Inflation, deflation, gold and currencies

[John]

Today I finished selling all of my inflation hedges and have moved 100% to US dollars (t-bills mostly) for the first time. I've been working on this since last Monday. I'd mentioned previously that I went to a deflationary bias for the first time in 2007, having moved from less than 50% US dollars to 75%.

More later. The best asset allocation shifts are typically made during times of maximum emotion and uncertainty and there are never any guarantees.

Higgie, are you still heavily shorted in the stock market?

John

[weak stream]

Vince writes': "If there is US dollar hyperinflation and your wealth is in US dollars you will lose. The longer you stay the more you lose. If you wait till the end when they find a replacement for the dollar you will lose everything"
Not entirely true. It depends on how the revaluation is structured. In the early 90's Poland example, yeah, you lost 99.9% in nominal terms. Meaning they removed three decimal points off your bank accounts and currency holdings. But then that currency didn't buy squat on the open market to begin with and the purchasing power of the new currency issue was so much greater that the net effect was actually positive for the average Joe. Now the USD and the Polish Zloty are two different animals to be sure but the point I'm trying to make is that "losing it all" in a currency do-over isn't necessarily true. And those who lost big time in the Polish currency revaluation were Paris Club members that had to write off loads of debt that they lent to the Polish/Soviet govt during the 'good old days'. I know that Helicopter man can try to screw each and every one of us and the other politicos can give him cover for a while but that's it.

[Higgenbotham]

Higgie, are you still heavily shorted in the stock market?

John

No, I pulled out of all my shorts the Friday before last because the panic cycles weren't taking hold in stocks.

Instead, they began to take hold in an inverse fashion in the gold and silver markets. This has been a very typical pattern since 2005. I will talk more about this and other things I see later. Briefly, though, if I were to short stocks in the future (and I plan to) it would be with more hesitation because I hold no assets that can outperform stocks in the event that the bubble gets bigger. I should also note that since my bias was deflationary beginning in 2007, that I was expecting all asset classes to contract in price, but for stocks to contract more than certain other assets. Therefore, I was short a larger dollar value of stocks compared to inflation assets I was holding and have lost money overall since July 2009 when I began shorting stocks again (but not since 2007). My loss since July 2009 is 4-5% plus the loss due to inflation.

[vincecate]

Not entirely true. It depends on how the revaluation is structured. In the early 90's Poland example, yeah, you lost 99.9% in nominal terms. Meaning they removed three decimal points off your bank accounts and currency holdings. But then that currency didn't buy squat on the open market to begin with and the purchasing power of the new currency issue was so much greater that the net effect was actually positive for the average Joe. Now the USD and the Polish Zloty are two different animals to be sure but the point I'm trying to make is that "losing it all" in a currency do-over isn't necessarily true.

Ok. Sometimes you lose everything by keeping your savings in a hyperinflating currency and sometimes you might only lose 99.9% of your savings. If you are comfortable with losing three zeros off your life savings, go ahead and stay in the US dollar. Maybe that is all you will lose.

[vincecate]

Today I finished selling all of my inflation hedges and have moved 100% to US dollars (t-bills mostly) for the first time.

Interesting. I am still sticking with long term silver calls and short term S&P puts (much smaller allocation but keep buying more as silver has gone up and puts expire). I still think that interest rates will have to go up and this will cause the stock market to crash.

I can't figure out any way that Bernanke could really stop funding the US government debt. I can't imagine them cutting spending or increasing taxes enough to matter, and I can't imagine $100+ billion per month coming from people foolish enough to put it in US government debt at this point. I really think many people/countries are going to stop rolling over their US government debt and the Fed will have to print to cover those. So I think we have a unstoppable flood of new paper money coming. Seems like non-printable money will keep doing well (gold/silver).

China's yuan has gone from 8 to the dollar in 2006 to 6.5 now. This is 18.75% over 5 years or about 3.5% per year. It looks rather steady and deliberate to me. China is reporting serious inflation while their currency is getting stronger. To me it looks like the US should have China's inflation rate plus 3.5% more.

The US dollar index looks ready to make new all time lows. From a technical view it is breaking through support levels and so could drop further. From a fundamental level it may indicate that central banks in other countries are not going to be supporting the dollar so much any more and the US has no way to support it.

Does not seem like a good time to be putting all your money in US dollars.

Why did you sell your inflation hedges now?

