Credit inflation, Deflation: Prechter Interview

[jk]

Re: Credit inflation, Deflation: Prechter Interview

are there other words that can be reasonably used beside "first derivative" and "second derivative"?

discussing motion in terms of distance over time, first derivative is velocity. second derivative is acceleration.

looking at, e.g, a stock chart, first derivative is the slope of the increase or decrease in price, second derivative is the change in the slope. if you look at gold and its "parabolic" ascent up to may, you see that the slope was positive, i.e. the price was increasing, and the second derivative was positive, i.e. the price was increasing faster and faster.

the second derivative shows an underlying trend. if e.g. a stock is increasing in price, we can say the slope or the trend is positive. but if it is rising more and more slowly, i.e. the second derivative is negative, we say that the trend is approaching a top/resistance/something.

[Finster]

Re: Credit inflation, Deflation: Prechter Interview

...i'm coming to see currencies as low beta gold...

No real beef with that.

But they're also low alpha ... negative alpha!

good discussion. thanks.

Ditto.

[Finster]

Re: Credit inflation, Deflation: Prechter Interview

And please go ahead and pick on Finster... it can be fun... ;)...

you otta know ...

[Finster]

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.

It's been almost that long since I took calc, Jim...

But remember how folks trying to encourage us used to tell us math was good for us and would help us succeed one day?

...they were right!

[bart]

Re: Credit inflation, Deflation: Prechter Interview

Originally Posted by bart
And please go ahead and pick on Finster... it can be fun... ...

you otta know ...

Ditto... ;)

[Finster]

Re: Credit inflation, Deflation: Prechter Interview

Ditto... ;)

Oh HARRS and tuts!!!

(with apologies to you-know-who...)

[Jim Nickerson]

Re: Credit inflation, Deflation: Prechter Interview

discussing motion in terms of distance over time, first derivative is velocity. second derivative is acceleration.

looking at, e.g, a stock chart, first derivative is the slope of the increase or decrease in price, second derivative is the change in the slope. if you look at gold and its "parabolic" ascent up to may, you see that the slope was positive, i.e. the price was increasing, and the second derivative was positive, i.e. the price was increasing faster and faster.

the second derivative shows an underlying trend. if e.g. a stock is increasing in price, we can say the slope or the trend is positive. but if it is rising more and more slowly, i.e. the second derivative is negative, we say that the trend is approaching a top/resistance/something.

Thanks, jk, I would not have come upon understanding that except for your time to explain. Would it be worth the trouble to put it into the iTulip glossary?

[Jim Nickerson]

Re: Credit inflation, Deflation: Prechter Interview

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.

I had the fleeting question of WHICH realm too regarding owning its coins.

I just put up a comment on view of how the current bounce could play out. I put it in EJ's piece of low volatility, or search Bronson.

[Finster]

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.

Jim, it sounds like you are missing the forest for the trees. In the passage which you question, the salient point is very clear - it is not merely whether there is inflation that counts, but changes in the rate of inflation that affect the relative performance of the asset classes. If you got that much out of it, it is not necessary to precisely understand every individual term used. Although the overall level of financial sophistication in this forum is pretty high, I try to state important points in more than one way on the assumption that what might be best understood by one reader might not be so for another. This might be over a series of posts in an exchange, or even in the same post. For example, in the instant case, the point about "derivatives" is recast in the very next sentence:

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.

Meanwhile, don't sell yourself short. From what I see, despite your confidence level, you grasp these things well. And in general, if you find a particular passage less than clear, first try reading the preceding posts on the topic - context is a wonderful illuminator. If all else fails, do just as you have done here, and ask.

[Jim Nickerson]

Re: Credit inflation, Deflation: Prechter Interview

Jim, it sounds like you are missing the forest for the trees. In the passage which you question, the salient point is very clear - it is not merely whether there is inflation that counts, but changes in the rate of inflation that affect the relative performance of the asset classes. If you got that much out of it, it is not necessary to precisely understand every individual term used. Although the overall level of financial sophistication in this forum is pretty high, I try to state important points in more than one way on the assumption that what might be best understood by one reader might not be so for another. This might be over a series of posts in an exchange, or even in the same post. For example, in the instant case, the point about "derivatives" is recast in the very next sentence:

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.

