What's with Bernanke jawboning the stock market upwards?

[Jim Nickerson]

Re: issue of inflation as depicted by Finster's USD chart.

Inflation has nothing to do with what you're buying.

If inflation had nothing to do with what we buy, it would not be a topic worth discussing.

My brain is in turmoil over this entire issue, because I believe everything that is believed and discussed is relative to some standard--and the issue first and foremost is what is the standard. Oil has not increased in price if measured against gold in USD. Gold has increased against USD. Conversely, it is obvious the USD has decreased in value if measured against oil or gold, but as just two examples, what has happened in whatever is the purest sense to the value of oil and gold over say the period of 2000 to now?

Finster's, FDI, is a good notion, but it too is of necessity determined relative to some unknowns, and being unknown how can the utility of the FDI be assessed?

It should be obvious in everyway possible to know I have no background in ecomomics or finance, and as such perhaps all my thinking approaches idiocy, but if one wishes to measure the relative value of a USD today, then why not determine how many of them were available on 1/1/2000 and how many of them are available now? If a zillion were in circulation back then, and 1.5Z now, would that not mean the value of the dollar has decreased by a third?

Now as I complete this, I note you have changed the part at which this was directed, but this is fine and good.

It is also fine and good that your chart is proprietary, and to me it would have been nice to note that from the outset. Perhaps at some point you will submit your work for publication in a peer review journal, so that ultimately more can possibly benefit from your insight.

[jk]

Re: What's with Bernanke jawboning the stock market upwards?

No one is asking you to accept something on nothing but faith. If you have read what I have posted so far and concluded that I don't know what I am talking about, then you are doing exactly what I would do under the same circumstances. Meanwhile, I have to weigh the potential benefit of giving away my intellectual property for free versus that of persuading you that it has merit. Particularly given that there is no guarantee that you would be persuaded even if I did disclose it, it seems like a no-brainer.

how long, and where, have you been publishing your index?
you mentioned "what if showed you an index that leads the dow by 1-2 years?" does your index lead or even coincide with any public value or index? e.g. does it lead the dollar index?

[Finster]

Re: issue of inflation as depicted by Finster's USD chart.

If inflation had nothing to do with what we buy, it would not be a topic worth discussing.

Oh come now, Jim. It is clear from the context I mean that it does not depend on the specific things we choose to buy. If you were to go to the BLS web site, for example, and look up the CPI, you will not first have to submit a questionnaire covering what you buy.

It is also fine and good that your chart is proprietary, and to me it would have been nice to note that from the outset. Perhaps at some point you will submit your work for publication in a peer review journal, so that ultimately more can possibly benefit from your insight.

I may well do that at some point. For now it is only the details of the calculation that I am loathe to publicly divulge. The result - the FDI values themselves - are posted on my website. General information regarding the philosophy, methodology and the kind of things that go into the calculation are disclosed as well. Moreover, readers can assess the general utility, if not from the "smell test", then from the way the index leads the CPI and other conventional measures of inflation.

My brain is in turmoil over this entire issue, because I believe everything that is believed and discussed is relative to some standard--and the issue first and foremost is what is the standard. Oil has not increased in price if measured against gold in USD. Gold has increased against USD. Conversely, it is obvious the USD has decreased in value if measured against oil or gold, but as just two examples, what has happened in whatever is the purest sense to the value of oil and gold over say the period of 2000 to now?

Finster's, FDI, is a good notion, but it too is of necessity determined relative to some unknowns, and being unknown how can the utility of the FDI be assessed?

As alluded to earlier, it can be compared to other inflation indices. It does not forecast inflation, strictly speaking, but due to the fact that the CPI lags inflation, it appears to. The surge in the CPI over the past year was "predicted" by the earlier run-up in inflation as registered by the FDI (the decrease in the value of the dollar). So if the FDI has validity, you can look its recent behavior and you should see a reflection of the trend in the CPI a year or so down the road. In rough terms, the CPI tracks about a four-year moving average of the FDI, i.e. it smooths and lags by roughly two years.

