Credit inflation, Deflation: Prechter Interview

[Finster]

Re: Credit inflation, Deflation: Prechter Interview

finster, i think i understand why you think equities are good inflation hedges. since, i gather, equities are one of the asset classes used to calculate your fdi, and thus your personal indicator of inflation, fdr, they must by definition be inflation hedges. all else being equal, if equities go up, the dollar's value, in terms of how much equity it can purchase, has gone down by precisely the same amount! thus, all else being equal, equities are the perfect hedge for equity-based inflation!

more generally, if we assume for a moment, and for the sake of simplicity, that your fdi is calculated based on a fixed basket of goods and assets, then of course that very basket will be a perfect inflation hedge! [figuring this out is almost as exciting as when i learned i was speaking prose! and i had been speaking prose all along!] and every item in the basket, viewed in isolation, will be a less than perfect inflation hedge, but an inflation hedge nonetheless!

have i got it now?

bart, finster - you two should get a room.
finster- you should clean out your mailbox.

Let me answer this way: Suppose you were correct - no, more than correct - and I actually created an index of inflation based solely on equities. Such that, rather than plot the value of equities in terms of currencies, I plotted the value of currency in terms of equities. But that through some strange metaphysical eventuality, it wound up looking like the real FDI.

Let's explore the impliciations.

Below is a chart of the FDI. According to your premise, it plots currency against equites:



Next please recall that you assert that you have no equities, but instead emphasize currency in your investment portfolio. But wait ... according to your own assumption, the above chart shows a virtually perpetual decline of currency in relation to equity. The obvious conclusion is that your investment program provides greatly inferior returns, being practically guaranteed to underperform equites. Thus, by excluding the entire asset class of equities, you are underperforming while taking virtually certain risk.

Consequently, by purely logical deduction - from your own stated premises - my original assertion is proved correct.

Q.E.D.

[jk]

Re: Credit inflation, Deflation: Prechter Interview

If we do, will you then listen to what either of us are actually saying?

It literally and seriously seems from here that almost no matter what Finster or I post, you question or critique it... which is of course your right. My point here is that disagreeing is fine, but I'm not at all certain you truly understand the basic views.

This chart, for example, should show you a great deal of what both he and I refer to when talking about cycles and stocks and gold too, for that matter.










And just precisely what is that supposed to mean???
You make an assumption, based on very few if any facts, and then hold it up to ridicule?



(sarcasm on)
Here are a few more ways to make "logical" comments:

If you agree with me that Appeal to Flattery is the greatest fallacy, it shows that you are intelligent and good looking and really good in bed. And a snappy dresser.

If you don't agree that Appeal to Pity is the greatest fallacy, think how it will hurt the feelings of me and the others who like it!

It's obvious that Bandwagon is going to win as the greatest fallacy. You wouldn't want to be one of the losers who choose something else, would you?

Ad Hominem:
This is the best logical fallacy, and if you disagree with me, well, you suck.

Appeal To False Authority:
Your logical fallacies aren't logical fallacies at all because Einstein said so. Einstein also said that this one is better.

Appeal To Emotion:
See, my mom, she had to work three jobs on account of my dad leaving and refusing to support us, and me with my elephantitis and all, all our money went to doctor's bills so I never was able to get proper schooling. So really, if you look deep down inside yourself, you'll see that my fallacy here is the best.

Appeal to Fear:
If you don't accept Appeal to Fear as the greatest fallacy, then THE TERRORISTS WILL HAVE WON. Do you want that on your conscience, that THE TERRORISTS WILL HAVE WON because you were a pansy who didn't really think that Appeal to Fear was worth voting for, and you wanted to vote for something else? Of course not, and neither would the people you let die because THE TERRORISTS WILL HAVE WON.

Appeal To Force:
If you don't agree that Appeal to Force is the greatest logical fallacy, I will kick your ass.

Appeal To Majority:
Most people think that this fallacy is the best, so clearly it is.

Appeal To Novelty:
The Appeal to Novelty's a new fallacy, and it blows all your crappy old fallacies out the water! All the cool kids are using it: it's OBVIOUSLY the best.

