The Other Side Of The Coin

Tyler Durden's picture

From Mark Grant, author of Out Of The Box

The Other Side of the Coin
Coins have two sides. That much we know and can agree upon. Trader, portfolio manager or senior executive; I think we can all agree on this premise. Since the financial debacle of 2008/2009 we have seen one side of the coin and what it has accomplished. We have also learned something in the process I hope. The Central Banks of the world have spewed out money like a whale does water when it hits the surface. Giant amounts of cash have been deployed into the marketplaces. We are given numbers that only reflect the surface because what can be hidden from our eyes and ears is done so with regularity given the penchants of the various Central Banks and their stated and not-stated purposes.
Equities have rallied to all-time highs, sovereign debt is still just off their all-time lows and risk assets have compressed to their benchmarks in ways not dreamed about five years ago. The absence of hyper-inflation, once thought to be the consequence of this type of behavior, is nowhere to be seen and this has befuddled many economist and money manager alike.  In other words, what most people thought would happen has not happened and there is a lesson here which rests upon all of the Central Banks acting in concert.  Money is always put to use, it is never idle because it then earns nothing, but since it cannot be invested off-world it must go into the spaces that are provided and so it has. One can honestly say that the game has been rigged and this is an accurate statement but it makes no difference; this is the game that we have been given to play. Investors get to make all kinds of choices but we do not make the rules and arguing with reality may be an interesting academic exercise but it changes nothing in the end.
The sovereign debt of the United States is now around $16.5 trillion, non-financial debt just hit a record high of $13.9 trillion; then throw in municipal debt and financial debt and you end up with about $57 trillion. Then if you add in the balance sheet at the Fed you are up to about $60 trillion and with an American economy of $14.3 trillion the problem begins to emerge. The debts of the country are 4.2 times the size of our economy. The problem with debt, of course, is that interest must be paid on the principal and then the principal must be re-paid at maturity. The issue is where does this money come from as the debt balloon increases and the answer has been to print money. You see it is not just that Quantitative Easing has funded our sovereign debt it has also allowed for increased borrowing from every other sector as an off-shoot to helping to finance the government. The current psychology of the markets is that this will go on forever and without end and that the coin on the table is without a flip side but I am here to tell you; that is not the case.
While there are three types of Valuation (Absolute, Intrinsic and Relative), the marketplaces operate on Relative Valuation for the most part. There was the thought, for a time, that Gold as the alternative to currencies would sky rocket and this was part of either a hyper-inflation thesis or an Armageddon thesis. Gold did go up but not to the levels many predicted and so there has been a pause in this play. Gold rises when one of two conditions are in place and the first is inflation and the second is calamity. Neither, to date, has taken place and so the speculation, while profitable for some, has not been the panacea as thought. Yet the Relative part of the equation continues to operate and some sort of currency battles are in progress no matter what you are told. The reason for this is twofold; the recession/depression in Japan and the worsening recession in Europe as brought on by mis-management and by austerity measures in a time when there is no growth to cure the ills of fiscal decline. This will then lead to both Japan and Europe doing what they can to devalue their currencies against the Dollar as China adjusts the Yuan to keep up with the ministrations of the rest of the world. The German economy at $3.5 trillion cannot support all of Europe and as things worsen not just in Greece, Cyprus and Portugal, all manageable because of the size of their economies, but worsen in Spain, Italy and France; the real trouble will begin. Everyone has been cute and managed to play hide-and-seek up until now but the coin is ratcheting about and may soon flip. The Euro was kept high against the Dollar in an attempt to compete for the world’s reserve currency but this can no longer be afforded by Europe and soon, in my opinion, great efforts will be made by the ECB and the other central banks in Europe to devalue their currency against the American one in an attempt to upright their economies. Austerity and high taxes reduce spending and raise income in the short-run but in the longer term they both decrease gross revenues as a result of their implementation. In my view the short-run has ended its course and now the longer term effects are coming into play and this will make the recession worse than thought by almost everyone and the financial projections for the upcoming several years a prayer that was never answered.
Now in Europe a strange method of arithmetic is used. The do not count liabilities, eighty percent of the liabilities on the banks’ balance sheets are declared “risk free” and revenues are double counted by being put in various baskets and trotted out as official numbers. Long before the end though this kind of arithmetic becomes troublesome. The money is not there to pay the bills, the interest and principal must be paid by someone and contingent liabilities become current liabilities with the passage of time. Then assets that have been declared “risk free” are all of the sudden at risk and Pandora shows up with her Box. Here is another cause of the coin’s palpitations and why I think the flipside may be showing its face soon.
Political Exercise:
Jumping to conclusions, running up bills, stretching the truth, bending over backward, lying down on the job, sidestepping responsibility and pushing your luck.
Just as everything rose in tandem as all of the water came in with the tide; the reverse will take place as the tide goes out. It will be higher yields, wider spreads and an equity market that will stutter and then plunge as the reality of the numbers overtakes the official counting of the numbers. As we all await the outcome of the Italian elections I am reminded of one truth in a democratic country; the people get to vote and their collective decision cannot be ignored. This is also the way of it in the financial marketplaces. All of us get to vote and the ballot box is the placement of our money and as confidence evaporates as the result of greatly disappointing numbers the coin will shudder and flip.
Beware the Ides of March!

