Historical View of Inflation

A nice historical view of inflation.  SGS is sourced from Shadowstats.com.

Sooner Or Later

"There is no means of avoiding the final collapse of a boom brought on by credit and fiat monetary expansion. The only question is whether the crisis should come sooner in the form of a recession or later as a final and total catastrophe of depression as the currency systems crumble.”
Ludwig von Mises

It Only Takes Two To Contango

"People seem to take for granted that financial values can be created endlessly seemingly out of nowhere and pile up to the moon. Turn the direction around and mention that financial values can disappear into nowhere, and they insist that it is not possible. “The money has to go somewhere…It just moves from stocks to bonds to money funds... For every buyer, there is a seller, so the money just changes hands.” That is true of the money, but it’s not true of the values...For prices of assets to fall, it takes only one seller and one buyer who agree that the former value of an asset was too high. If a million other people own it, then their net worth goes down even though they did nothing. Two investors made it happen by transacting, and the rest of the investors made it happen by choosing not to disagree with their price. Financial values can disappear through a decrease in prices for any type of investment asset, including bonds, stocks and land.  Anyone who watches the stock or commodity markets closely has seen this phenomenon on a small scale many times. Whenever a market “gaps” up or down on an opening, it simply registers a new value on the first trade, which can be conducted by as few as two people. It did not take everyone’s action to make it happen, just most people’s inaction on the other side.  A similar dynamic holds in the creation and destruction of credit. Let’s suppose that a lender starts with a million dollars and the borrower starts with zero. Upon extending the loan, the borrower possesses the million dollars, yet the lender feels that he still owns the million dollars that he lent out. If anyone asks the lender what he is worth, he says, “a million dollars,” and shows the note to prove it. Because of this conviction, there is, in the minds of the debtor and the creditor combined, two million dollars worth of value where before there was only one. When the lender calls in the debt and the borrower pays it, he gets back his million dollars. If the borrower can’t pay it, the value of the note goes to zero. Either way, the extra value disappears."
Vadim Pokhlebkin, Elliott Wave International


Entire article: http://www.elliottwave.com/freeupdates/archives/2010/08/16/Deflation-How-Does-It-Affect-Asset-Values.aspx

Deflationary Politics

My bro-in-law turned me onto this one. The day of the "drunken politicians" might be over for a long time. Deflationary politics is in full gear.

"City council members in the small California town of Bell -- where outrage over high salaries forced three officials to resign last week -- voted Monday night to slash their pay. And the mayor, who last week defended the salaries, said he would forgo a salary altogether and would not seek reelection. But the move was not enough to appease angry residents who demanded that the council members step down. 'You all need to go to jail,' a self-described underpaid teacher said at a contentious meeting Monday night. 'Shame on you. All of you.' When Councilwoman Teresa Jacobo said she will slash her salary but hold on to office, the crowd booed loudly and repeatedly. 'If you don't want to resign, we'll recall you,' said one man. The city council voted to reduce its pay to that of what one councilman, Lorenzo Veles, was being paid: $8,076 a year. Most of the other council members made nearly 10 times as much. The Bell salaries have provoked statewide anger at a time when California is grappling with a near $20 billion budget deficit. The median annual income of Bell -- which counted about 36,000 residents in the 2000 census -- is less than $35,000. Like Mayor Oscar Hernandez, another councilman George Mirabal said he will not seek reelection. Said the mayor in a statement: 'We must restore Bell's pride in our city and that requires a full, transparent, and deliberate review of the city's actions.' Last week, the city council accepted the resignations of City Manager Robert Rizzo, Assistant City Manager Angela Spaccia, and Police Chief Randy Adams, who reportedly had a combined salary of more than $1.6 million. Also on Monday, California Attorney General Jerry Brown, who is running for governor, said he subpoenaed hundreds of records from Bell as part of an investigation to determine whether civil or criminal action should be taken against any city leaders."
Source: CNN

The angry mob continues the lynchings.

Mass Social Mood Model

A Shift Toward The Big "D"

"In my October 2008 post, Four Potential Outcomes, I presented what I believed to be the four potential outcomes in the near future. Outcome #1, deflation, appears to have already swiftly occurred devasting asset prices in all sectors including commodities. The "missing piece" is that from an Austrian economics perspective, credit and money expansion need to deflate also. As we know, the opposite is occurring on a staggering level."
Random Roving, March 26, 2009

Well the chart below provides the "missing piece".  Money supply is tanking rapidly.  An Austrian economist would declare that deflation is here.  That would mean a decline in the value of everything. 

