Noflation

[I Shrugged]

I am re-reading JM and Craig's book, and paused to think about which of the four economic cycles we are in now.  It doesn't seem like we fit neatly into any of them.  Not tight money, but somewhat recessionary.  Certainly not prosperity.  Sort of deflation, and sort of inflation.  It's like a combination of deferred deflation and underachieved inflation, at the same time.  Call it noflation.
Or, flameout. 

Where do you think we are?

[Pointedstick]

And that's why the PP has been drifting sideways.

I think the U.S. economy doesn't really know which one of the four conditions it's ultimately going to wind up in.

[Reub]

Jim Rickards says that we are in a depression and have been for at least 5 years.

http://ad-orientem.blogspot.com/2013/05 ... n-and.html

HT: John

[I Shrugged]

And that's why the PP has been drifting sideways.

I think the U.S. economy doesn't really know which one of the four conditions it's ultimately going to wind up in.

To me that suggests a fifth condition.

And I think I was wrong to dismiss prosperity out of hand.  There is an element of prosperity in the current condition.
Recessionary prosperity? 
Stagnant prosperity?  (Remember stagflation?)
Inter-bubble stagnation?



What if there is a fifth condition?  It seems more than academic.  If there is a condition not addressed by the PP, then it's time to go back to the drawing board.

[Pointedstick]

I would say maybe Stratification. Part of the economy is firing on all cylinders and part of it is slowly rusting away. Part of the population is experiencing unprecedented wage growth--and inflation, especially in real estate--and another part is slipping into poverty.

[frommi]

Ray Dalio called it Reflation. Its basically a credit crunch/de-leverage and probably the real reason the PP is suffering.

[Libertarian666]

Repression.

[I Shrugged]

Ray Dalio called it Reflation. Its basically a credit crunch/de-leverage and probably the real reason the PP is suffering.

Makes sense.  But we can't ignore the bubblish "prosperity" from all the actions of the central banks.  They are causing re-leveraging.  Are they masking the underlying condition?  Yes, I think so.  Does this rise to be a fifth condition?  It could go on for a long time.

[Gumby]

Ray Dalio called it Reflation. Its basically a credit crunch/de-leverage and probably the real reason the PP is suffering.

I'm not convinced the PP is currently "suffering". Perhaps you could say it's "suffering" compared to high flying stocks. But, dropping 3-4% is hardly "suffering" (forgive me if I don't have the exact "suffering" figures..I really don't watch my PP at all). To me, the PP is just boring.

When the PP goes down in the short term, it typically means the dollars is getting stronger. When the PP goes up in the short term, the dollar is typically getting weaker.

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The PP has also provided a small long term return above these fluctuations in general (i.e. it provides a small real return). Currently, the dollar has been pretty stable — despite all the confusion as to whatever is really happening.

So, if the PP goes sideways for a few months or a few years, I don't see that as "suffering". If the PP were skyrocketing, it would actually imply that the dollar is "suffering". And oddly, this would make depressed PP holders giddy with excitement. Either way, it's almost always going to be a wash — in terms of purchasing power — with a small overall real return provided by the PP.

This is why I stopped watching my PP a few years ago. I realized that the ups and down don't really matter all that much in the grand scheme of things. Either way, it's just providing a small real return whatever it does (i.e. mostly wealth preservation). It's just a very boring portfolio — just how I like it.

In other words, if you are watching your PP closely — on most days you are just watching the effects of an inverse dollar relationship. Pretty boring if you think about it.

[Gumby]

And, btw, Harry Browne would say that there are only four DOMINANT economic conditions. Just because reflation, stagnation, disinflation, financial repression, noflation, etc. all may exist for periods of time does not discount the fact that Prosperity, Inflation, Deflation or Recession must always eventually take hold as dominant forces.

[Lowe]

Seems like the only serious problem is unemployment.  But there has been a lot of uncertainty for the past few years, and this year hasn't been an exception.  That may be why stocks only buoyed the portfolio, instead of lifting it.

The uncertainty could be lifting now, which is what I hope for.  I'm still young, and I'd like to start a business in the not-to-distant future.  Bring on the boom times.

[Ad Orientem]

I concur with with Rickards. We are in (but possibly on the cusp of emerging from) a deflationary depression. The only reason CPI hasn't been actually in the red is because of all the money the FED has been printing like mad. That has kept the depression fairly tame by historical standards.

[moda0306]

Seems like the only serious problem is unemployment.  But there has been a lot of uncertainty for the past few years, and this year hasn't been an exception.  That may be why stocks only buoyed the portfolio, instead of lifting it.

The uncertainty could be lifting now, which is what I hope for.  I'm still young, and I'd like to start a business in the not-to-distant future.  Bring on the boom times.

IMO, unemployment is the source of the uncertainty.  It is related to the stratification PS mentions upthread.  And until the employment (and wage) situation improves for the masses, uncertainty will persist, IMO.

+1

Unemployment.  Underemployment.  Private sector Balance sheets and income.

[Rien]

The four scenario's are scenario's that occur in a reasonably free market.
Maybe the markets are not free enough anymore to establish any of the four?

