Contrarian view of inflation hysteria: independent financial advice
Posted by Don Martin on Wed, Apr 06, 2011 @ 04:15 PM
Despite all the inflation hysteria I still believe that it is transitory and the trend is toward no inflation or slight deflation. Labor costs per unit of productivity have not increased, real wages are stagnant, loan growth is depressed, the velocity of money fell off a cliff in 2008 and has not recovered. The combination of reduced lending, shockingly low velocity of money and high unemployment and stagnant wages, and unresolved housing crisis means that inflation can’t occur. The rise in oil and food is transitory and will be paid for (offset by) with a drop in demand and thus a cut in price for other goods. A list of inflation by consumer items shows that only oil, oil related industries, tuition, tobacco exceeded 3%. So if the oil price repeats the crash of 2008 then there will not be any inflation. The Dallas Fed trimmed mean 12 month PCE is currently negative 0.3%.
Regarding inflation, it should be analyzed just like an investment by removing the emotions and looking at it objectively. Long range statistics show it is under control. We can’t judge it by this month’s food bill but rather we need to use comprehensive statistics like the chart in the Economist magazine a few months ago showing a steady downturn in the inflation adjusted cost of food over 30 years. I have written "what is the potential source of inflation" and "independent investment advice about inflation".
Investment success comes from screening emotional hysterical noise and finding a contrarian idea. So a contrarian idea is that deflation, not inflation will occur and that people are overpaying for inflation protection. There is a moderate slowly building bubble in inflation protection investments such as TIP’s, stocks, etc. The key to investing in addition to being contrarian is to avoid overpaying for investments and preferably to only buy at discount below intrinsic value. Today on Yahoo a silver closed-end fund manager was interviewed and he talked about the fact his fund has a 19% premium over Net Asset Value. He warned that if you buy silver coins it will cost you 10% in various costs. So either way silver costs too much to buy. Silver was around $5 to 7 an ounce for many years in the 1980’s after inflation was defeated in 1982. Adjusting silver for inflation would mean the 1980’s long term price of about $6 was like paying $15 an ounce in today's dollars (Assuming the CPI increased prices by 2.5 times in 29 years). So any excess over $15 for silver may be a bubble price where the buyer is overpaying for insurance.
Yes, I too am hurting when I buy groceries and gasoline. But I must use logic and statistics in judging inflation and not simply look at the pain without looking at the gain from price cuts in other items. For anecdotal news items see the recent Economist magazine article that cited Las Vegas homes rented out as low as $150 a month. The rent cut will offset a lot of higher food & oil costs.
This is an example of independent financial advice.