Three Asset Classes that Can Actually Outpace Coming Inflationary Price Increases

“Excess capacity is temporarily suppressing global prices. But I see inflation as the greater future challenge."

- Alan Greenspan, June 25, 2009

"The US economy may witness double-digit inflation in a few years unless the central bank tightens up its monetary policy… Unless we roll in this whole degree of expansion, we will be in trouble… I am not talking 3-5 per cent inflation, I am talking double-digit inflation in the US.”

- Alan Greenspan, September 9, 2009

--

Man, the Dow hit 10,000! Happy days are here again! Right?

Wrong.

Do you know what I loathe about the word "recovery?" It can mean whatever you want it to. It's sort of like using the word love. You might say you love sushi, or you love beef jerky, or you love Michael Jackson. Or whatever. But that's a whole lot different, for instance, than saying you love your child. We can agree on that, right? Children are way more important than beef jerky. And Michael Jackson.

I can't say I'm Alan Greenspan's biggest fan anymore. He did, after all, betray his roots not so many months ago, when he essentially proclaimed free markets to be flawed. Those of us who have studied his career -- and especially its beginnings -- know better, of course; poor old Alan was just reacting to a political environment that needed someone to whom it could point its ugly, bureaucratic finger. Who better than Alan? Somebody had to take the blame, right? You can't just have a financial meltdown without getting mad at somebody. My only beef with the poor man is that he actually agreed to do it.

But then again, Alan Greenspan has been swimming in the Washington political sea for a very long time, so we really shouldn't be all that surprised, should we? And, after all, he did play the let's-create-the-illusion-of-wealth-by-making-money-cheap game. No, he took the appointments, scratched his ticket, and came up a loser. Unfortunately, he took the entire U.S. housing market -- and subsequently the global economy -- down in the process. Thanks Alan.

No matter where you stand on the Greenspan issue, you still have to respect the man; he was, for better or for worse (I say worse), the architect of the longest protracted bull market of the 20th century -- and beyond. So when I read the quotes above, I can't merely dismiss them just because I think Alan is a sell-out, a turncoat, and a political lackey. And, of course -- as most of you know -- I happen to agree with Alan Greenspan on the particular point of coming inflation. Well, sort of. I actually think inflation is going to be a lot worse than "double-digit." Here's my favorite part of his observation:

"...unless the central bank tightens up its monetary policy... Unless we roll in this whole degree of expansion, we will be in trouble..."

To me, that says it all. There are literally trillions of components to the U.S. economy. How in the hell is the Fed going to know the precise moment it needs to reverse policy? I mean, who's going to argue against the fact that the success of its predictive power has been -- at its very best -- questionable. If Bernanke and his pride of dullards don't call this one right, we are all screwed. And in my mind, that means only one thing.

We are all screwed.

Dollars, Equities, Housing and All the Rest of It

A lot of people sit in front of televisions all day, staring at Erin Burnett and Maria Bartiromo (and the people they talk to), believing that, because the stock market is moving up so rapidly, we are in the middle of an economic recovery. And that's just silly. One might argue we are in the middle of a stock market recovery -- and based on simple, raw percentages, that position might carry some weight. But then you think about the the first time the Dow hit 10,000 -- about a decade ago -- and you look at the relative prices of gold (about $250 per ounce in 1999, as opposed to almost $1100 an ounce today) and something starts to become clear: this so-called "stock market recovery" may not be all that recuperative after all. I mean, gold is the ultimate and most efficient harbinger of inflation -- is it not? And what is gold telling us -- in a loud, clear voice?

And what about oil? Since its recent bottom eight months ago, it has more than doubled in price. I've been trying to tell you that oil, gold, and agriculture are going to be the biggest winners when the dollar starts its slide. Did you listen? Well... some of you did. But, my goodness, there were certainly a lot of people telling me I was a fool, an idiot, and a traitor. I'm sure they're all still out there, as eager as ever to show me the errors of my ways. Unfortunately most of my dissenters and critics believe there are only three phases to this economic fiasco, and they wrongly believe we've completed both -- that the recession is over. But that's just more nonsense. Here's what the common wisdom is saying:

PHASE ONE: Collapse in the prices of nearly all global asset-classes.

PHASE TWO: Global quantitative easing -- meaning unprecedented rate-cuts, coupled with unprecedented currency-printing, borrowing, and spending.

PHASE THREE: Stock market recovery.

And suddenly everything is fine, right?

