Author Topic: Precious Metals  (Read 65668 times)

Imanuels

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Re: Precious Metals
« Reply #700 on: October 02, 2020, 03:14:26 AM »
Campbell Harvey has recently communicated interesting observations concerning gold price:
"Currently the real, inflation-adjusted, price of gold is almost as high as it was in January 1980 and August 2011. Since 1975, periods of high real gold prices have occurred during periods of elevated concern about high future price inflation. Five years after the real price peaks in January 1980 and August 2011 the nominal (real) prices of gold fell 55% (67%) and 28% (33%), respectively."

Their published paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3667789
Youtube video: https://www.youtube.com/watch?v=7dpdbhOmODI

celerystalks

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Re: Precious Metals
« Reply #701 on: October 02, 2020, 07:44:52 AM »
Campbell Harvey has recently communicated interesting observations concerning gold price:
"Currently the real, inflation-adjusted, price of gold is almost as high as it was in January 1980 and August 2011. Since 1975, periods of high real gold prices have occurred during periods of elevated concern about high future price inflation. Five years after the real price peaks in January 1980 and August 2011 the nominal (real) prices of gold fell 55% (67%) and 28% (33%), respectively."

Their published paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3667789
Youtube video: https://www.youtube.com/watch?v=7dpdbhOmODI

We sort of have an everything bubble going on now though. Stocks have extraordinary high P/E ratios and yields on fixed income are at historic lows.

TomTX

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Re: Precious Metals
« Reply #702 on: October 02, 2020, 10:16:40 AM »
Campbell Harvey has recently communicated interesting observations concerning gold price:
"Currently the real, inflation-adjusted, price of gold is almost as high as it was in January 1980 and August 2011. Since 1975, periods of high real gold prices have occurred during periods of elevated concern about high future price inflation. Five years after the real price peaks in January 1980 and August 2011 the nominal (real) prices of gold fell 55% (67%) and 28% (33%), respectively."

Their published paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3667789
Youtube video: https://www.youtube.com/watch?v=7dpdbhOmODI

We sort of have an everything bubble going on now though. Stocks have extraordinary high P/E ratios and yields on fixed income are at historic lows.

Well, of course! The Fed is pushing trillions of dollars into the money supply. Barely still single digit trillions anymore!

$2.3T in loans:

https://www.federalreserve.gov/newsevents/pressreleases/monetary20200409a.htm

$7T in bond purchases:

https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm

maizefolk

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Re: Precious Metals
« Reply #703 on: October 02, 2020, 10:29:08 AM »
So a technical question that doesn't change the facts on the ground, just what we call them. TomTX I'm guessing you probably know the answer better than I do.

Is it actually a bubble if what is driving up prices is a bigger supply of money chasing after a fixed quantity of assets? I've always thought of bubbles are being driven by people being willing to pay more for something because the price has gone up in the past and they expect the price to keep going up in the future.

In real terms I'm not confident the price of stocks will go up in the near-to-medium term, but I (and I'd guess lots of other folks) are still buying them when I get my paycheck every month because real assets are less likely to go down (in real terms) than money sitting in the bank.

Edit: to be clear again, I'm not disagreeing with what is happening, just with what we call the phenomenon we're observing.

TomTX

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Re: Precious Metals
« Reply #704 on: October 02, 2020, 11:52:47 AM »
I see a "bubble" as anything pushing up one or more asset classes unreasonably high.

Due to the massive cash injection looking for places to be that pay better than 0.5% from a savings account, it's not a stock bubble or bond bubble or PM bubble - it's an everything bubble.

Of course, you're never absolutely sure it's a bubble until after it pops ;)

waltworks

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Re: Precious Metals
« Reply #705 on: October 02, 2020, 12:11:23 PM »
Yeah, but by that standard, any form of general inflation is a "bubble". 

I think you have to have buying purely on the basis that everyone else is doing it to qualify as a classic bubble, and I'm not sure this situation qualifies. These prices could be the "new normal" if the other circumstances (government propping up of markets) continue forever, right?

