Something’s Always Going Up

[Finster]

Re: Something’s Always Going Up

i'm not "people." and having spent time getting to know the ins and outs, the distortions and fabrications of the official cost index, i will pass on adopting an index i don't understand. that's ok.

i'm a physician, a biological psychiatrist. i have become quite skeptical over the years. when a read a research paper i examine it very closely to see if there are biases in its construction, so that i know how to interpret the results. i'm not any less interested in understanding the things on which i base the management of my money.

So you would rather use _____ (fill in the blank) for your unit of value. The US dollar? :rolleyes: I hope at least you get as far as the SGSCPI. Perhaps you can explain in gory detail how that is calculated. The only drawback is that that will leave you one to two years behind those of us using the FDI.

I hardly see the point of delving into the guts of the FDI without your first having examined more carefully the information you already have at your disposal. As I explained, it is simply an index of the value of the dollar. Look at the charts. Do they make sense? You could try using the the data to adjust your portfolio performance (bet you're not doing so great in real, FDI-adjusted terms :eek: ). Or you could take a look at how it relates to the performance of the stock market or other financial indices. Or you could compare it with the CPI (either version), and see for yourself how badly changes in the CPI lag it.

But even this would be missing the point; we are getting off track of the topic of this thread. The goal is not to market the FDI. I don't get a penny when somebody else uses it. The only benefit I get from it is better financial understanding and better investment performance. The important points as far as this thread is concerned are simply 1) the asset allocation concept and 2) the fact that the dollar itself varies and should not be treated as if constant. If it's helped readers understand those two basic issues, then it's accomplished all it should.

[WDCRob]

Re: Something’s Always Going Up

Finster, can you point us to a link showing FDI data (monthly? yearly?) and explain in general terms how you use it? Do you adjust each asset/class for changes in the FDI and then reallocate to get back to the %s you've chosen?

And what alternatives exist to FDI as an independent unit of measurement? Presumably none you like so much as FDI, but what options are out there beyond the official CPI and the Shadow version?

[Finster]

Re: Something’s Always Going Up

And what alternatives exist to FDI as an independent unit of measurement? Presumably none you like so much as FDI, but what options are out there beyond the official CPI and the Shadow version?

I really don't know of anything that attempts to do what the FDI does. Probably the Federal Reserve Dollar Index (which I usually refer to as the USDX) is the closest alternative. While it merely measures the dollar against other currencies, at least it is explicit in dollar value. And although people tend to presume the CPI is an index of inflation (and thus in the inverse an index of the value of the dollar) that was not the original intent, and even the BLS is a little cagey about referring to it as such, stating directly that "The Consumer Price Indexes (CPI) program produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services." http://www.bls.gov/cpi/home.htm Then the SGS (Williams) version of the same mainly is an attempt to do a better job of the same.

Finster, can you point us to a link showing FDI data (monthly? yearly?) and explain in general terms how you use it? Do you adjust each asset/class for changes in the FDI and then reallocate to get back to the %s you've chosen?

My web site has the data and chart, along with some other material. If you click on "Finster" at the top of any of my posts, you should see a menu with a link to my home page.

There are a number of uses. The main ones are to graphically illustrate the changing value of the dollar in real terms and to adjust other dollar-denominated prices to real terms. A very practical use for retired folks is to let them know how much they can remove from their investment portfolios each month without depleting it in real terms (or to track a target depletion rate). Other investors can calculate their rate of real return. Another is to keep an eye on what our government is doing with our money, if it inflates and all we have it its own data then it's leaving the fox in charge of the henhouse. But probably the most important is as a conceptual tool to help one mentally separate out the real and the illusory in changing asset values.

You certainly can "adjust each asset/class for changes in the FDI and then reallocate to get back to the %s you've chosen". On a snapshot basis, it's not necessary, because the only critical point is to use the same units for all values. But personally I do make that adjustment, because I want to make valid comparisons over time. It allows me to set specific target amounts - not merely percentages - for certain assets. For example, to set some amount like $40K in cash as a target, with the $ being in constant Y2K dollars. (The FDI arbitrarily sets the value of the dollar at the beginning of the year 2000 as equal to one). By just converting all values into Y2K dollars, I don't then need to worry about them changing over time due to the effects of inflation; X amount of stocks, Y amount of cash, and Z amount of bonds, etc. will always be worth the same in constant Y2KD.

[WDCRob]

Re: Something’s Always Going Up

Thanks for the explanation and the link. I think I'm treading on ground that's already been covered, but I'm hoping you'll indulge...

