Wednesday, January 27, 2010

Inflation/Deflation and market price mechanisms

I have been in the deflation camp now for over a year... my timing certainly could have been better.

I have been pulling the ethanol/corn/soy bean thing apart now for a couple of weeks... and in spite of the U.S. consuming 42.5% of its corn crop for ethanol, the price of corn is falling hard - and that's with fairly high oil prices. Should Oil prices fall, you could see corn under $3/bushel.

At first blush this might not make sense - but that is what is happening. Gold and silver have come in. Oil prices have declined. Ag prices are down. Equities have fallen. Small businesses cannot get loans.

This is what deflation would look like to me...

If this kept up you could have commodity prices fall and actually become MORE unaffordable for John Q. Public.

What a f*&^%ed up set of data... I am thinking of opening a surf/ice cream shop or applying for a job at the Anti-Christ... anything has to be easier than this.

15 comments:

bureaucrat said...

But this is what makes investing on par with the World of Poker tournament in Las Vegas!! :)

I'm also reminded tonight of the Chinese and Indians whose middle class is expanding **rapidly**, and everything they want (and they want to basically have whatever Americans have) will continue the upward demand of commodities for the next 20+ years. Long term, my man. Long term. :)

bureaucrat said...

You might want to remind the reading public also that deflation is ten times WORSE than inflation, cause you can't easily stop deflation. With inflation, you raise interest rates and that's about it. But with deflation, businesses are doing everything they can to get cash purchasing to come thru the front door to pay their fixed costs (rent, utilities, minimal stock, core salaries, etc.). Every business I talk to makes a pitch to switch to them (this month was Chase, State Farm, etc.) If they can't get cash, they go out of business, laying people off and repeating the cycle. Deflation is bad, bad, bad (unless you can keep your job or your benefits -- then deflation is good, good, good). Only positive thing is, we know exactly what causes deflation (it happens every 75 years or so). Deflation is caused by asset bubbles and WAY too much debt. Japan has been in deflation for over 20 years, and they are in big trouble.

Anonymous said...

Are you suggesting that the millions of people living on social security and all the government handouts that is supported by printing money out of thin air will see their purchasing power increase?

The status quo cannot continue forever, something will give. Remember Venezuela devalued their currency in half over night. Think the people got a warning sign to be ready for it?? Yeah, the insiders did but not Jose!

I'm starting to suspect that bureaucrat is a front man for the government to bullsh!t us into believing everything is A O K :P

daddynewton said...

Here is an article about cattle herd being at 1958 levels. Looks mighty deflationary.
http://www.businessweek.com/news/2010-01-27/u-s-cattle-herd-falls-to-1958-low-as-losses-climb-survey-says.html

kathy said...

Last year, buckwheat went for $40.00 a sack. This year, the same sack is under $17.00. My income has remained stable. Good for me. As you know, I store a lot of stuff for an uncertain future and I am buying right now. Not stocks but seeds and canning supplies and clothing and such.

bureaucrat said...

If you keep your income from whereever you get it, deflation is a good thing. Stuff costs less in a deflation. It's a bad thing if you lose your income, yes, or have to sell your house or car.

Bureaucrat is a simple man, with too much to say to people who have too much paranoia to offer. ;)

Donal Lang said...

When people feel wealthy they don't worry about paying twice as much for something that seems inherently cheap. Like a cup of Starbucks coffee or a loaf of bread.
But in my lifetime houses here have gone from 3 times gross income to 10 times gross income - same house, same job, but suddenly its 25 years debt and both parents working, and families vulnerable to any downturn.

Cheap oil has made us all feel rich and we've had a bubble in everything, not just assets. Devaluation is just poorer people getting a grip on what's really necessary for them. Some people call that reality!

Greg T. Jeffers said...

Dear Anon @8:48:

I don't have to suggest anything... the data speaks for itself.

You can have deflation AND a loss of purchasing power - just look at the 1930's in the U.S.

But there is no arguing that there is NO wage inflation, and commodity prices, with a few glaring exceptions, are going south at the moment. I am fairly stunned at the price of Corn...

Outstanding consumer credit (not including mortgage debt) has contract each and every month for the past year. Mortgage debt! "Contracted" just does not cover what happened there...

That does not mean a currency bomb could not go off tomorrow - but that is an entirely different issue (although it would end deflation... a lot like cutting the patient's throat to cure a bad fever).

I am not making any forecasts about this at the moment, other than to say that I am still a deflationist (at least for a little while.... I am sure that that will change) and if I am wrong I am gone.

Greg T. Jeffers said...

You gotta go with the data...

For example, the Ghawar Oil field in Saudi Arabia is, without question, the gas tank for the world...

A great deal of work was done and the conclusions claimed that its production would have gone into a Cantarell type decline. They were right about Cantarell, wrong about Ghawar.

Does that mean "they" will be wrong forever? Of course not. But you cannot deny what your own eyes are seeing.

Anonymous said...

Greg,

I went to TSC, farm suppy store, and found a 50lb. bg. of whole dent corn going for $5.00,that's retail! I can not imagine farmers holding out much longer if this continues.

Flip side; I bought Ocean Spray cranberry juice yesterday at Target,it cost $ 3.59 for 101 oz. jug. They have repackaged the same product from the larger size of 128 oz. Same price of course. This has happened in the last few weeks.

I can see this changing at some point with a vengence!?

peace

Anonymous said...

While the Fed prints like mad...

1. Set realistic reserve requirements for banks.

2. Bring all the banks' assets onto the books. Such shenanigans are fraudulent in that they hide the banks' true exposure from the customers and shareholders.

3. Kill derivatives. They are fraudulent. Barring that, they should only be allowed to trade in Las Vegas casinos. Gambling pure and simple.

4. Separate commercial banks from investment banks from brokerage houses. There is no way that GS, CIT, BoA et al. aren't betting against their customers. More fraud.

5. Break up the too-big-to-fail banks into OK to fail sizes. Then let them!

Regards,

Coal Guy

Donal Lang said...

Coal Guy

Its too late to end derivatives and revalue bank assets - the truth can kill!

The gov't hopes that time will let the pain work itself out. Of course, a long drawn-out recession won't allow devaluation to take care of the problem; the shit will just be the same at the end of it.

But then, I always get depressed this time of year!

Anonymous said...

Donal,

I get depressed in April, when the weather STILL stinks, but it's snowing right now.

Regards,

Coal Guy

Greg T. Jeffers said...

I don't know how you guys take those northern latitudes...

The weather and the taxes drove me out of New York.

Dan said...

I get depressed in April too, though for me it’s because of the taxes.