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maizefolk

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Re: Precious Metals
« Reply #706 on: October 02, 2020, 01:56:27 PM »
That's a fair enough point. But here I'd argue that, given the amount of new money created by the fed, stocks and bonds and real estate may not be unreasonably high. There's a good, non-speculative reason for assets to be more expensive and offer lower returns: more money chasing after a fixed supply of assets to buy.

Anyway, we could call it an everything bubble. We could call it asset inflation. Hmm, actually I take that back, I guess there is a difference we could see between the two looking back on this era from the future.

If this is an everything bubble, it'll eventually pop and the prices of assets will all fall. If it is asset price inflation, it may never pop, and we'll just be in for years and years of below normal returns.

big_owl

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Re: Precious Metals
« Reply #707 on: October 02, 2020, 03:01:00 PM »
BOOYAH just ordered another 1oz gold panda this week, should be here today.  Another gold coming to add to my scrooge mcduck pile. 

celerystalks

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Re: Precious Metals
« Reply #708 on: October 02, 2020, 04:20:27 PM »
BOOYAH just ordered another 1oz gold panda this week, should be here today.  Another gold coming to add to my scrooge mcduck pile.

Awesome!


celerystalks

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Re: Precious Metals
« Reply #709 on: October 02, 2020, 08:01:59 PM »
That's a fair enough point. But here I'd argue that, given the amount of new money created by the fed, stocks and bonds and real estate may not be unreasonably high. There's a good, non-speculative reason for assets to be more expensive and offer lower returns: more money chasing after a fixed supply of assets to buy.

Anyway, we could call it an everything bubble. We could call it asset inflation. Hmm, actually I take that back, I guess there is a difference we could see between the two looking back on this era from the future.

If this is an everything bubble, it'll eventually pop and the prices of assets will all fall. If it is asset price inflation, it may never pop, and we'll just be in for years and years of below normal returns.

So would you say that this time its different?

waltworks

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Re: Precious Metals
« Reply #710 on: October 02, 2020, 09:41:41 PM »
It's always different. We're just being dorks about semantics.

-W

celerystalks

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Re: Precious Metals
« Reply #711 on: October 03, 2020, 07:24:44 PM »
It's always different. We're just being dorks about semantics.

-W

Okay. But my question is: is it different this time?

Classical_Liberal

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Re: Precious Metals
« Reply #712 on: October 13, 2020, 04:05:58 PM »
If this is an everything bubble, it'll eventually pop and the prices of assets will all fall. If it is asset price inflation, it may never pop, and we'll just be in for years and years of below normal returns.

Adding to this thought process, we also need to think in terms of redistribution.  Who owns real assets, who has been the benefactors of their rise in real/relative value vs less durable goods and services.  IOW, why are asset prices skyrocketing and we are not seeing the corresponding price increases via inflation?

It can be summed up as velocity, but the more fundamental factor is why is velocity so low?  Mostly, IMO, it's because the new money is not getting into the hands of the lower 80% via wages/income who would be more likely to spend it on anything other than real assets.  I don't think this is viable long term either socially or economically.   If we end up redistributing, I think price inflation follows, which will take care of the overvalued real assets.  If we don't, I think real asset prices continue to increase as more liquidity enters the system, and will decrease if the monetary supply is reduced. 

As potential evidence of my theory, remember Q4 2018?  The fed tried to reduce its balance sheet and the equity markets reacted violently downward.  There were no earnings or fundamental other reasons for that large correction.  The fed responded by reversing course and equities recovered.

ChpBstrd

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Re: Precious Metals
« Reply #713 on: October 14, 2020, 08:17:06 PM »
If this is an everything bubble, it'll eventually pop and the prices of assets will all fall. If it is asset price inflation, it may never pop, and we'll just be in for years and years of below normal returns.

Adding to this thought process, we also need to think in terms of redistribution.  Who owns real assets, who has been the benefactors of their rise in real/relative value vs less durable goods and services.  IOW, why are asset prices skyrocketing and we are not seeing the corresponding price increases via inflation?

