What's with Bernanke jawboning the stock market upwards?

[blazespinnaker]

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

Well we could use a real currency, but at a fixed time. At least that's what I do with the FDI. The base unit is Y2KUSD - the value of the USD dollar at the beginning of the year 2000. What you see below is what you get if you plot the current value of the USD against the Y2KUSD (log format).

Yeah, but what measure of inflation are you using?

[Finster]

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

Finster,

Once you explain this to me, I expect I will regret bringing up the question, but I do not understand how you derived the chart? It seems to me a y2kUSD is still a USD worth 100 cents, unless you measure the dollar against some standard then, and the same standard now. If FDI stands for "foreign direct investment" I am not smart enough to understand how that results in the image your chart displays.

Can you broaden my education? And thank you.

Yeah, but what measure of inflation are you using?

Bart has answered the question well. But we’ll proceed with the ‘regret’ factor anyway…

Probably the simplest way to understand it is to start with a familiar index like the CPI. There are two major differences, and I’ll describe them separately.

The CPI of course plots prices of things in terms of dollars, so if you were look at a chart of the CPI, you’d see a rising trend that reflects the aggregate increase of prices as inflation erodes the value of the dollar. If deflation were to occur, the line would slope downward. The FDI reverses this relationship, so that rather than plotting things in terms of dollars, it plots dollars in terms of things. This is not completely arbitrary. If you look at the message connoted by the CPI, the initial impression you get is that things are getting more expensive. It puts the focus on the things. I invert that to emphasize the point that price inflation is really a decline in the value of the currency. It is not the things that are rising in value, but the dollars that are falling.

The other major difference is that the CPI is a relatively narrow gauge in that it only looks at consumer prices. But consumer items comprise just one segment of things that are exchanged for dollars in the economy. Financial securities such as stocks certainly comprise another segment altogether. Real estate is another. The US dollar is traded globally and only a fraction of the transactions it is involved in daily represent US domestic consumption. What’s more many of these transaction prices respond much more quickly than consumer prices to changes in the money supply. As a result, just looking at things like the CPI omits huge numbers of transactions and gives you a badly lagging impression of inflation. The FDI considers a much broader array of prices, including those that respond quickly to changes in the money supply and market value of the dollar.

Finally, since it specifies the value of the dollar in terms of things, and those things can be anything bought with or sold for dollars, you need some standard unit. Since it is changes in the value of the dollar that we are most interested in, it really doesn’t matter what you choose for that unit, the changes will always be the same. I arbitrarily chose the value of the dollar as of the beginning of the year 2000 as the unit. So the current value of the FDI of around 0.76 tells us that the dollar has lost about 24% of its value to inflation since that time. We can also divide the current value by the year ago value and see that the dollar has lost about 8% of its value in the past year. The same can be done with any time frame.

[jk]

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

Bart has answered the question well. But we’ll proceed with the ‘regret’ factor anyway…

Probably the simplest way to understand it is to start with a familiar index like the CPI. There are two major differences, and I’ll describe them separately.

The CPI of course plots prices of things in terms of dollars, so if you were look at a chart of the CPI, you’d see a rising trend that reflects the aggregate increase of prices as inflation erodes the value of the dollar. If deflation were to occur, the line would slope downward. The FDI reverses this relationship, so that rather than plotting things in terms of dollars, it plots dollars in terms of things. This is not completely arbitrary. If you look at the message connoted by the CPI, the initial impression you get is that things are getting more expensive. It puts the focus on the things. I invert that to emphasize the point that price inflation is really a decline in the value of the currency. It is not the things that are rising in value, but the dollars that are falling.

The other major difference is that the CPI is a relatively narrow gauge in that it only looks at consumer prices. But consumer items comprise just one segment of things that are exchanged for dollars in the economy. Financial securities such as stocks certainly comprise another segment altogether. Real estate is another. The US dollar is traded globally and only a fraction of the transactions it is involved in daily represent US domestic consumption. What’s more many of these transaction prices respond much more quickly than consumer prices to changes in the money supply. As a result, just looking at things like the CPI omits huge numbers of transactions and gives you a badly lagging impression of inflation. The FDI considers a much broader array of prices, including those that respond quickly to changes in the money supply and market value of the dollar.

Finally, since it specifies the value of the dollar in terms of things, and those things can be anything bought with or sold for dollars, you need some standard unit. Since it is changes in the value of the dollar that we are most interested in, it really doesn’t matter what you choose for that unit, the changes will always be the same. I arbitrarily chose the value of the dollar as of the beginning of the year 2000 as the unit. So the current value of the FDI of around 0.76 tells us that the dollar has lost about 24% of its value to inflation since that time. We can also divide the current value by the year ago value and see that the dollar has lost about 8% of its value in the past year. The same can be done with any time frame.

finster, the dollar has lost 24% of its value only in terms of the particular things you have chosen as its measure. it would help if you specified what thing[s] you have in mind. you have to convince us that your things provide a better measure of value than either the official cpi [shouldn't be too hard] or john williams' published corrected cpi at shadowstats.com.

