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Is That Stagflation That I Hear Coming?
From CNBC:
Jobless Claims, Inflation Jump as Economy Wobbles
Hmmm... What happens when wages and earning assets go down in value as
input prices increase? I have warned of the stagflationary scenario
several times in the past as the most likely outcome of the battle
between the deflation camp and the inflation camp. See:
- Economic
contractions AND rising prices, dare Reggie utter the "I" word - Enter
a global phenomenon - Reggie
Middleton's Take on Investing for Inflation, pt. 1 - Reggie
Middleton's Take on Investing for Inflation, pt. 2 - Reggie
Middleton's Take on Investing for Inflation, pt. 3 - Reggie
Middleton's Take on Investing for Inflation, pt. 4 - Reggie
Middleton's Take on Investing for Inflation, pt. 5 - More
on my stagflation rant - Deflation,
Inflation or Stagflation - You Be the Judge! - Is
My Warning of the Risks of a Stagflationary Environment Coming to
Fore? - China's
Most Expensive Export: Price Inflation
http://www.sangambayard-c-m.com
The situation becomes more clear if you look at this from the Asian perspective.
Written this blog about 4-5 months back http://www.systomatics.info/?p=514 which explains why and how stagflation is the new reality.
regards
hary
your anecodotal mention of your family situation in 1968 really sullied any respect I may have given your analysis...have you looked at economic data for US over 50-00's...just because your family improved greatly from 68 to late 80s til now does not mean that is experience of whole country..check out how the middle class was doing in 1970 compared to mid early 00's, remember in the 50s, 60s, when a guy with only HS degree could single-handedly support family of four doing a blue collar job, he could buy a house, car, feed his family, save, get a pension/retire. And remember the reason for bad economics towards end of 70s, rising oil prices, and Volcker, the grown up, raising the interest rates to get inflation under control...high interest and bad economy continued into first Reagan years, but eventually Volcker's move paid off and inflation did slack off....but please, your family's change in fortune proves nothing...it is a sample size of 1...
if deflation continues, how can commodity and energy prices keep up, high oil prices=high unemployment=lower consumer spending=deflation=lower commodity prices, no?
Don't commodities surge when people are bullish, haven't folks been fairly (crazily) bullish in last six months?
I know I am way oversimplifying, but isn't this just spike in inflation of things most dependent on commodity prices that will not last if credit bubble continues to deflate. I still can buy land for much less than last year, get a house built or remodeled for less than last year, rent an apt for less than last year, still get a car for cheaper than last year, many food stuffs are cheaper, cost of money/interest is cheaper, clothes are cheaper...gas is up a bit, energy about the same...if economy continues to stagnate, don't see inflation continuing...
This is the issue with the inflation/stagflation side. First it's we will get inflation as they print, than when certain prices drop, it's assets and wages will go down, but prices of "essentials" will go up.
I don't think the inflation/stagflation camp understands that it is almost impossible to measure inflation/deflation in terms of prices. If you dont believe me, than go out there and try to see which prices went up and which prices went down this past month. Once you find out which prices went up and went down, than try to find out why? Was it a flood in Argentina, or el Nino in El Salvador? Or was it the result of printing? Good luck with that.
What we have here is clear DEFLATION. Look at the money supply and credit variable. That should be your guide. Now... isn't that much easier to measure??
And just like Anon 16:41 mentioned, there is no such thing as stagflation. It's a made up word by the inflation camp to justify drop in certain prices, etc..
Wake up guys...
Dny
There is no such thing as stagflation. The conditions you call as stagflation will crash the stock market which will lead to a drop in consumer confidence and eventual deflation !!
But Bernie can still print money for us is it not?
no, its not. listen better.
"...as economy wobbles"
Well that's one way to describe it.
I dunno, SOME Nobel Laureate in Economics is going to be forever banished after this resolves itself. With all these definitions about inflation floating around, one can make contradictory statements and be "right".
For consumers, it's NOT about prices, so long as my wage goes up to match. Rather, it's the drift of costs to the basics, reducing available discretionary spending (here, discretionary spending means "investing", toys, upgrades, anything above basic housing, clothing, eating, and real medical spending. To measure inflation, fix my income at the value 1 at some point in the past, and measure essential and discretionary spending as fractions of 1. If my discretionary pie slice shrinks over time, then I experience inflation. If I change jobs, set a new baseline. Lose a job, change the baseline a LOT.
SO, if I can get my discretionary pie slice to grow via savings and investing instead of consumption, or by adding a part-time job, or by controlling or even reducing essential expenses (deflation? smart shopping?), my rainy-day fund can serve as income when the baseline changes for the worse.
