You say Inflation...I say deflation?!

User Forum Topic
Submitted by Bubblesitter on August 11, 2010 - 5:42am

You say inflation, I say deflation.

You say potatoe, I say potato.

Well, there’s alot more talk of deflation these days in the media. What are your folks thoughts for the next couple years? How are you investing?

Here’s how I see things playing out in the next 5 year or so and how I’ve adjusted my portfolio. Please do NOT take this as any kind of financial advice. Although, I do have an MBA with finance concentration, I am no adviser, nor do I work in financial industry. I’m just a poor schmuck trying to save enough for retirement, put kids thru college in few years and fund life in general. Please consult your investment adviser. Ok done with fine print.

Near-term 1-2 years, double dip recession, mild deflation. Unemployment will be persistently high. Government will be turning on printing presses to hold back more serious deflation. From a famous Ben Bernake quote from 2002, about fighting deflation, "The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost." He will use it.

Payback will be a b*tch though in a couple years, with record deficits continuing for years and deadlocked Congress unwilling to make the hard decisions, we will probably see inflation kicking in big time as ROW recovers and treasury yields will need to go up. Perhaps a bad replay of that 70s show, with double digit inflation.

I’m still invested a good % in gold (via ETFs, gold mining, stocks), although less now than last year. Gold is still classic safe haven in times of serious economic turmoil, both inflationary and less so in deflationary times. It will take a hit during the deflationary period. I’ve protected my gold stock’s downside risk to 15% or so. Will jump back in when price takes bigger hit. I have shifted more to cash and some classic deflationary hedge such as stocks with good dividends and consumer staple stocks, along with higher quality debt instruments (shorter term <1-2 years).

I’m having fun playing with excel spreadsheet and sensitivity models.

What are you doing?

Bubblesitter

Submitted by GH on August 11, 2010 - 8:04am.

An issue I seldom see addressed is that everyone wants a high rate or return on investment, Stocks must go up 8% a year, houses must go up 8% a year, banks must give 5% and so on. At the same time we demand ZERO inflation, and the Fed obliges by turning the screws on inflation.

The way I see it this has resulted in a massive pressure cooker economy with bubbles blowing left right and center. Now the whole thing is starting to look more like a soufflé though.

My question to those wiser than I... How can you maintain huge investment growth and zero inflation?

Submitted by briansd1 on August 11, 2010 - 8:37am.

GH wrote:

My question to those wiser than I... How can you maintain huge investment growth and zero inflation?

Productivity and population growth.

Problem is American workers are already as productive as can be right now.

And there's rising public sentiment against immigration.

Submitted by Arraya on August 11, 2010 - 8:54am.

Brian you don't understand how the economy works.

If there is zero inflation(as defined by an increase in money supply), than there is little to zero investment growth and actually it becomes quite dysfunctional, if it is not growing, as we will see.

As if, we just add some population the economy will magically grow. Good grief

Submitted by briansd1 on August 11, 2010 - 9:26am.

Arraya wrote:
Brian you don't understand how the economy works.

If there is zero inflation(as defined by an increase in money supply), than there is little to zero investment growth and actually it becomes quite dysfunctional, if it is not growing, as we will see.

As if, we just add some population the economy will magically grow. Good grief

Arraya, you're assuming that no money supply growth is a requisite to achieve low inflation.

If you add productivity and population you can increase the money supply and not cause inflation (I define inflation as increase in prices).

Submitted by bubba99 on August 11, 2010 - 10:34am.

The rate at which the FED is printing money should cause inflation via deflation of the currency. This is not happening because the M3 money supply is crashing. From a high of +16% growth in 2008 to a negative 6% growth currently (shadowstats.com) The rapid decrease in velocity of money is acting to offset the rapid increase in the printing presses.

In the short run, look for the slowing economy to offset the printing presses, maybe even a little inflation. The official CPI is bouncing around 1 or 2 percent, but the real inflation rate is between 4 and 6 percent (shadowstats.com)

In the longer run, look for the decrease in lending to level off, and the M3 money supply to begin to grow again because of the FED printing our way out of debt. This will bring hyperinflation.

