CPI vs. "Real" Inflation vs. Gold

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ThisDinosaur
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Re: CPI vs. "Real" Inflation vs. Gold

Post by ThisDinosaur » Sun Apr 16, 2017 3:37 am

Well one lesson I remember from that book (4 pillars) was that the best investments are usually the least popular, and that diversified risk is *always* associated with higher return. So, the relevant question is whether gold is currently seen as a "safety" bet or a "risky" bet by the population at large. My impression is that its a very popular asset right now.

Early in 4 pillars he mentions that an oz of gold could buy you a nice suit in Dante's time, and ever since. Well, google tells me right now an oz of gold is a little over $1,290 and a men's business suit is somewhere around $400. How much did a suit cost the day Nixon took office? About $30. An oz of gold? $40. (Can anyone who was around then confirm those numbers?)

OTOH, where are all the unpopular assets? I've already got lots of foreign and emerging market stock. The least popular asset I can think of is long term US bonds. Those have lots of credit risk and low expected return (basically just the yield). Buying LTTs without counterbalancing with gold is essentially a bet that deflation and low-to-negative interest rates will dominate the future, yes?

BRUTE, I agree with everything you said. And yes, I am over optimizing. But asking these questions will hopefully help me figure out WTF is going on. (Off topic: which Austrian economics book was it that gave you the warm fuzzies?)

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BRUTE
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Re: CPI vs. "Real" Inflation vs. Gold

Post by BRUTE » Sun Apr 16, 2017 10:11 am

ThisDinosaur wrote:
Sun Apr 16, 2017 3:37 am
which Austrian economics book was it that gave you the warm fuzzies?
Human Action by Ludwig von Mises. also good: Man, Economy, And State by Murray Rothbard. Rothbard got kicked out by Ayn Rand for being too Libertarian. for a different train of thought leading to similar ideas (except re central banking), anything by Milton or David Friedman.

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Dragline
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Re: CPI vs. "Real" Inflation vs. Gold

Post by Dragline » Sun Apr 16, 2017 10:18 am

ThisDinosaur wrote:
Sun Apr 16, 2017 3:37 am

OTOH, where are all the unpopular assets? I've already got lots of foreign and emerging market stock. The least popular asset I can think of is long term US bonds. Those have lots of credit risk and low expected return (basically just the yield). Buying LTTs without counterbalancing with gold is essentially a bet that deflation and low-to-negative interest rates will dominate the future, yes?
If you are looking for "the most hated" asset at a particular time, go find interviews of Jim Rogers, whose whole theory of investing revolves around accumulating such things until they become popular again and then selling them. But note that he recognizes that his timing is often poor and his investments can take years to play out.

Right now he is recommending Russia, oil, agricultural commodities and places like Kazahkstan and North Korea, although he admits that he has not found any way to invest in North Korea at this time. See https://www.youtube.com/watch?v=KXyuUN9rCwk and https://www.youtube.com/watch?v=ZM9bokmUr0w

I tend to look at these things on their 52-week ranges. Oil (XLE, XOM) is definitely in the lower quartile. LTT are down there, but have recently made gains. Some REITS are down (healthcare, some commercial property).

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Riggerjack
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Re: CPI vs. "Real" Inflation vs. Gold

Post by Riggerjack » Sun Apr 16, 2017 12:58 pm

where are all the unpopular assets
As I said above. Agricultural commodities that just had bumper crops and companies with insane amounts of debt, and losses, and projected dividend cuts. IE, JJG and FTR.

In this environment, about the only unpopular assets are extremely risky assets. Now, once you accept this, think of how "safe" the standard assets are currently.

Then start looking around for a bet you are comfortable making. Or put your cash under your matress. Now is the time to get used to risk. If you don't, this agonizing you are doing over what is "best", will be with you until you do.

If it helps, I think if it as points. I buy 401k points, and real estate points. When I have enough points, I can retire. In the end, it is all just points.
is Riggerjack investing the entirety of his FIRE money at this particular point in time
I have real estate that I am keeping, some I am preparing to sell, and my 401k. The 401k is usually fully invested. Currently, I have some in cash accounts, and some in index funds, and some in JJG and FTR. Which is functioning as a long term short of the indexes I would normally be investing in.

But for some reason, when I test for risk tolerance, I test off the charts. So, please factor that in, when looking at my choices. ( I think this is a side effect of watching " Rudy" too many times. Eventually the underdog will rule! Right?)

@ this dinosaur: In the end, it is only points. Fear is only relevant to real life. As you get older, and see that your choices to optimize X resulted in less optimal results for Y, and in the end Y was more important than you realized, you will start to understand that optimal is still not ideal.

