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RobertCampbell

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Reply with quote  #31 

More news ....

I just heard Geithner's speech about how the govt is going to recapitalize the banks to try to re-start borrowing in order to save the economy.

What a joke.  It can't work - and it's not going to work.

Let's put another $3 to $5 trillion on the national debt to save the banksters and Wall Street criminals who created and profited from the economic collapse we are now experiencing.  God help us.

The stock market fell 200 points while he was speaking and gold rose from up $15 bucks for the day to up $20 bucks.

His speech was obviously not a great confidence builder, and rightfully so.

You can't fool the markets - and I hope some of you are doing what you have to do to protect yourself.  Me, I have no intention of going down with the ship.

PS:  When it comes to protecting yourself, it pays to be paranoid.



kaihacker

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Reply with quote  #32 
Reading up on inflation and deflation...there is an amzing amount of disagreement about what is happening right now.  I relized I know very little about the subject and a shift to either higher deflation or switch to inflation is something that I would like to see coming. 


Professor Geoffrey Moore did a lot of work in this area.  You might want to Google his name and see what you learn.

Thanks...I will look him up.

Are you watching gold and silver right now?  Both are in rising trends - but I don't think the reason is based on the expectation of future inflation. 

Possibly a flight to safety?

We'll see if these rising trends keep on going - but I wouldn't be surprised if they do because I'm expecting the U.S. and global economies to really start nose-diving in in the Spring.  I think it's become more and more clear every day that the final outcome of this banking/financial crisis is going to be worse than most people imagined.

Yea...a year ago "economists" were mostly saying that sub prime was contained...

Did you listen or hear about Obama's speech to the nation last night?  Wow!  If that doesn't scare the hell out of people, I don't know what will.

After bashing Bush for spreading fear...Obama sure switched tunes from hope to fear pretty quickly when his 800 billion in liberal pork started looking like it might not pass. 



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ISamson

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Reply with quote  #33 
For those of us who mostly ignore the News and watch the Charts instead  ( which reflect reality versus speculation of what the news  "means" )  . . .

$ 7,197  is the key support level that the Big Dogs are watching in the Dow,  so today's move down is not a reflection of long term likelihoods,  but just a knee jerk on the news.

However,  back in September a more than  20  year up trend line was broken,  a line that even survived the dot com crash of the Nasdaq more than half a decade ago,  so it was much more important than even the pending  7,200  test.

That is why the October was a big crash month and why the Market as a whole right now is in a bearish condition.

There is a high percentage likelihood that we will go down and test that support around  7,200  and if it breaks we will likely see another leg down in the markets altogether.

We all know the fundamentals are weak,  and the news is bad,  but it is the point of view of the Traders,  those who control billions of dollars,  that actually move the markets.

Yet of course they make their decisions on which way to push and test the markets based on the news  . . .  quite an intricate web. 

So how does this affect you Investors ?

Get out !    Remember Amityville ?    Lol    Just kidding.  Well sort of,  or maybe not.

So how does it affect you Traders ?

Be prepared !    There are opportunities daily for high percentage plays,  mostly to the bearish side of course,  but to a Trader direction is not important.




pasadena

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Reply with quote  #34 
Quote:
Originally Posted by kaihacker
My question is...how do we know when this is happening.  Or even better...about to happen?


I like to take the practical definition of inflation, over the technical.  In other words, the reasons WHY I want to watch inflation should determine WHAT TYPE of inflation I'm looking for.

As an investor, I want to know when asset prices are starting to rise for no other reason than that the money supply expanding.  In other words, I'm worried that someday, the Fed will, through its policy, make the value of the $$$ I own worth less.  The reason I want to know this is that I want to put my cash into some type of non-cash asset (which type is debatable) to make sure my hard fought for war chest doesn't evaporate.

Currently we seem to be in deflation mode, and our $$$ are increasing in value over almost everything .  The reasons behind this is basic supply and demand.  Even with the Fed and Treasury pumping in billions (now trillions?) into the system, the credit destruction caused by the collapse (losses, unwinding positions, unleveraging) has effectively DECREASED the supply 'money'...in other words, even with the government pumping, the amount of funds available for trading are getting more and more limited, making each $ worth more.  A simpler example would be to imagine the Fed printing $1 per second of extra, 'new' money, while $2 per second of existing money was disappearing in a puff of smoke.  Clearly this process is deflationary.

To start inflation again, the Fed and Treasury would have to "print" enough money to compensate for the credit destruction, AND change the saving/hoarding mindset that businesses and individuals are now adopting.  It does no good to pump money into the system to stop deflation if people are unwilling to buy or invest with it.  As an example, if the Fed were to give everyone in the country $30,000, but everyone buried the bucks in their backyard "for a rainy day", it is unlikely that you would initially see (price) inflation, as the added $$$ would not be competing with existing $$$ for goods and services.

