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Manic Swings - Inflation or Deflation?/ Major Article


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#1 DrBubb

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Posted 12 August 2009 - 09:43 AM

This is a major article for me, which was published in two parts on FinancialSense.com

Quick link here : http://tinyurl.com/GEI-Manix
Links to Financial Sense articles about Manic Swings:
FS-1 : http://www.financial...2009/0914b.html
FS-2 : http://www.financial.../2009/1008.html
=========================================

Manic Swings - Inflation or Deflation?
Part 1: Bipolar markets are essential to the "adjustment process"
when voters and politicians prefer denial to a painful reality


On my website, which is an active investor's chatboard called GlobalEdgeInvestors dotcom, we became obsessed. Almost everyone joined in, trying to work out which of the two "-flations" was most likely. Several argued the current downwards pressure on price would not last, and massive money printing by the Fed would eventually hit the economy, and must somehow morph into much higher inflation. Some were listening to Marc Faber, who is "certain the US will experience hyperinflation" sometime in the future. On the other side of the debate, we saw persuasive arguments from Bob Prechter and Mish Shedlock who believe we will soon be living with even worse deflationary pressures. In this article, I explore the idea that there is another possibility. We may live through a long period where we continue to see both forces in conflict, bringing continuing price swings.



Moving beyond the Inflation versus Deflation debate

The "choose a -flation" debate is lively, but one thing I have noticed is the lack of profits for anyone who made a choice and committed their capital to a single theme. In fact, we have seen wild swings in both directions. A perusal of the charts of Oil or stocks, will show from the beginning of 2008, it looks as if a maniac driver has been at the wheel, driving the markets up and down. Oil: rose +56%, then fell -76%, then rose again, +110%. While for the S&P 500 index we have seen: +15%, -54%, and +50%, all within a period of about 18 months. Suppose you had made your choice a year ago. Even if you have been able to forecast the descent into today's lower inflation rate and chosen a single "deflationary" investment, you would have had a terrible time building wealth. With such huge swings, being frozen in a single investment, you would have missed out on some great opportunities along the way.

Might there be a better way. Why not bet on the big swings continuing? At least for the next year or two, why not accept that markets will behave like an unstable individual with a "bipolar disorder", swinging wildly back and forth from a focus on one "-flation" to its opposite. Each market swing pulls our attention one way, so one side gets the chance to "be right" for a while, but then the markets swing back the other way. Neither investment theme is triumphant. The real journey is in a third direction. Towards an outcome which looks inevitable to me, but many people still choose to deny.

Here is why I think that these wide swings might continue - They are an essential part of a long term adjustment process, with increased prices coming in some areas, and reductions in others. There's a pattern to the madness.

The Needed Adjustment

We live in a world where on one side of the globe we have creditor countries, which hold most of the world's savings, and also have a big share of the world's manufacturing capacity. On the other side, we have countries which have become accustomed to consuming a lot, and producing little. The consuming countries rely upon their ability to borrow money, recycling the excess savings from opposite side of the globe, to pay for their excessive consumption habits. This situation is not stable, and any continuation of the historical pattern of consumption in the West supported by the savings from Asia, will simply make the debt imbalance worse. And the current imbalance has already reached an unhealthy extreme, which threatens future economic growth and stability.

Periodically, "cracks in the system" appear and the strained conditions of the borrowers become so evident that the consensus supporting asset prices crumbles. Then, property, stocks, and commodities all slide together, as lenders panic, lose confidence, and tighten their lending. That's what happened in 2008-9, when stock indices fell by over 50%. Recently we have had a big swing back up in stock prices with property bouncing too, but I do not expect it to last. More sharp drops of 20%, 30% or more, are likely in the future, with sharp rebounds along the way. And we will most likely experience some huge swings in commodity prices as well.

What needs to happen, I think is obvious. Currency exchange rates and real wages need to be adjusted to a point where Western consumers adjust their spending, increasing savings, while producing more of what they consume and reducng their imports. On the other side of the globe, the Far East countries need to save less, buy more of their own production as they increase imports from the West.

This adjustment is not easy, since the change requires asset writedowns, business restructuring, and a large reduction in Western living standards - which is not politically acceptable - at least not yet. Western countries, and especially their politicians will fight it. Privately, some leaders may admit changes are needed and are inevitable. Yet it is not politically feasible to have open discussions which might lead to the appropriate actions, because it would mean embracing short term pain. Most voters are simply unwilling to elect anyone whose policies involve voters reducing their living standards. Better for a politician to make the adjustments look like an accident. In fact to gain votes, most candidates deny major changes are needed, and make bold public statements, about how they will lead without requiring any major sacrifices from voters. An extreme example was during the height of America's global ambitions some years ago, when George Bush, Sr. famously declared: "The American lifestyle is non-negotiable." Of course, the opposite was true. The wasteful American (also Canadian, British, and European) living arrangement has been the principle cause of the unhealthy debt and economic imbalances in the world.

The required adjustment also means overcoming cultural prejudices in the East, where people are prone towards savings. This is because they do not trust their own governments to look after them in the future. Savings is a form of self-insurance by those who want to control the quality of their own lives in retirement. Far Eastern savings countries will have to accept some future pain too. For example, jobs will be lost in some export-oriented industries. And, since their government-held savings are largely denominated in the currencies of the West, the real value of those savings will need to be written down. Writedowns are politically unpopular, and resisted in the East, just as they are in the West.

To hold onto power, leaders on both sides of the globe waste taxpayer funds, trying to restore the "old normal" through quantitative easing, vast governmental stimulus programs, and other short-term-oriented interference. Leaders-in-denial have set in motion certain programs which resist the needed price changes, particularly falling stock prices, and the loss of jobs. The stimulus and spending programs help to keep troubled businesses alive and spur temporary counter-swings in prices, after big impulsive moves in unfavorable directions. But these corrections are temporary, the larger trends of falling wealth and diminished western fiat currencies will win in the long run, I believe.

Despite all the fruitless efforts to force the economy back to "normal" - as if the bubble world of 2005-7 was somehow sustainable- the clock cannot be turned back. The "old normal" required an enormous shift of savings from East to West, and an unprecedented blindness to risk. Instead, the world will need to progress painfully towards a "new normal." We will see massive changes in consumption patterns, living arrangements, and wealth. Many high-paying "old" jobs in the west will be lost permanently, even as export oriented jobs are lost in the east. The "new" jobs will take time to materialise, as they arise from meeting local needs with local products, while building an economy which is less wasteful of resources, and uses less long distance transport.

New Ways of Defining Inflation and Deflation

To understand what is coming, I believe we need to redefine the forces of Inflation and Deflation that we are seeing in a new and more specific way, which fits our present global circumstances:

Inflation: an increase in the prices of key commodities, especially energy and food, when measured in dollars, sterling, or euros. (Inflation rates will be lower when prices are measured in Yen, Rmb, and the currencies of other saver nations.) The coming inflation will be different from that of the old "demand pull inflation" of the seventies and eighties, when rising incomes in the West, pushed up property prices and consumer prices in equal measure. Instead, we will see "cost push inflation" driven by falling currencies, and rising prices of essentials. Especially pricey will be commodities where foreign countries, like China, Japan, and other savings-rich countries are using their stronger currencies to bid up the price. Some asset classes, like property, which did well in the inflation of the 1970's will not do well in the manic-swinging world of 2008-2010 and beyond. If western incomes are falling, property yields will stay under pressure, and real estate prices will only hold up as long as western governments can maintain artificially low interest rates, which will become more difficult as the crisis moves into its later more virulent stages.

