Click to enlarge.
This is not the deflationary Great Depression so far. That was an era when producer prices spent the majority of the time below the line.
This is not the inflationary 1970s so far. That was an era when producer prices spend the majority of the time above the line.
It's a bit of both! We certainly have the high unemployment common to both eras anyway.
For long-term conservative investors/savers such as myself, it could be worse. Should the toggling continue, I can ride this out in relative safety in long-term TIPS and long-term I-Bonds (which is exactly what I've been doing). My investments will toggle in sympathy, but will still continue to outpace inflation (or at least keep up with inflation) over the long haul and that's all I really care about.
This chart also explains why I am not seeing all that much toilet paper inflation since I turned bearish (much to the surprise of the hyperinflationists). It isn't that my toilet paper investment has been bad though. It's pretty much just tracking overall long-term inflation these days, which is just fine by me.
In my opinion, this "cone of turbulence" is what happens when way too many heavily leveraged dollars slosh around looking to chase way too much global overcapacity using the power of the Internet, the power of instant real time trading tools, and the belief that the average individual investor can somehow be smarter than Goldman Sachs. It does feel empowering to have a computer on one's desk I guess, but to think my computer can compete with the computational power of a Goldman Sachs would truly be a delusion.
Program trading
The trading of these items is based purely on their price in relation to each other on a predetermined basis; and not on any fundamental analysis reason such as an individual company's earnings, dividends, or growth prospects; or, on any overall economic reasons such as interest rate movements, currency fluctuations, or governmental or political actions. According to the New York Stock Exchange, program trading accounts for about 30% and as high as 46.4% of the trading volume on that exchange every day.
Every dollar that Goldman Sachs manages to extract from the system is one less dollar for the typical investor to make, all things being equal. I have no great desire to participate. The less I can trade, the better.
Source Data:
Producer Price Index: All Commodities
Stag,
ReplyDeleteEvery dollar that Goldman Sachs manages to extract from the system is one less dollar for the typical investor to make, all things being equal.
That's how I see it too. All of the stock market gains have, are and will accrue to the financial "helpers" like Goldman Sachs, hedgefund managers, private equity shops, etc. It's impossible for aggregate investors to skim off what isn't there. Only a minority can benefit from the bubble skimming scam. The holders of risk assets (the investors not the managers) will get a rude awakening when they try and cash in their piece of the bubble reflation gains. The majority can only cash in value (actual earnings/output), not price.
The multiple bubbles over the past 15 years have transferred trillions and trillions from the producers to the helpers. And yet, Bernanke wants to CONtinue the asset inflation sham. It really makes you wonder.
Mark,
ReplyDeleteMy dog had to wear an Anti-Turbulence cone after an eye injujry and he had a hard time with it.
The return of a stagflationary stance perhaps?
mab,
ReplyDelete"All of the stock market gains have, are and will accrue to the financial "helpers" like Goldman Sachs..."
You know you are bearish when you see financial "helpers" and your mind processes it as financial "lepers". D'oh!
Out of curiosity, I searched for financial lepers. Check this out.
Boris: Don’t treat bankers like lepers
http://www.thisislondon.co.uk/standard/article-23752625-dont-treat-bankers-like-lepers-says-boris-in-attack-on-50p-tax.do
The Internet is truly amazing.
GYSC,
ReplyDelete"The return of a stagflationary stance perhaps?"
I'm not quite sure what to call the toggling between deflationary forces and inflationary forces combined with an uneasy feeling long-term growth just won't be there like many expect.
Let's see. We've got TUR-bulence, D-eflation, and in-FLATION? What should we call it? TUR-D-FLATION?
Turdflation!
http://www.reuters.com/article/ousivMolt/idUSTRE5AB4AG20091112
ReplyDeleteRoubini expressed caution that the rally in asset prices will continue since, he said, the "bubble" was funded by dollar carry trades in which investors borrowed at zero U.S. rates, shorted the dollar and bought stocks and commodities."
At some point, the dollar will stabilize, then people will have to close their short dollar positions and then sell long positions in risky assets," Roubini said. "Everyone will rush to the door at the same time."
