How to monitor the Fed's actions & invest to protect against future possible inflation?

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jdamo
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How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by jdamo » Tue Jul 28, 2020 5:23 pm

What is the best site or method to monitor the Fed's actions and the money supply and invest to protect against future possible inflation due to all the stimulus? Just increase stock index allocation% and hope for the best?

We are recent retirees at 61 yrs old with 40%/60% stock/bond fund allocation, and I worry about once the virus is behind us with the vaccine that inflation will take off. Also, I just read a WSJ editorial today about the Fed considering "yield-curve control" to control future interest rates (like last used in the 1940s after WW2 to control debt costs) instead of using current techniques to influence the market that sets for instance the 10-yr Treasury rate.

How should be monitor and prepare for this? Or not? Are others thinking about this? Or do we just stay the course?
Please - this is an investing question...no political comments.

000
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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by 000 » Tue Jul 28, 2020 5:26 pm

I have some cash and gold. I don't have an active strategy based on the Fed's actions.

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nisiprius
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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by nisiprius » Tue Jul 28, 2020 5:32 pm

My politics-free answer is: TIPS and series I savings bonds for reliable inflation protection that is directly tied to the CPI--as opposed to a sorta-kinda-tends-to relationship. For sorta-kinda-tends-to, stocks have worked reasonably well, as well as anything, but be aware of what Benjamin Graham wrote in The Intelligent Investor, 4th ed., 1973
Benjamin Graham (Warren Buffett's mentor) wrote:(p. 20) On this point we can be categorical. There is no close time connection between inflationary (or deflationary) conditions and the movement of common-stock earnings and prices. The obvious example is the recent period 1966-1970. The rise in the cost of living was 22%... but both stock earnings and stock prices have declined since 1965. There are similar contradictions in both directions in the record of previous five-year periods.
No particular changes are needed since predictions of inflation have been wildly unreliable.

Most assets and investments sorta-kinda-tend-to maintain real value. Nominal bonds, literal currency, and non-interest-bearing bank accounts are exceptions. So all sorts of random investments are touted as "inflation hedges." In my opinion, none of them have anything special to commend them. For example, an asset with one of the longest known histories, real estate in the Herengracht district of Amsterdam, held real value over 400 years but underwent a sharp decline and stayed down for a hundred years before getting back to even.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by alex_686 » Tue Jul 28, 2020 5:35 pm

Here is a chart of M2, but I doubt it will do you any good.

The relationship between ‘hard currency’ and money supply broke down about 20 years ago.

Now the banking system and the shadow banking system supplies most of the money. During the 2008 crisis the fFed pumped money into the system and M2 dramatically increases, but the M5 money supply dropped like a rock.

And M5 is such a slippery thing the Fed has stopped collecting data on it.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by jarjarM » Tue Jul 28, 2020 5:44 pm

alex_686 wrote:
Tue Jul 28, 2020 5:35 pm
Here is a chart of M2, but I doubt it will do you any good.

The relationship between ‘hard currency’ and money supply broke down about 20 years ago.

Now the banking system and the shadow banking system supplies most of the money. During the 2008 crisis the fFed pumped money into the system and M2 dramatically increases, but the M5 money supply dropped like a rock.

And M5 is such a slippery thing the Fed has stopped collecting data on it.
Since Alex_686 forgot to attach the link, here you go :happy
https://fred.stlouisfed.org/graph/?g=twpx

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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by alex_686 » Tue Jul 28, 2020 6:40 pm

jarjarM wrote:
Tue Jul 28, 2020 5:44 pm
Since Alex_686 forgot to attach the link, here you go :happy
https://fred.stlouisfed.org/graph/?g=twpx
Thank you.

And in review, I should have been referencing M1 and M3.

To extend abit, I used to know what drove inflation. Now I am not so sure.
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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by jarjarM » Tue Jul 28, 2020 6:45 pm

alex_686 wrote:
Tue Jul 28, 2020 6:40 pm
jarjarM wrote:
Tue Jul 28, 2020 5:44 pm
Since Alex_686 forgot to attach the link, here you go :happy
https://fred.stlouisfed.org/graph/?g=twpx
Thank you.

And in review, I should have been referencing M1 and M3.

To extend abit, I used to know what drove inflation. Now I am not so sure.
You welcome. I must said I felt the same, inflation prediction became even more of a magic work since the great recession 12+ years ago.

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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by jdamo » Tue Jul 28, 2020 6:59 pm

Thanks to all replies for the discussion and graph.
The amazing thing about the M2 graph is that it was remarkably low for most of my working career (1981 start) but has really ballooned now as we knew but.... seeing the graph really brings it to perspective.

