2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

[verdo]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

So i thought I'd revive this thread just to get peoples input and the general consensus on where the economy is headed in 2016. Seems to me like the Obama administration is trying to hold things together until after the election, but will they succeed? Inflation rates at the moment are dangerously low, coming out to something like 0.2%, with a few months showing negative numbers. It's starting to look like 2009, except we haven't had any major bubbles pop in the U.S., so im very curious as to what 2016 will look like for the U.S. stock market, and what you all think may happen. The problem for Obama is that republicans now have more control of government, and they seem more keen on pulling the rug out from under this asset price inflation than the dems were when Bush had his own bubble economy to deal with in the year leading up to the 2008 election. As a counterweight though, you've got the china markets crashing and the numbers overall looking worse elsewhere, which may push more money into the U.S.? EJ, i know you've been busy with your new start up, but have you seen any bad omens, or will 2016 be another quiet year for America?

[Polish_Silver]

what is over priced?

So i thought I'd revive this thread just to get peoples input and the general consensus on where the economy is headed in 2016.or will 2016 be another quiet year for America?

I don't see signs of bubbles, either.

So what is out of whack and will do a "mean reversion" ?

Is it the dollar itself that is overvalued?

That would imply inflation---but I don't see it happening.

Are stocks over priced?

What is unsustainable about the status quo?

How long before the fracking curve bends towards higher costs?

[jk]

Re: what is over priced?

one bubble is in corporate debt, and especially high-yield, i.e. junk, bonds. the most vulnerable are issues of commodity based companies, since commodity prices are plunging. [we also had a bubble in commodities powered by chinese consumption and stockpiling]. the question is whether the collapse of high yield debt will trigger a wave of problems in higher grade debt in a similar manner to the way that subprime problems propagated. within the last few days one high yield bond mutual fund froze redemptions- i.e. investors in that fund, an ordinary mutual fund, can't get their money out.

[verdo]

Re: what is over priced?

I don't see signs of bubbles, either.

So what is out of whack and will do a "mean reversion" ?

Is it the dollar itself that is overvalued?

That would imply inflation---but I don't see it happening.

Are stocks over priced?

What is unsustainable about the status quo?

How long before the fracking curve bends towards higher costs?

The stock market looks overvalued to me...but its looked like that for 2 years now. The fed has popped every bubble going back to the 20's, but i'm not sure if they will be the ones to do it this time. I just dont see them raising rates in this environment, especially with inflation as chronically low as they are right now. I don't think the dollar is overvalued though...i think if we see more problems elsewhere like we're seeing in china, the dollar could rally even further. I'm just trying to figure out what stocks and gold will do next year. Im guessing oil will be down, so gold will be down also?

one bubble is in corporate debt, and especially high-yield, i.e. junk, bonds. the most vulnerable are issues of commodity based companies, since commodity prices are plunging. [we also had a bubble in commodities powered by chinese consumption and stockpiling]. the question is whether the collapse of high yield debt will trigger a wave of problems in higher grade debt in a similar manner to the way that subprime problems propagated. within the last few days one high yield bond mutual fund froze redemptions- i.e. investors in that fund, an ordinary mutual fund, can't get their money out.

yes, i agree. Corporate debt seems to have not slowed down, and the emerging markets haven't been doing so well. i just don't know how to take advantage of all this with the capital i do have at the moment

[jk]

Re: what is over priced?

if we're looking at deflation the benefiting assets will be long duration treasuries [yes, even from current levels] and gold. gold actually has done as well or better in deflationary times as during periods of inflation. gold is really an indicator of fear and distrust of the gov't and its currency, not an inflation hedge.

[Polish_Silver]

Views on gold

if we're looking at deflation the benefiting assets will be long duration treasuries [yes, even from current levels] and gold. gold actually has done as well or better in deflationary times as during periods of inflation. gold is really an indicator of fear and distrust of the gov't and its currency, not an inflation hedge.

I think that is a good way of looking at it. The distrust of the currency can include inflation, but much more than that. For example, fear that the government would confiscate bank accounts or something. I am wondering, too, if a government bond default is always inflationary.

When did gold increase purchasing power during deflation? Perhaps 1929-1931?

If you view deflation as "oil getting cheaper relative to $usd " then that did not work the last 6 years.


Fear of bond defaults might drive gold up, since gold and cash would be the "default proof" assets.

