Monday, November 3, 2014

Recent Illusions of Prosperity

Posted by CP at 4:26 PM

13 comments:

Stagflationary Mark said...

In hindsight, this post was an early warning.

I'm told there is no gold bubble though. I think it is possible that history would/will show that no good investment has ever come out of a vending machine but maybe it is different this time.

November 3, 2014 at 6:12 PM
CP said...

That's a hilarious point. I don't think there was a stock market vending machine in 1982.

Motto:
"no good investment has ever come out of a vending machine"

November 3, 2014 at 7:58 PM
whydibuy said...

Another invented gold correlation.
How many have I heard of in my lifetime?
I think the original was 15 oz of silver to 1 oz of gold. Another was 8 oz of gold to the dow. Of course when those so called thumb rules of valuation fail, the correlation mavens just forget about them.

Now Mark devises another silly correlation ( pulled out of the air ) to back up his thesis. No doubt this homespun benchmark of comparative valuation will meet the same fate as all the others.

November 3, 2014 at 11:31 PM
Stagflationary Mark said...

whydibuy,

How many have I heard of in my lifetime?

Well, since you claimed earlier that Christmas sales have always been good every single year you could remember in your lifetime, it's no wonder that you are asking us.

I will agree with you on this though. We should never use relative valuation when making purchases. If I'm in the grocery store someday, hamburger is selling for $10 per pound, chicken is selling for just $1 per pound, and they both are similarly tasty, then I'm going to buy the hamburger! My momma didn't raise no fool! No doubt this homespun benchmark of comparative valuation will meet the same fate as all the others!

Best to just ignore prices when making purchases, like you seem to do. What's the worst that could happen? (Other than spending 10x more money on food than is necessary perhaps.)

November 4, 2014 at 1:19 AM
Stagflationary Mark said...

I moved to Seattle with a car and about $500 in my pocket in 1988 (fresh out of college) with the long-term goal of retiring early.

As seen on the first post on my blog, using relative valuation retired me in 1999.

It was a small private company. I believed strongly in their product and that's probably one of the best reasons to invest there can be. In fact, to emphasize how much I believed in their product I continued to drive my Hyundai (Hope You Understand Nothing's Dependable And Inexpsensive) rather than buy a new car I could certainly afford. It was the best investment decision of my life.

I can't tell you how tempting it was to use the money to upgrade my car. Had I not used relative valuation (the short-term joy of the new car vs. the potential long-term joy of not having to work), my life would have definitely taken a considerable turn for the worse. Conditions at my workplace detiorated so quickly that it was affecting my health in measurable ways. Accounting fraud? Layoffs? You name it. It was not just a few layoffs either. Round after round, seemingly endlessly, sometimes just days apart.

So, yeah. You're going to have a very difficult time convincing me that relative valuation does not matter. And after seeing massive accounting fraud up close and personal, you will also have a hard time convincing me that I should be swinging for the fences on "sure things" during retirement. Good luck on that.

November 4, 2014 at 2:25 AM
Stagflationary Mark said...

detiorated = deteriorated!

Oops. Typo!

November 4, 2014 at 2:30 AM
eah said...

Question for the knowledgeable crowd here:

Re raising rates, doesn't the Fed -- a private institution -- face a serious conflict of interest (no pun intended)? I mean, it has on its balance sheet lots of federal debt, which I assume would be less valuable if it raised rates. So I don't see how the Fed can implement an "exit strategy" in a environment of rising interest rates without suffering significant losses.

Re fiat currency not that the above really matters...I guess?

November 4, 2014 at 5:46 AM
Stagflationary Mark said...

eah,

There is no conflict of interest (embrace the pun! ;)).

Fed Turns Over $77 Billion in Profits to the Treasury

The Fed is required by law to turn over its profits to the Treasury each year, a highly lucrative byproduct of the central bank’s continuing campaign to stimulate economic growth.

Fortunately, the long-term treasury profits I have are mine to keep (and I'm holding to maturity). My money. My risk. My reward.

And when I say my reward, it amounts to nothing really. I was holding to maturity anyway. Nothing has changed for me unless I sell to someone else, which I more than likely won't.

For what it is worth, I don't think the Fed is going to need to raise interest rates.

Corporate Profits vs. Debt (Musical Tribute)

The following chart shows the 2 year moving average of all corporate profits (not just the nonfinancials) after tax with inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj) divided by nonfinancial corporate business credit market liabilities.

It's rolling over again. I think the Fed helped it roll over the last two times, but this time it seems to be coming down all on its own (simple physics?). I'm fairly sure that's a first (at least in my lifetime).

In other words, we've reached the point where corporate profits are now going up slower than corporate debt again. I can't imagine the Fed's going to like that when/if they notice, and I doubt very much they'll want to encourage it.

Time will tell. May we live in interesting times (pun intended ;)).

November 4, 2014 at 6:06 AM
whydibuy said...

My bad. The relationship between gold and the dow around 1981 was said to be 1 oz of gold to the dow, not 8 like I thought I remembered. People then used that thumb rule of valuation to tell me the dow was overpriced as it began its long upward advance. That is, until they couldn't use it and not look ridiculous.
Comparative valuation retired you in 1999??? No doubt age and maybe health had something more to do with it.
BTW, for your reading comprehension help, I was referring to invented financial correlations that lead people down the wrong road, not deciding to keep driving a junker to save money ( I do that too, btw )

November 4, 2014 at 8:16 AM
Stagflationary Mark said...

whydibuy,

Once again, the problem doesn't appear to be with my reading comprehension.

Comparing gold's price to hourly earnings is not an invented financial correlation. Even when retired, I use a similar process every time I make a purchase.

"How many hours would I need to work to pay for that thing?"

That's how I think when I buy things. If more people thought that way when buying a car then they might haggle longer.

When I bought that Hyundai, the sales manager asked me if it was worth haggling over our $200 difference. I told him that I was currently unemployed, therefore had plenty of time, and would be more than happy to spend the rest of the day haggling (I was actually willing to haggle 20 more hours at $10 per hour). He knew I was serious because I was serious. He immediately knocked that last $200 off the price. Not surprisingly, his time was worth more than mine (on a "relative valuation" basis). I therefore made an extra $200 per minute. He obviously would have preferred to make it instead, but it wasn't going to happen.

Relative valuation matters.

November 4, 2014 at 9:13 AM
Stagflationary Mark said...

What is it that bothers you so much about my thoughts on gold?

That neither of us seems to want to own it right now?

And yet we can't seem to both agree about the future of this economy too?

Would it be easier to accept if I was a gold bug rabidly pushing DJIA to gold ratios?

I'm sorry. Gold is just a metal from the periodic table to me. This economy, on the other hand, has fascinated me with morbid curiousity since 2004. Sigh.

November 4, 2014 at 10:01 AM
Anonymous said...

"How many hours would I need to work to pay for that thing?"

November 4, 2014 at 11:55 AM
CP said...

Gold and silver spiking again - but wages are not.

July 22, 2020 at 11:44 AM

Post a Comment

Subscribe to: Post Comments (Atom)