by Martin Weiss
Q: I see disturbing similarities between this crisis and The Great Depression. Both were triggered by the bursting of massive debt bubbles, for instance. But this time, the government is doing so much more to pump up the economy. So is it safe to assume that this crisis will be a lot less severe than the 1930s?
A: No, it's not safe to make that assumption. True, the government's massive intervention is a major factor. But there are also powerful factors that can offset or even overwhelm the government's impact:
* Broader speculative bubbles. In the years prior to the Crash of 1929, the bubbles were limited primarily to stock speculation and restricted to a minority of the population. This time, the speculation has engulfed not only stocks but also millions of homes, commercial properties, local governments, corporations, and entire nations.
* More household debt. U.S. households are in far greater debt today with much less savings. In the 1930s, mortgages were rarer and less onerous. For all practical purposes, second mortgages, home equity loans, creative financing, and credit cards didn't even exist. Today, they are everywhere in our society.
* U.S. is now a debtor nation. In the 1930s, the U.S. had large surpluses of foreign reserves and was a creditor to the rest of the world. Now, it has minimal reserves and huge foreign debts. As a result, there's ultimately a limit to how much Washington can throw good money after bad to save the U.S. economy before foreign investors rebel, refusing to continue providing abundant credit.
* Derivatives. In the early 1930s, derivatives were virtually unknown — a tiny niche of little consequence. Today there are nearly $600 trillion in notional value derivatives globally, according to the Bank of International Settlements. The forced liquidation of many of these derivatives could frustrate government efforts to revive credit markets, driving the global economy into a deeper decline than would normally be expected.
Q. A major factor that deepened the Great Depression was the Smoot-Hawley Act, which helped set off a global trade war as each nation rushed to protect its own domestic market. But today, it's unlikely we will repeat that mistake. So doesn't that imply a less severe decline?
A: Yes, it does. However, today there's another kind of economic war brewing: The U.S. and much of the world depend much more heavily on international capital than they did in the 1930s. This reliance on foreign capital has not been a major issue as long as we had continuing growth. But in a global economic decline, there's a real danger that each nation will scramble to grab back as much of its capital as possible to help rescue its own sinking economy. If so, we would see an international bidding war for capital, driving real interest rates sharply higher and sending the global economy into a deeper decline.
Bottom line: It's too soon to say if this crisis will be less severe, equally severe, or more severe than the 1930s.
Q. The Fed is now printing money like it was going out of style. Overall, the U.S. Government has now committed $8.5 trillion in bailouts, handouts, and guarantees to stop the crisis. Won't that lead to hyperinflation and the destruction of the U.S. dollar?
A: Only if governments succeed in overcoming the deflationary forces that have gripped the world. However, in our recent Deflation Survival Briefing, we demonstrated that the deflationary forces are now hundreds of times more powerful than the government's attempts to reflate. (Click here for the transcript)
Q. Why are you so pessimistic? Isn't there a silver lining in this crisis?
A: It's those who believe in the destruction of the dollar that are the true pessimists. In contrast, I am very optimistic that Washington will not only fail to overcome the deflation, but it will also …
Fail to reverse the long-overdue liquidation of excess debts,
Fail to stop a much-needed reduction in the cost of living,
Fail to kill the incentive for Americans to work hard and make needed sacrifices,
Fail to stop America from restoring its ability to compete globally,
Fail to sabotage our capitalist free market system,
Fail to trash the dollar or create hyperinflation, and
Fail to ruin our chances for a prosperous post-Depression era.
Q. Investors can't help but notice that Washington views certain companies as “too big to fail.”; Doesn't that create a de-facto government guarantee for their stocks and bonds, making them almost as good as Treasuries?
A: No. Regardless of any government guarantees, most investors recognize they're not nearly as good as Treasuries. They see that bailouts are hotly disputed in Congress, subject to severe conditions, and far from open-ended. They see growing signs of bailout fatigue in Congress and wonder whether or not Washington will be able to fulfill all its bailout promises. That's why investors routinely accept lower yields on Treasuries, while demanding much higher yields on equivalent bank CDs or corporate bonds in bailed out institutions.
Q. This is not a question, just a point of anger. CEOs of failing companies are getting their year-end bonuses, sometimes running into the tens of millions of dollars. And at companies that have benefitted from government bailouts, those bonuses are being paid with MY MONEY!
A: I am equally angered. But this trend will end and do so very abruptly. Even if companies are not trying to qualify for government money, you will soon see their executives either accepting drastic cuts in their compensation or getting canned.
Q: I have an employment question: Which industries are likely to produce the greatest lay-offs? Which kinds of jobs are likely to continue to be reliable for myself and my kids?
A: Lay-offs will be across the board — financial, manufacturing, services, even states and municipalities. Virtually no private-sector or local-government job will be secure. For now, you can rely more on jobs with the federal Government and with companies that provide debt recovery and bankruptcy services. Ultimately, however, the most reliable source of revenues may come from self-employment or extra income you can generate from the kinds of insights you can get here in our publications or from other sources with a track record of anticipating this crisis.
Q. You've written that this depression will be short and severe and that the recovery will come quickly. Elsewhere, you've compared it to the Japanese malaise that has lasted for nearly two decades. Which is it? The answer is crucial to me because it will determine how much extra money I'll need to continue paying the bills and to keep my family secure until this crisis ends.
A: What I've written is that we hope and pray we can get it over with quickly and move on to better times. Unfortunately, the reality is that, to the degree that the government continues to intervene, it can only prolong the agony.
The main reason: Nothing the government can do changes the fact that there are tens of trillions of bad debts that must be liquidated before a sustainable recovery can begin. That debt liquidation can occur either (a) quickly in a severe decline or (b) slowly in a far longer decline. Since it's too soon to say which it will be, I suggest you plan for a minimum of three years and a maximum of ten years.
Q. With unemployment nearly doubling and consumer spending cratering, you'd think we'd be seeing headlines about record numbers of corporate and personal bankruptcies. Why haven't we?
A. It looks like you missed them, and so did a lot of other people. Perhaps it's because the headlines about GM, Chrysler, Citigroup and other disasters were so shocking, they drowned out the news. But in mid-December, the Administrative Office of the U.S. Courts reported that personal bankruptcies in the U.S. surged 30%, while business bankruptcies jumped 49% compared to 2007. Overall, bankruptcies rose 34%. Three other troubling facts:
The trend is accelerating: In the third quarter, bankruptcies were up 60% from the year before.
That was before the devastating plunge in GDP that has taken place just now in the fourth quarter, estimated at an annual rate of minus 8% or worse.
The level of bankruptcies has not yet hit new records. But that's because most bankruptcies take place toward the end of a recession; and most economists now agree that this decline could continue at least until the end of 2009.
Q. Now I understand why you were pressing me to pay off my debts for all these years! But if I follow your advice now, I won't have any cash reserves left to see my family through. And if I don't pay them off, they will cost me more and more as my dollars become scarcer and more valuable. I'm between a rock and a hard place. What do I do?
A: First, take advantage of this temporary government-inspired decline in fixed 30-year mortgage rates to refinance immediately. Grab this opportunity while you can because it will not last for long. Second, pay off all of your high-interest credit cards. Third, sock away every extra penny you save in interest to build a cash nest-egg in short-term Treasuries or a Treasury-only money market fund.
Q. Everybody agrees that this crisis will eventually end. We'll reach rock-bottom, money will begin moving again, and the recovery will commence. When that happens, what impact will the trillions of dollars Washington has injected into the economy have? Will this great deflation be followed by an even greater wave of inflation? Is there something to do now to prepare for that?
A. It's too soon to prepare for what happens AFTER this crisis. First, let's cope with the deflation. Later, if that changes, you'll have plenty of time to adjust, and we'll be there to warn you with as much advance notice as we can.
Q. A year ago, my retirement nest-egg was in great shape — plenty of money to see me through my golden years. Now, it's a smoking gun and I'm staring down the barrel at — who knows? — years, possibly a decade or more, in which stocks are likely to continue to languish or even plunge. I may never be able to retire. My best friend had already retired; now, he's looking for a job just to survive — so far, no luck. Is there hope for us?
A. Yes! When you or your financial planner estimated how much you'd need for retirement, you assumed a continuation of the highest cost of living in U.S. history, or worse. Now, the cost of many essentials is plunging, and it's very possible that the cost of living will be far lower. Therefore, if you can just preserve what you have left in your nest-egg, you'll probably be much better off than you think. Plus, if you can use some (not all) of that money to generate extra revenues with unique investment strategies that are divorced from the ups and downs of the economy, that could also make a big difference for you.
Tuesday, December 30, 2008
Wednesday, December 24, 2008
The Rise of US Dollar in Deflation Era
by Martin Weiss (edited by Alex Wong)
Many people believe the 1930s Depression was caused by the failure of the federal government to fight the decline. This time, they say, the government is doing precisely the opposite.
