Inflation, deflation, gold and currencies

[Higgenbotham]

I sure don't think I am "talking my book". This is the one area where I think you are wrong. I think for making the right investments now this is the most important issue. Time will tell who is right.

If I understand right, you're down on that island buying scrap gold, making coins out of it, and selling them. It looks to me like you're excited, maybe because the value of your inventory is going up and you'll also be able to get more for your coins, if the price keeps rising.

Gold is a pimple on the elephant of the world economy, with about 50 million ounces being mined each year. This would amount to $60 billion in new supply per year.

The large volume hard assets are oil and real estate and that's what the Fed needs to inflate. Any hyperinflation or even a whiff of it would send these assets to new all time highs. The oil market is maybe 30-40 times larger than the gold market. With world oil production at 84 million barrels per day, we're looking at $2000 billion in new supply per year, and prices currently well below the 2008 high of $147 per barrel. Even at the current depressed level of housing starts, the residential real estate market is still generating about $100 billion in new supply per year in addition to a huge glut of unsold properties. Despite hundreds of billions of money pumping and incentives, prices have barely budged.

Central banks and government bureaucrats always get it wrong. They sold hundreds of tons of gold multiple times at the lows around 10 years ago and it only stands to reason they will be wrong again if they buy these high prices. I guess a side comment there is just as the Central Bankers were wrong about gold 10 years ago, they will likely be wrong about their perceived ability to prevent deflation.

The Wall Street bubble machine realizes the capability no longer exists to attack the large volume asset classes, so they are now creating what I call "sub-bubbles" because there's simply not enough income and credit to drive the large asset classes higher. They attacked oil and real estate with a vengeance, but now they have to go after the pimples like gold in order to generate any action.

People have tended to believe any story Wall Steet throws out there as long as the price of the attacked asset is rising. We're now at the point where we will see if the public can be sucked in one more time, in similar fashion to how the Connecticut soccer moms, etc., were conned into buying oil ETF's and flipping houses 2-4 years ago before those markets collapsed. Time will tell on that one. The gold market is small enough that's it's definitely doable. There is no hyperinflation, just as there was no imminent $20 per gallon gasoline coming when that story was pumped 2 years ago.

The "problem" with deflation is there's nothing to sell. Yet, at the same time, we still have a supply of con artists on Wall Street who continue trying to pick the pockets of the productive people because that's all they know. Until the public gets fed up and the arrests are made, I suppose it can continue.

[vincecate]

If I understand right, you're down on that island buying scrap gold, making coins out of it, and selling them.

I wrote my big document about a year ago. Then, thinking I understood gold would be going up, I got into the gold business in January. All the arguments came before I entered the business. The saying, "talking your book" makes it sound like I had all the gold and then came up with the arguments, which is just not so.

Also, "talking your book" makes sense for someone who is on MSNBC or whatever TV show, they might make people buy it and make the market go up, but here? With this post being read 20 times, where 4 of those are me?

I think John has explained many things to me and if I try to explain one thing to him, it is mostly an attempt to return a favor. But it is clearly not seen that way, if it is giving him headaches. So perhaps I should give that up.

This is the big document I am talking about:
http://pair.offshore.ai/38yearcycle/

[Higgenbotham]

If I understand right, you're down on that island buying scrap gold, making coins out of it, and selling them.

I wrote my big document about a year ago. Then, thinking I understood gold would be going up, I got into the gold business in January. All the arguments came before I entered the business. The saying, "talking your book" makes it sound like I had all the gold and then came up with the arguments, which is just not so.

Also, "talking your book" makes sense for someone who is on MSNBC or whatever TV show, they might make people buy it and make the market go up, but here? With this post being read 20 times, where 4 of those are me?

I think John has explained many things to me and if I try to explain one thing to him, it is mostly an attempt to return a favor. But it is clearly not seen that way, if it is giving him headaches. So perhaps I should give that up.

This is the big document I am talking about:
http://pair.offshore.ai/38yearcycle/

You had said you were a Mormon at one time. The Mormon Missionaries will hand someone the Book of Mormon and ask the person to read it and pray to see if it is true. You're told if you get a "testimony" such as a warm feeling in your bosom, then it is true.

When they did this, I asked them to take the Bible as their basis of their discussion and use that, for example, to show that the organization of the Mormon church is clearly defined in the Bible as being more correct than, say, that of the mainline Christian churches.

I see the same kind of dynamic here. You have your big document you're referring to, and you'd like to save a few souls from their incorrect thinking. The souls don't want to be saved and they are getting a headache and one guy even called you an idiot.