No! Everything is not fine. A quick look at the prices of oil, gold, and agriculture tell a much different story -- they have been rising significantly. And perhaps the most powerful signal of all is the increase in long-term Treasury yields over the last nine months -- despite the Fed's repeated announcements that it intends to keep rates low by buying the long end of the yield curve! The evidence continues to mount -- we're not anywhere near the end of the pain. No, there is a fourth phase to this economic storm: foreign creditors begin to abandon U.S. Treasuries, driving yields higher. Unprecedented printing causes massive inflationary pressure, driving the prices of all asset-classes higher, as major world currencies fail. Most people become euphoric, proclaiming an "economic recovery." Others buy gold, oil, and agriculture and hunker down for the worst.

The most interesting part of all this to me is watching the business news channels, who focus 90% of their energy on equities. I know it's natural; audiences comprehend a share of Google (GOOG) a whole lot better than they do a barrel of oil. But the stock market is in trouble -- even as it continues to rise. And that seems to be the most difficult concept for anyone to grasp! Mark my words: in real terms, equities are going to underperform gold, oil, and agriculture for a long time, and this necessarily means stocks will underperform inflationary price increases. It's just math.

Don't get me wrong; I love Google and a dozen or so other companies just as much as the next guy. At my core, I'm a value investor. I just don't happen to think there is any value to be found in this economy. The American consumer -- who drove the vast majority of the economy up until two years ago -- is dead. How are companies going to make money? Sure, stock prices will fly higher as the dollar falls, but what does that mean? Just because the dollar is failing does not mean American corporations are necessarily becoming more productive. Can net income outpace inflationary dollar-destruction? The answer is, of course, no.

Let's return to Google. I think the company is going to be around for a long time, and I believe it's a great business model with a lot of room for growth. And when Google beats its numbers and the CEO says he's excited about the future, well I get just as warm inside as the next guy. For about twenty seconds.

Just because stocks are moving up -- and even reporting some good numbers -- does not mean this is an economic recovery. And don't forget that, for the last year or so, I've been predicting not only a rise in the stock market, but a meteoric rise. I think the Dow is going to 20,000 and beyond, and I think it's going to happen a lot sooner than anyone believes. I also have no doubt it will blow through that mark with all the euphoric and histrionic drama of every other media-driven bull market explosion in the last thirty years. Of course the stock market is going to go higher -- in dollar terms -- because the dollar is falling apart! Housing is going to do the same thing: if the government keeps rates artificially low and offers tantalizing tax-incentives for investing in real estate, of course prices will go higher! Why wouldn't they? And thus the next (bigger) bubble begins.

In fact all asset classes are going to go higher as the dollar disintegrates! That's the way inflationary pressure works! But again: just because asset-classes are moving inversely to the phony currency in which they are denominated (by definition) does not mean we are in the middle of an economic recovery! According to BusinessDictionary.com an economic recovery is the "...phase in an economic cycle where employment and output begin to rise to their normal levels after a recession or slump." Yes, I know. Economists everywhere are saying the recession is over. Yes, CEOs everywhere are starting to become optimistic. But isn't this the same gaggle of pundits, academics, experts, and general know-it-alls that were prepared to deliver us the so-called "Goldilocks Soft Landing" three years ago? Yes. Smart group of folks, that.

On October 2, 2009, The United States Bureau of Labor Labor Statistics gave us the happy news: U.S. unemployment now sits at 9.8%. More specifically, it said this:

"Since the start of the recession in December 2007, the number of unemployed persons has increased by 7.6 million to 15.1 million, and the unemployment rate has doubled to 9.8 percent."

Does that sound like an economic recovery to you?

Our foreign creditors -- like Japan, China, and Saudi Arabia -- are now talking about ditching the U.S. dollar in favor of another reserve currency. Do you really believe they're going to continue to lend to the United States at absurdly low rates, in perpetuity? Our government has committed itself to spending $13 trillion dollars on this economy. Where is that money going to come from? You can read any number of my articles over the last year to get the answer to that question. But I assure you, printing dollars in current quantities is the death knell of our beloved currency. And I equally assure you our creditors are neither naive nor stupid, and they are not going to simply keep dumping money into a debtor economy whose currency is in jeopardy, whose savings rate is almost zero, and whose consumer has run out of leverage. Why do you think the Chinese -- for instance -- have bought U.S. Treasuries for so long? Because they knew the American consumer would return the capital to the Chinese economy many times over! But the American consumer is out of fuel. So what now...?

