How much inflation is necessary to get the markets up?

[darwinslair]

http://bloomberg.com/apps/news?pid=20601087&sid=aERLpgz65Qto

Just as a matter of curiosity for me;  How much inflation do they need to keep the markets looking positive?  Or will the inflation destroy enough companies that it will further destroy the stock market?  Especially considering how many companies are so deeply leveraged that inflation will kill them once higher interest rates in the bond market hit?

Tom

[Atash Hagmahani]

Inflation is COUNTER-productive Bud.

I could explain it from a theoretical point of view, but I have a better idea: an extreme empirical example: Zimbabwe. Production shut down in Zimbabwe BECAUSE of inflation.

Conventional thinking is that as $$ multiply compared to the price of ANYTHING--let's say, stocks--then the price of that thing in $$ "should" go up. That is too simplistic a view. As productivity goes DOWN, and it is going down, it seems as though stock prices should go DOWN.

The two different forces are BOTH acting on the prices of stocks.

I think that when stock prices stabilize and actually start turning UP, you will nevertheless be disappointed in the performance of the markets. The reason is because prices of stocks will not rise fast enough to compensate for loss of buying power.

This is called a STEALTH BEAR MARKET. We had a horrible, horrible one from the late 1960s until the early 1980s. The stock market would rise a little, then collapse again, then rise a little, then collapse again...leaving the Dow Jones slightly CHEAPER at the end of the stealth bear...BUT, after taking into consideration inflation of everything else, it was the worst bear market in US history. Prices of everything else more than doubled, so the stock market was worth significantly less than half of what it was when the stealth bear started in terms of real buying power...BUT WAIT, IT'S EVEN WORSE STILL, because of the "time value of money".

If one had put one's money in commodities then (actually, Junior Gold Mining stocks in those days, which rose about 50-fold; we will NOT have a repeat this time--the juniors are getting crushed as they starve for capital), then one would have been making money instead of losing money.

Now think carefully about this, Bud, and tell me if my thinking is clear on this matter:

You have a gigantic demographic shift as the Baby Boomers CONTINUE retiring, and the generation after them is called the Baby Bust. Even such new population that we do have, is significantly poorer than the people who are retiring now are; they are janitors, fast-food workers, Wal*Mart employees, and so on (overall. The population is not only imploding, but the new generations are dramatically poorer and less educated than previous).

As the Boomers retire, they will be SELLING ASSETS. They will be selling: houses, recreational land, use assets, stocks, bonds, mutual funds, ETFs, Money Market funds, etc.

They will be BUYING consumer goods for consumption in their retirement.

I see a stealth bear market in ASSETS and a gigantic BULL market in commodities and manufactured consumer goods.

[The Future]

i concur. 

[Eddie]

re:I see a stealth bear market in ASSETS and a gigantic BULL market in commodities and manufactured consumer goods.

What kind of commodities and goods in particular?

[Dame]

Atash, I do not think your thinking is clear, on this matter.

Boomers will attempt to sell assets.  Their pension plan managers will attempt to sell assets, their 401k's will be sitting there.  Who is going to buy and at what price.  Boomers will not be in receipt of sufficient funds from the sale of these so called assets to have discretionary dollars to buy commodoties, most of them still have mortgages and credit card balances.  The STEALTH BEAR market ate the real equity.

The demographic reality is that the Bust was generated by the STEALTH BEAR.  Boomers forwent having children and raising them due to the inflation present in commodoties during the 60's-80's.  This inflationary piriod is also why the Bust generation found jobs rather than becomming educated; and why the Boomers did not retire much earlier and why the real economy has not expanded, heck maintenance and replacement were forgone.  The cost of apparent affluence sence the 60's has been loss of people in the age group currently capable of excess personal production compounded by the loss of skills necessary to produce.

So, who is going to produce these consummer goods, the fast food workers; and who is going to buy them; the retired AND AGEING, MALNURISHED Boomers who will progressively need the unpaid care of family, and ever increasing expenditure of what money they do have on limited (insufficient skill out their) medical people (at seriously discounted rates) to provide it.

And I believe this is the tip of the iceburg.

[Atash Hagmahani]

What kind of commodities and goods in particular?

Energy would be at the top of my list. Even as we slooooooooowly cut down on energy consumption, we still use huge amounts of it to move goods and services around. Even if we rebuilt industries closer to home, that would take ENERGY to rebuild them.

Foodstuffs that are widely useable in a lot of different ways, like corn and wheat. You can eat them as is if needed (don't have to fractionate them).

I think coffee and chocolate may soon turn into luxuries. Hershey's is lobbying to allow sales of fake chocolate (if you have ever had "chocolate" in Japan or China, you have had fake chocolate), which I suspect is a sign that they are getting ready for tough times and substitutions for luxury crops. Coffee could be replaced by roasted barley/chickory mixes (e.g. "Pero" and "Inka").

[darwinslair]

Being in the business, I know that it is a general belief that the markets are the only safe place to invest to hedge against inflation and make money.  Commodities hold value but generally do not gain, so while you make the inflationary dollars, there is no real income plus you pay capitol gains taxes.  If companies are making any money, they make the inflationary dollars plus real income.  The hope is that the taxes do not eat up the second completely.

