I suspect the Mother of All Stagflations is developing
(a long one, guys)
this topic theme has been stuck within my diminutive brain for weeks now
here are some thoughts, as I compare to the last seriously damaging Stagflation Times
I vividly recall the tumultuous mid-1970's
OPEC quadrupled the price of oil
American businesses (European and Japanese also) had to absorb significantly higher energy costs
so did households for heating and air conditioning, as well as standard electrical usage
this caused a long recession followed by a short recession soon afterward
at the same time, Watergate struck the Body Politic in force
the result was a tremendous bear market for stocks
confidence in American institutions was shaken, even as profit margins were decimated
it was the last time we saw a prolonged Profits Depression
the ensuing bear market lasted several years
but the 1970 decade saw profits disappear from the opposite end of the BUSINESS STRESS SPECTRUM, which was characterized by rising supply costs, principally energy costs
in the 2000-2003 era, we have seen a Profits Depression, as profits disappeared with falling prices and huge excess capacity, wringing out debt collapse and a continuing spiral
thus the opposite end of the BUSINESS STRESS SPECTRUM
the origins of these two Depressions come from opposite ends: one from rising costs and shortage, the other from falling prices and oversupply
it is my belief (reinforced by Puplava writings) that we are soon to witness unprecedented STAGFLATION
Farfel re-iterates this belief with his own scenario
citation earlier this afternoon
he cites many inflationary sources: medical care, insurance costs, utilities costs, critical commodity deficits)
he cites many sources for crisis in confidence that might easily worsen any necessary defense of the USdollar, leading to higher interest rates
the combination will likely result in isolated sector inflation, which will exacerbate an already poor profit situation, as companies take on higher costs for health care and material supplies... combine this with eroding fundamentals for the USdollar trade and federal deficits, and you get continued trouble for stocks TOGETHER WITH a resumption in the USdollar decline
economic growth was non-existent in the 1970's for two reasons that have dogged us in commonality recently in the 2000's...
absence of profits, absence of available capital
the capital shortages came from both absent stock new issuances and from tougher commercial lending requirements
stock market declines made IPO and secondaries unattractive
bank portfolio stress made new lending problematic
the remarkable fact to this jackass observer is that those conditions are identical now, despite how the conditions came from opposite ends of the business Supply & Demand curve
we were at an extreme 30 yrs ago then
we are at an extreme now
the end result was USGovt futile attempts to stimulate the economy into resuscitation
as Farfel points out, govts do what govts do best -- PRINT MONEY they dont have
political pressures will be enormous to DO SOMETHING
so they will print money and distibute it in many ways
but with a dearth of new business opportunity, or expansion, money will not be directed into profitable sustaining enterprise based upon strong new capital investment, job creation, product development, efficient delivery, clever buyer matchups
instead, the new monetary stimulus from the Federal Reserve will go into all the unfortunate places, as far as the Fed and Dept of Treasury are concerned
where will new printed money go???
it will attempt to re-enter stocks, as we see now
fresh margin stock money will pursue stocks
but earnings will not support their case
as the dollar suffers another decline, valuations will be smothered with higher rates
just like in the 1970's, money will chase commodities
since debt is dangerous once again, and the wretched indebted mass of corporations are loaded with debt just as their businesses are faltering and new debt is increasing
debt debt debt debt is deadly
money will chase commodities
see the CRB index in
futures.tradingcharts.com
which resembles an S&P chart upside down
why commodities ???
several reasons:
- they have many times less debt associated with them
- derivative gearing has kept prices low, thus supplies low for 20 years
- alarms went off everywhere in the last few years on shortages
- govt regulation has kept many obstacles in place for new supplies (environmentals)
- delivery infrastructure has been decaying for years, now approaching dilapidation
- despite slowdown in business, many necessities for life must continue in demand (e.g. electricity, heating, gasoline, consumer essentials)
so history repeats itself, but with the chapter written from the back side of excess supply and fading price, rather than the front side of shortage and rising price
I like to say that "monetary expansion will seek out the path of least resistance, and that now is commodities"
no debt encumbrance, clear profit potential, serious shortages, strong demand with a baseline from human need
there is more...