It can be summed up as velocity, but the more fundamental factor is why is velocity so low?  Mostly, IMO, it's because the new money is not getting into the hands of the lower 80% via wages/income who would be more likely to spend it on anything other than real assets.  I don't think this is viable long term either socially or economically.   If we end up redistributing, I think price inflation follows, which will take care of the overvalued real assets.  If we don't, I think real asset prices continue to increase as more liquidity enters the system, and will decrease if the monetary supply is reduced. 

As potential evidence of my theory, remember Q4 2018?  The fed tried to reduce its balance sheet and the equity markets reacted violently downward.  There were no earnings or fundamental other reasons for that large correction.  The fed responded by reversing course and equities recovered.

^This is about the only theory that makes sense at this point. Most of the cash printed over the past 12 years has been locked up in the accounts of wealthy investors, some overseas, who buy financial assets rather than things that count toward CPI or PPI. The steady demand for assets has kept treasury rates low and corporate financing costs low while the steady lack of consumer demand has kept the CPI low. The result would have been years of low returns had PE ratios not inflated over the years. Imagine our conversations had the S&P's PE ratio stayed around 15 or 20.

https://www.multpl.com/s-p-500-pe-ratio

Moving on to what comes next, we must ask ourselves what could cause wealthy investors to stop buying assets, if inflation can be kept low forever by a lack of trickle-down.
1) A severe recession that wipes out their earnings could do it, but only temporarily.
2) An obvious asset bubble could persuade some of them to reallocate from stocks to treasuries, and this move would lower interest rates, creating a self-reinforcing risk of deflation.
3) Third, a loss of confidence in the US dollar could cause them to seek safer havens overseas.

I'm unconcerned about #1.

#2 will eventually become a factor, probably before #3 occurs. We are already above the PE ratios of 1999, which were once spoken of as the definition of insanity and are now casually explained away.

Regarding #3, I'm agnostic about Ray Dalio's theory of imperial cycles and reserve currencies, but I must admit his analysis is compelling and the alternative hypothesis seems to be something like "things will continue like they are forever, even if the US finances itself and pays all its people solely by printing currency", or essentially MMT. Dalio is careful to point out that imperial decline usually occurs on a scale of generations, but it could be that the world moves a lot faster now. The Soviet Union went from superpower to basket case in about 8 years. One could argue that the US is in about year 4. Meanwhile, China is doing interesting things with crypto that could be their bid for an alternative reserve currency, issued by an infrastructure-rich surplus-producing superpower that makes most of the things people want to buy (i.e. the US's position in about 1960). 

https://www.multpl.com/s-p-500-pe-ratio

« Last Edit: October 15, 2020, 01:26:40 PM by ChpBstrd »

maizefolk

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Re: Precious Metals
« Reply #714 on: October 14, 2020, 09:09:36 PM »
I feel like I must be missing a logical step in case #2. Wouldn't wealthy investors reallocating from stocks to treasuries drive interest rates further down rather than back up?

Radagast

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Re: Precious Metals
« Reply #715 on: October 14, 2020, 11:09:49 PM »
If this is an everything bubble, it'll eventually pop and the prices of assets will all fall. If it is asset price inflation, it may never pop, and we'll just be in for years and years of below normal returns.

Adding to this thought process, we also need to think in terms of redistribution.  Who owns real assets, who has been the benefactors of their rise in real/relative value vs less durable goods and services.  IOW, why are asset prices skyrocketing and we are not seeing the corresponding price increases via inflation?

It can be summed up as velocity, but the more fundamental factor is why is velocity so low?  Mostly, IMO, it's because the new money is not getting into the hands of the lower 80% via wages/income who would be more likely to spend it on anything other than real assets.  I don't think this is viable long term either socially or economically.   If we end up redistributing, I think price inflation follows, which will take care of the overvalued real assets.  If we don't, I think real asset prices continue to increase as more liquidity enters the system, and will decrease if the monetary supply is reduced. 