But with the amount of inflation we are going to see due to just the flood of money issued, and the loss of value due to the consuming public at large being broke, how are the companies going to survive with how leveraged they are, the interest rates they are going to be paying on their debt, and what those are going to go up to.  I see inflation as a multitude of things, including one of the means that government creates taxable income out of thin air (that is the capitol gains taxes again) and reduces their debt load (among other things)

But I think they have screwed the pooch on this one.  There is no recovery, there will be none, and it is a question of how to survive in the new world.


Tom

[Dame]

Tom, would you expand on whatever particulars you see in this "new world".

[Atash Hagmahani]

Think of relative gain on a shrinking pie, rather than absolute gain.

When you have a shrinking pie, then the best you can do is take a relatively bigger share of it. As priorities shift, items lower on Maslow's "pyramid of needs" enjoy greater demand relative to the demand for everything else.

Boomers will not be in receipt of sufficient funds from the sale of these so called assets to have discretionary dollars to buy commodoties, most of them still have mortgages and credit card balances.

They WILL buy commodities--just not as CONTRACTS on wheat--but rather, bread for the table. Buying bread is quite enough to make the commodtity CONTRACT prices go up too. They will do that, or starve to death. And some may very well. But SOMEONE will still want to eat, no matter how poor they are. They're spending will shift from less critical purchases to life-and-death purchases. The relative shift in priorities, and therefor FLOW OF MONEY, will cause the relative prices of things lower on Maslow's pyramid of needs to rise relative to other items.

But I am really talking about the prices of COMMODITIES and not NECESSARILY PROFITS on the contracts themselves.

It's called "nobody makes any money before the HOUSE MAKES MONEY. I have seen this: the contract opens at $7.00, closes at $6.85, opens at $7.25, closes at $7, opens at $7.50, etc. The problem with the commodities market is that the SPECULATORS are not the House. SPECULATORS USUALLY LOSE.

I think what you could do, is make money by UNDERWRITING OPTIONS. Own the contract, and sell out-of-the-money calls on it. If a price is going down, when you think it has roughly bottomed, start selling puts on it. When it roughly bottoms (doesn't have to be exact--as long as you are going with the trend and doing the underwriting not the buying), sell puts on it, and buy it if it hits some target price, to reverse direction again.

What you would find, is that you would make a little money tending to be long the contracts, and a LOT of money underwriting the options, many (not all) of which would expire worthless. The ones that don't, you made some profit on the underlying contracts, before they hit the strike price.

 

[Dame]

Or you could actually grow some wheat, put it in a grain bin and buy a futures contract.  Real world underwriting of the commodoty you actually produce.  When you actually have the commodity to deliver on a call it is far more dificult to loose money on either the actual wheat or the contract.

This was origianlly a market for real products held by people who actually wanted to sell the commodity.  It was a way of reducing the risk and inconvenience of the spot market.  Both the buyers and the sellers were interested in the production, processing and distribuition of food for a profit.  Productivity.

[Atash Hagmahani]

Or you could actually grow some wheat, put it in a grain bin and buy a futures contract.  Real world underwriting of the commodoty you actually produce.  When you actually have the commodity to deliver on a call it is far more dificult to loose money on either the actual wheat or the contract.

This was origianlly a market for real products held by people who actually wanted to sell the commodity.  It was a way of reducing the risk and inconvenience of the spot market.  Both the buyers and the sellers were interested in the production, processing and distribuition of food for a profit.  Productivity.

Oh I agree. That is a corallary to my claim that "speculators usually lose". The speculator--neither producers nor consumers of the commodity, but people speculating on commodity prices--statistically tend to be the big net losers. It is essentially gambling. Without the speculators willing to "gamble", the producers and consumers would not get the price protection the commodity markets were designed to provide (not to mention the House's profits too!). The speculators underwrite that protection based on their willingness to gamble.

One alarming thing about their motives, is their greed for the possibility of leveraged profits. But they are just as likely to have leveraged losses too!

[Lady Lilya]

Atash, aren't those Baby Boomers already consuming food?  Shouldn't their consumption of food stay relatively the same when they retire?  Or maybe that generation's food consumption will be declining as they start dying off. 

[The Future]

When you have a shrinking pie, then the best you can do is take a relatively bigger share of it. As priorities shift, items lower on Maslow's "pyramid of needs" enjoy greater demand relative to the demand for everything else.

As an aside but since you raised it, I think Maslow' pyramid is actually upside down.

[Atash Hagmahani]

Atash, aren't those Baby Boomers already consuming food?  Shouldn't their consumption of food stay relatively the same when they retire?  Or maybe that generation's food consumption will be declining as they start dying off. 

It's not that consumption rises in absolute terms, it's that production falls. They want to continue eating, despite the fact that they are no longer producing. 

[darwinslair]

Tom, would you expand on whatever particulars you see in this "new world".

It is a reset to a new order of things. 

The old rules do not apply, and no one really knows what the new rules are in a solid way.

I was talking with Atash the other day, and my thought at the time is that the only way you can be prepared is to own a small farm debt free right now that functions.  If you can provide all that you need without need for government and all infrastructure is a luxury instead of necessity, then you are ok.

If you are wealthy enough you are protected for the most part.  If you lose 99% of your money/value but had 500 million dollars to start with, you are still ok.  If you had 1 million dollars to start with, you are hurting.

That is what I meant.  People keep watching government and saying "hey wait! you cannot do that!" but what they are really failing to realize is that they are not playing by the rules you think are in place.  They can just be making up new rules as they go along.  So long as they are in a position to MAKE you play the game, you are going to have some serious issues.

Tom