Deflation: a drop in the standards of living in Western consumer countries, and within certain sectors of Asian economies. Old jobs will be lost, and especially those involved in producing, delivering, and selling products to be sold to over-stretched western consumers. These old customers are going to be buying less of everything, so they will need a smaller quantity of imported goods, fewer malls to shop in, fewer cars to drive to the malls, and fewer nonessential goods of all types. Instead of spending as they did in 2005-7, they will lead more frugal lives, downsize their living spaces, and rebuild their savings, as they respond to the impact of falling stock markets and sliding house prices.

When defined in this way, we can see commodity inflation, and deflation of incomes are not polar opposites - and an investor does not have to choose between one camp or another. Both influences co-exist. In the months to come, we will see both of these trends, sometimes overlapping, and sometimes following each other in alternation. The pressures, and price shocks will continue until the required economic adjustments are made, and the West has learned to cope with higher food and energy prices, and live on its own savings, while manufacturing locally more of the products it needs.

The move towards this new alignment is too controversial to be led by our politicians and business leaders, so it will tend to progress through a series of sharp and painful "surprise" adjustments, experienced as "inflationary" commodity price jumps and "deflationary" stock and commodity price crashes. These will be painful to the wealth of the majority who are unprepared for the swings. But for those who understand what is going on, they will look inevitable and predictable. Those who are prepared can protect, and maybe even increase their wealth, as the shocks hit.

Swings - Commodity Buying and Stimulus, to Painful Restructuring, and back

The drivers of the price swings come from both sides of the globe. We have seen a clear pattern. First, deflationary pressures in the West push asset prices lower. Then, the other two drivers kick in, as a reaction to the falls, and they work to push prices higher. I will examine these influences in detail, starting with the main driver which lifted global market off the Q1 lows - cheap credit from quantitative easing in the West, and aggressive lending in China, etc.

The price swings will move up and down, as if controlled by a pendulum, but one whose balance point is shifting, depending on the asset class.



+ Cheap credit and increased consumption of commodities, mainly from China and India ("Chindia") put upwards pressure on the prices of certain commodities. especially food and energy. The upwards price pressure appeared in a wave, as a quick reaction to monetary loosening. And in part, the price surge was fueled by opportunistic buying. Savvy buyers in savings-rich countries saw that a deflationary swings in the economy had driven commodity prices back down to attractive levels. Then, armed with cheap credit, they bought aggressively, kicking off a new inflationary swing. The latest inflationary move was led by Chinese stock indices, which bottomed in late Octobner 2008. A huge Chinese financial stimulus package was announced, it has quickly translated into higher stock prices. Jumps in commodities used by China, like oil, copper and iron ore are a coincidental signal that an inflationary upswing is underway. Rising commodity prices help to revive global stock markets, alongside the financial stimulus of loose credit and low interest rates in western countries.

As we saw in 2008, a deflationary swing depressed commodity prices while driving the value of the dollar upwards. The price drops provided a "window of opportunity", where cash rich Asian countries (and China, in particular) spent some of their dollar hoards liberally, stockpiling cheap resources, while simultaneously reducing their exposures to the vulnerable western currency. A buying spasms such as we are seeing can last for months, but will ultimately prove only temporary, because growth in western economies will prove anemic and the Asian growth will not be enough to sustain the upswing on its own. Savings countries have remained alert to excesses within their own economies. When excesses appear, they begin restrict their own aggressive lending, as we are beginning to see in China now. The upswing ends in excess stockpiles. When commodity inventories are high and the cost of banks loans is rising, the stockpiling may cease suddenly, triggering the next deflationary counterswing. As of late August, I am reading that credit is being tightened in China, with a slowdown in stockpiling. Consequently, I am anticipating another downwards swing in commodities and stock prices in the second half of 2009. In the downswing, the Dollar may rise, as a flight from stocks, brings a temporary move back into the dollar as commodities and emerging market equities are sold.

+ Ongoing reductions in consumption in the West, will persist for years. Western countries need to transform their economies away from being "consumption-led machines", and towards a better balance between savings versus spending; with more local manufacturing to meet the more essential local consumption needs. Also, they will have to invest in more locally generated energy. They will have to change their energy "diets", so their are fewer imported items on their energy menu, and also because imported energy will get much more expensive when priced in weak western currencies. Old and outmoded investments will have to be written down, with increasing pressure on profits, dividends, and bank balance sheets. Economic changes may take years to engineer, especially when political leaders are in denial about the scale and the nature of change which is needed. Whatever empty promises politicians may make to "restore the economy" to past glories, the deflationary swings serve a key purpose. They "bring reality home" to the general public that things are not fine; the economy is not healthy. Falling stock prices and the desire for sustainable new job growth, will keep the pressure on for a more dramatic economic restructuring, and political promises with crumble into sand.

+ Government stimulus related spending, is an attempt to soften the painful impact of the ongoing restructuring. The timing of these programs will help determine the jumps in revenues of some restructuring industries, and will have a major, albeit temporary influence on stock prices too. But stimulus spending is inherently wasteful, and will be increasingly limited by budgetary constraints. The government programs will eventually have to move beyond mere spending and become smaller and better targeted to the areas where changes are really needed to bring about transformation in the future economy. Wasting money on programs that simply delay the downsizing of dying industries, will become impossible as the US government finds it harder to find the money.


The swings that I have identified are leading towards a very unhappy perfect storm: a severe crisis for American suburbanites. When the dollar drops, the suburbanites' addiction to foreign oil will make a gas-guzzling living arrangement totally non-viable, just when government finances will be too weak to help.

Cash, Clunkers and the suburbanite's coming Catastrophe

As we move further into the crisis, Western governments may find they have less public support for temporary stimulus programs. Future governmental interference may take the form of tax incentives. We saw tax oriented legislation in the recently-passed cap-and-trade program. The law enacted was not ideal, but it does establish some useful incentives. Companies will strive to become more energy-efficient to avoid taxes, while those producing renewable energy will have the benefit of some enhanced revenues. Unfortunately, most government stumulus programs tend to bring temporary and highly unpredictable benefits, as we have seen with the cash-for-clunkers program. It is hard to build a long term business around a short term tax-incentive. Some popular stimulus measures, like the cash-for-clunkers program, will be merely borrowing current sales from future demand, rather creating a sustainable demand upon which one can build a sustainable business. We can only hope that such short term programs are abandoned, for something better with have a clearer long term objective. Major intelligent long-term oriented restructuring is what is needed, not just temporary spending.

History has shown that politicians nearly always chose short term bandages over painful long term cures. For decades, the US Congress proved incapable of passing sensible long term oriented legislation, like matching the higher gasoline taxes that were imposed in Europe years ago. The changes that really matter, like substantially higher prices for imported energy, are likely to be forced upon the US through through changes in exchange rates, if polticians in the US and otehr countries lack long term vision and courage.

