Roubini sees heavy deflationary forces through '12At a conference, Roubini said that although easy monetary policies have fueled another asset bubble, the deflationary forces coming from industrial overcapacity, falling labor costs and a still damaged financial system will prevail over the next two years.I have listened to the arguments of commodity bull Jim Rogers and the counterarguments of Nouriel Roubini. I find Roubini's arguments much more compelling. That's especially true after looking at long-term cement prices in my last post.
I did not believe in the global decoupling theories heading into the last commodity bust and I do not believe in them now. (As you may recall, I heckled Chinese investors heading into their Olympics.)
As such, I am changing my short-term inflation mood in the upper left hand corner of my blog to show my deflationary bias. 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.
It eventually all comes down to supply and demand. We built a supply side based on never ending debt-based demand. Now we're watching it all fall apart.
As a side note, my girlfriend just bought a gallon of milk for 99 cents. How is that even possible?Milk Prices Start to RiseDairy officials say this slight uptick in prices is not a long-term fix and they're still pushing for a change in the federal milk pricing system.
You would think that an unsustainable global construction boom would have pushed cement prices near the top of their historical trading range heading into the bust. What could be more obvious? That was not the case though. Yet another "sure thing" investment crashed and burned. Go figure. I suspected there was serious overcapacity but I certainly didn't think there was THAT much. Wow.October 22, 2009COLUMN-China's looming output glut: Christopher Swann Today's GDP figures provided further evidence that in its efforts to avoid a slowdown, China has been stoking over-capacity.
Even before the release, officials estimated that the peak output of steel was about 40 percent greater than expected demand. Purchases of cement, meanwhile, may absorb only two thirds of the industry's potential production.
Despite this looming glut, China's state banks continued until recently to shovel record funds into heavy industry -- more than $1 trillion in the first six months of the year. The consequences of this investment binge will last well into next year.This blog has taken a more deflationary stance and continues to do so. Commodity investors beware, and that includes fiat commodity currencies as well, unless you think gold can rocket higher even if global prices fall. Again!On an inflation adjusted basis, both cement and gold did very well during the 1970s. They were both horrible investments during the 1980s and early 1990s though. I don't think it is just a coincidence that they moved together. Both gold and cement are commodities. If one buys gold, it is with the understanding that it may someday be used to buy cement. That's the math behind the psychology. Right? Of course...Maybe it is different this time.That's pretty much the scariest sentence in all of investing though. Rarely does it work out in the average investor's favor.Gold investors of today are going to ban me at some point if I keep this up. It's just that I have a healthy skepticism of ANY investment once it reaches "sure thing" status. I was heckling dotcom stocks in 2000 when few were. I was heckling real estate in 2004 when few were. Although I owned gold from 2004 to 2006, I now find myself heckling it too.
This article started with a curiosity over historical cement prices. I was not actively seeking to warn about gold again. I ended up there though. Go figure.
I should also point out that I am aware of the risks. I very well could be wrong. I'm staking my blog's reputation on a gold price bubble theory at a time when most would consider that insane. So be it.
It all comes down to this. I honestly believe that toilet paper is the much better store of value if one must hoard these days and I'm sticking to it. Toilet paper has yet to go up in price much and yet it surely will if inflation takes off. Is it easy to hoard? No. Does it require a lot of work to transport it home? Yes. Is it easy to rationalize not hoarding it? Yes. It takes a lot of work to buy physical toilet paper at reasonable prices. I do not deny it. However, the market does not care about the work involved. It's either a bargain or it isn't. Relative to gold, I believe with 100% conviction that it is a serious bargain.
In sharp contrast, well over a billion dollars worth of gold is now traded daily just through the physical gold (GLD) ETF alone. All it takes is a button click to participate. I wonder how much thought goes into the idea that gold is 1/4th of the bargain it was when it was four times as cheap though. At what point will most participants actually question its price? $2000? $5000? Or is it a great store of value at any price? Just how much cement do gold investors imagine they will be buying with it in the distant future?
One last note. There's a lot of talk of India's government buying gold these days. From an emotional standpoint, this would seem to be a gold bug's dream come true. However, let's look back through history and see what it has to say. When was the best time to actually buy gold?Goldfinger Brown’s £2 billion blunder in the bullion marketGordon Brown had decided to sell off more than half of the country’s centuries-old gold reserves and the chancellor was intending to announce his plan later that day.
It was May 1999 and the gold price had stagnated for much of the decade. The traders present — including senior executives from at least two big investment banks — warned that Brown, who was not at the meeting, could barely have chosen a worse moment.The best time to be buying gold was when a major government was actually selling it. That's the conclusion of history. Only then could you know for sure that you were buying it cheap.
