Sunday, May 1, 2011

"Known Unknown's"

Calling markets is tough enough. Calling them when the rules and policies change everyday is impossible.

Market's that are head up, including those in bubbles, will keep going up until they stop going up (no sh#!, eh?).  Still, this commodity bull's day's are numbered. One, competition from stocks and bonds is going to be steep. Two, the end of the bond buying means the end of that supply of money into that market place. Three, the Fed & the Treasury and the various central banks have proven beyond a doubt that will do ANYTHING to achieve short term policy objectives (think about that for a moment). Four, grains led the market up, and good weather will change that in ways I am not poetic enough to describe.... and bad weather will have the same effect, in the opposite direction. (Making bets on global weather has never been a great way to make a living.) Notice I said grains led the market up - NOT OIL. And Gold is not a reasonable comparison as Gold, unlike Oil and Corn, is not consumed.... only produced. FIVE, and MOST IMPORTANT: There is no inflation in real estate or wages. The market for homes and jobs DWARF'S the commodity pits. If there were any threat of inflation, you would see it in homes and wages.

(BTW... on food inflation? Do you know what would happen to food prices if poor, working class, and middle class American's were incentivized - either positively (a PR campaign) or negatively (denied food stamps) - to produce food? From city gardens to back yard chickens to neighborhood dairies this increased margin of production would/could crush food prices, farmers, Ag companies, etc... think I exaggerate? Any gardener knows I am not. A small plot will yield ALL of the veggies and chicken/hog feed for a month or 2. No, not all year... but think of what would happen to prices in this very inelastic market when food supply increases by 1/12 (the summer harvest)! There is a reason that for THOUSANDS of years Agriculture has not been a profitable business for commerce... and that is because there are no barriers to entry for people to grow their own food... and each and every tomato or potato grown at home eats into the commodity price of the commercially produced tomato or potato.)

I know many people here HATE Bernake, but I gotta take my hat off to him. When I hear him state that "the inflation we are experiencing now is transitory" I believe that he is likely to be very correct.  The only place we are seeing price inflation of any sort is in commodities. Some commodities are VERY price inelastic - a small move in supply/demand makes for BIG price moves.

Translating Bernake's "transitory" comments leads me to believe that he is more concerned with deflation (of credit) than inflation, and if correct that dovetails nicely with the Fed's and the U.S. Treasury's seeming unconcern regarding inflation and the US$ (and of course, they could be wrong).

So... here it is... EITHER; Real Estate & wage inflation rises to meet commodities, OR; Commodity prices fall to meet Real Estate and wage price deflation.

EXCEPT!

For Oil.

Oil remains the f*&^*%ing fly in the G** DA** ointment in all of this.

Let me give you an example (of several things, including that journalists continue to prove incapable of independent, abstract thought). Read this article.

Got that? See any conundrum's there? How can the market support higher prices of all of these industrially produced consumer goods with item #9 - falling or stagnant wages? By deficit spending AND/OR increased energy prices/declining energy supplies (and or some combination of the 2). In fact, shouldn't this be the exact outcome of declining energy inputs? After all, declining energy inputs leads to production of less (per capita) consumer goods and lower productivity?

(BTW... Let us define productivity. If you measure it using currency/GDP you will be misled as far as production applies to the USE OF ENERGY. If one used the total weight of goods produced multiplied by the total distance those goods were transported one would have a decent "apples to apples" comparison of productivity, or production, than using GDP (which is not adjusted for currency and a bizzilion other variables that have nothing to do with how much energy was brought to bear)).

(More on that productivity comparison soon. I have been noodling it for a while and I want to open that up for a proper discussion.)

We are back to "its all about Oil" once again. The financial system is functioning reasonably, and likely will until the derivative bomb goes off... and that will probably be brought about by Oil...  

One could go looney thinking this through...








6 comments:

Bill said...

So what do you think about selling silver. I don't care to miss the highest high. I just want to get as much profit as I can. I'm thinking of selling this week.

Anonymous said...

On the ton/mile, the soviets used that metric. One of the problems they had was that their state industry managers preferred to produce heavier goods or ship long distances to meet their quotas. Iron pipe instead of PVC, lumber from just outside Moscow shipped to the far east and vice versa, etc.

Best,
Dan

A Quaker in a Strange Land said...

Bill: The International Silver market just opened down 10%!!!

Clearly those guys at the dealer on friday were on to something.

A Quaker in a Strange Land said...

BTW... don't blink. Silver sees $20 long before the $ goes worthless.

A Quaker in a Strange Land said...

Dan:

Ipods instead of stereos... I get that.

But when it comes to energy, not currency, its my way or the BS highway....

Anonymous said...

The dollar is not in danger as long as the credit markets are contracting. If the Fed doesn't keep blowing cash into the market, the banks will again become insolvent even with the BS accounting rules they get to operate on now. When markets contract, it is the cash that disappears first as asset values drop. The debt remains until it is written off over time, or all at once in bankruptcy. There will be QE3 and QE4 and on until the bad debt is cleared, and market asset values exceed their associated debt. The alternative is a credit collapse.

Remember the time when banks kept cash reserves? When a 20% down payment was required to get a mortgage? All of that existed to provide a cushion against economic contractions. Not a single loan would go upside down in a 20% real estate contraction. Not so today. The banks, by realistic rules, are still insolvent. There are no reserves, but they are slowly cleaning their balance sheets. To do this, the economy needs a steady infusion of base money just to stay even as bad debt is written off.

And we haven't learned the lesson yet. There are STILL no money down FHA loans available. Sheesh!

Having said that, this does not mean that it is the Fed's job to finance the federal government's profligate spending. If the fed has no choice but to print money to finance that behemoth, the markets will blow up. It doesn't look like the political will exists to rein in the budget. Too bad.

Regards,

Coal Guy