One of the primary economic arguments today is whether we will have deflation caused by the bad economy or inflation caused by the response to the bad economy.

I believe we will see deflation in many assets but inflation in staples like food and water.

It’s my opinion that we will continue to see a huge inflation in Cash prices but offsetting deflation in Credit prices. Think of the CPI as averaging the two product baskets, hence the disinformation of current low inflation being reported.

For example, bread is typically purchased with cash while TV’s are typically purchased with Credit.

We all know the distortions of the current CPI dating back to the Clinton years. To really understand the problem just simplify the basket to two goods; one a necessity and one a luxury.

2006 – Bread – $1 per loaf, 30″ Flat Screen TV – $1000
2009 – Bread – $2 per loaf, 30″ Flat Screen TV – $500

In 2006, $3000 would buy 1000 loaves of Bread and two 30″ Flat Screens

In 2009, $3000 would buy 1000 loaves of Bread and two 30″ Flat Screens

Hence no inflation, as long as you can eat a Flat Screen TV.

If you would like to learn more just Wiki “Gresham’s Law”

Last year: Bad economic news was a net positive for the markets because it increased the likelihood of a rate cut.

This year: Bad economic news is a net positive for the markets because it decreases the likelihood of rate cuts leading to inflation.

Next year: Bad economic news is a net positive for the markets because it increases the likelihood that we’ve reached a bottom.

“Regardless of the dollar price involved, one ounce of gold would purchase a good-quality man’s suit at the conclusion of the Revolutionary War, the Civil War, the presidency of Franklin Roosevelt, and today.”

-Peter A. Burshre

What rational person would sell oil for $100 a barrel today if they can get $120 in two months or less??

So whether it’s Gold or Oil; if you own it, it’s better to leave it in the ground and watch the FED work their magic on your inventory.  And of course, leaving it in the ground will result in lower available supplies and further accelerate the rise in prices.

And don’t believe the canard that at least our exports will be more attractive with the weakening dollar. As the following example demonstrates:

Widget costs $100 when Euro is worth $ 1.40 = € 71.43

Widget costs $100 when Euro is worth $ 1.50 = € 66.67

But, this assumes it still costs $100 to make the widget. Now lets add the that 7.14% dollar depreciation bank into the cost of the widget. Don’t forget that the widget’s raw materials all cost more with inflation.

Widget now costs $107.14 when Euro is worth $ 1.50 = € 71.43

Exactly the same cost in Euros, NOT LESS, as is assumed by those who state a weakening dollar leads to lower costs for foreign consumers.   It’s even worse if the costs to make a widget are going up faster then our currency is dropping.

Now, we all know there are many people smarter than me.   I also grant that some of them actually work in D.C. as well.   One more reason to ask; why is FED the lowering rates??

ShadowStats.com has inflation about 8%. Just because the government is reporting inflation around 4% doesn’t mean banks are stupid enough to lend on that erroneous number. That’s why LT mortgage rates are going UP not down.

The fed isn’t pushing on a string, its actually pulling it the wrong way.

Good Afternoon Everyone,

Keep in mind that finance is complicated precisely because of the profit opportunities that can be derived in this complexity.  (note: derived leads to derivatives)

Whether you are an accountant, lawyer, doctor or financial planner, the less your client understands, and the more they are dependent upon you, the more profit that can be made.  

European and Asian markets foreshadowed a 1,000 to 1,500 Dow decline on Monday January 21, 2008 (US markets closed).  This brought an emergency 0.75% Fed cut.. All the Fed action accomplished was to delay, not eliminate this drop.   

Notice how quickly we went from no recession talk, to denying a recession, and now to looking past the recession.  All without the requisite actual, factual earnings decline that must accompany a recession.  Surely a great many companies will be priced higher two or five years from now but some will and must be squeezed out during the next six months.  The inability for anyone to predict with 100% accuracy which companies will be good and which will be bad is precisely what will lead to future devaluation in all companies.  The larger indexes must reflect this uncertainty, a delay is not prevention.

The Fed’s and Congress’s moves just save some financial companies from bankruptcy and will also feeds inflation.  In fact, they haven’t changing anyone’s income statements, individual or corporate. Just as with the Smoot-Hawley Act in 1930, which has been universally acknowledged as exacerbating the depression, political Machiavellianism can sometimes be economically short sighted.  

But what makes this Fed move Machiavellian?  First, ignore the obvious political uses of delaying the actual stock crash until after the election.  The real money is in looking at the money.

Lets examine the situation of a new retire with three million invested and retirement income of a pension and Social Security that is sufficient to cover 125% of their current retirement costs. 

