This page has been archived and commenting is disabled.
John Taylor: "Cash Is Now King, Worthless Or Not, So Buy Dollars."
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
»
- 12921 reads
- Printer-friendly version
- Send to friend
- advertisements -
Bingo, even allowing for illiquidity of small businesses versus public markets...
Economic deflation with lower prices in our future...
So QE2 should focus on giving $100K to every person in the US, but not actual money. A free low introductory rate credit line with no payment terms for 5 years backed by the Gubbmint (you). Note: You may only roll existing debt from select financial institutions into the program. If you don't owe money you can borrow it and then use the program to pay it off. Don't worry, 5 years is a long way off!
Is this stupid, YES. Just kicking the can down the road. I am just wondering what form of insanity we are going to be subject to next.
Who knows what will happen at this point? There's no logic to the game. We're half in PMs and half in FRNs, with half of those in the bank and the other half in the safe. We've got an additional reserve of FRNs that we're holding on to in order to purchase more PMs if there is a big price drop.
What more can we do?
+1.... NOBODY KNOWS.... NOBODY. So what does this tell you? Hedge.
As warned about for some time... EURUSD daily chart is bullish.
http://stockmarket618.wordpress.com/about
Can anyone refute this article with a sensible argument? Words like hyperinflation, printing press and helicopters are invalid.
Thank you.
Just clarification:
Instead of a printing press producing more physical bucks, imagine a keystroke at a computer terminal.
No wheelbarrows of FRNs in the 21st century, just bits of data on a harddrive at some banks.
Those virtual matrix databit dollars can disappear as fast as they were created when the plug is pulled, thus the value of cash. Just try asking your bank for $10,000 cold cash now...
one of the most compelling causes of potential deflation could be a black swan-ish type of event that dramatically reduces the population - war, a real 1918 style flu or other epidemic, etc. what would happen to the price of housing, commodities, stocks, debt with a dramatically reduced supply of consumers? in such a circumstance, we return to inflation in the human resource of labor, especially that kind which is specialized or self-sustaining for the individual and his community. it could happen regionally or globally, depending on the nature of the event.
21 million people live along the Gulf inhaling, drinking and eating the latest Co-rexit chemical cocktail. Think NLC will go down?...
If you buy into the argument that the fed balance sheet strongly corresponds to their QE abilities, and then further consider that the vast majority of their balance sheet is tied up in garbage MBS, then further consider that they're par valued (where their market value is closer to 35-40% of that par value in aggregate), then further consider that right around the end of the year this MBS is going to audited/correctly valued, then a massive crash in available currency is almost a given at this point.
Gold went down to 680 in 2008 thanks to a little help from the bullion banks through the Crimex. The only question now is do they have the same power than they did then to smash the price?
Really this is a great post from an expert and thank you very much for sharing this valuable information with us................ windows vps | cheap vps | cheap hosting | forex vps