Hello All
As I sit here and watch the dollar tank once again tonight overseas, I wonder if the market is slowly coming to the conclusion that the USA will never be able to pay back the trillions of dollars that they have borrowed.
I really thought about yesterday's Jim Rickards interview on bubblevision today. Folks, I don't see how we escape this crisis without a dollar devaluation of 50% or so. This is the only way we will ever be able to pay off the ugly debts that we have accumulated.
So what are the unintended consequences of such actions? I'll be damned if I know. Inflation is an obvious answer but the social consequences would not be known until such an event occurred.
We are in uncharted waters. I can't make any sense of the stock market or the bond market at this stage. The fraud and manipulation at this point is unprecedented.
What's amazing is the banks continue to take advantage of the destabilization of our economy. I am beginning to believe that Wall St doesn't want to see a recovery because the chaos is creating so many profitable opportunities.
If we see an economic recovery, interest rates must rise, and this would be catastrophic to housing(higher lending rates) and thus the banks balance sheets.
Here is a nice example of why chaos is good for Wall St:
There is another "old school" bond game that's going on right now. The banks are borrowing short from the Fed at next to nothing(2% or so) and then buying the long end of the yield curve(4% or so) and pocketing the spread. This is why you have seen the long end of the bond market collapse over the past several weeks.
This is a beautiful game for the street for now but things can change in a hurry according to the pros:
An old bond trader friend of mine explained to me that he watched the same thing in the late '70's. It was a beautiful game while it lasted. The problem is they all got caught with their pants down when Volcker took rates to 12%.
Those long end bonds with a 6 or 7% yield from the '70's don't look so hot when it costs 12% to borrow a few years later!
You see folks, these games can only go on for so long before drastic actions must be taken in order to prevent ourselves from blowing up. When the party is over and rates soar(which I believe is right around the corner), the primary dealers and others holding these bonds are going to get killed.
One potential Black Swan in the bond market is the "audit the Fed" bill that's flying through Congress right now. The Fed is already screaming fire as they try and prevent this bill from going through.
If this passes, the Fed will be exposed for what they are: A fraudulent bunch of broke gangsters that are holding a bunch of worthless paper in an attempt to bailout their banking buddies. The Fed is a sham and everyone knows it.
I expect the rhetoric out of the Fed to soar as this bill gets closer to passage. It's already started. You can almost guarantee that they will warn us that such a move would threaten the whole financial system if this bill passes. I say bull****. We have been through much tougher times before. No one is too big to fail!!!! We will survive this crisis and move on.
The Fed however wants you to think the world will end if their balance sheet gets exposed. My questionn here is if they were legit then why would they be so resistant to an audit? Companies are audited all of the time! Their resistance to this bill proves their guilt IMO.
The Bottom Line:
The games never seem to end. Many of my contacts on the street are extremely skeptical of what's going on in the markets. A few see no way out for the Fed and the economy. In fact, I have never seen people from Wall St so bearish. They are usually a jolly group.
Many of them are now beginning to focus on how to profit from the collapse that seems almost impossible to avoid at this point.
The bulls own the market for now. Fundamentals don't matter when you are betting on a recovery. If the analyst's revise earnings down from .20 a share down to .05 on a company before earnings season and they come in at .10 it's a huge beat! Yeah ok, go ahead and tug the other one.
The mirage of Wall St continues but you need to wonder if their run is about over. A collapsing dollar and the Fed's response are what I am focusing on right now. If I had to guess, the Fed will do nothing with interest rates unless inflation really runs wild.
As a result, the metals are still the place to be long term. The street is beginning to realize that the only way we pay back our trillions in debt is by devaluing the currency.
The IMF will pick up our slack with a new currency in order to stabilize world trade as we clean up our mess by taking down the dollar in order to pay off our debt.
This is going to be a very painful experience for America.
18 comments:
The market will revert back to the means at some point, right now enjoy the ride up and pocket some profits. I think we need to let all the goverments programs run out and now that the earnings have been revised back to nothing we'll see how earnings will look next year. One thing I think has the potential to be socially scary is that the "experts" were saying it could take 10 years before we get back to the employment numbers of '07. That's a long time for a realitively high unemployment percentage to be out of work. What will these people have to do to feed them and their families. Maybe I should buy a jail? Interesting times!
Anon
I share your fears!
We are going to see a lost decade just like Japan and any other economy that has blown itself up.
The economic data today was terrible. Chicago PMI below expectations.
Mortgage applications dropped over 2% at a time where there is a tax credit and mortgage rates are collapsing! That is the worst news of the day in my opinion.