[RDRUNR]

Ok. Sometimes you lose everything by keeping your savings in a hyperinflating currency and sometimes you might only lose 99.9% of your savings. If you are comfortable with losing three zeros off your life savings, go ahead and stay in the US dollar. Maybe that is all you will lose.

I just purchased $50k of US dollars instead of purchasing gold or silver. (exchanged Candian dollars, a oil/gold/PM resource currency) I went the US dollar route because, like John and many other on here, I see gold and silver in a massive bubble and see buying gold and silver as a higher risk than buying USD. The gold and silver bubble reminds me of the US housing bubble, didn't everyone in the USA before the RE crash say "buy, buy, buy"...

I don't care if the USD goes down another 2-3% as gold and silver are destined to go down much greater when it pops.

[vincecate]

I went the US dollar route because, like John and many other on here, I see gold and silver in a massive bubble and see buying gold and silver as a higher risk than buying USD.

This seems to be the big question inflation vs deflation, dollar crash vs gold crash. Do you trust Bernanke or do you trust gold. The people that get this right and invest accordingly will do well and those that get it wrong won't do well.

If gold crashes the world does not really miss a beat. If the dollar collapses the world is mashed up. I think the world is going to mash up.

Major deflation is just not a credible crisis in my book. The world has never seen a pure fiat currency have substantial deflation. If the dollar was too valuable they could print some for each person in the USA, with more each month, till it was not too valuable. Deflation is just too easy to prevent for it to really be a major crisis. Hyperinflation on the other hand happens all the time and there is no easy fix. This would be a major major crisis.

[weak stream]

But there is a bit of a problem with definitions here. Austrian economists define deflation as credit contraction and neo classical/post Keynsian/idunno like contemporary economist define it as a cpi contraction. And, of course, inflation being the opposite. Inflation/deflation becomes a non discussion as two people cannot agree on definitions. I don't think gold is in a bubble per se as I cannot read Helicopter Man's mind. If he is so stoned on crack that he will go to QE^n then gold could go to 10k/oz, no problem. If he's blowing smoke and will get sober soon then maybe not. This is the problem with autocrats, generally. We're all pretty bright here on this forum but yet we can all lose to some greater or lesser extent by the whims of the Helicopter Man and 535 dunces in DC. Which is really sad. Either way, gold will do very well, IMHO, even if you buy it now as I think lots of minor central banks (and, uh, china and india) have been buying. Gold has been money for so many thousands of years that simply declaring that gold is, say, x above or below trend and the trend in question isn't going back that far is to not see the barbaric metal for what she is. I could stay in cash or gold or maybe silver as I see a general, worldwide industrial slowdown approaching. No commodities, no debt(even gummit debt), no equities, and, for goodness sakes no credit derivatives.

[Higgenbotham]

Why did you sell your inflation hedges now?

I was primarily a real estate investor for a long time. My expertise is there. In the early 1990s I saw gold and silver were cheap relative to real estate, especially silver. It may have taken 30,000 ounces of silver to buy the median priced home. Those are the terms I think in having worked in real estate.

This became more true 10 years after that. At that point, it may have taken 40,000 ounces of silver or 600 ounces of gold to buy the median priced home. I sold my real estate and put some of the proceeds into gold and silver. In 2007, I reduced that, selling about 60%.

Today it takes perhaps 3,000 ounces of silver or 100 ounces of gold to buy the median priced home. Gold and silver are no longer cheap vis a vis real estate. In fact, they are extremely expensive vis a vis real estate on a historical basis. Therefore, for my money, any inflation hedges I do buy in the future will be residential real estate, which also will produce an income, though less if there is deflation.

Real estate priced in gold and silver has already crashed 80-90 percent.

[vincecate]

Gold and silver are no longer cheap vis a vis real estate. In fact, they are extremely expensive vis a vis real estate on a historical basis. Therefore, for my money, any inflation hedges I do buy in the future will be residential real estate, which also will produce an income, though less if there is deflation.

Real estate priced in gold and silver has already crashed 80-90 percent.

You have made a very solid case to move from gold and silver to real estate. But you moved to dollars. So this dollars thing is just a temporary step in the move to real estate? If you get fixed rate 30 year mortgages on real estate at this point I think you will make out like a bandit. After the dollar collapses you get to pay these mortgages back with funny money. It looks like a very good move to me. Only worry would be property taxes, which in some places are rather crazy.