There is a big risk in the stimulus spending we have seen in the US (and the UK too) during 2009. The spending is not well-targetted. Too much money is being wasted, and the debts and dollar claims are piling up. The real change and the major pain still lies ahead some months or years in our future. Larger debts will mean an eventual bigger slide in the US dollar (and in other Western currencies too.) The ultimate result may be a higher US dollar oil price than we would have seen without such massive spending. High oil prices, such as $200 per barrel, or even my own forecast of oil at $400 per barrel, will mean enormous pain for energy users, and suburbanites in particular.

My point is that "easy solutions," like today's cash-for-clunkers program, waste money and boost government debt, and do not work. In the long run, the wasteful spending will deliver poverty and destitution for many Americans. The irony is great. Those who live in the outer rings, may think the clunkers program was wonderful - they had a brief improvement in their living standard. A new car was partially paid-for by the government. But the waste may simply increase the chances that the beneficiaries of the clunkers program will themselves wind up as down-and-outs, abandoned by a bankrupted government, which can no longer muster the financial resources to help rescue those in the "Stranded suburbs" of tomorrow.

= Continues, next week, where I talk about :
How the three Drivers-of-Swings influenced prices in 2008/9, and How to invest in a world of bipolar markets


== Part two is below ==

The market is "bipolar", swinging back and forth from a focus on Inflation to Deflation. Bet on swings; and stay flexible. What are bipolar markets? See: http://tinyurl.com/GEI-Manix

#2 DrBubb

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Posted 12 August 2009 - 09:46 AM

== Part two - Awaiting a final redrafting ==

Manic Swings - the Bipolar World
Part 2: Living in a world of price shocks and crashes


SUMMARY of Part 1
With wild swings in commodity and stock markets, it has NOT been profitable to commit to a single point of view: whether inflationary or deflationary. Unfortunately, huge swings could be an essential part of a global adjustment process in a world where voters and politicians choose to stay in denial. The leaders lack the courage to call for sacrifice and will not lead their countries in making the needed adjustments to their economies. Meantime, the voters prefer to cling to their present ways of living and working, however wasteful they may be. The result is, they delay critical decisions, and leave themselves vulnerable to inevitable price shocks arising from the market adjustment process. Operating this way, politicians would rather waste money and resources trying to "restore the economy to normal", a normal that was never sustainable. Stability cannot be brought back, so long as there is a huge imbalance between the savings-rich East and the debt-incumbered West, and historical exchange rates are maintained.



Three Big Drivers of the price swings

In part 1, I identified
Three big drivers of prices and the global economy:
+ Reductions in consumption in the west: which are driving consumer prices and western wages lower and savings higher,
+ Government interference like stimulus spending: which attempts to reverse the negative impact of falling consumer spending,
+ Increased prices of essential commodities like food and energy, as savings rich countries bid for "their growing share" of the pie

These influences are war with each other, to some extent, and that is a problem. Money is being wasted on stimulus and restructuring plans that are nothing but temporary "band-aids." And these programs may be adding to the long term pain by increasing indebtedness, and maintaining exchange rate imbalances. Many investors will find themselves leaning in the wrong direction, by betting that the "old normal" can be restored by these measures, and they are leaving themselves vulnerable to the inevitable adjustments in the direction of a "new normal" - a world where the US, UK and other western countries account for a smaller share of the world's consumption. At the same time, we are approaching limits to growth, thanks to peak oil and limited water resources. We will all be fighting for pieces of a pie that has stopped growing. With cost pressures bound to increase, this is not a time to try to maintain a wasteful living arrangement. The savings-rich emerging consumers will not allow it for much longer.

The Three Big Drivers, and How they drive the global economy

To get an clearer uderstanding of the three influences identified above, and how they will drive prices and the economy in the future, let's look at how they interacted in the recent past:

The big theme of 2007 and 2008 was one of the three drivers: that is, commodity buying by China, India, and other emerging countries. They bought commodities to build up their own economies, and also to use them as raw materials for goods they were manufacturing for sale to the West. Perhaps "Dr.Copper" is the best indicator of the multi-year surge in commodity prices. Sometimes called the "commodity with a PhD in economics", Copper is often used as a coincident indicator of the industrial economy. So its price rise shows how copper demand, mostly from growing emerging countries is pressing up against limitations in the supply.

....

Copper prices started to take off in mid-2004, from near $1.20 per pound. Within two years they had increased more that 3-fold to near $4.00 per pound in mid-2006. From there, Copper showed a 2-year oscillating pattern, as Oil prices caught up. The rise in Crude was quick, once it started. Crude also showed a near-tripling in price from just $51 at the beginning of 2007, to $146 just 19 months later in July 2008. Corn shot up too, rising also about 4x from under $1.80 in late 2005 to $7.50 a bushel in mid-2008. By summer 2008, the prices of most key commodities were near record highs.

Although it was rarely cited in the mainstream press, I see the Beijing Olympics as an important influence in the commodities story, since some Chinese companies speeded up their ordering and production prior to the event, so that they would be prepared to slowdown, or even close of their factories, when the Olympics were on. As evidence that this influence mattered, there was a big spike up in Baltic freight rates in Q2 of 2008, no doubt driven partly by aggressive imports into China. The price surge also inspired a stockpiling of commodities on the part of those (in China and elsewhere) who hoped to benefit from, or hedge against continuing price rises, which did not materialise. For example, some corporate energy users, like airlines, bought oil hedges aggressively in spring and summer 2008, to protect from a possible rise to $200, which many people had begun to forecast. Hedging these oil derivatives, put more upwards pressure on oil futures.

The inflationary surge was unsustainable, because it was being driven by temporary factors, like stockpiling and China's brief second quarter growth sprint. It was also being undermined by another one of my three "big drivers", the wobbling Western economies. By mid-2008, the restructuring needs of Western economies was becoming more apparent. Cracks were beginning to appear in the Western banking system, and in some key industries, like automobile manufacturing. Several G8 economies were tipping into recession as credit tightened. Bear Stearns needed rescuing in March, while Fannie Mae, Freddie Mac, and AIG got bailouts in the summer. But the biggest story was tightening credit, being painfully felt by individuals, small businesses, large corporations, and hedge funds as the banks that lend to them found it more difficult to get money themselves, as their credit ratings deteriorated.

Some want to blame the slide in commodities on the Lehman bankruptcy. But that did not happen until mid-September. Commodities had already peaked weeks before that. Gold was the first major commodity to peak at $1,034 in March 2008. Gold fever gave way to a seasonal drop in the late Spring, as it often does. Gold fell 24% over six weeks, before rallying again as all commodities became "hot" heading into the summer. Then Corn topped near $7.50 in June. Copper saw its highs near $3.90 at the beginning of July, and then finally WTI Crude rolled over, peaking at $146 on 14 July 2008. After that, all the commodities began sliding together, including Gold. And they were all well off their highs before the Lehmans bankruptcy.

....

Back in 2007, I used to hear in Hong Kong (where I live) that the bull market in Chinese stocks would go on until the Olympics began on 8 August 2008. This was clearly wrong since Chinese stocks peaked well before that in October 2007. But as a date for the end of the great bull market in commodities, it was not a bad call. Much of the Chinese economy was virtually shutdown, especially around Beijing, where many factories were actually closed a few weeks before in July to allow the air of China's capital city to clear. Perhaps that sudden slowing of Chinese production, and the resulting lower demand for commodity inputs, was the mainstraw that broke the camel's back. I watched the opening of the Olympics, wonder if price detruction in commodities like Gold was going to end. By late-August, most of the commodities were in freefall. On Friday Sept.12th, leading into the weekend before Lehman declared bankruptcy, crude oil was trading at $100, which was already 32% off its July high. Gold was down to $750 per ounce. It would make more sense to blame the price slide on the Chinese slowdown that came just before the Olympics, than on an event which did not happen until the commodities meltdown was already well underway.

