Financial topics

[aedens]

http://www.zerohedge.com/sites/default/ ... nction.pdf

FYI
If you do not know early and late you are prey.

[indyboy]

A headline from yesterday morning (not this morning as I previously indicated) that pertains to our discussion of last night. While the investment community and ratings agencies do not frame the issues in the way we do here, they've begin to sniff out the "disparity" using the same theme of mortgage backed securities and how those values relate to employment and the housing glut. Also, note the use of the word illusion, which indicates that the "disparity" was previously hidden but now has been discovered by the market. Therefore, a panic is probably not too far off in the future.

http://www.housingwatch.com/2010/02/17/ ... webmaildl4

Heartened by the recent rise in home prices? Don't get too comfortable. Standard & Poor's, the credit-rating agency that tells investors what mortgage-backed securities are worth, reports that the increase was just an illusion. It predicts the nation is about to see a deluge of new foreclosures that will drive real estate values back down.

Blame the "shadow inventory" – nearly 1.8 million homes that are on the road to foreclosure but for all kinds of reasons haven't gotten there yet.

Many homeowners have fallen behind on their mortgages or stopped paying, but foreclosure has not yet arrived. Mortgage servicers, the folks who send you the bills and file for foreclosure when you can't pay them, are overwhelmed. Courts, too, are backed up. Mortgage modifications and foreclosure moratoriums have put off the day of reckoning for borrowers, but not forever. And unemployment is sabotaging more homeowners every day.

Out of more than $1.6 trillion in existing mortgages that were packaged into mortgage-backed securities by Wall Street, some $425 billion worth are extremely late on their payments, and therefore likely to go into foreclosure. Only a fraction of borrowers who fall seriously behind are able to catch up, with the help of a loan modification. And even then the majority end up falling behind again. That amount of bad mortgage debt has been spiking up every month, slowing down just a little thanks to the government's Home Affordable Modification Program, but still continuing to rise.

Yes, Higgenbotham. These are things we agree upon. The shadow inventory, paying first-time buyers with rebates, keeping long term interest rates low (Fed buying treasuries), and Freddie/Fannie continuing to write bad loans with Geithner saying they are fully backed by the government are all ways of propping up the market and preventing it from reaching the price that would determined by a supply-demand equilibrium.

My original question was not regarding this. My precise question was that if Fed goes on a buying spree and pumps cash into the economy in the trillions, then how do things blow up ? Zimbabwe style inflation or 1930's type deflation ? Some people here say both and I am asking, if they really understand it, to explain how the macro-economic variables are going to evolve. And does there exist the right amount of money pumping that causes neither inflation or deflation. I am still thinking about it, but I was wondering if anyone else had thought it through. QE by the trillions was not happening in the 1930's, so even if things were to blow up, it is quite possible that the exact route will be different.

[indyboy]

A really good article in my opinion. To say that Chinese government is in a strong position to fight an asset bubble because of its huge assets is a mistake, because the assets are in USD.

http://mpettis.com/2010/02/never-short- ... -reserves/

[John]

> John, without any comment on the rest of your passage (my limited
> understanding of inflation being a little different than yours, I
> can write that separately) I am not sure of this statement. It
> seems to me that you are saying that 1970's were a period of high
> business growth which fueled shortage of labor and hence,
> wage-inflation. If so then 70's would be inflationary+growth where
> I believe that most people think of 70s as being
> inflationary+recessionary. Actually, post oil-shock, when the
> inflation really kicked in the unemployment rate was actually
> quite high. Briefly, I look upon prices as being the demand-supply
> equilibrium between available money (monetary-base + money created
> by our fractional reserve system) and the goods it is chasing. So
> inflation can happen if the same the same amount of money is
> chasing fewer amount of goods and in the 70's less oil was a big
> factor.

As I said, I find inflation to be very mysterious.

It's true that the 1970s is known for "stagflation," but you have to
ask yourself, how is that even possible? If there's a recession on,
the how could the velocity of money be so high as to cause 10%+
inflation?

That's certainly not happening today. There's a recession on, and
interest rates are effective 0% or negative. And yet banks aren't
lending, businesses aren't borrowing. The velocity of money is
near-zero.

In the 1970s, if there was recession and high inflation, then there
must be high velocity in a recession. That must mean that the economy
is partitioned into two parts: People who are in demand for
employment, and people who are unemployed because they're not in
demand. I can't think of any other way it could happen.

That's different from what we have today. Today we also have a
partitioned population. The unemployed people can't get a job for
months, and the employed people don't dare leave their jobs. So
there's no competition for labor. I knew several people in the 1970s
who changed jobs to get raises, but no one could get away with doing
that today.

