Financial topics

[burt]

Just to say it is dangerous to see a country as a whole, as an individual I have to ask myself if where I live is a good place, and I do not really care about if my country is doing well (this is not completly true, because of the laws that polician build at the level of the country and because I follow John in saying that we are in a Crisis era wher people go away from the political "Center" toward a slow but inexorable move to the "extrem" and THIS will differ from country to country, not region to region).

http://finance.yahoo.com/real-estate/ar ... estate-buy

So, for me, Home pricing is something you have to take care from an very local point of view.

On a general political and economical point of view I begin to ask myself if it is not time to come back to "Small is beautiful" (and local thinking too).

Regards

[burt]

This fits with one of the points in my list: "Many sentiment indicators near or at records". Nobody (almost nobody anyway) believes this market can go down much, but they want a correction so they can buy. The majority is usually wrong.

Interesting
see: http://www.bloomberg.com/news/2011-01-2 ... nings.html
they write:
“The sovereign-debt crisis is an issue that will come and go through the whole year and will create volatility,” said Markus Wallner, a senior equity strategist at Commerzbank AG in Frankfurt. “However, corporate profits are not made in Greece or Ireland and we have a very good quarterly earnings season with strong results. Some clients want to buy equities, but are waiting for lower prices to get into the market.”

So it looks like we are not very far from a conter-reaction, but from how much?? What I liked in your idea, Higgenbotham, is that you noticed a broadening triangle, when you wrote an article on the panics, a few days ago, so the worst situation would be: market up to 1400, then a crash of 400 points, then we would be in the dangerous zone, but, for me, not now.

What we have yet is a big inflation on financial assets, and social moods are quite pessimit, when people feel better, when everyone thinks that the market is up again, THEN ....

Usually a big step down appears (it was the case in 2008) when "earnings season" is not so good, AND when people think that this is NOT a problem... That is the worst case.

On MY point of view we need much more optimism in the press and within the "analyst" to prepare a "crash situation"

[OLD1953]

Hey, slow down a bit folks. Some assumptions in the last few days posts hit me like tinfoil on a filling.

I don't see how increases in rates will cause the velocity of money to increase. Consumers aren't going to flock to borrow at higher rates, credit card rates are still way high, and they are being paid down. Somebody needs to explain that one to me.

A stock market crash or decline or even a slow decline will cause issues with cash flows even in the most local settings. Look at how the market has messed up the pension plans for a number of cities and states for an example. As these are adjusted by whatever means, there will be deflation. There isn't a valid nondeflationary scenario here, WITHOUT ASSUMING INFINITE HUNGER FOR MUNI/STATE BONDS! Infinity does not exist in the real world, a point I keep making in many different contexts. The assumption of infinite bond sales creeps into so many posts here. It can't happen.

Related to that, oil is a limited resource. Nobody seems to want to mention that elephant, but it's still in the room and it's not going anywhere. There is no local fix for this, as every locality does not have the resources to shift and can't control how such a shift is made in other regions. Like it or not, it's a national matter - probably international.

As for QE2, how does less than a trillion replace five trillion in losses in the housing values, and that's lowballing the losses. Another 30% drop in housing would have to be considered deflationary under any rules I've ever considered valid.

[vincecate]

I don't see how increases in rates will cause the velocity of money to increase. Consumers aren't going to flock to borrow at higher rates, credit card rates are still way high, and they are being paid down. Somebody needs to explain that one to me.

Hussman shows data that the velocity of money goes up at higher interest rates. To me it makes sense that if interest rates are higher companies/people won't let cash sit around as long.

I don't exactly have the answer to your question though. Maybe just that when you get some extra cash you will pay to your credit card right away instead of waiting till the end of the month when interest rates go up.

A stock market crash or decline or even a slow decline will cause issues with cash flows even in the most local settings. Look at how the market has messed up the pension plans for a number of cities and states for an example. As these are adjusted by whatever means, there will be deflation. There isn't a valid nondeflationary scenario here, WITHOUT ASSUMING INFINITE HUNGER FOR MUNI/STATE BONDS! Infinity does not exist in the real world, a point I keep making in many different contexts. The assumption of infinite bond sales creeps into so many posts here. It can't happen.

