Friday, March 21, 2008

Dangerous Economic Times, or Irrational Hysteria?

What is going on these days?!?

Stock markets up 3% one day and down 3% the next... Home foreclosures at record levels... Recession all but certain... Unemployment rising... Dollar plunging... Oil north of $100/bbl and gold above $1,000 per oz... Inflation IS heating up...

I don't remember a time with as much bad economic news as we're currently getting. And it seems as though people are reacting--panicking in fact--like the sky is falling. Check out the current yield curve for US Treasuries; that's the interest rate people are getting on bills, notes, and bonds, i.e., the rate Uncle Sam will pay you to loan him money. It's low because A LOT of people are willing to take those rates.

But here's what's crazy... Inflation (WITH FOOD AND ENERGY INCLUDED!) is peaking over 4% annually, in other words, at this rate something you buy for $1.00 today will cost at least $1.04 a year from now. So why are people willing to take a dollar, and give it to Uncle Sam knowing he'll give you back only $1.01 in a year? You're losing buying power... it's a negative real return!!

It's a rhetorical question, and there are (at least) two answers as to why. First, people are freaking out and afraid to invest in anything with risk. Even rock-solid municipal bonds are yielding more than treasuries, by a couple percentage points in some cases. And they're federal- and state-tax free! Are people really worried that, say, the State of California or City of Los Angeles might go bankrupt?! Crazy.

Secondly, a big fraction of treasuries are bought by foreigners who view the US as a safe haven for money, and of course they're not worried about our domestic inflation rate or US tax issues. BUT, they should be worried about our free-falling dollar, which is the currency in which they'll be paid back. If you lived in a Euro-zone country and bought a five-year bond in 2002, then you'd have lost a big chunk of your money by the time your bond came due last year. Why do foreign investors continue to buy treasuries?? Perhaps because our economy will drag down the rest of the developed world and they have no other options... dunno.

What I do know is that I'm confused about what to do. Normally, I'd look at this kind of panicky scenario and be salivating at the buying opportunities in the stock market. Blue-light specials all around.

But what scares me right now is inflation, not this "Core Inflation" BS but REAL inflation, of things I buy. It's insane to exclude food and energy costs, those are the fundamental products we need to survive! And prices are on the rise faster than I ever remember (well, at least since I've been an adult and worrying about savings and retirement).

Here's the some national-average price increases over the last year...

Price of bananas per pound.


Price of roasted coffee per pound.


Price of unleaded gasoline per gallon.



Of course, all three of these items are more expensive here in California for some reason. Lucky us.

So we're probably in a recession, yet prices are rising. Is that "stag-flation"? And what if all this cheap money that the Fed is pumping into the economy does nothing more than goose inflation even higher? People like me who don't work a lot will be hosed, that's what! Makes me think twice about taking chances in the stock market... but then again, as an investor, you have to realize the best opportunities arise when the masses panic and become convinced the sky is falling.

Is this one of those times?

(pardon me for writing about topics other than bike racing, but this is my blog and this is what's on my mind currently. By about Tuesday of next week, I'll be so obsessed with the upcoming San Dimas Stage Race that I'll barely have awareness of anything else...)

7 comments:

TnA said...

Most of this is tied to the "irrational exuberance" of oil futures. Why is the price of oil rising as demand drops and supply is good? Because people are SPECULATING it's going to be even higher. Sound a bit like the housing market a few years back? What do you think's going to end up happening??

BTW, the higher fuel prices will drive the higher prices in the other things you listed due to transportation costs.

anony-miss said...

Lies, damn lies, and statistics...
It looks like the price of banannas has skyrocketed- like tripled. But it has gone up less than 8%.
I wouldn't worry about it too much, unless you are on a fixed income, or you have an adjustable rate mortgage...

Kk said...

No apologies necessary, Marco! I'm glad you spoke up.

The current climate does affect me directly in my cycling efforts because I've just begun to court corporations to raise funds for women's cycling.

I think that we're all working ourselves into a lather. The best thing negativity has going for it is that people love to buy into it!

The sky is not falling! For everyone who loses a dollar someone else is making one.

Not that certain factors don't exist but as tna just alluded to, people investing in oil futures are making bank.

Half a million years ago I was a commodities broker. When I first learned that the strength of our economy hung on the ephemeral, moment to moment beliefs and speculations of traders and investors it changed my view of reality forever. A rumor from the Strait of Homuz would put the floor in a panic at noon then another piece of news about crop yields would have it all back to normal by closing bell. Most of America never realizing that the country went damn nearly "broke" 3 times that day. Worth is what you say it is.

Folks can get sucked down the rabbit hole of despair if they want to. I'm keeping my money on prosperity! It really is a collective state of mind.

You going to Redlands, Marco?

Marco Fanelli said...

TnA- Certainly you are correct that oil is largely at the root of inflation's uptick, but I don't know why you say demand is dropping. Worldwide, especially in China, demand is rising. In fact, today's WSJ has a brief interview with the Chairman of the White House Council of Economic Advisors, and they asked him if Americans should get used to high gas prices, and while he wouldn't commit, he did say "Unfortunately for us, we are now in a world where we are competing with rapidly growing other countries that have demands for oil and we're finding that, as a result of that, the demand is increasing more rapidly than the supply has been increasing in recent years. And that is a reality, and I think that's a long-run reality. So what that means is constant upward pressure on oil prices."

Maybe MDW, our former cycling friend who's in the oil business, can comment if he ever looks in here...

Food prices are also rising, due in part to oil's rise, but it's much more involved than that. I've been spending a lot of time reading up on our food industry (Omnivore's Dilemma is a great book btw) and it's clear to me that the economics of our food industry are a mess. One thing that will bite us some day is that the amount of land per capita required to support how we eat is increasing whereas the available land under agriculture is diminishing. That is not a sustainable trend obviously. Further, we have completely lost the concept of eating seasonally, and as a result our food, on average, travels 1,000 miles from the field to the table. It takes more than 10 petroleum calories to feed a typical American a single food calorie.

I need to do a post on this stuff some day....


Miss Anony- 8% is not trivial.

KK- No Redlands for me. San Dimas, Ojai, and Sea Otter are the biggies for the next month or so.

Anonymous said...

If Bernanke and the ridiculous Fed keeps dumping liquidity(monopoly $) into the system to bail out these banks and save Wall Street, our dollar will continue to lose value against competing currencies. Recessions are sometimes a necessary evil, and setting the $ printers on high to avoid one is not the answer!!

Marco Fanelli said...

Totally agree! Seems reasonable that some commercial banks and investment banks should fail as a consequence of making foolishly risky decisions. Sometimes a partial push of the economy's "reset button" is ok. Bernanke is a short-timer anyway, since Barack will appoint somebody new! And that new Fed Chairman will have to deal with our inflation fiasco in '09.

Anonymous said...

Go here for a bit of truth from a man who knows economics:
http://video.google.com/videoplay?docid=-6046520409389956642&q=jim+rogers+cnbc&total=47&start=0&num=10&so=0&type=search&plindex=0