A lot of our mental habits are formed early in life and are difficult to break. I'm sure my writing reveals lots of endemic mental habits and flaws that people could spend plenty of time pointing out. It would be OK with me if someone did that (and a couple people here have)because I know I can't possibly find them all. In fact, since the record here never erases itself I spend a fair amount of time going back to old posts and finding probably what amounts to a very small fraction of those flaws, while the rest remain elusive because I want to find them, but am unable to.

I think what you should do is what I've suggested a couple times. Take what others have written and use that as the basis for your comments. Show what specifically you find incorrect in the logic and what facts are incorrect, rather than going back to your "Book of Mormon" and repeating the commandments such as, "The Fed can print as much money as they want."

A document can be created, used as the basis for a course of action, and the document can predict the correct outcome without being fundamentally correct. The chances are essentially 50/50. I think someone pointed that out not too long ago. A good guy to read in that regard is Harry Browne, now deceased. He was on that first gold run in the 1970's. After a few more decades in the investment prognostication business (and probably a few failures, I don't know), he wrote some final words of advice about "fail safe investing" and a "permanent portfolio" where he discusses the difficulties in timing market outcomes. The longer I look at the various concepts of what drives price, like Harry, the more agnostic I become.

Forecasting the Future

Rule #4: No one can predict the future.

Events in the investment markets result from the decisions of millions of different people. Investor advisors have no more ability to predict the future actions of human beings than psychics and fortune-tellers do. And so events never unfold as we were so sure they would.

Yes, there have been forecasts that came true. But the only reason we notice them is because it's so exceptional for even one to come true. We forget about all the failed predictions because they're so commonplace.

No one can reliably tell you what stocks will do next year, whether we'll have more inflation, or how the economy will perform.

Investment Advice

Rule #5: No one can move you in and out of investments consistently with precise and profitable timing.

You'll hear about many Wall Street wizards, but the investment advisor with the perfect record up to now most likely will lose his touch the moment you start acting on his advice.

Investment advisors can be very valuable. A good advisor can help you understand how to do the things you know you need to do. He can help call your attention to risks you may have overlooked. And he can make you aware of new alternatives.

But no one can guarantee to have you always in the right place at the right time. And worse, attempts to do so can sometimes be fatal to your portfolio.

http://www.harrybrowne.org/articles/InvestmentRules.htm

edited to add above quote and link.

[John]

I wrote my big document about a year ago. Then, thinking I understood gold would be going up, I got into the gold business in January. All the arguments came before I entered the business. The saying, "talking your book" makes it sound like I had all the gold and then came up with the arguments, which is just not so.

Also, "talking your book" makes sense for someone who is on MSNBC or whatever TV show, they might make people buy it and make the market go up, but here? With this post being read 20 times, where 4 of those are me?

I think John has explained many things to me and if I try to explain one thing to him, it is mostly an attempt to return a favor. But it is clearly not seen that way, if it is giving him headaches. So perhaps I should give that up.

This is the big document I am talking about:
http://pair.offshore.ai/38yearcycle/

Vince,

What really gives me a headache is your claim that gold is going up to
$5,000 per ounce. It was three years ago that someone was writing to
me to convince me that he was going to make "untold millions" from
buying gold. I agree with Higgie that you're in a state of mind that
well exceeds irrational exuberance. Whether you're "talking your
book" or not is irrelevant; either way, you're dreaming.

You're assuming that because the dollar has been weakening, because
investors are expecting QE, that the dollar is going to continue
weakening, when you're overlooking the fact that QE is already priced
in.

You say that deleveraging is "finite," while printing money is
"infinite." This is ridiculous. There are hundreds of trillions of
dollars in structured securities floating around, but only at most a
trillion or so of QE is politically possible.

Last week, the stock picker's digest came out, predicting Dow 38,000
in a few years. It was in 1999 that the book "Dow 35,000" came out.

The whole "This time is different" concept is people have irrational
hopes, and that you should take a position opposite to the "common
wisdom." Today, the "common wisdom" is inflation or hyperinflation.
That alone should warn you that you're going in the wrong direction.

I listen to people on CNBC and Bloomberg TV who give me a headache.
You sound just like them.

John

[Higgenbotham]

As the dollar gets weaker, all commodities, metals, energy, food, will get more expensive. This will feed into general inflation with a few months delay.

That hasn't been true lately. Sharp rises in the CRB Index haven't been spilling over into general inflation like they did in the 1970s.

http://www.bespokeinvest.com/thinkbig/2 ... ation.html

[vincecate]

As the dollar gets weaker, all commodities, metals, energy, food, will get more expensive. This will feed into general inflation with a few months delay.

