Credit inflation, Deflation: Prechter Interview

[Finster]

Re: Credit inflation, Deflation: Prechter Interview

it's interesting to me that you think of the dollar and all the other currencies as in the same asset class - "currencies." makes sense. but in my mind i group together foreign currencies, commodities and precious metals - "anti-dollars." but you're right to remind me that it's the overall asset allocation that counts the most, and it may not be worth the time to worry about allocation among my anti-dollar subcategories.

btw, my sleep-like-a-baby portfolio has no net exposure to equities at present. the major equity exposure is via the hussman fund, which is fully hedged at the moment. the minor equity exposure is in canadian trusts which are mostly energy, and also hedged with shorts.

The only true facsimile of an "anti-dollar" asset class would be all those asset classes that are not dollars. And not that good a one at that. The whole exercise of dividing the world into dollar and anti-dollar is a flawed enterprise that is unlikely to do much besides distort and crimp your portfolio management perspective. If this is what Hussman is teaching you, you need to find another teacher. :eek:

Seriously, there deep problems right from the get-go. One of which is competitive devaluation. Governments and their central banks can create currency at will, and those decisions are more often than not politically driven. Due to trade considerations and such, currencies have a tendency to move together. The situation is not that unlike with stocks. When a bear market is in force, most stocks will fall in price. When there is a bear market in currencies (global inflation) most will fall in value.

So what you are suggesting is tantamount to trying to pick the best stocks in a bear market. As you said yourself, the "least outstanding in an ugly contest." Nothing intrinsically immoral about that, I guess, but it is certainly trying to do an end-run around the asset allocation maxim just discussed.

It may be not quite as obvious in the case of currencies as with stocks, because we use currency units themselves as units of measure. We might get a little too comfy with the tacit psychological suggestion implicit in the use of the USDX (dollar index) that it is some indicator of the absolute value of the dollar, and forget that it merely compares it to other things that are moving around themselves. We may even mistake a rise in the USDX for a rise in the value of the dollar.

This is not merely hypothetical. Just last year, the USDX spent much of the time in a rising trend. As every gold investor "knows", the price of gold moves counter to the dollar. Ergo, the price of gold "should" have fell.

But it didn't ... it soared. Analysts were flummoxed. But as Ayn Rand said, when you encounter a contradiction, examine your premises. In this case, the flawed premise was that the dollar was rising. No, the USDX was rising ... simply because the other currencies in the index had temporarily overtaken the dollar in the speed of their decline. The dollar was merely the "least outstanding in an ugly contest".

Competitive devaluation is not a theoretical phenomenon. China's yuan peg to the dollar is a very real and significant case in point.

Now seriously, what are the chances that in the event of a serious dollar decline, other global currencies will actually rise? That the US would enter accelerated inflation while the Eurozone, Asia and the rest all instituted deflation? That is the bet you would be taking ... mine is that hard money is far and away the best refuge in such a situation.

One further perspective: You apparently believe the US dollar will rise relative to the stock market - another way of saying that stock prices will fall (you say you have a zero stock position). Yet you worry it will fall relative to the rest of the world's currencies.

An extraordinarily remote conjunction of contingencies.

[bart]

Re: Credit inflation, Deflation: Prechter Interview

...
One of which is competitive devaluation. Governments and their central banks can create currency at will, and those decisions are more often than not politically driven. Due to trade considerations and such, currencies have a tendency to move together. The situation is not that unlike with stocks. When a bear market is in force, most stocks will fall in price. When there is a bear market in currencies (global inflation) most will fall in value.
...

Grunt of agreement ;)



One view of that cycle:

[bart]

Re: Credit inflation, Deflation: Prechter Interview

You grok. In fact, didn�t we have a discussion about what your inflation prediction chart was predicting? Correct me if I�m wrong, but I think we concluded that it was actual inflation, not the CPI per se, that was the bogey.
...

Yes, pretty much - my work tries to primarily predict actual inflation... and also track the CPI as a lesser goal.

