Inflation pressures falling?

Today, I read two very interesting articles; one was about commodities, the other about decreasing inflationary pressures. I added 2 and 2 together, and came up with a semi-conclusion.

From Bloomberg

Commodity markets need international oversight, more transparency and intervention to deflate bubbles because increasing speculation means prices are no longer driven by supply and demand, the United Nations said.

Increased investment in commodity markets has encouraged “herding behavior” and creates bubbles, the UN’s Conference on Trade and Development said in a report published today. Anticipation of the global economic recovery played a “disproportionate role” in higher commodity prices, it said.

“Prices can move far from levels justified by the fundamentals for extended periods, leading to an increasing risk of price bubbles,” the UN said in the report. “Due to these distortions, commodity prices do not always provide correct signals about the relative scarcity of commodities.”

The UN’s Food Price Index neared a record set in February last month as commodity futures gained. Corn on the Chicago Board of Trade and silver have more than doubled in the past year and gold is up 27 percent. Rice is up 32 percent.

The “financialization” of commodity markets that’s increased since 2004 has led to a lack of “price discovery” that farmers and miners use to make hedging decisions, according to the UN report.

Trend Follower

“Market participants make trading decisions based on factors that are totally unrelated to the respective commodity, such as portfolio considerations, or they may be following a trend,” the UN agency said. “The price discovery mechanism is seriously distorted.”

Providing more timely data on fundamentals, information about market participants, especially in Europe, increasing position limits and banning proprietary trading by financial institutions that are involved in making hedging decisions for their clients are ways to solve problems associated with speculative investments in commodities, the UN said.

Introducing a tax system that slows financial market activities and more government involvement in trading is needed to ensure traders are considering supply and demand fundamentals when investing, it said.

Making decisions that ignore fundamentals such as the amount of stockpiles available, weather and demand for agriculture commodities work against assumptions of the so- called efficient market hypothesis, according to the report. That theory states that prices will rise or fall based on supply and demand, according to the UN.

Other Markets

“Contrary to the assumptions of the efficient market hypothesis, the majority of market participants do not base their trading decisions purely on the fundamentals of supply and demand,” the UN agency said. “They also consider aspects which are related to other markets or to portfolio diversification.”

Herd mentality takes over when traders make investment decisions based on what others are doing or when they follow trends that aren’t fundamentally driven, according to the report. Study organizers who interviewed 22 market participants reported “widespread herd behavior,” the agency said.

“Physical traders, in particular, emphasized that the activities of financial players have strong effects on commodity markets and sometimes impair the functioning of commodity futures for hedging,” according to the report.

From PragCap

The ECRI’s Future Inflation Gauge declined in May from 102.9 to 101.  This is one of the few reliable independent inflation gauges.  Lakshman Achuthan, Chief Economist of ECRI said inflation pressures are clearly receding:

“With the USFIG hitting a seven-month low, underlying inflation pressures have clearly begun to recede.”

This should pretty much put the imminent predictions of hyperinflation to rest (though we should not expect any of the hyperinflationists to be held accountable for their complete and total lack of understanding of the US monetary system).  Disinflation is clearly becoming a risk again.

So what does this all mean? Are inflation pressures really falling? I would say, YES! In case you haven’t been paying attention to my blog, I recently wrote in my silver analysis, there is a big reason to believe that commodities will fall. 1) Good weather = good crops harvest = good prices falling. 2) Slowdown in China = less demand for commodities = commodity prices falling. If these two things happen, then inflation pressure will be dramatically reduced. Plus, if the government wants to depress commodity prices, this will result in lower inflation.

So why does the government want to crunch down on commodity prices? Well, surging commodity prices generally means a weaker dollar. The American government does not want the dollar to be seen as too weak, or else how can they sell their bonds?

China’s biggest problem, according to Jim Rogers.

Here’s a really good post from Business Insider. It is written by Sprach Analyst, and he takes some quotes from Jim Rogers.

Whatever causes the drought, some people raised concerns on the China drought situation and its impact on the economy.  At the moment, quite frankly, I have very little idea on how serious the problem can be, except that I suspect it is not going to help with the inflation situation, particularly the food prices inflation in near term.

This is absolutely true. I hear from some connections in China that food prices have risen 20% in the past month.

In his own words, Jim Rogers said:

I don’t mind if China has civil wars, epidemics, panics, depressions, all of that.  You can recover from that.  The only you cannot recover from is water… China has a horrible water problem in the North… If China  doesn’t solve its water problem, there is no China story.  I’ve been around the world for a couple of times.  I see whole societies, cities, countries, disappeared when the water disappeared.

He added that “they are hundreds of billions of dollar to solve the problem”.


Of course, I have long pointed out some of the important problems that the Chinese economy is facing, including the real estate bubble, inflation, demographics, reliance on fixed-asset investment as growth driver, and over expansion of money supply and credit.  The water problem is probably going to make things more difficult.

This is 100% true.