Appeal To Numbers:
Millions think that this fallacy is the best, so clearly it is.

Appeal To Tradition:
We've used Appeal to Tradition for centuries: how can it possibly be wrong?

Argumentum Ad Nauseum:
Argumentum ad nauseum is the best logical fallacy.
Argumentum ad nauseum is the best logical fallacy.
Argumentum ad nauseum is the best logical fallacy.
Argumentum ad nauseum is the best logical fallacy.
Argumentum ad nauseum is the best logical fallacy.
Argumentum ad nauseum is the best logical fallacy.
Argumentum ad nauseum is the best logical fallacy.

Begging The Question:
Circular reasoning is the best fallacy and is capable of proving anything.
Since it can prove anything, it can obviously prove the above statement.
Since it can prove the first statement, it must be true.
Therefore, circular reasoning is the best fallacy and is capable of proving anything.

Burden Of Proof:
Can you prove that Burden of Proof isn't the best logical fallacy?

Complex Question:
Have you stopped beating your wife and saying Complex Question isn't the best fallacy?

False Dilemma:
I've found that either you think False Dilemma is the best fallacy, or you're a terrorist.

False Premise:
All of the other fallacies are decent, but clearly not the best as they didn't come from my incredibly large and sexy brain.

Gambler's Fallacy:
In all the previous talks about this subject, Gambler's Fallacy won, so I just know the Gambler's Fallacy is going to win this time!

Guilt By Association:
You know who else preferred those other logical fallacies?
*(insert pictures of Hitler, Stalin, and Pol Pot here)*

Non Sequitur:
Non Sequitur is the best fallacy because none of my meals so far today have involved asparagus.

Post Hoc/False Cause:
Since I've started presuming that correlation equals causation, violent crime has gone down 54%.

Red Herring:
They say that to prove your fallacy is the best requires extraordinary evidence, because it's an extraordinary claim. Well, I'd like to note that "Extraordinary claims demand extraordinary evidence" is itself an extraordinary claim.

Relativism:
Well maybe all those other fallacies are the best for you, but to me, the relativist fallacy is the greatest logical fallacy ever.

Slippery Slope:
If you don't like Slippery Slope arguments, you will do poorly in class, drop out of school, commit crimes, go to prison, and die of AIDS.

Special Pleading:
I know that everyone is posting about their favorite fallacies, but Special Pleading is out-and-out the best, so it should just win with no contest.

Denying the Antecedent:
If Denying the Antecedent were not the best fallacy, then I would be sad. I am actually in quite a good mood right now, so obviously Denying the Antecedent is the best.

Affirming the Consequent:
If it is proven that Affirming the Consequent is the best, then I will be very happy. I am feeling _very_ happy, so obviously Affirming the Consequent is the best fallacy.

Straw Man Argument:
Apparently you think the Straw Man Argument is bad because you have something against the Wizard of Oz. Well, you know what? It doesn't have anything to do with the Wizard of Oz! Therefore, the Straw Man Argument must be the best fallacy.

(sarcasm off)

mine was a reference to moliere's bourgeoise gentilhomme. you didn't just come up with your list, did you? it's very funny!

i too have the feeling we're having a dialogue of the deaf. and: It literally and seriously seems from here that almost no matter what I post, you or finster question or critique it

i think i understand what you are guys are saying. i certainly am aware of the information in the graph you just posted, and have posted before. and because i do appreciate those cycles, i part ways with finster who seems to be endorsing equities for all seasons.

[Finster]

Re: Credit inflation, Deflation: Prechter Interview

.. and because i do appreciate those cycles, i part ways with finster who seems to be endorsing equities for all seasons.

More precisely, at least some equities. And more broadly, at least some of each major asset class. The real question should not be whether, but how much.

The reason is simple. We don't live in a deterministic financial world. One can put probabilites on the course of the various asset classes, but one can never know with certainty what will happen.

If you knew for sure that commodities were going to be the best-performing asset class from T1 to T2, and that cash was going to be number one from T2 to T3, then logically you would put 100% into commodities from T1 to T2, and 100% into cash from T2 to T3.