Source: Shadowstats.com

The Third Depression

"Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31. Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.  We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense."
Paul Krugman
Source: The New York Times

The entire article:
http://www.nytimes.com/2010/06/28/opinion/28krugman.html

Prechter's Perspective

"The greatest extreme in positive social mood in centuries has led to the greatest expansion of credit in history. The level of outstanding debt is unsustainable and will be unserviceable and unpayable in the deepest depression in 300 years. The trend toward negative social mood that has been in progress since 2000 and which is about to accelerate will continue to curtail lending and lead to a tidal wave of defaults and a terrific deflation. The amount of outstanding credit today is so large that systemwide defaults could lead to as much as an 80-90% decline in the volume of dollar-denominated credits worldwide. Prices of everything, including corporate shares, would fall to reflect this change in the total supply of credit. In such an environment, surviving dollars and dollar credits, representing the denominator of the DJIA, will rise in value, and the Dow-along with everything else not used as money - will fall in dollar price."
Robert Prechter, Elliott Wave Theorist - May 2010

Jefferson & Currency

"If Americans ever allow banks to control the issue of their currency, first by inflation and then by deflation, the banks will deprive the people of all property until their children will wake up homeless." Thomas Jefferson

All Out

"Well, we are out of money now"
President Obama, 5-22-09 - C-SPAN Interview
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Drinking The Toxic Brew

"The unwinding of the grotesque debt excesses of the past have only just begun. For the first time in the post-World War era, we have deflation in credit, wages and rents and, from our lens, this is a toxic brew."
David Rosenberg - Gluskin Sheff

The Flation Debate

Jim Puplava on his weekly radio show, Financial Sense Newshour, has hosted a debate on inflation/deflation over the past few weeks. It was really informative and included input from several diverse sources. Three of my four "horsemen" participated.

Check it out:
http://www.financialsense.com/resources/readinglist.html

Inflation, Deflation, or Goldilocks

This recent article in the WSJ presents a nice portfolio approach to the future potential economic outcomes.



Entire article:
http://www.careerjournal.com/article/SB124847825820080351.html


A prior rove on the topic:
http://randomroving.blogspot.com/2008/10/four-potential-outcomes.html

If Deflation, Then...............

If you buy into the argument for deflation then checkout Robert Prechter's 10 tips and strategies:
http://www.financialsense.com/Experts/ewave/2009/0619.html

The Fort & The Canon

The debate of whether deflation or inflation await us is still ongoing. Jeff Clark makes a strong case for protection in either outcome.

"Whether we’re served debilitating deflation or insidious inflation, holding gold (and silver), along with an appropriate allocation of precious metals stocks, offers us both a fort for protection and a canon for profit."

http://www.financialsense.com/editorials/casey/2009/0603.html

The Japanese Canary In The Coal Mine

There was a short article in Barron's this week interviewing Robert Prechter. After reading it, I'm sure that you will agree that his view of the world and frame of reference is very unique and not one you will hear on bubblevision.

http://online.barrons.com/article/SB124275522397735517.html?mod=googlenews_barrons

Multiple Plays

My favorite NFL player, Peyton Manning, has one of the most interesting pre-snap processes in the league. In the huddle, he presents 2-4 different plays that might be called. Tom Moore, the offensive coordinator, serves as mentor and presents the original 2-4 plays. Upon getting to the line, he assesses the defense and makes a final decision. He and center, Jeff Saturday, bark out the code words for the play and blocking scheme.

In my October 2008 post, Four Potential Outcomes, I presented what I believed to be the four potential outcomes in the near future. Outcome #1, deflation, appears to have already swiftly occurred devasting asset prices in all sectors including commodities. The "missing piece" is that from an Austrian economics perspective, credit and money expansion need to deflate also. As we know, the opposite is occurring on a staggering level.

Option #2, inflation, appears to me to be the "next wave". The Fed and the Obama administration are continuing the "money printing" that Reagan, Bush Sr., Clinton, and Dubya participated in. The difference is that it's being done at unprecedented levels. The "slope" of the M3 curve makes Clinton's "printing" look trivial. The most likely result will be massive hyperinflation. This will drive prices of everything through the roof. As stated in the Oct-2008 post, buy some commodities. Gold is already back near its pre-crash price.

Option #3, the "zig zag", is the sideways movement similiar to Japan from 1990 to present. This involves minor "ups and downs" with no significant growth or contraction. Based on the past six month decline in prices, I would say that this option is already ruled out. The significant drop in prices already in place is more than what I would describe as a "zig zag".

Option #4, "the party continues", is the most fascinating to me because my unofficial survey says that everyone is still "all in" with stocks. The "40-50 something" generation only knows stocks and 401k's. The concept of buying gold coins is so foreign to most and I admit that it was initially to me (just had some more shiny ones arrive yesterday....beautiful!). I believe that the American public hopes for a continuation of the Supersize Me Era. We really enjoyed it and we hope that somehow Obama can keep the party going. Unfortunately, I believe that the kegs have run dry and we'll be forced to shift our mentality to a place it hasn't been in our lifetime. It's best to be proactive than reactive. Reactive can be very painful. Hopefully you have a nice photo album of the era. It will be one to remember.

As stated earlier, Peyton Manning, comes to the line with 2-4 plays. I believe that the American public only has one play. Design your plan with multiple plays and risk weight their probability of occurence. Also, assess your advisor. Tom Moore, Manning's offensive coordinator, has a great track record of success which eliminates Peyton's need to question the play calling. Who is your play caller? Has he/she only presented one play?

