Flation wars

Reddit

–Hmm, so gold took a tumble from its lofty heights. And markets in the US didn’t look too much better. Europe was ok though.

–But what’s changed? Have people forgotten that the world is about to be flooded with the “full faith and credit of the US government”? (That’s the text printed on Federal Reserve Notes, which the US government has declared to be legal tender). Perhaps people would prefer J.F. Kennedy’s silver backed dollars, which were quickly taken out of circulation by the Federal Reserve after his assassination. With them, we’d be on a sound money footing, which makes sound investing a lot more likely.

–Maybe the “awwww” part of the “shock and awe policy” has set in, as discussed yesterday. QE1 didn’t work, why should 2 do any better? Not that it won’t do anything.

–But how does frying bigger fish today sound to you?

–Lets take on the decisive question. The mother of all queries. The game-changer of all known unknowns: inflation or deflation? Better known to your editor as the ‘flation wars’. That’s the big one, dear reader.

–Those with a shred of credibility post GFC are the ones who predicted it. But they are far from the monotonous bunch you’d expect. And the ‘flation wars’ are where they really come head to head.

–You see, anyone outside the mainstream could predict a crisis was around the corner. Simply by being different, that is. It’s an inherent contrarian characteristic. Some contrarians fancy themselves as a modern Galileo or Luther. Sometimes they turn out to be more like the people you see walking around in circles outside our office, muttering to themselves. The point is that being correct isn’t the same as being right. Seeing something coming doesn’t mean your understanding of why it’s coming is correct.

–So you have to dig down deeper to discover who has a more sound theory. Track records aren’t everything. But they do matter, so let’s narrow the ‘flation war field down to some of those left standing after 3 years of hullabaloo.

–Hold on. It’s probably best to frame the battlefield first. Sun Tzu would approve. We live in a highly leveraged world with an audacious academic in charge of the most important central bank and a community organiser in charge of the most important economy.

–Two of those three facts favour the inflationists. As Marc Faber often says, simply look into the eyes of Bernanke, Obama, Geithner and advisor Summers and you can conclude nothing but inflation to come.

–The deflationists, notably Robert Prechter, think a repeat of ’08 is in the cards before any inflation can really appear. That’s because the world’s leveraging troubles aren’t solved. And interest rates can only go up. So, even if inflationists are correct initially, the inevitable increase in nominal interest rates will trigger a crisis, which means deflation. To put it plainly, any inflation will trigger deflation anyway.

–A mental image might clarify things.

–Imagine a tug of war with Bernanke and the entire Obama administration on the inflation side, with the private sector (importantly including banks) on the deflation side. Yes, the banks are involuntarily on your side for this one. The question is which side will outweigh the other.

–Deflationists would contend that the private sector has jumped off a cliff without letting go of the tug of war rope and Bernanke and Obama will be dragged down with them. Inflationists would argue that Bernanke has tied a helicopter to his side of the rope and plans to lift everyone into the skies, cliff or no.

–It’s a power struggle. The problem is that half of it is a political one. And politics doesn’t conform to the usual laws of economic theory. That leaves analysts like us with a problem. Austrian Economics believes in an inherent logic to all actions. Not that the logic is often decipherable to the observer. Bernanke’s certainly isn’t. But even he acts based on incentives. The question is, what are they?

–To paraphrase a congressman during a recent hearing, “We do not question that you are working hard. We question who you are working for.” The obvious answer is that Ben Bernanke is working for Ben Bernanke. But what is the highest bid in that auction? The fulfilling reward of putting the economy back on a sound footing? Not likely.

–So what side do you take as an investor on the battlefield of the ‘flation wars? Precious metals and commodities generally signal inflation. But when things reach all time highs, it’s usually not the best time to join in. It seems like an amateur mistake to do so.

–So how about you just sit it out for a round and watch the carnage unfold – to the upside or downside. But where? Bonds aren’t risk free (don’t believe your economics teacher). The Aussie dollar isn’t too bad, but it seems like a small fish in a big, big pool and US investors will determine investment trends to come. They can’t stay in US dollars if inflation takes hold, so that isn’t safe either.

–The logical place to turn to if nothing seems appealing is liquidity. Keep your portfolio dynamic so you can move fast as things play out. Talking of fast, dynamic and responsive, did you see this yet?

