How low can you go?

[Pointedstick]

Using your definition, inflation should have been 10 or 20% for the past few years, no?

I don't know. Is that how much the money suppy is growing? That's what I think the definition of inflation is. The "inflating" of the money supply. There are so many other factors involved in prices that I really think that's a separate thing. Prices can drop even when the government is inflating (Japan).

That's actually a good point. Money supply inflation and price inflation are two different things. The latter inhibits my purchasing power, but the former may not; It can, but only inasmuch as it can cause the latter. As you correctly point out, there could be substantial money supply inflation with no price inflation (like right now, for example).

It also illustrates why I care about how much or how little prices are rising, not how many dollars the Fed has created and bought smelly loans with. It's an irrelevant data point from the perspective of my personal finances. I want my investments to preserve and grow my purchasing power, not keep up with the Fed's money spigot.

[Kshartle]

I want my investments to preserve and grow my purchasing power, not keep up with the Fed's money spigot.

If the interest on bonds is subsantially lower than the rate of money expansion......shouldn't that be a pretty good signal that stocks/gold together are going to really out do cash/bonds? I think that's what we've been seeing for the last few years and I expect that to continue until the interest rates get above the expansion rate. It's seems like a no-brainer to me with the understanding that short-term moves are going to be unpredictable. The dollars are getting printed big time and they have to go somewhere. A lot are going overseas for sure but they just aren't going back to bondholders at these rates. Yields are so low now, as the FED expands it operations and the currency war heats up more and more I think the disparity in returns is going to grow and grow.


Returns since bailouts and QE operations:

                    2009        2010        2011        2012          2013
GLD/VTI        26.5%      23.3%        5.3%        11.5%        2.6%
TLT/SHY      -10.7%      5.7%        17.7%      1.5%        -6.6%
Difference      37.2%      17.6%      -12.4%      10%          9.2%

[Pointedstick]

I think you're overlooking the bonds' capital value. If I was buying 30-year bonds purely for the coupon payments, then yes, a 1% real return (or lower if you don't believe CPI-U) is pretty pathetic. But that's not their function in the PP. They exist for their capital value to respond to deflationary conditions and changes in the interest rate, and we've seen good returns as the rate has fallen. Call it fall forever? Nah. Can it fall for a really long time? I'd say it already has!  Learning that Switzerland has 23-year bonds at 1.2% absolutely blew my mind. That's insanely low, right? Well, the 30-year rate in the USA is 2.5 times higher! Looks like there's plenty of room left to fall.

But you're right that "dollars are getting printed big time and they have to go somewhere." But why can't you see that right now they're offsetting a diminished amount of private-sector-originated money printing (lending)? That's the missing piece of the puzzle! If the government and Fed created every dollar, then sure, their expansion makes the overall money supply grow. But in a shared system, they could be expanding their side while the private sector banks are contracting theirs.

This isn't endorsement of anything they're doing. I'm an anarchist, just like you are. I simply find value in understanding the system so I can profit from it, because realistically neither of us are going to live to see a free private society.

[MachineGhost]

But you're right that "dollars are getting printed big time and they have to go somewhere." But why can't you see that right now they're offsetting a diminished amount of private-sector-originated money printing (lending)? That's the missing piece of the puzzle! If the government and Fed created every dollar, then sure, their expansion makes the overall money supply grow. But in a shared system, they could be expanding their side while the private sector banks are contracting theirs.

This isn't endorsement of anything they're doing. I'm an anarchist, just like you are. I simply find value in understanding the system so I can profit from it, because realistically neither of us are going to live to see a free private society.

You're being too nice.   Kshartle has been spouting off gold-bug/Monetarist fallacies for awhile because he's not familiar with Monetary Realism.  Where's Gumby when you need him?

