Almost Back to Abby Normal

The following chart shows personal consumption of goods over services.

I can't speak for others, but I started buying a lot more stuff when the pandemic hit. Stuck at home, not much else to do. Some of that is seen in the chart and was directly responsible for the higher inflation rate in goods. Currently trying to wean myself off of this new temporary behavior.

There's something else going on too though, as seen in the upward slope of the red trend line channel. Here's one theory.

January 22, 2024
Study shows how social media fuels unhappiness and materialism

Clothes, cars, travel, followers: People with a materialistic mindset always want more and, above all, more than others. Social media provides them with ideal opportunities to compare themselves with others, which makes them susceptible to passive and addictive user behavior. This stresses them out and, ultimately, leads to low life satisfaction. This downward spiral, which turns materialists into less happy people, was identified by researchers from Bochum in an online survey of over 1,200 participants. They published their findings in the journal Telematics and Informatics Reports from January, 8, 2024.

Wage Inflation Pressure

The following chart shows the natural log of U.S. wage and salary disbursements. When using natural logs, constant exponential growth is seen as a straight line.

The Fed does not need to deflate wages back into the long-term channel in green, but rather to return to the slope of that channel. What's done is done. Deflation to undo the high inflation is definitely not the goal.

Some progress is being made. We've noved from the steep slope of the red line to the more moderate slope of the yellow line.

I'm convinced that they can achieve their goal, one way or another. But at what cost? I can be a bit cynical, but there's a high risk here that we're still in the early stages of a no-win situation.

How high will the unemployment rate need to rise to get us back to the healthier wage inflation trend? I have no idea, but I can say with 100% certainty that 100% unemployment would do it. Can't have any wage and salary disbursements if nobody is working.

The bulk of my net worth sits in inflation-protected I-Bonds and TIPS. As of about a year ago, my IRA sits entirely in bonds without inflation protection (TLT). And here's where I sit until I see a reason to take on more risk. Near record unemployment expected to rise, falling house prices, and high interest rates are not things that make me excited about taking on riskier investments.

Not investment advice.

Gimme Shelter

The following chart shows the natural log of the CPI for shelter. When using natural logs, constant exponential growth is seen as a straight line. I have added long-term trend lines in red.

With lofty housing prices and lofty mortgage rates, it seems very unlikely that we're going to make it back to the top of the trend channel anytime soon. Which, if you think about it, is kind of odd. I could swear that the Fed really wanted that. Just not all at once, apparently. Too bad.

If I were a gambling man, I would wager that there is more risk leaving the channel to the downside than to the upside. And maybe I am a gambling man, because I continue to hold TLT. Very encouraged by today's CPI report. One battle doesn't win the war though, of course.

Massive Economic Uncertainty Continues

So many consumer surveys, but none of them ask the key questions for the next year:
- How much did you accumulate in savings during the pandemic?
- How much do you have left?
- How much of that do you intend to spend?
Without the answers, forecast margins of error are *massive.*

Twitter: Ian Shepherdson

Great questions. Too bad the Fed Chairman can't see the answers.

Jerome “The Earl” Powell

The following chart shows the unemployment rate minus the 12-month percentage change in the median CPI. I have added long-term trend lines in red and a short-term arrow in green.

I looked at Earl and his eyes was wide
His lip was curled, and his leg was fried
And his hand was froze to the wheel
Like a tongue to a sled in the middle of a blizzard

I says, Earl, "I'm not the type to complain
But the time has come for me to explain
That if you don't apply some brake real soon
They're gonna have to pick us up with a stick and a spoon"

Whip Inflation Now!

The following chart shows the natural log of the 30-year Treasury yield. When using natural logs, constant exponential growth (or decay) is seen as a straight line. I have added long-term trend lines in red and a short-term trend arrow in green.

Will the long-term trend ultimately prevail? Trapped in a world of nearly permanent ZIRP?

Will the short-term trend break everything? Housing! Stocks! Bonds! Employment!

Will it be a combination of both? Or neither?

Stay tuned for the next exciting and terrifying episode of...

Global Devolution!

Trading Update

Sold the platinum eagles I bought at $1083.74 on 8/24/21 for $904.34 ($40 over spot) today. Fairly hefty loss, with nearly half of it coming from transaction fees (counting both the buying and the selling). In hindsight, not ideal. It was a very small position, but painful just the same.

