The deflation case: caught, gutted, poached and eaten

[grapejelly]

Re: The deflation case: caught, gutted, poached and eaten

This is a hot topic of debate within the hedge fund community. The general consensus is that managers bailing out of non-AAA rated corporates are not moving money from corporates into commodities but rather to the "safety" of government bonds, staying within the fixed income asset class. The perception of relative low default risk is creating a premium over inflation risk, so bond prices on the long end are rising and yields falling. How are commodity prices related? One theory I like is that hedge funds are buying into commodities to hedge the inflation risk in their bond positions.

Sovereign bond prices on the long end are rising a bit but I wonder for how long...Meanwhile, I think a lot of hedge fund money has been moving into oil. I think oil is around US$100 per barrel because of the flight out of financial assets.

I can see a pile-in to precious metals soon. There may be a bit of a correction as the Euro falls agains the US$ (I expect this to happen)...but not for long.

[touchring]

Re: The deflation case: caught, gutted, poached and eaten

You mean the action has not even started for gold? :eek:

I can see a pile-in to precious metals soon. There may be a bit of a correction as the Euro falls agains the US$ (I expect this to happen)...but not for long.

[Slimprofits]

Re: The deflation case: caught, gutted, poached and eaten

link

The price of tuition among private universities increased by 6.3 percent this year, while public colleges increased tuition by a drastic 6.6 percent, according to The College Board.

And the alternative is to delay attending or not attend at all. Of course, unemployment is rising in what did Fred say, 46 states?

[donalds]

Re: The deflation case: caught, gutted, poached and eaten

"Some will raise the point that the money supply is growing rapidly, by some measures, but I would counter that by other measures it is not. And please do not suggest, as some do, that the soon-to-be $180 billion Term Auction Facility, by which the Fed provides liquidity to banks, is proof of monetary inflation. It is not. The Fed "sterilizes" the money they inject through the use of the TAF, so that while they inject money into banks, they take a similar amount from the economy as a whole. Over the last few years, we have had little growth in the base money supply, and certainly nothing to get worked up over."

From John Mauldlin's email letter, yesterday (Friday).

[donalds]

Re: The deflation case: caught, gutted, poached and eaten

More from Mauldin:

"Today, there is little inflationary pressure coming from wage growth. Until that happens, I doubt the Fed will worry too much about inflation getting away from them."

"So, taking the longer view, we have two very serious deflationary forces at work in the economy that could lead to a serious recession if not dealt with, and the likelihood that the inflation numbers that are causing heartburn today will moderate by the end of the year."

Welcome to the deflation team!

[Guest]

Re: The deflation case: caught, gutted, poached and eaten

Xxxxxxxxxxxxxxxxxxxxx

Moved

[FRED]

Re: The deflation case: caught, gutted, poached and eaten

And the alternative is to delay attending or not attend at all. Of course, unemployment is rising in what did Fred say, 46 states?

Rising unemployment in 46 states, flat in 2, falling in 2 Nov. to Dec. 2007.

California state GDP makes it the 7th largest nation in the world, on a par with Spain, Italy, and China.

Zeroing in on California, unemployment by county, rising in 50 of 58 counties between Dec. 2006 and Dec. 2007.

California unemployment by county (Source: Bureau of Labor Statistics and iTulip.com)

[MEDIA="600,400,1,1"]http://www.itulip.com/movies/unemploymentMovie.swf[/MEDIA]
Recession by state 1978 to 1999 (Source: Economagic)

[Guest]

Re: The deflation case: caught, gutted, poached and eaten

Ackerman's comment may begin to appear increasingly as "pretzel logic" as commodities prices continue their ascent. At which point does it begin to recognize it's own convolution?

<< But if Fed stimulus continues to drive up prices for everything but housing, that is hardly a recipe for inflation; rather, it portends only a more spectacular bust when prices at the pump reach $5, and eggs $12 a carton. >>

Of course - eventually there is a "big all assets down bust". But if that final bust represents a scant 5% of the entire economic trajectory of this economic decline at the very end, what actionable use is it, while the other 95% of the decade (or two) is spent sweating it through the long-drawn-out process where purchasing power gets so degraded it only buys $10 a gallon gas, and $20.00 a carton eggs?

