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....
The chart above shows the inflation adjusted total value of household real estate minus the total home mortgages from the first quarter of 1960 to the first quarter of 2010 (as seen in Table B.100 in the Flow of Funds report).
The chart above shows the inflation adjusted cumulative trade deficit from the first quarter of 1960 to the first quarter of 2010.
This chart shows the size of the inflation adjusted cumulative trade deficit in comparison to the total inflation adjusted U.S. home equity.
The cumulative trade deficit is the "gift" that just keeps on giving. Too bad the same could not be said of home equity.
Everyone should worry about inflation. It's been the long-term trend for a century. You can worry about deflation too if you like. I am. Not worrying about either of them is a great way to lose one's nest egg.
Here's an update to my chart within the link. I've improved upon it by comparing the inflation rate over the previous 12 months to the average unemployment rate over the previous 12 months. It's now more of a direct apples to apples comparison. The conclusions remain the same though.
What pattern do you see in the data? I see a cumulus cloud formation. Maybe I can be an economist too? The trend line isn't exactly backing the Phillips Curve theory either, is it? If anything, it suggests that higher unemployment and higher inflation in that very noisy data set go hand in hand.
In the years following Phillips' 1958 paper, many economists in the advanced industrial countries believed that his results showed that there was a permanently stable relationship between inflation and unemployment. One implication of this for government policy was that governments could control unemployment and inflation with a Keynesian policy. They could tolerate a reasonably high rate of inflation as this would lead to lower unemployment – there would be a trade-off between inflation and unemployment.
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Like the expectations-augmented Phillips curve, the New Keynesian Phillips curve implies that increased inflation can lower unemployment temporarily, but cannot lower it permanently.
If the Fed's actions cannot permanently lower unemployment, then that would mean that the Fed is powerless to fulfill one-half of its dual mandate.
The first challenge is determining how to interpret the dual mandate. Of course, the Federal Reserve doesn't take a literal approach to the goal of maximum employment. In that case, our policies would need to be directed at getting everyone to work at least one hundred hours a week, and we would have to discourage senior citizens from retiring and young people from attending college instead of entering the labor force.
The Fed's policies certainly did help discourage some senior citizens from retiring. First, the Fed wished to punish savers on fixed incomes in order to entice them into taking on more risk. Second, those who took the bait saw their retirement accounts decimated. Apparently it hasn't helped our economy all that much though. Go figure.
Furthermore, every modern economy has a certain level of "frictional" unemployment, which reflects the transitory periods over which individuals remain voluntarily unemployed while searching for a new job. Partly for these reasons, Federal Reserve officials and other policymakers often refer to this aspect of the dual mandate as the goal of maximum sustainable employment, and they place particular emphasis on the word sustainable.
But Mr. Bernanke also warned that huge trade imbalances between the United States and the rest of the world had played a central role in the global economic crisis and that they could do so again.
What might his solution to the problem be?
“The United States must increase its national saving rate,” he said.
And how would Ben Bernanke implement his solution to the problem?
The current Fed policy fits nicely with the Obama Administration's aim to increase spending (both consumer and Congressional) of all kinds -- a policy which discourages any kind of saving and applauds any kind of spending.
The performance of the U.S. economy during the 1990s has been universally hailed as stellar. Economic growth has been strong, unemployment has reached its lowest rate in over a generation, and inflation has remained relatively low.
The 2000s? Not so much.
In both the media and popular opinion, trade deficits often are portrayed negatively, being blamed on the unfair trading practices of our trading partners or on a lack of U.S. competitiveness in world markets.
Score one for the media and popular opinion!
Simple logic suggests that the downward trend established during the 1990s cannot be maintained indefinitely—if it were to do so, the United States would ultimately exceed its ability to pay for the rising tide of imports.
Score one for simple logic!
This article has described the basic determinants of the current account, challenging the common, but simple notion that trade deficits are inherently bad.
Score one for common simple notions!
The resulting weakness of the U.S. current account balance is, therefore, a reflection of an economy that is strong, but in transition. A turnaround of the deficit is likely to be an important indicator of when that transition is complete.
The red dot represents the annual trade deficit at the time of the article.
The "turnaround of the deficit" was certainly an important indicator of something. It turned around just before our Great Recession. Score one for the St. Louis Fed! Hurray!
Only after we reach this more mature phase of the current economic expansion will we be able to fully evaluate the claims of those who suggest that we are on the threshold of a new economy in which rising rates of productivity and economic growth will last far into the future.
We are definitely on the threshold of something right now. If 11 years of massive trade deficits, 11 years of miserable job creation, 11 years of massive debt creation, 11 years of horrendous stock market performance, and 11 years of pension funds being overly optimistic about future returns are any indicator, then I'd claim we're standing on the edge of a cliff. Just a hunch.
The June report seemed to ask more questions than it answered. For one thing, the surge in imports didn't square with the sense that the economy had hit a soft patch and consumers were reluctant to spend money.
Another puzzle was that the imports didn't seem to show up anywhere. At least they were not where they would typically be found: either in inventory data if they ended up on store shelves, or in the sales reports.
In other words, imports, like a missing sock between the washer and the dryer, have simply disappeared.
For what it is worth, I think our entire economy is lost between the washer and the dryer. It's been a lost sock decade.
