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I have a head cold and can't seem to find the energy to do many charts, much less summarize the results of my last poll. That's okay though, because with $100 oil I think a lot of people are having a hard time finding the energy!
So here's my 2008 list of general predictions and observations for the New Year (and quite possibly for many, many years into the future).
- There are too many houses.
- There are too many banks.
- There are too many restaurants.
- There are too many shopping malls.
- There are too many airlines.
- The era of cheap food is over.
- The era of cheap energy is over.
- Unemployment will continue to climb.
- The stock market will stagnate (inflation adjusted).
- Real (inflation adjusted) yields will continue to drop.
- China will not decouple from us, nor will the rest of the world.
- Stagflation (slowing growth with above normal inflation) will continue.
Here's what I am doing about it.
I bought (and continue to buy) as many I-Bonds as the government would allow. Based on today's very low real interest rates (and potential risks that inflation might continue to rise), the 1.20% I-Bond is a great relative bargain. It earns an inflation adjusted 1.2% vs. just 1.00% (as of today) on the 5 Year TIPS. It doesn't take a financial wizard to see that the I-Bond is the better choice, especially since it is tax deferred! It also doesn't take a financial wizard to theorize why the government just reduced the maximum amount of I-Bonds you can buy starting this year. I think it is fairly clear that the government is bracing for stagflation (doesn't mean it is necessarily correct though, nor does it mean I am necessarily correct either).
The bulk of my investments are in TIPS (treasury inflation protected securities) and three month treasury bills.
I am reducing some of my three month treasury bill exposure. The real yield now appears to be negative. I'm using that money to participate in:
- January's 10 Year TIPS auction
- January's 20 Year TIPS auction
- Non-perishable hoarding (i.e., Costco purchases)
This is NOT investment advice. I am simply saying what I plan to do based on the things I believe. The money I will be parking in the 20 Year TIPS is money I intended to use to buy I-Bonds. The government took much of that option away from me. It is also money I will be needing in 20 years. The government has taken yet another step into pushing me into more risky investments (since TIPS are riskier than I-Bonds). The first step was lowering interest rates again to stimulate the economy. Unfortunately, it is not having the desired effect (on me). I'm not "investing" in any of our many housing markets, banks, restaurants, shopping malls, or airlines.
Here's a chart that summarizes my stagflationary thoughts rather well.
In my opinion, that's a classic dead cat bounce. Real yields have been struggling for years. It is the #1 reason I am a stagflationist. I don't see much in the chart to change my mind. If anything, it looks to be getting worse. Real yields turned negative in the 1970s on a great many investments. These paltry real yields of today might be worth salivating over if we continue to muddle through. They can get worse, much worse. It can become a self-fulfilling prophecy. Once hoarding starts (a driver of price inflation), it becomes very difficult to stop the hoarding behavior. Nothing says hoard like earning a negative real interest rate (and then be taxed on the "gain" as well).
The deflationists (such as Mish) keep pointing to the money supply to support their deflationary cases (even as oil rises to $100, gold hits $860, and the year over year CPI breaches 4% even as housing prices decline). If anyone finds out what they are smoking, I'd sure like some. There is a LOT of actual money floating around out there. I'm looking at money supply and all I see is a scary chart. You'd think the government spent 25+ years handing out money for free. That's what I think. In fact, that's exactly what I think. Positive real rates were handed to savers as a reward for not hoarding goods. It was a delaying tactic to temporarily thwart consumer price inflation as we fell off the gold standard.
1990
Government: What are you thinking?
Investor: I'm buying a gallon of gasoline with my dollar.
Government: We'll reward you with another dollar if you don't.
Investor: Okay.
2005
Government: What are you thinking?
Investor: I'm buying a gallon of gasoline with my two dollars.
Government: Here's another dollar! Don't do it!
Investor: Okay.
2007
Government: What are you thinking?
Investor: I've got $3 but can no longer buy a gallon of gasoline.
Government: Can't help you. We printed too many dollars.
Investor: But I need more dollars!
Government: That's some conundrum.
Investor: Well, at least I have $3.
Government: Not quite. You owe tax on the $2 we gave you.
As a saver, I'm heavily inclined to hoard hard goods that I will someday need if there isn't an incentive to stop me. What is the reward to stop the savers from hoarding these days? A taxable 3% return on short-term treasury bills when year over year inflation is over 4% certainly isn't much of a reward. It is a punishment. Why would I hoard paper fiat dollars over toilet paper? Do I think the price of toilet paper is going to suddenly fall in price? I know I will need dollars but I also know I will need toilet paper. I therefore see very little downside (pun intended ;)) in locking in my long-term toilet paper price right now, lol.
I wish to offer thanks to all that have posted comments on my blog. Words cannot express how much it has helped me to be able to bounce my ideas off of you. This is not a long-term goodbye. I will be posting more in the future, especially as conditions change. I just don't feel the need to keep beating a dead horse. Or perhaps the saying should be beating a dead house?
I'm not going to devote my life to watching the economy crumble (if indeed it does). I can say I have little hope for the future. Just look who we put in charge of it two times in a row.
And when somebody builds a new building somebody has got to come and build the building. And when the building expanded it prevented additional opportunities for people to work. - George W. Bush, October 3, 2007
One has a stronger hand when there's more people playing your same cards. - George W. Bush, October 11, 2006
See Also:
Extremely Bad News for I-Bonds!
