Posts Tagged 'inflation'

I’m from the government, and I am here to help.

Clinton has continued on the popular democratic theme, rob from the rich and give to the poor.  This time it is in the form of mortgages.

The thing that concerned me most was found at the bottom.  Clinton proposed that we freeze the mortgage rates of those who have borrowed using sub-prime mortgages. 

Let’s say that you had a CD at a bank, and you were given a 3% rate for the first year, and told that the rate would go up to 8% for the next 5 years.  Well, the bank ran into financial straits because of poor decisions, and could not pay you back the 8%. Can the government allow the bank to freeze the rate at 3%?  “Sorry, they can’t afford any more.  I guess you will have to start eating rice and rats.  It is for the public good.” 

That is what Clinton wants to let people do to the banks.  These banks make money on very small margins, but because they move so much money, they can make it happen.  When we destroy these margins, we destroy the banks. 

The other thing she brought up was forbidding lawsuits between financial companies.  The people who do the negotiating on the loans are expected to do all they can to ensure that the terms on the loan are honored by the investors (who actually end up lending the money).  Now Clinton want to remove the only method that the investors have to ensure that the contract is honored.  Nice.

Politicians continue to put a band-aid on the infection instead of letting the burning disinfectant permanently clean out the would.  We need to address real concerns, or we will just have a deeper trough.

 I also saw an article that did not make me feel secure about the inflationary pressure we are facing.  In China, service stations are running out of fuel.  The subsidized resource is falling short, because businesses can’t make enough, and don’t have any reason to expand because prices are held in check. 

One solution they are looking at is importing more fuel.   The price of goods in the US is influenced strongly by the price of diesel.  China is looking to import diesel directly.  Not going to be helpful to our trucking industry.

Despite this downturn in commodities prices, I still see the prices continuing to rise.  Railroads are going to get more popular as an efficient shipper of goods.   We will have ot see how much they can grow.

Good luck

Market Meltdown averted- For now

Banker From Monopoly

The fed has helped in averting a chain reaction that could have caused a meltdown in the markets. 

Bear Stearns made a lot of very risky investments in the derivative markets.  About 14 Trillion worth.  Holy crap.  $14,000,000,000,000.  Apparently, the fed pumped in the money to stabilize those investments.  The fed encourages risky behavior, and then proceeds to rescue big business from the results of that behavior.  All you have to do is put yourself in a position that if you go down, you take others with you.   It has almost become an art.  Who ever has the connections and the best sob story is insulated from disaster.  We are in what is becoming an Aristocracy of pull (thanks frisco).  It will be painful to live through the results, but we continue to placate the foolish, putting off the crisis, but ensuring that it will be worse.  I read that this happening after the S & L crisis in the 80’s proves that people don’t learn.  On the other hand, I think it proves that people learn very well.  Get deep into risky business, and tie others to you, and you are set.

Trading derivatives was once a vehicle that people used to eliminate future risks.  Farmers and food manufacturers traded corn and heat futures.  Miners, smelters, and steel companies traded metal commodities.  People used these to plan for the future, and make deals in advance.

Today, there is over $500,000,000,000,000 (not a typo) worth of derivatives in existence.  That is greater than the world’s wealth.  Instead of the stock market beign a place for people to enjoy partial ownership of large companies, it is the worlds largest casino.  Commodities markets are often worse.

We have been shuffling money around long enough, it is time for us to get back to producing wealth. 

$1000 Gold, $110 Oil, $4.00 gas, and low inflation. I promise.

Philadelphia Fed President Charles Plosser said he doesn’t think stagflation is a developing problem.  How does that work? 

The first question is, what is the situation on inflation.  To calculate core inflation, government does not include food and energy.  How does this work for your average American family?  How long can you go without driving or eating?  When we look at true inflation, at what prices have been actually doing at the grocery store and gas station, we find a much higher inflation.

