I won’t belabor or concentrate on the “flations” debate…

I have made the point before that hyperinflations have occured many times in the past, and the one common philosophical attribute of said hyperinflations was that in each instance- no one thought it was possible. Even during the most manic examples (Weimar and Zimbabwe) – the elected powers legitimately thought they were engaging in an economically viable strategy.

Now- on the other side of that coin, there has never been a hyperinflation that has occured within a militarily significant country- this is (to me) an important consideration if you believe the US is on a hyperinflationary path. The closest example we have is the Russian hyperinflation following the collapse of the USSR, but there was so much political chaos in Russia that the prospect of an overt military operation was pretty far-fetched…

History suggests that if the US is to go into a currency induced hyperinflation at some point, then our political landscape will first have to degrade to the point that we are no longer able to garner sufficient public support for a major military campaign offshore. Not saying such a hyperinflation couldn’t happen; just saying that it probably would not begin next Tuesday.

But, there is another point regarding the US and the exploding monetary base- we (the US public) might no longer control whether our currency lives or dies. There is such a global demand for dollars at present, that if said demand were to diminish by even a small percentage, then the resultant repatriation of these existant dollars would probably be adequate to demolish the US economy as “free dollars” poured back in from around the world.

Our currency today requires the faith not only of the US public, but of everyone on Earth. That seems pretty far-fetched, too….

At the end of it all, there has never been an adequte refutation of Plato’s philosophies regarding sound money, so I am sticking with Plato, as opposed to litening to any Nobel winning economists, because this time it is NOT different.

Cam, take off your blinders. The US gov’t is a master of deception and spin – especially when it comes to elections, but apparently you like many others give them too much credit and choose to ignore the rest of the world.

The underlying problems of the US will not be “fixed” with more debt, more spending or some smoke and mirrors deal on the debt ceiling, which purports to solve these problems.

Too many investors and prognosticators equate the economy with the markets and see gloom and doom, while others think the gov’t policy of pretend and extend through lies and manipulation can go on forever.

What I think everyone is missing is a simple fact – although there is a definite debt crisis, the over riding problem in the world is a currency crisis that no gov’t can hide or lie their way out of. This is going to cause stock markets to continue to rise, commodities to continue to surge and bonds to collapse. This simple force is too powerful to stop and can only end in world chaos and the eventual revamping of the whole world monetary system and debt adjustments between all nations. None of this will affected by another US election and those not holding hard assets will be crushed and forming long bread lines.

It baffles me that Rick has made a single standalone comment I wrote on his site into an article today. Possibly he felt my remarks were so over the top that they deserved public rebuke.

But they are not an article. Must have been a slow day at the Picks site. But this is Hollywood baby! The show must go on and I will happily defend my premise.

A response is forthcoming. In the meantime, before anyone else gets their panties in a knot over the comments you read you will need to appreciate I am not in fact a Commodity bear. Not even close. The secular trend is nowhere near over but it is my belief reality can and will be suspended temporarily for political expediency.

This does not need to be rational. If markets were rational they would have crashed already but obviously they have not despite very, very bad economic news and worries of instability developing all over the world. So bad news has nothing to do with market outcomes. What matters is whether companies are posting profits or not…and they are.

My premise, which I will detail tonight if time permits, revolves around the ideas of profitability and good quarterlies at a moment when the steam is being blown off the commodity markets.

It suggests how investment funds will be shifting over the medium term to take advantage of dividends and corporate yields while sheltering in defensives but in so doing will lead all equities higher. This is clearly desirable at a time like this and as elections slowly come closer.

In essence though, as commodity prices decline profits will rise and the mood on markets (which is critical to the feelings of positive sentiment) will improve. If consumption will slowly inch up on lower prices (food, fuel) a sense should emerge that a recovery is underway and this in turn should lead to employment gains.

For anyone curious though, I have not lost my mind. Nor do I wear blinders and ignore the raft of bad news. I have taken a macro perspective that suggests we can at least have the appearance of a recovery developing if certain conditions can be met. Falling commodity prices are instrumental and in fact are a necessary ingredient if rates are to remain historically low.

If we thought our debt problems were difficult now we will surely be apoplectic later as higher interest rates will absolutely ruin the party and send the debt/GDP ratios in the wrong direction. We need growth and we need it quickly if we are to avoid an impending crisis. I believe there is still time to grow our way out of some (not all) of the problems but that is simply going to be impossible if commodities continue to soar in the fall and tax the global economy out of it’s disposable income.

Thus, it is indeed commodities that need to be settled down.

More later.

PS.
I’m looking at a beautiful Italianate villa home and small grounds tomorrow morning in a silk stocking district in a resort area an hour from a major metro city. Price is fabulous, interest rates are what you’d expect to pay if you were borrowing for two years, not 30–let someone else eat the interest rate/USD devaluation risk, I’ll take my chances with “spiraling deflation”. Paraphrasing Jesus of Nazareth: The rich will always be with us. I plan to be there with a nice home to sell them in about 10 years.