I intended to hold for many years, but what a difference a year makes. When I bought, the 10-year TIPS yielded -1.01%. Today, it yields +1.39%. I must admit that I never saw that coming. It's a game changer, at least temporarily, if nothing else.

That's not the main reason why I sold though. I needed to sell something in order to pay ongoing expenses. My choices were TIPS outside my retirement account, I-Bonds, EE-Bonds, and these coins.

I don't want to sell anything that would push up my income this year, because I still qualify for the health insurance subsidy of the Affordable Care Act. I also don't want to sell things that are generating inflationary gains with inflation running so hot.

So, as much as it pains me, the coins had to go (and some I-Bonds too, soon). At least I can put the capital loss to very good taxation use thanks to my other investments tied directly to inflation.

Not the first difficult selling choice I've had to make. Won't be the last. TIPS generate plenty of inflationary gains but not all that much current income, savings bonds generate no income until cashed out, but the ongoing expenses continue to mostly come at night, mostly.

Soft Landing?

The following chart shows the natural log of the median consumer price index. I have added a long-term trend channel in green and a short-term trend line in red.

If the green channel represents the runway and the red line represents our current flight path, then we'll be very lucky not to careen off into the wastelands.

Food at Home

The following chart shows the natural log of the consumer price index for food at home. When using natural logs, constant exponential growth is seen as a straight line. I have added a long-term trend channel in green, a steeper short-term trend line in blue (heading into the Great Recession), and an even steeper short-term channel in red (our current trajectory).

The stock market sure doesn't like it. Not one bit. Isn't feeling all that confident about a soft landing. Starting to wonder why the captain's warning of "some pain" while wearing a parachute?

It's not all bad news. Hey, at least we're sitting in the middle of the long-term trend channel. Small comfort, I know.

How Bad Could It Get?

The following chart shows the natural log of household and nonprofit net worth divided by the consumer price index. When using natural logs, constant exponential growth is seen as a straight line.

The future's so bright, I gotta wear shades night vision goggles.

Producer Price Index

The following chart shows the natural log of the producer price index for all commodities. When using natural logs, constant exponential growth is seen as a straight line.

We've been screaming towards the top of the channel like a runaway train. Our engineer (the Fed) is now desperately attempting to apply the brakes. The odds of a soft train landing seem incredibly low. Beware the rapidly approaching Deadman's Economy Curve. We're likely to derail!

Some might argue that we've already derailed. The worst is now behind us. I'm not convinced. Since when has maximum pain been achieved with near record low unemployment? It seems to me that we still have plenty of pent-up depressionary pain potential. Surely the unemployment rate has not achieved a permanently low plateau, especially given all the financial pain both the stock and bond markets have recently dished out. In fact, it's entirely possible that the pain party might just be getting started. Perhaps the Great Recession will be followed up with an even greater one. *cringe*

This is definitely not financial advice. I am and have been very concerned about our long-term future, much like many must have been during the fall of the Roman Empire. Who is responsible? We all are.

No single raindrop believes it is to blame for the flood.

Trading Update X

In my IRA, all in on TLT @ $119.20. No longer sitting in cash awaiting opportunities. Long-term interest rates have reached the level I predicted in March of 2021. The 20-year bond looks to be the best bargain of the bunch, perhaps because TLT is now so unloved by retail investors and has a similar maturity.

The following chart shows the natural log of the 20-year Treasury bond yield. When using natural logs, constant exponential growth (or in this case, decay) is seen as a straight line. We have reached the trend line in red.

As is usual with my investments, this is intended to be a long-term holding. There's a lot of risk here, but if I am right about the particular path of our long-term future, then I feel pretty good about it. Well, as good as I could feel believing in an illusion of prosperity anyway. Counting on the Fed to engineer some sort of a landing. I do expect the plane to touch the ground again. Hindsight may easily show that touch was way too gentle a word though.

Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected. - George Soros

Brace for Impact

The following chart shows the natural log of the consumer price index for food and beverages. When using natural logs, constant exponential growth is seen as a straight line. I have added green and red trend lines to show how the growth has changed.

