Falling Prices

Posted by Jeff 12/01/2016 0 Comment(s) The Bearing Market,

Interest rates have been at or near 0% for six years.  This means one of two things: 1) the economy is incredibly stable and there is almost no risk in lending money or 2) risk has been horribly mis-priced and, as a result, there is now a lot of overcapacity in the global economy.

 

 

Obviously, the Fed has kept interest rates this low for this long in an attempt to goose a little more juice out of our economic system.  Risk has been wildly mis-priced and there are factories, cars, tractors and fishing boats now in existence that never should have been.  In some areas of the world, large construction equipment that once went for $2.9 million has been discounted to $15,000 (source: zerohedge).

 

This overcapacity has manifested itself in commodity prices of all kinds. Since 2008 cotton, corn, oil, wheat, copper, iron ore, silver and gold are all down substantially. Ironically, with zero interest rates, the Fed has caused deflation instead of the inflation their press releases indicated they were hoping for.

 

The same is true of bearings. Bearings are a commodity like any other and there has been massive over-investment in this sector. Bearing prices are now available on this site to individuals that many manufacturers would not have been able to get twenty years ago. That is largely thanks to the thousands of factories that now exist in China because of the availability of cheap credit.

 

How low are we going to go? It doesn't seem like corn prices are going to be up anytime soon. People are now talking about $10 oil. Car sales hit an all-time high last year but so did the length of car loans. The average car buyer will now be paying off his/her loan for more than five years (67 months). That average loan payment is also at a record: $488 (source: zerohedge).

 

How long can that continue while wages for the average American worker continue to fall? I have no idea but I suspect that car prices will be falling in the not-too-distant future.

 

It seems that prices--including bearing prices--will continue to fall for the foreseeable future. As long as unviable operations are kept afloat by cheap money, this overcapacity will not be allowed to clear.

 

 

 

 

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