Warren Buffett on Inflation

The Greenback Effect. Oped in the New York Times from Warrent Buffett on inflation. As with everything he writes, well worth reading.

IN nature, every action has consequences, a phenomenon called the butterfly
effect. These consequences, moreover, are not necessarily proportional. For
example, doubling the carbon dioxide we belch into the atmosphere may far more
than double the subsequent problems for society. Realizing this, the world
properly worries about greenhouse emissions.

The butterfly effect reaches into the financial world as well. Here, the United States is spewing a potentially damaging substance into our economy — greenback emissions.

Legislators will correctly perceive that either raising taxes or cutting
expenditures will threaten their re-election. To avoid this fate, they can opt
for high rates of inflation, which never require a recorded vote and cannot be
attributed to a specific action that any elected official takes. In fact, John
Maynard Keynes long ago laid out a road map for political survival amid an
economic disaster of just this sort: “By a continuing process of inflation,
governments can confiscate, secretly and unobserved, an important part of the
wealth of their citizens.... The process engages all the hidden forces of
economic law on the side of destruction, and does it in a manner which not one
man in a million is able to diagnose.”

Credit Crunch Part Deux

Video from Axel Merk of Merk Funds:

Waiting for Godot

Producer Prices in U.S. Decline More Than Forecast via Bloomberg.

This is probably worth noting though:

"Core costs were 2.6 percent higher than a year earlier."

Doesn't sounds all that deflationary to me.

Inflation Blog Weekend Reading

The debt-inflation myth, debunked by UBS, from the FT

The problem with the idea of governments inflating their way out of a debt burden is that it does not work. Absent episodes of hyper-inflation, it is a strategy that has never worked. Government debt: GDP burdens tend to be positively correlated with inflation. Market mythology has created the idea that inflation will help reduce government debt ratios. The facts do not support the myth. OECD government debt rises as inflation rises. Meaningful reductions in government debt will require a low inflation future.

The Fed's 'Last War'? Let's Hope So, from Seeking Alpha

We might as well buy some marble and hire a good engraver. The Fed and central banks around the world have all but written the epitaph of the next great boom bust period in global history. It will be a liquidity driven "recovery" that pails in comparison to the boom bust cycles we have previously created.

The problem this time around is that it's likely too boom in all the wrong places while the continued bust occurs across the entire consumer spectrum....

No Exit for Ben, from Peter Schiff

The bottom line is that Bernanke has no exit strategy. He can talk about it all he likes, but when it comes time to actually pull the trigger, his nerves will buckle. The current communications campaign is simply an attempt to calm the markets. I doubt few citizens or members of Congress had any hope of understanding the exit strategy mechanisms that Bernanke described. Many likely place their faith in his seeming mastery of financial minutiae. Sadly, as with the mythical “strong dollar policy,” confident talk may be the sum total of the Chairman’s strategy.

Trade of the Century?

via The Big Picture, Paul Brodsky & Lee Quaintance of QB Partners on gold.

As the SGP implies, an ounce of gold would fetch almost $6,000 if we lived in a world characterized by disciplined money issuance. In effect, people and governments around the world would have been exchanging their Federal Reserve Notes for gold to the point that it would take 6000 bills to buy an ounce. The Shadow Gold Price solves for the price of an ounce of gold if the US dollar were still pegged to gold and its rise reflects the inflation of the Monetary Base. (Gold used to actually be the US Monetary Base prior to 1971, when the US and other governments abandoned the Bretton Woods Agreement that imposed monetary discipline on their money printing.)


Obviously this appears to be a crazy gold price within the context of the $900-plus price at which gold has been trading recently on global exchanges (though we do remember its rapid move from $35 to $880 the last time around). We are under no illusions that the price of Comex gold will rise to track what we see as its intrinsic value (not because it shouldn’t, but because we expect external market forces with great interests in protecting the sovereignty of fiat currencies to step in before that occurs, see “Potential Endgame – A Managed USD Devaluation” below).

Bernanke’s Exit Dilemma

OpEd from George Melloan in WSJ.

Federal Reserve Chairman Ben Bernanke assured readers of this page (“The Fed’s Exit Strategy,” July 21) that he has the tools to prevent the huge reserves he’s pumped into the banks from generating an inflation that would abort an economic recovery.

But does the Fed have the guts to use those tools? Will it risk censure from Congress and the Obama administration if it tightens money at the crucial juncture when inflationary omens accompany a reviving economy? Mr. Bernanke signaled the probable choice by writing that “economic conditions are not likely to warrant tighter monetary policy for an extended period.”

The Fed’s past record of judging when and how to use its tools for regulating the money supply is not impressive, particularly in times of economic distress. Its financing of large federal deficits in the mid-1970s sent inflation up to an annual rate approaching 15% before Jimmy Carter repented in October 1979 and installed Paul Volcker at the Fed with orders to kill the monster.

Becker Says Bernanke May Fail to Curb Inflation During

From Bloomberg.

Nobel Prize-winning economist Gary Becker said he is concerned that Federal Reserve Chairman Ben S. Bernanke may bend to political pressure and fail to raise interest rates quickly enough to contain inflation.