It�s not even so much that it is a "flaw" in the absolute sense. Understood as a relative measure between currencies, it does exactly what it purports to. Only if it is assumed be "the dollar" without such qualification is it really flawed, and then the flaw is really in the interpretation rather than the measure itself.

Precisely, the flaw is in interpreting the dollar index as some kind of absolute value of the dollar when in reality all it is is a basket of currency comparisons.

As for the prediction issue, see again my discussion above about the FDR. Also, check out my forecast page, which among other things, does actually plot a forecast of the FDI out a year (bottom chart). FWIW, the current FDI forecast shows a small deflationary wave in the second half of next year.

Maybe I am being too pedantic about the forecasting issue, but it is mostly to drive home the point that the CPI does not merely understate inflation, but lags it as well. It is off not only in the amplitude domain but the time domain as well. This is exceedingly important, as it has repeated led to policy errors as I alluded to above.

Thou? Pedantic? :eek: ;)

No question on the policy errors and BS and all the rest of the junk on how the CPI is [censored], and that is covered on my CPI lies page and elsewhere.


On the prediction area though, check the following two charts - yours and mine. You noted that yours leads by about two years. The area on yours between roughly 1/2004 and 1/2005 looks very much like what mine is showing from about 10/2005 to 12/2006.







And I still think that you should produce a chart with that approx. two year lag against the CPI with Williams adjustments. It sure looks like the correlation is significant from here.

I'm actually playing with the CPI + Williams adjustments and the household net worth data to try and take asset value changes into account better.

[Finster]

Re: Credit inflation, Deflation: Prechter Interview

Thou? Pedantic? :eek: ;)

No question on the policy errors and BS and all the rest of the junk on how the CPI is [censored], and that is covered on my CPI lies page and elsewhere.


On the prediction area though, check the following two charts - yours and mine. You noted that yours leads by about two years. The area on yours between roughly 1/2004 and 1/2005 looks very much like what mine is showing from about 10/2005 to 12/2006.

I si!

It does indeed. Careful not to take the two year lag too literally, though; the lag is the result of a trailing moving average, which not only introduces a lag but also a smoothing or smearing effect. It�s an average of lags from zero to four years. Considering that caveat, the correlation is remarkable. Probably may be assisted by the fact that the FDI chart you cite is itself of a fairly coarse (hence partially smoothed) resolution.

And I still think that you should produce a chart with that approx. two year lag against the CPI with Williams adjustments. It sure looks like the correlation is significant from here.

I'm actually playing with the CPI + Williams adjustments and the household net worth data to try and take asset value changes into account better.

I don�t actually have the William CPI data. The chart I used above is a link directly to his site. Apparently the data itself requires a subscription.

BTW - did you see the charts on the last page of this thread - the ones comparing the FDI and USDX? From the steep decline out of 1985, to the levelling off, to the twin peaks in the late 1990s and early 2002s - there is definitely a correlation there. Main difference is the overall decline in the FDI is much greater, reflecting the USDX�s omission of the decline in the constituent currencies.

[jk]

Re: Credit inflation, Deflation: Prechter Interview

Now seriously, what are the chances that in the event of a serious dollar decline, other global currencies will actually rise? That the US would enter accelerated inflation while the Eurozone, Asia and the rest all instituted deflation? That is the bet you would be taking ... mine is that hard money is far and away the best refuge in such a situation.

you ask a very good question. what occurs to me is that this is schiff's scenario: a terrible decline in the dollar producing a worldwide reduction in overall demand, making foreign [especially asian] currencies more valuable with respect to industrial and agricultural commodities. his model is less clear about pm's. but when i think about it, even in that scenario it seems to me pm's would rise in all currencies. it's hard to imagine the world taking the demise of the dollar so lightly as to not want to hold pm's.

One further perspective: You apparently believe the US dollar will rise relative to the stock market - another way of saying that stock prices will fall (you say you have a zero stock position). Yet you worry it will fall relative to the rest of the world's currencies.

iirc that's what happened in argentina- their market dropped in local terms even as their currency dropped against other currencies. [i know the u.s. is not argentina, the peso was not the reserve currency, etc, etc. but such moves are possible.]

