Gyroscopic Investing

MediumTex wrote: Michael Pento is a gold bull who has a surprisingly simplistic view of the mechanics of inflation.

BearBones wrote: This inflation vs deflation argument has been argued on this forum before. Could it be that both sides are right? For that which is financed through debt, particularly non-necessities such as mortgages and autos, there could be deflation because slack was taken out in the last decade of low interest rates and because unemployment is currently so high. For necessities purchased with cash, particularly those which depend on finite natural resources (e.g., oil) or inexpensive overseas labor (e.g., china), there will be inflation.

Anyone buy into this argument?

doodle wrote: The only force that I think contains bernanke is the large voting senior population which would be harmed by high inflation. This group would rather see a deflationary environment and could potentially have the political clout to contain more stimulative QE printing.

Clive wrote: Using 25% weighting to the 'fixed' gold prices, 25% allocation to UK FTAS stock price gains combined with actual dividend yield after 1868, but an assumed 5% dividend yield for 1800 to 1868, 50% weighting into undated 2.5% treasury




Gold prices came from http://measuringworth.com/datasets/gold/result.php that go back to 1257

I stopped the chart in the 1940's as after that the historical values switched from GB Pound to US Dollars

After uploading the image I noticed that the years are slightly adrift. That big dip in the red (real) line coincided with WW1 era (1914 to 1920) when inflation soared from an 0.66 index value to a 1.72 value (160% rise over 5 or 6 years). So whilst the nominal PP was relatively stable, the real value declined from 82 down to 40 over that period.

doodle wrote: True, maybe his argument is simplistic but the inflation trend is very well established over the last 100 years and the fed seems hellbent on preventing deflation.

moda0306 wrote: A couple of my thoughts on inflation that may have been shot around this thread already:

1) A lot fo the leveraged assets (homes) have an expected inflation built into their pricing when people took out a loan to buy it. When the reality of this mis-pricing (when compared to other goods) finally shows up, no low interest rate will make a $300k house that should be $200k an attractive buy.  This puts huge strains on peoples' balance sheets that causes them not to want to take on more debt, even if its non-housing.  Debt IS money.

2) Money, as it would affect the economy, isn't just "printed by the fed" just as bullets aren't just shot by our police and military.  When I agree to lend money that I intend to save (aka, not consume) to someone who DOES intent to consume with those $$, that really changes the direction that the money I have is being used towards (MT's "velocity of money").  The fed can print all it wants, but if there is a mass-reprioritization towards saving (an easy spiral to get into (paradox of thrift)) it's hard for the fed to get the new money into the economy via credit.

If you look at excess reserves of banks, there are tons of it... but money has to work its way out into the economy to create inflation... and at a faster rate than money is being "destroyed" by people paying down their mortgage, credit card, etc and businesses paying down their debts as well.  These excess reserves represent the string the fed's trying to push on.  It'd be like if the treasury mailed you $10,000 to stimulate the economy and you used it to go buy an i-bond or something.

One last thing, the commodity surge of late (before the quasi-collapse) could very well be an effect of scarcity in the face of growing/recovering emerging markets.  I am still digesting how much of the commodity inflation we've seen is fed-induced, but I think we all have to acknowledge that with more people becoming middle class around the world and shrinking resource supplies, regardless of monetary policy, commodity prices will try to rise as billions of impoverished rice farmers become factory workers and start buying scooters and riding trains & busses or (gasp) start driving cars.

My thoughts... I'd love to hear some holes poked in them.

So basically, I agree with the "both are happening" people that say the general price level of commodities will rise or stay uncomfortably high while leveraged assets and the affected industries deflate.

I really stew about housing though, because if lumber, copper, steel, asphalt, etc become more scarce, a bunch of foreclosures end up with permanent damage, and land-use regulations make sprawl expensive (as it probably should be), maybe those forces will naturally keep housing up higher than what I'd otherwise imagine.