I've been talking for months about the $13 trillion mistake, as well as its historical implications. The evidence only continues to mount: on Friday, October 16, The U.S. reported that the federal deficit just hit an all time high of $1.42 trillion. My favorite part is the annual percentage increase in government spending, up 18.2% -- the biggest jump since 1975.

So here's the deal. Just as every asset-class in the universe collapsed starting in 2007, the massive implementation of quantitative easing that ensued is going to ensure equally massive inflationary pressure on most -- if not all -- of the world's currencies. So your job, as an investor, is not to try to figure out which asset-classes are going to increase in value, because they all are -- relative to the currencies in which they are denominated.

No, your job is to figure out which assets are going to outpace inflationary price increases. I've already given you one clue: this stock market surge you're seeing? It's an illusion. While equity prices will undoubtedly go higher, productivity and earnings are not going to outpace inflationary price increases -- simply because consumers are not going to have the power to fuel corporate profits as they once did. Sure, you'll get a good return from the stock market -- in nominal terms -- in coming years. And maybe that's enough to get you excited. I watch CNBC enough to know that there are a lot of people who believe this rally is authentic. But in real terms, it's unsustainable and unrealistic, because the dollar is falling, and its decline is accelerating. It won't be long before the smartest investors recognize stocks are not going to outpace inflationary price increases. And thus begins Phase Four.

So what asset-classes will outpace inflation? Do I have to say it again? Precious metals, energy, and agriculture. These assets are no longer mere hedges against inflation. Not only will they continue to elicit demand from investors seeking return, but many of them have industrial value, as well -- increasing the likelihood of increased demand and superior returns. And there's one more thing I have to add, which is probably going to cause me all sorts of grief from my more conservative readers, but I'm going to say it anyway: I'm not a huge fan of leverage -- for obvious reasons, considering the mess we're in. Nonetheless, if you can get into any superior-performing assets using leverage at a low fixed-rate of interest, you're rate of return is going to be exponentially higher.

Phase Four. The train is starting to pick up speed. If you weren't listening to me over the last ten months, I hope you will now...

Disclosures: Paco is long TBT and Gold. He also holds U.S. dollars by necessity, pending the advent of private gold-backed currencies.

Comments

[doubleguns]

Double gold DGP and double silver AGQ. No borrowing required.

2009 Oct 19 02:50 PM

[Steve in Greensboro]

Thanks, Mr. Ahlgren, for your thoughts.

Would you add to your list of acceptable investments equities or debt in jurisdictions that manage their currencies rationally, e.g. Canada, Australia?

2009 Oct 19 02:54 PM

[Socialism cannot compete!]

"No matter where you stand on the Greenspan issue, you still have to respect the man; he was, for better or for worse (I say worse), the architect of the longest protracted bull market of the 20th century -- and beyond."

Bull!! We owe the longest protracted bull market to the advent of the personal computer and follow-on innovations and efficiencies. We owe much more to guys like Gordon Moore and Bob Noyce than to Alan Greenspan! Big Al was just another "Chief Thief" at the Fed -- the organization that colludes to benefit large domestic and international banking elites, at the expense of the average worker, by fluctuating rates and currencies to the benefit of bankers rather than those living on fixed incomes and/or hoping for a fair return on savings.

2009 Oct 19 02:55 PM

[doubleguns]

Oh yes DAG double agriculture and again no borrowing required.

2009 Oct 19 02:57 PM

[Hot Richard]

Energy looks like a golden goose that lays golden eggs on a golden nest. And I mean in BRIC as well as the USSA.

Congratulations to Canada, Australia, and New Zealand. So far they are looking pretty good. And by "pretty good" I mean "sane".

2009 Oct 19 03:19 PM

[User 353732]

1. The Reserve Dollar was once the symbol of our national honor. A strong dollar was the visible manifestation of America's once remarkable capacity to innovate in ways that dramatically expanded the intrinsic capacity of the economy to create wealth. This capacity was the source of real increases in asset values, jobs and income.
The Fiat Dollar is now the symbol of our national disgrace. As the dollar atrophies so, it makes visible to all who care to see (The majority of Americans apparently look but do not see), the degeneration of America's capacity to create true wealth. Without this capacity, honest jobs and sustainable income cannot be generated.

