rob arnott: "ka-poom" [not in so few words]

[jk]

When much of the financial community was panicked about 1% inflation heading to 0%, I moved the All Asset Fund to 65% in TIPS and Commodities. Why?! The four best predictors of inflation, in order of effectiveness are:

• Real Short Rates. Below zero, look for reflation. Above 2%, look for disinflation. It was zero. Then, as inflation started to roll, it reached -1.5% before the Fed abandoned the idiotic fight against deflation.
  • Early 2003: -1.5%. Severe risk of renewed inflation.
  • Late 2006: +2.5%. High odds of disinflation.
• Slope of the Yield Curve: Steep, look for reflation. Inverted, look for disinflation.
  • Early 2003: +4%. Severe risk of renewed inflation.
  • Late 2006: -0.5%. Likelihood of disinflation.
• Magnitude of Current Accounts Deficit. Long-term inflation predictor. Larger than average GDP growth (3% of GDP) is not permanently sustainable and hence is inflationary.
  • Early 2003: 4% of GDP. Risk of long-term inflationary pressures.
  • Late 2006: 5% of GDP. Risk of long-term inflationary pressures.
• Magnitude of Fiscal Deficit. Long-term inflation predictor. Larger than average GDP growth (3% of GDP) is not permanently sustainable and hence is inflationary.
  • Early 2003: 4% of GDP. Risk of long-term inflationary pressures. If vast off-balance-sheet deficit is included, immense inflationary pressures.
  • Late 2006: 3% of GDP. Diminishing risk of long-term inflationary pressures. If vast off-balance-sheet deficit is included, immense inflationary pressures.

So, early 2003, we had four red lights out of four ... all with strong signals. Today we have short-term indicators showing lower inflation [ka] and weaker long-term indicators showing higher inflation[poom]. The latter can be eliminated with the stroke of a pen, whenever Congress and the Administration share a view that our SS and Medicare promises are unsustainable. That'll happen some day, but probably not until we're in the thick of boomers retiring, in a decade or so. - Rob Arnott

[EJ]

Re: rob arnott: "ka-poom" [not in so few words]

With respect to the dollar, currency policy presented by Republicans since the 1990s and accepted by the public as confident and worldly nonchalance will be interpreted in the context of a Congress controlled by Democrats as casual and naive imprudence, even though the policy in word and action is precisely the same:

"Money: Whence it came, where it went" by John Kenneth Galbraith (1975)

Chapter 10: The Impeccable System

Politicians Doing their Enemies' Work (Page 133)

"No feature of American–to some extent of Anglo-Saxon–politics is so certain as the tendency of politicians to become first the captives, then the agents, of their opposition. In consequence, major initiatives are not taken by those who originally most favour them. Those so captured by an idea are too much in fear of their opponents. The action comes with the opposition accepts the need and wishes to disarm the original proponents. In the 1960s, liberal Democrats in the United States urged peace and international amity but continued the Cold War and plunged the country into Vietnam. They did so partly because they feared being called appeasers and crypto-Communists by the right. Richard Nixon, having impeccable credentials as a Cold Warrior, moved towards peace or accommodation with Moscow and Peking and withdrew, if very gradually, from Vietnam. Thus on foreign policy he outflanked his liberal opposition. When Professor Milton Friedman proposed a guaranteed income for the poor, it was considered (quite correctly) an act of creative imagination. When a Republican administration proposed it to Congress, it was a mark of conservative statemanship. When George McGovern, running for President, advanced a close variant on slightly more generous terms, it was condemned by conservatives as the dream of a fiscal maniac. As known and stalwart defenders of the dollar, the Republicans were able, in the early 1970s, to devalue it not once but twice. For anyone suspected of a more flexible attitude towards the integrity of the dollar, such action would have been exceedingly perilous."

[WDCRob]

Re: rob arnott: "ka-poom" [not in so few words]

Ka?

"But underlying inflation pressures were held at bay last month as well. Core inflation, which excludes energy and food, dropped by 0.9 percent, the biggest one-month fall in 13 years."

[jk]

Re: rob arnott: "ka-poom" [not in so few words]

With respect to the dollar, currency policy presented by Republicans since the 1990s and accepted by the public as confident and worldly nonchalance will be interpreted in the context of a Congress controlled by Democrats as casual and naive imprudence, even though the policy in word and action is precisely the same.

i'm not sure what policy you mean. lip service has always been paid to "a strong dollar," since no politician wants to endorse something described as "weak." democracts, notably schumer, have called for quicker revaluation upward of the yuan, which is of course a call for a weaker dollar.

but for the last several years, our currency has been managed by the boj, the pboc, and [less directly] the ecb. the japanese may respond to our suasion, but the pboc and ecb appear to be pursuing their own policies for their own reasons.

so, ej, you obviously have a very different slant on how the dollar's value, in terms of other currencies, is managed. could you be more explicit?

[EJ]

Re: rob arnott: "ka-poom" [not in so few words]

i'm not sure what policy you mean. lip service has always been paid to "a strong dollar," since no politician wants to endorse something described as "weak." democracts, notably schumer, have called for quicker revaluation upward of the yuan, which is of course a call for a weaker dollar.

but for the last several years, our currency has been managed by the boj, the pboc, and [less directly] the ecb. the japanese may respond to our suasion, but the pboc and ecb appear to be pursuing their own policies for their own reasons.

so, ej, you obviously have a very different slant on how the dollar's value, in terms of other currencies, is managed. could you be more explicit?

The contradiction of words "strong dollar" and deed "weak dollar" pursued under a Republican Congress may be interpreted very differently by the markets when spoken and acted by a Congress viewed as Liberal. That is the lesson of history.

[jk]

Re: rob arnott: "ka-poom" [not in so few words]

The contradiction of words "strong dollar" and deed "weak dollar" pursued under a Republican Congress may be interpreted very differently by the markets when spoken and acted by a Congress viewed as Liberal. That is the lesson of history.

got it. thanks. so democrats are the party of spending and inflation, i guess, and the republicans the guardians of fiscal rectitude? is that still how it's viewed abroad? it's kind of hard to reconcile with the behavior of government in the last 6 years, and the balanced budgets and surpluses as far as mr. magoo could see during the clinton years. the dems are talking about putting in pay-as-you-go budgeting again. perhaps it will mean more in global perceptions coming from the spendthrift party.