Financial topics

[Higgenbotham]

In the Drucker article linked above, I believe that the last page is vitally important (as apparently Drucker does too). Drucker says that we can only bribe (his word) knowledge workers with stock options while the boom is still ongoing. And, interestingly enough, he said that in 1999 and further stated that this will be a problem in about 10 years time. According to Drucker, if the US is to lead in the next phase of the technology cycle, then the social position of the technology workers in US companies is going to have to change now that the stock option bribes have run out.

So here we are, the stock market bubble has burst. Now getting back to the generational aspects and specifically what John pointed out in his in-depth analysis of how the Boomers and Xers have dumbed down the IT industry with Boomer lenscap stupidity and Xer nihilism, we can see how the position of the US is relatively much worse than the position of the US was at a similar point in the technology cycle of the 1800s.

And this gets exacerbated by yet another fact, which Drucker also indirectly pointed out in his book Managing in the Next Society. The US birthrate hit a low point from 1972 to 1978 so the prime age workers that are needed to lead the next phase of the technology cycle are in short supply.

Further, since they can no longer be bribed with stock options, they will need to be paid with real m-o-n-e-y, which there is now a shortage of, as this credit bubble has burst.

[Higgenbotham]

RICHMOND, Va. — Circuit City Stores (CC) said Monday that it is pulling the plug on about 20% of its U.S. stores in an effort to return the nation's No. 2 consumer electronics retailer to profitability.
The company said it will shutter 155 of its more than 700 stores in 55 markets, including Phoenix and Atlanta, by Dec. 31, laying off about 17% of its domestic work force. According to its website, the company had nearly 46,000 employees domestic and international at the end of February.

http://www.usatoday.com/money/industrie ... htm?csp=34


Revisiting a topic from last weekend, this is a good illustration of how our economy has changed since 1929. In 1933, a sole proprietor on Main Street buckled down and struggled through the Depression even if his sales were reduced by 50%. His proprietorship was his job and he was determined not to lose it because that was all his family had. Neighbors helped each other out and made sure they survived, as they were all dependent on each other. Today we have anonymous ownership of nearly everything and decisions are made strictly according to accounting considerations. A national chain of shops can close down in a week, laying off thousands of people who are no more than digits in a computer at corporate headquarters. Greenspan lauded the flexibility of our economy and that is definitely true above a certain threshold, but if this Depression goes deep enough to break the ability to quickly reconstitute and reemploy, then we will see hundreds of articles like this within a span of a few months, rather than just a few.

[John]

Revisiting a topic from last weekend, this is a good illustration of how our economy has changed since 1929. In 1933, a sole proprietor on Main Street buckled down and strugged through the Depression even if his sales were reduced by 50%. His proprietorship was his job and he was determined not to lose it because that was all his family had. Neighbors helped each other out and made sure they survived, as they were all dependent on each other. Today we have anonymous ownership of nearly everything and decisions are made strictly according to accounting considerations. A national chain of shops can close down in a week, laying off thousands of people who are no more than digits in a computer at corporate headquarters. Greenspan lauded the flexibility of our economy and that is definitly true above a certain threshold, but if this Depression goes deep enough to break the ability to quickly reconstitute and reemploy, then we will see hundreds of articles like this within a span of a few months, rather than just a few.

But as the chain stores collapse, won't that also mean that communities will revive
their sole proprietor stores on Main Street just for their own survival?

John

[Higgenbotham]

Revisiting a topic from last weekend, this is a good illustration of how our economy has changed since 1929. In 1933, a sole proprietor on Main Street buckled down and strugged through the Depression even if his sales were reduced by 50%. His proprietorship was his job and he was determined not to lose it because that was all his family had. Neighbors helped each other out and made sure they survived, as they were all dependent on each other. Today we have anonymous ownership of nearly everything and decisions are made strictly according to accounting considerations. A national chain of shops can close down in a week, laying off thousands of people who are no more than digits in a computer at corporate headquarters. Greenspan lauded the flexibility of our economy and that is definitly true above a certain threshold, but if this Depression goes deep enough to break the ability to quickly reconstitute and reemploy, then we will see hundreds of articles like this within a span of a few months, rather than just a few.

But as the chain stores collapse, won't that also mean that communities will revive
their sole proprietor stores on Main Street just for their own survival?

John

I definitely think that will happen. All of the infrastructure and skills will be in place to do so, and some, but not all, of the existing managers will have the ability to make these stores profitable as standalone units, and will want to. Suppliers will still want to sell to them and may be willing to extend financing on good terms, especially if we can stay in a deflationary environment, which will be good for new startups in many ways. If costs come down, investors who are now playing tiddlywinks in the stock markt will turn their attention to these new opportunites in their own back yards and social connections will reconstitute. Existing managers will know who to retain from their existing staff and who to fire and will do it without a bunch of legal mumbo jumbo. In addition, since managers within companies like these will already know each other, a lot of information sharing can take place as to how to obtain money and implement changes and there will no longer be any interference from corporate. But the road will be bumpier at first than it was in the 1930s.

