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Unlucky 13
Luis Echeverria became president of Mexico in 1970. These were troubled times for the country. By the end of his term in 1976 every economic variable was running off the rails. Huge inflation, current account, trade and big budget deficits.
To keep the economy alive numerous steps were taken to kick the can down the road through the next election.
The most dangerous efforts that Mexico took were in its debt profile. The public and private sector was borrowing in dollars. The worst part was that the Mexican central bank was printing Pesos like mad in an effort to keep the banks liquid. The Pesos went into the banks; the banks immediately lent it back to the Mexican Treasury which was running a huge deficit. This was an early version of QE. The central bank created credit; that credit was used to fund the government deficit. All of the emergency steps were advertised to be “only temporary”. More stable policies were promised following the next presidential cycle.
In 1976 Jose Lopez Portillio took office and not long after, the Peso was devalued and economic hell broke out in Mexico. Portillio had inherited a disaster. All of the band aides fell off. There was no chance for an orderly economic transition. Only a massive devaluation and wipe out of debts could address the problem.
I was trading FX in this period. I had many US multinational clients with Mexican exposure. Every one of my customers got their faces ripped off. I hadn’t done much to help them.
By 1982 things had again gotten tenuous in Mexico. Portillio did exactly as his predecessor. He kicked the can down the road until after the election. The critical variables were Mexico’s dependence on foreign debt and the central bank’s financing of the government via the commercial banks. To keep a lid on things the Central Bank artificially set interest and FX rates. It was a rigged casino.
In 1982 the new president, Miguel de la Madrid took office. A massive devaluation soon followed. The chaos was so bad that it forced Mexico to default on $100+ billion of foreign debt. The devaluation precipitated what is referred to as The Lost Decade.
In 1982 I was still doing FX. I had a dozen corporate clients who saved a bundled based on my advice that Mexico would go tapioca. I’d learned from the last experience.
1994 was no different. Salinas Gortari’s term as president left the country in a fragile position. The same mistakes were made. Incoming president Zidillo was forced to devalue. In an effort to contain the crisis Bill Clinton was backed into making an emergency $20B loan to Mexico.
In 94’ I had no clients to protect. I made money myself on this deval.
I bring this history up to make a point about what America has set itself up for. In many ways we look like Mexico in the critical years of 1976, 82’ and 94’. In the year preceding an election the country has taken a number of steps to kick the can down the road. Promises have been made that all of those emergency steps will be reversed starting in January 2013. Some of the big issues that have been tabled:
A) The Bush tax cuts on those making more than $200k will expire.
B) The Bush tax cuts on those making less than $200k will also expire.
C) The Patch on AMT will expire.
D) The 2% payroll tax holiday will expire for all workers on 12/31/12 (I’m sure the current holiday will be rolled for another year)
E) The 99-week extended unemployment benefits die on 12/31. (The emergency benefits will also be extended for 2012)
F) There will have to be a budget that is approved. Alternatively, a series of continuing resolutions is required to avert a government shutdown. We have not had an approved budget in over 900 days.
G) 2013 is the first year that there will be mandatory caps on discretionary spending. These limits will result in a YoY decline in government spending.
H) The Federal Reserve has promised to keep interest rates at zero into 2013. While it is possible that the Fed could continue the madness for even longer, the reality is that interest rates have nowhere to go but up.
I) By January 2013 it will be painfully evident that the country’s key social programs, Social Security and Medicare will be running in the red at a pace that is far higher than anyone considered possible. The need for dramatic changes in these programs will have to come onto the table. The implications of this will be significant.
J) In 2013 the issues of Fannie, Freddie, FHA and the Federal Home Loan Banks must be addressed. The problems at the housing agencies has festered too long.
K) The country will face another debt ceiling extension. The last time cost us our AAA.
L) At some point in 2012 economic events (Probably Europe) will force the Fed into yet another round of QE. More LSAP and another increase in the Fed’s balance sheet. But when completed the Fed will have fired it’s last bullet. QE-3 will not achieve any better results than QE-1 or 2. The policy will be discredited as it achieves nothing positive and causes inflation. There are no credible options left for the Fed to fight the slowdown that HAS to occur when the effects of A – K are felt.
America looks like Mexico of the 70’s – 90’s. The last election cycle brought us the biggest economic crisis in 70 years. The next election will be no different. Dozens of landmines have been planted. They are timed to go off in 2013. Some may be fixed, others kicked further down the road. However the odds of the country addressing all of the things that have been programmed to explode is, in my opinion, close to zero. One or more of these things is going to trip us up. There are too many big issues to confront.
