Credit inflation, Deflation: Prechter Interview

[Finster]

Re: Credit inflation, Deflation: Prechter Interview

Oh the temptations to comments on the curves and aesthetics of certain "charts"... ;)

By the way, damn nice job on explaining your approach and the basics of the FDI, etc. and avoiding using the dollar as a benchmark, etc.

Oh, now you've done it. You went and had to be nice. What's a poor finster to do?

Now I'm gonna have to go kick the dog or something ...



;)

[Jim Nickerson]

Re: Credit inflation, Deflation: Prechter Interview

Jim, as Sean suggested, we should probably have a thread just for this issue, and can address these points more fully there. For now, let me just clarify that the term asset class is not totally uniformly used in finance. When I use the term, it’s generally in a very broad sense, such that equities, bonds (long and short term), cash, commodities, and real estate are pretty much all inclusive. Equities, for example, would cut across all capitalizations and geographies. You could even fold real estate into a more general "equity" class. Cash could even be considered the limiting case of a zero-maturity bond. Or going the other way, you might consider commodity futures separately from commodities themselves. But all told, there would be perhaps only three to five fundamentally different investable asset classes. Personally, for asset allocation purposes, I use three major classes and further subdivide those into fourteen subclasses. But the important point is not the exact classification you use, but the concept of dynamic asset allocation and the opposing principles of concentration and diversification, and the maximization of return and minimization of risk. Again, we’ll hopefully discuss this more fully in an upcoming thread on the topic.

Good, Finster, after reading a comment of yours above to Sean, I thought you might not get around to making another response for a while--like weeks.

I just picked up another of your pearls, or gained better understanding of it, maybe. When I have read "dynamic asset allocation" my mind has turned to the notion of other asset classes as the thing into which would would change the allocation, but I think you largely are referring to the ongoing reallocation of your, for example, present positions in the model portfolio as they move up or down and thus break above or below their respective percentage of allocation. Is that right for the major meaning as you use "dynamic asset allocation?" Probably all this would not be a question were I to read Browne's, but I probably will not get around to it, not meaning that others should in any way follow my poor example.

Of course, all this raises some more questions, but I can contain them until your time and thought permit you to open a new thread. Perhaps if my questions "cook" a while, they will be better when asked.

Earlier today, I thumbed through all the threads in the General Discussion Fora and this one then lacked just a few viewers in order to exceed the previously most viewed forum on the boards. Now I do not know how many of them actually read the whole thread, but if they did, I think they got their money's worth--and learned that money as we know it ain't worth much, but this thread has been worth a lot for me.

[jk]

Re: Credit inflation, Deflation: Prechter Interview

i've been away for a few days, but this thread has done a magnificent job of soldiering on without me.

first, finster, your post #134 was really terrific. it made me think a lot about my own investing metrics. for about 5 years i've been keeping track of my investments weekly. i track them in nominal dollars, oz of gold, and nominal dollars multiplied by the dollar index - which shows the value if i lived my life vaguely distributed over the globe. but i have only graphed the nominal dollar value. i haven't taken the other metrics seriously enough to put them in the graph! your post made me realize that this a tremendous oversight on my part. i had been paying mere lip-service to my knowledge that the dollar's value is declining. so, thank you.

i just went back and inserted those other data series into my total value graph. makes a little more humble about my returns.

this also makes me more interested in your fdi. just visited your web page to learn more about it, but all i find is: "The FDI therefore is designed to be a broad measure of the value of the US dollar somewhat analogous to a reciprocal of the CPI in that it tends to capture long term changes in the value of the dollar against real things, but takes into account the full scope of global commerce. It is analogous to the US Dollar index in that it provides a series explicit in the value of the dollar, but measures it against real goods, services, capital, and labor, rather than currencies which themselves fluctuate and decline in value. "

the bogus official cpi has made it clear how important it is to know how an index is constructed. so i wonder if you could let us look under the hood of the fdi? i am wondering if i should incorporate it into my calculations, but don't understand it enough to feel comfortable doing so.

i also want to second sean o's suggestion that you start a new thread on dynamic asset allocation. as i have indicated in other posts, i too was heavily influenced by reading one of harry browne's books - "inflation proofing your investments," which i read around 1981. i believe that i've read since that asset allocation accounts for about 80% of returns. [i.e., e.g. choosing to be in stocks provides 80% of your return, as opposed to choosing specific stocks, which provides only 20%.]

