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PIMCO's Investment Outlook
"Investment conclusions? A 3% nominal GDP "new normal"means lower profit growth, permanently higher unemployment, capped consumer spending growth rates and an increasing involvement of the government sector, which substantially changes the character of the American capitalistic model. High risk bonds, commercial real estate, and even lower quality municipal bonds may suffer more than cyclical defaults if not government supported. Stock P/Es will rest at lower historical norms [TD: presumably this does not include the 100x + prevailing P/E ratio], and higher stock prices will ultimately depend on tangible earnings growth in the form of increased dividends, not green shoots hope."
In brief, Zero Hedge will translate what is going on in the world:
The 4th branch of the government (PIMCO) is bearish on stocks -> bullish on Treasuries and MBS -> readers are welcome to browse through PIMCO's inventory of over a trillion in rapidly devaluing U.S. printed pieces of paper and buy as many as possible, as Bill Gross needs to buy an archipelago of islands.
The 5th branch of government (and the first 3 as well, Goldman Sachs, of course) is bullish on stocks -> readers are welcome to browse through Goldman's inventory of hundreds of billions in 100+ P/E completely worthless pieces of paper and buy as many as possible, as Lloyd Blankfein needs to frontrun Bill Gross in purchasing said archipelago of islands.
Full letter for those who need bathroom reading can be found here.
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what would zerohedge then recommend we do with our money?
You must read the disclaimer. Zerohedge is not an investment advisor. They are financial journalists.
I am assuming you are a grown man/woman and can come to your own conclusions on what to do with your money (as most grown up adults do)
Pizza Man: I am assuming you are a grown man/woman and can come to your own conclusions on what to do with your money (as most grown up adults do)
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Do like most 'merican adults: save nothing, and spend everything. Buy american, and spend on beer, prostitutes, and politicians.
No. Keep investing in 401K, mutual funds so that it goes straight to Goldman Sachs Charitable Bonus Fund
401k......41k.......4.1k..... invest for the long term.
With beer and prostitutes you know what you're getting when you buy and there is a definite benefit, this is in stark contrast to the stock market where a machine will take all your money.
Just keep the money in a good bank as fixed deposit. Government owned bank would be better.
OI am in India. so we do that.
Agricultural land.
agreed, ag land might be a good investment, that is unless farming said land becomes problematic due to escalating energy prices or rising pest / weed control products.
In my fantasy model post shit hitting the fan, I will lease out the land for able farmers (the 25 year olds who might get kicked out of goldman sachs and other wall street firms once the people come to their senses and demand action).
watch FLOW and you'll invest in as much water as you can....
It's escalating energy prices--if and when they emerge from some source other than GS-invigorated speculation--that are going to make local ag land valuable. Live on the East Coast? Don't pretend you're going to be getting lettuce and strawberries from the Central Valley if gas hits $10 a gallon--much less $100 a gallon. I'm not a huge subscriber to the hyper-inflation scenario but I'm not willing to completely discount it either. If it starts to emerge, buy land. Gold? LOL. Good luck going to your local Whole Foods with a pocketful of ducats. You'd be dead before you crossed the parking lot.
For me, figure out a cure for cancer, moonlight as mother teresa. what kinda life is treading water?
put your money in a money market account and sit on it for at least 6 months to see who wins the bull vs bear argument. Then invest accordingly.
Longer duration bonds are in trouble. Also, stocks are in trouble too because rolling over debt will become harder and harder.
Cash is king, so stay liquid.
Cash is king until the dollar collapses.
Hardly.
Ben has two choices:
1) Deflate and lose a few of his banks.
2) Inflate and lose the FED's power.
Which would you choose?
Don’t be blind, it may appear that the value of assets is dropping but when GDP, and wages are dropping faster, it means we can afford less. The dollar is dropping in value, why would you want to invest in it?
You forgot option #3:
Inflate and have the Obamanation codify new powers insuring permancy as the Fed becomes the actual 4th branch of the Federal Government.
And that option is quite alive.
Which will Ben B choose?
Remarks by Governor Ben S. Bernanke
Before the Japan Society of Monetary Economics, Tokyo, Japan
May 31, 2003
Some Thoughts on Monetary Policy in Japan
http://www.federalreserve.gov/BoardDocs/Speeches/2003/20030531/default.h...
