The deflation case: caught, gutted, poached and eaten

[GRG55]

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

EJ writes in:

With so much riding on the inflation bet, vigilance bordering on paranoia is called for. That said, with statements like these, it's difficult to see how the Fed will be able to engineer a serious and sustained decline in oil prices.

Oil prices won't fall under $60-$70: Naimi

Sun Mar 2, 2008 9:03am EST

ALGIERS (Reuters) - Oil prices won't fall below $60 to $70 a barrel as this is the minimum level at which alternative fuels are economically viable, Saudi Oil Minister Ali al-Naimi said in remarks published on Sunday by Algeria's APS news agency.

"From now there's a line below which prices won't fall," the official agency quoted him as saying in an interview with Petrostrategies magazine.

He said this involved "the marginal cost of production of alternative fuels, whether that's biofuels or tar sands" which had a threshold "between $60 and $70", APS reported.

I met with the largest investment bank in the Middle East in NYC a couple of months ago. They were offering a product to funds interested in GCC equities exposure. Their investment thesis was well summed up by one of the hedge fund managers in the room as "long oil." With oil already over $90, everyone was skeptical. But what if oil producers are in fact committed to holding supplies below demand to maintain prices over the price of alternatives in order to support a US Alternative Energy boom? What if that's the new political arrangement with the west?

1. It is against my nature to be making the kinds of musings I have posted in the past few days. My investing method is to buy what is cheap and hold it until it is dear. Many of the oil positions I hold today were purchased back in 1999 and 2000 when everyone was ga ga over tech, and nobody wanted petroleum. However, the vigilance bordering on paranoia description is exactly how I feel for the first time this decade.
2. To be clear, I do not expect the Fed to be able to engineer a "serious and sustained decline in oil" or any consumed commodity. My concern is Central Bank reaction to a near term parabolic overshoot that is not driven by fundamentals, but is purely a short term financial "event". No matter how well the rationalization is presented, wheat limit-up EVERY DAY in a week is no longer being driven by fundamentals. This is money smelling blood. If, for example, bond holders are hedging with commodities, they will not hesitate to close those hedges if there is any hint the Fed decides it needs to deal with skyrocketing grain and gasoline because of public and political considerations. This is, after all, an election year...and powerful as Wall St is, they cast only a small number of the total votes in November.
3. The absolute change is not important. A steady doubling of oil over the next, say four years that supports the US led Alternate Energy Bubble will be tolerated, and perhaps even quietly welcomed. A doubling of oil by the end of this summer, in concert with a collapsing US$ is a political nightmare. The latter will prompt a Fed and global Central Bank response IMO, before it gets to that extreme. It's all about first-derivative, rate-of-change.
4. The thesis of a "new political arrangement with the west" is intriguing. The benefit to the GCC producers is the security of high revenues to fund their massive social programs that the unrepresentative governments here must have to keep everyone happy. Entitlement expectations are growing very, very rapidly. Inflation is rampant. Subsidies for everything from petrol to baby food are expanding rapidly. A collapse in oil prices would be potentially devastating to social stability, and the political grip the Ruling Families hold. Now that the threat from Saddam has been permanantly removed, there may be a new symbiosis, along the lines you suggest, developing between the Gulf states sub-set of OPEC and the west/USA, that is less military and more economic in nature?

[dcarrigg]

Re: The Deflation Case: Caught, Gutted, Poached and Eaten

Editing error. My bad. Changed the tense back.

Not a problem. I needed a little inspiration for my avatar

[Guest]

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

I'm wondering how gold can't continue to rise as more money is printed.

But more importantly, looking longish term, how can we expect our dollars to be anything but diminished in real value when our government has what, 50 trillion in unfunded obligations that apparently it is mathmatically all but impossible for them to meet in the coming years?

To me, the obvious solution is that they will just pay people what they owe them, but in new peso-like dollars. You'll be able to cash a $1,000 savings bond and go buy a pack of gum with it.

In that event, what could you own besides gold and commodities that would keep up with this drop in the value of the paper currency?

Gold sounds magical and mysterious and a lot like UFO sightings, until you start thinking "what else can I buy to store value in?" Homes? Maybe in 5 years or so when they bottom out and return to the normal values and oversupply is absorbed.

Land? Possible if you know where to buy and have connections to use government to make your cheap land worth more in the future, but overall, not a ton of demand for that during a long economic downturn.

Are there any currencies that are not depreciating rapidly or that won't if ours collapses?

Stocks? Can they possibly keep up with the currency drop even w/o a recession and adjustment from our over-consuming, over borrowing ways?

