Holy cr@p, the sky is falling...

[retire@40]

..

buy and hold

buy and hold

buy and hold...

Actually, that's been my overall strategy for the past couple of decades.

It's worked pretty well over the long term.

 

[danm]

Sorry I missed the discussion, I don't frequent this board much anymore.

I don't want to talk about deflation too much, several on this board do their best to squash any reasonable discussion, and that's no fun, but here goes a little.

We're certainly experiencing deflation already. Housing is deflating rapidly, 15% so far nationally, this will probably bottom out at 40% nationally unless it overshoots, I think the number is to the tune of a few trillion so far. All the bank writeoffs, over 500B so far, which will go to 1T, possibly as high as 2T - that's very serious deflation. The stock market is deflating, something like 2T so far. What else, I've heard that bonds, excepting the highest quality Treasury/Agency bonds, are suffering the same, but I haven't verified that. You can look at the various monetary indicators (MZM and the like), and velocity to see what's happening to money, it's slowing down and deflating.

Now the talk about CPI - that's peanuts. Due to more speculation than anything fundamental. And with where US consumers are I believe that'll turn around too.

Here's an excellent discussion

http://www.hoisingtonmgt.com/pdf/HIM2008Q2NP.pdf

Simply, the last 25 years of leveraging up is now in the process of painfully deleveraging, which is deflationary.

Somebody mentioned the FED, the helicopter idea is misplaced. The Fed can't force anybody to borrow or lend, and they can't lend permanently. Anyhow during the credit bubble the Fed played a small part of money creation the past decade, it was all from what PIMCO's Paul McCully calls the 'Shadow Banking System' (banks and near banks).

As for investing for deflation, selling assets and getting out of debt is the best thing. Second best thing is own the highest quality/longest duration bonds you can get, 30 year treasuries in the US. I sold my house in 2005, and stocks in 2006 - a bit too early as it turned out for the stocks. Due to the credit bubble stocks went up nicely, but I judged it wasn't due to fundamentals but the peak of another bubble. At any rate, two years later, stocks are back where they were, and my bonds have returned maybe 20%. Compared to the house and stocks I sold to buy the bonds, I'm up about 50%.

Stocks are probably OK when IN deflation, but on the way to deflation they're not so good to own, which I think we've been seeing already.

 

[Bikerdude]

We're certainly in deflation already. Housing is deflating rapidly, 15% so far nationally, this will probably bottom out at 40% nationally unless it overshoots, I think the number is to the tune of a few trillion so far. All the bank writeoffs, over 500B so far, which will go to 1T, possibly as high as 2T - that's very serious deflation. The stock market is deflating, something like 2T so far. What else, I've heard that bonds, excepting the highest quality Treasury/Agency bonds, are suffering the same, but I haven't verified that. You can look at the various monetary indicators (MZM and the like), and velocity to see what's happening to money, it's slowing down and deflating.
.

There are two forms of deflation, 'asset deflation' that you point out and goods and services deflation that happened in the 1930's. Anyone who has hired a plumber and gone out to eat recently can tell you we don't have the latter.

That being said I would suspect that uncontrolled asset deflation would eventually cause goods and services deflation.

 

[Spanky]

Lots of people will lose lots of money because some ideas are more equal than others?

What in the world does that mean?

Some ideas (from whichever source) are crummy that may lead one to lose a fortune.

 

[danm]

Very true - but any ER/FIRE's biggest expenses are

1. Investments (1M+)
2. House (several hundred thousand)

And both of those are getting cheaper by the day, if you're positioned for it. Compared to that, the cost of eating out is nothing (and I don't even eat out

General price deflation/CPI is a distinct possibility I suspect - but who knows. My point is that if you become deflation aware, you can find lucrative investment possibilities that didn't seem possible before. Simply dismissing deflation out of hand makes you miss these opportunities.

There are two forms of deflation, 'asset deflation' that you point out and goods and services deflation that happened in the 1930's. Anyone who has hired a plumber and gone out to eat recently can tell you we don't have the latter.

That being said I would suspect that uncontrolled asset deflation would eventually cause goods and services deflation.

 

[Abreutime]

The incentives in a deflationary environment are clear: hoard money. Loan money, if you can get a positive nominal return. Withhold spending, since items will go down in price. Sellers of goods will face falling demand for goods, and have to lower prices to clear inventory. It is clear that deflationary pressures will have a large negative effect on economic activity, and that the Fed would take pressures to alleviate such pressures if it became an issue.

