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EJ
04-27-07, 07:30 PM
http://www.itulip.com/images/CJLRRACC.jpgSell Everything

Move to Bonds and Cash

That is essentially the message in Jeremy Grantham's letter to portfolio managers today. The only assets that make sense to hold now are cash and sovereign debt. However, if you are a portfolio manager, career risk prevents you from following this advice to a tee.
All the World's a Bubble (http://biz.yahoo.com/ts/070427/10353243.html?.v=3)
Friday April 27, 2007 (TheStreet.com)

While euphoria sweeps stock markets here and worldwide, there are at least a few voices of dissent.

One, unsurprisingly, is legendary value investor Jeremy Grantham -- the man Dick Cheney, plus a lot of other rich people, trusts with his money. Grantham, chairman of Boston firm Grantham Mayo Van Otterloo, has been a voice of caution for years. But he has upped his concerns in his latest letter to shareholders. Grantham says we are now seeing the first worldwide bubble in history covering all asset classes.

Everything is in bubble territory, he says.

Everything.

The bursting of this bubble will be across all countries and all assets.' -- Jeremy Grantham
AntiSpin: We got hold of the full letter and it's distinctly iTulipy. He talks about bubbles, such as in private equity, how hedge funds overcharge for managing mundane asset classes (see Most Hedge Funds Suck (http://www.itulip.com/forums/showthread.php?t=733)), and so on, and what will happen when they inevitably turn turtle. The letter is discussed in the iTulip Select forums in the context of Too Many Dollar Bears (http://www.itulip.com/forums/showthread.php?t=1271)?

We also received an update from our intrepid Real DOW analyst (http://www.itulip.com/forums/../realdow.htm) who gives us his take on US home prices. And it ain't pretty.


http://www.itulip.com/images/newHousData.gif


S&P/C-S 10 is the S&P Case-Shiller (C-S) home price index for 10 largest cities, released monthly, plotted on a real (inflation-adjusted) basis. The last datum was released 4/24 for the February 2007 number–actually a 3 month moving average, thus representing a Dec 2006 to Feb 2007 average. To get the real number, the C-S index is divided by the average CPI-U for the same three month period. The data are then scaled to a max. of 100.

S&P/C-S 20 is the same analysis applied to the 20 largest cities, and S&P/C-S US to home prices nationally and based on quarterly data.

IrrExubRJS US is based on Shiller’s real annual data, except for 2006 which is an estimation and explained here. (http://homepage.mac.com/ttsmyf/RD_RJShomes_PSav.html)

Meanwhile...
US posts weakest growth in four years (http://www.smh.com.au/news/Business/US-Q1-GDP-growth-weakest-in-four-years/2007/04/27/1177459988888.html)
April 27, 2007

US economic growth during the first quarter was the weakest in four years, hurt by a slumping housing market and deteriorating international trade, the Commerce Department reported.

At the same time, one price gauge in the GDP report posted its biggest jump in 16 years, sending a jolt of fear through financial markets that official interest rates will stay high.
So far, our now five year old prediction of the bubble cycle economy ending in an inflationary recession appears to be playing out, except more rapidly than expected. The housing bubble decline driven recession, scheduled for Q4 2007 (http://www.itulip.com/forums/showthread.php?t=550), is arriving ahead of schedule, as is the inflation, which is supposed to wait until the dollar depreciates further. If our Real DOW friend's analysis is correct, we are in very early innings of the process. Given where we're starting from, maybe we're in for the Wile E. Cayote scenario: after you strap on the skies with the rocket pack on your back and you fly off the cliff past the Road Runner, you fall 1,000 feet to the ground, then the anvil falls on you, then the rocket hits the cliff and the cliff falls on you.

Grantham letter is analyzed for iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032) subscribers here (http://www.itulip.com/forums/showthread.php?t=1282).

jk
04-27-07, 08:15 PM
"In my previous commentary I concluded that Ka-Poom is not tradable. It may be too short. In fact, the disinflation may have even already come and gone. I only know how to confirm the begining of the Poom, not the end of the Ka." ej 9/19/06

Sapiens
04-27-07, 09:00 PM
Hold -Printed currency, not "cash" in a bank account.

Hold Physical Gold and Silver

Hold T-bills, not bonds, not CDs.

Wait for those in panic to seek safety, pick them off when you think is right.

raja
04-27-07, 09:40 PM
The only assets that make sense to hold now are cash and sovereign debt. Did Grantham say what kind of cash and sovereign debt?

What about gold?

If Poom is is a period of high inflation, I would think cash would be exactly the wrong place to be . . . . or maybe Grantham's thinking deflation?

jk
04-27-07, 09:55 PM
grantham is saying all asset classes - equities, commodities, real esate - are, globally, in a bubble. thus they will, at some point, sell-off. i.e. they will go down relative to cash. [have i finally got it, finster?]

Finster
04-27-07, 09:56 PM
http://www.itulip.com/images/CJLRRACC.jpgThat is essentially the message in Jeremy Grantham's letter to portfolio managers today. The only assets that make sense to hold now are cash and sovereign debt. However, if you are a portfolio manager, career risk prevents you from following this advice to a tee...

Problem is ... there is no such thing as being invested in nothing. Give your assets to the brotherhood ... take a vow of poverty ...

... doesn't matter; if you think holding cash is tantamount to investing in nothing, you have a rude awakening awaiting you ...

EJ
04-27-07, 10:31 PM
Problem is ... there is no such thing as being invested in nothing. Give your assets to the brotherhood ... take a vow of poverty ...

... doesn't matter; if you think holding cash is tantamount to investing in nothing, you have a rude awakening awaiting you ...
That's fine for you and I. But Grantham is writing to portfolio managers. They can't hold much cash for long, and I don't know of any that is ever 100% cash. They need to be invested.

grapejelly
04-27-07, 11:20 PM
Hold -Printed currency, not "cash" in a bank account.

Hold Physical Gold and Silver

Hold T-bills, not bonds, not CDs.


this is pretty much what I am doing except I also have some gold and silver mining stocks.

Jim Nickerson
04-28-07, 12:45 AM
Hold -Printed currency, not "cash" in a bank account.

Hold Physical Gold and Silver

Hold T-bills, not bonds, not CDs.

Wait for those in panic to seek safety, pick them off when you think is right.

Sapiens,

It strikes me as nuts for anyone to suggest to iTulip readers they should hold "printed currency" vs. "cash" in an interest bearing account.

It would be interesting to see you expound on the wisdom of your recommendation. I expect it has a lot of deep serious thought behind the notion, and I'd appreciate knowing your perspective.