The Death of Real Yields
Source Data:
Tentative Treasury Auction Dates
U.S. Treasury Real Yield Curve Rates
BLS: Consumer Price Indexes (CPI)
St. Louis Fed: MZM
St. Louis Fed: Population
The Complete Bushisms
42 comments:
Stagflation followed by deflation, followed by hyperinflation: that's my guess. I'm buying the British equivalent of your I-bonds as three- and five-year investments.
Where're my manners? Thank you for your efforts, and a Happy New Year.
Stag,
Thanks for sharing your ideas. Great stuff.
That MZM chart sure seems to echo the real Dow chart in my mind (at least until the dot bomb bust). Not sure which leads and which follows though.
Also, just because now is not a good time to invest does not mean that now is not a good time.
A safe investment is ALWAYS better than a bad investment. The physicians creed: do no harm. A personal favorite: you can't push a rope.
Patience will test a person. I've been tiring of it since 1997. A whole lot of people ridiculed my caution during the the late 1990's stock boom. I had doubts every single day during the boom. Foolishly, I succumbed and bought two telecom stocks which to this day are worth less than I paid for them. A costly lesson which I will always remember. Saved me from following the herd into real estate. Yet through it all, I've outperformed the average mutal fund manager over the last ten years and with way, way, way less volatility and way more current income.
I like to get paid for risk, not pay for it!
Stag, you have a certain type of freedom that the world does not sell on credit. Of this I am certain.
Hopefully you will keep posting, even in a reduced amount. For me its a bit like alcoholics anonymous for my patience.
The first five can be condensed to "The US is massively overbuilt." Simpler is better.
I'm not so the era of cheap energy is over. The ROI for rooftop solar is now less than the projected useful equipment life. That at current kWh prices.
Other than that, spot on Staggy.
dearieme,
Safety is having another good day it seems. The real yields on TIPS dropped a bit more. I'm hoping there will still be a decent real yield in the upcoming auctions. It is a rare situation to be actively hoping my TIPS investments do poorly in the coming weeks (since I'll be buying more and I want them cheap).
MAB,
We've been riding the "something for nothing" wave so long I think some have forgotten that a "nothing for something" wave is even possible.
Rob Dawg,
Yeah, I could see that. I think the era of cheap energy is over, but that doesn't necessarily mean I think the era of very expensive energy is now upon us. Perhaps oil is high enough now so that alternative energies shine.
In any event, I'm not predicting $11 oil again in my lifetime. That doesn't mean I'd rule out $50 oil though, should we get a global slowdown/recession/depression.
I would add that if our grand plan is to grow our oil (ethanol) it seems to me that we're simply robbing Peter to pay Paul (i.e., we're burning our food). Further, Peter doesn't have the means to support Paul's lifestyle, lol.
Stag,
That MZM chart really bothers me.
You can't make people or companies rich by GIVING them money. Just look at home owners and home builders for proof. Both were given vast sums of money and are now going broke. Same with dot com companies. No need to remind me of the 1970's either.
What a paradox.
This is why inflation scares me sooooo much. Political hacks and a misinformed public do not allow proper controls to be maintained. I have no faith in the FED.
I keep remembering Bernanke (during his congressional testimony last year) telling Senator Shumer to raise the GSE Cap from 410K to 1000K. Bernanke also mentioned the Gov't gauranteeing mortgage loans. This is a massive admission of the FEDs incompetance. Where is the outrage?
BTW, I hope you don't mind me bouncing ideas of you on old posts. I respect your skills (memorable quote from the trial of a famous hacker).
Infamous Hacker I should say.
MAB,
I very much enjoy people bouncing ideas off any of my posts (even the older ones as I get an email each time a comment is left for me). They don't even need to be on topic!
Investors were distrustful of the stagflation story during today's market selloff (what an utterly awful employment report!). The deflationary forces ruled the day. My TIP fund was unchanged. I welcome that distrust. I'm hoping it lasts all month (since I'm participating in the long-term TIPS auctions and want a decent price).
It is very tempting to be sitting on the sidelines awaiting opportunities to put the money back to work. I'm done being tempted though. I think long-term TIPS ARE the opportunity.
There are pretty much four primary U.S. investments that can be made with U.S. dollars if I am thinking this through properly. Ultimately the U.S. dollars must find their way to these things (even if you unload your dollars for euros, somebody is left with the U.S. dollars and will be left with the same choices you had).
1. U.S. Housing
2. U.S. Stocks
3. U.S. Bonds
4. U.S. Commodities
There's so much money looking for a decent return right now. Should housing and stocks not perform well, money will flood into the other two. There just aren't that many places for the money to go once you remove two of the biggest "sponges" of excess liquidity (housing and stocks).
The battle then becomes one of bonds OR commodities. If investors choose bonds that would be deflationary. If investors choose commodities that would be inflationary. That's probably one reason why the inflation vs. deflation debate continues on.
If it becomes a battle of bonds AND commodities (as has been the case, since money has been flooding into both), bonds are eventually going to lose big time (as commodity price inflation eventually trickles through into the CPI numbers). That would be the stagflation story playing out, in my opinion.
TIPS are a fairly wimpy way to place the bet.
If deflation kicks in, we are safe. If we do lose money during a serious deflation, we will still maintain purchasing power as goods become cheaper. No harm done other than the psychological damage (bragging rights?) of having less money on one's statement. I'd prefer this outcome. No taxes! All I care about is maintaining purchasing power.