[jk]

Re: Views on gold

http://www.reuters.com/article/column-oconnell-gold-deflation-idUSL6E8ID53N20120713

GOLD LOSES PURCHASING POWER DURING INFLATION
"The Golden Constant", written by Roy Jastram over 30 years ago and recently re-released including fresh material by economist Jill Leyland, studies gold over a series of inflationary and deflationary periods, going as far back to the 17th century in England and the 19th century in America.
In England, over the past four centuries, gold lost its purchasing power in every period of inflation; by anything from 21 percent (in both 1675-1695 and 1752-1776) to 67 percent (1897-1920).
The story is similar for four periods out of five in the U.S., from 6 percent (1861-1864) to 70 percent (1897-1920).
The outlier here is the period of 1951-1976 when gold's purchasing power did increase in the U.S., by 80 percent as the price corrected after its sustained period pegged to $35/ounce.
BUT GAINS VALUE DURING DEFLATION
In each of the four deflationary periods since the 17th century in England, gold has increased its purchasing power, by between 42 percent (1658-1669) and 251 percent (1920-1933).
In the U.S. there have been three recorded deflationary periods - and gold increased its purchasing power in each of them - by between 44 percent (1929-1933) and 100 percent (1814-1830).

It could understandably be argued that these results stem from periods when the gold price was fixed, but Leyland notes that while a fixed price could help in the short term, there is a mass of economic experience showing that a price cannot remain fixed in the face of overwhelming fundamental forces.

Roosevelt having to free gold in 1933 (if only temporarily), and the subsequent changes in 1968 and 1971, are cases in point.

[shiny!]

Re: Views on gold

http://www.reuters.com/article/column-oconnell-gold-deflation-idUSL6E8ID53N20120713

GOLD LOSES PURCHASING POWER DURING INFLATION
"The Golden Constant", written by Roy Jastram over 30 years ago and recently re-released including fresh material by economist Jill Leyland, studies gold over a series of inflationary and deflationary periods, going as far back to the 17th century in England and the 19th century in America.
In England, over the past four centuries, gold lost its purchasing power in every period of inflation; by anything from 21 percent (in both 1675-1695 and 1752-1776) to 67 percent (1897-1920).
The story is similar for four periods out of five in the U.S., from 6 percent (1861-1864) to 70 percent (1897-1920).
The outlier here is the period of 1951-1976 when gold's purchasing power did increase in the U.S., by 80 percent as the price corrected after its sustained period pegged to $35/ounce.
BUT GAINS VALUE DURING DEFLATION
In each of the four deflationary periods since the 17th century in England, gold has increased its purchasing power, by between 42 percent (1658-1669) and 251 percent (1920-1933).
In the U.S. there have been three recorded deflationary periods - and gold increased its purchasing power in each of them - by between 44 percent (1929-1933) and 100 percent (1814-1830).

It could understandably be argued that these results stem from periods when the gold price was fixed, but Leyland notes that while a fixed price could help in the short term, there is a mass of economic experience showing that a price cannot remain fixed in the face of overwhelming fundamental forces.

Roosevelt having to free gold in 1933 (if only temporarily), and the subsequent changes in 1968 and 1971, are cases in point.

But in each of those deflationary periods they didn't have gold ETFs being dumped during liquidity scrambles, driving down the paper price of gold, which also drives down the price of physical gold. When it comes to the price and purchasing power of gold, will the existence of gold ETFs make this deflation "different"? Please forgive me if you've explained this before, but I'm having trouble envisioning gold going up when the paper price can keep going down, seemingly forever.

[Chris Coles]

Re: Views on gold

But in each of those deflationary periods they didn't have gold ETFs being dumped during liquidity scrambles, driving down the paper price of gold, which also drives down the price of physical gold. When it comes to the price and purchasing power of gold, will the existence of gold ETFs make this deflation "different"? Please forgive me if you've explained this before, but I'm having trouble envisioning gold going up when the paper price can keep going down, seemingly forever.

By pure chance I am currently reading Farmer's Progress by George Henderson, published in 1950, having recently bought his earlier book The Farming Ladder. In his latest book he makes this aside:

"When you buy a farm you pay only for the labour, thought and capital which has been put into it, for it would often cost as much to clear and equip virgin land as you will have to pay for a farm even at the inflated prices of the present time. If and when the land is nationalized, the farmers will be robbed of at least part of their invested savings, in the same way as if the government seized the savings of the small investors in Post Office accounts and similar reserves of capital, for they would never pay the real value in compensation. The gold in a sovereign is said to be worth about £3, but Jewish poultry buyers calling on farms will willingly pay £7 each for them. What race could know better the real value of money? It is the same with farms: no government script could compensate for the ownership of the land a man has loved and farmed."

