August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

[ASH]

Re: a side note about CPI

I ain't the expert...

I love it that my "bat signal" works so well!

as for which way the wind is blowing, basically, looking at the fdi, the wind is always - with rare exception - blowing in the same direction anyway.

Do you think the last few CPI reads that were cited in this post is one of those times when the wind switched direction for a bit?

And there's always my charts which show both. ;)

I love the Bart signal!

[rdrees]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

I like this post!

I would never pretend to know what the trends are. I would also acknowledge the ability of "EJ" to have seen at least one important trend--this severe recession--sooner than almost anyone.

But orthodoxy can be problematic. And predicting market trends is different from proposing a theory about how markets react in every case that a bubble is burst, which is really what Ka-Poom claims to do.

In this case, the evidence to me is tending not to support inflation for some time, and is in fact indicative of deflation from a traditional economic standpoint.

And yet, the PPI data may "still be wrong," in the words of jk.

And I'm glad we're talking now!

[FRED]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

Hi, rdrees. Jumping in late here. Do you mind restating briefly your objection to the argument that the U.S. economy is heading into neither a deflation spiral nor a period of stag-deflation as Japan has experienced since 1993, so that I may address it? Thanks.

I'll respond to you other comments, below.

I appreciate the engaged response, Ash.

My understanding of the iTulip thesis, the "Ka-Poom" theory is based on wandering around and reading past posts. And the one that sticks out to me is the 2006 post entitled, "No deflation, just disinflation" or something to that effect. It would seem to me that the PPI numbers I posted would tend to refute that, as they sure seem to reflect deflation to me.

Ka-Poom Theory makes two arguments. The first: with respect to the cycle of asset bubbles and crashes since iTulip was founded in 1998. It asserts that no self-reinforcing cycle of debt defaults, collapsing money supply, and falling prices will occur in the U.S. following any asset market crash as occurred in the U.S. from 1930 to 1934, whether the crash be in equities as in the 2000 to 2002 period or in mortgage and other credit markets in the 2007 to today. Events have confirmed the theory not once but twice: there was not self-reinforcing deflation spiral following either the 2000 stock market crash nor the 2007-8 credit market collapse. As forecast, government credit was substituted for private credit. In the latest instance, only four rather than 48 months of contraction in the CPI resulted:

The U.S. experienced a short bout of deflation we call disinflation before

the long-term inflation trend resumed

This is what a deflation spiral looks like, from 1930 to 1934

Doesn’t take a rocket scientist to see the difference between 48 continuous months of CPI decline and four months of CPI decline.

The second argument that Ka-Poom Theory makes is that, eventually, without a specific time frame, the U.S. is on track to experience the same difficulties of any country with a large net external debt that cannot finance the monthly payments on that debt with either tax revenue or money borrowed from domestic or foreign sources. The U.S. is vulnerable to a balance of payments crisis.

Not sure of your background, but most iTulip members are business people and think in business terms. Assuming you are such, one way to think of the U.S. predicament is to think of the U.S. as a corporation with a high cash flow to debt service payment ratio, and a diminishing internal rate of return.

Now I know there's a definitional subtlety that has been interlaid over that post suggesting that what "EJ" means by deflation is not some small amounts of deflation here and there, but actually a deflationary spiral. But it's hard not to look at 8 straight months of accelerating and large declines in the PPI as stronger evidence even of a deflationary spiral than some small deflation here and there.

You make an excellent point here.

As noted above, the CPI declined for four months in 2008 then recovered in early 2009 and continued on trend.

But what is the relationship among key components of the PPI and the CPI?

Interestingly, the lag between changes in the prices of energy inputs, intermediate goods, finished goods, and CPI are no more than a few months. We put energy on the right hand scale because it is so volatile is flattens the other components.

As predicted, these did not continue on a downward path for years on end, uninterrupted as those on the other side of the agument for the past ten years asserted: no deflation spiral, measured as CPI or any component of the PPI one chooses.

By the way, this tight relationship between energy costs and CPI is not a new phenomenon.

And sorry to have seized so much on the Target anecdote, but it does seem to be demonstrative of a larger issue about a near-term inflation call. Why would retailers be raising their prices any time soon when both demand is down and supply costs are down?

We have think like retailers rather than like economists!

