Saturday, December 20, 2014

Inflation coupled with deflation

It seems very unlikely to have both Inflation and deflation at the same time, but we have it. Health care costs are skyrocketing and gasoline prices are dropping.

The big items are not even being mentioned. The bond market is at an all-time high. If interest rates were to rise 600 basis points to about 8 percent, the bond market if marked to market would suffer a 75% loss. The bond market is at a top, it can go no higher from here, it can only go down. The California housing market is still unaffordable to the middle class unless both husband and wife work. This too could face a 50 percent cut in value, home values do not support the current rental rates so why own a home, rent.

Interest rates are low, so why save your money for later? Spend it now while it will still buy something and borrow some more or put it on plastic. Stocks are going up, and who cares if its selling for 200 times earnings, buy it and hold on for profits. It doesn’t matter what it’s worth, if it’s going up. For some reason, the housing fiasco seems to come to mind. Buy Apple at $1000 and sell it when it hits $1100 or borrow more and double your bet. The interest on the loan is peanuts compared to the rise in stock values.

The government is printing money, which is inflationary. The job market is not quite as it appears, people are returning to work, but most new jobs are a lot lower paying; less earnings is deflationary. Of course if you don’t have a job, no money is very deflationary.

Social Security retirement paychecks are inflationary. The government already spent the money paid into the program for other things, now they have to print dollars to cover the plan. Food stamps are a similar animal.

Once your unemployment runs out, you can go back to school on a student loan. Your own family might not have the ability to loan you money for school, but the government has a ready and willing check book. Sell your soul to the company store for a 4 year edu-vacation.

The one thing that is very easy to understand about the economy, is that it is not in a composed settled state, it is in a state of turmoil, a dynamic state of flux, twisting in different directions. Our bond market which is 10 times bigger than the stock market is not an area to park money for investment purposes. Interest rates are at zero. Investment funds are now dealing in indexes which are a step removed from the stock market. They don’t have to buy and sell stocks, just hold the index. The stocks on the stock market are real, the index options are a synthetic creature. There is a finite value of stocks to be purchased, but there are an infinite number of index options that can be sold on the stocks traded.

The real question, how long can the consumer be the driving force for our economy? Sooner or later people will either run out of items they deem necessary to buy or run out of funds to buy them with. At that point we begin to see deflation. Exhaustion of consumption from a lack of funds or credit. In 1929 it was different, there were no credit cards. In today’s world, let the good times roll, put it on plastic.

The present conflict is a war pitting inflation against deflation. We have a very good shot at the hyperinflation Germany experienced before WWII. They had everything with no deflation. Inflation won out, the Mark's value went to zero the hard way, a beer in the end cost 4 billion marks. Of course if you were a senior citizen who manage to save a million marks, that turned worthless as far a buying power went. From there, it wasn’t hard for Adolf Hitler to rise to power, he was going to change things and help those who had been screwed out of their life savings by a democracy that listened to no one, had all the answers and spent what they didn’t have.

The thing that needs to be pointed out is that there are contradictive things in motion. We just had a 400 point move in the stock market. And bonds are at a rate so low, you wouldn’t loan money to a relative. Does there seem to be something wrong with the way we value risk? Buy a stock it will go higher. As for bonds, compound interest used to be the 8th wonder of the world, now all investors do, is wonder who's buying them?

As long as the stock market goes up we are going to make money. That seems a bit artificial to me, an "investor" can make just as much money on a fast falling market as they can on a market going up. If you examine it, a majority of the players only play the up side. I once asked my broker why? And he said that it was easier to sell a market going up than a market going down. The human mind is geared for appreciation, not the negativity it takes to short a market.

So here we are with, an elf like looking, Janet Yellen posturing how great the economy is. She has a cute cherubic look that could sell just about anything. It's Christmas and everyone wants the good times to return. One or two weeks of holiday cheer should fit the bill.

Merry Christmas everyone, and God Bless.


Sackerson said...

I don't know if you have Blu-Tac in the USA, but all this bank-invented money rolling around between stocks, bonds and property reminds me of the way you use a ball of Blu-Tac to pick up the remnants from walls and the back of notices. Sadly we're not the ones with the ball.

dearieme said...

I once considered using a derivative as an investment. Had I had the spine to buy it I'd have done outrageously well, because it was late 2007 and I was convinced that the then madness in the markets couldn't continue for more than a couple of years, if that.

What put me off was counterparty risk. If you think that there will soon be insolvent banks, how are you to pick the one to buy the derivative from? As it happens, it was a large American company that failed, not the French bank whose derivatives I was interested in. But I've still not found a way around counterparty risk: it's useless to say "diversify: buy from several suppliers" because the amount of money I'm prepared to use is modest, and anyway a systemic collapse could bring down several banks.

dearieme said...

Seen today: "JPM has total assets of $2 trillion and a total derivative exposure of $71 trillion."

dearieme said...

Merry Christmas to you, Jim.

Jim in San Marcos said...

Hi dearieme

Here's wishing you and everyone else a Merry Christmas.

Thank you all for your support and comments.

Joseph Oppenheim said...

Dearieme, what is your opinion of Boots UK?

dearieme said...

@Joseph, I have no opinion either way; sorry. (Don't I remember that they were taken over and are now Alliance Boots?)

Update: Aha, I see why you were interested.