Much has been said about the comparison between Japan and the US on a macro level, as both countries succumb to the deflationary forces of social-wide deleveraging. Yet few have analyzed the transition of the US into Japan from the perspective of corporate credits. Below is BofA's Jeffrey Rosenberg, arguably the firm's best analyst, sharing what he sees as the arguments "for" and "against" the credit markets on America's one way road to Japanification.
The debate over whether bonds are in a bubble is very much the topic du jour, and while some deflationists like David Rosenberg believe that not only is there no bubble, but the 10 year will soon slide inside of its all time tights at under 2.1%, others believe the 30 years bull run in Treasuries is the dumbest thing since the dot com bubble, and that if anyone is hoping to make money, it should be on the countertrend. Two such Treasury bears are Marc Faber and Peter Schiff, both of whom were on CNBC tonight, and both were dissecting what in their view is the fallacy of the long-UST trade. As for the Faber-Schiff view, no surprise: Peter encapsulates it best: "the bond market is the mother of all bubbles right now, and when it bursts the losses will dwarf the combined losses of the stock market bubble and the real estate bubble. There is no way for the government to pay this money back." And echoing a topic Zero Hedge has been warning on extensively, namely the maturity of trillions in short-term debt that rolls every month, Schiff notes: "I am afraid is that when people realize we can't pay this money back, we aren't going to be able to roll over all this short-term debt. And so it's not just paying the interest, we are going to have to retire the principal." Peter Schiff is correct that inflating our way out of this debt bubble is a lose-lose proposition. Schiff also notes the stupidity of crowds, by highlighting that 10 years ago everyone was chasing risk, by piling into stock market funds, followed by everyone knows what. The outcome for bond investors is clear: "this decade is going to be the worst decade for bonds in US history. Bond holders are going to get wiped out. Either the government is going to default, or it is going to inflate, but either way the people holding the bonds, are holding the bag."
Is Illinois Worse Off Than Greece with a Little LTCM and Bear Stearns Thrown In? In Case You Didn’t Know…Submitted by Reggie Middleton on 08/23/2010 14:10 -0500
What does Illinois have in common with Bear Stearns, Ambac Financial, LTCM and Greece? Come on fellas, let's roll the dice. I've got some pension money in case I come up snake eyes...
Ten days ago we posted extended thoughts on the upcoming US demographic crunch, paraphrasing observations by Goldman Sachs, which speculated that with ever more individuals leaving the "prime-savers" demographic bracket, those aged 35-69, the (already meager) temptation to save in the US will decrease substantially going forward. Goldman was primarily focused on the implications this phase shift implies for future US Current Account deficits. Today David Rosenberg begins to tackle the US demographic issues from his own perspective, with his preliminary conclusions, as expected, not validating any optimistic perspectives before the US economy: "starting next year, this key age cohort for both the economy and the markets will begin to decline — according to official forecasts, each and every year to 2021. The last time we saw sustained declines in this part of the population was from 1975-83, which was an awful time for both the economy (except for that very last year when the negative growth rate in this age segment was drawing to a close) as the S&P 500, in real terms, was as flat as pancake and real per capita income barely expanded."
The economic news has turned decidedly negative globally and a sense of ‘quiet before the storm’ permeates the financial headlines. Arcane subjects such as a Hindenburg Omen now make mainline news. The retail investor continues to flee the equity markets and in concert with the institutional players relentlessly pile into the perceived safety of yield instruments, though they are outrageously expensive by any proven measure. Like trying to buy a pump during a storm flood, people are apparently willing to pay any price. As a sailor, it feels like the ominous period where the crew is fastening down the hatches and preparing for the squall that is clearly on the horizon. Few crew mates are talking as everyone is checking preparations for any eventuality. Are you prepared? Apparent synthetic wealth has artificially and temporarily been created through the production of paper. Whether Federal Reserve IOU notes (the dollar) or guaranteed certificates of confiscation (treasury notes & bonds), it needs to never be forgotten that these are paper. It is not wealth. It is someone else’s obligation to deliver that wealth to the holder of the paper based on what that paper is felt to be worth when the obligation is required to be surrendered. It must never be forgotten that fiat paper is only a counter party obligation to deliver. Will they? Unfortunately, since fiat paper is no longer a store of value, it is recklessly being created to solve political problems. What you will inevitably receive will be only be a fraction of the value of what you originally surrendered." - Gordon T. Long
Based on the comments and emails I'm receiving lately, it appears more and more people are hopping on the deflation bandwagon. These correspondences have exposed to me an obvious misunderstanding of basic facts. While I suppose I am an "inflationist", I'm the first to admit that deflationists have some valid arguments to support their claims. But at the end of the day, their arguments are flawed; I just don't see deflation as a realistic threat moving forward.
Dear Pragmatic Idealist: I don't know where you get your ideas about Austrian theory, but they are completely wrong.
Providing a semi-critique of some over-eager Austrian monetary business cycle theorists. Some Austrians go too far and attribute all blame to the government's monetary policies in creating bubbles. But at least some blame must be attributed to investor/consumer irrationality and groupthink.