When history looks at this period it will point to the incredible mismanagement of the economy that has taken place. A crisis is being programmed. It will go off like clockwork; it is now set on autopilot. I blame the partisan politics in D.C. for setting the country up for a big fall. But the reality is that the politicians are deeply divided because the voters are equally divided.
Not all these problems are Obama’s doing. But he, and his Treasury Secretary, Tim Geithner, have done everything they could to kick the problems of the day to just 13 months from now. It kills me that TG is still considered the fair-haired boy. I doubt history will agree with that assessment.
.
Note:
A thank you to readers on my blog:
http://brucekrasting.blogspot.com/2011/12/one-million-thanks.html
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Well, it seems there a few other old coots posting here, and yes having fewer days left to observe the finality of what has been in play for the many years I can remember. However, please don't forget the real culprits in the mix. The CFR and its offshoots, Bilderbergers, Tri-Laterial commission, and the vast obscenity known as Tavistock. These institutions since WWI have steadily invaded the halls of power to such an extent that they control everything of any real significance that happens. Until the general population wakes up to this, or the 3% of the population that know it do what is necessary not much can or will change.
Be reminded the revolution that began this great experience with the republic this country started with was conducted then by about 3% of the population of that time. it has been further estimated that just another 10% of that population actively supported the 3%. The rest of the population were basically out to lunch or were loyalists during the entire time it took to get rid of good old King George and his Red-Coats.
Also, keep in mind that what has been pointed out elsewhere the 3% of today's population that 'get it' are basically the survival crowd, and they're well armed, and they will not give up without a fight no matter what dumb-ass scheme is put into play to control them.
Aside from a dumbed down military and over zealous police force there are basically no 'loyalists' today to contend with. So, for all of us old timers there may still be some very interesting days ahead. Let's hope we all live long enough to see a major 'correction' take place.
Hopefully, many more of those who will have to suffer with the status-quo will wake-up in time to do what is required to dislodge the existing power-structure that is out to make them nothing more than slaves.
If Ron Paul doesn't run it's all over until violence breaks out . . .
"Well we are going to have to have a national discussion about those" Ben S Bernanke
You cannot import the peasant population of Mexico and Central America without becoming the political equivalent of a banana republic. The facts are the facts.
The elite banksters seem to like peasants better than a middle class.
don't be an embicile. the blood of three or four great civilizations runs through THEIR veins, Aztec, Mayan, Incan possibly, Spanish if you consider the mongrel Euro dog race (I am a member : fyi), of which you are probably a member. Euro Civ never gave us anything but the atom bomb and Beethoven. what blood runs through your veins, stooge?
Bruce - great post - Quick question - there are two other funding issues that appear to be in need of more immediate resolution - I refer to the medicare spending cuts (27.4% reduction in payments in Doctor reimbursements for 2012) as well as the current funding issue related to the US Post Office - with regards to your insightful time line listed above - could you please indicate where/how you see these issues within that perspective - Many thanks in advance & continued success -
Eliminated Duplicate Post
got a more current picture for us, bruce?
or is that one of your grandchildren?
check his blog, gots a pic-o-him.
Dontcha know? Bruce started FX trading in the womb.
You actually think that we'll go back to being a democracy if a republican is elected? where is your head?
insulting others while buying into the partisan puppet show. the irony.
Who the fuck can take Obama seriously when there has never been a budget passed during his tenure? He reminds me of a young athlete coming out of college football and coming into a contract that gives him access to profligate and idiotic unlimited spending, where he thinks he can do whatever he wants, until his time is up and he leaves behind a mountain of debt before he crashes and burns. But as Tyler says all the time, American voters get the president they deserve!
Tim Geithner = Council on Foreign Relations / http://www.stopthenorthamericanunion.com/CFRMembers.html
Congrats on 1,000,000 +1 ! The process of the Mexican crisis is explained in great detail in CREATURE FROM JEKYLL ISLAND, by G. Edward Griffiths. Its not just Mexico, but just about every foreign country on the planet. Griffiths finished his book in 1994, and it reads today as the playbook for the Federal Reserve's reactions to the current financial crisis. I understand that the 5th edition of his book is available with his comments on the 2007-2008 crisis included. I recommend this book highly, he has a website.