Ed
04-28-07, 01:08 AM
Grantham says we are now seeing the first worldwide bubble in history covering all asset classes.
Everything is in bubble territory, he says.
Everything.
The bursting of this bubble will be across all countries and all assets.' -- Jeremy Grantham

Seriously concerning talk coming from that big a reputation! Makes one think of conserving!
I remembered this “Robert Rubin on relativity” and found it (WSJ 9/24/98, Asian contaigion):

Mr. Rubin, whose world view was shaped by decades at the investment bank of Goldman, Sachs & Co., counters the Vietnam analogy with one of his own: the 1973-74 stock-market decline that devastated Wall Street.
"The difference between the people who were smart and shrewd, and the people who weren't really smart and shrewd?" he says. "Those people who were really smart and shrewd lost a lot of money. The people who weren't really smart and shrewd got wiped out."
Success, he says, "meant that you managed extremely difficult forces effectively enough to ... come out the other end."

TIPS is the one sure USA ride to ‘come out the other end’

DemonD
04-28-07, 02:26 AM
Ed, great point. Let me be my stock-market blue-chip loving bull here for just one second:

My favorite cigarette selling stock appreciated 600% in the 1970's - and that was without any dividends or dividends reinvested, which they not only paid quarterly throughout the 70's but also increased their dividend every year. Other blue chip stocks also fared well assuming you chose wisely, for example your local favorite mega-international large-cap integrated oil company, or your toothpaste and soap selling company, or your blood pressure medication selling company, or your band-aid and diaper and shampoo selling company.

In other words if you were just the regular coffee-can LTBH DRiP investor you would have done pretty well in the 1970's if you had chosen relatively wisely and not scared yourself or tried to chase up the market with your money.

Also the point about T-bills. Correct me if I'm wrong but T-bills are technically backed by the US government where cash is technically a "federal reserve note" meaning that T-bills would have stronger weight than cash right?

tree
04-28-07, 07:20 AM
Should I feel better? A few mornings ago I awoke feeling foolish for having cashed out my small pension, which was professionally managed, and rolling it into cash in my IRA, managed by scaredy-bear moi. I was concerned about the stability of my former employer, and the possibility the pension would go to the federal PBGC, where I couldn't get at my money until I turned 65. (If the cancer returns before then, I want to travel the world 'til the money and I am gone!) Of course, once I cashed out the pension, I worried that I wasn't taking advantage of traditional investments (stocks, bonds, etc.), not to mention a pro doing the work. A dear friend, a financial planner, stands ready to advise on investing, but every time I get close to doing it, I freeze and decide to stay in cash. Being a baby iTuliper ain't easy! :confused:

Sapiens
04-28-07, 08:20 AM
Sapiens,

It strikes me as nuts for anyone to suggest to iTulip readers they should hold "printed currency" vs. "cash" in an interest bearing account.

It would be interesting to see you expound on the wisdom of your recommendation. I expect it has a lot of deep serious thought behind the notion, and I'd appreciate knowing your perspective.

http://www.ces.org.za/docs/NofM.pdf

Finster
04-28-07, 09:28 AM
That's fine for you and I. But Grantham is writing to portfolio managers. They can't hold much cash for long, and I don't know of any that is ever 100% cash. They need to be invested.

My point is more conceptual than substantive. Simply that when you own cash, you are invested in a security. A debt obligation of the Federal Reserve. As you noted in another thread, you can view it "... as a common share in USA, Inc.". Of course cash happens to be the most liquid asset, and it happens to be the unit we use to measure the value of other assets, but that latter property leads us to mistakenly believe that when we are in cash, we are not invested in anything. That somehow we have removed all risk from our portfolio. But since cash itself is an asset, you can't actually sell everything, you can only trade other assets for cash.

So without taking issue with the merits of Grantham's views (he's a pretty smart guy, and I wouldn't do so lightly ;)), he seems to be saying that cash will outperform all other asset classes. At least in the Finsterish lexicon, he is calling for deflation.

The implication for the investor is not so esoteric, however. He has to ask himself what his position on the value of the currency is. Many here are quite bearish, for example, on the value of the US dollar, and not without reason. It has been depreciating in value for most of its existence, and seems unlimited in supply. A large short position has been built up by the US government and homeowners across the country, which puts upward pressure on its value. But the helicopters are loaded and ready, and an ace pilot is in charge at the Federal Reserve.

Sapiens
04-28-07, 09:36 AM
At least in the Finsterish lexicon, he is calling for deflation.

Thumbs up!

Jim Nickerson
04-28-07, 10:10 AM
Hold -Printed currency, not "cash" in a bank account.

Hold Physical Gold and Silver

Hold T-bills, not bonds, not CDs.

Wait for those in panic to seek safety, pick them off when you think is right.



It strikes me as nuts for anyone to suggest to iTulip readers they should hold "printed currency" vs. "cash" in an interest bearing account.

It would be interesting to see you expound on the wisdom of your recommendation. I expect it has a lot of deep serious thought behind the notion, and I'd appreciate knowing your perspective.

To which Sap. answers

[quote=Sapiens] http://www.ces.org.za/docs/NofM.pdf [/Sapiens]

Sapiens,

You've got to be kidding, an answer of 122 page PDF. Are you not capable of personally writing what it is that makes you suggest anyone with more than 1K in cash ought to be holding the bills rather than hold such in an interest bearing account?

I think anyone who would take all his cash and hold it outside an interest bearing account would qualify as a fool.

Jim Nickerson
04-28-07, 10:23 AM
Someone in a message about something else suggested that perhaps some of the more bearish readers are expecting an extended run on the banks.

To my simple thinking a bank and a brokerage account are not the same thing, but perhaps to the more learned there is no difference. Would cash in a brokerage account not be safe if there were to be a run on banks?

I personally only have $45 in a real bank account, and only because of being too lazy to close the account.

Sapiens
04-28-07, 10:24 AM
To which Sap. answers

[quote=Sapiens] http://www.ces.org.za/docs/NofM.pdf [/Sapiens]


I think anyone who would take all his cash and hold it outside an interest bearing account would qualify as a fool.

A fool is as a fool does....

Finster
04-28-07, 10:33 AM
To which Sap. answers


http://www.ces.org.za/docs/NofM.pdf

Sapiens,

You've got to be kidding, an answer of 122 page PDF. Are you not capable of personally writing what it is that makes you suggest anyone with more than 1K in cash ought to be holding the bills rather than hold such in an interest bearing account?

I think anyone who would take all his cash and hold it outside an interest bearing account would qualify as a fool.

FWIW, I agree there is merit in holding at least some of one's cash in the form of printed currency. Bank accounts are insured by the FDIC, but the FDIC has only a small fraction of the resources that would be needed to cover the bank accounts it insures. If there were a systemic problem with the banks, it would likely take an act of Congress to bail them out.

