Tag: deflation

Quantitative easing explained: “Is this an episode of The Twilight Zone?”

Couldn’t pass this up…

Rather than trying to revive the deflation as a cure meme, I’ll just thank Mish.

MG signing off (to buy more 50lb bags of rice)

News you gotta have to end your week – 1/30/09

Or your month

  • TechCrunch’s Mike Arrington is ‘taking a break’ from blogging, and running for his life. While the latter part seems pretty serious, the editor of the venerable Silicon Valley news resource is also blaming a Wall Street Journal property and one of Nick Denton’s gossip columns for some of his woes. And if that’s not enough, Ted Dziuba has called Arrington on the carpet regarding the part of the story dealing with a purportedly known felon who also purportedly owns a gun. We haven’t heard the last of this.
  • Blackstone’s Steve Schwarzman says it’s a wonderful time for buyouts. Henry Kravis too says private equity isn’t dead. It may not seem all that obvious, but these guys have a point – valuations are dropping right along with forecasts, which will in part make up for the fact that nobody can borrow like they used to. Further, I think this will play well with the middle-market buyout houses too – I’m sure there are a lot of business out there which the owners (often the founders) would trade a pile of liquidity for right about now.
  • Of the top performing branded pages on Facebook, only two are really brands. I take that back – if you are selling Barack Obama or Homer Simpson collectibles, you should be jumping for joy right now. And not to be outdone by the furious ‘business competition’ (read: frivolous attention mongering) which always exists among venture-backed startups, Facebook itself is the 8th ranked branded page on Facebook.
  • Les Jones asks what if we had inflation, and nobody showed up for the party? The hyperinflation question is being bounded about, and at the same time so is the deflation meme. I suspect that when and/or if the dollar takes such a whacking that an iPod costs $1,000, people are just going to quit buying iPods. Same goes for TVs, autos, etc., although they’ve pretty much quit buying most of that stuff already. I think the tougher question regarding which way prices go is whether or not the US can provide its own staples – a gallon of milk at $20 would be a real problem.
  • Talk of Google’s mysterious GDrive offering is bouncing about again – it’s file access anytime, anywhere. Meanwhile, Joel Spolsky says don’t ever rely on Google Apps for anything mission critical, or even keeping your coffee dates straight. I won’t be using either, regardless of the reliability. And while I don’t believe Google is going to disappear anytime soon, Mark Glaser is warning on Facebook/Twitter dependence, using alternate reasoning for those two ‘businesses’.
  • Last but not least:

  • Moldy Chum finds the final connection between golf and fly fishing, which means there is still hope for you fly fishing folks looking for AMEX and Buick endorsements.
  • And finally…

  • A new study finds alcohol makes men better in the bedroom. Last week we had to be rich. Now we just have to be drunk?
  • Adieu.

    The Weekend Deflation Meme

    I spent the better part of the weekend getting schooled by some fly fishermen. They showed up in what seemed a hand painted black matte panel van, bum rushed the stretch I drove three hours for, camped there all day, and pulled trophy after trophy out of that section while I looked on in dismay. I distracted myself with two twelve inchers over the first eight hours, and one twenty incher five minutes before leaving. My hat goes off to that crew – they were fine fishermen (and they got up a half hour earlier than my lazy ass).

    The latter part of the weekend was consumed by humbleness, and the weekend’s deflation meme. I hadn’t heard much of the word “deflation” until then, and now I’d seen it twice in just a day – combined with gloom and doom of course. Barry Ritholtz noted (emphasis mine) “A global recession is deflating all manner of commodities. This is a bad thing, not a good thing. At least he managed to wrap it in some sarcasm (The Economy is Just Fine) – The Wall Street Journal pulled no punches with the headline “Amid Pressing Problems, Threat of Deflation Looms“. Scary stuff, eh?

    I’m still trying to figure out what the problem is. CPI & PPI fudging be damned – we’ve just exited a period of significant inflation. Housing, and commodities of all types, have been on a half-decade long tear. People aren’t buying homes any more because prices are too high (still), and those same folks are driving less because of gas prices (until the recent oil correction). Demand waned because incomes remained stagnant while the true cost of living marched on. People filled the gap with credit.