As potential evidence of my theory, remember Q4 2018?  The fed tried to reduce its balance sheet and the equity markets reacted violently downward.  There were no earnings or fundamental other reasons for that large correction.  The fed responded by reversing course and equities recovered.

^This is about the only theory that makes sense at this point. Most of the cash printed over the past 12 years has been locked up in the accounts of wealthy investors, some overseas, who buy financial assets rather than things that count toward CPI or PPI. The steady demand for assets has kept treasury rates low and corporate financing costs low while the steady lack of consumer demand has kept the CPI low. The result would have been years of low returns had PE ratios not inflated over the years. Imagine our conversations had the S&P's PE ratio stayed around 15 or 20.

https://www.multpl.com/s-p-500-pe-ratio

Moving on to what comes next, we must ask ourselves what could cause wealthy investors to stop buying assets, if inflation can be kept low forever by a lack of trickle-down.
1) A severe recession that wipes out their earnings could do it, but only temporarily.
2) An obvious asset bubble could persuade some of them to reallocate from stocks to treasuries, and this move would raise interest rates, creating a self-reinforcing cycle.
3) Third, a loss of confidence in the US dollar could cause them to seek safer havens overseas.

I'm unconcerned about #1.

#2 will eventually become a factor, probably before #3 occurs. We are already above the PE ratios of 1999, which were once spoken of as the definition of insanity and are now casually explained away.

Regarding #3, I'm agnostic about Ray Dalio's theory of imperial cycles and reserve currencies, but I must admit his analysis is compelling and the alternative hypothesis seems to be something like "things will continue like they are forever, even if the US finances itself and pays all its people solely by printing currency", or essentially MMT. Dalio is careful to point out that imperial decline usually occurs on a scale of generations, but it could be that the world moves a lot faster now. The Soviet Union went from superpower to basket case in about 8 years. One could argue that the US is in about year 4. Meanwhile, China is doing interesting things with crypto that could be their bid for an alternative reserve currency, issued by an infrastructure-rich surplus-producing superpower that makes most of the things people want to buy (i.e. the US's position in about 1960). 

https://www.multpl.com/s-p-500-pe-ratio
4. Congress passes a law requiring the Fed to immediately sell all non-Treasury assets and prohibiting them from ever buying any again. The Fed is limited to 10% max of any Treasury issue and must immediately sell anything over that. That 10% treasuries and interest rates will be the only tools they have going forward. To stoke inflation cash will be issued automatically equally and electronically to all citizens, and no TARP or other government rescues will ever be allowed. That will turn things around pretty fast :D.

celerystalks

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Re: Precious Metals
« Reply #716 on: October 15, 2020, 04:31:39 AM »
I feel like I must be missing a logical step in case #2. Wouldn't wealthy investors reallocating from stocks to treasuries drive interest rates further down rather than back up?

Yes. i agree with @maizefolk here.. Perhaps I am missing something as well.

My understanding is that a reallocation from stocks to treasuries would bid up the price of treasuries thereby driving yields down further.

ChpBstrd

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Re: Precious Metals
« Reply #717 on: October 15, 2020, 01:29:19 PM »
I feel like I must be missing a logical step in case #2. Wouldn't wealthy investors reallocating from stocks to treasuries drive interest rates further down rather than back up?

Yes. i agree with @maizefolk here.. Perhaps I am missing something as well.

My understanding is that a reallocation from stocks to treasuries would bid up the price of treasuries thereby driving yields down further.

Corrected! I got that backward. I also clarified that the self-reinforcing risk would be deflation, which would be a signal to get out of stocks because companies are about to cut prices and earn a lot less.

vand

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Re: Precious Metals
« Reply #718 on: October 16, 2020, 02:05:21 AM »
If this is an everything bubble, it'll eventually pop and the prices of assets will all fall. If it is asset price inflation, it may never pop, and we'll just be in for years and years of below normal returns.

Adding to this thought process, we also need to think in terms of redistribution.  Who owns real assets, who has been the benefactors of their rise in real/relative value vs less durable goods and services.  IOW, why are asset prices skyrocketing and we are not seeing the corresponding price increases via inflation?

