May 6, 2014
- The tug of war between inflation and deflation
- Will China drag America down before the Fed can pump it up?
- Weak dollar, strong euro: Chuck Butler’s year-end target for the Esperanto currency
- A thousand-ounce gold haul from the seafloor: Will government stymie enterprise again?
- Readers insist on rehashing Social Security’s raw deal… and we indulge them
“In a tug of war between evenly matched teams, not much happens at first,” said author Jim Rickards last summer at a symposium we held in Vancouver. The evenly matched teams are inflation and deflation.
The Federal Reserve blows up its balance sheet north of $4 trillion. Inflation.
But on the other side of the rope, too many people are still too scared to part with their money. Consumers don’t run up their credit cards, businesses don’t buy new plant and equipment. Deflation.
While not much happens at first in a tug of war, eventually something starts to give way. And so it will go with inflation versus deflation. We get, say, $5,000 gold and $9-a-gallon gas… or $800 gold and gas below $2, the way it was in early 2009.
So who’s winning the tug of war right now? Join us in the broadcast booth this morning as we call the play-by-play…
Bank lending to business picked up steam during the first quarter, according to the Federal Reserve.
Every quarter, the Fed surveys roughly 100 banks about their lending activity. The gist of this quarter’s report, issued yesterday? A decided pickup in commercial and industrial loans, “particularly those related to inventories, accounts receivable, investment in plant or equipment and mergers or acquisitions.”
Lenders are easing their standards, in part because their competition is doing so.
Note well: This pickup in bank lending coincides almost perfectly with the Federal Reserve’s decision to start “tapering” its monthly bond buying/money printing in December. Back then, the Fed was taking $85 billion a month in Treasuries and mortgages off the hands of the banks. Now it’s only $45 billion. So the banks have $40 billion a month less of easy revenue rolling in.
Gotta make it up somewhere. If businesses are willing to borrow, problem solved.
Consumer borrowing? Still lackluster. Rising volume in credit cards and auto loans is offset by sinking demand for mortgages.
Overall, call it a tiny tug in the direction of inflation. But wait…
Chinese manufacturing is now in its fourth straight month of contraction.
There are two competing measures of the Chinese factory sector — the government’s and a private measure by HSBC that takes smaller businesses into account. The official figure still shows growth. HSBC’s? Not so much.
The Chinese slump is worth contemplating in light of our item last week debunking the notion that China will surpass the U.S. as the world’s largest economy this year.
Turns out there’s even more to the story: According to Beijing-based economist Michael Pettis, the wonks who calculate Chinese GDP treat a huge amount of debt as if it’s government-backed. As a result, investment losses don’t actually show up as losses. Account for those losses properly and Chinese GDP is overstated by as much as 30% relative to the U.S.
“If China is much smaller than we think, or is growing at a slower rate, then that has implications — for commodities in particular,” says our Chris Mayer. “You have surely heard already about how China consumes two-thirds of the world’s iron ore, 40% of its copper, blah, blah, blah.
“China had a lot to do with the commodity boom that kicked off in the first years of the last decade. China’s slowdown also had a lot to do with why most commodities have struggled since peaking in the summer of 2011.
“Given China’s growing size, a recession there is not likely to go unfelt over here — or around the world. I think when that Chinese recession finally happens, it will be a macro event for the ages.”
Score a big pull on the deflation side…
And just like that, inflation scores its own strong tug.
In 2008, economists at MIT started tracking the prices of goods sold online. The aim? To come up with a better measure of the cost of living than the horribly manipulated consumer price index (CPI) issued each month by the Bureau of Labor Statistics.
The result was called the Billion Prices Project. It tracks the daily price fluctuations of 5 million items sold by 300 online retailers in 70 countries. It also goes by the name PriceStats and is now overseen by the big bank State Street.
For the last couple of years, the Billion Prices Project tracked CPI fairly tightly — until the fourth quarter of 2013…
What changed? Well, remember the PriceStats index measures online goods only… while CPI is a mostly brick-and-mortar affair. “If bad weather depressed foot traffic at stores,” says a Wall Street Journal summary, “then retailers may have kept prices somewhat lower to keep the business coming in. Yet online, where purchases continue snow or shine, retailers had no need to offer discounts to bring in sales.”
Thus, the following prediction from the keepers of the PriceStats index: “Now that people aren’t hindered by weather, the CPI should converge toward the PriceStats Index, and not the other way around.”
It’s happened before: A review of The 5’s archives reveals a similar divergence between the two numbers in early 2011 — when skyrocketing bread prices set off the Arab Spring. By late summer that year, CPI here at home was approaching 4%. At present, it’s barely 1.5%.
We give up — we call it a draw, at least for now. But we avert our eyes from the tug of war at our own risk.
The aforementioned Jim Rickards agrees. “The opposing forces may have neutralized each other for the time being,” he writes in his new book The Death of Money, “but neither has gone away.” A Chinese collapse could tip us into deflation; a new hot war in the Middle East would set us up for rapid inflation.
[Ed. note: No matter the tug of war’s outcome, a specialized kind of Wall Street play spotted by our own Chris Mayer will keep you sitting pretty. It affords you the chance to amp your returns 10-fold… but it also allows you to put up to 80% less money at risk.
