Archive for the ‘Economics’ Category
Wednesday, April 1st, 2009What is a Re-Flation trade?
Since the US government has pumped so much cash into the system (increasing the US money supply), this should cause the devaluation of the US Dollar (supply and demand), which would in turn drive up the cost of Commodities causing a surge in prices of goods and services (since commodities are priced in the US dollar).
This fear is referred to as “hyper inflation”. So to trade this hyper inflation you should be invested in inflationary hedges (commodities i.e. gold, oil, etc). This phenomenon last occurred in the late 1970’s early 1980’s which happened to be the last commodities bubble. You should note though that interest rates (mortgages, credit, treasuries, etc) were extremely high (10 Year Treasury was at 15.84% in 1981 compared to sub 3% right now) during that same time period which is the opposite of today.
10 Year US Treasury Yield 1963 till 2009
Commodities prices come off their bottoms over the past few months and the inflation watchdogs immediately brace for hyper inflation. Maybe we should actually read the story before jumping to the end. Sometimes the story is s more interesting then the ending.
The US government has taken these dramatic steps to ward off the threat of deflation. The opposite of hyper inflation would be a “deflationary spiral”. During a deflationary spiral prices of goods and services are falling to catch up with falling demand. A deflationary spiral causes high unemployment which actually accelerates the process (for more information see What is Deflation? ).
Instead of just looking at the prescriptions’ possible side effects, maybe we should look at the illness we are attempting to treat. Interesting how strong the dollar has been over the past year, since inflation would mean a weak dollar.
Tags: bubble, deflation, deflation spiral, gold, inflation, money, Re-flation Trade, treasuries
Posted in Economics, Stock Market Actions | 1 Comment »
Sunday, March 29th, 2009The following two charts are disturbingly similar side by side:
First is the Dow Industrial Average over the last from 1928 till 2006:
Dow Industrial Average 1928 till 2006
The second chart is total US debt as a percentage of GDP from 1923 till 2006:
Percentage of Total US debt to GDP 1923 till 2006
In 1930 the total percentage of US debt to GDP was 270%. What this means that for every dollar of GDP there was $2.70 of debt. Notice the percentage soared as debt was accelerated and GDP was slowed in the early 30’s. This over expansion of credit was primarily responsible for the financial crisis of the 1930’s. It took many years for the population to forget about the dangers of too much credit.
In 2006 the total percentage of debt to US debt to GDP was 331%. So again this means that for every dollar of GDP there was $3.31 of debt. The overall consensus feels that we are again in process of deleveraging. The questions remains is where we stop.
The real question is what came first the credit or the growth? Was the United Sates at a standstill from the 1940’s till the mid to late 1970’s? If the country was not willing to assume more debt than about 150% (plus or minus say 10%) of GDP for some 30+ years and now we are assuming over 300%, was it that extra assumed risk what launched the economy over the past 30 years ?
I understand that over the past 30 years there has been great innovation, but let us not forget that in the previous 30+ years we went to the moon. It seems to me also that much of the technology over that past 30 years can greatly be attributed to the 30 years prior to that. Was the growth over that past 30 years attributed to Engineers and Scientists or some funny math created by financial institutions spurred by an increased appetite for risk?
Tags: credit, debt, dow, gdp, market, money, recession, risk, stock, stock market history
Posted in Economics, Side Notes, Stock Market Actions | No Comments »
Saturday, March 28th, 2009Is it possible the Dow Industrial Average really could descent to 1529? The answer is absolutely yes.
From 1929-1932 the Dow Industrial Average went from a high of 381 to a low of 41 (closing prices). The index corrected 89.2% in about 3 years. So if the Dow Industrial went down 89.2% from its high of 14,164 that would leave us at 1529.
In December of 1903 the Dow Industrial Average touched 44. On September 3rd, 1929 the Dow Industrial reached 381. In 27 years the Dow Industrial Average grew 865%. On April 21rst 1980 the Dow industrial Average was 759. On October 9th, 2007 the Dow industrial average was 14,164. In 27 years the Dow industrial Average grew 1866%.
From September 3rd, 1929 (Dow 381) till April 21rst, 1980 (Dow 759) the Dow Industrial Average grew 199%. So it took over 50 years to grow a little over 199% but in just the last 30 years the Dow was able to grow nearly 10 times that.
So even if the Dow where to go to 1529, that still would be a 201% gain on the Dow Industrial average over 30 years which is not bad considering the last 80 years.
I am not saying that this will happen, but I definitely feel as though the last 3 decades have been somewhat of an anomaly. Remember price is determined not by Wall Street professions, it is determined by demand. If investors are unwilling to accept the risk of equities (stock), then the perceived value is worthless.
Dow Industrial Average from 1929 till 1980
Tags: average, crisis, demand, dow, economy, index, industrial, market, stock, stock market history, supply, USA
Posted in Economics, Side Notes, Stock Market Actions | No Comments »
Friday, March 27th, 2009Several weeks ago when the US Stock market was selling off with no bottom in sight we heard much of the financial populous using the term “capitulation”. Capitulation is defined by Webster’s dictionary as “surrendering or giving up”, traders characterize it as panic selling typically accompanied by large volume. Many professionals look at capitulation as a way to capitalize on another’s emotional bad decision. If the masses, “mob”, sells out then the market would have nowhere to go but up because all the sellers are gone. The theory is that it pays to contrarian.