I don't know how to react.... except to really consider TIPS and I bonds more for 10-20% of our fixed income portion. Or, conversely, increase my AA to more stocks and hope for the best and let bonds in the VBTLX respond to changing inflation over time as they mature and new bonds join the fund. And hope for the best....Please, any more thoughts are appreciated particularly those that fought inflation in the 70s and early 80s! (I remember the inflation...my wife had to pay 18% interest rate on her first car loan in 1981 out of college and starting to work!)

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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by nisiprius » Tue Jul 28, 2020 7:24 pm

With regard to "hard currency," in 1961, Ian Fleming, published his novel Thunderball, featuring spy James Bond. In it, the evil genius of SPECTRE (Special Executive for Counterintelligence, Terrorism, Revenge and Extortion), Ernst Stavro Blofeld, remarks:
[our] total income to date... has amounted to approximately one and a half million pounds starling in the Swiss francs and Venezuelan bolivars in which for reasons of prudence--they continue to be the hardest currencies in the world--we convert all our takings.
Well, he was right about the Swiss francs anyway.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by Angst » Wed Jul 29, 2020 10:38 am

As usual, nisiprius makes some reasonable observations and suggestions.
nisiprius wrote:
Tue Jul 28, 2020 5:32 pm
No particular changes are needed since predictions of inflation have been wildly unreliable.
And I'd add that some people are thinking deflation is much more likely in our future than inflation. Clearly, nobody knows for sure.
nisiprius wrote:
Tue Jul 28, 2020 5:32 pm
My politics-free answer is: TIPS and series I savings bonds for reliable inflation protection that is directly tied to the CPI--as opposed to a sorta-kinda-tends-to relationship.
TIPS in a mutual fund are probably easier than buying I Bonds, but I Bonds are hands down the best value right now for inflation protection. One can experiment with as little as $25 buying I Bonds from TreasuryDirect.gov. Today, and for most of this year, I Bonds' inflation protection has exceeded that of TIPS. For anyone willing to deal with the mechanics of purchasing and necessarily holding them with Treasury Direct, many people could do quite well to buy them now.

If deflation really became an issue, the bond holdings you already have could do well. Long term Treasury bonds would perform better than short term. One could also experiment with as little as $25 buying Series EE US Savings Bonds from TreasuryDirect.gov. A big catch with them though is that they "must" be held to maturity (20 years) in order to get the effective 3.53% yield (i.e. they automatically double in value at maturity) so they are a long-term commitment. If redeemed at Treasury Direct prior to maturity, they revert to a minuscule yield, so the longer an EE Bond is held, the more important it becomes to NOT redeem it ahead of maturity.

The Wiki has write-ups on Series I and Series EE Savings Bonds.

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jdamo
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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by jdamo » Wed Jul 29, 2020 11:49 am

Thanks for the reply again and those are really good points about the undependability of inflation predictions and also whether to consider I bonds. I am thinking and will research these more. Also I appreciate the comments about longer-term bonds doing well. I realize that. I’m just trying to be prudent with 60% of our portfolio and thanks for the comments.

These seem like really weird times with Covid and also the stimulus so there’s too much to think about with regard to investing. But then I also realize that as Jack Bogle says no one knows nothing, so I may end up just staying with what I got or possibly adding some percentage of our bonds

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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by Robot Monster » Wed Jul 29, 2020 12:03 pm

I Bonds, sadly, have a purchase limits of $10,000 maximum in one calendar year.
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days) even when their actual investment time horizon is quite long (e.g. decades).

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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by Impatience » Wed Jul 29, 2020 12:51 pm

Just because the fed is printing money doesn’t guarantee inflation - be careful. If it were that easy to forecast every hedge fund and active investor would be deep into TIPs. If the cash is merely replacing other sources of income it won’t accelerate the overall money velocity.
Last edited by Impatience on Wed Jul 29, 2020 12:54 pm, edited 1 time in total.

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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by jarjarM » Wed Jul 29, 2020 12:53 pm

Impatience wrote:
Wed Jul 29, 2020 12:51 pm
Just because the fed is printing money doesn’t guarantee inflation - be careful. If it were that easy to forecast every hedge fund and active investor would be deep into TIPs. I’d the cash is merely replacing other sources of income it won’t accelerate the overall money velocity.
+1, some of us learn that the hard way after the financial crisis with the unprecedented intervention of central banks of the world.

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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by columbia » Wed Jul 29, 2020 1:31 pm

Impatience wrote:
Wed Jul 29, 2020 12:51 pm
Just because the fed is printing money doesn’t guarantee inflation - be careful. If it were that easy to forecast every hedge fund and active investor would be deep into TIPs. If the cash is merely replacing other sources of income it won’t accelerate the overall money velocity.
Thank you for posting this.
If you leave your head in the sand for too long, you might get run over by a Jeep.

