying to allow the modern mining equipment miracle to play a part and not just discuss prices in isolation. I think it helps to show that the sheer quantity of our money growth is at least somewhat balanced by the sheer quantity of mining. I think a decent inflation/deflation debate requires at least a bit of both.



This shows the cumulative world production of gold and copper since 1900 times the price of the metals in the given year. In other words, it's how much it would cost you to hoard all the metal mined since 1900 assuming it all still exists and also assuming that you wouldn't drive up the price while doing it.

Keep in mind that the price of gold was fixed for four decades. You can see the effect in the chart. Look for that straight line from the 1930s to the 1970s. You can also see the effect in the next chart. You can also clearly see the bubble that formed in its aftermath.



This sure does not look like a gold bubble to me, at least compared to copper. Things have changed a bit since 2007 though, so let's try to factor that in. For the moment, we'll ignore the recent world production and just concern ourselves with prices.

Copper was $3.28 per pound in 2007. It's now $3.18 per pound. It's 3% cheaper. Gold was $697 per ounce in 2007. It's now $1097 per ounce. It's 57% more expensive. Overall, that puts the gold to copper ratio at about 1.3. Compared to copper, it looks to be slightly undervalued. Score one for the gold bugs!

There's still one important question left though. Is copper in a bubble? I happen to be of a deflationary mindset. I think copper is very overvalued. If so, then gold could/should drop in sympathy if copper crashes (again). Much to the dismay of gold bugs, when copper crashed in 2008 gold did too. It just didn't crash as hard.

Financial and Commodity Bubbles Everywhere?

So, why isn’t copper or orange juice in a bubble? I wonder how many people are aware that copper is up over 4 times what gold is up this year, and oil over 2 times. Even silver is up more than gold this year.

That's just it though. I do think copper is in a bubble. It has recovered almost its entire drop from the bottom. We now have virtually the same copper price in this weak global economy that we had in the apparently strong global economy of just a few years ago. I'm not a believer and I'm bracing for the next down leg.

If I am right, then I may yet be a gold bug again someday. It would depend on how far copper falls (if it does) and how far gold may fall with it (if it does). If I am wrong, then I will have just one thing to say. Oops! Okay, maybe I'd have two things to say. Thank goodness I didn't short copper or gold. ;)

Copper extends gains; Shanghai at 15-month peak

"This is end-of-year optimism confronting fundamentals and it's the optimism that is carrying the day," Jonathan Barratt, managing director of Commodity Broking Services, said.

"I worry that stimulus packages are rolling off. Inventories don't seem to be falling and I am worried about property markets and sovereign debt -- we are watching those as a pre-indicator for a fall in copper."

But on the last day of trading before Western markets close for Christmas, investors said "Bah-humbug" to worries about demand in 2010.

Optimism is carrying the day? What happened to the pessimism bubble?

Source Data:
USGS: Historical Statistics for Minerals
Kitco: Gold
Kitco: Base Metals

Pessimism Bubble? (Musical Tribute)

Is there a pessimism bubble?

In fact, there is evidence that investor pessimism has reached levels not seen since the mid-1970s.

The S&P 500 is up 68% in the last 9 months.

Top 5 China Bubbles

Louisa Lim: China's top 5 'bubble stories' of 2009

Don’t sweat the small stuff; the whole of the Chinese economy is one gigantic bubble, skeptics warn, waiting to plummet down to earth with a stomach-turning thump.

...

So far, they’ve not been right. But this one, the naysayers warn, really could be the big one.

Here's something I wrote a week after starting this blog.

September 6, 2007
Gasoline Prices and the Business Cycle

This chart is yet another reason to be concerned about a possible recession (and is therefore yet another possible nail for the subprime borrower's coffin, and yet another possible nail for the home sellers, and yet another possible nail for those who feel copper only goes up, and yet another possible nail for those who have embraced the China story at any price, and yet another possible nail for those who feel that US stocks only go up, and yet another...).

So many nails. So many coffins. In hindsight, every single nail got hammered.

It's almost enough to make me want to change my name to Deflationary Mark, but that's just not something I'd bet on long-term. Call me silly.

I really could have changed my name to Deflationary Mark. I would have done just as well and possibly a lot better. Fortunately, it did not hurt me. Being bearish was good enough to weather the second major storm (the first being the dotcom bubble).

SSE Composite Index

Value on September 6, 2007: 5,393.66
Value on December 22, 2009: 3,065.16

That's a 43% loss. It was a bubble then. I think it is still a bubble. I'm not at all convinced that it is a 43% smaller bubble either. It might actually be bigger. I know the math seems really weird when I say that but consider this. China never did stop growing even as demand for its goods fell dramatically. How's that supposed to work long-term?

China's state planning agency is warning of massive overcapacity in a half-dozen industrial sectors. - Business Week, December 10, 2009

I'm normally rather skeptical, but that is something I believe with every fiber of my being. Why would China do this? Pretend and extend? The alternative would be hundreds of millions of unemployed workers who suddenly realize that they aren't all going to be living the American lifestyle someday.

China think-tank says social unrest on the rise

BEIJING — Social unrest, driven by abuses of power and a growing wealth gap, is on the increase in China, according to one of the country's leading think tanks.

Risk vs. Reward

Even dull TIPS can take a wild ride

But Herbst cautions investors against chasing this year's return in TIPS. It's not likely to happen again.

"The past year has been the most extraordinary that I have ever seen in my life," Herbst said.

The point of all this is that even a seemingly benign investment like TIPS can take investors on a wild and unexpected ride.

