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Albert Edwards Explains How The Leading Indicator Is Already Back Into Recession Territory And Why The Japan "Ice Age" Is Coming
Albert Edwards reverts to his favorite economic concept, the "Ice Age" in his latest commentary piece, presenting another piece in the puzzle of similarities between the Japanese experience and that which the US is currently going through. A.E. boldly goes where Goldman only recently has dared to tread, by claiming that he expects negative GDP - not in 2011, but by the end of this year. After all, if one looks beneath the headlines of even the current data set, it is not only the ECRI, but the US Coference Board's Leading Index, Albert explains, that confirms that we are already in a recesion. If one takes out the benefit of the steep yield curve as an input to the Leading Indicator metric, and a curve inversion physically impossible due to ZIRP and the zero bound already reaching out as far out as the 2 Year point (it appears the 2 Year may break below 0.5% this week), the result indicates that the US economy is already firmly in recession territory. Edwards explains further: "one of the key components for Conference Board leading indicator is the shape of the yield curve (10y-Fed Funds). This has been regularly adding 0.3-0.4% per month to the overall indicator, which is now falling mom! The simple fact is that with Fed Funds at zero, it is totally ridiculous to suggest there is any information content in the steep yield curve, which will now never predict a recession. Without this yield curve nonsense this key lead indicator is already predicting a recession."
All too obvious double dip aside, Edwards focuses on the disconnect between bonds and stocks, and synthesizes it as follows: "investors are finally accepting that what is going on in the West is indeed very similar to Japan a decade ago. For years my attempts to draw this parallel have been met with hoots of derision but finally the penny is dropping." The primary disconnect in asset classes as the Ice Age unravels, for those familiar with Edwards work, is the increasing shift away from stocks and into bonds, probably best summarized by the chart below comparing global bond and equity yields - note the increasing decoupling. This is prefaced as follows: "The reaction of bond markets is wholly appropriate given it seems we are heading into outright deflation. The increasing divergence of bond and equity market yields that has been a key plank of the Ice Age will continue (see chart below). Equities will look increasingly cheap relative to expensive bonds."
And just like in China, with time stocks will become increasingly cheaper when compared to bonds, whose intrinsic value due to their cash flow generation will make them a preferred asset. Granted, during the Japanese "Ice Age" it was not the case that the entire world was leveraged to the gills, and sovereign insolvency was a household phrase. We have certainly entered a new regime, in which excess debt makes the certainty of future coupons increasingly problematic. Although, courtesy of the reserve currency status, the US is likely insulated for the time being from an outright collapse in bond prices. But that is a topic for another time, and, incidentally, Edwards touches on it at the very end of his piece (more below). In the meantime, one thing is certain, that stock on a relative basis will become ever cheaper. As such, the recent dramatic divergence between stocks and bonds which we have been charting almost daily, presents some great entry points in an ongoing attempt to short the market on both a relative and absolute basis. For those wondering what Japan predicts for relative values between stocks and bonds, the chart below has nothing favorable to report:
Here is how Edwards captions the chart:
The de-rating in Western equities continues to rhyme in a surprisingly familiar way to what we experienced in Japan a decade ago (see chart below). Another cyclical rally has led to a temporary pause in the structural de-rating process ? just as it did in Japan a decade ago. US equities looked cheap verses bonds last year but will look even cheaper next year!
Edwards' conclusion is troubling, as it confirms an observation we ourselves have had: in its aggressive intervention to provide a basis for an accelerated sugar high, the Fed threw the monetary kitchen sink at a multi-trillion deflationary collapse. In doing so, it did in deed conceive a dramatic bounce in stocks from a fair value that is still well in the mid-triple digits. If Japan has shown anything, is that reversion to a long-term mean is inevitable. Yet its decline was gradual. Our own will likely be a mirror image of the spurt to the upside. The Fed knows this, which is why we have no entered a period where the half lives of new and improved monetary intervention will be ever shorter, in many ways comparable to the Swiss National Bank's intervention in the CHF. If the market is allowed to find its natural place without endless Fed manipulation (and not necessarily of stocks: the outright open intervention of USTs, MBS, and monetary aggregates is sufficient), the plunge lower will be severe, dramatic and instantaneous. Which explains why on Tuesday everyone anticipates a new message of monetary loosening, regardless of the form it ultimately takes. However, it is unlikely that this will be the last, or even a material, QE phase, as otherwise prices, even those of core CPI items, would have already risen. Alas, as deflation accelerates, and QE episodes become clustered and ever more frequent, the Fed is telegraphing that as we approach the endgame, it has little to no options left. The practial application of this be a plunge in stocks far more pronounced than the March 2009 lows. To wit:
Inflation continues to ebb away. In Japan core CPI deflation, at -1.5% is the worst on record. While in the US, the corporate sector is seeing its weakest pricing power on record ? even worse than that seen in the deflationary maelstrom during the Asian crisis (see chart below). We have consistently articulated the view that the severity of the current situation will only be appreciated when this current cycle ends in failure ? and that is not too far away. That will be the time that equities will plunge to new lows.
