The Simple Accountant

Breakout or Fake Out?

Odd...the most recent ICI flow of funds reports indicate outflows from US equity funds, inflows to international equities and bonds, and relatively flat money market balances. The net of US/international equity fund flows is positive. The overall picture hardly suggests irrational exuberance in the mutual fund world.


On Dec 29 08:08 AM fab4fan wrote:

> The money is starting to flow into U.S. equity mutual funds..+60%
> from the trough. Probably time to raise cash.

5 Reasons Why the Market Is About to Change Direction

We have been shown charts of various ETFs as proxies for the major equity indexes, gold and the US dollar. What is missing? How about charts of IEF and TLT? The above charts may not be saying much, but these are shouting rather loudly. December has been nothing but ugly for the longer maturity treasuries. Now, reconsidering the above in the light of this new information, how do the markets look?

Are Money and Bonds Perfect Substitutes?

Dr. Kling describes 30 day T bills and currency as near perfect substitutes, and you reply with a hypothetical of trying to exchange 30 year bonds for groceries. Is that an appropriate comparison for macro analytical purposes?

Recession, Depression, Deflation, Inflation, Collapse or Recovery?

Really now, you're going to cite Bob Chapman, conspiracy theorist extraordinaire, and try to pass it off as serious economic analysis?

Why omit these other gems of wisdom from the cited article?

"...banks are being told to obtain secure storage for new currency-dollars. They expect official devaluation by the end of the year."

"As you can see, the Illuminist [the dreaded Illuminati - SA] program is going to come quicker than we anticipated."

"The game as we know it today began in 1694 when the Rothschild’s [sic] formed the privately owned Bank of England..."

This is supposed to be a site for serious investment oriented discussion. I have no problem with anyone making a bear case from the observed data, indeed, I'm a market skeptic myself at this juncture, but there is no place for this kind of nonsense.

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.

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.

Letting the Reinflation Genie Out of the Bottle

Mr. Corcoran asks "Will policy makers exhibit the necessary good judgment to know when it is time to put the brakes on for this massive injection of liquidity?"

We should hope so. Watch the velocity of money. It has been dormant. When it starts to move up, in conjunction with the massive liquidity, then the genie could escape the bottle, and the inflation trade will be on. Long GLD / short TLT, for example, may produce spectacular winners, but the economic consequences would be ugly. Perhaps better to preserve capital or make small gains in a stable economy, than to make occasional windfalls in an unstable one.

Currency Impacts Are Huge When It Comes to Investment Returns

Sadly, many a mutual fund investor will have scanned the return tables, spotted the outperformance of the global and international funds, and allocated substantial portions of the portfolio to them. With the Euro in particular having cracked, performance chasing once again will come to grief at the cold cruel hands of mean reversion.