D. McHattie

Deflation vs. Inflation: The Great Debate Rages On

We are still talking about inflation and deflation as though they affect all assets, goods and services equally. This is usually, in general, true. But not now.

While I believe that it is never 'different this time', I also believe that each situation is slightly unique.

What makes our current situation unique is the uneven impact of inflation and deflation.

The most important factor today is the decline of US dollar hegemony. Not only do our trading partners no longer want to hold our currency as their reserves, they don't want to conduct transactions between each other in our currency. The dollar will decline.

As the dollar declines, the value of everything that cannot be exported from the US declines. Real estate, for one, is impossible to export and will continue to fall. US labour is another item whose value will diminish.

Labour-intensive goods and services made/provided in the US for the US market will decline in price. This is bad news for factory workers, barbers, landscapers, truck drivers, etc.

Items sold on the international markets will increase (ie: ag commodities, base metals). So will items that can take the place the US dollar currently occupies as a reserve (ie: precious metals).

Rising Commodities Mean No Deflation

'Inflationary depression' is another.


On Jun 09 04:58 PM Jimbo wrote:

> A proposed means to resolve all the contrary opinion above: STAGFLATION

Liquidity Is Working... At Least in China

Sober Realist, I just read your instablog and think I understand your point a little better now. You present a compelling body of information.

The part of your story that resonates with me is the inefficiencies and misallocations of capital produced by a command-and-control economy like China's.

I'm not entirely convinced at this point since the consumption level in China is so low and their population so large that even a moderate uptick could produce the consumption necessary to absorb their supply.

But you have me thinking, thank you.

Liquidity Is Working... At Least in China

Sober Realist, do you really expect the bulk of the Chinese population to continue living in veritable poverty? By choice? Because it's part of their 'culture'?

That seems to be what you're saying, perhaps I'm putting words in your mouth.

What is Hong Kong like? What is Singapore like? It seems to me that the residents of these Asian cities have adjusted quite well to the availability of material goods - they consume them.

I'm with Peter Schiff on this one: the Chinese make stuff for us and we give them nothing in return but rapidly devaluing pieces of paper.

Why would they not just keep the stuff for themselves?

This 25% growth in auto sales, to me, points to a widespread desire among the Chinese to have the creature comforts that we have.

You know what they say in America: when the going gets tough the tough go shopping. Well the going has gotten tough for the global economy and the Chinese went shopping.

Liquidity Is Working... At Least in China

I beg to differ. If you have a nation of 1.3B people, most of whom have very little in the way of material goods, increasing supply is exactly how you expand.

There is very little end to demand for everything in China. Example: auto sales in China increased 25% last year, surpassing total sales in the US for the first time.

You don't think the Chinese would like to watch sports on a nice flat-screen tv? You don't think Chinese women like to go shopping?

Give them no return on their savings coupled with a wide variety of goods to choose from and even the Chinese will buy with both fists.


On Jun 02 07:02 PM Sober Realist wrote:

> Commodities/stocks are rising from the sugar (artificial stimuli)
> being fed into the world economy. Right now the popular thesis is
> that the stimuli are actually working to bring the "real economy"
> back. Only the Chinese are expanding into the teeth of the worst
> global downturn since the 30's. They say they will will try "a thousand
> ways and a hundred plans" to stabilize external demand.
> (online.wsj.com/article...)
> "The Chinese government has offered tax breaks and rebates to help
> exporters keep exporting whether profitable or not. It is offering
> incentives and threatening punishments for companies to retain workers
> whether necessary or not. And it is urging banks to loan more money
> — and the first four months have seen a massive increase in domestic
> loans to companies (though primarily to state-owned enterprises,
> not the private sector) to help them fulfill their employment and
> export requirements — whether profitable or not."
> There's a real danger of a trade war in the not too distant future
> when China starts dumping their cheap goods onto the global market.
>
> "The first shot was their dumping of steel onto Europe. The Euro
> zone is already complaining. You can't expand into a massive contraction.
> Free markets wouldn't do it, but the China command economy thinks
> that it can. China thinks they can avoid this downturn by expanding
> supply. I am sorry, but that is as dumb as thinking the US can avoid
> this downturn by more consumption."
>
>
>
>

Why Investors Should Avoid TIP

An extremely timely and insightful article. But I only agree with the recommendations in your last paragraph.

International TIPS are no better than those in the US - they fall victim to the same flaws in CPI calculations and will ultimately understate inflation.

I also have concerns about shorting us treasuries with TBT. Although you are right that the fundamentals of treasuries are terrible, the federal reserve is openly attempting to manipulate high prices and low yields in all treasuries and I'm reluctant to fight the fed head-on.

So just stick to GLD or the higher returning GDX for gold exposure; stick to DBA or its leveraged cousing DAG for ag commodity exposure; stick to DXO or perhaps PBW for energy exposure.

As I've remarked elsewhere, TIPS are now the ultimate sucker's bet.

The Reflation Trade Portfolio

"It seems like the "thread-the-needle" or "goldilocks" scenario is the least likely outcome."

No kidding. Especially given the outsize proportion of owner's equivalent rent in the calculation of our inflation indices. Rents, home prices and owner's equivalent rents are falling and will skew our inflation measurements, making us think that inflation is moderate when, really, in everything but housing inflation is totally out of control.

Bernanke is definitely going to err on the side of inflation.

My reflation etfs would be GDX, PBW (or GEX) and NLR (do you realize how many nuclear reactors are in production?).

Jim Rogers: U.S. About to Have a Currency Crisis

HardwoodFlooring said "the dollar is in bad shape in relation ship to what?"

Jim Rogers has the answer for you, Hardwood: commodities. The dollar is in bad shape relative to real things of real value like food and metal.

Yes, practically all currencies will suck due to central bank easy money policy. But people still need to eat.

Commodities ETFs: The Time Is Not Yet Ripe

I appreciate that you've taken the time to author this article but are you really suggesting that we attempt to time the exact bottom of all commodities before investing in, say, gold or oil?

While it may be true that commodities, in general, are still in decline, I feel this should not dissuade investors from considering a position in some specific commodities.

Jim Rogers is not selling - he is buying agriculture and he is buying it now.