Will that be the end? Not at all. For as long as the Fed is in control of the US, and thus the world, it will do all in its power to preserve the wealth of the current kleptocracy. After all, aside from the bullshit about its dual mandate of keeping fake inflation and massively misrepresented employment low, this is its true prerogative. And to do that, the historian at the top has learned all he needs to know. Not from the Great Depression, mind you, but from the Weimar Republic's very own Rudolf von Havenstein. Indeed, as Edwards concludes, the penultimate phase will be fire, not ice.
And that, not March 2009, will provide the buying opportunity of a generation to hedge against the coming Great Inflation.
Yet whether it is fire or ice at the very end of the regime, is irrelevant. It will, after all, mark the transition to the next phase. And as such all legacy forms of wealth will be extinguished.
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China's Inter-Company Lending Ponzi Dynamics
Another Chinese listed company is in deep financial stress, due to 1.3billion in shark loan debt. An angry mistress reported the corruption of the chairman of Shenzhen International Enterprise (000056) to the Chinese authorities. In 2007, the company shifted its core business from managing department stores to commercial real estate developing. Years ago, one of the mistresses of its chairman began to report his corruption to the authorities. It turns out that he has at least 4 young mistresses, and has sent two of them to study abroad. He is suspected of transferring the listed companies profit to his mistress’s firm.
China's Inter-Company Lending Ponzi Dynamics
Cheers for this D22. Seems the real moral of the story here is not how much you borrow or lend, to whom, at what rates and what collateral is pledged.
as a corupt official, rule number 1 is: if you are going to keep a mistress, you have to keep her happy!
I think our last chance if we are ever going to get out of this is to hope Benanke has an unhappy mistress.
"... about (the fed's) dual mandate of keeping fake inflation and massively misrepresented employment low..."
freudian slip perhaps? hehe...
I read somewhere that 60% of the LEI is stock prices, money supply and interest rates, so it's skewed to non-production by design. Who knew?
Not true...
Leading Economic Index Factor
1 Average weekly hours, manufacturing 0.2725
2 Average weekly initial claims for unemployment insurance 0.0322
3 Manufacturers' new orders, consumer goods and materials 0.0809
4 Index of supplier deliveries – vendor performance 0.0715
5 Manufacturers' new orders, nondefense capital goods 0.0192
6 Building permits, new private housing units 0.0263
7 Stock prices, 500 common stocks 0.0373
8 Money supply, M2 0.3248
9 Interest rate spread, 10-year Treasury bonds less federal funds 0.1058
10 Index of consumer expectations 0.0295
Money supply, int rate spread and stock prices = 46% weight. Pretty substantial even if you are technically correct. One wonders if ZIRP 4VA allows past performance of this weighting to predict future etc . . .
3% of that 46% is stock prices. 32% is Money supply. Interesting wording you chose.
Anyone know exactly what all is included in "manufacturing"? A decade or so ago, they wanted to add the fast-food occupation of "burger assembly."
Anyone else remember that?
once they got rid of the McDLT they had to let that idea go... it did take skill to keep the hot side hot and the cool side cool
http://www.youtube.com/watch?v=UTSdUOC8Kac
2 chinese Mccheese burgers please!
I can't believe I've never seen that video before. Thank you.
I can remember when the Reagan administration ruled that ketcup was a vegetable for school lunch funding purposes but not when burger assembly was listed as manufacturing. Restaurants have always been service businesses.
i remember when McD's first opened, back in the day. my brother and sister would drive with friends every day to eat hamburgers. i personally never liked hamburgers, cause of the mustard and ketchup and pickles. they would get so mad that i had to order a plain one and they had to wait for me. so i just stopped that, and just ate the french fries, which at the time were tolerable. fast food = suck food. actually growing up swear i only ate plain pasta, no sauce cause it is R E D, and cereal, but was allergic to milk had to substitute. went to a Kellogg sponsored summer camp, so that worked out well only got to eat cereal. better now thanks, cogdis.
And as such all legacy forms of wealth will be extinguished.
That is such a wonderful way to end.
Isn't it...
land is still land and gold is still gold
i don't see any other 'legacy' wealth around..
It will, after all, mark the transition to the next phase. And as such all legacy forms of wealth will be extinguished.
That sounds very populist to me. Something that would warm Huey Long's heart a little bit.
WWHD?
And so, What Would Huey Do?
Ally with the Nazis to fight Stalin?
That's a really well written piece. Pleasantly surprised a non 'inflation, toMorrow!'piece would get such fair treatment here on ZH.