2. As the world marks down Regime that currently controls, corrupts and corrodes the US and seeks to spread its slow acting venom throughout the world (via the Fiat Dollar , criminal misallocation of resources and cascading deceits) so it marks down America's ability to remain an economic and geo-strategic hyperpower. This markdown is manifest in the gradual but inexorable decaying of the exchange rate of the once honest( now fraudulent) dollar against real assets.

The world's need for things from the earth(energy, minerals, aquifer water)
and things on the earth(agricultural,dairy and animal products; fibers; timber; residential, commercial, industrial, industrial, recreational and untamed land and water)
as well as transforming technologies, bandwidth, true talent and actionable knowledge, continues and will continue to increase, especially in the Global South.

In dollar terms, not only will the real assets of and on the earth go up in price in but so will useful information, knowledge and engineered technologies and true, globally demanded and globally deployable talent(including entrepreneurial and inspirational talent). Finally,in my view, the dollar price of globally appealing corporate brands with demonstrated and enduring brand equity will also rise.

2009 Oct 19 03:30 PM

[buddhabill]

I call 'Bull' on the unprecedented bull market:

Give a 18 year old a credit card with a $50k limit. He/She will live in unprecedented 'prosperity'. New car, new computer, new flatscreen TV, new clothes, eating out, etc. etc. etc. until the bill comes due. Now Uncle Ben gives him another card with another $50k, pay the monthly minimum with the old one, party on with the new.

Add up total consumer and government debt over the past 20 years. There's your 'Bull' market. Add-on the 13 T newly-committed, add the untold T's (10? 50?) in entitlement programs, and explain it to me like I'm a 6 year old who is going to pay those bills?


On Oct 19 02:55 PM Socialism cannot compete! wrote:

> "No matter where you stand on the Greenspan issue, you still have
> to respect the man; he was, for better or for worse (I say worse),
> the architect of the longest protracted bull market of the 20th century
> -- and beyond."
>
> Bull!! We owe the longest protracted bull market to the advent of
> the personal computer and follow-on innovations and efficiencies.
> We owe much more to guys like Gordon Moore and Bob Noyce than to
> Alan Greenspan! Big Al was just another "Chief Thief" at the Fed
> -- the organization that colludes to benefit large domestic and international
> banking elites, at the expense of the average worker, by fluctuating
> rates and currencies to the benefit of bankers rather than those
> living on fixed incomes and/or hoping for a fair return on savings.

2009 Oct 19 03:37 PM

[Swashbuckler]

"No, there is a fourth phase to this economic storm: foreign creditors begin to abandon U.S. Treasuries,....". About a year ago I figured that China would be committing economic suicide by not buying our debt. I have since revised my thinking with a few minor modifications, aggregating approximately 180 degrees. I believe now that there is NO WAY THEY WON'T pull the plug. IMO, all that remains is for them to fine tune their strategy. When they bail, we will be in a world of sh#t and they know it. And when we collapse economically, we collapse socially. I'm talking government exchange controls, seizure of personal property(gold), the works. Our economic demise is in the Chinese long term interest of being the world's soul superpower. They will sacrifice some short term comfort to reach this long term goal. IMO.

2009 Oct 19 03:45 PM

[Swashbuckler]

"No, there is a fourth phase to this economic storm: foreign creditors begin to abandon U.S. Treasuries,....". About a year ago I figured that China would be committing economic suicide by not buying our debt. I have since revised my thinking with a few minor modifications, aggregating approximately 180 degrees. I believe now that there is NO WAY THEY WON'T pull the plug. IMO, all that remains is for them to fine tune their strategy. When they bail, we will be in a world of sh#t and they know it. And when we collapse economically, we collapse socially. I'm talking government exchange controls, seizure of personal property(gold), the works. Our economic demise is in the Chinese long term interest of being the world's sole superpower. They will sacrifice some short term comfort to reach this long term goal. IMO.

2009 Oct 19 03:46 PM

[Swashbuckler]

Sorry for the duplicate post. My machine's OTR today.

2009 Oct 19 03:48 PM

[Brett Cole]

While I have agreed with all your posts and made money on the reflation plays over the past year myself, doesn't the short dollar trade at least in the short run seem to be ultra crowded. I believe there was only 5% bulls on the dollar and 95% bulls on precious metals and commodities in Sept. (Reminder: There were less than 10% bulls on the stock market in Feb./March and looked what happened)...

In my opinion, even with high unemployment and problems with leveraged loans and CRE, Bernanke and co. will have to start defending the dollar, or else your base case unfortunately will come absolutely true.

