Economics is not hard - Part I: Don’t let professional economists tell you otherwise

[jpatter666]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

i'll just note that niether buying gold, nor buying treasuries, nor shorting the equities market required consultations with specialists bound by non-disclosure agreements. i do not assume this trade will be accessible to many or most or any reader here.

p.s i'll bite. something in the energy sector?

Dunno, but I doubt it unless it is something truly wild there. After all, EJ said it was going to look as loony as buying gold in 2001. Thus, I would think a peak cheap oil play (which doesn't look loony at all to me) is *not* what he has in mind.

I have some thoughts as to where he is going based on some hints EJ has dropped here and there, I'll be interested in seeing if I'm on target.

[rdrees]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

MarkL, I think that's a bit of the pot calling the kettle black. You've carefully picked your time frame to show disinflation (one year), while my carefully picked time frame shows deflation (one quarter). We're either both wrong or both right; either way it doesn't move the argument along. But for what it's worth, it was EJ in this very post who called what we're seeing "brief deflation," not "disinflation" as he had previously called.

And in any event, that's not really my main point. As I said earlier, I'm not a "deflationista" and doubt very much that we'll have any kind of sustained, major drop in prices. What I do see, however, is two straight years of essentially flat/falling prices pretty much no matter how you slice the data. That's not significant inflation. And I don't see anything in the numbers that suggest that there's any kind of major change toward significant inflation on the horizon--indeed, the most recent numbers are trending down.

My main point is that among the very many excellent predictions made by EJ, the imminent significant inflation one was wrong, and I would sure love to see him address that. What was the flaw in his model? Did he underestimate the Fed's political ability/will to keep the printing presses jacked? Or did he underestimate the nastiness of this "Great Recession" and the immense deflationary pressures it puts on the economy? And once the model is corrected, what does he think is on the horizon? I would genuinely love to hear his thoughts on this one issue that he missed because I so value his perspective.

And just so we don't devolve into an inflationista/deflationista name calling debate, remember that there's a middle ground. It seems both sides can have a bit of the chicken little problem, with deflationistas screaming that prices will collapse while inflationistas shout that prices will skyrocket. But maybe the deflationary pressures of the sorry economy compared to the inflationary pressures of 0% interest rates effectively balance out such that we'll end up treading water for quite some time, with bits of deflation and bits of disinflation for several more quarters to come. It's not always sexy to predict the status quo or the middle ground, but sometimes that's what actually happens. For what it's worth, that's my non-professional opinion of what we're likely to see for a while, but I'd love to see some professional analysis on the subject.

[Chomsky]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

i'll just note that niether buying gold, nor buying treasuries, nor shorting the equities market required consultations with specialists bound by non-disclosure agreements. i do not assume this trade will be accessible to many or most or any reader here.

p.s i'll bite. something in the energy sector?

How about something in the subprime CDO sector?

[EJ]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

i'll just note that niether buying gold, nor buying treasuries, nor shorting the equities market required consultations with specialists bound by non-disclosure agreements. i do not assume this trade will be accessible to many or most or any reader here.

p.s i'll bite. something in the energy sector?

The beauty of the gold and Treasury bond portfolio through the asset boom/bust cycle of bubble economy was the simplicity and accessibility of it. It did require that one understand the dynamics of the process no later than the summer of 2000:

Asset Boom
Step 1: Asset price inflation groundwork – Deregulation and government subsidy
Step 2: Asset price inflation - Credit plus hype
Step 3: Crash trigger – Weakness in the real economy, revelation of fraud, etc.
Asset Bust
Step 4: Asset price deflation - Panic, asset sales, private credit contraction
Step 5: Spillover – Asset price deflation spills over in the P/C Economy through the banking system and credit markets
Reflation
Step 6: Reflation - Dollar depreciation, public debt expansion (liquidity), and movement of private debt to public account (solvency)

Why Treasury bonds and gold throughout? Treasury bonds rise in asset busts due to demand and also due to liquidity during reflation, while gold rises net the disinflation/reflation asset boom/bust cycle because the dollar ends the cycle weaker than when it started and total government debt levels end higher than before; as debt ratchets up, national solvency and the dollar ratchets down. Real equity prices fall because demand declines relative to claims on cash flows from taxes to pay government debt and payments of principle and interest on private debt.

Today one needs to understand an entirely different process to take positions that will hold up for the next ten years as well as gold and Treasury bonds did for the past ten years. Now we have to forget about the asset bubble cycle. That was then; this is now. This is why readers are not seeing more frequent posting from me. More time for analysis and thinking and running ideas past experts like Paul Volcker and Tom Ferguson means less time for commentary on the news and posting of intermediate results.

The Trade is not related to energy directly.

[MarkL]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

Actually I picked several time frames... 2 different years, the specific time frame you originally tendered, and almost all 6 month periods. And I can pick many more time frames. More importantly I can pick MOST time frames. You MUST orient all of your argument around a very short, and very selective time frame.

