Deflation Risk Dipping As Stagflation Risk Rises 43 comments
- Gregor Macdonald's articles on Seeking Alpha
- Visit: Gregor.us
- Gregor's Premium Newsletter
an article to
-
Font Size:
-
Print
- TweetThis
Raise your hand. Did you purchase the 30 Year US Treasury Bond at the 27-year high of $142.66, in December 2008? Because you’re not just making a single bet you can ride senior sovereign debt into the mouth of deflation. You’re making an additional bet that the private banking system can detonate and collapse while at the same time Washington can continue to service its debt, as tax revenues virtually disappear. Or perhaps you’re making a third bet, that the US is so exceptional future purchasers of US Treasuries will be happy to know that all new auctions will be monetized. Regardless of your thinking, I see US Treasuries as having too many ways to lose, and only a few ways to win.
In the January edition of my Gregor.us monthly newsletter Saving Hugh Hendry (download sample) (.pdf), I suggest Treasuries are at an historic turning point: To boot, the situation with sovereign debt has now finally exploded onto the front page, courtesy of the UK.
Although I go into further detail in the newsletter, it’s frankly very easy to explain what’s happened in the UK, and how it previews what’s nascent in the US. Essentially, the UK banking system is insolvent. Thus, the BOE and the Government have taken too many liabilities from that system on to their own balance sheet. Eventually, the market realized that the weight of these liabilities were significant in relation to the size of the UK economy, especially as it entered recession. Thus, global markets began to sell off the British pound further, and, despite a forecast of deflation sold off UK Gilts.
That’s how reflation starts. Oh, don’t misunderstand me. I’m not suggesting that a positive or helpful reflation is now due for the UK. On the contrary, what appear to be coming for the UK is a continued deflation in housing and credit markets and yet very likely a big slowdown in any fall in energy, food, or goods prices. This is exactly what’s in store for the United States. All of the conditions present in the UK, are equally present in the US. To those who falsely believe we are protected in the US because all our Treasury debt is USD denominated and we can simply print up USD I say this: please listen closely to what you, yourself, are saying.
Because there has indeed been such a rout in UK Gilts, and because US longer-dated Treasuries looked to have peaked in December, and because Gold and Silver are back on the march, I am raising my Stagflation forecast as a competitive risk probability now, to outright Deflation.
Photo: Keith Moon, London 1973
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
Try this ad:
albertsons.shoplocal.c...
There are cheaper deals to be had at the Mexican and Asian supermarkets, as Albertson's can be considered higher end.
We know available credit is tightening, but I am starting to see all the commercials about buying a house with 0 to little money down come back.
overall, there is still quite a bit of money available in the country, which means we are not at a depression deflation level yet. It will take employment to jump to high double digits before we start seeing chaotic deflation.
I also think there are certain factors that will play against a deflationary spiral to continue:
1-Deflation means giving power to the debtors as they collect on their debt and are able to purchase assets at high discounts.
2-The classifieds still list relatively high prices for luxury items. When I see people putting their plasmas on a firesale for 80% since they are not paying it back anyway and they need to buy food then I will accept the deflation scheme.
3-There is likely to be another wave of liquidation coming to a hedge fund near you which will seem like deflation till people rush with their monies to buy the next asset class(most likely at this point will be gold).
4-The politicians are going to force credit to be extended, and when they do everyone now knows what they have to do, take as much as you can and you might be even lucky enough to not have to pay it back.
with that said, I am waiting to see whether a next leg in liquidation drive gold back down to $700. I am a gold buyer on a break down to $600-700s or on a break out above $940 on closing basis
On Jan 26 08:13 PM SW Richmond wrote:
> Here's an issue I haven't seen discussed anywhere.
>
> We are all ignoring CDS. We are all ignoring the Fed's foreign "dollar
> swap line" that it funded with a few hundred $billion. We are all
> ignoring the fact that the Fed opened its windows to US branches
> of foreign banks.
>
> What happens when UK banks go belly up? What happens in CDS space?
SW Richmond,
You raise a very good point, and the short answer is "we don't know."
The longer answer is "we don't know, but we're going to find out, and we're not going to like it."
The issue you raise was responsible for tanking Aflac, an otherwise pristine and high quality insurer, over the last two days. An analyst noticed that Aflac had exotic securities (not exactly CDS, but of the same ilk) underwritten by Royal Bank of Scotland . . . and half of Aflac's market cap promptly disappeared.
Moral of the story: It will be hard to foresee all the places that the UK pain will show up, but when it does, it'll hurt. We do know that the UK banks were active in funding exotic strategies in the US
One of the best chats I've had on Alpha,thanks.
We ain't starving, we ain't poor, and it's half one in the morning here. I,ll visit in tomorrow to see how chat continues.
Got a few links to view from your replies.
I hang around the comment streams that cover gold, Europe, UK and the biggest farce of all, renewable energies, (don't start me on that last one)
The more interesting test will come in Q1 2010 when Helicopter Ben will have to decide whether to equip his chopper fleet with giant vacuums to inhale all of the excess dollars the Fed is creating.
