Trading the Trend

[over9k]

Very.

jog on
duc

Care to elaborate? I'll get to your other big post in a moment.

 

[qldfrog]

May i just add a short point in the inflation deflation debate
The western population age curve is such that the west peak consumption is over
No more nappies new car or house..
Time for gardening and ..used to be cruise ships.
The economy is lagging with production still matching that past peak so as such we have a structural deflation in place.
The higher demand in China for example is isolated in its own economic system.sure they still consume raw materials..our luck..but they do not really buy nappies here or our cars..a few counter examples in luxury goods a2 milk formula etc
But the US factories are not producing for chinese or indian consumers
So lower growth, deflation structurally in the West.
After, the various feds can play with money supply etc but growth is over and we are in a different environment from the one of the last 100 years. past experience may not be always replicated and our natural ratevis negative
my 2c

 

[qldfrog]

And for what it is worth, big activity lately with btc

 

[over9k]

3. Austrians definitely decry Central Banking. Now, what you haven't actually addressed is the question of a 'deflation'. It is clear however that if there is no Central Bank, then a deflation must simply be allowed to run its course. This would not be so devastating if this had continued to be the model and gold was the world currency. However, the switch to fiat pure in 1971, has allowed bubbles of such enormous size to build, that were they to undergo true deflation, the depression that would likely ensue would rival or exceed that of 1929 - 1934.

3(a) Austrians however go a lot further in their detail of how interest rates (should) be determined. They argue that the 'natural rate' should prevail. Given the situation today what is your guestimate, or even better, provide an analysis of the prevailing natural rate. How far off are the Central Banks currently?

4. Yes it is. We can conveniently divide it into: CPI & PPI. CentralBanks could care less about CPI. They move very quickly against PPI, which has been stated a number of times on this thread. So your 'hidden' inflation isn't hidden at all. It is very clear and out in the open for anyone even remotely interested.

5. Therefore anyone buying gold as an inflation hedge in the financial markets are simply kidding themselves. Stocks will rise alongside gold with the added advantage of a dividend return. Should there be a PPI inflation, and interest rates rise, gold gets slaughtered. Stocks are less prone to rate rises, some (financials) benefit. Therefore the whole 'inflation' issue is an interesting one currently as far as the two trends are concerned.

The public are positioning thus:

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Yet:

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6. So even CPI inflation is likely to come under downward pressure. Ironically, increased inflation expectations should lead (in a rational response) to increased spending, to get ahead of price rises (as happened in the 1970s). COVID is therefore (a) deflationary to debt, mitigated by Central Bank actions and (b) disinflationary from a CPI perspective. Inflationary pressures are however building in PPI via POO.

1/2. So finally, the volume of money. Austrians state it is the expansion of credit (primarily) that expands the money supply, which is correct. That expansion erodes purchasing power of the money. Correct. The Austrians failed to differentiate between asset price inflation and inflation generally, or PPI and CPI. Possibly it wasn't an issue for them. For those of us trading the markets, it is the primary and central issue. Schiff et al. are calling for the collapse of the US dollar.

If there were true inflation, the US dollar would be in trouble. This would show up in the market.

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7. The US dollar is a long way away from demonstrating any inflation. What it is demonstrating is increasing confidence around the rest of the world (check exchange rates) that the COVID crisis is over. Economies are re-opening, trade and economic activity is picking up and we are returning to 'normal'. Now normal may well be sub-par when compared to other time periods, but, that has been true for some time. This is good for stocks, bad for gold. Why? Because in a ZIRP/NIRP world which drives fixed income investing, stock dividends are a return that big money must have. Notice the surge in Utilities, the classic safe dividend sector. Tech. (particularly in early stages) does not pay dividends, hence the rotation. There will be further rotations out of gold as dividend paying sectors are adjudged safe and open for business. The only people chasing gold (into another mini-bubble) are the latecomers, momo traders, etc. Silver caught the gold fever, but is still miles from confirming inflation.

The fact is that COVID triggered a massive deflation (similar to 2008) but the speed at which the CB stepped into the market (seems to have fooled many) and prevented the blow-out and an extended recovery, as we had in 2008-2009 or more aptly in 1930-1934. If we were (able) to calculate net-net the deflation and consequent expansion of the Fed's Balance Sheet, what we would actually find? My guess is net-net we are pretty close to zero, although, that bubble in debt is again reflating, which means down-the-line, we will repeat this exercise again.

jog on
duc

3: Yep, austrians decry fiat currency as well though. We'd again have to focus on/think about which good(s) are dropping in price and why though.

