Daily Economic Update - An Inflating Baloon in a room of Pins

[feelingweird]

Looks like there is a whiff of inflation in the air. Oil just crossed 80 bucks(and backed off) and Gasoline futures are pushing on 2.00 a gallon(which if you remember my formula for using futures prices to gauge pump prices in the next week or 2, you'd guess that gas at the pump in NW Ohio is going to be 3 BUCKS SOON)..

Gold is right back at its high point again and is pushing on 1070 and the US Dollar index is jerking around like a man having a freaking coronary. US Dollar index is at a new low (for this go around, PREVIOUS LOW WAS 70.42) and is sitting at 75.28, down from the mid 75's yesterday. The chart looks like it is trying its best to break to the downside, but there is great pressure to keep it in the 75 range and not to fall into the 74's.

US Dollar is holding up well against the YEN but is nearing parity with the CAD (Canadian Dollar). Silver is pushing up very nicely and is approaching the 17.50 mark. Housing starts were UP but just barely, and DEFLATION in the producer segment is alive and well as we saw a .06% drop in the PPI this morning, pushed MAINLY BY DROPPING ENERGY COSTS.... I highlighted that last sentence for a reason. If energy prices snap back to the 80+ range, you will see the PPI on its next reading, rebound into the positive side of the ledger and probably pretty substantially.

So back to the title of today's update. An inflating balloon in a room full of pins. I would have to gauge their efforts as a partial success at this point. They have successfully inflated the balloon a little and have avoided all the pins at this point. But the balloon is very small still, this would be akin to that very first AND VERY HARD FIRST BREATH that it takes to get a balloon started. Once you push past that first breath, it becomes incredibly easy to blow the balloon up. And that is the problem in my opinion, and why I can with a straight face say that I still see long term deflation and NOT INFLATION..

Surrounding this balloon on all sides are needles. The needles of Energy prices, the needle of US Dollar collapse (or at the very least, rapid devaluation), the needle of unemployment and the subsequent fall out into the housing and small business realm. These are just a few off the top of my head. These needles surround their fledgling balloon and I feel there is no way for them to manipulate this balloon into missing these needles.

So they have now pushed the air into the balloon, they have done a decent job of patching the myriad of holes in the balloon and it is actually holding air. To get the air into the balloon they have attached an air compressor set at its highest level(liquidity into the system) and have done everything and anything to stop the bleeding of air out of the balloon(their attempt to stop foreclosures, and to tie a knot in the rope that business' were sliding off of and into bankruptcy.

Now the balloon is holding air and now we'll watch as we flip from Deflation to RAPID inflation in a matter of weeks(probably 4 to 7 weeks) blowing this balloon up so fast that they will not be able to stop it from smashing into ALL OF THE PINS DESCRIBED ABOVE. The first pin is already pushing into the outside of the balloon and that is EIGHTY DOLLAR A BARREL OIL and soon to be 3.00 gasoline. We are poised to replay the initial collapse of the system as all the pieces have gathered right back to the same place.

Once investors jump back onto the oil band wagon we'll see oil whip past 100 a barrel again, and subsequently, prices will whip up again(mostly in the lower level or the PPI level, It takes MONTHS for things to trickle up to the CPI level or customer level). Prices at the producer level will skyrocket faster this time, and given the pathetic state of most producers this time around I don't think they get the chance to push those price increases UP through the production cycle, I think many of them(especially the smaller ones like my Dad) just fold for lack of liquidity to keep them going as they pass the increases up through the chain.

POP, one major pin strikes into the balloon. DOES IT POP? maybe not. But after Producer prices skyrocket, there will be a secondary unemployment problem which will lead to a secondary housing problem (and a commercial real estate problem).

Does it take 18 to 24 months to play out like it did last time? My guess is... Not even close. I think the initial stages of this are already in play as we speak. The inflation won't last this time. 1 to 3 months is my guess. If oil snapshots back across 80 on its way back over 100 in the next couple of weeks (3 to 5) it will signal another deflationary spiral in the making.

