Jump to content

The Inflation thread


Recommended Posts

In reply to: Barra on Saturday 17/06/06 09:33am

I saw an interesting debate on CNBC during the week between Peter Schiff and a Wall street economist..

They were arguing the cause of inflation.

Schiff used the ""Austrian School "" defination to push his argument ie, (The Austrian School of Economics defines inflation as "an inflation of the supply of money." ).

The Wall street economist simply would not accept this.

As usual, just as it got interesting, they cut for a commercial break


This link will tell you everything about inflation




Heres a couple of snippets


Money supply

The amount of currency in an economy (the Money supply) is stated as M0, M1, M2, M3 and M4 each broader than the previous. As the amount of currency in circulation increases (inflation), its value decreases. This is the most direct way of measuring inflation as the amount of currency in bank accounts, bond, coins and paper notes, etc. is generally known to the government of each country. Observations of the money supply gives a much clearer picture of inflation because it responds quickly (as fast as banks report) and accounts for all inflation including that which occurs in financial markets as rising stock prices.



US FED discontinues reporting M3 data

M3 from 1959-2005


M3 from 1959-2005


The M3 money supply has been reported since 1959.


The United States Federal Reserve (the Fed) has announced that it will stop reporting the M3 money supply data of the US dollar on March 23, 2006. This announcement has started some speculation in the investment and banking community on the possible instability in the dollar system that the Federal Reserve is trying to hide. The Federal Reserve offers this brief note

Link to comment
Share on other sites

  • 2 months later...
  • Replies 146
  • Created
  • Last Reply

Top Posters In This Topic

Top Posters In This Topic

Posted Images

  • 1 year later...

Howdy been having an interesting discussion on cash is king thread.


Goes along the lines I see US inflation exploding over the next 3 months as oil prices from 12 months ago replaced with the current price in the CPI year on year series and as a result the US inflation number jumps from 2.8% headline to 3.5% and should ol stay here up at US$90 plus the eventual march to 4% is set in stone.


PPI the producer price cost index since its more heavily weighted towards and uses more energy as a cost of production has a weighting of 4 times the CPI impact and we may very well see PPI cost increases of 3/4/5 % over the tame inflation numbers being at present given.


Some research i will share with you thanks some of it my own and others contributing on the topic are at the end of this long cut and paste .....


US market and the US feds actions in cutting rates as opposed to raising them to fight any threat of inflation coupled with the US market rallying US bond rates down to 4.3% for a 10 year bond which has narrowed the margin over inflation rather than the opposite has me very scared.


I have been rabbiting on about this topic for some weeks on the other thread and never listening to Roger's before our thoughts are very similar about the long term impacts but my difference is ... having crunched the actual CPI and PPI expected numbers for the next 3 months an oil price of sub USD$60- is about to be replaced by last months average for October of US$82- ish and next number in Dec 2007 replacing a number from Nov 2006 seems set to be US$90- or so 50% higher and the whammy is Jan 2008 where the Dec 2006 number where oil was testing US$50- barrel 12 months ago is replaced by one possibly at USD$100- plus.


For me When one market goes one way and the fundamentals go the other its time to run and run hard. US cutting rates ... US bond dealers marking bond rates lower ... and in the meantime some total shockers about to be delivered. If I am even close to correct even halfway correct and headline CPI just rises to around 3.5% not the full 4% there is not a hope in hell the US 10 year bond remains at 4.3% yield and with the market fragile ... and the US economy even more so ... i have run !!


Who knows ... big call by me as per normal. Market totally disagrees ... not unusual ...


Anyhow a link to listen to ..


thanks to Brierley ...








Some background and details behind this bizarre call by me ...



People and the markets right now seem to be scrambling for some asset class to put their funds into and the two most popular ones at present is the US bond market and the other the equity market. Some flight also to gold. Gold aside .... I cant think of a worse asset class than US bonds due to currency risks along with capital risks. the US equity and ours also ... but to a much lower extent due to better underlying profits and outlooks ... leave me scratching for long term value . In my opinion over time right now the equity side amuses me almost as little as the US bond market does.


That said the market is speaking and has spoken ....


Brierley ... oh i love the Kudlow thing ... he state the US economy is growing and has pretty charts on lending and credit growth ... up 11% for consumers ect ect ... I am with Jim Rogers on this and his comment about the US non farm payrolls estimate which had employment growth shown in banking and insurance last month ? Almost as funny as the GDP deflator number. The largest sub prime lender let 10,000 people go last month along with investment banks all shedding and actual banks doing the same yet the read on the Non farm payrolls last month was what ? Employment grew ?


Oh this is a classic Rogers views ... first time I have heard them mirror my own. Ben at the US fed is printing money and dropping it out of helicopters. Kudlow the bigmouth still on about defending the dollar the funny thing is the US has US$53- billion in FX reserves and just over 500 billion in gold and the strategic oil reserve is another US$55- billion ... and this is backing the US debt of $9.2 trillion. Just filling in some gaps not mentioned in this interview.


Oh it had to happen ... the old old argument ... any anti view even when realistic is branded as anti American and Kudlow just cant help himself.


An interesting quandary and Rogers point about a commodity index up 3 times in 5 years yet zero inflation was countered with the prices falling on plasma TV screens and housing in Arizona ... hahahahha ...


Lets see what the next 3 months brings because despite agreeing with rogers the dollar is ripe for some form of correction short term ... I cannot for the life of me see any way for them to explain away the rise of oil and direct dire PPI and CPI price increases.


One thing I didn't mention but have in the past the price of a lot of agriculture products which require massive amounts of fuel and have seen recent gains corn up nearly 100% in the last 12 months , wheat 100% and on and on its goes the single biggest thing is supposedly these things have not hit food prices at all in the US and with oil trading at US$95 vs the average price in 2006 of US$58- any pullback I suspect is unlikely. It is currently I suspect being smoothed via a statistical adjustment to the CPI because the gain this year is seen somewhat as a one off thing. If one has a peek at the 5 year chart when oil was US$20- per barrel and its now nearly 5 times the price ... at best this has seen a cost of production rise 100% in the last 5 years and the actual price just catch up. Fuel in producing grains is around 20% the total cost .... when one actually knows the fertilizers are actually by products of petroleum and they also are 3-5 times the levels of 5 years ago ... the US Dept of labor can smooth the current spike and call it an aberration all its likes but the move like the repricing of metals and other commodities reflects these new realities ... cost of producing copper on average is double what it was back in 2001. Oil overall the same ... u name it its there.


