Friday, June 25, 2010

My Stagnationary Prediction

In my last post I concluded that the stimulus physics model I was using is beginning to break down. I clearly need to start thinking of another model to replace it. The most obvious path is that the stock market just continues to roll over. It is hard to believe in the obvious though. I typed "double dip" in Google and it actually tried to help me by adding "recession 2010" to the end of it. Go figure.

The DJIA is trading at roughly the same level that it was trading at when I turned bearish in 2004. That was my primary fear in 2004. It would simply stagnate. That's my primary fear now.

My long-term prediction is therefore just about as simplistic as simplistic could be. Hello stagnation. It's just a gut call. I don't have much supporting evidence to back it up. Just add one part deflation to one part stagflation and that's what you get though.

See Also:
Stimulus Physics
Stimulus Physics Update #1
Stimulus Physics Update #2
Stimulus Physics Update #3
Stimulus Physics Update #4
Trend Line Disclaimer

Source Data:
Yahoo: Historical Prices for Dow Jones Industrial Average


EconomicDisconnect said...

Sidewaysastagnation??? Sounds about right!

I put up pictures of the fishing trip if you like that kind of stuff. Great day away from work and the market news!

Stagflationary Mark said...


Nice pictures. Looks like you had fun.

Why do we call skipping work or school "playing hooky"?

Perhaps it is based on the word hook? I'm just trolling for fresh ideas. Just angling for a new spin. Spawning some thoughts. Weighing-in with my opinions.

Have I hit bottom? Is the jig up? I feel a backlash. I'm bobbing and sinking here. I should probably stop now before I cast off some real barbs. That would be a real drag. Some just don't appreciate puns and would likely throw a few carping remarks at me! I'm almost baiting them!! I need to learn to shut my large mouth!

Oh buoy. I've crossed the line. The lure of streaming puns was just two great lakes. I've hit my limit. The pun reservoir is dry and I can't restock it.

EconomicDisconnect said...

Bravo Mark, very well done! I am going to save that one and use it as my own!

Stagflationary Mark said...


Hahaha! :)

G.H. said...

The dollar, and subsequently UUP, has taken something of a drubbing lately.

As a result, my investment in UUP has reached a precipice. In other words, it's on the brink of being liquidated. This as per my exit strategy which has been in place since the day I bought.

As of today's close, UUP has drawn down a total of 3.87% from its high set on 06/07/10. Seeing as how this is a very low beta instrument (compared to the S&P 500) I have set a sell point of 4% down (typically I use 7% for domestic equity investments.)

If Monday confirms the resumption of downward movement I'll likely liquidate late Monday or Tuesday. Otherwise I'll hold. If in fact I sell I'll walk off with a tidy profit. Nothing earth shattering but a heck of a lot better than Ben is offering!

My initial UUP buy
My additional UUP buy

Stagflationary Mark said...


My main concern regarding UUP is that it is a zero sum game (since it uses derivatives). For every winner there must be a loser. In general, one cannot make money long-term unless one is smarter than the markets.

Further, even if the dollar rallies, that does not guarantee that UUP does.

That was certainly true of USO as it relates to oil. It also used derivatives (in a feeble attempt to track the price of oil).


Note that USO was supposed to be tracking the price of oil. It did FAR worse than that though.

And then there is CYB. I think this poster sums up my concerns.

Re: Im rich!!!!!!! my 100 shares are up 20 cents!!!!

Furthermore, holding CYB, which invests in the futures contracts rather than actually holding yuan, doesn't even guarantee any return. Once the markets figure out the rate of change in valuation (if any), then they will price the futures accordingly. So when CYB goes to buy or rollover those futures, they will already cost more to purchase.

I'm afraid the 20 cents you made is about all you are going to see. The only way for CYB to make any money is for a sudden and dramatic midnight re-pricing of the yuan - so that the futures contracts they currently hold become more valuable - and that ain't going to happen.

That's kind of what you saw in UUP I think. It surprised the markets when the dollar strengthened suddenly and dramatically.

Just something to think about.

remy said...

It's one of those black swan things... Maybe DJIA should stagnate or perhaps decline very slowly over the next few years. Or,maybe we will have another stimilus, maybe we will bail out BP with some cash for oil program (cash for clunkers helped save the auto industry, people who bet automakers would suffer suffered from this bailout program).

In the end the PTB decide what happens who gets the bailout and we are the last to know. (sometimes at least)..

Stagflationary Mark said...


Perhaps flat is safest. Flat is boring. Flat is uninteresting. Flat doesn't create panics.

If pain must be distributed, flat probably isn't the worst way to do it. The stock market in the 1970s was flat. The stock market in the 2000s was flat. Coincidence? Maybe. Maybe not.

G.H. said...


"Just something to think about."

The whole point to the stategy I employ is that I don't have to think. The beauty of it is that I don't have to fear my utter dumbness making its way into my investment decisions. That may not be a fear for the Einstein's of the investing world but that I'm not.

From where I'm standing the USO story is orders of magnitude simpler than the picture you painted. First, look at this chart of USO. Focus on or about the date 09/27/07. Now, imagine you can go back in time and take a look at this spreadsheet, dated 09/27/07. See USO about half way down the first page? That line on the spreadsheet is screaming "BUY"!

