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Some Deflation Predictions…

By: Rick Ackerman, Rick's Picks


-- Posted Monday, 30 June 2008 | Digg This ArticleDigg It! | Source: GoldSeek.com

Rick’s Picks

Monday, June 30, 2008

“Phenomenally accurate forecasts”

  

The supposed debate between inflationists and deflationists is really no debate at all as far as we’re concerned, and the dialogue we had last week with iTulip founder Eric Janszen should have convinced no one of his thesis that the U.S. economy is headed into some hybrid of inflation/stagflation/hyperinflation. Eric likes to play with definitions, such as by insisting that inflation means “an increase in the money supply.”  That’s one way of looking at it, but who cares?   It is the symptoms that matter, and in that regard, the inflationists have shown themselves to be deaf and blind to what’s going on in the real world. Granted, the price of energy and groceries has been rising at a rapid clip. But does it constitute “inflation” if we cannot afford to pay the higher prices?  For in fact we cannot, and because of this the average household is simply consuming less of other things in order to offset the hit of $4 gas and $3 milk.

 

 

We have also argued here that no inflationary spiral is possible unless wages are rising along with prices.  But has your paycheck risen to keep up with higher prices?  And, do you think you could get a raise from your boss right now by pleading the hardships of “inflation”? Of course not. And neither can anyone else. So how much higher do you think prices can go before the economy trips into recession or worse? Will, say, four-star New York hotel rooms continue to rise above their current average of $470 a night? Or are room prices instead about to plunge, a victim of the city’s financial-center tsunami and drastically reduced tourism? We foresee the latter – not just for NYC hotel rooms, but for nearly all products and services that are not absolutely essential to our daily lives.  As for foreign goods, Americans will curtail buying even more sharply as a falling dollar makes them less affordable. Let BMW worry about whether plummeting sales are due to “inflation” or “deflation”.

 

Airlines Can’t Win

 

And new cars are not essential, by the way. Although the price of steel and just about everything else that goes into a car – with the notable exception of wages -- have been rising, notice that prices for Chevy and Ford SUVs and trucks are crashing. Even Toyota and Honda are starting to offer buyer “incentives” that would have been unthinkable just two years ago.  And while we’re talking about falling prices, let us go on record with a prediction about airline fares.  The carriers are shrinking passenger capacity as fast as they can in order to turn the supply and demand equation more in their favor. Travelers have been warned that fares are likely to rise significantly as a result, but we predict otherwise. The economy is drying up so fast that the airlines will not be able to reduce seats quickly enough to more than maintain current prices at best. What this implies is that if they try to raise LA/NYC fares by, say 30%, planes will fly half-full no matter how many jets are mothballed.

 

Campus Crunch

 

We also predict that colleges are about to become some of the biggest price-cutters of all, since borrowing by students and their parents plays such a crucial role in making higher education “affordable” to the middle class. Deflation is about to hit the campus with a vengeance that will make up for all the years during which the cost of room, board and tuition were rising much faster than nearly anything except health care. Colleges have already begun to  draw down their endowments in order to free up more scholarship money for students of all economic backgrounds and means. This is bound to accelerate, not only because students will grow less able to pay their own way in a severe economic downturn, but because the endowment funds themselves will shrink as the financial assets they hold fall in value.

  

Concerning inflation vs. deflation, we suggest a very simple test that can be applied personally, or to any entity that has borrowed money, including local and state governments. To wit: Is debt becoming more of a burden, or less?  If the latter, we are in an inflation; and if the former, we are in a deflation.  The Federal government is a special case, of course, because it can print unlimited sums of money to pay its debt. But even if it should choose to do so, defaulting through hyperinflation, don’t get your hopes up that that will occur in time to extricate you or 40 million other homeowners from being crushed by mortgage debt. Most of the money owed by Americans is tied to homes that have decreased in value by an average 15%. That means those homeowners are being subjected to a real-rate burden that exceeds 20%. If that is a recipe for inflation/stagflation, then we are a monkey’s uncle.

 

***

 

Last Chance to Take Seminar

 

Because of family vacation plans, I will be able to offer the Hidden Pivot Seminar only once this summer – on two consecutive weekday evenings, July 23-24. If you’ve been thinking about signing up, now is the time to do it, since once this class is full there will not be another opportunity to take it until fall. Click here, and then on the “Upcoming” tab to register;  or here if you would like more information as well as a detailed description of the Hidden Pivot Method and a free Hidden Pivot calculator (our latest model, perfect for beginners). 

 

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Saving America

 

We don’t have any easy answers, but we’re hoping to hear from readers with ideas about how to return the U.S. economy to health. The person who submits the best essay on the topic What Will Save America will receive not only a scholarship to the Hidden Pivot seminar, but also unlimited access to post-graduate tutorial sessions held each week during market hours. The value of this package is $1,150, and a week into the competition we’ve received no fewer than 21 submissions, including one that argues that Americans need, more than anything else, to get serious about diet and exercise. 

 

Essays should be 750 words or less and must be received at this e-mail address by no later than July 15.   For details about the Hidden Pivot seminar and comments from those who have taken it, click here.

 

Our own idea about how to save America is to become a global leader in energy. A solution that works for the whole world would be a triumph for Yankee know-how on a par with the invention of the automobile assembly line. To stimulate thought on this topic and others, we will be presenting occasional guest commentaries by people with backgrounds in science and engineering. Economists need not apply. In the meantime, we welcome any contributions at the e-mail address linked above. We’ll print the best of them once the competition has concluded next month.

 

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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2008, Rick Ackerman. All Rights Reserved. www.rickackerman.com 


-- Posted Monday, 30 June 2008 | Digg This Article | Source: GoldSeek.com




 



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