No doubt, the primary reason for the commodities liquidation was the credit crunch, when banks stopped lending to each other. Interbank loans become scarce. Banks did not want to lend to their customers either, particularly to highly-geared hedge funds, whose assets were losing value day-by-day. Rarely mentioned, but important nonetheless, was a policy decision in China. In September, Chinese regulators told domestic banks to "stop interbank lending to U.S. financial institutions to prevent possible losses during the financial crisis." This story was first picked up in Hong Kong's South China Morning Post, and later reported in Reuters on September 25th. The ban on handing Chinese money to the US banks may have been imposed before it was discovered, but it coincided neatly with the upwards spike in Libor, and may have been one of its principal causes.

....

The chart on the left shows the 3 Month Eurodollar contract, which is structured to trade on an inverse basis, where Libor is equal to 100 minus the contract price. So a lower Eurodollar contract, means a higher interest rate. I have shown the contract all the way back to 2000. since I think rates are an important part of the big picture, of how government interference has distorted the economy, and worsened the global imbalance.

A quick look at the shorter term, three-year chart at right above should worry any thinking person. Only the massive dumping of credit into the banking system, which have driven down Libor rates to 50 b.p. or less, have succeeded in stimulating the signs of "green shoots" and stock market rallies that we are seeing. That may seem good news to some who are watching their stock accounts and home values creep higher. But it should be obvious to others, that the stimulus countries like the US and the UK have painted themselves into a tremendously vulnerable corner. It will not be easy to walk out of it, without an enormous painful adjustment. If the quick jump in Libor from 2.38% to 4.59% last year crashed the economy, then what is going to happen when rates begin to rise from the articificial and temporary 0.50% Libor of today? And what excesses of speculation, and wrongful investment are being inspired by the low rates of today. More on this later.

Roots of the Crisis: Low Rates and Speculative Malinvestment

It is important to look back even further than last year's crisis, to understand the roots of the credit crisis. It was not just that subprime debt valuations began crumble on their own in 2007 0r 2008. It needs to be remembered that the assets backing those debts were losing value too. If the money had been well-invested, then there would have been cash flows to support the debts, and the debt securities would not have become impaired. The real problem was the malinvestment that happened in the first place - in things like suburban homes, overpriced condos, SUV's, and depreciating LCD TV's, and all manner of junk imported from factories in places like China. Cheap rates, easy credit, and a pattern of malinvestment - all three of these occurred together. If any of these had not happened, then the fictitious existence of 2004-7 that we created through these influences would not have happened, and there would have been no bubble to burst.

My Third Big Driver is government interference in the economy. It has been a huge factor within 2009, with the aggressive efforts of a new president. But misguided government initiatives started years earlier.

I have shown a longer period in the Eurodollar chart, going all the way back to 2000, because I want to use the same chart to trace the build-up to the 2008 crisis, and make the connection between interest rate levels and the imprudent lending in the property sector that created the bubble. The changes in Libor resulted from decisions by the Federal Reserve, and particularly its chairmen, Greenspan and Bernanke. The Fed's rate decisions illustrate how governmental interference to "fix problems" can actually make them a great deal worse. (I acknowledge that the Fed is a privately owned bank, but its actions are driven by the same clique of Washington politicians and Wall Street elites that are driving the bailout and stimulus efforts, so I think it is not wrong to identify the Fed as a principle source of governmental interference.)

Back in 2000, the US was headed towards a serious recession which might have cleaned out many of the excesses of the dotcom bubble. But it was not allowed to happen. The Eurodollar contract bottomed at 93.00 (100-93 = Libor of 7.00%) in the first half of 2000, as the SPX was peaking above SPX-1500. As stock markets fell, Fed chairman Greenspan gave into pressures from Wall Street and cut rates aggressively. By summer 2001, SPX had fallen to below 1,200 and the Eurodollar contract had responded to Greenspan's rate cuts and risen to 96.50 (ie. a Libor of 3.50%, half the rate of 15 months earlier.) A normal cyclical correction might have ensued. But 9/11 changed everything. Stocks plunged to below SPX-1000, and fears ran high in America. There was a widespread worry that the US economy would slide into a more serious recession. Greenspan responded in his customary way and cut rates even further. By mid-2002, the Eurodollar contract was at above 98.00 (with Libor of less than 2.00%) and Greenspan was well on his way to engineering the greatest housing bubble in history.

The period of falling interest rate added fuel to a budding rally in housing, which kicked off as rates fell from 7.00%. The Case-Schiller CSXR index of 10 cities rose from its base of 100 in January 2000, to 114.58, a year later, to 135.04 in mid-2002 when rates were brought down to under 2.00%. Prices kept rising at an average of 14.1% per year up to the peak of 226.26 four years later in August 2006.

The 14% per annum rise in real estate went far beyond the 2% interest rates, and was also far more than the inflation rate. It should have been obvious that a dangerous bubble was being formed, but Greenspan believed that house price could not fall, simply because he had never seen that happen in his lifetime. So he was slow in raising rates back up, and other regulators (and Congress too!) turned a blind eye to the excesses that were happening in the mortgage market.

With mortgage lending rapidly becoming a major boomtime industry, real estate maintained its upward momentum even as the Fed started pushing rates higher in 2004. By the time US house prices peaked in mid-2006, 3 month Libor was back up to 5.50%. Property prices had risen much faster than rents (which were rising at lower levels, similar to inflation) and the ability to repay the mortgages. But that didn't matter and falling rental yields did not slow the market, even though rates were rising by then. The boom gained its fuel from speculative urges, particularly from those who had not previously been able to play in the property market, because of their substandard credit standing. New borrowers could lie about their incomes, and still get money. Investors bought packaged mortgages, not because the borrowers were sound, but because they mortgaged-backed securities they were buying had been awarded fictional triple-A ratings, and so could be sold. The financial system was corrupted by greed and incompetence at every layer, and so it was able to keep a boom going purely on the speculative greed for would-be capital gains, even when the cash flows to support those investments had deteriorated. This glorious malinvestment was fueled by low rates, creative lending packages, and unbridled greed. Greenspan's Fed should have known better, but few cared when they were all making money. The smart ones got out early, and then we found that our economy was collectively holding the bag.

== ==
possible sidebar:
Where I pick up an explanation from an article written in October 2005 called "Lessons of the Grandparents",
China wanted this boom too...

== ==

Aggressive Deleveraging hit stocks and commodities

Stocks fell sharply by almost half, from SPX-1440 in May to SPX-741 in November, as Lehman Brothers collapsed, and banks panicked and stopped lending money to each other and their customers. To quote Warren Buffett, "The economy experienced cardiac arrest."