So what I will be looking for are three things:

1. Injections of such large amounts of $$$ into the economy that they more than compensate for credit destruction.

2. Indications that people and businesses are trending towards spending again (in no uncertain terms), and not saving/hoarding.

3. Banks (finally) cleaning up their balance sheets (e.g. nationalization + RTC 2.0) so that they can lend at full capacity.
 
For an extreme idea of how much money it might take to make #1 a reality, take a look at the following article:

Naked Capitalism
Steve Keen: "The Roving Cavaliers of Credit" (or Why Ben's Helicopter Will Fail)
http://www.nakedcapitalism.com/2009/02/steve-keen-roving-cavaliers-of-credit.html

"...The only way that Bernanke’s “printing press example” would work to cause inflation in our current debt-laden would be if simply Zimbabwean levels of money were printed—so that fiat money could substantially repay outstanding debt and effectively supplant credit-based money.

Measured on this scale, Bernanke’s increase in Base Money goes from being heroic to trivial. Not only does the scale of credit-created money greatly exceed government-created money, but debt in turn greatly exceeds even the broadest measure of the money stock—the M3 series that the Fed some years ago decided to discontinue.

Bernanke’s expansion of M0 in the last four months of 2008 has merely reduced the debt to M0 ratio from 47:1 to 36:1 (the debt data is quarterly whole money stock data is monthly, so the fall in the ratio is more than shown here given the lag in reporting of debt).

To make a serious dent in debt levels, and thus enable the increase in base money to affect the aggregate money stock and hence cause inflation, Bernanke would need to not merely double M0, but to increase it by a factor of, say, 25 from pre-intervention levels. That US$20 trillion truckload of greenbacks might enable Americans to repay, say, one quarter of outstanding debt with one half—thus reducing the debt to GDP ratio about 200% (roughly what it was during the DotCom bubble and, coincidentally, 1931)—and get back to some serious inflationary spending with the other (of course, in the context of a seriously depreciating currency). But with anything less than that, his attempts to reflate the American economy will sink in the ocean of debt created by America’s modern-day “Roving Cavaliers of Credit”..."


Also, keep in mind that a "double-dip" recession/depression might cause you to *think* that we were headed for a long bought of inflation, only to whack your assets with deflation all over again.  Remember what the tax burden will be like when all of these government rescue programs are done, it 'appears' that we are out of the woods, and it's time to pay the Keynesian piper.  It's not to hard to imagine a double-dip recession triggered by heavily increased taxes.

But hey, nobody said that this would be easy!

  - pasadena

kaihacker

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Reply with quote  #35 
Pasadena,

Thanks for the detailed response.

Could a tax induced recession be inflationary? 

Looking at long term charts of CPI I could not find too many obvious double-dips.  Are there historical examples of this?



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Gene Hacker

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http://RiverLakeRE.com riverlakere@gmail.com

Home Inspections in Bakersfield and all of kern county:
http://bakersfieldinspections.com
pasadena

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Reply with quote  #36 
Quote:
Originally Posted by kaihacker
Thanks for the detailed response.


No problem...however, please remember that my plethora of detail in no way means that I know what I am talking about.  Please take all that I wrote about inflation with a grain of salt.

Quote:
Originally Posted by kaihacker
Could a tax induced recession be inflationary?


I don't know.  I've heard that there is debate to the causes of a similar situation, stagflation, but I don't as yet know how such a scenario would fit in with a 'strangled recovery' type situation.  Again, take my response with a big grain of salt.
 
Quote:
Originally Posted by kaihacker
Looking at long term charts of CPI I could not find too many obvious double-dips.  Are there historical examples of this?


If you want to use CPI as proxy for inflation/deflation, I guess you could describe 1930-1933 as deflationary, 1934-1937 as moderately to weakly inflationary, and 1938-1939 as weakly deflationary (again).

Now, if we are looking to protect our hard earned/won money against Fed liquidity-induced inflation without getting snookered into a fake (double dip) recovery, we might want to look at how assets performed during this double dip.  For laziness' sake, we can try using the DOW, as it's easy to get charts for the period from Yahoo finance.

The peaks for the DOW were hit in fall of 1929, and the bottom was hit in summer of 1932 (down 89%).  Then a recovery that seems to have lasted until early 1937 (up 373%), followed by another decline until early 1942 (down 52%).  Note that the 1937 high was still 48% lower than the 1929 high.  Also note that even though there was a double-dip, buying at the low of 1932 still made you 126% when you hit the  low of 1942.

So would buying stocks make sense during the first recovery, on the expectation that a second dip would still put you ahead?  It probably depends on timing; if you can get your money in at exactly the lows (ha!), it might not matter that you are buying before another dip.  However, who's to say that the second dip won't be worse (due to problems that weren't quite solved during the first dip?)

Maybe someone else with more time can do a similar quick and dirty analysis with other possible assets, to see how they fare in a double-dip scenario.

