tag:blogger.com,1999:blog-17908317.post724641639318207020..comments2024-03-28T03:15:14.875-07:00Comments on Unenumerated: Too big to failNick Szabohttp://www.blogger.com/profile/16820399856274245684noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-17908317.post-3063243479744530012009-02-18T15:52:00.000-08:002009-02-18T15:52:00.000-08:00hi nickjust thought you might want to know"Shellin...hi nick<BR/>just thought you might want to know<BR/>"Shelling Out" link is not working.<BR/><BR/>i have a link reference to it on my site, so i am keen to refer to another link if the essay is on the net<BR/><BR/>altoAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-17908317.post-56567060539125405262008-07-20T15:36:00.000-07:002008-07-20T15:36:00.000-07:00libra: People used to believe that investing in st...libra: <I>People used to believe that investing in stocks and real estate provided good hedges against inflation. But the trouble is, those sectors can get overproduced, and prices eventually fall to marginal cost of production. Thus investors now are reallocating towards commodities, because those do not get overproduced.</I><BR/><BR/>I agree that to some extent this is probably true. This is reinforced by the fact that commodities are a smaller market than real estate or stocks, so only a relatively small move out of them is needed to produce a relatively big run up in commodities. A caveat is that (speaking very generally) minerals will also be overproduced if their prices exceed the net present value of the mineral in the ground given inflation expectations (see my charts in my subsequent blog post).<BR/><BR/><I>So it's not that inflation is any different than five or fifteen years ago. It's just that now people are investing in commodities as inflation hedges, rather than stocks and real estate. </I><BR/><BR/>If you mean that rational inflation <I>expectations</I> are no higher, because stocks and real estate are down, then commodity prices exceed their net present value given inflation expectations and we are in a commodities bubble. The fact that minerals production has not substantially increased in response to higher prices tells me that it's not a bubble, i.e. that the the prices reflect rationally higher inflation expectations. These inflation expectations can be rationally explained by the extreme potentials now possible in federal finance that I've outlined above.<BR/><BR/>But in the U.S. at least real estate is not down at least nominally over its prices 3 years ago and longer, it is primarily down compared a year ago. The real estate market had been pumped full of moral hazard that it is now disgorging before it will go back to being as reliable an inflation hedge as it once was. <BR/><BR/>As for stocks, I've never thought they were a good inflation hedge. Price stickiness means they can only raise their prices far more slowly than the costs of their inputs, especially mineral inputs, so inflation (or even just higher inflation expectations which drive up commodity prices first) gobbles up profit margins. In the 1970s, U.S. stocks lost nearly 90% of their real value, as much as in the Great Depression, but unlike the Great Depression they broke even in nominal value. Inflation can destroy real stock values just as much as deflation.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17908317.post-30645892583411031742008-07-19T20:58:00.000-07:002008-07-19T20:58:00.000-07:00I've wondered if the recent run up in oil prices, ...I've wondered if the recent run up in oil prices, represents not a sudden surge in money creation, but rather asset relocation after the real estate collapse. People used to believe that investing in stocks and real estate provided good hedges against inflation. But the trouble is, those sectors can get overproduced, and prices eventually fall to marginal cost of production. Thus investors now are reallocating towards commodities, because those do not get overproduced.<BR/><BR/>So it's not that inflation is any different than five or fifteen years ago. It's just that now people are investing in commodities as inflation hedges, rather than stocks and real estate. That explains why stocks, real estate, and other inflation indicators are all down. I would not be surprised if the money supply is actually deflating as the credit crunch has slowed the amount of new money creation. Perhaps now is the time to put money back into safer bonds.Anonymousnoreply@blogger.com