Rogers quite rightly says he wonders where the people preparing the CPI and PPI numbers actually shop ... me I suspect the statistical smoothing is in full flight and we are never told what factors they are using but with the price of oil only a fool thinks it goes back to US$20- per barrel. Agriculture commodities are a very tuff one and we saw the Banana crop wiped out here and was a large factor in the headline food price rising ... the US since we are not told their methodology for preparing their own PPI and CPI food inputs I strongly suspect looking at the numbers right now ... have viewed this as something like a drought and one off shortage to be repaired when prices return to norms.


What is the norm ? If your machinery costs have actually gone down 10% making up 25% of the cost of production. Your fuel costs have increased 5 fold in 5 years an marked up 20% the production costs. Your fertilizer has gone up 3 fold in 5 years and make up 15 % along with pesticides both by the way made from oil byproducts ....


Let me see .... labor has kept pace with inflation and finance and mortgage rates lets just say the same .... machinery is minus 2.5% ... fuel has added 100% ... and fertilizers/pesticides another 45% ...


The actual returns should be basically 1.5 times the price average from 5 years ago.

They are a mere 100% and I suspect even these have been smoothed to death in a statistical whitewash in the hopes they come back. Pressures are one side .... returns are not even keeping close to the pace despite the 100% rise and as such farmers are the new white trash in the USA. Usual rules. More and more walking away for very good reasons.


Did you know in Australia how we had a great cotton producing area opened up in recent times ? Well yep the drought has hit and some areas actually have some water but have chosen not to plant ... not to plant and the crop will be 15% of the one normally seen.


Why ? well even back in 2002 when the currency was at 50 cents and cotton prices below 40 in terms of AUD the equation was 80 cents per lb AUD and things were not great then for the industry ... cotton consumes a lot of fertilizer and pesticides and energy to get the finished product. So in 2002 the price was AUD 80 cents a lb ... in 2007 with cost of production at 150% if not more due to water usage charges going nuts .... whats the price ? Well it's US$0.75 per lb or 82 AUD per lb so i dont think frankly even our very efficient farmers can plant a cotton crop and have a hope in hell of making a decent return. Costs have risen 150% yet the price is if anything the same as it was 5 years ago and in fact its almost lower then the price 10 years ago . For the record the price of cotton was US$0.75 per lb back in 1998.


Grain crops tell pretty much similar stories and a lot of other ones as well. Despite 100% rises in prices they never seem to appear ...


Ahh I have the answer the weighting of PPI raw food inputs on the PPI has been slashed and represents a mere 2% ... yes 2% of the index. Was wondering how they did it.




Near the top of the table ...


So the massive spike seen in July on these grains and Ag products of 11.7% as you can see was weighted at 2% for the PPI as a whole.


Maybe the US dept of labor is on some sort of diet ?


as you can see the weighting despite it being something we all use ... is lets just say low ... then read across and the 11.7% is further weighted down to 10.7% ... as I suspected the old statistical smoothing.


Oh even worse and these *)^*)^^@)*^ piss me off ... look at the three months on the crude inputs numbers and seasonally adjusted things according to them up 5.2% one month followed by negative 3.5% and up 10.7 % all seasonally adjusted ....


Oh I suppose its up 8.7% in crude terms over the period ... nut when one looks at the futures prices and actual prices paid ....


Wheat June - Sept Well the July 1 price compared to the 31 sept price was US$6.00 compared to US$9.50 ... in my books thats 50% .... since they use the average its US$7.30 compared to calender June at US$6.30. Only about 16% ... but the average is increasing ....




Since lots of things go into crude PPI food prices I am sure its likely correct the overall number some went down such as cattle prices and others faced massive increases like wheat.


Bottom line the smoothing such as it is always will go the opposite way to the headline number ... it doesn't mean it will not eventually have to be repaid.


For me the weighting seems wrong at 2% on PPI for food products ... when the weighting for oil is at 27% in its category ...


Trying to work out what these guys are doing is like a Chinese puzzle pull one way and it reacts the other.


Going to the CPI weighting since despite promising not to spend time posting ....




the latest set ...


very hard after looking and looking to get the weightings they use ... I cant find them.


Interesting the estimated to the end of Sept increase in energy prices overall for the US for the 2007 year was 11.7% for energy commodities it was up 20.7% I know the number this was in reference to since they do actually produce this one it was the US $58- average price or oil for 2006 in their estimates. So the CPI series as of the end of Sept reflects the average price of oil of US$70- for the year to date. Obviously the average with us nearly at the end of the year will only creep upwards slightly despite the headline price being US$25- over this average and as i said the CPI is smoothed to death in a very literal way.

US$25- is a 35% more price impact on CPI including it.


Since they will not reveal what weighing they use for energy the only way to work it out is to extrapolate backwards. Total index up 2.8% but if you look at the number they included in this UP 2.8% number and go down to the thing showing how far the energy index went up it states it only went up by 5.3% on page one ... which frankly is rubbish if you go to page two of the thing the Energy index is we are told their up double this for the year to date and its only the inclusion of a few very low oil price months from late last year thats saving the thing.


Sorry complex and maybe few dont follow but the index is made up from a 12 month read and average of the 12 months. October 2006 oil was around US$60- per barrel and the next number for Oct 2007 will be replacing it will be USD$80- ish average only 33

% and since its smoothed over 12 months it will not be such a great impact ....


My point just confirmed Oct 2006 replaced with a price 33% higher. November 2006 included in the headline number in CPI and PPI for the last 12 months out in Mid December will again be replacing a number around the US$60- per mark for CPI but it looks like the average for November 2007 will be I suppose US$90- only 50% higher ... but wait it gets worse !!! Worse than even my own call !! December 2006 many moons ago oil tested down near the US $50- per barrel and the way it looks to me is that oil is going to try US $100- so the third knockout blow will be one number in the series replaced with the new a full 100% higher. Of the three replacement numbers two are in the bag .... unless you think oil is about to crash and even at best these are SHOCKING.