They cannot lower any line item price below a price that produces a per unit profit net of input costs, that is, everything on the bill of materials, wages, interest, and so on. If input costs were falling as in 2001 they'd lower prices and still make a profit. But input costs are not falling this time, so a retailer cannot price cut the competition for long, unless they have enough cash and credit to cover the negative cash flow until the competition, that does not have as much credit or cash to finance negative cash flow, goes out of business.

Any retailer worth his salt would undercut the person who raised prices and could do so without hurting their bottom line given sharply reduced input costs. That would seem to hold true for at least some time to come given how much cheaper they can make things now than just one year ago.

But input costs did not drop dramatically! The Fed put a floor on them with quantitative easing and other measures. Oil is $69 not $16 as in 2001.

They did cut prices as long as they could, during the Great American Fire Sale in the first half of 2009, as we forecast. But remember: no retailer worth his salt kept any cash around going into this mess. What's a cash account earn in the high central bank liquidity, low interest rate era? It was irresponsible to hold cash, from a shareholder perspective. Instead, they funded inventory with credit lines. When those dried up, so did their ability to undercut competitors for more than a quarter or two, thus the timing of our forecast and the theory behind it: in our era of low interest rates, a credit crunch hurts suppliers even more than comsumers. Supply falls faster than demand.

I'm not sure I see as much value in monthly trends over a small time period as it's very easy to get lost in noise that way. But even still, doesn't it seem significant that both PPI and CPI have taken a turn downwards from June to July? And this after nearly $300 billion in quantitative easing and months and months of 0% Fed funds rate. Maybe the Fed is not as powerful as Ka-Poom posited, or at least not in the face of as severe a recession as we've got.

That's the bet, isn't it? That the CPI decline over the last month is an indication of a return to the deflation we saw for four months until early 2009 or not?

Remember, we learned all of this the hard way. We once under-estimated the Fed. We learned from our mistake. Never again.

Two recent iTulip articles you will find most helpful to understand our position:
Everyone is wrong, again – 1981 in Reverse Part I: The Great Divide – Eric Janszen
Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

[rdrees]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

Seriously? I've been asked to have a post removed because I've got a different viewpoint? This truly is an echo-chamber!

I had truly hoped this was a forum where "the contrary view" stated in a reasonably cogent fashion might be at least entertained instead of banished like heretical thought.

[bart]

Re: a side note about CPI

This is not a response to Cow's post... I just hit "post reply" by accident when I wanted to make a general post to no one in particular.

I ain't the expert, but it bears mentioning that for the most part, the problems with CPI have to do with changes in methodology over time that tend to attenuate the measured inflation. So, over a long span of time, the apparent price rise will be smaller than the man on the street encounters. However, it's not like the methodology used to compute CPI changes every season. So, if you are just trying to answer the question "are prices rising or falling?", the CPI is probably useable to get the direction. I personally think it is a bit inconsistent (for instance) to use the official CPI-U to adjust the DJIA for the "real DOW" while claiming that an alternate price index such as calculated by John Williams is the more accurate measurement of price levels. (A little inconsistent, but not a mortal sin.) However, it is not so bad to be skeptical of the long-term quantitative accuracy and consistency of the official CPI, yet use it to measure the direction the wind is blowing.

Personally, I just take the "real Dow" chart in the context of the 5000 target - especially knowing how tough and time consuming it is to keep up with charts as things change.

My current take on how EJ and iTulip view shadowstats.com corrections is that they're given credence, within the limits of long term CPI accuracy itself. It looks like they come close to splitting the difference... and as Finster and I and many others have observed, its damn tough to get a real and accurate picture of inflation.
I'll also note that I fade the shadowstats.com numbers - John Williams shows about 25-30% more inflation since 1982 than I do. I should change my charts to say "based on...", and its on my ever growing list of things to do.


And there's always my charts which show both. ;)









Same chart, but with dividends added:

[ThePythonicCow]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

Wow, bart. ..

I'm going to request that this post be removed. rdrees doesn't get it.

[rdrees]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

Wow, bart. You really do not like people who present points against your own.

Of course you should still post.

Of course, you should take pure empirical evidence of 8 straight months of falling PPI index--supposedly the gold standard around here--as something more than the "stale" old argument that "EJ" may be right on a lot of investment calls, but perhaps wrong on his underlying theory. At least Ka-Poom theory as originally stated in 2006.