3a: Yep, but an impossible thing to try & put a number on. We don't even know the public's elasticity with reference to time preferences/horizons etc etc. To try to compare with 3/4 of a century ago is a fool's errand as there's obviously a lot of other things that have changed since, not least of all demographics as frog has pointed out.

What I can say with certainty is that lots of old farts and few youngun's means there's far more supply of cash than there is demand for it, so rates would be (are) far lower than we'd see under a normal population distribution.

4. So you think the ppi is an accurate measure of inflation? Or is it just like any other index, weighted and imperfect?

The only way you'd ever really know is to compare the price(s) of, well, everything.

5. Sure, but what we have at the moment is stagnation causing a lack of inflation. I agree with what you're saying, and gold's actually tracked the market pretty well, but you've forgotten the third option, the nightmare scenario: Stagflation. It's no coincidence that gold's bounced on the days where the markets have been choppy/mixed with the jitters. Stagflation is the point at which everyone **** themselves and it's the point where gold goes to the moon.

Gold to me is a certainty index, not an inflation hedge. I say that because the inflation metrics are constantly f***ed with/engineered to make things look good. But when markets are uncertain (of a rise OR fall) then gold is where everyone bails to. It's not stagflation per se that drives its rise under that scenario, it's the market's reaction to the stagflation (the aformentioned shitting themselves). It's the last port in the storm, so to speak.

And markets have really had no idea what to think the last month or so, hence the spike in gold.

6. Yes, that huge bounce in saving(s) is precisely why we aren't seeing CPI inflation. That's what they call self-fulfilling irony.

Also worth thinking about the fact that joe public really has no idea about/what to actually do with money. You ask 9/10 people what inflation actually is or what they'd do if you could tell them with certainty that inflation is coming and they'd just stare at you blankly.

6.5: Austrians look at cpi as something that should constantly deflate and ppi or assets as something constantly playing tug-of-war between the utility (profitability) of the land improving (through entrepreneurship) and the increase in demand for capital that an improvement in its deployment would produce being the very force driving up the cost of the capital it wants.

7. I'm not really sure where you've got this idea that the world reckons things are returning to normal as the USD keeps dropping by the day and with very good reason. Virus cases are just hitting record after record, reductions in jobless claims are levelling out, so on and so forth. Hell, even cryptocurrencies are bouncing.

 

[ducati916]

I'm going to have to address the various issues one-by-one. Trying to address all the issues in a single post will simply lead to mass confusion.

So as an Austrian (by training, whatever that actually means), we are addressing the natural rate of interest. The Austrians are very specific in their discussions on interest rates, because historically, this was an area of great confusion and debate. Keynes never really understood Mises' position (which was):

Keynes asserted that Mises' peculiar new theory of interest confused the marginal efficiency of capital with the rate of interest. The point is that the marginal efficiency of capital is the rate of interest because the rate of interest is equal to the rate of price spreads in the various productive stages. It is precisely this 'natural' rate, rather than the loan rate that is the correct rate. The essentials of this doctrine were set forth by Bohem-Bawerk. Therefore (and I repeat my question):

Given that the natural rate is very 'knowable' and calculable: how far off are the Central Banks currently? Is that rate therefore inflationary?

jog on
duc

 

[ducati916]

You raise the issue of 'stagflation'.

You seemingly seem to assert that there is (a) a stagnant economy and (b) concurrent inflation. I would agree that there is and has been a stagnant economy since 2009, although that hasn't really inhibited the market rising pretty much non-stop since that time, so we can pretty much discount stagnation as being a factor that has any impact.

CPI inflation will also drive the market higher as has been evidenced since 2009.

I would be very surprised if gold were to go to the moon. Conversely, I wouldn't be surprised to see it fall back into that holding pattern. The 1970s stagflation had very specific drivers, which I have discussed a number of times. Few of the necessary variables are present (none currently) and only POO with the potential to create PPI inflation down the road, possibly into 2021. Is it your belief that gold is already pricing in this possibility?

jog on
duc

 

[ducati916]

What on earth are you going on about?

The US dollar is only coming down from its massive inflow of the 'run-to-safety' trade.

