No, but I'm not saying it IS the 1970s. We're not wearing bell-bottoms, either. The condition of the banks is pretty irrelevant to the question "if we get inflation, what happens to stocks?" It may (or may not) be relevant to the question of whether we will GET inflation - I don't think it is, but you can make an argument that it might affect the money multiplier somehow - but it isn't relevant to the question of what happens once we get it.
Yes, there's no doubt that inflation creates winners and losers relative to others, but I think you'd want to hedge your equity beta if you want to own ones that are going to be RELATIVE winners because they'll still cheapen up. There weren't many absolute winners, in real terms, in the 1970s.
For a loooooong time, it has been the case that deflation as well as quicker inflation has been associated with low multiples. Periods of low and stable inflation are good for stocks, but if you go too much either way then you get lower valuations.
So if you get a rise in inflation that leads to higher profits (as it should, eventually), that's great but it will be associated with much lower multiples so you're not going to do well in stocks. People think about the former and reason that it makes sense that equities should be an inflation hedge, but my answers are: (1) Zimbabwe? and (2) US, 1970s? There is lots of academic work on the relationship between stocks and inflation, and since the early 80s the conclusion that inflation is bad for stocks has been essentially unchallenged by academics I think. But for some reason Wall Street doesn't like that story. :-)
Well, not quite steady....the ratio has ranged between about 8 and 23 over the last few years. I showed a chart in a comment in early August here: mikeashton.wordpress.c.../
Yes, on the latter point - I show that above. In the long run, gold is going to go up roughly in line with the price level (the fact that it has done so historically might also be taken as something of a victory for those of us who think CPI is a pretty reasonable measure of the price level, too!).
Hard to measure as a zero coupon bond because it's perpetual. So your denominator is something raised to infinity. The Macaulay duration of a perpetual bond --> 1/r, but gold doesn't have a yield to maturity so... 1/0 gets kinda ugly!
I could probably come up with a mathematical construct that would make sense, but there would have to be a big stochastic error term and as we see above that kind of dominates the price changes anyway. I guess the bottom line is that the effect of the inflation duration of gold is swamped by "other effects," so it's not a very good short-term hedge for inflation.
Right - this will only give you a return if the calls are chronically overpriced. If they're fairly priced, you'll get the risk-free rate over time but with lots of volatility. But moreover, I don't know if you can write calls on physical gold, and this analysis only really applies to physical gold since this isn't a total-return series to rolling over futures contracts.
If there was no cost of rolling futures, then you'd expect to earn the return on your futures collateral as well, so that would provide you with a return. But a rolling gold futures investment will in general have several different characteristics from holding physical gold in any case.
I thought about trying to find a link between volatility and gold price changes, and I suspect I'd find something...although when you think about the last year or two we've had mostly declining vol and sharp rises in gold. A more practical problem is that I don't have a good volatility series going back far enough. But you have a very good point and if I do further research here I'll definitely be plowing that field.
Market Malaise: Another Week at the Beach? [View article]
Maybe. As bad as seasonal adjustments can be, though, they still will sum to 1 so if your supposition is true then in the next couple of months we should see some very strong (low) Claims numbers to counteract the fact that (as you propose) the numbers now are being exaggerated high by the seasonal adjustments.
QE2 isn't a cure for anything except deflation, and since inflation has been rising for several years (unless you want to include the bubble unwind in there) that's not really a risk. Printing more money doesn't generate any real assets or liabilities. It just raises the price level.
Because of money illusion, there may be short-term effects...if money goes up 10%, then people feel 10% wealthier without realizing the money is worth 10% less. I am somewhat skeptical that money illusion is so powerful, but this is one reason you might expect it to generate real activity. (MV=PQ, but the question is how long Q reacts or if it reacts at all to exogenous changes in M).
But for me the argument is not that they SHOULD do QE2, but that they WILL. This is an argument from the political reality that Congress and the Administration are out of bullets and that "someone" needs to do "something." The only someone and something left is the Fed and QE2, so that's what will get done...at least, that's my guess. But I agree with you that I'm not really sure it is in our best long-term interest to find out how the band can play on. Perhaps it's time to take 5.
Thanks! Yes, that's why I think that QE2 doesn't make a lot of sense unless the Fed also institutes a penalty rate on excess reserves. See my article from last week, mikeashton.wordpress.c.../ . It's right on point with what you're asking, I think.
Trillion-Dollar Fool Stepping Up? [View article]
At least, I don't THINK it's relevant. Is it?
Trillion-Dollar Fool Stepping Up? [View article]
Trillion-Dollar Fool Stepping Up? [View article]
Trillion-Dollar Fool Stepping Up? [View article]
The summary is in this chart:
mikeashton.files.wordp...
For a loooooong time, it has been the case that deflation as well as quicker inflation has been associated with low multiples. Periods of low and stable inflation are good for stocks, but if you go too much either way then you get lower valuations.
So if you get a rise in inflation that leads to higher profits (as it should, eventually), that's great but it will be associated with much lower multiples so you're not going to do well in stocks. People think about the former and reason that it makes sense that equities should be an inflation hedge, but my answers are: (1) Zimbabwe? and (2) US, 1970s? There is lots of academic work on the relationship between stocks and inflation, and since the early 80s the conclusion that inflation is bad for stocks has been essentially unchallenged by academics I think. But for some reason Wall Street doesn't like that story. :-)
What's the Duration of Gold? [View article]
What's the Duration of Gold? [View article]
What's the Duration of Gold? [View article]
Hard to measure as a zero coupon bond because it's perpetual. So your denominator is something raised to infinity. The Macaulay duration of a perpetual bond --> 1/r, but gold doesn't have a yield to maturity so... 1/0 gets kinda ugly!
I could probably come up with a mathematical construct that would make sense, but there would have to be a big stochastic error term and as we see above that kind of dominates the price changes anyway. I guess the bottom line is that the effect of the inflation duration of gold is swamped by "other effects," so it's not a very good short-term hedge for inflation.
What's the Duration of Gold? [View article]
If there was no cost of rolling futures, then you'd expect to earn the return on your futures collateral as well, so that would provide you with a return. But a rolling gold futures investment will in general have several different characteristics from holding physical gold in any case.
Good thought though.
What's the Duration of Gold? [View article]
What's the Duration of Gold? [View article]
I will tell you that I ended up with a different conclusion than I expected to when I began looking at the issue!
Market Malaise: Another Week at the Beach? [View article]
Market Malaise: Another Week at the Beach? [View article]
QE2 Beats QT1 Hands Down [View article]
Because of money illusion, there may be short-term effects...if money goes up 10%, then people feel 10% wealthier without realizing the money is worth 10% less. I am somewhat skeptical that money illusion is so powerful, but this is one reason you might expect it to generate real activity. (MV=PQ, but the question is how long Q reacts or if it reacts at all to exogenous changes in M).
But for me the argument is not that they SHOULD do QE2, but that they WILL. This is an argument from the political reality that Congress and the Administration are out of bullets and that "someone" needs to do "something." The only someone and something left is the Fed and QE2, so that's what will get done...at least, that's my guess. But I agree with you that I'm not really sure it is in our best long-term interest to find out how the band can play on. Perhaps it's time to take 5.
QE2 Beats QT1 Hands Down [View article]
QE2 Beats QT1 Hands Down [View article]