    A measurable pullback in spectrum-wide prices would actually give consumers’ new buying power. Lessened reliance on credit (most of which no longer exists anyway). And maybe even some savings (which certainly doesn’t exist right now).

    That should be a “good thing.”

    Joint Statement by Central Banks

    The FRB:

    The Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1-1/2 percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures.

    They got the “reduction in inflationary pressures” part right, but I’m not sure this is going to increase economic activity (unless you consider a few banks lending to each other to keep capital ratios in line for another 24 hours economic activity).

    Personally, I believe jobs and rates partially decoupled from their “Econ 101” inverse relationship back in 2001. Then, rate cuts resulted less in job creation and more in speculation (mostly in the housing market). Sorry that yet more intermediaries (i.e. real estate agents, mortgage brokers, and investment bankers) may lose their “jobs”, but at this stage it might make more sense to let rates rise, setting off spectrum-wide price adjustments that turn stagnant real wage towards the upside.

    Could the US deflate its way out of a financial crises?

    In theory, what if…

    You let those who are about to be foreclosed on be foreclosed on. Bank inventories would rise, and house prices would fall. This is called correction, and in many circles it is considered healthy. Rather than pour capital into the inevitably failing cause of bailouts, relax restrictions on the purchase of foreclosure properties. Lenders provide capital to those that qualify, instead of requiring investors to show up with a check for the full purchase price. Potential buyers sitting on the sidelines (with healthy credit ratings and plenty of savings) move in because there is now the visible possibility of a return on equity. Prices stabilize.

    Meanwhile, people that probably shouldn’t have been owners in the first place – they didn’t have a down payment and/or had to fudge their income – go back to renting. Rents rise with demand, and price/rent ratios move towards historical equilibrium. Those highly credit-worthy borrowers with an understanding of the basic concept of return on capital and positive cash flow (please move over, Carlton Sheets crowd), move in further. This time they are buying to maintain, rent out, and garner a long term return on their investment – not flip to the next joker two days after they close.

    Lenders are already putting the kibosh on home equity lines, so there is no need to argue this will bring the consumer-led economy to a screeching halt. Prices of everyday goods are taking care of that, and much of the non-core inflation is a direct result of interest rates and the falling dollar. Yes, demand will fall, but a significant amount that demand is consumers’ insatiable appetite for foreign goods. If the influx of good manufactured outside the US slows, you trip a decline in commodities prices – foreign demand in foreign currencies slows as a result of shrinking sales to the US, exacerbated by a stronger dollar on the back of dwindling supplies of it.

    While markets aren’t keen to consider the effects of negative growth with a smile, maybe they should consider the effect of rising margins too. Falling prices means decreasing cost of goods too. Meanwhile, price conscious consumers see bargains everywhere, which negates some of the revenue declines and the unemployment associated with it.

    Heck, we’re a services economy anyway, and it’s going to take plenty of accountants and attorneys and bankers to get those foreclosed homes into the right hands. And plenty of plumbers and electricians and interior designers to fix them up. Retirees make crap a few bricks while watching the Dow correct itself, but if you have 2/3rds of the savings you had before while a gallon of gas costs 1/3rd what it did while you were socking away, why would that matter? We might also see rising interest rates under this scenario, which means fixed income portfolio losses (on paper) but plenty of extra cash flow to support daily needs.

    Yes, it all means some pain, especially for trading partners. I suspect the far east economies wouldn’t be particularly pleased at the thought of forced moderation to their now improving lifestyles. And first you have to buy into the idea we do truly live in a global economy – and that decoupling doesn’t exist.

    Could it work?

    UPDATE: Some of this might happen whether we like it or not – the Fed is finally already warning on inflation.

    UPDATE 2: More on housing price/rent ratios. Note that the forecast doesn’t reflect rising rents – the spike is caused by projected housing price adjustment.