The big take-away from all of this?  You can drive yourself crazy with "what-if" situations, when you are trying to maximize/keep your gains.  The best strategy may be just to hedge your bets, so that no matter what happens inflation-wise, you keep most (or at least some) of your money.

Or, if you think you are smart enough and nimble enough to make the right calls, make sure that you have an exit strategy just in case you get it wrong!

 - pasadena

RobertCampbell

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Reply with quote  #37 

Pasadena,

The best strategy may be just to hedge your bets, so that no matter what happens inflation-wise, you keep most (or at least some) of your money.

What strategy do you like for doing this?

Thanks for adding to what I consider to be a very interesting topic, especially considering the economic times we are now in.

Robert Campbell

PS:  Inflation hedges, like everything else, are tricky.  Gold and real estate have historically been considered to be good long-term hedges against inflation.  But that doesn't mean they are always good.  After a speculative bubble in those two asset classes, for example, they are not a good hedge against inflation. Thus, unless you are someone like Michael Dell or Bill Gates, timing is important.



kaihacker

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Reply with quote  #38 
Quote:
Originally Posted by RobertCampbell


PS:  Inflation hedges, like everything else, are tricky.  Gold and real estate have historically been considered to be good long-term hedges against inflation.  But that doesn't mean they are always good.  After a speculative bubble in those two asset classes, for example, they are not a good hedge against inflation. Thus, unless you are someone like Michael Dell or Bill Gates, timing is important.



I read somewhere lately that "there have never been declining housing prices during periods of inflation."

Deflation is so rare that I couldn't find any examples in history that proved this wrong.

Because housing is such a huge part of our economy...it makes you wonder which of the two is the dominant force...inflation or housing.



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Gene Hacker

Passive and active real estate investment opportunities.
http://RiverLakeRE.com riverlakere@gmail.com

Home Inspections in Bakersfield and all of kern county:
http://bakersfieldinspections.com
RobertCampbell

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Reply with quote  #39 

Because housing is such a huge part of our economy...it makes you wonder which of the two is the dominant force...inflation or housing.

The collective marketplace is the dominant force - and it always will be. 

That's because economics is a behavior science. 

Have you noticed that gold has been in a rising pattern since mid Nov 2008, even though we are in a deflationary economy?  Higher highs, higher lows.

Silver, too.  The same pattern.

So go figure.  Who's right?  The market is right - always!

Granted, these trends can change from up to down.  But the prevailing strategy is to always to go with the market - the dominant force - and don't fight it.

That's how I play the game.

Robert Campbell

reijoe

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Reply with quote  #40 
Quote:
Originally Posted by pasadena
Even with the Fed and Treasury pumping in billions (now trillions?) into the system, the credit destruction caused by the collapse (losses, unwinding positions, unleveraging) has effectively DECREASED the supply 'money'...in other words, even with the government pumping, the amount of funds available for trading are getting more and more limited, making each $ worth more.  A simpler example would be to imagine the Fed printing $1 per second of extra, 'new' money, while $2 per second of existing money was disappearing in a puff of smoke.  Clearly this process is deflationary.

To start inflation again, the Fed and Treasury would have to "print" enough money to compensate for the credit destruction, AND change the saving/hoarding mindset that businesses and individuals are now adopting.  It does no good to pump money into the system to stop deflation if people are unwilling to buy or invest with it.  As an example, if the Fed were to give everyone in the country $30,000, but everyone buried the bucks in their backyard "for a rainy day", it is unlikely that you would initially see (price) inflation, as the added $$$ would not be competing with existing $$$ for goods and services.


Money is not going up in smoke. That's impossible unless it actually does go up in smoke (i.e. physical dollars are actually burned, or electronic accounts are brought to 0 by computer error). Or if the Fed sells government securities in the open market.

Otherwise, it's simply a redistribution of money. If you buy an asset, the asset deflates, and then you sell that asset ... this is just a transfer of money from you to the original seller. Even if your asset goes up in smoke, it's still not a decrease in the money supply because the money still exists.

Deflation of assets is NOT causing an actual decrease in the money supply.

What is causing an apparent decrease in money supply is perceived risk due to deflating assets. So people hold onto money rather than spending or lending it. This effectively reduces the "apparent" money supply.

I think this is important to talk about, because rather than simply pointing at the apparent decrease in money supply and saying we need to fix that problem by restoring the apparent money supply .... I think we should be looking at the perceived risk and addressing that. Treat the cause, not the symptoms.

For example, enact tax policies that encourage people to use the existing money supply rather than sit on it. If you believe that the private sector invests money more efficiently than the government sector ... then get rid of the tax deduction for interest earned on government bonds. And perhaps enact a tax deduction for interest earned on commercial bonds in groundbreaking new industries that would create jobs. How about a tax deduction for interest earned on bonds to solar panel and wind energy companies right now? Everyone keeps talking about the green industry - lets put our tax policies where our mouth is. These kinds of policies would do more than any government spending could ever dream of doing.
ISamson

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Reply with quote  #41 
Partially true.  "Money"  does not go up in smoke.

