Credit inflation, Deflation: Prechter Interview

[bart]

Re: Credit inflation, Deflation: Prechter Interview

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.

It has been answered, and more than once.
You just didn't like the answer, but apparently prefer some other answer which you haven't disclosed yet.

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 hasn't even kept up with inflation for the last 3+ years. What a yawner, to say the least.

[Finster]

Re: Credit inflation, Deflation: Prechter Interview

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

Put this one in the category of "A picture is worth a thousand words." (and I am much too lazy to type a thousand words...).

This is a chart of the FDI-adjusted price performance of cash, gold and stocks since 1865. The "cash" line is essentially just the FDI itself. Then of course we have the real price of gold and of stocks adjusted by the same.

Worth noting is if the FDI was equivalent to the inverse of stocks, the stock graph would just be a straight horizontal line.

Also, regardless of the merits of the FDI, since each asset is adjusted by exactly the same thing, the comparison is valid.

Moreover, note that the chart understates the total return from cash and stocks, since it is merely price, and cash and stocks can have yield. This means that if we were to plot total returns, the downsloping cash line would be less downsloping and the upsloping stock line would be more upsloping.

The conclusion is inescapable. Of the three asset classes, only one served as a full and complete hedge against inflation over a full 142 year time frame through today. Stocks. Even if the FDI were not valid, and "actual inflation" were such that gold fully retained its "real" value, stocks would have nevertheless done so better. This is particularly true during the period since 1913, when inflation became more or less permanent. Sure, there were periods in which gold outperformed stocks (known to many as a "bear market"), but as a general proposition, there is no getting around that stocks are overall superior to gold as an inflation hedge.

[bart]

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.

There you go again, making invalid assumptions and using them to try to prove a specious point.
How about you point out precisely where the FDI, in no uncertain terms and using full data, is "an attempt to value the dollar in terms of all goods and assets"?

Over the top comment - perhaps - but covert little shots with just plain wrong data are also under the commode.

[jk]

Re: Credit inflation, Deflation: Prechter Interview

finster, i'm curious if you corrected for survivor bias in your stock charting. and, on the other hand, does it include dividends?

[jk]

Re: Credit inflation, Deflation: Prechter Interview

It has been answered, and more than once.
You just didn't like the answer, but apparently prefer some other answer which you haven't disclosed yet.

i understand your position that currencies [combined with pm's] really don't add anything of value over pm's alone. and i am mulling it over. i keep asking because there must be some justification that so many folks trade currencies. now some are forced to by the nature of their business- e.g. a company has revenues in other currencies. and i suppose it is inevitable that there would then be market makers and speculators.

i have a gut feeling [not to be trusted] that somehow currencies and pm's have a diversification value over pm's alone. but i am far from convinced. for the moment i have some currency positions, and i am contemplating whether to reduce them in favor of more pm's. since this would represent a dramatic reallocation of 12% of my investments, and make me very heavy in pm's, you may understand my hesitation. perhaps the only value is that currencies allow me the false comfort of not feeling overweighted in pm's. but i'm looking for someone to defend currencies as an asset class, and so far there are no takers.

Hussman hasn't even kept up with inflation for the last 3+ years. What a yawner, to say the least.

hussman does well over a whole cycle, and is best judged over that time frame. to pick out the last 3 years of echo-bubble is not, in my opinion, an appropriate way to judge. my thinking is that his risk management provides stability to my portfolio, a flywheel. he'll protect me in a downdraft, and generate more than reasonable returns over the cycle. he's part of my deflation hedge - he won't get killed. in a solid economy and a healthy stock market he'll participate.

[jk]

Re: Credit inflation, Deflation: Prechter Interview

How about you point out precisely where the FDI, in no uncertain terms and using full data, is "an attempt to value the dollar in terms of all goods and assets"?

how about you tell us what the fdi is supposed to measure?

[bart]

Re: Credit inflation, Deflation: Prechter Interview

how about you tell us what the fdi is supposed to measure?