I have consistently underestimated the amount of time it will take for the currency to change direction, so while I expect inflation to begin within a year, expect it much later.

Submitted by andymajumder on August 11, 2010 - 11:06am.

I say Stagflation. Due to globalization and availability of cheap educated labor in Asia, job growth will continue to be anemic in US, and even those who do have decent jobs in the private sector will not see any significant increase in their compensation due to outsourcing pressure. Of course the top management in most of the private sector will continue to do great as profits continue grow due to expansion in Asia and latin america. Feds policies will lead to inflation in commodity and energy prices which will creep into food and transportation. So thing will get more expensive while salaries will stagnate. Middle class will continue get hammered, the rich will get richer (specially those with exposure to commodity stocks and top management of MNCs)...disparity between the haves and have nots will continue to grow.

Submitted by CA renter on August 13, 2010 - 12:26am.

Pretty much ditto what andymajumder said. It's going to get ugly for working Americans (and even worse for those who can't find work).

Submitted by Arraya on August 13, 2010 - 4:53am.

Fed policies may or may not lead to inflation, but a billion new eastern consumers trying to reach western consumption ratios will strain the energy system enough to raise the price of necessities, if western consumption maintains. But it really has nothing to do with increasing the money supply or any policy(except maybe globalization). It's more an effect of adding tremendous demand to a commodity system that has never been there before.

Chinese per capita oil consumption is about a twelfth of what US per capita consumption is and it's dramatically increased in the last decade. There is virtually zero chance they can reach US per capita levels without dramatically dislocating western economies.

China, aware of this situation, have been quietly arranging long term bilateral supply contracts directly with producers, thereby, going around and taking production off the market.

Western powers, rely on their own perceived ability to outbid the competition.

Submitted by Bubblesitter on August 13, 2010 - 4:59am.

China sold more cars last year than the US. It just surpassed Japan as the second largest economy. After dozens of trips out to China starting nearly 15 years ago, I'm still amazed by China's growth and very rapid change. 15 years ago vast streams of bicycles on the roads ....now huge traffic jams on jiangoumin avenue (wide 15 or so lane road in front of Tiannamen square, same road where man stood in front of tank). More Audis, BMWs, Shanghai GM Buicks you can shake a stick at. Btw, GM sold more cars in China last year than they did in the States. China still has 600 million dirt poor peasants, all want to be like western consumers.
These are some reasons I'm betting on longer term inflation, especially in energy oil and other commodities. It will be interesting ride for China, they are currently going thru ttheir own property bubble. Shanghai now more expensive than NYC. Wonder what impact of property crash will be, if it occurs.

Bubblesitter

Submitted by Bubblesitter on August 13, 2010 - 5:30am.

Arraya,
I've been following the Chinese acquisitions of commodity producers. The Rio tinto debacle was interesting one. I agree there is a concerted china govt policy to lock up and secure commodity supply.

We'll be seeing more and more Chinese cars in the US in coming years. Alot of components already being made there. Volvo is now Chinese owned. Huge amount of production already going on. Interesting player in emerging electic/hybrid market will BYD, huge producer of batteries, primarily for cell phones. Now taking that knowhow and applying it to car batteries. They have the scale to drive down prices to make electic vehicles feasible. Buffet is big investor. I'mI scoping some targeted investments in that area. Chinese love cars.

Smartest thing the Chinese government can do is to mandate that 20% of cars in China be electic or be hybrid. They could jumpstart a domestic clean car industry, leapfrog the west, and help clean up their pathetically polluted cities. My prediction is you will see inexpensive, good Chinese made all electric and hybrid cars in 7 years, earlier with with China owned (originally western brands, e.g Volvo)

Bubblesitter

Submitted by investor on August 13, 2010 - 7:24am.

Bubblesitter: I'm getting out of debt 100%(home, business condo) buying silver in 500 eagle allotments and I'm going to sit on my cash, waiting for great buying opportunities in commercial real estate in 2014 to 2017. (I know that long term fixed intrest rates are a good thing to be tied into during inflation, only if you have a job). In 2014 to 2017, I might buy commercial real estate without a loan and then sell it so that I am the bank. One way to really get a great investment return is to BE THE BANK.