Any well reasoned article gets fair treatment here, regardless of topic. It's the boneheads who credit their skill after hitting blackjack 6 times in row are the ones that ZH readers spit on. It's pretty irritating when some permabull posts on here and says "I told you so that the market will go up" right after the market just went up 200 points on low volume day with no news (read: the "broken clock is right 2 times a day" theory).
An article on ZH that states gold is going way down would get credit on here if the author brought up valid points.
cough..cough.. Leo.. cough
Is Leo still running around saying theres about to be a huge drop in unemployment?
Last seen he was looking off into the distance with that 1,000 yard stare, mumbling about a liquidity tsunami that was on the way . . .
Well put, Homer!
Just another article telling us how we are all completely screwed.
Scary!
Buy gold and other PMs. Pull out $500 (or your local currency) from the ATMs on Thursday.
i've never been fixed annuity fan always believing "they're the biggest scam ever" but I'm being forced by Mr. Market to reconsider. Needless to say "you can't blame CNBC" since when have you ever heard of them interviewing "the chief variable annuity advisor from Prudential." wouldn't it be nice to know if they might be buying equities, though?
Variable annuities at SP 450 ... hold 10 years.
Tyler, is there a link to the entire piece by Edwards? Thanks.
And as such all legacy forms of wealth will be extinguished.
Very tentatively I am targeting that when this fear/realization of its (potential) reality becomes widespread, that's the buying opp of a lifetime. But who will have the money or the cojones?
Bone up on the detailed financial history of 1932-3 (pun intended).
But, what the heck would anyone be buying? Ponder that question really hard, for it operates on several levels. Hint: there's a reason stuff is cheap- it's in excess, or it's not desireable.
Perhaps someone would be kind enough to refresh my memory. When did QE 1 kick in and how did equities respond? Followup, is there a correlation to equity prices? Was the July runup the inside money?
QE 1 was looked at as the way to get things going again, but when it was recognised that it wasn't working stocks starting correcting after the initial runn-up. QE2 will cause an initial smaller jump, but then be recognised for what it is- an admission of failure; then the stock market will head down a lot more.
Excess liquidity will flow to all asset classes just like it did during QE1. Stocks, bonds, oil and gold are all higher since 2009. The only things that have gone down are employment levels, regular hourly wages and purchasing power (for things we really need like food and energy). The regular guys get screwed and the banksters and politicos get richer. QE2 will be no different.
The Feds supposedly dual mandate is a crock of shite - low inflation and low unemployment. The latter is just used as justification for ZIRP. Structural unemployment will never be solved for an iCrap-obsessed populace whose deepest debates concern who will be kicked off from American Idol next week.
That's how it was _sold_. I think that most people here understand that it's all just a way to funnel yet more money to TPTB, in which case it was a smashing success.
QEII is a payoff to the next tier folks who went along with QEI. Their cut, being that they aren't the leading players, will be smaller, but they'll still get free money.
QEII will be for the rest of us, and it will amount to pure marketing BS, with no actual product being delivered- read "no free money," as it'll really be the bill for QEI and QEII made to look like a gift!
The cycilally adjusted PE (CAPE) will have to revert to its historic mean. It has been vastly overvalued for years, and will have to remain under its historic mean for years. This means S&P below 400 for years.
i don't think we hit new lows, the currency takes on a 3rd world effect and gold and the dow meet between 15000-20000. If not higher. We will go down to maybe 8500 this fall but this is now a sovereign debt crisis.......gold to the moon. Bernanke is going to release that gold revaluation tool shortly. Sniff sniff "he is going to change fed policy on Wednesday" now i know hes not raising rates......the gold revaluation tool is waiting
http://www.youtube.com/watch?v=YKn6h2x5IcY
All I have to do is dream
guess who is moving back to T E X A S , after son graduates H.S. (janko?)
forbes list after, O P R A H W I N F R E Y
cheeks, your not that rich‡
Zhu??
http://www.forbes.com/lists/2010/10/billionaires-2010_Zhu-Yicai_ZNT5.html
World's richest butcher
Sitting in my grad school classes, my finance professor tells us it's such a great time to buy a home...I chuckle inside. Classmates discussing how they decided to take advantages of all the great deals out there.
LMFAO at your professor....too bad I graduated in 2008...i would have clowned the whole class
land is still land.. if you really want to be wise tell them to buy the worst houses out there that are in good locations
Buying a house is not like baseball since there is no such thing as called strikes. You can just let a home pass you buy since you only need to be right once. (Yes its a Warren Buffet line but God I love to use it)
At this point soon to be home owners can wait it out. You just have to tell yourself that its always better to buy a home at a lower price even if its at a higher rate instead of buying a more expensive house at a lower rate.
