John Taylor: "Cash Is Now King, Worthless Or Not, So Buy Dollars."

Tyler Durden's picture

In his latest must read letter, John Taylor picks up where Goldman left off a few days ago, and follows up on the implications of Keynes' savings paradox, which as explained by Goldman, and now by Taylor, has to do with the fact that with the entire world entering an austerity phase and thus cutting off public sources of capital to offset private sector contraction and deleveraging (as per the Current Account equality), the slowdown in economic growth is virtually assured. It also explains why companies are hording cash. The result is a massive schism in perceptions between micro and macro analysts: "the result is that
the vast majority of the analysts that examine individual companies are
bullish and almost all of the macro analysts are bearish, many like us,
and dramatically so." Further adding to the dire macro picture, "because nominal GDP is growing more slowly than the outstanding national
debt is compounding, it is becoming a more oppressive weight on the
“non-S&P” economy, tightening the financial position of small
businesses and the consumer." Which leads Taylor to this simplistic and spot on conclusion: "if consumers build up their savings, we know what happens to retail
sales and the GDP. On top of this the money multiplier comes into play.
With the global banking system suffering under an extremely high load of
worthless assets – whether recognized or not – and being forced to
improve their capital allocation for risk by the Basel II and Basel III
rules, banks must cut back the amount of credit that they make available
to the economy. The multiplier will force global economies to shrink in
the years ahead. Cash is now king, worthless or not, so buy dollars." Brief, succinct and 100% spot on analysis.

Micro Booms, but Macro Slump
July 15, 2010
By John R. Taylor, Jr.
Chief Investment Officer

This week, the US equity market is starting its quarterly earnings ritual and the odds favor a strong performance for the closely followed investor favorites. Although the game is rigged as almost 50% of the corporate managements have adjusted their guidance in the past month trying to lower analysts’ projections down to levels that the companies know they can beat. Despite the opera buffa quality of the process, the S&P 500 companies will still produce a dramatic increase in earnings over the second quarter of 2009. The same can be said of the major European corporations. The increase in corporate earnings and the projection of further increases seems to be universal, and many argue that the positive outlook for thousands of individual companies must sum to an impressive economic recovery.

Despite these positive micro stories, they do not add up to a happy macro outcome. There are several reasons why this is the case, but the result is that the vast majority of the analysts that examine individual companies are bullish and almost all of the macro analysts are bearish, many like us, and dramatically so.

There is a very large segment of the US, Canadian, and European economies that is not part of theglobal equity system and this major fraction of the economies is not doing at all well. Even if theoptimists will retort that moaning about the depressed readings in the National Federation of Independent Businesses (NFIB) reports, the collapse in bank credit, and the sharp decline in the ECRI leading indicators are nothing but anecdotal examples, they should carry at least as much weight as the positive earnings numbers. These smaller businesses represent the lion’s share of the internal and retail economies, while the giants represent almost all of the export and global part of the economies.

The slowdown in the non-S&P sector of the economy is actually reflected in the sluggish increase in the major companies’ top-line revenue, but the tight cost controls that have allowed their reported earnings to keep climbing has exaggerated the decline hitting the independent businesses. The shrinking cost of goods at every Fortune 100 company represents the top line sales of many smaller companies and the take-home pay of thousands of employees. Because nominal GDP is growing more slowly than the outstanding national debt is compounding, it is becoming a more oppressive weight on the “non-S&P” economy, tightening the financial position of small businesses and the consumer.

The macro pessimists actually have academic research firmly on their side. Just two points must suffice here. Keynes famously noted that there was a savings paradox. As I would paraphrase it, if one family saves, it is good for the family, but if all families save, the economy will be ruined. This is happening everywhere. The S&P 500 companies are all saving, by cutting costs – and building giant worthless cash mountains (like they did in the 1930’s) – but this is shrinking nominal GDP as their saved costs are others’ lost earnings. The global economies are all trying to grow by increasing exports, which is the same as saving. If there are no countries stimulating consumption, the world economy will shrink. If all countries try to balance their fiscal books, they are clearly saving. The Eurozone, the UK, and the American states are dramatic examples of this. And if consumers build up their savings, we know what happens to retail sales and the GDP. On top of this the money multiplier comes into play. With the global banking system suffering under an extremely high load of worthless assets – whether recognized or not – and being forced to improve their capital allocation for risk by the Basel II and Basel III rules, banks must cut back the amount of credit that they make available to the economy. The multiplier will force global economies to shrink in the years ahead. Cash is now king, worthless or not, so buy dollars.

h/t Teddy KGB

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Hansel's picture

No thank you.  I'm not in the market for worthless kings.

