patrick.net

GC,

Huh? Housing is not an investment. It's a depreciating and asset consuming durable good.

The best thing to do in high inflation? Buy land, lower carrying costs. Buy long term bonds, especially if you think inflation is going to come down in the future.

Conor,

I'm much happier with the 8% inflation figures. Those are nice and understandable. The changes in commodities I don't fully understand (that is, I don't fully grok how they can be consistent with / explained by the rest of the economy). Because of this, I worry that the primary factor controlling the price is market psychology, which is notoriously unstable.

Owneroccupier,

Have fun! Let me know if there's anything else you're looking for. Sorry if I couldn't pull a neat XEU table out of OECD.

People always enjoy paying off their debts with worthless paper. If one can own a few fairly solid items with a year's salary, I'm sure everyone will jump on the opportunity.

The only problem with this scenario is that rarely in the history of mankind did the majority profit. It has always been the tiny minority who profit at the expense of the rest.

But, population-wise US is a minority in this world economy. So, it is possible that US consumers will come out WINNERS, wipe their debts clean, own their McMansions out right, and leave the worthless electronic paper to the bag holders in Asia.

requiem,

On the bright side, there are a lot more money making opportunities in a crazy chaotic world. Maybe I should look into arms dealing...

Conor,

BTW, just checked out wikipedia's take on uranium. Apparently uranium is quite plentiful:

"Owners and operators of U.S. civilian nuclear power reactors purchased from U.S. and foreign suppliers a total of 21,300 tons of uranium deliveries during 2001. The average price paid was $26.39 per kilogram of uranium, a decrease of 16 percent compared with the 1998 price. In year 2001, the U.S. produced 1,018 tons of uranium from 7 mining operations, all of which are west of the Mississippi River.

Uranium is distributed worldwide. Generally, large countries produce more uranium than smaller ones because the worldwide distribution of uranium is very roughly uniform. Canada is the world's largest producer of uranium, with the world's richest deposits in Saskatchewan. Saskatchewan, through three large mines in the Athabasca Basin region, produces over a quarter of the world's uranium. Because of this production, extra capacity, and the close government control of the industry the provincial government plays a central role in setting international uranium prices. Australia also has extensive uranium deposits making up approximately 40% of the world's known uranium reserves. The world's largest single uranium deposit is located at the Olympic Dam Mine in South Australia. [4] [5]

The ultimate supply of uranium is very large. It is estimated that for a ten times increase in price, the supply of uranium that can be economically mined is increased 300 times. See World Uranium Resources.[1]"

I always contemplate how one can profit from high inflation.

When the mass is told to profit from high inflation using gold/silver futures after a huge run-up, we will know that there is a gold bubble.

If you have economist subscription, you can look up an article called "The value of dollar " on Dec 2, 2004.

There is a graph there illustrating the fall of USD value vs two major currencies, Euro (DM as a proxy prior to 1999) and Yen. From 1960 to late 2004 when Euro was roughly at the same level it is now, in a mere 44 year period, USD has devalued around 60% against DM/Euro and 75% against Yen.

Back at the turn of 2004/2005, Economist had a whole feature seires about USD. Anyone who is interested in diversifying away from USD should consider getting that series.

Sir Bernanke will raise the rates and he will bust Au.

But, population-wise US is a minority in this world economy. So, it is possible that US consumers will come out WINNERS, wipe their debts clean, own their McMansions out right, and leave the worthless electronic paper to the bag holders in Asia.

If the IBs/Hedge Funds know this is coming through back channels from DC, the commodities run makes perfect sense. Throw dollars at every asset possible and prepare for the Fed's 3-card monty maneuver.

I'll see you at the gun store. Seriously, this would drive us all back to a barter system here in the states or to using Euro bills for groceries. I suggest it's unlikely that it will get that crazy. It's cheaper to throw the Blue State FBs to the wolves than to overturn the world economy.

I have seen a lot of Au pumping lately. It is disconcerting. Au is a very, very volatile piece of hot charcoal. I am worried that common folks will get burnt. A house is at least something one can live and have babies in.

Owneroccupier,

Thanks. I'll go to a library and make some copies. As I've mentioned, I've never quite forgiven them for their cheap oil prediction and support of BushCo.

Sure, I'll meet you OUTSIDE the gun store. I already took my NRA rifle training class. The instructors, seeing that I was natural sharpshooter, wanted to convince me to partake in their weekly matches. The same happened at my pistol training class a year ago. I said "not interested."

Pop!

Get a scooter or a diesel. Much cheaper and similar efficiency. Even a used Civic can deliver really good mileages.

GC,

Yeah. Except you don't want a wife or kids. So why bother? A house takes a lot more maintenance than storing a couple bars of gold in a bank.