Worse than I expected and unless you actually are able to or willing to pull apart the stats it comes like a blow from hell.


Three ultra low numbers replaced with 3 very high numbers ... at best the three months will send the energy index to the moon ... 180% for 3 months if oil creeps into US$100- in coming weeks down to 150% for the three months. Since its 3/12 months 50 or 60% added or taking a full 12 month read ... gee 12.5% to 15% on the energy side.


PPI my call at 4% added seems about right showing PPI inflation INCLUDING all things at somewhere miles above the current read ... 3-4% above the current read is now for me a forgone conclusion.


CPI and suspecting they could and will smooth this down still remains out there but gasoline prices for the same period which are the factor in the CPI more so than the PPI we are going to have a retail price at the bowser in the US of US$2.05 replaced with an average I suspect of something approaching US$3- or 46% higher and even allowing for the low weighting I think they use in regards to CPI of a mere 6% of incomes consuming petrol ....


Be afraid .... 3 months ... 45% ... at 6% weighting I suppose only adds 0.7% according to them overall to things ..... but as time marches on the low US$60- prices replaced with ones at US$90- as I said 1.2% and after looking at this very hard .... US CPI in 3 months after the release of the third CPI number up 0.7% just from fuel alone let alone other energy costs associated with it and transport cost rises seen.


We sit here US Treasury bonds 10 years at 4.35% CPI including it all now at 2.8% and set with not a hope in hell of not going to 3.5% in coming months and possibly as high as 4% making the real return ZERO on 10 year bonds. Since its averaged something around the 2% mark in low inflation times I wonder how they react to this.


PPI is a big call ... despite looking its hard to fathom what the actual increase will be ... one very low number replaced with a very much higher number. PPI has due to what it represents a cost of production a much much higher energy weighting than CPI in fact 4 times as much as it cost energy to produce things.


PPI price increases and pressures are not necessarily passed onto the CPI so its a side issue but the costs of Ag products and the thing like cotton costs rising 150% yet the price not going up but down and same for corn dont inspire me to make any call on the long term fall of prices back to historic levels. As insane as calling oil back to US$20- when costs have done similar things. Right now its not evident a shortage in these Ag products but if farmers are planting crops to loose money its not an option and cotton and corn stand out along with Sugar and OJ. At some stage they will come to their senses.


Sorry so much for no more longwinded posts :}.


Will just start another thread with this outrageous call and see ghow I fare along with my other absurd predictions from the past ... on SS from the Ozzie to 90 cents by 2008 when it was 77 cents to oil at US$60- when it was US$40-.


For once I hope I have this wrong becuase despite having numerous discussions on the topin on this thread and trying to fault my own logic I can only reach these conclusions based on facts.


If CPI breaches 3 % its not good for a bond market in the US let alone if it breaches 3.5% early in 2008 and if oil stays here approaches 4%.


Take care



few more interesting links on the topic ....


National Unleaded Average USA




US Debt to the Penny and Who Holds It




An interesting alternative view on what the real inflation rate is ....

Shadow Government Statistics




A decent infaltion calculator according to Official US reported CPI numbers ...




A historic look at the DOW ... work out how long it took u to break even buying in 1966 or 1929 ... I make it 26 years and 19 years :}




A look at crude oil prices adjusted to inflation ? Going back to 1949





Some food for thought ...


All views welcome ... if someone has a simialr link for say gold prices adjusted for inflation .... or one which has a look at investing in stocks vs cash taking into account the cash rate is usually 2% higher than dividend yields on average well at elast till they started messing with things last 10 years ... the averge is 2.9% over 100 years but the last 10 ...









Link to comment
Share on other sites

In reply to: kahuna1 on Saturday 03/11/07 05:20pm

Wow - Kahuna, that was an epic post!


So, what you're saying is:

- Inflation in the US is already out of control

- The official numbers have so far excluded the real impact of food and fuel (two things Americans don't use much of?) by using 12 months averages and also weighting them down on the basis that they are temporarily inflated (for one reason or another)

- We're approaching the time when even using 12 month averages will lead to dramatically higher numbers

- By cutting interest rates (choosing inflation over recession) when they should in fact be increasing rates, the eventual result will be that the inflation rate will reach the 10 year bond rate and the bond market will collapse, and then the US dollar will also collapse?


We have a credit market on the verge of collapse and a bond market headed the same way...........so my question is: how does this bring down equity markets?

Link to comment
Share on other sites

In reply to: kahuna1 on Saturday 03/11/07 05:20pm

Heard you were on holiday K1. Hope it was enjoyable http://www.sharescene.com/html/emoticons/wink.gif



I thought that the cpi was at 3.5% conservatively already, unfortunately we wont see or hear any such murmurs from the fed until she is good and ready to act accordingly with a rise again.


We are witnessing the do what you can to keep it manageable boys figures until the wagon over takes the horse then i assume it would have been sufficient time for the smart money to exit stage left.



Are we really stating the obvious or what? Is this even a topic of serious discussion K1 or are we taking the mickey out of each other. Shouldn't you have named this thread " when do you think the US Fed will come clean? ".


Friday was about the icing on the cake for this mug. Its getting dangerously predictable with these numbers of fantasy that even the US market was in a do we or don't we session, just looking at the graph its evident.


Keep it alive at any price. They will neither bend nor break without throwing every lifeline available until the realism is beyond the Feds control.


Lets not get caught up and complacent with the predict ables. Our true concern here is not to become predictable as well and follow the leader into un chartered waters.


Do what they please K, its their baby that's at stake but accountability under this administration is not what we'll get.


They are also in election season and the avoidance of a cpi blow up/recession/war losses are on the not to admit list. The pot may boil over in about 4 or 5 months if they cant throw enough money at it. Till then lets not hold our breath and play pretend.


Hey your not really having a break you stirrer http://www.sharescene.com/html/emoticons/biggrin.gif



Link to comment
Share on other sites

QUOTE (Ice9 @ Saturday 03/11/07 10:34pm)

Ice very well put,


And not my rambling sort of stuff.