I think gold has a long way to go up before anyone decides its a mania and its price collapses. Something better will have to replace it first. Any ideas what that might be?

[GRG55]

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

I'm wondering how gold can't continue to rise as more money is printed.

Perhaps your question is rhetorical, but I'll rise to the bait.

Throughout the 1980's and 1990's money was printed. And in no small quantities. Look what happened to the purchasing power of the US$ (and most other paper currencies) over those 20 years. If you wanted to buy a roof over your head in 2001, when gold hit bottom, it cost you a hell of a lot more in nominal terms than it did in 1981 - and that's before the housing bubble really got started. Over two decades, gold did nothing but head south (as did silver, platinum, base metals, oil, natural gas, coal, aluminum, uranium...), with periodic and brief rebounds that only served to disillusion all but the most ardent gold bugs. Perhaps money printing by itself isn't the only consideration?

But more importantly, looking longish term, how can we expect our dollars to be anything but diminished in real value when our government has what, 50 trillion in unfunded obligations that apparently it is mathmatically all but impossible for them to meet in the coming years?

To me, the obvious solution is that they will just pay people what they owe them, but in new peso-like dollars. You'll be able to cash a $1,000 savings bond and go buy a pack of gum with it.

"We can guarantee cash benefits as far out and at whatever size you like, but we cannot guarantee their purchasing power"
--Alan Greenspan responding to a question from Senator Jack Reed (D) of Rhode Island, February 2006 --

Are there any currencies that are not depreciating rapidly or that won't if ours collapses?

I have been invested in the Yen and Swissie since Dec 2006. Early, but now finally well in the money. The Swissie may now be vulnerable to a sympathy fall alongside the Euro, but the Yen still appears a reasonable bet. In both cases the interest they pay is essentially zero, so they have no room to play the "let's devalue the currency through rate cuts" game. They can use other means to devalue, but those are much more difficult, and involve bellying up to the bar and buying bonars.

[metalman]

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

and another thing... you will readily acknowledge that the gummit is lying about cpi inflation, about "productivity", about gdp, etc.

what makes you so darn sure the gummit ain't also lying about wage inflation? hmmmm?

itulip diggers... get digging on the data!

[GRG55]

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

and another thing... you will readily acknowledge that the gummit is lying about cpi inflation, about "productivity", about gdp, etc.

what makes you so darn sure the gummit ain't also lying about wage inflation? hmmmm?

itulip diggers... get digging on the data!

Good point. I don't live in the USA, but I'm prepared to make a small wager that wages in many sectors are going up faster than folks realise.

Has the fellow that fixes your car raised his rates in the last year?

Just askin'

[metalman]

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

Good point. I don't live in the USA, but I'm prepared to make a small wager that wages in many sectors are going up faster than folks realise.

Has the fellow that fixes your car raised his rates in the last year?

Just askin'

absolutely. got friends bragging about their income, how much they made last year. maybe that fed report posted here is right... wage inflation lags other inflation. curious to see how that holds up as unemployment rises.

that's my story and i'm sticking to it: we've already had wage inflation, the gummit lied about it, now they hope the recession will kill it.

fed to j6p: fuck you! lose your job! do your part to control inflation!

[Guest]

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

GRG55 -

Do you like our American vernacular? We Americans do this kind of thing really well. I know, it's tough for you Canadians to affect this same style of vernacular, because Canadians are all born with the 'good mannered gene'. We don't do those kinds of genes down on our side of the border though.

Even our Central Bank talks to us differently than your Central Bank would ever dare talk to Canadians. It's a uniquely American thing.

fed to j6p: fuck you! lose your job! do your part to control inflation!

[GRG55]

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

GRG55 -

Do you like our American vernacular? We Americans do this kind of thing really well. I know, it's tough for you Canadians to affect this same style of vernacular, because Canadians are all born with the 'good mannered gene'. We don't do those kinds of genes down on our side of the border though.

Even our Central Bank talks to us differently than your Central Bank would ever dare talk to Canadians. It's a uniquely American thing.

Can't speak for the manners of our Central Bankers, but you are correct...we Canadians like to think of ourselves as kinder, gentler, well mannered, Peace Keeper, boy/girl scout types. But every now and then the screech ( http://www.screechrum.com/ ) gets to us. And we go wild...

[c1ue]

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

I'm not seeing any wage inflation.

The wages I will be paying my caregivers is the same as they were being paid 3 years ago.

Out of the goodness of my heart, that and the ability to steal the better ones away from my competitors, I'm offering health benefits.

But the lack of wage inflation isn't hard to understand - just posit that the official unemployment numbers are completely unrepresentative of fact.

