For Top Down Investors: A Deflation Warning Chart (Proceed with Caution)

[BargainValueHunter]

http://graphics8.nytimes.com/images/2010/11/19/business/20101120_CHART_graphic/20101120_CHART_graphic-popup.jpg

[Guest broxburnboy]

I don't know how this chart shows deflation coming in the US...how are consumer prices relevant to real estate bubbles in different time frames? Does this factor in the exchange rate for the 2 currencies?

 

Here's some charts that may be more indicative of price trends in retail consumables:

 

http://www.indexmundi.com/commodities/?commodity=food-and-beverage-price-index&months=120

 

http://www.indexmundi.com/commodities/?commodity=agricultural-raw-materials-price-index&months=120

 

http://www.indexmundi.com/commodities/?commodity=petroleum-price-index&months=120

 

[alertmeipp]

From the chart, I see inflation coming (year 6). Then, Fed tries to pull the liquidity out which then cause deflation. (year 7).

 

 

[scorpioncapital]

Read Philip Fischer, 'Path to wealth through common stocks' he says in America, the seeds of inflation are sown in business depressions when inflation appears very low.

[ragnarisapirate]

There are a lot of factors that the chart doesn't show, which, in my mind, makes it unreliable to gather anything from.

 

1) we not only have different demographics than japan did, but, also vastly different economies.

2) virtually the whole world is replicating our monetary policy right now, whereas that wasn't the case for Japan back in the day.

3) We still have no idea what the fed is going to do in the effort of 'keeping unemployment low and prices stable'

 

What about adding in interest rates, the monetary base, AND the velocity of money? That might make for a more interesting chart, but, not really one that I would want to make predictions based on (seems too much like trend watching, to me).

 

and btw, scorpioncapital, the Fischer book that you mention is one of my favorites; I never really hear people talk about it though.

[scorpioncapital]

the only danger is a change in attitude, similar to Japan, perhaps a populist movement (the Tea party anyone?) but the argument is simple - human nature makes it hard for people to shoot themselves in the foot, who wants to reduce their standard of living and go through decades of more recession just to avoid a 2% silent, hidden tax on their wealth in the form of inflation? Everyone is screaming publicly but secretly, passively continuing the inflation attitude. Watch what people do not what they complain about.

[PlanMaestro]

And the Japanese real estate bubble was bigger and their banks in much worse shape

[SharperDingaan]

 

Keep in mind that inflation is just total supply of money available/total supply of goods available. Globally print enough extra money to offset the global reduction in the demand for goods - & every country can keep its factories open (jobs), with no global inflation [G-20 Nirvana]. Print too much money, or the global velocity of money accelerates, & we get an inflation spike [Gold investment]. 

 

But ... only if countries have free exchange rates, & they trust each other:

When the US devalues, all currencies pegged to the USD get cheaper as well, & their domestic economies [China] inflate. The higher domestic sales price, & the lower USD, prices the exporter out of the US Market & generates job loss [imports US unemployment]. De-peg the currency & you still import US unemployment - you just dont get inflation as well. Do the G-20 global inflation thing, & there is no impact.

 

To do this you have to look past the denial - & trust the gringo to not screw up again, with stakes that could not be any higher, & when the global economy is lurching from crises to crises. There is not a lot of confidence.

 

SD     

 

[Rabbitisrich]

One would think that China would be glad for American inflationary policies despite the short term hit to their exporters. The inflation differential is eroding their currency advantage, in real terms, anyway so why encourage a disinflationary trend?

[SmallCap]

Do we have any precedent for a world reserve currency or a currency that the rest of the world sets their currency in relation to like the USD ever having hyper inflation and what were the outcomes?

 

the examples of Hyper that are always trotted out are

Germany

Chile

Zimbabwe

 

none of these were at the time significantly depended on currencies in the world and so their hyper inflation became an isolated event but if the US ever has Hyper Inflation then the ramifications will be felt worldwide in a massive scale and I am wondering if other currencies like China will inflate with us to keep pace with us.