although i think in terms of asset categories [i use 14 categories], i don't have a formal model for how i decide to dynamically alter my weightings. i establish target weights based on my sense of the probabilities of deflation, seious inflation with growth, stagflation, and prosperous growth with mild inflation. and i slowly alter those weights as my readings influence my opinion. but of course that also makes me subject to emotional swings based on short term market action. i try to be vigilant for such subjective reactions, but..... i tend to do scenario analysis, very much in the mold of browne's book.

so i am also interested in learning about your allocation model. i very much question your current allocation to equities, both domestic and global, but i am curious about how you arrive at those allocation, both to total equity and domestic v. foreign.

the other issue that bears discussion is rebalancing: what schedule or what changes in asset values triggers rebalancing. i rebalance from time to time, rarely really, but on no fixed basis. again, i subjectively choose to do so from time to time, and have no formal triggers. again, i am aware of the dangers of such a setup.

[Finster]

Re: Credit inflation, Deflation: Prechter Interview

Looks like there is a little too much momentum on asset allocation and dollar variability issues to continue to wait before taking Sean's suggestion and giving them a proper home in a new thread. I'll take a couple of shortcuts by borrowing from some of my earlier posts, but hopefully later when more time is available we can fill in any gaps.

[Jim Nickerson]

Re: Credit inflation, Deflation: R. Russell comments 11/17/06

Richard Russell 11/17/06

"Today, Dec. oil slipped below 56 dollars a barrel to a 12-month low. Dr. Copper has now dropped below its 200-day moving average. Gold is below 620. Home prices are weak and new starts have collapsed -- and yet, assorted Fed governors are still warning about inflation. Is the Fed on the wrong side of the fence again?"

Ironically, now that the Dems control both houses of Congress, they will try to cut the various US deficits. But cutting the deficits, particularly the US budget deficit, is deflationary. And what if US consumers now decide to pull in their spending and maybe, just maybe, decide to pay off some of their massive debts? What if America's consumers decide to -- what's that word? Oh yes -- save? A move by US consumers to pay off debt and save would be highly deflationary.

Below we see the daily CRB Commodity Index. [not shown here]The chart is self-explanatory. The CRB is breaking down. I hesitate to say it, but all this appears deflationary. Remember, deflation is Bernanke's worst nightmare. Will he let it happen? Can he stop it from happening?

Wait, what's Dr. Copper got to say about the situation? The daily chart of copper is shown below.[not shown here] Looks to me as though copper is deflating too. And it's always dangerous to argue with Dr. Copper."

Stockcharts.com symbol for CRB =$CRB, and for copper $COPPER.

If someone wanted to argue Russell is old, I think he is 83, no one could argue with that unless one is a bit older. If one wanted to argue that he apparently has been out in "left-field" by not having, to my knowledge, particiapated in the run-up off the 10/02 lows, I could not argue with that either. I credit Russell with enough savvy, because I choose, to look at something and state a pretty good opinion, and in the underlined segments above he is to me raising a real question about deflation. The most important potential question raised if deflation were to seriously set in: Can Benanke necessarily stop it from happening?

I've read already, I believe, why deflation won't happen. Could that reasoning be faulty?

[Jim Nickerson]

Re: Credit inflation, Deflation: Gary Schilling.

I just put up a link http://www.itulip.com/forums/showthr...=4620#post4620 in the last post on the Housing forum, in which Schilling also sees deflation in our futures. What little I know, which is damned near nothing, discourages me from discounting Schilling and Russell's opinions.

Some of you "heavy-weights" jump in and please tell me where these guys must be smoking dope.

[jk]

Re: Credit inflation, Deflation: Gary Schilling.

I just put up a link http://www.itulip.com/forums/showthr...=4620#post4620 in the last post on the Housing forum, in which Schilling also sees deflation in our futures. What little I know, which is damned near nothing, discourages me from discounting Schilling and Russell's opinions.