This is not all that hypothetical. Remember the savings and loan debacle of the 1980s (http://en.wikipedia.org/wiki/Savings_and_Loan_crisis)? The S&Ls were insured by the FSLIC, just as the banks are by the FDIC. Depositors may get their money back, but they may have to wait a while for it. While you're waiting, that printed currency could come in very handy.

Jim Nickerson
04-28-07, 10:52 AM
FWIW, I agree there is merit in holding at least some of one's cash in the form of printed currency. Bank accounts are insured by the FDIC, but the FDIC has only a small fraction of the resources that would be needed to cover the bank accounts it insures. If there were a systemic problem with the banks, it would likely take an act of Congress to bail them out.

This is not all that hypothetical. Remember the savings and loan debacle of the 1980s (http://en.wikipedia.org/wiki/Savings_and_Loan_crisis)? The S&Ls were insured by the FSLIC, just as the banks are by the FDIC. Depositors may get their money back, but they may have to wait a while for it. While you're waiting, that printed currency could come in very handy.

So Finster, do you see any difference between having cash in a brokerage money market fund, I personally use Schwab, and a bank's money market fund? I think Schwab has about 4 million of insurance on every account, if that actually means anything.

Jim Nickerson
04-28-07, 10:53 AM
[quote=Jim Nickerson]To which Sap. answers



A fool is as a fool does....

I take it that you are not capable of personally explaining your recommendation. Good enough.

javacat97
04-28-07, 11:14 AM
Didn't I hear that the ultimate advice of this news letter was to remain invested as the final run of the bubble produces outsized gains? (Not sell everything)

Ed
04-28-07, 11:27 AM
You need to try harder with your reckoning. Comparing US$ from quite different times is NOT meaningful because the purchasing power of the US$ has varied a LOT. Look at
http://homepage.mac.com/ttsmyf
and note your 'the seventies' between 1966 and 1982.

Cash is US$ (future purchasing power uncertain). Treasury bills, notes, bonds, etc. (EXCEPT FOR TIPS) promise a specified stream of future payouts in cash/US$. TIPS promise a specified stream of future payouts in consumer purchasing power -- i.e., future payouts' US$ are uncertain, but the consumer purchasing power of those future payouts' US$ IS CERTAIN.
So, unless you use US$ as wallpaper, ...

Finster
04-28-07, 11:47 AM
So Finster, do you see any difference between having cash in a brokerage money market fund, I personally use Schwab, and a bank's money market fund? I think Schwab has about 4 million of insurance on every account, if that actually means anything.

There are definite differences. Bank accounts are generally covered by FDIC insurance. Brokerage accounts are usually covered by SIPC and other insurance. You'd need to check the details of the coverage for a full explanation, but cash is generally covered only if it's being used for investing and trading.

A money market fund is not the same as a money market account. A bank money market account is usually FDIC-insured. A money market fund is simply a mutual fund that invests in short term credits and is managed so that its net asset value stays at $1 per share. There is no guarantee that it will. Money funds can and do occasionally "break the buck".

Not all money market funds are alike, either. Most stick with fairly high quality credit, but some restrict their assets to short-term treasuries like TBills. These latter are arguably safer than most banks.

The point, however, is not simply whether you would get your money back. You probably would. The question is what do you do while you're waiting. That's where the cash under the mattress comes in.

Sapiens
04-28-07, 12:06 PM
The point, however, is not simply whether you would get your money back. You probably would. The question is what do you do while you're waiting. That's where the cash under the mattress comes in.

Finster,

Your pedagogical skills are superb, when you are not showing off.

-Sapiens

Jim Nickerson
04-28-07, 12:07 PM
There are definite differences. Bank accounts are generally covered by FDIC insurance. Brokerage accounts are usually covered by SIPC and other insurance. You'd need to check the details of the coverage for a full explanation, but cash is generally covered only if it's being used for investing and trading.

A money market fund is not the same as a money market account. A bank money market account is usually FDIC-insured. A money market fund is simply a mutual fund that invests in short term credits and is managed so that its net asset value stays at $1 per share. There is no guarantee that it will. Money funds can and do occasionally "break the buck".

Not all money market funds are alike, either. Most stick with fairly high quality credit, but some restrict their assets to short-term treasuries like TBills. These latter are arguably safer than most banks.

The point, however, is not simply whether you would get your money back. You probably would. The question is what do you do while you're waiting. That's where the cash under the mattress comes in.

Thanks, Finster. I appreciated before asking some of these differences, and I did confuse money funds and money accounts.

Some serious collapse, an example of which I cannot think, could realize the issue of what one does while waiting. I am such a pessimist, but despite that I have a serious reservations that a point could come such that I could not access my funds for other than short periods of time. How much does one hold in gold or bills to cover one's ass, it could be days, weeks, or even months in a worst case scenario? That is a rhetorical question.

bart
04-28-07, 12:26 PM
Just a mild observation...

In a thread entitled Sell Everything, there has been no mention made of shorting or using any of the shorting funds or ETFs designed for it or even the use of put options.

c1ue
04-28-07, 01:11 PM
Hold -Printed currency, not "cash" in a bank account.

Hold Physical Gold and Silver

Hold T-bills, not bonds, not CDs.

Wait for those in panic to seek safety, pick them off when you think is right.

The option I have chosen is to move money offshore into ultra-conservative banks in other countries.

I figure the ATMs will work no matter what, and furthermore if there is a currency inflation of the US$ (accelerated beyond what has already happened), I can again experience the benefit as I did while in Japan in 1999 - 2002.

Japan, Switzerland, and a little in Russia (for admittedly scarier looking ruble exposure).

As for FDIC - I thought I saw a paper not too long ago where an analysis of FDIC showed any major banking crisis would run the program out of money in 6 months. This is just like the pension program, only if the overall economy and government are in trouble there will be nothing left to add in.

At least, not until inflation has spoiled most of the 'insurance'.

Jim Nickerson
04-28-07, 01:16 PM
Just a mild observation...

In a thread entitled Sell Everything, there has been no mention made of shorting or using any of the shorting funds or ETFs designed for it or even the use of put options.

Bart, that is a good observation, and to offer a possible reason: perhaps most people are sucked into believing the market will continue to go up--which it may do and do. I got out of some long leveraged ETF's 9 market days ago, and wrote somewhere here, that my doing so indicated that the market had one more reason to keep going up, which it has done.

Relying upon memory I was in some short funds back in Nov. 1999 and I got killed in them.

It would seem wise to me for there to be some reversal in the upward movement of the markets before anyone gets seriously short, though some of the posted asset allotment accounts have established short positions.

Another mild observation, of all the people who contribute (and frequently) here, I would say you write the least about how you may be positioned. Why don't you join the "game" and put up an asset allotment in that thread?

