A Different Look At Pms

Thank You

If the stock market does crash, one of the ways to profit on it is buying the ETF "SDS". I'm using SDS as a hedge for other long equity positions right now. It is a double inverse S&P 500 index ETF. In other words, as the S&P 500 stocks go down, SDS goes up twice as fast. Of course as the market goes up SDS goes down twice as fast (no free lunch lol).

That also brings me to a point mentioned at the start of the link posted above. About how they forecast events months ahead of them happening. Being early can sometimes be very painful. As an example, since putting on my hedges in SDS in late June/early July I'm down about $2800 in it.

Deflation is something that terrifies those who borrow, spend, and get over-extended financially. Savers, on the other hand, LOVE deflation. Our money goes MUCH farther because everything suddenly costs a LOT less. Of course, any assets we may own (other than cash and PMs) becomes worth less as well but if we aren't selling them, we do not care if the price drops. Example: the house that my wife and I live in was appraised at $550k in 2006. Today, it is worth right at $400k. Do I care? No, not really, because that's still $175k more than we paid for it, we enjoy living here, and have no interest in selling it any time soon. At least our property taxes took about a 25% dive, which was nice.

Uncle Ben identifies with those who borrow, so he has no problem driving interest rates into the dirt and completely shafting people who used to supplement their meager retirement savings with CD and bond interest. In order to feed his pet borrowers, he has held US short-term interest rates at very low levels and for far longer than anyone would have expected. The amazing aspect of this is that the bond market, which sets the long term interest rates, has gone along with his program. It really surprises me that the bond market does not raise the long-term interest rate due to inflation expectations and force the Fed to raise short-term rates somewhat.

Interest rates have been too low for too long. It is past the time when they should be raised, IMO. A slow and methodical interest rate increase would not have a large deleterious effect on the US economy. We have had many years in which the short term rates were in the 3-4% range and business was booming.

I think most would say right now we have more inflation than the official numbers show. If food and energy start coming down in price I might get more worried about deflation. Also I think wages would be something to watch, if wages start falling prices could follow.

I haven't finished that video yet, but from what I've seen so far the weak link in his argument is that to have deflation you need a tight monetary policy. We have the opposite, right now anyway.

yes, or another way, their price has increased by 81%

I agree 100% with the above statement. Was it not the big banks of Europe that pushed all the right buttons, which aided in "stoking the fire" so to speak to the factors which lead to the beginning of the Civil war?

sh74-

And don't forget that Henry Fraud was a good buddy of Adolph.

Unfortunately, Hock, the whole situation is way more complicated than just this. Many things interact with other things to change the equations at which we're looking. Not everything inflates or deflates at the same time or at the same rate. Housing is deflating, so the part of the inflation calculation that the government does that includes the cost of housing shows a LARGE decrease. Many other things, though, such as food, energy, insurance, medical care, tuition, clothing, etc. are showing substantial price increases. Personally, I think that whether the economy is inflating or deflating should be based on a basket of things that practically everyone buys. Food, clothing, energy, and medical expenses are fairly universal. Housing is one of those costs, the impact of which, we cannot easily quantify. Whether housing costs are up or down, if you are not in the market for a house, is pretty much irrelevant to you. Same for the cost of tuition. If you don't have a family member in college, it doesn't much matter to you personally whether those costs are up or down.

When the talking heads talk about deflation, I think that they are talking about an economy that has widespread deflation and not isolated pockets of it like we do in the US. In this scenario, the value of practically all physical assets declines while the value of money increases. For this to happen, the supply of money available to the economy has to decrease rapidly and in substantial amount. That is virtually impossible with Uncle Ben running the presses 24/7/365.

Back in the 1930s, there was a deflationary depression. This was exacerbated by the fact that silver and gold, which we call commodities today, were money... and money was very dear in those days. Anyone who had some could buy practically anything they wanted and many did. While the news and the history of the Great Depression always focuses on those who were financially ravaged by those hard times, the fact is that many millionaires and some billionaires were created by the fact that they had some money and could scoop up a lot of great stocks for pennies on the dollar. Vast fortunes were made by some of these folks in the 1940s and beyond as their cheaply acquired shares zoomed much much higher in price. I remember watching a movie once where a young man was pursuing a young woman. He was a hard worker but not rich and her family was very wealthy. She mentioned that the source of the family wealth was that "Daddy bought AT&T at 10". What she meant was not that he bought AT&T at $10 a share but at $0.10 a share!

As to PMs... I really have two simultaneous thoughts on this and I do not know which is correct. Anyway, PMs are commodities these days and would fall in price during a deflationary period. That said, they are also, to many people, money, and money is scarce during deflationary times, so that should make them more valuable. This should be the case as long as paper money is in short supply. We do know that Bernanke has no intention of ever letting this happen and will flood the economy with easy money at the 1st whiff of deflation... and he has! Housing market deflation is probably what has Uncle Ben on such a tear with the printing presses. We also know that massive currency printing is very bullish for PMs, mostly because a large money supply leads to inflation. Since PMs inflate only with great difficulty, they are an excellent inflation hedge.

As an experienced investor, I know that the economy and the market are very complex and that it can be very difficult to tell which way they will go in any given future scenario. That said, I also know that diversification is about the only "free lunch" in investing. I would not concentrate all of my wealth into any single investment at any given time, no matter how strongly I thought that they were "sure things". There is always the chance that some unknown or unknowable event will occur at just the wrong time to completely derail our plans. Because of this, it is wise to invest in many different things. PMs are one of those things but they are also only about 2% of my portfolio at the moment. I want to raise this to about 10% but no higher than that. Currently, I am about 98% in cash and will stay there until the political situations in DC and in Europe clarify a little. I can handle the loss of income from this money far more easily than I can tolerate a large loss of the money itself. These problems do not need to be solved but some progress in that direction needs to be made before I will commit significant money back into this chaotic market.