In reality, America's First Great Depression wasn't caused by what the government failed to do to stop it. Rather, it was largely caused by all the wild things the government did do to create the superboom in the Roaring '20s that preceded it. They dished out money to banks like candy. They let banks loan money to brokers without restraint. And they encouraged brokers to hand it off to stock market speculators with 10% margin.
But if you want to see what happens when a government intervenes aggressively after a bust, just look at Japan since 1990. Japan lowered interest rates to zero, just like the Fed is doing today. Japan bailed out banks, brokerage firms and insurance companies, much like the Fed is doing here. Japan embarked on massive public works projects, much like President-elect Obama is proposing now. But it did not end the deflation.
So what's a person to do?
If you don't need something, seriously consider selling it. Real estate. Stocks. Corporate bonds. Even collectibles if you consider them an investment. You don't have to sell everything all at once at any price. Every time the government inspires a rally in the stock market, use that as a selling opportunity. Every time the government stimulates some activity in real estate or in the economy, grab that chance as well. You can afford to wait for a temporary stabilization or recovery. Markets never go straight down. And even in some of the worst markets, there are ways to sell most assets.
As long as your cash is in a safe place, the deeper the deflation, the more your money is worth. My last word: Just make sure you keep it safe!
There is just one thing that always goes up with deflation: The U.S. dollar! By DEFINITION, when the price of investments or goods and services goes down , the value of each dollar goes UP . That's the essence of deflation. And here's the key: When the value of the dollar goes up in the United States, it inevitably goes up abroad as well.
Virtually everything that matters in the global economy — trade, commodities, GDP, debts — is measured in U.S. dollars. The dollar is the world's reserve currency. So just as we see domestically, when your dollar buys more, its value also rises internationally.
A country's currency is never valued based on how well or how poorly that particular economy is doing in isolation. It's always measured against another country's currency. So it is always valued based on how a particular economy is doing relative to another economy.
The question is, “How is the U.S. economy doing compared to the European economy, the U.K. or Australia?” In this environment, it's not a beauty contest. It's a contest of which economy is the least ugly … which leads me to the second reason the dollar is rising: The U.S. is winning the least ugly contest hands down.
The U.S. economy, despite all its troubles, is still the dominant world economy. Militarily, it's the only remaining superpower. Financially, it's still the world's capital. So it's natural that when investors are running from risk, they rush back to the dollar, bidding up its value.
There's one notable exception: The Japanese yen. Japan is the world's second largest economy and also one of the world's largest sources of capital. So when the other currencies go down, a lot of that money goes back to Japan, boosting the yen.
So in the midst of all these bear markets, if you're looking for a big bull market …
You've found it! It's the U.S. dollar. I think the U.S. dollar is in the early stages of a powerful bull market that could last for years. It's the single cleanest way to make windfall profits from the deflation.
The advantage of the currency market is that it's divorced from the stock market. The stock market could be crashing, and it would not interfere with your ability to make large steady profits in the currency market. The U.S. economy could be sinking into a depression, and it would still not interfere with your ability to make nice large steady profits in the currency market. No matter what happens in the global economy or the world's financial markets, there is always at least some major currency that's going up in value.
Currencies are measured against each other. When one is going up, the other is going down, like a seesaw. Therefore, there's always at least one currency going up. There's always a bull market in currencies. I don't recommend them for all of your money. But at a time when nearly all other investments are going down, it's a great place to get away from the disasters and find a whole separate world of investment opportunity.
I also think that it's THE ideal vehicle for average investors to profit from deflation and a rising dollar.
Many people believe the 1930s Depression was caused by the failure of the federal government to fight the decline. This time, they say, the government is doing precisely the opposite.
In reality, America's First Great Depression wasn't caused by what the government failed to do to stop it. Rather, it was largely caused by all the wild things the government did do to create the superboom in the Roaring '20s that preceded it. They dished out money to banks like candy. They let banks loan money to brokers without restraint. And they encouraged brokers to hand it off to stock market speculators with 10% margin.
But if you want to see what happens when a government intervenes aggressively after a bust, just look at Japan since 1990. Japan lowered interest rates to zero, just like the Fed is doing today. Japan bailed out banks, brokerage firms and insurance companies, much like the Fed is doing here. Japan embarked on massive public works projects, much like President-elect Obama is proposing now. But it did not end the deflation.
So what's a person to do?
If you don't need something, seriously consider selling it. Real estate. Stocks. Corporate bonds. Even collectibles if you consider them an investment. You don't have to sell everything all at once at any price. Every time the government inspires a rally in the stock market, use that as a selling opportunity. Every time the government stimulates some activity in real estate or in the economy, grab that chance as well. You can afford to wait for a temporary stabilization or recovery. Markets never go straight down. And even in some of the worst markets, there are ways to sell most assets.
As long as your cash is in a safe place, the deeper the deflation, the more your money is worth. My last word: Just make sure you keep it safe!
There is just one thing that always goes up with deflation: The U.S. dollar! By DEFINITION, when the price of investments or goods and services goes down , the value of each dollar goes UP . That's the essence of deflation. And here's the key: When the value of the dollar goes up in the United States, it inevitably goes up abroad as well.
Virtually everything that matters in the global economy — trade, commodities, GDP, debts — is measured in U.S. dollars. The dollar is the world's reserve currency. So just as we see domestically, when your dollar buys more, its value also rises internationally.
A country's currency is never valued based on how well or how poorly that particular economy is doing in isolation. It's always measured against another country's currency. So it is always valued based on how a particular economy is doing relative to another economy.
The question is, “How is the U.S. economy doing compared to the European economy, the U.K. or Australia?” In this environment, it's not a beauty contest. It's a contest of which economy is the least ugly … which leads me to the second reason the dollar is rising: The U.S. is winning the least ugly contest hands down.
The U.S. economy, despite all its troubles, is still the dominant world economy. Militarily, it's the only remaining superpower. Financially, it's still the world's capital. So it's natural that when investors are running from risk, they rush back to the dollar, bidding up its value.
There's one notable exception: The Japanese yen. Japan is the world's second largest economy and also one of the world's largest sources of capital. So when the other currencies go down, a lot of that money goes back to Japan, boosting the yen.
So in the midst of all these bear markets, if you're looking for a big bull market …
You've found it! It's the U.S. dollar. I think the U.S. dollar is in the early stages of a powerful bull market that could last for years. It's the single cleanest way to make windfall profits from the deflation.
The advantage of the currency market is that it's divorced from the stock market. The stock market could be crashing, and it would not interfere with your ability to make large steady profits in the currency market. The U.S. economy could be sinking into a depression, and it would still not interfere with your ability to make nice large steady profits in the currency market. No matter what happens in the global economy or the world's financial markets, there is always at least some major currency that's going up in value.
Currencies are measured against each other. When one is going up, the other is going down, like a seesaw. Therefore, there's always at least one currency going up. There's always a bull market in currencies. I don't recommend them for all of your money. But at a time when nearly all other investments are going down, it's a great place to get away from the disasters and find a whole separate world of investment opportunity.
I also think that it's THE ideal vehicle for average investors to profit from deflation and a rising dollar.
Thursday, December 18, 2008
Young Graduates of Malaysia
by Salvatore Dali
In highlighting the shortcomings of today's young graduates, the below article is generalized, but I am sure that's pretty much the same conclusion throughout the country in all industries.
1) Rich parents - Parents who are rich, please note. Generally your children will be assholes if you do nothing right when they were young. That's because the over mollycoddling, pandering to their whims and fancies, have shaped their character - which is pathetic.
I have a few rich kids who have OK degrees, but decided to quit their jobs for a couple of months because they wanted to do "something else".
2) Character - Linking onto the above, the same spoilt brats generally have poor character. When I say character, I meant ability to assume responsibility, respect for corporate culture, ability to apply themselves well, work at something, ability to learn and willingness to learn, and general people skills.
3) English - Now we go to quality of graduates. Most, whether they are local or foreign graduates, cannot speak coherent English. I am appalled that the Chinese schools are now clamouring for Science and Maths to be taught in Chinese for the first 6 years of schooling. English is not a glorification of western culture, it is an essential tool for business and global communications. I am not dissing Chinese, Malay or Tamil language, but if you think you can compete in an increasingly globalised world with just your mother tongue, that it is misplaced arrogance of culture. Study English together with whatever other languages you want, not at the expense of English.
4) Communication skills - Oratory skills are mightily lacking in young graduates. The art of persuasion, the ability to project professionalism, and eventually the ability to lead. Just imagine Obama without his oratory skills. I always exhort my friends with kids to forget about the ballet classes, the extra tuition classes... make sure you enroll them in the drama and speech making skills classes, there are a few around.
