Monday, June 29, 2009

Market Manipulation/Argentina

Good Evening Folks!

Before I get started tonight, take a look at this discussion from CNBC this morning around market manipulation. I was pleasantly surprised that this was discussed in such detail. The market commentators almost talk as if its a foregone conclusion that the Fed is pumping up the markets via the banks.

Interesting stuff:


A hat tip to Itulip for the charts. Now before I get into this let me start off by saying that I am not entirely sold on this thesis. However, hyperinflation is increasingly becoming a formidable threat unless the Fed changes its ways.

Inflation/Deflation is going to come down to one question here folks: How does the Fed react when this debt bubble collapses? The collapse of the debt bubble is the one variable that WILL happen at some point. We simply don't have the money to service the interest payments on the trillions in debt we have built up over the past 25 years.

We will go boom. The question is whats next?

Argentina faced a very similar crisis earlier this decade. Unemployment soared to 20% by 2001 and peaked at 24% in 2002. The government reacted with a large spending plan just like we saw here. The government's debt load eventually began to pressure the currency as its creditors started to doubt whether or not the country had the ability to pay back its debts.

As the deficits grew and grew, eventually the currency violently collapsed and dropped in value by 73% in a matter of months as the world lost confidence in Argentina's Peso:

You would think with 20% unemployment, Argentina would have seen a massive deflationary spiral like we saw during The Great Depression. If the government had approached Argentina's crisis with a proper fiscally sound policy response in the form of increased spending(to a point!) from the government, they most likely would have just seen deflation.

Sadly, the government chose the helicopter route and paid for it dearly as the whole country collapsed.

All bets are off if your turn yourself into a bailout nation and spend more money then you can ever payback. As you can see below, the world seems to have taken a much different approach this go around then we did during the 1930's.

It's eerily similiar to the Argentina's approach:

Global fiscal deficits 1930 vs 2008

As you can see above, in the 1930's we increased our spending but only to a point. Ben believes this less agressive reponse by the Fed is where the mistakes were made during The Great Depression. As a result, this go around we have decided to throw money out of helicopters globally in an attempt to flood the system with trillions in liquidity.

As a result, Inflation should become more of a threat this go around because the Fed has been aggressively spending since the start of this crisis. Deflation ruled throughout the 1930's. However, inflation did tick up a bit towards the end as we began to run large deficits.

As you can see below, Argentina also saw debt deflation UNTIL the currency collapsed in late 2001:

CPI actually dropped to -4%(deflation) at one point as unemployment soared to 20%. However, once the currency collapsed inflation soared a whopping 120% in just a matter of months! Prices screamed higher as a result because no one believed the Peso was worth the paper it was printed on because the government had spent themselves into default.

Now they say our situation is different over here(Gee..Think I have heard that line before) because the US dollar is the world's currency. As a result, many of the pros think the US dollar could never collapse. I'm sorry folks but I don't know if I buy this.

We are now TRILLIONS in debt. I don't see how we ever possibly pay it back without destroying this country economically. We must stop spending HERE AND NOW in order to have a shot.

The risk that we run by carrying these massive deficits is that the world may begin to lose CONFIDENCE in our dollar. They may decide creating an alternative like a basket of the world's currencies may be best in the long run. We are already seeing signs that the world is losing confidence in our dollar...BRIC summit anyone? Folks, If the world bails, the dollar just might become the new Yen.

Its pretty frightening when you look at the data used to measure our fiscal health. I mean just look at how ridiculous bank borrowing from the Federal Reserve has gotten in the past couple years versus history. This is a fiscal nightmare!:

Bottom Line:

I don't see how we avoid a bout of inflation with all of this money floating around. My concern is the Fed can't pull this liquidity because the economy will collapse almost immediately as unemployment soars past 10%.

This means the Fed is basically stuck between a rock and a hard place. If they pull liquidity, rates go up and an already deeply damaged economy blows up. If the Fed doesn't pull liquidity and continues to flood the system with money, we run the severe risk of seeing inflation like we've never seen before. We will also run the risk of collapsing our currency which then puts hyperinflation on the table.

This is too tough a call in my opinion. The Fed is basically screwed either way. Inflating out of debts has historically been seen more often then deflation. My common sense side says deflation prevails, but i cannot be more certain until the Fed proves to me that they will pull liquidity and show a willingness to allow things to fail. I have seen no signs of this to date.

As a result, diversification is a MUST here IMO. I can't stress that enough. I am not totally sold on inflation or deflation. Prepare for both. This means owning hard assets to hedge against inflation. Shorting stocks, holding dollars, and paying off your debts is the best way to protect yourself from deflation.

I pray that deflation prevails because I don't think anyone in this country is prepared for inflation. We are a nation of debt slaves that's totally broke. If prices go up as a result of catastrophic inflation, social chaos will be right around the corner.


theART said...

I think that FED's long term goal is to get rid of international debt. And the only way to erase all this unplayable debt is to super inflate it. And that's what FED is doing.

theART said...

Super inflate the CURRENCY that is.

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snood said...

I think inflation is the plan. Not only does it allow the debt to go away, it also allows taxes to raise without a vote.

I bet there will be another round of "nobody saw it coming" as inflation takes hold.

Jeff said...


I agree with you.

I don't think the Fed haas any other option.

We are so screwed either way. I just hope this country is left standing when everything is all said and done.

Its a scary time in the world when no investment looks safe.

I was talking to one of my Wall St sources today about where the smart money is going.

I am going to put a post up around later this week.

God was today a boring day watching the market. Watching the market has been like watching paint dry recently.

There will be a time when we need to get used to tight ranges. Unfortunately it will probably from from a much lower level.

