What economic cycle are we in right now?

[glennds]

Are we in Prosperity, Recession, Inflation or Deflation?

What about the past couple of years? What economic condition would you classify 2011 and 2012?

Thank you,

[Pointedstick]

We have a Fed-fueled boom that's pushing up stocks without prosperity, bonds without deflation, and gold with very low inflation.

Soooo… nobody really knows. I suspect these things are only obvious in hindsight.

[Tortoise]

It's difficult to say objectively, but right now it seems like we're hovering somewhere in the middle.

[Kshartle]

Looks like massive inflation to me but it's all getting exported to other central banks that keep printing and buying up all the dollars, propping up it's value.

Real rates are clearly negative. If I had to compare to any other time I'd say it looks most like 1970, with gold and silver having already discounted a lot of what's coming.

[melveyr]

Recovering from a deflation, moving towards prosperity.

[clacy]

Deflationary forces are at work but due to massive central bank involvement this has been staved off for the time being. I suspect that ultimately this activity pushes us into inflation however.

Even though stocks are doing quite well, I see no reason to think prosperity is here or knocking on the doorstep but I do believe that we'll see prosperity again after a massive public sector deleveraging

[MachineGhost]

What about the past couple of years? What economic condition would you classify 2011 and 2012?

I agree with KShartle.  Stagflationary recession.  We just don't have wage push inflation compared to the 70's.

[Kshartle]

It's impossible to know exactly what the future holds for certain, and impossible to predict short-term movement (1-2 years) because crisis can pop up or disasters etc. It is however possible to look at the debt of the US Government and unfunded liabilities and ask yourself where the FRNs are going to come from to pay them. They are going to have to come from the Fed of course. More FRNs will be chasing a relatively stable amount of goods and services pushing up prices. When we start seeing prices going up 7-10% per year it will be impossible for the gov't to claim there's no inflation. No one will believe it (few do even now I think). Rates will have to rise or the FED will have to monetize all the debt. The US has to roll over 5+ trillion every year in addition to the 1 plus trillion deficit. How will this be possible at higher rates? They can do it now because rates are near zero.

My point is, I think it's possible that the government slashes the spending, and the FED tightens and gold and stocks fall. But I don't see how the debt will even be serviceable. It's either print massive amounts (metaphorically) or re-structure the debt (outright default). Either way, US debt looks extremely risky, same as corporate debt.

Prechtor has been saying sit in cash and have it under your mattress. Obviously that's been terrible but if the gov't allows a true deflation this is a great strategy. Schiff agrees with the problem but he expects the FED to print right over it to keep delaying the pain, in which case gold and silver and foreign stocks are the way to. So far he's been right but it's a big risk to take.

My question to the group is, A: does anyone think long-term rates can stay down without the FED intervening monthly and on an increasing basis; B: can the US government service the debt (roll over maturing and issue new bonds) if rates rise to normal levels?

If the answer to both is no, what is the justification for holding any bond denominated in dollars, short-term or long?

[MediumTex]

It's impossible to know exactly what the future holds for certain, and impossible to predict short-term movement (1-2 years) because crisis can pop up or disasters etc. It is however possible to look at the debt of the US Government and unfunded liabilities and ask yourself where the FRNs are going to come from to pay them. They are going to have to come from the Fed of course. More FRNs will be chasing a relatively stable amount of goods and services pushing up prices. When we start seeing prices going up 7-10% per year it will be impossible for the gov't to claim there's no inflation. No one will believe it (few do even now I think). Rates will have to rise or the FED will have to monetize all the debt. The US has to roll over 5+ trillion every year in addition to the 1 plus trillion deficit. How will this be possible at higher rates? They can do it now because rates are near zero.

My point is, I think it's possible that the government slashes the spending, and the FED tightens and gold and stocks fall. But I don't see how the debt will even be serviceable. It's either print massive amounts (metaphorically) or re-structure the debt (outright default). Either way, US debt looks extremely risky, same as corporate debt.

