Elements of Deflation, Part 2
by ilene - September 13th, 2009 5:00 am
Elements of Deflation, Part 2
Courtesy of John Mauldin, Thoughts from the Frontline
[Click here for Elements of Deflation, Part 1]
Elements of Deflation, Part 2
The Velocity Factor
Y=MV
Sir, I Have Not Yet Begun to Print
There Are No Good Choices
Washington DC, San Diego, and New Orleans, etc.
Just as water is formed by the basic elements hydrogen and oxygen, deflation has its own fundamental components. Last week we started exploring those elements, and this week we continue. I feel that the most fundamental of decisions we face in building investment portfolios is correctly deciding whether we are faced with
The problem is that there is not an easy answer. In fact, the answer is that it could be both. Today I got another letter from Peter Schiff, who seems to be ubiquitous. He says the rise in gold is because of rising inflation expectations among investors. Gold is predicting inflation. Maybe, but the correlation between gold and inflation for the last 25-plus years has been zero. I rather think that gold is rising in terms of value against most major fiat (paper) currencies because it is seen as a neutral currency. The Fed and the Obama administration seem to be pursuing policies that are dollar-negative, and they give no hint of letting up. The rise in gold above $1,000 does not really tell us anything about the future of inflation.
In fact, it is my belief that if the Fed were to withdraw from the scene of economic battle, the forces of deflation would be felt in short order. The answer to the question "Will we have inflation in our future?" is "You better hope so!"
I wrote in 2003, when Greenspan was holding down rates too long in order to spur the economy, that the best outcome or endgame over the course of the full cycle would be stagflation. I still think that is the most likely scenario. The Fed will fight deflation and knows how to do that. They also know what to do when inflation becomes too high. But there is a cost.
It is not a matter of pain or no pain; it…
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The Elements of Deflation
by ilene - September 5th, 2009 12:20 pm
The Elements of Deflation
Courtesy of John Mauldin at Thoughts From The Frontline
The Elements of Deflation
The Failure of Economics
The Super Trend Puzzle
Final Demand and Income
Unemployment Was NOT a Green Shoot
As every school child knows, water is formed by the two elements of hydrogen and oxygen in a very simple formula we all know as H2O. Today we start a series that starts with the question, What are the elements that comprise deflation? Far from being simple, the "equation" for deflation is as complex as that of DNA. And sadly, while the genome project has helped us with great insights into how DNA works, economic analysis is still back in the 1950s when it comes to decoding deflation. Notwithstanding the paucity of understanding we can glean from the dismal science, in this week’s letter we will start thinking about the most fundamentally important question of the day: is inflation, or deflation, in our future?
But quickly, I want to thank the many people who wrote very kind words about last week’s letter. Many thought it was one of the better letters I have done in a long time. If you did not read it, you can read it here. And of course, you can go there and sign up to get this letter sent to you each week for free. Why not become of my 1 million (plus and growing) closest friends?
The Failure of Economics
Among the economists and writers I regularly read, there are some who, if they agree with me, I go back and check my assumptions - I must have been wrong. Paul Krugman is one of those thinkers. I admit to his brilliance, but his left-leaning philosophy does not particularly square with mine, and I find that most of the time I disagree.
That being said, I strongly encourage you to read his essay in the New York Times Magazine, which comes out this weekend. It is worth the high price of the Times to read it, if you can’t get it online. It is a very hard critique and analysis of the failure of current macro and financial economic thought, which didn’t even come close to predicting the current financial malaise. Indeed, as he points out, most schools of thought said the state we are in could not happen. You can read at the essay if you are a member, or register for free if…
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An Uncomfortable Choice
by ilene - August 29th, 2009 7:50 pm
An Uncomfortable Choice
Courtesy of John Mauldin at Thoughts From The Frontline
An Uncomfortable Choice
What Were We Thinking?
