do we agree that we're in a period of deflation?

[christina]

The PP is supposed to take advantage of (and protect you from) all economic conditions. What economic season are we in now? Deflation? Are we still in a transitional period? I know, this question comes up a lot, but I *still* don't have an answer, and it's been almost a year since I've been looking at these forums.

[MediumTex]

The Fed is clearly battling deflationary forces.

1. Contracting credit
2. Falling home prices
3. Secular bear market for stocks
4. Unfavorable demographics
5. Falling bond yields

All of those things add up to deflation.

[clacy]

The Fed is clearly battling deflationary forces.

1. Contracting credit
2. Falling home prices
3. Secular bear market for stocks
4. Unfavorable demographics
5. Falling bond yields

All of those things add up to deflation.

Agreed

[Alanw]

I believe the falling bond yields the past 2 days tells us we are in a deflationary period.  Maybe a QE3 on the horizon?

[AdamA]

The Fed is clearly battling deflationary forces.

1. Contracting credit
2. Falling home prices
3. Secular bear market for stocks
4. Unfavorable demographics
5. Falling bond yields

All of those things add up to deflation.

I think the reason is hard for some of us to grasp is that gold is doing so well. 

I forget who, but someone posted a while back something to the effect of "just because does is used in the PP for inflation doesn't protection, doesn't mean that it can't do well in periods of deflation or prosperity." 

[BearBones]

The Fed is clearly battling deflationary forces.

1. Contracting credit
2. Falling home prices
3. Secular bear market for stocks
4. Unfavorable demographics
5. Falling bond yields

All of those things add up to deflation.

On the other hand, the world is battling inflationary forces as well, especially that which is not based on credit:
1. Population growth, increasing demand
2. Industrialization of many "third world" countries, increasing demand
3. Decreasing energy reserves
4. Decreasing reserves of most other natural resources

Hence, for many of us who's lives are not based heavily on credit, the picture is inflationary. This is most clearly visible in my grocery bills and property taxes.

[Lone Wolf]

The Fed is clearly battling deflationary forces.
...All of those things add up to deflation.

On the other hand, the world is battling inflationary forces as well, especially that which is not based on credit:
...
Hence, for many of us who's lives are not based heavily on credit, the picture is inflationary. This is most clearly visible in my grocery bills and property taxes.

Great lists from both of you guys.  On one hand, the deflationary forces are immense.  The level of credit destruction is just huge.

But unlike the deflation of the Great Depression, we're not seeing falling prices.  When you look at the price of goods and services, we are experiencing mild inflation.  Contrast this with the gentle deflation of the Industrial Revolution, which yielded gradually falling prices.  (And the Great Depression gave us plummeting prices.)

On top of what was already listed, Central Banks around the world are working feverishly to debauch their currencies.  (Even the Swiss, breaking some of PRPFX's assumptions.)

For the deflationists: what do you make of the fact that prices aren't actually falling but rising?  For the inflationists:  what to make of record low yields on LT bonds?

The whole narrative strikes me as a messy "work in progress".  I'd suggest staying diversified. 

[MediumTex]

For the deflationists: what do you make of the fact that prices aren't actually falling but rising? 

I would say that Bernanke, for now, is succeeding.

He us using monetary policy to successfully counter a cluster of strongly deflationary forces in the U.S.

[christina]

For the deflationists: what do you make of the fact that prices aren't actually falling but rising?  For the inflationists:  what to make of record low yields on LT bonds?

The whole narrative strikes me as a messy "work in progress".  I'd suggest staying diversified.   8)
[/quote]

Right, Lone Wolf! This is exactly the contradiction that makes me uneasy. Has the PP ever weathered such an economic climate: ie, where prices seem to be increasing but bond yeilds are so low?

[Lone Wolf]

Right, Lone Wolf! This is exactly the contradiction that makes me uneasy. Has the PP ever weathered such an economic climate: ie, where prices seem to be increasing but bond yeilds are so low?

To my knowledge, there's been nothing like it in the US Permanent Portfolio's history.  The closest case that I can think of is how the Japanese PP did through the last couple decades of very low bond yields coupled with net mild price inflation.  It did fine... not as well as a US PP, but "fine".

With bond gold and LT bonds up today, the stakes in this deflation-inflation wrestling match seem to be getting higher.  Although I don't really expect it in the near future, I can see scenarios where the bottom suddenly falls out of either asset.

[clacy]

For the deflationists: what do you make of the fact that prices aren't actually falling but rising? 