Abiggs's picture

It seems that most have forgotten about what happened in 2008. When credit is nowhere to be found and dollar guarantees cannot be rolled over, the dollar becomes the final source of liquidity. Unfortunately gold doesn't fare well in this type of environment neither...

jdrose1985's picture

+1

I'm not a fan of the current dollar system personally. It does however allow for some interesting opportunities to buy some thing very cheaply in dollar terms if timing is right.

If I'm wrong I have plenty of food supply, energy and my beautiful young bride. There are plenty of ways we can pass the time.

pan-the-ist's picture

I've been thinking about upgrading.  How much did she cost you?  Did you buy from Ukraine or Russia?

russki standart's picture

You are better off renting. Remember the 3 F´s?

tmosley's picture

That's a rather absolutist statement.  What makes you think that gold and currencies will act the same every time?  Europe is enacting austerity measures worse than anything we saw in 2008, but gold is off only some 4% from its high.

Further, since the source of the austerity is Europe, wouldn't it make more sense to crown the Euro as king? 

Abiggs's picture

Great Britain is the only European country enacting austerity that I know of. Last time I checked, it wasn't a part of the Euro...

Quinvarius's picture

Gold was at an all time high when the DOW was at 6500.  I don't know why people insist on making ridiculous statements to the contrary.  Look at a chart.

ATG's picture

We did.

Gold peaked in Feb 2009 at 1007.70 before the Dow bottomed in March and declined subsequently to 859.90 in April.

History repeats for those who do not learn from it.

http://stockcharts.com/charts/gallery.html?%24gold

MarketTruth's picture

He forgot about the Golden Rule.

He who has the gold makes the rules.

Food For Thought: One of the first things Hitter's military force did was upon invading a country they removed the country's gold holdings.

digalert's picture

How much do they want for them dollars and where can I get some? What form of payment do I use for them dollars and once I get some, what's my return?

PhattyBuoy's picture

A S S C L O W N

Sucka' on my balls two times!

 

Escapeclaws's picture

People who respond to comments like you have done here should really be automatically banned, even if, in your opinion, JohnnyBravo is the devil himself. Take your hate elsewhere.

Dismal Scientist's picture

more childishness than hate, I suspect. how tedious

Pamela Anderson's picture

Thank you Zero Hedge, I really appreciate the fact that you put Mr. Taylor comments.... is one of my favorites!

"FX and FX trading  lay hid in night:
God said, 'Let John Taylor be!' and all was light"

                                                             Alexander Pope will agree

Turd Ferguson's picture

Buy dollars, huh?

Yea, that makes sense. The US will only have to print, oh, 110,000,000,000,000 or so to meet all its current and future obligations. That's not dilutive at all to your current dollar holdings. No, not one bit.

Sorry, TD, but this guy Taylor is stuck in yesteryear, pining for the days of old.

bob_dabolina's picture

Yeah, I don't get it.

There are all these articles on ZH about how QE 2.0 is imminent and will be to the tune of between 2.5 and 5 trillion dollars. Maybe I don't have a PhD in economics but if you think the FED is going to debase the dollar by printing, yet also advocate buying dollars...uhm I guess I'm just confused.

Kinda' feels like the commentary about Roubini is self-applicable.

Hansel's picture

There are multiple Tyler Durdens.  Deflationist Tyler Durden posted this article.

Pamela Anderson's picture

"...banks must cut back the amount of credit that they make available to the economy. The multiplier will force global economies to shrink in the years ahead..."

The FED can print all the money that they want and keep giving it to the banks but if the banks don't lend it... forget about inflation.

"Cash is now king, worthless or not, so buy dollars."
Mr. Taylor is an FX, fix income guy. I think this is a polite way of saying "...short the shit out of TBT"

In case you don't have the pleasure of meeting Mr. Taylor here you have him... uhhhh what a man!!!!

Mr. Taylor ----> http://www.fx-concepts.com/meetthepeople.php

 

jdrose1985's picture

The treasury department prints anyways but yes the fed can extend all the credit it wants, unfortunately it just becomes caught in the liquidity trap.