....
Conclusion
The Bank of Japan became fully independent only in 1998, and it has guarded its independence carefully, as is appropriate. Economically, however, it is important to recognize that the role of an independent central bank is different in inflationary and deflationary environments. In the face of inflation, which is often associated with excessive monetization of government debt, the virtue of an independent central bank is its ability to say "no" to the government. With protracted deflation, however, excessive money creation is unlikely to be the problem, and a more cooperative stance on the part of the central bank may be called for. Under the current circumstances, greater cooperation for a time between the Bank of Japan and the fiscal authorities is in no way inconsistent with the independence of the central bank, any more than cooperation between two independent nations in pursuit of a common objective is inconsistent with the principle of national sovereignty.
I have argued today that a quid pro quo, in which the MOF acts to immunize the BOJ's balance sheet from interest-rate risk and the BOJ increases its purchases of government debt, is a good way to attack the ongoing deflation in Japan. I would like to close by reiterating a point I made earlier--that ending deflation in consumer prices is only part of what needs to be done to put Japan back on the path to full recovery. Banking and structural reform are crucial and need to be carried out as soon and as aggressively as possible. Although the importance of reforms cannot be disputed, however, I do not agree with those who have argued that deflation is only a minor part of the overall problem in Japan. Addressing the deflation problem would bring substantial real and psychological benefits to the Japanese economy, and ending deflation would make solving the other problems that Japan faces only that much easier. For the sake of the world's economy as well as Japan's, I hope that progress will soon be made on all of these fronts.
Too bad we are a debtor, not a creditor, nation like Japan.
Two points:
-What he prescribed for Japan has little meaning to America. It might as well be night and day.
-He assumed a friendly cooperation between fiscal and monetary authorities. Well, it's hard to achieve that when the fiscal authorities are trying to fire the guy. Now, he's worried about them auditing him and raising the issue about monetary independence. Strays from the script a little, doesn't it?
if the word "few" equates to "butt loads" in your above scenario I would tend to agree.
And when it collapses, your cash won't be cash.
cigarettes
and booze ... go long on cigarettes and booze ... the studies have shown that people tend to get self-destructive either in ID or Ego, and that to me spells profit for the companies that produce smokes and booze ... and no i am not kidding ...
Invest in yourself. Thats what my momma always told me.
Anyways, I gotta go deliver some pizzas.
For your entertainment---
http://www.youtube.com/watch?v=UVA7MDQr1Nc
http://www.youtube.com/watch?v=jkY--mEUBH0
ROR dude, i love ahnold parodies ... thanks
better yet just open your own liquor store - I've seen scotch skyrocket the last few months
Local liquor store = neighbourhood ATM.
I'd manufacture stockings(regular and fishnet)/ski masks.
i will print the whole letter and wipe my ass with it after i read it in the bathroom cause i just saw I'm all out of toilet paper and the stores are closed ... thanks TD
Printer paper won't be cheeky on your cheeks.
i dont give a shit ( hope you get the joke )
Tyler - It is not "bathroom reading" it is "the library".
And the winner is.....Gross / El Erian and Blankfein / Cohen.
Stocks will suck and Treasuries will suck. Soon enough, we will all be Jim Chanos clones and Chanos will frontrun everybody and get the archipelago of islands.
no, I mean go buy couple boxes cigarettes, a box is 100 cartons.. keep in cool dry place...I survive hyper-inflation, civil war and nato bombing with couple dozen boxes over 10, 11 years, sell pack here, carton there, no problems...in hyper-inflation uncle buy case beer in morning, sell each beer same price evening.. same next day.. no problems..
i know from first hand how expensive can a box of smokes or a bottle of whiskey be in war times ... some years back, when there was a war in one of the EU countries, the prices of smokes went up 10 000 %, yes you read it correctly ... because there was no distribution line. ... i remember paying 50 bucks for a pack of smokes, 50 bucks man, and i only had one cigarette a day ...
I wonder if GSEC can custody boxes of smokes for my hedge fund...
they would trade their mothers and firstborns if they know they could make a profit ...
