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....
Theft of metals — copper and aluminum as an example — have been growing in recent years as gutters are stolen off homes and catalytic converters are stolen from parked cars.
My girlfriend just got an email from her college's security. There's been a rise in the number of catalytic converters stolen from pickups, SUVs, and passenger cars within the college's parking lots.
Apparently it is rather easy to steal a catalytic converter from a vehicle as the thief can often bypass the alarm system. It only takes a minute or two with the proper tools. Catalytic converters contain platinum, palladium, and rhodium. Not much, but enough to make a used catalytic converter worth $100 or so.
You don't even want to know what it costs to have one replaced though. Let's just say it isn't cheap. You'll know you've lost yours when you start your vehicle.
The value of used cats has increased to the point where people are actually stealing them. A guy I know drives a Jeep Wrangler. He came out of a shopping center one day and the thing was loud as hell when he cranked it up. A check under it revealed that someone had hacked off the converter.
I understand it's also pretty common for them to steal them off of older Toyota trucks because they're really easy to get to (right under the driver's floorboard) without jacking up the truck. - justanotherusername
This is also confirmed by the email my girlfriend just received. If you own a Toyota pickup or SUV, be careful where you park. It was mentioned by name.
“Once again, take a whiff of the stagflation sandwich that is the September Chicago PMI. The headline index fell to 46.1 from 50 in the prior month, indicating that the Chicago manufacturing sector is once again in contraction after its brief breath of fresh air in August. Meanwhile, the prices paid indicator rose to 51.3 from 50.
“Let’s see… economic stagnation + inflation thanks to the Fed’s money printing… hmmm… what’s that called?
“I don’t know how many stagflationary data points like this we need to get before the market “gets it,” but when they finally do, gold is going to explode.”
Gold has exploded. It's four times more expensive than it was just a decade ago. If stagflation does appear in a major way, here are a few alternative suggestions.
Scan down to "Table 2. Producer price indexes and percent changes for selected commodity groupings by stage of processing" and check out the finished goods section. On average, they are down 4.3% since this time last year.
There are a few exceptions to the rule though.
Sanitary paper products: Up 3.7% Soaps and synthetic detergents: Up 6.0%
I'm a toilet paper hoarder. Dishwashing detergent and laundry detergent are also things I have stocked up on. I'm very thankful I stocked up on dishwashing detergent by the way. Costco apparently no longer sells the 20 pound tubs of powder any longer. It no doubt has something to do with Washington State's recent ban on phosphates (by 2010).
Both bank credit and the M3 money supply in the United States have been contracting at rates comparable to the onset of the Great Depression since early summer, raising fears of a double-dip recession in 2010 and a slide into debt-deflation.
That's a whiff of the deflation sandwich but as seen in the comment section...
I'm moving dollars into commodities. A years supply of Toilet paper, soap, food, motor oil. Buying guns, bullets, gold, silver, planting a garden....hey, they laughed at Noah too...... - Fil R
It isn't so much what he's planning to hoard, but his priorities. Note that toilet paper was mentioned first. Just a year's supply though? He's taking Noah too literally. Once it starts raining this time it may never stop. Sigh.
Recent media reports of a 103% price rise in toilet tissue are incorrect and are based on a misreading of Australian Bureau of Statistics (ABS) data by Family First researchers in Senator Steve Fielding’s office.
Kimberly Clark's correction is also based on a misreading of the data. You'd think they'd be extra careful knowing that there had already been one statistical mistake, but alas, that was apparently not the case.
In 2004, the ABS quoted on a 4 roll pack of toilet tissue, but in 2006 it used an 8 roll pack in its statistics.
Kimberly Clark didn't feel the need to point out that the 4 roll pack had 220 sheets per roll, but the 8 roll pack only had 190 sheets per roll. Surely they should have noticed. I did and I'm not even a toilet paper expert (although some might disagree, lol). The data clearly shows it. No digging deep required.
