I live in the USA and I am concerned about the future. I created this blog to share my thoughts on the economy and anything else that might catch my attention.
This is the End and a New Beginning
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I've been thinking about this for some time.
After 21 years of writing this blog almost daily, I've decided to stop
writing the daily updates on the blog.
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Silver Deep Dive
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Silver had a memorable year (+148%). Some of this can be explained by a
decline in the dollar. I decided to do some ML analysis to look for other
insights....
Others take issue with the methodology used by the Bureau of Labor Statistics to calculate the CPI—for example, its decision to register a decline in price for newer computers that cost the same as an old version but offer more capabilities. That’s one reason independent economist John Williams, who runs Shadowstats.com, argues the CPI underestimates inflation’s true impact on Americans by as much as three to seven percentage points.
Perhaps the independent economist John Williams would like to take me up on a little offer. Since he is arguing that there hasn't been deflation in computer prices, I'd be more than happy to sell him my old TRS Model III computer (assuming I can still find it, since I loaned it out many years ago) for the same price my girlfriend just paid for her new laptop. I paid slightly more than she did, so he should be getting a bargain.
Here's what he can expect from that "laptop" of the past.
CPU: Zilog Z-80, 2.03 MHz Memory: 48k Hard Drive: 0 bytes (there was no hard drive) DVD Players: 0 Monitor: 12-inch B/W monitor (64x16 text resolution) Wireless: N/A Battery: N/A Bundled Software: N/A
Here's the similar laptop of the present.
CPU: Intel Core 2 Due processor T6500, 2.1 GHz Memory: 4GB Hard Drive: 320GB DVD Players: 1 Monitor: 14.1-inch color monitor (1280x800 resolution) Wireless: 802.11b/g WLAN Battery: 12-Cell Lithium-Ion Battery Bundled Software: Microsoft Office
Her new laptop is at least 1,000 times faster, has nearly 90,000 times more internal memory, has infinitely more hard drive space, includes a DVD player, has a vastly superior monitor, can actually receive wireless communication, can be used away from an electrical outlet, comes bundled with Microsoft Office, AND comfortably sits on a lap. Other than that, these two machines are clearly pretty much identical though.
I wonder when I can expect a check for $799 (plus shipping and handling)?
If my offer isn't enticing enough and/or I can't scrounge up a Model III, then I might be willing to upgrade him to a superior TRS 80 Model 100 (or something even nicer, who knows!). It was actually designed to be a laptop. It would be $799 well spent!
And just two years ago, I bought a genuine TRS 80 Model 100 through eBay. It cost me US$50 (the original retail price was A$1299). It was, and is, in perfect nick, still in the box and working like a charm.
It's tempting to consider gold overbought. It currently trades at $1,017 an ounce, an all-time high. It's survived two asset bubbles with flying colors. It sells for three times its April 2001 decade low of $255 an ounce.
Two quick comments.
First, when people tell me that something is not a bubble and state it as fact, then I tend to get a bit nervous.
Second, since when is 3.988 times ($1,017 / $255) rounded down to "three times"? Call me crazy, but I might be tempted to actually round up.
Before you continue to call me completely crazy though, consider what this VERY same author wrote just over three years ago.
That sound you hear is the real estate bubble popping. Or so thinks Wall Street. When new home sales slipped 10.5% in February, it gave fresh evidence of the long-expected end to the housing boom. Homebuilder stocks are down as a result. Maybe that's unjustified: The big builders will tell you that an industrywide falloff in home starts lets these well-capitalized companies steal market share from the small-time developers, who are still numerous.
Yes, that's right. He was heckling the popping of the housing bubble and told us we could make money in real estate. How did that work out?
In my opinion, in order to justify gold's current price then inflation better show up at some point. Further, if inflation does show up there are probably better things to hoard than something that has already risen by a factor of four. Toilet paper continues to come to mind. Just a thought.
I know this isn't going to be popular with the gold bugs, but I just call it like I see it. I'm not saying gold is in a bubble, but I certainly have no interest in buying it (again) at these prices. There is serious risk at these levels and that is not something I look for in a "safe" store of value. Maybe that's just me.
Of course, we'll know one way or another in the coming years. It will be interesting to see what happens.
TIPS. You may be familiar with Treasury Inflation Protected Securities (TIPS), and they’re a very good long term inflation hedge.
Based on the article's headline, I am VERY impressed that he's getting off to such a great start. I expected to be heckling and/or using sarcasm by now. Have patience though. I assure you that it is coming. Hahaha!
But the problem with TIPS today is they don’t produce much income for you to live on.
Okay. The logic is starting to degrade now. TIPS are a capital preservation strategy. Nobody should expect TIPS to actually make them richer. I know this is a wacky theory, but I actually intend to use all of my savings to fuel my retirement. I expect to die relatively broke. I've just never been a very big fan of having my cake and eating it too.
