commodity inflation

Stuck on stupid I: More education bubble stuff

Posted by

1

I saw a young man, whose mother is from Boston, at the US Consulate General in Toronto; the consulate refused to acknowledge his US citizenship and issue him a passport yesterday.  He blamed the Tea Party movement’s influence on Congress.  He is by all counts a East coast liberal, 18-year old brain full of mush, wanting to emigrate to the US, get involved in the Democrat Party and the support the unions.  But is it his fault?  When the smartest people in the world are also stuck on stupid.

Look at Dr. Benjamin Bernanke, PhD.  He says the current inflation is low but caused really by a spike in commodity prices (from Reuters):

A recent increase in U.S. inflation is driven primarily by rising commodity prices globally, and is unlikely to persist, Federal Reserve Chairman Ben Bernanke said on Monday. …

Along the same lines, Bernanke argued that supply and demand factors are driving energy and commodity costs higher, but that these should eventually stabilize, allowing the United States to avoid any inflation troubles.

“I think the increase in inflation will be transitory,” Bernanke said in response to questions after a speech. “Our expectation at this point is that in the medium term inflation, if anything, will be a bit low. We will monitor inflation and inflation expectations very closely.”

Let me see if I understand Bernanke’s logic.  He believes that he can triple the money base in two years, but that commodity inflation is transitory.  Huh???  Get real.  If you want commodities to decrease you have to shrink the money supply.

Formerly with the Obama administration’s brain trust but now back in academia, Dr. Christine Romer, PhD, fears that there will be no QE III, for QE II worked so handsomely to get things going again.  Be careful with this video interview of Dr. Romer with my favorite Yahoo personality, Aaron Task: it can cause brain freeze, incredulity and a desire to throw things at your computer monitor.  Dr. Romer believes the best way to solve unemployment is through debauching the currency.  Of course, for the last two years, that’s exactly what the Fed has done, and the employment rate is pretty pathetic.  So what do you do when a policy doesn’t work?  Well it is obvious that you didn’t do enough of it.  So QE II is faltering because Bernanke hasn’t yet promised QE III.  Amazing.

Is it time to buy US? I. Studying the fundamentals

Posted by

4

Blogging has been a great help to DIY investors.  They can formulate their own strategies in writing, see what works, and share their knowledge with others.  Bloggers often have skin in the game; it might not be very much skin, as many are not rich people, but they are real investors and not like young journalists who don’t really have much hands on experience with trading or owning anything more elaborate than index or mutual funds in their RRSP accounts.

One of the clear reasons for thinking that many financial journalists are not particularly knowledgable about investing is that they are always engaging the advice of “experts” who are wrong most of the time.  Blogger Devon Shire is hypercritical of Robert Prechter, whose predictions are often dead wrong.  Another famous talking head is Dennis Gartman, whose own fund, HAG.TO, has remained essentially static since the fund began in 2009 while the stock indexes have greatly improved.  So why is this guy on TV?  He’s doing worse than an ING Direct savings account, where at least your money gets 1.5% interest.  The original investors of his HAG’s IPO at $10.00 are still 35 cents below water.  In the meantime, the Dow Jones and the TSX are both up about 60%.  How can a fund lose money in these conditions?  Why does Dennis Gartman get on TV and why do so many financial advisers read his famous Gartman Letter?  I think it may be because the journalists and the advisors are themselves incompetent.  At least all the many sheep following Warren Buffet around can say he is the best investor of all time.  A proven track record is actually a sign of competence.  But what proves that Gartman or Prechter know what they are talking about?

Bloggers, who have skin in the game and gain experience as they go, thus contrast with financial journalists.  Consider the Financial Post’s John Shmuel has a column with the title, “Lofty loonie spells buy opportunity”; but just a few weeks ago, he’s done columns on why Canadian stocks will outperform.  So why would he change his mind?–Or does he even see the contradiction? Well, as a journalist, he’s not actually trying to present a coherent strategy but information as it comes to him.  So I find that journalists can be great sources of information but terrible sources for eking out an investment strategy.  Why does Shmuel think that the lofty loonie spells a buying opportunity for US equities?  It seems for no better reason than that loonie is at a three year high.

Well, I did a few blogs about how and why I short the US dollar by using leverage in my US margin account to buy Canadian gold mining or oil and gas companies (e.g., abx, gg, erf, pwe, pgh).  The dividends from the oil and gas companies cover the interest charges and some.  Later, I added the selling of put options on the same equities, and reduced my overall cost of carry, because the leverage is now pushed off to some time in the future and I don’t actually have to pay interest on it today.  Has this strategy worked?  Extremely well.  Now that the loonie is at a three year high, will I now go long on the greenback or US equities as Shmuel’s article advises?  I don’t think so.  Consider the following chart (source Yahoo! Finance, straight line is mine):

What we see is that the loonie hit a low of $1.61 in 2002 and has basically improved in a nine year trend against a dollar.  Once the extremes of 2008-2009 are removed, a secular trend emerges which would suggest that the greenback will continue to move down against the loonie unless the fundamentals that caused this trend are changed.  If we looked at gold or oil against the dollar, we will see the same trend.  What we are seeing in the chart is US dollar inflation.  Not that the loonie is much better, but what happens in periods of inflation is that the cost of commodities rise.  Since the Canadian dollar depends so much on commodities, then whither commodities so the loonie.  If the price of commodities is increased by the inflation of the US dollar, can we expect this trend to reverse?  I think so if any of the following events were to happen:

(1) If Bernanke gives up QE.

