Why The Downside To The Fed's "All In" Attempt To Spike Shadow Monetary Velocity Is A $4.5 Trillion Drop In GDP (And The "Upside" Is Hyperinflation)Submitted by Tyler Durden on 10/30/2010 22:15 -0500
It appears that the one topic pundits have the most problems grasping is the spread between the segregation of traditional and shadow monetary aggregates, overall economic deleveraging and aggregate monetary velocity, and how all that impacts GDP. A summary which confirms just how prevalent the confusion is, is this terrific post by the Kalafia Beach Pundit, terrific not because it is even remotely correct (the post is so blatantly wrong - one wonders if Western Asset Management even expects its current and former asset managers to count beyond 2... M2 that is), but because it demonstrates how self-professed "pundits", whether of the beach variety or not, don't have the faintest grasp of more than merely trivial monetary topics.
Is The Fed TRYING To Force A Surge In Commodity Prices And Input Costs? Diapason Explains Why Hyperinflation Is Blackhawk Ben's End GoalSubmitted by Tyler Durden on 10/30/2010 17:29 -0500
A Fed paper released in September, which we luckily missed as otherwise it would have led to the collective death through uncontrollable foaming in the mouth of the entire Zero Hedge staff, was "Oil Shocks and the Zero Bound on Nominal Interest Rates", in which author Martin Bodenstein (an econ Ph.D.) argues that oil price shocks (i.e., surges in the price of oil such as the one we are about to experience courtesy of a fresh trillion in liquidity about to be unleashed by the Fed) are... wait for it... beneficial to GDP and stimulative to the interest-rate sensitive parts of the economy. To wit: "In fact, if the increase in oil prices is gradual, the persistent rise in inflation can cause a GDP expansion.". Yes you read that right. The Fed is stealthily floating the idea that a surge in oil prices will be for the greater good. In essence, the Fed is telegraphing that while it acknowledges that oil is about to jump to over $100, it won't be as bad as those with a functioning brain dare to claim. And, as we show below, it will actually be a very good thing! While we would probably get a massive lethal subdural hemorrhage if told to argue a view so blatantly and stupefyingly demented, insane and, simply said, wrong, as that espoused by Bodenstein, we are glad that Sean Corrigan of Diapason has gone the extra mile to not only expose the Fed charlatans for their voodoo gimmickry in this narrow topic, and brings up an even more critical idea, which is that the Fed "actually welcomes the current surge in the prices of many of the staples of everyday life; that it actually exults in the drain being exerted on family budgets; that it revels in the squeeze on profit margins being suffered by already-struggling small businesses, because it imagines this will serve to lower the reckoning of the ethereal construct of a generalized, future real interest rate and that this alone will serve to shower riches upon all who are presently suffering, in comparison for the present woes." That nobody has reached this conclusion before is explainable - it is something only the brain of an illogical, demented, perverted genocidal madman's brain can come up with. Which is why we are now convinced the Fed is hoping for not only mild inflation, but an outright surge in prices.
Veteran PM expert, Sprott's John Embry, whose observations on the lack of a bubble in precious metals we posted recently, and which came just before the CFTC's own disclosure that there may be extensive manipulation in the silver market, as well as a lawsuit filed against JPM and HSBC for silver price manipulation, shares his latest thoughts with Eric King in a traditionally contrarian insightful interview. In a nutshell, Embry is confident the current Fed policy will lead to hyperinflation, and that he would not be surprised if silver hit $50 within the next few months.
In today's interview with King World News, Art Cashin confirms that through its endless meddling, intervention and manipulation over the past two years, the Fed has essentially broken the market: "You used to have markets that were not particularly correlated. The asset classes now seem to be so heavily dominated and in inverse relationship to the dollar, and in direct relationship to the euro... It's frustrating having honed my skills over 50 years to be able to interpret news, and look at a piece of economic data, and try and outwit the rest of the world by figuring out how it would work, and now all you have to do is look and see how the dollar is reacting and know how everything else works. And that huge correlation is not good for people because if everything is correlated in a basket like that, it is very difficult for people to hedge and protect themselves, and therefore when assets move they tend to move altogether." In other words, step aside Value Investor Congress - meet Lack of Value Dollar Correlation Congress. But readers have known that for over three months. Just as they know that lately the biggest concern on Cashin's mind is hyperinflation "the difficulty is while you can get what appears to be nominal benefit out of [hyperinflation], when you try to convert to a hard asset, or even use it to try to buy a needed good, and the perfect example is Zimbabwe. If you were from out of space, and just could get the records of the Zimbabwe stock market you would say, "wow, they are having a pretty good time down there." But they are going up because the assets they hold are going higher and higher in a debased currency." And Cashin on his hyperinflationaty musings from earlier in the week: "My hope is that we don't get anything like that - hyperinflation would be destructive to civilization... But you are right, not only Zero Hedge, I think that was the most emailed comment that day all over the country." He may well be right. And he is certainly right about the Shazam moment: "Money only gets velocity when you lend it or spend it. The difficulty with studying things like the Weimar republic, is that the money supply growing drastically the initial reaction was small. There was very little doing, and it went slowly, until it went suddenly, and when it went suddenly, it went parabolic."