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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by jdamo » Wed Jul 29, 2020 1:42 pm

Thanks ...this makes me rethink how hard it is to forecast inflation. I am more settled on staying the course with our 39% stocks/61% Bond composed of: VFIAX18% VSMAX 4% 17% VTIAX/ 61%VBTLX. But I learn something everytime on the forum when something "bugs" me in the financial news and I feel worried. It's hard to "stand there and do nothing" and stay the course. The forum calms me down, adds history and perspective and re-enforces what we all need to know/remember! Thanks. :sharebeer

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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by jdamo » Wed Jul 29, 2020 1:45 pm

And the $10,000 limit per year for I bonds ...even if done for say 10 yrs won't make a dent that will make a substantial difference.
Staying the course!

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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by SemiRetire » Wed Jul 29, 2020 2:26 pm

Gold is a good hedge against currency debasement, not inflation per se. Inflation is a combination of velocity of money and money supply.

Foreign stocks good hedge against US inflation and loss of currency reserve status versus US stock.
Land ownership is a hedge against inflation

TIPS are a new product. CPI is a man made metric which does undergo adjustments, steak too expensive then chicken substitutes for steak etc in CPI. I have had half my bonds in TIP for over 5 years now. TIP payments are adjustable to the extent CPI calculation is adjustable. Also CPI calculation even if frozen as is now, may not mirror your personal inflation as well as you like. I bonds similiar to TIPS. I just think TIPS may well run into real world problems like the all TIPS ladder approach did. But with all that, I hold 50/50 TIPs/US Aggregate bond split quite happily. Will be interesting to see how it plays out.

In certain situations buying durable goods cars etc have served as hedge against high to hyper inflation, when inflation beats depreciation. Hopefully We will not experience this in US, not uncommon in world though.

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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by Valuethinker » Thu Jul 30, 2020 4:32 am

jdamo wrote:
Tue Jul 28, 2020 5:23 pm
What is the best site or method to monitor the Fed's actions and the money supply and invest to protect against future possible inflation due to all the stimulus? Just increase stock index allocation% and hope for the best?

We are recent retirees at 61 yrs old with 40%/60% stock/bond fund allocation, and I worry about once the virus is behind us with the vaccine that inflation will take off. Also, I just read a WSJ editorial today about the Fed considering "yield-curve control" to control future interest rates (like last used in the 1940s after WW2 to control debt costs) instead of using current techniques to influence the market that sets for instance the 10-yr Treasury rate.

How should be monitor and prepare for this? Or not? Are others thinking about this? Or do we just stay the course?
Please - this is an investing question...no political comments.
Here's what I would suggest:

- put up to half your bonds (but say 20% i.e. 1/3rd) into TIPS funds. You will experience greater volatility (during sharp market selloffs, like March 2020 or September-December 2008, investors liquidate their most liquid assets first, and TIPS prices tend to drop) but in the long run greater inflation protection. A short term TIPS fund will offer lower long run returns but has greater correlation with inflation (I think Vanguard produced a paper on that showing the highest correlation was with ST TIPS).

- buy ibonds for you (and spouse) - over time you can build up quite a portfolio, they can be treated as bonds for asset allocation purposes

There are issues about taxable location and I am not a US-based investor to advise you those.

Another possibility is to go 10% in REITs- but be sure you can stomach the volatility that fund exhibited 2008-09 or in March 2020. It is more volatile than the stock market as a whole. However, real estate rents tend to rise along with inflation, in the long run, underpinning value in the sector.

REITs are equities so you'd have to reduce your general equity index weighting by 10%.

As others mention, holding international stocks & bonds (the latter if not currency hedged) as protection against domestic US inflation that is ot experienced in other countries (eg the Eurozone or Japan). Again, lots of Vanguard research says a stock weighting around 1/3rd of your equities minimizes risk and maximizes return (the actual VG paper says 20-30% I think). So say 10% of your portfolio in international stocks (ie 1/4 of your equities).

Gold is a traditional inflation hedge but it's clear that right now gold is trading against the interest rate - the lower the interest rate, the higher the gold price. Makes sense because the cost of holding gold (ie the lost interest) is now very small or negative if you factor in inflation. There's a case for 5% gold, but you are condemning 5% of your portfolio to a long run negative return (the cost of gold storage - less than 1% but its' still there) even though it has hedging properties.

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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by Alchemist » Thu Jul 30, 2020 4:48 am

The Fed's actions ARE protection against future inflation, and its far more dangerous cousin, deflation.


Stop worrying and learn to love the Fed.

#brrrr


But really if you are very worried, TIPS were explicitly designed to protect you from unwanted inflation. So replace some of your nominal bonds with them until you feel comfortable.

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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by AlohaJoe » Thu Jul 30, 2020 5:24 am

jdamo wrote:
Tue Jul 28, 2020 5:23 pm
What is the best site or method to monitor the Fed's actions
The best way to monitor the Fed's actions are ... wait for it ... the Fed's website. I don't know why people don't just go the source when they want information....

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

Everything thing they discuss and decide goes up there.