Now, go back to the chart again and, given my description of UUP's price history and sell-stop rules, guess what I'd have been doing with USO on or about 07/14/08. For a look at the answer, take a look at this spreadsheet, dated 07/17/08. That last column, DD%, means my sell-stop was hit and I've liquidated. With a terrific profit I might add.

Main thesis being what in the world do I care about what's in USO or whether it actually tracks its index well or not. Likewise with UUP. What difference does it make to me what's in it? I wouldn't know a derivative from Adam. Do I need to know the difference?

Let's move to CYB. Here's the pertinent chart. What can I say? There is absolutely no reason on the planet I can see to buy this ETF. It doesn't seem to go up, or down. It does nothing. A trend in price action has never been established. In my world, it's useless as a tool to invest in.

The guy that offered his insights into CYB seems to be a knowledgeable man and I'm impressed with his thoughts. I just can't figure out for the life of me why I should care. This kind of banter may provide endless hours of fun on the yahoo message board but I'm at a loss to see the value.

Just my thoughts. And by the way, how many people you know actually post their buys? It's easy to finds seller's posting fortune telling stories of when they bought/sold, but it's a little hard to find people willing to post both ends and have to live with the result.

Stagflationary Mark said...


Main thesis being what in the world do I care about what's in USO or whether it actually tracks its index well or not. Likewise with UUP. What difference does it make to me what's in it? I wouldn't know a derivative from Adam. Do I need to know the difference?

We are so far apart on this, but that's fine. I always want to know exactly what I'm invested in. I'm just not a believer in historical squiggly lines on a chart to tell me what the future brings. You are and if it makes money for you then that's great. It cannot work for the "average" investor but that doesn't mean it can't work for you.

I will say that knowing exactly what I am investing in has stopped me from owning any structured investment vehicles or these things or anything else banks can think up to separate me from my nest egg though. I learned my lesson here. Black boxes scare me.

It helped me to exit the stock market in 2004. It also shows how I knew the upward path in TIP was probably about at its end back in November. 10% returns from there were extremely unlikely. Gone was almost any potential of drastically higher prices, due mostly to the fact that TIP's price can only go up if real yields fall. When real yields are scraping along near 0%, there just isn't much upside left. 0% is the floor.

Historical TIP

Knowing what I was invested in is actually the thing that retired me. I believed in the game that a tiny little private company managed to think up in a basement to the point that I piled in. There were no historical charts to guide me. The product hadn't even hit the store shelves yet.

My next best investment was Hansen. Its chart was amazingly flat for years when I bought it (in the late 1990s). It stayed flat for quite a few more years too. I sold way too early in hindsight, but in 2004 I did not want to own any stocks (and probably won't ever again). I made roughly 6x my money on that one and had I kept it until today it would have retired me too. I missed almost all of the ride. Go figure.

For what it is worth, I also post my buys and my sells. As you say, there certainly aren't many of us. I admire that trait when I see it in others and you are no exception. May your trading skills continue to work for you. :)

Stagflationary Mark said...

Here's a bonus thought on TIP by the way. I watch it like a hawk since it is the only fund I own (its in my IRA).

Re: Duration

And a correction...

Re: Duration

G.H. said...

And so it goes...discipline must win out over hope...

Trade Type: SELL

Security Symbol: UUP

Quantity: 1410

Price: $24.66 @ 2:22:56

Final analysis: 1.2% gain over 4 months time, in a word, paltry. Better than money market yet still a disappointment.

Mr. Market felt the dollar rally was getting a little long of tooth. Who am I to argue? As I said somewhere before, given the terrific gains from my first buy I was in a virtually couldn't lose situation. And I didn't. I'll rest on that.

Here's why I think the market shuddered on the Euro/Dollar relationship today: European investment bank lends to Greece for infrastructure

"The European Investment Bank said on Thursday it had made its biggest-ever loan of two billion euros (2.4 billion dollars) to Greece for infrastructure in the country which is in the throes of massive structural reforms.


Half of the EIB loan, or one billion euros, has been earmarked to upgrade a railway from the southwestern port of Patras to the Bulgarian border and link it to the new container terminal of Neo Ikonio near the main port of Piraeus.


"The interest rate will be determined at the time of the funds' release," he said, adding that the rate would be "good".

News reports put the rate at two to four percent."

There's that word again: "loan". Loans are going to get Greece out of its debt problem. And it gives me even greater confidence knowing the money will be used to help the shipping barons - who are based in Piraeus because of the accommodative tax policies that allow them to keep their fortunes in tact - to improve the infrastructure which allows them to make their fortunes.

Look at where soveriegn debt is headed. Same place as the US auto industry. 0% interest loans to keep up the "demand".

Unfortunately I see little opportunities after UUP for potential investment. I hold only VWITX and VFIIX at this point. If the market should hold onto its trend for deterioration through middle next week it may become time to dip into small short positions. We'll see.

Stagflationary Mark said...


Final analysis: 1.2% gain over 4 months time, in a word, paltry. Better than money market yet still a disappointment.

It also beat the CPI, which isn't bad all things considered.

The same cannot be said of the S&P 500 over the period.