Because the only way Oil goes to 100 this time is on the back of a falling dollar (which means dollar repudiation). This will not be a demand driven rise in oil prices. I think if the dollar was back where it was in 2001/2002(above 100) then we'd still be seeing oil selling for under 40 bucks a barrel. That is how bad the dollar has been devalued in such a short amount of time.

I still see nothing but deflation in our futures, their attempts at turning their POTENTIAL inflation into reality is falling flat. There are too many pins waiting to pop their expectations. That money has to get into the game somewhere and AS IT DOES it will sow the seeds for its own demise. Until there is a TRUE DEFLATIONARY BURN OUT OF THE ECONOMY, THERE WILL BE NO RECOVERY... They will all falter upon the pins that their inscecent money printing has created.

FeellingWeird

[feelingweird]

I won't be back to respond for a few hours. So hopefully I don't get to torn apart by the Inflation camp   ...

Be kind

Feelingweird.

[Megadoom]

How exactly have they patched up foreclosures? Foreclosures are being filed at record levels, even as many failed banks do everything possible to keep them off the books. The only thing I see with the housing market is constant reflation (pumping constant stimulus dollars) into home purchases (8k tax credit, FHA loans to those who can ill afford the terms, etc).

[feelingweird]

Exactly my point. They have "patched" over the problem, but not fixed it. Everything they are doing is an attempt to get more air INTO the baloon than is leaking OUT OF the balloon. And I think for now they have succeeded.

But this type of patch work comes at a steep price and that will show up in soaring energy costs, which will smash into the Producer part of the economy, the very part of the economy we need to be nurturing back to life.

So in an attempt to stop the deflationary spiral ( A SPIRAL THAT I CONTEND IS ABSOLUTELY NECCESARY TO GET US TO SOLID GROUND) before it really got started, they have sown the seeds of its demise. It will not be an 18 to 24 month inflationary period like we saw from 2005 to 2007(the peak of the inflationary bubble they used to pull us out of the 2001/02 (de)recession. The cycles are getting exponentially SHORTER with each time they use the same play book.

This flood of money from the government is NO DIFFERENT than them using the private sector to pump trillions into housing and commercial real estate in the mid 2000's. Its just that the government can push it out quicker, which is what was needed in early 2009..

But the cycle is going faster and I think will complete in less than 3 months. Meaning we'll see a bout of inflation in energy and probably food(food costs feel producer inputs almost immediately) and other lower level things and this time there will not be the liquidity available to the weak producers to get them through. Lots of bankruptcies on the near horizon in my opinion, which will start the whole process over again. Business(instead of mass layoffs) will fold and take with them all their employees. Those emplloyees will lose their homes, stop buying McCRAP, which will mean MORE commercial loses as those companies fold, and on and on... Meaning a continuation of the deflationary BURN OUT that must take place.

Also along the way the Fed will have to save itself and jerk interest rates hard like in the early 80's... This will be the only way they can save the US dollar. If they don't raise interest rates soon, it will be a FAST crash of the dollar and my last Economic Update will be the result(which is why I am preparing for the possibility)...

Robert

How exactly have they patched up foreclosures? Foreclosures are being filed at record levels, even as many failed banks do everything possible to keep them off the books. The only thing I see with the housing market is constant reflation (pumping constant stimulus dollars) into home purchases (8k tax credit, FHA loans to those who can ill afford the terms, etc).

[kmaine2]

Some food for thought...

If (a) farmers feel the pinch of inflation sooner and (b) many farmers are hurting now ( dairy one example but Unrepentant Cowboy shares similar stories of other crops) then we are screwed in terms of food very soon.

Right?

[PerfectScotty]

How exactly have they patched up foreclosures? Foreclosures are being filed at record levels, even as many failed banks do everything possible to keep them off the books.  credit, FHA loans

Come on Megadoom, we were all given the answer to that question yesterday in this thread :

http://www.doomers.us/forum2/index.php/topic,55053.0.html

The banks are stalling, using delay tactics and excuses to stay afloat because they know what a devastating problem nonperforming mortgages are. Funny numbers, made up paperwork losses, excuses and delays is all that's keeping our banking system afloat and you know it. This "shadow inventory" of homes is one of feelingweirds "pins" thats going to pop the balloon. Thanks to Plarvo for telling us about his foreclosure nightmare.

