PPI Whopper

[WDCRob]

Re: PPI Whopper

Economy slowing, change in money supply dropping faster = deflation
Economy growing, change in money supply steady = deflation

Are these the same from an investment standpoint?

If not, and there are no good measures of real GDP to tell you which scenario you're in, how do you go about deciding what to do with your $$?

[WDCRob]

Re: PPI Whopper

And just to be clear, I'm interested in the question generally - not specifically a net deflation.

[Finster]

Re: PPI Whopper

Finster,

Can you please explain why with your index it is only necessary to update it periodically? Is because there is not much volatility in the US and things rarely change?

The BLS only updates the CPI once a month ...

... The FDI can be updated as often as needed. Here's the latest:

[jk]

Re: PPI Whopper

Economy slowing, change in money supply dropping faster = deflation
Economy growing, change in money supply steady = deflation

Are these the same from an investment standpoint?

the second set of conditions- economy growing, money supply steady- has been called "good deflation." it characterized a lot of the 19th century. basically it's a scenario in which growth and productivity drives down costs while increasing incomes. i would think equities would be attractive in that context. tbonds would be a more conservative but attractive investment as well.

the first scenario is "bad deflation." investment choices- cash, tbonds, sell short other assets.

[WDCRob]

Re: PPI Whopper

But how in the world do you know where you are/which strategy to adopt if there's no good/independent measure of GDP ex-change in money supply?

I get that you can go to Shadowstats or FDI (for example) to get a gauge on inflation/deflation if you were so inclined, but where do you turn for the other half - a measure of economic growth?

btw... is economy slowing, money supply steady 'good' inflation, and vice versa?

[WDCRob]

Re: PPI Whopper

Sorry for the stream of conscious postings here, but I want to follow up while I've got hold of the questions...

If money supply steady vs growing economy is 'good' deflation and money supply steady vs slowing economy is 'good' inflation (not sure why I think this, but I do), why mess with the money supply at all? Why not leave well enough alone?

Yours in Econ 101,
WDCRob

[Finster]

Re: PPI Whopper

Economy slowing, change in money supply dropping faster = deflation
Economy growing, change in money supply steady = deflation

Are these the same from an investment standpoint?

If not, and there are no good measures of real GDP to tell you which scenario you're in, how do you go about deciding what to do with your $$?

Even if you had one, it would only tell you where you've already been. Not much help for investing since your results there depend on where you're going. On top of that, what to do with your $$ also depends on when you expect to exchange your investment for consumption items.

You have a similar problem with money supply. It is only known in retrospect, but you are concerned with how your investments will do in prospect.

The is virtually no doubt that we are now experiencing a brisk credit deflation. It is being countered much the same way as discussed above with reference to stock prices in the 1970s. That is, real credit is collapsing, but the dollars in which it is denominated are also collapsing, so that nominal credit is (albeit with great volatility) more or less holding up.

[WDCRob]

Re: PPI Whopper

Thanks Finster and JK - really appreciate the answers.

[Finster]

Re: PPI Whopper

But how in the world do you know where you are/which strategy to adopt if there's no good/independent measure of GDP ex-change in money supply?

I get that you can go to Shadowstats or FDI (for example) to get a gauge on inflation/deflation if you were so inclined, but where do you turn for the other half - a measure of economic growth?

...

What you would do is get the (raw) nominal GDP data from (say) the BEA, then apply your own inflation adjustment. For example, you would take reported nominal GDP of (say) 4.7%, and deduct inflation of (say) 9.2%, and conclude that over the past year, real GDP has contracted by (1.047/1.092) to get -4.1% contraction in real GDP.

btw... is economy slowing, money supply steady 'good' inflation, and vice versa?

There is no such thing as "good" inflation. Inflation is what happens when you have a claim (a dollar bill) on some unit of production that you worked for, and somebody else prints up an identical claim. I suppose it might be "good" from the counterfeiter's point of view ...

...