The Chinese leaders, in my view, are very intelligent.  As always, I trust that they have a very good understanding of the problems, and are trying very hard to tackle the problems.  My concern is that too many people are overly confident in the Chinese leadership’s ability to solve all these problems.  The fact China bears and sceptics have been wrong for 20+ years gives people huge confidence that China can muddle through.  Hugh Hendry said 10 years are enough to create a cult of belief in the capital market.  Now, we have 20+ years.

It is true that Chinese leaders right now are smart, but they’re weak as hell. They try to appease the American and European governments (disgusting).

Warren Buffett’s Investment Strategy

Prepare to be shocked (or at least I hope to shock you). This is Warren Buffett’s investment strategy.

I hate to break this to you, but Warren Buffett has been lying to the public for years, all the while putting on a straight face. This is how Warren Buffett describes his investment strategy.

Warren Buffett is a value investor. Value investors look for securities with prices that are unjustifiably low based on their intrinsic worth. When discussing stocks, determining intrinsic value can be a bit tricky as there is no universally accepted way to obtain this figure. Most often intrinsic worth is estimated by analyzing a company’s fundamentals. Like bargain hunters, value investors seek products that are beneficial and of high quality but underpriced. In other words, the value investor searches for stocks that he or she believes are undervalued by the market. Like the bargain hunter, the value investor tries to find those items that are valuable but not recognized as such by the majority of other buyers.

Warren Buffett takes this value investing approach to another level. Many value investors aren’t supporters of the efficient market hypothesis, but they do trust that the market will eventually start to favor those quality stocks that were, for a time, undervalued. Buffett, however, doesn’t think in these terms. He isn’t concerned with the supply and demand intricacies of the stock market. In fact, he’s not really concerned with the activities of the stock market at all. This is the implication this paraphrase of his famous quote : “In the short term the market is a popularity contest; in the long term it is a weighing machine.”

For the longest of time, I was fooled by Warren (I was so stupid). Now, it’s clear that this is a big fat lie. Here’s to quote an article from the Economic Times.

NEW YORK: Goldman Sachs Group won the backing of Warren Buffett, the world’s pre-eminent stock picker, as the Wall Street firm seeks to raise cash from investors whose faith in the investment-banking business model has been shaken.The bank soared 11% to $138.17 in German trading on Wednesday.

For Goldman, the endorsement came at a price. Berkshire Hathaway, led by the 78-year-old billionaire, is buying $5 billion of perpetual preferred stock with a 10% dividend. Berkshire also gets warrants to buy $5 billion of common stock at $115 a share at any time in the next five years. The common stock closed on Tuesday at $125.05, providing Buffett with an instant paper profit of $437 million.

“It’s a hell of a deal for Buffett,” said Brad Hintz, an analyst at Sanford C Bernstein who rates Goldman stock “market perform”. “The key thing for Goldman is making it through the credit cycle, and they’re doing the right stuff,” Hintz said.

In case you didn’t know, Goldman Sachs later fell to a low of $53.31 per share. So my ass Warren Buffett bought Goldman Sachs because it was undervalued. You want to know why Buffett bought GS? Because he had inside information. That’s right. The Buffett you all thought was a “value investor” isn’t. Here’s his real investment strategy.

  1. Get insider tips, and maintain a low profile from the Fed.
  2. Buy cash generating companies.
  3. Time is on your side.

1. If you ask Michael Steinhardt, he’ll tell you that Warren is a con. He actually depends on insider information. Take the Goldman quote I mentioned above. How did Warren know that the Fed was going to bail out GS (afterall, they didn’t bailout Lehman). Even an idiot would know that Warren Buffett had insider information (probably from the Fed).

2. Also, Warren isn’t truly an investor. What Warren Buffett really likes to do is to buy entire companies. Investors like Jim Rogers and George Soros buy stocks because they like it’s prospects. Even in his own biography Warren mentioned that his preferred holding time is “forever”, and he likes to buy entire companies. Warren especially likes insurance. The cash flows his insurance companies generate are used for investments. Warren’s ideal kind of company are the ones who can be run by a “ham sandwich” and generate large amounts of cashflow. Meanwhile, he’s preaching “value investing.” Trust me, unless you have billions of dollars to snap up companies with and lots of connections with the big guys in the government and executive boards, don’t pay attention to what Warren Buffett does. You can’t copy his strategy.

3. Warren Buffett has the ability to wait out a crisis. This investment strategy is very hard to copy. Warren can afford to watch a stock he bought drop from $115 to $50, and then back up to $180. Why? Because he owns a lot of cash generating companies. Hedge funds can’t use this strategy. They have quarterly redemptions, and investors would withdraw their money if they saw that a stock the hedge fund owned dropped from $115 to $50. The small, full time investor who’s entire portfolio is only worth $400,000 can’t afford to just wait the crisis out. He’s got a family to feed.

Warren is no true value investor.

Please feel free to comment below. Please show your anger against what I said, and criticize this post.