If stagflation (and/or pure inflation) kicks in, we are safer than most (since TIPS have inflation protection). We won't do as well as hard goods hoarders, but we'd do better than most (especially since TIPS are designed specifically to do best during stagflation).
I'm tempted to hoard gold (as I have in the past). However, gold has tripled in price. Canned goods have not. Either canned goods are too cheap or gold is too expensive. My gut says gold is predicting the rise in the price of canned goods. There's simply a lag. In a perfect world I'd hedge the bet. I'd short gold and be long canned goods in hopes the two would once again meet up in the middle (eventually).
When I say eventually, I mean in a Mad Max sort of way. He was not out looking for gold. He wanted canned goods.
Just the opinions of a canned goods, toilet paper, paper towel, sheets, toothpaste, soap hoardin' bear!
Hey Mark,
Just wanted to say thanks much for an interesting and fun-to-read blog. I feel I've benefitted from it immensely, though I reckon I won't know for sure for a few years. ;-) I wish you all the best and would encourage you to consider continuing with an occasional 'sarcasm' post.
If you're ever down in Portland, look me up. I'll buy you a beer. But sorry, you won't be able to hoard it.
-Allan
Allan,
I'm doing fantastic since the covert black ops helicopters dropped off some head cold medicine for me! I don't know why I was even posting in the first place. Things are great!
Diphenhydramine
http://en.wikipedia.org/wiki/Diphenhydramine
Diphenhydramine hydrochloride (trade name Benadryl as produced by Johnson & Johnson, or Dimedrol outside the U.S. & Canada. Nytol and Unisom as a sleeping pill) is an over-the-counter (OTC) antihistamine, sedative and hypnotic.
It relieves my cold symptoms while simultaneously shutting down my posting (and post nasal drip) activity. It also allows me to understand the bullish case about how great the economy is doing right now (even as unemployment shoots up to 5% while my girlfriend is unemployed). Goldilocks is frolicking in a sea of brightly colored flowers!
Good times!
(That's all the sarcasm you are getting right now, lol. The diphenhydramine is real. I may or may not have imagined the helicopters and how well the economy is doing. Could you believe me anyway? I'm being medically hypnotized! :))
1. Housing (change to real estate including commercial, industrial, raw land and rental residential)
2. Stocks
3. Bonds
4. Commodities
5. CASH
This is my U.S. investment allocation set. A bit broader than yours.
Everyone has been hoarding real estate, stocks and bonds. Hence the overvaluations IMO. Cash is usually a slow and painful death, but at this point it beats deflation in stocks and real estate. Commodities are volatile and risky for the average joe. TIPS look good, even here after the big run-up.
Mark, maybe you are just suffering good old fashion burn out, you have been on a tear on this blog and maybe a rest and some reflection will do the most good.
I'm starting to lean more to deflation as the days go by. Money is being vaporized in housing, and looks like stocks and commercial R/E are right on it's heals with rising unemmployment and a drop in capital spending soon to follow. None of this looks like inflation and while commodity prices are high one must also look back and see where they were a year ago and what prospect there is for them to go higher in the future with a slowing economy, I don't see it but I could be wrong. The only thing that really botters me is the dollar. If the dollar colapses all bets are off but with the massive holding of treasuries by other countries that is not in anyones best intrest either.
Kevin
Kevin,
Mark, maybe you are just suffering good old fashion burn out, you have been on a tear on this blog and maybe a rest and some reflection will do the most good.
Hahaha! I seem to only know two speeds: on and off. Somewhere along the way I determined that if it was worth doing, it was worth doing right. Giving myself a task that can always be improved upon given more time tends to turn me into a workaholic and/or basket case, lol.
I too lean towards deflation/disinflation in the short-term, but only if we get a recession (got a dartboard?). I would have leaned very much towards deflation in 1974 as well. 1974 was The Year That the Building Stopped (Time Magazine). Deflation must have seemed like a given, yet the aftermath was just the opposite (even with extreme unemployment in the years that followed).
In any event, I'm stagflationary in the long-term. Stagflation does require slow growth (stopped is certainly slow!). Stagflation is also compatible with very low real interest rates (as negative real interest rates encourage hoarding). During the Great Depression real interest rates were extremely positive. You could earn a great return by "hoarding" paper dollars in your backyard. Of course, dollars were backed by gold then. It could be argued that you would have been actually hoarding gold. This does not quite seem to be the same situation. We're running our country like a banana republic (large trade deficit) and/or Rome (refusing to let the party stop). Betting on deflation long-term seems like financial suicide to me (and many deflationary bears before me learned that lesson the hard way).
The only thing that really botters me is the dollar.
Other than that Mrs. Lincoln, how did you enjoy the play?
It makes it relatively hard to hoard dollars with the same level of enthusiasm then doesn't it? For the deflationists to be truly right, the value of hoarded paper fiat dollars has to increase. While possible (and perhaps even likely) in the short-term, it is not something I'd bet on for the long-term.
I know the following is getting old, but the elitist arrogance displayed in the following paragraph is one reason I am stagflationary and will continue to be stagflationary.
But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. - Ben Bernanke, 2002
I will never willingly hoard an item that can be infinitely produced at essentially no cost. The pure inflationists would argue I am when I hold TIPS, but at least I have some hedge against the power of this printing technology. My only fear is that the inflationists are too right. That's the only thing that can hurt me. That would mean even my inflation protected treasuries will be inflated away (extreme inflation would do it, as the extreme taxes on the interest would erode my principal quickly).