But what was that stock drop really about? A sudden mass realisation that the economy has become too reliant on debt. If the economy can grind to a halt when a single investment bank fails, doesn't that mean that we have all become too reliant on financial system and its credit? The lesson has finally been learned, and American consumers are making a sea-change in their behavior. They are beginning to save again. In only a few months, the savings rate has moved from near zero in the first half of 2008 to 6.9% of their incomes by May 2009. If Americans spent 8 years worth of income in 7 years, they will now need to spend 7 years worth of income in 8 years to get back to where they were. That will mean a big drop in consumer spending in the West, and for many years to come. The businesses that were most heavily reliant on those consumers will suffering the most, and laying off employees. Those jobs will not return, since the level of spending will be permanently reduced. If the people are to be employed again, it will have to be in new and healthy sectors of the economy which are growing. The problem is that those new areas are not so easy to identify, and may provide lower incomes. Either way, a large number of people in the West will need to downsize their living arrangements, and live on less income.

When the banks stopped lending, there was massive deleveraging, and almost everything sold off in price. That includes the commodities that have been fueling China's amazing growth. Oil fell by 76%, and copper by 69%. These commodities were at bargain prices as the year began - now here comes the one of the big drivers once again. China did what any rich person would do with a large wallet, when confronted by mouth watering bargains; they started buying. Even beyond their immediate needs. From the lows, crude oil has risen by 110%, and copper by 119%. And these commodities have been stockpiled. However, this sort of aggressive buying cannot go on forever. It is a temporary swing, fueled by the opportunity presented from last year's downswing in prices.

As Nouriel Roubini put it, in a recent mining conference in Australia, "China may have overstocked" these commodities. He now sees the risk of a slowdown, and a correction in commodity prices in the second half. He holds brighter hopes for a resumption of price increases for next year - and that is what was most commonly reported in the press. But he did warn about a price drop in the second half. So maybe the optimists are behaving with a bit too much mania now, as they push commodities back up towards their highs for the year.

This historical summary highlights the bipolar swings from the optimism of rising commodity prices to the depression of falling stock prices. It neatly encapsulates the ups and downs that I am expecting over the next year or two, and possibly longer.

= Continues, on part three, where I talk about : how to invest in a world of bipolar markets

== == ==

FSU Archive :: http://www.financial...on/archive.html
The market is "bipolar", swinging back and forth from a focus on Inflation to Deflation. Bet on swings; and stay flexible. What are bipolar markets? See: http://tinyurl.com/GEI-Manix

#3 DrBubb

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Posted 13 August 2009 - 10:10 AM

== Part three ==

Manic Swings - Bipolar Investing
Part 3: Investing in a world of Bipolar markets


SUMMARY of Parts 1 & 2

With the lack of leadership and planning, we are seeing a series of sharp and painful "surprise" adjustments. They are being experienced as "inflationary" commodity price jumps and "deflationary" stock and commodity price plunges. The swings are being made bigger by governmental actions, which are attempts to dampen the painful parts of the adjustment process. Resistance is growing from those who think money is being wasted. But meantime, the swings are continuing...




Anticipating the swings, and How to Trade them
= = = = =
(( Coming / Comments & investment ideas are welcome ))




This is a major article for me, that I have been working on for several days now.
I am still wondering where is the best place to have it posted or published.


Current suggestions are Financial Sense, and Moneyweek.
Also mentioned were SeekingAlpha and ZeroHedge.
I am also wondering what the print media, like the Atlantic or the New Yorker would make of it.
Does anyone have experience with that type of media?
The market is "bipolar", swinging back and forth from a focus on Inflation to Deflation. Bet on swings; and stay flexible. What are bipolar markets? See: http://tinyurl.com/GEI-Manix

#4 DrBubb

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Posted 14 August 2009 - 10:41 AM

SCRATCH PAD - please ignore this // I am saving this panel for future use.

== ==

Group Podcasts
Canadabis / Teleseminars (Group Conference calls)
How to put together Podcasts
3 episode podcasts, and I will contribute an interview, says KMO
What software ?: Cody and Sancho
Black Light in the Attic : http://blacklightattic.podomatic.com/

http://Vocolo.org : Vocolo Radio (5-7 minute limit) :: WBEZ, WBEW
The market is "bipolar", swinging back and forth from a focus on Inflation to Deflation. Bet on swings; and stay flexible. What are bipolar markets? See: http://tinyurl.com/GEI-Manix

#5 OneHundred

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Posted 14 August 2009 - 12:39 PM

Good job!
The argument has been enhanced.

I wonder if most GEI posters will have the patience to read it?
It is on the long side. But you have broken it up, which is good.

I liked the examples of how China's demand has impacted on commodities and Libor-loan-rates.

Am looking forward to the investment ideas, but if they are something different from Buy-and-Hold gold, I wonder how many here will be interested?

#6 PositiveDeviant

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Posted 14 August 2009 - 01:43 PM

I read this during my lunchbreak and it is a well thought out piece. I think it's important to try and define Inflation and Deflation as so much time is spent on that area, not everyone has the same definition. Prices of needs (Energy, food) will inflate, it's inevitable, prices of wants will come down (Consumer discretionary - TVs DVD etc, non essential assets).

China exports hugely excessive amounts of clothes, it cannot go on forever. No one really needs more than say two pairs of jeans.

What about posting it on - http://ftalphaville.ft.com/ to gauge response

"A man who is all caution, will never dare to take hold and be successful; and a man who is all boldness, is merely reckless, and must eventually fail. A man may go on "'change" and make fifty, or one hundred thousand dollars in speculating in stocks, at a single operation. But if he has simple boldness without caution, it is mere chance, and what he gains to-day he will lose to-morrow. You must have both the caution and the boldness, to insure success."
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#7 OneHundred

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Posted 14 August 2009 - 02:54 PM

QUOTE (DrBubb @ Aug 12 2009, 09:46 AM) <{POST_SNAPBACK}>
....
Only the massive dumping of credit into the banking system, which have driven down Libor rates to 50 b.p. or less, have succeeded in stimulating the signs of "green shoots" and stock market rallies that we are seeing. That may seem good news to some who are watching their stock accounts and home values creep higher. But it should be obvious to others, that the stimulus countries like the US and the UK have painted themselves into a tremendously vulnerable corner. It will not be easy to walk out of it, without an enormous painful adjustment.


How about this graphic:


Or this one:


#8 DrBubb

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Posted 16 August 2009 - 01:23 AM

EVIDENCE #1 - For my "inevitable swings" argument...
===============

Deliberate Deleveraging in China - Forced destocking ahead, and another swing down in prices?

Still, looking forward, some uncertainty persists, and gaps have begun to appear in the perennial growth story. Circulating on the mainland are rumors of private stockpiling of oil by gas stations and small-business owners. The reason for the hoarding, according to the IEA, is speculation that Beijing could lift the price caps imposed during harder times at the start of the year.

If price caps are lifted - or even eased - that would be bad news for downstream refiners, such as Sinopec Shanghai Petrochemical, which has risen 85% in value so far this year. On the other hand, PetroChina and CNOOC, up less than half that year-to-date, could still benefit.

The Chinese government is also committed to dramatically reducing interbank lending in the second quarter. China Construction Bank, the country's second-largest lender by market value, maintains that it will cut back loans by up to 70% in the rest of this year. A round of deliberate de-leveraging in the Chinese economy is significant, because for many market watchers, loose domestic monetary policy is exactly what kept the economy booming - and by association, commodities prices rallying.

Some evidence in the commodity markets suggests the de-leveraging might already be starting to take effect. In July, China's copper imports fell for the first time in six months, to 406,612 tons, representing a drop of 15% on the month. Perhaps not coincidentally, new lending by Chinese banks plunged 77% that month as well.