Yes, we are doomed- there is too much unrecoverable debt worldwide. Its time to quit issuing more. Maybe this is the first step: http://www.zerohedge.com/news/market-stumbles-conservatives-push-end-imf-bailout
Everyone should read this book
there's an article about mexico in the 70s on silverdoctors.com titled "living through a currency devaluation", great read:
http://silverdoctors.blogspot.com/2011/05/living-through-currency-devalu...
Come on man, not this again. This has been spammed here hundreds of times.
"spammed"? i've never seen the link posted here before.
it's a great article, i like it, and it's relevant to the discussion.
if you don't, just don't read it. get over yourself, buddy!
I agree it's a great primer ......like owning NFLX ..it splits without giving you extra shares
BRUCE and OTHERS:
How should we position ourselves for this?
Buy gold. I got that. What about gold and silver miners? Should I liquidate those shares to buy more physical, or can we expect miners to rise in value with physical, even if the market tanks? What about shorting the market, shorting the finanical sector? I sure read a lot of bearish articles on ZH, but don't see so many suggestions on how to position, other than commentors saying "buy gold." Thanks.
depends on your situation and your willingness to take risks.
if your money is in anything besides assets in hand, you should know you are taking a risk.
there's a good chance of a major collaps of our financial institutions, "banking holidays", other MF Global type events where customers' accounts are looted, etc.
personally, my assets are 60% bullion (40% silver, 20% gold), 5% cash, 35% equities (20% long gold & silver miners, 15% short financials)
shorting financials can be through outright shorting, buying puts, or selling bearish call spreads.
as far as shorting targets, my favs are BAC, MS, JEF, DB, RBS, but there's other good ones too, there's some detailed info on specific banks at reggie middleton's boom bust blog.
but be on the lookout for a big QE3 announcement in the coming months, once markets have dropped sufficiently (S&P 500 below 1000?) and be prepared to close out short positions at a moments notice.
+1 Outstanding breakdown. I really appreciate the "physical bitchez!" crowd, but I'm not going to convert to 100% physical. So, having an idea how to position the rest of my money, that in equities, is important. Any thoughts on Roth IRA? I've considered liquidating my account, even though that means paying big penalties and taxes. Is the risk of that account being wiped out worth the penalties of liquidating? Or is there another option for an IRA that gets the money out of the broker's hands and into a position where it doesn't face wipeout?
that's a great question, and one i've been wrestling with.
i don't have an answer yet.
some options are:
Stacking, I've been considering something called a Self Directed IRA that allows for investments in real estate (including foreign) and physical PM. This thread got me thinking about it again. The problem is that it's tough to find a credible custodian that ALSO handles the type of investment you are interested in. I think a found a "trustworthy" safe community bank in my home state and emailed them for details. I'm really looking to get out of Ameritrade, which is a subsidiary of The Toronto-Dominion Bank, which received $140Billion of the Federal Reserve's $16 Trillion bailout. I like your take the money and run option, but I'm too connected to the gov to get away...
I've heard of people using the Self Directed IRA to buy real estate that they then live on or have access to and then moving the excess into physical. Don't know the details. For me, I cashed out and am looking at a mountain to payments in April but I've already made that back through smart physical acqusistion...actually, I should say the dollar just got weaker around my acquisition. You guys seem to know a lot more than me though so I'll just sink back into the conversation.
May lose an assload of $$$$,but IF it's paper, from here on out, I do not WANT IT CLOSE TO ME.(Nationalization of the miners is SO happening, it's not even funny.).
Bank It. ...................Hide it..........................Physical or Die.
+1 for a genuine reply. So, are the stock markets just going to disappear? Why not keep some money in a bear ETF? Is your thinking that if the dollar implodes, then all bank accounts and all businesses and all shareholders will be wiped out to $0? Does anyone here have a plan OTHER Than HOLD PHYSICAL? I have physical and will get more...but want to hear some other positions. Is it not possible to profit off the coming demise? How did Bruce profit in 1994 from Mexico's devaluation?
I suppose the big question for that is your time horizon, but you have to understand that this situation has never happened before. We've never had EVERYONE falling apart at the same time. So anyone who says they know where we're gonna be in ten years is lying to you.
If you're talking about active management, are fairly sharp and market-wise, and are willing to take serious risks, there is a ton of money to be made. But for the non-geniuses among us, or those with longer time horizons, the best we can hope for is capital preservation, which means hard stuff like gold/silver.