Here's my assessment of the probability of occurence:
-Option #1: Deflation (35%)
-Option #2: Inflation (55%)
-Option #3: Zig-Zag (0%)
-Option #4: Continued Bubble Expansion (10%)

The heavier weighting of the inflation outcome has driven me to shift my portfolio strongly towards commodities (oil, natural gas, food, gold, and silver).

Inflation or Deflation?

Puru Saxena, Editor of Money Matters, is a frequent guest on Jim Puplava's radio show. He just posted an interesting article regarding the inflation vs deflation forecast. I believe that he's "dead on". An excerpt:

"It is my firm belief that over the years ahead, the US and all other debt-laden nations in the West will engage in massive money-creation in order to debase their currencies and dilute the purchasing power of paper money. Remember, monetary inflation is a debtor’s best friend as it makes the debt easier to service and repay. On the other hand, monetary inflation goes against the interests of savers and creditors. Given the fact that most of the ‘developed’ nations are up to their eyeballs in debt, you don’t have to be a genius to figure out that monetary inflation is our future. At present, the global economy is dealing with deflationary forces due to credit contraction in the private-sector. However, even now, total credit in the US is expanding due to rampant borrowing by the US government. So, I don’t expect deflation to take hold; rather, I anticipate accelerating inflation which has always led to rising asset and consumer prices."

"Now that we have established that monetary inflation is our future, let us examine which currencies and assets will maintain their purchasing power. If history is any guide, nations which engage in monetary inflation always diminish the purchasing power of their currency. So, in the years ahead, we can expect currencies in the West to depreciate in terms of purchasing power but the trouble is that none of the fundamentally sound nations want a strong currency either! As the world engages in competitive currency devaluations, I expect all the currencies in the world to lose significant purchasing power against hard assets. Therefore, in the years ahead, precious metals and other commodities with intrinsic value should appreciate considerably. Even the values of fundamentally sound businesses with clean balance-sheets should sky-rocket as a result of inflation."

The entire article:
http://www.financialsense.com/editorials/saxena/2009/0320.html

Prechter On Deflation

"In deflation, however, things depreciate and cash grows more precious relative to houses as well as everything else, because just about everything else is falling in value. Deflation will intensify because government and the Fed cannot force people to borrow and spend when their mindset is against it." Robert Prechter - January 2009

A Conversation Between Two of My Horsemen

This conversation took place in February 2003 on Jim Puplava's radio show, Financial Sense Newshour:

Jim Puplava: What are the possibilities that somehow they really get this wrong and we have hyperinflation? Do you think it is deflation first, then hyperinflation after that? Is there a possibility that we head straight to hyperinflation? In other words, if we look at Germany in the 1920s, did they experience deflation first, then hyperinflation after that?

Bob Prechter: What the German government was doing was printing bank notes, actual cash. What the Fed typically tries to do is to get people to borrow. I don’t think there is any chance that it is going to get people to borrow enough to overwhelm the deflationary forces. Borrowing is the problem, and credit is what is about to deflate. If they started printing bank notes, I think it would panic the credit markets. So I think we will get a deflation first. I think we will have a hyperinflation after the deflation, but that is not a monetary or market analytical conclusion. It is based on what I think is likely in politics... Our last national crisis, unlike Germany’s, was not inflation but deflation. The people who are running the Federal Reserve System are definitely afraid of deflation, because that is what brought on our Great Depression. It is very likely that they will turn on the monetary spigots and try like crazy to reverse the deflationary forces."

Amazing!! That was five and a half years ago. This week, the Federal Reserve pitched that exact plan. Buckle your chinstraps!

Mr. Geologist, How Much Speculation Is In That $90 Oil Price?

I had the honor and privledge to sit at the same table as legendary GE CEO Jack Welch at a family wedding in November, 2007. Halfway through the meal without warning, Mr. Welch says "Mr. Geologist, how much speculation is in that $90 oil price?". I quickly responded "I don't know". He said "what do you mean you don't know?". I then realized that he probably wasn't used to that answer. I then quickly changed my answer to "$30". He said "that's what I thought."

Historically, I believe that there has been two factors controlling the price of oil: supply/demand and whatever OPEC wanted it to be. In recent years, I believe that a third factor has arisen and that is fear. The fear factor could include "peak oil", terrorism, and geopolitical conflict in oil prone regions. This factor can explain the rapid rise to $145 per barrel this year. Supply and demand hasn't changed that drastically to explain the rapid rise or rapid fall. Most OPEC companies desire oil to be above $70 per barrel, so some overpowering force has won. Most recently, the "sprint to cash" and deflationary fears could explain the capitulation in the price of oil along with all other commodities.

In the coming years, I believe that these fears, geopolitical events, and market dynamics will drive the price of oil to very high levels. In the meantime, lets hope that low gasoline prices don't encourage us to take our eye off of the ball regarding the long term underlying problem of overconsumption.