Frugality is the New Normal
And Then We Face the Real Problem
The Teenagers Are in Control
Choose Wisely
We have arrived at this particular economic moment in time by the choices we have made, which now leave us with choices in our future that will be neither easy, convenient, nor comfortable. Sometimes there are just no good choices, only less-bad ones. In this week’s letter we look at what some of those choices might be, and ponder their possible consequences. Are we headed for a double-dip recession? Read on.
An Uncomfortable Choice
As our family grew, we limited the choices our seven kids could make; but as they grew into teenagers, they were given more leeway. Not all of their choices were good. How many times did Dad say, "What were you thinking?" and get a mute reply or a mumbled "I don’t know."
Yet how else do you teach them that bad choices have bad consequences? You can lecture, you can be a role model; but in the end you have to let them make their own choices. And a lot of them make a lot of bad choices. After having raised six, with one more teenage son at home, I have come to the conclusion that you just breathe a sigh of relief if they grow up and have avoided fatal, life-altering choices. I am lucky. So far. Knock on a lot of wood.
I have watched good kids from good families make bad choices, and kids with no seeming chance make good choices. But one thing I have observed. Very few teenagers make the hard choice without some outside encouragement or help in understanding the known consequences, from some source. They nearly always opt for the choice that involves the most fun and/or the least immediate pain, and then learn later that they now have to make yet another choice as a consequence of the original one. And thus they grow up. So quickly.
But it’s not just teenagers. I am completely capable of making very bad choices as I approach the end of my sixth decade of human experiences and observations. In fact, I have made some rather distressing choices over time. Even in areas where I think I have some expertise I can make appallingly bad choices. Or maybe particularly in…
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The Statistical Recovery, Part Three
by ilene - August 23rd, 2009 3:01 pm
The Statistical Recovery, Part Three
Courtesy of John Mauldin at Thoughts from the Frontline
The Statistical Recovery, Part Three
Capacity Utilization Set to Rise
A Real Estate Green Shoot?
The Deleveraging Society
Some Thoughts on Secular Bear Markets
Weddings and Ten Years of Thoughts From the Frontline
This week we further explore why this recovery will be a Statistical Recovery, or one that, as someone said, is a recovery only a statistician could love. We look at capacity utilization, more on housing, some thoughts on debt and deflation, and some intriguing charts on volatility in the last secular bear-market cycle. This letter will print a little longer, but there are lots of charts. I have written this during the week, and I finish it here in Tulsa, where Amanda gets married tomorrow. (There is no deflation in weddings costs!)
Thanks to so many of you for your enthusiastic feedback about my latest Accredited
For those of you who seek to take advantage of these themes and the developments I write about each week, let me again mention my good friend Jon Sundt at Altegris Investments, who is my US partner. Jon and his team have recently added some of the more successful names in the industry to their dedicated platform of alternative investments, including commodity pools, hedge
If you haven’t spoken with them in a while, it’s worth checking out their new lineup of world-class managers. Jon also tells me they just added yet more brilliant minds to their research team, making it, in my opinion, one of the foremost teams in the industry, focused solely on alternative investments. I invite you to have a conversation with one…
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THE “LAST BEAR STANDING”
by ilene - August 10th, 2009 11:34 am
THE “LAST BEAR STANDING”
Courtesy of The Pragmatic Capitalist
Good stuff here from John Mauldin:
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Six Impossible Things Before Breakfast
by ilene - August 8th, 2009 12:31 pm
"Science advances one funeral at a time." Max Planck
Six Impossible Things Before Breakfast
Courtesy of John Mauldin
In this issue:
Six impossible things before breakfast, or how EMH has damaged our industry
The Dead Parrot of Finance
The Queen of Hearts and impossible beliefs
Slaves of some defunct economist
Prima facie case against EMH — Forever blowing bubbles
The EMH ‘Nuclear Bomb’
The Efficient Market Hypothesis, according to Shiller, is one of the most remarkable errors in the history of economic thought. EMH should be consigned to the dustbin of history. We need to stop teaching it, and brainwashing the innocent. Rob Arnott tells a lovely story of a speech he was giving to some 200 finance professors. He asked how many of them taught EMH - pretty much everyone’s hand was up. Then he asked how many of them believed it. Only two hands stayed up!