Tell me what the environment will be like financially in ten years. Will the US have defaulted? Has China collapsed? Did the Eurozone break up? Has there been widescale civil wars and revolutions? What about peak oil, has growth died like many of us are predicting from the flattening/drop in production? How does that affect business, globalization, gas and food prices? Are fiat currencies still viable anywhere?
No one knows definitively the answers to all of these questions, yet we all know that they are major, major risks. Maybe one happens, or all, or some, but they are all game changers. This is not 1990-2000. The world is more unstable than it's been since the 30s. If you don't know where the world will be in ten years, how can you invest long term?
This is why we're in gold and silver. We simply don't know, nor does anyone else. Certainty of any given outcome is maybe 10%, which either means massive diversification in the hope of getting lucky or bailing out of the system via PMs.
Or you could go the Kyle Bass route and get a lot of nickels. :)
+1 for the well thought, well reasoned reply. No one knows. I'm going to continue accumulating physical, mostly silver, and am looking into transferring my roth ira from TDAmeritrade to a community bank to perhaps buy some South American agricultural land with that, and liquidate most my regular brokerage account to use for cash and more physical PM. What's left in my regular account, I'll probably devote to long PM miners and oil, and short financials and the market.
May lose an assload of $$$$,but IF it's paper, from here on out, I do not WANT IT CLOSE TO ME.(Nationalization of the moners is SO happening, it's not even funny.).
Bank It.
Physical or die.
Thanks, Bruce, for the clear summary of the problems just ahead for the US, and the parallels to Mexico. I have visited and lived in Mexico on and off since the time of Echeverria, and I was there for many of the currency events you refer to. Strange things can happen when money jumps the tracks.
If Mexico's experience is any indication, then at some point we should expect shortages of physical currency, particularly of small bills. In the town where I lived, no one had change for everyday purchases less than about $20. If the item was only a couple of pesos, the merchant would let you have it for a promise to pay later. If it was over about $10, you'd give him a twenty and let him owe you the change. Everyone kept a mental tab of what they owed and were owed. Obviously, this only works when everyone knows & trusts everyone else, probably not in a big city.
Mexican inflation/devaluation reached a point where the numbers were simpy too big to be manageable, and it was decided to knock three zeros off the banknotes. (By this time, Mexico was a nation of arithmetical geniuses, and practically everybody was a peso millionaire.) Banks would accept the old notes only until a certain date, and only if the notes were in good condition---no rips, no stray pen marks. So it became a game to spend your "bad" bills by slipping them past inattentive merchants, and to accept only clean bills from others. I can't imagine this will happen here, but I couldn't imagine it happening in Mexico either.
The main thing to remember is that currency events are all about the sudden transfer of wealth. Without a shot being fired, one group sees its standard of living go down overnight, as another group enjoys a huge increase. American retirees in Mexico who kept their funds in US dollars suddenly had a lot more purchasing power, while those who had converted to peso accounts were crushed. The same kind of wealth transfer is about to happen in Europe, just as soon as the right people are positioned correctly.
The other thing to remember is that Mexican government officials lied like hell about the peso devaluation, right up to the very moment it happened, motivated purely by the desire for what was best for the country.
The torn bills things does happen here. I was once told by Washington Mutual in Redwood City that I had to take the torn-but-entire $20 bill I was trying to deposit to a large branch in San Francisco, as that was the only place authorized to accept damaged currency. A distance of about 20-30 miles. Only when I started raising my voice and loudly taking about wanting to close and withdraw my account balance (fortunately in 5 figures at the time) did a manager come and allow the teller to accept it.
I was lucky I didn't get shot.
Too bad Volker is so old. He could turn things around, yet Obama ignored him.
the FED has painted the US into a corner where the Volcker solution can't work. With an ass load of US debt floating out there, a rise in interest rates and the whole ponzi bond scheme explodes. unless of course, US Corp can make everyone one else on earth look worst, first.
Volker is now fully corrupt. Volker had a chance to work towards the right thing, like he did back in the 70's, instead he held a gun to the head of the Taxpayers and demanded that they fund TARP and TALF. Fuck Volker, he should be one of the first to be hung for treason.
So if Obama/democrat is re-elected we're screwed. If republicans take over in '12 we're screwed. I'll take curtain #3...number three???
So if Obama/democrat is re-elected we're screwed. If republicans take over in '12 we're screwed. I'll take curtain #3...number three???
