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Still in Deflation Camp

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July 07, 2009 – Comments (18)

I can not make sense of the market rally, but contrary to nonsense adages, like the market has already priced in (fill in the blank), the market constantly undervalues and overvalues businesses and rarely gets it right, but over the long term over priced businesses will collapse and under valued will increase.

Right now I think that two things are perhaps driving the market, the very low yields available, which makes some people make poor decisions, and inflation fears.

On the latter I am still in the deflation camp.  John Mauldin really is a common sense must read, imho, and his most recent post, "Make Sure You Get This One Right" gives good arguments to look at.

When I was a young adult the prices of goods relative to income was quite high.  Indeed, some goods seem to be the same price today as they were 20 years ago, and some are actually quite a bit cheaper.  Meanwhile the cost of goods you need to live, food, energy, accommodations, etc., are all up considerably, far, far in excess of reported price increases.

Already there is deflations, rents are going down, housing is going down and other goods and services are going down as they compete for business.  I think longer term prices have to realign themselves to be in better balance.  If consumption drives the economy and goods are so cheap, how do the people involved in providing those cheap goods ever make a living so they to can be active in the economy.

There was also a wonderful quote in something I read this week about having patience in the market and sometimes the best place for your cash is just waiting.  I am still just waiting.

18 Comments – Post Your Own

#1) On July 07, 2009 at 1:35 PM, portefeuille (99.59) wrote:

But what actually happens when credit is destroyed at a faster rate than our central banks can print money?

have a look at this video (starting at 2:30/9:23)

 

 

 

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#2) On July 07, 2009 at 1:37 PM, portefeuille (99.59) wrote:

Way off base

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#3) On July 07, 2009 at 1:55 PM, tdoodler (24.55) wrote:

Love John Mauldin.  As he says the problem is in part that Banks are not lending.  But I read somewhere (maybe CAPS) that the Fed could start charging banks to park money at the Fed - thereby really forcing them to lend.  Then and not until then, will all that money will cause inflation.

 

 

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#4) On July 07, 2009 at 2:19 PM, Entrepreneur58 (36.82) wrote:

Inflation is a tax.  Deflation is a tax cut.

Government revenues are trending to zero.  Government expenses are trending to infinity.

Would you expect a tax or a tax cut?

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#5) On July 07, 2009 at 2:37 PM, FreundInvesting (29.34) wrote:

Entrepreneur58 (97.73)

Long term... tax.

Short term... tax cut.

That's the difference.

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#6) On July 07, 2009 at 3:12 PM, cbwang888 (25.83) wrote:

 

Deflation?

Why do the diaper counts of Huggies/Pampers super mega box keep going down?

Skippy peanut butter jar shrunk?

Haven't notice that the menu price going north in many restaurants you go? Just compare the same Round Table pizza, I saw at least 10% price increase.

The liquidation phase of the credit crunch has passed. Gas price at the pump is still near the decade high.

 

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#7) On July 07, 2009 at 3:15 PM, outoffocus (22.81) wrote:

Why do the diaper counts of Huggies/Pampers super mega box keep going down?

Yea and when I went to Red Lobster they only gave me 4 cheddar biscuits.  Whats up with that?

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#8) On July 07, 2009 at 4:00 PM, FleaBagger (29.66) wrote:

portefeuille -

I think Hugh Hendry is suffering from misconceptions from maleducation. Deflation does not press down on an entire economy, but on those who are overindebted (including the U.S. government, which will therefore never allow more than a couple months of inflation). The suffering of those who borrowed too much is offset, in deflation, by the good fortune of those who saved and eschewed debt, and who will deploy capital more or less efficiently when assets are allowed to depreciate from an illusory (easy credit-inflated) value to their true value.

Furthermore, it is asinine to call a trend follower a contrarian. Those betting on the dollar's collapse are immanently the true contrarians, until it actually happens.