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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by nps » Thu Jul 30, 2020 5:49 am

Impatience wrote:
Wed Jul 29, 2020 12:51 pm
Just because the fed is printing money doesn’t guarantee inflation - be careful. If it were that easy to forecast every hedge fund and active investor would be deep into TIPs. If the cash is merely replacing other sources of income it won’t accelerate the overall money velocity.
Exactly. The M2 chart can be misleading when looked at in isolation.

Here is the M2 velocity:

Image

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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by Chicken Little » Thu Jul 30, 2020 7:55 am

nps wrote:
Thu Jul 30, 2020 5:49 am
Impatience wrote:
Wed Jul 29, 2020 12:51 pm
Just because the fed is printing money doesn’t guarantee inflation - be careful. If it were that easy to forecast every hedge fund and active investor would be deep into TIPs. If the cash is merely replacing other sources of income it won’t accelerate the overall money velocity.
Exactly. The M2 chart can be misleading when looked at in isolation.

Here is the M2 velocity:

Image
OK, I’m struggling to make sense of this.

If we call money M2 (M1 + M2), there was a modest increase in M2 in 2008 compared to a much higher increase now.

There was a sharp decline in GDP in 2008, which led to a sharp decrease in M2 velocity (velocity = GDP/M2).

The FRED velocity chart is basically Q1. We know that the decline in GDP now should be much greater than in 2008.

Here’s my problem;

If GDP is going way down, and M2 going way up, velocity will go way down. One conclusion could be that there is an incredible capacity to increase M2 if the face of a markedly lower GDP. That’s almost direct support of MMT? When GDP is declining, there is no limit to increasing money supply?

GDP declines in 2008 and this crisis, but otherwise shows constant growth.

M2 supply increases relatively modestly in 2008, and increases a lot in this crisis. It also increases markedly between 2008and this crisis.

M2 velocity is more or less the same as M2 supply.

I guess I may not understand velocity. It seems like if GDP constantly declines, and M2 constantly increases, that velocity constantly decreases, and the threat of inflation constantly decreases?

That doesn’t seem right?

This is different than 2008 because we’ve created a lot more money now than we did then. I’m just stuck on textbook inflationary pressures; fewer goods or more money.

I also wonder about turning the corner. Say there was a 100% effective end to the pandemic. Is the move to let GDP “catch up” to M2, or do we feel in M2?

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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by Chicken Little » Thu Jul 30, 2020 7:56 am

nps wrote:
Thu Jul 30, 2020 5:49 am
Impatience wrote:
Wed Jul 29, 2020 12:51 pm
Just because the fed is printing money doesn’t guarantee inflation - be careful. If it were that easy to forecast every hedge fund and active investor would be deep into TIPs. If the cash is merely replacing other sources of income it won’t accelerate the overall money velocity.
Exactly. The M2 chart can be misleading when looked at in isolation.

Here is the M2 velocity:

Image
OK, I’m struggling to make sense of this.

If we call money M2 (M1 + M2), there was a modest increase in M2 in 2008 compared to a much higher increase now.

There was a sharp decline in GDP in 2008, which led to a sharp decrease in M2 velocity (velocity = GDP/M2).

The FRED velocity chart is basically Q1. We know that the decline in GDP now should be much greater than in 2008.

Here’s my problem;

If GDP is going way down, and M2 going way up, velocity will go way down. One conclusion could be that there is an incredible capacity to increase M2 if the face of a markedly lower GDP. That’s almost direct support of MMT? When GDP is declining, there is no limit to increasing money supply?

GDP declines in 2008 and this crisis, but otherwise shows constant growth.

M2 supply increases relatively modestly in 2008, and increases a lot in this crisis. It also increases markedly between 2008 and this crisis.

M2 velocity is more or less the same as M2 supply.

I guess I may not understand velocity. It seems like if GDP constantly declines, and M2 constantly increases, that velocity constantly decreases, and the threat of inflation constantly decreases?

That doesn’t seem right?

This is different than 2008 because we’ve created a lot more money now than we did then. I’m just stuck on textbook inflationary pressures; fewer goods or more money.

I also wonder about turning the corner. Say there was a 100% effective end to the pandemic. Is the move to let GDP “catch up” to M2, or do we reel in M2?

But it’s the same thing in reverse, you can’t decrease M2 when GDP starts increasing without increasing velocity?

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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by Chicken Little » Thu Jul 30, 2020 9:43 am

This makes sense...

With the above equation, it is easy to see that if money growth is equal to increases in real GDP, then there will be no inflation. Hence, a fast-growing economy will allow the government to create more money to help pay for its services without causing inflation. Inflation results when money growth exceeds real GDP growth.

https://www.google.com/amp/s/thismatter ... on.amp.htm

So to borrow, if there’s a big increase in money supply while GDP is decreasing, if that money isn’t being spent then “kinetic” inflation is low, but “potential” inflation is high because the money now exists?

