Tuesday, April 12, 2011

Inflation Pendulums, Nukes and Shoe Shops

It was only 8 months ago that the world was screaming that deflation was a foregone conclusion and the only way that the world could adjust. At that point we felt that we weren't seeing deflation, we were seeing wealth degradation. Since then of course the whole idea of deflation is as fashionable as building nuclear reactors in earthquake zones. On that subject, Japan's announcement that the calamity is now as bad as Chernobyl has TMM asking if the total amount of radiation is actually a problem. Isn't the area affected more important? There is a letter in this week's New Scientist suggesting that all nuclear power stations be built underground where the benefits of containment, natural shielding and gravity fed water cooling systems is obvious. Is there any good reason why not? What's that Lassie? There are strange men in white coats down the old mine?

But back to that inflation thing. The inflation story has rightly become the pressing theme in the last 6 months but TMM do wonder if we are now near the zenith of the counter swing in this pendulum of inflation expectations, for today saw something remarkable...

...The UK we have just printed inflation figures BELOW expectation...

Well when we say "expectation", it would depend who you talk to as there is a feeling that someones expectations might have been a little too informed to the point where even the ONS is examining the security on the 6.45 football supporters special it uses to ferry its hedge fund locum courier from Cardiff to London.

TMM are eagerly awaiting a follow up along the lines of:

It was still an eye watering 4% and as most UK residents know the cost of living here has absolutely sky rocketed over the past few years. When married to the slow down in the public sector it has crucified confidence and the consumer has responded accordingly, deciding to rein back on Plasma TV's and bling leading today's BRC retail sales figures to print -3.5%. We fully understand how the high street reflects the mood of the UK public but as we have protested before we don't see it as being a disaster due to "jobs being lost in retailing". That's just evolution and vital to keep the UK from evolving into Frogstar B - The planet in Douglas Adams Hitch Hikers Guide To The Universe.

"Frogstar B was thrown into poverty through an event termed the Shoe Event Horizon. The foundation of the Shoe Event Horizon theory is that when depressed, people tend to look down, and when they look down, they see their shoes. To cheer themselves up, they might buy themselves a new pair. Thus, in a generally depressed society, demand for shoes will rise. In the critical condition, demand for shoes rises faster than the capacity to make good quality footwear. As shoe quality decreases, the demand increases further because shoes wear out faster and need to be replaced more often; as the demand for shoes increases, cheap mass production causes shoe quality to drop even more. What results is a spiral of increasing shoe demand and decreasing shoe quality. Eventually, this destabilizes the economy to the point where it is "no longer economically viable to build anything other than shoe shops", and planetary society collapses".

That sounds familiar enough without even having to substitute "shoe" with "Apple".

We were going to now mention the UK housing market, but having Aussie-housing-ourselves-out it will have to wait. Instead, we will note that the Battle of Spain, which is where the markets expect the European Wars of the Periphery play out its decider, has seen the Chinese doing an impression of the Prussians with Wen as Blucher coming to the rescue with his host of bond purchases. Europe has gone too quiet again. If you think that everything is too pessimistic at the moment then perhaps its worth re-establishing the Optimism clubs of the 1930's, where organised positivism was seen by many as a way out, and by others as a sure sign of economic hard times.

Oh, look. They are back.


abee crombie said...

as much as I hate the fact that the fed is chronically behind the curve, I too am starting to wonder if the pendulum on inflation has swung too far.. is cotton going to $60, oil $150-200.. perhaps but i'm not betting on it.. inflation is not front page news but it is near the top of the headlines in the business section

Charles Butler said...

Noted that Munchau was back at it again yesterday. Three and a half straight years of getting it wrong - but with authority.

Anyone have an idea about what it takes for a journalist to find himself unemployed?

Leftback said...

"Anyone have an idea about what it takes for a journalist to find himself unemployed?"

Easy, if you don't write a few hundred words of conventional wisdom or complete bollocks every day, they will fire you.

Speaking of bollocks, TMM, the Bill Gross shorting Treasuries indicator is now 2/2...! Also we were "right" about crude, but a week early, aka "wrong".

England does indeed have inflation, based on LB's recent foray into Sloanesville. One's drinks bill was frightening... shurely shome mishtake, TMM?

Bob_in_MA said...

I'm not betting on oil going to $150 either, but I definitely wouldn't bet against it.

I'm fairly convinced this is real supply/demand, so either world growth slows appreciably, or oil starts rising again.

So far, only drivers in the U.S. seem to be cutting back (gasoline sales down 3.5% YoY.) That's the point when things like casual dining started getting slammed in 2007, but it isn't clear what effect its having more broadly.

In 2007/2008 emerging markets seemed to shrug off the price rises, and now they are an even higher share of consumption. Can they do it again? Or maybe the question is, for how long can they do it?

Anonymous said...

You know the old saying about the cure for an high price. Well regardless of other commentary I'd say energy prices more akin to the end of an expansionary cycle are going to do much more damage to growth far earlier when the 'expansion' we are in has not yet dealt with the high debt levels of a previous cycle.

I'd say there is a lot of wishful thinking in energy costs ,but we'll see what that is worth if Japan, 2 speed Europe ,UK and a US approaching the end of QE can't deliver growth up to expectations.In that case the old saying will turn out to be right yet again.

FX said...

Can someone confirm the following facts( the wiki).

By March 2009, it held $1.75 trillion of bank debt, MBS, and Treasury notes, and reached a peak of $2.1 trillion in June 2010. Further purchases were halted since the economy had started to improve. Holdings started falling naturally as debt matured. In fact, holdings were projected to fall to $1.7 trillion by 2012. However, in August 2010 the Fed decided to renew quantitative ....

The apprentice.

CV said...

My symphaties LB, up here in the North we can still get a pint for about 2-3 quid which means that just about any sob can get a kick on at will.

I would note though that filling up the old VW is eyewateringly expensive as well as I sense that the weekly Tesco bill is getting bigger ... but hey, 4 is lower than 4.4 and this must be deflation then? or ...