The consumer in this country will never be the same in our generation. they will become much more conservative. thrigt will be a better term for them moving forward.
Scary indeed.
"If we see an economic recovery, interest rates must rise, and this would be catastrophic to housing(higher lending rates) and thus the banks balance sheets."
Jeff - thats simply not true. Look at the late 70s early 80s when inflation was sky high.
From 1978-1983 inflation was running at about 10% a year (and mortgages were in the low teens). Was high mortgage rates due to high inflation catastrophic to housing?
The answer is no. During that same period in nominal terms (the terms that matter when you are repaying nominal loans), home prices rose 8.4% per year!
Now in real terms, home prices were losing out to inflation, proving that housing is a poor investment vehicle (easily available 10% CDs would have done better). However, again, in nominal terms, homes rose and were much more expensive at the end of that period than the beginning.
Anon
Good info. The difference here though is there was no housing bubble back then as rates rose!
The economy was mired in a 7 year slump including a 50% crash in the market in 1974/74 before the late '70's. Home prices as a result went nowhere for 10 years.
We in the exact opposite situation this go around. Prices are bloated and the banks have them market at bloated prices.
If rates zoom its game over for the economy. Why do you think the Fed QE'd?
They understand that that rates cannot rise because the banks are doomed as they sit on piles of toxic housing debt.
No buyer will be able to qualify for a 500k McMansion with 10% lending rates because they won't make enough money.
I guess we will see what happens.
Jeff lets be clear - there is no longer a "bubble" in housing. Housing is not cheap, but it is not ridiculously overvalued either.
Further, inflation may alread be at work now, and very well could be the reason case shiller just came out with its 4th consecutive monthly increase.
There is one thing you said which I need to comment on.
"No buyer will be able to qualify for a 500k McMansion with 10% lending rates because they won't make enough money."
Jeff - "wont make enough money" is not in the vocabulary of an inflationary environment.
The same argument would apply to other goods i.e. gas, gold, bread etc. You could just as easily have said:
No buyer will be able to buy $5 gas because they wont make enough money;
No buyer will be able to buy $1500 oz gold because they wont make enough money
No buyer will be able to afford $5 bread because they wont make enough money.
Thats basically the deflationary argument and the reverse of what you are arguing for in this thread.
One more thing you said I need to comment on:
"The economy was mired in a 7 year slump including a 50% crash in the market in 1974/74 before the late '70's. Home prices as a result went nowhere for 10 years."
Heres the 1Q nominal home price for each year 1970-1980
70 - $26,566
71 - $26,977
72 - $27,964
73 - $30,284
74 - $32,414
75 - $34,958
76 - $36,738
77 - $40,193
78 - $45,616
79 - $52,502
80 - $57,386
Again, these are nominal values. In terms of real values, home prices went nowhere, or even dropped. However in nominal dollars (the type you and I pay to the bank) home prices went up significantly.
So again, when you said "home prices as a result went nowhere for 10 years" are you just making this stuff up as you go?
Jeff,
If the Fed pummels the $ as you suggest, will the stock market then soar - or will the $/stock market decouple and move in the same direction (i.e stock market tanks along with the dollar?
Thanks!
Anon
All good points and not making stuff up its just not relevant this go around because it's an entirely different ballgame in the economy.
You had wages increasing during that period which allowed housing to move up in price.
Wages moved higher with inflation as the unions rose to power and forced salaries higher.
This is not happening this go around. As a result, the ability to qualify will be impossible because lending standards are now tougher and lower paid workers will not be able to qualify for these homes.
Wages are flat or flat out decreasing this go around.
Its a different environment this go around. I see inflation due to a currency devaluation at a time where people don't make enough money to handle it.
I don't see how this works out. Wages aren't going up anytime soon so food and the ability to live will become impossible for many.
I wish I had the answers to get through this but I see the deflating salary problem as a major issue at a time when prices are going up.
Social chaos is a risk here if you ask me. I agree with a lot of what you are saying. I wish I had the answers as to how this all works out.
Anon 2
That trade is working for now as long as the dollar drop doesn't get out of control.
If we get below 72 on the dollar I think equities will get hit because its going to put a lot of pressure on the consumer's wallets as oil rises.
Go back to the days last year of $140 oil if you want a preview of what happens when commodities soar.
Good grief Jeff. You are all over the place here!
"Jeff said...All good points and not making stuff up its just not relevant this go around because it's an entirely different ballgame in the economy."
Well you said home prices stagnated and I showed you that didnt happen. I call that making stuff up.
"Jeff said...You had wages increasing during that period which allowed housing to move up in price. "
As you do in all timeperiods when there is inflation.