[bart]

Re: PPI Whopper

Very high probability it will, El Bartos. We can say this noting that it has happened not once in the past century, but twice. The seventies were very much like the thirties ... if you express prices in gold instead of dollars. The main difference was that in the earlier period dollars and gold were the same thing. So when stock values fell to a tenth of their peaks, their dollar prices did much the same. In the seventies, basically the same thing happened, except that the dollar had been cut loose from gold. Thus as stock values fell to a tenth of their peaks, the same thing happened to the dollar, thus keeping nominal stock prices in a trading range.

This is abundantly clear when we remove the changing dollar effects from a chart of stock prices and instead use ounces of gold for our units. That puts stock prices in both the thirties and the seventies on the same footing. Any reason to expect it to be different this time?

-chart-

As you know from your help in providing stock prices from the 19th century, it can also be stated that it's a fairly regular occurrence for stocks & gold to swap leading positions since at least 1800.

The Fed's influence, starting in 1913 and even more in 1971, has done nothing but make the relationship into a wilder feedback loop as the decades go by. Gold/DJIA peaked at about 1.5:1 in 1932/33 and almost 1:1 in 1980, so .5:1 is far from out of the question in 2011 or whenever the next peak occurs.

[bart]

Re: PPI Whopper

What you would do is get the (raw) nominal GDP data from (say) the BEA, then apply your own inflation adjustment. For example, you would take reported nominal GDP of (say) 4.7%, and deduct inflation of (say) 9.2%, and conclude that over the past year, real GDP has contracted by (1.047/1.092) to get -4.1% contraction in real GDP.

[bart]

Re: PPI Whopper

You have a similar problem with money supply. It is only known in retrospect, but you are concerned with how your investments will do in prospect.

It also depends on one's time frame and investing approach or philosophy.

There is a time lag factor that applies to changes in money and credit supply until they affect inflation, so they can be used for prediction.

[Finster]

Re: PPI Whopper

As you know from your help in providing stock prices from the 19th century, it can also be stated that it's a fairly regular occurrence for stocks & gold to swap leading positions since at least 1800.

The Fed's influence, starting in 1913 and even more in 1971, has done nothing but make the relationship into a wilder feedback loop as the decades go by. Gold/DJIA peaked at about 1.5:1 in 1932/33 and almost 1:1 in 1980, so .5:1 is far from out of the question in 2011 or whenever the next peak occurs.

Bull's eye. For most of the 1800s, the dollar and gold were the same, so the routine bull and bear markets in dollar terms were also routine bull and bear markets in gold terms.

After 1913, the swings got much bigger. The "stabilizing" influence of the Fed basically smoothed out much of the small, regular business cycle oscillations but at the expense of much larger multi-decade booms and busts. The huge swings are due to a sort of ratcheting effect where the Fed continues to expand credit beyond its natural constraints, leading to equally huge contractions. The first of those (the 1920s boom and the 1930s bust), was during a transitional phase where the Fed had been established but the US had not yet abandoned the gold peg. Once free of the latter, it was possible to paper over secular stock superbears like that of the 1970s with dollar depreciation. The stock superbear still happened, but was only obvious in real money units.

Given that we are still not on a gold standard, it seems like that this superbear (which by my reckoning we're about half way through), will continue to proceed more similar to the one of the 1970s than of the 1930s. That is, nominal stock prices are likely to continue in the broad trading range established from 2000 to present while nominal gold prices advance at least another three times.

[grapejelly]

Re: PPI Whopper

It also depends on one's time frame and investing approach or philosophy.

There is a time lag factor that applies to changes in money and credit supply until they affect inflation, so they can be used for prediction.

funny about money supply...its effects are known to show 12 - 24 months afterwards.

The money supply was the most watched number in the Seventies, remember? (Or maybe you don't remember, but trust me on that...it was widely watched as the core rate is today, I would say.)

Now there is barely a peep about it in the press.

[Spartacus]

Re: PPI Whopper

no real US GDP growth since 1990?

http://fskrealityguide.blogspot.com/...egligible.html