Reconciling theories...

[SeanO]

Can someone please help me better reconcile the following 3 concepts?

1. Bubble economy - irrational excuberence driven, me-too waves which push up prices to unsustainable levels and then collapse.

2. Boomer economy - boomers drive certain markets as they all discover a need or want for the same things at the same time. See the Bill Gross article that JavaCat97 pointed out: http://www.pimco.com/LeftNav/Late+Br...ember+2006.htm

3. Inflation happens in waves - Finster pointed this out in another thread, and basically asserted that inflation doesn't happen all at once, but comes in waves with different items affected at different times. While this doesn't explain the late 90's NASDAQ, perhaps it explains energy costs, precious metals and even housing (i.e. housing is fairly flat if priced in oz of gold or barrels of oil)... so perhaps these things have risen so much, solely because the value of the dollar has gone down, and lots of other things are deflating with it obscuring the truth.

Seems to me that theory 1 is the hardest to plan around. Where will the next bubble be? Is gold a bubble now? iTulip is a wonderful resource on this, but it clearly isn't a cakewalk to figure out.

If you give more weight to item 2 then it becomes easier to figure out how the trends will play out. Simply follow the boomer crowd and pay attention to the talk at cocktail parties. Follow their lead, and then exit early... a strategy that appears would have worked pretty well for the tech and housing bubbles.

Finally, if item 3 is the fundamental driver, then do what you can to protect your assets against dollar devaluation. No reason to sell the house, possibly better off leveraging it to buy gold, and then when things stabilize exchange the gold for cheap dollars and pay off the debt (extreme example, nothing I'm truly contemplating).

Hopefully this at least conveys the issue I'm struggling with. My current belief is that we are experiencing a combination of all 3, and that each will have different impacts at different times, making just about everything risky, including just sitting on the sidelines in cash. Perhaps Eric's Ka-Poom theory adequately reconciles all three, but that isn't completely clear to me... especially the boomer dynamic. I don't think the housing bubble will be the last boomer impact, regardless of what else is happening in the economy.

Thanks for the help.

SeanO

[jk]

Re: Reconciling theories...

Seems to me that theory 1 is the hardest to plan around. Where will the next bubble be? Is gold a bubble now? iTulip is a wonderful resource on this, but it clearly isn't a cakewalk to figure out.

If you give more weight to item 2 then it becomes easier to figure out how the trends will play out. Simply follow the boomer crowd and pay attention to the talk at cocktail parties. Follow their lead, and then exit early... a strategy that appears would have worked pretty well for the tech and housing bubbles.

Finally, if item 3 is the fundamental driver, then do what you can to protect your assets against dollar devaluation. No reason to sell the house, possibly better off leveraging it to buy gold, and then when things stabilize exchange the gold for cheap dollars and pay off the debt (extreme example, nothing I'm truly contemplating).

Hopefully this at least conveys the issue I'm struggling with. My current belief is that we are experiencing a combination of all 3, and that each will have different impacts at different times, making just about everything risky, including just sitting on the sidelines in cash.

i'll take a swing at this, fwiw, but i'm very interested in hearing other thoughts.

1. where is the next bubble?

i think we're still in the housing bubble, on the far side of the mountain, and it will take time for another bubble to appear. i think the nominees are commodities and cash. commodities have had a run, which they are now consolidating, but if you look at multidecade charts commodities have a long way to go before they're classed as bubbled. for a long time shilling has been calling for savings to increase. [i see they just dropped further into negative territory as of this mornings economics reports.] a housing bust taking a couple of points off gdp and adding mightily to the unemployed, combined with major layoffs at the auto makers, etc might make holding cash or tbonds attractive for a while.


2. follow the boomers.

i think it is clear that the boomers in general will not retire until much later than their forebearers. they won't be able to afford to, and they will make a virtue of necessity by saying they are staying active. they may downshift to part time jobs or less responsible ones, but they will continue to earn income. this will be the greatest part of the answer to the demographic dilemma described by bill gross.

increasing numbers, but a minority, will also choose to retire to central and south america, at least for their mid-late 60's and their 70's. [they are likely to return in their 80's.] this will be done to make the most of limited wealth. there will be developers who do very well building communities and services for his population. i wish i knew who they were.

nonetheless medical costs will continue to rise disproportionately, putting a premium on biotech including pharma, biomechanics/prostheses, etc, along with health products, exercise, active vacations. further, biotech, especially genetically manipulated or newly-created organisms, will be increasingly relevant to energy production- both large and small scale, waste disposal, and other areas in which biology is not currently important. there will be biotech, genetic engineering, genomic and proteinomic companies which do well. this could be 2 bubbles from now.

3. waves of inflation
i think commodity inflation has a long way to go.

[SeanO]

Re: Reconciling theories...

i'll take a swing at this, fwiw, but i'm very interested in hearing other thoughts.

JK - Seems like you feel all three are in play. Any preference for one theory over another? Do you feel they can all be reconciled within Eric's Ka-Poom theory?

Thanks,
SeanO

P.S. I agree that the housing bubble has not fully played out. While we are clearly on the downside of the bubble in CA, I think other areas are still just reaching the top. Plus, if you expand "housing" to "real estate", specifically including commercial real estate, then it is quite clear we still have a ways to go.

[Finster]

Re: Reconciling theories...

Can someone please help me better reconcile the following 3 concepts?

1. Bubble economy - irrational excuberence driven, me-too waves which push up prices to unsustainable levels and then collapse.

