So, what are we looking at in 2-3 years?

[redduck]

Some elementary questions:

1. This government of ours that's giving out $800 billion (or whatever the amount is), just where is this money actually coming from? And, did they have it all the time? And, if so, why wasn't it used for daily physical education in the elementary schools or looking for a cure for cancer? Or both? Or for other things worthwhile?

2. Anyhow, with all this money the government is giving out, how is this going to affect the economy in 2-3 years? (And, more importantly, how is going to affect me--and less importantly, how might it affect you)?

 

[al_bundy]

i think there is a good chance we'll replay the 1970's. back then we also had a stock market top in 1968 and the threat of deflation and the government pumped money into the economy and we got inflation

 

[barbarus]

Hyperinflation.

 

[DragoMuseveni]

i think there is a good chance we'll replay the 1970's. back then we also had a stock market top in 1968 and the threat of deflation and the government pumped money into the economy and we got inflation

I am by no means an economist, but lately I have been more worried about a replay of the 1930's than the 1970's.

Over the past month we have had the greatest drops since the 1930's, and the greatest rebound since 1933. All of those references worry me.

Assuming that we do not replay the 1930's, I think the next year or so will be a very good time for me to buy my first house. If it doesn't go pear-shaped, we are due for some serious inflation. I figure if I buy in the next few months with a fixed-rated mortgage, I can pay it back of the next few years with inflated dollars.

 

[al_bundy]

so far we have avoided a trade war that stopped all global trade like in 1930 and no dustbowl. 1930's most people's jobs were tied to commodities and once the prices collapsed so did their jobs. this time most people's jobs benefit from lower commodity prices. same thing in the 1970's, we had some international problems make things worse and the government did some pretty dumb things back then even by our standards. extremely heavy regulation and price controls

 

[redduck]

OK, let's say you're correct, that we will experience inflation/hyperinflation. What would be the prudent financial moves to be making now? I just don't want to end up being the guy listening to the guy who says, "What did you expect to happen when the government bailed out a bunch of banks/financial institutions/car manufacturers (maybe) two years ago? You had this information, you should have used it. What did you expect when the government was doing things like buying into AIG and no on else was buying it?

 

[2B]

If I could accurately predict what is going to happen 2 or 3 years into the future on a consistent basis, I'd be too busy cruising the world in my 120 foot yacht with the latest supermodels to be posting here.

For me I'm keeping my fixed income maturities short. I'm considering moving a significant portion into TIPS. I'm keeping my equities where they are.

One thing I am very sure about is my inability to know what's going to happen in the market. I also don't think anyone else can either.

Right now the media is pointing out all the people who predicted the fall. These are seldom the same people that will correctly predict the rebound. Some will be but even fewer will predict the next fall. If they could, they'd be out in my yacht with my super models.

 

[Midpack]

OK, let's say you're correct, that we will experience inflation/hyperinflation. What would be the prudent financial moves to be making now? I just don't want to end up being the guy listening to the guy who says, "What did you expect to happen when the government bailed out a bunch of banks/financial institutions/car manufacturers (maybe) two years ago? You had this information, you should have used it. What did you expect when the government was doing things like buying into AIG and no on else was buying it?

Conventional wisdom suggests gold/hard assets to weather hyperinflation. Maybe Google investing and hyperinflation for some info...

 

[redduck]

If I could accurately predict what is going to happen 2 or 3 years into the future on a consistent basis, I'd be too busy cruising the world in my 120 foot yacht with the latest supermodels to be posting here.

For me I'm keeping my fixed income maturities short. I'm considering moving a significant portion into TIPS. I'm keeping my equities where they are.

One thing I am very sure about is my inability to know what's going to happen in the market. I also don't think anyone else can either.

Right now the media is pointing out all the people who predicted the fall. These are seldom the same people that will correctly predict the rebound. Some will be but even fewer will predict the next fall. If they could, they'd be out in my yacht with my super models.

Well, I'm not caring much about what the media thinks/says. And, I understand that it's really tough to predict the market--so I'm really not talking about predicting the market. But, you are saying that there's no way to use information (e.g. the goverment's running up huge debt) that we have today to help us make better investment choices?

 

[unclemick]

Nothing - balanced index aka Target Retirement 2015 and staying the course.

In the 70's I had a slice and dice porfolio - chased yield, gold, silver, platinum coins, timberland, REITS, rental property, - the guns and freeze dryed food I decline to discuss. Also foreign stocks and bonds.

Hindsight being 20/20 - had I bought a broad array(mock index fund) of US stock in 1966 and held till retirement in 1993 - I would in the Bahamas right now viewing the world from my veranda - instead of looking out my computer room window at the snow in Kansas City.

heh heh heh - Reminds me of those old 'ski Nebraska' bumper stickers back when I lived in Denver. .