On your charts...SPX, OIX and AUX are denominated in $$, yes? What do they look like adjusted for FDI?

Also...your PMs are full.

[Finster]

Re: Something’s Always Going Up

Thanks for the explanation and the link. I think I'm treading on ground that's already been covered, but I'm hoping you'll indulge...

On your charts...SPX, OIX and AUX are denominated in $$, yes? What do they look like adjusted for FDI?

Also...your PMs are full.

They are denominated in current dollars. Funny you should mention that, because they used to be FDI-adjusted to Y2KD. I changed them to current dollars because it makes them easier to interpret in light of the values we see and hear daily.

Below is one of the older charts, showing the S&P 500 as of April 29, in both current dollars (pink) and FDI-adjusted to Y2KD (dark). This should give you a feeling for how things look different when you eliminate the dollar illusion.

[WDCRob]

Re: Something’s Always Going Up

Interesting again.

And the reason that $ and Y2KFDI$ track nicely from 1999 until 2003 and then diverge at an increasing rate is...

Put another way...why should the SPX in $ and Y2KFDI$ show roughly the same rates of change for four years and then stop? What happened to decouple them, or, maybe, if that's an easy answer -- excess priting/credit creation -- why were they coupled in the first place from 1999-2003?

Not sure I'm asking the right question here, so feel free to play politician and answer whatever question you wish I'd asked.

[Finster]

Re: Something’s Always Going Up

Interesting again.

And the reason that $ and Y2KFDI$ track nicely from 1999 until 2003 and then diverge at an increasing rate is...

Put another way...why should the SPX in $ and Y2KFDI$ show roughly the same rates of change for four years and then stop? What happened to decouple them, or, maybe, if that's an easy answer -- excess priting/credit creation -- why were they coupled in the first place from 1999-2003?

Not sure I'm asking the right question here, so feel free to play politician and answer whatever question you wish I'd asked.

HA!

You nailed it. The Fed went into inflation high gear shortly after 9-11. You know how Greenspan's answer to every human ill always seemed to be easier money?

The FDI had actually been pretty well-behaved before that, we'd even had a couple mild deflations (seen on the FDI chart as a rising dollar), but basically the Greenspan Fed put the pedal through the metal after 9-11 and never looked back, even cutting Fed funds all the way to a generational low "emergency" rate of 1%. Then it remained way too easy way too long, and then to top it off, was way too slow in its "removal of accommodation" series of baby steps.

Soaring oil prices, house prices, trade deficits - just a whole litany of inflationary ills - are the sorry result.

[bart]

Re: Something’s Always Going Up

I really don't know of anything that attempts to do what the FDI does. Probably the Federal Reserve Dollar Index (which I usually refer to as the USDX) is the closest alternative. While it merely measures the dollar against other currencies, at least it is explicit in dollar value. And although people tend to presume the CPI is an index of inflation (and thus in the inverse an index of the value of the dollar) that was not the original intent, and even the BLS is a little cagey about referring to it as such, stating directly that "The Consumer Price Indexes (CPI) program produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services." http://www.bls.gov/cpi/home.htm Then the SGS (Williams) version of the same mainly is an attempt to do a better job of the same.

I also know of nothing that even attempts to do what the FDI does. Even my own inflation prediction attempts *at best* are only a cross between the SGSCPI and the FDI, and leaning much more to the SGSCPI than the FDI.

I may know a bit more on something similar, although it depends on what you mean by the Federal Reserve Dollar Index. If its the USDX index, the one that's traded on futures exchanges and is a basket of a few other currencies, then the trade weighted dollar index is probably a bit better.

Here's two views of the trade weighted index, direct from the Fed:

[Jim Nickerson]

Re: Something’s Always Going Up

Finster,

Either in this thread or the other one, you recently stated "the dollar and bonds are overvalued." I'm rather sure you made that statement, and I cannot find it to quote. And I tried searching, but no luck.

If you said that what parameter are you using to make the statement?

Right now I am unable to imagine how you arrive at that conclusion. I don't doubt your statement.

Thanks.

[Finster]

Re: Something’s Always Going Up

I also know of nothing that even attempts to do what the FDI does. Even my own inflation prediction attempts *at best* are only a cross between the SGSCPI and the FDI, and leaning much more to the SGSCPI than the FDI.

I may know a bit more on something similar, although it depends on what you mean by the Federal Reserve Dollar Index. If its the USDX index, the one that's traded on futures exchanges and is a basket of a few other currencies, then the trade weighted dollar index is probably a bit better.

Here's two views of the trade weighted index, direct from the Fed:

...