GOP Sucks, but I will SO TAKE them over Obama's fascist regime,it's not even funny.
Obama (INHO) has no intentions of ever being voted from office, I think he will manufacture a NATIONAL EMG, and seize power,HE is the ONE.
door # 3 is an R.P.G
a Ron Paul Government
"It kills me that TG is still considered the fair-haired boy".
Surely no thinking person has thought that.
DavidC
I had dinner with a moderately wealthy group the other day (all net worths over 7 digits, but not the uber-wealthy), and I was stunned to see the level of slack they were willing to cut Geithner. The inability to connect the situation and responsibility for that situation was surreal. The majority of these people are highly educated and capable of sophisticated thought. They are not the "TV braindead" masses. And yet, they had an instinctive trust for TG.
I think there's an element of relief that "at least they're smarter than Bush" going on. I do think Obama and Geithner are more intelligent than Bush is. But in the end, as has been noted on ZH more times than necessary to count, the show is being run from behind the scenes anyway, and the image of our leaders is a sideshow, no matter how well-spoken or intellectually facile they may be. Geithner, Bernanke, etc. are neither more nor less responsible for the mess we find ourselves in today than Paulson, Greenspan, etc. were (and many others before for years). But as long as people like the above group think that the system is fundamentally sound, and it just requires some tweaking, the beatings will continue until morale improves. We're not there yet.
That is the danger of the image of Tim Geithner.
It is a media-meme and they hump it like no tomorrow.
If that's so they flap to the right. No one on the left thinks timmah is a hot blonde.
"The last election cycle brought us the biggest economic crisis in 70 years."
This is nonsensical. The last election cycle was 2010. Even if you are referring to 2008, the elections had nothing to do with the crisis.
Something you fail to mention about the situation in Mexico in the early 90's is that they also experienced an enormous stock bubble. The Bolsa index rose 436% in dollar terms from 1990-93. Much of that rise was due to capital flowing in from the U.S, including a huge rise following the approval of NAFTA.
Furthermore, you also neglect to mention that the Mexican banking system got itself into huge trouble by catapulting its use of off-balance sheet complex derivatives instruments in the early 90's to circumvent regulations. Sound familiar? When the peso fell dramatically, those tesobono swaps, structured notes and equity swaps, among others, saw their market value plummet.
The structured notes were basically leveraged currency bets on peso-dollar money market spreads. When the exchange rate was devalued, bang!, Mexican banks had to sell pesos, driving the currency even lower.
Derivatives caused the Mexican crisis in the 90's, just as the opacity, leveraging and contagion they encourage caused our current crisis. It had nothing to do with election cycles.
i agree. garbage presented here. the fact of the matter is all the events presented to occur at the end of the next election cycle are tremendously bullish for treasuries. just as obviously it's the "end of the world" scenario for Wall Street--as they have been the biggest beneficiaries of "extend and pretend." this is not a crisis of Washington but a Wall Street "debt bomb" that blew up in Wall Street's face. It was WALL STREET that had to be BAILED OUT not the government. The government COURTESY of Tim Geithner and Ben Bernanke were miraculously able to save themselves IN SPITE OF HAVING TO RAMP UP THE WAR EFFORT. Now we have the most criminal IPO market in history coming home to roost, the value of municipal debt plunging courtesy of actual bankruptcies in the space and an out of control media that is literally killing people as a "thank you for serving your country." Throw in the the financial cockfucks of the CME have now resorted to simply "stealing from farmer John" and you obviously have a system that is literally flat broke with no way to back off from the abyss. I say equities soar on the news of the total corruption of the financial system as "those companies not only have money but know how to make it and make a lot more of it too" and are best positioned to succeed beyond the dreams of avarice as interest rates at the non-monetized level and the value of a dollar start reflecting "the new risk paradigm" of worthless debt.
"...the reality is that interest rates have nowhere to go but up."
...and when they do; I get the willies thinking about it.
Actually, they do have somewhere else to go, and that's sideways. Ask the Japanese.
Well it can't go down, or else Bernanke would have taken it there already.
Do not underestimate the desire of a megalomaniacal POTUS to stay in power. When things become irretrievably fucked up on the domestic front ( also known as now ), the hope and change instruction book states: "press the overseas conflict " button.
" We must not quibble about deficits when the furture of democracy is at stake "......BO 2012
The conflict button is stationed in Hawaii, I presume.