The virus is just a non-issue.

jog on
duc

 

[ducati916]

jog on
duc

 

[over9k]

I'm going to have to address the various issues one-by-one. Trying to address all the issues in a single post will simply lead to mass confusion.

View attachment 106679 View attachment 106680

So as an Austrian (by training, whatever that actually means), we are addressing the natural rate of interest. The Austrians are very specific in their discussions on interest rates, because historically, this was an area of great confusion and debate. Keynes never really understood Mises' position (which was):

Keynes asserted that Mises' peculiar new theory of interest confused the marginal efficiency of capital with the rate of interest. The point is that the marginal efficiency of capital is the rate of interest because the rate of interest is equal to the rate of price spreads in the various productive stages. It is precisely this 'natural' rate, rather than the loan rate that is the correct rate. The essentials of this doctrine were set forth by Bohem-Bawerk. Therefore (and I repeat my question):

View attachment 106681

Given that the natural rate is very 'knowable' and calculable: how far off are the Central Banks currently? Is that rate therefore inflationary?

jog on
duc

I don't know where you've got this idea from. It isn't without nuking the central bank. What do you mean by an inflationary interest rate?

You raise the issue of 'stagflation'.

View attachment 106682

You seemingly seem to assert that there is (a) a stagnant economy and (b) concurrent inflation. I would agree that there is and has been a stagnant economy since 2009, although that hasn't really inhibited the market rising pretty much non-stop since that time, so we can pretty much discount stagnation as being a factor that has any impact.

CPI inflation will also drive the market higher as has been evidenced since 2009.

I would be very surprised if gold were to go to the moon. Conversely, I wouldn't be surprised to see it fall back into that holding pattern. The 1970s stagflation had very specific drivers, which I have discussed a number of times. Few of the necessary variables are present (none currently) and only POO with the potential to create PPI inflation down the road, possibly into 2021. Is it your belief that gold is already pricing in this possibility?

jog on
duc

I didn't assert that we have stagflation now, I said that that is the situation in which gold skyrockets. I'm doubtful we're going to see runaway PPI. Like I said, I see gold as a confidence index.

What on earth are you going on about?

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The US dollar is only coming down from its massive inflow of the 'run-to-safety' trade.

The virus is just a non-issue.

jog on
duc

You're back to saying that the trajectory flip coinciding with the virus trajectory flip is a, well, coincidence.

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jog on
duc

Ok i'll be more specific: That we're not seeing the runaway inflation that we would expect with mass money printing. Kind of like back in the gfc when the belief that the bank stimulus (rescue) programs would percolate out into the economy due to the "wonder" of fractional reserve banking and the banks instead used the money to buffer their reserves and line their own pockets.

 

[ducati916]

You stated you were (trained) in Austrian economics. This is Austrian economics. So we can simply move on. There is no point in trying to engage in a discussion/analysis of Austrian theory when clearly you do not really have a grasp of Austrian theory (economics) at all.

jog on
duc

 

[ducati916]

But that is the inescapable conclusion. If the economy is stagnant (currently) which it is and there is inflation, which you seem to think that there is, then that is stagflation. But there is no inflation to speak of. Why? Because the shock in Feb. was massively deflationary and the current stimulus, if you actually apply Austrian economic principals, would demonstrate that currently, the environment is (still) disinflationary.

jog on
duc

 

[ducati916]

We're not seeing any inflation.

jog on
duc

 

[Smurf1976]

We're not seeing any inflation.

I think that depends where you measure it.

Someone looking at asset prices, stocks especially, would argue that they're going up relative to most other things (eg wages or consumer prices).

The central bank printed money has to go somewhere doesn't it?

 

[over9k]

View attachment 106724

You stated you were (trained) in Austrian economics. This is Austrian economics. So we can simply move on. There is no point in trying to engage in a discussion/analysis of Austrian theory when clearly you do not really have a grasp of Austrian theory (economics) at all.

jog on
duc

Rubbish. I even went to the mises institute. Right during the GFC in fact.

Austrian economics would nuke the central bank and fiat currency. You're trying to get me to put a numerical figure on what the interest rate would be if we had a (fairly) static money supply, no fed etc etc. This is impossible. The only thing that can be said for certain is that it would be significantly higher than it is now.