(Just thinking out loud)

[MediumTex]

A round of steroids will do wonders for a terminally ill person.

I think that this is the Fed's basic strategic approach to the current economic situation.

It's a depression, but the Fed has been pretty successful in blunting its effects.  So far, the only consistent effect we are seeing of the depression is stubbornly high unemployment.  We're not seeing price deflation or accelerating loan defaults, as we were seeing for a period of time in 2008-2009.  Short of a massive public works program it's hard to soak up the number of unemployed people who are out there, especially among young people.

In thinking about Obamacare, the requirement that employer provided group plans cover dependent children to age 26 may be the one promise Obama has kept to the young idealistic liberals who voted for him (they should probably be happy that he hasn't been bugging their phones like he has with his other principal enabler--the media).  He hasn't delivered student loan relief, low unemployment or a strongly expanding economy, but he managed to hold up employers to provide a form of stealth welfare to the young unemployed people struggling to get their adult lives going in an unfriendly economic environment.

If I were one of Obama's advisors, I might try to come up with a way of connecting him with with previous liberal Presidents and draw parallels between what he is doing and what they did while in office.  For example, in the early years of LBJ's presidency the economy was in pretty good shape, so much so that he talked about "Guns and Butter" when describing how the nation could wage war in southeast Asia while also building a gigantic welfare state back home in the form of the Great Society.

I'm thinking that a slogan like "Drones and Skim Milk" could be a rallying cry that could galvanize Obama supporters.

Here is how the speech announcing the new slogan might go:

Ladies and gentleman, my opponents say I'm out of touch
Ted Cruz stands on the floor of the Senate and blasts me
Well, I've got a message for Senator Cruz and his Tea Party cabal:
The only people who we ought to be blasting are the terrorists
And you know what, I've done that
I've blasted them

I've heard the terrorists have an expression they use to describe drone strikes
They call them "Obama Caps"
That's right ladies and gentlemen
America's enemies have come to fear the sound far up in the sky
Death from above
Or, more colloquially, "Putting an Obama Cap in Their Asses"
Some of my basketball buddies like to call them "fly bys"
I just call it "Tea Party Kryptonite" [laughter in the crowd; Obama smiles]

But seriously folks, we've got an anemic economy on our hands
It's skinny, like me [catcalls from the crowd]
It's lean ["You go Barry!!!" is heard from the crowd]
It's like skim milk
It won't give you heart disease and it won't make you fat
But it will keep you alive

So my fellow Americans
Today I offer you a new vision of America
A vision of a surveillance state where no one in the world can escape our monitoring and tracking
A vision of a state that arbitrarily assassinates foreign national on foreign soil
A vision of a state with a sick but functioning economy
A vision of a society in which a young person can go to college, accumulate enormous student loan debt, and then move back in with his parents and be entitled to health coverage from his parent's employer until age 26

Another great American from Texas preceded me in this office [boos from the crowd]
No, I'm not talking about that Texan
I'm talking about Lyndon Baines Johnson
Lyndon Johnson told America it could have Guns and Butter
A healthy economy in the midst of a gratuitous foreign war

Well, folks, our defense contractors have come a long way since then
And we can now deliver death to our enemies far more efficiently
We no longer need to throw our young men and women in uniform into foreign meat grinders...not much anyway [Obama flashes a sly grin]
We do most of that by remote control now
And, similarly, we have given those fat expanding economies of yesteryear a new twist
We do more with less today
Our economy is weak, but in the words of the great George Orwell, sometimes weakness can be strength

So, today, I offer you a new vision of America
A vision of a society where we all acknowledge that none of us built that
Where words like "hope" and "change" are just empty slogans
Ladies and gentlemen
When I look at America
I recognize that we can't have it all
But we can damn sure have the best military technology built right here in the U.S. of A. in the districts of the most powerful members of Congress

And our economy may be skinny, but I like skinny
Skinny is a sign of health
I've always been skinny, and look at all I have been able to do [cheers from the crowd]
You see, my friends, even though we can't have it all
We can have the most powerful military
While just getting by economically
We can have what I call a "Drones and Skim Milk" society [crowd applauds loudly]
Yes we can!

And isn't that the kind of world we all want to live in?
Isn't that the kind of place we would all be proud to call home?
Isn't that what our Founding Fathers dreamed about? [more applause]

Drones and Skim Milk!

Thank you
Thank you

Drones and Skim Milk!

Thank you
God bless you all
And may God continue to bless the United States of America
[Crowd goes wild]

[moda0306]

Rien,

Inflation and recession are very reasonable effects of government meddling.  In fact, some would say they're mostly caused by government, and this is why we have to consider them in our portfolio.

[smurff]

MediumTex wrote:

Drones and Skim Milk!

Thank you
God bless you all
And may God continue to bless the United States of America
[Crowd goes wild]

You ought to add speechwriter to your list of careers, which so far includes attorney, chaps maker, and carpet cleaner.

[MediumTex]

MediumTex wrote:

Drones and Skim Milk!

Thank you
God bless you all
And may God continue to bless the United States of America
[Crowd goes wild]

You ought to add speechwriter to your list of careers, which so far includes attorney, chaps maker, and carpet cleaner.

