Friday, July 31, 2009

Inflate or Die(Deflation)

It's pretty simple folks. We are approaching the moment of truth.

The government is slowly getting backed into a corner. The more pressure we see on the currency, the tougher it becomes for the Fed to continue and play their borrowing games.

I believe moving forward, successful treasury sales may be viewed as a negative versus a positive if the dollar continues to sell off. Currency traders are beginning to realize that we are risking our currency as we continue to dig ourselves into unthinkable debt.

Today was the first day the market didn't zoom higher as the dollar sold off. As we broke the USD trading range and broke to the doenside, I think some of the currency traders got spooked and bailed.

Treasuries rose as the move in the dollar put the fear of god into some investors. Other smart money ran into gold which also soared today. The VIX spiked sharply at one point during the day.

The volatility and action was quite remarkable today considering the small move that we saw in the market. Things appear to be quite unstable as we head into next week.

The Fed has a choice to make

Its inflate or die(deflation). We have hit the fork in the road. The government either has to slam on the brakes and stop spending which will lead to deflation, or continue to monetize the debt and inflate. This of course leads to us selling treasuries out the ying yang.

The big question here is does the government have the balls to walk away and let a lot of the economy die via deflation? Considering they can't even let a bank die, I am leaning towards further monetization for now. This should put serious pressure on the dollar.

The question down the road will be this: Does the Fed blow their head off and destroy our economy as they try to save everyone or will they decide to let the deflationary forces prevail which then leads to a deflationary collapse? I remain on the fence on this one.

1 Down 299 More To Go!

For those of you who think that housing is recovering take a look at this video. This is a sobering reminder of how out of control the real estate bubble was. The most recent Case Shiller Index improved but still was down 17% seasonally adjusted. This means housing prices continue to plummet.

Note to potential home buyers: Never try and catch a falling knife! There will be plenty of time to buy when housing bottoms. There is usually a period of years where housing prices stay flat after real estate bubbles collapse.

Don't be a victim like the family below!



CT-Hilltopper said...


One of the more frustrating things that we have discussed frequently here in the comments is the feeling of being on the edge of something, hanging right "on the precipice", starting to teeter, but not having the impetus to fall one way or the other.

It's been a common thread for months. But if we lookk at things dispassionately, month by month, things get a little worse. The euphoria of the stock market belies this, but, much as in 1929, the stock market is a lagging indicator.

I've stopped trying to time the crash. It only serves to drive me nuts. It serves no other real purpose. What the Fed and the pigmen are doing will work until it doesn't. I am finally at a point where I am at peace with myself (although still pissed off)and I think I am going to be able to pull my kids through this.

Maybe the Serenity Prayer got through to me...

Even though I don't watch CNBS much anymore, I had it on a few minutes ago, and one of the people on was Peter Schiff, who is hardly on anymore at all. Anyway, as he was trying to tell the panel of people on with him about the inflation that he saw coming, they were making fun of him and laughing at him, just like they did when he told them that the market was going to crash in 2007.

They just never learn.

I don't know, Jeff. I kind of think the die was cast during that "failed" treasury auction this week. They printed their way through that, and they will print us into Weimar.

If they don't...

Jeff said...


I have come to the same conclusion.

This could go on a lot longer then we ever could imagine. The oligarchs and other elites have a lot to lose when this thing collapses.

I am just trying to protect myself from inflation, raise cash, and short T's. These are the only preparations that make sense to me right now.

I plan on shorting the dollar on any uptick. UUP is a nice way to play that.

I believe it will rebound somewhat after the pounding it took today.

This is certainly a crazy world we live in. I am at peace with whatever happens. I believe I have done the best job that I can in terms of defending myself.

Ben said...

Re: the video about the condo owner

Shouldn't he have known the tower was empty before he bought his unit? If there was 15% occupancy in the other tower why didn't he just buy a unit there or go to a different development where there actually were people?

I feel bad for the guy but some of the blame rests on him. Research before you buy!

Keep up the good work Jeff!

Tom said...

hi jeff
For us economic novices it sure sounds ugly but everybody acts likes everything is normal. I am at an outdoor restaurant in D C and you would never think anything was wrong. This full court press of green shoots is making me think that us average joes have no idea how bad things really are.

Jeff said...


Thanks. I will keep trying!

Unfortunately, during the mania of a bubble, people make these kind of mistakes.

