Friday, April 10, 2020

Hyperinflation, but Few Prices Actually Rising

Illusion of Prosperity blog wrote this in 2010:

Gold trades at $1,180.60 per troy ounce. Aluminum trades at $0.9068 per pound. There are 14.5833333 troy ounces in a pound. The current gold to aluminum price ratio is therefore 18,987 to 1.
Now the prices are $24,500 per pound of gold and $0.65 per pound of aluminum, for a ratio of 37,692:1.

My favorite inflation indices are a Chipotle burrito, which I have been buying for 20 years, and a first class stamp. Both show inflation to be almost exactly 2% compounded over the past 20 years.

There's been significant inflation in things (assets and commodities) that rich people buy because they think they will protect them from inflation, but flat prices - even falling prices - in things that people buy to consume.

Oil prices (nominal) are where they were 40 years ago). Lumber prices (nominal) are about where they were 40 years ago. The price of corn (nominal) is at a 50 year low. Same with coffee, cotton, and many other commodities.

The expansion of the Federal Reserve balance sheet (money printing) is not exactly a secret, and seems to be more than priced in, at least in the assets and commodities that rich people buy because they think they will protect them from inflation. Lumber is cheap, but timber land is not.

American Eagle gold coins are selling for $200/oz over spot! When I last bought kruggerands (almost 20 years ago), they were at a discount to spot. In 2008, I bought tarnished silver eagles for a discount to spot. Now, silver eagles are selling for an $11 premium to spot - that's 70%!

As I put in in 2011, a better inflation bet than gold and silver coins is to hoard nickels, because you have a put option at your cost of five cents.

Silver is down more than 50% nine years later, even at the current exorbitant premium to spot. Gold is down maybe $100/oz or so. But the nickel is still worth a nickel.

The Federal Reserve balance sheet expansion is easy to measure, and people obsess about it. Deflationary forces are real, but harder to measure.


Anonymous said...

Kyle Bass hoarded nickels maybe five years back.

Stagflationary Mark said...

Fun fact: After all these years, I still enjoy reading your posts. :)

Imagine my surprise to see you link to my Illusion of Prosperity blog today. It’s been years since I’ve posted anything.

If you are looking for more fun ratios, check out platinum vs. gold. That’s gotta annoy some who upgraded from a gold credit card to the more prestigious and rare platinum credit card, lol.

In other news, you might recall that I went all in one one ultra long-term TIPS bond for my retirement account quite a few years ago. Was intending to hold to maturity. However, it skyrocketed in price over the last year so I sold it for a surprisingly large profit. I thought long-term real yields might someday go negative, but never that much.

I then dabbled in food-based consumer staples for 24 hours but didn’t enjoy the volatility and stress. Sold for a 2.5% profit. It might not seem like much to most, but that’s better than I could have done buying a 5-year treasury and holding to maturity. In 24 hours! I’m not greedy. I’m just trying to preserve capital.

That is how my retirement account ended up entirely in cash. Not sure what I’ll be doing next. I’m patient. No swinging for the fences from me. (I still own long-term savings bonds, TIPS, and cash outside my retirement account.)

And lastly, no mention of hyperinflation would be complete, in my opinion, without mentioning ShadowStats. If they still want me to read their 2008 Hyperinflation Special Report then they are going to need to increase the price of their annual subscription at some point in my lifetime. Seriously, it just makes them look bad to keep their price constant after all these years. Makes me wonder if I’m living in Japan. *shrug shoulders*

CP said...

Good to hear from you, Mark.

Next time you make a big move, let me know what it is!

If there was Zimbabwe hyperinflation, you'd think prices of hard and soft commodities would at least be higher than levels 30-40 years ago.

CP said...

Have you found any "exponential trend failures" lately?

Stagflationary Mark said...


“Next time you make a big move, let me know what it is!“

It’s not a particularly big move (because the government limits how much you can buy), but if you are willing to embrace the long-term ZIRP theory, you can still buy EE Savings bonds that are guaranteed to double in price if held 20 years (and only if held that long). That’s 3.53% per year, which compares more than favorably to the rate on a 20-year treasury. Further, if things go really south in the short-term, you can just cash them out like nickels. You will lose out on a lot of potential gain, but you won’t lose your principal and you won’t require a greater fool. In theory, anyway. I’m a buyer this month. I’m 55 so it will motivate me to live until at least 75. Ha! :)

If temporary deflation strikes with a vengeance (possible), I may buy LTPZ when it takes damage. It’s a long-term TIPS fund. It’s unlikely to do well in a deflationary environment because the value of each bond is directly tied to the inflation rate. That’s one reason I sold my main TIPS bond. What’s the CPI going to do from here? I sure wouldn’t bet on rents rising much anytime soon. And energy prices? That clearly can’t be offset by potentially rising canned goods prices. What percentage of the CPI is canned goods? Tiny. Further, energy is needed to make canned goods. Energy is cheap now.

