Predictions For 2013

[Pointedstick]

My bonus prediction was the highest average annual gas prices and the media would give up pretending there is a housing recovery. I think we just barely hit the former and they are just on the verge of giving up the housing ghost. I expected long-term rates to be 4.5% or higher by now which will totally kill the housing fantasy.

Huh? Maybe Everything's Local™, but where I live, gas is $2.78 a gallon and housing prices are rising more rapidly than they have in years.

$2.78?!?!?!

Where do you live....Oman?!?!?!

New Mexico, baby. Low gas taxes and abundant petroleum reserves. Natural gas is about 0.50¢ a therm, if you can believe it.

In my part of the state, there are still a lot of foreclosures, but they're starting to get snapped by by investors and flippers, which is reducing the lower-priced inventory and pushing prices back up as these properties make it back onto the market as move-in-ready Home Depot specials.

[Kshartle]

Huh? Maybe Everything's Local™, but where I live, gas is $2.78 a gallon and housing prices are rising more rapidly than they have in years.

$2.78?!?!?!

Where do you live....Oman?!?!?!

New Mexico, baby. Low gas taxes and abundant petroleum reserves. Natural gas is about 0.50¢ a therm, if you can believe it.

In my part of the state, there are still a lot of foreclosures, but they're starting to get snapped by by investors and flippers, which is reducing the lower-priced inventory and pushing prices back up as these properties make it back onto the market as move-in-ready Home Depot specials.

Ohhh yes New Mexico is part of the lowest-cost states for gas prices.

You know the investors and flippers have no intention of living in those homes though. I think a lot of the buying this year has been investors but they will be the first to walk away and default when they can't sell fast enough. I don't see where the demand will come from to support prices and buying with a continuosly shrinking labor force. My prediction was the media would give up this storyline as an economic driver by now but I think that process might take another 6-12 months. We'll see.

[Pointedstick]

Ohhh yes New Mexico is part of the lowest-cost states for gas prices.

You know the investors and flippers have no intention of living in those homes though. I think a lot of the buying this year has been investors but they will be the first to walk away and default when they can't sell fast enough. I don't see where the demand will come from to support prices and buying with a continuosly shrinking labor force.

That's an easy one: credit. People will get large and unaffordable mortgages to purchase houses at inflated prices until the whole house of cards collapses. Again.

[Kshartle]

Ohhh yes New Mexico is part of the lowest-cost states for gas prices.

You know the investors and flippers have no intention of living in those homes though. I think a lot of the buying this year has been investors but they will be the first to walk away and default when they can't sell fast enough. I don't see where the demand will come from to support prices and buying with a continuosly shrinking labor force.

That's an easy one: credit. People will get large and unaffordable mortgages to purchase houses at inflated prices until the whole house of cards collapses. Again.

So we agree on the outcome.....you just think the timing is farther off than I do.

I think they've been doing this already. It's just not as spectacular as 2004-2007 because we're poorer and more dependant on low rates.

[Gumby]

Money printing, which both suppressed bond yields and flooded the world with cash that had to go somewhere.

But, in August you said "money printing" was supposed to increase bond yields, and push up the price of gold as people piled out of stocks...

http://gyroscopicinvesting.com/forum/st ... /#msg75272

What he's saying is the money printing suppresses yields immediately, but ensures they will go up in the long-run. And the longer the money-printing pedal is to the metal, the higher they will eventually go as more buyers leave the market to protect against inflation.

You've gotta love "wait-and-see" economics. Most of the time people don't live long enough to see the predictions come true. It's been a few decades now and still people think these predictions are just around the corner.

And secondly his bungled prediction was "by the end of the year". So it's too late for back-pedaling.

[Kshartle]

But, in August you said "money printing" was supposed to increase bond yields, and push up the price of gold as people piled out of stocks...

http://gyroscopicinvesting.com/forum/st ... /#msg75272

What he's saying is the money printing suppresses yields immediately, but ensures they will go up in the long-run. And the longer the money-printing pedal is to the metal, the higher they will eventually go as more buyers leave the market to protect against inflation.

You've gotta love "wait-and-see" economics. Most of the time people don't live long enough to see the predictions come true. It's been a few decades now and still people think these predictions are just around the corner.

And secondly his bungled prediction was "by the end of the year". So it's too late for back-pedaling.

Yeah it was a thread about predictions for the next few months through basically the end of the year. Interesting you didn't pick at MTs prediction that stocks would be lower (they're higher) that gold would be higher (it's lower) and LTB would would be higher (it's up 2%).