One question is, how high is inflation.  The inflation of the Euro is around 2.5% per year.  In 2002 the it took $.8578 to buy a euro.  Now it takes $1.5904.  This means that the value of the dollar relative to the euro has dropped 10.8% per year, on average, over the past 6 years.  Combine these two facts and you end up with inflation of 13.3% per year.  I am getting slaughtered right now in the market.  The commodities are showing a lot of weakness based on the fact that the market is going to hell in a handbasket.  I still like real resources.   The full faith and credit of the US government does not do it for me.  The credit score of the government is dropping, and I hate to be holding too many of their checks.  Some one (Hulia) recently asked me what I think of keeping cash.  I still think you ought to set some aside to cover basic living expenses for 6 months, but I wouldn’t do too much more than that.  Holding an asset that seems to be depreciating at over 10% a year seems like a bad plan.  Gold and silver never really grow, but at least they have some intrinsic value. 

 Bear and Stearns is a pretty scary portrayal of what is going on in the market place.  People have made bad choices.  We think that the market owes us 15% a year.  Now we are seeing that if we demand those returns, the market gives them to us, but they turn out to be an illusion.  I had a rough day today finacially, but it does not even compare to the poor guy who lost a billion

Anyway, another amazing thing that happened is that I found myself agreeing with Harry Reid.   These big companies are in an interesting position.  If they crash, they will cause massive financial disruptions.  They then take aggressive risks, and if it pans out, they pocket the money.  If it doesn’t pan out, they tell the government that they have to survive.  A crash would be bad for the economy.  The taxpayer ends up insuring the big businesses.  Democrats believe in welfare for the poor (the projects worked out really well), Republicans believe in welfare for corporations (we sure learned our lessons from the savings and loan crisis). 

This money the Fed is pumping into the market is inflation happening before your eyes.   It is scary when we use fake economics to prop up the system.  Manufacturing continues to decline.  We can not consume more than we produce long term.  We have tried.

Inflation or Deflation?

Online, you will see people putting forth their opinions on whether we are facing inflation or deflation. You very rarely see them back them up with much.

The central case for deflation is that consumers have overspent. They have borrowed up to the hilt and have no more money to spend. When these stores sit with their doors open and no one buying, they will have to drop their prices. As the prices drop, people will delay their purchases for longer and longer. The store will continue lowering prices, and people will continue to delay purchases. This will spiral down into a disaster for many, with business being very depressed. Debtors will be especially hard hit, as the true value of their debt will go up.

On the other hand, we could have inflation. Some things in favor of inflation are large amounts of dollars abroad, our current spending habits, and government preference.

First of all, our dollars abroad. As the value of the dollar drops, people will want to hold them less and less. This will result in foreign and domestic spending of dollars. The chinese will not want to hold on to a currency that is rapidly losing value, and neither will Americans. That puts us in a situation of of people moving up their purchases, with more dollars chasing the same amounts of goods. Hello inflation.

American consumers always talk about how they are going to pay off those bills and get out of debt, but they rarely do something about it. Someone from work was talking about having too much debt, but they eat out frequently, and just bought a $2000 entertainment system. That is fairly typical based on my experience. People will continue buy as long as they can, knowing that if enough people get in trouble, the government will bail them out.

Oh, the government.

Successful politicians don’t care about logic or the future. They care about the next election. If they didn’t, they likely wouldn’t be in office in the first place. There are notable exceptions (Ron Paul), but as a trend, people are just looking for the next vote. Take the free money handout that the government is doing under the guise of a tax rebate.  They have just injected more dollars chasing the same amount of goods.  Inflation also helps debtors.  If a dollar drops in value by 10% in one year, your loan effective drops by the same amount.  Four years of such inflation, you would knock 34% off the value of the loan.   The government could use that to knock a few trillion real dollars off of national debt.

I think that given the situation, inflation is more likely.  Don’t keep too much money in cash.  A bit for buying opportunities is important, but make sure you are ready to take advantage of opportunities.  You don’t want to knock off the true value of your bank account by 34%

Good luck

Prepare for the coming financial duress.