[bart]

Re: Credit inflation, Deflation: Prechter Interview

It does indeed. Careful not to take the two year lag too literally, though; the lag is the result of a trailing moving average, which not only introduces a lag but also a smoothing or smearing effect. It�s an average of lags from zero to four years. Considering that caveat, the correlation is remarkable. Probably may be assisted by the fact that the FDI chart you cite is itself of a fairly coarse (hence partially smoothed) resolution.

That was my thought too... and I could offer the same warnings about my own prediction. Many elements, many differing lag factors, and a quart or so of moving averages are involved too.
And as you know, we use extremely different inputs too - very cool that they have such decent correlation.

I don�t actually have the William CPI data. The chart I used above is a link directly to his site. Apparently the data itself requires a subscription.

BTW - did you see the charts on the last page of this thread - the ones comparing the FDI and USDX? From the steep decline out of 1985, to the levelling off, to the twin peaks in the late 1990s and early 2002s - there is definitely a correlation there. Main difference is the overall decline in the FDI is much greater, reflecting the USDX�s omission of the decline in the constituent currencies.

Very much so on the FDI & USDX correlation - the only reason I didn't bring it up waaaay back when you produced version one of the FDI is that it was so apparent. In retrospect, I probably should have if for no other reason than to tweak a certain DR denizen whose name starts with V. ;)


The Williams CPI adjustment data that I use is only the data that he has publicly mentioned. I don't even have a sub, primarily for that reason - I don't want to take the chance of a copyright violation or similar.
The data is on my CPI lies page as follows:

Amount, cumulative
-----------As of date
+1.0%---1982
+1.5%---1993
+2.5%---1997
+3.5%---2001
+4.0%---2004
+4.5%---2005
+5.0%---2006

Any other "excuses"? ;)

[Finster]

Re: Credit inflation, Deflation: Prechter Interview

iirc that's what happened in argentina- their market dropped in local terms even as their currency dropped against other currencies. [i know the u.s. is not argentina, the peso was not the reserve currency, etc, etc. but such moves are possible.]

Right. Huge difference. The so-called "US stock market" is where most of the world’s major global companies trade. Many of their customers are overseas. In contrast, markets in places like China and Japan rely heavily on US customers. Arguably you’d be more exposed to a dollar drop there than in the S&P 500. Regardless, don’t make the simplistic assumption many investors make that foreign stocks are a dollar hedge and US stocks are not. Here again, we see the basic principle of asset class - not individual assets within a class - being the paramount factor.

you ask a very good question. what occurs to me is that this is schiff's scenario: a terrible decline in the dollar producing a worldwide reduction in overall demand, making foreign [especially asian] currencies more valuable with respect to industrial and agricultural commodities. his model is less clear about pm's. but when i think about it, even in that scenario it seems to me pm's would rise in all currencies. it's hard to imagine the world taking the demise of the dollar so lightly as to not want to hold pm's.

Absolutely. The weak link in the Schiff argument as you cite it is the nebulous nature of this thing called "demand". (Don’t get me wrong, Schiff makes some excellent points.) In any real science, when we talk about some quantity we have to define what it is and in what units it is measured. Unfortunately, when speaking of "demand" many economists leave the realm of real science.

Another example should help. Many are prone to citing high "demand" from Asia as the driver behind high commodity prices. But exactly what makes up this demand, and how is it exercised? Did it never before occur to the Asians that it might be nice to build roads and schools and drive cars and such? They just woke up one morning a few years ago and thought that would be cool? No. So what’s different now?

They have dollars. The Fed made billions of them, sent them to house owners all over America, and those house owners sent them to China and India. (Obvious oversimplification, but you the get general idea.) The house owners didn’t produce anything to get those marginal dollars, but the Asians did. But as a result, the Asians now had lots of dollars with which to compete for resources with the remaining dollars in America. Lots of dollars sloshing around, but the same amount of oil. Therefore, the dollars fell in value in relation to the oil.