30 Silver.
Comin Soon to a Theater near You.
Also, almost no one but banks, governments, and financial institutions are buying 30 year bonds. Lucky for them if inflation re-emerges they then get to go through more turmoil from treasury losses. The hits never end for these guys because there has never been a bubble banks didn't like to buy into. I guess they never lean or are so positive government will bail them out they ceased to care.
I guess you've never heard of peapod.com. How about Giant Food? Because that's who peapod delivers for around here. Chose it because they have a wide selection online, not just sale items. Pretty fair choice, don't you think? No? How about Safeway?
boneless chicken breast: $3.99/lb (your claim: $7.50)
King Oscar sardines: $3.59 (your claim ($4.50)
Scope: $5.29 (your claim $6.50)
Crest: $1.99 (on sale. your claim: $3)
So that's two. Did you consider that maybe, just maybe, prices are higher in New York City? Gee, what a surprise that would be. As for your link - seems to be much more about falling demand than rising prices.
As for your attitude, I'd apologize for pointing out how wrong you were, but I'm not sorry in the least. Grow some thicker skin or try making better arguments.
30 Silver.
Comin Soon to a Theater near You.
Second, at my local Aldi chicken breasts are going for about $2.20/lb, and the shelf is full. Even bananas are down to $.35/lb, whereas they were at $.62/lb at another store.
Perhaps Aldi is full of geniuses who know the supersecret to making money and will always be half the competition, but I'm guessing the competing stores are holding on to what little pricing power they have for dear life while hoping they don't continue to lose more customers to Wal-mart and other discounters. Either way, I'd guess most Americans are paying much less for food now.
The problem with deflation is that it tends to take capacity out of the system. People try to hold prices and wages the same (because price illusion keeps them from wanting those to drop)- and like any price control, supply dwindles. Then, when velocity picks up, any constraint that arises is a signal for healthy price hikes.
For simple goods, those price hikes can be met with new capacity pretty quickly. I doubt you'll see middle managers getting huge new salaries, as there's a glut of those now, and for years to come. But some goods are more complex, and require significant investment. And investment has a couple key considerations- namely, return and risk. The problem with the monetary meddling of the Fed is that it increases the risk component. Who wants to invest in a new plant to make flat panel TVs when you're wondering if your pricing power and return are going to be artificially altered by government fiat?
At the same time, the Fed created this mess by increasing interest rates 18 times, to 6% which was higher than long term rates. This caused panic amongst ARM and prime loan holders whose increase in debt service requirements looked overwhelming. So the Fed needs to take rapid, and rash, action, and then promise never again to steal the projected profits of new entrants to the global market.
Then, when inflation kicks in, let it go for a couple years to see what new capacity (amongst the billions of people and scores of technology on the shelf) is drawn into the global market. When we start reading stories about signing bonuses for Indian assemblers and tougher terms for commercial real estate leases and much higher prices for raw materials- then Ben can start sucking up money, but next time, stop around 4% for awhile...
> Perhaps Aldi is full of geniuses who know the supersecret to making
> money and will always be half the competition, but I'm guessing the
> competing stores are holding on to what little pricing power they
> have for dear life while hoping they don't continue to lose more
> customers to Wal-mart and other discounters.
Aldi is a Walmart-grade ferociously competitive German company. They're probably the only mass market retailer who could be said to be "as good as Walmart". You'll find that Aldi and Walmart can profitably sell groceries cheaper than many retailers can _buy_ them.
> The problem with deflation is that it tends to take capacity out
> of the system. People try to hold prices and wages the same (because
> price illusion keeps them from wanting those to drop)- and like any
> price control, supply dwindles.
A very important effect-- prices are "sticky" on the way down, but what dwindles is not so much supply as transaction volumes. There are a ton of houses for sale today at prices which are too high for the market -- the prices are "sticky" and until they meet the market, all you see is transaction volume falling. Its important to realize that that supply is still there, though . . . its just not coming to market at an appropriate price (yet)
This is what gives rise to the idea of "capitulation", both in technical analysis of stock movements, but also in the (much rarer) adjustments of sellers to declining price levels in the broader economy. Capitulation in real estate is often forced through foreclosure sales, for example.
for those of you, watching the market (Locally and in Chartland) unable to decide what to invest in (or whether you should or not), as well as the Survivalists
Some good (cheap) ultra-back-up investments might be in
-Cigarettes / Heirloom Tobacco Seeds
(ex. www.newhopeseed.com/to.../)--
Worst Case Scenario: History shows, such as in post-Soviet Russia, that cigarettes work well as a valued unit of exchange
Best Case Scenario: Open an E-Bay Store and work on your salesmanship ;)
-Heirloom Vegetable/Legume Seeds
(ex. www.survivalistseeds.c.../)--
Worst Case Scenario: History shows, its good to eat every now and then.