So, how bout that that economy?

I wish I wasn’t right, but all of the indicators seem to be pointing in some direction.  We need to prepare ourselves for what is clearly coming.

One thing we can look at is where we want to invest.  As the market develops, the law that people will only be able to consume as much as they produce will take hold.  The question is, where are these producers?  The developing world holds these producers.  They are going to drive a lot of future buying.  The question is, what do they want?  They are manufacturers, so what they really need is the natural resources required to make whatever they are making.  The feedstock for almost all processes is oil, for both plastics and energy.  Copper is also very important, for infrastructure and also for everyday electronics. 

As the world tries to get more energy efficient, we are going to move to more and more electrical devices, whether it is hybrid or plug in cars, or more power generation capabilities.  These will continue to consume raw resources like copper.  Also, as we try to wean ourselves form fossil fuels using biofuels, we will be pulling food off the market to use to convert to energy.  Commodities will continue to be strong over the near future.  Gold and silver are surging, supported by people fleeing the dollar.  

One big problem coming down the pike is that this is a self fulfilling prophecy.  As the dollar drops, it will lose its status as the world’s currency.  People will flee the dollar, causing even more pronounced drops. 

How can we reduce our exposure to the dollar?  I think some of the best choices are foreign stocks.  A friend at work mentioned investing in the Australian dollar.  If you are going to do that, why not improve it?  Why not invest in quality Australian companies, many of whom are heavily involved in commodities, and very close to the hungry Asian markets.   Canada also has a healthy economy that is based on producing real goods that people in the world are hungry for.   Although FCX is headquartered in the US, it is truly worldwide, and is involved in commodities.  I still love FCX.

I have been talking about the approaching grinder of recession and inflation over the past few months(here, here, here, here).  In order to lessen the impact, we needed to face it squarely and work through it.  The average citizen doesn’t have enough forethought not to live paycheck to paycheck.  How can we expect them to plan years (gasp) into the future?  Savings rates are poor on both the macroscopic and microscopic scales.  Government policy is based on short sighted placating of the masses.  People are getting more and more lazy.  I can sometimes feel myself getting infected with a sense of entitlement.  It is pushed into us from so many different directions.  The idea that we should be able consume resources based on are ability to produce is going by the wayside.  At work, they are astonished that I just don’t fly out and buy everything. 

People in Washington could really help by stopping all their help.  Just get out of the way.  Seeing politicians can’t stand to do this, lets just try to isolate ourselves from the problem so that amidst the ocean of hubris we can still have a few ships floating along.  I would rather be on one of those ships.

Good luck all.

Stimulating the economy or just financially masturbating?

The more I think about the tax rebates that will be sent out, the more crazy I get.  We are going to dole out money that we don’t have, go down to walmart, and end up sending it to Asia.  What a splendid idea!!  We surely don’t owe the Chinese enough already.   This idea created the worst sort of burying your head in the sand.

It is an election year and getting reelected is foremost in the minds of politicians.  What could be better than sending out cash to all of your constituents?  Only a brave few opposed the bill.  I really respect what Sen. Judd Gregg, R-N.H., who voted against the bill said”We have to remember that every dollar being spent on the stimulus package is being borrowed from our children. And our children’s children.”   We can’t create this money out of nowhere.  We are all taking out a loan that our children will have to pay back with interest in the future. 

Many people don’t know what really happened in the bible when Joseph foresaw the 7 years of plenty followed by the 7 years of famine.  Joseph stored up the food for the Pharaoh, and then he sold it back to the people during the famine.  The first year he took their money.  Then he took their animals.  Then he took their land.  Finally, he took them, as they sold themselves into slavery to ensure they would have enough to eat.

We are setting up a financial famine for ourselves, and we better make sure that we have something stored up, or our creditors will have their pound of flesh.  In some ways, this is even worse then burying our heads in the sand.  It’s like having trouble because you have spent too much and are too far in debt, so you head out with a credit card and go shopping.  It is not the cure.  It is more of the sickness (but it feels good to the general populace right now).