In reality, price per roll of toilet tissue has changed by 6%...
In reality, that is true. But in practice, the rolls are not the same size so it is actually a completely useless statistic. In fact, it is every bit as useless as the original claim by the media.
In December of 2004, "Toilet paper (4 x 220 sheet rolls)" cost an average of 305.375 cents in 2004. (I simply averaged the prices in the 8 cities provided.) That's 0.347 cents per sheet.
In December of 2006, "Toilet paper (8 x 190 sheet rolls)" cost an average of 649.25 cents in 2006. That's 0.427 cents per sheet.
That's a 23% increase per sheet in just 2 years. That's an average increase of 10.9% per year.
Kimberly Clark was rightfully concerned about the first statistical mistake. The number of rolls was not held constant. The outlandish inflation claim by the media made Kimberly Clark look worse than they really were.
Kimberly Clark had no problem whatsoever abusing that VERY SAME type of statistical mistake. The number of sheets was not held constant either. By not acknowledging it, Kimberly Clark made Kimberly Clark look better than they really were.
There's a word for this behavior. It's called hypocrisy.
Fortunately, governments do account for the quantity of an item when determining consumer price inflation. Unfortunately, the same cannot be said of the mass media and/or Kimberly Clark it seems. Two wrongs clearly don't always make a right.
As scary as this sounds (and believe me it is scary), I trust government more than I trust the mass media and/or global corporations. That's not really saying much though. Sigh.
And lastly, sorry Australia. Apparently you should have stocked up on toilet paper in 2004 when you had the chance.
“Replacing labor with software automation, or at least using software to reduce the need for new headcount, is one of the easiest ways to reduce overall I.T. costs. Where you have to have labor, getting it done in places where time is cheap is also a solid strategy.”
Humans have apparently become a disease that needs to be eradicated.
Beware, Italian Humans
Beware, Chinese Humans
Beware, Chinese Humans (Musical Tribute)
Beware, American Humans (Musical Tribute)
Beware, Japanese Humans (Musical Tribute)
No, really. Beware, Japanese humans. Big time. That's just creepy.
There are basically only three ways to remedy a current account deficit. One is to impose trade barriers in order to force a balance between exports and imports. This is what the IMF and US government have discouraged Mexico from doing. The IMF and US government are committed to "free trade" and are advising all countries to do likewise. In many cases this is not in the best interest of these less-developed countries because they will continue to need protection for their infant industries if they are to survive.
The second way to remedy a current account deficit is to allow a devaluation of the currency making it more costly for its citizens to buy foreign products and making its exports more competitive overseas. The third way is adopt economic policies designed to create recession, which undermines the public's ability to buy foreign-made goods. Unfortunately, if this is done when a country in already in recession, it simply creates a depression with widespread unemployment instead of simply less purchasing power.
In response, I said...
The second way is being tried now. Unfortunately, there are at least three problems. First, as our currency declines the price of oil rises. Paying more for oil makes the trade deficit worse. Second, we're addicted to oil. Our consumption of oil isn't falling nearly as fast as the value of the dollar is. Third, one of our major exports is food. Don't we kind of want to eat it ourselves or is that just me?
I'm seeing a major problem with the third way. Perhaps it is that "if this is done when a country is already in a recession" part? Or perhaps it is the "depression with widespread unemployment" part? Who knows?
Sept. 16 (Bloomberg) -- The U.S. current-account deficit narrowed in the second quarter to $98.8 billion, the least since 2001, reflecting a smaller shortfall in trade of goods as imports and exports both decreased.
This is good news. We only have $100 billion per quarter to go before things are in balance. We're half way there! Woohoo!
I'm confident that a mixture of all three ways to shrink the current account deficit will ultimately work in the end. We're making so much progress. The annual current account deficit used to be $800 billion a year.
Here's the plan.
We use the first way by placing tariffs on incoming Chinese tires. Check! We use the second way by making our currency as toxic as possible. Check! We use the third way to drive our unemployment up past 10%. Check!