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#9) On July 07, 2009 at 5:13 PM, gunark (83.90) wrote:

I'm thinking that even if we go the way of deflation (and in all likelyhood we probably won't go too far either way really), buying up some small stakes in leveraged gold/silver ETFs is probably a good insurance policy. Yeah, if we get nasty deflation those ETFs will get wiped out faster than you can panic-sell them, but assuming your stakes are small enough, the downside is minimal compared to the potential gains under hyper-inflation. The amplification effect on the leverage alone could be tremendous.

Of course you'd have to get out soon enough to trade your new massive cash position for guns & ammo before the world economy implodes and your ETF paper holdings turn meanginless.

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#10) On July 07, 2009 at 5:17 PM, portefeuille (99.59) wrote:

oh come on please. all those inflation freaks, gold bulls and dollar bears are now the contrarians? really? redeker talked of the cab driver rally in gold today. are they contrarians too? or should they not rather be taken as contra-indicators?

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#11) On July 07, 2009 at 7:36 PM, ChrisGraley (29.74) wrote:

Why doesn't anybody look at this globally? For the deflation to truly happen, the US dollar has to buy more now than it did yesterday. There are plenty of examples where this has happened before and even in the US, but the Black Swan in this scenario is that we have emerging nations that can also manipulate the economy that are counting on consumption from the US.

Why are the BRIC nations making so much noise about the US being the reserve currency? Because they just realized how screwed that they are in a US deflationary scenario. China survives on the slimmest of profit margins. They need close to a 10% growth rate just to keep the people from revolting. A strong dollar destroys those margins and to keep pace, they have to sell the only thing that didn't depreciate in their holdings, which is dollar based US debt. Selling the large amount that they have on the market means that they are selling it at a loss and so is the US, that is continuing to finance recovery.This downward spiral destroys their savings quickly at a time when they need to spend money the most to soothe the masses. On the other hand, a weak dollar increases the tiny margins and provides growth to the masses. Now they have an incentive to insure that US recovery is inflationary, but if they want to help that process along, they have to invest their own money. Since they know that they will be losing reserves trying to create inflation, a good hedge may be to stock up on commodities. Did China stock up on any commodities recently? Russia and Brazil count on commodity sales to China and other nations. Even without any US debt holdings, commodity prices are their main concern. Again they have financial incentive to make sure the US has an inflationary recovery.

The European Union needs a weak US dollar as well, but not to the same extent. The Europen citizens overall are better savers than US citizens, so they can take a bigger hit, but EU governments and companies are over-extended and depend on luxury sales to the US. They know that they take the biggest hit if the US dollar strengthens and they will sell out to make sure it doesn't happen. If nobody notices here, there are a lot of countries trying to create an inflationary dollar.

There will be a few winners. Canada and Germany and other countries (that have citizens that save money and have a government that doesn't overextend itself) will win. Also the commodity based countries will do well.  The problem is that when the US dollar inflates, it's going to eventually have a deflationsry effect on the other economies. The US will be paying off global debt with dollars that will be weaker tomorrow.

The US will lose reserve currency status eventually, but by the time that happens the damage will have been done. The only reason that we have inflation and not deflation are the prior bets that the rest of the world played on the US economy. If they would have bet what they thought 20 years ago and held their beliefs, the DOW would be at 300 right now.

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#12) On July 07, 2009 at 8:22 PM, AdirondackFund (< 20) wrote:

The point as far as I'm concerned is that all of this is very time savvy.  While I'm expecting to see a rather massive deflationary wave until November of this year, I wouldn't rule out mass stupidity thereafter.   In fact, I think it's rather likely.  The problem with the entire scenario is that it completely wipes out the economy.  A mass inflation wave will certainly arrive faster than that pay raise you will need to cover it.  This is the very core of the problem, as I see it.  If things happen too fast in any market the dislocations are incredible.  Corporate planning goes out the window quickly, just as it did last Fall. 