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Tombstone's picture

The only coin I see has The Dictator on the side we can currently see.  When it flips, and it surely will, the other side will show a monster.  Take your pick: Hitler, Mao, Castro, Hillary, "K", Stalin, or perhaps one of a dozen others.  For when that coin flips, you will know the destruction of freedom and capitalism as we have known it will be complete and fascism or something more horrid will replace it.

Lordflin's picture

I use to play, now I stack.

Herkimer Jerkimer's picture





Now in Europe a strange method of arithmetic is used. The do not count liabilities, eighty percent of the liabilities on the banks’ balance sheets are declared “risk free” and revenues are double counted by being put in various baskets and trotted out as official numbers.


I'd like to see a few references and examples of this, just for posterity.


I can't believe this. I don't want to believe this.

If I close my eyes, will it just go away?



PUD's picture

All well and stop using the word "investor" now ok?

Kirk2NCC1701's picture

The current (monetary & social) system will continue until it can't. What I keep seeing is the 'expectation' of a dramatic and parabolic end.

People are not only shaped by their culture or sub-culture, but held hostage by it.  E.g., in typical American or Doomsday-Christian fashion, many expect (or are taught to expect) that the 'End' will be parabolic and sudden, but this is not always so.  It may be less dramatic and less profitable for some, and more wished-for by others, but sometimes the system just crumbles and takes years or decades to occur. Case is point:  The sideways market in PM's since last fall, instead of the continued parabolic rise that was 'prophesied'.

Just as you will get 'down-arrowed' at work at a US defense contractor for speaking 'contrarian' to their culture, you will also get down-arrowed here for saying contrarian to this group, e.g.:  "Let's not be naive.  This 'The End is near, the End is here!' is also a bit of a racket.  It is not convenient or as lucrative to those whose are selling goods or services to speak of a slow crumbling than to expect a parabolic end."  


JOYFUL's picture

...There was the thought, for a time, that Gold as the alternative to currencies would sky rocket and this was part of either a hyper-inflation thesis or an Armageddon thesis. Gold did go up but not to the levels many predicted and so there has been a pause in this play...

Faced with the opportunity to do some good 'out of the box' thinking at this juncture, our man leaps back into the box about as far as it is possible...

spouting a compendium of tired 'explanations' of the kind one comes here purposely to avoid...and end's up with a whimper not a bang.

Mark, big minds make BIG plans, and some of the BIGGEST CRIMINAL MINDS are working on stuff that dwarfs your concepts of national sovereignities, boundaries or even patched together puddings like a YOUROWEZONE...

which makes it necessary to widen the scope of your vision.

G-20(the 20 GANG)have been having meetups with the Lagarde moll, and they got big but pretty secret plans in the offing for going global with the kind of small time printing the FED does in DC...we're talking free money for everybody, and new, refined strategies for keeping gold pinned down. SDR allocations n other real criminal stuff, no petty little stabilization funds...

something's gonna blow up real good, real soon, but you're more like the boy what delivers the paper rather than the journo who writes the tip for you this month!

moneybots's picture

"Investors get to make all kinds of choices but we do not make the rules and arguing with reality may be an interesting academic exercise but it changes nothing in the end."


How does an investor make prudent choices, when the whole thing is based on a fraud? Just what kind of reality is a fraud?  In the end they all come to light.  The mortgage fraud got the DOW to 14,000, but the truth knocked it down to 6,500.  What happpens in the end when the current fraud comes to the light of day?

moneybots's picture

"Gold rises when one of two conditions are in place and the first is inflation..."


Gold droppd from 1980 to 2000.  The rate of inflation dropped during that time, but not inflation itself.

tekmike13's picture

Correct...and that's why gold fell back to only $250, even with CB selling, and not to pre-71 $35.

MFLTucson's picture

There is no inflation because of the manner in which it is reported.  In reality, it is off the charts.  Take food and energy out and everything else is going down because there is no economy.

Bansters-in-my- feces's picture

Hey Mark Grant.....

Crawl back in your box,your delusional.

alfbell's picture

Despite the statements that we are going into high inflation and the CBs are printing money and sending us into oblivion... Nicole Foss sees it differently.

She says actual currency is less than 5% of the money supply because most of it is credit. Her definition of inflation/deflation is based on "money plus credit relative to goods and services". Mish shares the same definition. Rising and falling prices don't really matter that much as prices are manipulated and have other dynamics effecting them.

She says there isn't a lot of money printing going on. Just the creation of credit in an attempt to keep the credit ponzi money as debt scheme going. But without willing borrowers/lenders not much is going to happen. The engines of credit expansion have been broken and are dying. Whatever they put into the banking economy is not going to come out into the real economy and cause any stimulus. This debt contraction is proceeding much faster than any debt monetization could ever do. The amount of debt and deleveraging far outweighs the measly amount of printing or credit creation being done by CBs. They are desperate and failing at stopping deflation.