Prechtor has been saying sit in cash and have it under your mattress. Obviously that's been terrible but if the gov't allows a true deflation this is a great strategy. Schiff agrees with the problem but he expects the FED to print right over it to keep delaying the pain, in which case gold and silver and foreign stocks are the way to. So far he's been right but it's a big risk to take.

My question to the group is, A: does anyone think long-term rates can stay down without the FED intervening monthly and on an increasing basis; B: can the US government service the debt (roll over maturing and issue new bonds) if rates rise to normal levels?

If the answer to both is no, what is the justification for holding any bond denominated in dollars, short-term or long?

Doesn't Japan show that things can play out very differently?

Japanese debt has been an outstanding investment, even with ultra-low rates, and the Japanese currency has only strengthened in response to the government's and central bank's willingness to facilitate enormous levels of sovereign debt.

[notsheigetz]

I think of HB's observations about the 4 economic cycles of Prosperity, Recession, Inflation or Deflation about the same as I do Newton's observations about physics. It was about as good as you can get given the information available but things are never as simple as they seem.

[smurff]

I like Heisenberg' s Uncertainty Principle:

http://science.howstuffworks.com/innova ... icide2.htm

[notsheigetz]

Basically why I pay absolutely no attention to backtesting charts. I don't doubt that they are accurate about the past but do they really tell us anything at all about the present, let alone the future?

I like Heisenberg' s Uncertainty Principle:

http://science.howstuffworks.com/innova ... icide2.htm

[Kshartle]

the Japanese currency has only strengthened in response to the government's and central bank's willingness to facilitate enormous levels of sovereign debt.

Isn't the Yen making all-time lows against the Euro, the Aussie and Gold in response to the promise of the Central bank to print trillions?

How much return has there been on JGBs for the Japanese in the last decade? A couple % a year? What constitues a great investment? Wouldn't they have been better off in the bonds of some other countries, let alone stocks and gold?

Is there any doubt the Yen would be much much stronger without the constant printing?

My question for the US also aplies to the Japanese. Can they keep their bond yeilds low without printing? If they can't, they why not hold cash? Is there any benefit to holding JGBs (or treasuries) other than a temporary buffer against a possible short-term stock swoon.

Can the Japanese (or US Gov't) service their debt at higher interest rates? They have to print (covert default) or re-structure (overt default) it seems to me.

Does anyone have a theory about how long-term rates can stay low without debasement of the currency? When do you guys think rates will ever get to a real return?

[Kshartle]

What's missing is the answer to the questions I posed. Can the rates stay low without central bank bond buying (inflation)? Can the debt be serviced (interest paid) if rates rise? If the answer to both is no, why take the risk of holding US debt? It's reward-free risk.

The point of holding cash under the mattress is for a deflationary crash where the dollar price of stocks and gold are falling.

Long-term treasuries have been great for deflationary crashes thus far. The debt and deficits are so massive now and rates so low how likely is it they can provide shelter for investors again?

[Pointedstick]

What's missing is the answer to the questions I posed. Can the rates stay low without central bank bond buying (inflation)? Can the debt be serviced (interest paid) if rates rise?

I think the point is that the Fed seems very committed to doing both of these things. So we can agree that they're distorting the economy, but they have the power to distort it quite a lot for a very long time. Our fiat money system is ultimately a cooperative effort between the Congress, the Fed, and commercial banks, and I predict that the very robust Fed action we've seen over the last few years is not likely to be seen as a historically aberrant period of crazy activist central banking. We're probably going to be in for a lot more of the same.

[Kshartle]

No one interested in exploring those questions?

They have the power to distort for a long time but they can't put off the correction forever, only make it bigger. The market will re-assert itself and it's going to make 2008 look like a boom.

Interest rates will have to go up or the currency will have to be shredded. Either way the bond holders are going to lose. Cash might end up being the best, or maybe gold, some sectors will be ok but the bonds just look awful long-term.

