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Is My Warning of the Risks of a Stagflationary Environment Coming to Fore?
Last year, as the debate between the inflationists and the
deflationist was raging, I stepped in with a little empirical research.
I try not to make predictions and prognostications, but rather stick to
being prepared for the most likely events. I stated that if I had to
pick a scenario, the most likely would be stagflation wherein
high input costs would co-exist with a deflationary drop in asset
values, creating a "worst of both worlds" style environment. Well,
Alcoa has given us some anecdotal evidence of the likelihood of such an
occurrence approaching.
Alcoa's Quarterly Profit Trails Estimates on Higher Energy, Currency Costs
Jan. 11 (Bloomberg) -- Alcoa Inc., the largest U.S. aluminum producer, reported fourth-quarter profit that trailed analysts’ estimates as the company faced higher energy and currency costs...
Profit was hurt by higher energy prices and the dollar’s decline
against the euro and the Brazilian real, Deutsche Bank AG analyst Jorge Beristain said...“This quarter was disappointing, especially with the energy costs, and
having to buy primary aluminum on the open market,” said John Stephenson,
who helps manage C$1.5 billion ($1.45 billion) including Alcoa shares
at First Asset Investment Management in Toronto. The miss on earnings
was “significant,” he said.
Aluminum Prices
Alcoa’s sales benefited from aluminum prices that rose 18 percent in the quarter to $2,230 a ton
on the London Metal Exchange. The price Alcoa charged customers for the
metal increased 9.3 percent from the previous quarter, the company
said. Revenue exceeded the average estimate of $4.84 billion in the
Bloomberg survey.“They are benefiting partially from higher aluminum
prices, but the cost honeymoon the company has had for the past nine
months is rapidly drawing to a close,” Beristain said in a Jan. 5
interview. “Some input variables are starting to move against them as foreign currencies strengthen against the dollar.”Chief Executive Officer Klaus Kleinfeld cut about 21,500 jobs from June 2008 through December 2009 as the deteriorating global economy reduced demand for aluminum.
In March, he pledged to eliminate $2.4 billion in annual costs for
items from raw materials to transportation, and had completed 83
percent of that goal by the end of the third quarter.
Also from Bloomberg: Stocks, Copper Gain While Dollar Falls After China Reports Record Imports
Copper futures for March delivery climbed to $3.441 a pound
in New York. Shipments of copper and copper products into China rose to
about 369,400 metric tons in December, the Customs General
Administration said yesterday in Beijing. That was up 27 percent from
November and 29 percent from a year earlier, according to Bloomberg data. Record imports in last year’s first half helped copper prices more than double in 2009.
I have published a decent amount of opinion on the true historical
performance of popular inflation "hedges" as well as the probability of
stagflation being greater than hyperinflation or deflation, outright.
See the many article below.
performance of popular inflation "hedges" as well as the probability of
stagflation being greater than hyperinflation or deflation, outright.
See the many article below.
More on my stagflation rant ...lengthy. I noticed that some who have read the "Reggie Middleton's Take on Investing for Inflation, pt. 5" are looking at inflation and deflation as being mutually exclusive. ...
Wednesday, 24 June 2009.
The Butterfly is released! I
am releasing the balance of the Butterfly Effect (see The Asset
Securitization Crisis Part 27: The Butterfly Effect) to the public in
anticipation of the next two installments of the Asset Securi...
am releasing the balance of the Butterfly Effect (see The Asset
Securitization Crisis Part 27: The Butterfly Effect) to the public in
anticipation of the next two installments of the Asset Securi...
Tuesday, 21 October 2008
Economic contractions AND rising prices, dare Reggie utter the "I" word - Enter a global phenomenon Roadmap to the crisis. Before we go on with this installment let's get a firming of the definition of the term "inflation" with a little help from Wikipedia: Inflation can be considered a general ... Monday, 03 November 2008
Reggie Middleton's Take on Investing for Inflation, pt. 1 I have looked into potential inflation
hedges/speculative trades and decided to share some of my thoughts with
the blog. Despite the rumblings of many, there are already signs of
inflat
Wednesday, 10 June 2009
Reggie Middleton's Take on Investing for Inflation, pt. 2 As stated in part one of my inflation series of blog posts, I am not sure if we will have rampant inflation in the near to medium term (and I believe anyone who thinks they can acc
Friday, 12 June 2009
Reggie Middleton's Take on Investing for Inflation, pt. 3 The Performance of Inflation Correlated Assets: Reggie Middleton's Opinion This is part 3 of my thoughts on investing in inflationary times (see Reggie Middleton's Take on Investing for Inflation.. Friday, 12 June 2009
Reggie Middleton's Take on Investing for Inflation, pt. 5 In continuing with my rant on investing during inflationary periods (see Reggie's take on investing for inflation parts 1, 2, 3 and 4 for the background to this article)), I am addressing ass
Wednesday, 17 June 2009
... continues to gain from rising oil prices. Nevertheless, the slowdown in the US economy and spiraling global inflation are likely to hurt economic growth in Asia and the Middle East. This factor could...