The bottom line is all the in-house "money printing" the Fed has been doing has just gone into the monetary base.  And the banks are not lending as they are repairing their balance sheets by arbitraging their bank reserves for Treasuries and waiting.  There will be no inflation in the real economy until one of three things happens: the economy recovers from the cliff edge and yields rise forcing the bank reserves and other equlibrium-priced assets (i.e. all of them) to turn into musical chairs; the Fed screws up clawing back proportionate bank reserves as short-term yields rise due to loss of confidence or some other trigger event, or the banks dump all their Treasuries to nonexistent buyers in the secondary market and the Prime Dealers jack up the yields.  Any three ways, the Fed has to do *something* and if it does not do the job properly, then the CPI will double or triple.  Past history does not indicate the Fed has ever been competent short of Volcker inciting class warfare (it simply must not do to allow the proletarians to ask for and get real wage increases!).

Oh yeah, I suppose Congress could stop spending like drunken sailors.

[Kshartle]

I simply find value in understanding the system so I can profit from it, because realistically neither of us are going to live to see a free private society.

Yes I agree. I don't even know that a free society would be better with the current crop of humans. I think it's enevitable though as we learn better ways to teach children and they grow up learning to negotiate and trade rather than use violence to solve problems. When humans give up violence the state will fade away and all the problems it creates.

As far as profiting off the current monetary system, well that's what I'm trying to do. That's why I'm swimming with the inflation tide and not against it. Bernanke has said the stated policy is inflation. Now of course he means rising prices, inflation is just the vehicle to get there. I believe him. He is punishing bondholders and cash holders. He is making it easy for stockholders. Gold is 18 months from it's high because it ran up a lot faster and farther than stocks in the previous 10 years. I think the people buying gold were really ahead of the game. I personally think it's gold's turn to make a big move since it's so oversold compared to stocks but we'll see.

Not overlooking the possibility of capital appreciation in bonds. I think you guys are overlooking how remote that possibility is compared to the possibility of capital loss due to higher rates. Bond prices are still near all-time highs. Yes in the short-run they can go higher. Then can also stay high for a long time. They are just far far more limited than stocks and gold.

The central bank doesn't need help from the banks to inflate. There is no limit to the amount of "money" it can create. Rising yields and deflation will absolutely kill the economy at this point and the stock market, probably gold as well. Sure it's a possibility, but it is the opposite of what these are saying they are going to do and what is in their best short-term interest. It took double digit rising prices in the late 70s to get the rates neccessary rate hikes. Inflation isn't even being discussed right now in the news. We have a ways to go.

I'm taking a realistic look at the situation and profiting from it big-time. It looks like easy money to go with the FED and not fight it. Even though I despise the concept of being forced to use the paper they counterfit and all the problems it creates, it sure is easy making a buck of it. The trick is to hold anything else.

Last year I had my money split with a third in foreign stocks, a thrid in a global reit that did about 24% and a third in gold and silver that didn't do much. It was a fantastic year. I sold off the reit in december and am now split between PM and stocks with a big move into the miners in Feb and March. Those are still losing but I'll be holding on. The silver was 625 ounces/shares bought on May 31st at $26.86 so I think I'm in quite low there too. (It's SLV so shame on me I need to convert it to physical.

My point is there is so much admission floating around here that people have no idea what investments are going to do and that no one can make a reasonable prediction about the future. That's true in the short run but not in the long run. You guys are going to keep holding onto cash and bonds thinking some massive deflation is around the corner but you never present a scenario of how it's going to happen. There isn't one except for the FED stopping the presses. It will at some point but not until they are forced and gold and stocks combined are going to be much higher along with interest rates. Mark it.

Ohhh yeah stocks and gold will now proceed to sell off and interst rates will drop in April because I wrote this, 99% probability    It will be short-lived though.

[Kshartle]

Kshartle has been spouting off gold-bug/Monetarist fallacies for awhile because he's not familiar with Monetary Realism. 

How long have you been spouting off bond-bug/Keynseian fallacies?

The investment record since the bailouts and QE one through infinity are pretty dang clear that I've been right. I haven't held any bonds or cash since 2009. I've owned only stocks, reits and gold until buying 625 shares of SLV at $26.86 last May and a bunch of GDX recently at $42 & $37 (down on that one still). So I'm putting my money where my mouth is and it's paying off and I'm confident I know why.