I note there are some others who speak alot about how they think one should be invested, but they have not put up asset allotments either, that is to say they have not put their monies where their mouths are.

vinoveri
04-28-07, 01:18 PM
Maybe once the trend is clearly down (or if you think you can time the market) - things have looked bearish for a while now and folks who've been shorting markets are probably a bit frustrated by now (and with a bit less $) ... the oft-quoted Keynsian poiny regarding how markets can remain irrational markets longer than one can remain solvent seems relevant.

That said, there are some great and leveraged ETFs for shorting the markets e.g., SDS, QID, DXG, are apparently supposed to return double the inverse of what the S&P 500, Nasdaq, and Dow Inds return respectively.
These funds can be traded in retirement accounts (brokerage IRAs) - and they effectively circumvent the rules prohibiting "selling on margin" in IRAs (although I suppose you could argue it's not really margin selling)

I would tread lightly shorting the market in the final stages of a bubble which could continue on for a while.

Jim Nickerson
04-28-07, 01:20 PM
The option I have chosen is to move money offshore into ultra-conservative banks in other countries.

I figure the ATMs will work no matter what, and furthermore if there is a currency inflation of the US$ (accelerated beyond what has already happened), I can again experience the benefit as I did while in Japan in 1999 - 2002.

Japan, Switzerland, and a little in Russia (for admittedly scarier looking ruble exposure).

As for FDIC - I thought I saw a paper not too long ago where an analysis of FDIC showed any major banking crisis would run the program out of money in 6 months. This is just like the pension program, only if the overall economy and government are in trouble there will be nothing left to add in.

At least, not until inflation has spoiled most of the 'insurance'.

If it is not too invasive a quesiton, how have you done that? and if you can answer as much detail as possible would be appreciated.

bart
04-28-07, 01:41 PM
It would seem wise to me for there to be some reversal in the upward movement of the markets before anyone gets seriously short, though some of the posted asset allotment accounts have established short positions.

Very much so - there must be a significant trend line break before shorting in my opinion. It actually did break in the early morning of 2/27 and I did establish short positions at that time.



Another mild observation, of all the people who contribute (and frequently) here, I would say you write the least about how you may be positioned. Why don't you join the "game" and put up an asset allotment in that thread?

I note there are some others who speak alot about how they think one should be invested, but they have not put up asset allotments either, that is to say they have not put their monies where their mouths are.

I'm sure you're not the only one who wonders why I don't talk about my portfolio and trades much, and haven't joined that asset allotment thread.

There are three primary reasons, the first being that most of my trades are in the futures markets and that thread precludes futures. I never have been much of a stock guy and only own a few mutual funds.

The second is that I don't want to be viewed as encouraging or promoting futures trading - they can be very dangerous to one's financial health if one isn't well educated and doesn't have good money and risk management skills, etc.

The third and probably most important is that mostly I'm a short term investor/trader. Very recently, it's not unusual for me to open a trade in the morning and exit near the close - like I did last Wednesday on the S&P. I just don't have the confidence needed to carry leveraged or highly leveraged positions overnight.
My average trade length during the last year or so is under two weeks too... and I also don't want to encourage that kind of trading. Even though I do pretty well with it, I'm in the definite minority.

Jim Nickerson
04-28-07, 01:52 PM
Very much so - there must be a significant trend line break before shorting in my opinion. It actually did break in the early morning of 2/27 and I did establish short positions at that time.




I'm sure you're not the only one who wonders why I don't talk about my portfolio and trades much, and haven't joined that asset allotment thread.

There are three primary reasons, the first being that most of my trades are in the futures markets and that thread precludes futures. I never have been much of a stock guy and only own a few mutual funds.

The second is that I don't want to be viewed as encouraging or promoting futures trading - they can be very dangerous to one's financial health if one isn't well educated and doesn't have good money and risk management skills, etc.

The third and probably most important is that mostly I'm a short term investor/trader. Very recently, it's not unusual for me to open a trade in the morning and exit near the close - like I did last Wednesday on the S&P. I just don't have the confidence needed to carry leveraged or highly leveraged positions overnight.
My average trade length during the last year or so is under two weeks too... and I also don't want to encourage that kind of trading. Even though I do pretty well with it, I'm in the definite minority.

Thanks, Bart, for showing your colors. Why don't you put up a "play-like" asset allocation, perhaps that is what the others are anyway. I'm not trying to create work for you.

One other point, were the short positions on 2/27 a short-term position or are you still in them?

bart
04-28-07, 02:12 PM
Thanks, Bart, for showing your colors. Why don't you put up a "play-like" asset allocation, perhaps that is what the others are anyway. I'm not trying to create work for you.

One other point, were the short positions on 2/27 a short-term position or are you still in them?


I thought about putting up a "play" allocation but not only would it not be a fair picture of my approach and require "spare" time, some (not iTulip posters but folk on other boards) would undoubtedly use it as flame material.

Half of my 2/27 short position was closed on 2/27 itself after that huge spike down at around 2:30PM EST, and the other half was closed about a week later. Just in case it wasn't obvious, the trade last Wednesday was on the long side.

Jim Nickerson
04-28-07, 02:19 PM
I thought about putting up a "play" allocation but not only would it not be a fair picture of my approach and require "spare" time, some (not iTulip posters but folk on other boards) would undoubtedly use it as flame material.

Half of my 2/27 short position was closed on 2/27 itself after that huge spike down at around 2:30PM EST, and the other half was closed about a week later. Just in case it wasn't obvious, the trade last Wednesday was on the long side.

Gut genug.

Sapiens
04-28-07, 02:44 PM
I figure the ATMs will work no matter what,


http://news.bbc.co.uk/2/hi/business/1954363.stm

Christoph von Gamm
04-28-07, 05:07 PM
Didn't I hear that the ultimate advice of this news letter was to remain invested as the final run of the bubble produces outsized gains? (Not sell everything)
Key is that the bubble implosion might hit you in many ways, so one of the rules is to stay diversified by:
1. Asset class
2. Location

A good mix might be to stay diversitfied with:

*30% Cash - both in current accounts or money market accounts on two different countries and currencies (i.e. Euro and Swiss Francs, 20% home currency, 10% foreign currency)
*30% gold - as gold certificaties - this will do until the gold price reaches a certain trigger point - say $ 2'000,- After this trigger point the certificates holder guarantee should be revisited and maybe converted into real hard "20 grams per cube centimetre" gold.
*30% commodities
*10% a long running put on a major index, i.e. the Dow or Dax. Here the put goes up if the market goes down. If you take the right gear here, this will be enough to balance out the rest. If the market goes up, proably the rest goes up as well, maybe a bit less and your 10% (which you might lose out) will be covered by the gains of the gold and commodities.


Now you are at 100% of your fast disposible moneys. On top of this your house(s) should be halfways debt-free, means not leveraged to more than 65% to be on the safe side.

