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Economist Comments on Possible Inflationary Effects of Fed Moves
Old 04-03-2009, 03:38 PM   #1
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Economist Comments on Possible Inflationary Effects of Fed Moves

Econbrowser: The Fed's new balance sheet

Read down a little in the comments too. One guy, who is objecting to the use of the word hyper-inflation says we won't see hyperinflation, but prices could move up 100% or so over 3 or 4 years, then level off.

Well, no problem I guess.

Ha
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Old 04-03-2009, 04:29 PM   #2
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Wow! I hope stocks keep up with inflation then. Maybe we'll be back up to peak index prices faster than we think. Whoever wants to loan me mortgage money sure doesn't care about this yet. But I suppose they'll just sell off the debt to someone else...
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Old 04-03-2009, 04:32 PM   #3
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Eventually the debt must be paid. Bah just pass it down a few generations right?
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Old 04-03-2009, 06:06 PM   #4
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A lot of folks seem to think that hyperinflation is logical, inevitable and imminent.

I'm not going to worry about inflation until ECRI tells me that inflation is just around the corner: US Inflation Pressures At New 50-Year Low . These guys have a great track record at predicting inflation trends.

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Old 04-03-2009, 07:08 PM   #5
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While I doubt hyperinflation, as seen in Weimar, Zimbabwe etc., is in the cards, I don't know how 1970's inflation is not. It may not happen for a few years, but somehow the nat debt has to drop and it's one way to do it.
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Old 04-03-2009, 08:56 PM   #6
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Can I gripe a little? First the media tells us that inflation, or even hyperinflation is imminent. Then, often on the same day, they tell us that we are on the verge of a depression to rival the Great Depression, and deflation is going to be our problem. How on G*d's Green Earth a relatively novice investor such as myself is supposed to position her portfolio to prepare for both of these "certainties" at the same time is beyond me. And if I somehow figured that out, neither would happen. [/gripe]

Thank you. I feel SO much better, now.
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Old 04-03-2009, 09:06 PM   #7
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Can I gripe a little? First the media tells us that inflation, or even hyperinflation is imminent. Then, often on the same day, they tell us that we are on the verge of a depression to rival the Great Depression, and deflation is going to be our problem. How on G*d's Green Earth a relatively novice investor such as myself is supposed to position her portfolio to prepare for both of these "certainties" at the same time is beyond me. And if I somehow figured that out, neither would happen. [/gripe]

Thank you. I feel SO much better, now.
This describes me as well, much of the time.

Google "Harry Browne permanent portfolio" and read up on what I think is a plausible all-weather way to invest.
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Old 04-03-2009, 10:41 PM   #8
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Can I gripe a little? First the media tells us that inflation, or even hyperinflation is imminent. Then, often on the same day, they tell us that we are on the verge of a depression to rival the Great Depression, and deflation is going to be our problem. How on G*d's Green Earth a relatively novice investor such as myself is supposed to position her portfolio to prepare for both of these "certainties" at the same time is beyond me. And if I somehow figured that out, neither would happen. [/gripe]

Thank you. I feel SO much better, now.

It's easy:
Figure out whether it's inflation or deflation: SIMPLE
  • If deflation, go to cash or bonds (from a source unlikely to default) SIMPLE
  • If inflation, pick something that will inflate faster (maybe gold, maybe ammo, maybe food, maybe stocks) just pick the right one. SIMPLE.
It's so easy. Don't you feel better now?
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Old 04-03-2009, 11:06 PM   #9
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The simple fact is, few (if any) truly know what's going to happen in the near future.