Why don't you make a prediction instead of pointing out where people's short-term predictions were wrong? Short term predictions for investments are at best slightly better than a roll of the dice. If he said was going to roll a 7 at the craps table and it came up snake eyes would you point his "bungled" prediction? Would you be man enough to grab the dice or would you just watch and wait to criticize? Anybody can do the latter, good luck with the former.

[Gumby]

Interesting you didn't pick at MTs prediction that stocks would be lower (they're higher) that gold would be higher (it's lower) and LTB would would be higher (it's up 2%)...Would you be man enough to grab the dice or would you just watch and wait to criticize? Anybody can do the latter, good luck with the former.

The difference is I have an agnostic approach to the short term and long term future (as MT does). We admit we don't know what asserts will go where. Whereas you and Libertarian666 are so convinced that your logic is right that you've placed significant bets on a political outcome that never seems to come true, even after decades of Monetarist speculation. And every day it doesn't come true, you just say, oh it will happen "one day" — as if that's some kind of investment strategy.

As for me, I don't know which assets will go up or down, but the only prediction I will make is that the US won't go bankrupt unless it chooses to go bankrupt or the government falls. Every day that prediction seems to come true and you guys become more and more "surprised" that things haven't failed by now.

So I criticize because you guys came to this forum telling us why the dollar was doomed and keep extending the timeline and explaining away reality as if you can stay solvent long enough to see it happen.

[moda0306]

Here's my prediction, though it contains some qualifiers:

- IF inflation stays low, and workforce participation stays low, then the fed will most likely stick to its dual mandate and keep short rates very low and long-rates moderately low.

- My prediction is that inflation will stay low, and workforce participation will remain low, so rates will remain low or go lower (especially with 30 year yields @ 4%... that's 2-3% real yield right there if inflation is bouncing between 1% and 2%).



- IF yields accross the duration spectrum go below the rate of CPI-inflation, gold will rise in price, if they are higher, gold will fall.  I think they will fall in nominal terms a bit, so we might see some gains in gold this year if those long yields fall low enough below expected inflation (spread between T-bills and similar-duration TIPS).

- The stock market will probably have modest but predictable earnings, and will remain healthy, as US corporate balance-sheets are pretty healthy, but due to really lean earnings rations still might drop after such boom of a year.

- The euro will have a new batch of difficulties as their deflationary spiral continues, even with recoveries in some countries, long-term unemployment will continue to increase resentment and destabilize the area.

- Peter Schiff will parrot similar bs, without acknowledging why he and his ilk have been wrong for something like 5 years straight now.

[Kshartle]

Interesting you didn't pick at MTs prediction that stocks would be lower (they're higher) that gold would be higher (it's lower) and LTB would would be higher (it's up 2%)...Would you be man enough to grab the dice or would you just watch and wait to criticize? Anybody can do the latter, good luck with the former.

The difference is I have an agnostic approach to the short term and long term future (as MT does). We admit we don't know what asserts will go where.

Well there you go. You certainly can't ever be wrong when you say you don't know.

Here's the point about an investment prediction when it has a time-element, particularly short-term, which i consider less than two years: It's little better than a coin flip. Some threads people start here are started for the purpose of putting forth a prediction and soliciting the opinion of others. This was the point of MTs thread. Why are you even interested in such a thread if you're agnostic? Is it just to tell everyone that they were wrong after you made it clear you don't know either? Well enjoy, there will be plenty of opportunities with the new year coming up.

[Gumby]

Why are you even interested in such a thread if you're agnostic?

I just thought it was interesting for Libertarian666 to explain, matter-of-factly, why stocks went up — as if it was so obvious — when we literally spent about 2-3 months explaining to both of you why the future didn't have to be one where gold was skyrocketing and stocks/bonds were crashing. So, while I don't like making predictions — because I know they will turn out wrong 90% of the time — at least I'm able to accept all of the different outcomes that may come our way. And that's my point. I don't invest with one particular outcome and you and Libertarian666 probably shouldn't either.

[moda0306]

I don't mind longer-term predictions, but there have to be some consequences to being wrong, and maybe some qualifiers in there for reasons you may be wrong.

And further, if the BASIS for your prediction has been proven inadequate in other scenarios, usually there's a good cause for refining that debate TODAY.  For instance, if your argumen is universal healthcare and debt/GDP ratios will sink our country into an abyss of Socialist misery, then analyzing Great Britain's economy after WWII (before they really even controlled their currency) might be a valid exercise.