The macro forces that tantalize economists mean nearly nothing to the consumer. As evidence, why is there always a conspiracy theory about the disconnect between the national CPI and reality? Everyone has an opinion about the national CPI, but while it indeed measures something, the change in prices of a basket of goods and services, they may not be MY goods and services.
To a consumer, stagflation means inflation as defined above, and an inability to change my circumstance by getting a second job, moving to a place where my baseline for essential expenses drops,
homeowner A has a mortgage on his home, valued at 100K, fixed rate. Through the magic of the market that value rises to 200K. He decides to access his new equity, takes out a refi and lowers his payments 50%. With the added cash he invests in stocks each month. No wait that doesn't work does it? I know he buys Treasury bonds. So let's say he has a 20yr debt obligation, he buys the 20 year bond, still revenue negative, but then the value of his home returns to its former value of 100K??
He has made a collateral free loan on his home of 100K, and while in more prudent times, the banks would make him renegotiate those terms, but in this case the government moves in to protect his purloined equity. The homeowner has acted in his own best interests, the banks are prevented from seeking remedy, through their acting in a manner contrary to their own best interests.
Now if inflation rises that fixed rate mortgage gets sweeter by the day. Locked in at 5% and rates at 10%?? So of course the bankers want to keep rates low, the excess, monetized credit through unbacked equity handouts fires up the cost of living.
Of course it really didn't happen this way, very often, but in principle that's how it works, or just one scenario
It really happened this way in Denmark, 2009, long rates were going above 7% ... people with 30 year mortgages were happy, people with 1-year ARM mortgages not so happy and banksters set to lose big on holding long-duration mortgage bonds.
The government scraped together DKK 4600 Billion - four times GDP, six total revenue, in cash and "guarantees" and placed it in a privately held corporation "Finaciel Stabilitet A/S" (Fincial Stability Ltd) and long rates fell below 5%, short rates even more. A 1-year mortgage is now below 2%.
So the only action then is to go further, convert my 4%, 30 year fixed mortgage into a 5% 30 years ALT-A interest only for 10 years - because THAT sucker will die when someone defaults. Or I will default. Who cares?
if i was flipping houses i think i would resell the property at zero apr, and carry the note, nontransferrable. the advantage is a higher sale price, (the auto makers have been doing this for years). you could call it an equity only loan. The buyer gets plenty of incentives to stay current, there may even be some tax advantages to the seller. Should the owner decide to refinance with a bank you get your full asking price, less their equity.
a few years ago my mother tried to buy a Chevy with cash and they laughed her off the showroom floor. of course look where they ended up.
Stag party. ah boi.
The fed can control interest rates (nominally) and CPI, the inflation measure (nominally) and therefore guide the public perception of inflation relative to the real return on short term paper. what we have to watch is the spread, the difference between inflation and rates. If (real) inflation runs at 5% and rates at 3%, that spread is huge, but who cares really? If we extrapolate and add five points to inflation (oh the power of numbers) then you have 10% and 6%, break out the pitchforks, (same spread)
To the layman stagflation results from the priming of the commodity markets, (speculation driven) ahead of the economic recovery, causing businesses who want to add capacity to pay twice or three times what they should paying for raw materials, in a normal downturn. When Jim Rogers says he is bullish on commodities as far as the eye can see he is stating this problem in another way.
I would call the Stagflation spread, either de-Stagflation, or Stag-Deflation. In Stag Deflation assets prices will continue to fall, while consumer staples, food and energy rise. This is also the opposite of what happened during the housing bubble. Stag Deflation implies that the markets will keep nominal spreads down, or a box of cornflakes and the cost of a new car will eventually cross. Keep the concept in mind, and wait for someone to suggest that relationship.
I have thought for some time that the value of an asset like an automobile would eventually repeat the formula in cell phones and computer printers. The value of the item is net zero, the cost of using the item in this case operating an automobile (auto insurance, service, and fuel) is the true cost of owning that item. That relationship makes the stagflation argument even more poignant. Free cars like free computer printers (which guzzle expensive ink cartidges) come at a price.
Already we know that keeping a McMansion is a lot harder than it looks. You could give them away free and most people would not want the expense that goes with owning them. Until the cost of servicing the item goes down, which implies the labor cost as well, there is no economic recovery, and if labor must be thrown under the bus, there is no economic recovery. Stagflation is the death song of the economy.
Stagdeflation it is.