When my unit got sent on line in the sand duty back in August 1990 we stopped over in Germany and hit the stores for the smokes... Won't say if we got booze as well.. Anyway, we were good until the world caught up with us. And yes we made a bit on the side. American Marlboro Red is indeed the currency of the war zone. Bar none.
I got family in SA, same story. During the embargo (and for quite a while after) it was Reds and American blue jeans that could get you just about anything.
Geez, at that rate I think I'll tuck a few cartons away for my 2yo nephews college fund - thanks for the tip!
ps - Wanna light?
PIMCO the pig is hungry
You can have deflation + currency crisis
I like cash (USD) and physical pms. They hedge each other.
Yes we can.
It's called fuckflation. Another entry in the history books that this can happen too along with inflation, deflation, stagflation.
Jee back in the begining of 21st century there was fuckflation.
Im starting to see the light. Cigarettes as a perfect hedge against fuckflation. Pure genius!
Apocalypse Now-
Brilliant Project Mayhem. Not sure if it is saving 100% purchasing power but probably the best decision in the face of dramatic uncertainty regarding credit deflation depression versus currency crisis contagion hyper-inflation (let's stick with those terms so people know what causes them).
A basket of currencies and PM might also work. Note that if you have your money in some type of money market, it's not the same - the government or banks will probably just use those as a slush fund to continue propping up various asset classes or buying "AAA" rated collateralized mortgages- IMO.
The central banks have been cornering the market on gold, and I think wouldn't mind pushing for a new world currency and gold standard since they control most of it, both physical and ETFs (collateralized most likely based on the same original gold & silver duplicated IMO). You can't go wrong on the physical PMs.
But now, let's talk about cash - what kind of form (2 year treasuries?) and what A rated bank do you recommend? Longer term I think a great play will be to short 1X longer term treasuries (like TBT). I don't think anybody on this site would disagree with the math, but then again equities right now are levitating due to a 300 trillion pound gorilla on the other side of the teeter totter?
Whoever is controlling these markets seems to have a "Book of Correlations" and is breaking everyone of them for maximum pain. Hedging maybe a problem.
Bravo TD - couldn't have summarised the damned state of affairs any better ! :-)
bonds vs stocks as noted in this post reminds me of the joke....
guy goes to psychiatrist and repeatedly keeps telling the psych that he can't decide if he is a wigwam or teepee.... "Doctor, somedays I'm a wigwam, other days I'm a teepee. This is killing me, what's the problem?"
Doctor says "you're two tents"
:-) funny !
"In brief, Zero Hedge will translate what is going on in the world:
The 4th branch of the government (PIMCO) is bearish on stocks -> bullish on Treasuries and MBS -> readers are welcome to browse through PIMCO's inventory of over a trillion in rapidly devaluing U.S. printed pieces of paper and buy as many as possible, as Bill Gross needs to buy an archipelago of islands.
The 5th branch of government (and the first 3 as well, Goldman Sachs, of course) is bullish on stocks -> readers are welcome to browse through Goldman's inventory of hundreds of billions in 100+ P/E completely worthless pieces of paper and buy as many as possible, as Lloyd Blankfein needs to frontrun Bill Gross in purchasing said archipelago of islands."
In so many regards, this summary may just be one of your best TD.
thats some goood shit
Apocalypse Now-
You should win a pulitzer for the investment conclusions. As Joe from Themis said, the real liquidity has dried up and it's not coming back. Tug of war ensues for the remaining gamblers still sitting at the table dreaming of riches while the house fumbles through their wallets.
Scary to think that Jim Cramer of Mad Money Stop Trading might be the most honest character - told his audience to take any money needed for the next 5 years and move it out of the market. Of course, he and his friends at Goldman were probably already positioned short after pumping - along with Soros and Cohen per a previous pit trader post. He had done it before with his hedge fund as he admitted on video.
We should turn our backs on wall street, and micro-finance our friends and neighbors with any spare change left. Check this sight out for financing entrepreneurs: http://www.kiva.org/
There is a tug of war between stock bandits and bond burglars.
One camp keeps saying recession is over, get outta here, go shopping and the other camp says it is too early to see any recovery soon, unemployment at high levels is the new normal, get outta here, we are fucked.