As for a "standard", I'd posit that the one thing that never changes in value is an hour of a man's time.

It should be obvious in everyway possible to know I have no background in ecomomics or finance, and as such perhaps all my thinking approaches idiocy, but if one wishes to measure the relative value of a USD today, then why not determine how many of them were available on 1/1/2000 and how many of them are available now? If a zillion were in circulation back then, and 1.5Z now, would that not mean the value of the dollar has decreased by a third?

Sounds to me like you have a pretty good handle on it, Jim. In broad terms, the currency derives its value from its scarcity. All else being equal, if you were to have a supply of 1.5 Z versus a supply of 1.0 Z, the value of the unit would have decreased by one third. This is the idea behind tracking money supply.

The trouble is that money supply is not so easy to nail down. Just ask somebody like Bart, who has made a specialty of divining what is going on with the money supply. Moreover, all else is not necessarily equal. More completely, inflation is an increase in the money supply relative to the available value of real stuff - for example if the money supply increased by 50% and the real value of the stuff available to be bought with money also increased by 50%, each money unit would still be capable of buying the same real value, and you’d have no diminution of the value of the currency.

This issue can be quite important, considering that the USD shares the world with many other currencies. It was crucial in 1997-1998, when several emerging markets currencies (the bhat, ringgit, ruble…) collapsed and the dollar rushed in to fill the void. This is what gave rise to the spell of deflation seen in on the chart of the FDI. Although the supply of dollars actually increased somewhat during that time frame, the amount of real goods that that supply was traded against increased faster. Although it took some time for the CPI to moderate, this was reflected in a trough in the prices of gold and some other commodities. The upshot of this is that as difficult as it may be to fully get one’s arms around the money supply, gauging the value of "real stuff" against which it is traded is more elusive yet.

[Jim Nickerson]

Re: Finster's FDI.

I do appreciate your time for your in depth reply. It is much more than I can fully comprehend without doing a lot of thinking, and as I said my brain is in turmoil from thinking about this. I will visit your website and look at what you have to share. I, for one, appreciate your comments on iTulip. For the moment I say, "Uncle."

[bart]

Re: issue of inflation as depicted by Finster's USD chart.

My brain is in turmoil over this entire issue, because I believe everything that is believed and discussed is relative to some standard--and the issue first and foremost is what is the standard. Oil has not increased in price if measured against gold in USD. Gold has increased against USD. Conversely, it is obvious the USD has decreased in value if measured against oil or gold, but as just two examples, what has happened in whatever is the purest sense to the value of oil and gold over say the period of 2000 to now?

Finster's, FDI, is a good notion, but it too is of necessity determined relative to some unknowns, and being unknown how can the utility of the FDI be assessed?

Just my $.02 here...

I too have more than a few proprietary charts, most of which are unpublished. I'm not necessarily trying to defend Finster and his FDI here, but part of the reason why I don't publish them is the time it takes to defend or explain them.

A small example is the article I wrote and posted here and elsewhere about deficits and the dollar. I very much appreciate the feedback that I've gotten here and elsewhere, and it will help a great deal if and when I publish a followup... but it is a significant issue. My public charts are usually just recaps of existing data, more for just plain showing facts and attemping to pass along items I've found useful than anything. But that deficit/dollar article sure confused some and rattled others... and also got me one or two email rants.


The FDI is far different - in my read, its an attempt to put a real standard out there against which most, if not all, other financial assets can be compared. I recall some very long threads years ago on the original DR between Finster and myself and others that were precisely about the issue of having something that is a real standard. The FDI came out of those threads that were thrashing around in all the turmoil.
Gold can be useful at times, same as a corrected CPI (which is what I use)- and the same with the "real Dow" that's on the iTulip home page, etc.

