Friday, May 30, 2014

Right on queue.

I wrote this article a couple of days ago and didn't publish it because it's hard to convince anyone that the Fed isn't causing all the inflation we see. Since we are now printing a sub 1% growth I'm going to say I still believe a lot of the inflation being seen outside of housing is drought related and is in fact temporary. Painful, but temporary. I got a robocall from the water company this morning about water restrictions. They've never called before.

The numerous articles I've read in the past couple of days that call for interest rates to be raised only reinforced my belief. Good luck with all of that. Mortgage application volume was down 1.2% last week when interest rates were at their lowest in more than 6 months. And it's the "busy spring buying season". Don't believe me though - believe this chart of bank earning for the first quarter.

You don't seriously think we print a sub 1% growth number and the market continues to hit all time highs. Do you?


This post is brought to you by Jeff Cox at CNBC who writes: "Deflation 'greatest hoax' as prices keep rising." where he goes on to talk about the price of everything rising most especially food.

For the record I have been more in the deflation camp for pretty much the whole recession. There have been many periods where I thought inflation would eventually win out. I ultimately think inflation always wins. I've never lived through another period of deflation like we had in the Great Recession and when I go through the Misery Index inflation has been dominate at least 90% of the time they have been keeping records. Inflation is the norm. Deflation is a very abnormal occurrence according to history.

Having said that - just because you print money, doesn't mean people will spend it. People and businesses have all sort of reasons for hoarding money. Which is essentially why inflation has been a problem to take hold. Banks had new capitol holding requirements, so they swept up a lot of cash and just parked it. Businesses in many cases remember when the banks stopped lending to anyone - and that leaves a BIG mark. Of course they are going to keep a larger cash cushion now. Before the recession we didn't even know banks could stop lending. You just always thought "if I have good credit and make money - there is a good chance I will get a loan. Not a guarantee - but you have a good chance. After the recession we know that not to be true.

Why do I bring this up now? Because in March I wrote an article titled "This is going to make inflation look way worse than it is.", where I talk about how the drought is going to make people freak out about hyperinflation. This is causing all sorts of pundits like Jeff Cox at CNBC to say the Fed will need to raise rates to combat this out of control inflation. The thing is....the drought induced inflation is not caused by money printing. It's caused by a drought. And people don't understand how this trickles out through the economy. There is nothing the Fed can do about this particular type of inflation.

Nothing in the economy indicates things are getting strong enough to warrant a rate increase. So says interest rates. If things were that great, why is it becoming easier and easier to find loans under 4%? YOY home sales are actually down. Retail earning are a mess. Rental rates have topped a little while ago, and many markets are now showing price declines for homes. But when you pop into the store and spend 5 bucks on 4 limes as I did a couple of weeks ago it freaks people out. Still, as far as I know - the Fed can't control the weather.

Inflation wins for now. But not for long. I'm sticking with my deflation call (hopefully for the last time) until the end of the year.


  1. I can't speak for other industries, but we're seeing hyperinflation in the arcade prices too. Whole games are up 150 percent year over year and the value of parts has trippled. I'm not sure what is driving kids but my peers in the industry believe that it's related to housing. when people suck money out of their homes they invest in game rooms. I think it has more to do rarity, but who really knows what drives these thing. Df

  2. I can't imagine people have been able to take out too many HELOCs. Prices have gone up, but banks are still pretty tough.

    That's a hard one to figure out.