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Monday, May 09, 2011

If You Are Playing In Commodities

It's time to take the sucker unload.

Carloads April (May Rail Time indicators report):

April was about the peak, I think. It usually is about peak for year. In a good year, there is a second peak at the end of the summer.

We are a long, long way from recovering from the last recession, but energy prices appear to be taking the growth right out of the economy.

This isn't going to be an epic crash, but it is going to fold up very firmly.

This also, was a touch worse than I had expected.

April carloads shows some impact from the Japanese disaster, but the Japanese disaster is going to transform into a longer crunch and will be with us for a bit. (Due to Hamaoka NPS being shut down.)

Canadian rail isn't showing much in the way of growth either. There is another yea verily graph:

It sure looks like we just lost our growth edge! Services are just going to flatten out (in total) because of pressured consumers.

And you are probably thinking some sort of econobabble about the new economy blah, blah, blah, but all the new economy really is, is bubbles. And bubbles only last as long as buyers do, and buyers run out of money when they are buying commodities, because eventually someone does have to sell that commodity to someone, and then the jig is up.

If you don't understand why I think this is definitive, read The New Arthurian Economics on capacity utilization.

New Arthurian Economics blog - a lot of graphs. It's like Mark without the Snark.

Start with this post, which includes the following graph:

Monetary Base relative to Actual-Price Output:

Mark without snark!?! That's like apple pie without cheese.
Or a hug without a squeeze.
Coffee without cream....
Chocolate chip cookies without a glass of milk...
Federal government without deficit
Hmmm. One of these is not like the others.
A fish without a bicycle!

Aw, nuts. I've never been any good at this game.
The principles texts written by all these very liberal public economists, such as Blinder, still admit that growth in incomes depends on growth in output, but they will never shout that publicly because it require an indictment of all of the Obama and a lot of the Bush Administration policies, which were all consumption, consumption, consumption.

Growth in income requires growth in productive investment, and what firm is foolish enough to invest huge sums of capital in the US, which has a deficit of $1.5 trillion, and which most likely will be taken from corporations, and anyone making more than $60K per year. The US is a great place to sell in ( ask the Chinese ) but not a great place to produce in ( ask the Canadians, who have made a policy of making their country significanmtly more profitable to capital than the US. ).

Neither party will turn us from this path: the Democrats due to ideology, the Republicans due to fear of Democratic attacks.

This will only end if a new Reagan is elected. The current crop mostly looks likely to continue Obama's government by insider.
You all crack me up!

I was working through a suitably snarky response but then came to "A fish without a bicycle!" and knew that I'd been outsnarked this day, lol.

Oh the humanity!
Mark - but as a consolation prize, you do get inflation and stagnation, all wrapped up together.

Consider it your lucky day!!!
Charles - I, personally, would find a federal government without a deficit an attractive proposition.

What gets to me is that we're spending like loons now without the ability to cover the basics later.
Charles Kiting & AllanF,

Federal government without deficit

Hmmm. One of these is not like the others.

Perhaps if we embrace Keynesian economics for the day then they are all the same.

Pie, cheese, hugs, squeezes, coffee, cream, cookies, and milk for all! Woohoo! We'll be using government and deficits to pay for it. It's a free lunch party!

Fish and bicycles will be provided to those with proof of unemployment. Think spawning transportation to nowhere!

From your comments on the post you linked.

"No one wants to admit it, but the decline in US growth per capita is very real and very structural, and can only be redressed by increasing production and decreasing consumption."

Here's a snarky reason to be optimistic. We might not be able to improve US growth per capita but we can make US growth per employed look better. We just need to lay off more workers and shrink that denominator!

I know, I've said it before, but I'll say it again. What we need is a new version of Ross Perot with all those charts and graphs. Because that's the only way you'll get the average American citizen to notice. If you can post those on You Tube and Facebook, so much the better.
So Mark, getting back to the meat of the topic, how do you reconcile their hockey stick graph of money vs. your hockey stick graphs of Ag & Au vs. Al?

Not that I suppose you have to reconcile them, personally. But the former graph certainly explains the latters. If you run a commodities fund, I'd think all you need to do to make the sale is show that graph of the Fed's unprecedented intervention.

Thought experiment time.

Let's say gold and silver are perfectly priced relative to money. If that is the case, then I would argue that gold and silver are not good inflation hedges now. They've already priced in the future inflation that will be coming.

Meanwhile, let's say aluminum foil and toilet paper haven't priced in that future inflation yet. I'm basing this belief on the price increases of both of these products at Costco. Not much going on there.

So if aluminum foil and toilet paper rise in price to match the future inflation reality that gold and silver are predicting, that doesn't necessarily mean gold and silver will rise too.

We've already seen this effect in the 1980s and 1990s. Gold and silver fell as inflation continued higher. They did all their predicting of future inflation in the 1970s. It was already priced in during the 1980s and 1990s.

In other words, no matter what happens in the future (to the dollar), I eventually expect aluminum foil, toilet paper, gold, and silver to balance again relative to each other. It could mean that aluminum foil and toilet paper become a great deal more expensive relative to how much more expensive gold and silver will become. Or it could mean that the price of gold and silver fall. Who really knows for sure?

This is just a "what if" theory of course, but that is how I would reconcile it.
Mark understood where I was going: fedgov = comfort food. Just waiting for fedgov to lapse into a diabetic coma...
Three weeks ago, everybody was telling me I had no choice but to be in silver. This week, everybody is telling me that commodities are OVER.

I fully expect that within three weeks, everybody will say I have no choice but to be in gold; I expect to continue hearing that refrain as gold tops and heads down.

'Twas ever thus.
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