Thus, what we had in the 1970s was growing, thriving businesses, and a
population of people in high demand for those growing businesses.
That group of people raised labor costs, and also increased the
velocity of money. The other group of people didn't have the skills
to be part of those growing businesses, and they're the ones that
caused the recession.

> My original question was not regarding this. My precise question
> was that if Fed goes on a buying spree and pumps cash into the
> economy in the trillions, then how do things blow up ? Zimbabwe
> style inflation or 1930's type deflation ? Some people here say
> both and I am asking, if they really understand it, to explain how
> the macro-economic variables are going to evolve. And does there
> exist the right amount of money pumping that causes neither
> inflation or deflation. I am still thinking about it, but I was
> wondering if anyone else had thought it through. QE by the
+ trillions was not happening in the 1930's, so even if things were
> to blow up, it is quite possible that the exact route will be
> different.

Higgie already answered this, but I'll add to his answer. In the case
of Zimbabwe, Mugabe destroyed the economy so there was nothing left to
buy. It was a closed economy, with Zimbabwe currency like Monopoly
money -- you could only use it in Zimbabwe. So with nothing to buy
and a lot of currency, there was super-hyper-inflation.

The American dollar is NOT monopoly money. It can be used anywhere in
the world. It's in the portfolios of banks and countries around the
world. And the amount of money is decreasing, rather than increasing,
because everyone is "deleveraging" to get out of debt. That's why
there's deflation.

> A really good article in my opinion. To say that Chinese
> government is in a strong position to fight an asset bubble
> because of its huge assets is a mistake, because the assets are in
> USD.

> http://mpettis.com/2010/02/never-short- ... -reserves/

You're right. Pettis is an idiot. However, the problem is not that
their assets are in US dollars. Their problem is that their assets
are in US Treasuries. That's a big difference.

John

[Higgenbotham]

http://www.zerohedge.com/sites/default/ ... nction.pdf

FYI
If you do not know early and late you are prey.

There is no investment strategy that will preserve capital over a long time horizon, just strategies that allow it to go extinct more slowly. Wealth never survives more than a few generations no matter how much it is or who manages it. A lot of people point to gold. Gold costs roughly 1% per year to insure and store, so by that route the value of a constant amount in storage is gone in 100 years. If the storage is paid out of the value of the original holding, it will last longer and decay at 1% per year instead and only 37% of the value will be left in 100 years. If one chooses self storage, it will likely be lost or stolen when the crisis it is meant to protect against comes to pass. After decades of experience and many superb market calls, Harry Browne came to the conclusion that a "permanent portfolio" of 25% stocks, bonds, cash, and gold with yearly rebalancing is the best way to maintain your capital.

[The Grey Badger]

http://www.zerohedge.com/sites/default/ ... nction.pdf

FYI
If you do not know early and late you are prey.

There is no investment strategy that will preserve capital over a long time horizon, just strategies that allow it to go extinct more slowly. Wealth never survives more than a few generations no matter how much it is or who manages it. A lot of people point to gold. Gold costs roughly 1% per year to insure and store, so by that route the value of a constant amount in storage is gone in 100 years. If the storage is paid out of the value of the original holding, it will last longer and decay at 1% per year instead and only 37% of the value will be left in 100 years. If one chooses self storage, it will likely be lost or stolen when the crisis it is meant to protect against comes to pass. After decades of experience and many superb market calls, Harry Browne came to the conclusion that a "permanent portfolio" of 25% stocks, bonds, cash, and gold with yearly rebalancing is the best way to maintain your capital.

Yeah. They knew that back in 30 C.E. "Where moth and rust doth corrupt and thieves break in and steal." Not to mention the guy whose wealth was secure, but apparently his health wasn't. "You fool! This night will your soul be demanded of you." Oops... or as is said when many a fat cat or member of the Powers That Be has a heart attack, "They examined his heart and found nothing"?

[freddyv]

Congratulations, John, on the movie, Generation Zero. I watched the trailers and was blown away. I have also pre-ordered the DVD.

For those of you who haven't seen it, go here:
http://www.generationzeromovie.com/

As I watch all of this unfold I become more and more convinced that we are in much more than a crisis-era like that of the 1930's to 1940's, I believe that we are likely in a period that will lead to a much longer "dark ages" that may last for centuries. The reason I believe this is because of the incredible success and wealth that we have had and have been able to spread around the globe. That success is marked by our ability to worry about global warming, animal rights, and all sorts of issues other than how we will survive and thrive. Investors "play" the markets like they were casinos, even after 10 years of loses; this shows just how out of touch with reality we are.