Who would have guessed that the widows, orphans and elderly were having such exciting times?

So far, hindsight is treating my one trade for the year rather kindly. I sold at $105.401. It now trades at $104.55. It paid $0.20801 in distributions that I did not receive. Overall, cash has therefore outperformed it by 64 cents per share.

Some might scoff (and do) at 0.6% worth of pain avoidance in a world that's reset the bar on pain (housing prices are down about 30%) and pleasure (the S&P 500 is up about 67% from the bottom). I look at it this way though. If I could avoid 0.6% pain every other month then I could avoid a 66% loss over 30 years. I would only dream of being that lucky.

0.994^(30*6) = 0.34

Behold the power of compounding.

Chinese Déjà vu

December 18, 2009
Increasing Prices Spark Panic Buying in China

A Shanghai resident, who called the Sound of Hope Radio, said, “The news reported that the price of cooking oil will increase by 10 percent, but there will be no increase in our wages.”

He compared the current situation to the previous occurrence with gasoline prices. When the price of oil was US$150 per barrel, he could buy gas for US$3.30 per gallon. When the price of a barrel dropped to US$75, he had to pay US$3.60 per gallon.

December 20, 2009
The 5 million yuan student

Unlike other seniors busy scrambling for jobs, Ma, a senior majoring in media market research and analysis at Beijing-based Communication University of China (CUC) has lived his last year of college on the fast track to success, earning himself about 5 million yuan ($ 732,500)by investing in real estate and stocks.

...

As Ma approaches graduation day, he plans to keep developing his finance superpowers, but when asked what he would do if he lost it all tomorrow, Ma says he'll take his passion to the classroom.

December 21, 2009
China tightens property rules for developers

Beijing is concerned about long-term inflationary pressure building as a result of a fast economic recovery spurred by a government-engineered credit boom and public spending. It also faces public anxiety about overheating in the property sector and a potential asset bubble in the stock market, which could threaten social stability.

June 21, 2008
The rise and fall of China's stock market

"The market is a little like theatre," she says. "From behind the curtain, they seduce the audience into getting up on the stage. And once you're up on the stage you get involved in the plot. And you end up becoming a real actor in the drama.

"And then, of course, you're trapped. You can't get off the stage."

This is not going to end well, again.

The Sarcasm Report v.37

Wall Street Journal: US Stocks Fall On Fear Of Higher Interest Rates, Greece Downgrade

Fears of higher interest rates in the U.S. and a credit downgrade of Greece sent stocks tumbling and roiled other markets Thursday. The dollar soared, commodity prices sank, and Treasury prices climbed as investors sought safety.

Treasury prices climbed on fears of higher interest rates? Seriously? Let's simplify the claim into something that means exactly the same thing.

Rates fell on fears of higher rates.



Here's the list of US Treasuries with higher interest rates today.

Bloomberg: Interest Rates

1. The 3 Month Treasury Bill (now yields 0.04%).

That's it. That's today's entire list.

Hot Commodities vs. Commodity Glut?

In the red corner, weighing in at 800 pounds we have our current world champion. His simple answers are nearly always undisputed. He's the house of pain. He's the man with the plan. Please welcome, Mr. Gorilla!

Hot Commodities: Precious Metals boom in China

The answer is simple: commodities are booming in China, and commodity industry is the largest investment sector in the dragon land these days. Investors love commodities in China. No wonder, the spicy garlic is now one of the hottest agricultural commodities in China to invest in. Garlic prices have shot up by more than 50 per cent in the last few months in China that there is an acute supply vs. demand crisis on the commodity. Investing in garlic is going crazy in China that analysts are comparing the spicy stuff to gold these days!

In the blue corner, weighing in at 10,000 pounds we have our challenger. He hasn't won a fight since The Great Depression. Some say he's washed out, burned out, a has been. Please welcome, Mr. Elephant in the Room!

China's 'Made in China' Problem

The easy credit helped boost demand for commodities such as steel, chemicals, and glass. But it also led to a boom in new factories to make those goods. That may increase trade frictions if China starts exporting the excess at cut-rate prices—what trade experts call dumping. With the mainland's steel production capacity outstripping domestic demand by nearly 30%, "will they shut those plants down and lay those people off, or export their way out of it?" asks Daniel R. DiMicco, CEO of Charlotte-based steel producer Nucor (NUE). "Their tendency is to export."

China's state planning agency is warning of massive overcapacity in a half-dozen industrial sectors. Cement makers have added 600 million tons of annual production capacity this year to the 1.9 billion tons China already had. Aluminum smelters are running at only two-thirds capacity vs. nearly four-fifths last year. And over the past two years the number of Chinese companies making wind power equipment has quadrupled to more than 80.

Moody's Moody Warning

Moody’s warns of 'social unrest’ as sovereign debt spirals

In a sombre report on the outlook for next year, the credit rating agency raised the prospect that future tax rises and spending cuts could trigger social unrest in a range of countries from the developing to the developed world.

The Sarcasm Report v.36

Democrats propose $50B for jobs-boosting projects

WASHINGTON (AP) -- Responding to calls among rank-and-file Democrats for more infrastructure spending, House leaders Tuesday unveiled a plan to add almost $50 billion in spending on highways, housing and school repair as part of a year-end plan to create jobs.

Q: If we borrow $50 billion to create jobs for all of our country's 15.4 million unemployed and each new job pays a generous $3,250 per month ($39,000 annual salary), then how many months could we keep them fully employed?