We just bought some SPXU>14.33 and some SPY Puts as well…

Historically we have never had a stock market calamity with a sustained “V” shaped recovery without at least testing the prior lows. If we do retest the lows than I suspect it will not be because of an overheated economy but rather one where the overburden of debt has won out. Even two years after the last bottom has been seen we are still debating when inflation will come with a vengeance. It will take more than a low dollar, bad crop weather, and burgeoning third world markets to ignite a sustained inflationary spiral. In fact the deflation forced in the United States is actually getting stronger. Housing prices are still going lower with no end in sight. Personal insolvency is once again on the rise. Job recovery is so anemic for so long one questions what it will take to truly recover.

Once again going back to historical data we have had a steady pattern of boom/bust along with inflation/deflation cycles for centuries. In the past 50 years deflation became non-existent in the equation. I don’t buy into the Fed’s ability to eradicate deflation by micro-managing money supply and rates. I would argue that by their trying to do so they have created the greatest deflation pressure we have ever faced.

As for the dollar causing commodity prices to rise out of control that would require one of two things. The United States’ debt problem will have to far exceed other major countries or the world debt problem will force people to abandon paper all together. I don’t see these scenarios happening.

The idea that an election year will influence world inflation is not a likely scenario. The assumptions are that this president has the will and power to control its outcome is also very unlikely; too many players wanting different outcomes for this ever to succeed. The Republicans would like nothing better than to see a disastrous economy at the end of the election term.

I’ll stick with the idea that natural forces will overcome any of mans manipulations. The world is trying to prevent deflation and by doing so they are fighting the natural forces of true capitalism. I am pretty confident which will prevail.

The piece seems a little light as to the mechanism by which the so called powers will engineer this. Positive real interest rates are not going to happen in the next 12 months (particularly with an election looming). Significant deficit reduction is not going to be achievable in the next 12 months (particularly with an election looming). In the absence of these it seems unlikely that commodities will decline dramatically.

“Coming elections mean that the Obama administration needs to show proof that the economy is actually performing and that inflation is under control. ”

You’re thinking like a sane man, Cam. But when you’re the Great O(ne), giving a rat’s rear about facts is just not something you have to worry about. And when has he over the last 3 years?

http://www.rickackerman.com/2011/07/dot-com-bust-ii-looms-on-the-horizon/#comment-23159

And let’s not forget the page from a madman’s diary that you shared the other day (the linked Krugman article, not you!).

Cam’s argument in my mind assumes underlying health and organic growth. His last few posts from differing topics on this forum indicate as much. I do not think however, that the Fed/Treasury/Government-complex can achieve its goal of inflating debt away at a pace reasonable enough to have any meaningful impact, without noticing it at the ‘ground level’, as is happening now. An ‘acceptable’ amount of inflation, if you will.

Of course, in the debt ceiling negotiations, there is talk as I’m sure you’ve heard, of rejiggering CPI to reflect updated norms… Who in his right mind would care anyway – it’s a farce metric to begin with in terms of anything ‘real’.

Again, towards the election: It has been discussed in many circles, that there is a reasonable chance Mr. Bernanke leans in the direction of the current President. Which is of course to say that either he cares or there is some degree of interest in ensuring that this economy holds together into the 2012 elections.

There is only (2) ways to achieve this goal – the first one goes back to the beginning – Real, Organic economic growth, independent of and not-in-need of further $government stimulus. This argument has all but been charted and graphed (read: Blown) out of the water by those that most on this board are already familiar with. In fact, the latest pieces by Bruce Krasting and Charles Hugh Smith do a man’s job of it, and that’s only 2 men.

The key for the Fed is to play the levers just right and keep the market propped, which in turn will keep sentiment positive as the generally accepted distinction between stock market levels and positive (public) sentiment are still tied, accepted and anticipated – for now – i.e., there are still enough out there that buy the line. There has to be some inflation – and the fed can only keep it so far in check. As long as public sentiment (for those in sectors with money to invest or spend) remains positive, he will have his way with the economy – and inflation.

I disagree. Everything seems to be dependant on the greenback. Commodities and stocks have been joined at the hip for 4 years. How are “they” going to kill commodities while the stock market soars? If that were the case, why would they have let gas prices go to $4 and food prices double in a year or so? If the dollar rallies and commodities tank, I have to think stocks will tumble too.

Cost push inflation also involves rising wages, and that ain’t gonna happen with almost 20 million people unemployed or only working part time. State and local workers are being laid off in droves, and the Federal Government is going to be slashing thousands of jobs in the months ahead too with the spending cuts that will be coming. If the bozos in DC don’t address the deficit and extend the debt ceiling, the $ tanks and commodities soar, not a good thing for the economy.

Even if input costs do go down some, demand could easily fall at a faster rate. If you don’t have a job you don’t buy much. I still think Rick will be proven correct in that deflation will win out over hyperinflation, and that means falling prices for most things, except the essentials of everyday living. Deflation means massive unemployment and plunging demand. Commodities would crash, but so would stocks.

But, in this age of manipulated markets and Fed shenanigans, who knows what might happen. We could have 30% unemployemnt and the SPX at 2,000 !?