If there was ever a time to be picky about getting a home now is the time.
Cheers,
To be clear, are all these comments about "buying" a home in reference to actually purchasing a home, or are we talking about leasing it from the bank? Purchasing a home outright is a great idea, but putting a mortgage on ones back in a soon to be unstable or collapsing currency is very risky at the very best.
Further, one has to make the distinction between fuck-boxes and income-producing properties. Income-producing properties are real investments, something that is able to give a return, can have value in any market. NOTE: my idea of income-earning properties is not that which most equate to.
When the ponzi falls, and hyperinflation takes hold, and you are bound to a mortgage interest rate, you could pay off your house with a single ponzie FRN - a trillion dollar one and get 999 billion back. Use your change to buy a crust of bread.
Meanwhile, don't pay extra on the mortgage, and put that excess into gold, silver, wheat, and guns, not necessarily in that order.
Those who can, do. Those who can't, teach.
and those who can't teach, teach gym
and those who can't teach gym become Treasury Secretary.
And those who can't "treasury-secretary" go to work for GS.
Your professor is right.
Until ALL the optimism is burnt off everything will be better. However, when all the optimism is gone...
"And as such all legacy forms of wealth will be extinguished."
So, what will the new forms of wealth be?
silly bandz
Geez, man! Everyone knows it's beads!
hey Loris where ya been, honey?
So, what will the new forms of wealth be?
Rentendollar, subdivided into 100 rentencent (<- rhymes nicely, doesn't it). The Fed will issue those, and back the new currency with whatever they're able to get their hands on: land, cattle, babies...
ROFL
We can work out a long term plan involving austerity, cutbacks, taxes, soft government defaults on entitlement programs, and low growth. Nah.
Or we can go with Fed Plan A : Print, Baby, Print!!
"More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly." -- Woody Allen
I suspect manufacturing now includes any business that deals with a "good", whether the good is actually manufactured in the US or if it is manufactured in a foreign country, imported, market up and distributed in the US ... as is MOST common now.
Is it wrong to observe that it plays to "stereotypes" that our first African American President spent his 49th birthday playing basketball with a bunch of African American NBA superstars, while his wife was partying with Spanish Royalty in Europe at tax payer expense, while the country is mired in a depression? WTF is going on?
lmfao...damn..yea thats fked up..I am blk also....oligarchs could give 2 craps about anyone else though :(
Its all the trappings and tribulations of a royal family. (brings a tear to my eye)
In a way I think much of the nation expects them to behave in such a manner. We say we don't like them to live opulent lives but deep down I think we like it.
So back to the whole "life of luxury while the country suffers" concept.
Ahem... (clears throat)
The king and queen do not fix anything! Or President and First Lady just to avoid a minor semantics based argument.
Parliament (Congress) is the place for the fixing of things or the un-fixing of things. Always has been and it will always be. Of course parliament is just the political arms of the wealthy who bribe officials (lobbying is the modern term but its bribery) into actions both good and bad.
So take away all the frivolity of our royal family and your nicely bribed parliament we arrive at your real question.
"Why aren't the wealthy doing more to help out the country?"
Maybe the nobility doesn't need America anymore.
http://www.nakedcapitalism.com/2010/08/do-the-rich-even-need-the-rest-of-america-anymore.html
They need the baffled to pay withholding tax to support the MIC. They need honorable patriots to be their patsy's to staff the ranks.
If the baffled and the martial ranks learn the truth, the nobility will be hunted down in Zurich, Monaco, BA or wherever.
A big if but still possible.
As Billy Joel says: you may be right, I may be crazy but it just might be a Robespierre we're lookin for!!!!!!!!!
I never knew that was the line. Robespierre would just have all of their heads cut off! Who knows, we might be in for a modern Robespierre-but as I recall from a liberal arts French History lesson, his use of the guillotine was similar in method to McCarthyism except you really lost your head!
"Deep down we like it" ... I no level or depth do I like it. I so respect power than can be humble and sensitive to the times.
Harry Truman, after completing his term as President, packed his personal belonging into his Studebaker and drove home to Missouri. He knew that he was a servant of the people and not that the people were his servants.
P.S. oh, only if Mr. Soetoro would drive home in his Escalade to Hawaii.
And while things were melting down behind the scenes there was George W. Bush playing cowboy down in Texas, showing his macho cheerleading skills, er, a, chainsaw skills...
I wish people would quit perpetuating all this crap (voting)!
One interesting parallel between Japan and the U.S. is Japan had its copper market-corner, while the U.S. had its oil market-corner. I just wonder if the copper that piled up was used to lease as 'gold equivalent' at some point. You still have tankers of crude sitting in ships around the world.