They're all attempts to judge a given asset or asset class or return with as little "noise" and vested interest issues as possible. One of the very first pages I put up on my site was about the "changing dollar", both due to inflation in the US and inflation abroad.


I guess all I'm really saying is that the FDI is literally the only attempt I've ever seen to combine many major factors and produce a real stat, which can be used to remove world inflation and allow one to directly compare any dollar valued asset or class against any other to see real net pre-tax returns over almost any period of time.

As far as it being proprietary, yes I sure fervently wish it wasn't too and your point is well taken... but Finster also does note a number of the factors that go into it on his site, and as he basically says - check it out for workability yourself.... or not.

Having been there during the initial DR threads and having a good idea of what's in it, it seemed and seems pretty sane to me - and it has a pretty decent visual correlation with much of my work... and of course, I'm never wrong... ;)

Just to be totally open here (just in case), I have no financial or other interest in the FDI, and Finster & I haven't discussed the FDI in private for at least 18 months.

[Finster]

Re: issue of inflation as depicted by Finster's USD chart.

Just my $.02 here...

I too have more than a few proprietary charts, most of which are unpublished. I'm not necessarily trying to defend Finster and his FDI here, but part of the reason why I don't publish them is the time it takes to defend or explain them...

Oy! That time factor is an issue as well. I could write a book attempting to give a full exposition of the logic behind the FDI. You undoubtedly can identify with that with all the various indicators and charts you've explored. In the end, it comes down to how useful it is to analysts and investors. Like a theory of physics, no matter how elegant or obtuse, the ultimate test is whether its predictions pan out. And that there is a pretty decent correlation between it and your work - in spite of fundamentally different approaches - gives me more confidence in both.

[Jim Nickerson]

Re: issue of inflation as depicted by Finster's USD chart.

As alluded to earlier, it can be compared to other inflation indices. It does not forecast inflation, strictly speaking, but due to the fact that the CPI lags inflation, it appears to. The surge in the CPI over the past year was "predicted" by the earlier run-up in inflation as registered by the FDI (the decrease in the value of the dollar). So if the FDI has validity, you can look its recent behavior and you should see a reflection of the trend in the CPI a year or so down the road.

I believe your chart here and on your website end in January 2006, is it possible for you to show us "its recent behavior" since we are now 7 months further down the road.

In rough terms, the CPI tracks about a four-year moving average of the FDI, i.e. it smooths and lags by roughly two years.

I cannot begin to visualize what you wrote, can you perhaps produce us a graph?

As for a "standard", I'd posit that the one thing that never changes in value is an hour of a man's time.

Every hour of one's life relatively (and "relative" is the key word in this entire discussion, I think) is a relentlessly decreasing period of time--that ends upon death, so rather than never changing, it constantly changes--second to second.

[bart]

Re: issue of inflation as depicted by Finster's USD chart.

Oy! That time factor is an issue as well. I could write a book attempting to give a full exposition of the logic behind the FDI. You undoubtedly can identify with that with all the various indicators and charts you've explored. In the end, it comes down to how useful it is to analysts and investors. Like a theory of physics, no matter how elegant or obtuse, the ultimate test is whether its predictions pan out. And that there is a pretty decent correlation between it and your work - in spite of fundamentally different approaches - gives me more confidence in both.

Very much so - an explanation of why I added repos and detrended program trading data etc. into, for example, my Dow prediction chart also must include a huge amount of background and economic data in order to do a really good job, and quite frankly I'd rather spend time in other areas.

I must admit, it still worries me more than a little that our respective work tracks as much as it does... I'm concerned about your mental faculties... ;)

[Finster]

Re: issue of inflation as depicted by Finster's USD chart.

Every hour of one's life relatively (and "relative" is the key word in this entire discussion, I think) is a relentlessly decreasing period of time--that ends upon death, so rather than never changing, it constantly changes--second to second.

Of course, I was referring to aggregates. In general, it’s pretty safe to say an hour of a man’s time in the age of Shakespeare was worth just as much to him as an hour of one in the age of Sting.