I do not assume infinite hunger to buy bonds, my assumption is that people will buy less Treasury bonds and that as people buy less the Federal reserve will buy more, which will start a feedback loop. If people stop buying altogether there is some crazy large number like $2 trillion in real deficit (Mish had an article how student loan, social security and other debt increasers are off-book and not in deficit) and around $5 trillion in debt coming due over the next 12 months. So worst case the Fed would print $7 trillion in the next 12 months. Going from the current $2 trillion in base money to $9 trillion in base money over 12 months is a "nondeflationary" scenario, right? In all historical cases where a government with debt over 80% of GNP and deficit over 40% of spending where the government printed to cover deficit and debt coming due they had hyperinflation.

Related to that, oil is a limited resource. Nobody seems to want to mention that elephant, but it's still in the room and it's not going anywhere. There is no local fix for this, as every locality does not have the resources to shift and can't control how such a shift is made in other regions. Like it or not, it's a national matter - probably international.

Limited oil is a problem. With electric cars and solar I am not really sure how bad the problem will be. But what is your point? You are not trying to argue that oil prices going up is deflationary, are you?

As for QE2, how does less than a trillion replace five trillion in losses in the housing values, and that's lowballing the losses. Another 30% drop in housing would have to be considered deflationary under any rules I've ever considered valid.

This is a good question. It is at the heart of confusion in the inflation vs deflation debate.

Imagine that you loan me $100,000 against my land and I give the money to my wife. Now Anguilla does not have California attitudes about community property, so when I don't pay you, I default and you then take my land. Now maybe you can only sell the land for $50,000 and are pissed. But my wife still has the $100,000. The money was not destroyed when I defaulted. That you lost money does not really mean the money supply went down. Why should my default count as contributing to deflation?

Another way to look at it. Banks can use the fraud of fractional reserve banking to make $500 billion in base money (M1 type money) turn into $5 trillion in debt money (M3 type money). This is less than QE2.

[burt]

Hey, slow down a bit folks.

Yes

As for QE2, how does less than a trillion replace five trillion in losses in the housing values, and that's lowballing the losses. Another 30% drop in housing would have to be considered deflationary under any rules I've ever considered valid.

About MUNIs and STATEs and EUROPE (the problem IS very different in each case), BUT, on my point of view, we are in the middle of a long term conflict between Sovereign borrowers and Lenders, and until now, nobody tries to build a long-term solution, as if anything would be "infinite", as you say...
WE (all the Western world) have a problem, but it is a long-term problem, what happens in the short term (2011) nobody knows.

The unknown problem is "How infinite will halt?" and "When?"

About QE2: it is a swap program without inflationnary consequence IF (a BIG IF) the banks were honnest (ah ah), IF they didn't use the Treasury bonds as a collateral for their OWN leveraged operations.

Now about inflation:
- We are in the middle of a deflationary period (started in 1993-1998), usually (ref Aglietta) it is a 35-50 years period, so it IS very hard to get out from it NOW (possible, but hard, AND it is NOT related to governmental actions but to individual psychological position over the debt)

- The GENERAL trend is DEFLATION (this DOES NOT mean that a couple of years cannot be inflationnary), BUT BUT BUT with high inflation on the individual level (Food, Insurances, Taxes) and Deflation on salaries and homes (depends where you live), so as Gordon TLONG writes "INFLATION on what you need and Deflation on what you get" is, for me, the most probable scenario. This will be a BIG MESS for anyone who cannot inflate its revenue.

- "Crony Capitalism" is THE rule, this means every thing will be volatile to bring money from the individuals to the richest (and most powerful) players

- So Inflation-Deflation should be mixed, with a very tricky way to make middle class poorer every day (thank's to Reagan)

What I regret is that people look at Inflation or Deflation with ONLY Global Glasses, not with different glasses more local, more specialized. Inflation for true people IS VERY HIGH, but not for the Fed...

The stock market is made by institutionals, not (I think, but has anyone "true" numbers??) by individuals, so it should stay volatile with an up trend for the next ?? months.
So Deflation at the GENERAL level does not mean deflation at the individual level, and NOT for the Stock Market.
And long term deflation does NOT mean short term deflation...

It looks like (see UK dilemn) that Government CANNOT control anymore Inflation Neither Deflation (could they at any time? I do not Know, Prechter shown that Interest fixed by Central Banks FOLLOWED the market, never "controlled" anything, for example)

I Think "cooling down" is a good idea, taking care of the mood of "Crony Capitalism" too, and studying seriously what is a "crash" too.
But protecting ourselves from this crazy world IS (or should be?) a priority. And THEN (but only then, making profit from the situation, -First- where we are competent, -Second- Where we have a "clear view" (between quotes) on what we can speculate)
Ideas?

[burt]

Limited oil is a problem. With electric cars and solar I am not really sure how bad the problem will be. But what is your point? You are not trying to argue that oil prices going up is deflationary, are you?