TIPS have a few potential subtle psychological advantages right now.
1. Many bears are convinced deflation is coming in a major way. That has kept long-term inflation expectations low. Of course, the time to buy inflation insurance is when inflation expectations are low. As with any insurance, the price of insurance goes up once the problems begin.
2. The average bear probably feels he's/she's smarter than the average investor. Most wouldn't want the 20 year TIPS. If you are smart enough to see the pain coming then you are clearly smart enough to time the collapse and profit, then time the recovery and profit off of it too.
3. The average bull probably feels he's/she's smarter than the average investor. Why buy the 20 year TIPS when the stock market ALWAYS does better?
4. The average investor probably hasn't given much thought to the next 20 years, much like the average politician hasn't given much thought to the next 20 years. Both potentially assume that the next 20 years will be similar to the last 20 years. There will be ups and downs, but just riding them out will be fine.
5. The 20 year TIPS had a much higher real yield heading into the dotcom bust. It is now quite low. They haven't been around long enough for people to realize that today's yield might actually be the average. I think it might very well be, from looking at average long-term real bond yields using non-inflation protected bonds. Further, if today's yield is the average then today's yield must head even lower at some point (since the average is by definition the middle of the range). I would argue that the pre-dotcom bust yield was much too high and it will be a LONG time before we see anything like it again, if ever. That was the prosperity era mindset. Those days are gone. Waiting for them again might be like waiting for $1 gasoline.
Just opinions!
Hope you get to feeling better.
As for the 4 places for $$ to go -- what about bank CDs? Or is that same as cash? However, cash as in folding money under the mattress deosn't get the 4.55% which is better than nothing, and after fees and losses, my CDs did me better this year than my son's investment accounts.
I just read my comment and it's a bit ambiguous at the end. The fees and losses were on my son's investments, not on my CDs :)
auntmillie,
Thanks for your comment and I'm sorry to say this head cold just keeps dragging on and on (seemingly never getting better nor worse). If it continues for a few more days I shall capitulate and see the doctor.
As for the 4 places for $$ to go -- what about bank CDs?
Reported inflation was 4.3% over the last year. Let's say we bought a $1000 4.55% CD a year ago and are in the 20% tax bracket.
We earned $45.50 in interest. We pay $9.10 in taxes. That leaves us with $36.40. We needed to earn $43 after taxes to keep up with 4.3% inflation. It didn't happen. It is possible that if inflation continues to pick up that the situation will get even worse (it was VERY bad in the 1970s for example).
Now let's say we buy the 20 year TIPS instead (for money we're trying to protect long-term). It pays roughly 1.9% over reported inflation each and every year.
If inflation stays at 4.3% going forward, we will earn 6.2% per year. On that same $1000 we will earn $62. After 20% taxes we net $49.60. Once again, we needed to earn $43.00 to keep up with inflation. We did.
Even that isn't entirely safe though. It is simply safer than bank CDs (which have no inflation protection at all).
Let's say inflation hits 20%. In 1.9% TIPS, we'd be earning 21.9%. We'd be making $219.00 each year in income. Unfortunately, the tax man would take 20% of it. After taxes we'd have just $175.20. We needed to make $200.00 though just to keep up with inflation. During periods of high inflation we must fear both the inflation itself AND the taxes on that inflation.
If we buy TIPS (with inflation protection) should we root for inflation to be proven right? Absolutely not! We should hope we are proven wrong!! We would do far better.
Let's say inflation is -0.5% as we slide into a Japan style deflationary mess. In TIPS, we would only earn 1.4% (1.9% - 0.5%). That would give us just $14. In the 20% tax bracket we'd net $11.20. Here's the good part though. We had profits in a world where prices were in decline. Our purchasing power increased.
Let's say deflation is even worse. Let's say it hits -1.9% per year. In 1.9% TIPS that would leave us with no profits at all (1.9% - 1.9% = 0%). Would we be crying though? Hardly! We'd have the exact same amount of money but things would be 1.9% cheaper for us (due to the deflation). It would the government that would be crying. We'd be paying zero taxes while our real (inflation adjusted) net worth increased by the full 1.9%. Life is good! Those who predicted deflation and bet directly in it would be doing even better, but would we care? Well, we shouldn't care anyway. We'd be doing very well.
Pretty much the only thing one needs to fear while holding TIPS long-term is heavy inflation. However, if inflation protected treasuries are doing poorly, just imagine how poorly non-inflation protected investments would be doing (i.e., CDs).
And lastly, one of my biggest fears is that real rates of return won't be around in a few years. That means if we buy a CD that does well over the next several years we might not find a place to park it when it matures. If we buy a 2 year CD right now but in 2 years we're looking at 2004 level interest rates with above normal inflation, then what would we do?
If we buy a long-term CD to offset that particular risk we pick up another risk. Inflation could be much higher long before that CD matures. We'd be stuck with the rate we bought it at (which might end up being well below the rate of inflation).
This is not investment advice. I'm just trying to offer things to think about (since I think about them a LOT!).
That being said and for what it is worth, the 10 year TIPS auction was announced today. I'm participating. The 20 year TIPS auction is held later this month and I'll be participating in that as well.
I meant to add that I tend to think of bonds and cash as the following.
Bonds - Treasury bonds, long-term CDs
Cash - Cash, checking, savings, short-term treasury bills, short-term CDs, money market funds
Stag,
I was on the Treasury Direct web site de-ignorancing (pseudo Bushism) myself about TIPS.