People couldn't even catch their breath in '08 and that reaction is exactly the same as it was in '87.  The difference between then and now is not just the threat of computer trading, but the mortgage problem that has been tacked on additional this time.  In '87 the earnings were great, best ever the last quarter of '87, which left everyone scratching their heads as to how the decline occurred in the first place.  Program Trading got blamed in that one.  They pulled the Mad Computer Scientist excuse to explain the decline.  This one's got real teeth in it though and is nothing I have ever seen before, but oddly feel very comfortable in analyzing and understanding.  Go figure.

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#13) On July 07, 2009 at 10:12 PM, dwot (72.07) wrote:

Interesting discussion.  Coming back to visit this in a year or two will see who gets it right. 

 

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#14) On July 07, 2009 at 11:04 PM, DaretothREdux (43.23) wrote:

Dwot,

I think I have figured it out. We will see deflation in prices where the gov't is not involved or is minimally involved and we will see inflation in prices where the gov't has been and is still involved i.e. education, housing, healthcare, and energy...

prices may drop in these areas but not as much as other areas and I believe that they are way over priced currently and even a drop will not bring them to market value.

Dare

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#15) On July 08, 2009 at 1:01 AM, tonylogan1 (27.87) wrote:

chris - well said +1 rec on the comment

Adi - I think you may be making the mistake of compassionately looking at what will happen from the perspective of a J6P. Average joe middle class is going to take a beating, and the people that guide fiscal policy are not going to do anything to help them get pay raises. The fact they are moaning in their beer will not change anything until they start grabbing pitchforks (and it is pretty clear it is going to take a whole lot to get that to happen).

Instead, look from the perspective of billionaire bond holders like PIMCO or masters of the universe like GS to decide where the economy likely goes. Deflation (short term) is still good for them, as it allows for competition to keep getting wiped out. I think we'll see hundreds more bank failures, and probably at least one more major I-bank failure before this "crisis" is over.

Best thing I can think of for an average guy like us to do is learn trades and skills that will allow us to run our own businesses in an inflationary environment. You can dictate your own profits, rather than relying on a boss to give you a raise.

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#16) On July 08, 2009 at 1:08 AM, kaskoosek (56.09) wrote:

Is a currency collapse deflationary????

 

Spare me the houlala.

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#17) On July 08, 2009 at 12:30 PM, dexion10 (27.57) wrote:

 

---------------------------------

I agree with Dwot

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- deflation is still the dog barking at our door. I don't think it will always be a risk but it is right now. She is dead right we've destroyed shadow money quicker than we've replaced it with new currency.

 

Additionally creating money at the bank level is not inflationary until it gets into the money supply  and with credit standards as tight as they are right now - we are not seeing inflation.

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#18) On July 08, 2009 at 1:35 PM, unvrsldeflation (84.44) wrote:

Let's see, high unemployment, wages going down, tight credit, habitual buying of US debt at every new world wide convulsion (who cares what the BRIC countries say, follow what they and others do), all that needs to happen now is for the middle and upper middle class disinterested owners of capital in the US to sell, sell, sell. The capitalist class can sit back for a while. Why should they buy today what they can have tomorrow for so much less. Meanwhile the percentage of ownership that they hold should suffice to ensure philosophical dominance. Sure the price of capital is about to come down, pity no one in the middle classes will have enough money to afford even the discount prices. If we aren't in the throes of defaltion we are at the very least circling the drain.

Yes, the debt is a problem. Under a deflationary era it will become magnified as well. The question then looms, can the US government stave off default by means other than pulling the trigger on hyper-inflation? I think they can for some space of years. As long as the dollar remains the key currency for oil purchases and the world's habit remains to buy what are considered safe debt valued in dollars there will be a bridge in place for the capitalist class to cross over into the next paradigm. What I worry about is that the inflationary trigger will be pulled after the capitalists have bought up way over the fifty percent necessary to have control over an enterprise, after they have bought up enough to sell some off when high prices return and still not relenquish control.

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