What use is it, for an economic analyst to micro-analyse the "approaching inevitable washout bust" when 95% of the entire decade (or 2 decades?) instead patently displays the progression to $20 a carton eggs?

[metalman]

Re: The deflation case: caught, gutted, poached and eaten

More from Mauldin:

"Today, there is little inflationary pressure coming from wage growth. Until that happens, I doubt the Fed will worry too much about inflation getting away from them."

"So, taking the longer view, we have two very serious deflationary forces at work in the economy that could lead to a serious recession if not dealt with, and the likelihood that the inflation numbers that are causing heartburn today will moderate by the end of the year."

Welcome to the deflation team!

how much gold/silver/platinum did you buy back in 2001 when itulip was saying: inflation, ho!

let me guess: none. right? missed the whole trip so far, right? hoping deflation will take everyone back to your level, perhaps?

just guessing.

else the stuff you say makes no sense, assuming you agree with muddle-through mauldin. translation of his muddle-through theory: "on the one hand this, on the other hand that". classic.

"we have two very serious deflationary forces at work in the economy that could lead to a serious recession".

asset price deflation!
asset price deflation!
asset price deflation!
asset price deflation!
asset price deflation!

repeat after me.

asset price deflation!
asset price deflation!
asset price deflation!
asset price deflation!

debt financed shit... real estate, etc. in local currency... dollars.

recession = commodities price deflation? not always.

where's those itulip charts... ah, here they are...

argentina 1988 - 1991... falling real gdp in dollars, rising nominal gdp in reals, and rising inflation. peg real to dollar 1992.





usa 2008 - 2011... falling real gdp in gold, rising nominal gdp in dollars, and rising inflation. peg dollar to, what, euro
or gold in 2012?

get it?

sheesh!

[Guest]

Re: The deflation case: caught, gutted, poached and eaten

Mauldin's analysis of this market is a LUG NUT. Give him an "F" for sound actionable advice here.

Used to read Mauldin regularly - but he has palled somewhat, due to discovering a vague irritation with the mixture of "on the one hand this, but on the other hand that" analysis, interspersed with copious preening in his personal travel diaries, which he regularly posts for reader's admiration. His readers are regaled with breezy updates in every letter he posts, of the well heeled junkets he undertakes, from New York to London, to Paris, to Johannesburg, to safaris in Tanzania, back to tour Prague and Warsaw - so that we seem to be getting prepped for a blow by blow account of his eventual "grand coup", a dinner with her Majesty Queen Elizabeth.

Enough already Mr. Mauldin - concentrate on getting the biggest actionable call right (readers should seek to protect themselves from inflation, not deflation, and soon!). We can all catch up with your peripatetic travel at our own discretion maybe if we are all agog about it, by discreetly calling your secretary?

____________

February 29, 2008

Thoughts from the Frontline Weekly Newsletter - Stagflation and the Fed

Memo from the Fed: Inflation? What Inflation?

The inflation numbers for January were high. The Consumer Price Index (CPI) rose 0.4% in January, which means a rise of 4.4% over the last 12 months. If you annualize the 3-month trend, it is 6.8%. By the way, that 3-month average is a useful tool for discerning trends, so the trend in inflation is not good.

Just last August, annual inflation was 1.9%, including food and energy. Notice the rise since then. Also notice the rise in core inflation (2.5%) and the 3-month trend of 3.1%. This is clearly above the Fed's comfort zone of 2%, although good friend Paul McCulley makes a good case that the comfort zone should be higher.

Bernanke practically promised more rate cuts at this week's

But how can they cut if inflation is high and rising? Bernanke and Kohn made it clear that the think the #1 task right now is to fight the recession/slowdown in the economy. They are not going to let a little inflation keep them from that goal, nor are they worried about the dollar.