Foss says once the debt financing model has been broken we go into a deleveraging big time. We will hit a lot of temporary bottoms but will keep sinking down until all the excess claims to underlying wealth (created by the great credit expansion of the last 40 years) have been wiped out. After this great reset, the countries that are debt junkies will be in big trouble, once there bond markets are destroyed, then and only then will they actually start to print money/currency and then cause hyper-inflation. The cycle is MAJOR CREDIT CREATION -- CRISIS -- DEFLATION -- DEPRESSION -- HYPERINFLATION.

Makes sense to me.

chubbyjjfong's picture

As posted earlier by Decon, hyperinflation is the loss of faith in currency (the system).  It is a psychological phenomenon. Hyperinflation is often wrongly linked to inflation/deflation.  Ignorance is bliss and the masses would sooner eat their own shit than think about the dire financial situation the world finds itself in.  

There are signs however, that at present, in terms of faith, things are beginning to change. These signs cannot be ignored by the masses as they begin to affect the way they live their lives. MSM has been plasting the airways with messages of "green shoots", "perfect investment opportunities" and "stockmarket euphoria" however at the same time, news of mass lay-offs, business failures and energy inflation are becoming all too familiar. People start to think when they are told they are going to lose their job.  

Prices of desirable realestate are rapidly inflating in many locations around the world as the wealthy try to find a home for their freshly deleveraged funds.  The average person living in these areas cannot ever hope to own a property let alone afford rent. There is more money sitting on the sidelines than ever before and it all wants to find a home.  Those wealthy that have deleveraged already know the system is broken and are looking toward physical assets.

It is happening at present as you could argue that those with wealth are far more likely to be concerned with the REAL state of the economy.  They own the mojority of the wealth and will therefore have the greatest effect on inflation/deflation as they convert cash to asset purchases.  It is when the masses react to the affect of wealth deleveraging into assets that they rely on that faith will waver initiating the onset of hyperinflation.  

Ignorance of the masses ensures power to hierarchy.  That is changing.

besnook's picture

this is the closest anyone has gotten to explaining the current game. as long as the newly printed money never actually hits the streets there is no hyper inflation. the newly printed money has been issued as debt, either as straight sovereign debt or central bank debt meant to counter the shitload of debt gone bad and maintain dollar zirp with new debt that may or may not go bad but successfully hides the shitload of bad debt it is exchanged for. the fed mbs buying program is a case in point. the scheme takes god only knows what kind of crap off the books of the banks(boa) so it can be replaced at 100% on the money with new good debt. it is simply a mathematical model based upon accounting rules to complete the fiction that the banks are solvent. think about it a second. the fed is exchanging 45 billion dollars per month of total garbage in exchange for pristine money. the scale is mind boggling if it was real money being swapped but the fact that the fed actually thought that a trillion dollars worth of garbage (through 2014) needed to disappear(5 years after the collapse) before the banks could be considered solvent is the only empirical admission we have of the size of the problem. the fed is obviously pleased with their genius(lol) since they are already talking about the end of qe to infinity.


maybe the next phase of their plan will be to literally shower the consumer with cash then tax it at 100% to pay for the rise in interest rates on the debt at the end of the zirp plan or the fed can declare a jubilee for itself and forgive the debt on it's balance sheet.....or the bankers can flush the whole turd down the toilet with a real boots on the ground war from the cote d'ivoire to he pacific.

chubbyjjfong's picture

"As long as the newly printed money never actually hits the streets there is no hyper inflation."

Hyperinflation has nothing to do with money.  It describes a situation where society has lost FAITH in money.  It is a psychological phenomenon.  You do not need the masses to suddenly come into "free" money to have hyperinflation.  All that is required for hyperinflation is an "awakening" at which point the masses realise that the only worth of a dollar bill, is what you can use it for, and that is either as toilet paer, wallpaper or something you can burn.  

Inflation/deflation are terms used to describe money in an environment where price is proportional to value.

Hyperinflation is a term used to describe faith in an environment where money has lost all proportion to value.

besnook's picture

before hyper inflation the money has to appear on the streets in quantities that diminish it's value. hyperinflation does not have to be to the extreme of zimbabwe or the weimar republic. it can take the form of south american type hyperinflation at a coupla hundred percent/year or even 50%/year where the current currency is still viable but literally losing value every day simply as a function of quantity available.

alfbell's picture

We shouldn't be talking about hyper-inflation but rather "high inflation or higher inflation". Hyper-inflation means the currency becomes worthless and that is game over. That won't happen. Or if it ever did in the US it probably wouldn't be for decades in the future.

The Fed isn't enlarging the money supply with currency/paper dollars. It's only issuing credit, which can go up in smoke in an instant, in a desperate attempt to continue the debt super cycle in hopes of stimulating the economy and getting some perverted form of "recovery" so as to keep the status quo going down the road.

Doesn't the fact that the CBs all over the world doing this, prove that they are fighting a deflation wave that they will either overcome or will be overcome by it?

GMadScientist's picture

That latter, inevitably.