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By Mike "Mish" Shedlock | 15 October 2009
Inflation or Deflation? "It's Definitely Deflation," Mish Says. Ask an economist about their biggest concern about the U.S. economy and you're likely to get one of two starkly different answers: America is either about to be swamped by a major bout of inflation or decimated by deflation. Count Mike "Mish" Shedlock of Sitka Pacific Capital among the deflationistas.
While some consumer prices are rising and the Fed is printing money like crazy, Shedlock says deflation is "definitely" a greater threat than inflation. "People looking [only] at [consumer] prices are completely missing the mark," says Shedlock. "Consumer credit is falling, banks aren't lending, and we've got bank failures at a massive rate. These are the same kind of conditions as in the Great Depression". [[Especially from about 1933 on, when FDR succeeded only in inflating the CPI and the stock averages.: normxxx]]
Indeed, bank lending has tumbled and the Fed reports consumer credit has shrunk for seven consecutive months and was down 5.8% on an annualized basis in August, the most recent month available.
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Tech Ticker— Ignore The Euphoria
Dow breaks 10,000: don't get caught up in "euphoria", Mish warns. The Dow Jones Industrial Average closed above 10,000 today for the first time in a year, and more than a decade after first breaking the mark. Since hitting lows in March, the Dow is up an astounding 50%, while the S&P 500 has gained 60%.
But before you get your broker on the phone or start trading that dormant online brokerage account, take heed of this warning from Mike "Mish" Shedlock, the blogger behind MISH'S Global Economic Trend Analysis: "Five years from now, I think its quite likely the Dow is not going to be much more than 10,000," he says.
Why so negative? "We've still not solved any of those structural problems" in the housing, banking and debt markets, that caused last year's crisis, he claims. Shedlock's advice: ignore the euphoria, and "take some chips off the table. Now's just not a good time to be invested". Shedlock, also an investment advisor representative for SitkaPacific Capital Management, thinks investors are better positioned in gold and cash.
Tech Ticker— Thoughts On Gold
Exploding Gold Prices have nothing to do with inflation. If there are two things that just about everyone agrees on these days it's that the dollar will continue to plummet and gold will continue to soar. The dollar will keep plunging, everyone agrees, because the Fed will keep printing so much new money that soaring inflation will eventually turn it into toilet paper. Gold, meanwhile, will go to the moon as investors rush to try to hedge against this impending monetary disaster.
Balderdash, says Mike "Mish" Shedlock, blogger and investment advisor with SitkaPacific Capital Management. The dollar's a buy here, in part because everyone is so darn certain that it's about to collapse. And gold?
Well, gold is indeed going higher, Shedlock argues, but not for the reason people think. Gold is actually a lousy inflation hedge, as evidenced by the period from the late 1980s to the early 2000s in which there was plenty of inflation but gold prices plummeted from $800 to $250.
But gold IS a good place to preserve value during a credit crunch, Shedlock says. And that's what we're still having here. So Shedlock is long gold, too, even though he thinks everyone else is buying it for the wrong reason.
Year-Over-Year CPI Negative 7th Consecutive Month; Rents Decline First Time In 17 Years
Bloomberg is reporting Consumer Prices in U.S. increased at slower pace. The cost of living in the U.S. rose at a slower pace in September, showing inflation will not be a threat as the economy emerges from the worst recession since the Great Depression. The 0.2 percent gain in the consumer-price index followed a 0.4 percent increase in August, as forecast, figures from the Labor Department showed today in Washington. Excluding food and energy costs, the so-called core index also climbed 0.2 percent, more than anticipated and pushed up by health care and a rebound in auto prices. Rents dropped for the first time in 17 years.
The number of Americans filing first-time claims for unemployment benefits dropped last week to the lowest level in nine months, indicating the 'improving' economy is leading to a slowdown in firings, another Labor Department report also showed. Applications fell by 10,000 to 514,000 [[that's only 2%, or well within the "noise" range: normxxx]]in the week ended Oct. 10, lower than forecast, from a revised 524,000 the week before. The total number of people collecting unemployment insurance also decreased. [[About half a million simply ceased to exist, since they 'hadn't looked for a job in the last month'.: normxxx]]
Compared with a year earlier, consumer prices were down 1.3 percent. For the core index, prices climbed 1.5 percent from September 2008 after a 1.4 percent increase in the 12 months ended in August. Food prices, which account for about a seventh of the CPI, decreased 0.1 percent in September, reflecting cheaper meats and produce. Lower food prices are dragging down revenue at some businesses. Spartan Stores Inc., which distributes groceries and runs supermarkets, said lower prices are hurting sales.
Dennis Eidson, the Grand Rapids, Michigan-based company’s chief executive officer, said yesterday in a statement that he expects weakness for the remainder of its fiscal year due to "product price deflation" as consumers "behave cautiously given the challenging economic environment." Rents, which make up almost 40 percent of the core CPI, fell. 'Owners-equivalent rent', one of the categories used to track rental prices, decreased 0.1 percent, the first drop since 1992.
Owners' Equivalent Rent Drops First Time Since 1992
Although new claims for unemployment are 'falling', they are still above 500,000 and businesses are still reluctant to hire. The combination certainly suggests higher unemployment numbers coming up. I do expect food prices to continue to decline; however, the most interesting thing in the report is that rents fell for the first time in 17 years. Let's take a look at just how realistic that is.
OER From Twilight Zone: Please consider a few snips from Bill Gross Bets On Deflation, written September 29, 2009.
Given that the official measure of CPI is based on rents NOT housing prices, please consider the following collection of links courtesy of Lanser on Real Estate:
Really? Rents Fall Almost Everywhere.
- Manhattan: Apartment Rents Drop as Employers Cut Jobs
Houston: Renters are snagging deals in a slowing local market
Tuscon: On your mark, get set, go! Apartment firm makes game of it.
Nashville: Apartment rates squeezed by lower demand
Orange County: O.C. renters get twice the freebies
U.S. Nationwide: Renters look for thrifty comfort, not style
Tokyo: Apartment rents under pressure
Middle East: 17% fall in rents seen in Qatar this year
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