Some of you "heavy-weights" jump in and please tell me where these guys must be smoking dope.

as a literal heavy-weight, in spite of all my meagre efforts at dieting, i'll weigh in here.

all these signs of deflation are part of the "ka." the theory kicking around here is that once the ka has gone far enough, the fed will panic and drop rates back to 1%. the schilling piece you reference also predicts that. the issue is whether the fed can keep "it" [the japanese disease, as referenced in the famous helicopter speech] from happening here.

btw, i don't think russell is saying the same thing as schilling. russell is seeing signs of deflation NOW. he makes no long term prediction, implying only that we are headed in a deflationary direction at the moment. schilling, on the other hand, is saying that we will continue in the deflationary direction, go through a period of the "bad deflation" of insufficient demand, on the way to the valhalla of the "good deflation" of rising productivity and supply.

so the real question is whether the fed can generate inflation if it is sufficiently resolved to do so. schilling implies no, but doesn't explicitly show why not. he talks of long rates dropping to 3%. i don't know about you, but if that happens i'm going to be refinancing my mortgage- currently at 4.875%. me and many millions of other people. [my ability to do so, of course, is predicated on the idea that the value of the collateral, my house, will not drop below the amount of the loan i want to refinance. i think i'll be ok on that score, but i'm not 100% positive.] while many will be in bankruptcy and the indentured servitude embodied in our recently revised bankruptcy law, many others will be freeing up money via lowered mortgage payments and cheaply financed equity loans.

bernanke has made clear that the fed will find ways to monetize any and every asset should that become necessary. so, the question is: will it move quickly and vigorously enough to prevent a deflationary death spiral, attempting to avoid the "bad deflation" that schilling foresees? [for a long time, schilling only foresaw a transition to "good deflation." in the last year or so, however, his pieces have raised the likelihood of a period of "bad deflation" first.]

the betting around here is that the fed will indeed move quickly enough, postponing the bad recession/depression as much as it can, at the cost of escalating inflation. [that cost will be obscured as much as statistical manipulation will allow: i.e. a lot.] ej, for one, has stated unequivocally his belief that there will be no deflation in our immediate future. i am less than fully convinced of this. i think that more inflation and no deflation is the more likely outcome over the next 4-8 years, but there is a non-zero probability of deflation ahead.

[Finster]

Re: Credit inflation, Deflation: Gary Schilling.

I just put up a link http://www.itulip.com/forums/showthr...=4620#post4620 in the last post on the Housing forum, in which Schilling also sees deflation in our futures. What little I know, which is damned near nothing, discourages me from discounting Schilling and Russell's opinions.

Some of you "heavy-weights" jump in and please tell me where these guys must be smoking dope.

Keep firmly in mind those multiple meanings of the term deflation we discussed in reference to the Shedlock comments! Be sure you understand which meaning(s) Schilling and Russell intend.

[Sapiens]

Re: Credit inflation, Deflation: Prechter Interview

I've deleted my original message here. I wrote it out of frustration. It appears to me that the liars and plagiarists are starting to get the upper hand again. Many, thoough not all, make their money off selling products that may not be good for iTulip readers, and there is nothing more galling than to hear these guys take ideas developed five, six or seven years ago, haul them out as new and their own, and use them to sell garbage. But I received a note this AM from one of our regulars, a man I hold in especially high regard, and my faith in the good sense of the iTulip community is restored, that you all can tell the difference.

It gives me an idea, though, for a tool that will be useful to iTulip readers, a chart of who thinks what and when, so we can track changes over time. For example, in year X, Prechter predcits deflation, Hussman inflation, and so on. Not for the purpose of keeping score, but to guage changes in sentiment of "experts" over time, a useful tool for trading.

I know what you mean, yet getting credit for your original ideas will always be up to other people. I know it takes lot of work, i.e. reading, thinking, comtemplating to come up with logical conclusions, yet most individuals are not happy until others acknowledge the fact it was him/her that thought about the idea.

I got over that, now I just count the digits at the balance of my bank account to verify that I am the man! LOL.

Thanks,

Don't despair, true masters will always give credit to those that came up with the truth, even though the masses will never get to know who it was the discoverer.

-Sapiens

[bart]

Re: Credit inflation, Deflation: Prechter Interview

On the general subject of credit and inflation, here's a few new charts I created yesterday.

There's a short and long term version of each, and the only difference between the two sets is that one is M3 (a measure of total money in bank accounts, CDs, etc.) plus credit and the other is M3 plus debt.

There's no indication yet that credit creation has really broken down... although that doesn't mean it couldn't happen soon too.