5) Intellectually not strong - When I come across even those who scored fantastic results or graduated from top foreign universities, I find some of them unable to hold an intellectual argument. If presented with a common question such as why are we now in this global economic crisis. Most won't be able to answer effectively, providing one to two general answers.
A decent answer would have to include examining the crux factors and ascribing proper blame proportionately. You need to examine a complex issue from a few angles. Our education system is such that there is only one answer per question in the exam papers. Hence after giving one answer, they think they have answered the whole question.
Allow your kids to join the Scouts, Drama Clubs, Leos or Interact clubs. To me, these are breeding grounds for future corporate achievers. The interaction, social politics, club politics, camaraderie, application to one's objectives are all critical to encourage one to develop and establish his own identity and personality, and in many ways help them make sense of how the world operates. Most of the street smarts I know who now do well in corporate world, also did remarkably well in those movements and clubs when they were younger.
Parents nowadays have fewer children, so they can spend more resources on them. Don't molly-coddle. Some over protective parents do not allow their kids to join any societies or clubs. They get ferried to and from school and then to and from tuition. When home, they do some homework and play computer games or do internet chats. Time to rethink our influence in our young.
In highlighting the shortcomings of today's young graduates, the below article is generalized, but I am sure that's pretty much the same conclusion throughout the country in all industries.
1) Rich parents - Parents who are rich, please note. Generally your children will be assholes if you do nothing right when they were young. That's because the over mollycoddling, pandering to their whims and fancies, have shaped their character - which is pathetic.
I have a few rich kids who have OK degrees, but decided to quit their jobs for a couple of months because they wanted to do "something else".
2) Character - Linking onto the above, the same spoilt brats generally have poor character. When I say character, I meant ability to assume responsibility, respect for corporate culture, ability to apply themselves well, work at something, ability to learn and willingness to learn, and general people skills.
3) English - Now we go to quality of graduates. Most, whether they are local or foreign graduates, cannot speak coherent English. I am appalled that the Chinese schools are now clamouring for Science and Maths to be taught in Chinese for the first 6 years of schooling. English is not a glorification of western culture, it is an essential tool for business and global communications. I am not dissing Chinese, Malay or Tamil language, but if you think you can compete in an increasingly globalised world with just your mother tongue, that it is misplaced arrogance of culture. Study English together with whatever other languages you want, not at the expense of English.
4) Communication skills - Oratory skills are mightily lacking in young graduates. The art of persuasion, the ability to project professionalism, and eventually the ability to lead. Just imagine Obama without his oratory skills. I always exhort my friends with kids to forget about the ballet classes, the extra tuition classes... make sure you enroll them in the drama and speech making skills classes, there are a few around.
5) Intellectually not strong - When I come across even those who scored fantastic results or graduated from top foreign universities, I find some of them unable to hold an intellectual argument. If presented with a common question such as why are we now in this global economic crisis. Most won't be able to answer effectively, providing one to two general answers.
A decent answer would have to include examining the crux factors and ascribing proper blame proportionately. You need to examine a complex issue from a few angles. Our education system is such that there is only one answer per question in the exam papers. Hence after giving one answer, they think they have answered the whole question.
Allow your kids to join the Scouts, Drama Clubs, Leos or Interact clubs. To me, these are breeding grounds for future corporate achievers. The interaction, social politics, club politics, camaraderie, application to one's objectives are all critical to encourage one to develop and establish his own identity and personality, and in many ways help them make sense of how the world operates. Most of the street smarts I know who now do well in corporate world, also did remarkably well in those movements and clubs when they were younger.
Parents nowadays have fewer children, so they can spend more resources on them. Don't molly-coddle. Some over protective parents do not allow their kids to join any societies or clubs. They get ferried to and from school and then to and from tuition. When home, they do some homework and play computer games or do internet chats. Time to rethink our influence in our young.
Sunday, December 14, 2008
Inflation or Deflation: A Pro-Deflationist's View
by Mike Shedlock
A Practical Look At "Flation"
It depends on your definition of inflation; if it's a growth in money supply, then, yes, this is already extremely inflationary. But so far, this hasn't translated into higher price levels or even higher long-term inflation expectations as measured by the spread of 10 year TIPS versus 10 year Treasury bonds; TIPS are inflation protected Treasuries that provide compensation for increases in the consumer price index (CPI); it is this spread that the Fed is most concerned about when gauging the market's inflation expectations.
Why has it not (yet) been inflationary? Well, the Fed can provide all the money it wants, but it cannot force institutions to lend. Below is a chart of the "excess reserves" in the banking system; these are the reserves banks hold in excess of what they are required to maintain.
Until September, excess reserved hovered at or below about US $2 billion, but have ballooned to over $600 billion as of November 19, 2008. Read in conjunction with our discussion above on the Fed "printing money", the Fed has thrown money at the banking system, but the banks are hoarding the cash, they do not lend. For banks to lend money, two basic conditions must be bet: they must feel strong enough to provide credit; and they must feel their customers - be they consumers or businesses - are creditworthy enough.
That for me is the key issue. And the reason why it has not affected the prices of goods, services, asset prices, or even inflation expectations as measured by TIPs is that banks are not extending credit.
Here is a table of conditions and whether or not one would expect to see those conditions in inflation, deflation, stagflation, hyperinflation, and disinflation. Some expectations are debatable so I left those bank.
*** Current Conditions
** Base Money Supply spiked during Great Depression as one of the previous charts shows
* The Purchasing power of gold is in relation to other commodities
Those using practical definitions have an easy time explaining things. Those lost souls screaming hyperinflation missed the boat completely. Hyperinflationists have had trouble for years explaining falling home prices, and falling treasury yields.
Those screaming stagflation no longer have a case with falling commodity prices, a rising dollar, and falling treasury yields.
Disinflation makes no sense with stock prices down 40% and corporate bond yields soaring. Stocks do best in disinflation. Corporate bond yields drop in disinflation. This is not disinflation by any stretch of the imagination.
Routine inflation makes no sense in light of corporate bond yields priced for bankruptcy, collapsing stocks, plunging commodity prices and a negative CPI.
Those who think inflation is about prices alone were busy shorting treasuries, and looking the wrong direction for over a year. Only after the stock market fell 50% and gasoline prices crashed did the media start picking up on "deflation". Only those who knew what a destruction in credit would do to jobs, to lending, to retail sales, to the stock market, to corporate bond yields and to treasury yields got it right.
What It's Not
It's Not Disinflation
It's Not Stagflation
It's Not Inflation
It's Not Hyperinflation
What's left looks like a duck, walks like a duck, flies like a duck, and squawks like a duck. And that duck is deflation no matter what others suggest.
Those who stick to a monetary definition of inflation pointing at base money supply are selecting a definition that makes absolutely no practical sense. Worse yet they do it screaming about bond-bubbles at yields of 5% or higher, all because they refuse to see or admit the destruction of credit is happening far faster than the Fed is printing.
And it is that destruction of credit, coupled with the fact that what the Fed is printing is not even being lent that matters, not some Humpty-Dumptyish academic definition that has no real world practical application!
Phooey. I prefer a practical definition of deflation that matches and even predicts what the credit markets and stock markets are going to do, not some definition that is useless for anything but academic debate.
The trick now is to figure out how long deflation will last, not whether we are in it.
A Practical Look At "Flation"
It depends on your definition of inflation; if it's a growth in money supply, then, yes, this is already extremely inflationary. But so far, this hasn't translated into higher price levels or even higher long-term inflation expectations as measured by the spread of 10 year TIPS versus 10 year Treasury bonds; TIPS are inflation protected Treasuries that provide compensation for increases in the consumer price index (CPI); it is this spread that the Fed is most concerned about when gauging the market's inflation expectations.
Why has it not (yet) been inflationary? Well, the Fed can provide all the money it wants, but it cannot force institutions to lend. Below is a chart of the "excess reserves" in the banking system; these are the reserves banks hold in excess of what they are required to maintain.
Until September, excess reserved hovered at or below about US $2 billion, but have ballooned to over $600 billion as of November 19, 2008. Read in conjunction with our discussion above on the Fed "printing money", the Fed has thrown money at the banking system, but the banks are hoarding the cash, they do not lend. For banks to lend money, two basic conditions must be bet: they must feel strong enough to provide credit; and they must feel their customers - be they consumers or businesses - are creditworthy enough.
That for me is the key issue. And the reason why it has not affected the prices of goods, services, asset prices, or even inflation expectations as measured by TIPs is that banks are not extending credit.
Here is a table of conditions and whether or not one would expect to see those conditions in inflation, deflation, stagflation, hyperinflation, and disinflation. Some expectations are debatable so I left those bank.
*** Current Conditions
** Base Money Supply spiked during Great Depression as one of the previous charts shows
* The Purchasing power of gold is in relation to other commodities
Those using practical definitions have an easy time explaining things. Those lost souls screaming hyperinflation missed the boat completely. Hyperinflationists have had trouble for years explaining falling home prices, and falling treasury yields.