And lastly, I'm really starting to see how Japan fell into a deflationary spiral and has yet to emerge. Nobody really believes that deflation can be sustained when there are government monetary printing presses that can print money at essentially no cost. Maybe they should. If cement can't even keep up with inflation during one of the biggest construction booms in the history of this planet, what does that tell you about the ongoing bust? It tells me that the deflationary forces are extremely powerful and should not be underestimated.
Just opinions!Source Data:BLS: Historical CPIUSGS: Historical Statistics for Mineral and Material Commodities in the United States
The following two documents are a MUST read for those considering the purchase of TIPS.Minutes of the Meeting of the Treasury Borrowing Advisory Committee (pdf)
Click to enlarge.First, I want to sum up the ex-ante vs. ex-post thing. When looking ahead, inflation expectations imply that TIPS save the government money. That's the ex-ante part. However, when looking backward, inflation ran hotter than expected. That's the ex-post part. As an investor in TIPS, this condition serves me VERY well. In other words, the government did not expect me to make as much money off of TIPS as I have. I don't see this changing much as I look into the future.Second, I want to point out the stagflation sentence. I don't want anyone to miss it.The member noted that the "pro-cyclical benefits" argument for issuing TIPS also breaks down in stagflation environments.Should stagflation appear, the good deal that TIPS have been becomes even better relative to the debt the government could have offered me. The government gets a VERY rotten deal on inflating away the debt away if I'm sitting in inflation protected treasuries. Let's just put it that way.GAO: Treasury Inflation Protected Securities Should Play a Heightened Role in Addressing Debt Management ChallengesEconomists conducting ex-post analyses have concluded that the TIPS program has been less cost-effective for Treasury than nominal securities.In contrast, other economists who have studied the issue argue that from an ex-ante (before the fact) basis, TIPS are not more costly to issue than nominal securities and that the relative cost of the TIPS program to date in part reflects start-up costs that will not be incurred again.Gotta love those "other economists" who love using predictions of future inflation instead of tried and tested actual inflation. What do you suppose the thinking is? Well, no need to wonder. They'll tell you.The time horizon of the analysis affects the results since, over the long run, the average amount by which actual inflation exceeds expected inflation will roughly equal the average amount when the opposite is true.Tell that to Zimbabwe, the Weimar Republic of Germany, or the Roman Empire. Surely there must be something in the document to support my wild accusations of future financial instability. Let's see. Maybe a chart would do it.
I should die of old age right on schedule. Those expecting immediate short-term financial apocalypse will no doubt be sorely disappointed. This can drag on for decades. Rome did not fall in a day.
My burden will not be placed on my grandchildren though. Like many forward-looking Japanese peering into the never ending pile of government debt, I have chosen not to have any children. Should other people become as financially defensive as I am, then demographics will be a future source of financial instability.Are Western Governments Going Broke?The underlying problem which deficit spending does not solve is compounded by demographics. Japan’s government is hoping that continued borrowing can be financed at low rates by pensioners who will be cashing out of their pensions but seeking safety. However, we suspect that Japanese pensioners will begin to consume their savings as they downsize their lives into their twilight years (which tend to last much longer in Japan, as the number of Japanese centenarians shows).
That means interest on Japanese bonds-which already one fifth of the Japanese budget-will consume even more of the nation’s resources, if the older population clams up with its money. And like in the U.S., you’ll see the government borrowing more and more of every new yen spent, with more of that borrowed yen going to pay a previous creditor. That’s bordering on Ponzidom.So why would I pick stagflation over Japan's deflation long-term? Japan exports physical goods to us. We export paper dollars to them. We will always want Japanese goods in exchange for our freshly printed dollars. I think that pretty much goes without saying. However, what would happen if Japan started losing their interest in our paper dollars? Then what?
Gold's Last Hurrah?Gold is going to suffer a serious correction in dollar terms. Greater than the one that occurred last fall, as this positive sentiment must be wound out. Dare I call these new highs in gold "malinvestment" as I would real estate? I certainly will, though even I cringe as I type the word. Malinvestment has to do with expectation and intent - those buying gold now have the same expectations of gold they did of real estate in 2006, that it will continue to go up.
...