 

[brewer12345]

OK, let's say you're correct, that we will experience inflation/hyperinflation. What would be the prudent financial moves to be making now? I just don't want to end up being the guy listening to the guy who says, "What did you expect to happen when the government bailed out a bunch of banks/financial institutions/car manufacturers (maybe) two years ago? You had this information, you should have used it. What did you expect when the government was doing things like buying into AIG and no on else was buying it?

This is the scenario that I think is a bigger risk than deflation. The Fed and other regulators know pretty well how to combat deflation. Not so easy to corral the other side, though.

The classic way to beat inflation is to own commodities (PCRIX type stuff, physical gold, etc.), hard assets (stuff like real estate, timber, factories that make stuff people want, etc.), and commodity producers. Whether this is a good idea right now is an exercise left up to the reader. I will note that there are lots of companies now trading for less than the replacement cost of their assets, and quite a few are well run.

 

[samclem]

But, you are saying that there's no way to use information (e.g. the goverment's running up huge debt) that we have today to help us make better investment choices?

Ahh, the everlasting question.

Camp 1: Of course you can use this information to make better decisions! Study hard, do your research, buy the stocks that will do best, get rich (or at least avoid disaster).

Camp 2: (Efficient Market Theory): You have essentially the same information as everyone else. There are millions of people trying to optimize their chances of success. All the information everyone has is already reflected in the stock prices/bond prices/commodity prices we see. It might be possible to outguess the market, but stats show that it happens no more frequently than would be suggested by chance. The costs associated with trying to beat the market are greater than any slim benefit you might derive.

Everyone agrees on only one thing: Without folks in Camp 1 looking for bargains and keeping the market efficient, Camp 2 would certainly be wrong.

 

[samclem]

The Fed and other regulators know pretty well how to combat deflation.

Any thoughts on the continued effectiveness of the traditional anti-deflation tools? Some pundits/analysts believe that printing more money and providing economic stimuli may have only marginal effectiveness if the "velocity" of money through the system remains constrained by a newfound reluctance of people and businesses to spend/invest/borrow. If the new production equipment/car, etc can be bought with fewer dollars tomorrow, then it will often make sense to wait on these purchases, which drives the economy down. And if people are worried about keeping their jobs, they appear less likely to spend regardless of how easy credit is.

I find this all a little hard to swallow at this point. I think today's Joe Consumer, given easy credit, will borrow more money without a second thought. Now, if we start seeing 20% unemployment, we'd have a new dynamic, new fear, new reluctance to spend and invest, and a far deper problem than we face today.

 

[brewer12345]

I find this all a little hard to swallow at this point. I think today's Joe Consumer, given easy credit, will borrow more money without a second thought.

I agree. I think the YOY Black Friday retal sales increase strongly supports this notion. All of the stuff about US consumers permanently retrenching sounds very unlikely indeed to me.

 

[chinaco]

It seems to me that America is a bit lucky that the crisis is global... Otherwise we (our businesses) would be bought, stripped, and sold by investors and companies from other countries and governments fairly quickly.

Many American businesses are selling cheap because they were caught up in the downdraft.

 

[Architect]

If only that were true! I have research (private newsletter I can't post unfortunately) which has looked into consumer finances, and it really is that bad. The average baby boomer has saved only $46k for retirement, and that was before the stock crash. Their final leg was hoping their houses would fund the good life, but that hope has died away. Black Friday results probably indicates discounts more than it indicates spending. There's a lot that could be said about the U.S. consumer, but unfortunately the only spending growth we should expect in the decade is from the Govt.

In another post you mention deflation and the Fed. One small comment, the Fed's track record is far better at combating inflation, than it is at combating deflation. They're not good at it, and are failing again so far in this crisis. Maybe they'll figure it out this time, we can hope.

I agree. I think the YOY Black Friday retal sales increase strongly supports this notion. All of the stuff about US consumers permanently retrenching sounds very unlikely indeed to me.

 

[chinaco]

... Their final leg was hoping their houses would fund the good life, but that hope has died away...

If they did...that illusion is gone! However, I think the vast majority of people probably did not intend to do that with their primary home.... most do not own a McMansion. But there were some people flipping houses that thought they might make a windfall.

For most people that are in their 50's and older... they probably know that they will be working till 66.x (full SS retirement) if not longer.

The other problem that creeps in during the later years is unexpected health problems. Many who thought they would save huge amounts of money in the final 10 to 15 years will not be able to because they will become partially or fully disabled.

 

[Architect]

If they did...that illusion is gone! However, I think the vast majority of people probably did not intend to do that with their primary home.... most do not own a McMansion. But there were some people flipping houses that thought they might make a windfall.