But won't that guarantee a repeat of the '70s and require a new Volker to come in and cause a deep recession to bring inflation back down?

I don't think so. To understand why not, we have to look at just what inflation is and how it works its way into the economy. There are significant differences from the 70's and today.

Some will raise the point that the money supply is growing rapidly, by some measures, but I would counter that by other measures it is not. And please do not suggest, as some do, that the soon-to-be $180 billion Term Auction Facility, by which the Fed provides liquidity to banks, is proof of monetary inflation. It is not. The Fed "sterilizes" the money they inject through the use of the TAF, so that while they inject money into banks, they take a similar amount from the economy as a whole.

Over the last few years, we have had little growth in the base money supply, and certainly nothing to get worked up over.

[ Comment : What does Mauldin's sophistication count for if he cannot think his way out of this conceptual box?? Look for the inflationary flags abounding on the ground (are they observable or not today?), and work your way back from there to more accurately locate the inflation mechanisms! Rethink your premise Mr. Mauldin - the rampant inflation data on the ground, or the action in commodities suggest you might at least consider rethinking your premise! ]

But what if the Fed decided that inflation was a problem and decided to go ahead and raise rates and shove the economy into recession. Would that reduce oil prices? A little, as demand would weaken. But oil prices are not a result of monetary inflation or low interest rates. They are a result of rising demand for energy, particularly from Asia, and flat supply. The Fed has no control over oil prices.

Damn the Inflation Torpedoes! Full Speed Ahead!

So, let's look at why the Fed is not focusing on inflation, despite the numbers from last week. First, they truly think that inflation is going to come down on its own this year, and I agree.

As I have written for some time, it would be a very strange recession indeed, for inflation to be persistent, particularly with two major bubbles slowly collapsing before our eyes. The housing bubble is only beginning to be felt. It is clearly going to have a negative effect on consumer spending, and that is not a climate for demand-led inflation. It is just the opposite.

Again, this is not an inflationary force. It is just the opposite. As I have argued for over a year, the subprime crisis will not be contained. It is going to spread. The shoe will drop. Count on it.

Further, if you look at core goods prices, that is everything but food and energy, inflation is 0.2% over the last year. Yes, I know that we have to eat and buy gas, but in the '70s everything was going up.

And that included wages. Today, there is little inflationary pressure coming from wage growth. Until that happens, I doubt the Fed will worry too much about inflation getting away from them. That is not to say that it couldn't happen, but we would have to see wages and goods prices rise to convince the Fed inflation is an issue.

[ Comment : "On the one hand this, but on the other hand that" ... Mauldin leaves his own conclusions vague, ascribes all the above conclusions to the FED, and so further hedges his own already "safely agnostic" positions here ]

And one last point. Notice in the table above that inflation started picking up in August as food and energy costs rose. In six months, the year over year comparisons will be from a much higher base. Unless you think oil is going to $150 a barrel by the end of the year, energy inflation will be much lower. That does not mean prices will come down, though they may. In fact, I expect them to in the short run.

But if oil is $100 a year from now, then that will mean there was zero inflation in gasoline over the preceding 12 months. Remember, we measure inflation in annual terms.

The same with food. We are having massive dislocations in food availability due to using land to grow corn to make ethanol. These things will sort themselves out, and I expect that food prices will be flat to down from here for the next 12 months.

[ Comment : "On the one hand Mauldin believes soaring oil prices are "a result of rising demand for energy, particularly from Asia, and flat supply", yet on the other hand he chooses to believe rising food prices are only due to ethanbol?? ... You can't have it both ways Mr. Mauldin! Here he glosses right over soaring agri-prices as another symptom of underlying global inflation. "They are only due to Ethanol"! --- And this gem : "I expect that food prices will be flat to down from here for the next 12 month" Indubitably a brilliant call Mr. Mauldin!" -- And now for some much anticipated travel itinerary updates? ]

So, taking the longer view, we have two very serious deflationary forces at work in the economy that could lead to a serious recession if not dealt with, and the likelihood that the inflation numbers that are causing heartburn today will moderate by the end of the year.