Nick Hubble
Nick Hubble is a feature editor of The Daily Reckoning and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about The Daily Reckoning, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.
Reddit

Leave a Reply

70 Comments on "Flation wars"

Notify of
avatar
Sort by:   newest | oldest | most voted
Ned S
Guest

“The logical place to turn to if nothing seems appealing is liquidity. Keep your portfolio dynamic so you can move fast as things play out. Talking of fast, dynamic and responsive, did you see this yet?”

So Nick recommends being highly liquid, fast, dynamic and responsive – Sounds like a recommendation for dealing with an economy that has diarrhoea to me?

Biker
Guest

“Talking of fast, dynamic and responsive, did you see this yet?”

_Must_ have been fast. I never saw it. Did you?!~

Ned S
Guest

Faster than a speeding bullet our Nick, Biker! ;)

Ned S
Guest

Could this have been the article Nick omitted to link to in haste after it inspired thoughts of “liquid, fast, dynamic, responsive”? :

http://www.smh.com.au/lifestyle/lifematters/conception-chances-magnified-by-giant-sperm-20101110-17npa.html

Biker
Guest

Well, Nick certainly has lots of character, Ned. I guess he’s the third specimen?!~

“Keep your portfolio dynamic so you can move fast as things play out.”

Never was one to put all my eggs in the same basket, Ned… but these daze it’s getting harder to even locate the basket… . ;)

Ned S
Guest

Old bulls ‘n young bulls Biker; Keep poking around patiently and you’ll probably locate the basket??? :D

Biker
Guest

Hope so, mate!~ It’d be a terrible thing to misplace it permanently!!!~ :D

Ross
Guest
Along Ned’s lines about taking gift trading profits those UUCP calls might be a sell within days rather than the many months like last time. There always seems to be an Ireland problem immediately following a US QE and as the EU banks own the majority of the EU bonds who knows? Maybe the timing of EU sovereign near default events is not as random as we might think. You can’t expect the EU to lay down dead in a ‘beggar thy neighbour war’ can you? Mr trader Prozac what do you think? Today Brazil called for the G20 to… Read more »
Ned S
Guest
The days of the USD as the major global reserve currency will come to end eventually Ross. With it being pretty obvious that the US’s quite dominant role in the world is in decline. A basket of currencies might have interim merit. But given that they are all fiat, they are all fundamentally untrustworthy. I’d like to hear the idea of a basket of commodities discussed more – Not sure how it would work? But ultimately sovereign entities can always default regardless of what supposedly backs their currency. So none of them are really ever going to be any better… Read more »
Biker
Guest

The rise and rise of the pharmaceuticals might yet be the saviour of the US economy, Ned. The potential for healthy longevity is virtually untapped.

If we imagine this to be an optimistic view, let’s temper any pessimism with the certainty that we really can’t take it with us.. . :D

Ned S
Guest
I’d imagine the Chinese unis will start getting heavily into pharmaceuticals related courses one day Biker (assuming they don’t already which would seem unlikely!?) – And especially if they reckon there’s a buck to be made in it. Plus if one has a few trillion in reserves, one can possibly even buy up some existing companies ‘n patents to give one’s fledgling industry a help along??? Plus they are in the interesting situation of being able to potentially bring a long history of alternative treatments into the mix. With not all of them being quackery is my guess? Then again… Read more »
Biker
Guest

As with all technologies, there’s bound to be some misappropriation, Ned, but it may, as you say, be easier to simply buy the US company and then own the patents, anyway.

The US probably missed the immense opportunity to dominate alternative energy markets, being so petroleum-focussed. Wouldn’t be at all surprised if they gave away their lead in biotechnology!~

Stillgotshoeson
Guest

Ned here is an article about renting out a home that WAS a principle place of residence then rented out for 4 years.. The reader asks about capital gains tax..