Meanwhile, don't sell yourself short. From what I see, despite your confidence level, you grasp these things well. And in general, if you find a particular passage less than clear, first try reading the preceding posts on the topic - context is a wonderful illuminator. If all else fails, do just as you have done here, and ask.

Thanks, Finster. Dumb is no fun, though I can laugh about it. Not understanding first and second derivatives, even though you wrote "That is," I saw absolutely no relationship between the two sentences. You know from experience; "this horse will drink water, once it is led, pushed, cajoled, or encouraged to make it to the trough."

[Finster]

Re: Credit inflation, Deflation: Prechter Interview

Thanks, Finster. Dumb is no fun, though I can laugh about it. Not understanding first and second derivatives, even though you wrote "That is," I saw absolutely no relationship between the two sentences. You know from experience; "this horse will drink water, once it is led, pushed, cajoled, or encouraged to make it to the trough."

You are foundering on the unsupported assumption that the antecedent for "that is" is contained entirely within the immediately preceding sentence. For sure, if you were expecting the succeeding passage to state a formal definition of the derivative, you would have been disappointed. But I’m afraid an extended discourse on delta epsilonics would have lost more readers than it gained.

It would have destroyed my point. True that some readers might be find the derivative reference to be a speed bump, but others would find it a neat and concise way to express an important concept. Writing involves some degree of compromise and there is no such thing as framing a point to be all things to all people.

Derivatives are a sufficiently important and useful notion that civilization spends many billions of dollars teaching millions of students about them in colleges around the world. Of course not everyone will breeze right past an incidental reference to them, but it is simply not essential to understand them to get the gist of my argument. It is that gist that is critical here, not the individual terms. One need not dissect one’s dog to know what a dog is.

Even the best writers are not expected to do all the work for their readers. They have to choose between being so concise that critical detail is missed and so tedious that the broader point gets lost. This means that occasionally a reader may have to look up a term, or scan back through preceding discussion for illuminating context.

In this case, either one should suffice. Again, the ultimate issue is not "Did you understand each word?", but "Did you get the point?".

[Jim Nickerson]

Language and Communication. Philosophical Tripe?

Merriam-Webster 2003: Language = the words, their pronunciation, and the methods of combining them used and understood by a community. Communication = a process by which information is exchanged between individuals through a common system of symbols


This all gets back to a post made by Finster in #98 of this thread.

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.

For anyone who has the time or interest to read this (and I am not sure it is worth most people’s time), my problem was a lack of understanding of what Finster posted.

For those who do not know Finster, I will relate my knowledge of him. He is an investor who has lives in a haunted house, perhaps in America, who has interests in physics, music, and economics. One comment by Thye Usual Suspect on this board suggested something more about Finster, “Ok, I will spell it out...FUNSTER is a BONDS expert of some fame from inside the Beltways.” (FUNSTER was TUS’s peculiar way of naming Finster as I understood it) I don’t know if TUS’s comment is bloody rubbish or fact. I surmise Finster could be someone with commercial experience in investing. Were I to bet, I would bet the fact is TUS was truthful. However, I would not make that bet on what TUS’s simple statement but rather on the quality of the many posts Finster has made since he began to participate on iTulip. From my perspective, I believe he probably has a greater background of things economic than anyone else who participates on iTulip. No one should interpret that statement as suggesting that I think he is necessarily more correct in his opinions than anyone else, or that I personally discount anyone else’s opinion who I perceive may not have the academic background or OJT that Finster appears to me to have. I do not know whether Finster is correct about any opinion, but I do believe he has a bit more understanding than most people. Please, no one who contributes here should take offense at my characterization of Finster with regard to how anyone views his own knowledge. Certainly no offense is intended, and I do respect everyone who takes the time and thought to put forth opinions on iTulip and seldom do I discount any of them.