2. Boomer economy - boomers drive certain markets as they all discover a need or want for the same things at the same time. See the Bill Gross article that JavaCat97 pointed out: http://www.pimco.com/LeftNav/Late+Br...ember+2006.htm

3. Inflation happens in waves - Finster pointed this out in another thread, and basically asserted that inflation doesn't happen all at once, but comes in waves with different items affected at different times. While this doesn't explain the late 90's NASDAQ, perhaps it explains energy costs, precious metals and even housing (i.e. housing is fairly flat if priced in oz of gold or barrels of oil)... so perhaps these things have risen so much, solely because the value of the dollar has gone down, and lots of other things are deflating with it obscuring the truth.

...

Indeed, it doesn't explain Nasdaq 1995-2000 by itself by any means. My take would be mostly a combination of 1) and 3).

Demographics do count, but IMO they get blamed (credited) for more than they are really worth. Few phenomena get hyped so much. And many of the purported effects - both historical and predicted - stem not so much from demographics per se as rigid institutions which fail to flex with the times. Taking Social Security for example; people are living much longer than they used to but the age of benefits eligibility has not moved accordingly. If that age moved in concert with lifespans, we wouldn't be talking about a crisis. So it's not demographics, but our inflexible institutions that should get the blame.

Inflation and irrational exuberance conspire to produce bubbles. Easy money drives up prices somewhere, and if asset prices have some momentum that encourages speculation. Then the diversion of money to speculation helps contain the prices that are ordinarily associated with inflation, lulling the Fed into thinking it has it under control, and facilitating further monetary ease. First cause feeds into effect, effect into cause, and round and round we go.

The 1990’s stock bubble, for example, was not merely across the board inflation. On the other hand, it could not have gotten so out of hand without help from inflation. We can see evidence of this in the chart below - note that prior to the formation of the Fed in 1913 - we see no such wild swings in the stock market. The 1920’s bubble which led to the 1930s depression, was facilitated by the Fed. Same as the 1990’s bubble. Here's a little tidbit from Murray Rothbard over at LewRockwell:

…The autocratic ruler of the Federal Reserve System, from its inception in 1914 to his death in 1928, was Benjamin Strong, a New York banker who had been named governor of the Federal Reserve Bank of New York. Strong consistently and repeatedly used his power to force an inflationary increase of money and bank credit in the American economy, thereby driving prices higher than they would have been and stimulating disastrous booms in the stock and real estate markets. In 1927, Strong gaily told a French central banker that he was going to give "a little coup de whiskey to the stock market." What was the point? Why did Strong pursue a policy that now can seem only heedless, dangerous, and recklessly extravagant?

A "coup de whiskey"?!!! To the stock market?!!!

If that isn’t what Alan Greenspan did some time around 1995, I’ll take an asbestos massage.

[bart]

Re: Reconciling theories...

Just a quick $.02 worth and another viewpoint here.

My basic overall approach is driven by two major items:
1. Broad basic patterns or cycles
2. Changes in inflation/deflation, or in more trendy terms by excess liquidity and shrinking liquidity


I've posted this chart before but it really does form a key basis for me. It shows where relative gainers and losers will be in a broad sense:




In the changes of inflation area, here's a chart I put together over a year ago to help deal with overall confusions. The key is like a traffic signal = red is stop or no, yellow is caution and green is go or yes.

Others may have different opinions on the colors and classes but its at least a starting point for general areas of investment.

[jk]

Re: Reconciling theories...

JK - Seems like you feel all three are in play. Any preference for one theory over another? Do you feel they can all be reconciled within Eric's Ka-Poom theory?

i think they all matter but apply to different levels of analysis. i looked back and realized, for example, that my answers to question 2-boomer effects- were all on the microeconomic level- which industries, regions, etc would benefit. question 3- inflation waves- are clearly macro, with the inflation spilling out in various bubbles which transmit the liquidity out to the micro/industrial level.

looking back to 2000, for example, in a simplified/schematized outline: you get the fed dropping rates and pumping liquidity thereby. the money/credit then goes into the housing market. homeowners then liquify their nominal equity gains and the money goes into various consumer goods. the consumer goods and some services are produced abroad, especially in china and other emerging markets, so the money flows to foreign markets in the form of revenues, direct investment and portfolio investment. this raises consumption of commodity inputs, especially including energy, raising commodity prices. commodity prices are further goosed by speculative flows anticipating the trend here. commodity prices are transmitted back to the u.s. via direct consumption of e.g. oil, copper, iron, etc, and also via any indirect effects as factors in the consumption goods we still import. here the fed has, finally, bit itself in the ass - it can no longer completely obscure the inflationary effects of its policies.

so, 1. bubble effects- the housing bubble produced subsidiary bubbles in emerging markets equities and emerging markets debt, and just began blowing up a commodities bubble that still has a way to go.
2. boomer effects - boomers were ready to leverage the houses they started buying in the late 70's. they were already aboard the housing train and so would not miss the expansion of nominal values. [this country has always overinvested capital in housing, encouraged by its tax treatment.] i suppose you could make some argument about the size of the demographic and the size of the real estate pool that was available to inflate, but i don't think this cycle from 2000 to now is especially boomer related.
3. inflation waves- see the preceding paragraph.

as to whether they can all fit ka-poom theory: why not? they are phenomena that fit any theory of our future trajectory. but i don't think they determine the ka-poom model. the ka-poom model also requires a theory of how financial markets work, the psychology of markets and consumption, a sense of the time course of various financial processes -- these things go beyond the 3 notions you've mentioned.