Sounds like we have an overabundance of USDXs! I claim no expertise in USDXs and gladly defer to you on the proper nomenclature. The "Federal Reserve Dollar Index" as charted in Barron's Market Week section every week was the one I had in mind, and I'd presumed it to be the same as the "US Dollar Index" that has the futures contract listed in the same section, and that it is "trade-weighted".

Perhaps you can straighten us out.

[WDCRob]

Re: Something’s Always Going Up

Try try again...

So the fall in SPX from 1999-2003 was a collapse of the stock bubble, with the $ changing hardly at all vs. FDI$, but the 'rise' since 2003 has been driven by a devaluation in the dollar.

[Finster]

Re: Something’s Always Going Up

Finster,

Either in this thread or the other one, you recently stated "the dollar and bonds are overvalued." I'm rather sure you made that statement, and I cannot find it to quote. And I tried searching, but no luck.

If you said that what parameter are you using to make the statement?

Right now I am unable to imagine how you arrive at that conclusion. I don't doubt your statement.

Thanks.

This is why I changed my avatar just for this thread. It's the "relativity" thing, and it ties in with my claim that "something's always going up".

From the standpoint of an investor, it really doesn't even matter whether I am right about something always going up. There is no such thing as being invested in nothing (apart from taking a vow of poverty and joining the brotherhood). If everything appears to be going down in dollar terms, then it's cash (dollars) that you want to be invested in.

Suppose you make the case that the stock market is overvalued, bonds are overvalued, and that real estate, commodities, and hard money are all overvalued. What's left to be invested in? Cash! Conversely, if the stock market is fairly valued and commodities are undervalued, then cash and bonds must be overvalued. This by my reckoning is an inflationary setup not unlike what we are seeing right now. The Fed is too easy, interest rates are too low, and if I am right you want to be low in cash and bonds.

One good confirmation of this is what Bart just pointed out in his M3 thread - money supply is growing at an annual rate in excess of 10%!

I have my own methods for making that determination, and they would require at least a chapter of a book to explain. But the chart I posted earlier (and which I reproduce below) illustrates. It shows my target allocation. Keeping in mind that "neutral" is presumed to be 50% stocks, 25% commodities, and 25% bonds, the current target of 48% stocks, 36% commodities, and 16% bonds is the equivalent of saying the stock market is slightly overvalued, commodities are quite undervalued, and that bonds are well overvalued.

[Finster]

Re: Something’s Always Going Up

Try try again...

So the fall in SPX from 1999-2003 was a collapse of the stock bubble, with the $ changing hardly at all vs. FDI$, but the 'rise' since 2003 has been driven by a devaluation in the dollar.

The best way to characterize it would be to look at a chart of the FDI that covers that period. The $ did actually rise for a while, but the subsequent decline was much steeper.

BTW, re the question about investing versus speculating, as a first approximation at least, and for purposes of the discussion, I was considering the former to involve only cash-basis, long-side activity. That is, no shorting and no margin or leverage. Shorting and margin both involve borrowing, which is speculative in that you are placing bets with assets that aren't even yours to begin with.

[jk]

Re: Something’s Always Going Up

That is, no shorting and no margin or leverage.

you did say your statements about "investing" v. "speculating" was a first approximation. in a second approximation it might be noted that buying puts, for example, is a way playing the short side without borrowing. similarly, one might think that stocks were undervalued [i don't think this] but the dollar overvalued. then futures would allow you to hedge the dollar basis of your u.s. stock portfolio.

my point- i think it is misleading to worry about what is "investing" and what is "speculating." what's important is always thinking about the risks involved in anything you do with your assets. "think about risk" is the important message to get out.

btw finster, your current allocation in stocks seems to indicate only slight overvaluation, while looking at e.g. price/revenues, p/book, p/record earnings, etc says this market is way overvalued. so why do you think otherwise?

[bart]

Re: Something’s Always Going Up

Sounds like we have an overabundance of USDXs! I claim no expertise in USDXs and gladly defer to you on the proper nomenclature. The "Federal Reserve Dollar Index" as charted in Barron's Market Week section every week was the one I had in mind, and I'd presumed it to be the same as the "US Dollar Index" that has the futures contract listed in the same section, and that it is "trade-weighted".

Perhaps you can straighten us out.

I'm no expert in the area, and also don't know what Barrons has but it probably is the "standard" USDX which is composed of this fixed basket of other currencies:





The trade weighted ones I linked above are literally that - the other currencies are simply weighted by variables that represent how much trade the US does with a given country. The difference between the two charts is that one is "major" currencies and the other is almost all currencies.