Have no fears! My toilet paper hoard should maintain its value if that plays out. To the best of my knowledge, there is no physical toilet paper ETF for investors to rush out of! ;)
"At some point, the dollar will stabilize"
ReplyDeleteBig deal! At some point i'll be dead - big deal! My pet dog could've come up with something more intelligent than that - and he never studied economics!
Just like Buiter, who talked drivel and used warped logic about gold and lost a lot of my respect, Roubini seems cast in the same mould - he should've quit while he was ahead!
Stevie b.,
ReplyDelete"Just like Buiter, who talked drivel and used warped logic about gold and lost a lot of my respect..."
I'm not religious but it's enough to make me exclaim, "Amen!" Nothing scarier than investing in something and seeing your fellow bulls use warped logic! I'm reminded of a short-lived investment in Conseco about a decade ago. A fellow bull on the Yahoo message board sprayed SO much warped logic he actually helped me sell. Meanwhile, the bears offered logical and rational arguments on why the investment was not a "table pounding screaming bargain". I'm thankful they did. Saved me a lot of money pointing out the hidden risks. I hung around to heckle with them. Stock went all the way to the bottom. Go figure.
As for the dollar stabilizing, I do think it will be sooner than later though. The reasoning is simple. To think otherwise would mean that one thinks the rest of the world is in such great financial shape! I actually prefer the dollar over the euro right now. The grass may be green on this side of the fence due to our septic system, but the grass being greener on THEIR side of the fence might just mean their septic system IS bigger!
That may take gold down a notch or two in the short-term. Most metals have enjoyed a terrific ride up (parabolic), again. This happened in 2006. I was a seller when things turned parabolic. In the short-term it was a good plan. I exited before the crash. Hindsight isn't being as kind over the long-term though. I'd have been better off continuing to hold. That said, I'm not complaining. It still helped me vastly outperform stock market investors. The DJIA still sits at the same level it was at when I got out in 2004. In contrast, I made more than 50% on the third of my nest egg that sat in metals from 2004 to 2006 and I've had decent gains in "safe" TIPS and I-Bonds too.
My financial shape is at least as good as it was when I retired in 1999, which isn't bad considering I've ridden out two major stock market crashes, one major housing market crash, oil is MUCH more expensive, AND I've been spending part of my nest egg to live off of. I could be doing MUCH worse (especially if I would have invested based on "expert" financial advice and would have based my spending habits on "expert" never ending prosperity theories). 10 years down, 30+ to go.
"10 years down, 30+ to go"
ReplyDeleteI remember in 1974 when things were going to hell I was a youngish broker at Merrill London & was seriously thinking of joining the Territorial Army (dunno what the U.S. equivalent is) in some sort of role that could use my degree in psychology - genuinely felt that way I could be relatively assured of feeding myself and my beloved. Instead I put all the money I had (not much) into 4 stocks when the Ft 30 index (i think) was 169. It was around 1 week from the bottom and I sold 4 weeks later for a 40% profit. If I'd hung on for a couple of years it would have been closer to 400%, but I couldn't have cared less. I'd made my money and could afford to wait. I think I put some of the proceeds into gold a year or so later, and index-linked gilts came into the picture somewhere as I said on another post.
The moral is that if luck is with you, don't get greedy and always stay alert for the next opportunity. It could be years before it comes along, but plough your own furrow & patience is a virtue, & if I was doing the equivalent of 1974 again I might be more cautious (old age maybe) and invest in 1/3rds and hope I never needed to buy the 2nd and 3rd 3rds. I'd use charts to quantify risk, although in those days they were useless cos we were in uncharted territory - but i guess we always are to some degree.
Stay humble, & as you say stay clear of experts & conventional wisdom & always be on the lookout for pitfalls - your next decision could be your worst - the buck always stops with YOU!
And remember.....contentment = a good sense of perspective! I think I'll stop as even I am beginning to feel I'm fast becoming a boring old fart!
Stevie b.,
ReplyDeleteNot boring! Very interesting.
One thing that keeps me at least a bit humble is how wrong I would have been investing in the late 70s. I think about it often. Talk about a "sure thing" perfect storm. Fell off gold standard. Inflation out of control. Even in hindsight it is hard to imagine just how different the 80s and 90s were from what was expected.