Japan also benefitted from being on the doorstep of one of the biggest growth stories of history, which was the migration of workers from the countryside to the city in China during its deflation, whereas the U.S. relied on the global trade in derivatives, which was also a massive historical adjustment.
Remove every fraudulent aspect from the gold markets, and allow it to trade freely as money without the hindrance of taxation, as long as its in bullion or minted coin form, you would have a wealth-creating phenomenon.
Edit: This is assuming that the onset of financial problems was officially year 2000 with the Nasdaq crash. In inflation-adjusted terms, this was the peak. What followed was an unprecedented derivatives growth due to legerdemain. Even though the derivatives market was hyperinflationary in terms of growth, inflation remained a measured pace throughout the decline of the discount rate.
In the CPI-adjusted without lies, the SPX underperformed the Nikkei:
http://www.NowAndFutures.com/forecast.html#bear_markets
http://dshort.com/charts/N225-SP500-deflation-series.html?N225-SP500-ove...
If these charts are correct, then deflation-in-earnest starts now.
I see the Nikkei struggling now ! > down over 1.0 %
Batten down the hatches kids this is going to be along decade !
http://theautomaticearth.blogspot.com/2010/08/august-8-2010-stoneleigh-t...
Stoneleigh: There's an interesting interview at The Energy Report with John Williams of Shadow Stats ( John Williams: Times That Try Our Souls ), which I wanted to discuss because, while there are many aspects are we would agree with, there are other glaring differences with how The Automatic Earth sees the future unfold. It is worth looking at the article in some depth in order to find the source of the disparities.
Mr Williams' prediction is hyperinflation, although, like us, he is predicting a great depression. One major distinction between TAE's view and that of many inflationists is the definition of inflation. It is clear from the interview that Mr. Williams' definition is increasing prices. Readers of TAE will know that our definition is a monetary one - an increase in the supply of money, credit and velocity thereof relative to available goods and services. We have consistently pointed out that using a price definition of inflation removes all the explanatory and predictive value from the concept. Prices changes are lagging indicators of changes in the money supply, complicated by other factors, both globally and locally. For instance, global wage arbitrage has been a major factor driving prices down in recent years, despite a tremendous credit expansion.
Prices do not tell a story by themselves. It is necessary to assess price drivers in order to understand what is unfolding. It is then necessary to adjust prices for changes in the money supply in order to see what is happening to prices in real terms, as opposed to merely nominal terms. Prices in real terms show what is happening to affordability, as it is not price by itself that matters, but price relative to how much money one has in one's pocket.
Despite his call for an inflationary future, Mr Williams lays out the case for deflation, as defined in monetary terms:
Williams also points out that the actions of the FED so far are not having an inflationary effect:
It is indeed pushing on a string. Trying to stuff more credit into a system that is already choking on it will do nothing to increase the money supply in circulation. It cannot -even possibly- be inflationary. We are already in monetary contraction, as Williams has noted, and the contraction of credit makes the situation considerably worse than it appears from traditional money supply measures. Contraction is being aggravated by a fall in the velocity of money, as people, companies and banks hang on to what cash they have.
In a deflation, real interest rates are always higher than nominal rates. The real rate is the nominal rate minus inflation, and when inflation is negative, the numbers are added rather than subtracted. Even zero in nominal terms is not low enough to make the real rate sufficiently low to reignite borrowing and lending.
This is the liquidity trap, and governments are thoroughly caught in it already.
There is no chance that the money injected by the Fed will find its way into the real economy, and no chance that it will ignite a wage/price spiral in an era of credit contraction and rising unemployment. Employees will have no pricing power at all under such circumstances, which means that wages will fall rather than rise. Prices will also fall, as the withdrawal of credit will remove price support across the board. However, even as prices fall, affordability will be getting worse, because purchasing power will be falling faster than price.
People typically understand that inflation can make things less affordable over time, but deflation can do so much more quickly and much more comprehensively. The scenario that Williams describes is one of the effects of deflation, with real prices shooting up and everything becoming dramatically less affordable in a very short space of time.
We agree with Williams as to the prospects for the real economy in the near term:
We also agree with Williams as to the nature of the problem - credit expansion - and his observation that credit availability is decreasing:
Without the ability to expand consumption, there is no price support even at current levels, let alone a chance for prices to rise. Credit expansions are based on Ponzi dynamics - the creation of multiple and mutually exclusive claims to the same pieces of underlying real wealth pie, as opposed to cutting the pie into a larger number of smaller pieces as currency inflation would do. The Ponzi nature of credit expansion is the determining factor in the ultimate fate of all bubbles.
Like many inflationists, Williams describes a deflationary scenario, but then says that governments will simply print currency:
This projection does not recognize the power of the bond market, which is much greater than that of governments. Any government attempting to print actual currency is going to find that the bond market sends its interest rates through the roof in very short order.
Governments do not set interest rates.
