Central bank nonsense
Claiming fear of deflation
Come to your senses
Claiming fear of deflation
Come to your senses
Showing posts with label deflation. Show all posts
Showing posts with label deflation. Show all posts
Thursday, January 22, 2015
Monday, April 30, 2012
Wednesday, December 29, 2010
Spiking Bond Yields Will Accelerate Housing Double-Dip
These things all feed each other. When our foreign creditors show insufficient appetite for our bonds, yields climb:
When yields rise, home mortgages get more expensive. Floating-rate ARMs get more costly to service. Homeowners lose equity faster. Foreclosures, forced sales, and abandonment follow. The market-clearing price for homes will sink:
Those of you who bought houses as rental properties in 2010 made mistakes only if you went into debt. That debt will be hard to service as deflation puts a ceiling on prevailing rents.
Oh, before I forget, let's note that China is reducing its export quotas for rare earth metals. This has nothing to do with the above, but everything to do with the gradual shift in prosperity from the Anglo-West to the East. Tesla Motors will have a very hard time getting lithium for its batteries unless it digs its own mine in Afghanistan.
Treasury market yields rose Tuesday after the government’s sale of $35 billion in new five-year notes drew weak demand. The annualized yield on the notes was 2.15%, the highest market yield on five-year securities since June and up from the rate of 2.04% on Monday on previously issued five-year notes.
When yields rise, home mortgages get more expensive. Floating-rate ARMs get more costly to service. Homeowners lose equity faster. Foreclosures, forced sales, and abandonment follow. The market-clearing price for homes will sink:
Housing markets have taken a turn for the worse, with the widely followed S&P/Case-Shiller index declining more than analysts had forecast in October, lending credence to the housing bears who have predicted a double dip.
Those of you who bought houses as rental properties in 2010 made mistakes only if you went into debt. That debt will be hard to service as deflation puts a ceiling on prevailing rents.
Oh, before I forget, let's note that China is reducing its export quotas for rare earth metals. This has nothing to do with the above, but everything to do with the gradual shift in prosperity from the Anglo-West to the East. Tesla Motors will have a very hard time getting lithium for its batteries unless it digs its own mine in Afghanistan.
Wednesday, November 25, 2009
Saturday, November 15, 2008
China's Golden Opportunity
China is looking to buy some gold:
China's desire to reduce its exposure to U.S. Treasuries, combined with its recently announced fiscal stimulus plan, spell trouble for Uncle Sam's plan to fund the TARP with new debt. Who will buy that debt if China doesn't belly up to the bar? Not me, unless they pay a whopping yield (15% or more).
Unfortunately, the deflation-fixated Anglo-West continues to misread the global impact of conditions in China:
Industrial overcapacity is IMHO more of a problem for the West, where labor unions and their political retainers fight tooth and nail for bailouts to stave off retooling. China's political system suffers from no such obstacle. China's fiscal stimulus will, at a minimum, flood consumers' pockets with money in the short term and provide price support for retail goods. Deflation in China is now a much less likely outcome.
Nota bene: Anthony J. Alfidi is long FXI (with covered calls), IAU, and GDX at the time this commentary was published.
Beijing is considering changing its asset allocations during the financial tsunami in order to build up gold reserves "in a big way," the source said.
China's fears about the long-term viability of parking most of its reserves in US government bonds were triggered by Treasury Secretary Henry Paulson's US$700 billion (HK$5.46 trillion) bailout plan, which may make the US budget deficit balloon to well over US$1 trillion this fiscal year.
China's desire to reduce its exposure to U.S. Treasuries, combined with its recently announced fiscal stimulus plan, spell trouble for Uncle Sam's plan to fund the TARP with new debt. Who will buy that debt if China doesn't belly up to the bar? Not me, unless they pay a whopping yield (15% or more).
Unfortunately, the deflation-fixated Anglo-West continues to misread the global impact of conditions in China:
After a recent visit to China, Nobuyuki Saji, chief economist and equity strategist for Japanese investment bank Mitsubishi UFJ Securities, issued a report warning that China could be on the verge of pushing the world into a deflationary spiral. The problem? Swelling industrial overcapacity, which threatens to undermine prices both for China's exported goods and its imports of raw materials.
Industrial overcapacity is IMHO more of a problem for the West, where labor unions and their political retainers fight tooth and nail for bailouts to stave off retooling. China's political system suffers from no such obstacle. China's fiscal stimulus will, at a minimum, flood consumers' pockets with money in the short term and provide price support for retail goods. Deflation in China is now a much less likely outcome.
Nota bene: Anthony J. Alfidi is long FXI (with covered calls), IAU, and GDX at the time this commentary was published.
Wednesday, November 05, 2008
Saturday, August 16, 2008
Inflation vs. Deflation
"Inflation is always and everywhere a monetary phenomenon." That quote is often attributed to Milton Friedman.
Does the U.S. economy face inflation or defaltion? Signals abound either way. But which force is stronger? For inflation to be truly resurgent, we would have to see more than merely a rise in the price level. Institutional demand for commodity investments can do that all by itself. Inflation would require a wage-price spiral as employers raise worker wages to keep up with rising prices of goods, if only to stave off demand destruction for their own products.
Problem is, the destruction of demand has a deflationary effect, as producers would eventually reduce prices to find an equilibrium point at which a price signal would clear their goods from the market. Note that I said eventually, not immediately. Our immediate future is where we see the inflationary effects of low interest rates continuing to stimulate demand for money in the form of corporate and consumer credit. A surge in inflation would need to see a surge in the money supply to meet this demand, perhaps in the form of . . .
. . . dollar dumping on a global scale. If foreign holders of U.S. currency decide they don't need so many greenbacks anymore, all that U.S. currency will come flooding back to American shores. You'd think a flood on that scale would prompt the Fed to raise interest rates to make the dollar look attractive again, but the Fed may be thinking instead of Uncle Sam's unfunded liabilities. The temptation to inflate our way out of paying the Baby Boomers' Medicare bills in full may prove too strong to resist. Our governing class may have already decided to trade away dollar hegemony in exchange for an easy way out of the U.S. national debt time bomb.
Does the U.S. economy face inflation or defaltion? Signals abound either way. But which force is stronger? For inflation to be truly resurgent, we would have to see more than merely a rise in the price level. Institutional demand for commodity investments can do that all by itself. Inflation would require a wage-price spiral as employers raise worker wages to keep up with rising prices of goods, if only to stave off demand destruction for their own products.
Problem is, the destruction of demand has a deflationary effect, as producers would eventually reduce prices to find an equilibrium point at which a price signal would clear their goods from the market. Note that I said eventually, not immediately. Our immediate future is where we see the inflationary effects of low interest rates continuing to stimulate demand for money in the form of corporate and consumer credit. A surge in inflation would need to see a surge in the money supply to meet this demand, perhaps in the form of . . .
. . . dollar dumping on a global scale. If foreign holders of U.S. currency decide they don't need so many greenbacks anymore, all that U.S. currency will come flooding back to American shores. You'd think a flood on that scale would prompt the Fed to raise interest rates to make the dollar look attractive again, but the Fed may be thinking instead of Uncle Sam's unfunded liabilities. The temptation to inflate our way out of paying the Baby Boomers' Medicare bills in full may prove too strong to resist. Our governing class may have already decided to trade away dollar hegemony in exchange for an easy way out of the U.S. national debt time bomb.
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