Continued from Previous Post

One of my friends called me after reading my last post and asked me if I wasn't taking the easy way out on my "Both" for Inflation and Deflation - he said I was starting to sound like a Wall Street economist... you know, those guys that are NEVER wrong because they never take a position...

A fair point, that.

Deflation is here at the monetary level, and it will be here for a year, or two, or three (if I knew exactly, I wouldn't need my day gig). At some point the printing WILL overtake the defaults in the credit markets. Defining Deflation as Mish does, as a monetary issue, while certainly correct, does not help folks trying to decide on purchasing power protection strategies. After all, Treasury TIP securities are prices against CPI, NOT money supply, right?

I think that the Treasury and Precious Metal's markets are better indicators than the stock market for this. So far, Treasuries say Deflation and Gold says the US$ is losing value (import price inflation). I don't give specific advice, but it is no secret that my biggest positions are Treasuries and Precious Metals (please remember that I hedge with a covered call writing strategy, so don't take my disclosure as advice... I have been doing this a LONG time and kinda/sorta know what I am doing).

Lastly, I said the US$ could rally in the short term, I did not say it would. Look, nothing is impossible. For my money, I would rather be long a warehouse full of stable consumer goods like toilet paper than US$'s (click here for an interesting take by fellow analyst The Mad Scientist).

More on this soon.

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Regarding the Doomers on Agriculture.

Those guys got it wrong. Unfortunately, I believed their points had merit and after being up nicely in a leveraged Corn trade I got killed in one of my funds last year when the market just dropped out from under me and there was NO interest in out of the money spreads. I went from a VERY pleasing profit to disaster in a matter of 10 trading days or so...

I have been pulling apart Ag for some time now, and I think that weather is THE issue - not peak oil, or Nat Gas, or any of the other "off the cliff" scenarios. In short, there will be no overnight Ag disaster due to a shortage of Fossil Fuels in the near future, though Energy PRICES will affect Ag prices and production - just not to the point of disaster.

As I said in my previous post, "The "next blow up" will not likely come on time, as predicted, or as conveniently as" we think we are capable of predicting. Peaknic's focus on the food supply. No doubt they will be absolutely, positively correct ONE DAY - it just won't be because of Peak Oil (for the foreseeable future... 2020 and later they might be very, very right). This is not to say that the world's, and especially the U.S., food supply systems are perfectly secure - they are not. One growing season like 1936 in the U.S. heartland and we would be "up sh*t's creek" with no paddle and hole in the canoe. If you could just tell me which year this weather pattern would develop next, we would all be very, very rich... from what I understand this has a 1% probability of occurring in any given year, so good luck forecasting that.

(And yes, I am aware of the whole feed or fuel thing... more on that latter.)

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Oil rose sharply today despite inventories increasing because "gasoline demand increased over this time last year".

That was because SUPPLY went down after the Galveston hurricane, and we all know that demand cannot exceed demand... in short, there is not a great deal of support for Oil over $70 at the moment. If the data changes I will change, too.

Imports remain down over 8 % from last year. It will be REALLy interesting to see what Oil imports turn out to be over the next 3 years. That little tidbit of data holds the entire world by the kishkes (alt. gishgas).

Greg

Head Fakes, Y2K, Peak Oil, Inflation/Deflation and the Doomers...

I got some email from folks I can only describe as HOPING for doom...

I have no idea what drives their desire for Armageddon. Some of these people have been hoping for the end since Y2K. Ten years is a major portion of your adult and productive life... sitting around hoping something bad happens seems a terrible waste of time.

This last "Chernobyl" (that is Wall Street trader speak for losing all of your money or going out of business, etc...) was fairly easy to see, and still none of the bloggers - yours truly included - got it exactly right. Why would we? Forecasting is failure prone. The "next blow up" will not likely come on time, as predicted, or as conveniently as the Doomers seem to wish. There were only a few guys that were "right" every time, every call, every trade. Bernie Madoff was their poster boy.

Let me give you an example. In the Long Term (let's say 10 - 20 years) I believe that the US$ will go Chernobyl, Flame Out, Blow Up (you pick), ergo I do not plan on depending on that as a store of value long term. In the short term, a US$ rally could come at ANY time and kill the shorts - dead. Look what just happened in the US equity market. Hence the term "Head Fake". Markets LOVE to use that move on traders. Yes, I think the US$ is doomed, but that doesn't mean I'd be long the other currencies here (short US$). NOTHING moves in a straight line. Markets ebb and then flow.

But back to the Doomers... Eventually, you guys will probably be right. BUT, it is going to happen so slowly - say, over a decade - that you will adjust to the changes and never really see a blow up (unless the reinflation strategy of the Central Banks is so successful that the next balloon pop is overwhelming).

So...

