The New Pillars of Inflation 20 comments
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There are three asset classes that I currently have the fate of my portfolio tied to. The first is agriculture, the second is gold, and the third is base metals. These three asset classes are tied together, at least in part, by a single thesis. To paraphrase David Roche from his book New Monetarism, this thesis is:
We have been in a 25 year period of disinflation. From 1982 onward, global price increases slowed year after year… These days are now over.
25 Years of Disinflation
In New Monetarism, 5 reasons are given for the 25 years of disinflation that the global economy has experienced:
- Beginning in 1982, central bankers started to target low inflation as a priority in monetary policy
- Globalization empowered producers of cheap goods and services to sell their product to rich folks
- The internet created global competition in consumer markets that shifted the pricing power from the producer to the people
- Technology developed to make it easier for business to manage its global supply chain
- Government
began to empower rather then strangle markets
I would add to these that changes in global trade flows created a situation where surplus dollars in developing countries were re-invested in developed world assets, helping to keep interest costs down, which in turn helped keep inflation expectations down.
The New Pillars of Inflation
These dynamics, which caused 25 years of disinflation, are now being undermined by new inflationary pressures. Inflation is sneaking back into the global system in many ways. The argument of how inflation is returning has been condensed by Donald Coxe into 4 shortages that underlie the pressures. To paraphrase his comments, these shortages are:
- Energy: Oil was the first scarcity to be brought about by the rising Asian economies. Compounding the effect of rising demand has been a lack of supply in politically secure areas of the world and with easily accessible reservoirs.
- Metals: It took years for the managers of most base metal companies to realize that the demand for their product was not of the cyclical nature that they had become accustom. Their slow response to the rising demand of Asian economies, coupled with a lack of available deposits in easily accessible, politically secure areas, has now been compounded by the rising costs and time required for developing new mines.
- Grains and Oilseeds: The rise in prices for meat, eggs, and dairy products is evidence of the supply/demand imbalance that has been created by the middle class in China, India and elsewhere in the Third World, who are expanding their diets with non-vegetable proteins.
- Workers: We are in the midst of a multi-decade collapse in reproduction in the developed world. This process has insured that worries of excessive unemployment will be replaced by worries of where to find qualified people to employ. “The worker never born is the worker never unemployed.”
Donald Coxe made these arguments in April of 2007. Since that time, events have unfolded that, in my opinion, add two new pillars to the inflationary structure.
First of all, inflation is no longer at the primary concern of monetary policy. In April of 2007, central bankers were still acting vigilantly against inflation. This is no longer the case. Central bankers are now being forced to abandon their inflation-hawk bent because the global system is in dire need of liquidity, and banks are in dire need of low interest rates.
Secondly, Asian export prices are rising. Goldman Sachs recently noted that:
There is increasing evidence that the export of deflation by China may be drawing to a close.
Similarly, Andrew Hunt has pointed out that:
As the Asian domestic recovery has gained momentum, the pressure on the region's productive resources has increased and inflation has emerged. Crucially, these inflationary pressures have extended to the region's export prices and this exportation of inflation is already placing upward pressure on consumer goods prices in the Western economies.
There is not a consensus on what rising export prices imply. Some commentators, like the Economist, believe the rise in export prices is more the result of currency adjustments then the beginning of an underlying inflationary trend in Asia. But while the degree of inflation this demonstrates is debatable, what is less debatable is that Asia will not be exporting deflation to the degree that it has in the past.
Meanwhile, the 4 original pillars described by Donald Coxe have only gotten stronger. Oil is over $100. Copper, the king of the base metals has risen, not fallen, even in the wake of a slowdown in the developed world. Grain prices have gone hyperbolic.
And while the worker trend is perhaps the least appreciated of the pillars, it remains ominously on the horizon. The trend of declining birth rates will not reverse itself quickly. Sherry Cooper, Chief Strategist for BMO Capital Markets, has detailed the birth rate trends of the developed world in her book The New Retirement. She points out that labor force growth rates in Canada will half from 1.4% to 0.7% by 2011. By 2020, labor force growth rates will be 0.02%. And in the United States, by 2030, the skilled labor shortage could be as much as 30 million workers!
