Even though gas prices at the pump are cheap, relatively speaking, there are still those for whom the price is not low enough. Propane tanks were stolen recently from a Blue Rhino gas dispenser. This event is closer to a universe where goods are scarce, such as a universe I blogged about yesterday in 20200427M Day 118: Who Is John Galt?, before filling my car up with gas today. It was interesting how I came to notice. I saw the Blue Rhino dispenser and, for some unknown reason, was drawn to go look at it even though there was no damage from the exterior and no real reason for me to go check it out. As I walked towards it, a guy with a mask on started whistling at me from outside the gas station. When I turned to notice him, he told me that the dispenser had been broken into. It was then that I decided to investigate it further and see how the back of the dispenser had been pried off.
A few days ago I was moved to take a picture of a man blowing bubbles along West Cliff (20200423h Day 114: Bubbles in the Air). I wonder now if the US dollar is in a bubble. The value of the US dollar has remained strong, relative to other currencies, and has even held up fairly well against the price of gold. Investigating some ratios involving oil, gas, and the US dollar will help us understand the universes around us.
In Figure 1, the recent drop in the price of oil due to the supply/demand imbalance can be easily seen, even when priced in ounces of gold. Apparently, the demand for gold has not dropped, or at least not dropped more than the supply of gold.
In Figure 2, it’s interesting to see how much of the S&P500 increase in value is over the long term is actually due to the decrease in the value of the measuring stick – the US Dollar. When the S&P500 is measured in the closest thing we have to a gold-backed currency, $50 American Gold Eagles, then a more real evaluation of the value of the S&P500 over time can be seen.
Figure 3 is evidence for why I am currently long Silver. I primarily purchase Silver through the ETF $SLV because I can purchase using my retirement account and quickly move in and out of a position without worrying about loading up a truck.
Figure 4 is interesting because it values the price of gold in inflation-adjusted dollars. This, of course, hides the depreciation of the US dollar. If CPI is to be believed as an accurate measure of this depreciation, then gold appears to be over-valued at this point. I think it is more likely that the CPI is lower than the actually inflation rate. The way CPI was calculated was changed in 1980. If CPI were still calculated in the same way, it would be higher (see Figure 5).
What seems likely to happen in the short-term is:
- Demand for oil will increase as the world economy comes back online. This will cause the value of oil to return to it’s pre-pandemic value;
- The Fed will continue to prop up the bond market, including mortgages and corporate bonds, thereby preventing a deflationary implosion that would result otherwise;
- The “free money” that businesses and people receive through unemployment and stimulus checks will also prevent deflation from spiraling out of control;
- The supply/demand ratios for goods and services will both decrease and, once the economy is back, this will cause an increase in prices; and
- The Fed will hesitate to raise interest rates too fast and this will result in cheap money flooding the financial system, which will encourage what will look like speculation in the financial and housing markets.
In the longer term, there is a measurable probability that real inflation will finally get above 2% and possibly even get out of control. This definitely happens in some nearby universes – just not sure now how prevalent these universes are.
I’d like to end with some quotes from fellow wordpress.com bloggers:
Regular readers will be aware that a feature of my work is to look at the impact of inflation on the ordinary worker and consumer as opposed to central bankers who love to torture the numbers to get the answer they wanted all along
I had thought that given the neighborhood the house, despite its small size, would sell for about $400,000. That would be a sizable increase from the price it sold for 60 years ago. I was wrong though. Asking price is $599,900, 50 times what my parents paid for it. No wonder my mother and I were a bit discombobulated.
A grand inflation in front of a depression is pretty much the end of an economy. If the government prints money in serious quantities and issues debt in more or less unlimited quantities the game is over. The gold bugs will have won.
A rather smart investor named Rick Rule once said, “We don’t want to live in a world with $10,000 an ounce gold.”
Right now there is a greater than zero chance that this will be exactly the world we live in.