Inflation and Deflation Fought to a Draw

No big news from the markets yesterday. Inflation and deflation fought to a draw…and then called it a day.

The Dow fell 65 points – and we noticed that copper was down about 25% from its high. Copper, as you no-doubt know, dear reader, is regarded as the metal with a Ph.D. in economics . When it goes down, the economy tends to go down with it.

You don’t have to be a genius to figure out why. Copper is used in making machines and houses. When demand for copper goes down, so does business activity.

After landing those blows, deflation followed up with a nice combination of jabs. Building permits were reported at a 14-year low. And in Southern California, house sales sank to a 20-year low.

Wiring new houses takes a lot of copper; so when there are fewer new houses, there is also less demand for copper. And less demand for financing – which is a good thing, since financing is less available anyway. Financial stocks have already lost $74 billion of value this year. Moody’s is down 50%. Merrill is down almost 50%. KKR Financial has dropped from 27 down to 14.

And when housing and finance go down…it shouldn’t be long before the entire economy follows.

“The bottom line,” writes David Rosenberg of Merrill, “is that housing and consumer spending were joined at the hip…and now that hip is going in for replacement.”

Consumers can’t make money from rising house prices. And they can’t borrow money either. All they can do is to spend the money they earn. Ouch. Ouch. And in an economy that relies on consumer spending for 70% of its GDP, a falloff in consumer spending is very bad news.

Yes, dear reader…a recession in the United States is probably on the way. Maybe it is here already. And it will probably be a real recession this time, not just a phony recession such as we had in 2001. This time the consumer will actually have to cut back on his spending. This time, consumer credit will actually go down. In short, this will be a recession worth having.

When the dotcoms went down, it affected no more than about 10% of the economy – at the most. When residential housing goes down, the damage will be much more widespread, long-lasting and deeper.

Even the art market is beginning to get hammered. A report in the International Herald Tribune tells us that while prices have held fairly steady, it has come at a large cost in sales. At Christie’s, for example, 19% of the stuff for sale at a recent auction “hit the dust,” meaning – it didn’t sell. At Sotheby’s the total rose to 27%; lots at a recent auction didn’t make the minimum prices set by sellers. In other words, prices weren’t allowed to get to a market-clearing level. Result: no sales. And no information. We don’t know how low prices would have gone if they had been allowed to fully express themselves.

Turns out, the auction houses are giving sellers ‘guarantees’ that effectively stop the market-clearing process. If the price drops below the guarantee, the object is simply removed from the sale. In art, as in houses, it will take a long time to discover where what things are really worth.

But if we were a judge, we’d still have to give the day to inflation – on points. For while copper is getting knocked down, platinum never looked stronger. It’s at a record high and punching hard.

A headliner item on the inflation side was the price of wheat, which also rose to an all-time high.

“Grocery bills keep growing,” says an article in the Dallas Morning News . And the U.N. goes further, with a report saying that not only are prices rising – the world’s food supply is shrinking.

Shrinking? How could the world’s food supply be going down when the world’s population is growing so rapidly? How could farmers produce less food when they have so much more technology to work with? How could food production decline when so many marginal properties are being put into production? We don’t know. But if it is true that farm output has peaked out, prices of agriculture commodities should rise even more steeply in the years ahead.

Meanwhile, the American Farm Bureau tells us that it costs more than 10% more to feed people this year than it did a year ago – up to $42.26 for a group of ten. Not in Switzerland, says our old friend Marc Faber. Only in America could you feed 10 people on so little money. But the key point is that prices are rising sharply. Remember, inflation packs a wallop – especially among the marginal middle and lower classes, where food is a large percentage of the family budget.

Then again, as they have to pay more for food and fuel…they will have less left over. Which, of course, means less consumer spending…recession…falling demand…and…what?…falling prices! Go figure…

Bill Bonner

Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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And when housing and finance go down…it shouldn’t be long before the entire economy follows. on monday it was sunny so they called the sun golden on tuesday it was sunny so they called the sun money on wednesday it was sunny so they called the sun a loan from god and all through the night praised and thanked god……then on thursday it rained and when the people saw the dropping waters/valuations hit the dry earth they rejoiced and were assured of three more days of good growth except the sun worshippers of course…..who said the sky was falling
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