A Shift in the Underlying Trend
In the classic book Reminscenses of a Stock Operator, the strategy of the protagonist, Larry Livingston, was to examine the underlying conditions and to make investments aligned with those conditions. Since that time, this basic strategy has been put in other ways, such as the precept that 85% of your returns come from sector selection, while 15% come from the selection of individual stocks.
In my opinion, there has been a shift in the underlying trend to an environment of rising inflationary pressures. Every investor with a long term horizon needs to respond accordingly.
But this is the long-term story. There will be bumps in the road. I do not discount that the disinflation brought about by the fall in house prices will temper these inflationary pillars in the short-term. We should not expect a straight move up to high single digit interest rates or mid single digit inflation rates. But the pressures are undeniable and they are long term. This new trend will assert itself for years to come.
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This article has 20 comments:
Three rays of sunshine: "The first is agriculture, the second is gold, and the third is base metals."
That said, many of the commodity prices are rising becaus of the dollar devaluation. If oil were to, in a monumental OPEC announcement, be depegged from the US dollar, it would be good news for oil consumers, and bad news for the US.
The dollar has been resilient to depreciate much more quickly because so much has been pegged to it over the last 3 decades. However, it was only done so with the assumption that a strong dollar would alway be a strong dollar. That's why the Secretary and the President say they continue to support a strong dollar policy. Of course, what a politician says and what his central banker does are evidently 2 different things. To support a strong dollar, the Fed should be raising rates, be damned the consequences. That was the Volcker method, and he gave confidence to world markets even if he wasn't Mr October at home.
There's a saying that sounds much better in Spanish, but loosely translates like this: "Between the things you do and the things you say, I see a widening gap today."
I am going to forward this to my friends in Indonesia and Ausatralia
In reference to the “disinflation brought about by the fall in house prices will temper these inflationary pillars in the short-term.” I may add that house prices are not part of the Consumer Price Index of the USA (CPI); rentals are. Also, the CPI is falsified. To get a correct picture of the true inflation in the US, please refer to shadowstats.com. The inflation rate is much higher. That’s why the article’s author is so successful.
If we experience a bust in the US and a knock-on bust in China, I’m not so sure, whether the industrial commodities like copper, etc. will hold up in price. I think they will tank. Foods, oil and gold will hold up much better.
Get a grip ignorant monetarists, and worse, eveywhere. Read the TRUE story and approach history as did Cicero when faced with finding the culprit of a Senator's demise, who asked; "Qui Bono?" who benefitted?
The truth indeed can set you free - here is is - learn waht govt, media & academe least want average Americans to know anything about - our coruppt monetary system that fattens elites on the backs of the common man:
Wall Street, Banks, and American Foreign Policy
www.lewrockwell.com/ro...
tidbit/excerpt:
In the early years of the 19th century, the organized capital market in the United States was largely confined to government bonds (then called "stocks"), along with canal companies and banks themselves. Whatever investment banking existed was therefore concentrated in government debt. From the Civil War until the 1890s, there were virtually no manufacturing corporations; manufacturing and other businesses were partnerships and had not yet reached the size where they needed to adopt the corporate form. The only exception was railroads, the biggest industry in the U.S. The first investment banks, therefore, were concentrated in railroad securities and government bonds.
The first major investment-banking house in the United States was a creature of government privilege. Jay Cooke, an Ohio-born business promoter living in Philadelphia, and his brother Henry, editor of the leading Republican newspaper in Ohio, were close friends of Ohio U.S. Senator Salmon P. Chase. When the new Lincoln Administration took over in 1861, the Cookes lobbied hard to secure Chase the appointment of Secretary of the Treasury. That lobbying, plus the then enormous sum of $100,000 that Jay Cooke poured into Chase’s political coffers, induced Chase to return the favor by granting Cooke, newly set up as an investment banker, an enormously lucrative monopoly in underwriting the entire federal debt.