Submitted by FormerSanDiegan on August 13, 2010 - 7:57am.

Inflation.

Submitted by Bubblesitter on August 19, 2010 - 7:23am.

Gold is hitting all time highs again....aren't we supposed to be in deflation now? What else is going on?

Note, the Chinese have been net sellers of
US debt the last 2 months. They are using the treasuries rally to diversify from US debt. Will they come back? Please?!

Submitted by Bubblesitter on October 16, 2010 - 5:53am.

Good comments. I agree that in the mid to longer term 2-7 years stagflation is probably most likely scenario. During that bad 70's show, inflation was in low double digits and unemployment high. Gold was also at a all time high, nearly $2000 in today's dollars. So anyhow, I'm holding to my plan, with exception of narrowing downside risk of gold related stocks.

Since original post, we've seen widely reported news of potential "currency war" emerging as countries try to get upper hand on exports. Everyone seems to be incented to devalue currency. Heat is increasing on china to appreciate Yuan, they will probably only let it slowly apppreciate.

Bernanke is strongly hinting that there will be large stimulus via asset purchases by the fed, to counter deflation and jumpstart economy.

Bubblesitter

Submitted by Bubblesitter on December 6, 2010 - 5:20am.

The recent European sovereign debt problems have me increasing the odds of near/mid term deflation. Next up on deck are Portugal then Espana.

This is probably favorable for gold as a safe haven investment.

Recent moves by Chinese regulators to allow their citizens to invest in gold funds will also probably help gold. Most Chinese investors really have very limited options for investments. Real Estate for last few years have really been a big driver, but with princing getting frothy in many places, I bet speculators are getting nervous.

Bubblesitter

Submitted by briansd1 on December 6, 2010 - 12:51pm.

Bubblesitter wrote:
The recent European sovereign debt problems have me increasing the odds of near/mid term deflation.

Good call Bubblesitter. It looks like internal deflation will be required in many parts of Europe and to some extent in California.

Submitted by sreeb on December 6, 2010 - 1:26pm.

So far the money printing hasn't shown up as inflation here in the US.

Part of that is the decrease in the velocity of money. As long as inflation is very low, you can afford to sit on cash. But if we do see inflation or a continued fall in the dollar, that money will run from cash dollars, increasing velocity and providing positive feedback.

We are now in a truly global economy. Money printed here doesn't stay here. It causes inflation world wide. Google China and "hot money". This is also why stimulus money won't work effectively anymore. Instead of stimulating the US, money just pours into Asia.

Submitted by Djshakes on December 8, 2010 - 4:02pm.

But some people hear believe the stimulus is bring stability? (I'm not one of them)

Submitted by barnaby33 on December 8, 2010 - 7:04pm.

My question to those wiser than I... How can you maintain huge investment growth and zero inflation?

Leverage.

Submitted by Bubblesitter on December 10, 2010 - 6:06am.

At the time the stimulus was initally debated over year and half ago, nearly every economist supported some sort of large stimulus. Fiscal restraint during severe recession just prolongs recession. You can debate if all those "shovel ready" projects really shortened the recession or not. I guess no way to ever tell. By they way we are officially out of a recession, even though it doesn't feel like it with the high unemployment. Unfortunately I bet we're gonna double dip recession soon.

Bubblesitter

Submitted by Bubblesitter on February 22, 2011 - 5:34am.

Inflation seem to be getting more popular press these days.

Experts seem to like to use the "core" inflation metric that excludes volatile food and energy. Problem is that those 2 are seeing big spikes.

Interesting side effect of high food commodity prices....unrest in emerging markets, particularly in the Mideast. Unrest Driving up oil prices, further driving up food prices as most food needs to go from distant farm to mouth.

Submitted by Arraya on February 22, 2011 - 5:48am.

Oil is a master commodity - it's moves always push all other commodities. otoh -Speculators see momentum develop and begin to pile into the sector chasing that momentum. This rapidly drives prices higher by creating artificial demand. Which is vastly different from inflation defined by the dilution of money - we also have tightness in the oil market and big currency moves - so there are a lot of moving parts.