(2) If Stephen Harper announces a deficit budget in the order of 150 billion or more (its is currently projected at 45.4 billion).

(3) If the US Congress makes serious cuts or attempts to balance the US federal budget.

(4) If the Chinese and other foreign investors decide to abandon Canada.

Let’s discuss each of these issues:

(1) If Bernanke gives up QE. I fully expect him to announce QE 3 in the next few months.  If he doesn’t continue to implement QE then the US government will have to make serious cuts of a trillion or so dollars from its current spending.

(2) If Stephen Harper announced a deficit budget in the order of 150 billion or more.  The Canadian population is about 1/10th that of the USA.  Therefore, the Canadian deficit would have to reach 150 billion in order to match the magnitude of the US deficits of 1.5 trillion.  I don’t see this happening under Harper’s watch.  In fact the trend is that the deficit is dropping in Canada.

(3) If the US Congress makes serious cuts or attempts to balance the US federal budget. This won’t happen until a cost cutting president gets elected.  It may actually never happen.  But the new Republican House is arguing over small cuts which won’t make any difference in a 1.5 trillion or so deficit.  Cut a few hundred billion out of that, and you are still over $1 trillion.

(4) If the Chinese and other foreign investors decide to abandon Canada. Right now, China, Korea, Thailand, Japan are all pouring money into Canadian resources.  Heck, foreigners are even buying our sovereign debt.  I see this trend continuing, as Canada has what these economies need, commodities.

The economy in the US is bad.  I’ve lost money in the US in a bad real estate deal started in 2008.  You won’t see me fall into that trap again unless the secular trends change.  My feeling is that my reasons for shorting the US dollar haven’t changed because the loonie has improved to $1.03 US.  This is a sign of secular trend not a buying opportunity for US stocks.

And if you ask me why I expatriated from the US?  I’ll tell you now that it’s so that at least one of my dad’s four children will still be able to take care of him in his old age.

Update:  Why pick on the Financial Post and John Shmuel?  David Berman has a similar article at the Globe & Mail: “Bruised greenback an opportunity for Canadian investors.”  Like Shmuel, he makes it clear that the US dollar is at a low but doesn’t seem to deal with any of the secular trends that put it there and then irrationally states:

It seems likely that the worst of the freefalling is over, given that the factors that drove the dollar down – including massive deficits and stimulative monetary policies – will probably move in reverse as the economy improves.

But he provides no actual proof that the US economy is improving.  That’s just baseless optimism as far as I can see.  Personally, I doubt that the damage of the QE that Bernanke’s already done has run its course.  Some inflationistas believe that when the economy actually improves, that’s when we will see the full effect of monetary inflation, because then velocity and credit will also expand.

Hyperinflation is now here II: Food prices

Posted by

11

Bruce Walker writes today at the American Thinker that food prices are what is going to do in President Obama’s chances in the next election.  One of the signs of hyperinflation is spiraling out of control food prices, and Walker points out that the food commodities are up 27% over the last six months.  I don’t know about you, but a 54% annualized increase in food commodities looks a lot like hyperinflation to me.  I wrote a post in August 2010 that dealt with food prices, which I reproduce here:

August 3, 2010

What’s wrong with inflation? Do you have enough to eat?

Monty Pelerin has a excellent article on inflation this morning.  He maintains that the great temptation for government will be to try to solve the problem of debt and unfunded obligations by inflating it away, and that, since politicians are cowards, they will not make the tough decisions to avoid inflation.  He writes, however, about the consequences of inflation:  “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”

I believe that the real danger of inflation may lie in the consequences it will  have on the food supply.  Never mind that food shortages have never been a problem in the living memory of most North Americans (unless they are over 75 or immigrated here from a war zone or something).  Today, obesity in developed countries is feared more than starvation.  So I made the following comment on Pelerin’s blog:

I am reading Adam Ferguson, When Money Dies (1975). He tells the story of Frau Eisenmenger, an Austrian who at the end of WWI had sufficient investments to live on and care for her family (31). She went into her bank in 1918 to withdraw some funds and her banker advised her to buy Swiss Francs, but it was illegal to hoard foreign currencies, and so she declined. Eventually, her savings became worthless. Her situation was greatly helped by her daughter working in the “American mission” paid in dollars, renting a room in her apartment to an American, and speculative investments in the Austrian stock market.

I fear that what will happen is similar to Europe in that period, when food was scarce and required a large percentage of income to procure. Eventually, the price of food will sky rocket and so more dollars will be created ex nihilo. Then the farmers will refuse to supply their food to people for worthless dollars and food stamps from the government, and they will have to stop producing–because their costs have to be covered too. Then, we will see shortages like never before. A farmer offered Frau Eisenmenger three month’s provision for her grand piano (33); and an acquaintance of hers sold her own piano for a sack of wheat flour.