One thing that struck me was that the CPI interest component gets added to the principle. That seems like it could create a current cash flow mismatch at tax time.
Say interest payments are 2%/6% with 6% being added to the principal. At a 35% tax rate you would owe .35*(6+2)= 2.8% vs. 2% received.
Or is the CPI interest component only taxed at maturity??
Stag,
I'm sure you know this: per Treasury Direct web site, inflation interest applied to principal is taxable yearly. Bummer.
Its clear that original principal is protected from deflation. I'm still unsure how they treat deflation on a yoy basis though.
A bad scenario would be high inflation followed by deflation. Taxes paid on prior inflation interest would be sunk costs. Again, only a problem if yoy deflation is calculated against previously inflated principal.
Seems remote unless the electronic printing press breaks. Stranger things have happened though.
MAB,
One thing that struck me was that the CPI interest component gets added to the principle. That seems like it could create a current cash flow mismatch at tax time.
Indeed it can. Should inflation hit 20% the TIPS would turn into a serious cash anti-cow. I'm generally trying to spread out my TIPS purchases so that I will always have something maturing to pay the tax man. If I knew for sure inflation was going to hit 20%, I'd be hoarding hard assets in a serious way instead.
A bad scenario would be high inflation followed by deflation.
I'll give you something a lot worse to think about. Picture high inflation followed by high inflation. As a saver, the deflation/disinflation will always be welcome (she's the girl in the following demotivational poster, lol). I might not get back the tax damage done to me by the previous inflation but at least I won't be taking on even more tax damage going forward.
Persistence
http://despair.com/persistence.html
Its clear that original principal is protected from deflation. I'm still unsure how they treat deflation on a yoy basis though.
I believe that is the only deflation protection you get. I'm not quite sure how deflation affects the tax situation. In any event, deflation does not keep me up at night while holding TIPS. If I must choose a bad outcome, I'd pick serious deflation over serious hyperinflation every time. I think it is also safe to say that the government has a vested interest to see that the deflation protection in the TIPS never kicks in.
Stag,
I was more concerned with your toggle or muddle through scenario where we would oscilate back and forth between inflation and deflation.
Severe inflation or deflation seem like really remote outcomes imo.
I certainly don't mean to sound negative on TIPS either. I still think they look reasonable.
We really need more tax sheltered savings vehicles. Eventually, non profits will own the country.
Stag,
That MZM chart broke out of its long term range starting in 1997 (+/-). This eerily matches the the start of the housing and MEW booms. Check out the Greenspan-Kennedy MEW charts on CR's blog.
MEW growth will very, very likely be negative going forward.
Additionally, the home ownership rate broke its long term trend top of 66% in 1997. HOR is very, very likely to be negative going forward.
It all fits. MZM exploded as people monetized the rapid increase in the value of their homes.
Will MZM/capita be the next shoe to drop? DUH!
Values are declining, but the debt remains. With added leverage! This is going to HURT!
"You boys owe me a lot of money for that beer you drank" (Bob, owner of Bob's Country Bunker, Blues Brothers movie)
The money leaves as a slave, but returns as a master.
Look, they are starting to agree with the stagflation theory: Financial Sense
I thought of you right off.
MAB,
I was more concerned with your toggle or muddle through scenario where we would oscilate back and forth between inflation and deflation.
If it is any consolation, there was no deflation in the 1970s. The toggling simply went from higher inflation to lower inflation, with each new wave being bigger than the previous.
I'm pretty much in a deflation won't much exceed 0.5% (-0.5% annual CIP inflation) kind of mood, for what that's worth.
The main problem with my theories so far is that I did not embrace the stagflation story strongly enough in the past. I bailed on gold and silver when they hit their first parabola back in 2006. That parabola (and the downside) was extremely short lived. We're very much working on parabola #2 these days.
Will MZM/capita be the next shoe to drop? DUH!
I could go either way on this. On the one hand, those with money continue to seek shelter (which explains the very low interest rates even as inflation remains a problem). On the other, those with debt are stuck with overpriced shelters. D'oh!
Teri,
Thanks for the link! I've read Christopher Laird in the past.
But, even if central banks cut interest rates, we may get a big economic contraction anyway because, so far, Central Bank rate cuts have had virtually zero effect on the spreading credit contraction. If that is the case, we get a severe world economic recession. In such case, gold, commodities and oil likely turn in the other direction. The present price levels will not stay with us.
It is going to be important for gold and commodity bulls to discern if a serious recession is about to emerge which stems both inflation and or stagflation. And such a realization can happen rapidly if there is a big world stock sell off, something we think is quite possible this year.
I am long-term stagflationary, but somewhat deflationary in the short-term. If we get a global recession, the stagflation word will all but disappear from the headlines. However, it is my belief that it will reemerge in the years following (much like the aftermath of the 1974 recession). This is why I doubt I'll be changing my name anytime soon.
I think that the last bubble to inflate could be toilet paper. It is still relatively cheap. If given a choice between hoarding gold (at triple its recent price) and hoarding toilet paper my money is now firmly on the latter.
In any event, either gold is predicting the price of toilet paper rising or toilet paper is predicting the price of gold falling. The jury is still out on which is correct.
I can say that Kimberly Clark bulk toilet paper was $17.99 at Costco many years ago. They replaced it with a nearly identical Marathon brand a few years ago and raised the price to $19.99 (initially offering a $4 coupon to more than offset the initial pain). That's an annual increase of less than 2% per year though (quite tame). It has been a few years since the last price increase and suspect with $90+ oil we're about due for another one.