A: One month (15.4 million x $3,250 = $50 billion).

Our Pretend and Extend Economy

Today's PPI report ran hot. Nasty hot. The high price of oil is clearly starting to trickle in. I am still deflationary though.

PRODUCER PRICE INDEXES - NOVEMBER 2009

The Producer Price Index for Finished Goods rose 1.8 percent in November, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today.

So why am I still deflationary? What would cause this madness? This insanity?

I turned deflationary on 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.

WTI Cushing spot oil price then: $79.44
WTI Cushing spot oil price now: $70.69

It's been five weeks. Oil is 11% cheaper. I continue to believe that $80 is the mid-term ceiling. I might be wrong of course, but so far so good.

As seen in the PPI report, there are still some inflationary pressures in the pipeline. That doesn't mean they can all make it to the consumer though. Last night at 6:30pm I visited the largest mall in Washington State. It was quiet. I would not have guessed that it was Christmas season had I not seen the decorations. I was able to park very near the entrance. No circling required.

If I am right about oil's price going forward then right behind all those inflationary pipeline pressures is a rather large deflationary vacuum (just like there was the last time oil's price collapsed under its own weight). It's going to suck (if your entire nest egg is betting on inflation anyway).

Buy anything: 2010 should be a can't-lose year for investors

That would make it five for five: all asset classes are expected to move in parallel uptrends.

If something about that uniformity strikes you as questionable, it may be that history and common sense both stand against such parallel trends.

Profit Rises at Best Buy, but Margins Are a Worry

The Best Buy Company, the electronics retailer, reported a higher-than-expected quarterly profit on Tuesday, but its shares fell after it said its gross profit margins would decline in the holiday season.

Those who thought Best Buy was the best buy lost 8.5% today. Here's the interesting part to me. Circuit City (their largest competitor) closed last year. You'd think Best Buy was therefore a sure thing.

That brings me to Bed, Bath, and Beyond. Linens 'n Things closed last year too. Some therefore think Bed, Bath, and Beyond is a sure thing ("best idea").

Wedbush Adds Bed Bath & Beyond (BBBY) to 'Best Ideas' List, Removes PetSmart (PETM)

The firm sees Bed Bath & Beyond continuing "to benefit from industry consolidation, good visibility for cross merchandising opportunities and future growth potential for newer concepts, and strong balance sheet and cash flow."

Meanwhile, I see a stock trading at pre-bubble popping levels. I see a P/E (ttm) of 21.94. I also see Wal-Mart, online shopping cannibalization, and a poor holiday shopping season, which were the very things that Linens 'n Things could not survive long-term.

Here's a completely random item for sale. The "KitchenAid KSM150PSPK Komen Foundation Artisan Series 5-Quart Mixer, Pink" sells for $275.36 and ships for free at Amazon.com. It sells for $299.99 on Bed, Bath, and Beyond's website and also ships for free (during their limited time offer). The problem Bed, Bath, and Beyond has is that it just can't be competitive with Amazon.com.

Bed, Bath, and Beyond can't sell their goods much cheaper online than they do in their stores or they'd risk angering the customers who actually buy things in their stores. I would therefore argue that Amazon.com will always be able to sell goods cheaper online than they can. Further, Amazon.com does not have the added expense of "brick and mortar" overhead.

Online shopping continues to grow. In my opinion, brick and mortar retailers are pretending and extending. They are not alone.

U.S. Bureau of Labor Statistics: Retail Salespersons

Despite the growing popularity of electronic commerce, the impact of electronic commerce on employment of retail salespersons is expected to be minimal.

In related news, my local Safeway just installed some automated self-serve checkouts. I now have two grocery stores near me that use them.

Self checkout

The benefit to the retailer in providing self checkout machines is in reduced staffing requirements since one attendant is all that is required to run 4 to 6 checkout lanes at one time.

"Reduced staffing requirements" and "productivity miracles" are euphemisms for job destruction.

Gold and the CRB Index

September 23, 2002
Gold and the CRB Index

The principle underlying this gold/CRB relationship is very simple. Rising commodity prices are a signal that inflationary pressures in the economy are building. If inflationary pressures are building, the purchasing power of the dollar is declining and the gold price should be rising as well.

There's a chart in the article that is worth a look. The left scale shows the CRB Index from 180 to 280. The right scale shows the price of gold from 250 to 500. That makes sense to me. I see no conspiracies. I see no indication whatsoever that gold is both an inflation hedge AND a deflation hedge. All I see is a basket of commodities compared to one specific commodity (gold). In my opinion, the correlation is quite high.

Now take a look at the following charts.

StockCharts.com: CRB Weekly Index

Note that the CRB Index closed at 270.86 on December 11, 2009.

That's roughly the same level it was in 1983. It clearly has not kept up with inflation over the past 26 years. Blame the sheer size of modern mining equipment and advances in automation and productivity for that more than likely.

Kitco: 24 Hour Spot Gold

Note that the price of gold is currently $1,113.50 per ounce.

Now take those two numbers and plug them into the chart in the first link. I have and this is my conclusion.

All things being equal, either the price of gold is more than twice as expensive as history would suggest it should be, the CRB Index is at least twice as inexpensive as history would suggest it should be, or there's a bit of both.

Of all the investment assets, the price of gold is most influenced by what you think it will be worth to others when you someday sell it. How can one possibly put a fair and objective price on that? Gold can't be eaten. It can't be lived in. It can't fuel a vehicle. It does have to be protected though (stored, insured, and/or hidden). As an investment, the utility of gold comes only at the time you sell it to others. At that point, you hope that they will want it at least as much as you did when you bought it.