For those that are seriously expecting deflation, here is a speech by the current Fed chairman on deflation. As I said earlier, the steps to prevent deflation are clear and simple: get money into the economy. Bernanke's unequivical view on deflation makes it clear that he would step in to prevent it from happening.

As I understand it, more people are facing inflation and rising food and gas prices, and are worried about the falling dollar (which is partially caused by inflationary pressures). So I find it amusing that people are worried about the exact opposite happening. In June and July, inflation increased at over 5% (annualized), so I dont think deflation is a pressing concern.

Here's an excerpt from Bernanke:

The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand--a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers.1 Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending--namely, recession, rising unemployment, and financial stress.

However, a deflationary recession may differ in one respect from "normal" recessions in which the inflation rate is at least modestly positive: Deflation of sufficient magnitude may result in the nominal interest rate declining to zero or very close to zero.2 Once the nominal interest rate is at zero, no further downward adjustment in the rate can occur, since lenders generally will not accept a negative nominal interest rate when it is possible instead to hold cash. At this point, the nominal interest rate is said to have hit the "zero bound."

Deflation great enough to bring the nominal interest rate close to zero poses special problems for the economy and for policy. First, when the nominal interest rate has been reduced to zero, the real interest rate paid by borrowers equals the expected rate of deflation, however large that may be.3 To take what might seem like an extreme example (though in fact it occurred in the United States in the early 1930s), suppose that deflation is proceeding at a clip of 10 percent per year. Then someone who borrows for a year at a nominal interest rate of zero actually faces a 10 percent real cost of funds, as the loan must be repaid in dollars whose purchasing power is 10 percent greater than that of the dollars borrowed originally. In a period of sufficiently severe deflation, the real cost of borrowing becomes prohibitive. Capital investment, purchases of new homes, and other types of spending decline accordingly, worsening the economic downturn.

 

[Canadian Grunt]

Producer Price Index News Release text

Augusts PPI report is out.

Year over year percentage increase for finished goods was 9.6% in August.

Almost a 10% increase in finished goods from Aug 2007 to August 2008. Inflation is still alive, just hidden in government reports. Monthly variances and recent declines do take the PPI down a bit but otherwise there would be a panic on inflation.


When the government uses core inflation numbers things look very tame indeed and people start talking about deflation. But consumers don't just buy core products. That's the kick.

 

[Canadian Grunt]

Producer Price Index News Release text

Augusts PPI report is out.

Year over year percentage increase for finished goods was 9.6% in August.

Almost a 10% increase in finished goods from Aug 2007 to August 2008. Inflation is still alive, just hidden in government reports. Monthly variances and recent declines do take the PPI down a bit but otherwise there would be a panic on inflation.


When the government uses core inflation numbers things look very tame indeed and people start talking about deflation. But consumers don't just buy core products. That's the kick.

Oops, should qualify the report for the economics types.


CPI is usually the report banded about by media types but it is not really an accurate predictor. PPI is the producer price index and is a leading indicator of where inflation is headed as these costs are eventually passed through to the consumer

 

[explanade]

Isn't the YOY going to be high because oil, despite dropping almost $50, is still higher than it was summer of '07?

 

[cute fuzzy bunny]

several on this board do their best to squash any reasonable discussion, and that's no fun

If by 'squash reasonable discussion' you mean 'introduce actual data that is contrary to someone elses assertion' then yep, I think that happens.

We're certainly experiencing deflation already

That will be big news for the folks who calculate the CPI

15% so far nationally

Nope. It is not 'deflation' when something increases in price by 40% and then drops in price by 40%. Thats called a "price spike". It only looks like deflation when you ignore a large portion of the data. Most homes in most areas have appreciated by an annualized rate of around 8% over the last 10 years. Its also worth noting that while a lot of people did buy during the price spike, they sold their old home during the price spike and reaped a reward from that which needs to be factored in. Only first time home buyers and people who HELOC'd or refinanced and then spent the money on depreciating assets are screwed.

this will probably bottom out at 40% nationally

That should be interesting, since most homes outside of major metropolitan bubble areas didnt go up by 40%, so how they'll drop NATIONALLY to that level will be a pretty amazing thing.

All the bank writeoffs, over 500B so far, which will go to 1T, possibly as high as 2T - that's very serious deflation. The stock market is deflating, something like 2T so far. What else, I've heard that bonds, excepting the highest quality Treasury/Agency bonds, are suffering the same

You're apparently suffering a lack of understanding as to what the term 'deflation' means, and making up some numbers along the way.

but I haven't verified that

Clearly.

