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The Great Inflation Debate?
Linda Stern of Reuters reports, The great inflation debate:
Worried about inflation? Neither Federal Reserve Chairman Ben Bernanke nor all those traders currently dumping gold seem to be, but that may be the best time to make sure you're covered if prices go haywire. Some people think the combination of an expansive Fed policy and an expansive fiscal policy make that inevitable. Oh, and as I'm writing this, the United Nations is announcing that world food prices are at an all-time high. The last time consumer prices went crazy, it happened pretty fast: They rose roughly 3 percent in 1971, 6 percent in 1972, and 12 percent in 1973, according to the Labor Department's Consumer Price Index data. Back then, it took almost a decade and a deep recession to get that genie back in the bottle. "The rapidity with which that ... changes is actually pretty astonishing," says Hans Olsen, chief investment officer for J.P. Morgan Private Wealth Management. Olsen's clients already have roughly 25 percent of their portfolios in inflation hedging assets. "You want to skate to where the puck will be, not to where it is," he said in a recent interview. But not everyone thinks inflation is looming, or that typical inflation-fighters, such as gold, are a good place to keep money right now. "I'm concerned with investors making big bets on gold" and other traditional inflation hedges, says Dave Loeper of Wealthcare Capital Management in Richmond, Virginia. Loeper, a former adviser to the Virginia Retirement System, recently studied the behavior of anti-inflation assets during inflationary periods. He concluded that the payoffs for hedging inflation might not be worth the extra trading and holding costs. "Adding gold and real estate to a 60/40 (60 percent stocks, 40 percent bonds) portfolio looks pretty similar to a 50/50 balanced portfolio," he wrote. "Those extra positions... are certain to add cost... and do not appear to be worth much unless we do have that perfect storm" of an unusual and severe double-spike in inflation. Loeper looked at the most recent three major periods of inflation and observed that there was not one asset class that produced positive real returns in all three periods. Because gold, in particular, has been bid up as a safety plan during recent low-inflation years, he's concerned that it may not perform its typical anti-inflation role when prices rise. The yes-it's-coming/no-it-isn't debate about inflation can be seen in market prices and consumer expectations, too. Both bond market swaps and inflation-protected securities seem priced with an expectation that prices will rise a modest 1.5 percent or so, says Olsen. But consumers responding to the Conference Board's last survey had a different view: They expect prices to rise about 5.3 percent in the next 12 months. So, what's an investor to do? Here are some tips for preparing for a run-up in prices, which may or may not materialize. * Let some investments do double duty. Loeper and Olsen agree on this: Some investments already in your portfolio might protect against inflation without being strictly anti-inflation plays. For example, if you own a large-cap stock fund, you probably already own shares of Exxon Mobil Corp. or Weyerhaeuser, two traditional inflation-fighters. Similarly, Olsen's clients own foreign stocks; they'll be some protection if runaway prices hurt the U.S. dollar more than other currencies.
* Go long on items you'll use. Not all investments happen in your brokerage account. If you're a year or two away from buying a new car, lawnmower or retirement house, think about buying now while prices and interest rates are comparatively low. You can stockpile canned goods and paper towels, too, but not to the extent that you end up on A&E TV's reality show, "Hoarders." * Keep carrying-costs low. There are now many inexpensive exchange-traded funds which focus on commodities and other anti-inflation strategies. Many are available for an annual expense charge well below 0.8 percent. * Stay safe. You may lose purchasing power, but you won't lose money by buying individual Treasury inflation-protected bonds and holding them to maturity. Yields are low, but guaranteed to rise as the CPI does. The big risk there? If interest rates rise faster than prices, you could find yourself losing ground to better-yielding short-term securities.