Option 1 : Buy GS shares and Allianz shares (owns PIMCO). "If you can't beat them, join them"...
Option 2 : Worthless pieces of paper => go to commodities ?
Apocalypse Now-
Physical commodities? Herein lies the problem, just about everything has been collateralized by this brood of vipers so you could be buying paper that disappears. I think the form of commodities is important, perhaps large companies with proven reserves or access to real resources.
You could hedge your own food & oil prices in the future, since we don't know if they will be higher or lower. If your investments go down, you theoretically pay less at the store, if your investment goes up it offsets your higher gas price and food bill.
Hedge your own oil prices - that is one of the reasons I went long oil when it was in the 30s earlier this year. I figured, I am going to consumer my fair share of oil in my lifetime, and 30-odd bucks a barrel was a price I was willing to lock in for awhile.
That, plus I figured Bernanke would destroy the dollar.
PIMCO the pig recommends reading this article
USGovt Yuan Bond Threat
by Jim Willie, CB. Editor, Hat Trick Letter | July 29, 2009
http://financialsense.com/fsu/editorials/willie/2009/0729.html
the ultra paranoid and conspiratorial perspective of a financial outlier.
he's on my reading list.
Speaking of sovereign-bonds -- you DID see the mention in Japanese parliament from earlier this year, right?
"Masaharu Nakagawa, the financial-affairs spokesman for Japan's opposition Democratic party, elevated eyebrows by suggesting that Japan cease buying U.S. Treasury obligations unless they are "samurai bonds"--meaning those denominated in yen instead of dollars.Unlike more than a few of his U.S. counterparts, Mr. Nakagawa evinces an admirable command of arithmetic, and therefore fears the inflationary effects of the trillions of fresh dollars that are being unleashed into the economy through bank bailouts, stimulus largesse, and President Obama's lordly ambitions. Inflation is the most convenient way for government debtors to rook those who lend to them, and Mr. Nakagawa does not wish to see the Bank of Japan left holding a bag of rapidly depreciating dollars. China, too, grows anxious that the greenbacks it holds soon may be worth much less than they are now. Predicting short-term fluctuations in currency-exchange rates is a tricky business--ask George Soros--but it is clear that Tokyo and Beijing are taking the long view and not much liking what they see. If Washington does not discipline its borrowing and spending, bond investors surely will do it for them, and the market will accomplish what politics has not."
12 May 2009
http://www.thefreelibrary.com/Masaharu+Nakagawa,+the+financial-affairs+s...'s...-a0200921678
http://news.bbc.co.uk/2/hi/business/8046599.stm
guess what man .... just follow the link http://www.marketwach.com/story/wal-mart-issues-11-billion-in-samurai-bonds-2009-07-28?link=kiosk
americans wont know its bad until their baseball players get outbid by asian teams
most wont notice whole hockey teams move back to canada
Big election in Japan August 30. Here is the DPJ platform...if you read japanese: http://www.dpj.or.jp/special/manifesto2009/pdf/manifesto_2009.pdf
And analysis for us honkeys: http://www.observingjapan.com/2009/07/dpj-unveils-its-manifesto-part-one.html
I don't know how it will pan out, but this seems like change USD/Treasury shorts can believe in.
wow thanks, excellent find, sir. gold star.
For all of PIMCO's faults and there are many Bill Gross's fund is still doing well enough to mark gains during this weeks treasury mayhem. Must be all of those interest rate swaps with GS.
Wake up, get dressed, go to work. Eat, shit, sleep, save. Take a vacation every now and then, live life, play with your kids, go to church, get a hobby. Try to earn six to eight percent a year, live with in your means. Come on folks, lets get real. All you doomsayers, I would love to see you in the shit. Live life and prosper. Smile at your neighbor, open doors for people. Don't change the world, change your attitude.
Death before the rat race. YOU might like your monotonous life but some of us want more out of life so YOU go eat shit.
Death from above! I eat lobster.
What, no reply?
Thought so.
Yeah seriously. Project Mayhem is preparing to tour South America. What are you doing with your life Luis? Waiting for death?
Death is for losers. I won.
Apocalypse Now- Excellent, I too retired early and am traveling around the world - the first world that is!