I would say that Bernanke, for now, is succeeding.

He us using monetary policy to successfully counter a cluster of strongly deflationary forces in the U.S.

I agree that Ben Bernanke gets a horrible wrap.  He and Central Bankers are often times the economic boogeymen that all ills in the world are attributed, when in fact demographics and fiscal policy makers should catch the blame, IMO.  

I believe he is doing a very good job of walking a tight-rope where any slip up could result in a fat tail event on either the left or right side of the curve.

[MediumTex]

Right, Lone Wolf! This is exactly the contradiction that makes me uneasy. Has the PP ever weathered such an economic climate: ie, where prices seem to be increasing but bond yeilds are so low?

To my knowledge, there's been nothing like it in the US Permanent Portfolio's history.  The closest case that I can think of is how the Japanese PP did through the last couple decades of very low bond yields coupled with net mild price inflation.  It did fine... not as well as a US PP, but "fine".

With bond gold and LT bonds up today, the stakes in this deflation-inflation wrestling match seem to be getting higher.  Although I don't really expect it in the near future, I can see scenarios where the bottom suddenly falls out of either asset.

As I recall, the PP ran into conditions like we are discussing back in the 2008-2011 period, and I think it did pretty well.

[Lone Wolf]

As I recall, the PP ran into conditions like we are discussing back in the 2008-2011 period, and I think it did pretty well.

Absolutely -- and a lot better than "pretty well".  The PP was perhaps the most reliable car on the road throughout that whole period.

What I fail to find is a longer-term comparison to this whole ongoing "post-2008 era" of negative real interest rates, low yields, and rising gold.  I feel like I'm still waiting for the "exciting conclusion" of this story.  I don't know how it turns out.

Heh... look at me trying to invent a narrative.  Dangerous thing to do, that.

[craigr]

The thing with the portfolio is even if there is an exciting conclusion in one of the assets, you are never so overexposed that you'll lose your head. If gold dropped to 0$ tomorrow it would be a -25% portfolio loss. Which is not great, but still much less than what would happen to portfolios that are taking concentrated bets.

And of course that assumes no other asset goes up in value to offset the loss (at least partially) which is not likely.

The asset split in the Permanent Portfolio has firewalls for your life savings.

[alvinroast]

If gold dropped to $0 or even to $1000 I'd be backing up the truck with my VP and rebalancing the PP.

If only.

I always keep track of the portfolio in both dollars and gold so it's almost always going up one way or the other. If the price of gold fell I would feel like I'm getting ahead.

It is definitely an interesting time to be alive. Our grocery bill is going up 30%/yr. yet bond yields are crashing. My wife just bought socks. I wouldn't call that a luxury, but prices are definitely going up faster than 2%/yr. 

[AdamA]

For the deflationists: what do you make of the fact that prices aren't actually falling but rising?  For the inflationists:  what to make of record low yields on LT bonds?

Great questions.  I wonder the same things.

[Tortoise]

For the deflationists: what do you make of the fact that prices aren't actually falling but rising?  For the inflationists:  what to make of record low yields on LT bonds?

Great questions.  I wonder the same things.

Everything has a price, including safety. In this case, I think what we might be seeing is that many prices are steadily rising (groceries, etc.), including the price of financial safety. And because investors are bidding up the price of safety, that means higher Treasury prices--i.e., lower Treasury yields--since Treasuries are currently perceived to be one of the safest possible investments.

In other words, deflation may not be the only force that can cause low Treasury yields. Maybe low Treasury yields can be part of a general inflation if one of the assets being bid up in price happens to be Treasuries.

[alvinroast]

For the deflationists: what do you make of the fact that prices aren't actually falling but rising?  For the inflationists:  what to make of record low yields on LT bonds?

Great questions.  I wonder the same things.

Everything has a price, including safety. In this case, I think what we might be seeing is that many prices are steadily rising (groceries, etc.), including the price of financial safety. And because investors are bidding up the price of safety, that means higher Treasury prices--i.e., lower Treasury yields--since Treasuries are currently perceived to be one of the safest possible investments.

In other words, deflation may not be the only force that can cause low Treasury yields. Maybe low Treasury yields can be part of a general inflation if one of the assets being bid up in price happens to be Treasuries.

Very good point about the price of safety. The fed is pushing hard to get people to take more risks.