[Jim Nickerson]

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

Bart has answered the question well. But we’ll proceed with the ‘regret’ factor anyway…

My notion of regret was that your answer would point out something to me that should have been patently obvious, but so far you have not done that.

Finally, since it specifies the value of the dollar in terms of things, and those things can be anything bought with or sold for dollars, you need some standard unit. Since it is changes in the value of the dollar that we are most interested in, it really doesn’t matter what you choose for that unit, the changes will always be the same. I arbitrarily chose the value of the dollar as of the beginning of the year 2000 as the unit. So the current value of the FDI of around 0.76 tells us that the dollar has lost about 24% of its value to inflation since that time. We can also divide the current value by the year ago value and see that the dollar has lost about 8% of its value in the past year. The same can be done with any time frame.

A gallon of milk 2, 3, or 4 years ago cost me $2.00 and costs about the same today.

Gasoline 1.18 in 1/00, 1.22 in 1/01, .93 in 1/02, 1.24 in 1/03, 1.33 in 1/04, 2.23 in 1/05, and 2.87 two days ago.

If these items were plotted, the graphs would be vastly different.

So the same question still is what is the standard against which your graph was constructed?

[Finster]

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

My notion of regret was that your answer would point out something to me that should have been patently obvious, but so far you have not done that.






A gallon of milk 2, 3, or 4 years ago cost me $2.00 and costs about the same today.

Gasoline 1.18 in 1/00, 1.22 in 1/01, .93 in 1/02, 1.24 in 1/03, 1.33 in 1/04, 2.23 in 1/05, and 2.87 two days ago.

If these items were plotted, the graphs would be vastly different.

So the same question still is what is the standard against which your graph was constructed?

It's a composite of many things. Just as with the CPI, except it goes further by including things like stocks and real estate as well that are not considered in the CPI.

[jk]

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

It's a composite of many things. Just as with the CPI, except it goes further by including things like stocks and real estate as well that are not considered in the CPI.

but it's a secret, so you can't tell us exactly how it's constituted!

[Finster]

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

finster, the dollar has lost 24% of its value only in terms of the particular things you have chosen as its measure. it would help if you specified what thing[s] you have in mind. you have to convince us that your things provide a better measure of value than either the official cpi [shouldn't be too hard] or john williams' published corrected cpi at shadowstats.com.

Are you saying you need to know the exact formula to allow it any credibility? Is this the same standard you apply to other financial indices, whether the CPI, the S&P 500 or the LBA?

First consider what I have already stated. It is like the CPI, except (in addition to being inverted) factors in things besides consumer prices alone. Basically everything the dollar is used for in global commerce. If you are satisfied that consumer prices only should be considered in assessing the value of the dollar and rate of inflation, then there is no need to look further. You already have everything you want in the official or William's versions of the CPI.

[Jim Nickerson]

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

It's a composite of many things. Just as with the CPI, except it goes further by including things like stocks and real estate as well that are not considered in the CPI.

Finster,

I assume as Bart wrote that "FDI" in fact is the abbreviation for "Finster Dollar Index." It that correct?

It seems you have put forth your chart suggesting to us that it depicts what the USD as done since Y2K. In order for anyone to accept your data, isn't it appropriate that you define for us the basis of the items from which the USD is shown to have declined? Otherwise the very nice graph is senseless, at least to me if no one else.

[Finster]

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

Finster,

I assume as Bart wrote that "FDI" in fact is the abbreviation for "Finster Dollar Index." It that correct?

It seems you have put forth your chart suggesting to us that it depicts what the USD as done since Y2K. In order for anyone to accept your data, isn't it appropriate that you define for us the basis of the items from which the USD is shown to have declined? Otherwise the very nice graph is senseless, at least to me if no one else.

I have already stated it reflects stock and real estate prices in addition to consumer prices. Have you ever looked at a chart of the USDX? Do you place any creedence in it? Do you know exactly how it is calculated?

I could accept your critique of senselessness, however, if you had nothing else to relate it to. What if I could show you a chart that, for example, if placed alongside the Dow Jones Industrials, tended to lead the Dow by a year or two? Would you have to know how it is constructed to assess whether it had any value?

Let me suggest something that may be more meaningful. Consider that I have noted that the CPI lags inflation. If the FDI does not lag (or at least lags a lot less), then with respect to the CPI, the FDI ought to be a leading indicator. We should be able to get at least a qualitative forecast of the CPI from the FDI.

So I would suggest carefully looking at the chart and seeing for yourself if that appears to be the case. There are several features I could call your attention to. Look, for example, at how the plot levels off from about 1997 to 2002. Recall that increases in the CPI reached about zero late in that period. Then note how inflation sharply accelerated after about the middle of 2002 per the FDI chart (the steep decline), but has only in the past few months become a major concern for the CPI.

