Gyroscopic Investing

Kshartle wrote: If the money supply was static.......and prices fell over time because we got better at producing stuff....more productive etc.....would you say we were in deflation?

According to the economic definition… yes. And it would be great! "Deflation" and "inflation" don't have value judgements attached to them. They're just words to describe what's happening to the general price level.

Pointedstick wrote:

Kshartle wrote: If the money supply was static.......and prices fell over time because we got better at producing stuff....more productive etc.....would you say we were in deflation?

According to the economic definition… yes. And it would be great! "Deflation" and "inflation" don't have value judgements attached to them. They're just words to describe what's happening to the general price level.

I don't agree that it would necessarily be "great," but PS has a good point.  These are just words to describe economic concepts.  Neither is good or bad, necessarily.

And if we're going to talk about the morality of price levels, I think the real moral issue is when expectations are set, but then the rules are changed half-way through the game to one or another party's benefit.

For instance, "deflation" may have inherent problems we can argue about later, but it's not so bad as having a monetary system that would promise a 2% inflation target, but then allow over deflation to the tune of 2% per year after lenders/borrowers/homeowners/business-owners/bond-traders/etc all shook hands with each other based on expectations of a general price-level increase of 2%.

So a static money supply can result in inflation or deflation to you guys. And a rising money supply can result in deflation and inflation and a falling money supply can result in inflation or deflation.

Ok NM.

I swore I would never get into this debate about the correct meaning of these words. I lied to myself.

So if a rising money supply can lead to deflation (because the amount of goods and services is expanding faster than the money supply) How the #@%@$@$%^@$%^@$% does that make the stock market go down and government bonds go up?!?!?


Please riddle me that one.

Given that there seems to be considerable dispute about its definition... without using the word "deflation," can someone describe the economic conditions in which LTBs (once trusted but now widely held suspect) would be the most  productive component of the PP?  The whole Harry Dent/Demographic Cliff scenario seems to make sense, but while forecasting massive deflation, even he warns against long bonds.  (I'm thinking PS might call this "doomer porn.")

I can always adjust the portfolio, but say for the next 12 months, if the difference between cash and bonds is only likely to be 3% or so, I'd probably feel better holding more cash and just no carry no bond risk.  In raising my concerns,  I'm not trying to undermine the purpose of the forum, but rather just the opposite: y'all are very smart people, and I'm hoping you can help me.  I feel like there's must be some upside to holding the current super low interest bonds that I'm not understanding.

Roberto wrote: The whole Harry Dent/Demographic Cliff scenario seems to make sense, but while forecasting massive deflation, even he warns against long bonds.  (I'm thinking PS might call this "doomer porn.")

A couple of predictions  from Mr. Dent according to the website linked below....

"Another devastating crash occurs between 2010 and 2012, which ushers in a thirteen-year bear market into 2022.”?

“Technology, financial services, health care, and Asia will be the best sectors from 2005 to 2009. Long-term bonds, health care, and Asia will be the best after 2009.”?

http://www.avaresearch.com/avanew/artic ... ecord.html

So if he's now saying that LTB's are a bad bet then he reversed himself somewhere along the way which wouldn't be surprising.

One thing I do appreciate about Harry Dent is that he doesn't make generic predictions like Nostradamus that can be interpreted later to make him look good. He gets very specific so it's easy to see what a con man he really is.

Yeah, I figured I'd get hammered for mentioning Dent.  I didn't say he was always right, just that his focus on demographic changes leading to deflation seems plausible.  Looks like those with a response to my bonds concerns have done so already.  Thanks for all your input.

Kshartle wrote: Please riddle me that one.

Roberto wrote: Given that there seems to be considerable dispute about its definition... without using the word "deflation," can someone describe the economic conditions in which LTBs (once trusted but now widely held suspect) would be the most  productive component of the PP?

If you read the book linked at the top of this forum, there's a nice couple paragraphs that give a good definition of deflation on page 58.  It reads as follows (if posting this isn't allowed, let me know and I'll remove it from my post:)

Deflation-- Deflation is an economic environment in which some economic shock, such as a credit crisis or market panic, sets off a cycle of declining prices, falling interest rates, and rising currency value.  Under deflationary conditions, interest rates normally fall as demand for loans dries up or it becomes hard to get loans due to tighter lending requirements.  Prices also may start to fall across the economy as people reduce their spending.