Cooke and Chase then managed to use the virtual Republican monopoly in Congress during the war to transform the American commercial banking system from a relatively free market to a National Banking System centralized by the federal government under Wall Street control. A crucial aspect of that system was that national banks could only expand credit in proportion to the federal bonds they owned – bonds which they were forced to buy from Jay Cooke.
Jay Cooke & Co. proved enormously influential in the post-war Republican administrations, which continued their monopoly in under-writing government bonds. The House of Cooke met its well-deserved fate by going bankrupt in the Panic of 1874, a failure helped along by its great rival, the then Philadelphia-based Drexel, Morgan & Co.
J.P. Morgan
After 1873, Drexel, Morgan and its dominant figure J.P. Morgan became by far the leading investment firm in the U.S. If Cooke had been a "Republican" bank, Morgan, while prudently well connected in both parties, was chiefly influential among the Democrats. The other great financial interest powerful in the Democratic Party was the mighty European investment-banking house of the Rothschilds, whose agent, August Belmont, was treasurer of the national Democratic party for many years.
The enormous influence of the Morgans on the Democratic administrations of Grover Cleveland (1884–88, 1892–96) may be seen by simply glancing at their leading personnel. Grover Cleveland himself spent virtually all his life in the Morgan ambit. He grew up in Buffalo as a railroad lawyer, one of his major clients being the Morgan-dominated New York Central Railroad. In between administrations, he became a partner of the powerful New York City law firm of Bangs, Stetson, Tracey, and MacVeagh. This firm, by the late 1880s, had become the chief legal firm of the House of Morgan, largely because senior partner Charles B. Tracey was J.P. Morgan's brother-in-law. After Tracey died in 1887, Francis Lynde Stetson, an old and close friend of Cleveland's, became the firm's dominant partner, as well as the personal attorney for J.P. Morgan. (This is now the Wall St. firm of Davis, Polk, and Wardwell.)
Study our real history and economics at mises.org & lew's place below.
Everything the Austrian Economists (most like the Founders, Locke & Smith) have said about fiat money and it's expansion and contraction by govts is proving dead right yet again - Yet Keynes & Marx live on - how pathetic.
www.lewrockwell.com
FinHatch – I appreciate the comment but don’t think this argument is very similar to the Club of Rome argument at all.
First of all, I am suggesting that population is going to be one of the shortages, not that population growth is going to cause shortages.
Second, this is not a Malthusian argument. I would recommend reading my last article to understand what I believe is occurring today in the developing world. The process of economic development that is taking place in China, India, and elsewhere is sustainable, and it is bringing a middle class lifestyle to billions of people who, up until recently, had been living at levels only marginally above subsistence. This means unprecedented demand for metal, oil and higher protein foods. And that will continue to put upward pressure on the available resources. I have no doubt there will be new technology and substitution. There will have to be, because the prices of raw materials brought on by this degree of development will require it.
Finally, I would point out that the Club of Rome made a speculation about what might happen. This argument is based on what IS happening, right now.
THE REALITY IS THE FED IS ON A SLIPPERY SLOPE. I PREDICT THAT THE FED WILL BEGIN RAISING INTEREST RATES BY THE END OF THE YEAR OR FIRST OF NEXT YEAR TO FIGHT INFLATION. THE RISE IN RATES WILL BE BREATHTAKING AND RIVAL OR EVEN SURPASS WHAT OCCURRED IN THE LATE 70'S OR EARLY 80'S. SAY HELLO TO DEPRESSION, I HAVE LITTLE DOUBT THAT IT IS COMING SOONER RATHER THAN LATER.