It can be summed up as velocity, but the more fundamental factor is why is velocity so low?  Mostly, IMO, it's because the new money is not getting into the hands of the lower 80% via wages/income who would be more likely to spend it on anything other than real assets.  I don't think this is viable long term either socially or economically.   If we end up redistributing, I think price inflation follows, which will take care of the overvalued real assets.  If we don't, I think real asset prices continue to increase as more liquidity enters the system, and will decrease if the monetary supply is reduced. 

As potential evidence of my theory, remember Q4 2018?  The fed tried to reduce its balance sheet and the equity markets reacted violently downward.  There were no earnings or fundamental other reasons for that large correction.  The fed responded by reversing course and equities recovered.

^This is about the only theory that makes sense at this point. Most of the cash printed over the past 12 years has been locked up in the accounts of wealthy investors, some overseas, who buy financial assets rather than things that count toward CPI or PPI. The steady demand for assets has kept treasury rates low and corporate financing costs low while the steady lack of consumer demand has kept the CPI low. The result would have been years of low returns had PE ratios not inflated over the years. Imagine our conversations had the S&P's PE ratio stayed around 15 or 20.

https://www.multpl.com/s-p-500-pe-ratio

Moving on to what comes next, we must ask ourselves what could cause wealthy investors to stop buying assets, if inflation can be kept low forever by a lack of trickle-down.
1) A severe recession that wipes out their earnings could do it, but only temporarily.
2) An obvious asset bubble could persuade some of them to reallocate from stocks to treasuries, and this move would lower interest rates, creating a self-reinforcing risk of deflation.
3) Third, a loss of confidence in the US dollar could cause them to seek safer havens overseas.

I'm unconcerned about #1.

#2 will eventually become a factor, probably before #3 occurs. We are already above the PE ratios of 1999, which were once spoken of as the definition of insanity and are now casually explained away.

Regarding #3, I'm agnostic about Ray Dalio's theory of imperial cycles and reserve currencies, but I must admit his analysis is compelling and the alternative hypothesis seems to be something like "things will continue like they are forever, even if the US finances itself and pays all its people solely by printing currency", or essentially MMT. Dalio is careful to point out that imperial decline usually occurs on a scale of generations, but it could be that the world moves a lot faster now. The Soviet Union went from superpower to basket case in about 8 years. One could argue that the US is in about year 4. Meanwhile, China is doing interesting things with crypto that could be their bid for an alternative reserve currency, issued by an infrastructure-rich surplus-producing superpower that makes most of the things people want to buy (i.e. the US's position in about 1960). 

https://www.multpl.com/s-p-500-pe-ratio

I think that you are in danger of putting the cart before the horse. It's not so much wealthy investors buying assets causing inflated asset prices.. it's cheap money that causes assets to go up that then creates wealthy investors.  ZIRP gives access to cheap capital which creates a lot of the jobs you see today; companies can fund more projects and and need to employ people to bring them to fruition.

It's all a virtuous circle, but when the next true downturn arrives it will all go into reverse.

The last 40 years have been so fantastic for paper assets largely because of the secular disinflationary trend in developed economies due to technology, globalisation and many other factors, but all good things must come to an end, and we have seen the start of that with an extension of nonsensical policies that would only have made sense in years past being enacted in an attempt to keep us on the same trajectory.  You cannot logically expect people to "invest" their money into an instrument that will yield a guaranteed negative return.. there is no rhyme or reason why any rational investor would do that; the only reason is that they think someone else will accept an even more negative return, but that is where the world is today.
« Last Edit: October 16, 2020, 02:19:27 AM by vand »

ChpBstrd

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Re: Precious Metals
« Reply #719 on: October 16, 2020, 10:14:19 AM »
If this is an everything bubble, it'll eventually pop and the prices of assets will all fall. If it is asset price inflation, it may never pop, and we'll just be in for years and years of below normal returns.