Monetary Realism? Here's some realism:
Congress ain't stopping spending.
Benny ain't stopping printing.
The dollar has been in a bear market for over 40 years.
It has rallied here and there.
It might rally again next week.
It mostly rallies against other fiat currencies.
It will continue to lose purchasing power.
People holding cash and bonds aren't going to get a real return.
The stated policy is rising prices of 2%.
They might need to print 2% more money to get it. They might need to print 20%.
It doesn't matter what the banks do. The FED can print as much as it takes.
If they slip up for a few months they will make it up.
If they stop printing the banks will fail.
They won't stop until it's in their best interest to stop.
That will be when the people are about to lynch them because of rising prices.
We aren't even close to that yet. 
A depression doesn't mean prices are going to fall or deflation will occur.
Look at Zimbabwae. You can't get much more depressed than that.
I think we're in a depression right now that's been interupted by the stimulus.
The economy is in a bear market rally due to all the deficit spending enabled by the low rates. People have flocked to the dollar due to fears about the Euro.
How much longer is that going to go on?
Wages don't need to rise to bid up prices.
The entire country could be out of work and the government could just send out checks.
Last time I checked that was the condition for about 50% of the people.

Can anyone on here present a deflationary scenario? Please don't just say the FED stops inflating. At least mention why you think that might happen. Please don't say the banks will stop lending. All I here is how they aren't lending right now. They can't stop doing what they aren't doing.

I realize there are some predictions here. If you think they are wrong plese point out why, I'm interested. What isn't interesting is the oft-repeated "No one knows for sure", "How can you be sure", "Nothing can be predicted", "Predicting is speculation". Seriously it's like the Borg collective sometimes. Someone please present a deflationary scenario. I am all-in on stocks and PM right now along with my girlfriend and if you think we could really lose big then point out to me how that could happen. If I should be moving some of our savings into fixed dollar instruments then tell me why? Sincerely asking for at least one scenario that makes sense or has a ghost of a chance of happening.

[MachineGhost]

Can anyone on here present a deflationary scenario? Please don't just say the FED stops inflating. At least mention why you think that might happen. Please don't say the banks will stop lending. All I here is how they aren't lending right now. They can't stop doing what they aren't doing.

Easy.  All the sovereign bonds of Europe start imploding one after another just like they did in the 1930's as bondholders lose confidence.  Once confidence is lost, it is exceedingly difficult to get it back (see Japan).  The EU is not a currency issuer as the US or Japan are, so the time between loss of confidence and implementing a "money printing" legal mechanism and ratification EU-wide is gaping enough for a deflationary period.

Plus, don't forget gold tanked 50% in the inflationary 1970's just on fears of an economic recovery.

Timing is the real issue and the PP exposes you to all asset classes so that timing is not necessary.  While the vanilla PP has its risk inefficiencies, it does sound to me like you are forecasting though.  Its one thing to lower the duration of the barbell because you're afraid of incipient yields rising through economic recovery or increased inflation expectations but another to go all in one asset class or another based on unproven expectations of the future.

[Kshartle]

Easy.  All the sovereign bonds of Europe start imploding one after another just like they did in the 1930's as bondholders lose confidence.  Once confidence is lost, it is exceedingly difficult to get it back (see Japan). 

Plus, don't forget gold tanked 50% in the inflationary 1970's just on fears of an economic recovery.

Lose confidence in what? Do you think the EU will not print Euros and instead go through with austerity? Which governments are going to stop deficit spending first? How is that going to be deflationary to the dollar? A rejection of Euro inflation to bailout the indebted countries there sounds extremely bullish for the Euro and will shine a spotlight on the dollar's problems I think. Everytime there are Euro fears the dollar is the beneficiary thus far. Rising bond yields in Europe due to default fears should ultimately be bullish for the Euro don't you think? It would mean people don't expect the countries to get bailed out with inflation.

What loss of confidence in Japan? It seems to me that people willing to accept 1-2% annual returns are exceedingly confident that what they get will keep it's purchasing power.