If I may assume that Finster’s depth of understanding significantly exceeds the average person’s knowledge, the average person who visits iTulip, and understanding of things economic, then the language he might choose to communicate may exceed the comprehension of the average reader on iTulip. Now whether or not that assumption has any chance of being valid, I do not know.

To digress to an anecdote, I trained in my specialty with a fellow who was very smart; heck, he might have been a genius. Having known everyone who trained where I did for a period of 22 years, he was the smartest guy that ever went through the program. He went on to stay in academics and at times was called upon to make presentations on various topics at scientific meetings. For one with such wonderful mental capabilities, the presentations he made were generally useless, simply because his choice of language was of such erudition, than few, if any, could comprehend his presentation—and these were presentations made presumably to peers. I brought this up to him a couple of times, that his choice of language far exceeded the average attendee’s ability to readily comprehend his presentation. If one had his written paper, a dictionary, a library at hand, and all the time necessary, then one no doubt could gain understanding of whatever had been his comments and probably be elevated to his level of understanding. His reply to me each time was that he thought the language he used should elevate the knowledge of those who heard him speak. He was in the truest sense correct, but on a practical basis incorrect because none in the audience had his paper, a dictionary, a library at hand, and the time to decipher all that he said.

Another digression, I did a little “study” last Friday of iTulip’ bulletin board. If it was correct, of the number of comments made in the fora, 65% were made by 6 individuals; whereas of 450 members, only 133 were considered active, i.e. 30%. I do not know how “active” is defined. What I think I do know is that I have learned a whole lot of iTulip as someone who in retrospect did not begin reading iTulip with the notion that I would end up learning a lot. I started reading here because the content interested me and still does. I have learned from participating here because of having the luxury of retirement and lifestyle to spend as much time as I have participating and in fact studying some to try to comprehend most of what has passed before my eyes. Though even to me in retirement with time to use as I rather much please, there is a limit to how much time exists simply to study. I have learned here because many of you are willing and have time to correct and guide me, and for which I am truly appreciative.

From looking periodically at the visitors “meter” or just at the number of members, there are to me a whole lot of people who visit here and, I presume, find some answer or gain some knowledge from doing so. What I find perplexing is that more people are not members, or that more members do not contribute, either in asking questions, offering opinions or factual insights. I am of the opinion: the more opinions the better, the more facts the better.

I would not trade Finster for anyone else I “know” right now. I think he has added a lot to the discussions that go one here. In my opinion, his level of knowledge is superior to what I imagine is the average of all who visit here—pure conjecture. But in keeping with this vein of erudition and where it fits in, I wonder why those of us who do contribute do so? Do we do it to show how much we know, or do we do it in order to test our understanding against that of others and hopefully come away with some better understanding? For me it is the latter, and for me I have become a bit smarter though no richer in bonars. But there is another reason for some posts, and that is they offer opinions to clarify issues or to answer questions others post.

Assuming that the majority of people who visit iTulip have a life that involves eight or more hours a day working in gainful employment, I pity such a poor soul who perchance comes to iTulip today, finds it interesting, and is additionally compulsive enough to attempt to read all that has been written so far—does such a person exist? Such new people or even those members for some while now, I surmise, who have a life in the real world, i.e. that outside iTulip, must be rare in having the time to read this site, comprehend it, and at the same time consider contributing, much less doing any serious study daily about topics raised here and about which they may have mediocre knowledge. I know if I still worked, then I could spend much less time here, perhaps even no time.

Back to the main point.

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.