They merely choose a rate to defend. If that rate is radically different from what the bond market thinks appropriate, then the government will bankrupt itself very quickly.
If the bond markets raise interest rates even marginally, while so many governments are very vulnerable to any increase at all, the result will be a tsunami of debt default, which is deflation by definition.
Again, as with most inflationists, Williams supposes that governments have the power to prevent extremely negative outcomes:
Governments do not have the power that people imagine them to have. They cannot overcome the power of the collective, when that power is focused like a laser beam in one direction. Governments are going to find that the number of claims on their resources skyrockets, even as their tax receipts fall dramatically and their ability to borrow is curtailed by rising interest rates as a reflection of rising sovereign debt risk. Debt-junkie governments will be caught in a liquidity trap until the power of the international debt financing model is finally broken, as it will eventually be.
However, this does not happen overnight. Until it does, the power of governments to print will be sharply limited. We would expect this to remain the case through the era of deleveraging, which should last for several years. While inflation may be a long term threat once the power of the bond market is broken, that threat lies much further down the line. It is deflation that is today's threat, and deflation that people must prepare for right now.
We agree with Williams' diagnosis that a depression is imminent, but not his hyperinflationary rationale for it:
Wiliams has a very different view than The Automatic Earth has of the relatively near-term prospects for the US dollar:
The Automatic Earth says that the value of the dollar will increase sharply in the short term - over the next year or two - on a combination of a knee-jerk flight to safety into the global reserve currency and the deflation of dollar denominated debt. Both of these factors will create a demand for dollars, which should act to increase their value relative to other currencies for a period of time. We are not arguing that the dollar is a long term bet - far from it in fact. All fiat currencies eventually die, but now is not that time.
We have argued that people need to hold liquidity during the period of deleveraging, as the risks to cash will be lower than most other wealth preservation strategies. At the point when they can afford to do so without debt, which will depend on how much money they have to begin with, they need to move into hard goods. In doing so, they will prepare for an eventual bottom, at which point inflation should be a genuine threat. People need to be fully liquid at tops and fully invested (in hard goods in this case) at bottoms. In doing so they will be doing the exact opposite of the larger human herd, which is always the best prescription for success.
Williams holds a commonly-held view of the direction of oil prices, and their 'inflationary' impact (in price terms):
This is at odds with The Automatic Earth's view of where oil prices are heading in the short term. Our prediction is that falling demand (where demand is not what one wants, but what one can pay for) will lead to falling prices, but that more rapidly falling purchasing power (due to the collapse of the credit that represents over 95% of the money supply) will ensure that lower future prices will be less affordable than higher current ones.
We are predicting lower prices for oil initially, but are expecting demand collapse to set up a supply collapse down the road due to lack of investment in exploration, development and maintenance of existing infrastructure.
The financial crisis thus takes the pressure off in energy terms initially, at the cost of aggravating energy crises significantly in the longer term. Supply collapse will lead to skyrocketing prices in an era of tight money, when most people have very little purchasing power. It will also greatly increase the odds of a resource grab by governments seeking the ultimate source of liquid hegemonic power. Oil can be expected to lose fungibility, and ordinary people may be priced out of the market for fossil fuels entirely.
Williams offers a prescription for preparation that we would take issue with in a number of important respects:
While (physical) precious metals have been money for thousands of years, and can be expected to hold their value over the long term, they are not ideal for those who are not exceptionally wealthy, i.e. those who can sit on them for perhaps 20 years without having to rely on the value they represent.
Those who would be forced to sell - into the ultimate buyers market of the coming years of deleveraging - would have been better off holding the cash that most will be seeking in the not too distant future.
Governments are very likely to seek to control assets as valuable as precious metals, as they did during the depression. Ownership could be banned and precious metals could be confiscated. It can be as challenging being too close to a source of great value as it is being too close to the centre of power in difficult times. It can mean constantly having to watch your back and never being able to trust anyone. Our view at TAE is that there are many things you could own which will serve you much better than precious metals.
We would agree with Williams' suggestion as to what kind of supplies to hold in order to have some control over the essentials of your own existence:
While he suggests this as a hedge against inflation, we suggest it as a hedge against general economic disruption. Deflation is very likely to lead to a collapse of global trade, as letters of credit dry up and protectionism leads to retaliation-inspiring and -inspired import tariffs and trade wars. As we have a trade system built on long and vulnerable just-in-time supply lines, supply disruption under such circumstances is very likely. Holding one's own supplies of certain goods, along with liquidity, is therefore a good idea.