"The moral is that if luck is with you, don't get greedy and always stay alert for the next opportunity."
I hear that. Richard Russell has a great article on that. He describes how those who understand value and have resources don't ever feel the need to make money if the market isn't right for it. Meanwhile, the little guy is constantly looking to make the market do things for him. The market could care less what the little guy wants though.
As a side note, I'm skeptical that real opportunity will be found in the many "opportunity" funds currently offered to the public.
Here's a link to Richard Russell's commentary. Best advice ever. I pretty much live by it.
ReplyDeletehttp://ww2.dowtheoryletters.com/
See the article within the link titled...
Rich Man, Poor Man (The Power of Compounding)
Hey Mark,
ReplyDeleteThought you would appreciate this article:
http://www.mentalfloss.com/blogs/archives/40088#more-40088
After reading it, I believe you're right to have your TP hoard be "savings" rather than "investment". Apparently, like any commodity, TP is subject to substitution effects, thereby capping it's appreciation potential.
Unfortunately the article didn't get into CPI-U and hedonic adjustments for bidet's and newsprint. I'm fearful this might be the next area for government shenanigans to economic statistics. Since I consider you the foremost expert here, any thoughts?
;-)
Mark,
ReplyDeleteI read on Survival blog that toilet paper rolls, provided you have enough of them, can be used as a great insulate dbed above a cold ground to maintian body temp! Yet another use for TP! I think I will have to add to my holdings as well.
Re the dollar stabilising and/or rising:
yeah, other nations are pretty poor off, but remmbe to scale things as well. If the dollar rallies while the world currencies go to hell I think gold may still be strong.
P.S.
ReplyDeleteMy favorite economist Krugman talks about TIPS:
http://tinyurl.com/yfqc56j
AllanF,
ReplyDeleteI do appreciate it!
"Even as the markets boom in developing nations, toilet paper manufacturers find themselves needing to charge more per roll to make a profit. That’s because production costs are rising. During the past few years, pulp has become more expensive, energy costs are rising, and even water is becoming scarce. Toilet paper companies may need to keep hiking up their prices. The question is, if toilet paper becomes a luxury item, can Americans live without it?"
If toilet paper does become a luxury item then I shall wear a crown and rent my very own court jester! Mwuhahaha! ;)
As for CPI adjustments, as I see it first the CPI would capture the rising cost of TP but it would become a smaller and smaller contribution as people substituted. In its place would be the rising costs of bidets once the government saw the new trend. That assumes of course that there isn't a Cash for TP Program and $4500 incentives to buy bidets.
Generally speaking, I think the government's efforts to track consumer changes doesn't hurt TIPS holders much. The government is SO slow and rigid.
Take what we are doing right now for instance. Technology is allowing us to share news in real time with each other "at essentially no cost". We do pay for Internet access of course, but only because we value convenience. I could be sitting in a library typing this at absolutely no cost to me. So how should the government be tracking this massive deflation? And why does anyone still buy a newspaper (other than the sentimental value of paper touching hand)?
GYSC,
ReplyDelete"But what’s actually happening is that the nominal bond yield is about what it was in early September, while the real bond yield has fallen."
How can Krugman not understand why this is happening? Real yields are dying again. That's EXACTLY why I bought TIPS. Lock in a real yield before others did. That's EXACTLY what the Fed wants in order to inject inflation. That's EXACTLY why commodity prices are going parabolic again. It simply means that it is now harder to make money off of money. Screw the savers! Economy is on the ropes! Is this really a big surprise? Can he not seecurrent I-Bond yields and understand why the govt. thought 0.3% sounded good? It's no coincidence that real yields were NEGATIVE through much of the stagflationary 1970s.
That's supposed to be a puzzle? Perhaps he should try a 1x1 Rubik's Cube. It comes pre-solved. Perfect for hack economists! ;)
That said, this situation will most likely end just like it did last time. Once everyone is convinced that inflation is a "sure thing", the few remaing deflationists will laugh as everything crashes and real yields spike higher again. Double-dip recession for the win? I just can't shake the deflationary feelings. Something's just not right and it rhymes with...
Mommy Tanks Fold Rocks Pick Fast Bets!