But if a stock goes from  100  to  50  and a few billion dollars of equity disappears,  it is not redistributed anywhere,  it did for all practical purposes,  go up in smoke.

And when the stock market goes down like it has then you can change that few billion to a few trillion  "up in smoke".

But I agree with you about money supply,  just not equities  ( including house equity ).




pasadena

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Reply with quote  #42 
Quote:
Originally Posted by reijoe
Money is not going up in smoke. That's impossible unless it actually does go up in smoke (i.e. physical dollars are actually burned, or electronic accounts are brought to 0 by computer error). Or if the Fed sells government securities in the open market.

Otherwise, it's simply a redistribution of money. If you buy an asset, the asset deflates, and then you sell that asset ... this is just a transfer of money from you to the original seller. Even if your asset goes up in smoke, it's still not a decrease in the money supply because the money still exists.

Deflation of assets is NOT causing an actual decrease in the money supply.


It depends on what you call "money supply"...my worry is that competition for goods and services by an increasing "money supply" will render my existing $$$ worth less and less.  Actual cash can compete with my cash, so cash is included in my definition of "money supply".  However, credit can also compete with my actual $$$ (look at the housing bubble for an example), so that is part of my definition of "money supply" as well.

When the economy is booming, credit gets easier and easier to get, and competition for assets gets more intense, as more and more players have access to "credit money".  This situation can inflate prices (again, an example is the housing bubble).

When the economy is busting, credit gets harder and harder to get.  Competition for assets gets less and less, as less players have access to ever smaller amounts of "credit money".

For an example of what I call "credit money" (actually "commercial bank money", as opposed to "central bank money"), please see:

Wikipedia
Money creation
Money creation through the fractional reserve system
http://en.wikipedia.org/wiki/Money_creation#Money_creation_through_the_fractional_reserve_system

"...Fractional-reserve banking creates money whenever a new loan is created. In short, there are two types of money in a fractional-reserve banking system:

* central bank money (all money created by the central bank regardless of its form (banknotes, coins, electronic money through loans to private banks))
 
* commercial bank money (money created in the banking system through borrowing and lending) - sometimes referred to as checkbook money

When a loan is supplied with central bank money, new commercial bank money is created. As a loan is paid back, the commercial bank money disappears from existence. .."

During credit expansions, the average of "commercial bank money" seems like it would trend higher, while with contractions, it seems that it would trend lower.

One of the arguments for deflation in spite of the Fed actions to increase the money supply ("central bank money") is that the loss in "commercial bank money" far and away exceeds the Fed's increase in "central bank money", causing deflation.

How long this situation may continue is open to speculation.

However, the thought is that once "commercial bank money" starts expanding again, the massive increase in "central bank money" will exacerbate inflation problems.

Again, I am no expert on this subject, these are just my insane ramblings cobbled together from casually researching the topic...

 - pasadena
pasadena

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Reply with quote  #43 
Quote:
Originally Posted by RobertCampbell
What strategy do you like for doing this?


Robert, one strategy that I may yet regret was to keep 2 of my investment houses.  The houses are my "hedge" against broad inflation, as inflation may devalue my $$$ holdings, but it would also raise my rents while my fixed payments remain the same, and it would eventually raise the house selling prices (over 10-15 years).

The worst case scenario for this "inflation play" is prolonged deflation, putting ever increasing strain on my rents.  My $$$ assets (treasury MM) would do well, and I would eventually be able to pick up more assets, so the deflationary play for us is to keep amassing cash (return OF capital, not return ON capital) for vulture day (or year, or 3 years), while still carrying the existing structures (in the face of possibly declining rents).

However, even if we do hit a bout of inflation, I'm not totally convinced that we won't just get more asset bubbles, as general wage inflation seems harder and harder to do with a globalized economy...and I need wages to go up to be confident that rents will go up in an "inflationary" economy.

I do have some gold ETFs, but I'm not totally convinced in gold's ability to hedge inflation.  What was the inflation rate between 1960 and now, and has gold kept pace since then?  I don't know, I guess I should find out.  The gold I do own is mostly for the "flight to safety/baby Armageddon" play (in a real Armageddon, physical gold, seed, a well, and ammo would be worth more).

And I still own some stocks, in index funds.  I left 1/5 of our long term money in stocks, and bought another 1/5 back at S&P at 922.  The rest is in treasury MMs (along with almost all of our short-term and war chest money).  I don't know if stocks are a good inflation hedge, as I thought stocks were sensitive to interest rates.