Adding to this thought process, we also need to think in terms of redistribution.  Who owns real assets, who has been the benefactors of their rise in real/relative value vs less durable goods and services.  IOW, why are asset prices skyrocketing and we are not seeing the corresponding price increases via inflation?

It can be summed up as velocity, but the more fundamental factor is why is velocity so low?  Mostly, IMO, it's because the new money is not getting into the hands of the lower 80% via wages/income who would be more likely to spend it on anything other than real assets.  I don't think this is viable long term either socially or economically.   If we end up redistributing, I think price inflation follows, which will take care of the overvalued real assets.  If we don't, I think real asset prices continue to increase as more liquidity enters the system, and will decrease if the monetary supply is reduced. 

As potential evidence of my theory, remember Q4 2018?  The fed tried to reduce its balance sheet and the equity markets reacted violently downward.  There were no earnings or fundamental other reasons for that large correction.  The fed responded by reversing course and equities recovered.

^This is about the only theory that makes sense at this point. Most of the cash printed over the past 12 years has been locked up in the accounts of wealthy investors, some overseas, who buy financial assets rather than things that count toward CPI or PPI. The steady demand for assets has kept treasury rates low and corporate financing costs low while the steady lack of consumer demand has kept the CPI low. The result would have been years of low returns had PE ratios not inflated over the years. Imagine our conversations had the S&P's PE ratio stayed around 15 or 20.

https://www.multpl.com/s-p-500-pe-ratio

Moving on to what comes next, we must ask ourselves what could cause wealthy investors to stop buying assets, if inflation can be kept low forever by a lack of trickle-down.
1) A severe recession that wipes out their earnings could do it, but only temporarily.
2) An obvious asset bubble could persuade some of them to reallocate from stocks to treasuries, and this move would lower interest rates, creating a self-reinforcing risk of deflation.
3) Third, a loss of confidence in the US dollar could cause them to seek safer havens overseas.

I'm unconcerned about #1.

#2 will eventually become a factor, probably before #3 occurs. We are already above the PE ratios of 1999, which were once spoken of as the definition of insanity and are now casually explained away.

Regarding #3, I'm agnostic about Ray Dalio's theory of imperial cycles and reserve currencies, but I must admit his analysis is compelling and the alternative hypothesis seems to be something like "things will continue like they are forever, even if the US finances itself and pays all its people solely by printing currency", or essentially MMT. Dalio is careful to point out that imperial decline usually occurs on a scale of generations, but it could be that the world moves a lot faster now. The Soviet Union went from superpower to basket case in about 8 years. One could argue that the US is in about year 4. Meanwhile, China is doing interesting things with crypto that could be their bid for an alternative reserve currency, issued by an infrastructure-rich surplus-producing superpower that makes most of the things people want to buy (i.e. the US's position in about 1960). 

https://www.multpl.com/s-p-500-pe-ratio

I think that you are in danger of putting the cart before the horse. It's not so much wealthy investors buying assets causing inflated asset prices.. it's cheap money that causes assets to go up that then creates wealthy investors.  ZIRP gives access to cheap capital which creates a lot of the jobs you see today; companies can fund more projects and and need to employ people to bring them to fruition.

It's all a virtuous circle, but when the next true downturn arrives it will all go into reverse.

The last 40 years have been so fantastic for paper assets largely because of the secular disinflationary trend in developed economies due to technology, globalisation and many other factors, but all good things must come to an end, and we have seen the start of that with an extension of nonsensical policies that would only have made sense in years past being enacted in an attempt to keep us on the same trajectory.  You cannot logically expect people to "invest" their money into an instrument that will yield a guaranteed negative return.. there is no rhyme or reason why any rational investor would do that; the only reason is that they think someone else will accept an even more negative return, but that is where the world is today.