Housing prices are tied up with wages. If wages stagnate while commodities soar, even current price levels will not be sustainable.

http://www.triacom.com/frame.html?http://www.triacom.com/archive/exchange.en.html&en

One always learns something of value or humor everyday. At the NRA course, the chief instrutor mumbled phrases such as

northern aggression
the People's Republic of California
Taxachusettes

Above is a table of the historical exchange rates for the discontinued European currencies including DEM, FrF, ITL etc.

Euro is mainly dominated of DEM, then FrF, other currencies are relatively insignificant in its composition. So if you look back at what happened between 1970 and 1980, that will give you a fairly good sense of how these currencies did in the last troubled period. They *appreciated* against the dollar.

It is always my belief that the last 1980 crisis was a DOLLAR CRISIS in disguise. The run-up on gold, commodities, and foreign currencies were all pointing to one root problem, the world is losing trust in USD as the ultimate store of value. It took Volcker 18.5% rate to restore than credibility. How high is Bernanke willing to go this time, while our mess is much bigger than what Volcker faced?

Owneroccupier,

Very nice! I should have just looked on the web.

FRIFY, what you said about commodity run makes sense. However, I doubt there'll be wide participation in this run. At the meantime, there has to be a solution for the housing debts. Last I checked, US still has the most formidable military in the word and its citizens the most ready to fight. So, other weakling nations will have to suffer this time (again).

But astrid, house = leverage. Au, unless you play in the future's market, is just bars that you have to pay in full for.

Some other observations.

1) The biggest beneficiaries of the USD demise were Germany and Japan last time, they were also the export powerhouses of the world. I believe Japan and Germany still retain the top spots today in terms of value, while China is definitely the volume winner.

2) CAD didn't do that well, which sort of confirmed my hypothesis that its trade reliance on the US put it in a relatively vulnerable situation as we ran into troubles ourselves. Sterling was also a dog, well, sterling is the former life of USD, they went down the decline much earlier than us.

3) Although DEM, FRF, JPY appreciated against the dollar, the upswing was relatively small compared to commodities, oil and gold. In a sense, all of these currencies went into a competitive devaluation against the real assets.

Pop!, in the long run, it is possible that we'll get into high inflation to wipe out the debts, as I have already alluded to. However, Lord Exchequer of USA Bernanke is currently intent on raising rates. We shall see.

There are other reasons why Au may get busted. But they are beyond the scope of this BB.

Actually, the equilibrium price for Au, 25 years ago, was around $400. The $860 high was reached on a wild overshoot.

GC,

The current system is full of moral hazards. Hopefully, a tightening credit market will repair some of these problems.

Also. I'd rather play the futures market and deal with the risk. Buying a big house with a $10K+ property tax and nearly $5K+ other costs is just not worth it, no matter how good the leverage is.

Fixed rate leverage is cool in a hyper-inflation scenario. Otherwise, I can afford to wait, make a little money elsewhere, and then buy a house when the time is right.

GC: At the meantime, there has to be a solution for the housing debts.

Why can't the solution be:

Loser
1) FB (defaults - loses DP, owe taxes on loan forgiveness)
2) Unhedged Banks
3) MBS Buyer (those Asians)

Winners
1) IRS has claim on FBs soul for next 10 years
2) You if you keep your cash safe for the next 2-5 years and can land a 10-20% mortgage for the remaining 50% of the house

How the Great Depression was recorded in history books should be a subject that every high schoo/college history class should teach.

At the height of depression, unemployment rate was 20%. Not much worse than what happened to Germany in the 90's. The society was quite orderly.

Some folks charged that it was FDR's diddling that caused real problems and it was FDR who led US into war, etc., etc., etc., and that Nazi Germany was not entirely responsible for the outbreak of WWII, and that Japan was forced to attack Pearl Harbour, so on and so forth.

Of course, these are just another kind of conspiracy theories and they are inferior to Michael Moore's, if we judge by the box office and Amazon sales figures.

@Conor, thanks for the info.

I wouldn't go "all in" to any commodity that prone to speculation and wide price swings, but I think you could do far worse than to have a small % of your portfolio in precious metals right now. I have to second yours, Pop!'s & others skepticism about the Fed "getting tough" on inflation and start really hiking interest rates. What a joke. Inflation is their (and the pols') best friend, which can only be bullish for metals.

Dystopian,

That is my concern too. The Chinese have an old saying, it is better to be an animal in times of prosperity than a man in time of war. I fear that with so many weapons in the world, even the smartest amongst us may not be able to save themselves.

It's hard to know how it'll all play out. The wealthiest nations in the world have no interest in war with each other. Nationalism now is pretty benign compared to the 1930s version. However, there are a lot of second tier nations with oversized ambitions and despotic leadership.