I'm not an anti-gold bug. I want to make that clear. I bought it. I sold it. I no longer find its price attractive. I am not actively betting against it. Further, I thought it was very overpriced at $1000 (when compared to toilet paper and canned goods). I stated this on my blog and continue to think so. That doesn't mean gold can't go higher and stay there. Maybe it is different this time.

Thinking that one particular asset class is much better than all others and that the asset is also good at any price is one of the primary reasons we're in crisis mode though. One need merely point to housing. I simply offer this as food for thought.

The Inflection Point Is Near! (Musical Tribute)

Stores' Dilemma: To Deploy Discounts Now or Hold the Line

Its Ann Taylor and its Loft outlets have discount banners "ready to go" should consumers need an incentive to shop, she said.

...

"After solid traffic the first couple of days, it looks like the middle of August out there," said Stephen Baker, vice president of industry analysis for retail watcher NPD Group.

...

Sluggish sales in the first week of December have some experts saying that inflection point is near.

Jobs of the Future, Part 3

Imperial shows off new aluminum plant

The Chicago-based company plans to hire up to 50 people...

Peebles said the company expects to produce about 100 million pounds of product a year.

For those keeping score of our productivity at home, that's at least 2 million pounds of product per additional American worker, per year.

This is the continuation of a series. You may note that the first two parts were offered in September of 2007, shortly after starting this blog. The unemployment rate was 4.7% and seemingly stable.

See Also:
Jobs of the Future, Part 1
Jobs of the Future, Part 2

Quote of the Year

Forbes.com: The China Bubble

"The more debt that's on the balance sheets, whether you see it or not, the more vulnerable borrowing entities become to shocks," warns Michael Pettis, a finance professor at Peking University and expert on China's economy and sovereign debt.

Whether you see it or not? That's priceless.

Sleep Worry Free? Hahaha!

Sleep Worry-Free with These Inflation-Proof Investments

If TIPS sound appealing, you're not alone. Along with gold, this sector has been flooded with more new cash than any other during the past few months. The iShares TIPS offering attracted nearly $850 million in September.

I want to first point out that TIPS are not "inflation-proof" investments. Not even close.

There are two ways the government could default on all of its debt. TIPS protect against neither outcome.

1. In hyperinflation, the enormous taxes on the inflationary gains each year could and would create enormous pain to the holders of TIPS.
2. In severe deflation, the government could simply default on its debt outright.

In order to willingly invest with those risks in mind, I need to be paid some sort of a risk premium. Today's 0.33% real yield on the 5-Year TIPS is not a premium. It's a way to lose money. Even in a mild 3% inflationary world within a 30% tax bracket, I would not keep up with inflation. I'd be losing 0.7% per year after taxes. That assumes I buy TIPS for free directly from the government and therefore avoid paying additional fund expenses to a third party. If not, it can get even worse.

This brings me to my main point. I rarely sleep worry free when my investments are "flooded with more new cash than any other" while being simultaneously told they are a sure thing.

I tend to get all panicky and take some profits and junk and stuff. So far, so good.

Men in Black II

Agent K: You did not see a room full of shiny weapons, you did not see four alien night crawlers. You *will* love and cherish each other for the rest of your life.

Agent J: Which could be the next 27 or 28 minutes, so y'all should get to lovin' and cherishin'. Oh, and she gets to stay up as late as she wants and have candy and cookies and cake and junk and stuff.

Inflation Hysteria

The "You Are Here" point is October's data point.

There's a ton of oil out there right now. Oil prices have more than doubled since the bottom and the $80 line in the sand appears to be holding. If oil can't rise further, then energy's contribution to the CPI will be severely limited going forward.


The "You Are Here" point is October's data point.

All things being equal, look what flat housing costs would do to the CPI. It's probably worth two looks. Based on this chart, we might expect the overall CPI to be roughly negative 1%.

Q3: Record Rental Vacancy Rate, Homeownership Rate Increases Slightly

These excess units will keep pressure on rents and house prices for some time.

So will this.

Slow Growth and High Unemployment for U.S. in 2010: Report

"With such sluggish growth, the unemployment rate will likely peak at 10.5 percent in the first quarter and remain at or above 10 percent for almost all of next year," the closely watched report added.

And this.

Lending Squeeze Drags On

"The idea that we will reset to where we came from is false," Mr. El-Erian says. "It is a bumpy journey to a new destination with significant long-term effects."

Source Data:
St. Louis Fed: CPI-U: All Items
St. Louis Fed: CPI-U: Energy
St. Louis Fed: CPI-U: Housing

Chinese/American Consumption Math

December 9, 2009
Recession Elsewhere, but It’s Booming in China

Automakers are on track to sell 12.8 million cars and light trucks in China this year, virtually all of them made in China (although many are foreign brands), compared with 10.3 million in the United States. Appliance manufacturers expect to sell 185 million refrigerators, washing machines and other pieces of kitchen and laundry equipment in China this year, compared with 137 million in the American market.

By volume, the Chinese are slightly outspending us.

The size of China’s consumer market, notwithstanding its growth, will make it hard for China to rescue the world economy by itself. Total consumer spending in China is still less than a sixth of American consumer spending at current prices and exchange rates.

By price, we are massively outspending them. Is it any wonder China likes to sell us goods?

The Chinese can afford the cheaper cars apparently, but can they afford to pay what we do for gasoline? I don't think so.