I believe your chart here and on your website end in January 2006, is it possible for you to show us "its recent behavior" since we are now 7 months further down the road.

I cannot begin to visualize what you wrote, can you perhaps produce us a graph?

It is not quite so easy to illustrate either, especially the multiple subsidiary points discussed. What I’ve done here is prepare three charts. The first shows the FDI for the past 32 years, along with the reciprocal of the CPI for comparison. The latter simply inverts the CPI to, like the FDI, express the dollar in terms of stuff rather than the other way around. Although there are similarities, there are also two major differences. Changes in the trend of the CPI tend to lag those of the FDI, and the overall slope of the FDI is steeper. The first reflects the lagging and smoothing effect and the other a persistent tendency to understate the real rate of inflation. Logs of the raw values are used where appropriate.

The second chart brings it out more starkly by plotting the first derivative of the first chart (along with some smoothing). In other words, here we see not the level of each of the above, but the rate of change, or slope. Essentially it is the negative of the rate of inflation as registered by each index. Here, we see more clearly the tendency of the CPI to lag corresponding changes in the FDI. In addition, the CPI is generally displaced vertically upward from the FDI, which represents its persistent understatement of inflation.

The third chart is simply the FDI versus a four year moving average of the same, to illustrate the lagging and smoothing effect of taking a moving average. The average lags the original by two years, in addition to smoothing out the high frequency changes.







----------
Charts edited 2006 0818 1:45 PM EST

[Jim Nickerson]

Re: What's with Bernanke jawboning the stock market upwards?

Finster,

I do appreciate again your time to work up these charts. Now all I have to do is bring myself to comprehend them. At least for myself, I believe I am beginning to accept your arguments about the value of your Finster Dollar Index, it appears that some of your data may only be available at month's-end. My initial thought is that, if you are willing to do the work and share it, that something on the forum might be devoted to your perhaps posting an updated chart every night(just joking), realistically if you think it is realistic, middle and end of months.

I guess at the moment, if I am understanding the FDI correctly, it points out periods of deflation well, and deflation concerns me a lot because I understand it poorly, or I do not have a tool by which I personally can readily identify it. This is no doubt more my own inadequacy than anything else, I am sure others can suggest indicators that likely point it out well. The CPI and PPI seem suboptimal because they only are published monthly.

PS. and perhaps you could get the dates down at the bottom (smiley face), and for the benefit of everyone note the left axis as USD. Am I asking too much, I truly hope not.

[Jim Nickerson]

Re: issue of inflation as depicted by Finster's USD chart.

The second chart brings it out more starkly by plotting the first derivative of the first chart (along with some smoothing). In other words, here we see not the level of each of the above, but the rate of change, or slope. Essentially it is the negative of the rate of inflation as registered by each index. Here, we see more clearly the tendency of the CPI to lag corresponding changes in the FDI. In addition, the CPI is generally displaced vertically upward from the FDI, which represents its persistent understatement of inflation.

Finster,

Is it correct that when this, rate of change chart I believe it is, goes up, then deflation is happening? If that is correct, it seems clear that the FDI reacts a lot faster than the CPI. So if I am correct (and if I am not please correct me) since the last bottom of the FDI (sometime after 9/04) rather than inflation, we are already in a period of deflation?

Please know I realize I may be unrelenting in making requests of you, but could you put whatever you think is the most representative equity index into these graphs and note it on the right y-axis, Finster, I would personally love that, and I expect others would grow to it also.

[Finster]

Re: What's with Bernanke jawboning the stock market upwards?

Finster,

I do appreciate again your time to work up these charts. Now all I have to do is bring myself to comprehend them. At least for myself, I believe I am beginning to accept your arguments about the value of your Finster Dollar Index, it appears that some of your data may only be available at month's-end. My initial thought is that, if you are willing to do the work and share it, that something on the forum might be devoted to your perhaps posting an updated chart every night(just joking), realistically if you think it is realistic, middle and end of months.