Capital Gains Tax is payable even though the owners were away from the home for less than 6 years..

http://www.theage.com.au/money/investing/fractions-reap-rewards-20101108-17jpt.html

Biker
Guest

Still a better option than selling it to a grumpy bear, Ned!~ :D

Ned S
Guest
From your link Shoes: “We purchased the house in June 1988 on 650 square metres and lived in it for 18 years as our main residence, then bought an unrenovated property and completed renovations, extensions and resubdivision with an adjoining property, so it is now an 800-square-metre lot.” With a pretty key word there being ‘resubdivision’ is my guess. So it was far from a simple case of them renting out their original home property for under 6 years. I’d have to check the details, but it is my recollection that if one even subdivides their original property and sells… Read more »
Ned S
Guest

Did I ever tell you about my HIV test Biker? Turned up at the doc’s for the verdict – Doc announces: “Well, THAT’S a positive result!” Hmmm – A doc with a sense of humour can be an over-rated experience on occasion. :D

Biker
Guest
But I recall that your original supposition was that a young FHB couple who could not keep up repayments were better off renting that property out and moving back in with M & D; rather than taking a loss, wasn’t it, Ned? Shoes was correct that CGT would be proportional… but that’s a better move than a.) letting a bank sell it off; or, b.) selling to an investor hovering overhead, all vulture-like… . ;) It’s our view that the live-in-it-six-months-rule was devised to permit anyone later caught out by unemployment, rising rates, marriage-demise, etc., an escape route. Nice bit… Read more »
Ned S
Guest
Do you happen to know the period a FHB is required to live in a property minimum before they can rent it out re avoiding getting caught up in having to pay back the grant money? (I don’t but certainly wouldn’t just assume it is 6 months.) Then I’d also be wanting to know about what (if any) implications are there regarding the wavering of stamp duty on purchase. Plus implications re any of the ‘extra’ grant money I think some states were handing out. It’s quite doable is my understanding, BUT, as stated, one would have to do their… Read more »
Biker
Guest

My understanding is:

a. six months
b. no stamp duty was payable for FHBs in WA (other states???!~)
c. no idea if the six-month provision applied to shared equity.

Biker
Guest

We can expect to see a minor jump in the market when the first four-year FHSA periods mature; although only 20% of those eligible have applied.

Stillgotshoeson
Guest
Comment by Biker on 11 November 2010: My understanding is: a. six months b. no stamp duty was payable for FHBs in WA (other states???!~) c. no idea if the six-month provision applied to shared equity. In Victoria it is 6 months New homes are stamp duty exempt but not existing dwellings no shared equity schemes here.. I agree with Biker in that it was an “escape” clause.. I personally view the whole FHB scheme as wrong, however that is probably the “best” bit of a flawed policy. I might be a property investor soon… Looking to buy a house… Read more »
Stillgotshoeson
Guest

Comment by Biker on 11 November 2010:

We can expect to see a minor jump in the market when the first four-year FHSA periods mature; although only 20% of those eligible have applied.

There has been such a small take up on this I think there will be no impact seen from it.

Biker
Guest
“I personally view the whole FHB scheme as wrong, however that is probably the “best” bit of a flawed policy.” Disagree. The best aspect, for Aussies generally, was that it emptied the tenant pool. Prior to that, I was continually interrupted in my soakwell-digging, half-a-dozen times a day, by prospective tenants _pleading_ to take one of our new rentals, four of which were surrounded by sandy wastes! In 33 years renting out homes, we’d never witnessed such desperation for rentals. After two years of FHOGs, that pre$$ure disappeared… . If that had been the only positive outcome of that very… Read more »
Biker
Guest

Congratulations on your potential acquisition, Shoes.

FHSA: “There has been such a small take up on this I think there will be no impact seen from it.”

We believe it will reduce supply in Perth, currently running 4000+ above average, at a time when demand is increasing here.

May affect the east coast marginally… .

Stillgotshoeson
Guest
Comment by Biker on 11 November 2010: “I personally view the whole FHB scheme as wrong, however that is probably the “best” bit of a flawed policy.” Disagree. It was one of Labor’s major achievements… and to this day, they haven’t publicised its incredible success. (Considering their string of abject failures, this is incomprehensible… . ;) The incredible success side remains to be seen.. with 50% of FHB’s suffering financial stress and rates tipped to rise even more this may well turn out to be a disaster. The home in question is a 4 bedder 2 bath room BV on… Read more »
Stillgotshoeson
Guest

The house is not officially on market yet.. Owners are parents of children at my childrens school.. They are building a 70 Square house on a 10(ish) acre property..
They have gone over budget and have decided to sell earlier then planned to fund the finishing of the property and give them funds to rent for 6 to 12 months whilst they complete the new home.