[jk]

the necessity of inflation

http://www.minyanville.com/articles/index.php?a=11638

Consider this. If one took the Net Present Value of out budget deficit looking out 75 years (thanks to our friends at Ned Davis Research for the data), including future costs of Social Security, Medicare, etc., it would total $50 trillion. Yes, trillion. That is in addition to the fact that total credit market debt resides around 320% of GDP and the typical household has debt up to its eyeballs. So far, we have seen a bubble in stocks, a bubble in commodities and a bubble (now busted) in real estate. So you see, we need inflation to be sure that the right side of the balance sheet (assets) doesn’t overtake the left side (liabilities). It is why I believe the Fed talks hawkish (tough on inflation) and acts dovish (stoking asset inflation). They do this because they must. It maintains their global credibility, and hence keeps the dollar from collapsing (an inevitable outcome I am afraid).Why do they say that they are acting dovish? It is simple—the money supply continues to grow at an absurd 10% annualized rate—hardly tight monetary policy. All in a desire to grow asset prices. We need them.

[Jim Nickerson]

Re: Credit inflation, Deflation: Prechter Interview

Deflation.

blazespinnaker in new thread turned up an article on very rich hedge fund manager, Thiel, who is betting on deflation, rise in the bonar vs. the Euro and continued rise in oil prices related to realization of peak oil.

From all I have read, in summary, deflation in any serious sense in not on most people's radar.

Thiel's reference: http://www.bloomberg.com/apps/news?p...TKA&refer=home

blazespinnaker's thread: http://www.itulip.com/forums/showthr...=5058#post5058

[Jim Nickerson]

Re: Credit inflation, Deflation: Prechter Interview

Interview with Paul Kasiel by Mike Shedlock 12/11/06

http://www.safehaven.com/article-6488.htm

This article is worth reading.

A Kasriel comment, "If the current housing recession were to turn into a housing depression, leading to massive mortgage defaults, it could end. Alternatively, if there were a run on the dollar in the foreign exchange market, price inflation could spike up and the Fed would have no choice but to raise interest rates aggressively. Given the record leverage in the U.S. economy, the rise in interest rates would prompt large scale bankruptcies. These are the two "checkmate" scenarios that come to mind."

Shedlock concludes,

"Well I hope that puts to bed two ideas

• That it is impossible or nearly impossible for the US to suffer Japanese style deflation
• That slashing interest rates to 1% will matter one iota if it happens.

It should also put to bed (but probably won't) the distinction between inflation (a monetary event) and prices."

[Finster]

Re: Credit inflation, Deflation: Prechter Interview

...

There's no indication yet that credit creation has really broken down... although that doesn't mean it couldn't happen soon too.

I couldn't tune in your charts (more server problems?), but I'm not sure what you're driving at with the comment about credit creation "breaking down". The terminology connotes that you'd view a slowdown in credit creation as a negative.

Quite the contrary. In a real economy, Borrower B acquires credit from Lender A. There is no net credit created. Borrower B's credit is Lender A's debit. When, due to the fraudulent machinations of central banks, Borrower B acquires credit without any corresponding Lender A incuring a debit, we have "credit creation". AKA inflation.

Hence, any "breakdown" in credit creation is not something to be feared or rued, but a positive step in the right direction.

[bart]

Re: Credit inflation, Deflation: Prechter Interview

I couldn't tune in your charts (more server problems?), but I'm not sure what you're driving at with the comment about credit creation "breaking down". The terminology connotes that you'd view a slowdown in credit creation as a negative.

Quite the contrary. In a real economy, Borrower B acquires credit from Lender A. There is no net credit created. Borrower B's credit is Lender A's debit. When, due to the fraudulent machinations of central banks, Borrower B acquires credit without any corresponding Lender A incuring a debit, we have "credit creation". AKA inflation.

Hence, any "breakdown" in credit creation is not something to be feared or rued, but a positive step in the right direction.

So far, so good from here on the charts and my site... but the overall site traffic sometimes has huge jumps when I get linked from some site. And you might want to consider the poltergeist angle... you residing at The Manor and all... ;)

I was tempted to sass you some on the "breakdown" area, but I'm only on my 2nd coffee mug full and still feeling mellow. So I'll just (*gasp*) agree with your point (or state that you agree with my actual point :p ), and just say that overall credit data hasn't yet shown large signs of the expected significant drop that will signal that the "ka" stage has surely started.