This is your captain. While a soft landing is still theoretically possible, please brace for impact. Place your feet firmly on the floor, tuck your arms and elbows close to your sides, bend over your thighs as tightly as possible, and tuck your head as closely as possible to the surface you are most likely to strike when slammed forward. Thank you for choosing to fly with Federal Reserve Airlines. We hope you have enjoyed your flight, the upcoming landing notwithstanding.

Household Net Worth

Behold the household wealth creation of a pandemic combined with ZIRP. Broken window fallacies be damned. Break them, and break them good I say. It's a brand new era of unprecedented prosperity! And should this plan ever start to falter, look for plague, pestilence, and NIRP to save the day!!

Seriously. Other than recent bitcoin and stock market performance, there's absolutely no reason to fear downside risk or reversion towards the mean theories. Even in uncharted territory, the Fed always knows what it's doing. Always has your back!

I know I said I was serious in the last paragraph. It was gallows humor. Sorry about that. I actually just bought more I-Bonds. Not only do they track inflation as seen in the CPI, but they can never deflate. Not that many are all that worried about deflation again. Yet.

Fed Chairman Boromir

It is a strange fate that we should suffer so much fear and doubt over so small a thing. - Boromir, The Lord of the Rings

Trading Update IX

Closed all positions within my IRA. Sitting in cash.

Down 0.15% for the day, up 2.98% in 2022, and up 21.10% since I bought stocks in late December of 2020. (I'm also owed some dividends from all 3 tobacco stocks.)

I patiently await new opportunities. It is my hope that real rates will continue to rise and my next investment will be long-term inflation protected Treasury bonds (my preferred "safe" investment).

Right or wrong, this liquidation was triggered by the narrowing spread between the dividend yield on VPU (utilities fund) and the yield on the 10-year Treasury bond. At roughly 1%, it's way too narrow for my liking. Since I've earned more than the equivalent of a 10-year Treasury bond held to maturity (in just one year), I feel no great need to push my luck.

Side note: XBI continued to crash. Was my worst performer, by far, and I'd only held it two weeks.

Inflation Drama

The following chart shows the natural log of the median CPI. When using natural logs, constant exponential growth is seen as a straight line. I have added a trend channel in red.

 

Once the inflationary extremes are stripped out, it's just more of the same. When combined with exponentially decaying long-term interest rates, it is of little consolation to safety-seeking long-term savers though.

Trading Update V

Sold some VPU @ 150.40 to buy TSN @ 75.63.

New IRA asset allocation:

This is definitely a stock that I intend to hold long-term. I'm overweighting it and bracing for more pain. Not only has Tyson been in falling knife mode for the past month, but the White House isn't at all happy that the company raised meat prices during a pandemic. Makes inflation look bad, as if there aren't enough reasons already that inflation looks bad.

I suspect that the pace of my trading will soon grind to a halt, now that VPU is down to just 20% of my IRA. The buying and selling seems mostly done. Now it's time for the holding. If I thought that there was even a chance that we'd soon see 1% real yields on the 30-year TIPS then I would not be taking such risks.

Trading Update IV

Sold some VPU @ 151.29 to buy OKE @ 52.68 and KMI @ 16.14.

New IRA asset allocation:

Lured by the high dividends of ONEOK and Kinder Morgan. I'm certainly taking on a lot of risk for an economy in uncharted waters. *shrug*

VPU Performance v.008

Months Elapsed: 8
Total Growth: 12.80%
Annualized Growth Rate: 19.81%
Distribution Yield (TTM): 2.80%

This isn't a sustainable growth rate. There is risk here, especially if inflation isn't transitory and yields don't continue to decay over the long-term. That said, I'm still comfortable holding it.

I did sell about half of my VPU position this month to buy BTI, MO, PM, and VZ. As a group, I'm up 0.66% on those. Would be doing better if I had not overweighted BTI and VZ. No plans to change course though. Feel good about the allocation.

And lastly, also bought platinum Eagles this month. On the one hand, it would cost 3.27% extra to buy them now. On the other hand, I would lose 3.67% if I sold them now. Still fighting the ~7% round trip spread. That was a tough long-term call. Could have bought a platinum fund that charges 0.5% per year instead. I therefore need to hold at least 14 years to make holding the coins the better choice. As an added bonus, holding platinum coins in one's hand beats holding a paper IOU, especially if there comes a time when many paper IOUs become worthless.