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August 10, 2010 – Comments (14) | RELATED TICKERS: GLD , SLV

I like how the only guide we have to our immediate future is the past. If someone predicts something for the stock market, or for commodities, or for inflation, every response you will see is based on history. Little to no thought is given to cause-and-effect.

You want history? Go back and find how many times there was hyperinflation in the Weimar Republic. Just once? Do you think when the Austrian economists were warning about inflation they had historical examples of hyperinflation to point to in the Weimar Republic? People laughed them out of the public debate, and they are still derided, even though their predictions came true. Their predictions have always come true, in fact, because they are not limited to historical example, but rather have a clear, accurate understanding of cause-and-effect. 

Is there any intelligent reason to expect the U.S. stock market to beat inflation in the next 3-5 years? If so, what causes and effects do you see leading to that? Aren't the most reasonable, most lucid, most successful economists predicting high inflation, low stock returns, lower bond returns, and the commodity bull market to continue, for at least another 3-5 years (perhaps longer, depending on government policy)?

I'm not presenting evidence of my own here. You might think that discredits me, but I just want you to think about your epistemology. You evaluate data, regardless of whether or not you ever think about your methodology for evaluating data. Give some thought to what you consider to be reliable, and why. People are told that FDR pulled America out of the Great Depression, and they blithely take that for granted, even though FDR was the first president to preside over a depression that long and deep. So why give him credit for doing what may have happened faster and better without his help? Too few people ponder such a question.

If government expenditures (even nonmilitary spending) and regulatory agency employment and the length of federal regulation all grew under George W. Bush, why is he considered a free market president? How is free market defined? Is it defined by those who believe in it, or by those with a vested interest in making a straw man out of it?

If Obama's policies (foreign and domestic) are almost indistinguishable from Bush's, why expect different results? Is there some magic to having a (D) after your name for two years on C-Span? Do his mellifluous words (or his melanin) imbue his policies with power that those same policies lacked under Bush?

My basic contention is this: just because some predicted economic calamity is unprecedented is no reason to believe it couldn't happen. For everything that happens, there's a first time. Why be unprepared?  

14 Comments – Post Your Own

#1) On August 10, 2010 at 6:21 PM, FleaBagger (29.74) wrote:

I also want to solicit opinions about JAG.

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#2) On August 10, 2010 at 6:22 PM, FleaBagger (29.74) wrote:

The stock, not the show. I already know the show is Norris-fab.

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#3) On August 10, 2010 at 6:52 PM, whereaminow (22.35) wrote:

Economists that champion empirical evidence often have no empirical evidence.

David in Qatar

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#4) On August 10, 2010 at 7:00 PM, goalie37 (91.57) wrote:

Well thought out. 

Is there any intelligent reason to expect the U.S. stock market to beat inflation in the next 3-5 years?

I have zero ability to predict markets.  But I do know that if inflation comes, it will partly be in the form of products and services becoming more expensive.  Those products and services being provided by companies I own.

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#5) On August 10, 2010 at 7:19 PM, 100ozRound (29.52) wrote:

Regarding Jag:

"Commenting on the Q2 2010 results, Daniel R. Titcomb, Jaguar's President and CEO stated, "Our second quarter operational and financial performance was sharply below our plans as a result of geo-mechanical rock issues at the Turmalina operation. To overcome this issue, our technical team has been changing the mining method from selective stoping to cut and fill, however at a slower pace than planned. We are confident the transition to a cut-and-fill method will decrease dilution and lead to improved feed grades into the plant. Although still early, we are achieving sharp improvements in the limited number of cuts mined during July with overall dilution now running approximately 12 to 15%. However, we will not have the new development and sequencing in-place until later this year required to increase the tonnage from the primary ore body at Turmalina to meet our previous targets."

Mr. Titcomb added, "Our plan to reach mid-tier status remains intact. However, we will not be in a position to provide updated production and CAPEX figures until our engineering team completes the review of new technologies that management believes should sharply reduce our capital requirements and lower our operating costs. This analysis will be completed later this fall. Based on our present mine plans, which include the changes in mining methods at Turmalina, feed grades should improve in 2011. Moreover, with the contribution of the Caeté operation, which is ramping-up as anticipated, we estimate 2011 gold production could rise nearly 40% over this year's revised outlook."

May be a good time to buy long-term calls.

 

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#6) On August 10, 2010 at 7:20 PM, 100ozRound (29.52) wrote:

I apologize for the tiny font.  It was a copy/paste and apparently the formatting followed it.

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#7) On August 10, 2010 at 8:20 PM, MegaEurope (21.46) wrote:

Do you think when the Austrian economists were warning about inflation they had historical examples of hyperinflation to point to in the Weimar Republic?

Yes, anyone who has studied economic history should be familiar with historical examples of hyperinflation before Weimar Germany.  Likewise past periods of sovereign default.  Our current circumstances are not totally unique.