Jeff said...



Thats what my smart money guys keep telling me.

I keep talking about deflation and they tell me I am thinking too short term.

I think we will see deflation and inflation panics.

This market will become extremely difficult to invest in over the next couple years. It already is tough today.

Anonymous said...

Deflation is a necessary part of the economic cycle. In a sense, it's healthy (although unpleasant), just as a forest burns old trees and underbrush so new, healthy forest may emerge.

The Fed has cheated our economy of this necessary correction. No good can come of this. Either the correction will come fast & hard, or we will go the way of Argentina.

Deflation is unpleasant, but it lowers assets to a price that people eventually start buying again.

Inflation is deceptive. It allows numbers to remain somewhat pretty, but when compared to a solid standard (such as gold), the numbers really suck.

For instance, if you converted the Dow to gold, rather than dollars, it has been in steady decline since 2001. In dollars, it looks like a meteoric rise occured until 2007, but in terms of real wealth & productivity, we were actually in a decline.

Jeff said...



Tha's exactly how I see it.

Deflation will be great for anyone that has cash and a good job thats safe.

I still think we get pasted with a short serious bout of deflation.

What scares me is how the Fed will react to it and the ramifications of that in the bond market.

I am afraid we are about to find out. I can't see how this is sustained much longer.

Toney Brooks said...

We're in a liquidity trap, which itself is deflationary. Banks are afraid to lend -- no one wants to borrow anyway, as the 6.9% savings rate proves.

To ease a liquidity trap, you need a credible 'expectation' of inflation. Hence, green shoot spin and the recent manipulated uptick in interest rates to indicate (false) 'recovery'. With 10% unemployment and another 15% left on the housing downside, recovery is a rude ruse.

The policy responses we witness today in Washington will eventually lead to unimaginable horrors, I fear.

Good post, Jeff.

Jeff said...



Great points. I totally agree. Our policy responses always tend to overreact and I see no reason why it will be different this time.

The panic of trying to prevent deflation may cause an inflationary nightmare.

It's going to be interesting to see how it all plays out.

Peter said...

Great post Jeff. I am a strong believer in deflation for the time being. In the short run the Fed can not print enough money to make up for the money that has been destroyed. Think of every single household in this country that has lost hundreds of thousands of dollars in wealth between their house and 401k. This will take years to burn off.

Have you thought about the difference between the US and Argentina in that we are a debtor nation, everyone owes money here as opposed to there, which favors deflation as well. No one has money to buy anything.

The Fed's main purpose in all this has been number one without fail to save the banks/their friends. I had a friend tell me that at least the Fed averted a financial meltdown. My response was how can that be positive, they chose to meltdown the country a few years down the line rather than have the banks pay for their sins. Saving the banks take no genius, just give them all the money they need, which is what the Fed did.

Also, in terms of bank borrowings, don't forget that for every billion dollars a bank borrows they make 2 million bucks. The Fed now pays interest on reserves, so in some strange Alice in Wonderland world, you make money by borrowing money if you are one of the chosen few.

With that said, we will see inflation, but in the future, don't rush it. First we have to clear our debts then we get inflation.

Another reason I am in the deflation camp is that all this talk about a new world currency will take time. The dollar will absolutely collapse, but it can not collapse while the entire world is in depression. As soon as our competitors start coming out of the depression they will pull the rug out from under us.

China is no friend to us, they will take the first opportunity to destroy our country but not until they can handle it. Right now they own too much of our debt and are too dependent on us buying their crap, when they clear these two things up a little they will start dumping more dollars and repatriating them, coming over here and buying anything they can purchase with their soon to be worthless dollars. That is when the shit will hit the fan.

I keep trying to figure out where I can be wrong. What am I missing that can save this country from its demise? What can't I see? No one can give me a glimmer of hope for our salvation. We just continue spending more and increasing taxes. Where is our future?

CT-Hilltopper said...

The only hope is to take it back ourselves and to hope we're not too late in doing it.

We have to "Starve the Beast".

I saw this on Jesse's column ages ago, and more recently on Karl's, so the idea is picking up steam.

People need to stop feeding money into the system and let it fail. Karl had some ideas, if I can find the link to the other article in Jesse's blog, there were other ideas.

If the goverment is going to use the banks to manipulate the markets, there is no reason that you have to feed the banks so they play with your money.

If the government isn't going to let the markets progress naturally, we will just have to let the markets progress naturally for them, without their consent.

Many people are doing what is suggested in Karls column anyway, and not by choice, its called being forced into being poor.

I received my ray of light this weekend. Everyone is "waiting for this to be over". The system is collapsing NOW, in stages. Remember the old saying that goes something like it's a recession when the neighbor loses his job, but it's a depression when you lose yours? That's what we're going through now, as the corporations are forced to shed workers a little at a time.

So, things are falling apart now. The destruction of the consumer base is helping to speed it along. The govermnent is playing a game it can't possibly win on those numbers alone.

It all starts here, with this. Everyone can do it. Most of us probably already have.,-2009.html

Minton Mckarkquey said...

"Consumers seem to understand what the markets have yet to grasp: The recession is far from over."

Jeff said...


I love it.

Count me in. Thanks for bringing Karl's post to my attention.

I will mention it tonight on my blog as well.

This insanity must be stopped if the government and the bond market refuse to stop it.

I am very dissapointed in the bond market BTW. They appear to be playing along with this charade.

Thanks for sharing

Jeff said...



That's what I have been focusing on today. The consumer #'s were a big disappointment.

jeff said...

I will try to get a post up tonight

Schedule is crazy and so is the market!