EJ
04-28-07, 06:45 PM
My point is more conceptual than substantive. Simply that when you own cash, you are invested in a security. A debt obligation of the Federal Reserve. As you noted in another thread, you can view it "... as a common share in USA, Inc.". Of course cash happens to be the most liquid asset, and it happens to be the unit we use to measure the value of other assets, but that latter property leads us to mistakenly believe that when we are in cash, we are not invested in anything. That somehow we have removed all risk from our portfolio. But since cash itself is an asset, you can't actually sell everything, you can only trade other assets for cash.

So without taking issue with the merits of Grantham's views (he's a pretty smart guy, and I wouldn't do so lightly ;)), he seems to be saying that cash will outperform all other asset classes. At least in the Finsterish lexicon, he is calling for deflation.

The implication for the investor is not so esoteric, however. He has to ask himself what his position on the value of the currency is. Many here are quite bearish, for example, on the value of the US dollar, and not without reason. It has been depreciating in value for most of its existence, and seems unlimited in supply. A large short position has been built up by the US government and homeowners across the country, which puts upward pressure on its value. But the helicopters are loaded and ready, and an ace pilot is in charge at the Federal Reserve.
For clarification, by "deflation" he means, and I mean, a debt deflation.

Whose debt? Everyone's, including the US government's. But it is the form of the deflation of the US government's debt that bears upon the question of the value of the dollar, "money," and "cash."

One of the potential avenues for a US government debt deflation is default, the other is currency depreciation. The iTulip take for quite a few years (e.g., our mock 2001 US bankrupcy filing (http://www.itulip.com/bankrupt.htm) -- Ha-ha!) is that the US is far more likely to choose debt deflation via the latter method than the former, as the latter is painful yet recoverable (see Can the US Have a Peso Problem? (http://www.itulip.com/faceofinflation.htm)) while the former tends to lead to mass unemployment, and severe self-reinforcing economic and political crisis. The "Poom" event versus a "Poom" event is no mere post crash reflation but a one time write-off of US government debt via dollar depreciation.

We'll try to interview Grantham directly, but I have spoken with enough professional money managers over the years to conclude that none of them have debt deflation via currency depreciation on the radar. Jim Rogers has discussed it with me, but he's not a money manager. The most extreme financial markets condition that can be expressed in the context of a professional money manager's letter to clients is the kind of post-bubble panic and rush to liquidity that Grantham is talking about in his April letter. You won't see the potential for a US currency crisis discussed even in the Twin Focus client letters (http://www.itulip.com/images/twinfocusheading.jpg), and non-traditional crisis events are part of their model. (We picked them as a sponsor for a reason.)

The traditional crisis model is the standard script: risky emerging market assets sell off first, then less risky exotic domestic assets, cascading all the way down the risk ladder to US bonds, the "safest" of all. A lot of rarefied paper gets dumped for good old red, white, and blue bonds.

A scenario that includes a rush to non-US bonds and hard assets–capital fight from the US–does not fit the standard crisis model, and you will not hear Grantham talk about gold. The reason is simple: it's not that professional money managers cannot imagine it happening, but if it does happen it may not be the end of the world, but at least for a time it will be the end of their world. So why propose it? Under what conditions is that scenario relevant in the context of that client relationship? Think about it. Grantham is telling his portfolio manager clients that the most rational thing they can do is go to cash–but they can't do that. Such an event will be a boon for the hard assets crowd, however.

Think about it this way. Most professional money managers kept their clients in the stock market in 2000, and many lost a bundle. Guess where they are keeping their clients today? To Grantham's credit, he is talking them out of risky assets, now in fashion, and into relatively safe ones. But how will they be regarded if the US defaults on its foreign debt via depreciation? January 1999 we called for a 87% decline in the NASDAQ (http://www.itulip.com/compare.htm). In 2001 years we predicted a 50% decline in the dollar. The former turned out to be optimistic if you count all the companies that went out of business. The latter prediction may also turn out to be optimistic. If you believe that, do you want to hold a lot of long term US bonds? TIPS if you trust the house to index the resulting inflation accurately, T-bills otherwise.

Grantham's letter analyzed in detail over on the Select forums next week.

raja
04-29-07, 09:15 AM
If you believe that, do you want to hold a lot of long term US bonds? TIPS if you trust the house to index the resulting inflation accurately, T-bills otherwise. Long term bonds -- definitely not

TIPS -- Even if not indexed correctly, how far could it go without becoming obvious fraud -- not too far, I suspect. In my opinion, it's a lot easier to get away with printing lots of dollars "in the national interest" than it is to fraudulently manipulate the CPI in an extreme way.
So even if TIPS pay off somewhat less than expected, TIPS owners would be still be relatively wealthy when compared to those who lost a huge percent of their wealth through stocks and dollar depreciation.

T-Bills -- Continually reinvesting short-term T-bills may have a similar effect as TIPS. The T-bill rate should rise with inflation because the government must pay ever-rising interest to get people to invest.

Gold -- In a dollar depreciation scenario, gold would seem to be a great investment, as long as it was possible to sell before the bubble collapsed. Since paper gold can be sold more rapidly than physical in a feverish bubble situation because of physical-gold-trading infrastructure limitations, gold ETFs and other easily traded paper gold would seem preferrable.

On the other hand, there are scenarios in which the value of gold could plummet. To hedge against this, TIPS and T-bills might be effective.

grapejelly
04-29-07, 09:56 AM
The current scheme is continual currency depreciation that is camouflauged by "good" CPI, "core rate" and "economic growth" numbers.

I expect this to continue and it could continue for much, much longer.

The trouble with "sell everything" is that you could sell everything five years too early.

OTOH, it could happen tomorrow.

I favor a smattering of junior mining stocks (combination of explorers and a few junior producers with big lottery ticket upside), 13 week t-bills, and mostly physical precious metals.

I cannot emphasize enough how important physical metal is.

That's because the real danger that few talk about is counter-party risk.

Paper PMs are a liability of someone else.

They are not really PMs.

Paper PM products can default. They can be seized. They are liabilities of someone else. They can seize up in the event of a systemic financial crisis.

The key to surviving a severe financial disaster is to anticipate counter party risk and take steps to avoid being ruined in the event there is a systemic blow-up of the financial system. And if there isn't, you still want to preserve your wealth and participate in a hoped-for upside.

Precious metals in your physical possession serve this purpose.

raja
04-29-07, 12:01 PM
I cannot emphasize enough how important physical metal is.
That's because the real danger that few talk about is counter-party risk.
Paper PM products can default. They can be seized. They are liabilities of someone else. They can seize up in the event of a systemic financial crisis.
The key to surviving a severe financial disaster is to anticipate counter party risk and take steps to avoid being ruined in the event there is a systemic blow-up of the financial system. And if there isn't, you still want to preserve your wealth and participate in a hoped-for upside.
Precious metals in your physical possession serve this purpose. Grapejelly,

I would like to believe in the worthiness physical gold, and once did. But when I thought through several future finacial scenarios, I changed my opinion.

