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 following chart shows how much more expensive services are to us than they were in 1956 (in inflation adjusted dollars).
Click to enlarge.
Over the past decade, the bull market in commodities has created pricing pressure for our service economy. Picture the consumer having to choose between filling their gas tank or eating at one of this country's many restaurants.
As seen in the chart, this also happened in the 1970s.
Hoarding physical goods has not protected one very well against services inflation over the long-term (especially medical expenses). What will happen in the future? It all depends on whether or not we resume the failed exponential trend. I am not convinced one way or another. On the one hand, oil is no longer cheap. Our massive trade deficit has come back to haunt us. On the other hand, natural gas is cheap. There seems to be an abundant supply.
I can say this. If we don't resume the trend, thengarbage bagsfor the long-term win. As of today, they are up about 30%. Sigh.
If the Fed can keep the consumer price index growing at a stable and predictable pace then the following must be true.
1. If the inflation adjusted price of goods goes down, then the inflation adjusted price of services must go up.
2. If the inflation adjusted price of goods goes up, then the inflation adjusted price of services must come down.
Those betting on the long-term strength of our *service* economy should probably keep these two rules in mind (as should thehyperinflationists).
The following chart shows the historical Consumer Price Index for All Urban Consumers: Services minus the Consumer Price Index for All Urban Consumers: All Items.
What a ride that was. Or is the ride just beginning? Here comes the musical tribute!
My hands are definitely up. I'm also waving thenew French flag. It's a white cross emblazoned on a white background!
1. We're still in crisis mode (as seen in the chart below). 2. Today's 2.02% 10-year treasury yield doesn't change much over the next 2 weeks.
Click to enlarge.
I'm also going to predict that the government will change (or should change) the original maturity from 20 years to 25 years. That's the time it takes for the EE Savings Bond to be guaranteed to double in price.
At today's 20 year original maturity, the yield works out to be 3.53% per year (2^(1/20) = 1.0353) if held the full 20 years.
At an original maturity of 25 years, the yield would be 2.81% per year (2^(1/25) = 1.0281) if held the full 25 years.
The government doesn't generally set the EE Savings Bond's long-term yield above treasuries of a similar duration (like it is doing right now). See myExtreme EE Savings Bond Mispricingpost for a chart that shows this.
That said, perhaps the government won't alter the maturity. It is kind of silly to have 25 year savings bonds for educational purposes. That means you'd have to buy the bond about 7 years before you have a child. I just don't think most people (at least in this economy) think that far ahead. Sigh.
This is not an endorsement to buy EE Savings Bonds. I have purchased them every year for the past three years (the guaranteed 3.53% yield keeps luring me in). Each year I think it will be my last. Never seems to turn out that way though. I made my EE Savings Bond purchase for this year back in January.
Why January? Why not wait to see what happens? I guess that shows you what I think of this economy. I didn't feel the need to wait.
I prefer I-Bonds (for the inflation protection). I've been buying them every year since 2000. So here's some trivia. In what years did I buy I-Bonds in January and not wait? Here's the list.
2001 2005 2006 2007 2012
2001 was just before the recession began. I started bracing for the 2007 recession a bit early in hindsight. Should it really have taken that long for the housing bubble to pop? It's now 2012. Right or wrong, I'm bracing again. That brings me back to a recurring quote.
If one must panic, at least panic first.
Nobody ever protected a nest egg being the last to panic. Let's just put it that way.
Jeremy Siegel was just on Bloomberg predicting Dow 15,000 within the next 2 years. He then went on to say that the Euro would probably fall to parity with the dollar based on the ongoing crisis in Europe. He's just full of interesting predictions. And when I say interesting, I actually meandangerous.
I could believe that the Euro could fall to parity, but in that environment how does our stock market get to 15,000?
There is a bright side to this dismal series of Fed policies: The stock market has risen sharply, in a mirror image to the dollar's fall. In general, stocks have risen at about twice the rate that the dollar has fallen.
I see a market opportunity here. Someone needs to create an Ultra Short Jeremy Siegel fund, lol. Sigh.
I have bought nearly a lifetime's worth of clothing this month (think t-shirts, underwear, socks, sweat pants, sneakers). Most of it went directly into storage. First, it is still cheap. Second, the Christmas season was a bust so many of the things I bought were on sale. Third, I think most take it for granted that the things that have been deflating will continue to do so. I'm of the opposite belief. Clothing was one of the first to be outsourced. I would therefore argue that it is a safer thing to hoard. Much of the disinflation has already been squeezed out of it perhaps.
We also bought nearly a lifetime's worth of sheets. I'm not sure how the sheets will last but 14 sets (10 regular and 4 flannel) should cover me for a LONG time, lol. Once again, most are in storage.
Like toilet paper, clothing is about the cheapest it has ever been relative to gold and silver. I see very little downside in buying things while they are cheap. If they stay cheap, no harm done. If they become more expensive, there'll be little need to buy in the future. Win win.
I attempted tocatch the falling knife. That's generally a dangerous game. The following charts show how that has worked out so far. I have adjusted the consumer price index for apparel by the consumer price overall to show the real price drop in apparel over the years.
I can't complain. Is it bottoming? You tell me and we'll both know. I can say that apparel prices have not deflated (in nominal terms) since I hoarded clothing. I can also say that my plan, at least so far, beat treasury bills and what economistMark Zanditried to catch. Here is the notable quote (found within the link) from 2007.
"I caught the falling knife," Zandi said of his recent home purchase.
His falling knife has since turned into falling trauma shears (see chart within link). Is it any wonder he's on CNBC so often talking about how great the economy is?
Trauma shears, also known as 'tuff cuts, are a type of scissors used by paramedics and other emergency medical personnel to quickly and safely cut clothing from injured people.
As a physics guy, I'm literally sitting on a pile of shirts and yet there is mainstream economist Mark Zandi figurativelylosing his. Oh the irony.
It is not my intention to be mean. It simply bothers me that he talked up the economy heading into the crisis (still does), was wrong, and people listened to him (still do).
“Aggressive builders, greedy lenders, optimistic home buyers: Zandi succinctly dissects the mortgage mess from start to (one hopes) finish.”–U.S. News and World Report
As an optimistic home buyer, Zandi ought to know. However, he couldn't see the crisis coming until it was fully visible in the rear view mirror. I wonder if that is mentioned in his book. He's now telling us all how to avoid the next crisis? Let me guess. Does it involve knife catching? Or how about changing the optics of the mirror? Yes! The "objects in mirror are closer than they appear" technology will make us all feel safer, lol. Sigh.
Even if more jobs could be created, they must be what the young Americans are willing to do. It is impossible for them to make clothes or shoes as their grandfathers did several decades ago. It is more impossible for them to stay by the assembly lines of cars, telephones or other electric goods for eight hours a day as migrant workers in developing countries do every day. The salaries of these jobs could not support their accustomed lifestyle today.
The following chart shows the historical Consumer Price Index for All Urban Consumers: All Items minus the Producer Price Index: All Commodities index.
Click to enlarge.
Stick a fork in the 1980s and 1990s. That era is over.
The next chart shows retail trade employment growth.
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