Those screaming stagflation no longer have a case with falling commodity prices, a rising dollar, and falling treasury yields.
Disinflation makes no sense with stock prices down 40% and corporate bond yields soaring. Stocks do best in disinflation. Corporate bond yields drop in disinflation. This is not disinflation by any stretch of the imagination.
Routine inflation makes no sense in light of corporate bond yields priced for bankruptcy, collapsing stocks, plunging commodity prices and a negative CPI.
Those who think inflation is about prices alone were busy shorting treasuries, and looking the wrong direction for over a year. Only after the stock market fell 50% and gasoline prices crashed did the media start picking up on "deflation". Only those who knew what a destruction in credit would do to jobs, to lending, to retail sales, to the stock market, to corporate bond yields and to treasury yields got it right.
What It's Not
It's Not Disinflation
It's Not Stagflation
It's Not Inflation
It's Not Hyperinflation
What's left looks like a duck, walks like a duck, flies like a duck, and squawks like a duck. And that duck is deflation no matter what others suggest.
Those who stick to a monetary definition of inflation pointing at base money supply are selecting a definition that makes absolutely no practical sense. Worse yet they do it screaming about bond-bubbles at yields of 5% or higher, all because they refuse to see or admit the destruction of credit is happening far faster than the Fed is printing.
And it is that destruction of credit, coupled with the fact that what the Fed is printing is not even being lent that matters, not some Humpty-Dumptyish academic definition that has no real world practical application!
Phooey. I prefer a practical definition of deflation that matches and even predicts what the credit markets and stock markets are going to do, not some definition that is useless for anything but academic debate.
The trick now is to figure out how long deflation will last, not whether we are in it.
Saturday, December 6, 2008
Inflation or Deflation?
by Jaime E. Carrasco
Inflation or deflation? -- that is the question as to how the US financial mess will unravel. It is extremely important that we understand this debate as its outcome will have serious implications for your financial wellbeing.
My observations and conclusions are that the outcome of this mess will lead to inflation. I believe "the deflationists" are wrong. The main arguments for the deflationists are based upon two premises: first, the fact that deflation was the outcome of the Great Depression of the 1930s and of Japan in the 1990s; second the argument that the levels of debt are so big that the Central Banks could never print as much to offset the deflationary effect of unwinding the debt.
A historical study of these arguments reveals that deflation is a rarity. Furthermore, we have the experience of all other financial storms over the past century (apart from The Great Depression and Japan in the 90s) creating inflation. Inflation has been the historical norm. It is important to understand why so that one can make rational investments decisions.
The ability of Central Banks to create money always leads to inflation. This was not the case during the Great Depression as the US Fed was unable to print money because the currency was pegged to the gold standard; thus it was impossible to inflate the money supply.
It is important to understand that deflation is the Central Banks' greatest fear as it is the one thing they cannot control. Furthermore, one must also understand that the Central Banks' sole aim right now is inflation through their monetary control -- an outcome that is easier to control down the road. In this context the Central Banks will continue to increase the money supply and inflate.
The US Debt
The US debt is the last remaining credit bubble and rates have to climb in the future. This is one more good reason for increasing inflation as the US knows that the only way to deal with this tsunami of debt is to inflate the debts away at the expense of their creditors.
It was done in Russia, Argentina and all other over indebted countries. The simplest way to reduce debt owned by foreigners is to devalue the currency, either overnight or over a longer span of time. Which leads one to conclude that the recent rise of the $US is unsustainable and will reverse sooner than later.
Precious Metals
The world would not find itself in this mess if currencies were pegged to gold, as we would never have been able to create debt of such levels without acquiring the necessary gold to back the obligations. Gold allows us to peg the value of money to a constant, so that the financial system does not get into this kind of situation.
In a world where we have endless amounts of money we will have to re-evaluate what things are really worth. I see the changes to take place and from a financial perspective gold will increase as we re-define the value of money.
From a fundamental perspective wealthy individuals around the world have been buying gold and today we find ourselves with global shortages for the physical metal. Once again gold is signaling a very different picture than deflation.
Summary
Going forward we will see the global banking system normalize. The banking system will solve the illiquidity issues through global money creation.
Central Banks now know what deflation means and will do whatever they can to prevent it: they will inflate. And who better at the helm than the inflation expert himself Chairman Bernanke?
The US dollar will resume its decline and within the next three to nine months we will see prices rising and inflation returning to the headlines--this inevitable as the US needs a lower dollar.
Supply destruction of the things we need will have worked itself into the system, further supporting rising prices. Deflation, which always appears prior to an inflationary wave, will be a thing of the past and those who position themselves appropriately will be very well rewarded.
Inflation or deflation? -- that is the question as to how the US financial mess will unravel. It is extremely important that we understand this debate as its outcome will have serious implications for your financial wellbeing.
My observations and conclusions are that the outcome of this mess will lead to inflation. I believe "the deflationists" are wrong. The main arguments for the deflationists are based upon two premises: first, the fact that deflation was the outcome of the Great Depression of the 1930s and of Japan in the 1990s; second the argument that the levels of debt are so big that the Central Banks could never print as much to offset the deflationary effect of unwinding the debt.
A historical study of these arguments reveals that deflation is a rarity. Furthermore, we have the experience of all other financial storms over the past century (apart from The Great Depression and Japan in the 90s) creating inflation. Inflation has been the historical norm. It is important to understand why so that one can make rational investments decisions.
The ability of Central Banks to create money always leads to inflation. This was not the case during the Great Depression as the US Fed was unable to print money because the currency was pegged to the gold standard; thus it was impossible to inflate the money supply.
It is important to understand that deflation is the Central Banks' greatest fear as it is the one thing they cannot control. Furthermore, one must also understand that the Central Banks' sole aim right now is inflation through their monetary control -- an outcome that is easier to control down the road. In this context the Central Banks will continue to increase the money supply and inflate.
The US Debt
The US debt is the last remaining credit bubble and rates have to climb in the future. This is one more good reason for increasing inflation as the US knows that the only way to deal with this tsunami of debt is to inflate the debts away at the expense of their creditors.
It was done in Russia, Argentina and all other over indebted countries. The simplest way to reduce debt owned by foreigners is to devalue the currency, either overnight or over a longer span of time. Which leads one to conclude that the recent rise of the $US is unsustainable and will reverse sooner than later.
Precious Metals
The world would not find itself in this mess if currencies were pegged to gold, as we would never have been able to create debt of such levels without acquiring the necessary gold to back the obligations. Gold allows us to peg the value of money to a constant, so that the financial system does not get into this kind of situation.
In a world where we have endless amounts of money we will have to re-evaluate what things are really worth. I see the changes to take place and from a financial perspective gold will increase as we re-define the value of money.
From a fundamental perspective wealthy individuals around the world have been buying gold and today we find ourselves with global shortages for the physical metal. Once again gold is signaling a very different picture than deflation.
Summary
Going forward we will see the global banking system normalize. The banking system will solve the illiquidity issues through global money creation.
Central Banks now know what deflation means and will do whatever they can to prevent it: they will inflate. And who better at the helm than the inflation expert himself Chairman Bernanke?
The US dollar will resume its decline and within the next three to nine months we will see prices rising and inflation returning to the headlines--this inevitable as the US needs a lower dollar.
Supply destruction of the things we need will have worked itself into the system, further supporting rising prices. Deflation, which always appears prior to an inflationary wave, will be a thing of the past and those who position themselves appropriately will be very well rewarded.
Thursday, December 4, 2008
Calm Like A Bomb: 3-stage Crisis
by Sean Rakhimov
Basically we're in a situation that we've long expected. We all anticipated a big financial crisis, all sorts of problems, an end-of-the-world type of scenario—not literally, but the world as we know it. And I think we're there. This is the big one and it's for real. Where we go from here is largely a function of what the powers-that-be will do. We have some idea of what they will do; they will do all the things that will make it worse. I go by the theory that they will always do the right thing, but only after they exhaust all other options.
The economic crisis, I think, is going to last for a generation. I foresee a twofold crisis here, or maybe three stages. The first one is what we're going through right now - a debt crisis.
At some point down the line we're going to have a currency crisis, where the dollar will stop being the reserve currency of the world. I don't know how long before that happens. It's a matter of whoever runs first to the door, basically. I was just reading some articles. Iran is converting their foreign exchange reserves into gold. China is trying to do some of that. It only takes a few of these until there's a domino effect and when that happens, things should play out quickly.
This crisis, I think, has been a good example, where within three months we ended up in a completely different environment. If the dollar stops being the reserve currency of the world tomorrow, I expect things to happen quickly. It may take a decade until it gets started, but once it starts, I expect things to unravel quickly. The reason for that is we have maybe 20 to 30 major players in the world that can make a difference. I'm talking about countries and maybe some other entities such as sovereign funds. And I believe it's going to be very difficult to bring everybody to the table and get them to agree on a plan that everybody would sign on to. Even if they did sign on, I think it's going to be very difficult to make sure everybody sticks with it.