But you don't.

So why behave as though you do?

[jk]

Re: Credit inflation, Deflation: Prechter Interview

Next please recall that you assert that you have no equities, but instead emphasize currency in your investment portfolio. But wait ... according to your own assumption, the above chart shows a virtually perpetual decline of currency in relation to equity. The obvious conclusion is that your investment program provides greatly inferior returns, being practically guaranteed to underperform equites. Thus, by excluding the entire asset class of equities, you are underperforming while taking virtually certain risk.

Consequently, by purely logical deduction - from your own stated premises - my original assertion is proved correct.

Q.E.D.

i said i had no NET equities. i have 30% in hussman's fund, and he happens to be fully hedged. and i have another 12% in canadian trusts, mostly energy, but also hedged.

i have a currency position but do not think of my portfolio as emphasizing currencies. including the effects of leverage, it amounts to about 26%.

you should understand that, although the u.s. dollar is a currency, when i say i have a currency position, i mean other currencies. this consideration makes your example, showing a decline of "currency" vis a vis equities, not germane.

so n.q.s.e.d.

[jk]

Re: Credit inflation, Deflation: Prechter Interview

More precisely, at least some equities. And more broadly, at least some of each major asset class. The real question should not be whether, but how much.

The reason is simple. We don't live in a deterministic financial world. One can put probabilites on the course of the various asset classes, but one can never know with certainty what will happen.

If you knew for sure that commodities were going to be the best-performing asset class from T1 to T2, and that cash was going to be number one from T2 to T3, then logically you would put 100% into commodities from T1 to T2, and 100% into cash from T2 to T3.

But you don't.

So why behave as though you do?

i absolutely agree with a probabilistic approach. i am trusting hussman to give me equity exposure when it will do some good. his fund can go as much as 125% net long; it will never go net short. he is always at least 100% long but variably hedged. his hedges made a very good return during the bear market of a few years ago. he has underperformed a bit on the upside, mostly because he has been hedged in large degree most of the time, and because i think he's basically a value guy, while the run-up of the last few years has favored low quality stocks. [here i am using gmo's jeremy grantham's nomenclature.] his stated goal is good returns over the whole cycle with special emphasis on risk management. i invested when his fund had $30million in assets. it now has $3billion. he's a smart guy, and the only financial commentator i've come across who occasionally refers to buddhist principles in conceptualizing his work.

[bart]

Re: Credit inflation, Deflation: Prechter Interview

mine was a reference to moliere's bourgeoise gentilhomme. you didn't just come up with your list, did you? it's very funny!

i too have the feeling we're having a dialogue of the deaf. and: It literally and seriously seems from here that almost no matter what I post, you or finster question or critique it

i think i understand what you are guys are saying. i certainly am aware of the information in the graph you just posted, and have posted before. and because i do appreciate those cycles, i part ways with finster who seems to be endorsing equities for all seasons.

I've had that list for quite a while, and add to it as I find good ones. You're one of the few who has ever gotten the full & whole "treatment".

I wish I was as certain as you on the full understanding, and I also am certain you do have at least part of it. I'll just stand aside on the equity issue and Finster, except to say that I don't believe he does broadly believe in equities for all seasons as you seem to be asserting.

[Jim Nickerson]

Re: Credit inflation, Deflation: Prechter Interview

finster, i think i understand why you think equities are good inflation hedges. since, i gather, equities are one of the asset classes used to calculate your fdi, and thus your personal indicator of inflation, fdr, they must by definition be inflation hedges. all else being equal, if equities go up, the dollar's value, in terms of how much equity it can purchase, has gone down by precisely the same amount! thus, all else being equal, equities are the perfect hedge for equity-based inflation!

more generally, if we assume for a moment, and for the sake of simplicity, that your fdi is calculated based on a fixed basket of goods and assets, then of course that very basket will be a perfect inflation hedge! [figuring this out is almost as exciting as when i learned i was speaking prose! and i had been speaking prose all along!] and every item in the basket, viewed in isolation, will be a less than perfect inflation hedge, but an inflation hedge nonetheless!

have i got it now?

bart, finster - you two should get a room.
finster- you should clean out your mailbox.

jk, seldom, if ever, do I recall your taking time to respond to anything in a manner that was not serious and thoughtful. I took your quote above to be serious; however, Bart in post #75 seems to have taken offense from your post.

