Fighting Yoda

Fears of Inflation Seem Overblown

Agree you can have inflation without recovery. But you can have deflation despite recovery - shallow recovery, reset to lower level. And lot of people equate inflation and dollar devaluation as the same thing, it is not. Dollar may devalue for separate reasons, but we can still have deflation.

Once again - inflation is a monetary phenomena - but you have to measure money correctly - credit is the critical piece. As credit implodes - demand contracts - leads to deflation.

China etc demand - US consumer demand is higher than China, India, Brazil, Russia combined. If this demand goes down 10% (it is likely going down more than that) - BRICs cannot offset.


On May 30 12:33 PM dcb wrote:

> the first mistake you made is believing anything that comes out of
> the fed. The second error all over the place is the assumption that
> inflation requires recovery. As I mentioned Argentina, iceland, and
> the asian currency crisis prove that isn't the case. Zimbawae proves
> this isn't the case. The markets are showing signs of inflation every
> day in front of you, oil is rocketing upwards, commodites going higher.
> The taxi driver knows he is paying 30% more for gas than just a few
> months ago.
> Prices going down for a few months does not deflation make, a long
> period of deflation will not happen and isn't happening. Regardless
> of velocity of money, etc. the drop in value of the dollar means
> we can't have deflation. we can have a ruined economy but prices
> will rise until we are all in the poor house. We will have capitalized
> banks. If you doubt a word of what I say read about iceland, their
> inlfation, and their economy. they had a huge contraction of GDP
> and inflation at the same time. There is lots of information out
> there, articles, and statements of the people living in iceland.
>
>
> I wish the normal forces of deflation were being allowed to operate
> and run their way through the system so we would actually end up
> with a more stable economy. We weren't the bubble of Japan in the
> 90's where the tokyo palace was worth more than the entire state
> of california and hence we won't not have the deflation they had.
> It is clear common sense. Greenspan attempting to fight the deflation
> which never happened created the housing bubble and the commodity
> bubble and inflation. the exact same thing is happening now, only
> this time it will be worse. Because the fed is hell bent on preventing
> any deflation at all (there is nothing wrong with controlled deflation).
> The very collapse the fed tried to avoid by limiting the effects
> of deflation will be triggered by fed policy. We have seen this happen
> over and over in country after country. In fact fed policy will trigger
> the currency crisis that triggers the inflation that happens with
> a contracting GDP. All to prop up banks and avoid them having to
> mark their assets to true value. when you force money into a system
> faster than it can use it the result is not productive use but collapse.
>

Fears of Inflation Seem Overblown

"when recovery happens inflation will occur". You are suggesting recovery will happen- it maybe very far away. Also recovery may be very shallow, and also quite likley, the base will be reset to a much lower level.


On May 30 11:52 AM Steven Hansen wrote:

> we have laid the foundation for inflation. if there is no recovery
> i agree that inflation may not be a problem (L shaped recession).
> but when recovery happens inflation will occur.

Fears of Inflation Seem Overblown

Despite all the money printing deflation is taking root - CPI data clearly show that. CPI as usual under reports - it under reported inflation now under reports deflation. For inflation hawks - inflation is hard to come by when wages and demand fall - money printing cannot offset loss of income and confidence. If you believe in inflation you have to believe jobs will grow, and wages will rise. Does anyone believe that?

There is too much surplus capacity globally – look at China – do you think US is going to import all the junk that we imported from them. In US itself do we have shortage of auto or home capacity. Despite huge production cuts the capacity is still surplus. Nat gas is another very good barometer – rig count keeps going down but the inventories keep rising, and of course prices keep falling.

Green shoots are simply smoke and mirror tactics of Wall Street, meanwhile the Govt. is simply watering these weeds.

Velocity of money is dwindling as credit crunch continues, just because there is thaw in the credit markets (as measured by TED spreads) does not mean credit has increased. Credit is decreasing – both availability and demand. Money is money + credit – money may increase but if credit decreases more – net money has actually decreased.

SFP Fed had recently published a nice paper on the subject: U.S. Household Deleveraging and Future Consumption Growth
www.frbsf.org/publicat...

The Role of the 200-Day Average in Risk Management

200d ma should be used with 50d, 20d - to get the complete long term and short trem perspective. With volatility still so high - can't say which indicator will work best in the current environment.

Will just sit out the current madness - "markets can stay irrational longer than you can remain solvent"

April's Unemployment Report: Lies, Damned Lies, and Statistics

"Better than expected" is a tried and tested Wall Street game. Currently the Plunge Protection Team is very active and everything is being seen with rose colored glasses, and some botox added for good measure. Hey the banks have to raise money - good investment banking commissions are to be made - lets simply say - 'bottom is in' and happy days are here again. Lot of gullible investors will get suckered in.

However joining hands and clapping harder does not make the problem go away. We are in the Great Recession - no end in sight. 539K job loss is horrible number; we need to create about 125K jobs per month just to stay where we are. Temp hiring the leading indicator for future job gains is still not inching up, over time hours are paltry, work week (for people supposedly working full time) is at a historic low of 33.2.

This rally will die a bad death, all the suckers who have bought into this will be massacred again.

The Road Ahead for Investors

"....(1) equities will recover, (2) bonds will decline, and (3) inflation will return. We cannot know the timing of these things—but that uncertainty is what we, as investors, are being paid to take on...."

However difficult, if not downright impossible – you have to time the market or at least get the direction right. Eventually will recover could be fools game – will Nasdaq go to 5000 – highly unlikely even 3000 in the next 5 years, you may have bought Nasdaq on its way down from 5K at 3K or 2K and could still be way down. The biggest losses in this downturn have been incurred by those that picked the bottom too early and doubled down – likes of Ken Heebner, Bill Miller, even Buffet, etc.
Nikkei went down from the peak of 39K in 1989, to recover back 18 years later in ’07, to only to 18K. Now back to 8K – the levels of 1982. So “eventually it will recover” is not at all necessarily true. Once Tulip mania is over – no one wants to pay a dime for it. We likely will go through a phase of equity aversion – likely to last several years, valuations will not matter. Beauty is in the eye of beholder – if no one wants something, its price can fall and stay there forever.

You may not get it right but still need to forecast the bottom within +/- 5 or 10%, and act on it. My personal forecast for S&P is 500 – 10x$50. I will start buying at 550 and will average with the market – up or down. I am not enamored by these govt. inspired rallies – they will fade quickly as so many in the recent past.