You are buying experience, the sooner you start buying it, the less it will cost, since your pool of points is smaller. But find something you are comfortable with. Do that before it loses half its value, so you can stick with your strategy, rather than lock in your loss by selling low.

ThisDinosaur
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Re: CPI vs. "Real" Inflation vs. Gold

Post by ThisDinosaur » Fri Apr 21, 2017 12:42 pm

Ludwig von Mises wrote:A tendency prevails to make a sharp distinction between such purely
speculative ventures and genuinely sound investment. The distinction
is one of degree only. There is no such thing as a nonspeculative
investment. In a changing economy action always involves speculation.
Investments may be good or bad, but they are always speculative.
A radical change in conditions may render bad even investments
commonly considered perfectly safe.
https://mises.org/sites/default/files/H ... tion_3.pdf
A convergence of the point Brute has been making with the point I have been making. So, so I'll rephrase this way:
Is gold's diversifying role in a portfolio Dependent or Independent from its trajectory after the time of purchase?
IOW, what evidence is there that a portfolio with a large allocation to gold can outperform a similar portfolio without it *under the condition that the gold is over priced at the time of purchase*.
Dragline wrote:Right now he is recommending Russia, oil, agricultural commodities and places like Kazahkstan and North Korea
Jim Rogers. Perfect. It's comforting to find successful authorities to confirm what I'm already thinking.
Riggerjack wrote:In this environment, about the only unpopular assets are extremely risky assets. Now, once you accept this, think of how "safe" the standard assets are currently.
That's pretty much what Bernstein would say, I think.

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BRUTE
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Re: CPI vs. "Real" Inflation vs. Gold

Post by BRUTE » Fri Apr 21, 2017 5:45 pm

it seems intuitive that a portfolio with a large part invested in gold, bought at a high price, wound perform worse than the same portfolio with the gold part invested in another asset, given that the other asset performed better than gold during the same period. gold is only good to balance portfolios if it counters the fall in the other asset classes better than what it substitutes for.

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Riggerjack
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Re: CPI vs. "Real" Inflation vs. Gold

Post by Riggerjack » Mon Apr 24, 2017 7:37 am

So, you play on portfolio charts. Why not just model the portfolio you want, without the gold to see the results?

ThisDinosaur
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Re: CPI vs. "Real" Inflation vs. Gold

Post by ThisDinosaur » Mon Apr 24, 2017 10:11 am

@Riggerjack
I have. Its not as good. ie, lower withdrawal rate. I'm comparing all stock (TSM/DM/EM) to a 5 way allocation (TSM/DM/EM/GLD/LTT). The benchmark calculator shows the all-stock version outperformed the 5 asset version most years. So if I disregard the Nixon shock, all-stock might be better. Portfoliocharts doesn't offer a way to correct for starting CAPE, interest rate, and gold price relative to historical average. My question is whether that is relevant or not. Can we depend on these assets to remain anti correlated (and the portfolio CAGR to be high) if they are all currently correlated and expensive?

@BRUTE
If I understand you, you're saying I need to pick the asset that *will* be anti correlated to the rest of my portfolio, instead of the one that *was* historically.

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BRUTE
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Re: CPI vs. "Real" Inflation vs. Gold

Post by BRUTE » Mon Apr 24, 2017 12:14 pm

correct. unfortunately, that includes speculation. history is a guide post in how assets might behave in the future, but brute has been told that past performance is no guarantee of future results.

ThisDinosaur
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Re: CPI vs. "Real" Inflation vs. Gold

Post by ThisDinosaur » Mon Apr 24, 2017 12:59 pm

What does BRUTE base his investmemt decisions on?

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BRUTE
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Re: CPI vs. "Real" Inflation vs. Gold

Post by BRUTE » Mon Apr 24, 2017 6:47 pm

brute picks a portfolio he likes intuitively and then makes up rationalizations after the fact by looking at Portfolio Charts.

ThisDinosaur
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Re: CPI vs. "Real" Inflation vs. Gold

Post by ThisDinosaur » Tue Apr 25, 2017 9:03 am

If you're going to mock me, you should be more direct about it. I'm good with nuance, but not subtlety. OTOH if serious, how remarkably self-aware of you.

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Re: CPI vs. "Real" Inflation vs. Gold

Post by enigmaT120 » Tue Apr 25, 2017 9:56 am

I sometimes wish I had intuition.