BY THE WAY, I HAVE LISTENED WITH GREAT DISBELIEF TO ALL THE POLITICIANS, THE FED AND WALL STREET PLEADING THAT THEY DID NOT SEE THIS COMING. I SAW IT COMING SEVERAL YEARS AGO. I AM NOT AN EXPERT OR STUDENT OF THE MORTGAGE INDUSTRY, BUT AS AN EAST COASTER LOOKING TO BUY AND RETIRE IN CALIFORNIA, I HAVE OBSERVED THAT MARKET FOR OVER 10 YEARS. I BECAME AWARE THAT SOMETHING WAS SERIOUSLY WRONG AND LEARNED SEVERAL YEARS AGO OF SOME OF THE IRRESPONSIBLE LENDING PRACTICES THAT WERE IN PLAY.
CASUALLY LOOKING AT HOMES FOR SALE IN SOUTHERN CALIFORNIA MORE THAN TWO YEARS AGO, I OBSERVED THAT MANY WERE VACANT AND HAD BEEN ON THE MARKET MANY MONTHS. THE SMELL OF DESPERATION WAS IN THE AIR.
AT THAT TIME, THE MORTGAGE LENDING PRACTICES THAT I WAS AWARE OF INCLUDED: NO DOC LOANS, NO DOWN PAYMENT, INTEREST ONLY LOANS, PAYMENTS BASED ON AN ARTIFICIALLY LOW INTEREST TEASER RATE WHICH INCREASED THE PRINCIPLE OVER TIME, 100 PERCENT PLUS FINANCING ETC. MOREOVER, MORTGAGE BROKERS ALONG WITH THE REALTOR WERE AT OPEN HOUSES READY TO DO THE DEAL ON THE SPOT. AT THE TIME, I WAS SURPRISED BY THIS PRACTICE. IT TURNED OUT THAT THESE EXTREMELY UNSOUND PRACTICES WERE JUST THE TIP OF THE ICEBERG.
MOST OF THE HOMES IN SOUTHERN CALIFORNIA WERE PRICED IN THE $500,000 AND UP RANGE--THESE WERE NOT NEAR THE OCEAN. A DECENTLY SIZED HOME IN THE 2200 SQ FT RANGE WITH A VERY SMALL LOT WAS SELLING FOR 700,000 TO 800,000 AND UP RANGE. MANY WERE ON THE MARKET AT OR OVER $1 MILLION.
I COMMENTED TO SEVERAL REALTORS HOLDING OPEN HOUSES IN S. CAL THAT THERE WAS NO WAY THAT EVERYONE BASED ON THEIR INCOMES COULD AFFORD THESE INFLATED PRICES. IT WAS A PUZZELMENT TO ME AS TO WHY AND HOW THIS COULD BE HAPPENING. YET, IT ALL APPEARED SO EASY. EVERYONE WHO WANTED TO BUY SEEMED TO HAVE NO TROUBLE GETTING A LOAN. I WAS NOT YET READY TO BUY AND BELIEVED THAT PRICES HAD TO COME DOWN.
WELL WE NOW KNOW HOW IT WAS DONE—WITH SMOKE AND MIRRORS. THE US GOVERNMENT INCLUDING THE FED KNEW WHAT WAS GOING ON BUT DID NOTHING TO STOP IT OR EVEN SLOW IT DOWN. NO GOVERNMENT OFFICIAL WANTED TO PULL THE PLUG ON THE PARTY. MOST ESPECIALLY THE WHITE HOUSE WANTED TO KEEP THE ILLUSION OF A HEALTHY EXPANDING ECONOMY ALIVE AND THEY DID.
THE MOST SICKENING PART OF THIS NOW IS THAT RATHER THAN TAKE RESPONSIBILITY FOR WHAT THEY CREATED (THE FED, OTHER GOVERNMENT OFFICIALS AND WALL STREET), THEY NOW PAPER OVER THE DISASTER BY CLAIMING THAT THEY WERE ONLY TRYING TO MAKE HOME OWNERSHIP AFFORDABLE FOR THE POOR MASSES. THEY BLAME THE PROBLEMS ON THOSE THAT PURCHASED HOMES BECAUSE THEY LIED ABOUT THEIR INCOMES AND/OR JOBS ETC. WHAT BS.