Ten years after flat returns or losses we still see PE ratios of 30 for the S&P and DJIA and almost 100 on the NASDAQ 100. We have pushed the day of reckoning down the road once again, this time onto the backs of taxpayers, and skip merrily along, hoping that people like you are wrong. But just as when an individual decides he doesn't have to pay his bills and hopes things will work out, a day of reckoning is coming.

Over a year ago I mentioned here how things that once seemed unthinkable seem to be coming true. It starts with someone with the facts actually getting a voice on Bloomberg or CNBC. A year ago it was the mention of the US defaulting on its debt. It now appears obvious to anyone with the facts that one sovereign after another will fall at some point in the future. We are in a for a rough 10-20 years as the debt bomb explodes and the real dynamics are exposed once we no longer have to worry about playing nice to keep it from exploding. Once there is no further reason to worry what China thinks about us the clash of civilizations will build to a frenzy as basic human instincts kick in and turn nations against one another. But this time there are nuclear weapons to be used.

Fred
http://www.acclaiminvesting.com/

[aedens]

http://www.zerohedge.com/sites/default/ ... nction.pdf

FYI
If you do not know early and late you are prey.

There is no investment strategy that will preserve capital over a long time horizon, just strategies that allow it to go extinct more slowly. Wealth never survives more than a few generations no matter how much it is or who manages it. A lot of people point to gold. Gold costs roughly 1% per year to insure and store, so by that route the value of a constant amount in storage is gone in 100 years. If the storage is paid out of the value of the original holding, it will last longer and decay at 1% per year instead and only 37% of the value will be left in 100 years. If one chooses self storage, it will likely be lost or stolen when the crisis it is meant to protect against comes to pass. After decades of experience and many superb market calls, Harry Browne came to the conclusion that a "permanent portfolio" of 25% stocks, bonds, cash, and gold with yearly rebalancing is the best way to maintain your capital.

==============================================================================

http://finance.yahoo.com/banking-budget ... nal-scenes

I was a 80 : 20 investor years ago. I feel as he does in the article about some time frames. Also a wise man does
plan for his grand childrens inherantance. If you educate them and they do not get it you still did your part to keep them
informed as to proper thinking to acountability.

[Higgenbotham]

My original question was not regarding this. My precise question was that if Fed goes on a buying spree and pumps cash into the economy in the trillions, then how do things blow up ? Zimbabwe style inflation or 1930's type deflation ? Some people here say both and I am asking, if they really understand it, to explain how the macro-economic variables are going to evolve. And does there exist the right amount of money pumping that causes neither inflation or deflation. I am still thinking about it, but I was wondering if anyone else had thought it through. QE by the trillions was not happening in the 1930's, so even if things were to blow up, it is quite possible that the exact route will be different.

I think I've answered the question. If this response isn't specific or clear, it would be a good idea if people would quote a sentence or two and point out what is incorrect or unclear.

You asked if the Fed pumps trillions into the economy, how do things blow up. My answer was that if they do that over a certain dollar amount, the world economy will immediately collapse. I don't know exactly what the threshold would be that would cause that reaction. It might be $10 trillion. That's just a guess. Nobody knows. That idea is covered in the paragraph below from a previous response.

Let's take some version of the first case you gave. Say the Fed opened a bank account for every person in the United States and wired $1 million into it. It seems obvious that we would get inflation. My argument is that we would not except in a very abstract impractical sense. What would happen instead is that everyone (well, maybe not everyone) would hold onto their goods and refuse to sell them for dollars. The real economy would collapse and a barter economy would develop. Black market money like old silver coins or foreign currency would spring up and be used for exchange instead. In terms of dollars, there would be inflation but once the Fed destroyed confidence by creating this extreme amount of money, it would not have any practical use or value.

To get to the Weimar scenario, there are two levels of protection on the dollar that would have to be removed. The first is its use as world reserve currency and the second is the bond market. Having the world reserve currency incurs advantages that a country does not want to lose. Therefore, as a practical matter, the Fed will not want to do anything to jeopardize world reserve currency status. Since I wrote the previous responses, this concept was recently covered in a Congressional hearing where Bernanke stated that the bond market is in such a condition that further monetization and government deficits are too risky and will likely drive interest rates higher. Although the Fed can push enough electronic money out to get to the Weimar scenario, they would lose more by doing that than could possibly be gained. As far as thresholds, I would guess that somewhere around $1 trillion of additional monetization would cause the rest of the world to abandon the dollar. This is just a guess. Nobody knows. More of this was covered in the paragraph below from a previous response.