[Gordo]

FYI: I have no idea what the market will do short term at this point but I just want to go on record as saying that I am no longer playing this counter-trend rally. I significantly scaled back all my positions about 20 minutes ago. I made a small fortune from this bounce and have nice gains for the year so I can’t complain. Here’s to the NEW NEW DEAL! Cheers & Happy Voting!

p.s. I can't believe John today described Obama and McCain as "fine candidates" - these guys are both clueless. American thought GW was clueless, but he seems brilliant compared to these two. I'm going to put in a protest vote for either Ron Paul or whoever the libertarian candidate is, only because I believe its my duty to vote, but I can't vote for either of these guys.

[Gordo]

I don’t know how great the timing is – but I think its worth looking at contrary viewpoints on the inflation/deflation debate. Deflation has already hit this economy hard in the form of falling real estate prices, commodities, consumer spending, etc. It’s almost shocking that we haven’t even seen a negative CPI print yet. Do we get one or two quarters of negative prints? None? 1 or 2 years? 3 years would match the great depression, and would be totally unexpected by me. I don’t expect 2 years either. One maybe. But you have to ask yourself – is this just a silly side-show distraction in the grand scheme of things? I believe YES. If you ignore the bigger picture, you are going to get clobbered. The only thing I’d change about the following article is to replace the word “Democrats” with “politicians”. Anyone who still thinks there are fiscal conservatives running either party is delusional. Also for a balanced view I highly recommend you read the Roubini article from Forbes that is linked to in this article.

Anyone have specific predictions about CPI over the coming 1,2,3,5,10 years?

It's a Great Time to Be an Inflationista

by: SW Richmond November 04, 2008

The debate rages: inflation or deflation? Which shall it be?

It should be obvious that it’s in the best interests of the monetary authorities (central banks et al) to create a muddy picture with respect to inflationary vs. deflationary expectations. Were they to allow it to become obvious that deflation is unavoidably coming, everyone would place the appropriate bets and deflation would be self-fulfilling. The same is true of inflation. Confusion reigns supreme, and this fact is, in my opinion, no accident. It is as it must be. Mixed signals, unclear information, even confusing policy responses can be seen as dezinformatsia.

As an inflationista, I am positively drooling. The stage is set for the kind of epic currency debasement that only happens once in a lifetime. Here’s why:

1. Inflation is now a contrarian position. A critical mass of MSM economic “authorities” seem to be on the verge of declaring that we are in a deflationary environment. A recent Forbes article sums up the arguments very well: falling demand, excess capacity, falling T-Bond yields, global recession, collapsing commodity prices. Consider the perspective of a central banker: if you want to inflate, you must first convince everyone that you had no choice but to do it.

2. Democrats control both houses of Congress and their margin is likely to increase. Democrats love to spend other people’s money. The fact that there is no money to spend has never stopped them. It only means more deficit spending via borrowing or printing. Congressional Democrats have already made pronouncements about the need for more stimulus packages, including direct stimulus to taxpayers as well as public works projects. Whether Obama or McCain wins is irrelevant. Since everyone is afraid of deflation, there is consensus for fighting it with stimulus and bailouts, as Congressional Republicans recently demonstrated.

3. The Federal Reserve is stepping on the gas quite aggressively, but the engine seems to be stuttering. A wall of new money has been created and thrown at the system; it hasn’t gotten any traction (yet). Central banks worldwide are onboard with a coordinated campaign of new money.

4. The political outcome of deflation is much more dire for the political / ruling class. Massive inflation means a lot of bitching and moaning by the populace, but the populace can still buy food and fuel. This has been pointed out elsewhere but it bears repeating: Mugabe is still in charge in Zimbabwe. The Zimbabwean economy still marginally functions. Inflation hurts lenders (banks) terribly, but they get to stay in business and remain at the top of the economic food chain. Deflation, on the other hand, means that no one can pay back their loans and this means default at both the micro and macro level. Mom and Pop and Bear Stearns both cease to function as going concerns. Deflation and default can also lead to nasty political upheavals, since freedom truly is just another word for nothing left to lose. Such upheavals are most emphatically NOT in the Central Banker’s Playbook.

5. Japan doesn’t matter. Japan has been able to limp along in its deflation and still survive without collapse. This was made possible by several facts: a) the Yen was not the world’s reserve currency; b) Japan had a huge base of domestic savings to tap; c) Japan had a huge and healthy customer for its export goods, so its economy could continue to make and sell goods abroad.

