Fed president says US is close to Japan-style deflation

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kenner
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Fed president says US is close to Japan-style deflation

Post by kenner » Thu Jul 29, 2010 11:50 am

http://www.nytimes.com/2010/07/30/busin ... ed.html?hp

Opinions at the Fed differ, but this may be of interest to investors. I read on another post here recently that Japan's equities market has sustained a very prolonged 75% drop in value (not sure if that post is accurate).

Anyway, this may be something investors may want to consider when deciding their asset allocations.

Grt2bOutdoors
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Post by Grt2bOutdoors » Thu Jul 29, 2010 12:14 pm

Fed governor Bullard advocates buying Treasuries in the event of deflation, meaning lower rates for both borrowing and saving/investments.
If you think there's a bubble in bonds now, what do you think will happen if they do go on an exercise of buying Treasuries?

Time to go long in nominal bonds or CD's.

fishndoc
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Post by fishndoc » Thu Jul 29, 2010 12:22 pm

For all the talk of new asset purchases, Mr. Meyer warned that there were diminishing returns — a concern that is held by several of the governors in the Fed’s headquarters.

“A new round of asset purchases would have a smaller effect than the first round,” he said. “If the F.O.M.C. returns to asset purchases, to have a meaningful effect, they would have to purchase at least $2 trillion, doubling the balance sheet.
I'll readily admit to a very limited understanding of monetary policy, but it sure sounds like the Fed is slowly backing itself into a corner with no easy way out.
" Successful investing involves doing just a few things right, and avoiding serious mistakes." - J. Bogle

fishndoc
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Post by fishndoc » Thu Jul 29, 2010 12:23 pm

GRT2BOUTDOORS wrote:Fed governor Bullard advocates buying Treasuries in the event of deflation, meaning lower rates for both borrowing and saving/investments.
If you think there's a bubble in bonds now, what do you think will happen if they do go on an exercise of buying Treasuries?

Time to go long in nominal bonds or CD's.
and also, question the wisdom of holding onto 10 year (or less) TIPS??
" Successful investing involves doing just a few things right, and avoiding serious mistakes." - J. Bogle

xerty24
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Post by xerty24 » Thu Jul 29, 2010 12:30 pm

GRT2BOUTDOORS wrote:If you think there's a bubble in bonds now, what do you think will happen if they do go on an exercise of buying Treasuries?
Well, long term rates will fall if they do this enough, at least for a while. This will be good for intermediate and long term nominal bonds.
Time to go long in nominal bonds?
Or short. Hard to say.

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fluffyistaken
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Post by fluffyistaken » Thu Jul 29, 2010 12:36 pm

Deflation would be a major problem, but at its peak Nikkei 225's P/E was something like 70+ versus current S&P500's P/E of 20 or so. So S&P500 today is already roughly valued at about a quarter of Japanese market's value at its peak.

Doesn't mean that we can't drop much lower (in fact we just got back from there), but there's no reason why deflation would necessitate a 75% drop.

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Post by Grt2bOutdoors » Thu Jul 29, 2010 1:10 pm

fluffyistaken wrote:Deflation would be a major problem, but at its peak Nikkei 225's P/E was something like 70+ versus current S&P500's P/E of 20 or so. So S&P500 today is already roughly valued at about a quarter of Japanese market's value at its peak.

Doesn't mean that we can't drop much lower (in fact we just got back from there), but there's no reason why deflation would necessitate a 75% drop.
If the economy suffers from deflation, the equities market would experience a similar effect, you can't grow earnings in a deflationary enviornment, at least not in the long run. Return of principal, would override return on principal.
The sharp returns we experienced over the last year or so, would be more of an anomaly.