That said, the "problem" he mentions surely doesn't apply to other investments. Investors have made a killing in the stock market over the last decade. Treasury Bills are yielding an amazing 0.1% right now. Sign me up. I'm still kicking myself for not buying houses in 2005 so that I could generate income through renting them out. Yeah, right!
So if you load up on TIPS and we don’t get high inflation, or it takes years for inflation to emerge, you may be forced to spend more of your principal to pay the bills.
There you have it. Complete economic logic degradation. The word asinine comes to mind.
There is ABSOLUTELY no circumstance when inflation can actually help those of us who buy TIPS and hold until maturity. The higher inflation goes, the more we'll pay in taxes and the lower our after tax return becomes. It's that simple. Although holders of TIPS have some inflation protection, we should NEVER pray for higher inflation. Period.
Further, higher inflation makes it even worse than that. With TIPS, we get taxed on the inflation adjustments each and every year but we do not even get paid the inflation adjustments until the bonds mature. In other words, the higher the inflation, the worse our short-term cash flow situation becomes. Should inflation go high enough, all interest payments would be used solely to pay the taxes. Further, the taxes could at some point even exceed the money we are paid. We could therefore actually go cash flow negative. Not only would we not have the income to live, but we'd have to find other income just to pay the taxes on the TIPS.
So let's sum this up. Higher inflation does two things to holders of TIPS.
The higher the inflation rate becomes, the more taxes we'll have to pay on the inflationary gains. This will reduce our inflation adjusted after tax return. Ouch!
The higher the inflation rate becomes, the worse our cash flow situation becomes. We'll be spending more of the interest we do receive simply to pay the taxes. Ouch!
So if you load up on TIPS and we don’t get high inflation...
I would be thanking my lucky stars!
Greenspan said in 1966 that there is no safe store of value in a welfare state. Clearly there is no safe store of value in a main stream media state either. As proof, he started with the premise that TIPS are a "very good long term inflation hedge" and then proceeded to use incorrect logic to say why we shouldn't own them. What does he want us to own instead?
Flexibility. As long as you keep your fixed income holdings flexible, you should be able to respond to inflation by eventually buying bonds that provide higher income, while still earning more income today.
Never mind that fixed income investing ruined investors in the 1970s. Those who take him up on it will indeed get higher income now. Spend all of it. Don't worry about inflation. Your nest egg's purchasing power will last a full 10 decades. Take that trip to Europe you always wanted. Enjoy!
Speaking of "10 decades", do yourself a huge favor. Watch the first scene from the Newlywed Game (both her answer and his answer).
In my opinion, our economy is packed with dumb luck. We can't help but win long-term.
AFTER SECOND-QUARTER MUTUAL-FUND PERFORMANCE turned positive -- the first good showing since the economic crisis started -- financial planner Nancy Anderson expected a flood of inquiries about buying stocks. None came. "I was surprised," says Anderson, who works for Financial Finesse, which advises 401(k) clients like Aetna and General Motors. "I'm a certified financial planner. But calls about foreclosures and hardship withdrawals were up," as well as questions about budgeting and debt payment. So much for animal spirits.
She was surprised? I'm reminded of my last job. The General Manager was telling me that he just gave a "Coming to Jesus" speech to one team. He needed everyone on board. Anyone who didn't feel up to the task should tell him now and he'd put them on another team. Guess what? Nearly everyone wanted off of the team. Surprise! It seems that people grew tired of the heavy overtime and being continually told they were not doing a good job.
The creation of such an ambitious engine came at a price, however, and the game which was originally due for release in Summer 1998 didn't ship until Fall 1999 after changes in the design team and the decision to undertake a major rearchitecture of the engine halfway through production.
In its original form, the game was buggy, to the point where it could not be completed. Fixed in patches, it was still an annoyance that you would have to start all over again.
Oh the stories I could tell as an observer. For example, one day I was in the bathroom and the current lead engineer on the project (there were so many before it was over) looked to be in especially good spirits. I asked him how things were going. He said...
"Things are going great."
This surprised me immensely. I asked him how that could possibly be.
Brace yourself. A federal "cash for appliances" program is likely on its way to a store near you before the end of the year.
Here's what's on my appliance list.
1. A 19 year old electric stove top (two burners don't work). 2. A 19 year old electric oven (built in microwave oven above it doesn't work). 3. A 19 year old gas furnace. 4. A 12 year old washing machine (works fine). 5. A 12 year old dryer (doesn't work so fine, squeals). 6. A 4 1/2 year old portable air conditioner (died a few weeks ago).
Bingo! I've got clunkers and I can seriously take advantage of the program. In fact, it's...
Too Good To Be True!