Thursday, 14 August 2008
China Macro Update
China: An Insight into its Past Growth and the Future (also of interest
is the HSBC opinion and 2H08 update) China’s massive growth in the last
decade has taken the world by surprise. Curr
China: An Insight into its Past Growth and the Future (also of interest
is the HSBC opinion and 2H08 update) China’s massive growth in the last
decade has taken the world by surprise. Curr
Tuesday, 19 August 2008
The Asset Securitization Crisis Part 27: The Butterfly Effect The
Butterfly Effect: Paulson, Bernanke, the Asset Securitization Crisis
& their impact on the Industrial and Manufacturing Sectors - Part
27 of Reggie Middleton on the Asset Securitization Crisis
Butterfly Effect: Paulson, Bernanke, the Asset Securitization Crisis
& their impact on the Industrial and Manufacturing Sectors - Part
27 of Reggie Middleton on the Asset Securitization Crisis
Monday, 06 October 2008
Are Energy Prices Curtailing Growth? ...rew 1.0% and Japan rose 5.4% in terms of real GDP, while the U.S. and U.K. fell 0.8% and 3.0%, respectively. Inflation skyrocketed during these times; for instance, U.S. inflation peaked at 13.5% in 1...
Friday, 18 July 2008
GE and the Uber Bank Forensic Analysis lts in its mortgage and credit card portfolio. GE’s higher loss provisions, going forward, and rising inflation will impact the company’s profitability. GE also plans to sell its applian...
Wednesday, 09 July 2008
For those that don't click through the links above, Reggie Middleton's Take on Investing for Inflation, pt. 1 features empirical historical comparisons of inflation hedges. All o you gold bugs out there may be disappointed.
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People
Let's not forget that even in an extreme hyperinflationary environment certain goods/assets deflate (in real terms)
In Zimbabwe some luxury goods and real estate deflated (again, real terms)....usually the most needed commodities and items go ballistic.
I meant deleveraging causes a strong deflationary effect, while the Fed, Ginnie Mae, and the Congessional budget inflate, of course. I calculated last year that a $1.5 trillion budget increase was "needed" to stop deflation. Well, Congress managed to do about $1.0 trillion in FY 2009 on-budget, plus another $1.2 trillion extra in FY 2010 on-budget, plus at least another $1.2 trillion in FY 2009 off-budget, and at least another extra $0.8 trillion extra in FY 2010 off-budget, so we're back to commodities inflation, while home and commercial real estate have temporarily stabilized.
This has also been compared to a game of musical chairs. One by one we face unemployment, foreclosure, eviction, etc. Those who keep their seats assume they have caught the rhythm of the song being played. I wonder how many Khymer felt the same?
NO, unequivocally, real estate has not stabilized! It is still in an acute deflationary spiral. I expect commercial property is similar or worse!
I agree with Reggie - Stagflation it is.
Asset classes continue to deflate, while commodities run the other way.
Just walk into a grocery store. All the prices are up, but the portion sizes are WAY down - everything from tuna cans to potato chips to dishwashing liquid. It is a glaring paradigm shift - a "Supersize antithesis".
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JACKSONVILLE, Fla. – Jan. 11, 2010 – The December Mortgage Monitor report, released by Lender Processing Services, Inc. (NYSE: LPS), a leading provider of mortgage performance data and analytics, showed that one in every 7.5 homeowners in the United States is either behind on mortgage payments or in foreclosure. The December 2009 Mortgage Monitor report is an in-depth summary of mortgage industry performance indicators based on data collected as of November 30, 2009.
Total delinquencies, excluding foreclosures, increased to a record high 9.97 percent, representing a month-over-month increase of 5.46 percent and a year-over-year increase of 21.29 percent. Loans rolling to a more delinquent status totaled 5.01 percent compared to 1.52 percent of loans that improved. Of loans that were current in December 2008, 4.37 percent were either 60 or more days delinquent or in foreclosure by the end of November 2009, a rate higher than any other year for the same period.
Foreclosure inventories also continued to climb to new highs with November’s foreclosure rate at 3.19% – a month-over-month increase of 1.46 percent and a year-over-year increase of 81.41 percent. Compared to 2005 levels, foreclosure inventories across all loans are now nearly seven times higher, while jumbo loan foreclosure inventories are nearly 100 times more than levels four years ago."
I liken the effect to riding a bicycle up a slope while failing to pedal. At first, you can keep a balance by turning the steering wheel to the left or right. But eventually the bicycle must fall to the left or to the right.