Credit is the lifeblood of market economies, and the damage to our economy resulting from the constraints on the flow of credit has already been extensive.
(Reuters) - New York state's pension fund lowered its annual rate of return for investments by half a percentage point to 7.5 percent...
Click to enlarge.
As seen below, the Valentine Day'swormholewould also help explain the overabundance of New York State Chihuahuas, Pomeranians, end tables, and ladies' buttersoft lambskin swing coats.
Ever hopeful, Michael Javer offered up chihuahuas at half price this week. "We find sometimes that people think of puppies on Valentine's Day as a sign of warmth, love and all that good stuff," said Mr. Javer, the manager of American Kennels on the Upper East Side. Of course, his instincts are hardly unique.
All week, retailers have wooed shoppers with promotions for things they never knew they needed, like discounted Pomeranians, end tables and ladies' buttersoft lambskin swing coats.
The index is rebalanced on the last calendar day of every month, and a sovereign debt issuer is removed if it defaults on any of its debt, including noninflation-linked bonds.
I can't speak for you, but it brings me great comfort to know that if a sovereign debt issuer defaults on any of its debt and a likely panic ensues, then BlackRock is fully committed to joining in on the panic too. No price is too low! Everything must be sold! Sell! Sell it all! Sell it all now!
BlackRock said in its filing that the Global Inflation-Linked Bond Fund will be passively managed, but it reserves the right to invest up to 20 percent of assets in futures, options and swaps contracts, as well as cash and cash equivalents.
Maybe the passively managed Global Inflation-Linked Bond Fund ought to stay 100% invested in Global Inflation-Linked Bonds?
No, that's just what they'll be expecting us to do. - Rex Kramer, Airplane! (1980)
The black 10-Year TIPS data points show the results of every 10-Year TIPS auction (does not include reopenings). The blue 10-Year TIPS data point is today's rate, as seen at Bloomberg.
We've seen I-Bond rates fall to 0% (currently 0.2%). We've seen 5-Year TIPS rates fall to 0% (currently 0.13%). Are 10-Year TIPS rates next?
As long-term holders of TIPS, we need only suspect that the long-term direction of future real yields is down (that's the most important thing that determines what TIPS are worth). I not only strongly suspect that real yields will fall, but I'm actively betting on it. Real yields were actually negative in the 1970s. Few seem to know/remember that.
Death of Real Yields Perfect Storm
Guns AND Butter Governmental Policies
Forever War
Banana Republic Trade Deficit
Banana Republic Rising Income Inequality
Banks "Too Big to Fail"
Credit Crisis Flight to Quality
Slowing Economic Growth Flight to Quality
Retiring Baby Boomer Flight to Quality
The 1970s have nothing on us, in my opinion. I don't have to be right on the entire list. Just a few from the list should be good enough.
I underestimated the deflationary forces of the credit crisis. It temporarily provided much higher real yields. The overall premise still holds true though. Real yields are lower now than when I wrote that back in 2008.
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.
I also believe that these trends will continue far longer than most (those who have only been investing in the 1980s and 1990s anyway) think is even remotely possible.
In hindsight, above normal inflation did not continue. The stock market did much worse than simply stagnate. From what I can see, cheap food still exists. Although I am currently of a deflationary mindset, I do stand by all of those predictions over the long-term though. It does not paint a pretty picture for the future.
Has the government done anything to address any of my concerns from the list? Extend and pretend does not count.
Here is the real risk: if banks do require another rescue the political consensus to do it quickly and effectively will not be there. The United States has squandered its opportunity to address the fundamental problems, choosing to extend and pretend and to prop up asset values.
It will be interesting to see what Plan B is.
Plan A was a saver's nightmare. I expect Plan B to ultimately be more of the same.
The first example comes from the Bank of England. The BoE, in June 1999, auctioned off gold reserves to the lowest bidder.
That is not true. There's a huge difference between "lowest bidder" and "lowest accepted bidder".
The BoE used dutch auctions. The dutch auction is actually a very efficient, rational, and fair way to auction off a large quantity of identical things all at once. Google even used a dutch auction for their IPO.
In hindsight, the BoE should not have sold its gold when it did. However, it has nothing to do with the auction process itself. It most certainly did not just hand over all of its gold to the lowest bidder as he claims. If that was truly the case, then all the bids would have been $0.00. Why would anyone bid more? Free gold! Woohoo!
So, um.. I give you the lowest price for your gold and I win?
Um, no. If you offer the lowest price in a dutch auction then more than likely you will get nothing. Why? You were outbid by every other bidder.
Man, if only people on Ebay (EBAY) would follow this logic.
Some people on eBay actually did follow that logic! Unfortunately, eBay had to stop because the logic tended to confuse people. Oh the irony!
However, the price that each bidder pays is based on the lowest price of all the allotted bidders, or essentially the last successful bid.
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The U.S. Treasury (and other countries) uses a Dutch auction to sell securities.
The government only accepts the lowest price for its Treasury bonds? OMG! Conspiracy! The government is getting ripped off every time it holds a Treasury auction! Somebody needs to step in there and do something! Contact the press! Write your Representative! Call your Congressman! Tell them you want a formal inquiry! And most importantly, someone informJeremy Siegel!
My hands are waving all over the place right now in a most conspiratorial, alarmist, and utterly sarcastic manner!
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