Beating the coming inflation

I completely agree with both of you guys, Tex and piezoe...

I can only add a couple of smallish points.

Firstly, the issue is not just localized to the US. Other Western economies, like the UK, have allowed themselves to be dragged into the same morass.

The biggest problem with inflation, in my view, is its insidious political nature. Like crack, it's a slippery slope that leads to ruin and misery and, just like crack, it's very hard to get rid of the habit. Makes me very pessimistic about the exit from this mess, if we do get there.

So the answer is 'if you can't beat 'em, join 'em'. I am desperately seeking a way to get into debt, so that I can be one of the people who gets bailed out.
 
Quote from piezoe:

thus i expect some fairly steep inflation coming up, probably by 2012, if not sooner. Debt will continue to furnish the incentive for inflation and that will be the path, however disastrous in the long run, of least resistance.
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Daal dodged the question and simply said "outside the Fed's target band" which is a moot point. If we see 2.1% annualized CPI over the next 10 years Bernanke will be outside of his target band, Daal will be right but Bernanke will be awarded the Presidential Medal of Freedom and the Nobel Prize for Economics at the same time.

What is fairly steep inflation? And when will it start ramping up?

Current market pointers

5y TIP Spread:
http://www.bloomberg.com/apps/quote?ticker=USGG5Y5Y:IND
-> 1.98% annualized over 5 years

10y TIP Spread:
http://www.bloomberg.com/apps/quote?ticker=USGGBE10:IND
-> 1.31 annualized over 10 years

To put this into words: The current scenario would be a modest economic recovery over the next 2-3 years and then anemic growth/sideways churning for the following 7-8 years.

"Steep" in my book would mean anywhere between 4-8% CPI annualized over the next 10 years. So the market got this completely wrong? Why is the market wrong, what obvious or not so obvious point is the market missing?
 
Quote from makloda:

Daal dodged the question and simply said "outside the Fed's target band" which is a moot point. If we see 2.1% annualized CPI over the next 10 years Bernanke will be outside of his target band, Daal will be right but Bernanke will be awarded the Presidential Medal of Freedom and the Nobel Prize for Economics at the same time.

What is fairly steep inflation? And when will it start ramping up?

Current market pointers

5y TIP Spread:
http://www.bloomberg.com/apps/quote?ticker=USGG5Y5Y:IND
-> 1.98% annualized over 5 years

10y TIP Spread:
http://www.bloomberg.com/apps/quote?ticker=USGGBE10:IND
-> 1.31 annualized over 10 years

To put this into words: The current scenario would be a modest economic recovery over the next 2-3 years and then anemic growth/sideways churning for the next 7-8 years.

"Steep" in my book would mean anywhere between 4-8% CPI annualized over the next 10 years. So the market got this completely wrong? Why is the market wrong, what obvious or not so obvious point is the market missing?
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Ok I will give you a number.
CPI averaged 5% in the 70's, it averaged about 3% this decade before commodities crashed. So I bet they will average 4-5% for 5-10 years after the recession ends, some years it will go above that some years bellow

After 1933 the PPI averaged 7% and CPI about 2-3%, this shows business were getting squeezed and unemployment kept down consumer prices. This is not likely to happen this time so its possible CPI will get out of line big time and the fed has already said the 'sacrifice ratio' is higher these days, which means for any given rise in inflation expectations the fed needs to raise rates more than(and cost the economy more jobs) they did in the past to bring that back inline, the fed of course wont be able to raise like hell because of political pressure and fears of throwing the economy back into depression so they will have to let inflation get out of line

CPI figures are also more important given that it will drive inflation expectations and push up the core rate, so a 2.1% core figure would grow to became a 3% figure given that they wont go in a hiking rampage

But of course exact numbers are impossible to get it right, a version of the 70's can however serve as a guide
 
Makloda, i agree. Steep to me would be about twice or more the standard Fed line, or about 4-8% as you point out. (That's using government figures, not actual.)

I have to chuckle a bit when you ask: "Why is the market wrong?.. What's it missing?"

I'm an old fart like Soros, and i'm a fan of his. Soros says the market is almost always biased away from reality. And i'd have to agree with that except possibly on average over the long haul. In other words, from my perspective, the market, in the short run often does not reflect reality very well.

But who knows? I'm betting on inflation kicking in as we begin to see some light and some of the rest of you are counting on deflationary forces holding it in check, with the Fed's help. We'll just have to wait and see.
 
Quote from Daal:

Ok I will give you a number.
CPI averaged 5% in the 70's, it averaged about 3% this decade before commodities crashed. So I bet they will average 4-5% for 5-10 years after the recession ends, some years it will go above that some years bellow
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Not a single home-currency denominated, debt induced banking crisis (and the 70s wasn't one) ended in a decade of high inflation. This would be the first one.

Your argument is based on "things quickly going back to normal" when we get "out of the recession". What if we don't get out? Actually your inflation outlook is very bullish economically and I hope you're right.