Just throwing out the devils advocate position. (Either way its not a good situation at all. People are in for more suspense to say the least).

2009 Oct 19 05:12 PM

[Mad Hedge Fund Trader]

prw When people ask me what is the one stock they should put in their kid’s college fund and forget about, I always give them the same company: Google (GOOG). The toll taker for the Internet that controls 80% of the global market for search just announced record Q3 profits of $1.6 billion on a revenue rise from $4 billion to $4.4 billion. In this economic environment these numbers are nothing less than astounding, making GOOG one of the few US firms that has actual top line growth. Google earnings, in fact, have turned into a valuable leading economic indicator by telling us that the strong ad growth came in the retail, travel, and the automotive sectors. This bang up performance is further proof that the irresistible tectonic shift away from old line media like newspapers, radio, and TV, to online, is accelerating, offering advertisers far and away the highest return on investment. Google is fast becoming the operating system for all advertising. While critics focus on the myriad ways the company recklessly burns money on peripheral businesses like Google TV, YouTube, forays into print media, and their private space program, I see gigantic growth opportunities that will prevent the company from becoming another Microsoft (MSFT). Mobile search grew 30% QOQ as the growing legion of sophisticated portable devices are increasingly used for search. Also, click rates cratered in the great recession, the price of “investment advisor” for example plunging from $4 to pennies. A recovery could bring an equally ferocious rebound in rates that fall straight to GOOG’s bottom line. Most analysts are now targeting the high $600s for the stock price, which I believe will prove conservative. If you are ever worried about America’s future, then just look at these two kids, Larry Page and Sergey Brin, who built a $400 billion company out of their dorm room at Stanford in virtually no time, with no capital. Just ignore the office foosball table, volley ball court, and at-desk massage service.

2009 Oct 19 06:16 PM

[Moon Kil Woong]

First, Greenspan's comments just shows he was fully cognizant that his policies, much the same as Bernake's, is bad for America and leads to dollar devaluation and asset bubbles. Which shows he just wanted to be superman on his watch regardless of the fact he was doing so by setting an economic timebomb. I still have no respect for the man.

Regarding what he just said. He is thoroughly correct now that he's out of power. It's nice to know he knows something about fiscal prudence. But sorry, it's a bit too late and now he is just a mealy mouthed voice in a tornado of opinions. It serves him right.

The reason why no opne is complaining that oil is $80 bucks a barrel and your fuel prices are rising is because everyone knows this is a Federal Reserved induced dollar devaluation. It has nothing to do with anyone else. No oil production curtailment, no gold shortage, no undersupply, or too much demand. Just too many dollars.

When people say that it's our budget deficit they have it only 1/4 right or 3/4 wrong. In fact, the dollar's devaluation is mostly Federal Reserve QE related and artificialy stimulated liquidity driven by the prolonged abnormally low rates set by the Federal Reserve. In fact the Fed has poured more liquidity into the market than any elected official and spending program in 2008 and 2009. The deficit pales in comparison to the backstops and money the Fed balance sheet expansion has losed upon the world. Everyone knows it.

So when Bernake goes on his next speaking tour, he should be chastizing himself not others for their lack of fiscal competence. The Federal Reserve is the biggest cause for low savings rates in the US, Trade imbalances, and dollar devaluation. They always have been and they always will be for as long as they are around. They are the printing press and big spenders. Even more so than our elected officials. It's just that they are allowed to hide their nefarious actions because they claim immunity from audits and from accountability because they are a "private company".

I wonder, as a private company who made more per employee in 2009, GS or the Federal Reserve? And which bank is the biggest systemic risk? To have the Fed manage systemic risk is like asking AIG to manage the insurance industry.

So don't be so down on yourself for electing Bush Jr. or Obama. Whoever you elect means so very little compared to who sits in the throne of the Federal Reserve. If anyone's going to ruin your life it will be them and they figure that there is almost no chance you can or will do anything about it.

2009 Oct 19 07:29 PM

[E Nuff Sed]

Ha Ha Ha. Good one. Things change.

In the mid 90's, the Wall Street Journal ran an editorial with the headline "Bankrupt Canada?" It stated "Turn around and check out Canada, which has now become an honorary member of the Third World." It referred to the Canadian dollar as the Loonie Peso or something like that.

Back then, Canada had the second highest ratio of debt of any industrialized economy. Today, Canada's net debt-to-GDP ratio is the lowest in the G-7 economies.