The US dollar is possibly the most hated piece of paper in investor terms on earth today (leaving aside notable exceptions such as Zimbabwe's dollar et al hyperinflationist currencies). Gold is the most loved metal. That is why we fly the contrarian flag today. The deflationist flag.Clearly this guy doesn't like gold. Right? Au contraire!But we will be watching our dear metals. I am no gold-bull, but a gold-bug. And when gold really IS the best store of value you can bet the farm that I will be a buyer. Today, though, it is not - too many speculators have sucked the value out of it. Once they are gone my bull-flag will be back up, and up long-term.I'm a long-term stagflationist but there are just WAY too many people on the precious metal band wagon these days. I've said this time and time again. The price of toilet paper is NOT confirming the price of gold's exponential move higher, any more than the price of toilet paper confirmed the price of real estate's exponential move higher.That said, the higher the price of gold goes, the more I want to own toilet paper. Why is toilet paper so much safer? It has not quadrupled in price in the last decade. There is no long line of speculators betting on its never ending rise. There is no ETF allowing heavily leveraged bets on its future price. If there's one thing that this new economy should have taught all investors, it is that heavily leveraged bets are things that must be avoided in order to protect one's nest egg. That is especially true once an investment reaches the "sure thing" level.Deep down, gold bugs know this is true. True gold bugs simply want to own the metal itself and tuck it away for the future. They don't borrow money to buy it. They don't try to leverage up their bets to eek out exponentially higher returns. I very much admire that long-term thinking and this makes what I write especially difficult. In fact, if I thought the market consisted only of gold bugs, I'd still own it even at these prices. Seriously.
Toilet paper bugs and gold bugs are two peas in a pod. There is one key difference though. The only people investing in physical toilet paper are toilet paper bugs. I'm one and financially speaking, I'm very lonely in the investment. The lonelier I am, the safer I feel. My best investments were always made in isolation. That's how it has always been for me. I can still remember what it was like buying gold for the first time in 2004. I was not at all confident that I was doing the right thing. It was a very lonely feeling. The place I bought it from actually tried to talk me out of it. Gold was at the upper end of the trading channel and most felt it was due for a correction. I bought anyway. I believed in the long-term story.
Gold bugs these days are not lonely though. They are sharing their investment with waves of momentum traders. I have absolutely no desire to join them at these prices.
And lastly, from what I see there seems to be three main types of commercials on late night TV these days. This should be a wake-up call.
1. Natural Male Enhancement
2. Debt Consolidation
3. Gold
No-money-down real estate is still coming in at #4, for what that is worth.
With oil rising like it has it certainly isn't hard to imagine oil investors making out like bandits. Take the investors who bet on the price of oil directly, thereby cutting out the risk of owning individual oil companies. Let's see how they have done so far.United States Oil FundFund Inception Date: 10-Apr-06The investment seeks to reflect the performance, less expenses, of the spot price of West Texas Intermediate (WTI) light, sweet crude oil.WTI Spot Price on April 12, 2006: 68.53 WTI Spot Price on November 3, 2009: 79.58That's a 16.1% gain.USO Price on April 12, 2006: 67.84USO Price on November 3, 2009: 40.62That's a 40.1% loss.So what went wrong?The fund will invest in futures contracts...And why is that not a good thing?Zero-Sum GameOptions and future contracts are examples of zero-sum games (excluding costs). For every person who gains on a contract, there is a counter-party who loses. Gambling is also an example of a zero-sum game.Zero-sum games are not known for their ability to keep up with inflation long-term. Unlike investing in general, for each winner in derivatives there MUST also be a loser. There is no rising inflationary tide that can lift all boats.
That said, USO investors managed to go that extra mile. They actually managed to lose a lot of money betting on the rising tide of oil and being right. Apparently the "losers" on the other side of the trade wanted to be paid a hefty premium to take the losing bet.
Similarly, betting on the favorite ("sure thing") at the horse track each and every day of your life isn't going to improve your odds of keeping up with inflation either. Go figure.
Is it any wonder why I hoard toilet paper? It's not a zero-sum game, I'll tell you that much. In theory, all toilet paper prices can rise together. We can all be winners if and when inflation really does pick up. Hurray!
Sigh.Source Data:Cushing, OK WTI Spot Price FOB (Dollars per Barrel)USO Historical Prices
WisdomTree Registers New Inflation-Linked ETFWisdomTree Trust has registered with the SEC a new exchange-traded fund that seeks to give investors long-term returns above the rate of inflation.
To do so, the WisdomTree Real Return Fund (NYSEArca: RRF) will invest in inflation-linked securities such as U.S. Treasury Inflation Protected Securities (TIPS), bonds and commodities instruments.
RRF will be the newest member in an expanding group of ETFs that seeks to capitalize on investors' rising fears of inflation.For some strange reason, the contrarian in me is half tempted to start learning Japanese and take some profits in U.S. Treasury Inflation Protected Securities.
