Wednesday, September 17, 2014

Storm clouds of "disinflation" everywhere.

Last month I wrote an article titled "Deflation nation coming to a city near you". At the time food inflation was still going hot and heavy. This has now normalized. I've been saying since the very beginning of the year that without food inflation - things would have looked much different. The thing about food inflation is - it's the easiest type of inflation to sort out and has nothing to do with money printing. It's takes just a few months to get a crop from seed to your table. And farmers in other areas will pick up the slack if they feel they can make money. This often produces bumper crops, like for example corn.

Sure you still have people like Zero Hedge screaming about milk prices being at an all time high. But it takes several years to recoup livestock that was killed off due to drought conditions. Money printing has nothing to do with this. I guess he just ignores the fact that commodities have now fallen to a five year low. Or he ignores the savage drop in oil prices. I read gas may hit 3 bucks a gallon by the end of summer. On the face of things this seems great. But if higher gas prices produce inflation, what do you think lower gas prices produce?

When the second quarter GDP number came out, I kind of fell off my axis. I don't think it's ever good to become too entrenched into your beliefs. One day things will change and you are going to get blindsided. I mean, maybe we were producing more oil. I suspected that the real answer was the demand just wasn't there. And now that seems to be more true than our economy all of a sudden started growing gangbusters.

It was unusual enough that when all the analysts saw the jobs number they started screaming "don't believe it! It's an anomaly." Self I said - the only anomaly is that GDP number. Awfully convenient I think just a couple of months out of an election that all of a sudden we were growing at 4.7% (after the final revision). Especially when none of the earnings numbers backed that number up. Retail sales numbers are shit. A ton of companies revised their Q3 down.

First it was a massive order of planes that bumped GDP up. Then cars. Then health care spending. Then we sold more distillates. Literally every day it seems like they came up with a new reason we were growing so fast all of a sudden. Just throw everything at the kitchen sink they said.

And then there is housing. If we printed all that money to save housing - I don't really know where we go from here. When the recession first started 46% of homeowners were underwater and trapped. Now that number is 17%.

I don't see any relief coming for those 17% any time soon. The 29% of people who escaped will almost assuredly stay in those houses for the duration of the loan because the interest rates are just so low. That market is locked up, and the FED is trapped like a stuck pig.

Let's talk Europe. They are in negative interest rates. And they just embarked on their own money printing scheme. That means demand is going to be weak. Not to mention the sanction wars.

I see nothing but deflation for miles.


  1. I was on a road trip between southern texas and northern missouri sunday/monday. Gas prices ranged from 3.01 to 3.29. I saw it at 2.99 at one truck type gas station oklahoma city.

  2. Huh. Thanks. That's an interesting data point. We still have about 50 cents to go here in Ca. So you might get a little more relief. Which sounds like would be good for you since it sounds like you drive a lot. We have a ton in water storage right now. Floating around waiting for someone to take it.