Although a period of falling prices may sound appealing, the problem it presents is that businesses often have inventory they bought for a higher price than consumers are now willing to pay.  This makes it difficult for businesses to sell their goods at a profit.  In response to these conditions, businesses are forced to cut prices, take losses to clear out their inventories, lay off employees, and, hopefully, be able to stay in business until economic conditions improve.

It was quite a challenge to read even most of this thread but it is very interesting and causes us to debate basics.  My perspective comes from years of study of pp and prpfx and from someone who just purchased a 20% position in long bonds and gold as I phase into 100% pp eventually.  There are two critical components to the long bond position, one is the volatility which is the foundation of pp and also asset flows in times of slow growth/stock decline or stagnation.  People flock to long bonds and gold in these times so deflation is part of it and would come much later.  The last year and beginning of 2014 are a perfect example, in 2013 stocks soared, long bonds and gold fell and this year, even though short rates are at zero people flocked to gold and long bonds as uncertainty rose because most agree we may be headed for slow growth because of changing demographics from aging baby boomers that spend less.  This was my perfect opportunity to practice pp and move into two positions.  Textbook pp in action and the perfect time to buy long bonds and gold.  Entry into stocks will take longer but that is for another forum.

Do we ever see falling prices (other than housing) combined with rising interest rates?  Seems like that would be bad for bonds too.

Rates are rising because prices have become inflated from too much growth too fast although there will be some non-correlated prices going down at the same time. 

Roberto wrote: Do we ever see falling prices (other than housing) combined with rising interest rates?  Seems like that would be bad for bonds too.

You lend me a dollar (aka buy a bond from me) and expect repayment next week (when the bond matures.)

Because of the current rate of deflation, we expect the dollar next week to be worth more than the dollar you lent me.

Why would I be willing to give you an increased interest rate on top of that?  If anything, I would pay less interest for a loan in those conditions.

Good reading:  http://inflationdata.com/articles/2008/ ... deflation/

Roberto wrote: Do we ever see falling prices (other than housing) combined with rising interest rates?  Seems like that would be bad for bonds too.

If an inflation hawk were nominated fed chairman, they would attempt to raise rates, which could easily bring about overt deflation. 

This could be bad for some private bonds and muni, mainly, as the macroeconomic effects of deflation could make default much more likely.

moda0306 wrote:

Roberto wrote: Do we ever see falling prices (other than housing) combined with rising interest rates?  Seems like that would be bad for bonds too.

If an inflation hawk were nominated fed chairman, they would attempt to raise rates, which could easily bring about overt deflation. 

This could be bad for some private bonds and muni, mainly, as the macroeconomic effects of deflation could make default much more likely.

Why would rising rates bring on a lower price general price level (delfation)?

Kshartle wrote:

moda0306 wrote:

Roberto wrote: Do we ever see falling prices (other than housing) combined with rising interest rates?  Seems like that would be bad for bonds too.

If an inflation hawk were nominated fed chairman, they would attempt to raise rates, which could easily bring about overt deflation. 

This could be bad for some private bonds and muni, mainly, as the macroeconomic effects of deflation could make default much more likely.

Why would rising rates bring on a lower price general price level (delfation)?

It would decrease velocity of money, due to the fact that holding onto money is more lucrative, therefore decreasing aggregate demand.  Lower demand in the face of static or growing productive capacity will lower the general price level.

Does that make a decent amount of sense?

I have been following this thread with interest. Just a couple of questions that may enlighten beginners like me....

1. Deflation: Is this definition correct?  http://www.investopedia.com/terms/d/deflation.asp  That is, Cause = Decrease in Money Supply, Effect = General Decline in Prices (Deflation)

2. In the new permanent portfolio book it mentions that in some circumstances that long term bonds could be replaced by gold (ie 25% cash, 25% shares, 50% gold?). From memory there was only a line or two about this. If the bonds "Real Return" (interest rate - inflation rate) was negative would this be a valid time to sell the bond holdings? Could someone give some examples when eliminating the bond holding would be reasonable.

Examining some other analysis, http://www.merkinvestments.com/insights ... -12-10.php , different allocations may also be effective.

Looking forward to your insights.  (However I trained in Electronics, not Economics, so detailed explanations are welcome!!)