Is inflation the real threat going forward? The answer is nobody really knows for sure. Inflation is already present in China and emerging markets, but it has not picked up significantly in the US and Europe. We are likely to see higher energy prices, but even this is not enough to kick start a severe inflationary episode. Only wage inflation can do this, and to compare what is going on now with the 1970s is simply wrong. Despite December job gains, unemployment remains stubbornly high, unions are not as strong as they used to be, and the structure of the global economy has changed significantly in the last three decades. Demographics, global competition, the internet, deleveraging, are all factors weighing down inflation. It is possible that we start importing inflation, but even this is debatable. Bottom line: the great inflation debate will continue for quite some time, and while you should hedge against all scenarios, be careful not to jump on any inflation bandwagon. Deflation hasn't died; it might just be hibernating.
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Author, are you a conperson? Your post is plenty long, but makes minimal mention of TIPS:
“Stay safe. You may lose purchasing power, but you won't lose money by buying individual Treasury inflation-protected bonds and holding them to maturity. Yields are low, but guaranteed to rise as the CPI does.”
with MULTIPLE ERRORS.
TIPS held to maturity retain 100% purchasing power, and the real yield to maturity is both constant and known at purchase.
And here’s something with TIPS in it:
http://homepage.mac.com/ttsmyf/recDJIAtoRD.html
"Fresh rioting has broken out in the Algerian capital and several other cities, after days of unrest over food price increases and unemployment."
http://www.bbc.co.uk/news/world-africa-12134307
Brazil Inflation Rose as Fastest Pace Since 2004"Brazil’s consumer prices rose more than economists expected in December, pushing last year’s inflation rate to the highest since 2004."
http://www.bloomberg.com/news/2011-01-07/brazil-consumer-prices-rose-0-6...
China's central bank says inflation a priorityhttp://www.businessweek.com/ap/financialnews/D9KJ7IOG1.htm
Estonian inflation rate soars to 5.7 pct
http://www.google.com/hostednews/ap/article/ALeqM5j9Js2bYIkZtDlML13KShl0...
Mexico inflation accelerates in Decemberhttp://www.reuters.com/article/idUSN0727149020110107
India needs more tightening to tame inflation: IMFhttp://money.oneindia.in/news/2011/01/07/tightening-tame-imf.html
Yes. And I'm glad someone mentioned Milton Friedman here, above. Dr. Friedman was a famous economist who published a definition of inflation, so as to "disunderconfuse peoples"; it goes like this; "Inflation is always and everywhere a monetary phenomenon". Notice the period. There's no discussion of wages, employment, jobs, etc. Of course, it's possible that Leo understands this subject better than Dr. Friedman did; but that's highly unlikely.
Leo thinks he is a garden variety socialist...some would call him a crony capitalist...I have a different word for what he espouses in his articles.
I call it fascism.
State directed (check)...privately "owned" (check)...taxpayer subsidized for any loss incurred (check).
If you look deep, it makes an appearance in every one of his posts.
Ben stated today that inflation is 1%. Ummm wouldn't a prudent person peg the 1 year note at 1% plus vs 0.02?
Does he think we are all complete idiots?
"But consumers responding to the Conference Board's last survey had a different view: They expect prices to rise about 5.3 percent in the next 12 months."
So what? Have they proved to be accurate predictors in the past? What was the sample size? What questions were asked? Price of what? Durable goods? Food?
This entire article is garbage. . must be one of the MANY who couldn't see what was right in front of him. He missed the housing boom/bust for the reason he himself illustrated above. The sad fund manager does not understand the impact of monetary policy, as it has never gone ape-shit before, so he never needed to understand it. His career passed by just "selecting value", a glorified micro-analyst, a joke!
You're being too kind.
+1000
i'll tell you one thing; that is a great picture of bernizzle...suckin' down that recovery (or spitting out silly string depending on which direction in time you're going)!
you're right Leo there's no inflation
the new Larry Summers circa 2008
Ben made the most Gold Bullish statement of the year during the hearings today;
When asked directly the question 'did QE2 cause oil prices to rise' he said "no!"