Interesting point. I can think of the following ways low rates could increase asset prices:

1) Reduce corporate cost of debt, allowing for higher earnings in any given capital structure that includes debt.
2) Allowing for higher corporate leverage at any given level of interest expense / revenue.
3) Allowing for a greater range of profitable corporate investments, e.g. projects with an expected ROI of only 4% are profitable if you can fund them at 2.5%.
4) Lower rates on consumer debt reduce disincentives for consumption, increasing aggregate demand, and thereby increasing earnings expectations..
5) Lower the cost of buying assets on margin, even if the expected returns are low, which increases demand for low-yielding assets.
6) Lower the cost of buying assets on margin, creating the expectation that others will try to do the same, and setting up a rational greater-fool expectation.
7) Reduces the perceived risk of an Argentina style debt crisis, allowing for higher allocations of risky assets.
8) There Is No Alternative to risky assets for pension funds, endowments, insurance companies, retirees, fund managers, etc. TINA could push investors with mandated levels of returns to allocate more aggressively than they’d like, increasing demand for risky assets.

The question is: what is the relative influence of 1-4, which are genuinely positive economic effects that would in theory trickle down to the economic classes who spend most of their income, versus 5-8, which are influences on the marketplace demand for risky paper assets?

If you feel 1-4 are bigger factors than 5-8, an explanation is due for why inflation has not picked up.

If you feel 5-8 are the bigger factors, that explains where the money went (asset price increases) and why inflation did not increase (monetary velocity in the real economy did not increase because so much cash went into paper assets instead of consumption or corporate growth).

Perhaps most of the benefit of 1-4 was obtained years ago, and by 2015-2019 when unemployment was as low as it’s ever been, corporate growth potential was also near its max. As factors 1-4 were maxed out, factors 5-8 kicked in to absorb the liquidity being added by the Fed and so we got low inflation with rapid asset price growth.

vand

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Re: Precious Metals
« Reply #720 on: October 21, 2020, 03:14:11 AM »
If this is an everything bubble, it'll eventually pop and the prices of assets will all fall. If it is asset price inflation, it may never pop, and we'll just be in for years and years of below normal returns.

Adding to this thought process, we also need to think in terms of redistribution.  Who owns real assets, who has been the benefactors of their rise in real/relative value vs less durable goods and services.  IOW, why are asset prices skyrocketing and we are not seeing the corresponding price increases via inflation?

It can be summed up as velocity, but the more fundamental factor is why is velocity so low?  Mostly, IMO, it's because the new money is not getting into the hands of the lower 80% via wages/income who would be more likely to spend it on anything other than real assets.  I don't think this is viable long term either socially or economically.   If we end up redistributing, I think price inflation follows, which will take care of the overvalued real assets.  If we don't, I think real asset prices continue to increase as more liquidity enters the system, and will decrease if the monetary supply is reduced. 

As potential evidence of my theory, remember Q4 2018?  The fed tried to reduce its balance sheet and the equity markets reacted violently downward.  There were no earnings or fundamental other reasons for that large correction.  The fed responded by reversing course and equities recovered.

^This is about the only theory that makes sense at this point. Most of the cash printed over the past 12 years has been locked up in the accounts of wealthy investors, some overseas, who buy financial assets rather than things that count toward CPI or PPI. The steady demand for assets has kept treasury rates low and corporate financing costs low while the steady lack of consumer demand has kept the CPI low. The result would have been years of low returns had PE ratios not inflated over the years. Imagine our conversations had the S&P's PE ratio stayed around 15 or 20.

https://www.multpl.com/s-p-500-pe-ratio

Moving on to what comes next, we must ask ourselves what could cause wealthy investors to stop buying assets, if inflation can be kept low forever by a lack of trickle-down.
1) A severe recession that wipes out their earnings could do it, but only temporarily.
2) An obvious asset bubble could persuade some of them to reallocate from stocks to treasuries, and this move would lower interest rates, creating a self-reinforcing risk of deflation.
3) Third, a loss of confidence in the US dollar could cause them to seek safer havens overseas.

I'm unconcerned about #1.

#2 will eventually become a factor, probably before #3 occurs. We are already above the PE ratios of 1999, which were once spoken of as the definition of insanity and are now casually explained away.