[Zorrofan]

I don't think this situation (i.e. global reserve currency going into hyper-inflation) has ever occurred before. The British pound was the global reserve currency prior to the US. However they didn't experience hyper-inflation. Nor has the global economy been as inter-connected as it is today.....

 

cheers

Zorro

[ragnarisapirate]

I don't think this situation (i.e. global reserve currency going into hyper-inflation) has ever occurred before. The British pound was the global reserve currency prior to the US. However they didn't experience hyper-inflation. Nor has the global economy been as inter-connected as it is today.....

 

cheers

Zorro

 

perhaps one might wonder what happened to the pound as a result of being dropped as a reserve currency.

 

I can't imagine that not being the reserve currency would help much in the demand for dollars, which, would decrease their relative value, no?

[SharperDingaan]

 

A global reserve currency [uSD] cannot hyper-inflate. The currency just loses its reserve status, & ends up devaluing as nations swap their reserves out of the old reserve currency.

 

Sterling is the example. The UK eventually started printing money to repay/service its obligations & began to inflate [at a time when the consequences of inflation was seen in Weimar republic terms] . Creditors started taking their money out via gold purchases [was a bank reserve then], and asset sales [of UK real-estate, & corporate holdings] to American companies. Illegal holdings of sterling [dictators, etc] sold & bought US dollars, & all of them at a accelerating pace. There was effectively a run on sterling that the BOE could not contain, & the value of sterling collapsed. The devaluation was roughly 35%.

 

SD

[BargainValueHunter]

As many of you may recall, Prem "bet on deflation" this summer:

 

http://www.rationalwalk.com/?p=9254

 

Prem Watsa, Chairman and CEO of Fairfax Financial, has made a bold bet on falling prices over the next decade according to an article in The Wall Street Journal.  Fairfax Financial is an insurance company based in Canada which many have compared to Warren Buffett’s Berkshire Hathaway due to Mr. Watsa’s impressive long term track record.  Fairfax posted very strong results in 2007 and 2008 due to large gains in equity hedges and credit default swap positions that were taken based on Mr. Watsa’s correct reading of the economy ahead of the Great Recession.

 

While the case for deflation has been more popular over the past couple of months as economic news worsens and government bond yields have dropped to levels not seen since the depths of the financial crisis, Mr. Watsa has been worried about deflation for some time.  In December, we noted that Mr. Watsa’s views on deflation seemed to be very different from Warren Buffett’s warnings regarding a potential “onslaught of inflation” in the coming years.

[goldfinger]

The private sector needs to de-leverage. Debt levels are 1.7 times higher than during the great depression. This is deflationary and we slowed down the process with bailouts and stimuli. Since 2008, the private sector de-levered by around 1.2/1.5 T U$. In theory we should be de-leveraging for a long time (a decade or two). With the political stalemate that is developing, we should have more de-leveraging and economic problems in the next two years. However, the government should run into funding problems relatively quickly (a few years) and that probably is the big difference with Japan. There are no savings to draw money from and the global economy is not in the same shape as during the Japanese experience. The government can print as much money as it needs but the currency might get debased brutally in the process...

[Myth465]

goldfinger - I agree but I think you miss one point. There is a glut of savings around the world that calmer for "risk free" low yield assets. How long that last is anyones guess. But every crisis increases demand.

[Guest broxburnboy]

 

As many of you may recall, Prem "bet on deflation" this summer:

 

http://www.rationalwalk.com/?p=9254

 

I think it is more accurate to say that Prem hedged against another delevering event with his S&P500 puts. Perhaps he thought there was a chance that the Fed would not do QE2, which would have precipitated a downward correction in the markets. I wonder if he has changed his hedges lately.

To date it has been Prem's personal experience with the Japanese deflation which has given him an edge over mainstream anaylsts (like his CDS hedges in 2008)...perhaps we're in uncharted territory now.

[goldfinger]

goldfinger - I agree but I think you miss one point. There is a glut of savings around the world that calmer for "risk free" low yield assets. How long that last is anyones guess. But every crisis increases demand.

 

How long will treasuries continue to look risk free? For as long as it appears credible that the government is not printing money well in excess of US economic output. Economic output decreases with deleveraging (another way to look at it is that there is over-capacity right now).