I deliberately left the full paragraph intact, rather than just focus on the price of gold as the reference to "nationalized" brings me right back to my previous writings where I am convinced that after WW2 when the UK was forced to abandon their colonies, that in turn created a springboard for all those "Emperors" within the British civil service, forced to return, to set about taking over the UK as though just another colony. So I am glad to discover, (many years after the event), someone else that was very aware of what was going on at the time.

One of our core problems remains; that executive governments always assume they own the nation; that "their" nation is there to serve their needs; rather than they are there to serve the people.

[jk]

Re: Views on gold

But in each of those deflationary periods they didn't have gold ETFs being dumped during liquidity scrambles, driving down the paper price of gold, which also drives down the price of physical gold. When it comes to the price and purchasing power of gold, will the existence of gold ETFs make this deflation "different"? Please forgive me if you've explained this before, but I'm having trouble envisioning gold going up when the paper price can keep going down, seemingly forever.

i'm no expert on gold and the gold markets. however, there is a yawning disconnect between the physical market, which shows a huge flow of physical gold from the west to buyers - mostly official - in asia, and the somewhat depressed price of gold in the paper markets. the asian flows show large physical demand, currently being met by western supply.

i think if you're going to use an etf to own gold, it's important to use one that holds audited physical gold, and that doesn't lend out its gold holdings.

note, also, that gold doesn't track very well with commodities. go to the link below, and use the slider under the chart to maximize the period covered. it will push the chart's beginning back into 1999.

http://stockcharts.com/freecharts/perf.php?$WTIC,$GOLD,$copper,$wheat

although there are periods during which gold appears to track along with copper, or oil, or wheat, looking at the 16 years covered it doesn't appear to correlate really well with any of them.

if you move the slider to the right a bit, so that your chart starts at oil's peak in '08, the graph seems to fall into 2 distinct time intervals. from the '08 crisis until gold's peak in '11, gold staged a much stronger recovery than the commodities. note, too, that even at the heart of the crisis, gold didn't sell off nearly as much as commodities, in spite of the existence of etf's and the dash for liquidity.

since '11 until the present it has declined at about the same rate as the commodities.

[btw, it's interesting to add $spx to the graph and see how little volatility there has been in equities compared to commodities.]

i don't think there was a great deal of worry about inflation from '08 to '11, except for theoretical concerns about qe. certainly there wasn't much actual inflation.

so, again, i think gold thrives on fear and uncertainty. in the '70s stagflation there was the sense that the authorities, including the fed, were powerless to control inflation. added to the newly restored ability to trade gold, this made the price of gold soar. however, once it became clear that the volcker fed had changed the game and that the authorities really were in control, gold began its long decline. gold bottomed again in about 2000, along with oil, in the midst of the deflated dot-com bubble. there was a crash centered in the nasdaq, but i don't think the level of fear in 2000-2001 came close to that of '08 and its aftermath.

sorry for rambling on here, but i also note - in the article snip i posted above- that gold did NOT hold its purchasing power during prolonged inflationary intervals.

so it's not exactly an inflation hedge, which is the incorrect way that most people think about it.

so what is it?

[Polish_Silver]

currency systems and deflation

http://www.reuters.com/article/column-oconnell-gold-deflation-idUSL6E8ID53N20120713

GOLD LOSES PURCHASING POWER DURING INFLATION
"The Golden Constant", written by Roy Jastram over 30 years ago and recently re-released including fresh material by economist Jill Leyland, studies gold over a series of inflationary and deflationary periods, going as far back to the 17th century in England and the 19th century in America.
In England, over the past four centuries, gold lost its purchasing power in every period of inflation; by anything from 21 percent (in both 1675-1695 and 1752-1776) to 67 percent (1897-1920).
The story is similar for four periods out of five in the U.S., from 6 percent (1861-1864) to 70 percent (1897-1920).
The outlier here is the period of 1951-1976 when gold's purchasing power did increase in the U.S., by 80 percent as the price corrected after its sustained period pegged to $35/ounce.
BUT GAINS VALUE DURING DEFLATION
In each of the four deflationary periods since the 17th century in England, gold has increased its purchasing power, by between 42 percent (1658-1669) and 251 percent (1920-1933).
In the U.S. there have been three recorded deflationary periods - and gold increased its purchasing power in each of them - by between 44 percent (1929-1933) and 100 percent (1814-1830).