That hasn't been true lately. Sharp rises in the CRB Index haven't been spilling over into general inflation like they did in the 1970s.

http://www.bespokeinvest.com/thinkbig/2 ... ation.html

During the Great Depression they had 3 years where prices went down a total of 30%. This time it seems we may have a similar period where prices did not go up. But then things will return to normal where when the CRB jumps up general prices will follow higher.

[Higgenbotham]

That hasn't been true lately. Sharp rises in the CRB Index haven't been spilling over into general inflation like they did in the 1970s.

http://www.bespokeinvest.com/thinkbig/2 ... ation.html

During the Great Depression they had 3 years where prices went down a total of 30%. This time it seems we may have a similar period where prices did not go up. But then things will return to normal where when the CRB jumps up general prices will follow higher.

I don't know of any data source that points to 3 years of consumer price index deflation during a deflationary episode. Usually, it's more like 20 or 30 years.

According to the BLS Consumer Price Index Series E 135, there was 14 years of consumer price deflation between 1920 and 1934. Total deflation 33%.

Before that, according to the same series, there was 37 years of consumer price deflation between 1864 and 1901. Total deflation 47%.

www2.census.gov/prod2/statcomp/documents/CT1970p1-06.pdf

[vincecate]

That hasn't been true lately. Sharp rises in the CRB Index haven't been spilling over into general inflation like they did in the 1970s.

http://www.bespokeinvest.com/thinkbig/2 ... ation.html

During the Great Depression they had 3 years where prices went down a total of 30%. This time it seems we may have a similar period where prices did not go up. But then things will return to normal where when the CRB jumps up general prices will follow higher.

I don't know of any data source that points to 3 years of consumer price index deflation during a deflationary episode. Usually, it's more like 20 or 30 years.

According to the BLS Consumer Price Index Series E 135, there was 14 years of consumer price deflation between 1920 and 1934. Total deflation 33%.

Before that, according to the same series, there was 37 years of consumer price deflation between 1864 and 1901. Total deflation 47%.

www2.census.gov/prod2/statcomp/documents/CT1970p1-06.pdf

Almost all of your 1920 to 1934 deflation was in 1930, 1931, 1932:

http://www.visualizingeconomics.com/200 ... recession/

Going from paper money in Civil War in 1860s or paper money from Fed in roaring 20s back toward a real gold standard, where people are taking gold out of the banks and holding gold coins in their hands, causes a reduction in the money supply and deflation. Also, they had been on a bi-metalic standard including silver and de-monetized silver in the late 1800s, which also reduced the money supply and caused deflation. The Fed was limited to 2.5 paper dollars outstanding for every 1 dollar worth of gold they held. As people took out gold they needed to remove paper dollars.

These days, there is some credit contraction, but the base money is expanding fast, not contracting.

[Higgenbotham]

Almost all of your 1920 to 1934 deflation was in 1930, 1931, 1932:

http://www.visualizingeconomics.com/200 ... recession/

Your source doesn't show any data before 1930. When doing studies on inflation, all serious researchers use the BLS Series E 135 numbers.

www2.census.gov/prod2/statcomp/documents/CT1970p1-06.pdf

Those numbers show that half of the deflation in the 1920 to 1934 episode took place before 1930.

Returning to the original basis of this exchange, you invoked history and used that to make a prediction:

During the Great Depression they had 3 years where prices went down a total of 30%. This time it seems we may have a similar period where prices did not go up. But then things will return to normal where when the CRB jumps up general prices will follow higher.

Since you posted this, I have showed that according to the BLS official price series, the deflation did not last 3 years. It started in 1920 and lasted until 1934. In additon, only half of the deflation occurred during the 3 years you cited.

As far as the conclusions that can be drawn from that, that's much more complicated and you've gone back to your original talking points, most of which are completely irrelevant for reasons covered elsewhere and contain more flat out inaccuracies as well.

I think before one can make conclusions, it's really necessary to get an accurate understanding of history first and get a good grounding in the facts. To get an accurate understanding of consumer price history in the United States, the BLS Series E 135 is the place to look. If you can show that the BLS Series E 135 is not accurate for some reason and there is better data out there, I'd be very interested.

[vincecate]

During the Great Depression they had 3 years where prices went down a total of 30%. This time it seems we may have a similar period where prices did not go up. But then things will return to normal where when the CRB jumps up general prices will follow higher.

Since you posted this, I have showed that according to the BLS official price series, the deflation did not last 3 years. It started in 1920 and lasted until 1934.

Are you under the impression that The Great Depression started in 1920? People think of deflation and depression going together, but my point is it was only the first 3 years of the decade, not the whole decade. It ended when they went off the 40% gold standard and could print money freely. I know of no case where a country with a pure fiat currency had a 30% price drop like those first 3 years of the Great Depression. Do you?