But do we ever see such exercises?  Not really.  All we hear out of the inflationists is Weimar and Zimbabwe, or micro-analysis applied to macro-economics.  And it's a bit disappointing.  As these are really fun historical periods to look at.

So what's more fun than MAKING the prediction (or choosing not to make one) is what exactly is going into it, and how well your "model" can hold up to analysis looking back, since it's too hard to wait 20 years to see who was right before debating these things.

[Gumby]

Here's the point about an investment prediction when it has a time-element, particularly short-term, which i consider less than two years: It's little better than a coin flip.

Speaking of that timeline, a little over two years ago, you came here ranting and raving about how the dollar is "toast". I wonder how many years will need to go by before you finally admit to yourself that you've misjudged things?

[Kshartle]

Here's the point about an investment prediction when it has a time-element, particularly short-term, which i consider less than two years: It's little better than a coin flip.

Speaking of that timeline, a little over two years ago, you came here ranting and raving about how the dollar is "toast". I wonder how many years will need to go by before you finally admit to yourself that you've misjudged things?

Well, I've been arguing for years that the economy would continue to deteriorate and this will likely end in a deflationary crash after the dollar loses a lot of value relative to the metals, stocks and foreign currencies.

So I guess if the deflationary crash occurs prior to a serious decline in the dollar I will definately be wrong. I hope that happens because deflation will let the economy restructure faster and with a lot less pain than inflation.

As for a timeline.....you'd have to search for any timeline I've put forward. I did think the dollar would be lower than it is at this point.....no quesion.

I have been saying since I got here in in 2011 that a stock/gold portfolio would beat cash/bonds. We're about to close a third straight year of that. What do you think will happen in 2014? I think a repeat.

[Gumby]

I have been saying since I got here in in 2011 that a stock/gold portfolio would beat cash/bonds.

Not sure how comparing against a cash/bonds portfolio is relevant. The overwhelming majority of us here hold a 4x25.

[Pointedstick]

I have been saying since I got here in in 2011 that a stock/gold portfolio would beat cash/bonds.

Not sure how comparing against a cash/bonds portfolio is relevant. The overwhelming majority of us here hold a 4x25.

I think he's trying to say that the cash/bond half of the portfolio is dragging down the PP's return.

[Bean]

My prediction for the rest of this thread is folks being douches to each other.

[Gumby]

I have been saying since I got here in in 2011 that a stock/gold portfolio would beat cash/bonds.

Not sure how comparing against a cash/bonds portfolio is relevant. The overwhelming majority of us here hold a 4x25.

I think he's trying to say that the cash/bond half of the portfolio is dragging down the PP's return.

Still, I don't see how it's relevant unless one is speculating with stock/gold vs. cash/bonds — which we aren't doing when we hold the PP. Most of us have 25%-35% stocks and ~15%-25% in each gold/bonds/cash right now as the PP re-allocates itself.

Anyway, my point is that the endless dollar-imploding meme is starting to get tiring after a few decades of being consistently wrong. Maybe it will happen someday, but it doesn't have to happen in our lifetimes.

[Kshartle]

I have been saying since I got here in in 2011 that a stock/gold portfolio would beat cash/bonds.

Not sure how comparing against a cash/bonds portfolio is relevant. The overwhelming majority of us here hold a 4x25.

I think he's trying to say that the cash/bond half of the portfolio is dragging down the PP's return.

Yes that’s what I’m saying. Now everyone knows that short-term movements are impossible to predict with accuracy. However, once interest rates moved to extremely low levels in late 2008 and the government/central bank embarked on huge amounts of money printing and stimulus/deficit spending to “cure”? the economic malaise, it became clear to me that one half of the PP would outperform the other. This was still the case in 2011 when I first posted here and it’s still the case today imo.

I’ve advocated holding short-term bonds to mitigate risk if you’re risk averse because the risk/reward in the long bonds has been very bad. It’s still bad. The government is spending far more than it takes in and making even bigger promises. The central bank is very easy right now and says it will keep rates near zero for years still. Gold/Stocks might seem like a volatile combo but it’s really not that bad. You do need to gut out the occasional swoon from one but this has been a better way to go, particularly for a younger investor.

Of course I really thought it would be gold carrying the torch but I advocated a split for diversification. Now we’ll see. I thought 2013 would be a banner year for gold. Instead it was awful. The sentiment is so bad and yet it seems like the fundamentals are stronger than ever so I am expecting 2014 to be positive in a big way.

