Whoda thought it?

[Ad Orientem]

Yet further proof that the future is not in fact predictable.

After all the dire proclamations from last year that bonds were a financial death trap and that interest rates JUST HAD TO GO UP(!), here we are with TLT up by 18.5% ytd. Add in the yield and long term Treasuries are up around 20% for the year.

[KevinW]

Yup. Just gotta hold all 4 assets at all times.

[moda0306]

I'm basically done listening to bond/inflation hawks.  Even if we do have a spike, their analysis will probably be completely incorrect as to when, why, and how long.  They simply are working with an improper model on what is actually happening in the economy.  Most of them should stick to whatever area of micro-economic analysis that they excel at.


Where I may disagree is that this is all "unpredictable."  As arrogant as this might sound... low interest-rates in spite of high deficits, and low inflation in-spite of "money-printing" make perfect sense in this economy if you develop a better working knowledge of modern money and macro-economics.  I'm not necessarily saying I "predicted" 20% returns out of my TLT this year.  But persistent low interest rates and low inflation?  I read enough MR stuff that I'm pretty confident that while we can't "predict the future" to a huge degree of accuracy, we can at least work in a realm of probabilities and degrees of precision that are more reliable than saying anything can happen with equal probability.

[barrett]

While all y'all are so busy worrying about Ebola over on that other thread, I done made me 36$ in my PP thanks to the big spike in LTTs yesterday!

[FarmerD]

I read enough MR stuff that I'm pretty confident that while we can't "predict the future" to a huge degree of accuracy, we can at least work in a realm of probabilities and degrees of precision that are more reliable than saying anything can happen with equal probability.

Over the past 20 years watching Phd economists give their predictions, I would say they are right 50% of the time, i.e. right in line with random chance.  While I think I have some understanding of economics I know full well the difficulty of predicting system outputs where there are 100's of system inputs.  Making consistently accurate predictions on the stock market or the direction of the economy is a humbling experience so I am far less confident than you.  MMR seems to be the latest "New and Improved Economic" model.  I think it does a good job of interpreting the past events, but would I ever rely on it's predictions of the future?  Not enough to bet my money on it. 

[barrett]

I'm basically done listening to bond/inflation hawks.  Even if we do have a spike, their analysis will probably be completely incorrect as to when, why, and how long.  They simply are working with an improper model on what is actually happening in the economy.  Most of them should stick to whatever area of micro-economic analysis that they excel at.


Where I may disagree is that this is all "unpredictable."  As arrogant as this might sound... low interest-rates in spite of high deficits, and low inflation in-spite of "money-printing" make perfect sense in this economy if you develop a better working knowledge of modern money and macro-economics.  I'm not necessarily saying I "predicted" 20% returns out of my TLT this year.  But persistent low interest rates and low inflation?  I read enough MR stuff that I'm pretty confident that while we can't "predict the future" to a huge degree of accuracy, we can at least work in a realm of probabilities and degrees of precision that are more reliable than saying anything can happen with equal probability.

Hey Moda, I've been meaning to ask you something since I read this post. Have you adjusted your investments (say away from a 4X25PP) to take advantaged of what you think might happen in the financial markets? If so, I'd be interested to hear how.

Personally, I find it really enlightening to periodically go back to the polls on this forum where people take a shot at predicting how the different PP assets will perform over the next year. They are all wrong but some less so that others. Of course, that is bound to happen in any similar poll. The trick with money would be to be correct on your educated guesswork for most of your investment horizon.

[moda0306]

Farmer,

Thanks for your analysis.  Just to be clear, I'm more of a MR fan that MMT, but overall some pretty traditional Keynesian economic predictors would have predicted 1) low interest-rates in spite of high deficits, and 2) low inflation in spite of "money printing" due to there being no real fundamental difference between cash and ST bonds (somthing HB basically said himself in justifying putting 1/4 of his portfolio there instead of green slips of paper) .

And MR/MMT aren't really "new" economic models.  Like all of science and economics, they borrow and pull from some basic universal principles and leave other ones behind if they don't really represent reality.  It's not like all of a sudden production is bad, destruction is good, up is down, etc.  The fact that we are in a demand-side recession really accentuates the diference between MR/MMT and Austrian-type theories.  In other environments, MRists would probably be siding with Austrians.  In fact, they do make a point to accentuate how utterly important production is.  Sometimes Keynesians get so caught up in cash-flow and forget about the meat & potatoes behind it all.


