Gyroscopic Investing

I looked Clive's historical PP returns spreadsheet that had US, UK, Japan local currency returns for stock/bond/gold/cash.  I looked at each decade 1980-89, 1990-99, & 2000-09, in each nation.  In this historical data set, it seems that a tight money recession as a PP economic condition is a brief maybe 1-3 yr event.  IIRC the US had a tight money recession ~1982, from what I understand deliberately caused by Fed Chair Paul Volker, who drastically changed Fed monetary policy (eg raised interest rates significantly) to successfully lower a long existing (3-10 yrs long?) high inflation rate.

Is it theoretically possible to have tight money recession condition for 5+ yr periods?  Has this happened in the historical record in any nation?  Perhaps Clive, who noted that he has UK returns data since 1800 (understanding caveat that non-gold back fiat currency only started circa 1973) can note if this ever happened in the UK?

Is it possible for a tight money recession to "occur naturally/randomly" by other non-Central Bank events, as opposed to being engineered/deliberately caused ala Volker's 1982 tight money recession?

I use a non-cash 3X33 variant of the PP.  This backtests given the aforementioned historical record (which iirc only has that 1 brief tight money recession in ~1982).  But if it were possible to have a 5 or 10+ yr tight money recession, similar to how Japan has had ~1990-now 20+ yr deflation, the non-cash 3X33 would probably fail hard relative to the orthodox 4X25 HBPP.

The Austrians argue that a tight money recession is caused by a decrease in the rate of increase of the money supply.  This is normally triggered by the central bank.  Is it possible? Theoretically, yes.  Is it likely? IMHO, not very while we have elected politicians.  That being said, I'd be a bit wary of not having cash around, just in case; cash makes me sleep better at night.  Well, now all four assets make me sleep better at night, but I like cash.

Understanding the difference between a "tight money" recession induced by central bank tightening when the economy is already weak is conceptually hard to distinguish from a typical recession in which money is "tight" simply because lending standards tend to be raised as business conditions deteriorate and credit risks increase.

What Volcker did in the early 1980s is harder to understand than it may at first appear.  The fact that the price of oil was in the process of collapsing due to a glut of new supply may actually explain the taming of inflation better than Volcker's decision to raise interest rates and intentionally tip the economy into recession in order to "tame" inflation.  In other words, Volcker may have actually been a complete bonehead who happened to be incredibly lucky that the price of oil happened to collapse at the same moment he decided to intentionally steer the economy onto the rocks.  Volcker may have actually delayed the commencement of the 1980s economic boom and the whole "Volcker broke the back of inflation" narrative may be completely false.

The basic fact is that any time the central bank is raising interest rates it's not good for many assets, other than perhaps a stock market that is performing very well (though raising rates are not necessarily good for the stock market, but a bull market for stocks might be able to weather rising interest rates reasonably well).

I would say that a tight money recession at the 5 year mark is clearly a depression and any central bank that would persist in raising interest rates until it had plunged the economy into a full blown depression would be a pretty foolish central bank. 

MediumTex wrote: What Volcker did in the early 1980s is harder to understand than it may at first appear.  The fact that the price of oil was in the process of collapsing due to a glut of new supply may actually explain the taming of inflation better than Volcker's decision to raise interest rates and intentionally tip the economy into recession in order to "tame" inflation.  In other words, Volcker may have actually been a complete bonehead who happened to be incredibly lucky that the price of oil happened to collapse at the same moment he decided to intentionally steer the economy onto the rocks.  Volcker may have actually delayed the commencement of the 1980s economic boom and the whole "Volcker broke the back of inflation" narrative may be completely false.

That's fascinating.  Are you saying that absent the drop in oil prices, you think that Volcker's inflation-killing policies might have failed?  Even with interest rates getting close to 20%?

The mid-70s, for example, had oil prices that were actually lower than those of the mid-80s yet the United States was in the grip of economic stagnation, obnoxious inflation, and disco.  Doesn't that limit the degree to which oil can drive the narrative by itself?

While I agree that falling oil prices and the formation of the band "Whitesnake" were big contributors to the awesomeness of the 80s, it seemed like the temporary high interest rates of 1981 helped set the stage.  Do you think that the opposite is true and that the 80s were so good in spite of what Volcker did?  If so, when do you feel that high interest rates would be appropriate if not to kill inflation?

More pragmatically, what does that mean for the PP?  Is 3x33 (cashless) a better option?

Xan wrote: More pragmatically, what does that mean for the PP?  Is 3x33 (cashless) a better option?

I have thought long and hard about this question, but we will only know which is better in hindsight.

I think a cashless option might very well be a better overall option from a return standpoint, but I doubt it's a safer option and would likely give you more volatility along the way.