Why Stagflation Has Already Begun 12 comments
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Many have noted the inverse relationship that has existed since the previous bear-market lows of 2002-2003 between the US Dollar and stock and commoditiy prices: to wit, the US Dollar declines as stocks and commodity prices rise, particularly gold and oil.
Since the crash of stock and commodity markets began in earnest in the Fall of 2008, this relationship has played itself out on a near daily basis, as opposed to a general trend. Indeed, as stock markets crashed the US Dollar spiked higher, and as stock markets recovered the US Dollar sank.
I don't know why these markets are so highly correlated, but one has to formulate an opinion as to the direction of stocks, commodities and the US Dollar. At the present time, on cannot be bullish of stocks and the dollar at the same time, or bearish on the dollar and bearish on commodities, for example.
Perhaps hedge funds have automated these trades to such an extent that they have created the seemingly perfect recent correlations.
Be that as it may, on Tuesday, for the first time in months, there was a distinct break down in this pattern. The US Dollar was down over 1% against almost all major currencies including the Euro, Aussie, Loonie, Yen, and Pound. Commodities went up as expected, with oil in particular spiking higher over $2 per barrel. Precious metals traded quiety.
However, the stock market did nothing. Traded flat. Tried to sell off, recovered, tried to rally, sold off. Volume was anemic. In spite of a well received auction in 3-year Treasury Notes Tuesday, bond prices have been plummetting recently, and yields rising.
If Tuesday's action becomes a trend, we could be seeing what many consider to be the inevitable end game of current US fiscal policy: A falling dollar, rising interest rates, flat equity prices, and rising commodity prices. In short, stagflation.
I believe stagflation has already begun. Does it not give one pause that oil is at $70 per barrel and gasoline $3 per gallon in the midst of the fiercest recession and decline in demand since the early 1980s? Does it not seem odd that oil prices are as high today as they were in 2007 following a 4-year world-wide economic up cycle? I think it odd given the world is now over a year into a world-wide bust.
Why is the price of oil, a key marker and maker of inflation, at $70 per barrel in the midst of an economic bust and ample supply? I would argue it's one of inflation's first shots across the US economy's bow. I'd say it's stagflation, but we're still in the midst of a severe recession with job losses, economic contraction, and falling housing prices.
If this is the early phase of a new trend, we can expect higher interest rates, higher commodity prices including food and energy, economic stagnation, persistently high unemployment, high precious metals prices, a falling US dollar, and a declining standard of living.
In truth, the standard of living of most Americans has probably been declining for several years already. A country that produces relatively little, consumes a relative excess of world wide commodities and finished goods, and has to borrow trillions of dollars to do so, is a country, and a currency, and a standard of living existing on time borrowed from our creditors.
One has to be bearish on the US dollar, US bonds, neutral US equities, and bullish of commodities. Gosh, I sound like Jim Rogers or Peter Schiff. One complicating factor is that the US is not the only major economy flooding the world with money; the UK, Euro Zone, Japan, and even Canada are guilty as well. However, the US seems to be out borrowing and out printing these other economies not only on an absolute, but on a relative basis.
For this reason, currency conversion from US Dollars to Yen or Euros or Aussies may not be enough to preserve wealth. That probably will require investment in commodities.
Disclosure: Long FXA, FXE, FXC, BZF, GLD, SLV, DBO, as well as accumulating silver and gold bullion coins.
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around with links to his possible cash generating websites.
I too believe stagflation is our final outcome. The worst possible out come unfortunately. I just hope we dont get a depression first.
On Jun 10 08:44 AM amg wrote:
> Telling us the fines means nothing if you don't tell us how much
> they were convicted of
> paying in bribes. This could be peanuts, not prohibitive and in fact
> could encourage them to
> simply factor getting caught into their huge money pots. they have
> more money than
> governments at their disposal. they are "they" - the enemy of the
> lower and middle classes
> in this ongoing class war that little people have been losing forever.
>
>
> good reading: kl.am/tsc finance and econ articles
Not if you consider - -
> Peak world oil production occurred in 2008
> Opec production cutbacks, including Nigeria crashing due to bad govt.