View attachment 106725

But that is the inescapable conclusion. If the economy is stagnant (currently) which it is and there is inflation, which you seem to think that there is, then that is stagflation. But there is no inflation to speak of. Why? Because the shock in Feb. was massively deflationary and the current stimulus, if you actually apply Austrian economic principals, would demonstrate that currently, the environment is (still) disinflationary.

jog on
duc

No I didn't say that there's inflation. I said quite the opposite. But we got bogged down on which metric we're using.

We aren't seeing stagflation now and I never said we are. But do I think it more than possible/likely? Absolutely... depending on which metric is used to measure it.

View attachment 106726

We're not seeing any inflation.

jog on
duc

Which is what I've been saying - like in the GFC, people/banks have just stuffed the money under the proverbial mattress. Fate is not without a sense of irony.

 

[over9k]

Here's what I was talking about reference "things returning to normal".

Things are going to hell in a handbasket in the U.S. Little wonder gold's on a tear.

You seem like one of those guys that can't see the forest for the trees duc.

 

[over9k]

What's gone on over the last month reference trends/cycles isn't complex:

Profits were taken before earnings season. So tech dips.

The non-tech stuff reported first. It was almost all above estimates. So everything rotated into it. Tech dips more in order for people to be able to do so.

Tech now reports and outperforms estimates like it very obviously was always going to. So now it absolutely screams as everyone go "Ohhhh tech's outperformed estimates just like everything else did. Of course tech would if everything else did too! We should have bought days ago!".

And the market goes nuts.


Even PEZ that I mentioned a while ago has absolutely screamed lately.

 

[gartley]

Looks like yesterday's end of day FED pump is coming undone today......

 

[over9k]

Yep I was going to flog some gold & buy a bit of PEZ yesterday but held off to today and I've made a cheeky sell 1% up on gold and buy 1% down on pez by doing so.

 

[ducati916]

I think that depends where you measure it.

Someone looking at asset prices, stocks especially, would argue that they're going up relative to most other things (eg wages or consumer prices).

The central bank printed money has to go somewhere doesn't it?

Mr Smurf, there is CPI inflation returning (after a small dip), there is asset price inflation (massive). What there isn't is PPI inflation, which is the only type of inflation the Fed. will (aggressively) lean against. So gold while moving higher is not actually hedging you (protecting) against inflation, it is simply part of an asset price inflation in the same way that Tech stocks are. If there was a true PPI based inflation and interest rates were increased above whatever that PPI inflation rate were, gold would collapse.

You have Schiff et al. pumping gold based on a devaluing dollar. Devaluing against what? All Central Banks are creating credit. China/Japan/ECB/BoE. All fiat currencies are in the same boat so to speak. But the purchasing value, one against another is simply resetting after the huge run to the US dollar in the early part of COVID. The US dollar is no more imminent to collapse than any other fiat currency currently. Schiff et al. will argue: devaluing against gold. Currently that is true. Is it always true? Over long periods of time on aggregate, yes. But you are talking decades and centuries. The fluctuations can be so significant that in any given time frame you can be winning or losing. If you bought gold at $230oz in the 1985-1999 period, of course you are laughing. If you bought it last week, will you still be laughing if interest rates jump back to the 3% level? No you most definitely won't. To win with gold you either need to (a) trade it like any stock or (b) hold it for the next 20-40yrs. Now if you are holding in those sorts of time frames, you could also be holding stocks with some dividend return: which has outperformed? Gold over 35yrs has returned from $200 to $2000: 6.8% compounded. S&P500 (with dividends) in that same time frame has returned 11% compounded. Almost x2. You (should) always compare gold (asset) against comparable assets, not cash. What about RE? How has gold fared against housing and commercial properties?

Arguments will state, well look at Fed money supply, it dwarfs (pick any) their money creation. Yes it does. That is simply because other nations need dollars to service dollar denominated debt. The pros/cons of being the primary Reserve Currency of the world.

CPI inflation is precisely what makes the stock market profitable. The margin or spread between PPI and CPI is the profitability of business. Sure consumers may moan when you go to the supermarket to pick up groceries, but the supermarket stocks are profitable. Do I agree with it? No. But this is the reality.

jog on
duc

 

[ducati916]

If that is all you came away with, you wasted your time there. The natural rate of interest can easily (with a bit of elbow grease) be calculated. The natural rate of interest was first propounded by Bohem-Bawek, expanded upon or clarified by Mises and further elucidated by Rothbard. As you don't even know what I'm talking about, there is no point continuing this conversation.

jog on
duc