"The main driver here is the huge liquidity created by the huge new loans issued by commercial banks," Cheng Weiqing, director of trading at Beijing Citic Securities, told Hard Assets Investor. He points out that the average price-to-earnings ratio on the mainland right now is 29, and that "earnings estimations are very high compared to the rest of the world."

/more: http://seekingalpha....cken-or-the-egg
The market is "bipolar", swinging back and forth from a focus on Inflation to Deflation. Bet on swings; and stay flexible. What are bipolar markets? See: http://tinyurl.com/GEI-Manix

#9 DrBubb

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Posted 16 August 2009 - 05:47 AM

EVIDENCE #2 - The US matters little in the Commodity Price equation
===============

As for the most recent 3-quarter period, even assuming growth of 6% during the 3rd quarter of this year (admittedly a reach), the 3-quarter growth rate will still be negative. Yet commodity prices for the same period will have risen 16%. It's unheard of for commodity price growth to be a standard deviation above the mean in the context of negative economic growth! Plus, 6-year commodity price growth is close to 75%, which is off the charts and almost unbelievable given the weakness of the U.S. economy and that of the entire developed world!

Our point is that the U.S. has become a non-player in the commodity dynamic. The real players are the emerging markets, which continue to grow like crazy. Indonesia, for instance, will likely grow at an annual rate of 5-6% for the next 6 quarters. China and India will grow even faster. The emerging nations have become more important factors than the developed nations. Nearly 100% of world growth over the next 6-8 quarters will likely come from the emerging markets. And as the emerging markets become bigger and bigger players, their need for commodities will become even greater.

This is bad news for the U.S.

High commodity prices caused growth in the U.S. to be subdued during the 2000s. Now, with the emerging markets growing larger and driving commodity prices higher, U.S. growth will be even more restrained.

Also holding down U.S. growth for some time will be the very tired U.S. consumer, who accounted for over 100% of U.S. growth during the 2000s.

It's not a pretty picture

/more/ Stephen Leeb: http://seekingalpha....is-about-to-pop
The market is "bipolar", swinging back and forth from a focus on Inflation to Deflation. Bet on swings; and stay flexible. What are bipolar markets? See: http://tinyurl.com/GEI-Manix

#10 DrBubb

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Posted 16 August 2009 - 06:08 AM

Looking at SeekingAlpha

What Readers Say About Seeking Alpha
by: David Jackson .. March 15, 2007 .. 19 comments

For those who want to understand Seeking Alpha better, I thought I'd share an overview of our inbox. We sincerely appreciate readers' feedback on SA and see it as vital to producing a better product. The emails we receive tend to fall into four categories:

+ Questions and issues about email subscriptions. We send out over 300,000 emails per day, so we get a lot of questions from subscribers, for example about losing emails in their spam filters. (We've now put up an FAQ about email subscriptions to help with this.)

+ Questions and concerns from companies. Companies track the coverage they get on Seeking Alpha. Sometimes they email us with helpful corrections to conference call transcripts or clarification of factual points. We care passionately about the quality and accuracy of articles on Seeking Alpha, so we reply to every email individually and immediately address any concerns.

+ Questions about authors and how to contribute. New readers are often surprised at the type of articles on Seeking Alpha -- they're used to news more than opinion and analysis. So we field lots of questions about our contributors, how they're selected, and our compliance standards. Fund managers and industry experts email us to ask about becoming contributors.

The nice stuff. Finally, we receive a ton of email about Seeking Alpha generally, providing feedback on the work of our contributors (now over 400 of them) and editors. Most of it is nice. I personally also get a lot of email about the ETF Investment Guide.

/source: http://seekingalpha....t-seeking-alpha
The market is "bipolar", swinging back and forth from a focus on Inflation to Deflation. Bet on swings; and stay flexible. What are bipolar markets? See: http://tinyurl.com/GEI-Manix

#11 hotairmail

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Posted 16 August 2009 - 06:14 AM

I wrote this on the other thread.


QUOTE
That is a very good theme Dr Bubb - I don't know why I hadn't seen it before to comment on.

Anyway - I hope you don't mind me offering my tuppence worth.

We spoke about excess productive capacity and extremely cheap labour in developing countries like China leading to price deflation of things that are produced.

This also leads to lower wages over time.

Another outcome is very low rates of interest and increasing supply of cheap money. This cheap money will search out for the latest investment to generate returns - i.e. it will try and chase asset bubbles.

As the asset bubbles blow up they in turn impact on demand and collapse in on themselves. But the removal of demand also seems to bear down on prices again.

So we have excess supply and excess money and scarce resources (but only if not choked off by price).

So we perhaps need a new lexicon - not deflation or inflation - but a state of affairs where the one is generating the other in short order.

Btw - regardless of the true description - I totally agree with the conclusion - don't bet the house on one or the other for any length of time because we will be getting sequential bubbles and bursts over the next few years.



EDIT: "Long term buy and hold or surf the waves of global bubbles?"


Whilst your article reflects what I wrote there, whilst better/good, it doesn't quite hang and nail the issue.

The 'inflation' side of things won't be a constant although your definition of it that way implies that. But on the investing side you say ride the bubbles. Need to marry the two concepts up more tightly I think.

The west has been fighting the deflationary forces of massive and cheap productive capacity in China with loose money for a decade, this leads to a world of speculative bubbles and busts in many markets. Massive price spikes choke demand off and lead to turning the screw on the deflationary forces again - or bubbles can simply burst because of a change in sentiment such is the nature of markets. The bubbles and busts seem to be arriving in ever shorter order now.

Over time, the west's money should become worth less but currency pegs are not bringing the necessary adjustment - leaving the world open to another source of instability: China's problem is that it knows it needs to let its currency appreciate but its exports become more expensive and its savings become worth less - a terrible choice for an export reliant creditor nation.

However it is achieved - smoothely or by violent moves of the market exposing the artificial lines in the sand by men - the currencies of the East and the wealth of its inhabitants will come up to that of the West - and in a world of ever scarcer resources that means the peoples of the west becoming poorer.
I'm not listening to any more nutters.

There are massive and growing deflationary forces on produced goods arising from China resulting in excessively loose monetary policy in the West. We are destined to continue suffering deflation of the general price level in manufactures and serial bubbles and busts in stocks, commodities and property until the average Chinese has the purchasing power of a Westerner.
Be prepared for currency volatility and trade wars.

There is an elephant in the room pretending to be a black swan. Can you see it?

#12 DrBubb

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Posted 16 August 2009 - 06:52 AM

Thanks for those detailed comments - very useful

QUOTE (hotairmail @ Aug 16 2009, 02:14 PM) <{POST_SNAPBACK}>
The 'inflation' side of things won't be a constant although your definition of it that way implies that. But on the investing side you say ride the bubbles. Need to marry the two concepts up more tightly I think.


Interesting comment, since that wasnt my idea, at all.
Instead, I think we get bursts of inflationary stimulus from time-to-time from (I will summarise):

+ China buying in response to bargains which arise from the deflationary down-swings
+ Governmental stimulus arising from politicians hearing that voters want save them from pain of wealth reduction,
like the loss of jobs, and the fall in the value of their homes and share portfolios

This reaction/counter-reaction pattern ("essential swings") is a key part of my argument, which I havent seen elsewhere. Have you?