[MEA]

We, (LOTOCer), however, are not in the baloon's basket. We are hiding in our doomsteads and doing something usefull.

MEA, who is acutally reading LATOC, but it could useful, you know.

[cabacaba]

Some food for thought...

If (a) farmers feel the pinch of inflation sooner and (b) many farmers are hurting now ( dairy one example but Unrepentant Cowboy shares similar stories of other crops) then we are screwed in terms of food very soon.

Right?

RIGHT
I can't buy the inflation argument at this time...   NO JOBS + NO CREDIT + WELFARE CUTS =  NO MONEY =  DEFLATION   

Lots of inflation in the Boom years (2003-2008), now the balloon is deflating...

[kmaine2]

Some food for thought...

If (a) farmers feel the pinch of inflation sooner and (b) many farmers are hurting now ( dairy one example but Unrepentant Cowboy shares similar stories of other crops) then we are screwed in terms of food very soon.

Right?

RIGHT
I can't buy the inflation argument at this time...   NO JOBS + NO CREDIT + WELFARE CUTS =  NO MONEY =  DEFLATION   

Lots of inflation in the Boom years (2003-2008), now the balloon is deflating...

Well look at it this way...FArmers are not getting a fair price for crops this year, and they will not be getting credit next year and THEN they get a short sharp shock of inflation for the needed things like fertilizer and pesticides  ( petro chemicals, nat gas). If some conventional farms have been able to hang this year something like this is just gonna decimate farming. 

Which I think is what another oil price spike could create ...even if we are in a deflationary spiral...

[127001]

if we have oil crude spike up to 150+, I expect to see a clawback - possibly even nationalization - of the oil companies in the US.  I'm dead serious about this. 

[2handband]

if we have oil crude spike up to 150+, I expect to see a clawback - possibly even nationalization - of the oil companies in the US.  I'm dead serious about this. 

I don't think we'll see that for quite awhile. I agree with Robert regarding deflation... and that means oil prices will plummet as well. I don't expect severe oil price shocks in the near term. Give it a year or two.

[feelingweird]

I am actually looking for a brief spike in oil prices again. 150 might be a bit high for me, but certainly 90 to 100 is not out of the question, and with 100 oil will bring probably 3.50 to 3.75 a gallon gasoline and it will push people back to the brink once more.

Because it also means higher heating oil prices(even as NG is falling, but much of the country still uses heating oil). It will mean higher food prices as inputs rise fast(like transport), etc ,etc..

My contention is that this ends much quicker than last time. Last time the inflationary rise lasted for over 18 months(possibly even 24 months). This time it will be measured in single months, like 3 or 4... And then right back to the deflationary spiral.. The deflationary spiral WILL COMPLETE one way or another. You can hold it off for only so long as the Great Depression proved. It took them all the way to the end of the 1930's to see any sign of reflation and then of course it whip sawed to crazy inflation during the war years. They even saw a good deal of rationing and shortages if I remember correctly...

FeelingWeird

if we have oil crude spike up to 150+, I expect to see a clawback - possibly even nationalization - of the oil companies in the US.  I'm dead serious about this. 

I don't think we'll see that for quite awhile. I agree with Robert regarding deflation... and that means oil prices will plummet as well. I don't expect severe oil price shocks in the near term. Give it a year or two.

[Jellric]

Wouldn't a dollar collapse be highly inflationary?

[Dangime]

One possibility to consider would be the seasonal timing of the spike this time. If we see true shortages in this cycle having the event come in the winter could be the worst thing. From my understanding, gasoline isn't as important to industry and agriculture as diesel is. In other words there is probably considerable discressionary use of gasoline that ends when prices go up, but not so for diesel, its used in all the big rigs, trains, and so on. During the winter the refinaries are making less diesel in order to produce heating oil. The last event occured during the summer, if it occurs in winter this time maybe we see the first appearance of a transport breakdown, or the government having to scurry to deploy some of its military earmarked reserves...

[Bruce]

Given that we are at war in two places and soon to be three and that fuel will be needed for the troops here in the U.S. when things fall, there is no way in hell that the U.S. fuel reserves will be tapped again....................Bruce