Central Bank Struggles

August 13. 2008. Oslo, Norway.

The markets are volatile.
They go up and down, increasingly so.
But mentally people seem the same.
US consumers still have not started saving.
People still believe their houses are worth peak quotes.
Investors still believe in stocks for the long haul.
All this will have to change before we see real change in the economy.
This will take time and it will be painful, very painful.
We see mounting clouds everywhere, have have for years for that matter.
We sold out in 2005/2006, too early it turned out, we missed the last leg of the froth.
But we choose to go with our conviction. Markets where overvalued big time and still are.
Most people don’t think like that, they jump into it, and as long as markets are up up up all seems well.
They dance as the central bank orchestra is playing.
Hey, people even think they “deserve” the gains they have on their houses from easy money. As if it was a payment from heaven on their virtue as good consumers.
Witch leads us to think that people do think about their net worth, in houses and savings, as if they where to consume it all one day. As if it all was going into hamburgers, gas, diamonds and bread.
If you think that over you quickly realize that there is still way way way too much money in the world. There simply is not enough consumables to consume (excuse me) all that money away.
There is too much money, too little consumables and time.
The imagined wealth is a mirage, and has been so for a long time, an illusion, numbers, hot air.
World asset prices are pumped up like balloons, it has to pop or deflate.
We are in the midst of the popping now, and the deflation will be done by inflation – if you see the turning of the terms. Prices must go up to catch up with all the money that has been printed.

The Norwegian central bank decides on the interest rate later today. Most economist where predicting no change, but Mondays inflation numbers where higher than expected. It turns out rents on houses are rising dramatically as people rather rent than buy a new home in the falling market. House prices are not measured in the price index, rents are. So when the easy money froth is going on, everyone buys and no one rents, rents get low and interest rates are set low, when the tide reverses rent go steeply up and pushes interest rates up. The central bank is pushing the pedal and hitting the breaks, exasperating the problem. Perverse on the ups and perverse on the downs. We believe the Norwegian central bank does take inflation seriously and is now trapped by it’s own faulty model now being forced to push interest rates from 5.75% to 6%. As our friend Fredrik Norman pointed out this might for the common man be a mental tipping point from “low interest rates” to “high interest rates” that could trigger a mental change in people.

This mental change is what we are awaiting now world wide. It will change everything. We are entering into a new era of savings again. The worlds central banks all have inflation fighting as top priority. Before we again see massive inflation (and it will come) our era now will be marked by central banks fighting inflation and then giving up one after the other. The coming downturn will to this extent be correlated to the central banks commitment to non inflation. When they give up, and start the printing presses, there will be a new boom. Expect a circus of explanations, changed models, new people, institutional change, outright lies and deceit in the process. Inflation will come back, it is the only way conceivable way to solve the worlds financial imbalances, someone has to pay.

Hans Lysglimt

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