It seems certain that in a scenario where fiat currency worldwide becomes worthless, gold would be desirable . . . along with seeds, guns and a willingness to shoot your starving neighbors. But I give it a less than 5% probability. Other than that dire scenario, I can't picture a situation in which physical gold is necessary or desirable.

Could you please describe what you think would have to occur for paper gold, like a gold ETF, to fail? What type of systemic "blow-up of the financial system" are you talking about?

In one type of "blow-up", where the dollar crumbles and stocks crash, I would think that paper gold companies would be especially flush, with money pouring in. Can you elaborate on the "counter-party risk"? Who is going to "seize" the paper gold?

Thanks.

FRED
04-29-07, 12:39 PM
Just a mild observation...

In a thread entitled Sell Everything, there has been no mention made of shorting or using any of the shorting funds or ETFs designed for it or even the use of put options.

Anyone know about this one?

Shorts junk bonds... AFBIX (http://finance.yahoo.com/q?s=AFBIX)

spunky
04-29-07, 12:42 PM
It doesnt have to blow up. I cant remember where I saw the article that showed there arent enough above ground silver depoists to cover the paper issued. Kinda like fractional reserve banking . Hardness is hard, paper is paper. I understand the problem of cashing in your gold/silver bullion, but that is something ya just gotta plan ahead for. Nice to wait for the " new " dollar to appear and stabilize. Unless we get a pandemic on top of a world/regional war I dont see a " doomsday" scenario either

Pilot Fish
04-29-07, 12:43 PM
Interesting. I was not at all familiar with Grantham or his views but I have been sitting in cash (including foreign) and sovereign bonds for some time now (with no regrets). And I didn't even consider it to be an "end of the world" allocation choice. Just seemed like a good, relatively safe idea. Nice to know I will eventually prove to be as smart (or equally misguided) as such an esteemed gentleman.

bart
04-29-07, 01:11 PM
Grapejelly,

I would like to believe in the worthiness physical gold, and once did. But when I thought through several future finacial scenarios, I changed my opinion.

It seems certain that in a scenario where fiat currency worldwide becomes worthless, gold would be desirable . . . along with seeds, guns and a willingness to shoot your starving neighbors. But I give it a less than 5% probability. Other than that dire scenario, I can't picture a situation in which physical gold is necessary or desirable.

Could you please describe what you think would have to occur for paper gold, like a gold ETF, to fail? What type of systemic "blow-up of the financial system" are you talking about?

In one type of "blow-up", where the dollar crumbles and stocks crash, I would think that paper gold companies would be especially flush, with money pouring in. Can you elaborate on the "counter-party risk"? Who is going to "seize" the paper gold?

Thanks.


Study the early 1930s, the late 1970s, and Argentina earlier this decade as just three possible scenarios.

Tet
04-29-07, 01:13 PM
Grantham has a minimum $5 million investment, now if you can get some of these $5 million accounts to put some stock in play and create some volume the next news letter will advise you to get back in. Somebodies got to sell in order to create a higher floor, getting the small investor to do so just won't get you anywhere near the volume you need to get this party started.

raja
04-29-07, 05:27 PM
Study the early 1930s, the late 1970s, and Argentina earlier this decade as just three possible scenarios. Bart,

Can you save me some research time with this . . . .
In any of the 3 scenarios you mentioned, did paper gold get seized or default?

Thanks

bart
04-29-07, 05:39 PM
Bart,

Can you save me some research time with this . . . .
In any of the 3 scenarios you mentioned, did paper gold get seized or default?

Thanks

Yes, and at other times and countries too.

grapejelly
04-29-07, 10:35 PM
you don't have to visualize the world blowing up to understand the value of physical gold.

Futures markets have defaulted in deliveries in the past. The settlement is in cash rather than in delivery of the contract.

The bond futures market faced default not long ago and was resolved through cash exchange rather than delivery.

If things get crazy, there will be no deliveries on precious metals futures exchanges. This is all to probable and it doesn't take an end-of-world scenario.

DemonD
04-30-07, 12:45 AM
I am going to relate one third-hand story on how gold was useful in a real-world scenario.

Czech Republic Circa 1939-1945. Read a story on another blog about how their grandfather stockpiled gold, and used it to get through that time, with enough left over at the end to send their father to university in Vienna after the War.

Was there anyone in the US using physical gold for currency for purchasing goods and services in the 1940's?

I wish I knew people that owned Mobil stock from the 1920's. Because I also read another story where a guy sold XOM and some of the original purchase dates were in the 1920's (and I'm going to take a wild stab and say those stock certificates were FAR more valuable in dollars than gold).

raja
04-30-07, 09:53 AM
Can you save me some research time with this . . . .
In any of the 3 scenarios you mentioned, did paper gold get seized or default?

Bart,

I have just spent a lot of time searching for an example of paper gold defaulting during the Argentina crisis . . . and I can't come up with anything.

Perhaps I wasn't clear on what I meant by "paper gold", and you thought I was referring to the Argentinian paper currency.

What I'm referring to by "paper gold" is something like a gold ETF.

Are there any examples of this type of paper gold defaulting or being seized that you know of?


Thanks

raja
04-30-07, 10:39 AM
you don't have to visualize the world blowing up to understand the value of physical gold.
Futures markets have defaulted in deliveries in the past. The settlement is in cash rather than in delivery of the contract.
The bond futures market faced default not long ago and was resolved through cash exchange rather than delivery.
If things get crazy, there will be no deliveries on precious metals futures exchanges. This is all to probable and it doesn't take an end-of-world scenario. Grapejelly,

When I was talking about "paper gold", I was thinking of gold ETFs. But as you point out, there are other forms of "paper gold" with apparently various levels of risk, and it was a mistake on my part to lump them all into one category. So permit me to clean up my terminology, and perhaps we can continue this discussion more fruitfully by narrowing the topic . . . .

Here's what worries me about physical gold . . . .

In the event of a gold bubble, I fear the price of gold could rise and fall so rapidly that the physical-gold-trading infrastructure could not handle the load. Physical gold traders could not possibly service the number of trades desired if the world suddenly decided that fiat currencies, or even just the dollar, were headed for the dumps. jk referred to an article which pointed out that even though gold soared to over 800 two decades ago, it plummeted back to the 600s in only a couple of days. I wouldn't want to be holding physical gold in that type of situation . . . .

In a bubble scenario such as the above, I'm assuming that a gold ETF could be traded very easily, and thus would be preferable to physical gold.
Trading is all electronic . . . and there's no phone calling for quotes or shipping required.