December 9, 2009
A Land Where Car Sales Leap, but Gasoline Sales Stay Flat

GUANGZHOU, China — Auto sales are so strong in China that an unusual conspiracy theory has circulated on Western stock markets this month: the Chinese government must be secretly buying hundreds of thousands of cars and parking them somewhere.

The main evidence presented for the theory is that the number of gallons of gasoline consumed in China has been flat this year. But auto executives and Chinese buyers deny the rumor, which has spread so widely that economists have begun producing reports on why it is implausible.

I don't think it is a conspiracy. I don't think the Chinese government is secretly buying and parking cars. I have a much simpler theory.

1. You really, really want a car.
2. You think you can afford it.
3. You are told you can afford it.
4. You buy a car.
5. You really, really don't want to pay for gasoline though.
6. You know you can't afford it.

It seems very similar to subprime home ownership to me.

1. You really, really want a house.
2. You think you can afford it.
3. You are told you can afford it.
4. You buy a house.
5. You really, really don't want to pay the power bill though.
6. You know you can't afford it.

November 9, 2009
China Raises Fuel Prices; Sinopec, PetroChina Gain (Update1)

Pump prices for 90 octane gasoline will be set at a maximum of 5.98 yuan (88 cents) a liter, or about 22.6 yuan a gallon, in Beijing, National Development and Reform Commission, China’s top economic planner, said on its Web site yesterday. The price increases of as much as 8 percent boosted shares of China Petroleum & Chemical Corp. and PetroChina Co., the nation’s two largest refiners.

1 Chinese yuan = 0.146469 U.S. dollars

That works out to $3.31 per gallon. You think we have sticker shock when we look at gasoline prices? Just think what the Chinese see. It boggles the mind.

For what it is worth, I have no interest in investing in China. I think it screams bubble. This is probably the most important decision to make when investing today though. If China is in a bubble it would have huge implications for all investments, commodities in particular.

December 10, 2009
China imposes tougher home sale tax to control bubble

China's central government, facing rising complaints about soaring home prices, has moved to control bubbles in its real estate sector, by re-imposing a tough sales tax on homes sold within five years of purchase.

They are officially in the inflationary complaint stage.

China in January cut the sales tax on the vehicles to 5 percent from 10 percent between January 20 and December 31. It introduced the incentive to revive demand after auto sales rose at the slowest pace in a decade last year. The rate will be 7.5 percent next year, the State Council statement said.

Taking from housing and giving to autos? Does anyone really think that is going to fix anything?

Mexico's Insurance Policy

Mexico buys $1bn insurance policy against falling oil prices

"We want this as an insurance policy," said Agustín Carstens, Mexico's finance minister. "If we don't collect any resources from this transaction, it's OK with us." That would mean the oil price had remained above $57 a barrel, he added.

I own TIPS and I-Bonds as an insurance policy against higher inflation. If deflation appears and I don't collect any resources from the transaction, it's OK with me.

I also have fire insurance on my house. If my house doesn't burn and I don't collect any resources from the transaction, it's OK with me too.

These Are a Few of My Favorite Gluts (Musical Tribute)

Bailouts for losses and granite for kitchens
Cheap copper kettles and discount vitamins
Brown paper bags for those without bucks
These are a few of my favorite gluts

Profits for cronies who use trading models
Doorbells on condos and "free money" bubbles
Oil that powers our country's new trucks
These are a few of my favorite gluts

Shoes in white leather made from cow asses
Nest eggs invested in "sure thing" potashes
Things sold at Sears, yes even Roebuck's
These are a few of my favorite gluts

If the stocks crash
If the pin pricks
While I'm watching gold
I simply remember my favorite gluts
And then I won't feel oversold

That Darned Weather!

February 10, 2009
Favorable Weather Boosts Mall Traffic

Warmer weather brings shoppers into the malls. According to our calculations, the overall temperature across the U.S. this past weekend was significantly warmer than average. Regions along the Eastern seaboard saw the warmest weather this weekend (with respect to the average temperature) of the season, reaching as high as 25 degrees above average.

Unseasonably warm weather really helped the malls!

December 3, 2009
Early promotions fail to deliver in November

NEW YORK (MarketWatch) -- Retailers, hurt by unseasonably warm weather that damped demand for coats and sweaters and consumers holding out and delaying purchases, failed to deliver November same-store-sales improvements, setting the stage for a highly competitive December.

Unseasonably warm weather really hurt the malls!

December 7, 2009
Ahead of the Bell: Mall traffic weak, analyst says

Icy rain and snow hit parts of the Northeast and Southeast, which kept consumers indoors, Lazard Capital Markets analyst Todd Slater said in a note to investors.

There seems to be a weather glut. Somebody needs to do something.

The Sarcasm Report v.35

Inflation T-Shirt: Making Groceries Barrels of Fun!

The United States has been printing money like a Zimbabwe dictator, and the inevitable result of too many dollars chasing too many goods is inflation.

That's an interesting definition of inflation and one I have not seen before. I've been working under the assumption that too many goods creates a deflationary environment.

We can only hope that there are too many dollars chasing too many goods though. If there are too few dollars in the hands of consumers then who will be buying the abundance of inflation t-shirts? Keep in mind that they are 35% off if you buy 251+ of them.

Deflation T-Shirt: Yield To Deflation

No matter what economic situation you are in, always yield to deflation!

Why does the inflation t-shirt have three 5-star ratings and yet the deflation t-shirt has none? That deflation t-shirt sure doesn't seem to be very popular.

Perhaps the commentary should have said...