As soon as they break ranks, I think within six months the whole thing is going to break apart. Whatever accord they come up with, if it's going to be Russia or China or somebody of that size, things are going to happen even quicker. If it's going to be a smaller player like Iran or Venezuela, that may take a bit longer. The significance of it may be downplayed for a period of time. But ultimately I think most people understand the dire straits we're in. At some point it's going to be "everybody for themselves" and that's when I think the current system is going to fall apart.
I foresee maybe several stages of this crisis unraveling and that's why I say it's going to take about a generation. As I said, the first one is the big debt crisis we have now. Maybe an extension of it will be some sort of a currency crisis. It's not just a dollar that won't be worth anything, but most other currencies as well. And then I believe what's going to really, really change the environment and exacerbate the situation will be an oil crisis. I do expect oil to hit a new all-time high, say, by 2011. So within two to three years I would think that's going to happen.
Suppose three of us represent countries. One has oil, the other has wheat, and I have copper. If I want to buy your oil, I go back to my printer and print up as much money as I can and buy your oil. Well, the one with the wheat will do the same thing, print up as much money as possible and try to buy your oil. At some point people will stop accepting these currencies, whatever they are, because there's no limit to them. Money is printed like leaflets. There's no backing to it. When we get to the stage where there isn't enough to go around—like you go to a gas station and you can't get all the gas you need—the reevaluation will be forced on the market and will be forced on all the players. So, unless you have something else to offer, something of substance other than your paper money, I don't think you're going to get any of whatever it is you're looking for.
Right now the supply and demand is about 85 million barrels a day supply against 87 million roughly in consumption. Suppose those numbers get to 90 and 95 (million barrels a day of consumption). At some point the shortage will become so severe that it's going to wreak havoc in the marketplace. Those who have the oil will start to choose who they sell it to and in exchange for what. And I don't think it's going to be paper. That's my longer term outlook.
As for precious metals, the trick here is gold and silver markets are not based on large amounts of buying. Let's say tomorrow Warren Buffet says he's going to buy $10 billion worth of gold. Immediately the supply is going to dry up. People who have gold will say, “Wait a minute, we're not selling. The price is going up.” So the effect of a single event like that in the gold and silver space can reach far beyond what it would in any other market.
It is important to remember you don't want to be in and out of assets of this type on a whim. Even if it takes a year, even if you have corrections like this, for my investment strategy I do not believe that gold and silver are amenable to buying and selling as are assets in other markets. Better to treat them like insurance, where you have it in good times and bad times. It won't take a lot of buying to push these metals back up. And even though the metal prices have come down, if anything, demand for gold and silver has increased.
Today's metals prices are absolutely bogus, as is the price for oil. Yes, you can buy it at that price, but that is not what it's worth. Right now oil is trading much, much cheaper than water, maybe one-third of the price of water. It should not be possible. I don't believe in the rational market theory. I think the market is always wrong in the short term.
If you can get bullion at anything close to spot prices, you should buy as much as you plan to buy. I don't endorse investors paying 50% premium, but I do believe in percentage terms the premiums will shrink at some point.
Basically we're in a situation that we've long expected. We all anticipated a big financial crisis, all sorts of problems, an end-of-the-world type of scenario—not literally, but the world as we know it. And I think we're there. This is the big one and it's for real. Where we go from here is largely a function of what the powers-that-be will do. We have some idea of what they will do; they will do all the things that will make it worse. I go by the theory that they will always do the right thing, but only after they exhaust all other options.
The economic crisis, I think, is going to last for a generation. I foresee a twofold crisis here, or maybe three stages. The first one is what we're going through right now - a debt crisis.
At some point down the line we're going to have a currency crisis, where the dollar will stop being the reserve currency of the world. I don't know how long before that happens. It's a matter of whoever runs first to the door, basically. I was just reading some articles. Iran is converting their foreign exchange reserves into gold. China is trying to do some of that. It only takes a few of these until there's a domino effect and when that happens, things should play out quickly.
This crisis, I think, has been a good example, where within three months we ended up in a completely different environment. If the dollar stops being the reserve currency of the world tomorrow, I expect things to happen quickly. It may take a decade until it gets started, but once it starts, I expect things to unravel quickly. The reason for that is we have maybe 20 to 30 major players in the world that can make a difference. I'm talking about countries and maybe some other entities such as sovereign funds. And I believe it's going to be very difficult to bring everybody to the table and get them to agree on a plan that everybody would sign on to. Even if they did sign on, I think it's going to be very difficult to make sure everybody sticks with it.
As soon as they break ranks, I think within six months the whole thing is going to break apart. Whatever accord they come up with, if it's going to be Russia or China or somebody of that size, things are going to happen even quicker. If it's going to be a smaller player like Iran or Venezuela, that may take a bit longer. The significance of it may be downplayed for a period of time. But ultimately I think most people understand the dire straits we're in. At some point it's going to be "everybody for themselves" and that's when I think the current system is going to fall apart.
I foresee maybe several stages of this crisis unraveling and that's why I say it's going to take about a generation. As I said, the first one is the big debt crisis we have now. Maybe an extension of it will be some sort of a currency crisis. It's not just a dollar that won't be worth anything, but most other currencies as well. And then I believe what's going to really, really change the environment and exacerbate the situation will be an oil crisis. I do expect oil to hit a new all-time high, say, by 2011. So within two to three years I would think that's going to happen.
Suppose three of us represent countries. One has oil, the other has wheat, and I have copper. If I want to buy your oil, I go back to my printer and print up as much money as I can and buy your oil. Well, the one with the wheat will do the same thing, print up as much money as possible and try to buy your oil. At some point people will stop accepting these currencies, whatever they are, because there's no limit to them. Money is printed like leaflets. There's no backing to it. When we get to the stage where there isn't enough to go around—like you go to a gas station and you can't get all the gas you need—the reevaluation will be forced on the market and will be forced on all the players. So, unless you have something else to offer, something of substance other than your paper money, I don't think you're going to get any of whatever it is you're looking for.
Right now the supply and demand is about 85 million barrels a day supply against 87 million roughly in consumption. Suppose those numbers get to 90 and 95 (million barrels a day of consumption). At some point the shortage will become so severe that it's going to wreak havoc in the marketplace. Those who have the oil will start to choose who they sell it to and in exchange for what. And I don't think it's going to be paper. That's my longer term outlook.
As for precious metals, the trick here is gold and silver markets are not based on large amounts of buying. Let's say tomorrow Warren Buffet says he's going to buy $10 billion worth of gold. Immediately the supply is going to dry up. People who have gold will say, “Wait a minute, we're not selling. The price is going up.” So the effect of a single event like that in the gold and silver space can reach far beyond what it would in any other market.
It is important to remember you don't want to be in and out of assets of this type on a whim. Even if it takes a year, even if you have corrections like this, for my investment strategy I do not believe that gold and silver are amenable to buying and selling as are assets in other markets. Better to treat them like insurance, where you have it in good times and bad times. It won't take a lot of buying to push these metals back up. And even though the metal prices have come down, if anything, demand for gold and silver has increased.
Today's metals prices are absolutely bogus, as is the price for oil. Yes, you can buy it at that price, but that is not what it's worth. Right now oil is trading much, much cheaper than water, maybe one-third of the price of water. It should not be possible. I don't believe in the rational market theory. I think the market is always wrong in the short term.
If you can get bullion at anything close to spot prices, you should buy as much as you plan to buy. I don't endorse investors paying 50% premium, but I do believe in percentage terms the premiums will shrink at some point.
Thursday, November 27, 2008
Watch Out For GOLD
edited and revised from various sources by Alex Wong
In 1933, when the US Dollar was still pegged to the Gold Standard, Franklin Roosevelt took an extraodinary step to overcome the Great Depression by devaluing the dollar via an executive order, whereby the government confiscated gold and raising its price by 69.3%. Due to the devalued dollar, asset and consumer prices started increasing, which kick-started a new round of inflation. This is called a reflation policy (re-inflation).
Consider George Soros’ recent proposal for a new monetary system involving the Special Drawing Rights, or SDRs, at the IMF: Currencies should be devalued … then repegged to each other and to SDRs … and then SDRs would be circulated as an international currency. (This sounds strikingly similar to Mahathir's proposal of Dinar Emas. Ironically, Mahathir blames Soros for all things evil about the 1998 Asian Financial Crisis).
Fears of the unknown long-term effects from the global financial crisis have sparked a new gold rush. With retail and wholesale clients around the world stocking up on the precious metal, many physical gold makers have been forced to suspend orders. (Remark: Please don't confuse this physical gold with the gold sold at the jewelry shop. Those are cosmetic golds. What is meant here is the gold in the form of Bullions and Coins, with 99.9% purity).
