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Five Things for Tuesday, May 26


Agreeing to disagree about inflation, deflation; five deflationary forces to watch now; the demise of bling and much more.

1) Agreeing to Disagree About Inflation, Deflation

Zimbabwe. Wheelbarrows full of dollars. Hyperinflation. Barely a day goes by without someone warning me of the hyperinflationary collapse hanging over our heads.

A couple of months ago it was Morgan Stanley (MS) ringing the hyperinflation bell, warning that "with policymakers around the world throwing massive conventional and unconventional monetary and fiscal stimuli at their economies , we think that it is worth exploring the black swan event of very high inflation or even hyperinflation."

Which is true, but misses the point. And what is the point? Demand.

The reality is that the economics of credit creation is no different than the economics behind the creation of all goods and services. It's a story with two sides: supply... and demand.

Perhaps because the secular credit expansion comprised a span of more than 20 years, many people, including Washington politicians and mainstream economists, are making the mistake of focusing only on the supply of credit. The demand, they assume, will always be there. And that is a false assumption.

Yes, inflation will one day be a reality, but that reality is so far into the future it might as well be behind us. Recently in Time magazine, Peter Schiff was trotted out as the poster boy for doom & gloom: "Why We Should Listen to Peter Schiff's Bad News."

According to the article, Schiff believes "the "phony economy" of the U.S. is headed for even harder times. He believes that the crisis-fighting measures coming out of Washington are merely delaying the inevitable, debasing the dollar and loading future taxpayers with huge debts."

Because I write about deflation it is automatically assumed that my views are diametrically opposed to Schiff's, which is not true. If we disagree, it's largely in the timing of dollar debasement, something I believe will only happen after massive debt destruction has occurred. As well, I am optimistic, perhaps foolishly so, for thinking that the social mood change to negative will ironically provide an opportunity to rebel against policy decisions and the institutionalized inflationary policies that brought us to this point. (See, for example, last Friday's Five Things on the Potential for U.S. Debt Default and why that would actually be a positive for future generations).

2) Five Deflationary Forces to Watch Now

Meanwhile, there are at least five deflationary forces in the present one should focus on, leaving the inflation concerns for a future date, because a person could go broke preparing for inflation when we are barely a third of the way through a deflationary debt unwind:

1. Unemployment. Including the underemployed, we have a "real" unemployment rate of nearly 16%. All but six states lost jobs in April.

. Meanwhile, inventories and capacity remain extraordinarily high.

3. U.S. rail volumes are down 17.7% year-to-date, according to the Association of American Railroads, while worldwide air cargo volumes are running more than 20% below last year's levels.

Credit is tightening even as credit demand is plummeting.

Finally, these changes in consumption are secular, not cyclical; driven by a combination of forced and voluntary thrift.

3) Social Actions Result from Social Mood Change

Ran across an interesting question and answer with Robert Prechter in Barron's over the weekend. Although the focus of the piece from Barron's perspective was gathering some kind of market forecast, his answers were more directly related to social mood and explaining how it is that social actions result from social mood change, not the other way around as is assumed.

Take, for example, the following question: Will policy decisions being enacted now help stabilize the economy, or exacerbate the downturn?

On the one hand, Prechter explains, policy decisions made by governments hamper and ruin economies all the time. But it is important to understand that this kind of intervention does not affect waves of social mood. "On the contrary," Prechter says, "waves of social mood generally spur governments to act."

Citing policy decisions made following the 1929-1932 collapse, and later decisions made at the tail-end of the 90s boom, Prechter makes the case that these policy decisions did not cause any changes in social mood, but that the social mood trends already in place predicted the character of the policy changes. "Government herds, just like everyone else, but it is at the tail end of the herd, because it takes time for a consensus to develop so extensively that government has the public support to act."

4) The Demise of Bling

This piece on "forced thrift" hitting the culture of rap music made it into the Wall Street Journal this morning:

Culture of Bling Clangs to Earth as the Recession Melts Rappers' Ice

After years of starring in rap-music lyrics and videos, "bling" is losing its ring.

The recession is cramping the style of hip-hop artists and wannabes -- many of whom are finding it difficult to afford the diamond-encrusted pendants and heavy gold chains they have long used to project an aura of outsized wealth.

- Miguel Bustillo, Wall Street Journal, May 26, 2009

This is the phenomenon I first described four years ago in "The Demise of Bling." At the time it seemed difficult to imagine anyone in pop culture, and especially in certain segments of the rap music industry, embracing a bling-less world. Indeed, it goes deeper than merely embracing thrift and austerity as the focus, for now, is shifting to discussions of authenticity and what is real:

"Rapper 50 Cent has relished the chance to accuse his musical adversaries of not glittering like gold. During a radio interview, the artist, whose real name is Curtis James Jackson III, taunted rapper Rick Ross for wearing faux and rented jewelry. "Everything that you see has to absolutely be fake," said Mr. Jackson."

The Journal observes that, "[f]rom the dawn of rap music three decades ago, hip-hop artists have festooned themselves with gaudy ornaments to signify that they have risen above humble origins to become ghetto royalty."

Which is not entirely true. From the outset, there have always been rap artists who have made conscious decisions to rebel against the culture of bling. Where we are at any given point in terms of social mood waves has had a large impact on which of these artists have gained success and popularity.

For example, artists such as Boogie Down Productions, which featured KRS-One, The Jungle Brothers, Black Sheep, De La Soul, A Tribe Called Quest and Wu-Tang Clan all presented some form of relative rebellion against displays of gold and jewelry even if in some cases it was merely to react against the frivolity of it.

Now that we have a large degree shift in social mood, it would be reasonable to anticipate the coming dominance of "bling-less" rappers over those emphasizing it, and especially over those choosing the "fake bling" route.

5) News & Weirdness

Fed's Next Task: Reeling In Lifelines - Washington Post
Now, fears that the Fed's efforts to steer the economy away from a 1930s-style depression will push the country toward '70s-style inflation. Also, fears of a return to 50's-style discipline, 60's-style political instability; 40's-style telecommunication systems and an 80's-style fashion sense.

Localities Seek U.S. Support for Municipal Bonds - NYT
So much for "reeling in" those lifelines.

Libor Hides `Exceptionally Wide' Spreads by Banks Hoarding Deposits - Bloomberg
Drop in the London Interbank Offered Rate (LIBOR) masks a growing gap between the rates the biggest banks charge each other for credit.

Zombie Banks Walk Among Us -
In metropolitan Atlanta and the state of Florida more than 50 banks reported non-performing asset levels of 10% or more of total assets as of the end of March.

Housing Hitting Bottom by June Means Fewest New U.S. Home Starts Since '45 - Bloomberg
2009 housing starts will total about 496,000 homes, the lowest since the end of World War II.

No Sign Home-Price Falls Ending - WSJ
First quarter S&P/Case-Shiller U.S. National Home Price Index slumped 19.1% compared to a year earlier, the biggest quarterly decline for the reading's 21-year history.

Gold May Climb to Record $1,250, Standard Bank Says - Bloomberg
A break and close above $1,050.40 "provides warning that an important breakout" has occurred, says technician.

Obama Administration Sparks Battery Gold Rush
Energy Department soliciting applications for $2.4 billion in funding aimed at turning U.S. into battery-manufacturing powerhouse, according to Journal. Companies applying include General Motors (GM), Dow Chemical (DOW), Johnson Controls (JCI) and Ener1 (HEV).
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