Daily: Inflation worries in a fundamentally deflationary episode

I haven’t done the daily for a few days because I have been trying to get out a few more lengthy posts. But today I wanted to highlight the inflation issue because I will be speaking on a Euromoney panel about investing in inflation later today. I have two links below that get at some of the issues I am concerned about.

The crux of the matter is that even during the worst deflationary period of the Great Depression, investors were concerned about the value of their money and the government debasing it. Izabella Kaminska does great investigative work to uncover some quotes from the depression, the most vivid period of deflation in America’s last century. And what she found was that a search for inflation and deflation yielded 5 times as many results for inflation despite the rampant deflation all around. Why?

I’m not exactly sure why but what is clear is that it is difficult to get sustained inflation except through a combination of at least two of three factors: credit growth, high employment and currency depreciation. Unless you get credit growth, the economy contracts. If you have high unemployment, then it is difficult for the inflation to embed for long periods of time without having some sort of collective bargaining agreement that guarantees wage increases to mitigate the effects of the inflation And the principal way that inflation embeds besides through sustained overproduction is through currency devaluation and the need to pay for hard assets in devalued currency.

Given that, perhaps what investors are concerned about with inflation is the currency depreciation aspect but it is still unclear to me why people are concerned about inflation in a period that is fundamentally deflationary due to deleveraging and a lack of policy space.

In any event, after a brief journey higher in the wake of the QE3 announcement, inflation expectations have cooled as they should. Consumer price inflation will remain subdued until the three factors I mentioned above come into play. Asset inflation is where the inflation is now centered.

For those of you with gold memberships, there is a lot more on this in the last two weeklies: On optimism in the face of deflationary crisis responses, part 2 and Should we be optimistic?

After Brief QE3 Fever, Inflation Expectations Cool – Real Time Economics – WSJ

“The 10-year break-even rate, the yield difference between a 10-year Treasury note and 10-year TIPS, jumped to 267 basis points, or 2.76 percentage points, — the highest since May 2006 — after the QE3 announcement. That suggested investors expected the U.S. inflation rate to average 2.67% on an annualized basis within a decade.

Yet the rate has since pulled back to 244 basis points Wednesday as doubts have mounted over whether the Fed’s stimulus will be effective. The 10-year break-even rate is now close to the 238 basis points where it stood before the Fed’s QE3 release.”

 FT Alphaville » A time of hoarding and inflation fears, 1930s edition

“contrary to popular belief, our working theory is that the crisis results as much from the conjoined effects of a suddenly over-abundant and over-productive world (on account of technology advances) — something which has been exacerbated by a shortage of safe assets, credit and money relative to goods available — as it does from credit profligacy in the mid-naughties .

In that sense, we believe that the credit binge, rather than being the ultimate cause of the crisis, was possibly only one of its symptoms.”

Technology

Apple seeks patent for Siri automated assistant

“The company’s extensive 51-page application with the U.S. Patent and Trademark Office is entitled “Intelligent Automated Assistant.” The patent application continuation, discovered this week by AppleInsider, describes a system that “engages with the user in an integrated, conversational manner using natural dialog, and invokes external services when appropriate to obtain information or perform various actions.””

Elsewhere

Damming dollar flood comes at a huge cost to Argentine economy – Telegraph

“Anyone with moveable assets started shifting them out of her reach by transferring them abroad or converting them into dollars.
In 2010 the flight of capital started gathering speed, totalling $11 billion by the end of the year. In 2011, as the election approached and signs of a probable Kirchner win emerged, this figure more than doubled to $23 billion. Hence the great slamming of the fire exits as soon as her victory was in the bag.”

SA strikes close AngloGold Ashanti | beyondbrics

“After closing its Kopanang mine after a strike that began last week with 5,000 workers, the company has now halted all South African operations as most of its 35,000 employees have joined the industrial action. Shares are down 3 per cent in Johannesburg on Wednesday.”

United States

Obama Approval, Vote Support Both Reach 50% or Better

“More generally, September is turning out to be one of Obama’s best months in over a year: he is on track to average roughly 49% job approval this month, up from 45% in August and 41% in September 2011.”

S&P | S&P/Case-Shiller Home Price Indices | Americas

“Data through July 2012, released today by S&P Dow Jones Indices for its S&P/Case-Shiller Home Price Indices, showed average home prices increased by 1.5% for the 10-City Composite and by 1.6% for the 20-City Composite in July versus June 2012.”

Bair on Geithner’s Appointment: ‘A Punch in the Gut’ – Deal Journal – WSJ

“The rocky relationship between Bair and Treasury Secretary Tim Geithner is already the stuff of Washington legend. But Bair has new details to enter into the lore.

Bair, for instance, urged the fledgling Obama administration to nominate former Fed Chairman Paul Volcker as its first Treasury Secretary. Many of the officials calling the shots during the crisis were too cozy with Wall Street chiefs, Bair believed, and “we need more independent perspectives to deal with the substantial problems confronting the financial sector.”

The news that Obama had nominated Geithner instead felt “like a punch in the gut,” Bair writes. “I did not understand how someone who had campaigned on a ‘change’ agenda could appoint someone who had been so involved in contributing to the financial mess that had gotten Obama elected.””

What Sheila Bair Really Thinks About Wall Street’s CEOs – Deal Journal – WSJ

“Former FDIC Chairman Sheila Bair’s new book, “Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself,” on her time during the financial crisis is out, and it’s juicy. Here’s a quick look at what she had to say about some of the country’s top bankers.”

A Foolish Interview With Michael Mauboussin (LM)

“Over the summer I had the good fortune to interview Michael J. Mauboussin, chief investment strategist at Legg Mason Capital Management and adjunct professor of finance at the Columbia Business School. We had an outstanding conversation about his views on investing and how we can get better, as well as his new book to be released soon, The Success Equation.”

Noahpinion: EconoTrolls: An Illustrated Bestiary

A very humourous take on the various economic schools of thought and their crazy followers

Europe

SNB hits back at S&P bond-buying report – FT.com

“Standard & Poor’s said bond markets have been distorted by an estimated €80bn in purchases of “core” eurozone countries’ debt by the Swiss National Bank in the first seven months of 2012.
“In our view, this has significantly contributed to the declining yields on bonds issued by the core sovereigns,” it said.”

Be Very Careful, Beloved Spain – Telegraph Blogs

“Two weeks ago I was interviewed by the Catalan newspaper El Punt Avui. I said it would be unthinkable for the Spanish state to stop Catalan secession by military force.
Such action would violate EU Treaties and lead to Spain’s suspension from the European Union. You do not do such things in the early 21st Century.”