[murphy_p_t]

Interest rates will have to go up or the currency will have to be shredded. Either way the bond holders are going to lose. Cash might end up being the best, or maybe gold, some sectors will be ok but the bonds just look awful long-term.

I continue to share this view. The wrinkle is that before we reach the "long-term"...the 30-year could go down to 2%.

Suppose you couldn't touch your portfolio for 10 years...I don't think I'd be holding near the amount of LTT as the PP prescribes.

[Kshartle]

Yes, rates can do anything in the short-term. Heck, they can do anything in the long-term too. But if they stay this low for 5+ more years you still won't be making any money in them. If they do stay low you have to ask yourself how this would be possible? There isn't enough people out there willing to purchase US debt. The FED is buying nearly all the mid-lonf term paper. That means inflation and a continuation of the melt up in stocks, hopefully an explosion in the metals after this long consolidation.

So other than for short-term volititliy dampaning, can anyone make the case that Long-term bonds will generate a real return for a long time? Why are T-bills better than cash under the mattress? For all that interest? Give me a break. I guess it's a lot harder to be robbed, that's a benefit.

[Pointedstick]

So other than for short-term volititliy dampaning, can anyone make the case that Long-term bonds will generate a real return for a long time?

Their coupon payments sure won't be generating a real return, but their capital value can increase faster than inflation--even with very small changes in the interest rate--due to their high duration.

Why are T-bills better than cash under the mattress? For all that interest? Give me a break. I guess it's a lot harder to be robbed, that's a benefit.

That's a very pertinent question, and honestly, at rates this low, I don't think anybody would scoff at a PP investor who decided to hold their cash in good old fashioned greenbacks. In fact, I actually do this already for a portion of my cash.

[Kshartle]

Their coupon payments sure won't be generating a real return, but their capital value can increase faster than inflation--even with very small changes in the interest rate--due to their high duration.

Agreed. But even if they dropped to 1% and stayed there over a 5-10 year period it's going to take so much intervention from the central bank Gold and possibly stocks should be moving up that much more. The rates are so low they can't hope to beat inflation over a long time period in my opinion. I just don't see how. And how will the government manage to make the interest payments if say the ten-year moves up to 5-6% even? So much debt has to be rolled over it will add hundreds of billions to the deficit, maybe a trillion! Now you are talking some printing! Bernanke's arms are gonna fall off! Get to the chopper...now!!!!

[MediumTex]

Long term treasuries have now been trading in the 2-4% range for almost 5 years, and over that period the PP has harvested HUGE gains in this asset.

[Kshartle]

No they haven't.

30 year rates hit 4% on Oct 6th 2008.

Since then TLT has returned 38%

VTI has returned 60%

GLD has returned 92%

By the time rates make it back up to 4% the disparity will probably be a lot worse.

[Kshartle]

Fast forward to Dec 1st 2008 when 30 year rates were at the same 3.2% they are now and you've TLT return of 24%, VTI of 110% and GLD of 114%

Despite maintaining the low rates the return since then has been predictably pitiful due to all the QE needed to keep them down.

[MediumTex]

No they haven't.

30 year rates hit 4% on Oct 6th 2008.

Since then TLT has returned 38%

VTI has returned 60%

GLD has returned 92%

By the time rates make it back up to 4% the disparity will probably be a lot worse.

What I should have said is that in the 4 full years since 2008, long term treasuries have been the leading PP asset in two of those four years (2008 and 2011), and those two years of high performance occurred when rates were in the 2-4% range.

I'm not saying that long term treasuries are the best asset to own in the PP.  I'm just saying that they have done their job in recent years, even with rates at exceptionally low levels.

[Kshartle]

They have kept the volitility down, no argument there. I recognize that is a major benefit to some. I just fear that the volitilty they will mostly be dampening in the next ten years will be the upside volitility. I can't see any path to profiting by owning them for any serious length of time.

Now if they crashed by 50+% in a short time I could see picking them up if it looked like the government could possibly pay them with something other than monopoly money. Obviously if they crashed by that much it would take a looooooong time to ever see a real return if you held or were buying throughout.