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Dragline
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Re: CPI vs. "Real" Inflation vs. Gold

Post by Dragline » Tue Apr 25, 2017 10:24 am

Oh, I'm sure you have it. We all do. Trouble is, its often wrong, and in a random fashion. ;-)

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BRUTE
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Re: CPI vs. "Real" Inflation vs. Gold

Post by BRUTE » Tue Apr 25, 2017 12:28 pm

ThisDinosaur wrote:
Tue Apr 25, 2017 9:03 am
If you're going to mock me, you should be more direct about it. I'm good with nuance, but not subtlety. OTOH if serious, how remarkably self-aware of you.
brute isn't sure his mental model is complex enough for the distinction.

history of this insight:
- brute reads about asset allocations
- brute likes the Global Market Portfolio because it's maximally diversified
- brute likes the Golden Butterfly because GOLD and it's pretty diversified
- brute invests all his money into high-risk equities
- brute retrofits his strategy to match his behavior, and decides that the stability of GMP/GB are really not for him and they're too complex anyway, right? and also past performance doesn't guarantee future results, so fuck that..

ThisDinosaur
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Re: CPI vs. "Real" Inflation vs. Gold

Post by ThisDinosaur » Tue Apr 25, 2017 1:12 pm

I feel similar:
I like GMP because owning the market means you beat >50% of all investors.
I like GB or similar because of strong evidence of 5% withdrawal rate.
I have all my money in equity indexes because of "stocks for the long run is my religion" legacy investments.
I want my future strategy to be based on the best available information, but I think changing strategy too frequently is probably costly and stupid.

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bryan
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Re: CPI vs. "Real" Inflation vs. Gold

Post by bryan » Tue Apr 25, 2017 2:26 pm

Hello politics in CPI data: http://worthwhile.typepad.com/worthwhil ... wrong.html
A prominent theme of my career has been to reveal anomalies in what has been put forward as evidence. One instance is known only to me. In 1961 I was doing research for my doctoral thesis at what was then called the Dominion Bureau of Statistics. I wanted to know spatial price level differences across Canada. The data were collected for several major cities across the country but only changes over time for those cities were published as the CPI. I wanted geographical differences. I was on good terms with Simon Goldberg, the Assistant Dominion Statistician and he said , OK just go into the archive where the original reports from the cities were stored and dig out what you need. So I did.

What I discovered is that the clerks who recorded the data were under an instruction that, since the CPI was to represent prices paid by better off working class families, to edit out any rental figures what were above a designated threshold. By the end of the 1950s they were throwing out more than half of the reported rents. There had been a serious downward bias in a price that got fairly heavy weight in the CPI. I reported that to Simon but I don't think any alteration was ever made. It was water under the bridge. - Marvin McInnis, personal communication, November 23, 2016

Good resource: http://bpp.mit.edu/

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BRUTE
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Re: CPI vs. "Real" Inflation vs. Gold

Post by BRUTE » Tue Apr 25, 2017 5:47 pm

government inflation data bogus? no way.

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Riggerjack
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Re: CPI vs. "Real" Inflation vs. Gold

Post by Riggerjack » Wed Apr 26, 2017 7:42 am

Oh, were we talking about Canadian CPI?

Honestly, I don't know anything about that.

ThisDinosaur
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Re: CPI vs. "Real" Inflation vs. Gold

Post by ThisDinosaur » Wed Apr 26, 2017 7:49 am

@Riggerjack
No. I'm in the US. But if I see enough stuff like that about US CPI, I'll be more comfortable upping my gold allocation.

@bryan
Good stuff. The MIT site seems to focus on very recent price data only, though. Nothing before 2008, that I've seen.

ThisDinosaur
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Re: CPI vs. "Real" Inflation vs. Gold

Post by ThisDinosaur » Thu Apr 27, 2017 11:13 am

A History of Interest Rates wrote:Instead of overemphasizing risk, another basic difference from today should be emphasized—the relative inconvenience of lending or investing
money in ancient times. A lack of institutional intermediaries would
today bring our credit structure to a standstill. The mechanics of lending
as individuals to other individuals on pawns or real estate or general
credit is complex, burdensome, and potentially unpleasant, however giltedged
the collateral. This difference of convenience alone may outweigh
the factor of risk in explaining the tendency of ancients to hoard metal
and invest in land.
So one reason all investments are currently overpriced is the ease with which we can trade them. Compare a face-to-face exchange of livestock at a high discount rate vs. buying a diversified ETF on your smart phone. The role of gold was to protect your principle from the high risk of default. Gold's success in the modern era was due to -Surprise! The US just ran off with your money. I'm having trouble squaring this with the fact that the paper Tyler posted (https://snbchf.com/swissgold/gold/gold-silver-prices/) observes gold having positive correlation with non-US currencies. Maybe because flight-to-gold in panic is a largely American thing to do.

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