The Simple Accountant

Holding Cash? Might as Well Hold TIPS Instead

The Fed has consistently signaled that deflation will not be allowed, come what may, so the inflation trade is the order of the day. Few things have ever been more obvious for the portfolio manager

An easy, and relatively lower risk, inflation trade for those uncomfortable with the volatility of the commodity markets: TIP + TBT

4 Possible Market Scenarios, Updated

Agree with this. US turning Euro AND Japanese at the same time, in limited fashion. Permanently higher structural rate of unemployment seems likely, as does perpetuation of zombie banks hoarding capital, and large fiscal deficits.


On Nov 05 02:03 PM Alex_G wrote:

> Alex,
>
> I would swap the probabilities of GD 2.0 and an amended Japanese
> disease. I think the govt will do anything (including severely debasing
> the currency) to avoid GD 2.0, which will result in the substantially
> higher taxes you talk about. What this will do is make our economy
> look a lot like the Euro Zone’s, much slower growth, with lower levels
> of private investment and a higher level of unemployment going forward.
> Full employment might have a bottom 6-7% unemployed.

A New Economic Indicator?

OK, lets see...
Gold run - check
Ammo run - check
Canned goods must be next?

Are we supposed to think the US proletariat is arming itself against...what?
Does this explain all the empty seats at recent NASCAR Cup races too?
What does Ted Nugent have to say about all of this?

How Hyperinflation Can Accompany a Deepening Recession

1970s stagflation was fairly conclusively demonstrated to have been a result of cost push input price shocks, namely (1) lifting of wage & price controls, and (2) petroleum embargo. The monetarist explanation seems to me less compelling.

We did experience energy price shock from Q4 2007 through Q2 2008 at the outset of the most recent recession, but are there any other common factors?


On Oct 29 04:33 AM W.E. Heasley wrote:

> Mr. Corson:
>
> Excellent article.
>
> If you did not live in the 1970's then its much harder to understand
> StagFlation. Can remember going into the store, picking up a package,
> peeling off the price tag, on top of the price tag, on top of yet
> other price tags to see what the price was when the package first
> entered the store (no bar codes then). It got to be a hobby to see
> "what the item cost a short time ago".
>
> That "price tag" hobby was real life. Plus people were using this
> line all the time: "better buy it before the price goes up".
>
> Maybe your equation should be y = mx + b. That way you can quickly
> plot your point on the weird-econo-poop-o-meter- curve brought to
> you by the Council of Economic Advisors (Romer, Bernstein, Summers,
> and Goolsbee). You know, the people that brought you "Jobs Saved".
>
>
> Understand you reference to Hyper-Inflation and what context you
> are meaning. Maybe Hyper-Debt needs some consideration as well.

Bill Gross Thinks All Assets Appear to Be Overvalued Long-Term

What Gross advocates, and US policy makers appear to be counting on, is something analagous to Voltaire's famous remark that "the art of medicine consists in amusing the patient while nature cures the disease." Which is to say, they are buying time for what they hope will be a natural recovery. Reduction of excess debt through steady inflation, gradual repayment, manageable default rates, etc.

America Uncoupled: Wall Street and Main Street at a Fork in the Road

Seen in historical perspective, the United States is internally returning to something more like the "robber baron" era. The establishment of what a previous commentator refers to as "Middle class centered participative democracy" was in reality a transient phase created by two primary elements: the hard won gains of the working class through organized labor action, and the US supplanting of Britain as the dominant world economic power. There are many volumes of labor and economic history which document these.

In both of those developments was contained the seeds of their own undoing. The very success of American labor in winning a solid middle class lifestyle for industrial workers led to their their abandonment by relatively unconstrained capital mobility, with de-industrialization beginning much earlier than most of us realize (the population of Detroit peaked in the early 1950s).

The burden of being the world's dominant power has severely constrained the policy options of the government. In the macro process of globalization, the US has had much to lose, and its industrial, financial and political elites have not provided particularly good leadership. They have too often sold the nation down the river for their own short term gain.

Is Capitalism in Its Death Throes?

Well, certainly anything like the "ideal" or "pure" form of capitalism likely to be put forward by most people, would be a kind of entrepreneurial capitalism consisting mainly of small proprietors. The problem of an advanced industrial society is a structural one, because a world of small proprietor capitalism can't achieve the scale required to innovate and produce the goods and services required. So, something like the Pareto principle (a.k.a. the 80/20 rule) holds, where a small number of large firms utterly dominate the much larger number of small firms.

The downside of this is that large institutions are required, and that creates a massive agency problem. Poor governance and managerial self-serving at the expense of shareholders, in a broad sense, explain much of what we have seen as recurring problems of capitalism over that past decades. In a sense, the agency problems appear in a similar form in representative government, where elected officials look after their own interests before those of their constituents. Therefore ownership, the basis of capitalism and democracy in theory, is weaker than management, which produces all sorts of distortions.

Is Capitalism in Its Death Throes?

