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Overcapacity or Deflation II ?


JEast
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Things are really getting interesting.  Gold is on a run, but so are bonds which normally would be considered a contradiction.  So what is going on? The debate of deflation and inflation continues.

 

Based on the most recent data of fuel distillate inventories, we are at record high levels since the last big recession in the early '80s. With such high inventories, will oil make its run? Seems unlikely but one just doesn't know. Also read that Saudi Aramco will drop WTI as a pricing mechanism and switch to an index of sour crudes in 2010. The sour crudes usually sell at a discount to WTI which should lower the top news headline price.

 

http://tonto.eia.doe.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WDISTUS1&f=W

 

What are others seeing?

 

 

Cheers

James

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I think there is no debate - we will not see deflation in our lifetimes.

 

I have no idea what is going to happen, but I can tell you that deflation is still very much a real possibility.  In fact, we've been experiencing a deflationary environment for over a year now.  Cheers!

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I think there is no debate - we will not see deflation in our lifetimes.

 

I was unaware that we had board members from Zimbabwe.

 

Kidding aside, outside of only a few years - I have personally only seen deflation in my lifetime. This from sources such as lower transportation costs, communication costs, food costs, etc ...  But then again, I won the ovarian lottery and have not lived in either Zimbabwe, Argentina, or Venezuela.

 

 

Cheers

JEast

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Let me qualify that, because a year or two is irrelevant. Over some meaningful period of time, there is no deflation and there won't be going forward. That is the nature of our Western society. As long as people will not stand for the alternative we will have constant inflation over time. Just look at your own experience...Somebody I talked to said in 1978, it cost 10 cents to ride the bus in the Seattle area, rent was $80/month. What is it now? Even creeping up at 1% per year, prices are going to be at least 10% higher in 10 years, and 1% is an extreme.

 

Having said that, inflation is largely irrelevant for making money in stocks. It is part of the constant background noise and whether you make money or not in stocks depends on many other things of which inflation is at the bottom of the list - but that's another subject for debate :)

 

 

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Over some meaningful period of time, there is no deflation and there won't be going forward.

 

Per the "Monetary History of the United States" by Milton Friedman and Anna Schwartz, from 1875-1900 (i.e. 25 years) consumer prices fell by more than 1% a year.

 

 

Cheers

JEast

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Over some meaningful period of time, there is no deflation and there won't be going forward.

 

Per the "Monetary History of the United States" by Milton Friedman and Anna Schwartz, from 1875-1900 (i.e. 25 years) consumer prices fell by more than 1% a year.

 

 

Cheers

JEast

 

 

I'll bet one can't find "quantitative easing" in that book.

 

 

 

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Inflation/deflation should really be looked at in 3-4 year tranches, & deflation does occurr, even in the US. The depression of the early 1930's being the classic.

 

The UK is currently in a recession as bad as it was during the 1930 depression, & has not been able to turn it around. The white-house is now warning of a 'double-dip', which implies that the US may not be able to turn it around either. Falling asset prices for some time out is a very real possibility.

 

But where it matters is in the stuff you have to buy (groceries, clothing, etc) & its hard to see why those will not cost more. For the same standard of living, the cheap clothes & food from China & South America can only cost more - simply because the USD is devaluing. To spend the same is to reduce your standard of living; ie switching to the cheaper brands in the grocery store.

 

We would suggest that we will actually have cost inflation over the next few years, but because asset values are flat/falling - it will 'feel' like deflation. Japan disease.

 

SD

 

   

 

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For the same standard of living, the cheap clothes & food from China & South America can only cost more - simply because the USD is devaluing. To spend the same is to reduce your standard of living; ie switching to the cheaper brands in the grocery store.

 

Um.. China's currency is pegged to the dollar so how is the devaluing dollar going to affect cheap stuff from China?

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Also read that Saudi Aramco will drop WTI as a pricing mechanism and switch to an index of sour crudes in 2010.

 

This strikes me as an interesting fact.  It fits with the thesis of "Twilight in the Desert".... If the Saudi fields were still overflowing with the light, sweet that has flowed from their major fields in abundance for decades, would they still be making this switch?