However, that's the point I was trying to make with the 5y & 10y TIPs. They point to a double dip expectation. A shallow recovery and then - on average - a sideways grind that nets very little economic growth and inflation. That would be consistent with a L- or U-shaped recovery. Not a 1974-76 V-Shape bounce in real GDP.
 
Makloda, you bring up good arguments.

May I ask what your view on gold is?

Deflation is bad for debtors and no greater debtors then banks who leveraged up 100 to 1 right so this financial crisis might take a few years to play itself out hence the panic play might still be on?

Thanks.
 
I feel Gold would need more than a little deflation from here... like massive corporate and sovereign bankruptcies and systemic stress (Ireland, Austria defaulting etc., something of that magnitude) to get traction. Lehman & Iceland failed, the entire US, UK banking system went on artificial life support and Gold couldn't stay above $1k was a big red flag, IMO.

It appears to me its still a very loved investment and is seeing tons of retail participation. But who knows, doesn't mean all those bus drivers have to be wrong it can't go to $5,000 now can it :)

I'm long some GC (futures); will reverse and go short on a drop below 850s on the monthly.
 
Quote from makloda:

I feel Gold would need more than a little deflation from here... like massive corporate and sovereign bankruptcies and systemic stress (Ireland, Austria defaulting etc., something of that magnitude) to get traction. Lehman & Iceland failed, the entire US, UK banking system went on artificial life support and Gold couldn't stay above $1k was a big red flag, IMO.

It appears to me its still a very loved investment and is seeing tons of retail participation. But who knows, doesn't mean all those bus drivers have to be wrong it can't go to $5,000 now can it :)

I'm long some GC (futures); will reverse and go short on a drop below 850s on the monthly.
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Ok thanks.

Also, as you believe we have entered a debt deflation backed (banking) crisis, how far do you feel are we in the needed recapitalisation of US (and global) financial institutions?

According to Mish (also a deflation believer maybe you heard of his blog)

Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where is the rest of the loot? The answer is in off balance sheet SIVs, imploding commercial real estate deals, Alt-A liar loans, Fannie Mae and Freddie Mac bonds, toggle bonds where debt is amazingly paid back with more debt, and all sorts of other silly (and arguably fraudulent) financial wizardry schemes that have bank and brokerage firms leveraged at 30-1 or more. Those loans cannot be paid back.

http://globaleconomicanalysis.blogspot.com/2009/01/fed-and-boe-shell-games-to-bailout.html


How much truth is there in this statement in your view and how far is the FED 1)aware of this situation and 2) taking the steps to get them solvent again?

Would you agree there could be a case of not only to big to fail but also to big to save?

Thanks.
 
Quote from makloda:

Not a single home-currency denominated, debt induced banking crisis (and the 70s wasn't one) ended in a decade of high inflation. This would be the first one.
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I'm not sure this study would be right. As I have shown the worst banking crisis ever was followed by a good deal amount of inflation(US 33-38), the initial jump of PPI and CPI probably throw the average of inflation of that period to a level that can be considered somewhat high.

Looking at a chart of world wholesale prices(I believe this is the same as PPI) from 33-38 from bernanke's book, show a massive move. The CPI also rose but it was less. His theory on why is that is that because unemployment was way above the NAIRU(the U6 equivalent hit 46% in the US I believe) hurting business pricing power. Since this time around its likely not to be this bad its possible that CPI will more closely track PPI

Your argument is based on "things quickly going back to normal" when we get "out of the recession". What if we don't get out? Actually your inflation outlook is very bullish economically and I hope you're right.
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The thing is that the worse the recession gets(along with inflation figures) the more likely the Fed will push the panic button then go to extreme QE with every fed governor and fomc voter giving the dollar a verbal beating.

In the end where I would disagree with the deflation thesis is because I believe the fed CAN control prices, I agree that monetary policy is less effective now and milton friedman was wrong that the fed could prevent depressions.

However by reading the stuff that bernanke has written you can't rule out the absolute extreme measures he will use. Looking at the total dollar collapse after the 2 QE fomc statements I'm growing convinced the fed can control US pricing.

If they do money printing in a japanese level multipled by 20 combined with signaling to the markets 'we have a printing press and will destroy the dollar' its likely they dodge deflation, then I have a hard time believing by some kind of magic inflation will land at 2% and everything will be fine, they will likely surpass that, greenspan says monetary policy is like jumping from a 60 story building and trying to land on your feet, they will err in the side of too much inflation. Then they will likely stay loose.

Plus since I expect commodities to return to an uptrend(the 33-38 period had a 7% average rise in the PPI all commodities index) this will create all kinds of issues in terms of inflation expectations and velocity down the road with the fed having their hands tied and not being able to pull a volcker
 
not sure if it's (inflation) gona come on over night. But I'm heavy in oil since 30s. I am in Currency Baskets (getting a little red as the currenies of the world have fallen off, more than the dollar % wise, the strong dollar goes against my positions.).

But, I would suspect that inflation will creeeeeeep into the system.

Land I bought, but in Texas....Land is well, plentyful if you know what I mean. It's not liquid enough if you need the money but it's a investment of longterm.
 
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