I can tell you that a whole lot of what you, Finster, and Bart are posting here is pretty deep as far as my understanding goes. I took your comment in [ ]'s to be a joke on yourself, and that you admitted you thought you had figured out their points. Am I wrong, were you joshing or were you serious?

[Finster]

Re: Credit inflation, Deflation: Prechter Interview

i have a currency position but do not think of my portfolio as emphasizing currencies. including the effects of leverage, it amounts to about 26%.

you should understand that, although the u.s. dollar is a currency, when i say i have a currency position, i mean other currencies. this consideration makes your example, showing a decline of "currency" vis a vis equities, not germane.

so n.q.s.e.d.

Nice try. But other currencies inflate just the same, especially over the long run. We could do charts of an FLI, FEI, FYI, etceteras for all the major currencies and while the squiggles might be smaller or larger or occur in different places, the overall chart looks the same.

i absolutely agree with a probabilistic approach. i am trusting hussman to give me equity exposure when it will do some good. his fund can go as much as 125% net long; it will never go net short. he is always at least 100% long but variably hedged. his hedges made a very good return during the bear market of a few years ago. he has underperformed a bit on the upside, mostly because he has been hedged in large degree most of the time, and because i think he's basically a value guy, while the run-up of the last few years has favored low quality stocks. [here i am using gmo's jeremy grantham's nomenclature.] his stated goal is good returns over the whole cycle with special emphasis on risk management. i invested when his fund had $30million in assets. it now has $3billion. he's a smart guy, and the only financial commentator i've come across who occasionally refers to buddhist principles in conceptualizing his work…

…i said i had no NET equities. i have 30% in hussman's fund, and he happens to be fully hedged. and i have another 12% in canadian trusts, mostly energy, but also hedged.

Hmmm … the situation we have here is what they call in legal circles "hearsay". It is not admitted because the "witness" is not present to be able to be cross-examined.

Put another way, Mr. Hussman is not here to defend himself. But you can get better returns and less risk without all that the goofy hedging and nervous nellie market timing. What the heck is the point of having equities if you’re just going to cancel them out with hedges? Aside from running up your expenses. K.I.S.S.!!!! All you need is three to five basic asset classes and a little decent dynamic asset allocation. You need to find yourself a new guru. Try Harry Browne, for example. His last book, Fail-Safe Investing, outlined a program that is more bulletproof and probably higher returning than that - all without the high-fallutin’ phd-generated costs and convolutions - so simple you could sleep 364 days a year. Do yourself and Hussman both a favor and send that poor tortured soul a copy, too.

[bart]

Re: Credit inflation, Deflation: Prechter Interview

Nice try. But other currencies inflate just the same, especially over the long run. We could do charts of an FLI, FEI, FYI, etceteras for all the major currencies and while the squiggles might be smaller or larger or occur in different places, the overall chart looks the same.

Funny that you should mention that:




(edit/add - note that this is not my chart and I have not validated all the data personally)

[Finster]

Re: Credit inflation, Deflation: Prechter Interview

Funny that you should mention that:

Interesting to note that one "currency" that outperformed them all - gold. As I asserted to jk at the outset, most investors should only concern themselves with only two forms of money - their own coin of the realm, and hard money.

(Leave the forex markets to sophisticates like that guy from NowAndFutures...;))

[bart]

Re: Credit inflation, Deflation: Prechter Interview

Interesting to note that one "currency" that outperformed them all - gold. As I asserted to jk at the outset, most investors should only concern themselves with only two forms of money - their own coin of the realm, and hard money.

(Leave the forex markets to sophisticates like that guy from NowAndFutures...;))

That's actually pretty much the way I play it too. I seldom trade anything but the dollar index in the forex area, only twice with a yen trade since 2004. I actually trade less than 10 markets - it gets too time consuming otherwise.