Fears of an economic recovery? Well.....that seems like a pretty irrational fear to me at this point. Decreasing labor participation, growing debt levels, kids graduating high school and college without marketable skills, food stamp and welfare rolls growing at record pace, a blatant socialist president who beat the socialist light candidate. Gold isn't going to tank anytime soon because of economic recovery. In any case wouldn't that be bullish for stocks?

I guess I should have been more specific, can you think of deflationary scenario for the US dollar (i.e. where you think monetary expansion will stop or even contract)? That's the only way to get a real gain on cash & bonds with yields these low I think, other than a short drop in long-term rates for a couple weeks or months.

[Kshartle]

All the sovereign bonds of Europe start imploding one after another just like they did in the 1930's as bondholders lose confidence.

Ohh yeah, why would they lose confidence? What is the scenario? What is the chain of events? I'm not asking you to gaze into the crystal ball....just maybe take a stab at a possible path there. It's kind of like me asking why you think stocks and gold could drop against bonds and cash and then saying because people lose confidence and sell them. Lose confidence in what?

[AgAuMoney]

your definition of inflation is essentially "growth of the money supply." IMHO, that's a more embarrassing admission. How does it make sense to estimate a value that's the intersection of supply and demand for money by only looking at supply? Using your definition, inflation should have been 10 or 20% for the past few years, no?

Inflation is the growth of the money supply.

The effect of inflation as measured by prices is the intersection of supply of money, demand for money, supply of goods, demand for goods.  In addition different goods are affected differently because of their individual supply and demand factors.

[AgAuMoney]

Yes I agree. I don't even know that a free society would be better with the current crop of humans. I think it's enevitable though as we learn better ways to teach children and they grow up learning to negotiate and trade rather than use violence to solve problems. When humans give up violence the state will fade away and all the problems it creates.

Or perhaps if we can get rid of the state, then the majority of humans will give up violence.

(Look at violence in the 20th century.  By far the worst has been state sponsored.)

In any case, I think we'd be better off without much of the current crop of humans.  But I suspect that problem would also be solved by getting rid of the state.

[AgAuMoney]

Do you think the EU will not print Euros and instead go through with austerity? Which governments are going to stop deficit spending first? How is that going to be deflationary to the dollar? A rejection of Euro inflation to bailout the indebted countries there sounds extremely bullish for the Euro and will shine a spotlight on the dollar's problems I think. Everytime there are Euro fears the dollar is the beneficiary thus far. Rising bond yields in Europe due to default fears should ultimately be bullish for the Euro don't you think? It would mean people don't expect the countries to get bailed out with inflation.

Right now it is a race to the bottom.

The Fed and the gov't talk "strong dollar" but when exports start to suffer they practice weak dollar.  Unless the future is going to be different from the past...

Even the Swiss had the same reaction.  The Franc reached 1.22 per Euro and businesses were complaining and talking about leaving the country and so their bank announced that 1.20 was going to be the cap.  WHAM.  Take down the Franc just like that.

Japan, same thing.  For 20 years or more now.

The Fed, the ECB and the BoE are all in agreement to inflate the money supplies.  Nobody wants to be too much stronger than anybody else, and nobody wants to go down too far too fast.  So everybody is playing games with words and actions to manage the decline.

[Pointedstick]

your definition of inflation is essentially "growth of the money supply." IMHO, that's a more embarrassing admission. How does it make sense to estimate a value that's the intersection of supply and demand for money by only looking at supply? Using your definition, inflation should have been 10 or 20% for the past few years, no?

Inflation is the growth of the money supply.

The effect of inflation as measured by prices is the intersection of supply of money, demand for money, supply of goods, demand for goods.  In addition different goods are affected differently because of their individual supply and demand factors.

If that's how we're going to define inflation, then I think we'd better use a different measurement for calculating real returns. As far as I can tell, we're all here investing our hard-earned money to preserve and grow our purchasing power, not keep up with the number of dollars in circulation.

If, say, my PP returns 8% in a given year, the money supply has grown by 7%, and the prices of stuff I buy has gone up by 2%, what makes most sense to say my real return that year was; 6% or 1%?  I think 6%.

