Friday, January 1, 2010
Profits? Nah. Many Businesses Just Reaped Paper Inflation
Anon wrote: "FDR, isn't it possible that banks that borrow money from the fed are putting it somewhere where they can get a higher rate of return?What is keeping them from taking their $'s overseas, which is what the carry-trade crowd is doing?
The Fed makes a nice profit, the banks still profit. For now..."
There is no easy rate of return above 0%. That's why the world's wealth is piling onto 0% treasuries at the rate of about $0.5T per month. Smart businesses know, or sense, that the natural state of affairs has shifted to dwindling profits, as opposed to the easy inflationary "growth" of yesteryear.
The businesses that will really suffer those that refuse to acknowledge that most of their previous growth, and thus increasing access to capital, was nothing more than the trickle-down result of an unrecognized Fed-government-banker Ponzi scheme. Most business in the US are insolvent, at least partly because their business models simply don't work in a stable or deflationary environment. In fact, they never worked, but for a dwindling domestic dollar covertly chomping away at their liability column.
Deflation is probably running between -10% and -15% today. During the Great Depression the deflation rate peaked at about -12%, we should double that during our peak crunch years. This is a most likely a Grand Supercycle topping process, meaning the wave length from our s 5th wave to Wave 1 reaches back several hundred years to pre-American Revolution, at least, possibly even capturing another degree, back to a Roman W1-2. The magnitude of our top formation is the largest challenge and also the largest opportunity.
The long-term deflation trader of today is much like the one-in-a-million inflation believer in 1932+. Grandchildren will be the most likely beneficiaries, after decades of grands fits and grand starts. It'll be easy to die thinking you were wrong, only to miss the next harrowing tumble.
Bottom line:
Money frozen in the form of assets will lose value for decades. Stuff inflated cash into a time capsule and forget about it (or more risky: short assets in all classes).
Subscribe to:
Post Comments (Atom)
"Deflation is probably running between -10% and -15% today."
ReplyDeleteI am postioned to benefit if this is true. I would like to believe it is true. I have sought out the preachers of deflation including yourself. I have been following the Prechter game plan for the last 6 months, seemingly to no good end. Sadly, I do not see the evidence of the sizeable deflation that you describe. Could you elaborate?
"Sadly, I do not see the evidence of the sizeable deflation that you describe. Could you elaborate?"
ReplyDeleteIn the 2000-09 decade, rotating major stock indexes (continuously pumped with new companies) like the Dow are down 20% in absolute terms and 80% in terms of commodities buying power. The NAZ is down 65% in real terms and down 96% in terms of commodities buying power.
If that isn't enough for you, give it another decade.
...and pre-1973, when the gold/dollar peg was lifted, the Nasdaq would have been overtly reported a 96% price decline.
ReplyDeleteNow the deflation is better hidden (though the losses are the same) which is no doubt why we have another 90% to fall over the next 10-30 years.
Thank you for your work. I have been reading you for a little while. I have read much of your archives. I check in everyday.
ReplyDeleteI think that commodities must decline as well in the deflation you foresee (think DOLLARzilla). A deflation calculated by reference to "commodities buying power" is a somewhat unsatisfying or incomplete deflation. I am in US dollars, and only price declines measured against US dollars will benefit me.
I think you'll see both. As I've said quite a bit, the odd think about commodities buying power is that it ebbs and flows inverse to inflation.
ReplyDeleteWhen inflation is all the rage, commodities prices soar but their buying power, their value, dwindles. No one really cares about commodities when paper is in--and vice versa.
Asset prices have nothing to do with deflation or inflation. We can have deflation and deleveraging and still have corporate profits rising and thus stocks rising. Deflation can continue and asset prices can continue higher, as they will. Just watch real profits and the market will reflect this reletively accurately. That is why the market traded up so much. Anyone following profits made money, anyone who bet against profits are down. Very simple when you stop trying to overthink it.
ReplyDelete"That is why the market traded up so much. Anyone following profits made money, anyone who bet against profits are down. Very simple when you stop trying to overthink it."
ReplyDeleteWhen I mentioned business "profits" in the title, and talk about reaping inflationary "growth" in the body of the article, I'm referring to the sum total of the last 88 years (post-1932) of corporate-owned-government action, not just the last few months.
GDP should come in close to 4 or 5% in 2010. Do you think thus will cause prices to cine down? We had a huge deleveraging crash and those caught in it are hoping for another one so they don't look like the only fools. Happens everytime. In 2007 the masses thought the market was going higher forever, now the same crowd thinks the market is going lower forever. Watch as the recovery surprises everyone in 2010 and companies start to panic to beef up inventories. The cycle will be so rapid that job growth will take off in the 2Q at a stronger pace than ever. I see unemployment back in the 8% range by Q4 and falling hard.
ReplyDelete"GDP should come in close to 4 or 5% in 2010."
ReplyDeleteYou can increase GDP by burning down buildings.
In the final analysis, it is (heavily) deflationary to increase government debt without a greater benefit than cost, because it takes wealth from the peoples and exports it to the Federal Reserve's private shareholders.
Paying more interest for nothing might shift the numbers, but only because the numbers are chosen to be easily manipulated.
Anyone can show there is no deflation with meaningless numbers designed to take money from those dumb enough to believe their home and asset prices are soaring, but that won't raise prices either.
"GDP should come in close to 4 or 5% in 2010."
ReplyDeleteYou can increase GDP by burning down buildings.
In the final analysis, it is (heavily) deflationary to increase government debt without a greater benefit than cost, because it takes wealth from the people and exports it to the Federal Reserve's private shareholders.
Paying more interest for nothing might shift the numbers, but only because the numbers are chosen to be easily manipulated.
Anyone can show there is no deflation with meaningless stats designed to take money from those dumb enough to believe their home and asset prices are soaring, but that won't raise their home and asset prices.
Also consider that some states, like CA, have a 50-90% drop in home prices depending on location. They need around a 300% rise in home prices to get financiers back on track, not 5%.
http://www.zerohedge.com/article/government-your-legal-right-redeem-your-money-market-account-has-been-denied
ReplyDelete