The actual lack of employment is probably over 10% - and that doesn't lend itself well to pay raises.

Of course, there are a few areas where supposed productivity warrants the money, but good luck maintaining that over the full course of the next 10 years.

[FRED]

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

I'm not seeing any wage inflation.

The wages I will be paying my caregivers is the same as they were being paid 3 years ago.

Out of the goodness of my heart, that and the ability to steal the better ones away from my competitors, I'm offering health benefits.

But the lack of wage inflation isn't hard to understand - just posit that the official unemployment numbers are completely unrepresentative of fact.

The actual lack of employment is probably over 10% - and that doesn't lend itself well to pay raises.

Of course, there are a few areas where supposed productivity warrants the money, but good luck maintaining that over the full course of the next 10 years.

Excellent point and observation. Riddle me this.

1) There has been significant inflation over the past few years and the CPI understates it.

2) Inflation cannot increase without wage inflation.

3) Nominal wages are flat and real wages are declining.

All of three of the above assertions listed cannot be true. One or more of them must be wrong.

We are working three hypotheses:

1) CPI-W adjusted wage inflation is higher than reported because inflation measures used to deflate wage rates are higher than reported.

2) Distribution of income gains means high levels of inflation among top wage earners has a disproportionately strong tendency to transmit inflation into the price complex.

3) The inflation cycle does not need rising wage inputs, that rising import prices due to a depreciating currency are sufficient.

[GRG55]

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

I'm not seeing any wage inflation.

The wages I will be paying my caregivers is the same as they were being paid 3 years ago.

Out of the goodness of my heart, that and the ability to steal the better ones away from my competitors, I'm offering health benefits.

But the lack of wage inflation isn't hard to understand - just posit that the official unemployment numbers are completely unrepresentative of fact.

The actual lack of employment is probably over 10% - and that doesn't lend itself well to pay raises.

Of course, there are a few areas where supposed productivity warrants the money, but good luck maintaining that over the full course of the next 10 years.

Yet at the same time we are hearing reports that fruit and vegetable growers in California and Washington states cannot get enough pickers, and have to pay significantly more for those they can find.

Is this solely a function of the crackdown on illegal immigrants? Or are there other factors at work too?

My network of US and Canadian based engineering friends are buying BMWs and complaining the dealers are cranking up the Maintenance Dept charges at double digit rates (my heart goes out to them ). No recession in that sector. At least not yet...

[Jim Nickerson]

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

Yet at the same time we are hearing reports that fruit and vegetable growers in California and Washington states cannot get enough pickers, and have to pay significantly more for those they can find.

Is this solely a function of the crackdown on illegal immigrants? Or are there other factors at work too?

My network of US and Canadian based engineering friends are buying BMWs and complaining the dealers are cranking up the Maintenance Dept charges at double digit rates (my heart goes out to them ). No recession in that sector. At least not yet...

You might suggest to them that they buy Lexuses (Lexi?). I had an Lexus SUV for 5 years, and it had NOTHING GO WRONG WITH IT OVER THAT TIME. After being ripped at the Lexus dealer a couple of times, I started taking it 2 blocks from my house to a real mom and pop outfit whom I trust more than the Lexus dealership for fairness and routine maintenance. Saved a bundle and if it ever hurt my SUV I couldn't detect it.

[GRG55]

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

You might suggest to them that they buy Lexuses (Lexi?). I had an Lexus SUV for 5 years, and it had NOTHING GO WRONG WITH IT OVER THAT TIME. After being ripped at the Lexus dealer a couple of times, I started taking it 2 blocks from my house to a real mom and pop outfit whom I trust more than the Lexus dealership for fairness and routine maintenance. Saved a bundle and if it ever hurt my SUV I couldn't detect it.

I have a Toyota product over here for the same reliability reasons. 6 years old; only maintenance so far is oil, filters and plugs, and one recharge of the AC system). But what the damn dealer charges for that little bit of work always makes me feel as though I am buying my vehicle back from him. Good thing gas is still cheap here.

[c1ue]

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

My network of US and Canadian based engineering friends are buying BMWs and complaining the dealers are cranking up the Maintenance Dept charges at double digit rates (my heart goes out to them ). No recession in that sector. At least not yet...

How were the network's wages doing when oil was $20/barrel?

Or from 1991 to 2001?

Just curious - this would separate the $100/oil price bonus from the inherent oil industry profitability bonus.

As for BMWs - that is a very unreliable statistic. In the Bay Area, it seems every 3rd car is a Merc of BMW; when your house costs $5000/month, a $1000 car payment is only keepng up with the Joneses.