I'd say that's both up to Finster to discuss and disclose, and data is also available on his site that show its not just goods and assets in the underlying calculation.

My basic points are that its not as simple as you seeked to portray it, that it also tracks well with the more conventional ways to measure inflation and dollar value, and most importantly that its the *only* measure of which I'm aware that even attempts to measure a global dollar value.

[Finster]

Re: Credit inflation, Deflation: Prechter Interview

finster, i'm curious if you corrected for survivor bias in your stock charting. and, on the other hand, does it include dividends?

The first question is better directed to the folks at Dow Jones and the other keepers of official stock indices. In the plot above, I used the Dow Jones World stock index and extended it back to 1865 using several others. They are, however, what are termed "investable" indexes, which means they reflect the collective experience of investors. Some stocks will be out, others will come in. There are, after all, very few stocks that have a continuous record from 1865 to 2006. The second question is answered in my last post.

Re your question about "all conceivable combinations of movements of all asset classes", note my point about "overall" performance. Clearly if you consider all possible sub-time-frames there will be some that will yield up other conclusions.

In particular, I already discussed one such circumstance in general terms a couple posts back - and that is where I broke down inflationary times into sub-periods of rising and falling inflation. Gold and commodities do better in the former than in the latter, and stocks do better during the latter than the former. But - and this is critical - accurately forecasting inflation at the level of the second derivative is a much dicier proposition than at the first. That is, it is not sufficient to forecast inflation, but the rate of change of same, when it comes to giving the edge to commodities. Not only that, but it is the markets' expectations regarding the course of that second derivative that matter most, making it dicier still. That is why it is always smart, even assuming you expect inflation, to hedge your bets by including at least some of the best overall inflation hedge in your portfolio.

[bart]

Re: Credit inflation, Deflation: Prechter Interview

i understand your position that currencies [combined with pm's] really don't add anything of value over pm's alone. and i am mulling it over. i keep asking because there must be some justification that so many folks trade currencies. now some are forced to by the nature of their business- e.g. a company has revenues in other currencies. and i suppose it is inevitable that there would then be market makers and speculators.

i have a gut feeling [not to be trusted] that somehow currencies and pm's have a diversification value over pm's alone. but i am far from convinced. for the moment i have some currency positions, and i am contemplating whether to reduce them in favor of more pm's. since this would represent a dramatic reallocation of 12% of my investments, and make me very heavy in pm's, you may understand my hesitation. perhaps the only value is that currencies allow me the false comfort of not feeling overweighted in pm's. but i'm looking for someone to defend currencies as an asset class, and so far there are no takers.

Lots of opinions in this area, and its not a simple area either. I wouldn't expect many (if any) to defend currencies on a board like iTulip either.

One of the advantages of currencies over PMs is just plain volatility - PMs move a lot more and if one can't sit through bone rattling moves, currencies can be better.

Another is time frame - if there is a heavier bout with disinflation or deflation, gold will likely get hammered where most currencies won't. Another is the (small to me) risk of outright deflation, whether in the US or worldwide.

This is not the '70s too, where SFr were a great parking place and investment. I also view most folk that trade currencies as very high risk takers, considering the manipulative attitude and track record of most central banks. Longer term though, currencies like the SFr and CDn and even perhaps the AUD and other commodity country currencies will very likely outperform the bonar/US dollar.

Nevertheless, money can be made in currencies and there is a value there for some. I think its more a question of what one is hedging against and/or what one is expecting that's the real issue, along with the time frame in question and of course the comfort level.

hussman does well over a whole cycle, and is best judged over that time frame. to pick out the last 3 years of echo-bubble is not, in my opinion, an appropriate way to judge. my thinking is that his risk management provides stability to my portfolio, a flywheel. he'll protect me in a downdraft, and generate more than reasonable returns over the cycle. he's part of my deflation hedge - he won't get killed. in a solid economy and a healthy stock market he'll participate.

No question that different strokes for different folks applies here. I'm much more short term oriented and more of a trader than you, and also quite underwhelmed by the multi year significant underperformance.
I'm also, as you know, not a fan of Hussman and his views on the Fed and other central banks - I think he has some blinders on.