Hal

Roberto wrote: Given that there seems to be considerable dispute about its definition... without using the word "deflation," can someone describe the economic conditions in which LTBs (once trusted but now widely held suspect) would be the most  productive component of the PP?  The whole Harry Dent/Demographic Cliff scenario seems to make sense, but while forecasting massive deflation, even he warns against long bonds.  (I'm thinking PS might call this "doomer porn.")

This thread has overcomplicated what is a simple concept.  If you have no stocks, you need no bonds.  The bonds are a HEDGE for the equity.  Nothing less.  Nothing more.

And the missing term everyone is looking for is disinflation (or revaluation).  True deflation is when the GENERAL price level consistently decreases below zero (i.e. negative), not a bubble imploding.  Generally, only real estate bubbles cause true deflation due to massive leverage and widespread public participation (i.e. no island pockets of calm left).  In a true deflation, only cash benefits as there is no confidence in sovereign bonds.  We flirted with deflation after the 2008 bubble, but certain actions were taken to forestall it.  Actions that have delayed the inevitable clearing mechanism of misallocated resources.  It bought time for the banks to repair their balance sheets at expense of everyone else's well-being, the typical snow job that central banking was explicitly designed for.

Realize that Harry Browne was imprecise with his economic environment definitions for mainstream marketing purposes.  Or he could have been ignorant like most.  It doesn't really matter as the PP works as a whole.... except when it doesn't... like in 1969, 1981, 1994, 2008.  The line between disinflation and deflation may be measured objectively, but people act like chimps and discount the most tantalizing doom porn fantasies.  When it becomes too excessive, the PP will sustain net losses because the cash is not duration or volatility matched to the other three assets.

Hal wrote: 1. Deflation: Is this definition correct?  http://www.investopedia.com/terms/d/deflation.asp  That is, Cause = Decrease in Money Supply, Effect = General Decline in Prices (Deflation)

That's too imprecise.  Disinflation is a slowing, slowdown or decrease in the supply of anything, not just money.  It's when it actually turns into net negative growth that it becomes deflation.  Modern fiat economies rarely get to that point in fiscal spending unless the government royally screws it up, like Zimbabwe.

Thanks for the explanation MachineGhost.  I have just finished a marathon session reading "How you can profit from the coming devaluation" written by Harry back in the 70's.

This book answered my concerns about an exit strategy from the PP.  If I read correctly, the PP is for normal economic cycles. In cases of impending currency collapse (for example) then you would be better of with most of your liquid assets in gold. Eg Icelandic currency collapse.

The key point is that you cannot predict exactly when an event like that will happen. So my thoughts are until you start loosing sleep over the PP allocations, leave things alone. Once things really start falling to pieces, then its probably time to look changing your strategy. Bottom Line: PP now seems reasonable,  Gideon Gono type policies, rethink strategy.

Has anyone given thought to or run the numbers on the possibility of a 33x3 omitting bonds instead of cash?

This a long thread with a lot of economic interpretations. Just because something makes sense (bonds are not good investments, the Fed is screwing things up, gold is getting trashed, deflation is coming, or whatever) the major fact is the timing of these events cannot be predicted. You might be right but the event could not come until ten years after your death.

HB didn't say the parts of his theory couldn't at some point be threatened or not be practical.  I am sure there were times when gold made less sense then bonds are today during his life time. The point of PP is having a
portfolio has SOME stake in what is doing well without having to predict when it comes or what it is. If you want to cut out your bonds or change the percentage based on current facts, you can do that. However, you can't predict the future and the timing of things. Once you time the sale, then you have to time the buy and then human nature takes over making you prone to making emotional human errors.

for me, one example reinforcing portart's message is the bond market rally in 2011 when there was some talk of gov't defaulting on bond payments, debt ceiling, blah blah. The rally was totally counter-intuitive to me.

Predictions are futile, acting on those predictions is ludicrous.

LTT's are positive YTD and are outperforming equities, gold and cash. 

Bonds are likely a bad investment.  I think what I'll do is limit them to 25% of my asset allocation (allowing for swings between 15% and 35%).  That'll limit my losses in case I'm right, but also will allow me to profit in case I'm wrong.

Xan, I think you're onto something!

dualstow, did you do something with your hair? You look different somehow. Younger actually.