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Guest Post: A Tale of Two Charts: Are We 2007 America Or 2006 Zimbabwe?
Submitted by John Rubino of The Dollar Collapse blog,
The US equity markets are back in record territory, at least in nominal terms.
The last two times they spiked this way, the following year was pretty brutal. See the next chart, which tracks the S&P 500 and margin debt, the amount of money investors are borrowing against their shares of stock to buy more stock. The chart seems to show that when investors are optimistic enough to use leverage to invest in already-risky stocks, then the good times have pretty much run their course and something nasty is imminent. If recent history is our guide, it is now time to either take some money off the table or short the hell out of the big indexes – or whatever else you like to do when the market looks overbought.
But this conclusion is only valid if we’re in the same stage of the credit bubble as during those two previous sentiment peaks. In 2000 and 2007, to take just one measure of financial stability, the federal government’s debt was $6 trillion and $8 trillion, respectively, versus $17 trillion today. Plenty of other leverage metrics are also way up, indicating that the US is much further down the path of currency debasement than it was just a few years ago. So the question becomes: at what point does a quantitative difference become qualitative? When does the phase change occur? The next chart shows why this question is more than academic. In the early stages of Zimbabwe’s epic hyperinflation its stock market rose from 2,000 to over 40,000 in one year. Presumably a lot of indicators similar to margin debt were by then pointing to a blow-off top and screaming “sell” to students of history.
Then the market proceeded to run up to 4,000,000. What happened? The country ran its printing press flat-out and inflated away its currency, so the price of pretty much every tangible asset, when measured in Zimbabwean dollars, went parabolic. Since equities represent part ownership of companies, and most non-financial companies own tangible assets, their value went up as well. Not enough to increase in real terms (versus gold, for instance) but enough to make shorting that market a really bad idea.
So are we 2007 America or 2006 Zimbabwe? A lot is riding on the answer.
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I don't read charts real well but doesn't the Zimbabwe chart say we have a ways to go on the Dow...need to call my broker.
See my post above, as well doing your own research.
Phyzz is going to beat the Dow by a long shot when this show's over!
Always thought the Fed would follow the Zimbabwe plan. Max market upside and printing.
The result of Obama and the Fed's plan is already known from history. It's occurred throughout history so many times before.
As in the past it results in a collapse of the currency.
B-B-but I thought this time was different? (in a trembling voice)
It all depends on whether the scenario ios inflationary or deflationary.
The inflationary scenario goes like this:
The current firewall that keeps the FED-loaned money from breaching the M3 barrier collapses- how? It will have to be printed by the Treasury. Right now, the banks are not loaning the money they get from the FED to the public. This is the firewall. Instead the banks are using FED money to purchase stocks and real estate directly.
Under what conditions would the Treasury begin to actually print? It's already happenning in some areas, not printing per se, but a close facsimilie, that is subsidizing. Food stamps are one form of money printing. So is Obamacare. Food stamps drive up (inflate) the cost of food, and Obamacare will drive up (inflate) the cost of health care. Student loans have inflated the cost of education.
Ironically, deflationary pressures will drive government spending, in compenastion for the burgeoning unemployment and hardships (hunger) faced by Americans in a shrinking real economy, which in turn will drive inflation as the government prints more money, both directly and through the form of various subsidies.
The money will come from unlimited loans from the FED, and this process will compound itself in a geometric fashion until hyperinflation has enough momentum to become self-reinforcing.
Of course, beneath this is the unremittting defaltionary dynamic, driven in real terms by Peak Oil, unsustainable debt loads, global peak population growth, and Climate Change.
The Fed has already crossed the line by buying up treasuries and allowing government expansion and spending.
You can expect the Fed to continue to use mark to fantasy accounting like their banks.
All you need is a Democratic retake of the House in the Midterm, and Federal spending will go parabolic. Right now, the only thing holding them back is the GOP's unwillingness to give Obozo any stimulus. The only thing Obozo can do on his own is to spend on permanently authorized entitlements, and that straightjacket is really crimping his style. Trillion dollar coins won't help him if there are no authorized appropriations to spend it on.
The Sequester is the single most powerful force in politics right now.
I'm not sure even a Democrat retake of the House would change that. New seat holders in conservative districts would vote like the Republicans they likely ran to the right of.
A GOP take of the Senate won't change anything either.
Frankly, nothing will change matters because oil net joules scarcity doesn't care about political ideologies.
You made so many good points until I couldn't take you seriously anymore. We are not close to "peak oil" - every CB in the world is pumping out fiat and oil is at $96. Why? Our technological ability to extract oil is far outstripping demand. We are a long ways away from "peak energy" which is the more proper term as we will likely have some replacements when fossil fuels run short in a few hundred years. And "climate change" lol - on this earth that hasn't seen any warming in 20 years and has been far warmer many times? You don't believe that canard do you?
I see no need to buy new wallpaper for the future, if that's what you're asking.
I envision the Zimbabwe scenario for the US. I think they have backed us into a corner now and the only way out is a reset (which to bankers means hyperinflating all your debts away and starting over with 'new' money).
Hyperinflation isn't going to help the Fed's portfolio of garbage mortgages. When interest rates go up the value of those mortgages go down quickly.
Do I sell? Do I buy? Do I sell ... oh yeah ... I already SOLD in the summer of '07.
I think I'll go back to sleep now.
This just in: Rand Paul putting a "hold' on Yellen nomination!
Political extortion?
Coupled with that he is introducing a bill to audit the Fed. This should be great theater.
Audit The Fed?! Are you kidding - that would "politicize" the foundation if we ever actually found out how they treat our money! Must not ever know. Must not ever, ever know.