 

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Per the "Monetary History of the United States" by Milton Friedman and Anna Schwartz, from 1875-1900 (i.e. 25 years) consumer prices fell by more than 1% a year.

 

I think this is correct.  In fact, I don't think we saw steady and continuing inflation until 1913 -- the year the FED was created.

 

Buffett and Munger said at a meeting many years ago (in my OID files somewhere) that they invested (in the U.S.) based on the reality of continuing inflation.

 

Given the structure of debt -- both business and personal -- in the United States, I think steady (but moderate) inflation is good.  Given the current debt structure, real deflation would lead to a massive depression in my opinion.

 

I think it could easily be argued that the debt structure in the U.S. isn't necessarily optimal (I don't know), but it seems to me given what we've got, true deflation is a disaster.  We've got to print and monetize right now, don't we?

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  • 5 weeks later...

Just resurrecting this old thread, as I read an interesting article from Prechter on deflation.  It echoes some of the themes from Hoisington & Fisher.  This is just an excerpt from his recent book -- so it should be put in context to his whole book.  Anyway, if you liked Hoisington, you may find these excerpts interesting as well.

 

cheers,

Vinayd

 

Note: I don't have an opinion or am advocating Prechter or EWI -- I just found the attached deflation exerpt interesting.

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Yes, I don't necessarily have an opinion (...or agree with) his technical analysis side.  But like many financial analysts, he has a longer term strategic view of deflation based on some sound macro fundamental analysis (which the article gives a glimps of) similar to Hoisington & Fisher.  Then, like many analysts he attempts to answer when will the peaks & valleys occur during this deflationary period.  This is where he uses the EWI & technical analysis -- which I don't necessarily agree with or have an opinion on.

 

Like Hoisington, who points out that in deflation, long treasuries (...and safe US dollar demoninated bonds) may likely outperform.  The $US dollar may remain strong during a debt-induced deflation cycle, is Prechter's thesis (...which has merit).

 

The article talks more to the nature of and fundamental argument of deflation, which is an intersting read -- if you found the Hoisington/Fisher articles interesting.

 

cheers,

Vinayd

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The government has to refinance $2.5 Trillion next year, plus fund $10 trillion in deficit spending over the next ten years. If the dollar is still going to be a safe haven with all that, what the heck is the rest of the world going to face?

 

cheers

Zorro

 

Yes, I don't necessarily have an opinion (...or agree with) his technical analysis side.  But like many financial analysts, he has a longer term strategic view of deflation based on some sound macro fundamental analysis (which the article gives a glimps of) similar to Hoisington & Fisher.  Then, like many analysts he attempts to answer when will the peaks & valleys occur during this deflationary period.  This is where he uses the EWI & technical analysis -- which I don't necessarily agree with or have an opinion on.

 

Like Hoisington, who points out that in deflation, long treasuries (...and safe US dollar demoninated bonds) may likely outperform.  The $US dollar may remain strong during a debt-induced deflation cycle, is Prechter's thesis (...which has merit).

 

The article talks more to the nature of and fundamental argument of deflation, which is an intersting read -- if you found the Hoisington/Fisher articles interesting.

 

cheers,

Vinayd

 

 

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http://open.salon.com/blog/kind_of_blue/2009/12/18/something_just_doesnt_add_the_fk_up

 

http://blogs.surfermag.com/office-blog/north-shore-1989-vs-2009/

 

Seriously, DEFLATION???  For everything that really matters to me and the average Joe, we've lived in inflationary times.

 

Know anyone who got a raise this year?  Know anyone who got a paycut?  Know anyone willing to go into more debt after their home equity went upside down?  Oh, and that computer and cell phone.. how much would they have cost 5 years ago?  How much do they cost now for double the speed?  Deflation is all around :-)  So is inflation.. Just depends where you look...

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http://open.salon.com/blog/kind_of_blue/2009/12/18/something_just_doesnt_add_the_fk_up

 

http://blogs.surfermag.com/office-blog/north-shore-1989-vs-2009/

 

Seriously, DEFLATION???  For everything that really matters to me and the average Joe, we've lived in inflationary times.