[jk]

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

Are you saying you need to know the exact formula to allow it any credibility? Is this the same standard you apply to other financial indices, whether the CPI, the S&P 500 or the LBA?

yes. i am saying i need to know the exact formula in order to allow it any credibility.

yes, this is the same standard i apply to "other financial indices." in the case of any publicly disseminated official index, i know i can look it up if i so choose. articles are published in learned journals, newspapers, newsletters and on websites critiquing its composition. i know a lot of people have thought about it, and i can come to some conclusions of my own as to its credibility in order to know how to use the information in my thinking.

if you direct me to comparable public analyses, critiques and discussions of your index, so that i can decide whether it is something worth paying attention to, that might suffice. if you wish instead that i merely take on faith the utility of your secret index, then no, i won't.

if i'm not going to believe on faith what ben bernanke, gary shilling, robert shiller, john hussman, henry paulsen, richard russell, the gavekal group or anyone else says, but insist on looking at their data and their arguments, why on earth should i accept on faith what you say?

[jk]

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

What if I could show you a chart that, for example, if placed alongside the Dow Jones Industrials, tended to lead the Dow by a year or two? Would you have to know how it is constructed to assess whether it had any value?

2 answers- 1. yes, i'd have to know how it was calculated to see if it made sense in theory. or 2. no, i could live with not knowing how it was calculated if it had a long history of being publicly available, so i know it was not backfitted.

[bart]

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

Finster,

I assume as Bart wrote that "FDI" in fact is the abbreviation for "Finster Dollar Index." It that correct?

My apologies to Finster - I know that's what he used to call it but since its his chart and formula, I defer to whatever he wants to call it... or not.

[Jim Nickerson]

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

http://www.investorsinsight.com/otb_...?EditionID=365

The above reference is to an artice by Louis-Vincent Gave at John Mauldin's site date 8/7/06.

To conclude, we would like to leave the reader with the following points:

• Inflation, at this stage, does not seem to us to be a viable threat. The current increase in prices we are witnessing reflects the past years' easy monetary policies and increases in China's export prices. These factors are now behind us. In front of us, we have the fact that China is once again exporting deflation (a fact which might help explain Japan's weak equity market performance) and the tighter monetary policies of recent quarters.
• In a tighter liquidity environment such as the one we are now facing, owning the guy that says "I'll take all the profits" makes a lot more sense to us than owning the guy that says "I'll take all the jobs".

To me part of the interest in this article is the point that inflation is dependent upon what one is buying.

[Finster]

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

http://www.investorsinsight.com/otb_...?EditionID=365

The above reference is to an artice by Louis-Vincent Gave at John Mauldin's site date 8/7/06.

To me part of the interest in this article is the point that inflation is dependent upon what one is buying.

In the aggregate, inflation is an objective reality not peculiar to the observer. It originates with creation of money and credit beyond the available real stuff that can be bought with it. The trouble is that the increase in various prices due to inflation do not occur uniformly throughout the system. The first prices to rise are those in closest proximity to the flow of newly created money, and the rest follow.

For example, house prices were among the first affected by the latest wave of inflation. The Fed lowered interest rates, driving up the size of mortgage that a fixed monthly payment could buy. House prices then rose. People then found they could get cash from the concomitant nominal increase in home equity. This cash then was used to buy stuff, and without an corresponding increase in domestic production, that meant from overseas; places like China. China in turn used all those billions of fresh US cash to buy things to make these products and improve its infrastructure. This in turn drove up the prices of commodities like oil, copper, etceteras.

You can therefore trace the flow of all the newly printed money from the US banking system to the homeowner to China to OPEC, and watch the prices of things move up along the chain like a snake that has swallowed a pig. Then the increase in prices of commodities ultimately drives up consumer prices, as manufacturers eventually pass along their material costs in the form of higher finished product prices. Since consumer prices sit near the end of the chain, indices like the CPI are among the last to reflect the inflation.

[Finster]

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

yes. i am saying i need to know the exact formula in order to allow it any credibility.

yes, this is the same standard i apply to "other financial indices." in the case of any publicly disseminated official index, i know i can look it up if i so choose. articles are published in learned journals, newspapers, newsletters and on websites critiquing its composition. i know a lot of people have thought about it, and i can come to some conclusions of my own as to its credibility in order to know how to use the information in my thinking.

if you direct me to comparable public analyses, critiques and discussions of your index, so that i can decide whether it is something worth paying attention to, that might suffice. if you wish instead that i merely take on faith the utility of your secret index, then no, i won't.

if i'm not going to believe on faith what ben bernanke, gary shilling, robert shiller, john hussman, henry paulsen, richard russell, the gavekal group or anyone else says, but insist on looking at their data and their arguments, why on earth should i accept on faith what you say?

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.