Bernanke is in a very tight spot.  He can’t win, because we have to have a reckoning.  We are going to have a recession, inflation, or most likely, some combination of both.  He can shift it a bit, but huge economic forces are coming home to his doorstep.  We can minimize those that come to ours by not squandering our resources during our years of plenty, which might be coming to an end very soon.   Get out of debt and get some savings put away, preferably invested in some economy that knows how to save and invest in the future.  We seem to just want to mortgage ours.

Good luck.

Feeling the stock market pain

Well, they say that you are supposed to buy when there is blood in the streets.  They seem pretty bloody today.  I am looking for an opportunity to put more money in.  I have been severely kicked in the teeth.  I guess I will have to invest a little more.  It is interesting how the market has responded to the up days over seas. 

I still think that people should be looking at the long term.  The stocks that make you money are going to continue to make you money. 

One interesting part of the energy story is that as fossil fuels become more expensive, our dependence on electricity is going ot continue ot move up.  This will increase the demand for copper.  Apparently, mexico is still in the middle of a big housing boom, where they will be using huge amounts of copper. 

The Chinese are probably getting ready to consume a bit of the accumulated resources that they have. 

Today was painful, but to me it would be irrational to get out now.   The finances of the world do not support that story.

Good luck

A little taste of the Economic Trouble we are in

Well, this morning was pretty interesting.  I was surprised to read that Bernie cut the feds rates this morning by a whopping 75 points.   People are getting nervous and starting to shake things around.

I have been saying for a while that the economy is going to be caught between the twin anvils of recession and inflation.  We have chosen inflation and we will get recession.  It will just hold off for a few more months.  Anyway, try to get your assets in something that isn’t US dollars.

 I read a book recently called Crash Proof (Thanks In-Laws).  It was pretty good over all, and talked about the coming economic problems.  They guy points to three ways to get yourself protected against the coming issues. 

One is to invest in foreign stocks, and he recommended his company, E.  This was a little frustrating, because it felt like the last third of the book was a plug for investing through him.  I checked on the Internet and found that you could also buy foreign stocks through Etrade as a discount broker.  I am going to check if scottrade will do anything like this anytime soon

2nd was to get into precious metals, as they traditionally hold value well.  He also recommended doing this through his company.  If you watch feedback, I have found Ebay is a very effective way of getting precious metals at prices that are very close to melt value. 

The last thing he recommended was keeping some  money in cash.  But not dollars, they will not do so hot.  He recommends buying foreign currencies.

 One thing he did dwell on with the stocks is that you want a company that pays out dividends.  That way if the market goes down, who cares, you get your dividend each quarter anyway.  I tend to agree with him here.  A company should have a plan on how it will return money to you.  Even if the dividends are small, as long as it increases them consistently, you are doing well.

Reinvesting all the earnings can be nice at the beginning, but the company is supposed to exist to make you money, not simply to grow.  Many American companies seem to have lost this concept. 

I am still big on the commodities.  These rising countries need more electrical infrastructure and they now have the saving to purchase it.    I have been getting my butt handed to me on  a platter the past few days though.  I have increased my position, and home to see it go up as earnings come in tomorrow. 

 On the election, everybody through out the stimulus package where we send out free money to everyone. This is retarded, and I will talk more about it tomorrow.  Romney had the plan that I liked best.  Making a more favorable business economy in the USA.  The average citizen would rather have a steady job than a handout.

Stagflation is right around the corner

Well, it looks like the stars of recession are beginning to align.  I remember about a year ago, when our trustworthy, impartial friends over at the National association of Realtors said that the housing slowdown would be over by the end of 07, and that it was a great time to buy (isn’t it always?).  The market has shown otherwise.  Most economists say that a recession is now nearly guaranteed.  I remember the creepy fat guy on disney’s Pinochio, telling the little jackasses, “You’ve had your fun, now pay for it!”  Well, we certainly had ours. 

