Prices Prices Prices

Prices prices prices. I went out on to the sales this weekend to buy a winter coat. Saw one I liked and looked at the price tag, it came at NOK 14990, that is USD 2100!, about ten times more than I expected. My heart missed a beat, my blood pressure went up, my brained screamed as I saw my cash savings being instantly inflated away to be worth a tenth of what I expected – this can not be! Turned out it was all cashmere, designer-label coat – but anyway, please anyone USD 2100?. Is anyone in their right mind really cuffing out USD 2100 for a winter coat? I ended up buying a very nice coat, cashmere/wool blend for USD 145 in the mainstream shop next door. I also went home and finally sewed in the two missing buttons in my old favorite coat, it will serve me a few years more.
This experience however, of seeing general prices skyrocket by a factor of ten and savings equally diminished in value is the tune of the next decades – get ready for it.

It also turned out my hairdresser raised her prices by 13%, from USD 32 to USD 37. She blamed it on her landlord raising her prices and some customers telling her she “should”. She complained of fewer customers and being squeezed. Naturally I was the first who commented on the hike (is commenting on prices a “complaint” by default?). My excuse to be obsessively concerned with global monetary policy did not impress her; she grumpily went on as I “complained”.
Yet, I am sure many more silently took note, some will not return. And so it is in the crisis that some compensate by raising prices, perhaps giving a boost in the very short term – but actually eating up their capital stock as some customers, like yours truly, might look for cheaper pastures. We don’t mind you dear reader considering us a cheapskate.

I liked my hairdresser; had gotten to know her, and her family. Even advised her on some business matters, as she advised me on nutrition. “Friends” is to strong, but “friendly” – yes. But now I will have made a mental note to look for another, cheaper hairdresser. Maybe I will return to her anyway, but has she “won” then, gotten away with a price hike? Or has the central bank of Norway “gotten away” with their inflationary policy, maybe.

Inflation thus stresses us up, blurs our judgment, it destroys trust and the social bonds and fabric of society – it is one of the great unseen costs of inflation.

Next door was a Norwegian management run regular restaurant, two thirds empty, waiters hanging in the bar – someone is loosing money. I went on around the corner to the local Thai diner, known for hardworking Thai’s, smiles, good food and great prices. It was jammed full, with a line stretching out of the door. Their business is booming. The final bill was 20% lower than what I expected. USD 28 for a nice Thai dinner for two in Norway is a bargain. Dinner for two came in substantially lower than a simple 15 minute men’s haircut – obviously something is wrong somewhere…

The moral is that there is a market out there, there is demand. But answering the slowing economy with raising prices is most likely the wrong strategy. See if you can lower prices instead, substantially if you can, and make it back in volume. The volume potential is there.

The markets
Obama and his administration promises to take drastic measures to kick start the economy. We should take them on their word. I worry about what they have up their sleeve. Unprecedented actions have already been taken, all bets are off really. Prepare to be surprised, shocked even. Their announcement of something drastic could turmoil the markets. I do not think we have fully taken in the meaning of “drastic measures”. I am personally extending my diversification and buying more gold.

Currently the FED’s dual mandate is price stability and full employment. Of the two the second is the important politically motivated one. Price stability can be tossed out the window by a simple voting round. Full employment, which really is about social rest and political stability, is what they are really after.
Price stability will therefore eventually be moderated, at first just cosmetically in language an interpretation, then totally removed from the mandate as inflation again starts roaring. We already see the first signs of the price stability regime being reworked, it will change everything.

I have recommended gold and diversified cash since November 2007, plus shorting the Swedish stock market for those who dared (that has turned out spectacularly well). As world stock markets have fallen by 50%+ and the dollar and gold has rallied this has been very good advice. I should have recommended buying US treasury bonds instead of outright cash, but I did not fully see the flight to safety into US bonds. Now it seems a bit late to make this move as US bonds and the dollar will eventually reverse.
Now, however is the time to start planning for getting out of cash as cash will diminish in value in the coming inflationary waves.

You need some gold; as a matter of fact you can hardly have enough.
A little bit of silver.
Some cash in actual paper money in your direct possession.
You will be buying some oil, at huge discounts for the long term.
You need some debt, as inflation will eat away that debt.
Carefully buying rental properties is the way to do it.
You are looking for real long term value.
You are looking for stable revenue streams.
You will also allocate some money to extremely risky investment; we currently like some Russian holding companies where the discount towards underlying values is just amazing, with layers of discounts on discounts.
You are looking for blending your own work with a part of your investment to make a true bargain. Buy a bankrupt firm in your own industry for a song, or perhaps your own current employer, and work it yourself to turn it around and positioned for the next boom – thousands of fortunes will be made this way within the next 15 years.

It is too early to get out of cash quite yet, but you need to mentally prepare and start being on the lookout for your opportunities.

Oslo, Norway. February 4. 2009. Hans Lysglimt

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  1. Posted 4 February, 2009 at 2:20 pm | Permalink

    Great piece, Hans! I asked the local baker the same questions yesterday: why the prices were still at the same inflated levels as they raised it to when wheat was twice as expensive. I like my baker, and I’m not likely to stop going there because their bread is half a dollar too expensive. But they are in the binary category of businesses who are still in bubble-land with regards to prices. And their excuse was that they didn’t raise prices enough when wheat was expensive. Well, there is a Portuguese bakery a bit further away selling the same quality bread a dollar cheaper. On my bike, in the bitter Canadian winter cold, the extra distance is simply not worth it, however :-(

    I’m starting to get really annoyed with the low interest rates. At today’s interest rates, you’re not really getting compensated for the risk of lending it out. If you have money in the bank, that money is being lent out, to God knows whom, with 10x leverage or more. If you have money in a savings account (as opposed to a chequing account), there are NO RULES in either Canada or Norway that regulate how much of that the bank has to keep in actual cash or central bank deposits. In the US, it’s at least 3%. So in a sense, the US banking system is MORE SOUND that many other places. The bank deposits are insured, but the insurance does not say WHEN you get the money back, and WHAT you will be able to purchase for it.

    Gold in a safe deposit box sounds awfully attractive right now…

  2. Pedro
    Posted 7 February, 2009 at 8:40 am | Permalink

    Hei Hans, Why do you say “You need some debt, as inflation will eat away that debt”? I do not understand this relation. Excelent blog!



  3. Håvard
    Posted 9 February, 2009 at 8:44 pm | Permalink

    Have looked a bit at gold this weekend. Looking at historic data the price was rock bottom stable until Nixon dropped the gold standard in the early 70′s. Then the gold price rose sharply in the late 70′s and peaked during the early 80′s. Then through the 80′s and 90′s the price fluctuated in the 3-500$ area before it steadily have risen from 2004 and are at record high levels now.
    Historically speaking it looks a little like a repetition of the early 80′s and that the price will drop sharply again if they manage to kick start the world economy and convince people that everything is under control. If this is the most likely outcome wouldn’t it be too late to buy gold now or is gold investment just as much a safe haven from inflation as countries around the world print money as mad?