Deleveraging causes a very strong inflationary force. The Fed and Ginnie Mae are throwing currency at the situation, which helps the few while hurting many more. And manufacturing, as the guy pedaling the bicycle, falls more and more. The Chinese guy is pedalling too fast, and will also meet a bitter end.
Trade wars, competitive devaluation (not debasement: that implies that our currency has a base), followed by militarization and war. The U.S. turns either to a theocracy or a Caesar. Early returns say Caesar. Knowledge of farming will be as valuable as gold, and equally likely to get you killed when flashed. Or am I being optimistic?
As long as the upper crust is artificially protected from the damage they've wrought all will be well. The rest of us don't matter.
Buzz, I believe they call that a "jobless recovery".
All the bulltards touting how great commodity inflation is for the market forget that people who actually make real things have to may a 60% increase in iron ore with no pricing power. Cost push inflation will be the name of the game which of course will be eventu8ally rolled back by the market leaving comapnies with no choice but to trim at the edges in a further attempt to prove that American companies are so productive it takes a village in China to match the prowess of the American worker
Reggie-
Let's look at reality on Main Street. Some of us still work in finance there...for now.
1. Incomes are stagnant or falling. Disposable family/taxpayer income is being diminished by increases in health care costs, energy, etc. Unemployment is rampant and persistent. Nearly all of those moving back into the workforce are doing so at a lower rate of compensation.
2. ZIRP has little traction left, even if it had any in its beginnings. Consumer credit is still contracting and if you can find creditworthy borrowers, they'd rather not borrow. Credit is also being destroyed by default as well. IMO, the only thing accomplished by the quick move to ZIRP is margin compression at banks/lenders.
3. Small businesses are struggling. Many are dependent on the health of their local economy or major local employers. Most small businesses have laid off help. Large businesses are maintaining profitability in the short-term by slashing expenses/services and downsizing their workforce. That's neither sustainable nor desirable.
4. The state/local fiscal disaster is still in its infancy. Budgets and services are being frozen or cut. Taxes and fees will increase. The only question left is how much do they increase and how soon. That's another cut into disposable income.
5. QE, endless backstops and bailouts, and the utter shredding of the dollar is no doubt keeping the commodity markets afloat. In the short term, this is a reprieve for the Ag sector. However, I think that day of reckoning is on the horizon. Key dollar-denomated commodities will trend upward, some perhaps violently if QE is not put to bed. Oil could kick this whole thing in the head.
6. Look for the Fed to lose its ability to keep a tight grip on interest rates, particularly as it applies to consumer credit and mortgages. The bond market has been waiting to have its say. ZIRP what? Nothing but spinning wheels here, folks.
In all, it seems that the Fed/Treas is setting the table for some species of stagflation. We have clearly signaled deflation on Main Street and in the state houses. In the meantime, monetary and fiscal policy are pointing to inflation in key dollar-denominated commodities and rising interest rates.
The table is set for quite a disaster, IMO. I hope that all the waves fail to crash simultaneously. In fact, that is about the only sense I can deduce from the administration's approach to its economic policy.
In 2009, Venezuela had a 3% drop in GDP and inflation surged to 27% for the year.
Why not in USA?
Just goes to show that equities are not the best hedge against fiat currency destruction (call it "inflation" if you want, it is really currency debasement). Gold is the ultimate hedge against currency debasement, and oil and other commodities are increasingly becoming good ones. But some companies will benefit from currency debasement, some will suffer, while others will be relativley neutral.
It's impossible to have inflation and deflation at the same time. What you are talking about is full on deflation with a shift in the real relative prices in the economy. i.e., if there was a stable money supply and 0% inflation, people would still see more of their income devoted for food and energy due to supply and demand. This is a real trend independent of the inflation/deflation rate. Then, add inflation on for stagflation, or add deflation for what would have to be the worst of all possible worlds, since even in the 1930s the problem was abundance of food, not scarcity.
It strikes me, with the options of inflation or deflation that have been discussed by various proponents, that we have three possibilities;
1 - Inflation. With the pumping of the system with currency (I avoid the use of the word money). inflation, in the 'dictionary definition'.
2 - Deflation. With the decreasing of debt and deleveraging (specifically, by the personal component of the system).
3 - Stagflation. With the concurrent deleveraging of personal debt and the pumping of the system with currency.
Given the current situation and potential outcomes (near zero interest rates, historic pumping with currency) I'm inclined towards deflation or stagflation, both outcomes that require a fall in the (stock markets).
DavidC
Alcoa has to cut wages and benefits. Well so do all US corporations. American exists after all to provide good corporate earnings. Obviously on a competitive basis high wages are the Achilles heel of US corporations. Well except for banking and finance where high pay is a gigantic plus.