Barrett,

I really haven't adjusted them much.  I hold less than 25% gold due to its volatility, and due to the fact that I believe it would have massive REAL returns in a dollar collapse.

I play with EE bonds a bit.  I see them as good "deep bonds," and when LTT rates were at 2.6% for 30 years but EE's were at 3.5% in 20, it seemed like a good arbitrage.

I assume low future inflation rates when running some financial decision analyses, and due to the earnings ratios on the stock market, plus what I believe to be low future growth and inflation in our economy, I usually run a 6% assumption on that, and don't expect the PP overall to do anywhere near its 10% average for quite sometime (average... of course you'll have one-off years).  I did buy a small permanent life insurance contract with the highest guaranteed IRR on CV and death benefit that I could find, and add more cash to it (which also has high-ish guaranteed IRR).  Since these guarantees go out to endowment at age 100, I'm sort of making a leveraged bet on continued low interest rates.  The MN Life/Health Guarantee Association guarantees up to $500k of benefit and $130k of cash value, so I tend to think I'm pretty safe on that front, but I know i'm playing a disinflationary macro game here without guarding against full-blown financial melt-down.  But like many here, I question the ability to ever get at our treasuries in a full-blown meltdown.  The banks are our access-point to our "super safe" treasury money.  I think anything but cold-hard cash (and bartarable items) is going to be pretty worthless if the banks have melted down.

But mainly I don't make huge leveraged plays on my disinflationary predictions.  Perhaps this makes me just another squacker.  But I'm not really advising anyone to make crazy predictions.  But some predictions are more sound than others.  We are at an interesting crossroads here.  This is one hell of a set of natural experiments we have going on, worldwide. 

I think I remember betting someone a few thousand dollars a few years ago (indexed to inflation, of course) on the future course of events.  I think my bet was something along the lines of CPI (or MIT's Billion Price Index, if he preferred) not once going over 5% over the next 5 years (back in 2011 or so), and not averaging over 3%.  He didn't jump on it (he has a lot more money than I do).

It wasn't that I was 100% confident in my guess, but I just felt the ego-boosting urge to hold these inflationists feet to the fire.  "Do you actually believe this or are you just b!tching about life not being as easy as you'd like it to be?"   He is a great guy, and I have a ton of respect for him.. but we have a very debate-friendly relationship, and it would have been quite the accomplishment to really put our money where our mouth was, and come out the victor.

[barrett]

Thanks for posting that, moda. I wish I had the econ chops to get everything you are delving into. I do agree on the lower than expected nominal PP returns at least for the next several years. That is based on my view that stocks and bonds have both been pushed way high by the Fed keeping rates so low. If interest rates stay low, PP returns kind of have to stay low unless people are willing to buy stocks when PE ratios are up at 25-30 and/or there are suddenly enough gold buyers to send the price of that asset way up.

But I figure that I'll be happy with 3% nominal returns on average if inflation is at zero.

Explain this to me if you would... I was just re-reading the first bit of HB's Coming Devaluation the other day. In your view is his formula 'General Price Level = Money divided by Goods' not ALWAYS true? I mean are we in an oddball situation now where there is a ton of money that has been printed but it doesn't lead to inflation because people aren't interested or able to buy stuff?

Thanks.

[Pointedstick]

I feel like being able to explain the present is no guarantee of being able to predict the future. It's quite clear that we're in a low-rate, low-inflation period right now, but those winds could change very quickly, and all the people who bet heavily on low rates for the next decade would be wringing their hands and crying foul over whatever unexpected thing happened to cause the change.

[barrett]

I feel like being able to explain the present is no guarantee of being able to predict the future.

PS, Not trying to predict the future, really. I just want to know enough to sound reasonably intelligent in the event I am invited to a social function! Still holding all four assets in equilibrium.

[Pointedstick]

Heh, I wasn't addressing anyone in particular. Just being a spoilsport.

[moda0306]

Thanks for posting that, moda. I wish I had the econ chops to get everything you are delving into. I do agree on the lower than expected nominal PP returns at least for the next several years. That is based on my view that stocks and bonds have both been pushed way high by the Fed keeping rates so low. If interest rates stay low, PP returns kind of have to stay low unless people are willing to buy stocks when PE ratios are up at 25-30 and/or there are suddenly enough gold buyers to send the price of that asset way up.

But I figure that I'll be happy with 3% nominal returns on average if inflation is at zero.