US bonds stuffed, credit side as well.


How this leads to lower US equities is similar to all the rest. Us Dollar slides making holding US equities a loosing proposition ? Or US credit defaults increases even more and a cascade of foreign owners of most of the US debt totaling 9.2 trillion start departing. This happens and no matter what the US fed does rates go up. central banks control only one thing in reality and thats the target price of the cash rate.


Their is nothing set in stone the US 10 year bond has to trade at 4% and in fact the average investors have demanded last 20 years has been 2% over the US inflation rate on average ... right now even without my pet theory about what the CPI numbers next 3 months will bring .... the 10 year bond is trading at a mere 1.55% over US inflation and the tilt the market has on it right now is the total incorrect one if in fact inflation is going up.

Potentially a correction of 1.2% in short order and close to 2% over 12 months.



Hard to argue say for the Dec 2006 oil price of the US$55- ave in the year on year CPI number being replaced with something which looks likely to be over US$100- by then and at best one is replaced with another 75% higher.


Us equities have not a hope in hell of standing up short long or medium term IF this scenario is correct and since its based on actual numbers as opposed to what I think the price will be ... at least for the upcoming Oct 2007 CPI out in 10 days and the Nov one out in 40 days they are pretty clear.


So how does it flow into the stock market. Dollar assets all of them not just bonds ... but equities if you are say from Japan and have funds in the Us stock market the only exit is to sell the stocks in question and with the proceeds sell the USd and buy JPY. If the US CPI and PPI comes out as I suspect the Fed has no room to move and in fact should reverse the cuts already made to prop up wall street. The US fed in its wisdom I suspect will tell them to get nicked which will only spur more and more selling in both the equity side and the dollar which will lead to more of a cascade effect in equities.


Have a look at the long term chart last time we saw some sort of shock in the CPI via oil and 1975 saw the market tumble 30% ... sure it came back but it took 10 years .. 10 years with massively high interest rates for the US equities to even get back above the 1,000 on the DOW.


Whilst we are not talking at this stage a CPI like the 1970's not even close ... these things have a mind of their own and their is nothing written as we should know to say a fair price for a commodity which is in ultra tight supply cant go a further 50%. Oil like platinum is so scarce and dwindling known reserves anything could and usually does happen. Back when oil broke US$30- most were calling it lower ... at US$40- even more ... at US$60- Forbes held their world economic summit here and the sap running it said he thought oil fell from the high then at US$60- back to US$40- within 12 months. It never even looked like going down and was in fact prior to Katrina visiting even higher levels above US$70-.


To date we have seen little impact from this oil price rise for the simple reason the US dollar for a lot of the rise in 2003/4/5 was a strong as 30 men and in fact went up 15% making imports of Chinese manufactured goods cheaper offsetting the increased energy costs. Also a lot was just not passed on to consumers. In 2007 the dollar falling 10% in recent months the Chinese revaluing at double the prior 5% P/A rate I wish you all luck.


Does it translate across to equities ? Well strangely enough some seem to think it doesn't. Past experience served time and time again has seen this to be sheer folly . A US economy laden with debt and writing more and more debt at the rate of 13% or more to fund the already existing debt ... which just lowered rates to facilitate this endeavor ... for me is not about an individual company or its P/E or prospects or what it does ... its the fabric of the whole modern economic system they are messing with and what happened to Mexico in 1995 then Argentina and every other South American nation and their equity markets is exactly the same and for exactly the same reason. In 1998 the Asian financial crisis ensued and it didn't matter what stock one held on any of the exchanges everything was slammed. And how did the Asian financial crisis start ? well the key I suspect most would agree was the Thai baht being devalued which led from one market to another to another.


The US has declared via the Treasury secretary they are committed to a strong dollar and then done the opposite to ensure a strong dollar. One factor is interest rates and making the dollar more attractive via offering higher rates not ... lower ones. Another is having a CPI inflation below your trading partners and ensuring it stays there ... another fail. Another is having a balanced govt spending balance ... fail ... another is having a positive trade balance ... fail ... and on and on it goes.


One thing is also very sure .... despite them mouthing one way but their actions being the other ... the US wants its largest trading partner to devalue the USD against it .... the CNY to revalue ... just like the Thai baht back in 1998.


Investors faced with a sliding dollar and frankly a very contradicting policy as to which way it wants it to go have a choice ... and its not a good one. Buy something on faith when the actions are contradicting the verbal intent ....


Sorry not very clear because it will not be clear ... just like when the markets fell out of bed recently ... we saw massive moves in currencies when it was a US credit problem ... tighter credit threatened the US consumer side and falling asset prices on the Housing side meant those with assets in the equity side relied more and more on them as security for loans ... and so on.


One leads to another ... one problem cascades into another market and another and another and another. we saw our equity side fall 15 % in weeks ... our dollar loose 10 cents in an even shorter period ... commodities slipped similar amounts.


This time they all bounced back all from the US confidence being repaired via soothing moves on the US feds side and cutting of rates.


What ammo do they have this time ? Lets cut again ? Well part of the debacle they are now in is the oil price is and has accounted for this and not the way the wanted. US dollar falls in value the price of oil based in USD will just go up. If they cut rates again the fall in the US dollar seen last time will look like a cakewalk. The cause of this on my own reading will be the headline US CPI and PPI going to the moon.


How Can one cut rates irrespective of any outcome when PPI and CPI are going up.


Exactly how I see it playing out ... is PPI and CPI come out in 11 days ... maybe they are smoothed this time but a clear case of knowing shocking things are going to happen is to me the best way to be prepared. Might be swept under the carpet this month like the large PPI rise last month was. So its a maybe for this months numbers but two in a row and it will be on for Young and old.


US bonds and the massive rally they have had ... shattered in very short order. Yield rise quickly and since a .25% change in yield makes the paper worth 25% less I would start running ahead of the pack Facing losses after what just happened I suspect makes all the rest of the ball of string unwind. More financials who are barely scraping by holding too much crappy paper turn tail and the run on the Rock in the UK not out of the question for a few US Non bank financials ... some forced to hide under chapter 11 bankruptcy laws ... everything repaired with a band aid to get banks to lend to each other undone and liquidity in even more dire straights 10 times worse than in August. Banks wont lend to each other let alone clients .... it places direct pressure on the whole economy ....


