This was an interesting book.? It is well written, and I share some of the points of view of the authors.? That said, there are a bunch of things that I take issue with in the book.
The style of the book was engaging.? I liked the way that the authors used two fictional characters, Elvin Greedo, and Neo Fyte, to illustrate the decision-making processes of amateurs.? I particularly appreciated the growth of the lesser/younger Neo, as he worked to learn, versus his initially more smarter/successful brother-in-law Greedo.
There is a problem, though.? This book takes an inflationist viewpoint.? I largely but not entirely share that viewpoint.? There is the bias, commonly stated as “What else can the government do but encourage the central bank to inflate away the debt?
There are other possibilities: the government could raise taxes dramatically and pay off all existing debts/claims.? Or, the government could pay off domestic claims, and refuse to pay foreign claims, or vice-versa.? It depends upon whom they are more afraid.
I think the inflationist view is most likely, but to me it is a two-out-of-three odds.
Thew book takes you through what you would do in order to preserve purchasing power in a bond portfolio through a crisis where there are significant municipal defaults amid inflation.? If that is not the scenario we get, this is not the right book for you.
That said, the book understands the complexities of markets.? Cycles aren’t simple; they don’t occur on schedule, and there are often fake-outs.? That said, the narrative with Neo and Greedo takes place too rapidly.? A crisis the size that the authors are purporting would take longer to play out.
Also, any crisis/recovery might be far more uneven than the book posits.? Think of the ’70s where no one knew what to do.
Quibbles
The book does not discuss the difficulties inherent in inverse and leveraged ETFs, in how they are short-term vehicles that do not necessarily achieve a long term result.
I also did not appreciate the plugs for Marilyn Cohen’s newsletter.? One or two would have been okay, but more is distasteful.
I also found it amusing that the author thinks Wisconsin and Maryland are safe states.? Also that they focus on a few sorts of bonds that are “full faith and credit” of the US government, to the exclusion of others.
I also did not appreciate the nuclear winter rhetoric.? There are things that balance in this world; if China starts selling Treasuries, the dollar will fall, and US exports will thrive.? That is what brings balance.
Finally, I could not use the flash drive that came with the book, which was okay, because I got the data from their website.? The password is in the book.? I did not try out the excel spreadsheet, because I personally don’t have a lot of bonds.? That is another solution to the inflationist problem.? Don’t own bonds denominated in US dollars.
Who would benefit from this book:
Anyone with a big bond portfolio that is sleepy and unconcerned about looming risks could benefit from this book.? The book isn’t perfect, but it will make you think more than most books will.
If you want to, you can buy it here: Surviving the Bond Bear Market: Bondland’s Nuclear Winter.
Full disclosure: This book was sent to me without my requesting it.
If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)
Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.
FWIW, Hoisington view via Pracap:
http://pragcap.com/hoisington-qe2-has-been-a-spectacular-failure
Time will be required to reestablish balance sheets to more normal levels, and in the interim disinflationary/deflationary tendencies will be ascendant. This environment is favorable for holders of long dated Treasuries. Positioning for an inflation boom will prove to be disappointing.?
Now they are a lot smarter than I am, but part of me can’t help but wonder if they are permabulls on bonds. I used to be firmly in the deflation camp due to the contraction in credit I think is going to last for years, but it seems to me the monetary policy is hell-bent on reinflating the system.
Who knows how long Bernanke will be the captain of the ship, but as long as he is doesn’t it seem like the lesson of the last 2 years is he will do absolutely everything to fight deflation?
Hoisington, Shilling, MMT and a few others versus PIMCO and many others.
Hoisington I respect. PIMCO does not make their money off their economic forecast, but off of quant trading.
I share the inflationist view, but do not hold it in entire, mainly because of Hoisington. I have my doubts.
But much of this comes down to what policy the government chooses… I think each side embeds an assumption that the government/central bank does things their way.
it should be mentioned that the US has not experienced a significant drop in CPI since 1934 (when FDR defaulted on gold backed dollars).
