Monday, May 11, 2020

Another Trend Failure Looming For Real GDP Per Capita?


Posted by CP at 12:10 PM

6 comments:

Stagflationary Mark said...

I would like to thank both Jeremy Siegel and Forbes this time.

July 13, 2011
Illusion of Prosperity: The Sarcasm Report v.112

I've been betting on falling real yields for a decade under the assumption that it would become increasingly difficult to make money off of money. It was just over a decade ago that I first embraced TIPS and I-Bonds. For what it is worth, I continue to do so. Growth has been lousy over the last decade. Real rates are therefore justifiably low. I don't expect the next decade to be much (if any) better. In fact, it could easily be worse.

We're told over and over again to avoid long-term TIPS. I have avoided that advice each year and have been rewarded for doing so. That was especially true this year. Thanks Jeremy Siegel! Not one of the TIPS in my bond ladder is currently underwater, not that it matters. I only track the inflation adjusted principal. I do not track what the market claims they are worth. I know what they are worth to me.

Perhaps I am wrong. Perhaps this economy is about to generate enormous "real" prosperity for the typical middle class American worker. I put the odds of that happening slightly higher than a snowball's chance in hell though. Barring that I tend to place my long-term bets on the combination of inflationary World War II, the inflationary 1970s, and deflationary Japan though. That's why I like long-term TIPS. It's the same reason I hoard toilet paper (and why I once hoarded gold and silver). It is my way of locking in a current standard of living for what I see coming.

Real yields are tied to real GDP growth. TIPS are directly tied to real yields. Since I was not a believer that past long-term real GDP growth would even remotely predict future long-term real GDP growth (unlike Jeremy Siegel), and instead expected future long-term real GDP growth to be poor, I was a complete believer in buying the longest-term TIPS I could and locking real yields in.

There’s nothing left to lock in right now, in my opinion. The bond market, with the Fed’s help, has removed that strategy. That’s why I’m now content sitting in cash. There are elements of the 1970s now. Try buying yeast or toilet paper at reasonable prices. It’s unlikely that the pandemic will make health insurance cheaper next year (understatement). Supply chains are broken. And yet, the deflationary story is still alive and well too. If this virus pops back up in the fall/winter, we’re going to be in a depression. We’ll know this because we won’t be optimistic, we’ll be greatly depressed.

This is all consistent with the theory that it will be harder and harder to make money off of money. The ultimate vessel for not making money is simply holding cash. If the returns of other investments decay to nearly nothing (or worse), then cash isn’t so bad by comparison. Just ask the Japanese. Sigh.

May 11, 2020 at 1:25 PM
Stagflationary Mark said...

MarketWatch: ‘It is part of self-care in a weird way’: The looming recession hasn’t stopped people from making crazy impulse purchases

On Saturday she went to Menards, a chain home improvement store, intending to purchase a hammock and wooden base. Instead, she came home with two garden gnomes which cost $99 each.

“I could not decide between the two so I bought them both,” Hudson said.

There’s never been a better time to buy stocks and garden gnomes!

May 11, 2020 at 4:01 PM
Allan Folz said...

Soma everywhere you look. That's not being glib either.

May 11, 2020 at 5:00 PM
CP said...

Mark -

New post: http://www.creditbubblestocks.com/2020/05/a-trend-that-isnt-failing.html

Also made a tag in your honor: http://www.creditbubblestocks.com/search/label/trend%20failure

May 12, 2020 at 9:37 PM
CP said...

Obviously, not good that the only trends that aren't failing are the bad trends.

May 12, 2020 at 9:37 PM
Stagflationary Mark said...

CP,

I have some good news that might cheer you up. We managed to avoid one of Jeremy Siegel’s biggest’s concerns for 2020.

The Wharton professor who forecast that the Dow Jones Industrial Average DJIA would see 20,000 at the end of 2015 says that market fundamentals are sufficient to support the recent run-up in U.S. equity benchmarks but worried that euphoria, or a meltup, could take stocks to unsustainable peaks.

He said that 2% from the DJIA’s peak. The euphoria was replaced with depression, so we’ve got that going for us, which is nice, lol. Sigh.

Oh, and he also pointed to low interest rates being a positive. Guess he’s finally given up on his Great American Bond Bubble theory of 2011. I would also point out that he was among the first to beg the Fed to lower interest rates this year. So yeah, he’s definitely given up on his Great American Bond Bubble theory. Go figure.

May 13, 2020 at 7:53 PM

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