in the 1970's the USA was coming off a nasty expensive war in VietNam
this war gave us our first $1 trillion in Trez debt
now we are embarking on an equally unpopular War on Islam
(I mean on terrorism, my faux pas)
in the 1970's faith in governance was totally shaken, as Watergate mushroomed like a cancer, destroying faith in our leaders of govt
now we have a parallel but equally crippling governance issue, this time with corporations and their fraud, whether outright theft or phoney balance sheets or exaggerated fallacious earnings or pumped up stock option dilution
so we are left with extremely similar economic conditions, which once produced terrible unending STAGFLATION
however, today I argue that conditions are worse, and will likely produce even more magnificent and enduring STAGFLATION
once Nixon was ousted (sorry, I mean resigned), some faith was quickly restored as Gerry Ford took the presidential mantle
Ford was just great, the best empty chair ever to sit as president
what a dufus, but he did restore some faith in the presidency
but now faith in governance extends from corporations, to suspicions on Cabinet motives for war
we had questions in 1970's about secure supplies of oil and gas, but the higher prices spawned new efforts to exploit the Gulf of Mexico and the Alaskan North Slope
now we have much worse supply problems with greater MidEast dependence, the most ridiculous fascination with SUV's, and dwindling supplies regardless of price... and to make matters worse, we have insecurity of travel itself
in the 1970's we withstood a midcourse correction in personal finances, correcting from the burgeoning 1960 stock boom, seeing 30% declines in stock indexes
but now we had complete destruction of the NazDog stocks, with 90% declines commonplace... we have seen utter decimation of many pension programs, mostly the self-managed (which removed corporations from underfunding problems, and mgmt of the funds themselves)... continued insecurity of pension viability remains
in the 1970's our economy merely reacted to middle age body blows, and was strong enough to rise, gut check, and move onward and upward in a few years
but now we must wonder about the real solvency of both banking and insurance foundations, each tremendously shaken
in the 1970's we had almost no derivative gearing, no huge morass or dumbfuch pyramids which required constant balancing acts by the major banks (sorry, I mean casinos) and multinational corporations
now we have a $43 trillion pyramid of eroding derivatives that live in the basements of our banks and major companies, all unregulated (thanks to Congress and Sir AlanG), any or all of which will explode at any time... the best indicator of imminent explosion is what we saw in 1998, debt collapse, widening bond yield spread, both of which are in fulltime activity as we speak and breath
in the 1970's we had a strong dollar that weakened with economic distress and huge rises in energy costs... we spoke constantly about "the Energy Crisis" ad nauseum... but we did not have a worldwide participation in our corrupted stock market and bond market, nor any trade debt at all... the dollar fell some and it was no great big deal, no great shakes
now we have a hugely overvalued dollar, with 45% ownership of TrezDebt, 25% of CorpDebt, and households maintaining 107% debt relative to income... we also have a stock market laced with fraudulent reporting and accounting, off-shore banks, off-balance sheet entries, and a near total lack of disclosure... we also have widespread illiteracy in all thing financial, with a press/media designed to dupe investors and keep them duped and in the game
THIS TIME, THE STAGLFATION WILL BE MUCH MUCH GREATER
ECONOMIC GROWTH WILL BE STYMIED FOR YEARS
FED MONETARY EXPANSION SHOWS NOW 40% INCREASE SINCE JAN 2001 ALONE
CHINA AND JAPAN WILL KEEP A LID ON THE INFLATION OF GOODS
BUT COMMODITY PRICES MIGHT GET TOTALLY OUT OF CONTROL
SUPPLY COSTS WILL FURTHER INHIBIT PROFIT MARGINS FOR COMPANIES
JUST AS HEALTH CARE AND INSURANCE COSTS CONTINUE TO RISE
IF WE DONT SEE WORSE INFLATION THAN 1970'S, WE WILL SEE LONGER STAGFLATION FOR CERTAIN
FOR ABSOLUTE CERTAIN
IT MIGHT LAST UNTIL 2007-08
TO EXIT STAGFLATION, BALANCE SHEETS MUST BE CLEANSED
in the financial world, bonds will not thrive in such an environment
apart from Mortgage Backed bond upcoming woes from laxity and lack of its own disclosure, even mildly rising inflation rates will torpedo TrezBonds, MortgBacked Bonds, and Real Estate
if not torpedo RE, then at least cause a long slow leak
so the financial world will chase commodity GOLD, later SILVER
in the commercial world, despite slower factories and slower businesses, the demand for energy will enjoy a strong baseline
heat for homes & businesses, electricity for homes & businesses, gasoline for cars, diesel for trucks, natgas will come in strong demand all over the place from homes to factories to electric generator plants which will result in dire shortages
so the commercial world will chase commodities OIL and NATGAS
I am patient... I know others want gold to skyrocket now now now
but I remember the 1970's like they were yesterday
I was in gradschool studying statistics, in love with Bobbie
the economy was a sideshow following Watergate
now we have a crippled economy following Enron and WorldCom and GlobalXing and Merrill and Adelphia and Xerox and JPMorgan and Citibank
we will have false starts in the economy, just like confusing bear rallies
but watch commodities, which are the constant as they rise in price
these next few years will be all about gold, silver, oil, natgas
/ jim (just another intellectually lazy shlepp)
p.s. sorry if posted already, not sure, dont care |