 

"The price effects of inflation can occur in goods, which most people recognize as relating to inflation, or in investment assets, which people do not generally recognize as relating to inflation. The inflation of the 1970s induced dramatic prices rises in gold, silver and commodities. The inflation of the 1980s and 1990s induced dramatic price rises in stock certificates and real estate." - Prechter

 

This past decade has seen a large trading range for stocks & real estate, but as of now, stocks are 35% lower than the beginning of this decade, and the real estate bubble has burst.  If we agree that US real estate was a 'bubble', -- no bubble has surpassed 50% of its peak value within a generation (Nasdaq bubble & Japanese stock bubble are still following this trend).

 

You are correct that 'commodity' and goods have not seen deflation over this decade, but we got our first deflationary panic this past year.  We'll see how this plays out in the coming years.

 

cheers,

Vinay

 

 

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The government has to refinance $2.5 Trillion next year, plus fund $10 trillion in deficit spending over the next ten years. If the dollar is still going to be a safe haven with all that, what the heck is the rest of the world going to face?

 

 

" 80% of the economy [the private sector] is de-leveraging. Only 20% is government stimulus. Companies are operating at 65% of capacity or utilization rate. Unemployment is rising. If in six to 12 months' time, the stimulus and bailouts don't work, and we are at zero interest rates, what then? We had 20 years of good, meaning no recession to speak of, and only one year of bad. We are not worried about inflation, just the opposite" - Prem Watsa

 

Although the US government (20%) can print money to manage payments of their debt in the short-medium term, the private sector cannot (80%).  The private sector will need $US dollars in great supply and during very acute time periods in an environment of involunatary debt liquidiation.  We saw our first glimpse of this in October 2008 when a medium sized investment bank went bankrupt, even though the US government had initiated specialized stimulus programs from Jan 2008 - Oct 2008

 

cheers,

Vinay

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Know anyone who got a raise this year?  Know anyone who got a paycut?  Know anyone willing to go into more debt after their home equity went upside down?  Oh, and that computer and cell phone.. how much would they have cost 5 years ago?  How much do they cost now for double the speed?  Deflation is all around :-)  So is inflation.. Just depends where you look...

 

I agree bargainman.  The Japanese experience has asset deflation for about 20 years now, but they have experienced goods & commodity inflation just like the rest of the world during these past 20 years.  Since Japan is only 90 million people, commodity deflation isn't in the cards against the world population.  What happens when North America and Europe enter a similar "Japanese experience" (debt induced asset deflation)?  Can China & India's population balance the commodity deflation experience by these ecomonies?  I don't know either.  But it is far from certain.

 

cheers,

Vinay

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http://open.salon.com/blog/kind_of_blue/2009/12/18/something_just_doesnt_add_the_fk_up

 

http://blogs.surfermag.com/office-blog/north-shore-1989-vs-2009/

 

Seriously, DEFLATION???  For everything that really matters to me and the average Joe, we've lived in inflationary times.

 

"The price effects of inflation can occur in goods, which most people recognize as relating to inflation, or in investment assets, which people do not generally recognize as relating to inflation. The inflation of the 1970s induced dramatic prices rises in gold, silver and commodities. The inflation of the 1980s and 1990s induced dramatic price rises in stock certificates and real estate." - Prechter

 

This past decade has seen a large trading range for stocks & real estate, but as of now, stocks are 35% lower than the beginning of this decade, and the real estate bubble has burst.  If we agree that US real estate was a 'bubble', -- no bubble has surpassed 50% of its peak value within a generation (Nasdaq bubble & Japanese stock bubble are still following this trend).

 

You are correct that 'commodity' and goods have not seen deflation over this decade, but we got our first deflationary panic this past year.  We'll see how this plays out in the coming years.

 

cheers,

Vinay

 

 

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Sorry for the previous post ,screwd up. Vinay you mentioned no bubble traded above 50% of peak valuations for a generation and then mentioned the nasdaq bubble and Japan. I am interested in this thesis what is your source for this observation. The clearest bubbles in the last generation were IMO residential real estate recently the Nasdaq in the last decade. Japanese stocks in the eighties and precious metals in the late 70''s. Currently I suspect that US treasuries are in bubble territory.

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