All in all, I'm still in the process of formulating an effective plan, along with a better way to predict when deflation ends, and (real) stabilization or inflation begins.  With so many possible "head fakes" (due to conditions, psychology, and government policy changes), it makes for an interesting problem!

Quote:
Originally Posted by RobertCampbell
Thus, unless you are someone like Michael Dell or Bill Gates, timing is important.


Robert, as you come up with possible indicators, it would be interesting to hear your thoughts and reasoning behind them.  these are indeed interesting times!

rickencin

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Reply with quote  #44 

Quote:
Originally Posted by pasadena
 
It depends on what you call "money supply"...my worry is that competition for goods and services by an increasing "money supply" will render my existing $$$ worth less and less.  Actual cash can compete with my cash, so cash is included in my definition of "money supply".  However, credit can also compete with my actual $$$ (look at the housing bubble for an example), so that is part of my definition of "money supply" as well.

For an example of what I call "credit money" (actually "commercial bank money", as opposed to "central bank money"), please see:

Wikipedia
Money creation
Money creation through the fractional reserve system
http://en.wikipedia.org/wiki/Money_creation#Money_creation_through_the_fractional_reserve_system


 - pasadena


Thank you for the links to Steve Keen and Wikipedia.  Really great!

My life experience centers on currency, not credit money.  It appears that the money supply can expand and contract regardless of the amount of currency issued.  Thus deflation or inflation can happen with a fixed amount of currency (not money supply) and a fixed amount of goods and services.  And, of course, the currency and amount of goods and services can and does change.  Thus the frustration in figuring out whether we have deflation or inflation.


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kaihacker

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Reply with quote  #45 
Quote:
Originally Posted by RobertCampbell


So go figure.  Who's right?  The market is right - always!

Granted, these trends can change from up to down.  But the prevailing strategy is to always to go with the market - the dominant force - and don't fight it.



I understand what you are saying but I feel like my biggest successes are when I went against the market because I thought it was wrong. 

I sold most of my property holding in 2005...possibly even a tiny bit early.  I thought everyone else was wrong.  I thought the homes were overvalued.

I also made a few great moves timing market bottoms in oil (stayed out this last crazy cycle because I could not figure out what the heck was happening).  Again...I bought and sold when I thought the market had strayed from where I thought it "should be".



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Gene Hacker

Passive and active real estate investment opportunities.
http://RiverLakeRE.com riverlakere@gmail.com

Home Inspections in Bakersfield and all of kern county:
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reijoe

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Reply with quote  #46 
Quote:
Originally Posted by pasadena
It depends on what you call "money supply"...my worry is that competition for goods and services by an increasing "money supply" will render my existing $$$ worth less and less.  Actual cash can compete with my cash, so cash is included in my definition of "money supply".  However, credit can also compete with my actual $$$ (look at the housing bubble for an example), so that is part of my definition of "money supply" as well.

When the economy is booming, credit gets easier and easier to get, and competition for assets gets more intense, as more and more players have access to "credit money".  This situation can inflate prices (again, an example is the housing bubble).

When the economy is busting, credit gets harder and harder to get.  Competition for assets gets less and less, as less players have access to ever smaller amounts of "credit money".

For an example of what I call "credit money" (actually "commercial bank money", as opposed to "central bank money"), please see:

Wikipedia
Money creation
Money creation through the fractional reserve system
http://en.wikipedia.org/wiki/Money_creation#Money_creation_through_the_fractional_reserve_system

"...Fractional-reserve banking creates money whenever a new loan is created. In short, there are two types of money in a fractional-reserve banking system:

* central bank money (all money created by the central bank regardless of its form (banknotes, coins, electronic money through loans to private banks))
 
* commercial bank money (money created in the banking system through borrowing and lending) - sometimes referred to as checkbook money

When a loan is supplied with central bank money, new commercial bank money is created. As a loan is paid back, the commercial bank money disappears from existence. .."

During credit expansions, the average of "commercial bank money" seems like it would trend higher, while with contractions, it seems that it would trend lower.

One of the arguments for deflation in spite of the Fed actions to increase the money supply ("central bank money") is that the loss in "commercial bank money" far and away exceeds the Fed's increase in "central bank money", causing deflation.

How long this situation may continue is open to speculation.

However, the thought is that once "commercial bank money" starts expanding again, the massive increase in "central bank money" will exacerbate inflation problems.

Again, I am no expert on this subject, these are just my insane ramblings cobbled together from casually researching the topic...

 - pasadena


Credit money, cash in your hands, cash at the bank ... it's all the same. Credit money doesn't come out of thin air either. When a bank makes a loan to a consumer to buy a house, that money comes from somewhere. The source is anything from its own customer deposits, to investors buying CDOs and MBSs.