I am not certain what will happen next week, next month or even the next year but I’m not personally investing for any of that. I'm investing for decades. I am certain that over the next 5-10 years gold/stocks will outperform cash/bonds because rates are so low, monetary policy is so easy and the government is so reckless.

People call that a political statement or doomsday prediction or some other nonsense. It’s none of that. It’s an analysis of the situation. If the situation changes then the analysis will change. Some people have a bias against analyzing the situation and want to jump on peopl's short-term predictions/guesses. Well that’s fine. Keep buying bonds and cash if it helps you sleep at night to not see major movements in your portfolio. I want to see major movements…up.

[Kshartle]

But a stock-only portfolio would have been better.  Or a stock/cash portfolio.

Unfortunately hind-sight is 20/20.

If you go back exactly 5 years, about when the deficit spending and money printing heated up a GLD/VTI port is up 92%. A TLT/SHY port is up 3.5%

I'm not cherry picking the stock bottom here. My starting point was still prior to a 22% drop in the S&P.

What has changed since then? Rates are only slightly higher but the government is still running wild and the central bank keeps extending any date when it will start to raise rates.

When you have a SHY/TLT split you basically have a barbell bond portfolio that acts very much like a 10-15 year bond portfolio. Well.....look at the yield on the ten year and if it's very low you know your avg annual return over the next ten years the bond half is going to be very close to the current yield. This is regardless of principle movements in the long-bond portion. I'll see if I can put together a chart demonstrating this.

All that being said, again you have no idea about short-term so everyone should invest in a way that they don't lose sleep since that's about all you can control.

[Kshartle]

Ok so below I put the 10 year rate (as best I could grab it off Yahoo, for the first trading day of each new year for the last 25 years. I might be off by a day or two on some. After that is the average cash/bond return over the next ten years as put forward here: https://web.archive.org/web/20160324133 ... l-returns/

There is an average delta of about .4% in favor of returns which is probably explained by a 25 year bond bull market as well as slightly higher average maturity on the barbell vs. the actual 10-year. This means the investements had slightly average rates starting each year than the ten-year.

There are only a could notable deltas but they aren't even big and culminated at the end of major interest rate moves. They would no doubt be smaller if we had the 13-15 year rate instead of the ten.

                                    Avg 10YR
Year        10-Yr Rate    Return          Delta
1980         10.5           12.4           1.9
1981         12.4           12.7           0.2
1982         14.2           13.0         -1.2
1983         10.3           10.8           0.5
1984         11.9           11.5         -0.4
1985         11.6           9.7         -1.9
1986           9.0           9.7           0.6
1987           7.2             8.0           0.8
1988           8.8           8.9           0.1
1989           9.2           9.2           0.0
1990           7.9           7.6         -0.4
1991           8.0           8.3           0.3
1992           6.9           7.5           0.6
1993           6.6           8.0           1.4
1994           5.9           7.1           1.2
1995           7.9           7.9           0.0
1996           5.6           6.2           0.6
1997           6.5           6.3         -0.2
1998           5.7           6.2           0.5
1999           4.7           6.6           1.9
2000           6.6           6.4         -0.2
2001           4.9           5.6           0.6
2002           5.2           6.5           1.4
2003           4.0           5.5           1.5
2004           4.4           4.7           0.3
Avg             7.8             8.2             0.4


The point of all this is the current 10-year is 3%. This means your most likely return over the next ten years on the cash/bond portion of the PP is close to 3%. It might even be slighlty less if rates rise significantly over that time. If the PP is going to do anything near it's historical average of 8-9% for the next ten years it's all going to be coming from stocks/gold. This only makes sense because they need to print to keep buying to prevent bond prices falling and printing raises the spector of inflation while supporting stocks that can raise prices.

Anyway, if you think I'm drawing really wrong conclusions from the data please let me know. But please don't call it doomsday/political/emotional, it's not and the insinuation is lame.

If anyone wants to check my math please go ahead, I could certainly have made an error.