Everyone’s poster child for deflation after a credit bubble collapse is Japan. Look at Japan’s HCPI from 1990 to 2010, and you will see it is ***UP*** by 0.3 percent per year. 0.3% per year increases (on average) is hardly what people in the US would call inflation. But it is a POSITIVE number; it is NOT deflation. It is slightly higher (by a whopping 0.03%) if you look at 2000 to 2010 — still a positive number.
It doesn’t matter what the models say is supposed to happen. When the models predict something that conflicts with actual observation — the models are wrong.
There is no widespread deflation in Japan or the US. Bubble housing prices reverting to the mean is not deflation. iPad2 prices being unchanged is also not deflation, no matter how many ex Goldman guys claim otherwise. The money supply / credit supply models are wrong, actual real life observation is right.
The deflation scam is just political cover to allow Washington to steal money from savers to bail out bank CEOs.
It doesn?t matter what the models say is supposed to happen. When the models predict something that conflicts with actual observation ? the models are wrong.
There is no widespread deflation in Japan or the US. Bubble housing prices reverting to the mean is not deflation. iPad2 prices being unchanged is also not deflation, no matter how many ex Goldman guys claim otherwise. The money supply / credit supply models are wrong, actual real life observation is right.
Greg, can you expand here. I think you are making an interesting point here but I am trying to ascertain the full picture of what you are trying to get at. One of the conceptual things I have been pondering is that you can have ?currency debasement? without it necessarily showing up in CPI or whatever version of CPI (core, trimmed, whatever) one picks out of a hat as measured by the government.
Seems to me one conundrum is why is gold up 500%+ in the last 10+ years while long-term bond yields are down over that time frame from the perspective of ?inflation?. The only way I can square that circle (if you assume the 10+ year move in gold isn?t purely irrational) is to think that bond yields react to CPI ?inflation? while gold is reacting to some other monetary effect.
Seems like conventional wisdom is that QE has just resulted in increased bank reserves that are not lent out therefore not inflationary. Does it reduce the ?value? of the cash in your wallet? Seems to me it is a lot like the question ?does a tree make a sound when it falls if no one is there to hear it?. If I print a trillion dollars and instead of handing it out, I bury it where no one can get to it, is that ?inflationary?? Does it devalue existing currency?
I guess what I am wondering is if over the next 5-10 years we could have a lot more money ?creation? or ?printing? in terms of various central bank policies yet for whatever reason (output gap, wages, unemployment) it never really shows up in sky high CPI rates but instead maybe in certain asset classes going to sky high prices?
@Mike C:
According to academic models that we all had to learn in college, inflation is caused by the Fed printing money which then gets multiplied by the reserve banking system. If “too much” money is printed, you get inflation.
Modern theorists say the definition of “money” should also include credit, under the assumption that you can buy useless junk with your credit card just as you could with cash (credit card or HELOC, mtge refi, etc). These theorists seem to ignore that credit is a two sided beast — one guy (debtor) gets to spend, another guy (creditor) does not.
We have these macro-economic models, written by Nobel prize winning PhDs, so they must be correct. Lets not mention all the flaws in CAPM or Black-Scholes or other models.
According to the deflationist camp, including the inexperienced guy running the Fed, the US is/will face horrible deflation because the money/credit supply is collapsing.
Of course, if anyone really believed this nonsense — they would have argued that inflation was running 15% per annum from 1998-2007 during the credit bubble. No one made that argument, and Fed Funds never reached anything close to that level.
But now, with housing prices reverting to their long term trend line, we are told that all those annoying ISLM models are forecasting crippling levels of deflation, and thus the Fed must run inflationary policy to fight this deflation that we cannot see.
——
The problem with ISLM, like all models, is that it is just a theory. Its a way to help try to wrap your head around the broad economy. It is not a scientific fact or anything even close.
A map (like the one in many GPS systems) is an example of a model (a model of the road system). Maps are a useful tool, but if the map says to turn down a road that has been closed — guess what? The map is wrong.
My favorite quote (which has a hundred variations) is: “Every ship at the bottom of the ocean has a set of charts on it.”
Bernanke is focused on his charts that he seems not to have noticed the ship is sinking.
We are seeing prices of all sorts of things WAY up. As many people have pointed out (PIMCO’s Gross is just the “most famous” to say it) — the USA can no longer pay its debts in real terms. It must inflate to survive. The big banks are in essentially the same boat.