Because of government theft,
the CPI, currently 10%
in shadowstats.com land,
using 1980 methodology,
may continue to rise or
be redefined down to
zero, as real assets fall
in value to cover the
global margin call...
http://www.jubileeprosperity.com/
Good point on the spread.
This morning's PPI was 4.6% and current rates are 0%.
Am I misunderstanding, or is the current spread not much wider than the dire scenario you used as an example above?
Todd
www.hedgeye.com
Sure....growth is big....
BWAHAHAHAHAHAHAHAHA....ask Government
Sachs what their forward projections
for GDP are. We're going back to 1%
by the 4th quarter.
Goods inflation is coming back, but look at the latest Federal Reserve IP release:
"In January, manufacturing output rose 1.0 percent after having slipped 0.1 percent in December; the level of output in January was 1.7 percent above its year-earlier level. Capacity utilization for manufacturing was 69.2 percent, a rate 4.1 percentage points above the trough in June 2009 but 10.0 percentage points below its average for the period from 1972 to 2009."
Still lots of slack out there, but growth is coming back with a vengeance in manufacturing and more importantly, in services. Will discuss tonight.
Growth coming back with
a vengeance you say?
Must be why gold is falling...
Whenever I hear people discuss "lots of slack out there" I can't help but visualize one of those weight-loss photos with a skinny guy in some ridiculously over-sized pants. I don't think the economy is going to come back with a vengeance. Instead, it's time to look for smaller pants.
"but growth is coming back with a vengeance in manufacturing and more importantly, in services. Will discuss tonight".
Leo,
Have you been smoking some of that good weed you mentioned yesterday?
"If you guys don't think that the big global macro hedge funds got calls from Goldman and other investment banks ahead of time, thereby exacerbating the raid on European sovereign debt and the euro, then you are all smoking some great shit". ... LK
Wait till my post tonight, I'll convert you bears and make you see the galss is half full!
Bagdad Bob is being courted for the highly sought after job since the resignation of Gibbs as WH Press Secretary.
I guess Leo has his own personal hater club... flagged as junk by 2 when it's about as far from a junk post as can be.
There should be agree/disagree buttons as well as junk. It's sad that the idiot spammer who posted before Leo has fewer junk ratings.
Permabulls don't get a whole lot-a-love in ZH-land, it seems.
True, true. I don't actually agree with many of Leo's investment ideas, I just think it's infantile to label his post as junk. It's a far, far more useful post than the seeming creed of "Gold bitches" or whatever it is this week. Opposing viewpoints and healthy discussion tend to improve knowledge. Infantile attacks bring us all down.
oh come on, nobody thinks ZH will remove Leo due to junk flag, they have him contribute frequently, so it's just funny to see the little junk votes...a little fun is not necessarily infantile,
and Leo is like junk food for ZHer's....every now and then you look at a post and say, hey, I'm tired of this steady diet of sticks and twigs of bearish financial analysis, why not indulge in sweet little economic candy...but after reading it, you fill sort of sick, bloated and comatose, and you know your long term mental health has somehow been irrevocably damaged.
I hear ya. Fortunately Leo doesn't kill anywhere near as many brain cells as, say, Cramer.
that why he is tolerated here...he is no Cramer..
got solar??
http://finance.yahoo.com/q/ta?s=SPWRA&t=3m
SunPower has a hell of a time getting their product out. I know solar installers whose primary bottleneck is SunPower. Other manufacturers (I'm speaking specifically of Chinese ones) are terrible about promising one product and then abruptly telling vendors 'Sorry, no more of these will be shipping', which of course leaves companies on the hook for the time and money spent on engineering, permitting, and staging projects for customers already on contract.
Leo Kolivakis will make some shekels on solar investments, I am fairly confident of that, but it will be subsidizing the worst players who sell the cheapest shit. The best ones are hurting.
I've been wondering about this for a while - the talking heads all say either inflation or deflation, arguing the points of the other, neither thinking that they could both be right. Ergo, stagflation could be the name of the game.
DavidC
yes it is stagflation..to a theatre near you
When folks finally see that they can’t just get someone else to pay for all this, there will likely be a huge tax rebellion
which will cause more short term problems, but may in the long term (hopefully) have the effect of getting the government to manage our money better. In the meantime, let’s hope we don’t have too many large national disasters, military conflicts, pandemics or the like to deal with. This country is in a lot of trouble and we need to start thinking like Americans instead of Republicans or Democrats if we’re going to get through this mess……
Meanwhile experts say the market will crash sometime this year..
Fasten your seatbelts...
Don't feed the ianmed spammer