You accuse and accuse and accuse others of ignoring your points, being rude, etc.

Let's move beyond the personal, bart, and look at the numbers.

Not arguments. Not "stale" points.

Numbers. Numbers that show significant deflation despite overwhelming efforts by the Fed against it.

Let's elevate this thing, bart.

[bart]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

Double, quadruple AMEN!

Bart - we love you .

*hug*... ;) ... to you and the others, and thanks.

I can get my dander up in a hurry when what I love about iTulip and the general environment is challenged by a newbie who hasn't done his or her homework - perhaps a character fault of mine, but I've been someone that says what's on his mind when a clear line has been crossed for many decades.

And that last bit of being called a coward by MarkL... well, I think now is the time to practice discretion being the better part of valor.


edit/add:
Just in case - I don't want anyone to back off if they think I've gone over an edge or over reacted, etc. I'm not going to leave if someone disagrees. Some may remember when I got really aggravated and went slightly ballistic with a poster who criticized both my ESF dollar intervention posts and facts, and also "questioned" my ECB evidence of gold price manipulation or control with bogus facts that he pretended came from the ECB... and Fred reminded me of the rules about insults, etc.

[jk]

Re: a side note about CPI

I ain't the expert, but it bears mentioning that for the most part, the problems with CPI have to do with changes in methodology over time that tend to attenuate the measured inflation. So, over a long span of time, the apparent price rise will be smaller than the man on the street encounters. However, it's not like the methodology used to compute CPI changes every season. So, if you are just trying to answer the question "are prices rising or falling?", the CPI is probably useable to get the direction. So, it is a bit inconsistent (for instance) to use the official CPI-U to adjust the DJIA for the "real DOW" while claiming that an alternate price index such as calculated by John Williams is the more accurate measurement of price levels. However, it is not so bad to be skeptical of the long-term quantitative accuracy and consistency of the official CPI, yet use it to measure the direction the wind is blowing.

unfortunately i don't think the cpi is even that good. its manipulation goes back to arthur burns coming up with the "core inflation" concept at nixon's behest. [not too long before those photos of alan greenspan wearing his WIN - whip inflation now- button]. my impression is that hedonics are added to more categories on a regular basis, and the substitution adjustments are of course an ongoing process. i.e. the substitution methodology may not change, but with every price rise there's a new substitution effect. and i've never heard of a revision or modification that resulted in a higher, instead of a lower, value. as for which way the wind is blowing, basically, looking at the fdi, the wind is always - with rare exception - blowing in the same direction anyway.

[ASH]

a side note about CPI

This is not a response to Cow's post... I just hit "post reply" by accident when I wanted to make a general post to no one in particular.

I ain't the expert, but it bears mentioning that for the most part, the problems with CPI have to do with changes in methodology over time that tend to attenuate the measured inflation. So, over a long span of time, the apparent price rise will be smaller than the man on the street encounters. However, it's not like the methodology used to compute CPI changes every season. So, if you are just trying to answer the question "are prices rising or falling?", the CPI is probably useable to get the direction. I personally think it is a bit inconsistent (for instance) to use the official CPI-U to adjust the DJIA for the "real DOW" while claiming that an alternate price index such as calculated by John Williams is the more accurate measurement of price levels. (A little inconsistent, but not a mortal sin.) However, it is not so bad to be skeptical of the long-term quantitative accuracy and consistency of the official CPI, yet use it to measure the direction the wind is blowing.

[bart]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

Originally Posted by bart
I see you didn't comment about manners or how tacky it is to post a first post like that, and without even having studied KaPoom, etc. but rather chose to focus on dissent, which is not and never has been the issue - but is a red herring. As he indicated in a later post he had studied Kapoom and read the 2006 article. You made an incorrect assumption, flamed him on it and called him a troll. Frankly you were the one without manners... and to a newcomer even.

My assumption was correct, but I wouldn't have expected you to read and fully understand the whole thread - given your insistence on beating a dead horse, etc.

And I note that you eliminated some of my key points and facts from my post when quoting it. I don't feel it necessary to redress points that have already been addressed or I agree with.

Feel free to ignore convention and also not answer or comment on questions or comments that clarify or enhance another's position - and leave yourself open to valid criticisms about practicing logical fallacies.