So let's play your game and use the quarter as our time frame. How many quarters did you conveniently overlook over the last 2-3 years? Seven? Ten? During all of these OTHER quarters which your "quarter" selection conveniently ignored we've had inflation. And that's the majority sample. That's the trend. Especially when you sum the results.

Again, focusing on the speed bump doesn't give you a feeling for whether the car is going up or downhill. You have to look at more reasonable, longer time frames. Imagine how silly this argument would be if you were pointing to a week of deflation. Why does an occasional quarter or two of slight deflation over 2-3 years (8-12 quarters) mean we've had a "persistent drop in prices" to use Eric's dictionary deflation definition? Even over ONE year it doesn't mean that. Look at the general trend... please!

And in what 2 year time frame do you see "essentially flat/falling prices pretty much no matter how you slice the data?" I looked at multiple two year periods and the lowest I could get was 1.6%... and of course that was by being highly selective. Most are in 2%-3.8% range. No flat there... unless you call 1.6%-3% flat. I don't. I call it low inflation. But certainly not prices that are "flat/falling."

You're working hard to select the time frames, facts and definitions that fit your "deflation" argument. Let's stop the argument based on 1 or 2 quarters out of 8-12 and ask, to our own and the forum's benefit, what has the general economic trend that Eric was predicting REALLY been? Over 2007, 2008, 2009 or any two years combined, or any 3 years combined, OR an average of all of these types. Or averaging MULTIPLE quarters together. But for objectivity's sake, quit picking out the occasional one!

Economic forecasting on a quarterly basis is unrealistic and not what Eric intended.

Pick any of those multiple more reasonable economic time frames and I can't see any word for it but... Disinflation.

[bill]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

The Trade is not related to energy directly.

But indirectly change energy use and source.

[vinoveri]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

The Trade is not related to energy directly.

I guess that means shorting oil is out ... and shorting UST bonds and the $ is out b/c it's so obvious.

Is the trade based more on a macro-economic inevitabilities (e.g., peak oil, regional growth.. or not) or on likely political events, for example currency adjustments international debt restructurings, climate change? Or are these criteria too interdependent?

It occurs to me with all this unpayable debt, talk of a new global currency regime, if one could forecast (or an insider become privy to) how such debts will be written down and how a global currency(ies) is/are to be formulated and on what they will be based over the coming years, one could leverage that in some way in positioning themselves.

[ASH]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

p.s i'll bite. something in the energy sector?

Apparently, the strategy is being surreptitiously crowd-sourced.

[ThePythonicCow]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

The beauty of the gold and Treasury bond portfolio through the asset boom/bust cycle of bubble economy was the simplicity and accessibility of it.

I take it that the flip side of this statement applies as well -- what you have in mind now is not so simple or accessible.

Hence, even if you told us more details (if you even could legally) it would not do us small-time part-time investors much good. It's not like gold where almost anyone with a few hundred dollars and a few hours of research time could have had some success buying and holding gold for the last decade.

I am imagining it's more like venture capital investing in the 1990's, where those with substantial contacts and substantial resources, able to invest serious money, could work (even create) opportunities that were not accessible to others.

Good luck with it.

[dummass]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

Perhaps something in line with Buffett's purchase of Burlington Northern.

A shift due to the lack of energy.

[ThePythonicCow]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

Perhaps something in line with Buffett's purchase of Burlington Northern.

A shift due to the lack of energy.

That's what I'm thinking too, along with a reversal of the suburban real estate and global trading trends of the last half century. This suggests going long rail, mass transit, municipal bonds and local or regional producers of food and basics. At the same time anything that can transit "for free", namely information, continues its global integration.

I worry however about the bezel, the infestation of fraud, corruption and tyranny at the highest centers of power. I think that bezel is a tad thicker and more sinister than EJ admits. Shrinking that bezel is going to be a bitch.

[World Traveler]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

Railroads take a while to retrofit and upgrade - and U.S. rail system is in bad shape.

In the 1990's, I spent some time in several Latin American countries (Ecuador, Peru, Guatemala, Mexico), and I was very impressed by the bus systems, both within major cities like Quito and between cities. Most Latin Americans can't afford cars, but nonetheless get around quite well, due to the extensive bus systems.

As Peak Cheap Oil and the Dollar Downfall hit the U.S., a growing bus sysem is the logical alternative for a suddenly poorer population. We've already got excellent roads and highways. Buses are also the cheapest, fastest alternative to ramp up.

Will bus companies be a good future investment? Could be...