US Fed's response ... cut rates again ? Well if they cut rates in response to radically rising CPI inflation I suspect the dollar will crash and not to the extent of the Asians since most of them did 100% backwards in the blink of an eye. I think 15-20% .... and all bets are off. Oil could go nuts either way .... massively falling US dollar eventually means it will go up but like in August it initially went the opposite direction ...


Being blunt ... the only response the US should be having if CPI goes up is to raise rates and reverse the recent cuts. anything else and they are courting and daring the rest of the world to buy any currency other than the USD.


It ain't going to happen ... the raising of rates ... so we go down the other path of letting inflation out of the bag after 30 years. US dollar slammed ... cannot see the Chinese sitting by and not moving whole hog despite holding lots of US assets and bonds. US imports more inflation because imported goods ... all of them will reflect the lower purchasing power of the USD.


Bond markets, M+A debt ... and equity markets in the resulting carnage all about the same.


What amazes me frankly is after having the bell rung and hedge fund after hedge fund closed out of margined equity position after position ... basically a week later they were all back buying things back to previous levels ... and in some cases a lot higher.


Do we never learn ? It seems so.


For the retail side here in Australia a record number of enforced margin stop loss orders were done by CBA that week back in August. people leveraged saw their 50% equity in a stock due to the stock falling 25% go to near zero ... and loose their money. the response and think about it for many was ... on shucks the market tricked me and stopped me out and many went and got more money buying back in and hold the same stock ... leveraged again saying to themselves if it happens again I will just buy more.


Well this time if it happens I suspect the 15% option on correction size is off the table ... has nothing ... not a thing to do with underlying strength of companies or their P/E's or outlooks ....


This goes to the whole fabric of the financial system when things go nuclear .... maybe its not a full scale nuclear correction but ... stuff me ... a twit who bought the latest fad stock on margin stopped out with 100% losses was it appears back with the same position 3 weeks later and with a firm conviction he will not sell out this time and stick with it.


At the end of the dot com boom I suspect some poor saps were talking lovingly about Yahoo when it hit an implied P/E of 500 ... even when its started sliding its just a good time to buy some more ... when it had lost 95% of its value from its peak 19 months later the same person ... well was broke and with little chance of financial recovery and his position had been closed out.


We just avoided the bullet last time and in reality I suspect the fact we have already been there just makes it easier for us to go back there in very short order.


When the money stops flowing and even the central bank is forced to buy commercial paper to try and stimulate some liquidity was the closest we have been to 1929 ever.

Sure the markets are not over extended on a P/e basis ... but by every other measure out there if anything the credit side and expansion of the the credit size is a bubble . When a country like the USA has GDP growth of 3-4% but credit keeps growing overall at 15% at some stage someone has to go ... hey this isn't right ...w e cant keep increasing the level of borrowings like this.


The shocking thing is for every US person employed the US debt number per capita is US$55,800- and growing at 13% as of the latest numbers. If CPI and wages are not growing at the same pace ... the economy either ... aren't you just a little worried about the servicing of this debt ? On top of this we add a trade number and govt deficit of similar proportions and frankly something has to break. Whether its now of in 2 years when it exponentially increases to something larger.


Sorry another messy ramble ....


On the 14th may 1986 Our treasurer of the time warned that Australia threatened to become a banana republic if it didn't clear up the mess of trade balances and debt burdens and govt overspending.


Some things they did well on others ... not so well.


But this was a wake up call for the thing that swept our region 10 years later and if Australia had not cleaned house and continued to clean house with the change of govt just prior to the crisis ... when every economy in the region bar none was smashed to hell ... we would have followed suit.


Now the US ... go bless their cotton socks ... cut rates of tax for the very rich ... adding 2 trillion to the US govt deficit woes ... has run a red number peaking at US$405- billion two years ago ... a trade number from pure hell ... US$730- billion has a net debt number which is frankly stunning not in just size but a per capita burden and no signs either the US govt black hole is about to be repaid and the US trade side when one imports 12.5 million barrels of oil a day a mere US$30- increase I suspect will add hmmm US$150 - billion to the number. Total US debt I believe sits at US 9.2 trillion ....


As Sky said the CPI is understated on official numbers I suspect we all know know that but being faced with no place to hide these impacts .... and seeing inflation break out of a band that has not been broken for over 10 years ....


the response to date ...


No lets cut US rates. Not stem credit growth ... or reverse the idiotic tax laws for the rich where Buffett who wants them out back to old levels by the way pay a marginal rate of 15% yet his secretary pays a rate of 30% marginal tax.


Markets and free markets even ones with dirty floats or as I suspect with questionable numbers like the US economic numbers presented at times being in the fiction section ....

markets reach a point where faith and confidence is lost in them and rightly so. we have scene it all in individual stocks and I suspect we see a rejection of the US dollar as a base currency and for very good reasons.


We have a bloated 600 lb moron with an IQ of 40 as the leader of the free world or so it seems from their economic policies.


What is not apparent other than to a few like Rogers in the below link ... is the fact that the US believes still it is the leader and it plainly is no longer the case and the action by the US fed and rejection and revaluation of Oil and gold to account for moves in the underlying US dollars demise .... really make me think that if the CPI comes out as I expect they will either not act or come out and refuse to act to stem inflation and the response on the equity side hearing the US fed will not raise rates will be relief ... on the other side the dollars slide will possibly make them think twice ... but the key in the end the US bond market will go nuts. A central bank not putting the brakes on CPI rises ?


So CPI goes to 3.5-4% ... wage demands same ... price rises across the board the same ... none good for business. Dollar thumped China revalues 10% in short order ... US imported goods since they like us have no real manufacturing industry for most common labor intensive goods have a price rise of 10% which leads to a further demand for more wage rises ... and the continual sell-off of the USd has seen OPEC cut supply when the price of oil is US$120- ... further causing US workers to demand more price wage rises .. causing these rises to be passed on and meanwhile the US dollar drops another 10% causing china to adjust again in one move by 10% and leading to yet another US wage demand which in turn leads to another price increase for everything from Apples to Zoo entrance fee's.