We have a great deal of respect for John Williams and what he has achieved with Shadow Stats, but it is always important to assess the foundation of people's predictions. Williams does not appear to accord sufficient significance to the role of credit and the effect of its evaporation during a Ponzi implosion. He also, in our view, chronically over-estimates the power of governments to control the way that events unfold. Outcomes are possible, indeed probable, that no one would choose. We simply do not have that choice to make. We will be at the mercy of the underlying logic of the system we have built during the expansion years, and that logic leads directly to a deflationary depression.
There you go quoting Stoneleigh. Since their site is not concerned with how to short the collapse she doesn't go over as well here but she is spot on as usual.
Hyperinflation and inflation are different things.
Hyperinflation results from loss of confidence in currency.
It's really not a hard concept to grasp. Go read any of the Austrian economists, they do a good job explaining it.
This post seems to subscribe to the monetary theory, at least in reference to velocity of money. Henry Hazlitt debunks the concept that velocity can produce a hyperinflation for several logical reasons. Read his book, The Inflation Crisis and How to Solve it, available at mises.org.
An excellent piece for thought...
"Prices will also fall, as the withdrawal of credit will remove price support across the board. However, even as prices fall, affordability will be getting worse, because purchasing power will be falling faster than price."
What is missed in this equation, and EVERYONE misses this, is that prices HAVE to go up as production volumes are reduced. It's economies-of-scale in reverse, and it's something that we really haven't encountered before, given our highly industrialized world. But, I do agree that the real issue is that of affordability rather than pure price, and in this case reversing economies of scale will result in signficant reductions in affordability.
Also, there ARE things to invest in that are better than dollars and canned food (and other perishables), and it's as old as dirt... (and no, it's NOT gold).
Yes ....as to: Williams does not appear to accord sufficient significance to the role of credit and the effect of its evaporation during a Ponzi implosion. He also, in our view, chronically over-estimates the power of governments to control the way that events unfold. Outcomes are possible, indeed probable, that no one would choose.
(Well said by the way.)
No....as to: We simply do not have that choice to make. We will be at the mercy of the underlying logic of the system we have built during the expansion years, and that logic leads directly to a deflationary depression.
(Well, sorry, but No - only true if "whole systems were not collapsing and reinventing themselves at the same time - no we are in unpredictable waters - we know what is crashing but we don't really know what it is all going to look like when all the crashing is "over" - if it ever is - this may be the "new" normal for awhile. I hope not.)
There is nothing in our accepted recorded history of humanity history that is like "right now" our present.
Great comments, folks! Thanks for all the pertinent views.
Once again on a Sunday evening at the church of ZH.
Has anyone else noticed the peculiarities with the S&P futures compared to the DAX, FTSE etc.? Last two trading days when the major european markets melted up intraday, /ES didn't follow along... Something is seriously broken. How's breadth?
Thanks for the observation ... If Monday Meltup is meek and mild the Tuesday Tumble will be a week and wild.
Do you/anyone know if QE2 is coming tomorrow or not? Getting very mixed signals across the board, but I guess we'll know by tomorrow.
TOMORROW!! you are a real prophet if it comes. I think that if it were tomorrow, and anyone knew about it ES would be at 1150 not 1120.
I'm not so sure... Announcing QE2 would be to admit that they've been wrong/been lying about the recovery.
You're thinking too fundamentally. For sure it would be another nail in our coffin; however, I think that there would be a several day knee jerk reaction of at lease 30 ES points ... that is when it is time to pile on SDS, TZA, SSG, and EDZ
Might be, but looking at the Dax (topping), USD (major bullish divergence on the way), I would be surprised to see /ES at 1200... Although there is a possibility.
Top at 1137.50 on Wed if no QEII at 1167.50 if QEII is soon.
the first one is the one i am crying for...will also complete the Right shoulder
Keep your finger on the pulse of the amero.
I guess 'better than expected' as usual spin for Monday pre market futures ramp?
Spin = "Look the market recovered so nicely after Friday's horrible news ... nothing can bring down this market ... therefore, it must go higher". Also better buy now (Sunday) than wait until the Monday Meltup.
I drew a line on the 4th of this month, it was at 1118.75. The market has spun around that line since then. I don't think it's far off to say that someone or something (Bernanke doesn't count as someone anymore) is holding a huge Nick Leeson type short straddle. Of course this entity will also pay dearly if the options don't expire around this strike. As most people right now, I'm just guessing why the market isn't moving.
So why and when exactly will we have hyperinflation, considering that Japaense CPI went nowhere in the last 20 years? Edwards completely misses making that argument in his comparison with the Japanese example.
Albert Edwards couldn't find his ass with both hands. Despite his certainty of a gloomy future, we're unched on the year. This after an 82% rally off the lows. You would be better served looking at the aftermath of previous banking crises (1907 for starters), and analyzing what happened (Hint: The market went up).
While you guys print some good stuff, put down the bong once in a while and thimk about what is already discounted. The herd is selling equities, do you really want to run with those folks?