I think the way people were taking money out (MEW) and spending it's clear they thought the value of their houses would grow to the sky forever. Even the Wall Street geniuses did too, which is why the credit system blew up. But MEW was across the board, from those who owned crack houses to the McMansions. During the dot.com bubble many thought stocks would provide it all, then when that blew up it moved into houses. Consumers spending has grown more than their incomes by a few percentage points YOY for over 20 years! Japan enjoyed a business led balance sheet recession in the 90's, we're presently seeing a consumer led balance sheet recession in the U.S.

What will fuel the recovery is a tough question! Economics is a hobby of mine, I forecast this downturn pretty accurately as it turned out, and I'll tell you I don't honestly know what will the recover will look like. Oh - I know it will come for sure, like spring after winter. But I don't see it within 2-3 years, maybe five, and it's something unforeseen right now.

 

[al_bundy]

I agree. I think the YOY Black Friday retal sales increase strongly supports this notion. All of the stuff about US consumers permanently retrenching sounds very unlikely indeed to me.

CNBC did an informal poll in one of the NYC area stores on friday and most of the shoppers were there to flip stuff on fleabay

 

[FANOFJESUS]

Deflation then inflation the only thing is, I do not know how much time in each.

 

[samclem]

If only that were true! I have research (private newsletter I can't post unfortunately) which has looked into consumer finances, and it really is that bad. The average baby boomer has saved only $46k for retirement, and that was before the stock crash. . . There's a lot that could be said about the U.S. consumer, but unfortunately the only spending growth we should expect in the decade is from the Govt.

I think you are addressing the consumer's ability to spend (low, based on current debt/savings levels). I was looking more at the consumer's willingness to spend (which I believe remains high). So, if Uncle Sam makes it possible for the consumer to spend more (through sponsorship of easy credit, more tax rebates, etc), then the consumer will oblige by doing so (and getting farther into debt, whether it be public debt or private debt). Hey, indentured servitude for us and the kids--a small price to pay for continuing the good time party a few years longer!

 

[Architect]

Good point, but isn't it two sides of the same coin? Take auto's for example, I'm pretty sure that there's plenty of 0% financing available, but the metal still isn't moving. Why? Who really needs a new car? Who wants to take on the debt, even if the money is loaned out to you for free?

Sure everybody wants to spend forever, but after 25 years it seems the tilt is finally going the other way. It makes more sense to shore up the balance sheet than get the new bedroom set.

I think you are addressing the consumer's ability to spend (low, based on current debt/savings levels). I was looking more at the consumer's willingness to spend (which I believe remains high). So, if Uncle Sam makes it possible for the consumer to spend more (through sponsorship of easy credit, more tax rebates, etc), then the consumer will oblige by doing so (and getting farther into debt, whether it be public debt or private debt). Hey, indentured servitude for us and the kids--a small price to pay for continuing the good time party a few years longer!

 

[lazygood4nothinbum]

...just where is this money actually coming from

why, from thin air, of course. from within the smoke and mirrors. yes we can. just like all the other money in this construct called capitalism. yes we can.

And, did they have it all the time?

yes and no, all the time. yes we can. how can you have what does not exist yet what does not come from nothing: god, big bang, universe, life. yes we can. what if universe stopped inflating? deflation destroys capitalism. inflation expands the empire. expansion requires exploitation of natural resources and cheap labor. black and blue and green. yes we can.

why wasn't it used for daily physical education in the elementary schools or looking for a cure for cancer? Or both? Or for other things worthwhile?

worthwhile to whom? doctors make more money than garbage men. yes we can. jail hookers. yes we can do that too. if everyone was healthy the health system would collapse. can't have that. no we can't.

how might it affect you

in god we trust has been broken. what money i thought i have, i have not and so i do not trust what money i think i have.

 

[redduck]

why, from thin air, of course. from within the smoke and mirrors. yes we can. just like all the other money in this construct called capitalism. yes we can.



yes and no, all the time. yes we can. how can you have what does not exist yet what does not come from nothing: god, big bang, universe, life. yes we can. what if universe stopped inflating? deflation destroys capitalism. inflation expands the empire. expansion requires exploitation of natural resources and cheap labor. black and blue and green. yes we can.



worthwhile to whom? doctors make more money than garbage men. yes we can. jail hookers. yes we can do that too. if everyone was healthy the health system would collapse. can't have that. no we can't.



in god we trust has been broken. what money i thought i have, i have not and so i do not trust what money i think i have.

Well, at least you were willing to take a shot at that part of the original post.

 

[unclemick]

Not to worry. It's all been figured out by the theory cats!

Vanguard Total World Stock Index, started 6/26/2008, VTWSX

That plus some interest bearing fixed in whatever your local currency is for some walking around money and you have it all covered.

Theory wise - right?



heh heh heh - it's good to have academic stuff to work it all out. .