And we wonder why funds and banks, full of the best and brightest, have made such a mess of things. Part of the reason is that we have taught economic nonsense to two generations of students. They have come to rely upon models based on assumptions that are absurd on their face. And then they are shocked when the markets deliver them a "hundred-year flood" every 4 years. The models say this should not happen. But do they abandon their models? No, they use them to convince regulators that things should not be changed all that much. And who can argue with a model that was the basis for a Nobel Prize?
I am again out of town this week, but I have been saving a speech done by my friend James Montier of Société Générale in London on the problems with the Efficient Market Hypothesis (EFM). While parts of it are wonkish, there are also parts that are quite funny (at least to an economist).
Ideas have consequences, and bad ideas usually have bad consequences. The current maelstrom from which we are emerging (finally, if in fits and starts) has many culprits. A lot of bad ideas and poor management that came together to create the perfect storm. Today, we look at some of the ideas that are part of the problem but are too often glossed over because they are "academic" and not of the real world. However, gentle reader, academic ideas that are taught and accepted as gospel by 99% of the professors have real-world consequences. Where does your money manager stand…
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U.S. GDP Review — Consumer, Where Art Thou?
by ilene - August 4th, 2009 5:35 pm
U.S. GDP Review — Consumer, Where Art Thou?
Courtesy of John Mauldin’s Outside the Box, with Guest Author Dave Rosenberg
This week I am in the office for just one day, but I can rely on my friend Dave Rosenberg to give us solid insight on the latest GDP numbers for this week’s Outside the Box. Dave slices and dices to show us what really happened. David was the former Chief Economist at the former Merrill
I am in Maine later this week. It is likely I will be on CNBC, as they will be shooting live from our fishing camp. Also, they plan to do a one hour special with a number of interviews. I will let you know when it airs. A quick note from me: The third quarter is likely to be positive, especially given the success of the "Cash for Clunkers" program which it looks like our Congress is going to pass another round of spending which taxpayers (our kids) will get to pay off, or more likely pay $50 million per years for decades in interest. Sigh. Essentially, we are moving up car sales today which would have been made later, except that if you can get someone else to make your down payment, why not make that purchase today? A very reasonable response on the part of the consumer.
A teaser from Dave’s work below: "Consumer
Encore, indeed.
John…
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The End of the Recession?
by ilene - June 27th, 2009 9:12 pm
Courtesy of John Mauldin’s Thoughts from the Frontline
John Mauldin is a multiple NYT Best Selling author and recognized financial expert. He has been heard on CNBC, Bloomberg and many radio shows across the country.
The End of the Recession?
By John Mauldin
Last week we began a series on data abuse, about how various commentators twist and torture data to make it say what they want, or fail to look at the details underneath the headlines. Predictably, there is a lot of fodder this week as we forge ahead into this ripe territory. The headlines screamed that US income data went up unexpectedly. Green shoots were everywhere. But if you look at the actual data, you find something much different. And, I keep hearing the insistent refrain that the market is telling us that the recovery is around the corner. Well, the recovery may be, but can the market really tell us that? I have about 25 windows open in my computer, with tons of misleading data. Let’s see how much we can cover in this week’s letter. [More information on John Mauldin's subscription service here.]
And now to funny-looking data. Where to begin? There are so many targets of opportunity!
The End of the Recession?
I walked into the office yesterday evening and there was someone on CNBC talking about how the 50-day moving average of the S&P 500 rising above the 200-day moving average was telling us the market was getting ready to rise and the recovery had started. I listened to his babbling for another 2-3 minutes and couldn’t take it anymore (and no, it was not my friend Larry Kudlow, who is a lot more balanced than whoever was on.)
We keep getting told that the market is telling us "something," usually that the recession is going to end. For some reason, people keep repeating the bromide that the market looks out about 6 months. To that I politely say, rubbish.
Riddle me this, Batman. Did the market see the recession in October of 2007? We were already in recession and the S&P 500 (see below) was making new highs! Where was the market prescience? Did it see the 25%+ drop in January of this year? And I could go back and cite scores of examples where the market "missed" the future turning points over the past ten decades.