Inflation? Or Deflation? Both. I think it probable that another Deflationary scare is in the offing. I DO NOT think we will experience Zimbabwe style hyper-inflation. Why would the Central Banks need to do that? If the U.S. was just another Banana Republic that might have already happened, but with the US$ being the reserve currency for the world? Nah... I think garden variety VERY high inflation will get the job done. Several years, perhaps a decade, of double digit price inflation will bring the US Budget Deficit down to a very manageable level as well as the average American's debt load - and destroy the life's work of the industrious, frugal, and productive (but in America, at least, we have always despised these f*ckers anyway - "Die Yuppie Scum!"), and it will have the added benefit of keeping the Establishment ESTABLISHED (hey, that's what inflation does - it hobbles the Nouveau Riche (first generation professionals, small business owners... folks working there way UP the ladder) to the benefit of the outright Rich).

Yea... I think 12% inflation for 4 or 5 years should do it. A loss of purchasing power of 12% per year for 5 years and an equal and opposite increase in printing would devalue the US$ by 50% or so. That would be the MINUMIM, with 10 years at 12% yielding a 75% or so decline in the value of the US$ being more likely. (And it will sneak right up on you. Nobody rioting in the streets (and rightly so). No big deal. Just a lot of time wasted working hard for something when you could have been hard at the wine, women, and song. So, if you are a Doomer that started Dooming for Y2K, you will have had to wait 20 years and it will have happened so slowly that the collapse of the US$ just won't be that satisfying.)

If one thinks about it, the above scenario dovetails nicely with the Gold $2,000 crowd. That would mean a 50% decline in the US$, and Gold $3,000 would be close enough (especially for government work) to the 75% decline in the value of the US$. Of course, Gold might succumb to the Defaltionary scare I see as highly likely. Remember, Gold is not the perfect investment. It is simply an alternative store of value, one that has worked for 8,000 years or so - somewhat longer than any paper currency has held value. Paper currency, stocks, bonds, small businesses, etc... are only markers, a place holder, indicating the owner's cut of the world's:

1. Fisheries
2. Forests
3. Ranching and Live Stock
4. Agriculture
5. Mining & Minerals
6. Fresh Water
7. Fossil Fuels
8. Human Resources Capital

There is nothing else. If The Powers That Be print more currency, issue more stock certificates, lend more money, huff, puff, suck, or blow etc... you don't increase ANY of the above - not even a little bit. Capital Stock? Means of Production? These are merely 1 thru 7 and the application of 8.

Well, TPTB are printing, but even they can't print fast enough to collapse everything overnight. Sorry Doomers, this is going to take more than a day or 2, but less than 3,650 days I should think.

In the meantime, life goes on. Tonight I am going for a walk on the beach with the kids, then its off to Dairy Queen for some ice cream, and later a glass of wine with my wife.

The best line I ever heard in my LIFE was when I lived in NYC and some nitwit or other was proposing to make a park within Central Park, taking land away from children's play areas and dedicated to, wait for it.... "World Peace". A bunch of locals came over to heckle these jerks when the media got there and after a few back and forth came the line of the Century from a stereotypical NYC mom:

"World peace will come and go. My kids gotta play little league."

Brings tears to my eyes.

Greg

"You f**ked up - you trusted us! Hey, make the best of it. Maybe we can help..." From the movie "Animal House"

Just for fun, read this:

U.S. Federal Reserve Gov. Kevin Warsh said in an opinion piece published late Thursday that the central bank might have to begin taking steps to normalize policy before the need is obvious.

"If 'whatever it takes' was appropriate to arrest the panic, the refrain might turn out to be equally necessary at a stage during the recovery to ensure the Federal Reserve's institutional credibility," Warsh said in a piece published on the Wall Street Journal's Web site.

"The asymmetric application of policy ultimately could cause the innovative policy approaches introduced in the past couple of years to lose their standing as valuable additions in the arsenal of central bankers," he said.

Warsh says the Fed is at "a critical transition period." He cautioned that if policy steps are "not implemented with skill and force and some sense of proportionality, the success of the overall endeavor could suffer."

"Policy makers should continue to communicate as clearly as possible the guideposts, conditions and means by which extraordinary monetary accommodation will be unwound, including the removal of excess bank reserves," Warsh said.

Since the global credit crisis began, the Fed has pumped more than $800 billon into the banking system, kept the federal funds rate near zero and purchased so many Treasurys and mortgage-backed debt that the amount of assets on its balance sheets has now swollen to $2.14 trillion.

Got that? I don't know about you, but I really liked the:

"The asymmetric application of policy ultimately could cause the innovative policy approaches introduced in the past couple of years to lose their standing as valuable additions in the arsenal of central bankers,"


thing.


Allow me to translate:


"We really f**ked up, and the cure may turn out to be worse than the disease. Our policy moves, both fiscal and monetary, are leading to a complete collapse of the currency, and with it, the system. Holy sh*t! This is bad!"


These guys should hire me as their director of public communications.






Greg