As the World Gold Council reported that the dollar demand for gold reached a quarterly record of $US32 billion ($50.73 billion) in the third quarter, industry insiders said the race to secure physical gold had reached an intensity that had never been witnessed before.
Europe are leading the demand, with Russia, Ukraine, Middle East and US all buying --All around the world there has been a heavy run on physical gold and there is a shortage of supply.
The only thing that is depressing the price of gold is the Futures market where mainly paper gold is traded. Notice that gold has an artificially low price on the paper contracts, which contradicts with staggering huge demand for physical gold. This condition defies the economic nature of real supply and real demand.
The paper gold market is flawed, and many people now want no part of it. What physical gold becomes available is being grabbed immediately. The gold futures contracts are traded at the COMEX and NYMEX, whose prices are routinely suppressed by a high volume of uneconomic short contracts by hedge funds, major banks and financial institutions.
However, with newly energized Russia & China building their gold treasures, with Arabs turning from distrusted Western paper and more toward gold & silver, look for the new players to offer support to the gold price. Gold is hitting back with a vengence.
In 1933, when the US Dollar was still pegged to the Gold Standard, Franklin Roosevelt took an extraodinary step to overcome the Great Depression by devaluing the dollar via an executive order, whereby the government confiscated gold and raising its price by 69.3%. Due to the devalued dollar, asset and consumer prices started increasing, which kick-started a new round of inflation. This is called a reflation policy (re-inflation).
Consider George Soros’ recent proposal for a new monetary system involving the Special Drawing Rights, or SDRs, at the IMF: Currencies should be devalued … then repegged to each other and to SDRs … and then SDRs would be circulated as an international currency. (This sounds strikingly similar to Mahathir's proposal of Dinar Emas. Ironically, Mahathir blames Soros for all things evil about the 1998 Asian Financial Crisis).
Fears of the unknown long-term effects from the global financial crisis have sparked a new gold rush. With retail and wholesale clients around the world stocking up on the precious metal, many physical gold makers have been forced to suspend orders. (Remark: Please don't confuse this physical gold with the gold sold at the jewelry shop. Those are cosmetic golds. What is meant here is the gold in the form of Bullions and Coins, with 99.9% purity).
As the World Gold Council reported that the dollar demand for gold reached a quarterly record of $US32 billion ($50.73 billion) in the third quarter, industry insiders said the race to secure physical gold had reached an intensity that had never been witnessed before.
Europe are leading the demand, with Russia, Ukraine, Middle East and US all buying --All around the world there has been a heavy run on physical gold and there is a shortage of supply.
The only thing that is depressing the price of gold is the Futures market where mainly paper gold is traded. Notice that gold has an artificially low price on the paper contracts, which contradicts with staggering huge demand for physical gold. This condition defies the economic nature of real supply and real demand.
The paper gold market is flawed, and many people now want no part of it. What physical gold becomes available is being grabbed immediately. The gold futures contracts are traded at the COMEX and NYMEX, whose prices are routinely suppressed by a high volume of uneconomic short contracts by hedge funds, major banks and financial institutions.
However, with newly energized Russia & China building their gold treasures, with Arabs turning from distrusted Western paper and more toward gold & silver, look for the new players to offer support to the gold price. Gold is hitting back with a vengence.
Friday, November 21, 2008
Why Is The US Dollar Gaining Ground?
by Alex Wong
The trillion dollar question that we continually ask ourselves is: Why is the US Dollar gaining against almost all other currencies when it is the US economy that is facing the biggest contraction and with the largest unprecedented current account and budget deficit?
According to a top aide in Japan, "The dollar now looks strong for a technical reason. The funds of US financial firms that had invested in the world are being repatriated into the homeland, causing dollar-buying. But once this conversion into the dollars is done, the currency will head south."
But George Soros has a different point of view, "The American and European financial authorities committed themselves not to allow any of their major financial institutions to fail. But guaranteeing that the banks at the center of the global financial system will not fail has precipitated a new crisis that has caught the authorities unaware: countries at the periphery, whether in Eastern Europe, Asia, or Latin America, could not offer similarly credible guarantees, and financial capital started fleeing from the periphery to the center. All currencies fell against the dollar and the yen, some of them precipitously."
Below are excerpts from George Soros' recent article:
This remarkable sequence of events can be understood only if we abandon the prevailing theory of market behavior. As a way of explaining financial markets, I propose an alternative paradigm that differs from the current one in two respects. First, financial markets do not reflect prevailing conditions accurately; they provide a picture that is always biased or distorted in one way or another. Second, the distorted views held by market participants and expressed in market prices can, under certain circumstances, affect the so-called fundamentals that market prices are supposed to reflect. This two-way circular connection between market prices and the underlying reality I call reflexivity.
While the two-way connection is present at all times, it is only occasionally, and in special circumstances, that it gives rise to financial crises. Usually markets correct their own mistakes, but occasionally there is a misconception or misinterpretation that finds a way to reinforce a trend that is already present in reality and by doing so it also reinforces itself. Such self- reinforcing processes may carry markets into far-from-equilibrium territory. Unless something happens to abort the reflexive interaction sooner, it may persist until the misconception becomes so glaring that it has to be recognized as such. When that happens the trend becomes unsustainable and when it is reversed the self-reinforcing process starts working in the opposite direction, causing a sharp downward movement.
The typical sequence of boom and bust has an asymmetric shape. The boom develops slowly and accelerates gradually. The bust, when it occurs, tends to be short and sharp. The asymmetry is due to the role that credit plays. As prices rise, the same collateral can support a greater amount of credit. Rising prices also tend to generate optimism and encourage a greater use of leverage—borrowing for investment purposes. At the peak of the boom both the value of the collateral and the degree of leverage reach a peak. When the price trend is reversed participants are vulnerable to margin calls and, as we've seen in 2008, the forced liquidation of collateral leads to a catastrophic acceleration on the downside.
Bubbles thus have two components: a trend that prevails in reality and a misconception relating to that trend. The simplest and most common example is to be found in real estate. The trend consists of an increased willingness to lend and a rise in prices. The misconception is that the value of the real estate is independent of the willingness to lend. That misconception encourages bankers to become more lax in their lending practices as prices rise and defaults on mortgage payments diminish. That is how real estate bubbles, including the recent housing bubble, are born. It is remarkable how the misconception continues to recur in various guises in spite of a long history of real estate bubbles bursting.
Bubbles are not the only manifestations of reflexivity in financial markets, but they are the most spectacular. Bubbles always involve the expansion and contraction of credit and they tend to have catastrophic consequences. Since financial markets are prone to produce bubbles and bubbles cause trouble, financial markets have become regulated by the financial authorities. In the United States they include the Federal Reserve, the Treasury, the Securities and Exchange Commission, and many other agencies.
It is important to recognize that regulators base their decisions on a distorted view of reality just as much as market participants—perhaps even more so because regulators are not only human but also bureaucratic and subject to political influences. So the interplay between regulators and market participants is also reflexive in character. In contrast to bubbles, which occur only infrequently, the cat-and-mouse game between regulators and markets goes on continuously. As a consequence reflexivity is at work at all times and it is a mistake to ignore its influence. Yet that is exactly what the prevailing theory of financial markets has done and that mistake is ultimately responsible for the severity of the current crisis.
The trillion dollar question that we continually ask ourselves is: Why is the US Dollar gaining against almost all other currencies when it is the US economy that is facing the biggest contraction and with the largest unprecedented current account and budget deficit?
According to a top aide in Japan, "The dollar now looks strong for a technical reason. The funds of US financial firms that had invested in the world are being repatriated into the homeland, causing dollar-buying. But once this conversion into the dollars is done, the currency will head south."
But George Soros has a different point of view, "The American and European financial authorities committed themselves not to allow any of their major financial institutions to fail. But guaranteeing that the banks at the center of the global financial system will not fail has precipitated a new crisis that has caught the authorities unaware: countries at the periphery, whether in Eastern Europe, Asia, or Latin America, could not offer similarly credible guarantees, and financial capital started fleeing from the periphery to the center. All currencies fell against the dollar and the yen, some of them precipitously."
Below are excerpts from George Soros' recent article:
This remarkable sequence of events can be understood only if we abandon the prevailing theory of market behavior. As a way of explaining financial markets, I propose an alternative paradigm that differs from the current one in two respects. First, financial markets do not reflect prevailing conditions accurately; they provide a picture that is always biased or distorted in one way or another. Second, the distorted views held by market participants and expressed in market prices can, under certain circumstances, affect the so-called fundamentals that market prices are supposed to reflect. This two-way circular connection between market prices and the underlying reality I call reflexivity.