I noticed where living your life fits into your scheme of things. My attitudes and priorities are somewhat different than yours. I choose to live every moment of every day and not to simply exist to serve your system.
As to wanting to see me "in the shit" I would like to say that as an Airborne & Ranger course graduate and a 100% disabled war veteran have had most likely been in far more shit than you will ever imagine let alone volunteer for. Especially to defend what you believe in. Me, I am in the position I am because I sacrificed for some ideas that I believe to this day are worth it. Among those things is my belief in the institution of free markets.
It has been my experience that folks who are so totally self absorbed and concerned with the; wake up, get dressed, go to work, eat, shit, sleep and save rarely smile at their neighbor, open doors for anyone since they expect society to do the opening for them because their attitude is that it is everyone else's responsibility to meet their needs. To you and your attitude all I care to say is be glad you live here. You have the opportunity to talk all you want without having to deliver anything. Anything worthwhile to anyone else that is.
Do you have any loyalties at all or any idea what the concept of loyalty to the institution really is?
Black Panthers and Sky Soldiers eat t-10s for breakfast. Did you jump into bashur? I don't care about your experience. I care about me.
THE 505 are the black panthers.. What the hell do you know but the google?
Ever been to Pirates, just out side Pope AFB?
Just run yoself down Ardennes to Yadkin and head off base. You must be lost.
Its off of McKellers.
My original point is, there are few people here who have been in the shit. It's easy to live in mom's basement blogging in your underwear, but what the hell does it prove? Live life. Good or bad. I would rather everyone invest poorly and die young. Its natural selection and only increases my odds. But, if you don't like sound advice, then buy gold.
Since you only care about you then you are the worst sort of citizen. An O2 thief without loyalty...
See ya... never
gold is valuable as investment class in fiat currency world... if central banks adopt gold for currency standard it introduce stability in system and gold not rise and appreciate in own right...
when cigarettes become cheaper in any currency? ever? nicotine legal drug but goverment keep price high, yes? good hedge in any currency regime any inflation scenario..
PIMCO is NOT bullish on Treasuries, just like GS
I bought silver, I bought gold, and I even bought a shotgun.
I can't believe I forgot cigarettes. Fuck. I stopped smoking a few years back and was shocked to see prices on them even today... 5x increase in 10 years. When hyperinflation begins, I'll back up the truck on smokes. They're a more liquid asset than silver, even.
Don't forget the little bottles of Johnny Walker! I have a problem , since I have a tendency to drink all my emergency liquor and snort my emergency blow and sleep with all my emergency hookers.
i like you man, you have some rudimentary Hunter-S.-Thompsonesque style ..
Here is a test for all you gold bugs. What can fuck and multiply: A-people, B-gold or C-gay dolphins. You cannot base a monetary system on something inelastic. Fuck peak Oil, Why don't they talk about peak gold. Follow the silence.
what says fuck two times but doesn't produce a single clear sentence.
luisvonahn, a guy who insists an alien probe counts as his first time.
but it's true, the gold bugs admonish the creation of financial bubbles, but wish for a bubble in the gold price so that they can sell.
Didn't know you were so sensitive about gay dolphins, snapperhead. FUCK, FUCK, FUCK.
3 fucks, gay dolphins, and a snapperhead.
what are things you would say in a blog comment.
Why don't you ask Zimbabweans their opinion of gold? You may be correct on not being able to base a monetary system on something as inelastic as gold, but what about the transition period from hyperinflation to a new fiat currency that gives you the elasticity you seem to crave as a monetarist? I wouldn't bother being audacious enough as to say hyperinflation won't happen in the US. Check your history, i.e. the Titanic, as well as fiat currencies throughout history that have been extinguished due to hyperinflation.
The way I see the predicament the US is in is the policymakers can choose one of two paths. One path is to inflate our way out of debt, which will end in hyperinflation. The other path is to pay the piper, and tell the American sheeple they squandered the country's wealth. Ergo, the country is screwed whichever path the policymakers decide to take.
My interpretation of the cirumstance is to hedge a nice position in bullion with cash, as bullion has repeatedly proven to hold value well in a deflationary environment (gold as an inflation hedge is obvious). The policymakers of the past and present have squandared, and are squandering, the wealth of posterity in the US. Ultimately, it comes down to taking solace in knowing that my financial future is insured, Sir.