We present today's thoughts by Art Cashin on the coming hyperinflation (and no, it does not mean very high inflation - it means a complete and total collapse in the monetary system - which is what Ben Bernanke is attempting to achieve), without commentary.
"The number one performing stock market in the last ten years has been Zimbabwe - in nominal terms" - that is the most memorable soundbite of Kyle Bass' presentation to David Faber at the Bearfoot Summit, because unfortunately, in real terms investors have lost all their money. In this series of key presentations in which Bass recaps not only all his previous positions on hyperinflation, but pretty much everything previously noted on the topic on Zero Hedge, Bass focuses on what is the most "convex" product to imminent hyperinflation. Spoiler alert: it is not stocks. In fact, Bass says to shun stocks by and large, as in real terms (note not nominal), stocks will underperform a hyperinflationary system. This confirms what we have been observing for the past months ever since the latest FOMC regime, when gold has benefited far more from "money deluge" expectations that risk assets. In other words, those who are betting on a rising tide emanating from the inkjets' liquidity spigot, will do far better to buy gold than stocks.
There have been a lot of articles about the coming hyperinflation in America. Many of the commentators with whom I agree most of the time say hyperinflation is inevitable here. The problem is that it is an easy thing to say but more difficult to prove. If one does a careful analysis of the hows and whys of hyperinflation, it is highly unlikely to happen here.
Hugh Hendry Interview With King World News: "If Inflation Is A Monetary Phenomenon, Hyperinflation Is A Political Phenomenon"Submitted by Tyler Durden on 09/28/2010 14:27 -0500
In which we learn that that outspoken iconoclast has now taken on a $2 billion short position in Japanese credit, although presumably not cash-based as Ecclectica is well under that in AUM. For those who wish to recreate this position synthetically, we refer you to Dylan Grice's ATM swaption in the 10Y10Y forward which is the cheapest way to follow in Hugh's footsteps, and, ahem, may we remind you of Takefuji's recent bankruptcy...). His bet is in essence a gamble against the "China will never fail" bandwagon: "I am just intrigued as to the optionality, as to the profits that could be made, should that revert. And because it's deemed to be impossible, the trade is actually asymmetric. By golly if I am right, I can make a lot of money." Another topic is the already much discussed malinvestment in China, which was the centerpiece of the argument between Hendry and Faber from some time ago (link for clip). But back to what actual things Hugh is doing, he gives the following specifics: "I am shorting 10 year industrial corporate debt with 1% yield. Should this ricochet, which began in America, should the west be grappling with fears of recession, it goes to Asia, it goes to China, and I do not believe they have the vitality and consumption to pull the global economy out." And just in case there is any doubt how Hendry view the endgame, here it is:"At these immense levels of yen strength, Japan is bankrupt. And when it's bankrupt it has given up hope, and there is huge political legitimacy to then do quantitative easing, which leads to the debauchery of the system." In other words: the nuclear response of monetary debasement is certainly coming. We won't spoil what Hendry says on gold (suffice to add the following quote: "We will see a joint meltup in US Treasrys and gold") - for his insights on where the metal will go, for a shoutout to all Zero Hedge Hugh Hendry fans, and for much more, listen to the whole interview.