Because I respect his knowledge, when Finster writes “and this is critical,” it makes me set up, try to get my thinking cap on, and seek understanding of what he writes next. But when he chooses to write in terms that I happen not to come close to understanding, then it leaves me “flummoxed” (a Finster choice of a word for the more commonly used and understood word “confused.”) and frustrated. The “gist” (see quote below) of the above quote is: 1--Finster’s assertion that during inflationary periods gold and commodities do better during accelerating inflation, and stocks do better during decelerating inflation. His chart in post #92 supports his contention. 2—“ 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.” As I see it, hoping to get into “smart” crowd, one must understand the “why.” And I believe one cannot understand the “why” if one does not understand his discussion of second and first derivatives—which I did not until jk (post #106 above) explained it to me, and I believe had Finster just by chance chosen to use accelerating and decelerating inflation during inflationary times, this might have consumed much less of my time in coming to grasp his point; at the same time I am not suggesting anyone should go to incredible lengths just to use words that might satisfy my understanding of them. I think what he has pointed out in this thread is worthy of consideration when it involves trying to decide into what assets to diversify. To me his insight is profound.

Derivatives are a sufficiently important and useful notion that civilization spends many billions of dollars teaching millions of students about them in colleges around the world. Of course not everyone will breeze right past an incidental reference to them, but it is simply not essential to understand them to get the gist of my argument. It is that gist that is critical here, not the individual terms. One need not dissect one’s dog to know what a dog is.

But somewhere one must learn what is a dog and what is a cat, and it is the extension of that simple differentiation to other fields where the simplicity fails—or as least failed as it is related to me.

What is taught in college, and even in high schools today may not be learned now or may not be remembered 47 years later. I took calculus 47 years ago next quarter, and as I recall I finally grasped it while cramming the night before the final to have honestly gotten a “B” in it—nailing the final to go from a low “C” to a “B”. Civilization also spends I expect billions on alcohol, and since I took calculus I have done way more than any reasonable human should do in the way of having engaged in binge drinking. More than once I have wondered whether I have just forgotten things or have I killed off enough brain cells with alcohol such that the knowledge that may have been there earlier is now destroyed. Everyone I presume knows the dictum: use it or lose it. I do not know if what I once “learned” has just been forgotten from non-use or has it been wiped out by having killed off no telling how many brain cells? At any rate, regarding the things put forth by Finster and many others on iTulip have increased my understanding of things economic. Just writing this and going back and looking and thinking about the thread has been productive for me.

You [Jim Nickerson] are foundering on the unsupported assumption that the antecedent for "that is" is contained entirely within the immediately preceding sentence. For sure, if you were expecting the succeeding passage to state a formal definition of the derivative, you would have been disappointed. But I’m afraid an extended discourse on delta epsilonics would have lost more readers than it gained.

Thank heavens Finster did not enter into a discussion of “delta epsilonics” a subject of which I have never heard. Take away from this, if you got to here, what you may. iTulip is a great site, with some smart, patient contributors, and I expect a lot of smart readers who for whatever reasons unfortunately do not contribute.

"Did you get the point?"

Yes, but actually only after a long time and rather much coming to understand every word.

[Finster]

Bloody Rubbish And Other Philosophical Tripe



Jim, your fine ability to dissect a gnat whilst an elephant is sitting on your shoulder is exceeded only by your sporting wit and good humor.

;)

[Jim Nickerson]

Re: Credit inflation, Deflation: Prechter Interview

Maybe someone else will pop in and take an opposing view, jk, but I sure can’t think of any meaningful extra benefit. As alluded to before, possibly someone with a very large portfolio and who likes to spend a lot of time on its management might prefer it, but even then any advantage would come from management skill and effort, which could just as easily cut the other way.

It’s practically a truism of investing that the single most important determinant of risk and return comes not from the selection of individual assets, but from the mix of asset classes. Currencies, including the US dollar, are all currencies. The major diversification benefit would come not from the inclusion of other members of the same asset class, but from the addition of other asset classes, like stocks, bonds, real estate, commodities and hard money.

Let’s take a look at an example $320,000 portfolio. For good measure, you could throw in some coins, cash in the bank (or under the mattress), and maybe some real estate and energy trusts, but just to keep it simple, let’s have it composed entirely of ETFs.