Actually sir, while you raise good points about the 'reification of value' endemic to all systems of exchange besides barter, in Zimbabwe , they actually DO spend all time panning for gold in order to purchase a loaf of bread.
Gold for Bread - Zimbabwe (*must watch)MDC activist Sam Chakaipa returns to his village in Zimbabwe to find his friends and neighbours starving. As the Zimbabwean dollar becomes ever weaker, gold has become the currency of choice.
http://www.youtube.com/watch?v=7ubJp6rmUYM
As for the United States, we are presently in a protracted period of deflation, with possible currency crisis and/or bank runs on the 6-18 month horizon. At the moment, my opinion is forecast is NOT hyperinflation. As Mish Shedlock points out, there is no hyperinflation in history where land values did not rise. As property values are falling, global credit contracting, etc, we are technically in deflation. But you can have deflation with currency crisis. But deflation + currency crisis is precisely what happened in Iceland last October and November. Most people don't understand this. The latter (currency crisis) could easily be triggered in the U.S. by a failed USTbond auction , or the issuance of sovereign bonds by Japanese or Chinese creditors.
Or a new war. Pakistan, perhaps.
Project Mayhem: Thanks for your input.
Anytime my friend. I've taken the opportunity to think out loud here in homes to figure out what I mean when I say "deflation + currency crisis"...
Well, if we define deflation as a net contraction in money and credit, characterized by escalating unemployment, supply chain defaults, inability to get credit, increasing corporate bond spreads, debt which has exceeded system capacity etc..
I think currency crisis + deflation, under a reserve currency system of USD, would principally manifest itself in a few different possible ways.
1) Plummetting or spiking UST yields. I see two scenarios here. One, the entire curve plummets downward. I think this is the position of Dr. Antal Fekete.
see "The Federal Reserve as an Engine of Deflation"
http://www.professorfekete.com/articles%5CAEFFederalReserveAsAnEngineOfD...
The second possibility I see for the USTbond complex is the steepening trade, where long-term maturities skyrocket ('steepener'). This would be the consequence of a failed auction which was not supported by covert monetization. The USTbond complex is the hardest beast to figure out , as it is managed by trillions in OTC interest rate swaps on the balance sheets of JP Morgan and others (see BIS data).
http://www.financialsense.com/Market/kirby/2009/images/0518_clip_image00...
2) An inability to purchase imported consumer goods. This would be because of inability to get letters of credit internationally. Thus ships will not dock. This situation would be analogous to Iceland during Fall 2008. We already are seeing the shipping indices beginning to roll over once again. Inability to get letters of credit for urgently needed goods would be a terminal phase effect, likely to occur after bank holidays etc. I think there would be characteristic warning signs (bank runs, BDI hitting new lows, etc) prior to credit collapse at the ports.
See http://www.dryships.com/pages/report.asp
One interesting piece of history from Fall 2008:
"Icelandic Shoppers Splurge as Currency Woes Reduce Food Imports
Oct. 13 (Bloomberg) -- After a four-year spending spree, Icelanders are flooding the supermarkets one last time, stocking up on food as the collapse of the banking system threatens to cut the island off from imports.
Bonus, a nationwide chain, has stock at its warehouse for about two weeks. After that, the shelves will start emptying unless it can get access to foreign currency, the 22-year-old manager said, standing in a walk-in fridge filled with meat products, among the few goods on sale produced locally. "
http://www.bloomberg.com/apps/news?pid=20601109&sid=aVFtDRGwcc50&refer=home
3) Skyrocketing yuan-yen/dollar exchange rates (Dollar would fall vs. Yuan and Yen). Euro is a big question mark. So then you get a somewhat two-tiered currency system where the dollar is worth much less internationally for settlement, but still remains in the high demand in the U.S. to the astronomical debt loads and demand for dollars domestically to pay rent, mortgage, credit card loans, auto loans, student loans, etc etc.
4) Oil unknown. This depends on whether there is a war or not. Since I suspect there will be a war in Pakistan, this could cause oil prices to spike. But I'll admit I don't know how oil behaves during deflation + currency crisis. It really depends on geopolitics I think.