[Kshartle]

Interesting.  A 50/50 stock/gold portfolio would provide a lot of excitement.  I know backtesting is looking in the rearview mirror, but just for fun I threw a 50/50 TSM/Gold portfolio and a 20/80 TSM/5YT portfolio into Simba's spreadsheet.  For the period 1985 - 2011, the results are (I'm not making this up, the CAGR was exactly the same):

            Gold/TSM        TSM/5YT
CAGR      8.68%            8.68%
Sharpe    0.48                0.74
SD          10.5%            6.3%

So a very conservative 20/80 portfolio (with treasuries, not TBM!) provided the same return with much less volatility. But forgetting about backtesting for a moment, what do you see driving gold prices in 2014?  I'm thinking they'll continue to slide as nominal and real rates continue to rise.  The 10 year treasury rate has increased from a 2013 low of 1.66% to 2.94%.  PenFed has 5 year CD's at 3%.  With rates keeping up with or even surpassing the inflation rate, holding gold will be even less attractive than it was in 2013.  I think we'll need some "fear" event to drive gold prices in the short term.  Of course in the long term I expect gold to have a real return around 0%, but we've had a long bull market in gold that appears to have some unwinding to do.  Of course I don't know for sure, so I'll continue to hold it.

Stocks have had a heck of a run recently also.  I'm expecting stocks to continue to rise in 2014 though, due to momentum and investors jumping in at precisely the wrong time.

The bond yields have moved up but they are still extremely low, especially in the short-term. I don't think anyone is jumping for joy to go get their 3% ten year bonds. I think money markets and CDs are better competition for gold and those rates are still pitiful.

Regarding price inflation....we've been seeing it in housing/bonds/stocks/education/health care and other industries for several years now because the government/banks are funneling money in there. Will it leak out into consumer prices at some point? I think so. Browne wrote about the 2 year lag between money-printing and consumer prices. With rates so low, and China saying it will back off treasury buying coupled with the government's disasterous budget problems.....I think they're going to have print even more just to keep rates down.

Once main street starts seeing consumer prices really jumping I think they'll start buying, they only started to get a tiny taste when prices were over $1,500. Intelligent investors will have pushed the price up long before then. Then you've got global demand. There are a bunch of shorts that will eventually have to cover so that's built in demand.

I have no idea what gold is going to do in the short run but I would just be shocked if it wasn't several times higher in the next ten years. Of course the central bank could engender a deflationary collapse but this is really really remote imo. Time will tell. The idea that our economy will behave like Japan's has for the last few decades doesn't seem plausible. There are too many differences between the US today and Japan of 15-20 years ago.

[Gumby]

I am certain that over the next 5-10 years gold/stocks will outperform cash/bonds

That's really not an impressive prediction, by any means, considering that "cash" doesn't do anything useful for our performance. We use cash for a rainy day, not to beat gold or stocks.

[Kshartle]

I am certain that over the next 5-10 years gold/stocks will outperform cash/bonds

That's really not an impressive prediction, by any means, considering that "cash" doesn't do anything useful for our performance. We use cash for a rainy day, not to beat gold or stocks.

You're missing a key concept then.

If money market rates were 15% you'd be singing a different tune. I suspect you were not around for those days. I was not either except as a boy but I do remember buying 2 year CDs paying +6% in the 90s.

I assure you that would do something useful for your performace.

[Gumby]

I am certain that over the next 5-10 years gold/stocks will outperform cash/bonds

That's really not an impressive prediction, by any means, considering that "cash" doesn't do anything useful for our performance. We use cash for a rainy day, not to beat gold or stocks.

You're missing a key concept then.

If money market rates were 15% you'd be singing a different tune. I suspect you were not around for those days. I was not either except as a boy but I do remember buying 2 year CDs paying +6% in the 90s.

I assure you that would do something useful for your performace.

Umm... you know that if Money Market rates were 15%, that would imply that the real return of our cash would be very different from our nominal return, right?

Anyway, you seem to completely miss the point of the PP in that by holding all of the assets it not only takes the guess-work out of deciding which assets will go up or down, but it also smoothes the volatility in the process. So, even the dopey bonds/cash, which may very well underperform, help make the volatility tolerable.

[Kshartle]

That's really not an impressive prediction, by any means, considering that "cash" doesn't do anything useful for our performance. We use cash for a rainy day, not to beat gold or stocks.

You're missing a key concept then.

If money market rates were 15% you'd be singing a different tune. I suspect you were not around for those days. I was not either except as a boy but I do remember buying 2 year CDs paying +6% in the 90s.

I assure you that would do something useful for your performace.

Umm... you know that if Money Market rates were 15%, that would imply that the real return of our cash would be very different from our nominal return, right?

Anyway, you seem to completely miss the point of the PP in that by holding all of the assets it not only takes the guess-work out of deciding which assets will go up or down, but it also smoothes the volatility in the process. So, even the dopey bonds/cash help make the volatility tolerable.

Thanks for the major insight.