Interesting how we really never did get this day of reckoning or “capitulation”. Instead a steady flow of relatively good news has spurred the major average up near 20% in a matter of weeks. With several weeks on a roll we have heard (not from all, but a large majority) from public officials, investment professionals and financial press that we may have seen the worst of this economic crisis.
If it pays to be contrarian then don’t you lose if you are part of the mainstream? Could the market be doing the same as capitulation but on the upside, panic buying for their jobs? Remember Wall Street suffers long term in a bear market.
President Herbert Hoover (31rst President of USA 1929-1933) on May 1, 1930 stated that United States was not through all its difficulties but he believed that United States had been through the worst (taken from The World in Depression 1929-1939 by Charles P. Kindleberger)
Red Circle Indicates End of April Beginning May 1930 Dow Industrial Average
Tags: bear, bull, chart, depression, economy, goverment, market, stock, USA
Posted in Books, Economics, Stock Market Actions | 1 Comment »
Tuesday, March 24th, 2009The simple answer is, prices coming down on goods and services. There are two types of deflation, good and bad.
Good Deflation:
Prices of goods and services are improved due to innovation either in manufacturing or in product delivery (i.e. inventory management).
Bad Deflation:
Prices of products and services are pressured by a lack of demand at current price level and demand can only be spurred by a price reduction. Some people actually feel as though bad deflation is a way of deflating an over inflated economy. When prices are forcefully reduced due to economic pressures, this causes increased unemployment, which perpetuates the situation. Companies must let people go to be able sell their products cheaper. This in return pressures the remaining workforce to pick up the slack without increased wages.
Many people may say that my definition of deflation is not descriptive enough to all the moving pieces (i.e. monetary value), but to me it is a simple way to identify and understand this potently destructive force.
Tags: deflation, Economics, economy
Posted in Economics, School | 2 Comments »
Sunday, March 22nd, 2009We as the people of the United States are at a historic impasse where we can either band together to get through these hard time or fight and create a hostile environment where recovery is more difficult and prolonged.
When viewing an economic crisis over history many economists strictly view the flow of money, whether it is spending, lending or monetary. My view is somewhat more of the psychological viewpoint of the masses. If we strip out the dollars and cents of a crisis what we are left with is the acceptance of a failed endeavor.
We as individuals are able to handle extremely difficult stresses in life by going through stages of acceptance to finally moving on. As pointed out by Gustave Le Bon in The Crowd the individual is typically smarter than the crowd. As an individual we cope much faster with a crisis then the masses. Since this crisis is affecting so many people it makes it harder as an individual to go against the irrational actions of the crowd and move toward the somewhat obvious solution.
So instead of acting out of anger, we need to think as individuals and act rationally. If everyone thinks as an individual rather than part of the mob we would make more progress toward the resolution of this difficult time.
Unfortunately, if history is any indication of the future, people will jump on the bandwagon and the resolution will be prolonged and full of irrational behavior. Interesting that it is not the economic factors that determine the outcome, it is the human action.
Tags: econimics, economy, Gustave Lebon, the crowd, US, USA
Posted in Books, Economics, Side Notes | No Comments »
Friday, March 20th, 2009Well, like the Great Depression it will be debated for years to come and will still come down to theories. Well here is my theory.
I believe that the cause to this terrible economic world disaster is simply RISK. If you look at the following chart of the Dow Industrials from 1928 to 2009 you will recognize the last 30 years seems to be an anomaly.
Dow Industrial Average from 1928 to 2009
When an index like the Dow Industrials grows to levels like it has over the past thirty years fundamentals can only explain so much. Money is what makes a market climb like it has over the past 3 decades. Simply the more people investing in stock makes the market grow. So basically a generation decided that they were going to accept more risk than their parents did. Their parents had kept the market at bay, since they did live through the Great Depression and understand what can happen when you accept too much risk.
If you look at the last generation who lived through the Great Depression their retirement from the workforce coincidently coincides with the beginning of this current run up in the market. In the early 1980’s the USA had a savings rate of nearly 10%, in 2006 we were at a negative savings rate (spending more than we made). Over the past 30 years we have accepted more and more risk into our lives and now are dealing with the rebalancing in my opinion. We tend to forget if we do not have someone continuously reminding us.
Tags: depression, economy, great, money, retire, retirement, risk, save
Posted in Economics, Stock Market Actions | No Comments »
Thursday, March 19th, 2009Are they serious? The US Federal Reserve yesterday took significant action to promote lending and restore growth to the US economy. The Federal Reserve cited the following reason for the dramatic action:
Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession.
Inflation will be an issue in the USA when it actually starts growing instead of contracting. Read the above statement from the Federal Reserve, does this seem like growth is around the corner? If growth is so close, then why has the Federal Reserve taken made such a bold move? I think that Deflation is the real concern here. Remember that we can stop inflation; Deflation is the real scary one, especially since the Federal Reserve has already thrown the kitchen sink at the problem. It is funny how the stock market always seems to be so ahead of the news without actually thinking about the now. It is true, low rates makes growth easier because of the cheaper cost of money, but to get to the ending you have read the whole book.
Annual inflation rates in the United States from 1666 to 2004
Tags: deflation, economy, federal reserve, inflation, invest, investment, US, USA
Posted in Economics | No Comments »