Fractional reserve banking doesn't create money out of thin air either. All FRB loans are the result of real money that exists. http://www.websitetoolbox.com/tool/post/sdcia/show_single_post?pid=29645587&postcount=46 IMO, the primary benefit of FRB to people with cash is the ability to earn interest on demand deposits. In a non-FRB system, you would have to pay the bank to hold your demand deposits since they can't lend them out (because you could walk in the door tomorrow and demand all of it back). So, demand deposits wouldn't exist unless you paid the bank a fee for their holding service. The only kind of deposit that would exist would be CDs. The bank could only make a $100k 30 year loan if you had deposited $100k in a 30 year CD with the bank. Otherwise if you deposited $100k in a 1 year CD, and the bank made a $100k 30 year loan, and you wanted your money after 1 year ... the bank would say they can't give it to you because they don't have it. But if you are their only customer, and you made that $100k deposit, and they made that $100k loan, and you come in demanding all of your deposit back ... what do you call that? A run on the bank - when all the customers come into the bank and demand their deposits. FRB ensures that BOTH demand deposits and long-term loans can exist at the same time. FRB is wagering that most of the time, there won't be runs on the bank. If there is a run on the bank for demand deposits when the money is lent out ... there's no difference between FRB and non-FRB.

But you do have a good point about the availability of credit to certain portions of the economy. This sort of creates sub-economies within the overall economy. If you want to split the economy into consumers and businesses, then you have the consumer money supply and the business money supply. When $600k loans are being made to farm workers bringing in $10k a year, the consumer money supply has been expanded drastically. And now that those loans are no longer being made, the "consumer" money supply has been contracted. Hence deflation in consumer assets, etc. STILL, this does not mean the total money supply changes as a result of consumer credit. But your point does mean that changes can happen in a subset of the economy. Very excellent point that I had not thought about before.
reijoe

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Reply with quote  #47 
Quote:
Originally Posted by ISamson
Partially true.  "Money"  does not go up in smoke.

But if a stock goes from  100  to  50  and a few billion dollars of equity disappears,  it is not redistributed anywhere,  it did for all practical purposes,  go up in smoke.

And when the stock market goes down like it has then you can change that few billion to a few trillion  "up in smoke".

But I agree with you about money supply,  just not equities  ( including house equity ).


If you are referring to the subset money supply that pasadena had brought up, then I agree. If not, then the stock going from 100 to 50 just means that 50 of your wealth was simply transferred to someone else. It hasn't actually vanished.
ISamson

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Reply with quote  #48 
What makes you think that is the case ?

Where did the  $ 50  per share go ?

It went to no one else,  it just ceased to exist.


Kingside

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Reply with quote  #49 
This question about what is a good hedge is a great one. So here are my simplistic thoughts about one hedge that I think will work for the long term.

So now, most all agree we are in a deflationary trend, in the sense that asset prices are falling, and the dilemma of everyone trying to deleverage at once has the effect of driving asset prices lower.

And the Government response? Throw as much money as you can at every aspect of the problem. And keep throwing money at it. Whether you agree with the policies or not, what the government is doing is logical and makes perfect sense. Why? because unlike Japan who was a creditor nation in the 90's, the US is a huge debtor nation, with huge long term debt. Deflation must be avoided at all cost. It is unthinkable that debt repayment rebalancing will have to be made when US assets are falling. So as long as the possibility of a deflationary cycle exists, government will do everything in its power to reflate until the beast is dead and inflation is back. When that US debt gets repaid, it is in the government's interest that those dollars be worth less than they are now. By a lot.

So contrary to recent experiences and current consumer thinking, the best long term hedge in the US is to get leveraged up. Tricky, since it only works real well if you can link it to an asset that isn't falling in price. Also tricky since you don't know when this deflationary cycle ends. But at some point, I do think the government will kill it through sheer volume of spending, and then we could see similar comparisons to the Wiemar German Republic of the 1930s and the currency devaluation that occurred. It would have been great to have been leveraged to the hilt back then. 
kaihacker

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Reply with quote  #50 
Quote:
Originally Posted by Kingside


So contrary to recent experiences and current consumer thinking, the best long term hedge in the US is to get leveraged up. Tricky, since it only works real well if you can link it to an asset that isn't falling in price. Also tricky since you don't know when this deflationary cycle ends. But at some point, I do think the government will kill it through sheer volume of spending, and then we could see similar comparisons to the Wiemar German Republic of the 1930s and the currency devaluation that occurred. It would have been great to have been leveraged to the hilt back then. 


In regards to the quote:  "Tricky, since it only works real well if you can link it to an asset that isn't falling in price."

Do you think real estate prices would/could fall in a inflationary environment?


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reijoe

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Reply with quote  #51 
Quote:
Originally Posted by ISamson
What makes you think that is the case ?

Where did the  $ 50  per share go ?

It went to no one else,  it just ceased to exist.




The $'s don't cease to exist just because an asset fell in value.

Person A: 1 share of stock
Person B: $50

B buys 1 share of stock from A at $50/share.