While the two-way connection is present at all times, it is only occasionally, and in special circumstances, that it gives rise to financial crises. Usually markets correct their own mistakes, but occasionally there is a misconception or misinterpretation that finds a way to reinforce a trend that is already present in reality and by doing so it also reinforces itself. Such self- reinforcing processes may carry markets into far-from-equilibrium territory. Unless something happens to abort the reflexive interaction sooner, it may persist until the misconception becomes so glaring that it has to be recognized as such. When that happens the trend becomes unsustainable and when it is reversed the self-reinforcing process starts working in the opposite direction, causing a sharp downward movement.
The typical sequence of boom and bust has an asymmetric shape. The boom develops slowly and accelerates gradually. The bust, when it occurs, tends to be short and sharp. The asymmetry is due to the role that credit plays. As prices rise, the same collateral can support a greater amount of credit. Rising prices also tend to generate optimism and encourage a greater use of leverage—borrowing for investment purposes. At the peak of the boom both the value of the collateral and the degree of leverage reach a peak. When the price trend is reversed participants are vulnerable to margin calls and, as we've seen in 2008, the forced liquidation of collateral leads to a catastrophic acceleration on the downside.
Bubbles thus have two components: a trend that prevails in reality and a misconception relating to that trend. The simplest and most common example is to be found in real estate. The trend consists of an increased willingness to lend and a rise in prices. The misconception is that the value of the real estate is independent of the willingness to lend. That misconception encourages bankers to become more lax in their lending practices as prices rise and defaults on mortgage payments diminish. That is how real estate bubbles, including the recent housing bubble, are born. It is remarkable how the misconception continues to recur in various guises in spite of a long history of real estate bubbles bursting.
Bubbles are not the only manifestations of reflexivity in financial markets, but they are the most spectacular. Bubbles always involve the expansion and contraction of credit and they tend to have catastrophic consequences. Since financial markets are prone to produce bubbles and bubbles cause trouble, financial markets have become regulated by the financial authorities. In the United States they include the Federal Reserve, the Treasury, the Securities and Exchange Commission, and many other agencies.
It is important to recognize that regulators base their decisions on a distorted view of reality just as much as market participants—perhaps even more so because regulators are not only human but also bureaucratic and subject to political influences. So the interplay between regulators and market participants is also reflexive in character. In contrast to bubbles, which occur only infrequently, the cat-and-mouse game between regulators and markets goes on continuously. As a consequence reflexivity is at work at all times and it is a mistake to ignore its influence. Yet that is exactly what the prevailing theory of financial markets has done and that mistake is ultimately responsible for the severity of the current crisis.
Wednesday, November 19, 2008
Calm Like A Bomb: The Impending World Recession Part 2
by Nouriel Roubini
This is a continuation of the article, "Calm Like A Bomb: The Impending World Recession".
Below is the edited piece of Nouriel Roubini's recent article:
I’ve been saying for a while this will be the worst financial crisis the US has experienced since the Great Depression and it looks like the worst one.
I think there’s a growing recognition that this was not just a subprime mortgage problem, where there much more generalized asset bubble and credit bubble in the economy. There were massive excesses also of underwriting in commercial real estate, the boom in the indebtedness of the household sector included also unsecured consumer credit like credit cards, auto loans, student loans with all this other excesses in the corporate sector.
And even in the corporate sector that was on average in better shape than the housing sector there was a fat tail of corporates that were highly indebted with little profits. They issued a huge amount of junk bonds and corporate default rates that had been very very low, for the last couple of years, are going to be surging in a major way, and once this major surge of corporate defaults is going to occur this is other huge time bomb of the CDS market where about $55 trillion of nominal protection has been sold against an outstanding stock of only $6 trillion of corporate bonds. So when you add it all up as you remember I’d estimated that the losses would be at least $1 trillion, and more likely close to $2 trillion.
This housing recession is not bottoming out. The production of new homes starting is falling sharply, but demand until recently had fallen even more, therefore this excess supply of inventory of the new and existing homes kept on becoming larger, and that put downward pressure on home prices.
Based on Case-Shiller, home prices have already fallen by about 20 percent from the peak, given the excess supply number and other factors I would expect home prices are going to fall another 20 percent for a cumulative fall of 40 percent from the peak. Now in 1991, the cumulative fall based on Case-Shiller was only 5 percent, now we’re going to have 20, another 20, 40 — something we haven’t seen since the Great Depression. If it’s more like 40 percent, then the losses is another $800 billion. So you’re in a situation in which you can wipe out a good chunk of the capital of the financial system.
If you look at the 2nd quarter data, Eurozone growth was becoming negative, UK growth was becoming negative, Canadian growth was becoming negative. Same in New Zealand, same for Japan, same for most of the other advanced economies. About 60 percent of GDP, that is most of the GDP of the advanced economies was already contracting in the 2nd quarter of this year. This is before these other shocks are going to make these things more severe.
At this point it looks like we’re not going to have just a US recession, or an advanced economies recession, we’re also going to have a global economic recession, because there is a massive amount now of re-coupling in financial markets and also in real economies, also among emerging market economies.
So we are going to have a global economic recession. And by the way, within the emerging markets, there are about a dozen economies are now on the verge of a financial crisis. Thinking emerging Europe — countries like Latvia, Estonia, Lithuania, Hungary, Bulgaria, Romania, Turkey, Belarus, Ukraine; you go into Asia, trouble in Pakistan, Indonesia and Korea. You go into Latin America — trouble in Argentina, in Ecuador, Venezuela, just to name a few. So this is a global economic recession.
Now why do I think that the bottom in financial market is not been reached yet — for 3 reasons and I’ll conclude on that. The first one is that I think that the flow of market-economic news are going to surprise on the downside for the next few weeks and months. People have priced now a US recession, but if this US recession is I believe going to be more like 24 months, rather than only 8 months, and is going to be global, then there will be surprises on consumption, investment, on housing, on employment and industrial production.
Secondly, I think there will be negative surprises also for earnings. Not just earnings of financial firms, but also in a severe recession a sharp contraction of the earnings of the non-financial corporate sector.
And the third reason is that while the sources of a systemic financial meltdown has been somehow contained, I still see as a lot of potential threats to the financial system. One is this major surge of corporate defaults is going to occur in the next year or so. The second one is related to it is the blowup is going to occur in the CDS market is a major source of the systemic risk. Third of all you are going to have hundreds of hedge funds are going to go bust in the next few months.
And finally there is this other time bomb of many emerging market economies, the risk of a financial crisis. And any of them going bust could have contagious and systemic effects. And one example — take Iceland. Little small island of 300,000 folks in the middle of Atlantic. Their banks had borrowed an amount of money was 12 times the GDP of the country to buy toxic MBSs, CDOs and you name it. Now the banks are bust, the government doesn’t have resources to bail out the banks, and these banks will have to sell, in a highly distressed and illiquid market, a huge amount of distressed assets. And even a small tiny island like Iceland can have systemic effects on asset prices, let alone if you have a blowup of Hungary, or Argentina, or Korea, or other economies.
So, for the last few months people have always been calling the bottom. Every time there was a major event they said this is the cathartic event that says the markets have bottomed out. They said it after Bear Stearns, after Fannie and Freddie, after AIG, after TARP, after the G7 Communique. And each time markets have rallied for a little bit, and have gone further south. Unfortunately I don’t think we’re at the bottom of the housing crisis, we’re not at the bottom of the mortgage crisis, we’re not at the bottom of the financial and banking crisis, and certainly we’re not at the bottom of the severe economic crisis. So I’m quite still pessimistic looking ahead.
This is a continuation of the article, "Calm Like A Bomb: The Impending World Recession".
Below is the edited piece of Nouriel Roubini's recent article:
I’ve been saying for a while this will be the worst financial crisis the US has experienced since the Great Depression and it looks like the worst one.
I think there’s a growing recognition that this was not just a subprime mortgage problem, where there much more generalized asset bubble and credit bubble in the economy. There were massive excesses also of underwriting in commercial real estate, the boom in the indebtedness of the household sector included also unsecured consumer credit like credit cards, auto loans, student loans with all this other excesses in the corporate sector.
And even in the corporate sector that was on average in better shape than the housing sector there was a fat tail of corporates that were highly indebted with little profits. They issued a huge amount of junk bonds and corporate default rates that had been very very low, for the last couple of years, are going to be surging in a major way, and once this major surge of corporate defaults is going to occur this is other huge time bomb of the CDS market where about $55 trillion of nominal protection has been sold against an outstanding stock of only $6 trillion of corporate bonds. So when you add it all up as you remember I’d estimated that the losses would be at least $1 trillion, and more likely close to $2 trillion.
This housing recession is not bottoming out. The production of new homes starting is falling sharply, but demand until recently had fallen even more, therefore this excess supply of inventory of the new and existing homes kept on becoming larger, and that put downward pressure on home prices.