I'd say have a wee bit of gold for the truly scary possibilities (which remain unlikely, IMHO); a bit of cash (king in a deflationary scenario); bonds were alright in the Thirties; stocks for inflation and/or when all this comes out alright in the end; a small nuclear device for when the neighbors get too unruly.
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Old 04-04-2009, 06:37 AM   #10
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i like harry browns permanent portfolio idea too....my own version not the fund..

been actually using at as trading vehicle for the last 2 years so i guess its not so permanent at times...

the various parts have been cycling up and down like crazy so i have been taking a small gain in whatever went up. letting it fall back and rebuying..just rebought gld and tlt yesterday as they rolledback.... still didnt buy back vti
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Old 04-04-2009, 07:30 AM   #11
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Can I gripe a little? First the media tells us that inflation, or even hyperinflation is imminent. Then, often on the same day, they tell us that we are on the verge of a depression to rival the Great Depression, and deflation is going to be our problem. How on G*d's Green Earth a relatively novice investor such as myself is supposed to position her portfolio to prepare for both of these "certainties" at the same time is beyond me. And if I somehow figured that out, neither would happen. [/gripe]

Thank you. I feel SO much better, now.
Interesting topic to me and probably TMI but what I've learned so far about things like this in my 55 years:

1) You can find someone who can convincingly argue either side of any situation. With the internet, it's even easier to find equally convincing arguments from all sides.

2) Most people tend to point to sources that agree with views they already hold. Again the internet provides the best examples, when people provide links to other sources. More often than not, the "agree" with the article because it supports the conclusions they've already drawn, not because they've learned anything new. You see it here and everywhere - people who simply can't/won't listen to another point of view, they use the same arguments over and over again without ever really addressing another POV. Beware someone who answers primarily with quotes and links, and unfortunately many of them pass off the thoughts of others as their own without your knowledge. Show me an example of someone really changing their views here. I see points argued for page after page without anyone budging a single inch...

3) The "media" is one of the worst sources in general. More than ever they are a business trying to get your viewership first and foremost, an information source second. Even more now with print media fighting for their very survival in many cases. I used to watch CNBC every day. IMO, there is so much non-news and speculation, the real news becomes unrecognizable.

3) I don't claim to be smarter than anyone, nor do I claim I can see through 1 & 2 above. But what I do take from the above:
a) We are all on our own for the most part. Nothing wrong with trusting others by any means, but in the end it's your life and your portfolio. If you lose half your net worth or more, others won't do anything but feel bad for you and move on.

b) So I try to read both sides, I deliberately and always look for views unlike my own to consider them. I still make mistakes, but hopefully fewer than folks who pick their sources and mindlessly follow them (liberal sources, conservative sources, Cramer, Oprah, Suze O, etc.). While there are people who I tend to agree with more often, there is no one who I agree with on every topic 100% of the time (even though I realize I am wrong far more often than I know today).
FWIW...
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Old 04-04-2009, 08:47 AM   #12
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It's sometimes helpful to consider the forest (aggregate money creation) instead of getting hung up on an individual tree (the Fed's balance sheet).

Sure the Fed has increased the size of its balance sheet. But why? Because the mechanism by which a fractional reserve system creates money was rapidly removing dollars from the system. The Fed's balance sheet has grown to partly offset the larger decline in private lending. A big part of the early run up was due to the Commercial Paper Funding Facility (CPFF). The CPFF was used to make sure public companies could roll over A1/P1 commercial paper back in October & November when that market shut down. Then once the CP market began to function again, the Fed's balance actually shrank as its CP purchases rolled off. I saw some people worry that the Fed was actually tightening credit, but what was really happening was that the private market was picking up the slack and the Fed was no longer needed to provide a backstop.

Similarly, the securitization market has shrunk by some $800B from its peak. Part of the Fed's purchases of MBS is to offset a fraction of that decline. As the author of the link notes, this creates some unique problems for the Fed longer term. Not least of which is how the Fed unwinds these postions without causing a spike in rates. My guess is that you'll see the Fed request authority to issue its own debt so that it can essentially shrink its balance sheet (by offsetting its assets with match dated liabilities). This would enable it to remove the excess dollars from the market without effecting the broader allocation of credt, without bearing interest rate risk on its asset purchases, and with minimal political consequenses.