The political elite picked a nitwit to run the Fed, one they knew would see deflation everywhere and would run massively inflationist policies.
Everyone knows deflation is a lie — but the political elite need inflation to survive. They will redefine CPI as much as needed to justify running inflation. Bad for cash, bad for bonds, good for certain other asset classes.
This is already a very long “comment” and I don’t want to monopolize David’s blog. I don’t think he allows guest posts, so maybe he will do a post on which assets might benefit
I don’t mind long comments at my blog; in fact I like them. I like a good debate.
I just think that many talented posters might benefit from having their own blog; their content should get more bandwidth than those who read the comments here.
One other note: I get a decent amount of notice at Seeking Alpha, but I wish everyone who comments there on what I write would comment here. I don’t have time to monitor two sites.
David – a friend of mine is actually trying to get more readers for his blog. Do you allow “advertising” other blogs here?
PS – Seeking Alpha has some great comments, and some that…. um… I don’t know a diplomatic way to characterize the others. It takes all kinds, but oh boy
You can place a comment that references his blog, and I will accept it, whether it is relevant to a post or not. Your friend can also e-mail me to review his blog. If it is good enough, I will add it to my blogroll, and I will occasionally comment on it.
Thanks… I will pass your info along
Measurement issue as well?
http://www.cnbc.com/id/42551209
“After former Federal Reserve Chairman Paul Volcker was appointed in 1979, the consumer price index surged into the double digits, causing the now revered Fed Chief to double the benchmark interest rate in order to break the back of inflation. Using the methodology in place at that time puts the CPI back near those levels.
Inflation, using the reporting methodologies in place before 1980, hit an annual rate of 9.6 percent in February, according to the Shadow Government Statistics newsletter. “
When I was getting my MBA back in 2000, I had an accounting professor who jokingly coined the term EBE referring to the manipulations companies would do on their income statements….Earnings before Expenses.
When you look at food, energy, healthcare, college education and the weightings, I sometimes wonder if the reported inflation should be called IAIR…inflation after inflation removed…basically subtract out, substitute, or underweight anything with high inflation.
Seems to me the healthiest thing long-term would be to purge all the rotten debt from the system and allow a Great Reset to occur where consumer prices and asset prices are based on actual income and not credit spending. Seems to me there is key link between credit based spending and inflation…houses a few years back….college education. Not that I will hold my breath.
Taking CPI numbers from the St Louis Fed (actually this graph shows yoy pct changes) … CPI was already into double digits before Volcker arrived.
http://research.stlouisfed.org/fred2/graph/?chart_type=line&s%5B1%5D%5Bid%5D=CPIAUCSL&s%5B1%5D%5Btransformation%5D=pc1
CPI had been trending upward since 1965-ish, but it wasn’t until 1979 when the government finally acknowledged the inflation issue that had been building for ~15 years
I would not be surprised if history repeats itself (or rhymes) after Arthur Burns-Berknanke leaves office. The issue IMHO will be whether the next Paul Volcker will want to tolerate the corporate culture of Washington DC …
David,
Blog post suggestion here as I am very interested in your opinion. To what degree do you think the market rally we’ve seen since summer 2010 is QE 2 induced:
http://www.zerohedge.com/article/deja-vu-all-over-again-jeff-gundlachs-latest-set-contrarian-observations
Page 36
Or reacting to improved “fundamentals”
http://oldprof.typepad.com/a_dash_of_insight/2011/04/can-investors-survive-the-end-of-qe-ii.html
I’m trying to think through the asset allocation question and amount in equities as we near the end of QE2
Newman!!!! (second link)
As for the QE2 question… my two cents would be to look at the S&P, denominated in Euros (or in barrels of oil, bushels of soybeans, etc). I am picking Euros because that is most of the so called USD “index”
It is not exactly a secret that Washington wants to devalue the US dollar. If you have 10 feet of lumber, and then the King declares a foot to be 11 inches instead of 12, suddenly you have 11 feet of lumber (plus or minus)
Its the exact same piece of lumber, but now its 11 feet. Its the exact same group of 500 large capitalization companies, but now…