Becker, a University of Chicago professor, warned that there is a “big risk” of inflation as the economy recovers, largely because of the hundreds of billions of dollars in excess reserves that banks have on deposit at the Fed. He said Bernanke “has the tools” to control inflation, by selling Treasury bonds rather than by purchasing them, and by reversing the central bank’s emergency programs expanding credit.

Barron's on Inflation - Beware of Rotting Money

Article here (subscription required).

WHICH IS A BETTER STORE OF VALUE, BANANAS or corn? The answer is obvious to anyone who leaves a bunch of bananas lying around for a couple of weeks. Green bananas turn yellow, then black. They soften, then they rot. The fruit that was worth a couple of dollars two weeks earlier becomes worthless, at best. More likely, one must expend effort to clean up the mess: Rotten bananas have a negative value.

Doom, gloom, greed & fear: What markets should expect next

Some thoughts from Marc Faber on the dollar and equity markets from the FT.

Another reason for near term-caution, in Faber’s view, is the increasing likelihood of a US dollar rebound. As of last week, he notes, the net number of contracts speculators held betting on a decline versus a rise in the value of the dollar against currencies traded on the CME was nearing extremes, which in the past was associated with at least a temporary US dollar rebound. And since US dollar weakness accompanied the stock market rally since early March, dollar strength is likely to occur simultaneously with a stock market correction.

Paul Krugman on Inflation

The Big Inflation Scare from the New York Times

Suddenly it seems as if everyone is talking about inflation. Stern opinion pieces warn that hyperinflation is just around the corner. And markets may be heeding these warnings: Interest rates on long-term government bonds are up, with fear of future inflation one possible reason for the interest-rate spike.

But does the big inflation scare make any sense? Basically, no — with one caveat I’ll get to later. And I suspect that the scare is at least partly about politics rather than economics.

Inflation or Hyperinflation?

Thoughts from Axel Merk of the Merk Hard Currency Fund (MERKX)and Merk Asian Currency Fund (MEAFX).

Nothing during the financial crisis seems to have worked as planned by the Fed. Policies have been far more expensive as the Fed’s credibility has eroded. The Fed has repeatedly shown that it completely underestimates the political dimensions of its policies. Will the market really buy its tough talk? And if not, what will happen? If the Fed substantially increases its market interference, it can lead to hyperinflation down the road. How likely? We are reluctant to quantify it, but the risk is real. The appropriate way for the Fed to regain credibility may be to not only announce that there is a viable exit strategy to the policies that have been pursued, but to embark on it. So far, this hasn’t happened, the printing press continues to be very active with the Fed’s balance sheet growing steadily. We hope the balloon won’t pop, but hope is not a strategy.

How to Build a Portfolio Wisely and Safely

Article from WSJ on portfolio construction depending on your inflationary view.

Inflation
If you believe all the government spending in response to the financial crisis will ultimately beget inflation, you want a portfolio that thrives in a period of surging prices.

Commodities are the primary play, because everything from oil and corn to copper and pork bellies should gain. Plus, commodities -- particularly gold -- hedge against the dollar, offering a 2-for-1 benefit if a weak dollar accompanies inflation, as some expect.

Since commodities contracts can be a hassle for individual investors, consider a fund such as Pimco's CommodityRealReturn Strategy Fund, which offers exposure to a broad swath of industrial and agricultural commodities.

Jim Rogers: Commodities are 'the best place to be'

Interview with Globe and Mail here.

Throughout history, when people have printed lots of money, it has always led to higher prices. Throughout history, when governments printed, the money has to go somewhere. Historically, it has always gone into real assets, as people try to protect themselves. … It's not going to go into people buying new cars, it's going to go into wheat and silver and oil first. It may go into new cars eventually, but it's going to go into real stuff first – at least it always has. I'd rather own commodities than just about anything I can think of in a period when the whole world is debasing paper money.

5 Non-Traditional Inflation Indicators

Nice article from seeking alpha.

We essentially use five indicators:

1. Emerging market small caps vs. developed market small caps (EWX vs. GWX)
2. Commodities in general relative to gold (CRB vs. GLD)
3. Non US inflation protected Treasuries vs. ex US unprotected Treasuries (WIP vs. BWX)
4. Commodity stocks vs. the broad US stock market (CRX vs. VTI)
5. Commodities vs. US 30 year Treasuries (CRB vs. USB)

...To us the market is sending very strong signals that world growth and inflation is picking up. We are not above the market (and have seen very few cases of anyone who has consistently outperformed the market) that is why we follow it.

Interview with Jim Rogers.

Transcript here.

In the near term, markets seem to be more concerned about growth than they are
about inflation. The difference between the 10-year and the two-year bond yield
in the US has narrowed some 40 basis points since early June. Unlike you Jim,
people are actually going out and buying long maturity treasuries because they
don't see growth, don't see inflation. So, what do say to these bond buyers?
Good luck?

When you see anomalies like this in the market, you are
supposed to take advantage . The spread is very low. So, why would anybody buy a
10-year when he can buy a two-year ? Not worth the extra risk to go out 10
years. I would urge people to keep their wits. Now, granted Mr Bernanke and the
US are buying a lot of government paper and driving the price up. That's why I
am not sure. He has got more buying power than I do, at least for the
foreseeable future. So, you are seeing longer bonds going up. That gives you an
opportunity to get out if you own them or think about selling them short if you
don't own them and know how to sell short.

Some video here....Kind of an odd interview....