6. Inflation solves the debt problem by rendering it irrelevant. Debt is everywhere and is crushing economies all over the world, threatening a total systemic default. Currency debasement through inflation makes it possible to pay off debt, at least on paper. In such an environment, real things will cost a lot more, but the system remains intact with its existing political structure. I consider it undeniable that all that is required is to pump enough easy money into the system. Think about it in the extreme: If Treasury printed up and sent out checks for $500,000 to each US household, would there be a household debt problem? What would happen to house prices, and to the ABX indices and all those nasty CDOs? If there are 100 Million households, that act would require a paltry $50 Trillion. In a universe where credit default swaps are over $65 Trillion, what’s another $50 Trillion? We have already gotten into the $Trillions in our bailout efforts and it's not working yet. Learn to think outside the box.

7. Think “infrastructure”. Domestic spending will make it possible for debts to be repaid and people to work again. Construction provides the perfect vehicle for doing it; it is intensely local, and it is labor and material intensive. It is domestic. We will build roads, railroads, bridges, wind farms, power grids, you-name-it.

8. We have had real deflation for some time; if you factor in real rates (not silly government rates) of inflation, the economy has been shrinking for several years. What would a comparison of housing "appreciation" rates vs real inflation rates reveal?

We have had deflation; now we’re going to have inflation. Entry points for currency shorts have never been more attractive.

A word of warning: It may take some additional evidence of deflation to get the central banks to really hit the money accelerator. One should never push all of one’s chips onto the same square, and certainly not all at once.

Disclosure: Author is 50% cash and 50% currency shorts (miners, PMs, etc), but has begun incrementally moving cash into commodities and other suitable currency short instruments. I am not an investment advisor and I don’t play one on TV. DYODD.

[aedens]

As an avid reader and independent I appreciate the compilation of information. I agree more should be fixed as in income placement to date. All I can do is utilizing their fixed income retirement account at vanguard security's to date. I am not hawking there services but as they said "we are not picking raisons out of crap for investments either." I think it would be helpful to be proactive instead of reactive to the direct context where more can with certitude of reason for their generational capital placement needs. The sun will come up tomorrow and utilizing cultural ideological reasoning over time some of us moderate folks have taken the time to study accurate history independently. My definition of moderation is what Thucydides forwarded to which he was condemned for telling them the consequences and was subsequently censored. As of today, the corruption that people blame on "deregulation" is actually a byproduct of a strong central government that is inherently corrupt because it has a monopoly on force. Governments oppose free markets because it undercuts their power. They use free market language to disguise the protection they give to business to commit fraud and theft against the public. I know I've been watching the events that built up to these crises for decades also. Not because I needed an education but to protect capital, which has been done on fiat USD to date. There were major panics on Wall Street in 1792, 1819, 1836, 1857, 1873, 1893, 1907, 1929, 1987, and now 2008. Much like the 2008 meltdown, the 1836 crisis occurred after a huge real estate crash. The shame of it all is that through mass indoctrination in school and media propaganda, people are afraid to be free. I place a high value on personal freedom. I don't argue for anarchism or ever have; I argue for a form of limited government that protects our rights to life, freedom and the property of individuals. As things stand now, our system of government is the enemy of those basic rights. I'm afraid that the concept of world social justice has never had any meaning whatever. We will never again be able to get sufficient growth of the current economy to eliminate or even markedly reduced unemployment. NAFTA, GATT, and hope of growing the economy to solve unemployment are doomed to failure so wake up and move on to the next predicated cycle and scale to it now. The promise of competing in the global economy is a hoax perpetrated upon the working and unemployed people of this country because over time a nation needs to buy and sell overseas in roughly equivalent amounts. Those who think we can continue to have business as usual will use increasingly desperate means. If some among you fear taking a stand because you are afraid of reprisals from customers, clients, or even government, recognize that you are just feeding the crocodile hoping he'll eat you last. What we need is neither anti-socialism nor anti-communism but an open positive endorsement of that system to which we owe all the wealth that distinguishes our age from the comparatively straitened conditions of ages gone by.

[Higgenbotham]

There were major panics on Wall Street in 1792, 1819, 1836, 1857, 1873, 1893, 1907, 1929, 1987, and now 2008. Much like the 2008 meltdown, the 1836 crisis occurred after a huge real estate crash.

Drucker is saying that from a technological development standpoint today is equivalent to the 1830s. In the past, I've tried to get my head around what he's saying and really couldn't, but saved the article and the book summary in my notebook because so much of the rest of what he says makes sense. My thoughts have been that the personal computer circa 1979 was more like the railroad circa 1829. Add the Internet to personal computers 20 years later and that would be like railroads in 1849 or so. And the Internet came along with the same 150 year lag time and to me that was more like the telegraph.