The United States has been creating credit like Japan, and the inevitable result of too little credit chasing too many goods is deflation.

All these t-shirts remind me just how well China must be doing these days. They are an unstoppable force. I should probably try to get as much of my nest egg into that country as I can before it is too late to profit off of it.

Two thirds of China's cotton-spinning enterprises unprofitable

The rapid development of China's cotton-spinning industry in the previous decade resulted in fast-expanding capacity, said Xu. After the breakout of the global financial crisis, overseas demand contracted significantly and competition in the domestic market became fierce.

Gross, Roubini Weigh Dueling Chinese Bubbles: William Pesek

China’s plan was to tide the economy over until U.S. consumers begin spending again. Yet a stark reality awaits central planners in Beijing: the global demand its all-important export markets need to thrive won’t turn up as planned.

Disclaimer: All commentary should be taken with a deflationary grain of salt. This is a sarcasm report after all.

Bizarro Economics!

Looking into China's future

Krugman complains that Beijing's weak-currency policy, by displacing the output of foreign producers with its own low-wage goods, is arguably the prime culprit in holding back a robust recovery in global economies.

"In normal times," he writes, "I'd be among the first to reject claims that China is stealing other people's jobs, but right now it's the simple truth."

The theory is ridiculous in normal times and a simple truth in abnormal times? Bizarro Economics!

Here's what Krugman said when Bush was in office.

Well, basically we have a world-class budget deficit not just as in absolute terms of course - it's the biggest budget deficit in the history of the world - but it's a budget deficit that as a share of GDP is right up there.

It's comparable to the worst we've ever seen in this country.

It's biggest than Argentina in 2001.

Here's what Krugman said when Obama was in office.

As I said, deficits saved the world.

The previous deficits were the worst we'd ever seen but these new deficits that are much larger actually saved the world. Bizarro Economics!

3 Oil Pricing Models (Sarcasm)

Illusion of Occam's Razor Oil Pricing Model

1. Today's stronger employment report led to a stronger dollar.
2. The stronger dollar pushes the price of oil down.
3. Stronger employment will also cause more people to burn more oil.
4. More people burning more oil pushes the price of oil up.
5. The price of oil is therefore pushed down and up.

This model is also known as the Main Stream Media Oil Pricing Model. It's not a true Occam's Razor model though. Fewer assumptions would not allow financial TV's airtime to be filled.

Occam's Razor

Occam's razor states that the explanation of any phenomenon should make as few assumptions as possible, eliminating those that make no difference in the observable predictions of the explanatory hypothesis or theory.

Iterated Prisoner's Dilemma Oil Pricing Model

1. Oil hits $40. Play game. Buy.
2. Oil hits $140. Defect before others do. Sell.
3. Oil hits $40. Play game again. Buy.
4. Oil hits $80. Defect earlier this time. Sell.
5. Oil hits ___? Play game again. Buy.
6. Oil hits ___? Defect even earlier this time. Sell.

Prisoner's Dilemma

Since in any situation playing defect is more beneficial than cooperating, all rational players will play defect, all things being equal.

In the iterated prisoner's dilemma, the game is played repeatedly. Thus each player has an opportunity to punish the other player for previous non-cooperative play.

Murphy's Law Oil Pricing Model

1. If you are not invested, the price of oil can always go up another dollar.
2. If you are invested, the price of oil can always go down another dollar.

Murphy's Law

It is used as either a purely sarcastic musing that things always go wrong...

Natural Gas vs. Unleaded Gasoline

As a believer in Return-To-The-Mean theories, I offer my summary of the chart above. Either gasoline is roughly twice as expensive as it should be, natural gas is roughly twice as cheap as it should be, or there is a combination of both.

My gut says that gasoline is way too expensive. I think speculators have once again driven up the price of oil to unsustainable levels under the assumption that it is a riskless trade. The only other conclusion is to think that natural gas is a table pounding screaming bargain right now. While it is possible, I am skeptical.

U.S. Stockpiles Are Rising, Sending Natural Gas Falling

"The bottom line is that you are at the end of November, and you are still putting gas in the ground," said Stephen Schork, editor of the energy advisory newsletter the Schork Report, adding it would take an "ice age" to send prices significantly higher.

I think this has huge implications for those convinced that heavy inflation is a sure thing in the coming months. Based on the price of oil, gold, and TIPS yields, there seems to be an ample supply of potentially very disappointed investors.

Several weeks ago, I even put my money where my mouth is. I sold TIP.

Source Data:
EIA: U.S. Natural Gas Wellhead Price
EIA: Motor Gasoline Retail Prices, U.S. City Average

Want to Create Jobs?

Want to create jobs? Try capitalism

Capitalism is the real, and only, solution to job creation.

Here are some examples of what capitalism can do to create jobs.

Welcome to Robotic Turnkey Solutions

Robotics can handle 'almost' anything a human worker can do, only they are more efficient and more precise, plus robotics don't require costly health insurance premiums or other taxes and fees. Robotics are energy efficient.

The Future Of Outsourcing

Workers' fears have some grounding in fact. The prime motive of most corporate bean counters jumping on the offshoring bandwagon has been to take advantage of such "labor arbitrage" -- the huge wage gap between industrialized and developing nations. And without doubt, big layoffs often accompany big outsourcing deals.



Yeah, let's try more of that capitalism thing. It's working great so far. We just need to give it more time. There's 6.7 billion people on this planet and many of them want jobs. Capitalism's solution? More robots!