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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by jdamo » Thu Jul 30, 2020 10:51 am

This is really interesting. I had not heard of money velocity. I had heard of M1, M2, etc. This explanation of money velocity and whether there is inflation or not seems to make sense.
So really it may take a while even after a vaccine to see if the GDP takes off as fast as the M2 did so the velocity may stay "similar" and not cause inflation. Plus we know that the Fed has been unable to create or cause significant inflation in recent years for reasons everyone is wondering about. (cheap foreign labor?) Anyway, thanks for these last discussions. I am still pondering replacing 10% VBTLX with 10% TIPS fund. But i may wait until after the vaccine is out and study the economic response for a while, to check the money velocity.

Do any others have further thoughts? Particularly those in retirement for 5-10 years who have studied and experienced investing for a while in past inflationary times? Again, no politics...just investing or economic responses please. Thanks! 8-)

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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by alex_686 » Thu Jul 30, 2020 2:46 pm

jdamo wrote:
Thu Jul 30, 2020 10:51 am
This is really interesting. I had not heard of money velocity. I had heard of M1, M2, etc. This explanation of money velocity and whether there is inflation or not seems to make sense.
There are a variety of different economic theories on money. The one you cite - I am assuming Monetarism - is a older classic version. One that I don't think holds anymore. That being said, most reputable theories are breaking down. And the ones that are replacing them are kind of out there and new.

So let us talk about the holes in your theory.

The Credit Theory of Money says that money is a special type of bond. It is very safe. Principle protected, highly liquid and negotiable. Anything that fits that definition is money. Gold when we were on the metallic standard. Cigarettes in a WWII POW camp. Cans of tuna in prison. Whatever.

Note, there is a difference between currency and money. Currency has government backing. M1 & M2 fall under this category. Money may not. Think of the difference between governmental minted coins (currency) and bank issued gold notes (money). In theory, both are backed by the same amount of gold.

The problem today is that most of the money is circulation is not currency. It is bank created stuff. I am including near-banks and shadow-banks. The M4 stuff. Banks take in one asset, a 30 year mortgage, and transforms that asset into another asset, money.

Most of the money in circulation is outside the Fed's control.

You might want to study the past 30 years of Japan. Their central bank has been pumping money into the system but has had no effect. We are kind of seeing the reverse here.

Normally high powered currency (M1 & M2) being pushed out has a multiple effect thanks to the banking system. However, I have seen arguments that Japan is going through a balance sheet recession. So the extra money being pumped in goes into banks and stays there because banks are deleveraging.

Or maybe demographics. Or maybe because deflation expectations have been set - inflation can largely be societies expectations.
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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by Oicuryy » Thu Jul 30, 2020 3:22 pm

FRED graphs are fun.

I'm not seeing much correlation between inflation and money supply.

Here is CPI versus M2 velocity. Does anyone really want to claim that velocity in the 1.7 to 1.9 range causes high inflation?
Image
https://fred.stlouisfed.org/graph/?g=tzjY

Here is CPI versus M2 quantity.
Image
https://fred.stlouisfed.org/graph/?g=tzk5

And here is CPI versus change in M2 quantity.
Image
https://fred.stlouisfed.org/graph/?g=tzkf

In theory, the Fed should be able to cause high inflation. They did it in the 1970s. But they could not do it in the 2010s.

Those looking for insight into the inflation of the 1970's might find some in this paper by Robert Hetzel.
Arthur Burns and Inflation

Ron
Money is fungible | Abbreviations and Acronyms

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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by alex_686 » Thu Jul 30, 2020 3:38 pm

To the OP, here is some interesting reading. A bit broader than the topic, but still a good read.

[edit - forgot the link]
https://www.economist.com/briefing/2020 ... oeconomics
Last edited by alex_686 on Thu Jul 30, 2020 5:31 pm, edited 1 time in total.
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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by alex_686 » Thu Jul 30, 2020 3:41 pm

Oicuryy wrote:
Thu Jul 30, 2020 3:22 pm
I'm not seeing much correlation between inflation and money supply.
Nor should you. You are leaving out the 3rd variable, GNP. A GNP at level X needs money (as measured as a flow variable) for transactions. If the GNP grows, you are going to want to either increase the money supply or velocity.

The point of the Fed is to control inflation. They know the theory. They have been adjusting accordingly. Until things have stopped working.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

Dominic
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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by Dominic » Thu Jul 30, 2020 4:19 pm

If you need a reliable inflation hedge, stick to TIPS or Series I Savings Bonds. Cash isn't terrible either.

Any other asset class (stocks, real estate, gold, value stocks) has way too much other risk piled on top of their real value. In the long run, those should have non-negative real returns, but other economic factors (and speculation) make them dangerous for short term inflation protection.

Chicken Little
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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by Chicken Little » Thu Jul 30, 2020 5:36 pm

So what about comparing 2008 to now?