Whilst they can dismiss and fustigate all they like if CPI goes up 3.5% workers will demand 3.5% rises. Its just the tip of a very slippery and dangerous slope the yanks are playing at and the yanks laugh at Mexico and its economic performance and debt and currency woes ... I suspect in the not too distant future countries like Argentina and Brazil and Mexico and Thailand and Malaysia and the Philippine's and Indonesia might be needing to send some financial experts to teach the US how to get out of a debt pickle.


Whilst the absolute level of debt in the US is just broaching 70% of the total GDP of the nation I know we in Australia post float had to be forced to have our interest rates miles above the US as we were perceived as not such a great risk.At times this differential we had to suffer above the US to attract funds to pay off our negative trade numbers and foreign debts approached 5% over US rates.


It is an interesting world we live in and my own call is if it goes nuclear the US Fed can set rates wherever it likes 1% for all I care . To attract funds to the US since they run the govt balance in the red and the consumer side even more in the red ... to attract these funds if we go nuclear is not going to be a mere 1% but a 5% margin to compensate for such a risky endeavor and a currency and economy being run by MR fatty ... who despite 3 bypasses is asking for more fried food please.


the credit side to companies I thought was insane lending to sub prime and risky M+A at virtually the same rates as a AAA bank ... this is on a macro scale the whole thing and overrides any other concern ... any others its the sovereign risk of the worlds largest debtor nation and them demanding and insisting and getting a rate of return for a 10 year bond at 4.35% when their inflation and outlook is far worse than our own ... far far worse ... yet the rate on the Australian bonds reflect the current cash rate and at 6.5% ish for the best performing currency and bond investment for the last 5 years seeing an almost insane 70% currency gain and a yield at least 2% above the US treasury bond off the day ... what makes me think the world is insane and things are about to change ... is if you were a European investor you have lost 40% via the currency and returned 10% less via interest for the corresponding period.


Is the world run by morons ? If your bullish the USD over a 10 year period with twin deficits and a massive debt load compared to say the JPY a large creditor nation with the opposite or China .... or even Australia whilst we have a trade problem still ... 300 million tons of Iron ore more exported will square it let alone 300 million barrels of oil equiv via LNG coming on line 2009-2014 Pluto Gorgon Browse and others.


This has been a nirvana and I find the whole thing insane and just showing how stupid people can be. Only thing which has kept the glue held together has been the falling US bond yields an the capital gains are multiplied basically by the length of the paper till expiry. so a mere 0.5% fall in yield compensates for a 5% fall in the currency.


Its been going on for years and the US dollar as a safe haven and base currency ...blah blah blah .... wrote a paper on it for some very senior and cluey guys in investment banking about 18 months ago and begged them to invest in any currency other than USD as Australian based investors. Given the choice of JPY vs USd go for the JPY ... EUR or USD investment go for the EUR. Anything but the USD. So my view on this is not a new one. Sadly I didn't hear back from them and watched them invest 90% in US based assets with predictable results given the level of the AUD . How to loose money when global equity markets trade at all time highs.


Sometimes Scientist should never be allowed into management. the US treasury secretary is an ex Investment banker himself and like the Investment bankers from oz who wanted to be fund managers in foreign currencies starting to come to the conclusion they make worse currency managers than scientists make as CEO's of listed companies and thats really saying something.


Does the US credit market implode to the extent I am suggesting ? Why not. The reason used at present to justify the absurdly low rates they charge verses what appears to be shocking risk both currency and longer term debt servicing ability is they have no other choice but to invest in the US markets since they are after all as per normal the biggest and the best and in this case the largest debtor nation on the planet.


I know for myself I would not be lending them at a rate below our own 10 year bond rate and with similar last reads on inflation and ours likely to go down since our currency has gone up and we are importing Deflation and the US the opposite are they mad ? To demand 2% less for bond same term ... but one countries inflation rate is 2% lower than the other and the real return looks to be zero for one ... or about to approach it ...USA USA .... and for ours when the full impact of cheaper imports from China flows thru .... since we just have shot up 10% higher on the AUD CNY exchange rate in the last 4 months vs it and similar vs the USd ....


We are in reality going to be offering a real return heading towards 4% on our bonds and the US heading towards zero.


In the end these inequalities have to come to be paid for somewhere. usually its the exchange rate and when they start making the Peso look good is when investors start demanding higher and higher returns to fund them.


Another pet theory along the same lines ... longer term the interest rate differential where the US rates have been 2-6% lower than ours is actually reversed . Part of the stick in the mud is the fact that our RBA is acting like central banks for the last 30 years stemming demand pressures and overheating and inflation by raising rates and the US is being a plonker and ignoring inflation of possible impacts lowering rates and of the US GDP number was to be believed the US economy didn't slow down ... then again why did they lower rates if this was true ...


Only reason for the GDP number out during the week to be stronger rather than weaker is the deflator number they used which was ... a stunning 0.8% ... so the negative this took off the GDP was a mere 0.8% ... funny thing is and was for me ... US dept of Labor which prepares the US PPI and CPI numbers came out 15 days prior to this and said the US CPI was 2.8 % and the deflator is a similar number all be it slightly broader based but there was not a single reason why one was giving a read 2% different than the other ... is it maybe because one wants the deflator to be as low as possible since it a negative on headline GPD growth ... and the CPI itself is ... shall we say not reflecting the real CPI increases we face. The link below on the shadow CPI and GDP ect covers all this and found it after someone pointed it out when i wrote at length about our own CPI numbers and the fact they in reality dont seem to reflect reality and understate the CPI I suspect by 1-2% every year.


Enuf ....


This is it ...


Promise ... just wanted to cover this in detail and as to why I have exited 97% of trading stocks .. .leaving just 3% and down under 10% in shares for SMSF ..


Maybe could be totally wrong .


Feel fairly strongly however I am correct.


As Sky said its something i think we all know has been coming but .... having to face reality for the US bond side will I suspect be far too much.