SWings, and psychological extremes describes the ongoing process better than the inflationists or deflationists are doing IMHO.

QUOTE (hotairmail @ Aug 16 2009, 02:14 PM) <{POST_SNAPBACK}>
The west has been fighting the deflationary forces of massive and cheap productive capacity in China with loose money for a decade, this leads to a world of speculative bubbles and busts in many markets...


Yes. That's a good point, that outsourcing manufacturing to Chindia has been a deflationary force for years. True enough,
and worth adding to the basic argument. The West was spared from feeling the impact of this action by China's willingness to
recycle the dollars rather than spending them and driving the dollar down. I had intended to mention this in the sidebar in Part#2,
which I havent finished yet. Maybe it could go elsewhere too.

QUOTE (hotairmail @ Aug 16 2009, 02:14 PM) <{POST_SNAPBACK}>
... Massive price spikes choke demand off and lead to turning the screw on the deflationary forces again - or bubbles can simply burst because of a change in sentiment such is the nature of markets. The bubbles and busts seem to be arriving in ever shorter order now.


Shorter? Maybe. More violent? Certainly. So even the small swings become evident.

Do you also see the swings continuing? I think they will until we swing so far, that a "new normal" is reached
and becomes acceptable to the populace - ie, they decide it is better to stop fighting the drop in their real wealth,
and learn to live with a new reality.

QUOTE (hotairmail @ Aug 16 2009, 02:14 PM) <{POST_SNAPBACK}>
Over time, the west's money should become worth less but currency pegs are not bringing the necessary adjustment - leaving the world open to another source of instability: China's problem is that it knows it needs to let its currency appreciate but its exports become more expensive and its savings become worth less - a terrible choice for an export reliant creditor nation.


China sees the problem more clearly now. And they are acting to minimise it, by spending bigger and bigger chunks
of their dollars on commodities, and buying (for dollars where possible) stakes in commodity-producing countries.

QUOTE (hotairmail @ Aug 16 2009, 02:14 PM) <{POST_SNAPBACK}>
However it is achieved - smoothely or by violent moves of the market exposing the artificial lines in the sand by men - the currencies of the East and the wealth of its inhabitants will come up to that of the West - and in a world of ever scarcer resources that means the peoples of the west becoming poorer.


We agree on that!
Short of moving to the East, you should think of moving your capital there in some way.

Buying Gold is a way of buying an international store of value, which should hold up better than Western fiat currencies.
The next best, has been buying commodities needed in the East, but tehse are hit by the Mainc Swings in price, even
more than Gold. So you have to trade in and out, or learn to live with the volatility.
The market is "bipolar", swinging back and forth from a focus on Inflation to Deflation. Bet on swings; and stay flexible. What are bipolar markets? See: http://tinyurl.com/GEI-Manix

#13 DrBubb

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Posted 16 August 2009 - 07:35 AM

EVIDENCE #3 : Another Downswing is coming...
============

Insiders Continue to Sell, Sell, Sell
by: Ockham Research .. August 14, 2009 .. 29 comments

We have to send a tip of the hat, to ultra popular finance blogger at Zerohedge.com for alerting us to the huge number of insiders who are selling off stock in their companies.

We have noted this sort of activity over the last few months and it appears that corporate insiders are selling with increased fervor. In late April (Insiders Are Selling Into the Rally), insiders were selling at a rate of 8.3 times the amount that insiders were buying. When we revisited the issue about two months later in June (More Evidence of Skepticism from Insiders), insiders had become even more bearish as they were selling at a rate of 9 times for each insider buy.

Now, we are nearly two months later and the ratio of sellers to buyers continues to expand. In the last week, corporate insiders sold 13.6 times more than insiders bought according to information compiled by Finviz.

/more: http://seekingalpha....icle_sb_popular

Compare: Buys vs. Sells :: http://www.zerohedge.....s 8.13.09.jpg
The market is "bipolar", swinging back and forth from a focus on Inflation to Deflation. Bet on swings; and stay flexible. What are bipolar markets? See: http://tinyurl.com/GEI-Manix

#14 hotairmail

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Posted 16 August 2009 - 11:24 PM

Posted by Sillybear at hpc. Article by aep.

http://www.telegraph...s-capacity.html


It is exactly what I have been going on about - the credit event/crisis and deflation is not just a monetary phenomenon. It has its roots in over capacity.....




Too many steel mills have been built, too many plants making cars, computer chips or solar panels, too many ships, too many houses. They have outstripped the spending power of those supposed to buy the products. This is more or less what happened in the 1920s when electrification and Ford’s assembly line methods lifted output faster than wages. It is a key reason why the Slump proved so intractable, though debt then was far lower than today.

.....

Professor James Livingston at Rutgers University says we have been blinded by Milton Friedman, who convinced our economic elites and above all Fed chair Ben Bernanke that the Depression was a “credit event” that could have been avoided by a monetary blast (helicopters/QE). Under that schema, we should be safely clear of trouble before long this time.

I'm not listening to any more nutters.

There are massive and growing deflationary forces on produced goods arising from China resulting in excessively loose monetary policy in the West. We are destined to continue suffering deflation of the general price level in manufactures and serial bubbles and busts in stocks, commodities and property until the average Chinese has the purchasing power of a Westerner.
Be prepared for currency volatility and trade wars.

There is an elephant in the room pretending to be a black swan. Can you see it?

#15 DrBubb

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Posted 19 August 2009 - 01:19 AM

Good article.
Here's more from Evans-Prichard...

The sugar rush of fiscal stimulus in the West will subside within a few months. Those “cash-for-clunkers” schemes that have lifted France and Germany out of recession – just – change nothing. They draw forward spending, leading to a cliff-edge fall later. (This is not a criticism. Governments did the right thing given the emergency). The thaw in trade finance has led to a V-shaped rebound in East Asia as pent up exports are shipped. But again, nothing fundamental has changed. Deficit countries in the Anglo-Sphere, Club Med, and East Europe are all on diets. People talk too much about “liquidity” – a slippery term – and not enough about concrete demand.

The "concrete demand" is not there, and will not be there, since Western consumers must reduce debt, and rebuild savings.

Professor James Livingston at Rutgers University says we have been blinded by Milton Friedman, who convinced our economic elites and above all Fed chair Ben Bernanke that the Depression was a “credit event” that could have been avoided by a monetary blast (helicopters/QE). Under that schema, we should be safely clear of trouble before long this time.

Mr Livingston’s “Left-Keynesian” view is that a widening gap between rich and poor in the 1920s incubated the Slump. The profit share of GDP grew: the wage share fell – just as now, in today’s case because globalisation lets business exploit “labour arbitrage” by playing off Western workers against the Asian wages. The rich do not spend (much), they accumulate capital. Hence the investment bubble of the 1920s, even as consumption stagnated.


He's right about the gap, and the big gap is between those who have savings, and those who do not, and have relied on credit.

Those who are betting on savings rich Asia, are likely to gain wealth, while those betting on the zombie industries of teh west will lose wealth. Unfortunately western governments are taking a huge on its zombies. They will destroy public wealth
The market is "bipolar", swinging back and forth from a focus on Inflation to Deflation. Bet on swings; and stay flexible. What are bipolar markets? See: http://tinyurl.com/GEI-Manix

#16 DrBubb

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Posted 19 August 2009 - 01:29 AM

Manic Swings thinking seems to get to the right answers more quickly... quicker even than Taib

"The Tumor is still in the system," says Taib.
"The leaders are not dealing with the real problem."
"Debt is higher, while employment is down."
"The Obama administration has been rewarding failure... Bernanke supervised the build-up of risk."

