Tuesday, June 24, 2008

Price For (Almost) Everything Except Houses Rise

Today we learned that house prices in the U.S. continues to fall. By 15.3% according to the Case-Schiller index and 4.6% according to the OFHEO index. The Case-Schiller and OFHEO indexes are constructed in different ways, which is why the numbers differ. Case-Schiller probably overstates the decline because it only covers big cities where the previous increases were largest. OFHEO on the other hand probably underestimates the decline because it does not cover all house transactions and excludes those most closely associated with the bubble. So the true number is likely somewhere in between, although it is probably somewhat closer to OFHEO.

However, the price of commodities continues to go up. Chinese steelmakers just agreed to a 85% increase in the price of iron ore they pay to Australian miner Rio Tinto. This means yet another windfall boost to the Lucky Country, which is bullish for the Aussie dollar. It also implies that inflation remains strong in the goods markets.

The combination of high inflation in the goods and services markets and deflation in the housing market was captured in this The Economist cover from May 24, where one says that the price of everything seems to be going up, to which another reply "except my house price".


Anonymous Justin Rietz said...

Not to sound like a broken record, but we need to be careful when discussing the rising prices of commodities. A good part of the increases is due to supply and demand factors and hence not inflation by Austrian standards. Inflation, i.e. an increase in the monetary supply, is the icing on the cake, as Jim Rogers says.

5:34 PM  
Blogger stefankarlsson said...

Justin, I agree with that. But if you look carefully I didn't discuss the cause of this relative price movement at all. I just stated the obvious facts that commodity prices are rising sharply relative to house prices.

10:21 PM  
Anonymous Justin Rietz said...

True, and I don't mean to argue for the sake of arguing. However, you do state "The combination of high inflation in the goods and services markets..." My feeling is that we are seeing more of a supply and demand impact right now, and that the big inflation kick is yet to come. I don't have a quantitative backing for that claim, but more of a gut feel based upon supplies of agricultural commodities, the price of oil, etc.

What do you think?

11:42 PM  
Blogger stefankarlsson said...

As I've made clear on a number of occassions, I think both monetary and nonmonetary factors are at work. I don't know the exact relative quantitative proportion, but the fact that the oil price for example started shooting up really dramatically after the Fed started its series of rate cuts is hardly a coincidence.

7:53 AM  
Anonymous Larry said...

Justin, there are maybe 1-2 million gas stations in the world. Not one of them have run out of gasoline. Not even in the thickest jungle in Congo are there any shortages.
Secondly, the price of oil in terms of gold is up 50% since 2003. It was up only 20-25% before the latest bubble-rally. Which seems fair to me since demand has increased by 12%. I repeat 12% increase in demand since 2003. And no supply shortages.

The price of oil is around 85 Euro and 140 USD. Remember Euro and USD at par?

What we have here is what Austrian School tells us. The consumer didn't want all those capitol goods, he wanted food and gas. Add in the final speculative money and we have an enormous bubble that will burst after a final leg up.

Now, for all those factories in China we can only pray. Take cover, money is starting to disappear across the globe.

NB! I've been long oil since '04 and took profits in January. I will now short Oslo Stock Exchange to the bottom. And that's far downhill.

I suggest you study the facts. Don't get sucked in by the dot.com rethoric now plaguing the oil market. It's different this time? Where? Show me the gas station with no gasoline.

Stefan: Great site.

7:05 AM  

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