I am quite bullish on toilet paper and find its current price rather comforting (the 2-ply mindset of inflation vs. deflation notwithstanding)! If nothing else, I don't think a serious hyperinflation is possible with relatively tame toilet paper prices.
Stag,
"Those with debts are stuck with overpriced shelters."
Why?
This question is key and why I think today's economic landscape is indeed unique.
To me, borrowers acted rationally bidding up home prices and banking on price appreciation.
With no down payment required, borrowers were playing with house money. Heads I win, tails you lose.
The incentive existed to borrow and risk as much as possible. Similar to hedge funds and investment banks. Lucrative work if you can get it. And everybody with a pulse could.
For the first time in history, the little guy has leverage on the banking system.
No money down on no doc loans? Ludicrous. Houston, we have a problem. This is historic. A systemic threat perhaps.
The dot-bomb & telecom bust primarily vaporized investor's money. A zero down housing bust could vaporize a significant part of our banking system. Fractional reserve leverage in reverse on a grand scale. Full faith and credit could become just....
Is this the seventies? An eighties S&L redux?
What will a rational borrower do now? Throw good money after bad?
What will a rational central bank do now?
What should I do now?
I'm not sure. And from what I can see, neither are the people in charge of our financial system. I AM SURE that I see growing fear at the FED and Treasury. First denial, then acknowledgement of a minor problem, then a growing problem, then a significant problem, then a .....
Amateurs.
If I could see this train wreck coming years ago, why couldn't the FED? They've proven their incompetence and don't deserve trust.
Where is the outrage? Where does this blind faith in the FED come from? A printing press? Get real.
And why does the FED claim they don't know how much mortgage risk our banking system is carrying? This is either an admission of incompetence or dishonesty.
An ounce of prevention is worth a pound of cure.
Its not hard to see what will happen when this bill comes due. Socialization of the losses. I'm worried about the FED and Gov't making me and mine poorer.
I have yet to find clarity as to how to protect my nut. So far, your idea of partnering with the government on inflation has a lot of merit.
Will MZM be vaporized? I Think so, but either way it looks like PAIN CITY dead ahead.
I have yet to find clarity as to how to protect my nut. So far, your idea of partnering with the government on inflation has a lot of merit.
It is possible that it is a limited time offer. I'm reminded that the I-Bond maximum cap was reduced 83% recently ($30,000 to just $5,000) and that the 30 year treasury bond was discontinued in 2002 when deflation seemed likely and reintroduced in 2006 when inflation seemed likely. Further, I note that in 2007 the government called the 20-year 10 3/8% treasury bonds due in 2012 citing "these bonds are being called to reduce the cost of debt financing." Treasury bonds issued today are not callable (see below) but who knows what the government might offer in the future.
The government is rarely my partner. It is more of a shady business associate at best, lol.
Will MZM be vaporized? I Think so, but either way it looks like PAIN CITY dead ahead.
One obvious source of vaporization would be inflation higher than short-term interest rates. That alone would erode the inflation adjusted MZM (as can be seen from 1966 to 1982 in the above chart, as well as 2002 to 2005).
That being said, it is always possible Bernanke pulls a Volcker. Is Bernanke planning to raise short-term interest rates at the next meeting to choke off the rising inflation as seen in the three month, six month, 1-year, 2-year, and 5-year inflation charts? Or do you think he'll stick to his helicopter speeches while being cheered on by Wall Street as the market's savior?
*heavy sarcasm*
U.S. Treasury Bonds
http://stason.org/TULARC/investing/bonds/U-S-Treasury-Bonds.html
Treasury securities generally are not callable prior to maturity. The exception is that prior to 1985, the Treasury issued marketable, callable long-term bonds, and many of them remain outstanding. The Treasury can redeem those callable bonds on their first call date, which is five years prior to the maturity date, or on any semiannual interest payment date thereafter. The Treasury must provide four months' notice before calling a bond. In fact, we have called a number of bonds during their call periods.
Oops.
Further, I note that in 2007 the government called the 20-year...
I meant 30-year. It was a 30-year treasury bond issued in 1982 that was originally set to mature in 2012.
One more thought.
Where is the outrage? Where does this blind faith in the FED come from? A printing press? Get real.
Where is the outrage that Ben Bernanke owns Canadian treasury bonds while guiding our country's monetary policy seemingly into the toilet?
Bernanke's bucks
http://money.cnn.com/2005/10/26/news/newsmakers/fed_bernanke_portfolio/index.htm
He also lists between $50,001 to $100,000 in Canadian treasury bonds...
Stag,
I haven't spent much time de-ignorancing myself about MZM expansion and contraction. Money takes so many forms.
I suspect that bringing hundreds of billions of off balance sheet short term funding back onto the balance sheets of banks at reduced prices will be a negative though.
Fractional reserve leverage in reverse.
The FED is providing lender of last resort services in a new manner as we speak. The TAF, and it is working according to Bernanke. NO STIGMA he says.
Still, commercial and asset backed paper are cliff diving. Is it a reduction in volume or price?
BTW, I thought sunshine was the best disinfectant. For crying out loud, Benanke just gave a speech pledging more transpancy and communication from the FED.
He who has the gold makes the rules. The king can do no wrong. The ends justify the means. Trust me. We're from the Gov'y and we're here to help.
Watch what they do. It seems more relavant than what they say in a time of crisis.