Usually.
everyone laughed at mugabe ... but it turned out he was an innovator, an avant-garde, a visionary, a role model for central bankers all over the world ...
And Chalky's role model, let's not forget.
mugabe's policy was to displace all remnants of white colonial rule. even though the tribal people didn't know how to work the land. in america we hand everything over to the corporations, (opposite) mugabe's plan wasnt much different than pol pot in cambodia, who had a rural population hiding in the cities because they were terrified of the khmer rouge, he forceably moved them back to the countryside. something like that could happen in this country, but its more likely people will figure it out before the forced evacuations of urban (parasitic) dwellers begins.
Actually, we are 2013 Yemen, with a smattering of 1984.
Smattering?
cornucopia
The "Free Shit Army" would make the "Walking Dead" look like a day at Disney if the markets blow up like that.
the Free Shit Army lost a unit today, SNAP benefits have been cut
Obama is just putting the FSA at defcon 2. He needs to make sure they are pissed and focused on those damned republicans......and the republicans are pointing at the Tea Party folks saying they are to blame.
Yes the EVIL tea party who want individual liberty and freedom from tyranical government...
unfortunately for us Western Canadians.....the USSA will usurp Canada's four western provinces....only 12.5 million citizens here...a plethora of natural resources...and the USSa will also Nationalize all foreign ownership too....China's investments here come to mind first.
Is Western Canada next?....
via New Bank Guy in Brussells...
""...US oligarchs, in accepting the loss of the petro-dollar, are also accepting the US empire is over, with quick mass impoverishment of the US people, as the US loses its ability to sell worthless dollars & debt to finance its uniquely horrid .5 trillion annual trade deficit (by comparison, the EU has no trade deficit at all!)
The plan for the USA, already visible in what US leaders say, is a much poorer USA taking over Canada to get its oil (US politicians already talking about this, and Canada's quisling leaders already signed away rights to US troops to enter Canadian soil after a 'terrorism' incident, which criminal US gov will certainly provide under false flag fakery)....""
If Canadians Give up Canada, well then They deserve to Loose it, Just like they Lost their Guns. My Buddy I in Canada keeps saying Christ we keep getting more and more Like America every Day...
Don't fret... this pitiful administration and the whole house of cards criminal carnival that comprises the Federal government is teetering, tottering, and about to fall down permanently. The individual states won't invade. Canada is safe.
This administration is over when the TV says its over.
this is what Bush and his trilateral meeting on AMERO were all about, being a Texan he knows that this country will never leave that job (ALAMO) unfinished. Canada is different of course, but one thing at a time
http://www.huffingtonpost.ca/2013/09/30/north-american-union-diane-francis-us-canada-merger_n_4016913.html
Geee....WONDER WHY BEN IS LEAVING THE FED NOW!!
JEFF SKILLING ANYONE? Nodody talks about that....nobody.
Looks just like the chart of the Weimar stock market!
Zimbabwe armed to the teeth with nukes, bioweapons and spying aparatus.
YeeeeeeeeHaaaaaaaa.
Seriously, as soon as inflation starts the FED will stop printing and we will be thrown into a deflationary spiral. Otherwise it's game over and no-one wants the game to end.
Ah but what if they want a new game which doesn't include most players?
No one has a clue how or when any of this is going to end.
But don't bet on the final outcome being a freer country.
Correct. Unless you move to a less predator-dominated place.
-----
Important: "freer" in theory is not the same as freer in fact. Sometimes places very low on the "free in theory" scale are quite a bit freer in practice. Like where the government is so poor, and so clueless, and so distracted with utter nonsense in their capital city or big cities that outling places more or less function entirely without government. Fiji is a fair example of this, where some doofus more-or-less deemed himself king and absolute ruler, but his clueless keystone cops (and rest of his "micro-government") are more-or-less confined to the capital city, leaving the 300 outlying islands pretty much without much of any interference --- not even property tax!
My points are: MOVE... and don't make your "where to move" decision based upon simple or conventional measures, because the best answers today are almost never the obvious ones. Perhaps the only reliable near-certainty is, extreme boonies are essentially always much freer in practice, no matter the locale or theory. This is more-or-less the "outer rim" in star wars and firefly. Those fictions are quite definitely based on the way things work in reality.
As evidence that there is deflation take a look at food. Recently, i noticed that the loaf of bread I bought was half the size as before. The tuna comes in smaller cans, etc. Everything is shrinking. That's deflation. Oh well, I have to go buy a kidney bean for tonight's dinner.
Looks like at least 3 ZH Einstiens missed the implied /sarc.
It's not the first time, won't be the last.
Uhm, what about ; a little bit of both worlds?
New hights in 2013/2014 with several pullbacks, 2 of them quiet severe within the next 6 month but followed by a 30 to 50 percent rocket ramp?
Until the US loses reserve currency status, this is all speculation and 'chicken little' shit. 'Don't fight the Fed' just seems to be too true to draw any other conclusion at this point (despite all the charts ... which definitley keep me up at night). Simply put, TPTB and their TBTF masters have too many weapons and too much ability to snuff out insubordination among the masses and in the markets. But, once the US does lose reserve currency status, and it eventually will, everything changes ... drastically. Frankly though, I think there is a better chance of a solar flare (or a hostile computer attack) knocking out the US power grid than the US losing it's reserve status anytime soon. Nonetheless, under either scenario, you will still be glad you have SRP'd (stacked, racked and packed). Thank you ZH for helping me and my family be ready.
Mugabe will be proud that the colonialist western governments are aspiring to his business model.
Who knows, perhaps he'll demand royalties paid for use of this model.
who knows Tyler, its gonna be bad bothways