$40,000 SHY (1-3 year Treasuries)
$40,000 TLT (20+ year Treasuries)
$20,000 DJP (Commodity index)
$20,000 GSP (Commodity index)
$20,000 DBC (Commodity index)
$20,000 CEF (Gold & Silver)
$50,000 SPY (Large-Cap US Stocks)
$40,000 VXF (Small-Cap US Stocks)
$40,000 EFA (Foreign Developed Market Stocks)
$30,000 EEM (Foreign Emerging Market Stocks)

This is pretty much a sleep-like-a-baby portfolio. You could turn off the news and forget about it for a couple years at a time. Particularly if you are worried about a decline in the value of the dollar. You have 25% in short and long term bonds, 25% in commodities and hard money, and 50% in global stocks. The first two positions would likely decline in real terms, after all, they are dollar-derivatives. But what about the next four? Combined they represent gold, silver, oil, gas, wheat, corn, and sundry other commodities. With a diminished and diminishing dollar, you don’t really think it’s going to cost less dollars to buy these things, right? Quite the opposite. It’s going to take more dollars to buy them; their prices would soar. If they fell, we’d be talking about a rising dollar (deflation), not a falling dollar (and then the first two positions would rise).

Between the four stock ETFs, you own the world. Now if the dollar declines, as measured against what did it do so? All the publicly traded equity capital in the world? If that capital fell in dollar terms, you’d have at least half of a bullet-proof case that the dollar actually rose in value, not fell. If, perhaps due to some global communist revolution, the world’s capital stock actually declined in real value, there’s not a whole lot left you could say it declined against except for commodities. This would take us back to our commodity positions. All in all, its hard to imagine any foreseeable scenario where such a basket of assets would lose intrinsic value over any realistic investment time frame, and with a little insight and effort, ought to actually grow your real purchasing power come what may.

Finster, assuming your are not entirely tired of this thread, I have a question.

I do not know how many years your FDR goes back, but the FDI goes back to the beginning of time almost, and over the last 70 years at least the bonar has lost value. In my primitive mind, if it were to prove correct that a lot of inflation lies ahead, it seems to me that at some point, the FED is going to have to raise interest rates in order to attract foreign money. Were that to be true, and I am not positive it is, why would you in the model asset allocation put anything into long bonds via TLT?

[Finster]

Re: Credit inflation, Deflation: Prechter Interview

Finster, assuming your are not entirely tired of this thread, I have a question.

I do not know how many years your FDR goes back, but the FDI goes back to the beginning of time almost, and over the last 70 years at least the bonar has lost value. In my primative mind, if it were to prove correct that a lot of inflation lies ahead, it seems to me that at some point, the FED is going to have to raise interest rates in order to attract foreign money. Were that to be true, and I am not positive it is, why would you in the model asset allocation put anything into long bonds via TLT?

geez, Jim, you sure do have a way of asking good questions...

Not quite sure how to explain this without writing a thesis, but mostly it boils down to probability.

Suppose for a minute that you knew with certainty exactly which asset class was going to perform the best over a time frame starting now and ending as some point in the future - which is also known with certainty. If that were the case, naturally the best investment strategy would be to put 100% of your portfolio into that one asset class. And then, when that period was over, move it all into that asset class which would then be the top performer in the next investment period.

Before long, you'd be the richest man in the world.

Alas, the financial markets do not work that way. If they did, everyone would soon be the richest man in the world. You never have certainty as to a specific course of financial future history. The best - the very best - you can do is establish probabilities.

Moreover, consider subperiods of that "next investment period". How long for? A few hours? One day? One week, month, year??? Unless you are prepared to trade second by second, even having your portfolio in the "best" performing asset class will at least temporarily leave you underperforming the rest. This means that you will have losses, if only on a relative basis.

This, in turn, means that even having 100% of your portfolio in the best asset class will leave you underperfoming during at least one subperiod.

Thus, in order to sidestep the possibility your forecast of the financial future might not be perfect and to minimize the volatility you will experience in realizing the best possible return, you seek to optimize probabilities.