[MachineGhost]

Lose confidence in what? Do you think the EU will not print Euros and instead go through with austerity? Which governments are going to stop deficit spending first? How is that going to be deflationary to the dollar? A rejection of Euro inflation to bailout the indebted countries there sounds extremely bullish for the Euro and will shine a spotlight on the dollar's problems I think. Everytime there are Euro fears the dollar is the beneficiary thus far. Rising bond yields in Europe due to default fears should ultimately be bullish for the Euro don't you think? It would mean people don't expect the countries to get bailed out with inflation.

You're taking what I said out of context.  The EU doesn't have the legal ability to "print Euros".  In any case, the time delay between the pragmatic need to do so and actual ratification in all of the EU could easily take years and the interim would be a deflationary period with a loss of confidence in sovereign bonds.

What loss of confidence in Japan? It seems to me that people willing to accept 1-2% annual returns are exceedingly confident that what they get will keep it's purchasing power.

Japan is a highly socialist, export-oriented economy with high saving domestic savings rates due to little native economic growth and low returns on capital.  Along with the BOJ, the rest of the world has been subsidizing Japan's domestic uncompetitiveness.  Maybe things will change with Abe's stated goal of higher inflation, maybe not.  But they've gone nowhere for 20 years.  I'm not holding my breath that a little inflation is going to change the need for fundamental restructuring.

Gold isn't going to tank anytime soon because of economic recovery. In any case wouldn't that be bullish for stocks?

Gold has tanked 16.5% since its peak and stocks are up 27% since that time on expectations of an economic recovery.

I guess I should have been more specific, can you think of deflationary scenario for the US dollar (i.e. where you think monetary expansion will stop or even contract)? That's the only way to get a real gain on cash & bonds with yields these low I think, other than a short drop in long-term rates for a couple weeks or months.

Loss of confidence in the petrodollar hegemony, loss of confidence with the Fed endlessly pushing on a string, loss of confidence in expectations of an economic recovery, EU imploding, Japan imploding, China imploding, or after an extended period of unrestrained inflation when the Fed grows a pair (classic "tight money" conditions).  There's lots of potentials that can cause deflation that can overwhelm the lack of any transmission mechanism from the Fed to the real economy.  There has never been a synchronized worldwide deflation... yet.

[Kshartle]

If, say, my PP returns 8% in a given year, the money supply has grown by 7%, and the prices of stuff I buy has gone up by 2%, what makes most sense to say my real return that year was; 6% or 1%?  I think 6%.

This is a good point. It demonstrates how subjective the words are we are using. I would bet half of the disagreements here are because we don't agree on the definition of the words we are using. I think saying 6% makes more sense. That demonstrates the value of saving. Let's say the money supply never grew by another dollar. If all you did was store cash in a shoebox you would still be getting a real return from saving because technological and productive capacity increases would lower prices. There would be a reward for deffering present consumption and I'd call that a real return. If someone wanted to make the case that the return was just 1%......well I'd be ok with that too as long as they defiened it.

[AgAuMoney]

Inflation is the growth of the money supply.

The effect of inflation as measured by prices is the intersection of supply of money, demand for money, supply of goods, demand for goods.  In addition different goods are affected differently because of their individual supply and demand factors.

If that's how we're going to define inflation, then I think we'd better use a different measurement for calculating real returns. As far as I can tell, we're all here investing our hard-earned money to preserve and grow our purchasing power, not keep up with the number of dollars in circulation.

The issue is, purchasing power is a personal metric depending on what you purchase or need to purchase in the future.  The effects of inflation are never evenly distributed but most affect where the new money goes first and spreads/levels from there.

We've tried to measure the impact of inflation by measuring price changes.  It never applies to an individual because of different purchasing habits combined with the variance of inflation on different products over time.

[AgAuMoney]

Let's say the money supply never grew by another dollar. If all you did was store cash in a shoebox you would still be getting a real return from saving because technological and productive capacity increases would lower prices. There would be a reward for deffering present consumption and I'd call that a real return.