...or capitalism isn't dead, it just smells funny

Is Capitalism in Its Death Throes?

Hmm...Karl Marx wrote about the transition from entrepreneurial capitalism to large industrial capitalism, with increasing concentration and the squeezing out of the small proprietor, what, 150 years ago?

How delicious an irony - Marx, thoroughly discredited by the incompetence of his most avid devotees, finally vindicated by the brilliance of his most ardent detractors. Who says God has no sense of humour?

Jobless Recovery: Few Winners, Many Losers

@gmwright: The buying of luxury items from Apple actually does make sense, and reflects a phenomenon I discovered in an academic paper written as a university srtudent in the 1980s: People who cannot afford to buy homes or cars will afford themselves smaller luxuries, like the world's finest mustard, or really cool mp3 players.

Bond Expert: Monday Outlook

Macro Man's point regarding the interests of foreign holders of US assets is well taken.

It seems also that the US authorities are beginning to take notice that whileethe super easy monetary policy has helped the financial economy to avoid total catastrophe, it has not done so much for the real economy.

Unchecked dollar depreciation + liquidity fueled speculation in commodity prices = further misery for the growing legion of the un/under-employed. Perhaps the authorities are planning real -as opposed to rhetorical - support for the dollar in hopes of heading off a disgruntled electorate at the mid term? (Yes, I do understand that the Fed is independent of political motivation).

Have Government Actions Sown the Seeds for Green Shoots or Another Depression?

A few observations and questions:

US govt actions have stabilized the financial economy, and they hope that this will extend to the real economy. What is the evidence so far?

The recession has been declared over, strictly speaking in terms of quarterly nominal GDP growth no longer being negative. What is the GDP growth figure in real terms? To what extent is the return of nominal GDP growth a function of a falling US dollar?

It seems widely accepted, even in the US govt, that the recovery will be a "jobless" one (again), and that many of the destroyed jobs will never return. To what extent then is this recession a re-allocation of mis-allocated resources, including labor? If this is a structural re-allocation, how does super easy monetary policy help?

Given the foregoing, how surprising is it that the flood of liquidity has found its way into liquid financial assets and trading, not so much into long term investments, when there is excess production capacity in so many real economy industries?

With liquidity driven speculation in financial assets, commodities, etc...combined with huge slack in real assets, how can the prospects be for anything but stagflation in the forward period? How does the investor position his portfolio for that scenario?

Prechter's Same Old Story

Props for the Aerosmith quote, Mr. Smead. Mr. Prechter is like the proverbial broken clock. It would be interesting to see the total return on his personal portfolio over the last three decades. He is nonetheless an interesting read but like other socio-economic cycle theorists (Ravi Batra for example), must be taken with more than a pinch of salt.

The Great Shift: China Rising, U.S. Falling

A few comments on the Chinese ascendancy / US decadence meme:

1. China has developed and presently recognized the other side of the aggressive mercantilist policy. For example, so much of the state funding has gone into heavy industrial capacity, that the state has imposed a prohibition on the construction of new aluminum smelting plants, etc. This overcapacity can only be absorbed by steady foreign buying, and the US market will continue to be an important element. Just based on the size and maturity of its markets, the US can only fall so far, even if it is nowhere near its former heights .

2. US deindustrialization has been a long ongoing process (I remember writing papers and debating the matter as a university student in the 1980s, by which time there was already a considerable literature). The only possible remedy is a governmental policy solution which will be highly controversial. For example, the firm in which I work, a US manufacturer, was late to the Asia import game and entered only reluctantly. At that point, our competitors were "all in" and began to undercut our prices materially, so we faced a stark choice: either join the foreign sourcing party, or go out of business. In either case, we could not sustain the same level of domestic production and employment.

We chose the lesser of two evils, and still employ some US manufacturing workers. Margins have eroded anyway, because buyers know the foreign sourced product is cheaper, and nobody in our industry has much pricing power. We live and raise our families in these communities, and would have preferred to maintain full employment. That would only have been economically feasible if something like a tariff had decreased the cost gap between foreign sourced and domestically produced goods. Is that an argument for protectionism? Would such a thing be viable? I understand perfectly well what economists say, having been educated by them.

What about the indirect hard and soft social costs of deindustrialization? Unemployment insurance, law enforcement and prisons, falling property values, etc, social stability, human happiness. How much do any of these matter? Certainly the economists will have their answers for these as well.

The Hard Truth, Courtesy of the FDIC

Kid asks "Thus, we wave a magic wand, and even though the FDIC is asking the banks for 3 years' worth of money today, the banks will be able to recognize the cost over 3 years. Since when do we treat insurance as a depreciating asset?"

GAAP Accounting 101: The bank expenses the current year portion of the three year assessment, and recognizes the future year portion as a prepaid asset. If they booked expenses attributable to future years in the current year, current earnings would be understated. That's not allowed, although it would be nice to reduce taxable income.

So, in short, it is a balance sheet item, but not a deprecating asset.