But let's take what he says at face value and assume that we are due for an 1837 style technological shakeout as well as an 1857 style generational shakeout, shakeout being panic. He could well be right because as I read him again he is saying it's not really the actual penetration or capability of the technology, but the mindset that the existence of such a thing creates. So we're due for 2 panics and we've had 1. I've studied the 1857 generational panic in detail. What we just had was essentially that in terms of time and loss in the stock market, but we're still nowhere near the valuations that previous panics have taken the stock market to.

Consensus is that it's over, we've had our crash, time to buy. If Drucker is right and the cycles are overlapping, then we could really be due to see Dow 4000 quickly, as John is thinking, his idea being that we really haven't seen true generational panic.

So what did I do today besides vote and think about this. As I mentioned a few days ago, I had gone from 80% cash to 60% by putting some money in stocks. Last week I lightened up on the stocks to get my average down, selling half. Then about 5 minutes before the close today, i just went right down the list of what I still owned as fast as I could and sold everything.

[John]

> There were major panics on Wall Street in 1792, 1819, 1836, 1857,
> 1873, 1893, 1907, 1929, 1987, and now 2008.

There was a very important panic in 1914 that nobody ever seems to
mention.

I discussed in this article:

** Investors commemorate the false panic of Monday, October 19, 1987
** http://www.generationaldynamics.com/cgi ... 19#e071019

The reason that it's important is because it played the same role as
the False Panic of 1987, in convincing investors that there'll never
be another major crash, thus paving the way for the crash of 1929.

There's even a startling parallel between Alan Greenspan, who saved
the financial world in 1987, and Treasury Secretary William G.
McAdoo, who saved the financial world in 1914.

Sincerely,

John

[John]

From a web site reader:

> Hi, I know you've addressed this forwards and backwards six
> different ways already, but in all of that I have been bothered by
> a consistent inconsistency which perhaps you could address more
> explicitly than you already have:

> On one hand, you say the US is not like germany (1920) because
> they were not sufferring a credit implosion. On the other hand,
> you say the US _is_ like germany because they too were a debtor
> nation.

Well OK, but just keep in mind that we're talking about two different
time periods here. The hyperinflation occurred in 1922, and the
attempted bailout of Germany occurred in 1932.

> I well understand the deflationary pressures of the credit
> implosion, and have been one of the few to argue for (near-term)
> deflation, Japan-style, as a result.

> However, debtor nation status creates huge incentive to the
> central bank to inflate the currency, as Germany demonstrated.
> And more to the point, I don't see how the numbers can possibly
> work out in the long run if we don't see hyperinflation; which is
> rather like observing during the housing boom that house prices
> simply _must_ eventually turn around, because nothing comes from
> nowhere and the math mandates it within that constraint.

> Your semi-explicit argument is that the magnitude of the credit
> implosion overwhelms the abilities of the fed to inflate. But how
> and where is there a limit to their ability in that regard? Flip
> a few bits in a computer and the feds have bolstered the books of
> banks arbitrarily. To me it seems a choice they (congress, to
> whatever degree they have not already given up power, but really
> the fed/treasury) will face at some point: Default on treasury
> bills, or (hyper-)inflate the currency.

This has been hotly debated on this forum, and I won't repeat the
arguments here. I would point out that there are enormous political
pressures preventing those bits from being flipped. First, it's
against US law, so it would require a debate in Congress. And then
every country in the world would chime in. In the extreme case,
where such a move appeared to have a chance of succeeding, they would
refuse to recognize that "flipped bit" money as real money, and they
would threaten to throw the US into default.

> Japan allowed a deflationary spiral because they were a creditor
> nation. When they decided to start pumping money into the economy
> via government (borrowing fiat dollars and) spending, their
> deflation largely subsided.

Japan didn't "allow" a deflationary spiral. There was nothing they
could have done to stop it, and the situation only began to improve
after 16 years.

** Japan's real estate crash may finally end after 16 years
** http://www.generationaldynamics.com/cgi ... 20#e070220

> The US treasury is in the paradoxical situation wherein more
> borrowing (and spending) will actually lessen their debt, by
> eventually breaking the dollar and making the debt servicable with
> highly inflated future tax revenues.

> Is there a third possible long-term outcome? Is the US debt
> servicable by a deflationary economy? Or do you see the US
> defaulting on treasuries?

I have been saying for years that all those treasuries will never be
redeemed.

> The years of borrow-and-spend behind us have burned real value
> while filling pockets with dollars. Either those dollars need to
> default or become worth less. Every time the US govt prevents a
> bond or debt default, that is dilution of the currency. True
> deflation happens when debts default, and those holding the
> remaining dollars now own a larger portion of the country's net
> worth (simplified explanation, but in rough principle...). When a
> debt should default but is backed with fiat dollars, the unwise
> investors who should have lost their value instead keep it at the
> expense of diluting everyone else's.

I have nothing more to add than I've already said.

Sincerely,

John