1. Seems like 2008 had lower decline in GDP and less increase of money supply
2. Seems like now had greater decline in GDP and much higher increase in money supply

I’d think if anyone had anything intelligent to say with regard to inflation, it would have to fit each of these unique crises?

000
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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by 000 » Thu Jul 30, 2020 5:38 pm

Inflation happens because of group beliefs -- not economic theories. What really matters is popular beliefs -- not Fed actions in particular, although those can affect people's beliefs.

alex_686
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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by alex_686 » Thu Jul 30, 2020 6:31 pm

Chicken Little wrote:
Thu Jul 30, 2020 5:36 pm
So what about comparing 2008 to now?

1. Seems like 2008 had lower decline in GDP and less increase of money supply
2. Seems like now had greater decline in GDP and much higher increase in money supply

I’d think if anyone had anything intelligent to say with regard to inflation, it would have to fit each of these unique crises?
You contradict yourself. First you push for a universal theory, then you point to unique cases which - by definition - can't fit into a universal theory.

A more serious answer is that we do not. Alas we are talking about a social science, and society is malleable in a way that physics is not. Supply of money is just one leg, and money does evolve over time. Then you have to look at the other leg - demand for money. This too is malleable.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

Chicken Little
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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by Chicken Little » Thu Jul 30, 2020 7:10 pm

alex_686 wrote:
Thu Jul 30, 2020 6:31 pm
Chicken Little wrote:
Thu Jul 30, 2020 5:36 pm
So what about comparing 2008 to now?

1. Seems like 2008 had lower decline in GDP and less increase of money supply
2. Seems like now had greater decline in GDP and much higher increase in money supply

I’d think if anyone had anything intelligent to say with regard to inflation, it would have to fit each of these unique crises?
You contradict yourself. First you push for a universal theory, then you point to unique cases which - by definition - can't fit into a universal theory.

A more serious answer is that we do not. Alas we are talking about a social science, and society is malleable in a way that physics is not. Supply of money is just one leg, and money does evolve over time. Then you have to look at the other leg - demand for money. This too is malleable.
Pushing?

I’m asking questions?

Chicken Little
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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by Chicken Little » Thu Jul 30, 2020 7:10 pm

duplicate
Last edited by Chicken Little on Thu Jul 30, 2020 7:28 pm, edited 1 time in total.

alex_686
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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by alex_686 » Thu Jul 30, 2020 7:22 pm

Chicken Little wrote:
Thu Jul 30, 2020 7:10 pm
alex_686 wrote:
Thu Jul 30, 2020 6:31 pm
Chicken Little wrote:
Thu Jul 30, 2020 5:36 pm
So what about comparing 2008 to now?

1. Seems like 2008 had lower decline in GDP and less increase of money supply
2. Seems like now had greater decline in GDP and much higher increase in money supply

I’d think if anyone had anything intelligent to say with regard to inflation, it would have to fit each of these unique crises?
You contradict yourself. First you push for a universal theory, then you point to unique cases which - by definition - can't fit into a universal theory.

A more serious answer is that we do not. Alas we are talking about a social science, and society is malleable in a way that physics is not. Supply of money is just one leg, and money does evolve over time. Then you have to look at the other leg - demand for money. This too is malleable.
Pushing?

I’m asking questions?
I apologize for misreading your sentiments.

Your questions mirror a common arguments against economics, and hence investment theory. If it is a science then one should be able to construct iron clad laws that are inmutable, which is not the case.

As a specific point, I will point to the banking system. In 2008 it was in dire straights. During this crisis they are doing nicely considering everything.

Since banks create most of the money, one would not expect the sane results.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

UpperNwGuy
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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by UpperNwGuy » Thu Jul 30, 2020 7:35 pm

jdamo wrote:
Tue Jul 28, 2020 5:23 pm
What is the best site or method to monitor the Fed's actions and the money supply and invest to protect against future possible inflation due to all the stimulus? Just increase stock index allocation% and hope for the best?

We are recent retirees at 61 yrs old with 40%/60% stock/bond fund allocation, and I worry about once the virus is behind us with the vaccine that inflation will take off. Also, I just read a WSJ editorial today about the Fed considering "yield-curve control" to control future interest rates (like last used in the 1940s after WW2 to control debt costs) instead of using current techniques to influence the market that sets for instance the 10-yr Treasury rate.

How should be monitor and prepare for this? Or not? Are others thinking about this? Or do we just stay the course?
Please - this is an investing question...no political comments.
1. I don't monitor the Fed's actions.
2. I don't invest to protect against future possible inflation.
3. I stay the course at 60/40.