FWIW- When oil pushed past 100 in 2008 food riots flared up in the third world.

Submitted by Bubblesitter on July 17, 2011 - 3:40am.

I'm still holding to my belief of long term inflation. Bunch of things going on that continue to be worrisome. All will impact US housing market to some degree. Sovereign debt issues in Europe still seem to be spreading. Also China property market potential big fall may be big problem. Here's interesting wash post article on big problems in China. You will be kidding yourself if you believe it will not.impact you in someway.
http://mobile.washingtonpost.com/rss.jsp...

Submitted by Bubblesitter on July 24, 2011 - 1:09pm.

Well folks, we're going to the show the next couple days.

I put a successful debt deal at 40% odds now, and if it happens it will not have enough cuts to placate the rating agencies.

A credit ratings cut will boost interest rates across the board and result in higher costs for everyone. Essentially a stealth tax.

I'm gonna be following the asian markets closely later this afternoon.

My prediction is that gold is gonna jump big time.

10 year treasuries yield will jump and mortgage rate will step up, as the 2 are highly correlated.

This may be the event that precipiates big problems.

Submitted by CA renter on July 24, 2011 - 4:20pm.

Bubblesitter wrote:
Well folks, we're going to the show the next couple days.

I put a successful debt deal at 40% odds now, and if it happens it will not have enough cuts to placate the rating agencies.

A credit ratings cut will boost interest rates across the board and result in higher costs for everyone. Essentially a stealth tax.

I'm gonna be following the asian markets closely later this afternoon.

My prediction is that gold is gonna jump big time.

10 year treasuries yield will jump and mortgage rate will step up, as the 2 are highly correlated.

This may be the event that precipiates big problems.

Rising interest rates only make costs higher for those who have debt. For those of us who have no debt, and who've been patiently (or not so patiently) watching and waiting for higher rates/lower costs this past decade, the low interest rate environment has felt like being pecked to death by ducks. It has royally sucked.

Bring on the higher interest rates...finally!!!!

Submitted by moneymaker on July 24, 2011 - 8:26pm.

It's all good!...I have debt and I still want inflation. Of course I want my wife to stop changing the TV channel and then walking out of the room too. Doesn't mean anything is gonna change. Jobs jobs jobs that is the answer. Why don't we put pressure on the utility companies to put all the utility lines underrground in a timely manner. That would create jobs. I think putting our human resources to work in a meaningful way is what needs to be done. I have a job and I want everybody that wants a job to have one too. Why did I give my change to the homeless guy at McDonalds today? Because he held the door open for me coming and going. That's a minor thing but it represents effort, and effort should be rewarded.

Submitted by CA renter on July 25, 2011 - 1:14am.

threadkiller wrote:
It's all good!...I have debt and I still want inflation. Of course I want my wife to stop changing the TV channel and then walking out of the room too. Doesn't mean anything is gonna change. Jobs jobs jobs that is the answer. Why don't we put pressure on the utility companies to put all the utility lines underrground in a timely manner. That would create jobs. I think putting our human resources to work in a meaningful way is what needs to be done. I have a job and I want everybody that wants a job to have one too. Why did I give my change to the homeless guy at McDonalds today? Because he held the door open for me coming and going. That's a minor thing but it represents effort, and effort should be rewarded.

Agree, our entire focus should be on jobs.

Unfortunately, the rhetoric from the right says that lower tax rates will promote job growth. They won't let the fact that there is NO evidence that lower tax rates promote job growth.

The rhetoric on the left isn't any better...they say that piling more debt onto an already unsustainable pile of debt will magically fix things.

We will never dig ourselves out of this hole until someone has the balls to talk about global wage arbitrage (and everything that entails) in a serious way.

Submitted by bubba99 on July 25, 2011 - 3:38pm.