He blamed it all on 'demand from emerging markets'. Which is exactly what I expected him to say. Most would take that to mean he's oblivious to the fact that money printing in dollars (the trade currency for oil and most commodities) is a way to not only produce inflation, but to export it when you are a nation with giant trade deficits. But I don't think he's oblivious. I think instead he's in deep denial. That's because the Friedman style economics that he, Greenspan and Volcker have applied for 40 years aren't working anymore. And that is a threat not only to his ideology, but to his entire career. He and all the rest of the claque would be out of business permanently.
Not inflation in the UK is touching 3% and there was great fear in the media when this number was released last week. The rest of Euroland is following suit. Inflation is rampant. We're stuck in biflation. Gold is in the sweetest spot imaginable.
hey leo where ARE YOU BRO ?
yet trying to come w/ arguments how its only possible to have inflation w/ wage increases ??
yet no words about Zimbabwe
what a jerk ...
alx
You hammered him into oblivion, and I for one am glad to see him finally give it up. Even the MSM is now starting to cover the shrinkray....
It's not inflation. Call it what it is, It's FRAUD. Plain and simple. It's fraud conducted on behalf of the great ponzi scheme.
To allow people to use terms that have no clear definition to explain actions that have no basis in reality is a flat out lie.
There is no such thing as inflation, the only things that are true real and defineable are "fraud" and Ponzi scheme. The fraud supports the ponzi. To call it anything else enables the fraud and supports the ponzi. I will have no part in either.
No, it is called inflation. Which is fraudulent and theft.
All terms are clearly definable. Reality is that they inflate with the purpose of stealing. That is very reality based and there is a clear motive.
It IS important to use a word that embodies the deceit AND the method. The word "Fraud," while very accurate, accomplishes solely the former. When speaking to others about inflation, you can describe how inflation is theft and a fraud, then when your friends are posited with a choice in currencies perhaps they will remember how fiats are manipulated to lose value.
+1
- Soybeans, $13, when $8 was considered a wall in the sky for most of the last fifty years
- Corn at $5, when all through the "inflationary" 70s, it maxed out around $1.75. Even the terrible droughts in the 90s couldn't hold it above $4 for more than a day or two.
- March wheat, up over $8.
- Sugar's almost doubled off the bottom.
- Heating oil above $2.50, nearly a double off the bottom.
- Copper at $4.32/lb. A few things get made out of that.
- Let's not forget healthcare costs, inflating at 12 - 14% per year over the last decade.
- Most important of all, oil at $90, gasoline above $3. We *know* the wheels begin to come off with oil much above $100.
And yet, the *very* thing he set out to reflate - home prices - 30% off their peak as measured by C-S composite 20 data from November. Of course, there's that whole 'real wages' thing, which hasn't worked out so well, either.
The evidence says that we have biflation: inflation in the things you need, deflation in the things you own or the products of your labor.
The only question is, how many thousands or millions of people die worldwide while the Nobel-men try to preserve the status quo for useless banksters?
"The only question is, how many thousands or millions of people die worldwide while the Nobel-men try to preserve the status quo for useless banksters?"
One is too many. That actual figure is far greater than that number. I can't express the guilt I feel over this. My tax dollars help to pay for bombs that actually do kill innocent civilians. I'm pretty much disgusted with the omelet chef's response to that fact.
One difference is, you can vote the guys out of office that support funding the whatever you might disagree with, whether it's redistributing public funds to banksters, to the M-I-C, to state pensions, to the pharma industry, etc.
But you never get a vote when it comes to the Fed.
Price inflation NEVER affects asset classes uniformly. There is no need to rename it, as that does not render any additional information.
Common during inflation, some assets experience price deflation while other assets experience price inflation.
-Real wages fall as they were already inflated and there is a high degree of competition in the labor market.
-Same in housing, inflated prices, competition among homes for sale, a glut.