5) Gold would increase in USD terms under conditions of deflation + currency crisis. What it does in Yuan/Yen/Ruble terms is an open question. The wildcard is the COMEX.
6) Plummeting prices for used cars, televisions, furniture, homes, condos, DVDs, used goods of all types as people scramble for cash to pay down debt and cover living expensive. See the escalating craiglist sale wars.
7) Skyrocketing prices and spot shortages for anything imported. This would only become apparent during the severe phases and would probably result in a two tiered system of currency exchange and possibly capital controls. The latter has already been proposed by Senator Lieberman.
8) Stocks, of course will crater. Lows of 666 will certainly be retested and will epic fail.
In summary, I think severe Deflation + Currency crisis would manifest itself similar as it did in Iceland last fall. Defaults. Bank Failures. Massive Unemployment. Inability to get credit for imported goods. Massive defaults that spread like a chain reaction through the system. In the Eastern Bloc, the problems first appeared in loans denominated in foreign currency, as in Iceland and large parts of Eastern Europe (Hungary, etc) many people took out auto loans, house loans, etc denominated in foreign currency. While this problem is not analogous to the United States (all loans here are dollar denominated), similar dynamic could manifest itself if the U.S. were Treasury were forced to accept Yen or Yuan denominated bonds to fund its increasingly expensive domestic operations. Such a scenario may not occur until sometime in 2010, but the start of currency crisis (71 or so on USDX) and possibly bank holidays could arrive much sooner, as soon as Fall-Winter 2009.
The big question is the Euro. And whether there will be war.
Comments welcome.
Thank you for all your insight.
I myself am only an econ student, 1 year left. Anyway, I have always thought this was definitely a deflationary enviroment, not inflationary. And whenever you turn on your TV you inevitably see some smuck in Congress or anchor on CNBC railing about the deficit or national debt, generally because this plays well with any and every American.
Now my thinking, and I may be horribly wrong, so please correct me, is that if we cant get prices to rise again, well, then we are basically doomed as a nation. And with the current fiscal policies of this country, I simply don't see us getting on that path to a stabilization at the very least or actually an increase in prices.
To me, we risk entering an enivronment almost identical to that of the Japanese last century with a liquidity trap. Even with the Fed funds rate at damn near 0%, these banks are not lending, nor will they lend to even qualified businesses at a reasonable rate of interest. And what business, assuming they can even get a loan, would take out a loan in this environment at 8 or 9%?
The Fed can only lower interest theoretically to 0% and if the economic environment is as bad as it is, businesses still arent likely to take out these loans at this rate because regardless of the interest rate, they still have to payback the principal. And again, most businesses arent getting anywhere close to this rate.
My theory is that sense most of these banks were so highly leverged, some almost 35:1 that it is going to take YEARS for these banks to delevrage to normal, reasonable rates. Now what if in the meantime the Federal govt. set aside an amount of money to be lent directly to businesses, bypassing the banks, at a negative interest rate if need be (If the economy is actually is as bad as it appears we may need to REALLY entice people to invest money in the economy), until a time in which the banks are back to a more appropriate rate of leverage. I know this may be ridiculous, and please feel free to say so.
In addition, how would you propose to get out of deflation?
Thanks again.
Am I off base here? Can anybody provide a compelling substantiated argument that is on the contrary?
No, you are on base. I think this is actually the most pressing question at the moment, next to what happens to the USTbond complex and the Euro (whether there will be a facture between Club Med states and Germany).
My position is identical to yours. My positions are in bullion and cash, which tend to have low correlation coefficients -- inverse actually, at least historically. Another thing to keep in mind is that gold performs well during systemic crisis, which includes deflations and hyperinflations. Cash performs well during deflations / bank runs etc. Thus my positions are in both.
Apocalypse Now-
I'm in the deflation camp: gold & silver bullion, cash, with hedges on my consumption of oil and food as well, and an incredible mad max bug out bag with plenty of canned goods, water, and G&A as a put option on the American dream. Like you, watching for hyper-inflation a year or two out. If H.I. happens to us, it should happen worldwide.