You can look at the various monetary indicators (MZM and the like), and velocity to see what's happening to money, it's slowing down and deflating.

Care to look at the chart below and explain where the slow down is, and then explain the relation of MZM to deflation? It doesnt look like MZM is a predictor of...anything...and that its in a very normal range.

Simply, the last 25 years of leveraging up is now in the process of painfully deleveraging, which is deflationary.

I see no basis in fact for this assertion.

At any rate, two years later, stocks are back where they were, and my bonds have returned maybe 20%

Long treasuries have returned roughly 12% total return since 2006. Totaling up the inflation rates for 2006 and 2007, with a guess at where 2008 will end up means your real rate of return on this investment is probably somewhere between zero and something less than zero. Given that the fed will eventually raise rates to curb inflation, and that a rate raise will kill your long term bonds, thats not a very wise investment.

Compared to the house and stocks I sold to buy the bonds, I'm up about 50%.

The s&p 500 is almost exactly at the same level now that it was in 2006 when you fled the stock market. So unless you bought a house in the highest peak of the highest bubble market on the planet and then sold at the bottom of the lowest trough (which wasnt in 2006) you wouldnt have come anywhere near 50%.

You also might want to throw in 3 years of rent you've thrown out the window.

Stocks are probably OK when IN deflation, but on the way to deflation they're not so good to own, which I think we've been seeing already.

There is no data I've seen which supports this assertion.

Any questions?

 

[rickier55]

That's good.........HOW would you be investing WITHOUT the pension??

That's hard to say - without a pension, I would probably have been much much more conservative. Perhaps 50-50, but with a much larger cash reserve. But then again - without a pension, I imagine I'd still be working -

Rick

 

[Canadian Grunt]

Very true - but any ER/FIRE's biggest expenses are

1. Investments (1M+)
2. House (several hundred thousand)

And both of those are getting cheaper by the day, if you're positioned for it. Compared to that, the cost of eating out is nothing (and I don't even eat out

General price deflation/CPI is a distinct possibility I suspect - but who knows. My point is that if you become deflation aware, you can find lucrative investment possibilities that didn't seem possible before. Simply dismissing deflation out of hand makes you miss these opportunities.

The problem with this line of thought is that in order to purchase a house at advantage you either have to have sold at the high water point and repurchase at a lower price point. This is not deflation as it is only taking advantage of normal variations in the housing market. Boom and bust cycles are normal.

Now if you are making a new purchase requiring a mortgage the cost of funds is actually going to be higher than the last few years as mortgage rates are higher without the fierce competition that caused this mess.

As for investments. The reason they are cheaper is because certain investments are actually riskier than last year. Banks for example. This is not deflation but the risk premium that investors apply to stocks, thus knocking down the share price. When a stocks fortune improves the risk premium is reduced thus raising the stock price. There are more components to a stock price but I am just simplifying my position for ease of reading.


If we fail to understand the economic conditions we fail to invest in a strategic manner.

Inflation is alive and well in North America. When oil prices creep back up towards the end of the year Inflation will become the buzz word again.

 

[danm]

CFB - it's the snide comments inserted in the discussion that turn me off, such as

"You're apparently suffering a lack of understanding as to what the term 'deflation' means, and making up some numbers along the way."

That's not conducive to a reasonable discussion.

21k posts, amazing. Ciao, friends.

 

[cute fuzzy bunny]

My feelings are that its people who pull random numbers out of the air and try to reinvent economic terms that arent conducive to a reasonable discussion, but I think I'll stick around and keep pointing it out when it happens.

Believe it or not, I was trying to be nice. I didnt pick on each of your individual numbers, because they were almost all incorrect...including your own estimated rate of return on your investments.

I do however appreciate your notice of my long tenure and extensive contribution. Its only around 3000 posts if you take out the bacon, kayak and pancake threads though.

No matter how you slice it, its not deflation when long term held capital assets run up to an unreasonable price and then quickly returns to a more reasonable value without having inflicted any actual cost of living change on the majority of the population. Deflation occurs when the value of currency rises as broad based costs of living change, it has nothing to do with asset valuations.

Deflation also isnt bad for the economy. In fact, it could be pretty darn good. A nice -2.5% CPI and all you'd have to get is ~3% out of your stocks, bonds and cash to pay your taxes and get a nice 4% SWR. I think I could do that. Only high deflation running for two decades would be a problem. Thats not going to happen.

It might have been a hint to notice that home prices and stock market values are not incorporated into the CPI.