CA renter wrote:
threadkiller wrote:
It's all good!...I have debt and I still want inflation. Of course I want my wife to stop changing the TV channel and then walking out of the room too. Doesn't mean anything is gonna change. Jobs jobs jobs that is the answer. Why don't we put pressure on the utility companies to put all the utility lines underrground in a timely manner. That would create jobs. I think putting our human resources to work in a meaningful way is what needs to be done. I have a job and I want everybody that wants a job to have one too. Why did I give my change to the homeless guy at McDonalds today? Because he held the door open for me coming and going. That's a minor thing but it represents effort, and effort should be rewarded.

Agree, our entire focus should be on jobs.

Unfortunately, the rhetoric from the right says that lower tax rates will promote job growth. They won't let the fact that there is NO evidence that lower tax rates promote job growth.

The rhetoric on the left isn't any better...they say that piling more debt onto an already unsustainable pile of debt will magically fix things.

We will never dig ourselves out of this hole until someone has the balls to talk about global wage arbitrage (and everything that entails) in a serious way.

Exactly right. But I give zero probability that congress will meaningfully address the issue

Submitted by briansd1 on July 25, 2011 - 4:15pm.

CA renter wrote:

Agree, our entire focus should be on jobs.

Unfortunately, the rhetoric from the right says that lower tax rates will promote job growth. They won't let the fact that there is NO evidence that lower tax rates promote job growth.

CA renter, corporations are sitting on
$2 trillion of capital that they are not using. High corporate taxes and profitability are not the problem.

The problem is that businesses lack demand and customers.

CA renter wrote:

The rhetoric on the left isn't any better...they say that piling more debt onto an already unsustainable pile of debt will magically fix things.

Who on the left is talking about about more debt? Everybody is talking about spending cuts and paying down the debt.

On least, on the left, there is talk of addressing the demand issue by putting more money in the hands of average American consumers.

CA renter wrote:

We will never dig ourselves out of this hole until someone has the balls to talk about global wage arbitrage (and everything that entails) in a serious way.

Building barriers around our country, erecting tariffs, and retreating into isolationism are not the answer.

eveasdropper addressed education in another thread. We need to encourage education and technology. And we need to learn to do new things and better things than our global competitors.

We need an industrial policy that builds American technological champions.

I think that the left is better equipped to deliver.

Submitted by CA renter on July 26, 2011 - 4:50am.

briansd1 wrote:
CA renter, corporations are sitting on
$2 trillion of capital that they are not using. High corporate taxes and profitability are not the problem.

The problem is that businesses lack demand and customers.

Absolutely agree, 100%. That was my point.

CA renter wrote:

The rhetoric on the left isn't any better...they say that piling more debt onto an already unsustainable pile of debt will magically fix things.

briansd1 wrote:

Who on the left is talking about about more debt? Everybody is talking about spending cuts and paying down the debt.

On least, on the left, there is talk of addressing the demand issue by putting more money in the hands of average American consumers.

While I agree that we need to strengthen our social safety net during hard times, there is a limit. It would be much better if we had put these people to work, rather than hand them 99 weeks of unemployment checks.

CA renter wrote:

We will never dig ourselves out of this hole until someone has the balls to talk about global wage arbitrage (and everything that entails) in a serious way.

briansd1 wrote:

Building barriers around our country, erecting tariffs, and retreating into isolationism are not the answer.

eveasdropper addressed education in another thread. We need to encourage education and technology. And we need to learn to do new things and better things than our global competitors.

We need an industrial policy that builds American technological champions.

I think that the left is better equipped to deliver.

That's a nice theory, but I can't think of a country that had a growing economy because of thinking, alone. It's only when those thoughts are put into action via manufacturing/exporting that a country really thrives in a sustainable way.

Ultimately, it is always about manufacturing and exporting. That is how a large country becomes rich.

We didn't lose jobs because our workers weren't smart enough. We lost jobs because our workers weren't **cheap** enough. I think most Americans would tell you that we made things better, and that our workers were superior to those who replaced them.

Not everyone can be Bill Gates, and even if we tried, the value of that talent/job would go down as we all rush into the same fields. When everyone has a math or engineering degree, what is the value of mathematicians and engineers? We need an economy that is flexible and varied, and I'll be the first to say that we need our brilliant thinkers, but we should not understate the importance of manufacturing jobs for the masses.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.