Capital is dead labor, which, vampire-like, lives only by sucking living labor, and lives the more, the more labor it sucks. - Karl Marx

Shocking Retail News

U.S. retail sales miss view on weak holiday start

"It looks as if the litany of Black Friday and Cyber Monday surveys did not exactly paint a clear picture of the start to the holiday selling season," Sozzi said of early hopes for a strong Thanksgiving weekend.

Shocking! Shocking I tell you!

Pop Quiz: What Is Wrong With This Picture?

Here's an article from 1997.

Nearly 90 Percent of Americans Will Achieve Homeownership (pdf)

Additional research in progress at Freddie Mac is looking at the next round of questions prompted by realistic expectations for high lifetime rates of homeownership, including: Who does not become a homeowner? Why not? Should they? and What are the benefits of encouraging homeownership at earlier points in the life cycle?.

Here's an article from 2009.

FDIC: 1 in 4 US households lacks access to banks

In what could be a dream for banks, about 9 million American households, or 7.7%, have no checking or savings accounts.

A survey by the Federal Deposit Insurance Corp. this morning also shows that an additional 21 million, or 17.9%, of U.S. households are underbanked -- meaning they have checking accounts but use problematic alternative services such as payday loans or overdraft programs that carry high fees or huge interest rates.

So what exactly is wrong with this picture?

1. 15 points awarded for spotting "realistic expectations".
2. 15 points awarded for spotting "benefits of encouraging homeownership".
3. 15 points awarded for spotting "a dream for banks".
4. 15 points awarded for spotting "high fees".
5. 15 points awarded for spotting "huge interest rates".
6. 15 points awarded for spotting "payday loans".
7. 10 points awarded for offering a formula that includes "90%" and "1 in 4".
8. 5 bonus points awarded if you can get the formula to actually make sense.
9. 5 bonus points awarded for thinking outside the box.
10. 5 bonus points awarded for thinking outside the box again.

The Fed's Preemptive Pre-Panic

Fed's Plosser says policy must be preemptive

ROCHESTER, New York (Reuters) - The U.S. Federal Reserve must be prepared to raise interest rates if needed before the jobless rate has fallen to an "acceptable level", or risk losing its inflation-fighting credibility, a senior Fed official said on Tuesday.

I guess someone at the Fed just figured out the unintended consequences of telling us that interest rates would be kept near zero for many years. Time is beginning to accelerate it seems.

The real interest rate on the 5-Year TIPS is now just 0.10%. Those betting on its never ending decline are now just 0.1% away from the floor. The ceiling is who knows where though.

"Looking ahead, I see an economy that will be growing over the next two years, which means real interest rates will be rising," he told an economic seminar in Rochester, New York.

That's one optimistic reason real interest rates could rise. Here are some pessimistic reasons that might work as well.

1. Another deflationary downturn appears (perhaps a butterfly flaps its wings in some emerging economy).

2. Investors start believing in the never ending falling dollar story and decide to ditch all US Dollar denominated assets in response.

3. Investors start thinking that the US might not be able to afford paying its debt long-term and therefore start requiring a premium to cover the risk.

4. The US Government simply issues too much debt and demand for it can no longer keep up.

5. The euro crashes and a great unwind begins. Very few even entertain the thought. The euro only goes up. Right?

Nutcracker Sales Plunge as Euro’s Climb Hurts German Exports

She said Stollen fruitcake that sold for $20 dollars a decade ago was now selling for $40. “It’s the exchange rate and shipping costs that are causing the problem.”

People will actually pay $40 for a fruitcake? Who knew!

Weak Dollar Has European Shoppers Flocking To Americans, for Deals on European Products

Grossman comments: “It's almost like a cartoon you’d read in 'The New Yorker', we're selling Rolex Watches back to The Swiss, sending Hublot Watches to Italy, and any IWC piece ordered, you can bet is on it's way back to Germany”.

That is just beyond messed up!

Our Next Panic Attack in the Making (Musical Tribute)

Commodities Back on the March

"Considering the magnitude of the reaction in the markets, it is clear how quickly the bulls are ready to sprint for the exits at the least sign of trouble and [it] makes one wonder about the durability and conviction of the recovery cycle in asset prices," said John Hardy, foreign exchange strategist at Saxo Bank.

Should you sell stocks and prepare for another market crash?

Question: I'm very worried that we may see another stock market correction. Since the market low of early March, my 401(k)'s value has risen 77%, which seems like an awfully large jump. So last week I moved the majority of my investments into bond and money-market funds, although I did leave 50% of my international holdings intact. Do you think I jumped too soon? --Rick G., Corona, Calif.

Answer: I don't think the question is whether you jumped too soon, but whether you should be jumping at all.

You know what they say. If one must panic, at least panic first.

Copper Kettle Mania?

The copper price has been nearly fully re-inflated to pre-bubble popping levels. See here.

Copper kettle mania in China leads to massive jump in prices

As one commodities banker told me: "The Chinese traders assure me that demand for copper kettles from households has increased massively. They can't buy copper derivatives, but they can buy those."

...

This is not the Chinese government cleverly diversifying its way out of the dollar, as some retail commodities salesmen and advisers would have it. The Chinese state has declared purchases of just 235,000 tonnes this year, and has made it clear that it is unhappy with the rise in the copper price, and with private Chinese speculation.

Hell hath no fury like a Communist Central Bank's currency scorned?

What they plan to do about it, what they can do about it, and/or when they plan to do something about it are certainly topics open for discussion.

