Wednesday, March 30, 2016

Deflation worries are not over

A jump in the core U.S. inflation rate has persuaded many people that deflation is no longer a threat. But even those who never subscribed to the idea that consumer prices might decline for a sustained period should be wary of misreading the data and dismissing the risk of deflation. 
When prices rise, people think the devil or other forces outside their control are at work. But when they pay less, it’s because they’re smart shoppers. 
Consumers (and even economists) also aren’t aware that there's deflation in goods prices. In December 2015, the goods component of the inflation index fell 2.2 percent. Furthermore, U.S. consumers aren’t spending the windfall from lower gasoline prices and thereby spurring the economy and prices. 
There’s also a link between the prices of goods and the costs of services, so the annual inflation rate for services has declined to 1.9 percent in December from as high as 2.5 percent in May 2014. (Laid-off oil field workers don’t take as many vacations; they frequent bars and restaurants less often.) 
In addition, inflation worriers tend not to look beneath the headlines to acknowledge that the CPI measure considerably overstates inflation. Many quality improvements aren’t reflected in prices, despite what are called hedonic quality adjustments designed to capture improved performance. A new laptop, for example, may cost the same as its predecessor but have 10 times the computing power. Also, the CPI has fixed weights and doesn’t reflect the fact that when oranges are cheaper than apples, people buy more oranges. 
So, in my judgment, deflation remains not just possible but probable..... And this matters because the value of the consumer price index reverberates through the economy, ranging from cost-of-living assessments to the returns on U.S. government inflation-linked debt to how the Federal Reserve shapes monetary policy.
DYI Comments:  DYI agrees with Shilling that deflation being a very probable out come.  I put deflation in the range of negative -1% to -3% starting at any time.  However, when we move into the 2020's Federal commitments(liabilities) for Social Security and Medicare will be expanding at a feverish pace.  Around 2022 one half of the Boomers will be receiving Social Security and Medicare with the remaining Boomers piling in all the way through the 2020's.  Governments being as they are will only tax the populous just below the boiling point and then pay for the remaining dollars needed through the hidden tax of inflation.  Between now and 2022 expect on again and off again(very low inflation) deflation.  Even the possibility of negative interest rates is on the table as well.

Why Gold can beat Currencies around the world including US Dollar


Gold vs US Dollar and other currencies 
I don't understand why the world is so enthusiastic about the US Dollar. I think in the long run will be a weak currency. I think the most desirable currency will be gold, silver, platinum and palladium. I still think the mining sector has embarked on a new bull market. 

DYI Comments:  Whether or not the mining sector has embarked on a new bull market is not necessary.  The mining stocks have been beaten down on average(before this resent rise) of around 70% plus.  The reason of course is that all precious metals are way off their highs and hence many of this highly leverage companies are either going bust, selling off assets, merging or those few that have financial muscle buying mines at give - away - prices.  Simply having this beleaguered industry return to profitability will result in higher stock prices without the necessity of having a bull market in precious metals.
Below Vanguard Precious Metals Mining Fund symbol VGPMX
Vanguard Precious Metals and Mining Inv (VGPMX)
The bounce off the bottom for VGPMX is 50% and yet prices remain on the give - away - table. Here is DYI's model portfolio.
   Updated Monthly

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION -  3/1/16

Active Allocation Bands (excluding cash) 0% to 60%
87% - Cash -Short Term Bond Index - VBIRX
13% -Gold- Precious Metals & Mining - VGPMX
 0% -Lt. Bonds- Long Term Bond Index - VBLTX
 0% -Stocks- Total Stock Market Index - VTSAX

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DYI

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