“Have you found any "exponential trend failures" lately?“

Yes. US coronavirus deaths, thank goodness. It’s the only trend I’ve been tracking lately. I needed to see the trend failure with my own eyes, just to have any peace of mind. Started off at an 18.5% daily growth rate, shifted to 30% per day, and is now finally failing to the downside. Great news!

Here’s something else I’m watching casually. I have a membership at Planet Fitness. They aren’t charging me while they are closed, which is smart. Have not decided if I will cancel once they reopen though. (They require me to cancel in person.) What should PLNT be trading at right now? Should those who bought in December 2018 really be sitting on a profit? Call me skeptical. I don’t intend to short it, but I do think it’s a sign of excessive market optimism.

As one amusingly sarcastic person recently put it, if this bull market stays on pace much longer it will be the first time the stock market closes at a record high with 20% unemployment. Can’t wait to see that headline! (I paraphrased his idea for added amusement.)

The experts keep saying we brought this on ourselves so it is different this time. Why does it matter? Business cycles are based a lot on changing moods. Are moods going to be better in 3 months? What if we have to sit 6’ apart in movie theaters while wearing masks? Maybe I should plan on drawing a smiley face on the front of mine just so others can see how happy I am, lol. Sigh.

Allan Folz said...

Mark! How you been ole' buddy! I feared you'd lost your passwords and decided to just leave the interwebs for good. Glad the WuFlu hasn't gotten you. Don't be a stranger, eh.

OK, I'm callin' in now. Rubicon party at CP's house! Sure, that would have sounded unpossible two months ago, but, hey, two months from now... I say why not. When it comes to recrossing the Rubicon, never say never.

Allan Folz said...

I would gladly be at peace with inflation in what billionaires use to keep score and deflation for the rest of us.

Also, I would gladly be at peace if Trump wants to hitch his wagon to it and jaw-bone (and worse) it up because he sees that's the primary driver for the only consumers with discretionary dollars these days.

However, they haven't completely ring-fenced that inflation. It's in housing, employment credentials, and mandatory health insurance. The only people that can opt-out of that are middle-aged, unmarrieds. For folks with the next generation that they have a direct responsibility toward, the wealth theft is more than an internal philosophical question to deal with.

Anonymous said...

Mark, love you like a brother, but he virus numbers are utter bullsh+t and can't be trusted for a minute.

CP said...

Brace yourself for stagflation. Asset values are going down to where they should have been all along. The cost of genuine necessities will be rising. You think employment was tenuous before? Just wait. Inflation will be rearing its ugly head. Nominal prices could actually go down yet still rise relative to wages which could fall even faster.

Stagflationary Mark said...


“OK, I'm callin' in now. Rubicon party at CP's house! Sure, that would have sounded unpossible two months ago, but, hey, two months from now... I say why not. When it comes to recrossing the Rubicon, never say never.“

It’s like we’re putting the band back together to sing some blues. ;)

GolfcourseUndertaker said...

The post-1971 USD-centric currency system that has allowed us to have a “strong USD” financially but that has left us begging China for pharmaceuticals, ventilator parts, & masks. This has happened because the structure of the USD system post-1971 reduces the US’ economic role in the world to running deficits to provide the world with USDs, up to and including offshoring our manufacturing sector to places like China to help run those deficits. Now that "public" and politicians have "woken" up to the game, I think the next 20 years may not look at all like the past 20 years. I would imagine that the gold price is a leading indicator of what will happen to wages and breadstuffs of all sorts.

Stagflationary Mark said...


From your link:

“Meanwhile real productive goods will be recognized for their true worth. Will it keep you warm and dry? Will it fill your belly? Will it last?”

We were lucky to score 30 pounds of basmati rice at nearly Costco’s normal prices on Amazon at the end of March. That wouldn’t be the case today. Prices are much higher.

Here’s a fun fact about basmati rice.

“The best basmati rice isn’t pearly white—the grains will have a slightly golden hue, but shouldn’t be gray. That's because quality basmati rice is actually aged, sometimes for as much as a few years, which helps to dry the rice fully and keep those grains fluffy and separated in a pilaf.”

Did basmati rice producers know a few years ago that they needed to produce more because millions of people might want to stock up? What are the odds that the Fed can fix this potential aged rice problem quickly by throwing easy credit at it? How many people will be optimistic if their favorite rice actually does run out? Will they start buying even more of other things that they think might run out? How many other things are we taking for granted right now?

More thoughts on Planet Fitness: What if the workout equipment needs to be 6’ apart for a year or more? They operate on volume. If they can no longer do that (because fewer people can workout at the same time), then prices must rise. Can you think of a worse time for any gym to raise prices?

Trump can relax the 6’ distancing guidelines and maybe even force the states to relax them too, but I won’t be relaxed working out right next to a stranger, especially if that stranger coughs. Also applies to sitting right next to a stranger in a movie theater.