Based on Case-Shiller, home prices have already fallen by about 20 percent from the peak, given the excess supply number and other factors I would expect home prices are going to fall another 20 percent for a cumulative fall of 40 percent from the peak. Now in 1991, the cumulative fall based on Case-Shiller was only 5 percent, now we’re going to have 20, another 20, 40 — something we haven’t seen since the Great Depression. If it’s more like 40 percent, then the losses is another $800 billion. So you’re in a situation in which you can wipe out a good chunk of the capital of the financial system.
If you look at the 2nd quarter data, Eurozone growth was becoming negative, UK growth was becoming negative, Canadian growth was becoming negative. Same in New Zealand, same for Japan, same for most of the other advanced economies. About 60 percent of GDP, that is most of the GDP of the advanced economies was already contracting in the 2nd quarter of this year. This is before these other shocks are going to make these things more severe.
At this point it looks like we’re not going to have just a US recession, or an advanced economies recession, we’re also going to have a global economic recession, because there is a massive amount now of re-coupling in financial markets and also in real economies, also among emerging market economies.
So we are going to have a global economic recession. And by the way, within the emerging markets, there are about a dozen economies are now on the verge of a financial crisis. Thinking emerging Europe — countries like Latvia, Estonia, Lithuania, Hungary, Bulgaria, Romania, Turkey, Belarus, Ukraine; you go into Asia, trouble in Pakistan, Indonesia and Korea. You go into Latin America — trouble in Argentina, in Ecuador, Venezuela, just to name a few. So this is a global economic recession.
Now why do I think that the bottom in financial market is not been reached yet — for 3 reasons and I’ll conclude on that. The first one is that I think that the flow of market-economic news are going to surprise on the downside for the next few weeks and months. People have priced now a US recession, but if this US recession is I believe going to be more like 24 months, rather than only 8 months, and is going to be global, then there will be surprises on consumption, investment, on housing, on employment and industrial production.
Secondly, I think there will be negative surprises also for earnings. Not just earnings of financial firms, but also in a severe recession a sharp contraction of the earnings of the non-financial corporate sector.
And the third reason is that while the sources of a systemic financial meltdown has been somehow contained, I still see as a lot of potential threats to the financial system. One is this major surge of corporate defaults is going to occur in the next year or so. The second one is related to it is the blowup is going to occur in the CDS market is a major source of the systemic risk. Third of all you are going to have hundreds of hedge funds are going to go bust in the next few months.
And finally there is this other time bomb of many emerging market economies, the risk of a financial crisis. And any of them going bust could have contagious and systemic effects. And one example — take Iceland. Little small island of 300,000 folks in the middle of Atlantic. Their banks had borrowed an amount of money was 12 times the GDP of the country to buy toxic MBSs, CDOs and you name it. Now the banks are bust, the government doesn’t have resources to bail out the banks, and these banks will have to sell, in a highly distressed and illiquid market, a huge amount of distressed assets. And even a small tiny island like Iceland can have systemic effects on asset prices, let alone if you have a blowup of Hungary, or Argentina, or Korea, or other economies.
So, for the last few months people have always been calling the bottom. Every time there was a major event they said this is the cathartic event that says the markets have bottomed out. They said it after Bear Stearns, after Fannie and Freddie, after AIG, after TARP, after the G7 Communique. And each time markets have rallied for a little bit, and have gone further south. Unfortunately I don’t think we’re at the bottom of the housing crisis, we’re not at the bottom of the mortgage crisis, we’re not at the bottom of the financial and banking crisis, and certainly we’re not at the bottom of the severe economic crisis. So I’m quite still pessimistic looking ahead.
Friday, November 14, 2008
Who Freed RPK?
by jingoisticbuthornydesperado
1) Is it Anwar?
2) Is it Badawi?
3) Is it Najib?
4) Is it Mahatir?
Anwar? No, I don’t think so. He does not have the power to convince our judiciary to release RPK.
Najib? No! Who is an idiot who would have wanted to release RPK after all the misery Najib has put RPK through? RPK has a score to settle, well that is what Najib fears anyway! But whether or not RPK will put country or personal vendetta first, I think it is an answer we would have already all guessed pretty accurately. Not to mention the articles that RPK write about has been a venom to Najib’s political career.
Mahatir? Bollocks! This is a twat who complains about restriction of free speech when he is the perpetrator behind almost absolute control of the mainstream media. A malicious hypocrite I should say. He supports Najib to become the PM, that would have been in my opinion, endorsing putting RPK behind bars to ensure Najib’s safe passage to the creme de la creme of all political posts.
Badawi? Yes, I do think so. This guy whom we love to despise ironically could be the very guy to have allowed for the release of RPK. I don’t think Badawi is the leader of the Gamorrah, he is just a really, really inadequate administrator who listens to all the wrong advises like George W. Bush Junior. However, he in my opinion is a very formidable ‘chess’ player. Twice he has played better than expected by Mahatir. The first one is the ‘promise’ to pass the premier post to Najib after his first term as prime minister. The second one is to have out-think Anwar to prevent September 16 from becoming a reality. By the way, Mahatir thinks Badawi is no match for Anwar ‘chess’ play. Maybe Badawi is an idiot, it is just that his political opponents have been extremely jinxed, hence Badawi is able to come right to the top for now…..
All of us, including RPK I suspect, know that Najib will make a more disgusting PM than Badawi. RPK will devote more resources from preventing Najib’s ambition from becoming a reality. Anwar launching another take over in December if we are to believe Anwar, which might be true considering the economic and financial chaos gripping the world. Badawi is in control of the military, Syed Hamid Albar will have to watch his back this time before putting RPK back into ISA because he no longer has the military support of Najib. Najib will be attacked from the sides, from the front and from the back.
While Najib is trying to tighten up all the screws (together with Mahatir?), Badawi is hecticly loosening the bolts and nuts. He has given Najib the most undesirable job of the country at the moment, control the military, release RPK (with the support of the military?). Are we seeing a rise in political temeprature again? I would think so. Maybe Badawi is truely a reformer but with Najib in the way all these years. Or maybe he is going for a Kamikaze attack? Or maybe he is a cohort of Anwar? The latter seems like a histrionic fantasy.
We pin all our hopes on Anwar succeeding in his quest and release RPK. But in the world of extreme juxtaposition, Badawi turned out to be THE ONE!
1) Is it Anwar?
2) Is it Badawi?
3) Is it Najib?
4) Is it Mahatir?
Anwar? No, I don’t think so. He does not have the power to convince our judiciary to release RPK.
Najib? No! Who is an idiot who would have wanted to release RPK after all the misery Najib has put RPK through? RPK has a score to settle, well that is what Najib fears anyway! But whether or not RPK will put country or personal vendetta first, I think it is an answer we would have already all guessed pretty accurately. Not to mention the articles that RPK write about has been a venom to Najib’s political career.
Mahatir? Bollocks! This is a twat who complains about restriction of free speech when he is the perpetrator behind almost absolute control of the mainstream media. A malicious hypocrite I should say. He supports Najib to become the PM, that would have been in my opinion, endorsing putting RPK behind bars to ensure Najib’s safe passage to the creme de la creme of all political posts.
Badawi? Yes, I do think so. This guy whom we love to despise ironically could be the very guy to have allowed for the release of RPK. I don’t think Badawi is the leader of the Gamorrah, he is just a really, really inadequate administrator who listens to all the wrong advises like George W. Bush Junior. However, he in my opinion is a very formidable ‘chess’ player. Twice he has played better than expected by Mahatir. The first one is the ‘promise’ to pass the premier post to Najib after his first term as prime minister. The second one is to have out-think Anwar to prevent September 16 from becoming a reality. By the way, Mahatir thinks Badawi is no match for Anwar ‘chess’ play. Maybe Badawi is an idiot, it is just that his political opponents have been extremely jinxed, hence Badawi is able to come right to the top for now…..
All of us, including RPK I suspect, know that Najib will make a more disgusting PM than Badawi. RPK will devote more resources from preventing Najib’s ambition from becoming a reality. Anwar launching another take over in December if we are to believe Anwar, which might be true considering the economic and financial chaos gripping the world. Badawi is in control of the military, Syed Hamid Albar will have to watch his back this time before putting RPK back into ISA because he no longer has the military support of Najib. Najib will be attacked from the sides, from the front and from the back.
While Najib is trying to tighten up all the screws (together with Mahatir?), Badawi is hecticly loosening the bolts and nuts. He has given Najib the most undesirable job of the country at the moment, control the military, release RPK (with the support of the military?). Are we seeing a rise in political temeprature again? I would think so. Maybe Badawi is truely a reformer but with Najib in the way all these years. Or maybe he is going for a Kamikaze attack? Or maybe he is a cohort of Anwar? The latter seems like a histrionic fantasy.
We pin all our hopes on Anwar succeeding in his quest and release RPK. But in the world of extreme juxtaposition, Badawi turned out to be THE ONE!
Subscribe to:
Posts (Atom)