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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by arcticpineapplecorp. » Thu Jul 30, 2020 7:40 pm

i heard on a podcast the other week (think it might have been Jeremy Siegel on masters in business?) that the difference between the money printing in 2008 and now is that most of the printing helped the banks balance sheets, but wasn't necessarily lent out. Now that banks have greater reserves (as required out of GFC), they don't need the same liquidity as before. The money printing happening now has actually put cash in people's hands to spend.

The situation now could lead to inflation if too much money is chasing too few goods. Of course if it does, the fed has tools to deal with inflation. They raise interest rates. That helps the bondholders and savers who have been complaining interest rates are too low. Be careful what you wish for!
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

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jdamo
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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by jdamo » Thu Jul 30, 2020 8:41 pm

Thanks for this further discussion and the links to the papers above!
I will have to study these!

And it still seems to me that the Fed will be limited in how much they raise interest rates in an inflationary period because servicing the national debt would be too expensive in interest payments.
Thanks

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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by Chicken Little » Fri Jul 31, 2020 4:47 am

arcticpineapplecorp. wrote:
Thu Jul 30, 2020 7:40 pm
The situation now could lead to inflation if too much money is chasing too few goods. Of course if it does, the fed has tools to deal with inflation. They raise interest rates. That helps the bondholders and savers who have been complaining interest rates are too low. Be careful what you wish for!
Can they?

Normalization came to an abrupt halt in second half of 2019, with rate dropping nearly a full point before crisis started. If raising rates glitches markets or tanks the economy, how do they balance their mandates?

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arcticpineapplecorp.
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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by arcticpineapplecorp. » Fri Jul 31, 2020 9:45 am

Chicken Little wrote:
Fri Jul 31, 2020 4:47 am
arcticpineapplecorp. wrote:
Thu Jul 30, 2020 7:40 pm
The situation now could lead to inflation if too much money is chasing too few goods. Of course if it does, the fed has tools to deal with inflation. They raise interest rates. That helps the bondholders and savers who have been complaining interest rates are too low. Be careful what you wish for!
Can they?

Normalization came to an abrupt halt in second half of 2019, with rate dropping nearly a full point before crisis started. If raising rates glitches markets or tanks the economy, how do they balance their mandates?
since they must have a "dual mandate" of stable prices and maximum employment, they're going to have to make tradeoffs aren't they? If inflation gets high, people stop buying. What happens to an economy when people stop buying?

So the fed has a precarious position of having to balance two (at times) competing forces.

They have many tools to do this. Adjusting interest rates to influence the flow of money supply is only one.
Since 1977, the Federal Reserve has operated under a mandate from Congress to "promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates" — what is now commonly referred to as the Fed's "dual mandate."

source: https://www.richmondfed.org/publication ... 1/eb_11-12
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

Chicken Little
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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by Chicken Little » Fri Jul 31, 2020 11:36 am

arcticpineapplecorp. wrote:
Fri Jul 31, 2020 9:45 am
So the fed has a precarious position of having to balance two (at times) competing forces.
You said it, not me.

We know they have a dual mandate, and we know they have tools. Just because they have those thing’s doesn’t mean they will be successful in hitting their targets.

I haven’t drawn any conclusions, I just know this is different than 2008 for many reasons, but two in particular;

1. There is a much higher increase in money supply now, and we’re not finished.

2. This is cumulative on top of 2008. There was no significant normalization after 2008.

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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by alex_686 » Fri Jul 31, 2020 12:12 pm

arcticpineapplecorp. wrote:
Fri Jul 31, 2020 9:45 am
Chicken Little wrote:
Fri Jul 31, 2020 4:47 am
arcticpineapplecorp. wrote:
Thu Jul 30, 2020 7:40 pm
The situation now could lead to inflation if too much money is chasing too few goods. Of course if it does, the fed has tools to deal with inflation. They raise interest rates. That helps the bondholders and savers who have been complaining interest rates are too low. Be careful what you wish for!
Can they?

Normalization came to an abrupt halt in second half of 2019, with rate dropping nearly a full point before crisis started. If raising rates glitches markets or tanks the economy, how do they balance their mandates?
since they must have a "dual mandate" of stable prices and maximum employment, they're going to have to make tradeoffs aren't they? If inflation gets high, people stop buying. What happens to an economy when people stop buying?

So the fed has a precarious position of having to balance two (at times) competing forces.

They have many tools to do this. Adjusting interest rates to influence the flow of money supply is only one.

....
A couple of points here.

I think there was a fair amount of normalization that happened. Banks and other financial institutions had to really shore up their foundations. They liquidated a fair amount of TARP program's assets. etc. Maybe not as flashy as the money supply, but still good work.

Next, the Fed really does not have a full mandate. After the 70s the Fed kind of abandoned full employment. Partly it was due to their disastrous policies in the 70s. Partly because they figured that they had the tools for price stability and making the financial system sound, and they concluded that this was critical for long term economic growth.