Best Case Scenario: Finally garner those gardening skills and taste what you've been missing (by likely buying food that's already been halfway around the world)
NOTE: Any seeds you purchase, make sure they're heirloom (so that they continue to germinate (produce further seeds on successful planting))
Thanks BS Detector, for sounding the alarm. I too can't find any of those deals in my local classified or on craig's list or ebay. I have found that everything associated with gasoline or oil or transportation is significantly more affordable than in July. (Other than those items prices are about the same as last year at this time)
"On the other hand, if you go to a discount store or supermarket: can of sardines form Norway, $4.50, toothpaste $3.00, mouthwash $6.50, boneless chicken breast $7.50/lb."
This is total hogwash. Every well stocked Safeway (x3), Albertsons (x2), King Supers (x3), Super Target, Super Walmart, can beat those prices... and has been for 2 years straight.
"This is worse than the Great Depression... "
Falling Knife... have you ever spoken to someone who lived thru the Dust Bowl or the Great Depression? Today's conditions are a cake walk compared to that. If you can't find someone to talk to about it, go read "The Worst Hard Times" for a glimpse into what its like when the economy is failing, your crops are failing and your government is doing absolutely nothing about it.
Good ole Herbert Hoover on his way out the door, "There is nothing more to be done, we have done all that we can do."
Thanks again BS Detector for sounding the alarm and thanks Gregor for getting us going...
Forget the terms deflation, inflation, and stagflation. Just look at the raw prices:
2008 Oil, Gas, Energy Prices: Way up Jan->July, Way down July -> Dec
2008 Transportation Prices: Ditto
2008 Everything else: Flat
Knife, don't know what slanted shelves you've been stockin', but they ain't in my country on the west side of the pond.
GNE
goodnewseconomist.com
On Jan 26 10:35 PM MarvinMBA wrote:
> Its all simple arithmatic. The money supply times the volocity equals
> gross national product. Increasing the money supply at the same
> time that GNP is increasing is Kosher. If GNP does not increase
> increasing the money supply will inflate prices that make up the
> GNP. Sooner or later the volocity of the money will increase as
> it works itself thru the system taking about a one year delay but
> looking ahead one year, inflation is going to be a major factor....MarvinMBA
The Fed has all sorts of tools to affect velocity and to reduce the money supply-- we're probably on more solid ground when we say "we know how to cure inflation" than we are when we say "we know how to cure a deflationary recession" because we have many more successful examples.
The theory of the response to a deflationary threat is to pump tons of money into the system to combat deflation and depression, and then once the system has turned, to "mop up" that excess liquidity.
I'd add that because the Fed and the Treasury are going end up owning or controlling a lot of the banking system, Bernancke & Geithner will end up with tools that haven't been available before (eg the ability to dictate bank lending practices and credit allocation throughout the economy) and as the "shadow banking system" has disappeared, nearly all credit creation is going to occur in directly controlled or regulated institutions (eg no one will get a construction loan with a credit guarantee from a hedge fund)
You could observe "gee, I'm skeptical that they're going to actually execute this the way that the theory goes" -- but you should at least acknowledge that theory and past practice does address the issue, and has on occasion resolved it successfully.
'reserve' currencies, the dollar may be more resilent than many think.
Although all kinds of $ denominated assets are falling in price, they still have a value; and are still a necessary item of every day use.
Next, there are currencies that are 'pegged' to the dollar.
These perversions in valuations may make it much harder than any analyst suggests to make money betting for/against the dollar.
Gold/Silver will be interesting; it may rise even with a rising dollar.
With returns on MM, CD's racing toward zero and nobody wanting to be the first into equities; Gold/Silver just may be more attractive than some of us think.
On Jan 26 04:32 PM DiggerUK wrote:
> @ Bad Dog
> I see the same deflation as you, especially in consumer goods and
> housing.
>
> The stagnation of production, with mass layoffs and closures in all
> sectors of service and manufacture, is an hourly story.
>
> Prices in the supermarket and at the petrol pump still seem the same
> here, my utility suppliers don't seem too keen to lower prices. But
> these are items I have to buy.
>
> Faith in the $US seems a bit odd to me. How can a currency not be
> debased with the amount of helicopters flying around at the moment.
> I find myself in a band of few with this suggestion of a debased
> currency.
>
> As to inflation you only have to look at the rise in Gold in UK.
> At March spike last year it was 505 GBP, today it is at the highest
> in UK history, 645/655 GBP.The same phenomenon is also seen in Canada,
> India, Australia, New Zealand and the whole of Europe.
>
> To me the danger posed by debasing the worlds number one reserve
> is underestimated.
I've converted into prices per lb from metric, and used $1.40 to the GBP.
Bear in mind that six months ago we got $2 to the pound.
Cubed casserole beef $5.53
Boneless pork loin $5.66
Carrots $0.49
Onions $0.39
Sugar $1.25
Butter $1.52
1 Litre OJ, 1Litre Apple Juice $1.20
and how could I leave T Bags out, 80 for $2.78