I doubt a single economist in the US and certainly not in Australia goes to as much trouble as I do trying to predict the numbers and whilst a bit of work ... looking at what numbers are being replaced with along with weightings is far beyond their simple minds.





PPI I suspect Up 1.2% this read mid Nov

Up a further 0.8% for the next number out Mid Dec

and the Mid Jan number if oil remains at US$90 - per barrel its 1.2% ...


PPI up 3% in 3 months and 4.2% in 4 months.


CPI ...


Similar and possibly ignored month one ... next read 0.4 increase for the month

followed by 0.5% the next month and worse for the Dec Number at 0.6 % for the month taking the year on year read from 2.8 % to .... a 3.5% minimum and possibly to 3.7% .


None of it good and unavoidable unless they totally bugger the numbers beyond belief and after seeing the Commerce department do that very thing ... nothing is beyond them.


They seem to have employed the ex Enron accountants and Worldcom guys to put a spin on their numbers which at times makes me wonder how stupid market economists are along with other market commentators who seem to swallow every piece of it like its candy instead of bile from outside a pub on a Saturday night.


Sorry but since my calls on CPI and PPI are in advance had to put some caveats on them.

Dont think the Labor department can skew the numbers too far this time anyhow. The contrast in oil prices 12 months ago allows zero wiggle room.


As to how it unfolds ... the scnario's I presented even if I am correct on the PPI and PI and end results I doubt will be even close to how it unfolds. It is not possible to predict the cascades with any accuracy and anyone who suggests they can after trading thru at least 10 perfect storms in 24 years ... if frankly full of it.


Sorry long winded again just wanted it clear on a single thread ...


My view as to the long term direction of the equity market has changed as a result.


This is not s short term cash is king for me ... as the other thread suggests but a long term get the hell out of Dodge and the risk of a signifigant permanent loss of capital via staying fully invested and even partially invested has me on the sidelines till either I am very wrong or the dust settles. Not going to try and pick a bottom this time around as it has the potential this time around not to be some small short temr correction but a longer changing of the guard going on and all when this happnes all the goal posts are moved.


It did not matter for quite some time for stocks on Asian index's and two years later when it was still sucking mud thru a straw even for Singapore one of the better ones out there. Hong Kong has taken nearly 10 years due to their stupid moves. They shut the market down and then the Govt bought massive amounts of stock creating an overhang which lasted till onyl recently.


Nope ... their is something afoot and your all welcome to hold a party at 7,000 since its bugger all away ...


Have fun

Link to comment
Share on other sites

Might be a little clearer after several attempts ....


this is the current version ... basically an oil shock like seen before. Right now not on anyones radar ... PPI and CPI rising sharply in the next 12 months to around a 4% sort of thing an depends on oil price as to any further advances beyond that.




ABout the CPI measures being different ... same thing but one reported at 2.8% and the other an astounding 0.8%.


You know I just looked up the CPI vs Deflator and since they changed their methodology in 2000 so both were the same ....


The average 2000- 2006


CPI 2.66% vs Deflator CPI used in GDP at 2.59%


I think the Commerce departments use of a 0.8% Deflator vs the Labor departments official CPI at 2.8% is the funniest thing I have ever seen.


Will it spur them to bend the books some more ?


Possibly since they swallowed the swill without pause last week.


I suspect most have been lost in the wash on this discussion.


Sorry ....


Last time US CPI inflation was above 3.5% was in 1992 and that was when it was falling.

Back in 1987/88/89 the US inflation went from 2% to peak at over 5% in 1990.

US feds response was to tighten rates and kill the inflation in the bud. Rates were pushed up and up and up peaking at 10% in the US after a whole series of raises.


Fast forward 2007. Inflation was a pretty tame 2% in 2003 and crept up as the fed raised and raised rates during 2004/5/6.


In 1990 I suppose the memory of the awful 10% numbers of 1980 were still fresh in their minds. It is however interesting to see the response last time inflation reared its ugly head back in 1988 going above 4% and the US fed raising rates from memory up from 6% to 10% to squish the bloody thing down. Last time we were at similar levels the US fed funds rate was 6% and that was in a falling inflation market.


This time in 2007 we just lowered rates in a rising inflation market. Fed funds in the US at 4.5% vs a peak last time of 10% .


Real rates are basically going to be sub 1% this time around.


I don't know the outcome of any of it but the oil shock of the mid 1970's saw a tame inflation rise from

sub 2% in 1965

to 5.92% in 1970

to 9.14% in 1975

to 13.52% peak in 1980.


response this time ? Lets cut rates :}


Oh the DOW since someone asked


Peaked at 1,000 in 1966

low in 1967 at 800 or 20%


Tried the 1,000 again in 1970

crashed to 740 in 1971


Tried the 1,000 level again in 1973 and failed

hit an even lower low of 630 in 1975


Tried again the 1,000 level in 1976

flopped again to 800 ish .


Didn't break the 1,000 level till 1985.


Only 19 years of hell.




This is only part of the story and whilst the average dividend for the 19 years was a whopping 2.7% .... US fed funds rate peaked at 19% in 1981 and the average for the 19 years was 9.4% .... in other words you earnt 6.7% more in cash .


Break even 6.7% compounding even at 30% tax a real return of 4.69% ... hmmm 19 years worth ...a return of 139% better. So when did the Dow break even about 1991 or 26 years later.




If anything the comparison is worse since holding cash till 1991 from 1985 would have still earnt you a positive return of cash even after tax of 3.3% vs a dividend and it would have taken us out to 1993/4 as compared to 1966 to actually be ahead.


Quite some contrast. Not just the US fed .... but the consequences of the last time we saw anything like this.


Watch the US CPI and PPI ... also watch the Dollar and the response the oil price has.


I have to say its pretty clear oil is actually a scarce commodity with a limited shelf life and hitting supply constraints. In 2007 the largest suppliers as was the case in 1973 were the OPEC bloc and how disposed are they this time around to lowering the prices when people are willing to pay for their product and there is clearly no tapering of demand despite the price being multiples of what it once was.