1907 ... don't remember, but things might be a little different then.
"The herd is selling equities"? ... Why is the market going up if the herd is selling?
Your reasoning seems a bit problematic.
What does the situation today have in common with 1907 ?
Just look at a graph of total debt to GDP :
http://theeconomiccollapseblog.com/wp-content/uploads/2010/07/Total-US-Debt-As-A-Percentage-Of-GDP.jpg
Did total debt decrease after 1907 ? Nope. Went up for the next 25 years.
You are another commentator who hasn't yet understood that the cause to our crisis is an astronomical bubble of total debt. There are only two historical parrallels to this massive deleveraging that is now taking place, one is the great depression, the other Japan since 1995. And No, there was no V shaped recovery in either cases.
No V shaped recovery, but certainly no hyperinflation "at the end" neither. This entire notion of "a little deflation first, then huge inflation" idea has been debunked as a giant air bubble.
I disagree:
a protracted deflationary depression can quite likely engender a crisis of confidence in the international financial system that will cause savers to prefer hoarding "stuff" (canned food, oil, medical supplies, agricultural supplies and land, spare parts, precious metals) rather than cash and cash equivallents. When the 30+ year bull run on bonds will end, it will collapse within a few months, investors will panic and try to convert en masse their Fiat denominated bonds into useful "stuff" for the future.
This didn't happen in Japan because:
private deleveraging causing deflation was unique to Japan (whereas now it is general to all advanced economies) and during that time the world economy grew, Japan being an export led economy benefitted immensely from this and managed to avoid a depression (slow growth instead of collapse).
This time, the deflationary depression is going to hit all advanced economies simultaneously (ie 65% of world GDP instead of 6%).
Now the world economic equilibrium is broken, the international financial system has become highly instable, first we will have a 4 to 6 year protracted deflationary depression with an acceleration of the inventory business cycle (ie bull run on bonds will continue during that period and equity markets volatility will increase greatly) followed by a sudden crisis of confidence in Fiat currencies and a collapse of the bond market.
Excellent rebuttal!
Agree. If one steps away from the temptation to make macro forecasts ( the scarier the better) - and looks at actual companies - there are values to be had.
Lots of folks have been scared away from the right investments because of the volatility, excess exposure in the past and difficult personal financial circumstances.
So - everyone is so scared of the future that they want a "secure" 2% yield in medium term govt bonds. At a time when the commodity indices are rocketing higher and most of the world is hardly in a great depression - far from it.
The only reason the world economy has been growing during the last twelve months (by about 3.5%) is thanks to government stimulus of about 10% of GDP.
And you really think that can continue for a long time?
Bonds (USU0 +.125) and SP (ESU0 +3.75) continue to track 'up' together = more confusing anomalies
DOW and SP500 weekly charts update :
http://stockmarket618.wordpress.com
Keep posting these articles, they will keep the timid on the side. Soon they won't be able to stay on the side as day after day they watch the profits pass them by.
Get long I said two weeks ago, get your free money, the market is rigged to the upside till the November election. This site has many of you brianwashed, it's feeding your inner fears. As the market marches higher you will soon hate this place. Free yourself, price action is all that matters, price action is telling us the market wants to go higher.
I would rather go to the casino and play single deck black jack than to throw my money to the mercy of these robber barons.
Hm... ever wonder why that money is "free?"
My "long-term" is miles longer than yours. While you're sitting there playing with Monopoly Money and on the verge of starvation I'll be managing to chug along. But, by all means, please do keep every distracted, as this just helps me gain greater distance.
Thanks for playing!
Investing has been made diabolically difficult because of wall street and hedge funds and the excessive volatility they create.
The problem is - the "right" investments might well be in well chosen equities today. Which may provide a 7-10% annualized return over the next few years. However, one has to have the stomach and deep enoug pockets to live through the inevitable 20% drawdowns along the way. Which is difficult for most people.
So most people are unfortunately going to be in the worst possible invest,ment - long term govt bonds yielding 2%.
Hmm - it just occured to me. Maybe that is the PLAN. Make the markets scary and volatile so most regular folks volantarily go into Bernanke Bonds. Heheheh.
In the old days when men were men etc - the govt had to plead with people to lend it money - war bonds etc had to be marketed.
Not now. With a bunch of nitwits and flabby , unthinking peasants - the best marketing strategy is - FEAR.
Just shake the tree a little and all the critters will automatically buy govt bonds. Brilliant!!
In the event any one is under the misperception that figuring out the macro situation will help you make money - here is a good one:
Guess what the best performing stock market in Asia has been this year.
yes- the country whse capital was routinely shown on TV as being ablaze!! Thailand!!!!
"from a fair value that is still well in the mid-triple digits"
Got a love these arbitrary statements of value based on nothing than some subjective sentiment