Regarding #3, I'm agnostic about Ray Dalio's theory of imperial cycles and reserve currencies, but I must admit his analysis is compelling and the alternative hypothesis seems to be something like "things will continue like they are forever, even if the US finances itself and pays all its people solely by printing currency", or essentially MMT. Dalio is careful to point out that imperial decline usually occurs on a scale of generations, but it could be that the world moves a lot faster now. The Soviet Union went from superpower to basket case in about 8 years. One could argue that the US is in about year 4. Meanwhile, China is doing interesting things with crypto that could be their bid for an alternative reserve currency, issued by an infrastructure-rich surplus-producing superpower that makes most of the things people want to buy (i.e. the US's position in about 1960). 

https://www.multpl.com/s-p-500-pe-ratio

I think that you are in danger of putting the cart before the horse. It's not so much wealthy investors buying assets causing inflated asset prices.. it's cheap money that causes assets to go up that then creates wealthy investors.  ZIRP gives access to cheap capital which creates a lot of the jobs you see today; companies can fund more projects and and need to employ people to bring them to fruition.

It's all a virtuous circle, but when the next true downturn arrives it will all go into reverse.

The last 40 years have been so fantastic for paper assets largely because of the secular disinflationary trend in developed economies due to technology, globalisation and many other factors, but all good things must come to an end, and we have seen the start of that with an extension of nonsensical policies that would only have made sense in years past being enacted in an attempt to keep us on the same trajectory.  You cannot logically expect people to "invest" their money into an instrument that will yield a guaranteed negative return.. there is no rhyme or reason why any rational investor would do that; the only reason is that they think someone else will accept an even more negative return, but that is where the world is today.

Interesting point. I can think of the following ways low rates could increase asset prices:

1) Reduce corporate cost of debt, allowing for higher earnings in any given capital structure that includes debt.
2) Allowing for higher corporate leverage at any given level of interest expense / revenue.
3) Allowing for a greater range of profitable corporate investments, e.g. projects with an expected ROI of only 4% are profitable if you can fund them at 2.5%.
4) Lower rates on consumer debt reduce disincentives for consumption, increasing aggregate demand, and thereby increasing earnings expectations..
5) Lower the cost of buying assets on margin, even if the expected returns are low, which increases demand for low-yielding assets.
6) Lower the cost of buying assets on margin, creating the expectation that others will try to do the same, and setting up a rational greater-fool expectation.
7) Reduces the perceived risk of an Argentina style debt crisis, allowing for higher allocations of risky assets.
8) There Is No Alternative to risky assets for pension funds, endowments, insurance companies, retirees, fund managers, etc. TINA could push investors with mandated levels of returns to allocate more aggressively than they’d like, increasing demand for risky assets.

The question is: what is the relative influence of 1-4, which are genuinely positive economic effects that would in theory trickle down to the economic classes who spend most of their income, versus 5-8, which are influences on the marketplace demand for risky paper assets?

If you feel 1-4 are bigger factors than 5-8, an explanation is due for why inflation has not picked up.

If you feel 5-8 are the bigger factors, that explains where the money went (asset price increases) and why inflation did not increase (monetary velocity in the real economy did not increase because so much cash went into paper assets instead of consumption or corporate growth).

Perhaps most of the benefit of 1-4 was obtained years ago, and by 2015-2019 when unemployment was as low as it’s ever been, corporate growth potential was also near its max. As factors 1-4 were maxed out, factors 5-8 kicked in to absorb the liquidity being added by the Fed and so we got low inflation with rapid asset price growth.

Bonds are the base of the investing pyramid.. they're the baseline which dictates what risk premia each increasingly riskier asset classes can command.

Lower interest rates can only happen if investors are willing to accept the lower future returns in fixed income. In a rational world, this then means are also willing to accept lower future expected returns (ie higher valuations) across other risky asset classes.

Check out the chart on this video at 10:40: https://www.youtube.com/watch?v=WFiJw6QoTL4

It should be clear why official policy has targetted the 2% inflation rate and interest rates manipulated to meet this end, because that is the goldilocks zone for risky assets.
« Last Edit: October 21, 2020, 03:27:44 AM by vand »