I made some mistakes during the tech bubble but I learned my lesson. I remember buying a tech stock at $100 a share, watched it soar to $215 a share, and then fall to $15 once everything burst.

Fundementals always matter and they will this time to.

Stocks are way overvalued from a P/E perspective.

Jeff said...


I hear ya. You live in DC so be careful interpreting that.

The government is one of the few people left hiring!

I live in Baltimore so I understand how things are not as bad in this area as they are in the US.

People are struggling in many areas of the country.

I see the same stuff in terms of people going out, but I also see home prices dropping sharply so even in this area the recession is having an effect.

flipdippy said...

Dollar down and equities failing to rally? And on the last day of July? Very interesting.

Did you happen to read about this?

This week will be interesting.

With all the banksters on holiday in August, and with CSCO's earnings and the ADP job report, I'm guessing we may get good signals about where the markets are going.

If the markets end this week up again, what does that portend for the following week with 10 and 30 year bond auctions?

I can't decide if I have a negative bias or if we've successfully punted problems until Q3-Q4 2010 and the markets rally until then.

The bulls and bears have strong arguments at this point, and the markets will choose their own direction.

Jeff said...


I agree.

I think the inflation risk has made this market more difficult to figure out.

Will the markets begin to rise out of fear of hyperinflation? thats my concern.

The fundementals from a P/E regarding stocks perspective make me want to short the market.

However, the monetary policy by the Fed is risking the fate of the dollar, and I believe traders are starting to buy stocks as defense from inflation.

Other investors like mutual funds are now forced to buy the market in order to keep up with the Jones from a performance standpoint.

On the flipside, chasing the market at this point seems like a suckers bet after the move we have seen.

I think we may hit a wall at 1000 on the S&P and stay in a tight range for awhile.

The bond auctions are critical of course as always.

DIversification and defense is my game plan for now.

If we get up to the 1100 range I might buy some short options.

Anonymous said...

I recall that, what, $1.3 trillion was earmarked for QE? I suspect some of it got spent last week! It might be interesting to see current totals. I haven't looked, but rather assumed I'd eventually run across a blog piece about it.

Jeff said...


I think so too. I know that only $300 billion was allocated to buy treasuries.

Did you see we had annother 5 bank failures on Friday? they are really starting to add up.

ZMonet said...

A site I frequent on mortgage rates has the figure at $702 billion (of the $1.25 trillion). I think they were at about $630 billion at the beginning of the week. For those looking to follow the crazy world of MBS, check this blog out:

Jeff et al, did you see that Calculated Risk made a post about how he went long the market in March? He says that he could get out at any minute and doesn't announce his trades, but I found it interesting because I guess I projected that he was bearish about the market. His revelation came in a post about his frustration with the way the media handled the Case-Shiller season adjusted vs. NSA data. CR is supposedly going to make a post this weekend about his thoughts on whether housing prices have bottomed...I personally think house prices will continue down, but I just don't see how home prices in the DC Metro area go down more than another 15% without a total Armageddon scenario unfolding. Also, if we do have hyperinflation and interest rates aren't raised quickly to combat it, a lot of inventory will be soaked up. Man, I hate straddling the fence, but the straddle is unfortunately the safest place to be...

Jeff said...


Yeah its tough.

I wish I had some advice for you. Unfortunately, what happens in the bond market will dictate how bad it gets in housing.

If interest rates soar(which I expect) as we continue to try and peddle all of this debt prices will get whacked once again.

When the bottom does arrive housing prices will bounce off the bottom for years so I wouldn't try and catch a falling knife.

Certian areas of Florida and Cali are bottoming because prices are down 50% or more.

If you are looking under 300k I don't think you will get burned too badly. Anything higher is a definite no no.


getyourselfconnected said...

Great stuff Jeff! I think the inflation "decision" via currency devaluation (either fast, or a slow bleed0 has been totally missed by the entire financial landscape. While that may mean that ideas like yours (that I share) are just way out there, it may just be good olf fashioned denial by established market observers.

In this market you can be overall bearish (I am) and still play short term rolls to the upside. I currently have very few positions as I am refraining from market interaction on principle.

Have a great weekend.

Jeff said...


Right there with you.

I have a few long funds in my retirmement account that hedge out my short positions.

I read some excellent stuff from Martin Armstrong around this weekend over this issue. I will share later.

Hope you enjoyed the concert,