-Bonds were inflated by early 2010 EU "surprise," and by QE.
All 3 are continuously correcting. Bonds began to move after the $600B # disappointed.
The money will leave those assets and into other assets.
This rate of transfer is the extent to which prices will rise in assets deemed by investors to provide better prospects. IE, watch the bond market.
+1
Oh, but Leo says buy Chinese solars!
1) asset prices decline 2) price of goods rises 3) buy farmland, according to Jim Rogers
inflation deflation debate? NONSENSE!!!!!!
you dont need to be a genious to see EVERY ASSET price is colapsing against gold!gold IS market money.
so,if you want a definition,this is deflation.
stocks and housing and wages have been collapsing since 2000,now bonds are collapsing as well.
this I-D debate is only what kind of asset will collapse next
this is Krugman's June 2008 argument of why seventies style inflation will not happen
The Nobel Laureate goes on
(edit) tell that to the fixed income pensioners in flyover country who now are buying store brand dog food for Sunday dinner becasue they can't afford Purina
http://www.nytimes.com/2008/06/02/opinion/02krugman.html
Loeper is talking about gold as 'an inflation hedge'. That makes clear he has no idea what he is talking about. Wait until we see the current European support fund becoming larger, the selling of euro bonds or Ben announcing that we need QE3 after QE2's deadline of June 2011 has passed.
@If people are unemployed and seeing their real wages decrease, hard to see where massive inflation will come from
again Leo, this exactly in Zimbabwe.. people are unemployed, dont have money and there's huge I mean real
hyperinflation.. they dont import much ( no hard currency)
so PLEASE EXPLAIN HOW EXACTLY THIS CAN HAPPEN IN ZIMBABWE?
and why is it different in USA?
alx
It is straightforward. Zimbabwe was confined to Zimbabwe economy alone; the currency was cycled around in a very small economy as other countries did repudiate the currency.
The USD is diluted all over the world and keeps buying stuff from every country possible.
That is where the difference is: Zimbabwe could but rob from themselves. US citizens can rob from anyone in the world.
What is going to be the catalyst for wage inflation in the US? I can't think of one. anyone?
the increased money supply is not getting to wages or lending on main street, it is being hoarded by big banks and recycled into treasuries and other financial markets.
That looks like stagflation to me. Squeezing the entire average America even harder.
No one disagrees with this statement, spare the construction.
1. Markets are global.
2. Bond yields will take a lumpy road higher over 5 years, the new money hiding here (and despite Leo's blindness, there is a WHOLE LOT of new money) will find its way into other assets.
History and what we are experiencing has already proven Krugman and Leo wrong, labor while contributing to asset price inflation is not the sole driver. This ruse is a diversion as we all know labor will remain depressed. But as it is one of the few asset classes that will remain depressed, and the reason that it effects but in no way DRIVES price inflation, is the reason it is deliberately selected to attempt to make a long ago refuted point.
"The rapidity with which that ... changes is actually pretty astonishing," says Hans Olsen, chief investment officer for J.P. Morgan Private Wealth Management
Well duh, ever hear of Weimar.
@And don't compare the US to Zimbabwe or the USSR
or really.. ? what is the diffence?
here and there stupid political leaders print money and give away to poor schmucs.. thats it..
alx
to patch up things here's goodie.. do you know 'political' is Greek word ? what a smart country your motherland was before
Turks invaded and fucked each and every human over there...
Inflation: Commodities
Deflation: Crap we buy from China and Real Estate.
With the depressed consumer demand I just can't see much in the way of wage inflation.
I would agree that real estate will deflate, but not arable land. That's going to rise. A lot.
@leo
I still wanna hear about hyperinflation in Zimbabwe /East block/ Weimar and wage inflation ?? :)
alx
You are delusional if you compare the US to any of these episodes. The only way you can have a sustained inflationary episode is through wage inflation. If people are unemployed and seeing their real wages decrease, hard to see where massive inflation will come from. Again, to compare the US to Zimbabwe /East block/ Weimar is just stupid but it gets people all scared so they jump on the inflation bandwagon.
