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....
I also still own TIP in my IRA. I'm letting that ride. It is in a dividend reinvestment plan and I see no point in actively trading something I won't be touching for 25+ years. I also own TIPS directly through the government. No intention of selling those either.
I intend to put some of this money back to work in January's 10-Year TIPS auction, especially if we have yet another deflationary Christmas and inflation fears therefore recede.
So what prompted this?
1. I recently posted that I was deflationary in the short-term. I probably should put at least some of my money where my mouth is. Otherwise I am just a hypocrite. Most of my investment assets are still in TIPS and I-Bonds though.
2. This money is considered both emergency money and money I use to live off in the short term. No matter what, I'd need to sell some of TIP just to eat. Some of this money will therefore be used to replenish my online savings account. This price seems a more than adequate price to sell at. Buy low, sell high. Right?
3. This is not a bad year to be paying some taxes on the gains. Tax rates are still low. Interest payments have been rather low this year. The tax burden should therefore be relatively light.
4. The 5-Year TIPS is paying just 0.35% over inflation. The 10-Year TIPS is paying 1.17% over inflation. 0% is the lowest they can go. My opportunity cost risks are therefore relatively minimal.
5. The 5-Year TIPS rate did fall to 0.01% on 03/10/2008. That was not exactly the buying opportunity of the century though. Way too many investors feared inflation. On 11/26/2008, just 8 months later, the rate actually hit a mind boggling 4.24%. A funny little thing called deflation struck with a vengeance out of nowhere.
6. Inflationary Christmas or deflationary Christmas? I lean towards the latter.
7. Oil seems to really be struggling to push past $80 a barrel, even as the dollar tanks. If it can't go higher, wage pressures are certainly not going to drive inflation higher. I'm also a believer that if it took $140 oil prices to crush the economy last time, it won't take nearly that much this time. $100 ought to do it for sure. The psychology of that alone would be devastating in my opinion, not just to us but China as well (which I am also very bearish on, unlike most these days).
8. There's a sign on an apartment complex near where I live. It says, "Pay on time, $50 off." Rent is a major component of the CPI. We've seen housing prices fall. We see the government push renters into becoming homeowners. So what does that imply might happen to rental prices?
9. I have a nearly overwhelming belief that most believe that the inflation trade is a "sure thing" that simply cannot lose money. I would have thought that myself in the very early 1980s. I would have been so sure of it that I would have no doubt lost my entire nest egg over the next 20 years. That was the worst possible time to embrace inflation.
10. Parabolas. They are everywhere these days and they ALWAYS scare the heck out of me. There is one question I always ask myself when I go to sell an investment. Would I buy today at these prices? If the answer is no, then I will hold. That's not a good enough reason for me to sell. If the answer is hell no though, then I do sell. Right or wrong, this feels like hell no. I just can't stand investing in parabolas.
11. And the straw that broke the back... mab pointing out that Sears just hit a 52-week high in the comments. Sold!
That's 11 reasons.
I am still embracing inflation long-term. My investments still lean that way overall. I'm just not embracing it short-term any longer. I just don't see any reason to be "all in" on inflation right now. The poker table is just SO darned crowded.
Most economists base much of their understanding of the economy on average and median income, savings, and debt data. Our very own Ben Bernanke looks to this type of data as seen in the Federal Reserve's Flow of Fundsreports. There's just so much data to look at and the only way it seems even remotely manageable is to average it and summarize it.
I am now going to point out how this type of data can effectively hide problems within the economy and thereby confuse and shock mainstream economists as things fall apart. This is especially true when the problems start in subprime loans and are expected to remain there. The average person doesn't even have a subprime loan, right?
Consider the following two hypothetical economic situations. They are based on an economy with just three workers (which I have named "A", "B", and "C").
As seen through the eyes of "average" and "median" data, both situations are 100% identical. I would ask you these questions though.
1. Which situation is more unstable? 2. Which situation would be hurt most by rising oil prices? 3. Which situation would see payday loan stores become a growth industry?
I would argue that the economy as a whole is in far worse shape under situation #1 than it is under situation #2.
Now let's discuss situation #2. It might seem silly to you to see everyone in the economy have $30,000 in savings and $30,000 in debt. Why don't they just pay it off?
I actually have a short story based on this premise. My memory is a bit fuzzy as it has been 30+ years, but I will share it the best I can.
My dad was the bank manager in a small farming community. One day one of his customers (a farmer) came into the bank. He used his $250,000 in savings to pay off his $250,000 loan. In one day, my dad managed to lose $500,000 in business. Needless to say, the higher ups within the bank were not happy with my dad's performance that day. They thought he could have done a better job talking the person out of doing it. My dad saw it differently of course. There was no way he was going to try to talk someone out of doing a very rational thing.
That brings me to another point. We clearly "need" more banks under situation #1 than we do under situation #2. That's what we are told anyway. We "need" lots and lots of banks. In fact, the more banks we have the more prosperous we become. That seems to be the thinking. I'm not exactly a believer, but then again I'm not exactly a mainstream economist. I have no economics degree. I tended to study things like gravitation in college instead. What goes up must come down. That sort of thing.
The Federal Open Market Committee (FOMC) headed by Fed chairman Ben Bernanke likely will stay its highly accommodative courseto help get credit, the lifeblood of the economy, flowing as the recovery progresses in fits and starts, analysts said.