Again it may sound idiotic but the OPEC nations mainly being in one region are not as disposed towards the US as they were once. Whilst I dont see any massive spike like the oil price saw when OPEC was formed and prices hit a 10 fold increase from the lows mid 1960's reason being we are virtually there from the low in 1998 at US$11.91 average to where we are now ... but it is certainly possible as stupid as it sounds to see them double even from here.


If you look at the tables on the inflation links above the worst years for CPI were ones where the oil price shot thru the roof. In 1974 inflation hit 11% and the price of oil doubled basically from the previous year. Same in 1979 and 1980 11.2% and 13.5% ...

US $15- in 1978 to US$37 average in 1980.


Great link and perspective on this ....




You might note the last set of average numbers on the oil price US$58.30 for the full year 2006.


Whats the price now ? Certainly not 100% higher like the oil back in the 1980's or 200% ... but its not that far away.


A US$95- average for 2008 as opposed to a US$58.30 ... 2006 thats 63% ....

looking up the chart and seeing similar years 1979/80 was close and god help us if we go there oil up same amounts and virtually a double act from the 2005 vs 2007/8 picture.


Not a thing to stop oil from being US$150- in 6 months. Supposedly the price rises being passed on like they were back 25 years ago will and cannot happen and I must go look in the mirror and tell myself that.




Is it OPEC pumping out as much as it can to ease the pressure ? Can it actually do it ?

Will everyone resist the urge to raise prices to compensate ? Just like back in 1979 and 1980 ? Is the world a much better behaved place ? Will China stop being a pain and demanding more and more oil ?


Back in the mid 1970's Finally the USA was out of Vietnam and Russia about to enter its own version of it in Afghanistan. Its funny how sadly sometimes history does actually repeat itself despite our best intentions and shocking lessons from the past.


I will finish on this note ... in the mid 1970's the US fed did a similar thing in response to a market almost in depression the stock market shed nearly 40% of its value in 1975 and the US fed slashed interest rates in response from 12% to 5%. Sadly it had to reverse this decision with inflation exploding again in 1977 and on-wards.


Right now this history lesson has not a single person even seemingly concerned at the US Fed and by some miracle which is beyond me to see they hope to avoid it this time around ?


This is my point and after several attempts at trying to make it clear .... as good as I can get.


and my poor fingers :{


History teaches us some lessons and at other times none at all.


What does every boom do longer term ? It goes boom.


Good Luck

Link to comment
Share on other sites

In reply to: kahuna1 on Sunday 04/11/07 06:59pm



An article on Yahoo agreeing with you: the Fed has chosen inflation rather than recession. Most of the article is concerned with the wealth destroyng capacity of inflation. Worth disussing as there will be many people around now who've never experienced it.


The thought that occurs to me is that although this might be the wrong move, at least the Fed knows that the usual response to a falling currency is to raise, not lower, interest rates. That they didn't follow normal practise might be that they're stupid, but it might instead be that they know something we don't. Given the dire consequences of lower interest rates (as you've discussed) it could be that the Fed is looking at even more dire consequences of higher interest rates. A major recession in the US would also presumably lead to a weakening $US with maybe a bigger impact than expected from interset rate falls. Maybe the Fed is in a position to see the second wave of the subprime problems, and that it's (much?) worse than the first wave.


You discussed the impact on equities, but I think US equities. No doubt Australian equities will be dragged down with rest, at least initially, but the fact that we don't have the debt problems, and rising interest rates, would be a possible correction to that.

Link to comment
Share on other sites

In reply to: kahuna1 on Sunday 04/11/07 06:59pm

Keep up the good work Kahuna...........you should be able to turn this into a book when you're finished: "The last bull market"?


So where was I up to with my running summary of this thread:

- Inflation in the US is already out of control

- The official numbers have so far excluded the real impact of food and fuel (two things Americans don't use much of?) by using 12 months averages and also weighting them down on the basis that they are temporarily inflated (for one reason or another)

- We're approaching the time when even using 12 month averages will lead to dramatically higher numbers. We've already seen the PPI starting to rise dramatically, the CPI can't be far behind.

- Traditionally, the cure for inflation is to increase interest rates (causing economic growth to slow). By cutting interest rates (choosing inflation over recession) when they should in fact be increasing rates, the result will be a continually falling dollar. Consequently, commodities such as oil, wheat, gold, iron ore, etc will continue their meteoric rise feeding inflation and continuing the cycle of dollar deflation.

- At some point, investors will flee from US$ denominated investments.........that is bonds, property and equities, and the result will be substantial falls in these markets.

- A geopolitical event which pushes an already tight oil market over the edge would accelerate the above.


How's that, did I miss anything major?

ok - so following this path, one would assume that the US economy will end up in recession?

So what do they have to deal with then? Stagflation? How do they get out of that?

A US recession would obviously be a shock to the global economy.......after all, that is why world markets dropped so much in August.......the threat of US recession?

So oil, iron ore, etc would presumably retreat somewhat.

But in Australia would we see our otherwise healthy economy threatened by global financial market instability?

What impact would all this have on Australian interest rates?

Some people have argued that any decrease in consumption by the US will be easily replaced with demand from the growing middle classes of China and India? That would be good for Australia if it were true?

My favourite book, The coming economic collapse: How you can thrive when oil costs $200 a barrel (by Stephen Leeb), predicts this sort of path........except it stems from peak oil...........rising prices, a fed preoccupied with protecting the housing market/economy from recession and also aware of the impact of rising interest rates on the record debt within the society......chooses inflation over recession........causing runaway inflation.........turning into hyper inflation............invest in oil stocks and gold, India and China.........and he uses the 70's as a guide to how each class of assets may perform. So that's what I've been doing........buying oil and gold stocks! I've recently sold my managed investments in ASX200 stocks.......and am now just holding my direct oil/gold stocks. But I've been giving some thought to a new plan........get out of the market all together, after it collapses, buy oil and gold stocks?


If the above is wrong, you can always buy back in.............







Link to comment
Share on other sites

In reply to: Ice9 on Tuesday 06/11/07 08:06pm

But I've been giving some thought to a new plan........get out of the market all together, after it collapses, buy oil and gold stocks?


Or keep a limited percentage of funds invested in oil/gas and gold producers with good growth outlooks and have a bunch of cash ready should a major correction occur.


Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now

  • Create New...