Just 2 remarks, Oil price is a way to MAKE people poorer (middle class I mean).. but this remark is at a political level.

Now Electric car (the one we build today) ARE NOT the solution of anything, Study the ALL process from the cost of building car to the cost of using car (in term of energy of how many oil was used in the whole process), and I think you'll arrive at the same conclusion as mine:
-a- Drive a true electric car (anyone you can find on the market) and don't read what the electronic tells you about the consumption of oil, but MEASURE it buy yourself, it is VERY FAR (about 30%-50% more, could be the double too) from what the automaker says in his book. Honda, just to take one, was very realistic on its consumption a few years ago (this is one of the automaker I follow from time to time), now it is a liar as anyone. It looks like you have to be a liar to stay on the market (unravelled era? or crisis era? this attitude changed more or less 5 years ago)
Please do the real test, I did it...

-b- You need a lot, but really a lot of energy to build an electric car and you have to change the battery quite often too (don't believe the automaker, chat with people having electric cars or electric engine, the problem of the battery is always the same), so, if you take the all process, from day 1 when you begin to build the car, and 100'000km(or 60'000 miles), time where you are supposed to throw away you can of metal, the gain in oil is VERY VERY small.

So this is a marketing solution (to look nice) but in no way a long term solution. We are very very very far from an industrialized alternative car using less fossile oil.

This was a technical remark, please read and make your own conclusion

[vincecate]

Now about inflation:
- We are in the middle of a deflationary period (started in 1993-1998), usually (ref Aglietta) it is a 35-50 years period, so it IS very hard to get out from it NOW (possible, but hard, AND it is NOT related to governmental actions but to individual psychological position over the debt)

I really think the reason the CPI is not going up fast is just that they are fudging the numbers.

http://www.chrismartenson.com/blog/infl ... told/51631

[vincecate]

Limited oil is a problem. With electric cars and solar I am not really sure how bad the problem will be. But what is your point? You are not trying to argue that oil prices going up is deflationary, are you?

Just 2 remarks, Oil price is a way to MAKE people poorer (middle class I mean).. but this remark is at a political level.

I fully agree that American's will be poorer. I expect that sometime soon the world will tire of trading real stuff for pieces of paper with pictures of dead men on them, they will want to trade for other real things. If the US can not print money and trade that for oil they will have to give up some real stuff to get oil, and they will be poorer than now.

[burt]

I really think the reason the CPI is not going up fast is just that they are fudging the numbers.

Yes for sure, see also http://www.shadowstats.com/alternate_data

But the real CPI (not the one of the government which is ONLY political) is the way people (from the middle classe) live their "inflation", it is ONLY one "inflation", you have so many way to define inflation that it depends which one you take.

The real CPI is very high (10%), but the manufacturing cost is deflationary.

Now you must take each kind of asset (and each manipulation of the governments on the numbers) to have an idea on where is inflation-deflation.

On my point of view this is not a very useful key.

A practical key is where to invest my money and my knowledge on what I know as real? It is awfully difficult today if you think "big".

The trouble is that we have no more a real economy but a financial one, starting from, let's say 1998, and finance is NOT real. So if you want to play the poker game of the stock market (is is NOT a Casino) you have to play poker, not trying to think about the reality.

By the way, the fact that people want to buy: if the so called "market" just go sideline for a while, it will build a "panic buying" in a month or so, another type of panic that John doesn't speak about.

[Carl Lieberman]

"In all historical cases where a government with debt over 80% of GNP and deficit over 40% of spending where the government printed to cover deficit and debt coming due they had hyperinflation."

I believe that this will end with hyperinflation. All of the cases in "This time it's Different" did not involve the Reserve Currency. Country's debts were denominated in the reserve currency. We are in a unique situation and it will take much longer for the hyperinflation to take hold. I was struck by the State of the Union last night. It seems absolutely clear to me that our political system (really all political systems) lose their legitimacy if they try to impose losses on the population. There will NEVER be substantial cuts in federal spending. No matter how irrational the arithmetic of Medicare, Social Security, and Government Pensions appears to be, we will find a way to "print" a limitless stream of new spending. By definition we will be inflating the currency. Once we have embarked down the path of QE, there can be no turning back.

The inflation/deflation debate is complicated and on paper could go either way. In all of my travels, I have seen the markings of prior currencies that have had zeros lopped off to create new ones. There are always stories of people who lost everything when their money became worthless. John and most of this list are hard core deflationists. I think that it would be prudent to hedge your bets with some hard assets.