A: $50
B: 1 share of stock

Company cuts dividend, stock drops to $25/share.

A: $50
B: 1 share of stock

A buys 1 share of stock from B at $25/share.

A: $25 and 1 share of stock
B: $25

The total money at any given point in time is always $50. And the total stock at any given point in time is always 1 share. It's redistribution of money.

You could argue that while the total money is the same, it is the "value" of the assets that has disappeared. But this isn't actually true either. Because while person A had $50 or 1 share of stock before (but not both) ... they now have $25 AND 1 share of stock. So that $25 will go out in the market and demand other shares of stock, which will raise their prices equal to the additional demand of $25. It's all redistribution. Redistributing money, redistributing demand.

The total of all money supply demands the total of all assets at all points in time. It's like the law of conservation of mass ... mass can neither be created nor destroyed, only rearranged in space.

In reality, this doesn't happen instantly. So you get local fluctuations as markets take time to react. This is where you step in with your stock strategies and make your money.
Kingside

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Reply with quote  #52 

Sure, I guess it could fall in real terms, but it is hard to imagine real estate falling in nominal terms when wages, prices, etc. are rising. I guess my point is that if you are locked into long term fixed debt against it, you are coming out ahead.

ISamson

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Reply with quote  #53 
I disagree with your line of logic.

In the beginning of your equation string there is  $ 100  of value.

Then at the end there is  $ 75  worth of value.

It does not matter that there is still  $ 50  of cash and  1  share of stock.

The other  $ 25  of value is gone  "up in smoke"  and no one can make it reappear or  "redistribute"  it.

When you own that one share of stock at the beginning you have parted with  $ 50  cash.  At this point,  sure equal representations of value have exchanged hands.

But once the value has decreased to  $ 25  ( to continue with your numbers )  the purchaser of that stock cannot ever get their  $ 50  back.

Half of it is gone,  "up in smoke".

If you already owned it when it was worth  $ 50,  and you now own it at  $ 25,  no redistribution of cash or wealth has gone anywhere.


 


reijoe

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Reply with quote  #54 
Quote:
Originally Posted by ISamson
I disagree with your line of logic.

In the beginning of your equation string there is  $ 100  of value.

Then at the end there is  $ 75  worth of value.

It does not matter that there is still  $ 50  of cash and  1  share of stock.

The other  $ 25  of value is gone  "up in smoke"  and no one can make it reappear or  "redistribute"  it.

When you own that one share of stock at the beginning you have parted with  $ 50  cash.  At this point,  sure equal representations of value have exchanged hands.

But once the value has decreased to  $ 25  ( to continue with your numbers )  the purchaser of that stock cannot ever get their  $ 50  back.

Half of it is gone,  "up in smoke".

If you already owned it when it was worth  $ 50,  and you now own it at  $ 25,  no redistribution of cash or wealth has gone anywhere.


 




I think the problem is that you are calculating the asset-to-$ exchange rate in your mind throughout the whole scenario. 1 stock isn't equal to $50. 1 stock is equal to 1 stock. 1 stock is only worth $50 once you exchange it for the $'s at the current exchange rate. Just tally up all the assets in the economy. You can't count the $'s twice. They only exist once.

For simplicity, let's say the housing market crashed overnight.

Two questions:

1) The day before, what is the money supply, and how many houses exist?
2) The day after, what is the money supply, and how many houses exist?

This is all academic anyways, and you seem like the calculating type ... so try this on for size. Instead of calculating the $-value of all the houses. Calculate the house-value of the all the $'s.

The median (average might be better) house-to-$ exchange rate for 4Q 2008 was 1 house per $180,100. Given our M2 money supply of $8171.1 Billion in December 2008 ... that means our money supply is equal to 45.3 million houses. So if we used houses as our medium of exchanging liquid wealth instead of dollar bills, I could walk into a McDonalds and buy a hamburger for 0.00002 houses. Or I could walk into a dealership and buy a new car for 0.14 houses.

So just because the house-to-$ exchange rate changes doesn't mean the number of houses or the number of $'s change.

If you burn down a house, that's a different story.
kaihacker

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Reply with quote  #55 
Quote:
Originally Posted by reijoe
It's all redistribution. Redistributing money, redistributing demand.

The total of all money supply demands the total of all assets at all points in time. It's like the law of conservation of mass ... mass can neither be created nor destroyed, only rearranged in space.



But money isn't real.  There isn't stock piles of gold to back up our dollars.  It is created and destroyed daily. 

In your example what happens when buisness fold and stock goes to Zero? 

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RobertCampbell

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Reply with quote  #56 
Pasadena,

Robert, as you come up with possible indicators, it would be interesting to hear your thoughts and reasoning behind them.  these are indeed interesting times!

As I mentioned earlier, the two best indicators for hedging against inflation and deflation are probably gold and bonds.