Two years ago when I told everyone I knew that the United States was bankrupt and would ultimately default of its debt one way or the other (by inflation or restructuring) I was called crazy and dismissed by 95%+ of the people I met. These days many of the same people still think I am crazy when I say that a political, financial and intelligence elite which has now teamed up with large corporations is attempting to create a global currency and world government (with them at the helm of course), but the notion that the U.S. is bankrupt is now more or less mainstream. Even the corporatist/socialists in power are now unable to merely dismiss questions about the deficit. The public has woken up from its slumber of consciousness and is now starting to see things as they are. This is an extremely positive development and is why as I have said before I think the elite are in their last days as the freight train of consciousness runs them and their twisted illusions of grandeur into the sea. The weakest link in this sick and corrupt financial system that was forced upon many of us before we were even born with its mechanics purposely hidden in the shadows so that we remained ignorant of its preposterousness, is the commodity market. However, within the commodity market the weakest link is gold. - Mike Krieger
Some people in Asia burn joss paper, also called ghost money, on the Lunar New Year, to give their deceased ancestors something to spend in the afterlife. Because ghost money doesn’t represent a claim on any actual goods or services in this world, there is no reason for its issuers to exercise any particular restraint, and in Singapore it is possible to find notes issued by the First Bank of Hell, with the mythical Jade Emperor’s picture on the front, in denominations ranging into the millions and billions of dollars. Perhaps we’re counting on this charming tradition to make Asian investors comfortable with the prospect of continuing to add to their holdings of European and American sovereign debt, despite the obvious fact that the money they’ve already lent us is money they’ll never get a chance to spend in this life. - Daniel Cloud
Money supply is declining, ZIRP and QE hasn't worked, so what's the Fed supposed to do? More of the same? This article takes a look at banks and their role in the money supply and credit process, what banks are actually doing, and why they are critical for an economic recovery. The article comes in two parts. Here is Part 1.
More insights from "smart money"....
The Dodd-Frank Wall Street Reform and Consumer Protection Act: The Triumph of Crony Capitalism (Final, Part 4)Submitted by Econophile on 08/17/2010 01:05 -0500
Until I began to examine the Dodd-Frank financial overhaul bill I had no idea that it would so significantly change the direction of the United States. It's scope is so vast and pervasive that it is difficult to grasp its totality. I wrote this article to try to explain this and why I believe it is so important for us to understand it. This is the final part of this four part series. I examine the consequences of Dodd-Frank.
No, there will be no double dip. It will be a lot worse. The world economy will soon go into an accelerated and precipitous decline which will make the 2007 to early 2009 downturn seem like a walk in the park. The world financial system has temporarily been on life support by trillions of printed dollars that governments call money. But the effect of this massive money printing is ephemeral since it is not possible to save a world economy built on worthless paper by creating more of the same. Nevertheless, governments will continue to print since this is the only remedy they know. Therefore, we are soon likely to enter a phase of money printing of a magnitude that the world has never experienced. But his will not save the Western World which is likely to go in to a decline lasting at least 20 years but most probably a lot longer. - Egon von Greyerz, Matterhorn Asset Management
Willem Buiter's Game Theoretical Explanation Of The Interaction Between Central Banks And TreasuriesSubmitted by Tyler Durden on 08/15/2010 23:12 -0500
Despite missing this most recent paper by Buiter at its first publication three weeks ago, it represents the bedtime reading for this evening as it is just as relevant now as it was then. In it, the Citi strategist asks "who will control the deep pockets of the central bank?" and does so from the perspective of a game of "chicken" in a prisoner dilemma context. Buiter summarizes the problem as follows: "As long as neither the monetary authority nor the fiscal authority gives in, the deficit is financed by public debt issuance. With the public-debt to GDP ratio rising without bound, an eventual catastrophe occurs: the sovereign defaults and banks holding large amounts of sovereign debt may collapse, triggering a financial crisis and a deep slump. Following default, the fiscal authority loses access to the government debt markets, at least for a while. The resulting need to instantaneously balance the government’s primary budget means sharp public spending cuts and tax increases. This would be the "collision" outcome. The outcome where the monetary authority gives in and monetises public debt and deficits is called Fiscal Dominance. Monetary dominance is the outcome where the fiscal authority gives in and cuts public spending and/or raises taxes to stabilise or reduce the public debt to GDP ratio to prevent a sovereign default." Buiter does a dramatic deconstruction of this theoretical principal to the practicality of Europe, in a truly fascinating and must read analysis. His conclusion is that the "analysis emphasises that the Eurosystem can absorb much larger losses without risking its solvency or undermining the effective pursuit of its price stability target. We don’t, however, argue that the resources of the Eurosystem should be used in this quasi-fiscal manner. Openness, transparency and accountability suffer when the central bank is used/abused for quasi-fiscal purposes, and the legitimacy of the institution can be undermined." Alas, this only means that fiscal stimulus fundamentalists like Krugman will now start pushing for monetary replacements to traditional policy. And with that QE2 (and its myriad of imminent associated alphabet soup programs) is even more of a certainty.