Biker
Guest
Sounds ideal. One of the benefits of this kind of project is doing an upgrade yourself, at your own pace; or finding a top tradie: honest, skilled, and who values his/her reputation. We have found such workers. We no longer allow our two agencies to send in their ‘own’ people, who provide a percentage back to the agent and charge 30 – 50% more. We now have a data base of preferred repairers: sparkies, plumbers, painters, etc. We’ve reduced maintenance costs by well over 30%.. and there are never any arguments about faulty workmanship, warranties, etc. It’s only in the… Read more »
Stillgotshoeson
Guest

A friend is a chippie another is a sparkie.. I would not be in a hurry to do anything anyway…

Ned S
Guest
FHOG – It pushed prices up. And while the guv knew it would, I fully expect they underestimated the effect. Given that they almost certainly expected declines due to higher unemployment to offset at least some or all of the effect. With such declines in employment never really eventuating of course. Which leaves the RBA to try and clean up any potential fallout. By leaning against house prices while hoping and praying the anticipated minerals boom goes ahead. Until such time as they suddenly find they don’t want to be leaning against house prices any longer. Because a significant downwards… Read more »
Biker Pete
Guest

“FHOG – It pushed prices up.”

May well have, over there, Ned.

We know of not one WA family who bought an _existing_ house.
We know there were many hundreds who took the full $21K and built near our projects during that two-year period. We do not know any experiencing difficulties… but it’s a high-waged, full-employment beachside community.

Another peripheral benefit was the spur to construction in WA.

My own view? Happy ending*. :D

* Sorry if that offends anyone… .

Ned S
Guest
I’m bearish so would question your timing a bit Shoes. But timing markets is something I have an abysmal track record in. The property you describe sounds like it has a lot going for it. Being that vintage, I’d fully expect it has a hardwood frame – Which I see as a plus. Over pine anyway. Plus it has the second and often overlooked factor regarding property (aside from position) with the second being potential. Namely a ginormous block and while being quite liveable now also has reno potential. It surprises me that a few more with decent super don’t… Read more »
Ned S
Guest

FHOG put them up in Brissy Biker. But we are down again now.

Big picture – GO ASIA! (Fingers crossed.) Though even barring any little hiccups along the way, it is about as close to a certainty as I can imagine.

As to the US (and Europe?), even BB opined a while back that it could become a reasonably laid back and pleasant enough, though somewhat less prosperous place to be retired in – Given some more time.

Biker Pete
Guest

“FHOG put them up in Brissy Biker. But we are down again now.”

There ya go: Another Happy Ending…!~ :D

Stillgotshoeson
Guest
Ned, I am bearish on house prices too in the shorter term but feel confident for the future that they will regain any shorter term loss in value. It may suffer a fall of 10% or 20% who knows, but may never be available to me either.. Potential is good so I have made an offer.. They are mulling over and deciding whether too list it on market or do a private sale with me.. They like that I am a “cash” buyer and don’t have to worry about subject to finance clause… I am flexible on settlement terms too… Read more »
Ned S
Guest

Being such a positive chap Biker, I’m not at all sure I’d recommend you go for a HIV test! ;)

Stillgotshoeson
Guest
Comment by Biker Pete on 11 November 2010: “FHOG – It pushed prices up.” May well have, over there, Ned. We know of not one WA family who bought an _existing_ house. Most in Melbourne bought existing housing stock.. There is no doubt that the FHOG boosted prices here. Anecdotal evidence suggests 50% of them are struggling now. Partly blamed on poor budgeting/savings history/experience partly blamed on over commitment to home loan and other finance commitments and of course the 7 rate rises.. More rate rises to come will increase these financial pressures. Northern and Western suburbs of Melbourne seem… Read more »
Ned S
Guest

Sincere best wishes with it Shoes. Must admit I’ve never been in the Steve Keen type bear camp either. And inflationary pressures would seem to be the long term trend to me.