I sometimes wonder how we didn’t see what was coming.  Is our society now so advanced that even the laws of math don’t apply?  Many otherwise intelligent people just can’t put off the gratification that comes from buying right now. 

I recently talked with a friend about lasic.  His first thought was to transfer the cost to a payment plan over 4 years.   No wonder Americans are in such poor financial shape.  The idea of paying for things up front has completelty disappeared.  I teach for a living, and am continually amazed by the amount of people that want me to shove infromation down their throats without them exerting any substantial mental effort.  You have to pay the price if you want the benefits. 

We are the sailor who went out and had a fantastic time, disregarding the advice of the old fogies that advised us to use moderation.  We are waking up the next morning with a hangover, an empty wallet, and a yet unnamed venereal disease.   The question is, what’s the cure?

I guess that individuals have made good decisions and are finding themselves in a precarious situation as far as investments.  If you are not extremely interested in the stock market, you should do what the old fogies recommend.  Cost average though the downturn, because no one knows when we will finally get the upswing.  Your financial solvency will yield big dividends.  I remember hearing about some economist in california that sold his house and planned on buying back after the market regained sanity. 

These environments can be tricky to navigate.  You want to keep your money is non dollars as much as possible, but it would be nice to be able to keep the cash around to swoop up bargains (anyone have any good theories on how to do this, other than foreign currencies?).  I am staying with companies that produce commodities.  They will be braced against the inflation.  The recessionary environment will hit them, but they should hold up, given the Asian situation.  Other areas might me European stocks, or your “Proctor and Gamble” companies of the world.  Make sure you are going for basic goods that meet basic needs.  One are that should be taking a hit fairly soon is consumer electronics and car stocks.  Anything that produces durable or semi durable goods will take a dip, such as apple.  People will have trouble forking over $300 for the latest ipod when they aren’t sure their job will be there at the end of the month. 

 Any comments are welcome, and good luck to all

Hello Inflation

I assume that everyone has seen the jump in wholesale prices.  It jumped by 3.2% last month.  This falls in line with what people have been actually seeing.  If all the commodities are more expensive, soon what we buy in the stores has to follow.  I think the amazing fact is that they are still understating inflation.\

I think one of the clearest indications of inflation is the falling dollar.  In the world economy, when one currency falls, it represents de facto loss of buying power for that country.  It can be argued that the inflation that the US is seeing averages about

The exchange rate for the Euro has gone from a low of .857 to 1.47 dollars per euro from 2001 to today.  This represents a loss to the euro of about 8.66% per year.  The the Europeans are saying that their inflation is around two percent per year, that means that we  are having an effect that will simulate inflation of around 10% a year after the US interior trade catches up to the rest of the globe.  I recognize this number is high, but I believe it shows some things that the government statistics don’t.  Loss of value is loss of value.  Our increases in productivity have made up for a lot of our inflation in keeping the cost of the goods in this country down, but we can only ask innovators to do so much. 

On the other hand, consumers think it is their duty to keep spending as if nothing has happened, and that is what they are happily doing.  This can’t go on forever.  The longer we put our heads in the sand, the worse things will be when we look.  The old fashioned theories of thrift, savings, and investment are based on sound principles, and as a nation as we do this we will restore national wealth.  Hopefully the politicians will pass laws that encourage this sort of behavior.  The flat tax is a good start.

In the mean time, I have my own ideas about what we can do to preserve the value of our money.  One of the big things is only keep an emergency fund in cash.  Put the rest in some sort of investment, so you can preserve yourself against the encroaching beast of inflation.  I prefer stocks that are tied to commodities and other countries economies.  Others prefer real estate.  Just make sure that each individual investment makes sense on its own.  Think about how many hours you worked for the money that you invest, and recognize that it is worth many hours of your time to make sure that the value of that savings does not dwindle down to nothing.  The people that conserve wealth will end up owning the wealth of this country.  We can all be haves if our choices don’t make us have-nots.