Perhaps the small Chinese investors have a savvy exit strategy all planned out. Then again, maybe they don't. Who knows?

The Quantity Theory of Aluminum

Quantity theory of money

In monetary economics, the quantity theory of money is the theory that money supply has a direct, positive relationship with the price level.



That is one scary inflationary chart.

In aluminum economics, the quantity theory of aluminum is the theory that aluminum supply has a direct, negative relationship with the price level.



That is one scary deflationary chart.

Nothing is ever easy, is it? Inflation? Deflation? We should all be thankful that the debate can continue.

In my last post I showed why I believe aluminum appears to be very cheap relative to silver. That does not necessarily mean aluminum is cheap relative to dollars though. In fact, I think there's at least a decent chance that there is more deflation to come.

November 23, 2009
Aluminium bubbles away as surplus grows

Warehouses holding enough aluminium to build 69,000 Boeing 747 jumbo jets are why Peter Sorrentino says the most abundant metallic element in the earth’s crust is too expensive.

“I don’t see why the aluminium price has gotten so high,” said Sorrentino, a fund manager at Huntington Asset Advisors in Cincinnati. “There’s plenty of supply around and demand is still quiet. There’s a disconnect between the price and reality.”

Silver to Aluminum Price Ratio

This chart shows the price of silver divided by the price of aluminum going back to the year 1900. I've also included today's data point. Silver is currently trading at $18.25 per troy ounce. Aluminum is currently trading at $0.8887 per pound. There are 14.5833333 troy ounces in a pound. The ratio is therefore currently 299.50 to 1.

Why the chart?

I chose aluminum because...

1. It represents overcapacity of hard assets (deflation).
2. It is plentiful. Aluminum is the most abundant mineral in the earth's crust.
3. It is hard for speculators to influence its price. There's nearly an unlimited supply of aluminum available to be hoarded.

I chose silver because...

1. It represents overcapacity of printed money (inflation).
2. It is rare. Silver is one of the rarest minerals in the earth's crust.
3. It is easy for speculators to influence its price. There's a very limited supply of silver available to be hoarded.

I've mentioned in the past that if I was running my portfolio like a hedge fund then I would buy toilet paper and aluminum foil and sell precious metals. The chart is my attempt to show why I feel this way. Can the parabolic ratio continue higher? Of course it can. Might it someday revert to the mean though? Of course it could. Either aluminum could get more expensive, silver could get cheaper, or both.

I guess you could say that I am just not a believer in the theory that silver is good at any price, any more than I was a believer in the theory that real estate was good at any price. I could be wrong to think this way. Time will tell.

Disclosure: I own a LOT of toilet paper, aluminum foil, canned goods, and so on. As you can see, I am not exactly bullish on our long-term economy. Other than several silver coins held for sentimental value, I currently have no position in precious metals though. Right or wrong, I took profits at much lower prices.

Source Data:
USGS: Historical Mineral Prices
Kitco: Spot Silver Price
Kitco: Spot Aluminum Price

Nothing Can Hold a Roman Candle to Stocks (Musical Tribute)

Nothing Can Hold a Candle to Stocks

Despite suffering a decline in the stock market in 2008, my faith in owning shares of businesses is unshakable. Nothing comes close in performance over the long term, with stocks outperforming every other asset class by a factor of two or more. And after a decade of underperformance relative to other assets, stocks are the asset to own for the coming decade.



Sing along! You know the words!

A Huge Trap Is Being Set By A Vigorous Super Bear

Over the last few months the relationship between the U.S. stock market and the U.S. dollar has been totally inverse. The lower the dollar the higher the stock market. Thus, the bear has been luring inexperienced analysts and investors deeper and deeper into his trap. His mission is to get as many investors as possible fully invested and than he will spring the trap door which will make it very difficult for investors to liquidate their holdings.

...

The break in the Euro will cause convulsions in the U.S. and Asian stock markets because China’s currency is pegged to the Dollar.

EU business: strong euro could hurt economy

A stronger euro makes European goods more expensive for dollar-based importers in the U.S. and in Asia. EU nations such as Germany depend largely on exports to drive economic growth.

Happy Thanksgiving to My Super Friends!

5 Year TIPS Yield Drops to 0.16%

Bloomberg: Government Bonds

0.00% is the absolute floor. There's just 0.16% left to go.

The maximum possible upside reward is now just 0.80% (0.16% x 5 years).

In my opinion, that's one of the wimpiest maximum possible upside rewards (adjusted for inflation) in the history of investing, especially considering that the maximum possible downside loss is much, much higher.

It will be interesting to see what happens if indeed the rate does hit 0.00% again. I find it hard to believe it will just permanently hover there. It didn't last time. Take a look back in time to 2007-2008.



I would also point out that a 0.00% floor is a momentum trade killer. You can see it in the chart above. It's just like hitting a brick wall. I can't think of a single other investment where momentum trading can be killed off that easily. Can you? That's no coincidence that it bounced at 0.00% in my opinion.

That said, I'm certainly taking some risk being out of TIP. It's up nearly 1% since I took profits last week. Investors continue to flood in. On the other hand, my gut says I should probably be selling the TIP in my IRA too at this point. I'm certainly thinking about it.

It isn't just deflation that can hurt TIP. It could be that there's more supply of US Debt than demand at some point. It could be a hint that the government may default on its Debt at some point. It could be that the stock market euphoria continues to the point that everyone wants stocks again. There are lots of reasons real yields could rise again, and any one of them would be bad for TIP.

Just opinions. Please don't think of this as investment advice. It isn't.