What about the shibboleth that the market turns up 6 months before the end of a…
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The New, New Normal
by ilene - June 7th, 2009 12:04 pm
[Click here to sign up for a free subscription to PSW - no credit card, it's easy!]
The New, New Normal
Courtesy of John Mauldin, Thoughts from the Frontline Weekly Newsletter
We are coming to a critical inflection point, perhaps the most critical point that we have had in 70 years for the US and to a great extent the global economy. The choices we make (or that Congress and the Fed make for us) will affect not just our investment portfolios but business and our jobs for a very long time. Last week I talked about the three paths we face as a nation. I want to go back to that theme and expand upon it. You need to clearly understand what the risks are so that you can interpret the actions and data that will be coming at us in the next few quarters. I am feeling a little tired today, so I am going to take the liberty to reproduce Bill Gross’s latest comments as well, which are somewhat in line with my own.
A Different Perspective on Health Care
But before we jump into the letter, I want to acknowledge the very large response I got from readers about the cut and paste I did about the differences between the national health care systems of Canada and Great Britain the health care system of the US. To say that I touched a raw nerve is an understatement. I should also admit that I learned a great deal from some very cogent and thoughtful letters. I often write about the problems with using selective statistics in gauging the economy. I have learned that you can do the same with health care statistics.
There are many letters I could quote, but let me give you a counter for the statistics from last week from Raoul Pal of Spain. And of course, there are other statistics that can be brought in to make almost any case you want. But I found these to be very thought-provoking.
"Using the Economists World in Figures I think there is a very interesting and maybe appalling story to tell. In its simplest terms a healthcare system is there to extend the longevity of live of the population. It is the single best and simplest way to judge it because we can all find examples of where one country is better than another but the longevity stats don’t lie. When we use that framework the…
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The Paradox of Deficits
by ilene - May 28th, 2009 2:23 am
Courtesy of John Mauldin
The Paradox of Deficits
In this issue:
Things That Go Bump in the Night
A Trillion Dollars as Far as the Eye Can See
The Global Recession Gets Worse
Where Will the Money Come From?
The Paradox of Deficits
Naples, London, and Eastern Europe
There is something that is bumping around in my worry closet. The bond market is not behaving as if there is deflation in our future, and the dollar is getting weaker. Unemployment keeps rising, but most of all, the US government deficit looks to be spinning out of control. This week we look at all of this and take a tour around the world to see what is happening. There is a lot of interesting material to cover….
A Trillion Dollars as Far as the Eye Can See
As of this week, total US debt is $11.3 trillion and rising rapidly. The Obama Administration projects that to rise another $1.85 trillion in 2009 (13% of GDP) and yet another $1.4 trillion in 2010. The Congressional Budget Office projects almost $10 trillion in additional debt from 2010 through 2019. Just last January the 2009 deficit was estimated at "only" $1.2 trillion. Things have gone downhill fast.
But there is reason to be concerned about those estimates, too. The CBO assumes a rather robust recovery in 2010, with growth springing back to 3.8% and then up to 4.5% in 2011. Interestingly, they project unemployment of 8.8% for this year (we are already at 8.9% and rising every month) and that it will rise to 9% next year. It will be a strange recovery indeed where the economy is roaring along at 4% and unemployment isn’t falling. (You can see their spreadsheets and all the details if you take your blood pressure medicine first, at www.cbo.gov.)
Just a few quick thoughts. This year the proposed administration plan is to borrow 50% of every dollar spent. The CBO projects than nominal GDP will grow by about 50% over the next 10 years (which is historically reasonable), but also that revenues will double, which suggests massive tax increases in relation to GDP. Interestingly, the International Monetary Fund says growth next year will be tepid at best (more below). The deficit in 2010 is almost 10% of GDP. The average proposed deficit is almost a $1 trillion average for the next ten years. Ten years from now, the deficit is projected to be $1.2 trillion. And that is if government costs…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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