The "real" forex traders regularly use leverage of 50-100:1 and that's way too risky for my taste.




NowAndFutures?...



OR



... and that's all I have to say about that... ;)

[jk]

Re: Credit inflation, Deflation: Prechter Interview

jk, seldom, if ever, do I recall your taking time to respond to anything in a manner that was not serious and thoughtful. I took your quote above to be serious; however, Bart in post #75 seems to have taken offense from your post.

I can tell you that a whole lot of what you, Finster, and Bart are posting here is pretty deep as far as my understanding goes. I took your comment in [ ]'s to be a joke on yourself, and that you admitted you thought you had figured out their points. Am I wrong, were you joshing or were you serious?

jim, what i think i figured out is that finster's fdi, being an attempt to value the dollar in terms of all goods and assets, must in part reflect the stock market. so, by definition, if the equity market goes up, a dollar buys less equity, so the fdi goes down. that equity would then function as an inflation hedge is tautological, i.e. self-evident and circular. saying that, i thought it was funny- the grand conclusion of the obvious. this reminded me of moliere's bourgeoise gentleman who, wishing to be educated at the highest level, was delighted and impressed to learn that he spoke prose. i think i've figured out that finster and bart are joshing a lot, not so much in their thoughts as in their over-the-top style. so i indulged myself a bit.

[Finster]

Re: Credit inflation, Deflation: Prechter Interview

jim, what i think i figured out is that finster's fdi, being an attempt to value the dollar in terms of all goods and assets, must in part reflect the stock market. so, by definition, if the equity market goes up, a dollar buys less equity, so the fdi goes down. that equity would then function as an inflation hedge is tautological, i.e. self-evident and circular. saying that, i thought it was funny- the grand conclusion of the obvious. this reminded me of moliere's bourgeoise gentleman who, wishing to be educated at the highest level, was delighted and impressed to learn that he spoke prose. i think i've figured out that finster and bart are joshing a lot, not so much in their thoughts as in their over-the-top style. so i indulged myself a bit.

The flaw in your reasoning is so obvious it's surprising you even had the temerity to reveal it. If equity prices fail to move in step with the prices of everything else, they will have fallen even in FDI terms and will not have served as an inflation hedge.

[jk]

Re: Credit inflation, Deflation: Prechter Interview

But other currencies inflate just the same, especially over the long run.

I need to check back to bart’s list of fallacious logic – to say “but currencies inflate just the same” is to assume that which you are trying to prove. More to the point, I agree that all fiat currencies inflate; where I disagree is with the phrase “just the same.” Even you modify that assertion with “over the long run.” But among keyne’s famous saying is the one that goes “in the long run we are all dead.”

The question I’ve been unsuccessfully trying to ask is whether a portfolio including currencies along with pm’s offers any diversification or volatility or risk-adjusted return benefit over a portfolio with just pm’s.

But you can get better returns and less risk without all that the goofy hedging and nervous nellie market timing.

how about some data?

year Hsgfx s&p 500
2002 +14.0 -22.1
2003 +21.1 +28.7
2004 + 5.2 +10.9
2005 + 5.7 + 4.9
2006 + 3.7 +11.06

3 yr annualized rtn + 6.18 +11.53
5 yr annualized rtn +11.01 + 6.89

Hussman outperformed strongly with his “nervous nelly timing” during the down market of 2002. He underperformed somewhat during rising markets. Over the not-quite-whole cycle he strongly outperformed and with markedly less volatility. I don’t have risk-adjusted returns available, but I if you look at a chart, or even look at the numbers above, it’s pretty clear.

[jk]

Re: Credit inflation, Deflation: Prechter Interview

The flaw in your reasoning is so obvious it's surprising you even had the temerity to reveal it. If equity prices fail to move in step with the prices of everything else, they will have fallen even in FDI terms and will not have served as an inflation hedge.

do any of your inflation hedges work equally well under all conceivable combinations of movements of all asset classes?