The bottom line vis-a-vis "demand" is that as far as the prices of things is concerned, "demand" is measured by the number of dollars available with which to express a desire. The Chinese could pine for a billion barrels of oil all they want, but only to the extent they can deploy dollars in pursuit of that wish can they make it so that it takes more dollars to buy that oil.

Ultimately, it’s as Milton Friedman said: "Inflation is always and everywhere a monetary phenomenon."

In the ephemeral sense of "demand" as Schiff uses it, however, there is no such thing as a "worldwide reduction in demand". Human desires are unlimited. The only way a global price drop can come about is for there to be less money available with which to express them.

Consequently, any perceived lack of "demand" can be rectified merely by printing more money. This in turn drives the value of the money down. But hard money - gold, silver, etceteras - cannot be printed. As fiat currency is produced in an attempt to rectify any lack of demand - hard money will rise in value by comparison. That’s why it is the most important dollar alternative in any monetary crisis.

[bart]

Re: Credit inflation, Deflation: Prechter Interview

iirc that's what happened in argentina- their market dropped in local terms even as their currency dropped against other currencies. [i know the u.s. is not argentina, the peso was not the reserve currency, etc, etc. but such moves are possible.]

I think its much more valid to make that general comparison against the last reserve currency, the British pound.

[Finster]

Re: Credit inflation, Deflation: Prechter Interview

That was my thought too... and I could offer the same warnings about my own prediction. Many elements, many differing lag factors, and a quart or so of moving averages are involved too.
And as you know, we use extremely different inputs too - very cool that they have such decent correlation.

Yes, it’s that warm and fuzzy feeling I get whenever two independent fact sets point towards the same conclusion. Suggests there is some underlying truth being converged in upon…

Very much so on the FDI & USDX correlation - the only reason I didn't bring it up waaaay back when you produced version one of the FDI is that it was so apparent. In retrospect, I probably should have if for no other reason than to tweak a certain DR denizen whose name starts with V. ;)

HA!

Actually this is the first I’ve done a direct comparison, so in my case it was NOT apparent, merely suspected. ;-) But another remarkable correlation, considering I don’t actually use the USDX or any exchange rate data per se in the FDI. It’s evidently implicit in the international price data I use.


The Williams CPI adjustment data that I use is only the data that he has publicly mentioned. I don't even have a sub, primarily for that reason - I don't want to take the chance of a copyright violation or similar.
The data is on my CPI lies page as follows:

Amount, cumulative
-----------As of date
+1.0%---1982
+1.5%---1993
+2.5%---1997
+3.5%---2001
+4.0%---2004
+4.5%---2005
+5.0%---2006

Any other "excuses"? ;)

… uhhmmm … I’ve got a headache?

... (muttering under breath) … russn frussn bartaceous wisecracker …

Tell ya what. Actually I’m not sure how to interpret the cumulative amounts, but it’s no great shakes to do a chart of a four year moving average of the FDI. Since even if I was sure how to apply the adjustments it would take me probably close to an hour to reconstruct the Williams CPI series, and you already have it, if you email it to me I’ll do your chart. Or if you prefer, I’ll email you the four-year moving average of the FDI.

I hope you are not trying to squander that most excellent get-out-of-finned-free card already!:p :p :eek: ;)

:cool:

[EJ]

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.

Speaking of sentiment, please see http://www.sentimentrader.com, a site pointed out to me by another reader. It indicates we are nearing a peak in market optimism.

[bart]

Re: Credit inflation, Deflation: Prechter Interview

Yes, it�s that warm and fuzzy feeling I get whenever two independent fact sets point towards the same conclusion. Suggests there is some underlying truth being converged in upon�

Indeed, makes me a happier camper too.

� uhhmmm � I�ve got a headache?

... (muttering under breath) � russn frussn bartaceous wisecracker �

Tell ya what. Actually I�m not sure how to interpret the cumulative amounts, but it�s no great shakes to do a chart of a four year moving average of the FDI. Since even if I was sure how to apply the adjustments it would take me probably close to an hour to reconstruct the Williams CPI series, and you already have it, if you email it to me I�ll do your chart. Or if you prefer, I�ll email you the four-year moving average of the FDI.