At least, that is the bet at the Fed. As I wrote last week, they are very concerned about the credit crisis. They are going to bring rates down, and I think it likely they will go below 2%. They may stay there longer than we now think if I am right about a protracted and slow Muddle Through recovery. I would not be surprised if I am writing about deflation by the end of the year.

[ Comment : " likelihood that the inflation numbers that are causing heartburn today will moderate by the end of the year. -- At least, that is the bet at the Fed" = Mauldinspeak > "On the one hand this, but on the other hand that" ... Mauldin hedges his bets here ]

I have kids at home waiting for me to take them out, so I am going to hit the send button. Have a great week, and remember, it is only a recession. We will get through this and back to solid growth, just as we always have. That is what free markets do.

Your still thinking we have just begun a bear market analyst,

[donalds]

Re: The deflation case: caught, gutted, poached and eaten

For a (much) less than superficial analysis of what took place during the crisis in Argentina, see:

http://www.newleftreview.org/?view=2410

[FRED]

Re: The deflation case: caught, gutted, poached and eaten

how much gold/silver/platinum did you buy back in 2001 when itulip was saying: inflation, ho!

let me guess: none. right? missed the whole trip so far, right? hoping deflation will take everyone back to your level, perhaps?

just guessing.

else the stuff you say makes no sense, assuming you agree with muddle-through mauldin. translation of his muddle-through theory: "on the one hand this, on the other hand that". classic.

"we have two very serious deflationary forces at work in the economy that could lead to a serious recession".

asset price deflation!
asset price deflation!
asset price deflation!
asset price deflation!
asset price deflation!

repeat after me.

asset price deflation!
asset price deflation!
asset price deflation!
asset price deflation!

debt financed shit... real estate, etc. in local currency... dollars.

recession = commodities price deflation? not always.

where's those itulip charts... ah, here they are...

argentina 1988 - 1991... falling real gdp in dollars, rising nominal gdp in reals, and rising inflation. peg real to dollar 1992.





usa 2008 - 2011... falling real gdp in gold, rising nominal gdp in dollars, and rising inflation. peg dollar to, what, euro
or gold in 2012?

get it?

sheesh!

No need to go to the Argentine extreme. The Great US Inflation, as discussed in the report Understanding the Evolving Inflation Process, U.S. Monetary Policy Forum, Jul 2007 (pdf, 77 pages, very technical) shows inflation rising through the early 1970s recession in the US.

[metalman]

Re: The deflation case: caught, gutted, poached and eaten

For a (much) less than superficial analysis of what took place during the crisis in Argentina, see:

http://www.newleftreview.org/?view=2410

i'll take that as a "no" you didn't buy any gold in 2001 or 2002 or 2003 etc. because every year deflation was... just around corner.

the new left review article on argentina is very interesting... thanks for posting it. very detailed account. but it's weak on the point i'm making.

"The economy contracted steeply, with GDP falling by a record 16.3 per cent in the first quarter of 2002, and manufacturing output by almost 20 per cent."

the data in the itulip graph show that nominal gdp growth in the real was up during the period. the reason that's important is that we are hearing that the usa is not in recession yet and in nominal gdp terms that is correct. but so what? it ain't true in euro terms or gold terms.

[donalds]

Re: The deflation case: caught, gutted, poached and eaten

That's right, metalman, didn't buy gold in 2001-2003. Sunk most of what I had in oil (or related) stocks, like Flour, Transocean, Oxy, etc., and did quite well, thank you.

When i get an itchin to listen in on the gold bugs I go to financialsense.com podcast to catch a whiff of the hyperinflation depression coming. Don't usually get through the entire thing though . . . the belly laugh soon turns to a belly ache.

[Guest]

Re: The deflation case: caught, gutted, poached and eaten

Jim Puplava at Financialsense will give you a lot better guidance than your globetrotting Mr. Mauldin I'll wager.