Heaven help us. I am a believer that there will be many, many fits and starts though. In fact, I'm starting to have a fit ("a sudden, acute attack or manifestation of a disease") just thinking about it.
It was requested (by AllanF) that I do a regression analysis to estimate the formula used to generate I-Bond rates. This is my attempt. The four data points in the "Post-Crisis" box just happen to be the most recent four data points (starting on 5/1/2008). Go figure.
As can be seen in the chart, there actually seems to be two formulas. One formula is used when there isn't a crisis. Picture moving that red trend line through the points in the blue box.
The other formula is used once the crisis begins. Picture moving that red trend line through the points in the yellow box. As I am quite possibly the first to discover the secret secondary formula, I think I shall name it STS (Screw The Savers).
Using a crude back of eyeball calculation, it looks like the STS can scrape about one full percentage point off of I-Bond yields once an economic crisis develops, all things being equal. All it takes is the wave of the pen by the government when it decides what I-Bond rates should be. Fortunately, TIPS rates are mostly determined by the bond market. The government clearly doesn't have quite as much control over those.
The four points in the yellow box also share one other trait. Once the crisis began, the government limited the amount of I-Bonds we can buy in a year from $30,000 to $5,000 (double that if bought in paper and electronic forms). Talk about overkill.
TOILET paper, local and imported tea, diapers, bath soap, toothpaste, toothbrushes, cane knives and roofing sheets are among 24 new items that could soon come under price control regulations.
With the wave of a hand, or the flash of a legislative pen, they promise to make everything cheaper. And for more than four thousand years the results have been exactly the same: shortages, sometimes of catastrophic consequence; deterioration of product quality; the proliferation of black markets on which prices are actually higher and bribery is rampant; destruction of a nation's productive capacity in the industries where prices are controlled; gross distortions of markets; the creation of oppressive and tyrannical price control bureaucracies; and a dangerous concentration of political power in the hands of the price controllers.
When the first World War broke out, the German Reich immediately adopted a policy of inflation. To prevent the inevitable outcome of inflation, a general rise in prices, it resorted simultaneously to price control. The much-glorified efficiency of the German police succeeded rather well in enforcing these price ceilings. There were no black markets. But the supply of the commodities subject to price control quickly fell. Prices did not rise. But the public was no longer in a position to purchase food, clothes and shoes. Rationing was a failure.
This is not the deflationary Great Depression so far. That was an era when producer prices spent the majority of the time below the line.
This is not the inflationary 1970s so far. That was an era when producer prices spend the majority of the time above the line.
It's a bit of both! We certainly have the high unemployment common to both eras anyway.
For long-term conservative investors/savers such as myself, it could be worse. Should the toggling continue, I can ride this out in relative safety in long-term TIPS and long-term I-Bonds (which is exactly what I've been doing). My investments will toggle in sympathy, but will still continue to outpace inflation (or at least keep up with inflation) over the long haul and that's all I really care about.
This chart also explains why I am not seeing all that much toilet paper inflation since I turned bearish (much to the surprise of the hyperinflationists). It isn't that my toilet paper investment has been bad though. It's pretty much just tracking overall long-term inflation these days, which is just fine by me.
In my opinion, this "cone of turbulence" is what happens when way too many heavily leveraged dollars slosh around looking to chase way too much global overcapacity using the power of the Internet, the power of instant real time trading tools, and the belief that the average individual investor can somehow be smarter than Goldman Sachs. It does feel empowering to have a computer on one's desk I guess, but to think my computer can compete with the computational power of a Goldman Sachs would truly be a delusion.
The trading of these items is based purely on their price in relation to each other on a predetermined basis; and not on any fundamental analysis reason such as an individual company's earnings, dividends, or growth prospects; or, on any overall economic reasons such as interest rate movements, currency fluctuations, or governmental or political actions. According to the New York Stock Exchange, program trading accounts for about 30% and as high as 46.4% of the trading volume on that exchange every day.
Every dollar that Goldman Sachs manages to extract from the system is one less dollar for the typical investor to make, all things being equal. I have no great desire to participate. The less I can trade, the better.
That's right! They've gone from 0.1% to a whopping 0.3%! Just look at that massive spike in the chart. Wonderful!
Who said I can't be optimistic when conditions warrant it?
I've already bought I-Bonds this year when they were offered at 0.7% (using the rates as of November of 2008 and good for six months thereafter). It has been my hope that I-Bond rates would be at least somewhat tolerable by November of next year. So far, so good.
I'm trying my hardest not to mention terms like "illusionary lipstick", "pig", and/or "dead cat bounce" though. There's just no need for that sort of negativity around here now that the economy has rebounded so robustly.
I'm also trying not to mention that I-Bond rates have perhaps spiked unsustainably high and might be due for a massive correction. I mean really, tripling to a whopping 0.3%? The higher the rates go the farther they can fall. Right?
I won't mention these things though, because that might get investors to think that the same thing might happen to riskier assets at some point. "Crash" and "mall traffic" are words I'm specifically not mentioning by name.
Disclaimer: Commentary may have contained sarcasm. Past performance of I-Bond rates may not be indicative of future I-Bond rates. Illusionary lipstick, pigs, dead cat bouncing, crashes, and mall traffic mental images are offered simply as opinions and should not be construed as investment advice.
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