But hey, we’re told that it’s different this time. No worries. We brought this on ourselves, so it somehow doesn’t count. Economy gets a free pass for a couple of quarters and all of this can be forgotten. Right?

CP said...

Melt value still 4 cents:

The coin is 75% copper but 44% of the value is from the nickel, which is worth 2.3x as much per pound (right now).

Will a 37% increase in the Federal Reserve balance sheet since 2015 be enough to push the melt value into the money?

I doubt it.

Here's the test: I really wouldn't want to own copper-nickel slugs without the free put option!

CP said...

There was a 2007 nickel bubble:

CP said...

Another great thing about nickels: the Chinese aren't counterfeiting nickels. (As far as I know...)

How many people buying gold coins or bars do x-ray fluoroscopy to make sure it's real?

This is the brutal reality goldbugs are ignoring:

Stagflationary Mark said...


In the late 1980s, I worked as a research assistant in the physics department for a professor studying short-range gravitation. One day, he wanted me to swap out some viewing ports on his vacuum chamber. He bought new carbon steel engine block bolts from an auto supply store. He asked me to install the new viewing ports. As I was tightening the first bolt, something unexpected happened. The bolt never got tight. instead, it got longer. It stretched. I took the bolt back to my professor and the look on his face was one I will never forget. He looked at me like I was Superman. Told me to take another bolt down to the lab and use a torque wrench on it. I did. The next bolt stretched with pretty much zero torque, like it was made of lead.

Those carbon steel engine bolt blocks were pretty much completely useless. Clearly counterfeit. To this day, I wonder how many engine blocks were being held down with lead bolts. The bolts sure looked real.

He got me some more bolts to try. The real ones were impossible for me to stretch. They were incredibly strong. Looked the same though. I could not tell them apart just by looking at them.

So, if people are willing to counterfeit carbon steel engine bolts, I’m guessing they’ll counterfeit just about anything.

“The worst confirmed accident in the air from counterfeit parts occurred in 1989 on a Convair 580 turboprop charter plane carrying 55 people from Oslo, Norway to Hamburg, Germany. At 22,000 feet over the North Sea, the tail section of the craft began vibrating violently and tore loose. The plane splattered over 3 miles of sea. Everyone aboard died. Norwegian investigators painstakingly dredged up 90 percent of the 36-year old plane and found the cause: bogus bolts, bushings and brackets. The charter company Partnair, went out of business, and the origin of the parts was never determined. (Lubbock Avalanche –Journal 1996) The Federal Aviation Administration estimates that 2 percent of the 26 million airplane parts installed each year are counterfeit, which equals approximately 520,000 parts. The June 10, 1996 cover story in Business Week found that bogus airplane parts played a role in at least 166 U.S. based incidents and malfunctions involving small aircraft during a 20-year period, 1973­ 1993.”

CP said...

[T]heir CPI stopped increasing when the productive population started falling, at the same time that their central bank began a huge increase of the money supply. The evidence is now showing in the U.S. and Japan that the price index is not a dependent variable of the quantity of money. However, both experiences are consistent with the price index and the quantity of money both being dependent variables of demographics. Falling working age population seems to cause desperate but fruitless schemes by central banks. We may have an answer now to our inflation/deflation question. The underlying trend is deflationary. The central bank can panic everyone into buying inflation "hedges" by doing something crazy, but this is counterproductive. Most importantly, no amount of central bank jawboning is going to make your boss come into your office and give you a raise. You could just get fired, though, if the central bank makes your company's input costs go up too much due to commodity hoarding.

"I assess the chances of a U.S. hyperinflation being underway by the end of 2014 at more than 90%, by the end of 2013 at more than 40%. A likely trigger event here, again, would be panic selling of the U.S. dollar and dumping of dollar-denominated paper assets such as U.S. Treasuries. The initial trigger event could be seen literally at any time."

We can broadly understand the consequences of hyperinflation or deflation (asset prices rise and rise in money terms, or fall and fall in money terms), but we can't really predict which one will happen ahead of time. That being said, hyperinflation destroys the monetary system itself by completely undermining confidence in the medium of exchange, which is something you'd think a modern central banker would be hesitant to commit to as a policy because they'd be destroying their own franchise, or at least creating gross uncertainty about their future ability to influence such a franchise. With deflation/crash, certain crony capitalists get wiped out, which would be very "annoying" for the central banker who has relationships with them, but the monetary franchise remains in tact.

Anyone who makes the case for inevitable hyperinflation needs to present evidence on how hyperinflation will enable the United States government to escape the political obligations of the promises that it has made to retirees.

CP said...

New post for comments:

CP said...

Commodity investors: why would you want to outbid these lunatics for commodities? They won't be able to keep it up forever.

CP said...

Thinking about hoarding nickels today.