We're using all three ways now! So what could possibly go wrong?
“We expect to see more stable demand going forward so we could see a mild widening of the current account next year,” said David Semmens, an economist at Standard Chartered Bank in New York.
Oh oh. Can't have that. Where is Greenspan's Age of Turbulence when we need it? Fortunately, I'd wager that it is just a matter of time.
Only after the last tree has been cut down. Only after the last river has been poisoned. Only after the last fish has been caught. Only then will you find that money cannot be eaten. - Cree Indian Prophecy
Today, governments and central banks are celebrating their victorious stabilizing of the global financial system. To achieve the same, they could have saved Lehman with US$ 50 billion. Instead, they have spent trillions of dollars -- probably more than US$ 10 trillion when we get the final tally -- to reach the same objective. Meanwhile, a broader goal to reform the financial system has seen absolutely no progress.
I can't argue with that.
Trading gains are a form of income redistribution. In the best scenario, smart traders buy assets ahead of others because they see a stronger economy ahead. Such redistribution comes from giving a bigger share of the future growth to those who are willing to take risk ahead of others. Past experience, however, demonstrates that most trading profits involve redistributions from many to a few in zero-sum bubbles. The trick is to get the credulous masses to join the bubble game at high prices. When the bubble bursts, even though asset prices may be the same as they were at the beginning, most people lose money to the few. What's occurring now is another bubble that is again redistributing income from the masses to the few.
I can't argue with that.
The big change that happened is a rapid increase in the U.S. household savings rate. It happened much more quickly than I expected and has the potential to change the global economy. The economic explanation is negative wealth effect. U.S. household net wealth declined 20 percent, or nearly 100 percent of GDP. The rule of the thumb is that it would lead to a 5 percent reduction in spending. The U.S. household savings rate has increased more than that -- and continues to rise. It could rise above 10 percent next year. Because of rising savings, the U.S. trade deficit has already halved from the peak. It could halve again next year. This is why I have turned positive on the dollar.
I can't argue with that. I'm in a semi-deflationary mood these days. A dollar turning positive would coexist quite nicely with my current theory thatDr. Copper Is Certifiably Insane.
Financial markets are still maximum bearish on the dollar. Liquidity is being channeled out of dollar into all other assets. This is why there is such a high correlation between the dollar and other assets. I think this is the most crowded trade in the world. When the dollar reverses, the short squeeze could cause a global crisis.
I can't argue with that.
Many investors today think a bubble is inevitable and, when it bursts, another can be created quickly to keep on going with life as usual. What has occurred over the past six months seems to validate this viewpoint. History, however, is not kind to this view. Serial bubble making leads to a bigger economic crisis later. What occurred in the United States in the 1930s and Japan over the past two decades are good examples in that regard. If a new bubble were always available for bailouts, we'd have the ultimate free lunch. But there is no free lunch.
I can't argue with that. The housing/debt bubble was MUCH bigger than the dotcom bubble and as such was MUCH more painful when it burst.
The environment for tolerating such a loose monetary environment ends when inflation surges in emerging economies first and developed economies second.
I can't argue with that. I have no idea how high the stock market can climb with me on the sidelines. I have no idea when inflation will become a problem again. I can say that oil and copper have outperformed the stock market since the bottom and I'm no more a believer in commodity driven stock markets now than I was in 2004. I can say this with 100% conviction.
Sept. 28 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke has some good news for investors: Treasury bondholders will lose money for the first time in 10 years...
Last month, investors put twice as much money into intermediate-term and junk-bond funds as into short-term bond portfolios. As a result, they have exposed themselves to much greater risk from rising rates or falling credit quality. When interest rates go up, as in 1994, investors in longer-term bonds can get slaughtered.
"People feel they have to choose between the frying pan of zero yields and the fire of risk," said Crane Data's president, Peter G. Crane. "And they're sick of the frying pan, so they're jumping into the fire."