Financial procrastination pays off yet again. Power to the frugal (if it still mostly works, then don't pay to replace it yet), the lazy (can always fix it tomorrow), and the deflationists (things only get cheaper, so wait)!
This is a great deal for those who already have money and/or a job. However, aren't we just borrowing money from the less fortunate so that we can give it to the more fortunate? This is very confusing. I mean really. People with NO money and/or NO job will have to help pay for this someday (our children, our grandchildren, and the massive number of unemployed come to mind). Why exactly are we doing this again?
I guess I'm not the only one looking at my computer screen trying to make sense of it all. I do not think I'm at maximum confusion yet though. I think that begins when the government introduces its "Cash for Everything" Program. There are just so many things that I'd buy with "free" money. It's absolutely staggering.
My quote comes not from the article (which certainly is very quotable), but rather from the comments. Here's what commenter John Ryskamp has to say.
I trust no one is stupid enough to believe that the "stimulus" and "bailout" nonsense is evidence of government "engaging" with the society. It is simply corporatist looting--backing up the powerful in the society in any way they can be backed up.
The society? It will continue to sink. It is sick--no government wants to be a part of that.
As a holder of Treasury Inflation Protected Securities (TIPS), I have a vested interest in tracking the Consumer Price Index (CPI) and understanding how it can affect me.
The CPI is something I understand and for the most part I am comfortable with how it is calculated (as it relates to my investments anyway).
The GDP Deflator is something I did not understand so last night I attempted to better educate myself.
The CPI uses a fixed basked of goods from some base year, meaning that the quantities of goods and services consumed remains the same from year to year in the eyes of the CPI, whereas the price of goods and services changes.
The GDP deflator, on the other hand, uses a flexible basket of goods that depends on the quantities of goods and services produced within a given year, while the prices of the goods are fixed.
Generally speaking, the two indexes track each other fairly closely. The article offers an example showing how an extraordinary event can cause the two indexes to vary widely though. I'm going to offer my own example so that I can plug in actual numbers.
Let's say the basket of goods consists of exactly two items to make things simple. The first product is a six-pack of Coca Cola. The second product is a six-pack of Pepsi.
Let's say each product costs $2 and therefore our basket of goods costs $4.
Now we'll add an extraordinary event. The Great Depression sets in. Pepsi goes out of business. Meanwhile, Coca Cola has to cut prices in order to get people to drink soda over water.
In one year it costs $1 for the six-pack of Coca Cola but it costs $99 for a six-pack of Pepsi (if you can even find one).
Under the CPI model, your basket of goods would now cost $100. That's a 25 times increase in the price of your goods. That's hyperinflation!
Under the GDP deflator model, your basket of goods would now only cost $2. You would have substituted entirely to Coca Cola. Rather than have one six-pack of each, you'd now have two six-packs of Coca Cola. That's serious deflation! What once cost you $4 now only costs you $2.
So what is the truth? It depends. If Coca Cola is your life and the thought of drinking Pepsi upsets you anyway, then your standard of living will rise substantially. If Pepsi is your life and the thought of drinking Coca Cola upsets you, then you will most certainly experience a massive price increase and/or a dramatically lower standard of living.
As far as our Gross Domestic Product is concerned, it's deflation. Everyone would assume to have substituted to Coca Cola. Pepsi went out of business. Hello deflationary spiral. Hello Great Depression.
As far as the CPI is concerned, we've entered hyperinflation. Clearly we haven't really entered hyperinflation though. Most rational consumers would substitute.
So when you see people get all bent out of shape talking about the bogus CPI and how substitution is a conspiracy and a fraud, you may wish to think twice. We really do substitute. Without that substitution, the CPI really does overstate inflation. Further, very few substitution adjustments have been added to the CPI. I substitute a LOT more than it thinks I do.
I substitute all the time. If something becomes more expensive, I'm very likely to buy less of it. If something becomes less expensive, I'm very likely to buy more of it.
To summarize, consumer substitution is a sign of inflation. BLS has been convinced by politicians to use consumer substitution as justification for removing inflation from inflation. Huh? So the CPI is a way to measure inflation (rising prices) without equal mathematical weighting for items that are rising rapidly in price.
That is utter BS. While we do substitute away from items rising in price (so that part is right), we also substitute towards items falling in price (which he has conveniently ignored). Substitution therefore isn't a sign of inflation or deflation. When substitution appears, it simply means that all prices are not rising or falling uniformly.
The lack of substitution adjustments will always make inflation appear to be higher than it really is. Hopefully you can see that in my example. Without substitution adjustments, all it takes is the price of one product in the CPI to move to infinity and the entire index would move to infinity right along with it. For some products where no substitution is possible, that's a rational outcome. However, if the price of Pepsi (but not Coca Cola) became infinitely expensive tomorrow, my budget would not be infinitely doomed.
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