I've been studying the markets for over 35 years, and these two asset classes seem to be the "chosen" ones. 

BTW, on a buy and hold basis, the stock market has historically been the best inflation hedge of all. 

I have an idea for developing a trading system that only uses bonds and gold.  It's a short-term trading system that is based on a 1-2-3 trend reversal and momentum. 

If I develop it, I'll let you know.

Best wishes, and good luck to you. 

Robert Campbell

PS:  Yes, these are interesting times.  It's pure Darwinian survival of the fittest, baby! 

reijoe

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Reply with quote  #57 
Ok, so lets take the opposite view point. What if housing prices doubled over night? Does that mean instead of vanishing out of thin air, an equivalent amount of wealth has been created out of thin air? Just because a house went up from $100k to $200k doesn't mean there's $100k worth of additional productivity in the economy. It just means that the house is now more valuable relative to the value of everything else in the economy. Because the same amount of dollars are chasing the same products in the $200k house economy as were in the $100k house economy. Just more of those dollars are chasing the houses and less are chasing everything else. It's a redistribution of wealth from everyone who didn't own a house, to the people who do own houses.

Quote:
Originally Posted by kaihacker
Quote:
Originally Posted by reijoe
It's all redistribution. Redistributing money, redistributing demand.

The total of all money supply demands the total of all assets at all points in time. It's like the law of conservation of mass ... mass can neither be created nor destroyed, only rearranged in space.



But money isn't real.  There isn't stock piles of gold to back up our dollars.  It is created and destroyed daily. 

In your example what happens when buisness fold and stock goes to Zero? 


For the purposes of this discussion, a fiat dollar doesn't matter because we're assuming a central bank has already established a system of liquid exchange based on the fiat dollar. It could be a gold-backed dollar and all the same principals still apply.

If it goes to zero? Let's see ...

Person A: 1 share of stock
Person B: $50

B buys 1 share of stock from A at $50/share.

A: $50
B: 1 share of stock

Company cuts dividend, stock drops to $0/share.

A: $50
B: 1 share of stock

A buys 1 share of stock from B at $0/share.

A: $50 and 1 share of stock
B: $0

Still $50 and 1 share of stock. Since the stock is worth $0, the $50 that used to be chasing it is now free to chase other stocks. Hence, the other stocks will go up in value. Redistribution of wealth from the people who own the failed stock to the people who own the other stocks.
RobertCampbell

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Reply with quote  #58 
Gene,

re:  do what the market is telling you to do

I understand what you are saying but I feel like my biggest successes are when I went against the market because I thought it was wrong. 

I sold most of my property holding in 2005...possibly even a tiny bit early.  I thought everyone else was wrong.  I thought the homes were overvalued.


But everyone wasn't wrong, my friend.  The "market" was indeed telling you to sell in late 2005 - just as you did.

I say that because my market timing model gave a "sell signal" in August 2005.  Thus, the market wasn't wrong - it was right.

See Gene, you're just a natural born market timer - a person that can successfully rely on gut instincts for knowing when to sell instead of having to rely on data that reflects the supply and demand dynamics of the marketplace.

Robert Campbell





kaihacker

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Reply with quote  #59 
Robert,

I wish I could say I was a natural born market timer...but the truth is it was data that made me sell. 

I got lucky by coming across a book called "The coming crash in the housing market" in 2004.  I didn't believe it at first because I was very "invested" in housing. 
I was doing very well in my investing I actually took it a bit personally when the book suggested Real Estate would go down...major denial.  But the book caught my interest and I started studying up on the subject.  Eventually I was completely convinced that the run up was not "different this time" or a "fundamentally different market where the old rules don't apply".  In my studies I also came across your book and Bruce Norris' material and even "the housing bubble blog" which all help strengthen my strategy.

I feel lucky I came across the notion when I did and that I had an open mind to see thru the hype.  I was laughed at a lot by other investors and folks in the industry that I work with when I talked about this stuff.  I finally learned to keep my thoughts to myself...except for my family and close friends which I didn't want to see get hurt by the down turn.  Some listened...other didn't.  That was a delicate balancing act.  I did everything I could without making things uncomfortable...now I wish I would have said/done more.

The data that guided me:  I was worried about affordability and the rent/price disconnect then I saw inventory starting to grow and sales slowing so I bailed.  Comparing the trends I was seeing to history gave me a "gut reaction" alright.


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GeorgeB

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Reply with quote  #60 
Quote:
Originally Posted by kaihacker

I was laughed at a lot by other investors and folks in the industry that I work with when I talked about this stuff. 


You'll find that the above reaction should be comforting to you as an additional indicator that your analysis is correct. The crowd is irrationally exuberant near the climax.

At around the peak of the bubble I noticed that a approx. 3000sq ft house was listed for around $150,000 in the Dallas/Fort Worth area. That was quite a contrast to California prices for a similar property.

 



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