Do you think foreigners will keep lending to us at cut rates?
Do you think foreigners will keep lending to us at cut rates?
As long as foreigners are willing to sell us goods in exchange for paper dollars those dollars must find a home somewhere. It isn't us offering the low rates as much as it is too much money flooding into all of the various categories in my opinion.
Our stocks (low real yields)
Our real estate (low real yields)
Our bonds (low real yields)
Our TIPS (low real yields)
Our cash (low real yields)
Our treausry bills (low real yields)
Our commodities (sky high prices)
Pick your poison. Yesterday money flowed out of TIPS and into the stock market. It worked out fantastic for me since that was the day of the 10-Year TIPS auction and I got a higher than expected real yield. Today, the money rushed out of the stock market and fell back into TIPS. If you believe in conspiracy theories (I tend not to), was I on the same side of the trade as the big money? Or just incredibly lucky? No idea. I'll take it though!
If it happens again during the 20-Year TIPS auction (later this month) I might consider whistling conspiracy theories past the financial graveyard though!
I've never heard of a pump, buy TIPS, and dump but this is the era of financial innovation. I suppose anything is possible.
Miss your input at CR. Hope the new year's good for you. (sdtfs)
David,
Thanks for the kind words. I've been kind of down lately, as the economy continues to slide as expected.
I don't see much point in preaching to the choir as much these days. Generally, those who visit Calculated Risk (and/or my site) aren't the ones who could use the information. I'm also running out of things I'd like to say. Most of my bearishness is based on the long-term, and one month's new data makes very little dent in the big picture (one way or another).
Advice is what we ask for when we already know the answer but wish we didn't. - Erica Jong
None of us really needs the advice. We can simply look around us and extrapolate unsustainable "prosperity" trends.
Stag,
"We can simply look around us and extrapolate unsustainable "prosperity" trends."
Well PUT! Pun intended.
Stag,
"It isn't us offering the low rates as much as it is too much money flooding into all of the various categories in my opinion."
I agree.
But money won't necessarily continue to flood into U.S. assets at the current low rates of return. Consider that China and Japan have several trillion of U.S. dollar reserves already. This dwarfs the Fed's approximately 780 billion of U.S. $ assets (almost entirely treasuries).
Its hard to believe that billions of people can't figure out a way to spend money on themselves rather than watching us spend it for them. Whats the point? If something can't continue forever, it won't.
Trillions of dollars of real claim tickets in the hands of foreigners lurking against future U.S. production. Not good. Exchanged for trinkets in many cases. Way too similar to the Dutch buying Manhattan from the Indians (I mean Native American casino owners).
The money leaves a slave, but returns a master. Sounds biblical, but I'm not sure.
Anyway, borrowed money should only be used for productive purposes. I'm not certain over-priced McMansions, second homes, $800 Coach handbags and the Iraq war will meet global ROI thresholds.
To me, the huge foreign reserves accumulated in Asia guarantee foreign internal demand will continue to increase, albeit more slowly if a U.S. recession takes hold. Hence, foreign demand for U.S. Treasury debt will slow or decrease resulting in increasing long term rates. Commodity prices just might remain stubbornly high.
All this likely means lower growth rates for the U.S. going forward, but higher growth rates for CPI goods (even with low rents). Not a good environment for stocks and bonds.
Far to many people seem to be living right at the limit of their incomes. And its not just middle and lower income people as I previously thought. I've recently learned of several very high income wall streeters who have found themselves in financial binds. They were counting on big 2007 bonuses which did't materialize. Big mortgages, private schools, ouch! Just like a business, its not the revenues, its the profits (savings) that matter most.
I think this lack of savings is key. In boom times, a weak balance sheet gets ignored. In tough times, a weak balance sheet can be lethal.
What does the US's balance sheet look like compared to the past? Keep in mind that our national income accounting metrics would look a LOT different if stock, bond and real estate prices returned to historic valuations.
The notion that it will be good for the U.S. if Asia decouples from our economy is just another poorly thought out wall street sales pitch imo.
A decoupling would signify greatly increased internal demand and a likely end to the current vendor financing arrangement. In fact, any economic down turn will slow the vendor financing dynamic. After all, foreigners keep lending us our own money (at interest).
An immediate decoupling is not the path I see though. Longer term, however, the U.S. is going to have to trade something other than paper. U.S. treasuries and other asset yields will have to be priced more competively.
MAB,
Its hard to believe that billions of people can't figure out a way to spend money on themselves rather than watching us spend it for them. Whats the point? If something can't continue forever, it won't.
Indeed. That would certainly push up the prices at Wal-Mart. If we stay on the path we are on it isn't a question of if, it is a question of when.
Anyway, borrowed money should only be used for productive purposes.
When I saw all the borrowed money being put into new home construction in 2004 (around my home in particular) I just about had a cow. How was THAT going to make us more globally competitive?
All this likely means lower growth rates for the U.S. going forward, but higher growth rates for CPI goods (even with low rents). Not a good environment for stocks and bonds.
I should have you write this blog while I hibernate, lol.
The notion that it will be good for the U.S. if Asia decouples from our economy is just another poorly thought out wall street sales pitch imo.
The notion that it will be good for the U.S. [insert blah, blah, blah here] is a very common poorly thought out wall street sales pitch, lol. If it wasn't for Rick Santelli, I'd have a hard time watching CNBC.
