Indulge me, I promise it's worth it.

I know I've had a penchant for going a little off topic but I feel these issues are important.  This article I read today is really worth reading in its entirety.  The guy's name is Charles Hugh Smith and I know that sounds like a pretty right wing name but if I can read Krugman, then you can indulge me and read this article. It really gets to the heart of the matter about why our polictical elites prefer a policy of inflation over deflation.
Despite my hard money and laissez faire bias, I do believe that some regulation, policy, or law needs to be imposed to prevent the elites from running away with the piggy bank!  I think that if you're a die hard liberal and believe in the rights of the majority then Hugh Smith's opinion piece is worth reading.  He's able to articulate the difference between more desirable inflation that he calls 'organic' and the bad kind that I've been alluding to called the 'speculative'.  He also alludes to what we discussed in the previous post about monetary policy being a blunt instrument and how policy needs to pick up the slack viz a vis chartering new banks if necessary.  The deflationary bugaboo has been much ballyhooed by the very same financial elites that benefit from government bailouts.  Yes the Great Depression was bad but that's why we now have unemployment insurance, and welfare. (not to mention Fannie, Freddie, Gov't Motors and Cash for Clunkers)

You Want Inflation?

Go ahead. It's worth it!

Back to Stocks.

My speculative bottom fishing is NOK. I haven't seen a stock getting hammered like this, from $11.50 to $8.84, over an executive decision. When you think about it, most of the fast stock drops are due to bad earnings or guidance, rarely caused by some planned corporate strategy. Former MSFT Apps exec Stephen Elop, with no wireless expertise, is now being widely panned as having delivered NOK to a sinking MSFT, instead of choosing the superior Android. A CEO is brought into enhance shareholder value, not to wipeout 20+% of market cap in two days by making such bad strategic choices. I suspect his days are numbered, and the board should hang him out to dry, if they are truly there to protect shareholders. The stock should jump back to previous levels if/when they dump him and undo the Windows Phone deal. I don't like much anything else about NOK in terms of fundamentals or market positioning of smart phones. But I think the soon to be dumped Elop may be the best thing about this stock!

The View from 30,000 feet.

I’m writing this on an early morning flight so I thought the title and content were apt. Hence, it's written in a oxygen and sleep deprived state so take with grain of salt, per usual.

1. It seems your Fed bashing is somewhat misdirected. The Fed has ONE very blunt instrument, monetary easing or tightening, for the dual goals of inflation control and full employment. (nevermind that the neo-cons are making some fairly disingenuine arguments for handcuffing the Fed’s dual mandate while complaining about a jobless recovery. But logic has never been their strong suit.)
So then it is upto fiscal policy (gasp politicians!) to redistribute the monetized wealth. The right-wingers mantra of leaving the trickle down economy to work its capitalism magic is a pipe-dream. This jobless recovery and the credit bubble of 2008 have thoroughly discredited this classical theory. The bankers are padding their bonuses while the middle and lower classes are being left out. So given that laissez-faire has failed, why not try the New Keyensian approach; yes, tax the bankers’ bonuses and spend on infrastructure and education. It will more effectively redistribute wealth and stimulate consumer demand, rather than creating more financial/asset bubbles. What are the uber rich going to do: stop lending or creating new businesses? Yeah, we’re already there. What I find most galling about this is the way conservatives are always shooting down any possible solution while providing no new alternatives. In summary, the current situation is not a failure of Monetarism, but a failure in policy and it is upto Obama to fix that.

2. One thing I find intriguing about your preoccupation with inflation is that most bond vigilantes have a vested interest in scare mongering, jawing down the market. But you don’t really invest in bonds, which makes your obsession slightly puzzling. Understanding the dynamics between bond and stock markets are fine but drinking your own koolaid may lead to some poor investing decisions.

3. Last but not least, name calling is the last resort of a debate lost. And from my biased perspective, the right seems to do that a whole lot more than the socialists.

I’m 40+ and I’m still a bleeding heart liberal… sad.

Cotton, Oil, Rice Prices a Harbinger for Deflation!

I was reading the G&M this weekend and was perturbed again about the poor understanding and reporting of price inflation. The front page stories in the ROB discus how rising cotton prices are causing food inflation. Ok it does follow that farmers who want to capture the historically high prices of cotton and rice will plant less corn, soy, and wheat. What the article doesn't discuss are the reasons behind the cotton price increase to begin with. Was it some one off fungal blight of this years crop? Or will next year we see a cotton price collapse barring some new cotton t-shirt fad? One real cause of food price inflation over long periods of civilization are population pressures much as we're seeing now in the burgeoning and much talked about emerging nations. Once inflationary fires start, you get positive feedback loops that magnify the misallocations of resources and set the loop into bubble type dynamics. Just like during the initial stages of the housing boom that was fueled by low interest rates, bubble dynamics are hard to pick out as the psychology overtakes the fundamentals.

One other cause for the rush into commodities is the so-called inflation trade because of the real or anticipated increase in the monetary base. QE1, and 2 have done wonders for just about every asset class. This has been true for Ag and this has been especially true for oil as the
Globe reporter points out that this will eventually lead to inflation. I have a problem with this simplistic understanding of inflation and it's causes. Without getting into a long dissertation regarding Monetarism and Austrian economics, let's agree that if the monetary base was held relatively stable, the price increase (some would call this inflation)of oil is inherently deflationary. Simple really: more $ spent on oil and its many derivatives, the less $ for other things. $100 per barrel oil is a deflationary brake on the economy despite Bernanke's disingenious academic sound bytes about trying to "anchor higher inflationary expectations". It's when the monetary authorities increase the monetary base for whatever reason, you start to get price levitation (I'm avoiding the I word)in commodities first.
Eventually because oil and other commodities are used in the production of other products, you will get price inflation in those goods too, followed by wage inflation etc.
I suspect that we'll not see wage inflation like in the 70's because of the current global wage arbitrage and also because we'll have a stagflationary collapse before then.

So how long does this inflationary wave last? Like I said before, it's hard to see through these psychological ponzi dynamics, but as long as quantitative easing is official policy, the fuel is still burning and you want to ride the wave as it catches and explodes. Be careful what you wish for Mr. Fed Chairman.