> Mexico crashing, soon not to be an exporter
> China just completing its first SPR build out, and other large amounts of oil being hoarded at sea
> Substantial cutbacks in oil E&P investment
> failure of peoples and their govts. to recognize the need to transition to "declining oil" economies
As an old boss once asked, "What are we pretending not to know?"
At the risk of sounding like a hippie, I will say that a massive expenditure on U.S.-based renewable energy while we still have access to large amounts of credit is the right move to make. No matter how you try to frame an economic scenario, it all comes down to energy. It takes energy to produce food, mine materials, process materials, ship goods, get to work, clean water, run lights, the list goes on and on. If we spend now on U.S. rnenwable energy infrastructure, the coming dollar collapse may not hit quite as hard.
Just my two cents.
On Jun 10 10:41 AM Mad Hedge Fund Trader wrote:
> It's just a matter of time. I know what keeps Obama awake at night.
> Let’s say we spend our $2 trillion and get a couple of quarters of
> weak 2% type growth. Then once the effects of the stimulus wear off,
> we slip back into recession, setting up a classic “W” type recession.
> Unemployment never does stop climbing. This happened to Roosevelt
> in the thirties. So congress passes another $2 trillion reflationary
> budget. Everybody get’s wonderful new mass transit and alternative
> energy infrastructure. But with $4 trillion in spending packed into
> two years inflation really takes off. The bond market collapses,
> the dollar tanks big time, gold goes ballistic to $3,000, and silver
> to $50. Ben Bernanke’s replacement has no choice but to engineer
> an interest rate spike, taking the Fed funds rate up to a Volkeresque
> 20%. Housing, having never recovered, drops by half again. This all
> happens in the 2012 election year. Obama is burned in effigy, a Mormon
> is elected president, and the Republicans, reinvigorated by new leadership,
> retake both houses of congress. We invade Iran. Crude hits $200.
> This is not exactly a low probability scenario. Remember Jimmy Carter?
> This is why junk bond yields are still stubbornly high at 14.5%,
> and credit default swaps are at lofty levels. The risk of Armageddon
> is still out there. Just thought you’d like to know. Pass the Ambien.
On Jun 10 10:41 AM Mad Hedge Fund Trader wrote:
> Unemployment never does stop climbing. This happened to Roosevelt
> in the thirties.
Unemployment dropped from 1933 to 1942, although this article demonstrates that, just as today, measurement of unemployment is just about as political as it is econometric:
edgeofthewest.wordpres.../
Almost everyone in America wants, or thinks they want, inflation instead of deflation. That fact alone seems to be fueling a massive advertising campaign in favor of inflation.
But the laws of economics have not been suspended ... yet.
Fed is trying to inflate, commodity traders have bought into it, Wall Street is spreading the green shoots PR. Corporates are not buying any of it - firing people, reducing salaries and bonuses. Inflation is hard in this scenario, a lot more capacity will have to be not just idled but simply destroyed (think GM).
Money printing is not getting transmitted to the consumers - job losses and pay cuts prevent that. Tax cuts and stimulus (Govt. consumption) have been too small to offset loss of private consumption. All tax cuts and and some was saved by US consumers last month - so the Govt. stimulus is not working.
Yes, the US is in a job destroying, asset destroying, recession. Demand is relatively weak, and capacity is still relatively high, so-called slack in the system.
The Federal Reserve is monetizing the debt, and the Government is spending incomprehensible amounts of money. Hence, regardless of demand, the value of the US dollar is declining, which is inherently inflationary. Witness the price of oil.
Other countries are printing lots of money too to monetize their debt and prevent a depression. On the other hand, the countries with current account surpluses and good growth like the BRIC countries are likely "spreading around their wealth" by converting their worth-less dollars and Treasuries into things they need like food, energy, and other hard assets.
And that is driving demand for hard assets even though aggregate demand world-wide is lower than it has been for some time.
On Jun 10 01:30 PM carey_jim wrote:
>
>