0/2
Historically not accurate.
Presently not accurate.
Based on your thinking, we should be able to, in a stable wage environment, monetize every dollar of new debt issue pretty much forever without any inflationary tendency. Brilliant!
"The only way you can have a sustained inflationary episode is through wage inflation."
Not necessarily true.
Why could we not have it right now with the printing and distributing of money to non-workers? As long as the money gets into the hands of people or entities who will spend it, sustained inflation can happen. Wage increases are a side-show.
Of course, eventually the inflationary effects of that will then roll over into wage increases as people get angry at the "price increases" that keep them from affording what they are normally used to buying.
Higher prices will reduce demand unless there is enough money available to compensate.
Consumer spending is still a major component of our GDP, or more importantly GNP. If consumers cannot earn more money (or choose to save more money) higher prices will not necessarily translate into increased consumer spending.
alexwest,
Who pissed in your Cheerios this morning? Do a chart of CPI and oil prices in the 1970s and then do one with wage inflation. Grow up and stop polluting this post with irrelevant comments. I do not see a massive inflationary episode but do recognize that the Fed will do whatever it takes to avoid deflation. This doesn't mean they will succeed. And don't compare the US to Zimbabwe or Russia. You're only embarrassing yourself.
CPI? CPI?! CPI?!?!?!?
Goodbye, credibility.
Leo - it's been a while. Hope all is well with you. That said, I think you need to explore the possibility of the FED destroying the USD in the process of avoiding deflation. So H.I. could come via a currency collapse, or a UST bubble-pop - the smart money runs to commodities, which are priced in USD's and boom goes the dynamite. You're correct that it'll be different than Weimer/Zimbabwe, but that doesn't mean it can't happen, even without wage inflation. When this great ponzi falls it's going to happen hard and fast - don't get caught with your pants down buddy. Have a good weekend all -Muir
You don't 'SEE?' ROFLTOMATO!
NO LEO Your th embarressment MORON
Screw Ben Bernanke and the CPI. The CPI says there's no inflation but there's inflation in the neccesities that I purchase.
CPI? Speaking of irrelevant comments...
and last one leo..
if you were so kind to re-print opinion of next schmuck who probably paid you ,, please publish his investing record
during 2008 yy and 2000-2002 years..
thus we will know is he any good ..
alx
leo are you insane ?
#only wage inflation is enough to kick start a severe #inflationary episode
what about 70x ? you might know oil jumped up, its called cost inflation..
what about Zimbabwe ? do they have wage inflation over there ?
what about Island couple years ago ? negative GDP and positive inflation ? did they have wage inflation too?
what RUSSIA and whole east europe block in 90x... did they have wage inflation as soon as USSR collapsed ?
leo pal, stop embarassing yourself..
do you really make living in finance ? i'd say you're some kind of freelancer without even basic college knowledge of macro/business/etc..
alx
leo , my poor pal, are you kind of Ludovic xiv ? what is fuck 'WE'.. I understand YOUR ENLGLISH IS NOT GOOD .. here's
short lesson in english
as Brit/Englishman we usually say 'I' i said, i did , I dont know etc ..
#Is inflation the real threat going forward? The answer is we #don't know.
no.. we know.. ANY HUMAN with any trace of brain activity
understand that US gov prints 1 $ for each 1$ in taxes.. period.. and if you think it will keep on forever.. you're bigger fool I'd imagine..
as far as inflation concerns Leo, my pal, are you from EARTH?
do you go to movies/ shops/ spas /etc.. do you drive car ? fill up tank, are your children insured ?
please do yourself a favor, just compare current receipts w/ those 1, 2 years go.. then please publish your report and YOU WILL KNOW...
alx
ps
please write anything else, like something smart..