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fluffyistaken
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Post by fluffyistaken » Thu Jul 29, 2010 1:16 pm

I agree, it won't be anything great. Just saying a 75% drop from current levels in a deflation is probably just as unlikely as a string of 10+% annual gains. A 75% drop would put us at PE10 level of ~5, for one thing, which only happened twice and both were ridiculously good times to buy (if you had cash). It could happen but I think it's very very unlikely. A 50% drop is more plausible. Just ask Adrian :D

allsop
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Re: Fed president says US is close to Japan-style deflation

Post by allsop » Thu Jul 29, 2010 1:37 pm

kenner wrote:http://www.nytimes.com/2010/07/30/busin ... ed.html?hp

Opinions at the Fed differ, but this may be of interest to investors. I read on another post here recently that Japan's equities market has sustained a very prolonged 75% drop in value (not sure if that post is accurate).

Anyway, this may be something investors may want to consider when deciding their asset allocations.
That Japanese stock market has still not recovered from it's crash in 1989 should give some thought for food for those that claim that it is too risky to invest abroad.

Regarding the NYT article: I suspect that Krugman might release a very small sigh of relief.

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Post by Grt2bOutdoors » Thu Jul 29, 2010 1:46 pm

fluffyistaken wrote:I agree, it won't be anything great. Just saying a 75% drop from current levels in a deflation is probably just as unlikely as a string of 10+% annual gains. A 75% drop would put us at PE10 level of ~5, for one thing, which only happened twice and both were ridiculously good times to buy (if you had cash). It could happen but I think it's very very unlikely. A 50% drop is more plausible. Just ask Adrian :D
Is that a black swan I see in the distance? :wink:

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3CT_Paddler
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Re: Fed president says US is close to Japan-style deflation

Post by 3CT_Paddler » Thu Jul 29, 2010 1:49 pm

allsop wrote:
kenner wrote:http://www.nytimes.com/2010/07/30/busin ... ed.html?hp

Opinions at the Fed differ, but this may be of interest to investors. I read on another post here recently that Japan's equities market has sustained a very prolonged 75% drop in value (not sure if that post is accurate).

Anyway, this may be something investors may want to consider when deciding their asset allocations.
That Japanese stock market has still not recovered from it's crash in 1989 should give some thought for food for those that claim that it is too risky to invest abroad.

Regarding the NYT article: I suspect that Krugman might release a very small sigh of relief.
Valuations matter. As other posters pointed out, the Japanese stock market was way overvalued at its peak. If we follow Krugman's advice, the cure will be worse than the disease. Strange that Germany has enacted austerity measures, yet it is doing better than us. Maybe they have experienced something we haven't.

Beagler
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Post by Beagler » Thu Jul 29, 2010 1:53 pm

GRT2BOUTDOORS wrote:Fed governor Bullard advocates buying Treasuries in the event of deflation, meaning lower rates for both borrowing and saving/investments.
If you think there's a bubble in bonds now, what do you think will happen if they do go on an exercise of buying Treasuries?

Time to go long in nominal bonds or CD's.
You're in good company with your thoughts about avoiding Treasuries http://tinyurl.com/29eo8k5
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.

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fluffyistaken
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Post by fluffyistaken » Thu Jul 29, 2010 2:07 pm

GRT2BOUTDOORS wrote:
fluffyistaken wrote:I agree, it won't be anything great. Just saying a 75% drop from current levels in a deflation is probably just as unlikely as a string of 10+% annual gains. A 75% drop would put us at PE10 level of ~5, for one thing, which only happened twice and both were ridiculously good times to buy (if you had cash). It could happen but I think it's very very unlikely. A 50% drop is more plausible. Just ask Adrian :D
Is that a black swan I see in the distance? :wink:
If you can see it, it's not a black swan :lol:

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Adrian Nenu
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Post by Adrian Nenu » Thu Jul 29, 2010 2:24 pm

Another reason to use the global index as the basis for the equity diversification strategy.

Adrian
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Rose21
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Post by Rose21 » Thu Jul 29, 2010 3:16 pm

In Taleb's view, the black swan to watch for is a little different:
What are are potential sources of fragility or danger that you're keeping an eye on?

The massive one is government deficits. . . The problem is getting runaway. It's becoming a pure Ponzi scheme. It's very nonlinear: You need more and more debt just to stay where you are. And what broke [convicted financier Bernard] Madoff is going to break governments. They need to find new suckers all the time. And unfortunately the world has run out of suckers. . .