Like I said 10 - 15 years in a long time. These things go in cycles.

On Oct 19 02:54 PM Steve in Greensboro wrote:

> Thanks, Mr. Ahlgren, for your thoughts.
> Would you add to your list of acceptable investments equities or
> debt in jurisdictions that manage their currencies rationally, e.g.
> Canada, Australia?

2009 Oct 19 08:15 PM

[E Nuff Sed]

People sometime forget these things run in cycles. In 1995, the Wall Street Journal insulted Canadians by declaring their country an honorary member of the Third World. "Bankrupt Canada?" was the headline on the editorial. They called the Cdn dollar the northern peso.

Canada's debt at the time was 68.4 per cent of its gross domestic product. Thirty-five per cent of federal revenues were drained by interest payments on the debt. Its debt is now less than 30 per cent of GDP - the lowest in the G7 and it has handled the great recession quite gracefully. Like diet and exercise to lose weight, spending cuts and higher taxes are the only cure for fiscal obesity.

On Oct 19 02:54 PM Steve in Greensboro wrote:

> Thanks, Mr. Ahlgren, for your thoughts.
>
> Would you add to your list of acceptable investments equities or
> debt in jurisdictions that manage their currencies rationally, e.g.
> Canada, Australia?

2009 Oct 19 08:41 PM

[derryl]

E Nuff Said:
Good point about turning around a "hopeless" fiscal situation.

In 1995 Finance Minister Paul Martin balanced Canada's federal budget by cutting the federal health and social transfer to the Provinces by $11B. Scaled up 10X to the US economy that would equal a $110B reduction in annual transfers from Washington to the states. Canada's provinces use the health and social transfer mainly to fund health care and education, which are provincial responsibilities under Canada's constitution. The provinces all squealed but responded by rebalancing their own budgets and cutting whatever they could from the 2 big ticket provincial budget items, health and education. So if there was 'pain' it was dispersed as widely as possible by Martin's budget balancing move. And now Canada leads the OECD in fiscal (and banking) health.

In 1993 Alberta Premier Ralph Klein and Treasurer Jim Dinning attacked Alberta's deficit spending, that began with the oil collapse and depression (in Alberta) of 1982. They required ALL gov't departments to find 5% cuts, which actually happened. Alberta had a 25 year plan to pay off its net debt, but after oil began rising in 1998 and natural gas took off the debt was paid out in full 10 years early. Alberta now has no net debt (some debts are longer term and can't actually be paid out until they come due, but Alberta has set money aside to pay these). This year due to the collapse in natural gas, Alberta's major royalty cash cow, Alberta is running an $8B deficit. But over the past few fat years the province has saved $17B in a sustainability fund, so no new borrowing will be required to fund the deficit. Gas royalties are still low but tarsands construction is starting up again so Alberta should endure the present recession quite well.

Most other Cdn provinces have been behaving as fiscally responsibly as Alberta (and some are doing even better which is why political change is in the Alberta air), with the exception of Canada's biggest province--Ontario. Ontario's socialist premier is determined to 'go green'. Admittedly, Ontario has suffered fully 1/2 of all Cdn manufacturing job losses as steel and autos are way down, but if you want to see what Obama's greenonomics might do to America just have a look at Ontario.

2009 Oct 19 09:34 PM

[Tack]

Energy....check
Agriculture....check
Chemicals.....check
Industrial minerals....check
Gold....a very poor inflation-adjusted history

2009 Oct 19 09:39 PM

[sethmcs]

Somebody is definitely wrong and is going to get financially crushed. The 10 year bond yields 3.395%. Oil is at $79.75 a barrel and gold is at 1,065.50 an oz. No COLA adjustments for the next two years. 10% of the labor force on unemployment perhaps another 6% on underemployment. Industrial production at maybe 60% capacity. Not a picture of inflation to me at least not now. Weak dollar? Will inflate earnings of US multinationals through currency translation and will improve competitiveness of exports. Will discourage imports. I think I read that US oil imports actually fell. Cargo containers of foreign goods are falling, rail and truck shipments are down. Personal income is falling. AND you guys think gold and oil are great investments? Do you realize that deflation will wipe you out? I recall stagflation of the seventies but that was labor driven. Can't demand higher wages when there are six applicants for each job. Sorry but I see what the fed sees. A real threat of deflation. A second oil shock can definitely cause a double dip recession and will if it goes unchecked. There was some noise a while back about curbing the speculative investments in oil futures but nothing has come of it yet. Maybe another spike and the rules will change. Maybe. As was stated in the other comments that things goes in cycles. In the 80s Japan economy was the envy of the world. In the 90s Japan could not do anything right and is still struggling even today. Now the middle kingdom China is the envy. In ten years in the future we may have to bail China out to avoid unrest. Stranger things have happened. To have inflation you need too many dollars chasing too few goods. That seems to be the case with gold and oil. Recently I seemed to read that there are 600 million barrels of oil under contract in the next three months. My only question is where are they going to put it?