I wonder if it has something to do with WisdomTree launching their stock market ETFs shortly before the stock market imploded? And now they want to do the exact same thing with commodities? Call me skeptical of the wisdom.Stock Market ‘Bubble’ to End, Morgan Stanley Says (Update2)The commodity-producing nations will be the hardest hit when the current rally ends, Sharma said. The Latin American markets of Brazil and Chile are the most expensive, he said, and Morgan Stanley is also “underweight” on Taiwan, Malaysia, Israel and Russia. Commodity prices are rising even as economic fundamentals are deteriorating, he added, a sign that the rally may be fizzling.
“Commodities are at the centre of this echo bubble,” he said, adding that they are “in substantially overvalued territory, way above fundamentals.”
Inventories of oil, copper, aluminum have risen over the past few months even though demand hasn’t picked up, Sharma said, adding that the price of oil is inversely correlated to the U.S. dollar. Increasing buying of commodities as a hedge against the decline in the U.S. dollar has resulted in the commodity rally, he said.I am sympathetic to his deflationary arguments. Let's just put it that way.
I was at Costco this week and noticed that the price of garbage bags has gone up. It's almost like garbage bags are made of oil. Go figure.
Garbage bags were purchased at $9.99 + 8.9% sales tax = $10.88.Garbage bags now cost $10.79 + 9.5% sales tax = $11.82.ROI = ($11.82 - $10.88) / $10.88 = 8.6%I feel SO much richer now that Costco has raised its prices on garbage bags AND sales taxes have gone up. Win win! You can't see it in the picture but there are actually 12 boxes there. That's a capital gain of $11.28 that I will never have to pay taxes on.
Compared to the current 0.05% yield on 3-Month Treasury Bills, isn't hoarding wonderful?That said, it's been a while (at least 2 years if memory serves) since I've seen an increase in garbage bag prices. I do not consider it to be part of an alarming trend. Overall, the prices of the items in the picture are fairly stable. Let's reserve "alarming trend" for if and when I'm circling the whole picture each and every month. 10 Easy Ways to Reduce Your Petroleum Dependence7. Replace your plastic garbage bags with biodegradable cornstarch-based bags, like those made by BioBag Garden. They are available at Whole Foods, or you can order them online from stores like Gaiam.I seem to have found an 11th option. While it may not be the "green" way to do things, it is certainly the far cheaper way.11. Hoarding plastic garbage bags in bulk now will also reduce my petroleum dependence. I'll simply have less need to buy garbage bags in the future.
The government is walking a fine line these days. They want us to spend money but they don't want us using it to hoard goods. As seen in the picture above, their efforts have been pretty much a failure with me.
As I left Costco, I was told that I certainly made good use of the coupons. I laughed and said that I was preparing for the apocalypse. He said he understood. I turned a bit serious and said I was only half-joking. He said he wasn't joking at all. I followed up by saying that the economy was really struggling and he nodded in agreement.
I'm reminded that all of the people cannot be fooled all of the time.You can fool some of the people all the time, and those are the ones you want to concentrate on. - George W. BushSpeaking of which...Dividend StrippingGuys-I have been stripping two dividends a month using PHB-HYG-JNK for about a year now. It has worked for about 10 months with the X-dates set right for this method of income. I have done this for years with utilities common but the ETF's with the large dividend has been working better. Please be careful and have patience, and set some limits too remember a 40 cent divi can not off-set a 90 cent cap loss. Just hold for the next dividend and don't worry about only one dividend in 30 days. Even successful 4 months a year with JNK and PHB will increase your return to about 20%.Re: Dividend StrippingNow that is an interesting concept. I do just the opposite.
I trade between PHK, and JNK for the capital gain, and seldom get a dividend in either one, unless trapped into it.
I buy after the dividend, and sell just before the dividend.
to get the cap gain. for instance, I sold my PHK just before divvy of .12 this month at 10.49, and the rebought it at $10.20 for a net gain of .29. Of course I lost the $.12 divvy so netted out at $.17 on each share after subtracting the divvy, and commission of $13.00 each way. Since I do this in my ROTH, no taxes no bookeeping. Two methods of working the divvy date, as long as both work that is great.If that isn't proof that bull markets make geniuses out of everyone, I don't know what is. One guy day trades for the dividends and avoids capital gains like the plague. The other guy day trades for the capital gains and avoids dividends like the plague. It will be curious to see how their two "gambling" systems work if and when junk funds start going back down again. The first guy plans to ride it on down ("just hold for the next dividend") and the second guy will be paying "$13 each way" to concentrate on pure capital losses.
Neither seem to grasp the concept that passive buy and hold investors were up 31% YTD on JNK (and will also lose big if the junk funds head back on down of course).
Meanwhile, here I sit quite comfortably in... garbage bags, lol.
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