. . . Because governments can print more of their own currency, the risk comes from a rise in interest rates. . .
http://www.businessweek.com/investor/co ... 530571.htm

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Re: Fed president says US is close to Japan-style deflation

Post by Specialized » Thu Jul 29, 2010 3:20 pm

3CT_Paddler wrote:
allsop wrote:
kenner wrote:http://www.nytimes.com/2010/07/30/busin ... ed.html?hp

Opinions at the Fed differ, but this may be of interest to investors. I read on another post here recently that Japan's equities market has sustained a very prolonged 75% drop in value (not sure if that post is accurate).

Anyway, this may be something investors may want to consider when deciding their asset allocations.
That Japanese stock market has still not recovered from it's crash in 1989 should give some thought for food for those that claim that it is too risky to invest abroad.

Regarding the NYT article: I suspect that Krugman might release a very small sigh of relief.
Valuations matter. As other posters pointed out, the Japanese stock market was way overvalued at its peak. If we follow Krugman's advice, the cure will be worse than the disease. Strange that Germany has enacted austerity measures, yet it is doing better than us. Maybe they have experienced something we haven't.
I think that's a good point. Krugman doesn't seem to address the fact that government debt always has to be paid off via taxes (result in lower growth) or inflation (erode the value of everyone's savings). I guess it's theoretically possible that government stimulus could set off an explosion of real economic growth that could solve all our problems. AFAIK, no economist of any school of thought sees that on the horizon.

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zblongladder
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Re: Fed president says US is close to Japan-style deflation

Post by zblongladder » Thu Jul 29, 2010 3:41 pm

Specialized wrote:
3CT_Paddler wrote:
allsop wrote:
kenner wrote:http://www.nytimes.com/2010/07/30/busin ... ed.html?hp

Opinions at the Fed differ, but this may be of interest to investors. I read on another post here recently that Japan's equities market has sustained a very prolonged 75% drop in value (not sure if that post is accurate).

Anyway, this may be something investors may want to consider when deciding their asset allocations.
That Japanese stock market has still not recovered from it's crash in 1989 should give some thought for food for those that claim that it is too risky to invest abroad.

Regarding the NYT article: I suspect that Krugman might release a very small sigh of relief.
Valuations matter. As other posters pointed out, the Japanese stock market was way overvalued at its peak. If we follow Krugman's advice, the cure will be worse than the disease. Strange that Germany has enacted austerity measures, yet it is doing better than us. Maybe they have experienced something we haven't.
I think that's a good point. Krugman doesn't seem to address the fact that government debt always has to be paid off via taxes (result in lower growth) or inflation (erode the value of everyone's savings). I guess it's theoretically possible that government stimulus could set off an explosion of real economic growth that could solve all our problems. AFAIK, no economist of any school of thought sees that on the horizon.
http://www.npr.org/blogs/money/2009/02/ ... esson.html

Japan's fiscal austerity was what caused their lost decade. Germany might be doing better at the moment, but its austerity measures will likely stagnate growth in the long term.

Eureka
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Post by Eureka » Thu Jul 29, 2010 3:48 pm

The most disturbing thing about Bullard's turnaround -- coupled with Bernanke's recent statement about the extreme uncertainty of the economic outlook -- is that it indicates the Fed is flying blind with empty gun magazines. This makes it more likely to do the wrong thing at the wrong time.

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Taylor Larimore
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Post by Taylor Larimore » Thu Jul 29, 2010 3:49 pm

This conversation has drifted from the effects of inflation/deflation on our investments into a discussion of various economic policies which is prohibited.
Last edited by Taylor Larimore on Thu Jul 29, 2010 3:50 pm, edited 1 time in total.
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Post by walkinwood » Thu Jul 29, 2010 3:50 pm

Having spent my career in the highly deflationary (on a unit price & price/performance basis) computer industry that is thriving; and having seen the immediate gratification behavior of the American consumer, I wonder if deflation in the US today will have the same outcome as Japan (a nation of savers) experienced.

This thought is not based in any theory or calculations - just a thought.

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