Appreciate the kind words, Jim. These charts and series can be formatted for any time interval, but the underlying resolution is weekly. In the charts you see here, the interval is in sixteenths of a year. When I get the work on my site done, figure there will be weekly updates, and can easily cross post them here if there is sufficient interest.

I guess at the moment, if I am understanding the FDI correctly, it points out periods of deflation well, and deflation concerns me a lot because I understand it poorly, or I do not have a tool by which I personally can readily identify it. This is no doubt more my own inadequacy than anything else, I am sure others can suggest indicators that likely point it out well. The CPI and PPI seem suboptimal because they only are published monthly.

The problems with the CPI and other government ecostats are so rife Bart and I could probably put out a monthly magazine devoted to just that one subject. It sounds like you do understand the deflation correctly. Basically whenever the FDI is rising (which is rare for any length of time), you could call it deflation. On the rate-of-change charts, it’s just whenever the graph goes positive.

PS. and perhaps you could get the dates down at the bottom (smiley face), and for the benefit of everyone note the left axis as USD. Am I asking too much, I truly hope not.

I’m uploading the charts again with the dates at the bottom. This way rather than repeat posting them they’ll be in the prior post. The vertical axis, however, is not USD, but rather a logarithm. In the first and third cases, of the ratio between the plotted value of the USD and that at the beginning of 2000, in the second, of the annualized rate of change. I can plot the charts without the logs, but they still would be dimensionless ratios rather than dollar values. This is nothing unusual, for example, the CPI itself is just a ratio.

Finster,

Is it correct that when this, rate of change chart I believe it is, goes up, then deflation is happening? If that is correct, it seems clear that the FDI reacts a lot faster than the CPI.

That's part of the idea. The FDI both reacts faster to changes in inflation and bypasses the understatement bias in the CPI. Deflation would be signified on the first chart by an upsloping line, and on the second (rate of change) chart by going above the zero line.

[Jim Nickerson]

Re: What's with Bernanke jawboning the stock market upwards?

Finster,

I do appreciate your work and your willingness to discuss it at length. So much to assimilate for me. So right now, if you will, back to the middle chart--roc chart--that the FDI is moving up since 9/04, is it correct to label that move could, would, should be noted as disinflation? What I have been trying to do for my own benefit is to understand these things with reference to EJ's Ka-Poom theory, and your work seems at the moment to be aiding my getting closer to that.

And yes, for them to be on your site updated weekly to me seems all I could ask. Thanks.

[Finster]

Re: What's with Bernanke jawboning the stock market upwards?

Finster,

I do appreciate your work and your willingness to discuss it at length. So much to assimilate for me. So right now, if you will, back to the middle chart--roc chart--that the FDI is moving up since 9/04, is it correct to label that move could, would, should be noted as disinflation? What I have been trying to do for my own benefit is to understand these things with reference to EJ's Ka-Poom theory, and your work seems at the moment to be aiding my getting closer to that.

And yes, for them to be on your site updated weekly to me seems all I could ask. Thanks.

Sounds to me like you understand well, Jim. The term "disinflation" is usually applied to periods of positive but falling inflation, which on that chart would be any period like that one in which the line is negative but rising. I realize it's a little confusing having the charts 'upside down' so as to show inflation as negative, but a key point is to emphasize that inflation really represents a currency that is falling in value, not merely that things are getting more expensive.

[Jim Nickerson]

Re: What's with Bernanke jawboning the stock market upwards?

I hope you will put all three of your charts on your website, at the moment the ROC chart seems most timely, or certainly the one that can give the most information about what seems to be occurring most recently. For what it is worth, I think the way you have the lines moving is best--as you no doubt did when you chose the axis orientation. Down is bad for the dollar, and thanks for clarifing to me--though it was plain in your earlier posts--that the left scale is log changes and not the value of the USD.