This seems like a good point to review the commodities discussion.
Now I think I see why MH has been all over this.
Chart courtesy of www.contraryinvestor.com
Very cool chart.
Machinhead if you read this would you care to comment.
The red line now on top is the CRB.
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Machinehead™ responds:
richmtn
Thanks for the excellent charts. Here is a PDF chart of the CRB index of 17 commodity futures, going
back to the 1970s:
http://www.mrci.com/pdf/cr.pdfAfter the great Jan. 1980 record high of 337.60, the CRB made four subsequent lower highs, the last
one being a triple top in the 232-234 range during Oct. 2000 to Feb. 2001. Today's dramatic breakout in
gold over $330 brought the CRB right to the edge of the 234 resistance. A rise beyond 234 would break
the long stairstep downtrend and establish a higher high for the first time in 22 years.
What was missing today was breadth. Yes, the concept of breadth applies in commods too. Today's
strength came from precious metals and energy. Other sectors - softs, industrials, grains, etc. - were
flat to down. A convincing breakout would mean not just a move through 234, but across-the-board
strength in commodities, materials, commodity-related bourses such as Canada, Australia and many
Asian markets, and commodity-related currencies (same countries).
What we're looking for is flashover -- when a roomful of superheated gases ignites from one end to the
other in a big whoosh. The inflation flashover will be a point of psychological recognition -- a belated,
seemingly overnight realization that deflation is not the problem. Rather, spiraling prices, costs and
taxes are eating us alive, and it's quickly getting worse. Doc alludes to this in the Anals tonight.
When inflation flashover occurs (probably together with a crumbling dollar), bond yields will rocket
higher. At that point, no amount of tightening - 5%, 10%, even 15% T-bill yields -- will brake the slide of
the dollar.
For deflation to prevail, the rise in PMs and energy must turn out to be a flash in the pan. The dollar
must strengthen, and the Fed must fall asleep at the switch, nodding, drooling and mumbling. Moreover,
the GSEs must turn tail and run from the housing market. It's not impossible -- it happened in the
1930s -- but it's hard to believe the interventionist authorities are going to let it happen again. For so
many reasons, inflation better suits their interests.
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Jorma replies:Nice assessment MH. We have been blinded somewhat by the absurd CPI regime constructed over the
years to downplay inflation. That is the evil government I suppose, but urged on by it's most important
clients.
As always the dollar is the author of this story. So it was in the 70's and so will it be in the future.
Inflation caused by market forces as described in Econ 101 is a mirage, a straw man. It is possible in
commodities from time to time but in the world of manufactured goods it essentially never happens.
Oil is a big dog in the CRB and as we know this baby could do a moonshot almost anytime. This is the
one thing that would cause the recognition you speak of almost instantaneously. Currently there is
much hope that the ME situation will resove itself in our favor (speaking simply in brutal oil supply terms)
and eliminate this uncertainty. This is THE official administration story. If you were a bigwig who got
breifings from the WH that is what you would hear. Could happen I suppose. It almost has to happen,
or else. The lack of discussion about at least the possibility of an oil shock is possibly the number one
example of wishful thinking.
Always complicating this discussion is the fact that financial assets are usually never considered to be
inflating or deflating. A fatal error. We stoolies know, paper is going down, one way or another. I even
think in terms of falling bond prices (rising rates) as deflationary. So yes I am in the school that says we
can have both inflation and deflation.
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MH:
"I even think in terms of falling bond prices (rising rates) as deflationary." - Jorma
Mainstream economists have totally missed this issue, but stoolie Jorma has not.
In the 1870s to 1890s when very little monetary gold was added to the Treasury, the gold-backed
dollar got more valuable and deflation ensued. Farmers and ranchers were crushed. After the South
African gold discovery, monetary gold holdings increased and a mild inflation started in the early 1900s.
Now we have a bond-backed dollar. Both bond prices and bond supply (Fed holdings of Treasury
obligations on its balance sheet) are pertinent.
During the 1970s, bond prices declined drastically as rates rose. You can't directly exchange your FRNs
for T-notes at the Fed, but you can do it via Treasury auctions. What is the result? Does the shrinking
value of its paper backing make each dollar less valauble, thus stoking inflation? Or does the shrinking
aggregate quantity of currency make each dollar more valuable (deflation)? Or since FRNs and
Treasuries are both paper assets, do they devalue at the same rate?
Bear in mind that the Fed's holdings of Treasuries were sharply increased in the 1970s, so two factors
(value and supply) were changing at once. And it probably will happen again from here on.
Macroeconomics is not a true science because to date it has been impossible to conduct real-life
experiments where only one variable is changed whilst the others are held constant. Economists try to
extract significance from one-off events and multivariate correlations. But it doesn't work all that well.