I hope you are not trying to squander that most excellent get-out-of-finned-free card already!:p :p :eek: ;)

:cool:

I'm saving that "get-out-of-finned-free" card - it's worth way more per (p)ounce than gold... ;)

Since other folk might be interested in the raw CPI & CPI + Williams data, I've just put the Excel worksheet in a zip file here.

[Finster]

Re: Credit inflation, Deflation: Prechter Interview

I'm saving that "get-out-of-finned-free" card - it's worth way more per (p)ounce than gold... ;)

Since other folk might be interested in the raw CPI & CPI + Williams data, I've just put the Excel worksheet in a zip file here.

Holy moly. Your server is either down or loaded with traffic ... probably from all those hits NowAndFutures is generating these days. The below is all I get. But no more excuses ... I'm a man of my word, and will strive to complete the assignment NLT tomorrow.

PK�Q5��?�0cpi_and_williams.xls�� |Nu���9ׅaƆٮ���BR)b�Jy~le2L�aXR �D�a"y*!J�ҝJ5�*R7Z� �Z�;��J�R������v}��}�_�������k�]��y�sv����ˬ�*�%k������:J@ΔV��e2���%�/-���},4�B�}��^d�����w������*G�Y��lJ�SiG�y�D\�� !ޡ��|gH��|�����*�݇���E���NEqL��澺Գ{W��׶�O�e ����Mr2��Œ�vv�:�������${_��;�5����/��c�B��_*8W�%C%���uL��� �|�� cv;9�QJ�F*�4k���싌f��Dsvƕ���5��BIRI�[�e���1���Γ���-�6�K������Cg���h�o�l�t~�mS��R��/C˺�(Lt����ưo�gw*�&;u:�����y��m��'L2Y�I�� ��۶�tp��e�d�Ƙ[F�o7��` Y/UDƴ�j��SK$��JCr�V�r�l~�_��3����#!9w;�~���'�� f����F��7��j.f0�� ��+����˻��"7(Q��R�f~E�X+?hk�W���/�1:�Bi���f��m��vW�~#G�Ƚ�K:� �K�xɕ��$�5v��'�|�)�eGNI3��6˦ �a�v�}Mu{j�nTv���c&���!�*F�e�G�1���*���Ҝ��NT��NU7"pv� f�kb|*���X��"k��)�L6Mڛ�E�]kޞ~f�"{���7Z�\�]y"ųD����\�V�dm��ٱm&{Yd�N��o���-���\5>4?�ac�i>�9��H�i��#[+�7��#iu��Ⱦ$G�9��ʑ�9r��#:;R�Ց�=��H� G� u��͎��H^�#;�p$r�#�g;�r�#��a�ܑ�Վl��H�qG�?���� 9�#ɯ9���l���f���n�����wf�'��Ϙ�]�PՕ����q%:ޕ�dW�5w�hkW�^�J�����J䵮����ʁ��p%e �+��\�>Ε�$W�繲x�+�渒���l��m� WN*q%m�+s�pe�VW�^t%k�+�_w����}f��험�a������f�? �훡�g��ȀD�H�z���Í����6��. �N�~e@w ȡ>INH��ٚ�S�$m|@���}SW`�s�y\dֳ< �ך�<�O�����;�z�H��f=r�Ĭ�ُcf='�~����RPV�JVLPR �r�IP�� J��A��ќLW�P� ����Ai;"(����37(s�ҿ (qs��8e� �>����>m���Y�v��f�����i���Y�>�ރf���~j���Y�Q��cf�?���b�u2(��Di�}^�N�Q�;�� �wz ��i�͛ۼ���a��s��4�&�p��fG0�? gڥ ���Ro�p���cn%��=0�F�{b��U�a�� }�)�|�k��W�kq��彳H�%x��@N �9J�*Y@ɂJVA�**Y%% ...