Biker Pete
Guest
Shoes: “Anecdotal evidence suggests 50% of them are struggling now.” I’d be surprised to learn that more than 20% are struggling. But the term ‘struggling’ is, in itself, interesting, used in this context: http://www.watoday.com.au/wa-news/struggling-perth-homeowners-turn-to-renting-20101111-17oto.html There are numerous ways to hold property through plateaus. It’s interesting that some Perth families are choosing this successful holding strategy. Don’s unemployment figures for Cairns, confirmed during our recent visit, mean that, as you’ve inferred, some areas will do it harder than others. WA’s current unemployment rate is 4.7%, less than half that of some FNQLD cities. I suspect that we’ll ride it out better… Read more »
Stillgotshoeson
Guest

Comment by Biker Pete on 12 November 2010:

Shoes: “Anecdotal evidence suggests 50% of them are struggling now.”

I’d be surprised to learn that more than 20% are struggling. But the term ‘struggling’ is, in itself, interesting, used in this context:

http://www.abc.net.au/news/stories/2010/10/25/3047493.htm

Specifically mentioned Melbourne and Brisbane…

Biker Pete
Guest
Interesting link. It does note increasing rents as a barrier to buying: “The reality is that many of them are staying in rental properties, which is not necessarily a great place to be in terms of the sort of rental shortage we are seeing at the moment and the high rents that many inner city renters are having to pay. Of course whilst you are paying those high rents it is difficult to actually save money for a deposit.” Two opposing views seem relevant here. ‘FHOGs exposed these folk to future loss’ VS ‘FHOGs assisted these folk to get a… Read more »
Stillgotshoeson
Guest
Comment by Biker Pete on 12 November 2010: We’ve little sympathy with those who believed a FHOG was a lotto win to be accompanied by a new car, new furniture and appliances, etc. Their inability to plan and budget exposed them to high risk. The Melbourne and Brisbane contexts do support the view that any pain may be localised… . A lot of FHB’s in Melbourne instead of using the grant to borrow less, either bought a bigger home than they other wise would have with the “extra” or used it to fund a host of shiny new things for… Read more »
Biker Pete
Guest
In the context you describe, the First Home Savers Accounts meet the criteria you’ve outlined, Shoes; particularly in respect to a (four year) savings history. We can agree that the funding a ‘host of shiny things’ often complemented FHOG home purchase. As you say, all these shiny things have lost value. If mum and dad assisted with the deposit, chances are they’ll help keep the boat afloat if it looks like sinking… even if that only means allowing the kids to move back home and rent out the new house. Although we give our kids _nothing_ we’d give them shelter… Read more »
Steve
Guest

Steve was happy that the other 2 banks lifted their interest rates well above the RBA
:D

Ned S
Guest

Steve’s always just a happy chappy – ‘cept when he’s not … :D

Steve
Guest

True Ned,
Hopefully some of these priks will start to default now…

Its about bloody time

hehehe

Biker Pete
Guest

Happy? Here’s a 25yo stuck in his room with his keyboard, all Friday night.
At his age I was out on the town having fun… . :D

Biker
Guest

In case ya missed it, Ned:

http://www.youtube.com/watch?v=oPhP-75rdos

Biker
Guest

“If it’s not a misprint, this fella has just dropped his price from $450K to $345K(!) It sounds too good to be true… and probably is.”

It was a misprint, all right. Apologetic agent called back. Price is $445K.
Owner has dropped the price by just $5K. Realtor wasn’t keen to disclose how many calls he’d had. (“A few!~”) ;)

Ned S
Guest

Yes, many a true thing said in jest – I gave a bit of thought to heading up North QLD way and getting into red claw commercially in about 2006 Biker. With NOT doing it, being a pretty good move in hindsight quite possibly.

Biker
Guest

‘red claw’?

Don managed to put us off Cairns… and Port Douglas seems overpriced, given the tourist decline.

If Shoes’ predictions for Melbourne eventuate, a high-rise city apartment would be great for quick trips. We don’t have an an(y) apartment(s) and I’m a little regretful Son2 didn’t pick one up back when Keen was shouting to the rooftops that it was all gonna fall over.

Talking of high rise:

http://gizmodo.com/5687521/chinese-build-15+story-hotel-in-just-six-days-rest-on-seventh

wpDiscuz
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au