Don't forget truck driver. 

[smurff]

MediumTex wrote:

Drones and Skim Milk!

Thank you
God bless you all
And may God continue to bless the United States of America
[Crowd goes wild]

You ought to add speechwriter to your list of careers, which so far includes attorney, chaps maker, and carpet cleaner.

Don't forget truck driver. 

Yes, truck driver--and book author, too!  (I forgot about those...)

[LC475]

What if there is a fifth condition?  It seems more than academic.  If there is a condition not addressed by the PP, then it's time to go back to the drawing board.

Absolutely, it's more than academic.  But I think Harry is right, there's only four.  I don't think he explained it very well, however.  The Permanent Portfolio book does explain it well.  In weather, you can have wet, dry, hot and cold.  Humidity and temperature are the two variables.  You either have high or low in both of them.  That accounts for all the weather in the world, in a sense (leaving out all other factors that could be consideredpart of the weather, like wind, brightness, presence of aurora, etc.).

So, my interpretation (which could be wrong) is this: Harry Browne looks at the economy as a two-by-two grid.  There are two primary considerations:
Is prosperity increasing, or regressing?  and
Is inflation accelerating or decelerating?

For both prosperity and inflation, it's either one or the other.  So four possibilities cover all the possibilities.
1. Prosperity going up
2. Prosperity going down
3. Inflation going up
4. Inflation going down

The way I see it, there are various combinations of these elements.  You could have accelerating inflation, and increasing prosperity.  Or you could have accelerating inflation and decreasing prosperity.  Likewise with decelerating inflation: it could be paired with either of the prosperity conditions, good or bad.  So again, it's a 2-by-2 grid.  Also, there are degrees of intensity.  Inflation could be 10% annually and adding 1% each year, or it could be 100% annually and adding 1% each month.

Perhaps right now we are somewhere near the center point of the grid, where the axes cross.  Eventually, the point will move, in one direction or another.  Which quadrant will it move toward?  As Harry would say: nobody knows.

[Reub]

Is there an economic condition called "falsification"? That would be where they lie about health care, unemployment rates, inflation, green sprouts, etc.

[Pointedstick]

That sounds more like a political condition, and I believe it is the only one.

[k9]

Yes, I think the political factor has to be taken into consideration and it is not taken into consideration at all in the "academic" 2X2 grid. If the government (or a supra-national organization, like, say, IMF, or ECB for us European citizens) wants to steal my property (there are many ways : government default, IMF 10% taxes, bail-ins, corralitos, etc.), reasoning only about inflation/deflation & prosperity/recession fails.

But the 2D grid model is the way to think. Actually I think what we're worried about is not a fifth condition : it's a 3rd axis. So we would have 3 variables :

• inflation delta
• prosperity delta
• political risk delta

Now, it's getting harder to reason about, since you have potentially 8 conditions to deal with.

[LC475]

Political risk of what?  Do you mean just risk that they will "steal my property"?  As you say, that's just another axis.  In the future, will they be stealing even more property, or stealing less?  Since they will spend the money somehow, this axis really just amounts to: Is the government budget (cumulative at all levels, perhaps) going up, or going down?

I think if you have a Permanent Portfolio, you'd be covered under either scenario.  During the entire tenure of the PP thus far, the government budget has been going up, at all levels (federal, local, and state).  It has provided a real return under 40 years of that.  If the rate of stealing increase got extremely high, "hyper-stealing" let's call it, assets out of the reach of being stolen would do very well.  Specifically: gold, and especially gold stored either in a secret cache or overseas in a country that won't extradite it.  Gold will cover the entire portfolio as it soars to the moon in a scenario where the government is confiscating 401ks, garnishing returns of stocks, reneging on bonds, or, more likely, simply raising taxes and inflating the currency (more likely because taxes and inflation are easier sources of money).

On the other hand, if somehow pigs start flying and rainbow unicorns appear on every doorstep, that is, if the government budget goes down, then that would be stellar for stocks.  Stocks would carry the whole portfolio in that case, and who knows, some of the other assets may do fine, too.

Or did you mean something else by political risk?  Are you envisioning a scenario where the PP would not protect you?  If so,what is it?

[k9]

EU (where I live) is a real laboratory for "political risk". Many things have been tested yet, besides the obvious continuous tax rate raises :

• partial default on government bonds (Greece)
• default on banknotes (Italy, although it was on a small scale)
• annihilation of any bank account balance above 100 000 € to protect shareholders (Cyprus)
• retroactive taxation of long-term investment plans (since 1996), although this has been partially abandoned due to popular pressure (France)
• IMF's proposal to tax 10% of EVERY asset (bank account, stocks, bonds, real estate, etc.)

These are the "soft" political risks, they don't have a lot of consequences (yet). It could be much worse. However, all of this is clearly about deflation (that's what Germany wants) but the PP's deflation-protection assets didn't quite work (anybody wants 50% of his assets in Greek bonds ? Meh, bonds suck, let's hoard cash in banknotes & FDIC accounts ?) and in some case it was done to protect stockholders (whose property should have been annihilated before bond holders even felt the wind turn).