Most of the world is in a worse position than we are from a debt to GDP perspective and their dependency on exporting into the US. Right now I think it is a bluffing game between countries of the world and their official economic statistics. Whichever asset class/country is deemed safest will win out when investors realize it's a worldwide depression. We had the advantage of being the world's reserve currency, and if there is an event before the world transitions to a new system of SDR's/basket of currencies - the world will flock to USD, Treasuries, and gold.
We are not Iceland, we have the world's largest military guarding resources around the world and our debt is in $USD not foreign currencies. We have plenty of oil and would rather use up the rest of the world's before tapping into ours. We have weather modification and earthquake capability weapons with plausible deniability (HAARP).
We are currently taking money off the Chinese so they can finance us, giving them some airtime on the rise of China, and letting them save face in public by genuflecting. The remainder of the Treasury purchases are done through our own dark pools with FED or government entities to save face - remember the trillions in derivative positions really could be anything. Oil, commodities, gold, and most equities trade through our exchanges or are "influenced/controlled" with huge derivatives positions for the time being. When Saddam threatened to change his oil from being priced in USD, he was removed - after which we shipped over planes filled with greenbacks "All political power comes from the barrel of a gun." - Mao Tse Tung
The world movement out of US markets & paper and into baskets of trade between countries will change the picture dramatically. These countries realized they were financing our military empire with debt purchasing, and decided that was not strategic. However, they still want to export to US consumers and we need vendor financing (catch 22).
What new fiat currency? As for hyperinflation, or inflation in general, start to worry when the shelves go bear. Although there is a growth in money supply, you first need a run on goods to start the inflation train going. The destruction of balance sheets globally have absorbed most, if not all the additional money supply growth. I believe the IMF still states that there is another $2 trillion in write downs to go.
Someone's been lapping up the Fed propaganda like a good little econ major.
Funny how the modern industrial world managed to emerge when money was based on gold and silver.
better buy distill equipment, not complex, woodburning,.. make own booze, not hard.. even hillybilly know how
when the shit really hits everyone will be growing weed
fuck yeah!
Got clones? :)
Thanks everybody for the excellent discussion.
16 CAPTCHA! 16!!!
Save your money for the aforementioned hookers n blow, when it all goes boom you'd better be up on your rasin wine.
http://hubpages.com/hub/PrisonWine
PS: just toss in some bread for the yeast
We're not the ONLY ONE who see's this coming
http://www.reuters.com/article/marketsNews/idUSN2949944020090729
Housing is doomed - and so is the economy:
My thesis earlier this week that a massive increase in prime mortgage foreclosures is going to cause a second, more deadly drop in the financial system is starting to grow some muscle:
http://truthingold.blogspot.com/2009/07/foreclosures-hit-record-levels-i...
I think that is coming, but just like the big D I don't think the tipping point will happen here in the US. Look to a blow up in Europe or if they can hold on long enough the (re)bursting of the Chinese housing bubble.
Hmmm, I've always considered the MSM he 4th branch. But now that I think about it, They, and the first three are just loose change, giggling around in Goldman's pocket.
Obama, will get a bone for his hard work though; a propped up economic symbol, and Opium for the masses. Anyone noticing that the class divide is growing faster than ever will labeled as “Not Hip with Hope” -- Hype.
Opium! That reminds me, I need to prepare for better than expected unemployment numbers in the a.m.
Now where’s my hooka?
If you think that equities will tank, you should be agreeing with PIMCO. I happen to think that there will be demand for those treasuries.
New normal for unemployment will be 8% according to Mr. Gross's little August investment report. So, if U-3 is 8% what will the unperverted unemployment rate be, 20%. That sounds about right to me. 3% nominal GDP translates to negative real GDP. I love Keynesianism. Big government + corporations = Keynesianism which is nothing more than Fascism with big words and perverted mathematical equations.
And we only get to 3% nominal if you add the growth in gov't to GDP, which is ridiculous, since theres no P in government.
I'm going to invest in gambling, prostitution and bootlegging. It's not too dissimilar from government, though with the vital difference being it will be the sound basis for future government tax revenue and to pat for all the governments: gambling, prostitution and bootlegging.
Forget ordaining the future. Go with the trend.
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