Just a heads-up for all of my American friends reading David’s blog, today the bubble is in panic. Right now the TSX (Canada’s main stock index) is down 5%, about 600 points, and markets globally are sinking too. If this translates to the US open tomorrow, the DJIA would be down 600 also.

Get ready for the panic, unless central banks globally act to try to forestall it. Given their fairly ineffective efforts so far, it might be akin to King Canute commanding the tide…

Some fantastic bargains are beginning to show up, but it’s hard to fight the crowd all trying to squeeze through the door on the way out.

Steve

I think there is a great confusion amongst many government officials and market participants between prices and inflation. Even during the hard money 19th century, there were price booms/busts and cycles. This is econ 101 whether one is Austrian or Keynsian.

The value of the US dollar was relatively stable for about 100 years even with all of the boom/bust cycles. Ag and energy prices are a perfect example of this and Kondratieff’s cycle work on prices holds up regardless of hard or fiat money. Why is this? Because the long term balance between supply and demand for hard to secure resources can get WAY out of line on the upside and downside. As Jim Rogers says, there hasn’t been a major oil field discovery in over 30 years! Global inventories for many ag commodities are falling fast.

These developments create cyclical and even secular price trends – but that is not inflation. That is free market economics. Inflation is the destruction of purchasing power on a permanent and not cyclical basis. Since 1913, the Fed has been THE force, along with deficit spending, behind massive inflation.

As for the “bond bubble”, it seems to me that the term bubble is overused. I often wonder when I hear Bill Gross talk about the “real” rate based on “core inflation”, whether he is just talking his book or really that dumb.

If one believes that the CPI is a reasonable measure of a standard of living, then the current one is fraud. It is more of a “standard of existance” index rather than standard of living. That is the root nature of substitution adjustments.

As John Williams at Shadow Statistics calculates, the pre-Boskin commission CPI is running in the high single digits. I think anyone who is honest about their personal inflation rate would concur that is reality. So let’s assume that policy should be determined based on consumer prices (I don’t agree), then the real 10 year yield is probably around a negative 3-5%. I disagree with David in so much as even a 300-500 bps spread would simply result in a real yield of -2 to 0.

As much as I think the stock market is in trouble over the long term, I’d rather own stocks than most bonds at these price for a 10 year horizon. Of course, owning short duration debt in strong currencies (like the Yen) and some gold is probably better than either!