There's also this reason for the low yields on LTT:
http://online.wsj.com/article/SB1000142 ... %20reserve

[hoost]

For the deflationists: what do you make of the fact that prices aren't actually falling but rising?  For the inflationists:  what to make of record low yields on LT bonds?

One possible explanation that just occurred to me might be that we're seeing price inflation in treasuries.  Maybe treasuries are the next bubble?  I'm not sure how that would work; or if it could work.  Thinking about it is turning my brain to mush.  I'll try to hash out my train of thought more later.

Edit:  Looks like this point was already made.  I should've kept reading before posting.

[Ad Orientem]

The Fed is clearly battling deflationary forces.

1. Contracting credit
2. Falling home prices
3. Secular bear market for stocks
4. Unfavorable demographics
5. Falling bond yields

All of those things add up to deflation.

I would add rising unemployment to that list. While conceding that there are some contradictory signals out there, in general the dominant economic theme at the moment seems to be deflationary.  I am not sure what can be done about it. We are in a general election year with both parties worrying about the national debt, one in particular. And that party controls the House of Representatives. With the GOP firmly opposed to any new spending does it make any difference if Bernanke undertakes another round of debt monetization (QE3)? The Fed can give all the zero interest loans it wants to Congress but they can't make Congress spend the money.

I wonder if the Fed might be more effective if its next round of money printing were directed into the Muni bond market. Unlike Congress most states have a constitutional obligation to balance their budgets and borrowing costs are running high for some of them.  Lots of states are laying off workers and cutting spending to a degree that is certainly contributing to the economic crisis. A couple of hundred billion injected into state coffers in the form ultra-low interest loans from Helicopter Ben might get into circulation a lot quicker than any money spent on Treasuries.

[AdamA]

One possible explanation that just occurred to me might be that we're seeing price inflation in treasuries.  Maybe treasuries are the next bubble?

Although I could see the LTT market being very volatile for a while going forward, it is very difficult for me to think that US Treasuries are in a bubble.  That market simply lacks the characteristic mania.  

Most people don't even know how to buy bonds (we had to post a tutorial on this very website), and even fewer understand the basics about the market (although I guess not understanding an investment doesn't always prevent one from investing in it).

[hoost]

One possible explanation that just occurred to me might be that we're seeing price inflation in treasuries.  Maybe treasuries are the next bubble?

Although I could see the LTT market being very volatile for a while going forward, it is very difficult for me to think that US Treasuries are in a bubble.  That market simply lacks the characteristic mania.  

Most people don't even know how to buy bonds (we had to post a tutorial on this very website), and even fewer understand the basics about the market (although I guess not understanding an investment doesn't always prevent one from investing in it).

Yes, that's true.  Although I think the big money is really what matters.  If the big money moves into stocks, it starts pushing up prices and the small timers want to get in on it, giving it the mania.  Maybe we don't see the mania in the bond market because the small timers aren't actively involved in it, or don't understand it well enough.  That wouldn't necessarily mean there isn't a bubble, just that we aren't seeing the symptoms.

Either way, just throwing the idea out there to kick around.  I'm not convinced in one direction or the other on what's happening (which is why I'm thankful to have a PP).

[AdamA]

Either way, just throwing the idea out there to kick around.  I'm not convinced in one direction or the other on what's happening (which is why I'm thankful to have a PP).

Yeah, I gotcha.  I don't have strong convictions about these things either...mostly b/c I have been exactly wrong about them so many times in the past.

[Tortoise]

Although I could see the LTT market being very volatile for a while going forward, it is very difficult for me to think that US Treasuries are in a bubble.  That market simply lacks the characteristic mania.  

Most people don't even know how to buy bonds (we had to post a tutorial on this very website), and even fewer understand the basics about the market (although I guess not understanding an investment doesn't always prevent one from investing in it).

Right. Most retail investors who are buying Treasuries right now are probably buying them via bond funds, not directly. And that's probably also how most retail investors were buying stocks during the stock bubble of the late '90s--via funds.

Not necessarily saying that bonds are in a bubble. Just agreeing with your point that lack of understanding of an investment doesn't usually seem to deter people from finding ways to invest in it when they want to.

[MediumTex]

Either way, just throwing the idea out there to kick around.  I'm not convinced in one direction or the other on what's happening (which is why I'm thankful to have a PP).

Yeah, I gotcha.  I don't have strong convictions about these things either...mostly b/c I have been exactly wrong about them so many times in the past.

Getting to this state of mind is a great achievement.

It's like a surfer's optimal state of mind toward a wave.