Look at Japan. And yes u can make the argument that consumer prices have risen in Japan but it's more a function of the rising real costs of energy inputs on the supply side rather than monetary inflation.

ATG's picture

Good man; Stanford Preceptor Sponsor with Academic Senate

along with Michael Boskin...

Ropingdown's picture

The world has become dangerous in this way: The Fed can print to handle emergencies, but there is a definite limit on how much it can print before not only the T-market gets no funding, but also the US Corporate bond market. It is fanciful to think they can print away the problems.  Yes, the entitlement programs will have to be cut and taxes will have to be raised.  But the US will have to do these two until they work.  Inflating away the debts (of all sorts) is a dream inspired by the Fed so that people will not panic until we are (somehow) out of the Euro-debt quandary.  The administration, too, does not want people to think that the gov cannot possibly deliver on steady benefits, health or otherwise.  Cut off foreign funding by causing inflation? End of US economy. We all take our money somewhere else for a decade, one way or another.

Hansel's picture

If they are printing how would the T-market ever get no funding?

Yes, the entitlement programs will have to be cut and taxes will have to be raised.

We are going to default on obligations to our citizens and then make them give us more of their money.  That should go over nicely.

jdrose1985's picture

We are going to default on obligations to our citizens and then make them give us more of their money.  That should go over nicely.

It's sickeningly simple. It'll of course be blamed on some such bank or another, "bastards ruined it for all of us". Pecora commission comes to mind. Better yet the masses will be convinced it's all their fault like what Warren Buffett was saying when talking about the housing collapse on the TEEVEE a few months ago.

Island_Dweller's picture

We are going to default on obligations to our citizens and then make them give us more of their money.  That should go over nicely.

Exactly!  Will all of the trolls who come here and tell this board that gold is going down because of deflation please give this some thought.  You expect Joe 6pack to make less, pay more taxes, receive less from the government, AND sit around and watch all the banksters, government employess, brokers, hedge fund managers, and traders get wealthy!

HAHAHA!  and you trolls say we live in dream land?  Maybe gold doesn't "go to the moon", but it'll hold value; FRN's? total garbage; unless you like a boot stamped in your face forever.

Dollars as a trading vehicle is about all I can understand.  Yeah, maybe we have deflation for a while and your dollar buys you more; maybe.  However, I didn't even mention the rest of the world in this equation and they have to have respect for dollars for this ponzi scheme to keep rollin'.  Good luck with that too.

 

Buzz Fuzzel's picture

"In October 2009, firearms and ammunition excise tax collection climbed 45 percent from the previous fiscal year, the greatest annual increase in the firearms tax revenue in the agency's history,"

http://in.reuters.com/article/idINIndia-50132620100714

 

augmister's picture

Hey Obama!  I found a Green Shoot!  Guns and Ammo Taxes!  Who wudda thought?

ATG's picture

"If they are printing how would the T-market ever get no funding?"

Ever hear of bond market vigilantes like PIMCO?

Treasury Debt compounding faster than the GDP can grow is not inflationary...

Muir's picture

"The US will only have to print"

That's your assumption.

It's plausible, maybe even likely, but not a given.

What is true (right now and here) is disinflation.

jdrose1985's picture

What is true (right now and here) is disinflation.

I was under the assumption we'd been in this period going on 30 years now?

Printing money is so cliche'.

Extinguishing the hundred claims on every underlying dollar of collateral is going to be a real bitch for us all.

abalone's picture

Extinguishing the hundred claims on every underlying dollar of collateral is going to be a real bitch for us all

A classic game of who's is it

Johnny Bravo's picture

Every time I see your avatar, it reminds me of my girl's boobs.  Then I want to go squeeze them.
Luckily, she's home.

Time for a boob attack.  LOL

jdrose1985's picture

LOL

My wife seriously needs a reduction, natural 36D on a 135lb frame. Yeah they'll be hanging to her knees as soon as we have our first kid. I love being held down and attacked by the WMD squad in the meantime though.

 

Johnny Bravo's picture

My girl is a natural 36DDD, and she is a little bit big for the bra.  She's 5'2!

I also worry about gravity eventually.  I also feel badly for her back pain.

Reductions cost about 6 grand, I've heard.  You looked into it at all with her?

Pinky's picture

This former 32G sez:  More than 7K if you live in the northeast and use a good surgeon. It's worth it. But wait a few years after you're done with all the babies. 

