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Friday, May 04, 2012

 

Economics 201

Hearing President Obama blame rising gasoline prices on "speculators," Fed Chairman Ben Bernanke claim inflation can't be a problem as long as wage growth is restrained, and Treasury Secretary Geithner parrot administration talking points about millionaires and billionaires as if he were some kind of marionette makes you wonder how these guys came to be the smartest in the room when they apparently slept through macroeconomics class. All three have repeatedly made the same fundamental mistake neophyte journalists, the media talking heads, and just about everyone who has not actually studied econ makes. And that is confusing inflation with raw price level data. Prices may rise or fall because of inflation or deflation, but more often the price level of any commodity changes because of shifts in demand versus supply. That is not inflation. If speculators were adding to demand, that would be a perfectly normal price effect in an otherwise stable environment. But that is unlikely to have much of anything to do with the price increases we are seeing, which I believe are early visible inflationary effects. Following Hayek, the monetarist school personified by Mr. and Mrs. Milton Friedman taught that inflation is a monetary phenomenon. That is, increases in the money supply that exceed increases in productivity cause supply and demand curves to shift up the Y axis. When this happens, prices of commodities (including labor) generally increase. Deflation is the opposite effect, of course. This is completely different from price changes that fall along a stable supply demand curve. Those price changes are a market phenomenon. In that case, the price runs up or down the curve, but the curve does not itself move. The price will move until a level is reached where there is equilibrium between supply and demand. When we used to hear Greenspan, and now Helicopter Ben claim that the money supply can be safely increased (indeed, that it should be) because there is slack in the labor and other markets indicating an absence of inflation, I just cringe because they are confusing the two concepts. How is the public supposed to understand what's going on when the person charged with running the economy is so misleading? The President blames speculators for gasoline price rises, with no evidence by the way, when in fact the change in prices could be a function of demand and supply for the commodity, but more likely reflects the inflation we have been expecting because of the prolonged inflationary monetary and fiscal policies we have followed. This situation was predicted a long time ago, because of the Greenspan mystique. Greenspan managed the monetary strings of the economy for years by monitoring all aspects of the labor and commodity markets, trying to control the price level while supplying as much credit as the economy "needed." While mainstream economists worried about the possibility that whoever Greenspan's successor would be could not possibly match his record, monetarists sounded alarms about looming asset bubbles and inevitable inflation. Sure enough, we had repeated stock market bubbles and worst of all, the disastrous residential real estate bubble that culminated in the financial fiasco of 2007-2008. And clearly we are building to more of the same. Some years ago, this blog predicted that the next bubble would be in public credits, and that has occurred in European sovereign debt and, to a lesser extent, in the US municipal market. Though those who predicted disaster for the local and state governments have been ridiculed in the financial press, the fact is their predictions were off only by a matter of degree, not conceptually. In addition to the bankruptcies of a number of cities and counties (notably Jefferson County in Alabama and Harrisburg, PA), we have cities and states all over the country frantically cutting their workforces and revamping pension plans in last ditch efforts to avoid bankruptcy. Unless Paul Ryan style budgeting is actually enacted and implemented, we are heading for "inflation unchained" because the only way to pay for the services that our Social Democrats want to provide for their voters is to keep the printers and banks printing money and expanding credit. When that happens, gold will resume its upward climb as will most other commodities. It won't matter what demand is, when those curves shift up the Y axis, the misery index will rise. --------------------------------------------------------------------------- You might as well try to convert an environmentalist to a Jehovah's Witness as convince them they might be wrong about something, so I think I'll just agree to disagree with our commenter and drop the subject for now. At least that was my intent until I spotted the following editorial in the WSJ this week, which seemed timely and on point. So at the risk of unleashing readers' fury one more time, I will simply (and without permission, so keep it under your hats) reprint that short WSJ opinion called "Crucify Them." It's no secret that the bosses at the Environmental Protection Agency hate fossil fuels. But few are as candid as Al Armendariz, the regional administrator who says the agency's "general philosophy" is to "crucify" oil and gas producers. That's how EPA chief Lisa Jackson's point man for Texas, Oklahoma and other south-central states put it in a 2010 lecture. Mr. Armendariz explains that his staff's "philosophy of enforcement" is "like how the Romans used to conquer little villages in the Mediterranean. They'd go into a little Turkish town somewhere, they'd find the first five guys they saw and they would crucify them. And then you know that town was really easy to manage for the next few years." The point is to "make examples" of alleged lawbreakers. Oklahoma Senator James Imhofe released video of the speech on Wednesday as part of his investigation into the EPA's now-discredited claims of water contamination due to hydraulic fracturing, including in Parker County, Texas. In that case Mr. Armendariz's shop targeted Range Resources, a driller that has since been exonerated, and his remarks about executions raise questions not only about his own work but the EPA's larger impartiality and judgment. Julius Caesar probably would have suggested a different remedy, but Mr. Armendariz's resignation would suffice. The postscript is that Mr. Armendariz actually took the Journal's advice and resigned Sunday. ------------------------------------------------------------------------------ Over the years, we have cited Birdland's Wednesday early show featuring Dave Oswald's Louis Armstrong Centennial Band as one you should make a special effort to see. Oswald's rotating sidemen (and sidewomen) feature some of the best talent, young and old, around for a fraction of the cost of seeing the headline acts. One veteran musician we praised some time ago was clarinetist Joe Muranyi, who played with Dave into his 80's at an extremely high level and was part of the Wednesday evening fun, contributing humor as well as musical improvisation. We haven't seen him on the bandstand for a couple of years now, which was understandable given his age. Turns out that he was suffering from an array of serious maladies, and he passed away on April 20 at age 84. Mr. Muranyi was the last person to hold the regular clarinet chair in Armstrong's All Stars band from 1967 to 1971, when Pops passed on. He had studied with the great pianist Lenny Tristano as a young man. ------------------------------------------------------------------------- The old adage is "sell in May and go away," and that has certainly been timely advice the last two years. Right now, the market looks so shaky that it might be good advice for this year too. It's always a danger sign when the big stocks outperform the small ones, and that's what we're seeing lately. You don't want the generals out in front of the troops. On 4/27 we bought 15 shares of the SPDR Gold Trust (GLD) for the IRA at 161.78. I can't worry about the fact that gold is likely to go down more from here. I don't try to pick bottoms. I just know that when the inflation hits, this price will look low. On 4/30, we sold 200 shares of Marine Max (HZO) at 11.03. We paid 1.54 on 11/10/2008. At that time, we remarked in this blog that the stock was priced as if no one would ever buy another boat. Well people are still buying and servicing boats I guess. On 5/2, we sold 200 shares of Conrad Industries (CNRD), a lightly traded stock, for 17.31. This was not a great execution by my discount broker, since they didn't get the opening price of 17.75, presumably because there are lots of places to buy and sell these pink sheet stocks. Your only defense against such shenanigans is to make a limit order at the price you want, but then you risk the possibility that you won't get the trade off at all. Not the end of the world since we paid 1.30 on 4/26/05 for these shares, when this stock was shunned by all because it looked like the company would go private to avoid Sarbanes-Oxley reporting requirements. Good thing our formula doesn't get spooked by any emotion. We are the Vulcan investor. Here's the periodic disclaimer: Neither redwavemusings nor its author are investment advisors, and the securities mentioned here are not to be considered recommendations or suitable for anyone else (or even for me).

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