As a practical matter the Fed has to keep the outright creation of money at a low enough level to prevent the abandonment of the dollar as world reserve currency. That's probably the first threshhold. That level is determined by foreign countries who currently hold dollars as reserves and use dollars in trade. The BRIC countries have already said "enough is enough" and have made plans to abandon the dollar if further debasement occurs. There is debate on whether the BRIC countries can really make good on that threat or not. They probably can't immediately, but they can make our lives pretty miserable in the meantime. If the Fed wanted to push to the point that the dollar is abandoned as world reserve currency and the Fed pursued this strategy domestically, I think they can create inflation once they push enough electronic money into the system to destroy the bond market. Once the bond market is destroyed, then we could end up like Weimar.

Higgenbotham - In the same writeup you seem to be outlining two completely opposite scenarios. In the first paragraph, you mention a hyperinflation scenario (Weimar-republic scenario) as a result of the Fed minting money. In the second paragraph, you mention of asset prices crashing in spite of the Fed printing money.

The reason the scenarios are opposite is because we are talking about different levels of response from the Fed. The collapse scenario would involve the highest amount of money printing. The hyperinflation scenario would involve a high amount of money printing over time, some to trigger the rejection of the dollar as world reserve currency, followed by more later to destroy the bond market. The deflation scenario involves a smaller amount of support. Those 3 distinctions were discussed some more in these paragraphs from a previous response.

The reference to Weimar is to show the steps that would be necessary to theoretically get to approximately that, however unlikely they are. First, the Fed would have to create a situation where the rest of the world rejects the dollar for international trade, but the dollar still stays in use domestically. I think that's possible to do. After doing that, the Fed would then need to push enough electronic money into the system to destroy the bond market. Only after doing those 2 things could we get to the Weimar scenario.

The first part of that paragraph describes what would happen if the Fed were to obviously push a huge excess of electronic money into the system. In my opinion, the market would instantly reject it, and the world economy would collapse. So that's a separate thing from the Weimar scenario and much more devastating. We could talk more about how that scenario could develop, but it would probably start with a foreign government obtaining intelligence in advance that this is going to happen, then selling their bonds to be first out the door, converting the proceeds to some other currency or to gold, then stopping all shipments of goods to the US unless alternative non dollar payment arrangements are made.

The second paragraph where I described the Fed MBS purchases gets to your point about moving the right amount of money into the system. This is in my opinion what the Fed is trying to do; however, this "disparity" I am talking about refers to the fact that the Fed is unable to target all aspects of the economy equally. While they may be able to hold security prices constant with the right amount of money, they are unable to hold, for example, the underlying wage structure constant which ultimately supports the prices of the securities. As a result, the market waits with baited breath for every weekly unemployment claims report and monthly employment report and dissects the numbers looking for signs of improvement.

[aedens]

http://economistsview.typepad.com/econo ... -laws.html

Deeper context's applies to aversion processes and social acrimony of the times. Mises reminded the consumer is sovereign
and was flatly ignored to the logical conclusion. I agree with Higgy on so many facets to there logical conclusion's.
To be perfectly clear the tipping points is what wealth seeks to balance unto margin, the point of the matter
is still decided by the consumers and the allocation of scarce resources to best means of innovation available.
Now mix in ethos and lesson's learned to class and we will never agree as we see every day. Do we see recovery
or aversion in the current context this predicated business cycle since the incompotent are replaced by the compotent.
Washington can kick the can as long as the bayonet will pierce, or is it we reap what we sow to order? Gauging the Generational
Dynamics is really a rinse and repeat process some can attain but not regard given the apathy and regard I assume since we
all understand politics is local is it not? I went to a meeting of local issues and really is was a method for metering out
scarce capital provided by whom? I choose the course labor and capital have responsibilities we have watched erode.
http://en.wikipedia.org/wiki/Slavery_Abolition_Act_1833

http://www.lewrockwell.com/orig3/acton-lee.html

Innovation is a path which many do and can confuse as plunder the industrious people and capatalist never have been held in regard
given group ethic's in a very large universe... Are we better off today? Until capital is depleted since socialism has proven that
fact time over and over that it in fact will.

Given the flux of politcal will to ethics of the timelines of two decades then I can see our walk on this hemisphere.
Acton follows some time later in conveyances of reason to the progression of innovation which the writings convey
clearly we see today in this new predicated business cycle.

================================================================================
http://mises.org/story/3423

Mr. Keynes's assertion that there is no automatic mechanism in the economic system to keep the rate of saving and the rate of investing equal … might with equal justification be extended to the more general contention that there is no automatic mechanism in the economic system to adapt production to any other shift in demand.