In their investment portfolio rapidly decreases, lets says over the next ten days, to only two million (33% drop, typical bear market), while at the same time prices for basic goods like oil and food fall to allow their pension to cover 150% of their expenses.  Not only will their standard of living go up but they will be able to put 50% of their excess income toward purchasing investments at a the new, immediately lower, prices.

What’s really happening?

Let’s look at this same individual with the same decline in their investments from three to two million, but over two years instead of ten  days.  Let’s also add inflation which changes the impact on their standard of living.   Rather then covering 125% of their cost of living, their retirement income will only cover 100% two years from now and then 50% in ten years and 25% in fifteen years.  This sixty-five year old who retired with $3,000,000 will become insolvent in 2010 and bankrupt in 2032 at eight-nine years old.

Of course this assumes 10 percent inflation per year due to continued “easy money” in the future.  This also assumes that the CPI continues to grossly understate inflation and subsequently under-adjust CPI pegged retirement benefits.

Actual Inflation over the last two years

Oil up 19% per year, 38% totals from $65 to $90

Gas at the pump up 25% per year, 50% total from $2.30 to $3.00

Gold up 35% per year, 70% total from $515 to $890

We all have observed inflation in our own lives, from milk to eggs, and beyond to college costs.  The street is crying that deflation is bad, and it is for those that owe money.  Deflation is good for those that own don’t owe money; middle-class Baby Boomers anyone??

The wisdom to know the difference between what should be done and what will be done has never been more important.

Have a nice day.

Tom

Here’s a nice supporting from CNBC in 2007 (note: haven’t seen Mr. Rodgers on CNBC since) 

Good Afternoon Everyone,

Keep in mind that finance is complicated precisely because of the profit opportunities that can be derived in this complexity. (note: derived leads to derivatives)

Whether you are an accountant, lawyer, doctor or financial planner, the less your client understands, and the more they are dependent upon you, the more profit that can be made.

European and Asian markets foreshadowed a 1,000 to 1,500 Dow decline on Monday January 21, 2008 (US markets closed). This brought an emergency 0.75% Fed cut.. All the Fed action accomplished was to delay, not eliminate this drop.

Notice how quickly we went from no recession talk, to denying a recession, and now to looking past the recession. All without the requisite actual, factual earnings decline that must accompany a recession. Surely a great many companies will be priced higher two or five years from now but some will and must be squeezed out during the next six months. The inability for anyone to predict with 100% accuracy which companies will be good and which will be bad is precisely what will lead to future devaluation in all companies. The larger indexes must reflect this uncertainty, a delay is not prevention.

The Fed’s and Congress’s moves just save some financial companies from bankruptcy and will also feeds inflation. In fact, they haven’t changing anyone’s income statements, individual or corporate. Just as with the Smoot-Hawley Act in 1930, which has been universally acknowledged as exacerbating the depression, political Machiavellianism can sometimes be economically short sighted.

But what makes this Fed move Machiavellian? First, ignore the obvious political uses of delaying the actual stock crash until after the election. The real money is in looking at the money.

Lets examine the situation of a new retire with three million invested and retirement income of a pension and Social Security that is sufficient to cover 125% of their current retirement costs.

In their investment portfolio rapidly decreases, lets says over the next ten days, to only two million (33% drop, typical bear market), while at the same time prices for basic goods like oil and food fall to allow their pension to cover 150% of their expenses. Not only will their standard of living go up but they will be able to put 50% of their excess income toward purchasing investments at a the new, immediately lower, prices.

What’s really happening?

Let’s look at this same individual with the same decline in their investments from three to two million, but over two years instead of ten days. Let’s also add inflation which changes the impact on their standard of living. Rather then covering 125% of their cost of living, their retirement income will only cover 100% two years from now and then 50% in ten years and 25% in fifteen years. This sixty-five year old who retired with $3,000,000 will become insolvent in 2010 and bankrupt in 2032 at eight-nine years old.

Of course this assumes 10 percent inflation per year due to continued “easy money” in the future. This also assumes that the CPI continues to grossly understate inflation and subsequently under-adjust CPI pegged retirement benefits.

Actual Inflation over the last two years

Oil up 19% per year, 38% totals from $65 to $90

Gas at the pump up 25% per year, 50% total from $2.30 to $3.00

Gold up 35% per year, 70% total from $515 to $890

We all have observed inflation in our own lives, from milk to eggs, and beyond to college costs. The street is crying that deflation is bad, and it is for those that owe money. Deflation is good for those that own don’t owe money; middle-class Baby Boomers anyone??

The wisdom to know the difference between what should be done and what will be done has never been more important.

Have a nice day.

Tom

PS The video below is a good mockup of 2007’s Irrational Exuberance