 

[Hamlet]

I'm amazed that anyone is worried at all about deflation. I really don't think serious deflation is possible once you are off the gold standard, since it is the easiest thing in the world for the government to fix.

Too much deflation? Just print more money. Problem solved.

Does anyone really think that the government is going to keep money tight enough to actually cause deflation?

Just about everything around is more expensive than it was five years ago. A popping asset bubble is not really deflation, except over a very short timeframe.

 

[haha]

I'm amazed that anyone is worried at all about deflation. I really don't think serious deflation is possible once you are off the gold standard, since it is the easiest thing in the world for the government to fix.

Too much deflation? Just print more money. Problem solved.

Does anyone really think that the government is going to keep money tight enough to actually cause deflation?

Just about everything around is more expensive than it was five years ago. A popping asset bubble is not really deflation, except over a very short timeframe.

I agree completely. I was once moderated for making a slightly flip comment about the extreme unlikelihood of CPI deflation.

Popping asset bubbles can indeed wreak havoc, as we are now seeing. But I generalized deflation? Doubt it. Let's keep an eye on the Boeing Machinists strike for clues.

Ha

 

[2B]

Deflation is catastrophic to any government. They depend on inflating tax revenues. A dose of deflation will cause panic at any government entity. Just think what the impact of lower property tax assessments will mean. They are in a total panic.

 

[harley]

Deflation is catastrophic to any government. They depend on inflating tax revenues. A dose of deflation will cause panic at any government entity. Just think what the impact of lower property tax assessments will mean. They are in a total panic.

I'm not seeing any panic. They seem to just figure that if values are going down, then rates must go up. The money belongs to the gov't. They print it, they let us hold it, then they take it back.

 

[Helena]

Did your corporate job's 401k or whatever not offer you a NON-equity investment option while you were still employed, or did you choose to be in equities then?

Yes, my company offered a non-equity investment option.
I began switching to it before I retired... also my Roths.


~

 

[Helena]

Actually, that's been my overall strategy for the past couple of decades.

It's worked pretty well over the long term.

Really ?

Have you cashed out your chips... or are you still letting them ride ?


~

 

[retire@40]

Really ?

Have you cashed out your chips... or are you still letting them ride ?

~

If I cashed out all my chips right now I would have such a large capital gain (yes even in today's market) it would make me nauseous to think of how much in taxes I would have to pay.

As an example, if I cashed out of my entire Janus Contrarian investment, that alone would generate over a $27,000 capital gain. I have 18 other funds that would also give a capital gain and one that would give me a capital loss.

Then what would I do with all that cash? Put it in a money market account or CD earning 3 or 4 percent? I already have about 35% of my portfolio in cash investments doing that for me.

I am very comfortable with the way my investments are allocated right now, except I need to be a little more weighted in real estate, but I'm working on that.

 

[Helena]

Because my stocks were all in retirement accounts,
I was able to switch from stocks to other investments
when stock values were high without the tax consequences.

~

 

[ERD50]

Deflation is catastrophic to any government. ...

Just think what the impact of lower property tax assessments will mean. They are in a total panic.

Lower property assessments would have zero impact in my local taxing district. They take the total of the assessments, then factor the tax by that.

If every home doubled in value, my tax bill would be the same. If every home value dropped in half, my tax bill would be the same. I think most communities work this way, but I don't know for sure. Based on the comments from some of my neighbors, I suspect that a lot of people don't know how their property taxes are structured.

-ERD50

 

[2B]

Lower property assessments would have zero impact in my local taxing district. They take the total of the assessments, then factor the tax by that.

If every home doubled in value, my tax bill would be the same. If every home value dropped in half, my tax bill would be the same. I think most communities work this way, but I don't know for sure. Based on the comments from some of my neighbors, I suspect that a lot of people don't know how their property taxes are structured.

-ERD50

If you lived in Texas I'd say you were full of sh*t. When property values go up, the pols are beside themselves to tell you the tax rate isn't going up even though you are paying more. They then tell you how every highshool "needs" their own natatorium and new uniforms for every team down to the chess club. If property values drop then you should be happy to have your tax rate go up "for the children."

 

[ERD50]

I can't speak for Texas (and I didn't). But that *is* the way it works in my taxing district. Yes, taxes go up for various (mostly bad) reasons, but it is independent of the property assessment. I traded several emails with our county assessor's office last year to confirm this. She said she wished everyone understood it as well as I did. They spend a lot of time explaining this to people.

The assessment determines how the tax is split among property owners, not the amount of taxes collected in total.

-ERD50