"Jeff said...This is not happening this go around."
So it sounds like you are arguing deflation. If so, dont argue that this will end in inflation.
"Jeff said...Wages are flat or flat out decreasing this go around."
Deflation
"Jeff said...Its a different environment this go around. I see inflation due to a currency devaluation at a time where people don't make enough money to handle it."
That is a bit of a tautology. Unless the money is in peoples hands (i.e. M1) its not inflation!!!
"Jeff said...I don't see how this works out. Wages aren't going up anytime soon so food and the ability to live will become impossible for many."
Deflation.
"Jeff said...I wish I had the answers to get through this but I see the deflating salary problem as a major issue at a time when prices are going up."
Deflation.
So again, what you are really arguing is people wont have any money for anything. As such you will have deflation. Thats fine if thats your argument, but just note your argument for inflation is filled with deflationary aspects. As such, it really looks like you are arguing for deflation.
Bottom line - I have read your posts long enough to where you "want" to have a situation where there is inflation in everything, but at the same time, this inflation will somehow not affect housing. I would like that too, but thats just not the way it works in the long run.
Anon
You are right!
It all screams deflation but we have that currency issue to deal with.
Every analyst is all over the place right now.
Where are all of these wage increases going to come from as BK's and unemployment soars? The land of Oz?
Theoretically thats how inflation works. Realistically I don't see it happens.
So what happens when the economy teeters on the brink of collapse as the currency sits on the edge of a cliff? who knows?
I have yet to hear the answer. If you've got a good one I would love to hear it.
I don't think anyone has a good handle as to how this plays out. there are too many variables at play here.
I will continue to be all over the place because I see threaqts of deflation and inflation. IMO it's still up in the air.
Wow!
Anon and Jeff really mixing it up.
While Anon makes several good points, they are of the comparison type. What happened in the 70's (or the 30's for that matter) adds litle help to the current issues.
Also, it is very easy to pull up a few charts and say this or that went up in nomnal or real terms 35 years after the fact, while at the time things were pretty scary all around. If deflation is going to be huge, then yes buy a home and in 35 years (I hope you are under 30) you will recognize the beauty of your forsight.
This is a confusing time with plenty of cross currents of information to look at. Nobody knows what is going to happen, there are too many wild cards.
Get
Yeah this is a tough situations.
The problem IMO is the fix that is needed in this is an economic reset where prices drop down to affordabkle levels.
We can't afford 50k to send a child to school for a year. we can't afford 500k houses.
The ability to borrow and pay for this stuff is no longer available. In a nutshell it's too expensive to live nowadays!
The problem is if we have a reset, it will destroy the banking system because they will take massive hits to their balance sheets as their assets drop tremendously in value.
I personally don't see a way out of this mess. Any exit involves SEVERE pain.
Anon,
You're pretty much describing stagflation.
We didn't have outsourcing quite like we do now in previous recessions. Jobs are both 1) being outsourced and 2) outright eliminated as technology makes them obsolete. The workforce is much larger thanks to women, which is also keeping wage pressures from going up too high.
We have asset deflation - homes, cars, annuities, stocks, $ currency, bonds.
Despite the weak economy, equities had their best quarter since the heyday of the tech bubble?
Many days recently, stocks/bonds/gold/oil/currencies all trade in the same direction? That makes no sense.
Commodities are trending higher - metals, ag, energy.
Services, fees, taxes are all going up. Daycare, healthcare, tolls, energy fees, etc are all going up anywhere from 5-20% annually.
I recall in my youth (early 80s), my father who owned his own business, told me a good salesman for him would earn 250k a year, which was a living they should be happy with.
Fast forward to 2009. I don't know too many single earners making 250k. Those who do paid a lot of money to get to that level (med school, law school, top tier MBA, PhDs).
Throw out the book on other recessions. The only similarities are it has a cause, a lifecycle, and will eventually have a conclusion.
Maybe in a future recession we'll have a better frame of reference but this one is mostly unique.
What I am gathering from this post is to be be prudent, buy a house you can afford (preferrably pay cash for) have a well diversified portfolio to capture any situation that may play out and also diversify with taking ownership of firearms and a months supply of food etc. in case there becomes a social unrest and you need to protect your self or use force to survive. Boy, I feel great about the future, don't you;?
Anon,
Please read CNBC.com for a few days, the future is so bright you gotta wear shades!
Get - I point out that (a) in terms of inflation, housing is a "poor investment" and (b) jeff is basically aruguing for deflation, not inflation, and you accuse me of CNBC type unbridled optimism?
Fuck you dude.
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