2009 Oct 19 10:58 PM

[phdinsuntanning]

Ostiaz Paco, hedge yourself. Most of the fools,
idiots & traitors of the world (me included) know
inverse repo time is coming and RMB/USD is (ands will be)
the global hedge ancor now.

2009 Oct 20 01:48 AM

[Tack]

First of all, personal income is NOT falling. It's been up four of the last five months. Despite heart-tugging media stories, the income stats do not support your thesis.

Too much emphasis is focused on the 10% unemployment and not enough on the 90% with jobs, who, apparently, are still getting raises, as hard as that may be to accept by some. It's their behavior that will control the economy, not the jobless.

We've already been through the meat-and-potatoes portion of this recession, and we haven't had any deflation, except as measured by the leaving out food and energy from the stats, and even that has prices basically flat. Now, things are improving, and the government's printed trillions haven't even hit the street yet.

As long as people use year-over-year measures that use as the denominator a period before the economic collapse, wrong conclusions will be drawn about the direction of the economy. Soon, the denominator of that equation will be lower than all the numerators, and all the measures will indicate improvement, not worsening.

Inflation is no longer labor driven. It's driven by the fact that worldwide demand for basic resources --energy, food, minerals-- is outstripping the production rate, and many of these cannot be ramped up, like manufactured goods, simply by adding labor, which, yes, is readily abundant. This trend has been and continues to be aided and abetted by near-suicidal "environmental" policies that pretend that if we don't invest in these areas, the demand will just somehow go away or be met by windmills ( a perfect Quixotic fantasy).

Finally, there's never been a period of sustained worldwide deflation in modern recorded history, save for a brief period in the '30's, when the money supply was in a disastrous cyclical contraction from 1929-1935. Now, with world governments having printed unprecedented amounts of currency, the usual laws of supply and demand will take over unless they make a heroic effort to withdraw that largesse, which politician's are always loathe to do, no matter what they may say.

Yes, you are correct: somebody's going to get financially crushed, and it's going to be anybody in "safe," fixed-rate investments at historic low yields. The longer the term of those investments, the worse the crushing will be.


On Oct 19 10:58 PM sethmcs wrote:

> Somebody is definitely wrong and is going to get financially crushed.
> The 10 year bond yields 3.395%. Oil is at $79.75 a barrel and gold
> is at 1,065.50 an oz. No COLA adjustments for the next two years.
> 10% of the labor force on unemployment perhaps another 6% on underemployment.
> Industrial production at maybe 60% capacity. Not a picture of inflation
> to me at least not now. Weak dollar? Will inflate earnings of US
> multinationals through currency translation and will improve competitiveness
> of exports. Will discourage imports. I think I read that US oil imports
> actually fell. Cargo containers of foreign goods are falling, rail
> and truck shipments are down. Personal income is falling. AND you
> guys think gold and oil are great investments? Do you realize that
> deflation will wipe you out? I recall stagflation of the seventies
> but that was labor driven. Can't demand higher wages when there are
> six applicants for each job. Sorry but I see what the fed sees. A
> real threat of deflation. A second oil shock can definitely cause
> a double dip recession and will if it goes unchecked. There was some
> noise a while back about curbing the speculative investments in oil
> futures but nothing has come of it yet. Maybe another spike and the
> rules will change. Maybe. As was stated in the other comments that
> things goes in cycles. In the 80s Japan economy was the envy of the
> world. In the 90s Japan could not do anything right and is still
> struggling even today. Now the middle kingdom China is the envy.
> In ten years in the future we may have to bail China out to avoid
> unrest. Stranger things have happened. To have inflation you need
> too many dollars chasing too few goods. That seems to be the case
> with gold and oil. Recently I seemed to read that there are 600 million
> barrels of oil under contract in the next three months. My only question
> is where are they going to put it?

2009 Oct 20 05:07 AM