Exactly.

Example today if you dump spare change and small bills into a jug to accumulate funds to buy your next computer or HDTV, your "return" is 0%, and the "real" return as adjusted by the CPI will be less than 0% (near certain).  However as production and capability/features of computers and other electronics such as HDTVs are advancing faster than inflation their price/capability keeps dropping which gives your targeted savings an effective "real" return over time.

[Pointedstick]

The issue is, purchasing power is a personal metric depending on what you purchase or need to purchase in the future.  The effects of inflation are never evenly distributed but most affect where the new money goes first and spreads/levels from there.

We've tried to measure the impact of inflation by measuring price changes.  It never applies to an individual because of different purchasing habits combined with the variance of inflation on different products over time.

That's true. It's also true for investment returns; it doesn't matter that the "average" yearly return is 7% or so; what matters is our personal return. I think it makes the most sense to compare your personal return to your personally-experienced rate of price inflation. Comparing your personal return to the average price inflation doesn't give you great data. You'd need to compare the average return to the average level of price inflation.

Example today if you dump spare change and small bills into a jug to accumulate funds to buy your next computer or HDTV, your "return" is 0%, and the "real" return as adjusted by the CPI will be less than 0% (near certain).  However as production and capability/features of computers and other electronics such as HDTVs are advancing faster than inflation their price/capability keeps dropping which gives your targeted savings an effective "real" return over time.

I used to make these "cash in a shoebox" arguments myself, but are they really relevant in this day and age? How many people actually save that way? Most people I know save their money in bank savings accounts and CDs which usually return at least something close to the rate of inflation in normal times. And anyone with more financial knowledge can save in bonds, stocks, commodities, currencies, you name it. We truly live in the golden age of savings vehicles.

[melveyr]

We truly live in the golden age of savings vehicles.

LOL. A golden age of fiat savings vehicles 

[Pointedstick]

We truly live in the golden age of savings vehicles.

LOL. A golden age of fiat savings vehicles 

Real ones too. We can save in gold, silver, real estate, factories, firearms, ammunition, canned goods, antique furniture. livestock, Obama inauguration commemorative plates, you name it. Of course, most people don't consider buying those things to really be "saving." My point is that there are a zillion and one ways to attempt to perserve and grow your wealth outside of putting greenbacks in a cardboard box for 30 years and then discovering to your dismay that an ice cream cone costs $1.50 rather than a nickel.

[Kshartle]

Ohhh yeah stocks and gold will now proceed to sell off and interst rates will drop in April because I wrote this, 99% probability   

By God who posted this brilliance? Market timing is simple.

[Reub]

Obama inauguration commemorative plates

  Good one. 

I've been trying to talk Reub out of a large allocation to Obama plates.

The only way that you will get them from me is to pry them out of my dead, cold hands!

[AgAuMoney]

My point is that there are a zillion and one ways to attempt to perserve and grow your wealth outside of putting greenbacks in a cardboard box for 30 years and then discovering to your dismay that an ice cream cone costs $1.50 rather than a nickel.

Which is why I was very specific about "targeted savings" and how even the very poor choice of a bottle as a savings vehicle could be a real return after inflation when compared to electronics.

And yes, I know quite a few people who intentionally save with bottles or envelopes, or etc.  I watched a guy wheel a 5gal water jug full of coins and a few bills out of work just a few weeks ago.  He said he fills a jug about every 10 months.  He uses some of the money to buy donuts and other treats which he brings in to work and he dumps his change in the jug, as do some coworkers who want to contribute.

Other people are uncomfortable mixing funds in an account for some reason, and they don't want to open multiple accounts.  So for short-term savings things (up to a few years) they save in envelopes or shoe boxes or ...

And then there is teaching kids to budget and save.

And then there is the dave ramsey (or was it suze orman? don't remember) approach to budgeting where you cash your check and put money in envelopes by category.

[goodasgold]

The folks who rushed to sell their bonds might be re-thinking their move. TLT is up 2.6% today (so far.) 

Maybe that guy Harry B knew what he was taling about.