Now we can go back to to discussing the fire sales, and the cash we will use to take advantage of them. Cash is king once we're fully prepped for the Synthetic Armageddon with our guns, gold and grub.

I hate math questions that give me a four digit answer (i.e., a negative three digits), because this thing only accepts up to three digits. Fix please!

Andy_Jackson_Jihad's picture

Pics or you two are full of shit.

tsx500's picture

 i luv that avatar . . . . .absolutely luv it.      can't get enough. please keep posting. a n y t h i n g   ! !

tsx500's picture

i was referring to 'Muir'  avatar

poopdeville's picture

Sure, but every one of America's strong sovereign competitors are under a similar debt load, and will have to dilute their currencies too.  Remember how the G8 decided to provide "stimulus" the second to last time they met?  They are trying to coordinate inflation so it is as painless as possible to everyone.

Under a "long term" point of view, who cares if a today dollar is worth 1000$ tomorrow dollars?  Dollars are cheaper to print than pennies and dimes are to mint, anyway.  As long as the decline in value is gradual and smooth across developed countries, there's only a few years of tight credit to go.

On the other hand, it will be difficult to overtake America's productive capacity in absolute terms.  Germany, for example, has plenty of capacity.  It will beat us in marginal terms.  But it won't make a huge difference to the value of a devalued dollar versus a devalued Euro.  China is a different can of worms, and might be the prisoner that squeals.

augmister's picture

"On the other hand, it will be difficult to overtake America's productive capacity in absolute terms. "

You got to be kidding?  We don't MAKE a damn thing anymore!  A society of paper-pushers who have off loaded their manufacturing to venues of cheaper labor.   Germany MAKES things!  Achtung baby, that's a fact.   And who says those wise Germans won't ditch the Euro, haul out all those old DM's then have been hiding in the bowels of their banks and supplant the USD as the one-eyed man in the land of the blind?

Andy_Jackson_Jihad's picture

The Saudis would need to agree to take DMs for oil.  Until Germany has a gold horde to backup the DMs or the carriers, spies, political pull of the US to keep things a certain way in the ME don't count the dollar out.

In 20 or 30 years?  Sure but geo-politics plays a big role that we seem to be ignorning when talking pure economic theory (like that has mattered over the last 3 years).

 

ATG's picture

All the inflationistas who keep junking the simple obvious truth of defacto deflation appear to be living in an expensive past. Wait til gold hits $1110 and $550...

http://stockcharts.com/charts/gallery.html?s=%24gold

Tyler Durden's picture

The report focuses on risk assets. There is no mention of gold. One way to paraphrase JT is that in a global race to the currency bottom, the USD will be first... or last depending on how you look at it. And yes, gold will do well as the race goes from the third to the final lap and after.

jdrose1985's picture

Gold priced in oil has been getting blown away for over 10 years. It all comes down to energy. Whether we like it or not oil is priced in dollars and gold is mostly a risk asset.

GoinFawr's picture

"And yes, gold will do well as the race goes from the third to the final lap and after. "

What TD said: the 'tell' on that one is how more and more often these days Au spot moves with the USD, and not inversely. Most notably if the USD breaks to the upside. Because anyone stuck right now with holdings in USD knows that the endgame is to get out while the getting is still good, and anything that briefly propagates the myth of value in the world's 'soon to be former' reserve currency is an opportunity to load up on real assets.  So bring on the deflation, disinflation, stagflation, reflation, inflation, youflation whatever you likes to call it: FIAT is effed up the hoop.

Regards

Abiggs's picture

"these days Au spot moves with the USD" - all you need to do is take a look at the markets as you type to realize that you're wrong about this. I believe that you are referencing the sell-off in gold a couple of weeks back during the massive euro short squeeze? - This is the exception rather than the norm. Also, check out yesterday's dx and au activity (specifically the spike in gold that TD posted a manipulation post in regards to) for additional confirmation...

 

 

 

 

 

 

GoinFawr's picture

Note the 'more and more often' caveat above Abiggs. And Au has been behaving this way for a lot longer than a 'couple of weeks', with ever increasing frequency.  You open up your charts to include Nov.2008 until today, you'll see or you're blind. And yes, I do find it exceptionally pleasing that Gold is finally coming back into its own as a currency sans debt, thank you for asking. Look for that 'sans counter party risk' thing to become the norm in the very near future when it comes to choosing criteria employed to define 'money'.

Regards