M1+M2 Update, Or Does The Deflation/Hyperinflation Debate Hinge On The Propping Of Shadow Monetary Aggregates?Submitted by Tyler Durden on 09/16/2010 20:39 -0500
Together with the Fed's balance sheet, we are now convinced that the second most important developing metric for the economy is a granular analysis of the key public monetary aggregates: M1+M2. Within a month we also hope to develop our own definition of M3, to supplement such work elsewhere, in order to provide an independent opinion on what the true monetary growth is, now that increasingly more people are discussing the threat of outright hyperinflation. But before we get there, here is our first breakdown of M1 and M2 data. As a reminder, M1, or the monetary base, consists of the i) Currency in Circulation, ii) Demand Deposits, and iii) Other Checkable Deposits (technically it also includes roughly $5 billion worth of Travellers Checks each week, but this is merely a remnant of a bygone era and it rarely if ever changes). In the most recent week, total M1 was $1,700.7 billion, a modest decline from the prior week mostly due to a $12 billion drop in Other Checkable Deposits. Beyond pure M1, there are also i) Savings Deposits at Commercial Banks, ii) Savings Deposits at Thrifts, iii) Total Small Denomination Time Deposits and iv) Retail Money Funds. All these, in addition to the items listed under M1, make up M2, which closed the week ended September 8 at just over $8.7 trillion for the first time in history. For those who look at M2 as an indication of just how much liquidity is sloshing in the system, and use it as a proxy for inflation, the attached chart must be rather troubling.
In his new post, Gonzalo Lira analyzes the Oil Shock of '79, and the subsequent run up in inflation. He comes to some interesting conclusions about 1979, and how those conclusions might apply to today, if and when there is a run on Treasuries. "In both 1979 and today, dollars were poised to chase after commodities, following a triggering event. In ‘79, it was the fall of the Shah. In 2010, we are waiting for our moment to exit Treasuries. Therefore, one can look at the events of ’79–’82 as a dress rehearsal for what I think will happen today, and in the immediate future, if and when the Treasury bond bubble pops." — Gonzalo Lira
John Williams Sees The Onset Of Hyperinflation In As Little As 6 To 9 Months As Fed "Tap Dances On A Land Mine"Submitted by Tyler Durden on 09/14/2010 08:22 -0500
John Williams, arguably one of the best trackers of real, unmanipulated government data via his Shadow Stats blog, has just released a note to clients in which he warns that hyperinflation may hit as soon as 6 to 9 months from today. With so many established economists and pundits seeing nothing but deflation as far as the eye can see, and the Fed doing all in its power to halt the deleveraging cycle, both in the open and shadow economies, what is Williams' argument? Read on. Incidentally, even if some fellow bloggers disagree with Mr. Williams' assesment, we believe it is in our readers' best interest to have them make up their own mind on this most critical economic development.
A recent guest post by Gonzalo Lira on Zero Hedge, providing a theoretical framework for the arrival of hyperinflation, went viral, generating over 75k views and over 1,000 comments, further confirming that the biggest and most confounding debate in all of finance is what will the final outcome of the Fed's market manipulative actions be: deflation, inflation or, and not really comparable, hyperinflation (which is a distinctly different phenomenon from either of the above). The post infuriated some hard core deflationists who continue to refuse to acknowledge the possibility that in its attempt to inspire inflation at all costs, the Fed may just push beyond the tipping point of monetary imprudence away from mere target 2-3% inflation, and create an outright debasement of the world's reserve currency. One among these was none other than Mish himself, who a week ago recorded a podcast on Global Edge with Eric Townsend and Michael Hampton (link here), in which his conclusion was that Hyperinflation is the endgame, "so it is unlikely." Of course, the very premise of this statement argues that even in a monetary collapse the Fed will retain control over the flow of money, which of course is unlikely, and thus makes us very skeptical that such a simplistic and solipsistic argument is enough to resolve the debate. Since one of the items covered in the Mish podcast was Lira's argument, it was only fair that Gonzalo himself should be heard. Here is the Gonzalo Lira podcast defending the "Hyperinflation" case.
I usually don’t do follow-up pieces to any of my posts. But my recent longish piece, describing how hyperinflation might happen in the United States, clearly struck a nerve. There were two issues that many readers had a hard time wrapping their minds around, with regards to a hyperinflationary event: The first was, Where does all the money come from, for hyperinflation to happen? The second question was, Why will commodities rise, while equities, real estate and other assets fall? In other words, if there is an old fashioned run on a currency—in this case, the dollar, the world’s reserve currency—why would people get out of the dollar into commodities only, rather than into equities and real estate and other assets? In this post, I’m going to address both of these issues — Gonzalo Lira
Yields are low, unemployment up, CPI numbers are down—in short, everything screams "deflation". Nevertheless, the next leg down in the Global Depression will be a hyperinflation. Here's why it will happen, how it will happen, and what to do about it. - Gonzalo Lira
This is the fourth and final part of my major four part series dealing with what I feel is the primary question investors must now answer: is our future to be inflation or deflation? The answer has vast implications to our investment planning and decisions for the near term, and possibly for our long term. It is a very complex question with a lot of moving parts involving economics and politics. For those of you who have stuck with me for this series, thanks!