Videos: Tumor is still in the system - Nassim Nicholas Taleb
#1 ::
#2 ::

Taleb doesnt say enough about the Real problems : "the dependence on debt needs to be changed,
and so does the asymmetrical payoffs to banks." That's fine, but it doesnt go far enough.

He doesnt talk about the imbalance between the savings and consumer countries, and the imbalance
in exchange rates
The market is "bipolar", swinging back and forth from a focus on Inflation to Deflation. Bet on swings; and stay flexible. What are bipolar markets? See: http://tinyurl.com/GEI-Manix

#17 hotairmail

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Posted 19 August 2009 - 08:41 AM

QUOTE (DrBubb @ Aug 19 2009, 02:19 AM) <{POST_SNAPBACK}>
Mr Livingston’s “Left-Keynesian” view is that a widening gap between rich and poor in the 1920s incubated the Slump. The profit share of GDP grew: the wage share fell – just as now, in today’s case because globalisation lets business exploit “labour arbitrage” by playing off Western workers against the Asian wages. The rich do not spend (much), they accumulate capital. Hence the investment bubble of the 1920s, even as consumption stagnated.[/i][/color]

He's right about the gap, and the big gap is between those who have savings, and those who do not, and have relied on credit.


This is something else I have been pondering. Whilst people go on about exponentially growing debt - well the functioning of FRB system means that all that extra debt also gets created as deposits. So for every new loan, someone somewhere will accumulate more money. This money then bids up assets to an even higher level of on paper wealth.

So if there is more debt there is also a greater concentration of wealth as the money supply grows. And the greater the disparity between rich and poor.

If you don't want to continue growing the money supply, net debtors must be given the ability to gain money from net creditors some other way - whether by trade or forcible reallocation thru the tax system or default.

This even extends to the China issue - if they want the value of the $ to be maintained and not inflated away, then they will have to trade with America. And I don't mean snapping up resources and industries that take away their ability to repay their debts.

Clearly we are in a position right now where BALANCE in the economy is completely blown apart. And perhaps some of the clues always were there by the advent of really super rich individuals and how much money they had - balanced by hugely indebted people on the other side of the equation. Globalisation worked in their favour because they were able to avoid the normal reallocation method of tax.
I'm not listening to any more nutters.

There are massive and growing deflationary forces on produced goods arising from China resulting in excessively loose monetary policy in the West. We are destined to continue suffering deflation of the general price level in manufactures and serial bubbles and busts in stocks, commodities and property until the average Chinese has the purchasing power of a Westerner.
Be prepared for currency volatility and trade wars.

There is an elephant in the room pretending to be a black swan. Can you see it?

#18 hotairmail

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Posted 19 August 2009 - 11:10 AM

german ppi -7.8% yoy

http://www.ft.com/cm...144feabdc0.html

German data fuel deflation fears

Published: August 19 2009 11:32
German producer prices have recorded their largest year-on-year fall since the second world war, highlighting the weakness of inflationary pressures across Europe.

Prices of industrial products were 7.8 per cent lower in July than 12 months earlier, the steepest such fall since records began in 1949, the German federal statistics office reported.




I'm not listening to any more nutters.

There are massive and growing deflationary forces on produced goods arising from China resulting in excessively loose monetary policy in the West. We are destined to continue suffering deflation of the general price level in manufactures and serial bubbles and busts in stocks, commodities and property until the average Chinese has the purchasing power of a Westerner.
Be prepared for currency volatility and trade wars.

There is an elephant in the room pretending to be a black swan. Can you see it?

#19 DrBubb

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Posted 19 August 2009 - 11:34 AM

QUOTE (hotairmail @ Aug 19 2009, 04:41 PM) <{POST_SNAPBACK}>
This is something else I have been pondering. Whilst people go on about exponentially growing debt - well the functioning of FRB system means that all that extra debt also gets created as deposits. So for every new loan, someone somewhere will accumulate more money. This money then bids up assets to an even higher level of on paper wealth.

So if there is more debt there is also a greater concentration of wealth as the money supply grows. And the greater the disparity between rich and poor.


What we have been seeing is the wealth accumulates in the East, and with the upper 1-5%, but falls for the average guy,
who is in denial, and strives to maintain his former lifestyle, or "keep up with the Jones" or his aspirations, by borrowing more.
In fact, if he reduced his lifestyle (below what he could afford) he could continue to grow his wealth, as many GEI-ers have
been able to do,

So do you blame "the system" for spiking their aspirations, or themselves for being irresponsible and living too well?

QUOTE (hotairmail @ Aug 19 2009, 04:41 PM) <{POST_SNAPBACK}>
If you don't want to continue growing the money supply, net debtors must be given the ability to gain money from net creditors some other way - whether by trade or forcible reallocation thru the tax system or default.


Alternatively, they must reign in their livings standards NOW - finally! - and learn to live with their reduced circumstances.

QUOTE (hotairmail @ Aug 19 2009, 04:41 PM) <{POST_SNAPBACK}>
This even extends to the China issue - if they want the value of the $ to be maintained and not inflated away, then they will have to trade with America. And I don't mean snapping up resources and industries that take away their ability to repay their debts.

Clearly we are in a position right now where BALANCE in the economy is completely blown apart. And perhaps some of the clues always were there by the advent of really super rich individuals and how much money they had - balanced by hugely indebted people on the other side of the equation. Globalisation worked in their favour because they were able to avoid the normal reallocation method of tax.


We saw this problem in the old Latin American Debt crisis of the 1970's. The LDC's had accumulated more debt than they
could service (like America.) Ultimately, the solution was to Brady-ise the debt, by converting it into bonds whose principal
was backed by US dollar zeros, with the interest being backed by the LDC's obligation. And this Brady bond debt could then
be swapped for equity in certain projects within the country. Usually, the new project, would be given some new money
by a foreign lender to compliment the debt that was swapped for equity.

I see this same solution being used by China. But we are years away from the realisation that such a drastic solution is
needed. And the US would not want to see its debt denominated in Rmb, and back by Chinese government bonds.
Another 3-5 years of wealth reduction will be needed in the US before this sort of realisation can take root.

It is not the only solution, but it is one that has worked before,




The market is "bipolar", swinging back and forth from a focus on Inflation to Deflation. Bet on swings; and stay flexible. What are bipolar markets? See: http://tinyurl.com/GEI-Manix

#20 hotairmail

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Posted 19 August 2009 - 12:47 PM

Are we entering a deflationary swing in sentiment right now - 10 year treasury yields trending down of late and gapping down today.

Thoughts appreciated Dr Bubb.






I'm not listening to any more nutters.

There are massive and growing deflationary forces on produced goods arising from China resulting in excessively loose monetary policy in the West. We are destined to continue suffering deflation of the general price level in manufactures and serial bubbles and busts in stocks, commodities and property until the average Chinese has the purchasing power of a Westerner.
Be prepared for currency volatility and trade wars.

There is an elephant in the room pretending to be a black swan. Can you see it?




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