It's worth noting, too, that as the Fed's balance sheet has grown, the CPI index has declined from a peak of 220 in July 2008 to 212 in February. A 3.5% decline in less than one year - that's called deflation. Now monetary policy works with a lag so we could still have inflationary pressures once the impact of all the new programs hit, but instead of just getting upset about the possibility of future inflation, folks should also consider what would have happened had the Fed done nothing.
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Old 04-04-2009, 09:17 AM   #13
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Wow! I hope stocks keep up with inflation then. Maybe we'll be back up to peak index prices faster than we think.
The market responds to the economy, not to inflation. If we get large price increases, that will extend or deepen the current recession, or create a new one. Not much chance of the stock market going up in that scenario. What might keep up is gold, commodities, or TIPS. Well, I doubt if TIPS will keep up, since the govt does the inflation math, but at least their yield should increase.
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Old 04-04-2009, 09:41 AM   #14
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i like harry browns permanent portfolio idea too....my own version not the fund..i
I'm intrigued by the PP and have been studying it. It seems to me that the fund (PRPFX) is a little heavier on equities than the 4x25 Harry Browne version, and has those Swiss Francs which used to be a good idea -- but now that currency is just another fiat currency and it seems useless or worse now.
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Old 04-04-2009, 10:04 AM   #15
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last year the fund was down,,, my actual tlt,vti,gld, moneymarket was up1% as those long term treasuries we all love to hate shot up a remarkable 28% and gold was up 5%....quite amazing since my other portfolio following my newsletter was down 38%
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Old 04-04-2009, 10:06 AM   #16
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The market responds to the economy, not to inflation. If we get large price increases, that will extend or deepen the current recession, or create a new one. Not much chance of the stock market going up in that scenario. What might keep up is gold, commodities, or TIPS. Well, I doubt if TIPS will keep up, since the govt does the inflation math, but at least their yield should increase.

tips may not do well as the gov't manipultes the index and new tips will offer much higher base rates than older tips forcing your tips value down if you have a tips fund or sell your tips before maturity
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Old 04-04-2009, 10:55 AM   #17
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Interesting topic to me and probably TMI but what I've learned so far about things like this in my 55 years:
I would say the net effect of reading and participating on internet boards is almost always negative cognitively, though it may be positive socially and emotionally.

If you object to every piece of nonsense you see on the board you come off like a dork, and you would have time for nothing else in your life. If you keep your mouth shut you find yourself being influenced, even if only a little, by the deluge of nonsense..

The difficulty is that much of what we must form plans to deal with as investors can only be formulated by processing our 1st order observation of facts and our inferences about these facts in some theoretical framework. A lot of scatterd data, even if accurate doesn't often tell us much about what to expect in the area we are interested in, such as equity returns. So one must choose a theory, and frequently it is hard to know how to do this in a way that will be robust and on balance helpful. Clearly, as W2R pointed out, there are many irreconcilable ideas being put forth by prestigious economists, portfolio managers, and other “experts”.

IMO, the board excels in a type of long distance social support and entertainment. It is also very good as a source of 1st order facts which each person can pretty easily run down. Like, "the new Honda xxx gets y mpg." Or airline fare sales are in progress, or it has been unusually cold and snowy in Chicago, or etc....

But 80% of what is posted here is merely someone's opinion. Often an opinion about something that there is no reason to think that he has any particular facts or expertise or deep experience. Or, as you have pointed out Midpack, it is often someone's recasting of someone else's opinion. Very often a commercially packaged opinion put forth by some guru.

I love the arguments about tiny "swr" or allocation adjustments originally put forth by some guru, perhaps just to differentiate him from other gurus in the marketplace. IMO, a very large % of this is inane at best.

Ha
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Old 04-04-2009, 10:58 AM   #18
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tips may not do well as the gov't manipultes the index and new tips will offer much higher base rates than older tips forcing your tips value down if you have a tips fund or sell your tips before maturity
The calculation for CPI is pretty transparent (and has actually tracked prices really very well . . . check for yourself by using real prices published over the last century in the NJ Daily Record Historic price survey, Morris County New Jersey 1900-2000 ). Talk of a massively distorted and manipulated index is wildly overblown.
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Old 04-04-2009, 11:01 AM   #19
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But 80% of what is posted here is merely someone's opinion.
Do you have any facts to back this up or is it merely your opinion?
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Old 04-04-2009, 11:03 AM   #20
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Do you have any facts to back this up or is it merely your opinion?
This is kind of reflexive, isn't it?

Ha
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