It could understandably be argued that these results stem from periods when the gold price was fixed, but Leyland notes that while a fixed price could help in the short term, there is a mass of economic experience showing that a price cannot remain fixed in the face of overwhelming fundamental forces.

Roosevelt having to free gold in 1933 (if only temporarily), and the subsequent changes in 1968 and 1971, are cases in point.

Deflation means the price level declines. If you are on a gold standard, then , by definition gold loses purchasing power during inflation and gains during deflation.

More relevant to the present time is what happens to gold's purchasing power when the paper money is in an inflationary or deflationary mode?

I have never heard of a significant deflation of current goods on a paper money system. Only asset prices have declined. Japan's so called deflation was primarily in asset prices,
not gasoline, rice, or electric power prices. (Consumer prices went down 1-2% in some years, I think)

[shiny!]

Re: Views on gold

i'm no expert on gold and the gold markets. however, there is a yawning disconnect between the physical market, which shows a huge flow of physical gold from the west to buyers - mostly official - in asia, and the somewhat depressed price of gold in the paper markets. the asian flows show large physical demand, currently being met by western supply.

i think if you're going to use an etf to own gold, it's important to use one that holds audited physical gold, and that doesn't lend out its gold holdings.

note, also, that gold doesn't track very well with commodities. go to the link below, and use the slider under the chart to maximize the period covered. it will push the chart's beginning back into 1999.

http://stockcharts.com/freecharts/perf.php?$WTIC,$GOLD,$copper,$wheat

although there are periods during which gold appears to track along with copper, or oil, or wheat, looking at the 16 years covered it doesn't appear to correlate really well with any of them.

if you move the slider to the right a bit, so that your chart starts at oil's peak in '08, the graph seems to fall into 2 distinct time intervals. from the '08 crisis until gold's peak in '11, gold staged a much stronger recovery than the commodities. note, too, that even at the heart of the crisis, gold didn't sell off nearly as much as commodities, in spite of the existence of etf's and the dash for liquidity.

since '11 until the present it has declined at about the same rate as the commodities.

[btw, it's interesting to add $spx to the graph and see how little volatility there has been in equities compared to commodities.]

i don't think there was a great deal of worry about inflation from '08 to '11, except for theoretical concerns about qe. certainly there wasn't much actual inflation.

so, again, i think gold thrives on fear and uncertainty. in the '70s stagflation there was the sense that the authorities, including the fed, were powerless to control inflation. added to the newly restored ability to trade gold, this made the price of gold soar. however, once it became clear that the volcker fed had changed the game and that the authorities really were in control, gold began its long decline. gold bottomed again in about 2000, along with oil, in the midst of the deflated dot-com bubble. there was a crash centered in the nasdaq, but i don't think the level of fear in 2000-2001 came close to that of '08 and its aftermath.

sorry for rambling on here, but i also note - in the article snip i posted above- that gold did NOT hold its purchasing power during prolonged inflationary intervals.

so it's not exactly an inflation hedge, which is the incorrect way that most people think about it.

so what is it?

Thanks for this, jk. What is it, indeed?

[EJ]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

Why the long silence?

My views remain unchanged since early 2013.

No reason to test your patience by repeating myself.

Why am I not concerned about the asset market correction since Yellen's predictable politically motivated .25% rate hike?

I can sum it up this way:

Fake markets. Fake crash.

I'll let you know when I think a real crash is coming as I did in 2000 and 2007.

[verdo]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

Why the long silence?

My views remain unchanged since early 2013.

No reason to test your patience by repeating myself.

Why am I not concerned about the asset market correction since Yellen's predictable politically motivated .25% rate hike?

I can sum it up this way:

Fake markets. Fake crash.

I'll let you know when I think a real crash is coming as I did in 2000 and 2007.

Interesting. Clearly you know something that I don't. So do you think the S&P500 will recover all of its lost ground from here or does it have a little further to fall before rebounding? Thing is, I've been short the market since the 1st of Jan. and my expectation was that it would go down at least another 20%. If that's not the case, then I'll probably take my winnings now and sit in cash or ride the S&P back up for a while

[seobook]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

No reason to test your patience by repeating myself.
...
I'll let you know when I think a real crash is coming as I did in 2000 and 2007.

I don't think reiterating a view or checking in once in a while tests people's patience anywhere near as much as not posting for month(s) at a time does by making people think perhaps you have checked out or are disinterested.

Such reassurances are helpful to many people who are constantly bombarded by other messaging, or people who discovered the site after the 2013 views were published, or who saw the site earlier but missed those posts.