Is there any intelligent reason to expect the U.S. stock market to beat inflation in the next 3-5 years? If so, what causes and effects do you see leading to that? Aren't the most reasonable, most lucid, most successful economists predicting high inflation, low stock returns, lower bond returns, and the commodity bull market to continue, for at least another 3-5 years (perhaps longer, depending on government policy)?

Have you actually quantified the returns of the supposedly "most successful" economists and money managers you listen to?  For example, I think John Paulson's 5 year returns are probably higher than Peter Schiff's and he is currently way more bullish.

 

I agree with you that we should not just accept historical trends uncritically.  Even if it is the clearest trend in the world (like the long-term superiority of stocks versus other assets) it doesn't justify itself.  It only occurs because of complex, changing underlying factors, which we have to attempt to understand in history and in the future.

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#8) On August 10, 2010 at 8:34 PM, MegaEurope (21.46) wrote:

As far as providing an "intelligent reason to expect the U.S. stock market to beat inflation in the next 3-5 years", using only cause and effect without any historical evidence introduced at all, I admit I cannot.

It is totally impossible for a person to understand every cause and effect that goes into a market price.  We have to use shortcuts like P/E ratios which are based on historical data, otherwise we would have no clue where to begin.

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#9) On August 10, 2010 at 11:19 PM, FleaBagger (29.74) wrote:

MegaEurope - I shudder to contemplate challenging you head to head again, after you pwned me last time, especially considering that you are Mega-informed about Europe, but regarding this statement:

Yes, anyone who has studied economic history should be familiar with historical examples of hyperinflation before Weimar Germany.  Likewise past periods of sovereign default.  Our current circumstances are not totally unique.

In the context, I was referring to the tendency to say that "[whatever is being discussed] has never happened in this country before, so it can't possibly happen now!" Those things were said in Germany as the clouds of hyperinflation were gathering on the horizon, and are being said about hyperinflation in the U.S. I think hyperinflation is still far-fetched, but less far-fetched with every passing month, every passing spending bill, and every Fed meeting where they remain determined to fight deflation, even though what they call deflation is outside of their control, and what they are successfully fighting is fully necessary for recovery.

So when you point to the histories of other countries, that can be instructive if it corroborates a sensible theory of cause-and-effect, but it is not sufficient if you are merely attaching yourself to anything that survives backtesting or using a misrepresentation of an historical example to justify a power grab. 

Sorry if that was unclear.

Yes, hyperinflation occurred in the Egyptian province of the Roman Empire, with grain prices, measured in Roman specie, multiplying several times within the space of a year. 

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#10) On August 10, 2010 at 11:39 PM, FleaBagger (29.74) wrote:

Oops: I was going to have more than one example, but I got distracted. Anyways, hyperinflation has happened more than once.

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#11) On August 10, 2010 at 11:53 PM, Starfirenv (< 20) wrote:

Flea- Agree.+1. Hope it's happenin' for you. Got the res, I'll see what I can do. Regards.

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#12) On August 11, 2010 at 12:01 AM, MegaEurope (21.46) wrote:

"In the context, I was referring to the tendency to say that "[whatever is being discussed] has never happened in this country before, so it can't possibly happen now!" Those things were said in Germany as the clouds of hyperinflation were gathering on the horizon"

I agree with you, we shouldn't listen to idiots.  This fallacy is too obvious to waste much time on though.

I guess I was getting a little too epistemological.  Obviously you don't believe that we should totally throw out historical assumptions, just that we should apply them carefully.  I agree.

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#13) On August 12, 2010 at 4:58 PM, FleaBagger (29.74) wrote:

And just because John Paulson is better at turning his predictions into profits than Peter Schiff is, you can't necessarily point to any of Peter Schiff's predictions as wrong. More importantly, Peter Schiff is just one of many Austrian economists who publicly predicted the crash, outlined exactly what would happen with house prices and the stock market, and warned against quantitative easing and stimulus, the courses of action being taken now.

I sort of expected a pullback in stocks, but I'm surprised at how severe the last two days have been (especially yesterday, Aug. 11). I think that if we see anything like 2008's stock returns, it would be a buying opportunity: anything backed by hard assets, or with any kind of pricing power (i.e. the power to pass higher commodity prices on to customers), is going to be inflation-resistant enough to justify buying on major dips, even in a stagflationary bear market. 

At this point, the likelihood of gold going down from these levels is approximately that of the Tea Party successfully slashing government spending. Considering the tack taken by previous Republicans, however, I'd say gold is a pretty safe bet from here. Vast increases in the national debt and the money supply seem almost inevitable, and stagflation will follow. 

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#14) On August 12, 2010 at 6:02 PM, Starfirenv (< 20) wrote:

#13- "...just because John Paulson is better at turning his predictions into profits than Peter Schiff..."
 I would respond to that by saying Schiff has never commited the equivelent of financial arson either. TMF ran a story on him recently praising how he "got it right". Disheartening to say the least, but hey, look who sits on the board of directors.

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