[Jim Nickerson]

Re: Credit inflation, Deflation: Prechter Interview

Bart, Finster, jk:

On most days, I consider myself less ignorant than the majority of the population, and since I have come to "know" you fellows, I consider you to be much smarter than the majority of the population, and that perception places me way down on the list of ignorance (0-100, 0=brain dead), which is okay.

You know if everyone thought the same, there would be no discussion, and to me, within my abilities to keep up with it, this has been a good discussion. I hope each of you consider it to have been worth your time and thought. I appreciate your thoughts and your time. Because everyone is ignorant about something, it doesn't shame me particularly to admit to being in that boat, but if it is possible, now that I have named you guys as elite in your knowledge of things financial, it would be nice for me, and perhaps for others, if you are able to minimize esotericism. Example: I am not picking on Finster, but are there other words that can be reasonably used beside "first derivative" and "second derivative"? I do not have a clue as to what that refers. I looked up derivative, which I understand, I think, and in Wikipedia it led me to calculus which I took 46 years ago and have not thought much about since.

[jk]

Re: Credit inflation, Deflation: Prechter Interview

Lots of opinions in this area, and its not a simple area either. I wouldn't expect many (if any) to defend currencies on a board like iTulip either.

One of the advantages of currencies over PMs is just plain volatility - PMs move a lot more and if one can't sit through bone rattling moves, currencies can be better.

Another is time frame - if there is a heavier bout with disinflation or deflation, gold will likely get hammered where most currencies won't. Another is the (small to me) risk of outright deflation, whether in the US or worldwide.

This is not the '70s too, where SFr were a great parking place and investment. I also view most folk that trade currencies as very high risk takers, considering the manipulative attitude and track record of most central banks. Longer term though, currencies like the SFr and CDn and even perhaps the AUD and other commodity country currencies will very likely outperform the bonar/US dollar.

Nevertheless, money can be made in currencies and there is a value there for some. I think its more a question of what one is hedging against and/or what one is expecting that's the real issue, along with the time frame in question and of course the comfort level.

good discussion. thanks. i'm coming to see currencies as low beta gold with a skew in a disinflationary/deflationary scenario.

i made some money trading loonies a while back, but these days i'm more positional and not looking to trade. i think in spite of it being party time on wall street lately, there's a chance of a big sell-off in equities sometime in the next 6-12 months, at which time i would expect gold to sell off sharply as well, perhaps just back to 575 but perhaps to 500-530, so for now i think i'll keep some powder dry with my "low beta gold".

[Jim Nickerson]

Re: Credit inflation, Deflation: Prechter Interview

good discussion. thanks. i'm coming to see currencies as low beta gold with a skew in a disinflationary/deflationary scenario.

i made some money trading loonies a while back, but these days i'm more positional and not looking to trade. i think in spite of it being party time on wall street lately, there's a chance of a big sell-off in equities sometime in the next 6-12 months, at which time i would expect gold to sell off sharply as well, perhaps just back to 575 but perhaps to 500-530, so for now i think i'll keep some powder dry with my "low beta gold".

jk,

But doesn't this get one right back to what Finster suggested, I believe, with regard to holding "coins of the realm" which I took in our case to = the bonar, and gold? Which I guess is somewhat similar to R. Russell, though Finster is much more diversified.

I take your remarks to represent the capitulation of a bear, at least for the moment.

[bart]

Re: Credit inflation, Deflation: Prechter Interview

good discussion. thanks. i'm coming to see currencies as low beta gold with a skew in a disinflationary/deflationary scenario.

i made some money trading loonies a while back, but these days i'm more positional and not looking to trade. i think in spite of it being party time on wall street lately, there's a chance of a big sell-off in equities sometime in the next 6-12 months, at which time i would expect gold to sell off sharply as well, perhaps just back to 575 but perhaps to 500-530, so for now i think i'll keep some powder dry with my "low beta gold".