The only point of owning gold is to make a profit on it, right? This means it must go up in value, then be sold. If it can't be sold at a high price, then there's no advantage of having it, and even the risk of a great loss . . . and that's why I think a gold ETF is "safer" than physical gold.

However . . . there is one scenario in which is would be desirable to hold gold rather than sell it, and that's a situation of total societal collapse . . . and I give that a very small probability. Still, it might be good to have some physical gold for that unlikely eventuality. But in all other scenarios, I think it's necessary to be quite nimble to catch the moment, and a gold ETF is the only way I know to do that.

So, if we re-frame this discussion from talking about "paper gold" to talking only about a gold ETF, what would you think?
What are the dangers or downsides of a gold ETF. Under what types of scenarios would a gold ETF be subject to default.
During the bubble scenario I painted above, tons of money would be flowing into the gold ETF. Under this circumstance, there would be no fear of default. Of course, when the bubble starts to deflate rapidly, default could happen toward the end. . . but one has to get out "in time" anyway to make a profit . . . .

bart
04-30-07, 10:51 AM
Bart,

I have just spent a lot of time searching for an example of paper gold defaulting during the Argentina crisis . . . and I can't come up with anything.

Perhaps I wasn't clear on what I meant by "paper gold", and you thought I was referring to the Argentinian paper currency.

What I'm referring to by "paper gold" is something like a gold ETF.

Are there any examples of this type of paper gold defaulting or being seized that you know of?


Thanks

Yes, keep doing your research and do broaden your concept of paper gold.

The period starting with the corralito in Argentina and going on for many months (at a minimum) does fit your general parameters... and you're welcome to disagree or see something different, as I suspect you will.

grapejelly
04-30-07, 11:25 AM
Grapejelly,


Here's what worries me about physical gold . . . .

In the event of a gold bubble, I fear the price of gold could rise and fall so rapidly that the physical-gold-trading infrastructure could not handle the load. Physical gold traders could not possibly service the number of trades desired if the world suddenly decided that fiat currencies, or even just the dollar, were headed for the dumps. jk referred to an article which pointed out that even though gold soared to over 800 two decades ago, it plummeted back to the 600s in only a couple of days. I wouldn't want to be holding physical gold in that type of situation . . . .

Physical gold is precisely what I would want to be holding.

If you study the bubble more carefully you will note that the "over 800" time was extremely temporary. But the period when gold rose to $600 and $700 lasted quite a lot longer a time. If you were a gold investor you hopefully would have already taken a position and would be riding the thing up and if you felt things had changed you would have had a good deal of time to sell. Not at the precise top of course. But you would have done extremely well. As many people did.




In a bubble scenario such as the above, I'm assuming that a gold ETF could be traded very easily, and thus would be preferable to physical gold.
Trading is all electronic . . . and there's no phone calling for quotes or shipping required.

There won't be trading in these vehicles when things go crazy. The whole system will seize up.

You see, from your point of view it's paper. But read the prospectus. You buy paper but someone delegates the job to someone else of going out and buying all that silver or gold and warehousing it supposedly. When things go crazy there won't be anyone who can get the amount of physical to back that paper. Trading will stop. Liquidity will be gone.



The only point of owning gold is to make a profit on it, right? This means it must go up in value, then be sold. If it can't be sold at a high price, then there's no advantage of having it, and even the risk of a great loss . . . and that's why I think a gold ETF is "safer" than physical gold.

Wrong. The only point of owning physical is to preserve capital. It may or may not be profitable but it will at least keep up with real inflation and then some. And it is not as I call it "on the grid" so there is no counter party risk. It is isolated from the rest of the financial system that will at some point become highly contagious.



However . . . there is one scenario in which is would be desirable to hold gold rather than sell it, and that's a situation of total societal collapse . . . and I give that a very small probability.

I don't anticipate society collapsing. But I do anticipate the end of the current fiat regime and the beginning of a new one. Old dollars vs. new dollars. Lop a few zeros off, massive default, or a slow steady depreciation that is really not that slow.

I anticipate this happening in the next x years. What is x? Can't say. The blowoff period may correspond with a massive runup in commodity prices especially precious metals because there will be a flight into tangibles. A flight out of paper.




So, if we re-frame this discussion from talking about "paper gold" to talking only about a gold ETF, what would you think?
What are the dangers or downsides of a gold ETF. Under what types of scenarios would a gold ETF be subject to default.
During the bubble scenario I painted above, tons of money would be flowing into the gold ETF. Under this circumstance, there would be no fear of default. Of course, when the bubble starts to deflate rapidly, default could happen toward the end. . . but one has to get out "in time" anyway to make a profit . . . .

Wishful thinking. You cannot have both physical and paper. It's one or the other. There will be no money flowing to gold ETFs at some point because of massive "failure to deliver". To me the question is when, not if.

raja
04-30-07, 03:40 PM
Grapejelly,

Thanks for your response . . . .

I now see the root problem of our conflicting ideas about physical gold -- we are operating from different future scenarios, so naturally we come to different conclusions.

Let me see if I understand your scenario . . . .

You believe the whole financial system will seize up. You say, "I don't anticipate society collapsing. But I do anticipate the end of the current fiat regime and the beginning of a new one. Old dollars vs. new dollars. Lop a few zeros off, massive default, or a slow steady depreciation that is really not that slow."

If this scenario were to come to pass, we are in complete agreement -- physical gold is better.
If the stock market ends, gold ETFs default, and it's the "end of the current fiat regime", then, yes, physical gold will be the only form of "currency" worth having. This would also suggest that the government defaults on its bonds, or just prints its way out of its obligations until the dollar is worthless.
This is a scenario far worse than the Great Depression. If things get to that point, perhaps food and barter may be the currency of choice, not gold.

But here's where we differ . . . .

My bet is on what I understand as the iTulip Ka-Poom scenario, where things get bad, but not as bad as you envision.
In this scenario, ETFs still function and there is no concern about default. (In fact, America's Bubble Economy recommends buying gold ETFs, and Eric Janszen's chapter in that book describes gold ETFs as a convenient alternative to physical gold, "Investors can buy gold as shares of an ETF using their brokerage account . . . . No visits to the coin store to deal with quirky coin store owners or dealing with the high transaction costs of buying and selling gold over the Internet.")


You buy paper but someone delegates the job to someone else of going out and buying all that silver or gold and warehousing it supposedly. When things go crazy there won't be anyone who can get the amount of physical to back that paper. Trading will stop. Liquidity will be gone. . . . There will be no money flowing to gold ETFs at some point because of massive "failure to deliver".
This is an interesting point . . . but in thinking it through, here's what I came up with . . . .