[rdrees]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

I was never able to access your attachment, MarkL, so I don't actually know what data you were looking at. But you challenged me with underlines to pick any time period, and I'll pick the one I have been talking about the whole time: the past two years. Here's the raw data for PPI (which EJ has said is a preferred metric since it is less of a political football) for finished goods for the past two years:

July 08: 1.3
Aug 08: -.5
Sept 08: -.1
Oct 08: -2.6
Nov 08: -2.7
Dec 08: -1.8
Jan 09: 1.1
Feb 09: -.2
Mar 09: -.8
Apr 09: .6
May 09: 0
Jun 09: 1.8
Jul 09: -1.2
Aug 09: 1.5
Sept 09: -.5
Oct 09: .2
Nov 09: 1.5
Dec 09: .5
Jan 10: 1.3
Feb 10: -.5
Mar 10: .8
Apr 10: -.1
May 10: -.3
Jun 10: -.5

In sum, that's 13 of 24 months with falling prices, 10 with rising prices, and 1 with no change. 13 out of 24 months with falling prices is not me picking apart the data the way it pleases me; I think quite the opposite is true. You say you want to talk majority? You're talking deflation.

And I don't think it's unfair at all for me to characterize these past two years of having exhibited flat/falling prices. In fact, I believe it's what most people would call accurate: I'm not much at math, but I figure all the increases over that time frame total 10.6%. The decreases, on the other hand, total 11.8%, which means a net FALL in price over the last two years of 1.2%. Not disinflation; deflation.

I'm reminded of a recent study that found that when human beings believe something, they simply cannot accept plain facts that contradict their viewpoint. I wonder if there's some of this going on here. http://www.boston.com/bostonglobe/id...ire/?page=full

Now, I still stand by what I said: we're either both right or both wrong from a statistical standpoint. I have no doubt you can find statistics that bolster your argument. But you cannot deny that the reasonable, objective statistics I've referenced here bolster mine, so you're no "more right" than me.

But this is distraction, really. Let's get down to it: EJ was wrong when he said we'd have significant inflation by now. Using whatever statistics you want, I don't think even you, MarkL, would characterize what we're seeing now as significant inflation. No matter how right EJ's been no matter how many times (which I acknowledge), the man is a human being and on this particular call he was wrong. Let's confront that and integrate it into the analysis instead of pretending it never happened.

[dummass]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

We've already got excellent roads and highways. Buses are also the cheapest, fastest alternative to ramp up.

The problem could be the maintenance of all those roads. Expensive oil = Expensive roads

[metalman]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

I was never able to access your attachment, MarkL, so I don't actually know what data you were looking at. But you challenged me with underlines to pick any time period, and I'll pick the one I have been talking about the whole time: the past two years. Here's the raw data for PPI (which EJ has said is a preferred metric since it is less of a political football) for finished goods for the past two years:

July 08: 1.3
Aug 08: -.5
Sept 08: -.1
Oct 08: -2.6
Nov 08: -2.7
Dec 08: -1.8
Jan 09: 1.1
Feb 09: -.2
Mar 09: -.8
Apr 09: .6
May 09: 0
Jun 09: 1.8
Jul 09: -1.2
Aug 09: 1.5
Sept 09: -.5
Oct 09: .2
Nov 09: 1.5
Dec 09: .5
Jan 10: 1.3
Feb 10: -.5
Mar 10: .8
Apr 10: -.1
May 10: -.3
Jun 10: -.5

In sum, that's 13 of 24 months with falling prices, 10 with rising prices, and 1 with no change. 13 out of 24 months with falling prices is not me picking apart the data the way it pleases me; I think quite the opposite is true. You say you want to talk majority? You're talking deflation.

And I don't think it's unfair at all for me to characterize these past two years of having exhibited flat/falling prices. In fact, I believe it's what most people would call accurate: I'm not much at math, but I figure all the increases over that time frame total 10.6%. The decreases, on the other hand, total 11.8%, which means a net FALL in price over the last two years of 1.2%. Not disinflation; deflation.

I'm reminded of a recent study that found that when human beings believe something, they simply cannot accept plain facts that contradict their viewpoint. I wonder if there's some of this going on here. http://www.boston.com/bostonglobe/id...ire/?page=full

Now, I still stand by what I said: we're either both right or both wrong from a statistical standpoint. I have no doubt you can find statistics that bolster your argument. But you cannot deny that the reasonable, objective statistics I've referenced here bolster mine, so you're no "more right" than me.

But this is distraction, really. Let's get down to it: EJ was wrong when he said we'd have significant inflation by now. Using whatever statistics you want, I don't think even you, MarkL, would characterize what we're seeing now as significant inflation. No matter how right EJ's been no matter how many times (which I acknowledge), the man is a human being and on this particular call he was wrong. Let's confront that and integrate it into the analysis instead of pretending it never happened.

read ej again. in all articles since 2008 he predicts a fall purchasing power of income and savings... reflected in the declining quantity & quality of goods and services not nominal prices rising... higher commodity prices & weak demand keep producers from passing higher 'input costs' (ppi) to consumers. c1ue has a thread around here that tracks shrinking packages & less 'stuff' in the box. yo... when you get dog food instead of meatloaf is that 'deflation'? quality/quantity deflation = inflation.

where'd you get your ppi numbers?



'persistent price decline' = deflation? where? nah. disinflation.