Which of the four cycles-prosperity, inflation, deflation, recession are we in?

[gonetowindsurf]

With the recent sell off in gold, and treasuries, and the rise in equities - is the PP reflecting a transition to prosperity? Would be interested in the opinion of Craig, Mediumtex, Gumby, Moda and Machine Ghost since they have experienced transitions periods before. Or is it too soon to tell? It will be difficult to commit to rebalancing into gold and/or treasuries if we are experiencing a prosperity era.

[MediumTex]

The secular trend is deflation.  That's what the Fed is fighting.

With the stock market struggling to get past levels it first reached almost 15 years ago, I wouldn't say that we are in the midst of "prosperity" in PP terms.

[clacy]

I agree with MT and would add that in real terms the market still is down quite a bit from all time highs.

I think we'll see more ups and downs for the next 5-10 years as this deleveraging works itself out

[melveyr]

I think that there are two things happening.

1) Market expectations are moving towards a greater probability of prosperity occurring.

2) Additonally, there is a reflexive process with aggregate stock prices moving up. The sheer upward move in stocks makes people feel wealthier which can cause them to spend in the real economy, which is good for stocks. So stocks moving up in anticipation of prosperity, can actually beget more prosperity because people feel wealthier. Unfortunately, it works exactly the same way in reverse during a crisis.

So even if the you don't agree with the recent rally, the rally occuring has an effect on the underlying economy which can make it become a self-fulfilling prophecy. This is a framework that George Soros has made famous because it has allowed him to ride momentum to extremes on the upside and downside (profiting on the downside by short selling).

[Pointedstick]

Melveyr speaks words of wisdom, as usual.

Budd, I think you need to step back and take a look at your expectations. It seems as though you want your investments to achieve whatever performance the best asset or portfolio is yielding, but without any downside risk. Is that a realistic desire?

[gonetowindsurf]

Hi Pointedstick,
Was the  Budd directed at me? If so, let me address your concern.
I think most everyone has a difficult time buying an asset class that is in decline. My question which was answered most eloquently by Melveyr - is that perhaps the PP is signalling a prosperity phase. No one knows for sure - but when stocks begin to perform better than the other three asset classes,  PP is reflecting prosperity according HB, which can become a self professing phenomena. And that would be a good thing.
MT also brings up good points about the secular trend of deflation, but from what i have read there is good news on the home front. Zero down home loans are back. Home prices have risen, houses are being built again, etc. And PP lagged the overall market last year which it does during times of prosperity.

[Pointedstick]

Actually, I posted in the wrong thread. Oops.

[MachineGhost]

2) Additonally, there is a reflexive process with aggregate stock prices moving up. The sheer upward move in stocks makes people feel wealthier which can cause them to spend in the real economy, which is good for stocks. So stocks moving up in anticipation of prosperity, can actually beget more prosperity because people feel wealthier. Unfortunately, it works exactly the same way in reverse during a crisis.

A 1% change in the stock market only has a short-lived effect of .03-.05% of GDP.  So the effect is marginal, at best.

It's more accurate to say a crisis will drag down both the real economy and the stock market, not the other way around.  Both have a low correlation to each other.

[melveyr]

2) Additonally, there is a reflexive process with aggregate stock prices moving up. The sheer upward move in stocks makes people feel wealthier which can cause them to spend in the real economy, which is good for stocks. So stocks moving up in anticipation of prosperity, can actually beget more prosperity because people feel wealthier. Unfortunately, it works exactly the same way in reverse during a crisis.

A 1% change in the stock market only has a short-lived effect of .03-.05% of GDP.  So the effect is marginal, at best.

It's more accurate to say a crisis will drag down both the real economy and the stock market, not the other way around.  Both have a low correlation to each other.

Where did you find this data?

[moda0306]

2) Additonally, there is a reflexive process with aggregate stock prices moving up. The sheer upward move in stocks makes people feel wealthier which can cause them to spend in the real economy, which is good for stocks. So stocks moving up in anticipation of prosperity, can actually beget more prosperity because people feel wealthier. Unfortunately, it works exactly the same way in reverse during a crisis.

A 1% change in the stock market only has a short-lived effect of .03-.05% of GDP.  So the effect is marginal, at best.

It's more accurate to say a crisis will drag down both the real economy and the stock market, not the other way around.  Both have a low correlation to each other.

I wonder how different this would be without Social Security and other "safety nets" that either aren't affected by recessions or actually expand spending (food stamps, medicaid, unemployment, etc)... methinks it would be MUCH more pronounced in correlation.

[Stunt]

Recession because nobody took a hit when the banks took excessive risks and got bailed out. There was never a reset or write off of bad investments. Now we are destined for negligible growth for a significant period, suppressed by overextended fed balance sheet and excessive government debt. I don't see prosperity for a significant period.

Corporations, well off and upper middle class are in deflationary phase. Large savings and reduced debts. Meanwhile, government entities, low income and emerging markets are in an inflationary phase. Low savings and increasing debts.

I see corporations continuing to turtle, they use uncertainty as an excuse but they don't want to make investments with the consumer stretched so much. Upper class will continue saving. Low income and emerging markets will continue to be stretched. Governments will be on the hook for everything - growth, investment, safety net, etc. throwing more money at diminishing returns. Ben will not allow deflation to win even if he has to expand the fed balance sheet much larger than it is today.

Private sector deflation, public sector inflation winning out, recession.

[Ad Orientem]

The secular trend is deflation.  That's what the Fed is fighting.

With the stock market struggling to get past levels it first reached almost 15 years ago, I wouldn't say that we are in the midst of "prosperity" in PP terms.

I agree though there is evidence that we may be nearing the end of that cycle. Central banks are getting incredibly aggressive with the printing press and the money seems to be making its way into the real estate and stock markets. But time will tell. I nerve underestimate the government's ability to F--- up something good.

If I were forced to prognosticate on long term trends I would say the next ten years are likely to be more inflationary. There is just so much debt out there, both public and private, that inflation seems to be only way to deal with it. And the evidence suggests that central bankers grasp this.

[murphy_p_t]

Corporations, well off and upper middle class are in deflationary phase. Large savings and reduced debts. Meanwhile, government entities, low income and emerging markets are in an inflationary phase. Low savings and increasing debts.

I find this an insightful comment...something I hadn't considered before....both at the same time.

[notsheigetz]

With the recent sell off in gold, and treasuries, and the rise in equities - is the PP reflecting a transition to prosperity?

My guess is that it is reflecting a transition to wishful thinking about prosperity. If the PP could tell us whether or not we are in a real transition to prosperity we wouldn't need the PP.