Cool - glad it helped. The area is *so* subject to many factors, not the least of which are the comfort one and the time frame of an investing position.

I see roughly the same as you on gold in the next few months - a run towards $700+ and then a drop back again to $550-600... black swans notwithstanding, DYODD, etc.

[bart]

Re: Credit inflation, Deflation: Prechter Interview

Bart, Finster, jk:

On most days, I consider myself less ignorant than the majority of the population, and since I have come to "know" you fellows, I consider you to be much smarter than the majority of the population, and that perception places me way down on the list of ignorance (0-100, 0=brain dead), which is okay.

You know if everyone thought the same, there would be no discussion, and to me, within my abilities to keep up with it, this has been a good discussion. I hope each of you consider it to have been worth your time and thought. I appreciate your thoughts and your time. Because everyone is ignorant about something, it doesn't shame me particularly to admit to being in that boat, but if it is possible, now that I have named you guys as elite in your knowledge of things financial, it would be nice for me, and perhaps for others, if you are able to minimize esotericism. Example: I am not picking on Finster, but are there other words that can be reasonably used beside "first derivative" and "second derivative"? I do not have a clue as to what that refers. I looked up derivative, which I understand, I think, and in Wikipedia it led me to calculus which I took 46 years ago and have not thought much about since.

Speaking just for myself, please don't put me on a pedestal. I'm just a guy who has studied a *lot* in the last two years and trying to share some views and facts, many of which were surprising to me.
I wish I could point you at some of my posts from two years ago for example so you could see how much of a babe-in-the-woods I was then... and then there's the old saw of how much I still don't know - its almost overwhelming. You may not believe that and think I'm trying to be humble, but I'm honestly not... or at least I don't think I am.

I also hope you score yourself well over 50 (and then some!) on that scale too. Just trying to understand and being willing to listen and work at it is *way* more than the majority are doing.

I agree on the discussions, I learn stuff too by participating.

And please go ahead and pick on Finster... it can be fun... ;)
Seriously though, I do understand about terminology issues and various very esoteric terms. The terms in the whole area are and have been a major barrier to me too, and my glossary was actually started as a "self-defense" move on my part. I do try and avoid them but sometimes, when in the midst of fairly esoteric topics and threads, its unavoidable in order to make a point (whether a real one or a somewhat over the top one) via their use... I honestly don't have a good solution here. What I do and have done when running into them is simply ignore that section or thread, just chalking it up to a relative brain deadness in the area... that 1st & 2nd derivative is one I treated that way (Finster is a major math maven, and we have a running diatribe on linear vs. log charting - you can 'blame' most of my use of one year annual rate of change lines on my charts on him... after he beat it into me ;)).

And don't forget to pick on me and ask for a definition or explanation - I'm far from perfect in always remembering that everyone doesn't know what M1 is for example. I literally couldn't define it about 3 years ago. (M1 is a Fed money measure that basically includes cash and checking accounts - very liquid money).

[jk]

Re: Credit inflation, Deflation: Prechter Interview

jk,

But doesn't this get one right back to what Finster suggested, I believe, with regard to holding "coins of the realm" which I took in our case to = the bonar, and gold? Which I guess is somewhat similar to R. Russell, though Finster is much more diversified.

I take your remarks to represent the capitulation of a bear, at least for the moment.

the issue was: coins of WHICH realm? as i indicated in my reply to bart, though, i'm coming to see currency as low beta [lower volatility] gold on the upside of "flation," different from gold on the disinflation or deflationary case.

as for the capitulation of a bear, in some other thread, perhaps only yesterday though it feels like ages ago, i agreed with you that it felt in some ways like 1999. i also pointed to my own history of premature shorting [still sounds like a problem for pharmaceuticals], russell's pti being very strong, and hussman's indicators showing an improving climate as reasons i hesitated to add to my shorts and puts positions. i haven't closed those positions, however, i'm just delaying any additions. i still expect a big decline in the next 6-12 mos, i'm just less sure that it will be before year-end.