[bart]

Re: Credit inflation, Deflation: Prechter Interview

I've read all these guys, have for years. Prechter "At the Crest of the Tidal Wave: A Forecast for the Great Bear Market," 1997, A. Gary Shilling "Deflation" 1998, Gerald Swanson "Hyperinflation" 2003, Warburton "Debt and Delusion" 1999, etc. I have well over 200 finance, econ and related books on the shelf, and I've read every page. I even have an original "The Bubble the Broke the World" by Garet Garrett, 1932, that I picked up at a used book store in Boston in 1999. Of these, I rate Debt and Delusion an "A" but the others are at best engaging in what Nassim Nicholas Taleb would call "Narrative fallacy."

Someday I hope you do a review and/or article on "Debt & Delusion". I've always wanted to find & read it.

The more I learn, the more amazed I am how much bad and false data exists - its literally over 99%. It has truly been the most difficult issue with which I've dealt the last 2+ years - both trying to erase it for myself and also and most importantly how to communicate it to others.

I've been reading the minutes of the FOMC since 1998. One result, for example, is that I was the first to note that the Fed tried to pop the stock market bubble in 1994. Go ahead. Type in the first few words of the minutes into google and see what you get...

"When we moved on February 4th"

I'd put the reading of those transcripts amongst the top 10 items to help gain a much fuller understanding of both the Fed and the "game".

Ka-Poom Theory is not only likely to prove out, but you can expect that these

other guys will start to copy it as the thinking that went into it six years ago, when it looked nutty, starts to look obvious. No deflation. Disinflation, then inflation. But not hyperinflation, just very high inflation, along the lines of what Russia experienced during their Ruble crisis.

"Experts" in the industry have been copying my stuff for years and putting their name on it, sometimes in not so subtle ways. Who invented the idea of the bubble cycle? Google will tell you. Type in bubble cycle. Six months later, some bright analysts over at Bear Sterns came up with this bright idea: Approaching an Inflection Point in the Bubble Cycle (pdf).

No matter. It's not the past that matters, it's the future, and everyone else is only able to copy what I have revealed so far, not what I have yet to reveal.

I'm honored to have this very bright group here that is capable of grasping these ideas.

You da' man!
You're our Fearless Leader! :eek: ;)

...but I don't think that makes Finster & I Rocky & Bullwinkle... although... hmmm... ;)


We'll certainly stay tuned for coming attractions - are any previews available yet? How long do we have to sit on the edges of our seats?
There's certainly more than enough PEBKAC* to go around on our illustrious world.

*Problem Exists Between Keyboard And Chair

[bart]

Re: Credit inflation, Deflation: Prechter Interview

Holy moly. Your server is either down or loaded with traffic ... probably from all those hits NowAndFutures is generating these days. The below is all I get. But no more excuses ... I'm a man of my word, and will strive to complete the assignment NLT tomorrow.

...

Weird!
So far as I know, everything is ok with that file and the web site - it downloads and opens fine from here.

I just added a raw Excel file too:
http://www.nowandfutures.com/downloa...d_williams.xls

I just emailed it to you too.

[Finster]

Re: Credit inflation, Deflation: Prechter Interview

Weird!
So far as I know, everything is ok with that file and the web site - it downloads and opens fine from here.

I just added a raw Excel file too:
http://www.nowandfutures.com/downloa...d_williams.xls

I just emailed it to you too.

Meanwhile I kept trying and finally got it.

The results are a little hard to discern, because the CPI is so smooth on this scale that the undulations are hard to pick out. Plus it's plotted linear, which compresses detail towards the bottom of the chart. But this is the raw FDI (reciprocal and scaled to 1985=100) along with the four year moving average of the same (FDI4). Then the raw CPI, along with the (Williams) SGSCPI (Shadow Government Stats Consumer Price Index).

Comparing the raw and averaged FDI, notice the lag introduced by taking the four year moving average, along with the smoothing. The tracking of the undulations in the CPI (both versions) with the smoothed and lagged FDI is just visible. The match could be made closer by applying more (longer term) smoothing to the FDI, but in a way that retains the same overall net lag. But that would result in loss of detail for both series. Probably plotting the rate of change would have worked better, but it is getting late and that's a lot more work!