"If the dollar continues to decline, (the Fed) would have to raise interest rates to combat rising inflation expectations. That would be bad for the markets first and later the economy," he says.
Third, we must not forget about the housing market investors.
How will rising interest rates affect housing prices?
That low interest rates have been the driving force behind real estate's unprecedented rise is not a point of debate among economists. Quite simply, lower rates mean buyers can afford higher home prices.
It stands to reason, then, that the opposite would be true. Yet, many economists have been arguing that higher rates won't hurt housing.
Unfortunately, it is very difficult to predict what the future holds for inflation. We cannot properly estimate global commodity demand and it is almost impossible to forecast an oil price spike that would be similar to last year's bubble.
It is very difficult to predict what the future holds for inflation and yet we're told not to worry about it? I am now beating my forehead against my desk. Why did I continue to read the article? I must be a glutton for punishment.
Everyone should worry about inflation. It's been the long-term trend for a century. You can worry about deflation too if you like. I am. Not worrying about either of them is a great way to lose one's nest egg.
Using fundamental economic modeling, the odds of high inflation over the near term are extremely unlikely.
Is this the same fundamental economic modeling that Bernanke was looking at when he said there was no housing bubble to go bust?
The odds of my house burning down are extremely unlikely in the near term too. I still have fire insurance though. Ever try buying insurance once the fire trucks are parked outside?
The most widely used theoretical model for examining inflation has been the Phillip's Curve. In most undergraduate macroeconomics courses, the Phillip's Curve is depicted as the relationship between unemployment and inflation.
An increase in unemployment causes inflation to decline.
Now you know why economics is considered the dismal science. Theories are often more important than facts. Here's the chart of the Phillips Curve from 1948 to present. I made it myself today. The blue dot represents where we are now.
What pattern do you see in the data? I see a cumulus cloud formation. Maybe I can be an economist too? The trend line isn't exactly backing the Phillips Curve theory either, is it? If anything, it suggests that higher unemployment and higher inflation in that very noisy data set go hand in hand. I guess there must be more to it than that.
What could possibly cause high unemployment and high inflation at the same time though? It makes no sense. It would mean that undergraduate macroeconomics courses are teaching the wrong things. Hey, maybe we can ask Zimbabwe. They successfully managed to get94% unemployment AND hyperinflation. They ought to be able to give us some advice.
If money is not demanded, goods are not purchased, and inflation cannot increase.
It can't? I guess that completely rules out any sort of currency crisis. You know, our "money is not demanded" by foreigners any longer. Thank goodness that can't happen. We wouldn't want to suddenly find ourselves trying to buy goods from them with something they no longer want. As a side topic, I wonder how much oil would cost if we could no longer purchase it?
The market does not expect inflation to become a problem.
Would this be the very same market that was completely and utterly blindsided by deflation recently (as seen in his very chart)? Or is this the market that the dotcom bubble and housing bubble sneaked up on? Or is this the other market that has pushed gold up to $1000 an ounce? You know what? Maybe I'll pass on what the market(s) thinks when it comes to long-term inflation expectations.
By the way, as a non-economist I am VERY skeptical of using TIPS to determine inflation expectations of the market. Those convinced that deflation is coming can and do buy Treasuries. Those convinced that inflation is coming aren't going to be buying TIPS though. They are going to be buying oil and other natural resources instead. I am actually in the middle ground. I worry about both deflation and inflation. Therefore, I do like TIPS.
If I am right to be skeptical about using TIPS to determine inflation expectations, then inflation should actually run hotter than the markets think. In other words, there will be less demand for TIPS than there should be. If I was an economist, I'd argue that less demand for something I buy is a good thing. It means I bought it cheaper.
I may lean towards deflationary thinking in the short-term, but I'm not at all done worrying about inflation long-term. Call me paranoid. I will conclude with one thing I do agree with the author on. It is very difficult to predict what the future holds for inflation.
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