An immediate decoupling is not the path I see though. Longer term, however, the U.S. is going to have to trade something other than paper. U.S. treasuries and other asset yields will have to be priced more competively.
I say somewhat tongue in cheek, look at U.S. corn. It is being priced a lot more competetively (and it isn't good for Americans long-term).
http://futures.tradingcharts.com/chart/CN/M
If real U.S. median incomes have been declining without much if any global rebalancing, just imagine what they'll do when the rebalancing begins in earnest.
Stag,
"I say somewhat tongue in cheek, look at U.S. corn. It is being priced a lot more competetively (and it isn't good for Americans long-term)."
Paper assets (stocks, bonds) vs hard assets (commodities). Crucial distinction imo.
Paper asset inflation = seemingly free wealth.
Hard asset inflation = higher CPI/inflation (time to pay the piper or tape worm).
MAB,
I expect two-ply paper asset inflation at some point, and it won't be seemingly free wealth. Don't [credit] squeeze the Charmin! ;)
Stag,
Humorous!
I really enjoy your blog. Truly insightful as well as entertaining (sarcasm is not the lowest form of humor, despite what a former teacher, who hated my guts for many good reasons, used to say).
I have to admit though, sometimes I feel like I'm hi-jacking your time and your blog. Don't hesitate to ignore me or tell me to bug off. I'm thick skinned (and thick skulled).
The prospect of forfeiting so much prior work to taxes and inflation is frightening. I fear your statement about "nothing for something" will become a reality for so many unsuspecting koolaide drinkers.
I'm long on lawsuits, pitch forks, torches and gallows.
MAB,
I have to admit though, sometimes I feel like I'm hi-jacking your time and your blog.
You have nothing at all to fear from that. You probably wouldn't guess it from looking at the volume of posts on my blog, but I'm 100% introvert on those personality tests.
That being said, I very much enjoy one on one conversations (such as we are having) and can turn VERY chatty. Misery loves company, right? ;)
One reason I've slowed my posting down considerably is that I finally convinced myself that I might actually be right about stagflation long-term. New incoming data does little to change my mind, although I keep looking for a reason! That's rather depressing on various levels.
* Too bad I didn't come to that conclusion while I still owned gold and silver. The first parabola scared me off (with decent profits though).
* The economic pain is just beginning. The public seemingly has no idea how bad it may get or even what they might do to prepare for it.
* Toilet paper has become the best investment value I can think up. That's quite scary. (As a side note, I've convinced my deflationary sister that extra toilet paper is not a bad thing in this financial environment.)
* I stayed up all night (I'm not a morning person) just so that I could see Bernanke squirm, not that I wish him ill. During the questioning I was entertained by his use of the "gold" word (as something they watch) and the "Volcker" word as something a congressman said.
When I say entertained, I actually mean relatively mortified (as I don't own gold currently). It was probably the most important speech and questioning session I've seen in years. He's more hawkish than the market expected clearly (and seems more willing to fight inflation than the market previously believed). If so, then I am more comfortable parking more of my money in longer term TIPS. (Remember that hyperinflation would crush me even though TIPS are inflation protected).
Bernanke's unpredictable but clearly wants to be predictable. His problem is that, unlike Greenspan, he speaks his mind (in an effort to be transparent). There's NO way Greenspan would have given us visions of printing money at essentially no cost. Yet that's exactly what Greenspan did in practice.
I often wonder how much premium is built into gold and silver simply because of Bernanke's 2002 deflation speech. However, that doesn't seem to be the Bernanke we have now.
Old Bernanke:
"Deflation: Making Sure "It" Doesn't Happen Here
New Bernanke:
Inflation: Making Sure "It" Doesn't Happen Here
I think the new Bernanke is going to have a lot harder time. I think Wall Street is going to have an even tougher time though, since Bernanke has made it very clear he's not interested in bailing out investors on a whim.
2000
A Crash Course for Central Bankers
A collapse in U.S. stock prices certainly would cause a lot of white knuckles on Wall Street. But what effect would it have on the broader U.S. economy? If Wall Street crashes, does Main Street follow? Not necessarily. Consider three famous episodes: the U.S. stock market crash of 1929, Japan’s crash of 1990-1991, and the U.S. crash of 1987.
Stag,
"That's rather depressing on various levels."
Lock up the hemlock before reading this:
http://www.safehaven.com/article-9051.htm
Regarding Ben Bernanke, he is fighting a three headed monster (Cerberus, too funny). Just look at your chart showing tangible assets, financial assets and liabilities relative to historical trend lines.
Crazy things happen with negative real interest rate.
MAB,
Lock up the hemlock.
I read the contents of your link while mumbling things like, "Yeah, that's pretty much what I see." I then read the most depressing part of the whole article.
Paul Kasriel is the recipient of the 2006 Lawrence R. Klein Award for Blue Chip Forecasting Accuracy
On the radio today I heard three things of note.
First, I heard an advertisement for a local jewelry store. They wanted me to sell them my gold jewelry. Apparently they are under the impression that I may be experiencing economic distress and are looking to help me out. No joke! No wonder retail sales are down. Retailers are buying from customers! (Okay, that last part is intended as a "poor" excuse of a joke, in a gallows humor sort of way.)
Second, there was a bull from the Motley Fool telling me that I need to put it in a longer term perspective. Stocks have performed well over the last 4-5 years. Apparently eight years is too long term for purposes of his discussion, lol.
Third, I did not hear a single advertisement for adjustable rate mortgages. Oh how times have changed. Go figure.
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