THE TRUTH IS THAT MANY IF NOT MOST OF THE BUYERS OF HOMES USING SUB-PRIME AND OTHER NON-CONFORMING LOANS WERE CONNED BY GREEDY SALES AND MORTGAGE BROKERS WHO WERE ONLY INTERESTED IN THE COMMISSIONS THEY COULD GENERATE. I SUBMIT THAT ALL THE PURVEYORS OF THESE LOANS KNEW WHAT THEY WERE DOING AND WOULD NOT HAVE MADE THESE LOANS IF THEIR OWN MONEY WAS AT RISK. THIS ALSO APPLIES TO EVERYONE UP THE CHAIN WHO DID NOT INTEND TO BE MORE THAN TEMPORARY CONDUITS OF THIS FRAUDULENT PAPER.
DO THE GOVERNMENT, FED AND WALL STREET REALLY WANT US TO BELIEVE THAT THEY WERE THAT STUPID OR THAT WE ARE? NO, THEY WERE GIVING A PARTY AND EVERYONE WAS INVITED. THE ONLY REASON WALL STREET IS NOW FEELING SOME OF THE PAIN AS THE MORTGAGE GAME ENDED IS BECAUSE THEY WERE STILL CREATING THIS PAPER EVEN AS THE HOUSE OF CARDS WAS COLLAPSING. THEY JUST DIDN’T HAVE TIME TO GET RID OF IT BEFORE THE MUSIC STOPPED.
WHO BENEFITED? THE PRIMARY BENEFICIARIES WERE THE FAT CATS ON WALL STREET WHO ACHIEVED GREAT WEALTH WITH A $B BY CREATING NEW MONEY INSTRUMENTS THAT TURNED STRAW INTO GOLD AND SOLD IT TO EVERY FOOL AROUND AS THE REAL STUFF. TO A LESSOR EXTENT, THE POLITICIANS WHO DEPEND UPON THE LARGESS OF WALL STREET AND OTHER FAT CATS ALSO BENEFITTED. OF COURSE, THE POLITICIANS GOT THEIR TAKE BECAUSE WALL STREET WANTED THEM TO STAY OUT OF THE WAY WHICH THEY OBLIGINGLY DID.
SOONER OR LATER, THE AVERAGE US CITIZEN IS GOING TO REALIZE THAT THEY ARE THE CHUMPS, BECAUSE THEY ARE PAYING THE BILLS BUT GET NO SAY IN HOW THE MONEY IS SPENT. MOREOVER, THEY ARE THE MAJOR LOSERS AS THEIR WEALTH HAS BEEN TOTALLY DESTROYED.
NO, I DO NOT HATE WALL STREET OR THE GOVERNMENT. I JUST WANT WHAT I AND OTHER TAXPAYERS HAVE PAID FOR WHICH IS HONEST AND RESPONSIBLE GOVERNMENT. CORRUPTION AND GREED HAS TO GO. WE NEED AN OVERHAUL OF THE GOVERNMENT. GOVERNMENT’S ROLE IS TO STAY OUT OF THE WAY AND LET THE MARKETS WORK EXCEPT WHEN NECESSARY TO PREVENT FRAUD AND RECKLESS BEHAVIOR. MOST IMPORTANT, THE POLICY SHOULD NOT BE “LAISSEZ FAIRE” OR “LET THE BUYER BEWARE.”
THE GOVERNMENT NEEDS TO IMPOSE REASONABLE AND SOUND REGULATION TO PREVENT FRAUD AND IRRESPONSIBLE BEHAVIOR THAT PUTS THE ECONOMY AND THE SAFETY OF THE UNITED STATES AT SERIOUS RISK. WE AND THE GOVERNMENT NEED TO BE PROACTIVE TO STOP OBVIOUS FAILURES OF THE SYSTEM BEFORE THEY REACH THE CURRENT STAGE. THIS COULD HAVE BEEN DONE AND SHOULD HAVE BEEN DONE. SHAME ON THOSE WHO HAD THE POWER TO INTERVENE BUT DID NOT DO SO.