Hong Kong market is about to pop. Avoid at all cost.

China Construction Bank (CCB) is now valued at a higher multiple than Citi, HSBC etc. while its bad debt is as horrible as you can imagine. I generally won't touch any Chinese banking stock with a 10-foot pole. Hong Kong stock market right now is exactly the deja vu of 97 right before the crisis, any China-related concept stock (called Red Chips back then) is trading at a ridiculous multiple that can hardly justify itself.

I invest in Nikkei and German stock market because I believe as things blow up around the world, money will be seeking safe havens in the "proven" countries, aka, countries that produce goods that other countries want, and countries with a unique knowhow/skill that cannot be easily replaced. I am personally very bullish on Japan for the next decade, because they are very ahead of the energy conservation curve that the rest of the world will have to climb very soon, but I may be wrong.

GC,

That was back in the 1930s, when people married young and almost no women worked outside of their homes. They also had no social support like the 1990s Germans. A 20% unemployment meant nearly 20% of the families were without economic support other than what they can gleam from their families and friends.

I don't have data of Toronto market dating back more than 10 years.

Based on the data I have, when DOW was going sideways in 1976-1981, the other stock markets that did well were Australia (up about 50%), Japan (up 50%), Germany and Britain both went sideways just like their American counterpart.

From what I've read and seen (on movies), Americans were more resilient and hard than they are now. Decades of affluence and entitlements from civil rights movement did it.

Pop!,

inflation won't get out of control here because America is a resource-rich country and we can manufacture most stuff we consume, if the cost structure is right.

Weimar Republic went into hyperinflation because it had to pay back its war debt in gold, and foreign currencies. We owe foreigners USD, and we have the military power to cancel our debt entirely (although it will certainly look bad for our future generations). So we will see high inflation, but not out-of-control inflation.

Besides, there's nothing one can do. Every so often, wars come about to wipe the slate clean.

If you look at it, China and India, with their combined 2.5 B population, are bound to clash with the developed world. Although many prefer to look away from reality and think economic competition is NOT a zero-sum game, in reality it always is. There is only so much market for so many goods; there is so much resource for x number of people at y level of living standards.

The HISTORY knows only one way to resolve such a conflict: That is WAR. In addition, let me borrow an observation by Richard Maybury, China has excess male population that she must find a way to "employ" and/or get rid of.

Occupation of Iraq -- yours truly realized this long before the shooting began -- was a geopolitical move to position US strategically for highly plaussible military conflict with certain rivals. It had nothing to do with WMD and OIL.

(damn those "less than" dropouts)...

Pop! : Here is a nice and scary read:

Yeah, and it falls into those less than 1% chance of it happening so focus on feeding your family with a reasonably stable US dollar for the forseeable future. His theory implies that after this thing goes down, the next day, I go into Safeway and pull out my credit card and they say "Sorry, but we'll be charging you in Euros today and your icecream is $27,323.23"

Not going to happen, but if it did, you're better off investing in rice, beer and guns than gold. I'm suggesting neither. Fight your bearish instincts - you'll lose your shirt guarding yourself against low probability risks.

NOT FINANCIAL ADVICE

Conor,

Good point about inflation in CA. Higher inflation will just accelerate the trends we already see. The best public school districts will become quasi privatized (huge donations demanded from parents) and the rest of the school districts will be absolutely worthless.

OT. Anyone seen this?

http://www.nytimes.com/2006/05/07/realestate/07california.html?pagewanted=all

Pop: I still keep my portfolio diversified even though things may or may not turn out as ugly as some of my posts might suggest.

and I'm actually a lot more bearish than my posts have made it seem. I've been long in cash ever since August 2000 and it's crucified me. It was the classic "right play" to make before a recession but the recession never really came. It's been crawling at 5% after a house running at 15%. I sure hope Aesop was right...

Dystopian Contrarian echoes many of the things I've learned from Randy H. Has anyone ever seen both of them in the same place at the same time?

Dystopian Contrarian,

Good writing. I enjoyed it.

But I thought the real Depression only came into existence AFTER FDR took power!!

I don't think occupation of France was part of A.H.'s design. It was meant to drive England out of the continent, for the English always liked to meddle in continental affairs and forestall any promising aspirant. A.H.'s real object of expansion is towards the east, if you care to read the historical texts (including that guy's own rumination from a prison).

The US forced Japan into the Pacific War for a number of reasons. Mind you, the US did NOTHING regarding Japan's "incursion" into China proper, prior to the outbreak of WWII in Europe.

China was a hegemony of some sort in Asia, for a long time.

Only after WWII did the act of "intiating a war of aggression" become criminal, provided of course the aggressor lost.

There is no MORALITY in international relations. It's all about power interests.