Call it however you like, the PPI and CPI being up in the last 5 months since the stock bottom in March are the actual facts. Yes and it's down over the last year AND the last month. You still don't show an ability to recognize the other side of the argument... this sentence of yours completely ignores it.

And yet again, you actually ignore the main and primary point of my initial post... nor do you show an ability to just give it up.

If you also choose to get into straw man type "arguments" about how I used the CPI, then how about commenting on the huge amount of coverage of John Williams and shadowstats.com CPI corrections on my site, and perhaps post one of my charts that shows the "real" inflation - which is over 6% higher than current CPI, and shows yet more facts and data about what is really going on with real inflation (or disinflation if you prefer)? Did you even read my "The Consumer Price Index Is a Lie."? Because I was pointing out your hypocrisy of you using the CPI as a reasonable stat on one hand and then denigrating in your website as another. I wasn't making all the other points that are, in fact, now being entered into the argument as straw men. I actually agree with you that the CPI is a bad stat! This is why I can't understand why you used it as an argument!!!

A straight question I can actually answer - because the CPI has been generally going up for the last 5 months, just like PPI - and CPI without lies too.

Did you get the point about who is the one truly being disingenuous and hypocritical and practicing logical fallacies like straw man attacks, etc. yet? Nope...sorry. It appears to me, it's you.

Give it up, unless you have to continue for some odd reason

Feel free to ignore all my specific points in prior posts about disinformation, initial critical posts, etc. too. Feel free to attack me again about having strong opinions in the area too. I have no problems with strong opinions and never have. Don't put words in my mouth. I had a problem with you calling a newbie a troll, accusing him of doing no research, calling his dissenting opinion an "attack" and then walking away like a coward. ASK him next time about what he's read. SUGGEST he do research if you think he hasn't.. I'd like to see reasonable discussions here that are encouraging to newbies as opposed to troll calling, assumptively dismissive posts like yours.

When you don't comment on others points, that's not called debate - whether you do it or he does it (note that he *never* directly addressed that set of recent PPI data)... and that you not only can't just drop it, but also show by this comment that you have little no no clue what I objected strenuously to.

And now you're calling me a coward - too bad we're not in person.

I think you've now gone well beyond propriety, manners and the rules of iTulip itself.

[ThePythonicCow]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

AMEN!

jim

Double, quadruple AMEN!

Bart - we love you .

[ASH]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

I'm not sure I see as much value in monthly trends over a small time period as it's very easy to get lost in noise that way.

That's actually sort of the point. EJ's renown as a forecaster is based upon making accurate long-range predictions and calling turning points, before the new trend is obvious or "proveable" by the data. The long-range predictions are based upon detailed macroeconomic, political, and historical analysis (not the type of short-term evidence that some have found off-putting in this post), and the turning points are called based upon recognizing expected "markers" in the short-term data that were predicted based upon the detailed analysis. One recent memorable example was when EJ called the start of the recession. It took NBER many quarters to identify the start of the recession looking at long-term data in hindsight. From my perspective, the whole point of iTulip is that EJ's analytical framework permits him to make timely and actionable calls before trend changes are obvious to all in the data.

So stick around. Check back in a year to see what happened with inflation. iTulip has been very explicit that inflation will be recognizable to all no later than 1st quarter 2010. This post seems to be an early call about a turning point. The iTulip management very explicitly announced that they are done arguing inflation vs. deflation, so I'm afraid they've stopped presenting their "big picture" case in every post. But, if you interpret this post in that context -- as a turning point call rather than an exposition of grand theory -- you'll better understand why the data that was presented was selected for the post.

[jiimbergin]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

Attacking Bart here is outrageous. If he thought 'stuff it' I'm not going to post on the tulip anymore, we would all be worse off. And we don't need a reengagement of the stale old arguments. Been there, done that, boring.

AMEN!

jim

[a warren]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

Nice of you to finally acknowledge in your last paragraph that he's probably not a troll. Perhaps an apology is in order and a renegagement of the discussion without the flames? Naw...probably too much to expect.

Attacking Bart here is outrageous. If he thought 'stuff it' I'm not going to post on the tulip anymore, we would all be worse off. And we don't need a reengagement of the stale old arguments. Been there, done that, boring.