BECAUSE OF OUR INCOMPETENT GOVERNMENT AND THE IRRESPONSIBLE BEHAVIOR OF THE RICHEST AMONG US, WE ARE NOW DESTINED TO RIDE A ROLLER COASTER ECONOMY OVER THE NEXT DECADE. UNFORTUNATELY, WHEN THE RIDE STOPS IT WILL BE QUIT EVIDENT THAT MOST OF US DID NOT SURVIVE THE FINANCIAL TURMOIL. GLOOM AND DOOM YES, BUT IT APPEARS TO BE REALITY. DON’T BLAME ME, I DID NOT CREATE THIS MESS AND IF I HAD THE POWER WOULD HAVE TRIED MIGHTILY TO STOP IT IN ITS TRACKS LONG BEFORE IT GOT TO THIS POINT. OF COURSE, WALL STREET AND ITS POLITICAL CRONIES WOULD HAVE PREVENTED ME FROM ACHIEVING THAT OBJECTIVE. SAD BUT TRUE!
FINALLY, I MAKE ONE LAST POINT. ONE OBJECTIVE OF “AL QAEDA" WAS TO DESTROY THE UNITED STATES POLITICALLY AND FINANCIALLY. WELL GUESS WHAT. WE HAVE DONE THE JOB FOR THEM. JUST LOOK AROUND AND THE EVIDENCE IS THERE FOR ALL TO SEE. BY THE WAY, WHERE IS OSAMA BIN LADEN? I THOUGHT HE WAS THE ENEMY. HISTORY IS REPLETE WITH EMPIRES THAT FAIL BECAUSE OF ILL CONCEIVED WARS AND FINANCIAL RUIN. SINCE MY ROOTS RUN BACK TO THE EARLY 1700’S IF NOT BEFORE, I AM APPALLED AT WHAT IS HAPPENING TO THIS COUNTRY. WE NEED TO GET SMART REAL FAST OR WE WILL BE JUST A MEMORY OF WHAT COULD HAVE BEEN.
OK, I HAVE LOTS OF OTHER POINTS. ONE THAT I THINK NEEDS TO BE ADDRESSED IS THAT POLITCAL CAMPAIGNS NEED TO BE PUBLICLY FUNDED WHICH WOULD BE A LOT LESS EXPENSIVE THAN THE BILLIONS IN IRRESPONSIBLE EARMARKS THAT CONGRESS INSISTS IS THEIR RIGHT UNDER THE CONSTITUTION. SECOND, SINCE CONGRESS WILL NOT ADDRESS THE ISSUE, WE NEED A CAREFULLY DRAFTED CONSTITUTIONAL AMENDMENT THAT WOULD REQUIRE THAT ALL SPENDING BILLS BE FULLY VETTED PUBLICLY THROUGH THE CONGRESSIONAL PROCESS. THE ONLY EXCEPTION WOULD BE REAL EMERGENCY SPENDING THAT WOULD HAVE TO BE FULLY VETTED AFTER THE FACT TO ENSURE THAT WHAT WAS APPROVED MEETS SOUND FINANCIAL STANDARDS. ALTHOUGH SOME MAY CONSIDER THESE PROPOSALS ILL CONCEIVED, THEY SHOULD AT LEAST BE EXHAUSTIVELY CONSIDERED AND VETTED AS TO BENEFITS AND RISKS.
HERE’S TO A NEW DAY FOR THE USA. LET'S MAKE IT HAPPEN!
My question is - what happens in 5 years, when average Joe or Jean Farmer will retire? Who's going to fill these boots? My guess is that we will see A LOT higher food prices, especially dairy, simply to attract new people into the business to keep it running.