Lastly, do they have the tools? They have hauled out their big guns. They don't have much left in the arsenal. They could pour massive amounts of free money into the system. I personally feel that fiscal policy, not monetary policy, is the answer.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by Blue456 » Fri Jul 31, 2020 12:16 pm

nisiprius wrote:
Tue Jul 28, 2020 5:32 pm
be aware of what Benjamin Graham wrote in The Intelligent Investor, 4th ed., 1973
Benjamin Graham (Warren Buffett's mentor) wrote:(p. 20) On this point we can be categorical. There is no close time connection between inflationary (or deflationary) conditions and the movement of common-stock earnings and prices. The obvious example is the recent period 1966-1970. The rise in the cost of living was 22%... but both stock earnings and stock prices have declined since 1965. There are similar contradictions in both directions in the record of previous five-year periods.
No particular changes are needed since predictions of inflation have been wildly unreliable.
Which stocks? SP500, REITs, small caps or total world stock?

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ray.james
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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by ray.james » Fri Jul 31, 2020 12:25 pm

Poster boy Japan and its fed has been printing money for years. They just moved to long curve controls from short.I do not know how this will end. My intuition is Japanese avoided serious deflation due to all the money printing.( demographics, asset bubble , take any measure they should have been in serious deflation but they did not.)

I am at 50% international stocks and long mortgage to protect against inflation. Bonds and 50% domestic will protect against deflation.
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939

Chicken Little
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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by Chicken Little » Fri Jul 31, 2020 12:57 pm

alex_686 wrote:
Fri Jul 31, 2020 12:12 pm
I think there was a fair amount of normalization that happened. Banks and other financial institutions had to really shore up their foundations. They liquidated a fair amount of TARP program's assets. etc. Maybe not as flashy as the money supply, but still good work.

Next, the Fed really does not have a full mandate. After the 70s the Fed kind of abandoned full employment. Partly it was due to their disastrous policies in the 70s. Partly because they figured that they had the tools for price stability and making the financial system sound, and they concluded that this was critical for long term economic growth.

Lastly, do they have the tools? They have hauled out their big guns. They don't have much left in the arsenal. They could pour massive amounts of free money into the system. I personally feel that fiscal policy, not monetary policy, is the answer.
1. Sure they unloaded some TARP assets, made a few bucks, and improved bank balance sheets, but compared to total government debt and interest rates, it’s small potatoes. If there was significant normalization during the longest bull market in history, perhaps they wouldn’t have needed to go to new tools?

2. I don’t know why so much is made of the mandate. I trust that they’re doing the best they can, and having a mandate doesn’t mean they’ll succeed.

3. Japan CB is a big equity holder through ETFs, right? I don’t think there’s much doubt that would be the next big tool. Hopefully not until next crisis.

Too often Fed is viewed in isolation. There are no answers that way. Fed is part of government. It’s one thing.

evofxdwg
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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by evofxdwg » Fri Jul 31, 2020 1:16 pm

Well, if I had a crystal ball over 10 years ago when I bought VTAPX and VAIPX as part of my bond fund holdings, I wouldn't have bought it, or at least as much of it.
It seems like just holding VBTLX would overcome future inflation better. Maybe VTAPX/VAIPX is protection against Weimar Germany type inflation, I don't know. Something tells me if we have that type of inflation, holding inflation protected bonds won't have the protection I need, or I don't hold enough, which I cant afford to do at those return rates.

10 year total return ending 7/30/2020 (Morningstar data)
VTAPX: +9.24%
VAIPX: +16.49%
VBTLX: +29.89%

Last 120 months inflation rate (10 years): 19.00%
https://www.statbureau.org/en/united-states/inflation

VAIPX is currently 5.2%
VTAPX is currently 2.3%
of my portfolio

bck63
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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by bck63 » Thu Aug 06, 2020 2:04 pm

AlohaJoe wrote:
Thu Jul 30, 2020 5:24 am
jdamo wrote:
Tue Jul 28, 2020 5:23 pm
What is the best site or method to monitor the Fed's actions
The best way to monitor the Fed's actions are ... wait for it ... the Fed's website. I don't know why people don't just go the source when they want information....

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

Everything thing they discuss and decide goes up there.
Maybe the guy didn't know. Sheesh. Trying telling him without insulting him too. Unbelievable.

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Re: How to monitor the Fed's actions & invest to protect against future possible inflation?

Post by Mel Lindauer » Thu Aug 06, 2020 2:55 pm

Robot Monster wrote:
Wed Jul 29, 2020 12:03 pm
I Bonds, sadly, have a purchase limits of $10,000 maximum in one calendar year.
That's per SS#. A couple can buy $20,000 and an additional $10,000 per trust. And $5000 can be purchased via one's tax refund.

I'll also add that I Bonds also protect against DEflation. In fact, the greater the DEflation rate, the higher the REAL return would be on the I Bonds, since their composite rate can never go below 0%.
Best Regards - Mel | | Semper Fi

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