(Zombie Banks Hold Toxic Assets!)
Mark,
ReplyDeleteI thought you would pick out that Krugman is clueless. He should just run for CONgress and stop pretending he is an economist. I loved the TP bed idea, it just makes sense!
BTW, anyone know how the govt decides what to set the real yield on I-bonds to?
ReplyDeleteI reckon it's some huge calculation based on a basket of consumer prices and statistics, rounded to the nearest one tenth of one percent. I wonder if it could be reverse engineered from a regression analysis. Maybe a 3rd order poly? What say you Mark, are you up for the challenge?
AllanF,
ReplyDeleteWhat formula could have possibly predicted that the government would lower the maximum amount of I-Bonds we could buy each year from $30k to $5k?
The government wants low real rates to stimulate the economy. It's a lot easier to make I-Bond rates low. They aren't set by the market. The government can set them to whatever they like. In other words, there might not even be a formula.
If there is a formula, I would expect it to use the following.
1. The higher the risk of deflation, the lower the I-Bond rate (since I-Bonds offer superior deflation protection and that protection is worth more at low inflation rates).
2. The higher the tax rates and/or future expected tax rates, the lower the I-Bond rate (since I-Bonds allow investors defer taxes and deferring taxes is worth more at higher tax rates).
3. The lower the rate on TIPS, the lower the I-Bond rate.
I tend to just look at 10-Year TIPS rates heading into the next I-Bond rate reset (every six months). If they are down since the last I-Bond rate reset, I'll want to buy I-Bonds before they reset. If not, I'd be better off waiting to buy I-Bonds until after they reset.
It's not looking good for I-Bond rates heading forward. TIPS have been bid up recently (lower yields). Further, even if we get another deflationary crash that sends TIPS rates much higher, I-Bond rates should still be set low because of reason #1 above.
Come on Mark, that's the easy answer. I want the regression analysis. :-)
ReplyDeleteThough it would not surprise me if it were something incredibly simple like a 6 month running average of some swap rate between TIPS and 10 yr treasury futures.
AllanF,
ReplyDeleteOkay, okay. I'll try to offer a simple formula! Coming soon to this blog!
Mark - maybe "just tracking long-term inflation" (whatever that actually is...?) aint quite good enough any more.
ReplyDeletePerhaps t-p may have a bit of catching-up to do...
http://www.econbrowser.com/archives/2009/11/commodity_infla.html
cheers!
Stevie b.,,
ReplyDelete"Perhaps t-p may have a bit of catching-up to do..."
If one believes that gold and TP could both be long-term stores of value, then gold's current price does indeed imply that TP may have a bit of catching up to do.
Gold could be wrong of course. TP's current price may imply that gold may have some catching up to do (to the downside).
From a purely hedge fund mathematical standpoint, I'd be long toilet paper and be short gold until the gap between the two narrowed somewhat. However, seeing as how I am not a hedge fund with the ability to use OTHER PEOPLE'S MONEY to place very risky bets, I have decided NOT to short gold as our country's fiscal and monetary situation continues to deteriorate. Go figure! ;)
"Gold could be wrong of course."
ReplyDeleteMark - so could t-p, so am curious to know what you think might make you admit (as you're a humble lad) that your t-p strategy was not quite as robust as you had hoped...
Stevie b.,
ReplyDelete"Mark - so could t-p, so am curious to know what you think might make you admit (as you're a humble lad) that your t-p strategy was not quite as robust as you had hoped..."
That's an easy one. Here are several off the top of my head.
1. We continue to slide into a deflationary mess and even toilet paper prices start to fall. Burying cash in back yard instead would have clearly been superior.
2. Mr. Fusion comes along and provides unlimited free energy. Toilet paper could then be produced far cheaper making my hoard a very bad purchase. I would not complain. That would lead to actual prosperity and I'd shut my blog down.
3. New technology replaces toilet paper and it is substantially superior. Some say the bidet is it. Even so, I have less than a 10 year supply. It would not be the end of the world.
As a saver and from purely selfish concerns, I would not complain about any of those outcomes. Just as you wouldn't mind gold going to zero, I would not mind toilet paper going to zero either.