Explain this to me if you would... I was just re-reading the first bit of HB's Coming Devaluation the other day. In your view is his formula 'General Price Level = Money divided by Goods' not ALWAYS true? I mean are we in an oddball situation now where there is a ton of money that has been printed but it doesn't lead to inflation because people aren't interested or able to buy stuff?

Thanks.

barret,

Oddly, I think MMR is the best way to approach it from the first point, because that was the big "aha" moment for me around private sector balance sheets and "net financial assets," even though I think MR is technically more correct, if I had started with that my puny mind would have exploded.  Really, HB started my curiosity about all this because he asserted so confideny that STT's were essentially cash... and I didn't really believe it.  I started trying to research how money is made and how the fed interacts with the treasury, and neither Keynesian nor Austrian explanations seemed to fit the bill (nor anything in between) until I read Warren Mosler.  BOOOM!  That's all I have to say.  Not that he's right about everything, but he really changed the way I think of modern money and debt.

Just as oddly, as much as I love HB's personal and investing philosophy, I haven't read his investing/money books.  But I would have to disagree with him.  Keep in mind, this isn't because I'm "smarter" than HB.  I consider him the single-most influential person in my life.  But it's always easy to look at things in hindsight based on further work that is done and say "tisk tisk, you didn't have that quite right." The problems with trying to come up with supply vs demand in money these days is multifaceted, IMO.

1) Money's definition is nebulous:  What is money?  M0?  M1?  M3?  Beaver pelts?  Gold?  Silver?  If you believe STT's are essentially "money," exchanging them for M0 doesn't really do anything (as long as the Fed doesn't use those STT's to affect the real economy).

2) Money's supply is reversible:  Money's supply, even if we define it as M0 (or at least to not include STT's) is reversible by the fed.  Gold, once mined, doesn't get destroyed.  So its addition to the supply is permanent.  But "the economy" knows that if the price level of goods/services starts getting out of control, the fed will essentially "reduce" the money supply."  This totally changes the game.

3) Money is integral to every aspect of the economy: Money may be confetti, but holy hell it's used as a unit of account not just on short-term instruments/contracts, but very long-term ones as well. It's the only thing on our balance sheet that can satisfy payments for anything unless we're willing to barter on a massive level, which our economy isn't designed to do well.  These contracts come with all sorts of expectations of the future regarding inflation, employment rates, interest rates, and liquidiy.  The government can control, to different degrees all those variables.  They all have huge effects on economic decisions.  To boil all that down to "money supply" to try to guess what's going to happen to prices is just not seeing the forest through the trees



PS,

I agree that certain aspects of predicting the future are difficult... especially in inductive quasi-sciences like economics.  But some behaviors by individuals and markets are a lot more predictable than others.  We almost literally (IMO), mathmatically, would have to engage in entirely FOOLISH behavior to generate meaningful inflation and high interest rates juxtaposed against what our current deficits, money supply, balance sheets, etc are showing us.

The future may be unpredictable, but I can predict that if there's a burning building with nobody in it to save, you won't see many people running into it.  Likewise, if that building is loaded with gold coins (and no fire), you'll see lots of people running into it.  I think these predictions are probably pretty accurate .  In places/times where hyperinflation has developed, if you look at the social/political/economic circumstances surrounding it, it's completely different that the one's that I can see we face.  That is obviously in-part a matter of opinion.  But many things are pretty fact-based if you look at the MR references on inflation in the past.

But giving a 50/50 shot at any future event is a pretty radical way of handling the fact that we don't know.  I know you're not doing this.  But I still think it's a bit sly for any of us to make grand political statements about what "works" and what "human nature" will bring, and then simply refuse to carry those premises to their logical conclusion of what we SHOULD see IF those premises are true.  If I wanted to assert that "people are lighter than nitrogen," but then I see people walking around everywhere, I should probably not respond "you can't predict the future." 

[Pointedstick]

We almost literally (IMO), mathmatically, would have to engage in entirely FOOLISH behavior to generate meaningful inflation and high interest rates

Oh, and nobody's ever done anything like that before... 

I get what you're saying, though. However, there's still a difference between establish causal probabilities and actually trying to figure out what's going to happen in the future. Admitting that people are more likely to run into a burning building full of gold vs an empty one with nothing of value in it still doesn't tell us the likelihood of the building catching on fire. If anything, the sort of cause-and-effect statements of fact you're bringing up are what should lead us in the direction of wide diversification. They can tell us that gold will do X if Y condition appears, or that bonds will do P if Q condition shows up, but we still don't know which of those conditions are going to be present next year, or for how long.