Best of all, you can buy it easily in your existing online brokerage account. And like the inflation-deflation tug of war, this opportunity would have never turned up if were it not for the 2008 financial crisis. Chris shows you the power of “executive dividends” when you click here.]
The major U.S. stock indexes are drifting lower, with the financial sector looking weakest.
As we write, the S&P 500 has dipped about 5 points, to 1,880; it remains near the midpoint of a price channel that goes back nearly 18 months now. Snooze…
Gold is slipping a bit, but holding the line on $1,300, at $1,307. Crude, which fell below $100 on Friday, has barely budged this morning, at $99.58.
And that relative weakness in commodities comes despite weakness in the dollar; the dollar index is down a half-percent as we write, to 79.1. The index’s major component, the euro, is up to $1.393.
“The European Central Bank and eurozone manufacturers don’t want to see the euro this strong,” EverBank World Markets president Chuck Butler reminds us this morning.
“They’d prefer to see the euro between $1.20 and $1.30. But as I’ve also said before, I don’t think the ECB is interested in currency wars or selling the euro to weaken it. So jawboning the euro in the direction the ECB feels to be right is their tool of choice.”
Chuck is sticking with a call he made late last year — $1.50 on the euro. A pause or even reversal of the so-called taper will be bearish for the dollar, “and with the euro the offset currency to the dollar, the euro then gets pushed higher and higher, whether the ECB wants it or not!”
The euro has seen $1.50 before, before the 2008 crisis. “It’s not uncharted waters,” says Chuck — “been there, done that, bought the T-shirt.”
Chalk up an early success for our friends at Odyssey Marine Exploration as they begin salvaging the cargo of the SS Central America.
The “ship of gold,” as it was immortalized, sank off the South Carolina coast during a hurricane in 1857, laden with a cargo from the California Gold Rush.
Odyssey says its first reconnaissance dive on April 15 yielded almost 1,000 ounces of gold — including five ingots and two $20 Double Eagles. “Gold ingots and other artifacts were clearly visible on the surface of the site during the dive and no excavation was required for their removal,” says a press release that undersells the difficulty of the operation at 7,200 feet below the ocean’s surface.
Perhaps Odyssey should savor its success while it can. After an unfortunate run-in with the feds during its last major haul — the depths of Washington’s double-dealing revealed in the diplomatic cables pinched by Chelsea Manning — Odyssey might face an obstacle to future endeavors.
“The U.S. Navy has proposed a new rule,” according to BusinessWeek, “that could block businesses from salvaging some of the richest wrecks. The rule would establish a permitting process under which the Navy would decide who gets to access or disturb any nation’s sunken military craft within U.S. waters.”
The Navy’s definition of “military craft” appears to be, umm, rather broad — even a Spanish galleon returning from the New World with gold appears to qualify.
Odyssey has written the proverbial strongly worded letter: “Prohibiting independently funded commercial archaeology companies from engaging in such recovery projects will seriously diminish the discovery and study of our nation’s maritime history.”
To be continued…
“I hate to disagree,” a reader wishes to carry on a discussion we figured was closed, “but the Social Security trust fund does exist as a ledger entry.
“The SS fund is no different than the government employees retirement fund — which is also not fully funded. It is all part of the smoke and mirrors, Kabuki theater that passes for government these days. When the term ‘fund,’ is used I believe most people understand that it is shorthand for a partially funded debt.
“Keep up the good work — I really enjoy The 5.”
“Social Security is ingrown in my mind,” writes another reader.
To make the most of our 5 Mins., we’ll truncate his life story — child of lifelong Democrats, told from an early age welfare was only for people who were unable to work, worked three jobs through college, served as a Navy officer, including three tours in Vietnam.
Social Security was always there in the background. “Work hard,” our reader says, “and what we put into the Social Security trust fund was there for you, the mandatory investor from proceeds from our paycheck. Not a lot of money, and not taxed, but a stipend to keep you going and put food on your table.
“Never in my late parents’ minds could they have ever imagined what the New Socialist Democrat Party has done to our beautiful country. These lying crooks now say Social Security is an entitlement. Little did my late parents know, starting with LBJ and his Democrat House and Senate, was that they STOLE from the Social Security trust fund, replacing that money with worthless IOUs. Then the lying, corrupt, cheating, self-serving Al Gore cast the deciding vote to start taxing our already taxed Social Security.
“My wife and myself are shattered over what what this corrupt, lying, incompetent government is doing to destroy America. Just ask yourself this question: Our leaders, when sworn in, put their lying hands on the Bible in to uphold our Constitution and Bill of Rights — right??? ‘Nuff said.”
The 5: Don’t let the Republicans off the hook. LBJ might have hatched the job, but his GOP successors drove the getaway car.
And don’t forget the Greenspan Commission, appointed by Ronald Reagan, which decided to monkey with the consumer price index, the better to suppress the annual cost-of-living increases.
All that said… your editor is starting to wonder if Social Security is actually in better shape than most of us assume. But we’ll have to explore that some other time. (Medicare? That’s totally screwed…)
Best regards,
Dave Gonigam
The 5 Min. Forecast
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