For the trading system to work, it assumes that when there is someone who wants buy gold, there is also someone at the same time who wants to sell gold. If this were not the case, then a bubble couldn't form, because as you say, liquidity will be gone. Are you saying there will be no gold bubble?
Also, if trading stops, there is still gold in the ETFs vaults. Shareholders own that, and when things got going again, they would have that wealth.

Of course, someone could steal the ETF gold, or there could be fraudulent activity . . . that is a risk.
There is also a risk that if your scenario came about, and you started using your physical gold for purchases, you might get a visit in the night from some bad people who happened to observe or hear about your transaction.


The blowoff period may correspond with a massive runup in commodity prices especially precious metals because there will be a flight into tangibles. A flight out of paper. Commodity trading is paper trading, isn't it? People really don't collect their pork bellies at the end of the day.
If commodity prices and precious metals are still trading, why wouldn't metal ETFs be trading?

grapejelly
04-30-07, 04:25 PM
If this scenario were to come to pass, we are in complete agreement -- physical gold is better.
If the stock market ends, gold ETFs default, and it's the "end of the current fiat regime", then, yes, physical gold will be the only form of "currency" worth having. This would also suggest that the government defaults on its bonds, or just prints its way out of its obligations until the dollar is worthless.

I don't see the stock market as ending, but otherwise yes, this is what I see as the end game.



This is a scenario far worse than the Great Depression. If things get to that point, perhaps food and barter may be the currency of choice, not gold.

Well maybe. But this has happened in many countries many times before and things work out. I was in Argentina when something like this had just happened. The world continued. Things subsequently recovered.

What it does is really put a crimp on imports. It makes domestic production much more important. Ultimately it is very healthy because it could be the rebirth of American manufacturing and making things. But it is quite painful.


My bet is on what I understand as the iTulip Ka-Poom scenario, where things get bad, but not as bad as you envision.
In this scenario, ETFs still function and there is no concern about default. (In fact, America's Bubble Economy recommends buying gold ETFs, and Eric Janszen's chapter in that book describes gold ETFs as a convenient alternative to physical gold, "Investors can buy gold as shares of an ETF using their brokerage account . . . . No visits to the coin store to deal with quirky coin store owners or dealing with the high transaction costs of buying and selling gold over the Internet.")


Well, I don't agree with this. ETFs are good in fair weather but unproven in really stormy weather.

There have been many times when the vaults were opened to reveal...nothing. Don't be too sure that your shares are really backed by gold. They probably are right now, but they may not be and in the future you really don't know what will happen to them. And there is no redemption privileges. What is to keep the ETF from paying you off in Federal Reserve Notes?



Commodity trading is paper trading, isn't it? People really don't collect their pork bellies at the end of the day.
If commodity prices and precious metals are still trading, why wouldn't metal ETFs be trading?

If there are no deliveries then to my thinking it is a phony market, a bucket shop as they used to call it, and will eventually blow up. That is, deliveries will be made in worthless currency.

There are deliveries in real futures markets.

raja
04-30-07, 05:40 PM
this has happened in many countries many times before and things work out. I was in Argentina when something like this had just happened. The world continued. Things subsequently recovered.
Had the gold ETFs existed at that time, would they have run into the problems you are suggesting?
I don't think so . . . but I'm not knowledgable on this subject . . . .

There have been many times when the vaults were opened to reveal...nothing. Don't be too sure that your shares are really backed by gold. They probably are right now, but they may not be and in the future you really don't know what will happen to them. And there is no redemption privileges. What is to keep the ETF from paying you off in Federal Reserve Notes? Well, if there was a gold bubble, and I wanted to cash out at near the top, then they would be paying me in dollars . . . but it would be multiples of what I had originially invested, because gold would have kept up with inflation.
Also, I don't care if the vaults are empty, as long as I get out near the top. They are only going to be looking in the vaults when things start to crash, and I hope to be long gone by then . . . .

If there are no deliveries then to my thinking it is a phony market, a bucket shop as they used to call it, and will eventually blow up. That is, deliveries will be made in worthless currency.
It doesn't matter if it's a phony market, as long as I get out before it blows up.

Are you planning on holding your gold -- riding the bubble up, then riding it back down again? That doesn't sound good.

Or, do you think gold will always retain it's value in relation to the fiat currency? Historically, that hasn't always been the case.

Another thing to worry about: In the last chapter of America's Bubble Economy, the authors postulate that when the new economy arises from the old, gold will be forgotten, and will return to it's commodity value.
Just another possible future . . . .

bart
04-30-07, 06:02 PM
Are you planning on holding your gold -- riding the bubble up, then riding it back down again? That doesn't sound good.



And in the "Just another possible future . . . ." department, it wasn't a bubble in Argentina... and other many countries too.

grapejelly
04-30-07, 06:05 PM
I'm planning on holding onto gold until you can buy the Dow with one ounce or so of gold...at which time I will switch into stocks.

raja
04-30-07, 09:29 PM
I'm planning on holding onto gold until you can buy the Dow with one ounce or so of gold...at which time I will switch into stocks. You expect the Dow to go as low as $250 ??? ;) :D

bart
04-30-07, 09:33 PM
You expect the Dow to go as low as $250 ??? ;) :D

Cage. You. Now. ;) :D

grapejelly
04-30-07, 10:28 PM
Cage. You. Now. ;) :D

:confused: :confused:

bart
04-30-07, 10:38 PM
:confused: :confused:

Sorry - "cage" as in "get back in your cage". It was a humor attempt.


Personally, I have a custom built one... and EJ approves of it too... ;)

http://www.nowandfutures.com/grins/cage_brain.png

grapejelly
04-30-07, 10:57 PM
Sorry - "cage" as in "get back in your cage". It was a humor attempt.


Personally, I have a custom built one... and EJ approves of it too... ;)

http://www.nowandfutures.com/grins/cage_brain.png
:eek::p.............

raja
04-30-07, 11:08 PM
Grapejelly . . . Regards Bart's "cage" post, he was making a joke about my "Dow at $250" joke. It took me a minute to get it.

So anyway . . . while in the cage :D, I took Bart's suggestion and did some homework, learning about the Argentine crisis.

What a mess it was!

I think there was a gold bubble or sorts, although I couldn't find anything specific on this.

Inflation was rampant at the time, so bad that the government closed the banks to stop people from exchanging their pesos for dollars. With the peso ravaged by inflation, the price of gold versus the peso must have soared, and I imagine everybody who could exchange pesos for gold was doing so.

Still, bubble or no, I'm not sure how looking at the Argentine situation sheds light on whether investing in gold ETFs is a good idea, or whether it's foolish. If the U.S. went down the same path as Argentina, would the PM ETFs survive?

No question that physical gold would have been good during the Argentine crisis . . . but so would investment in a gold ETF, had one existed at the time. (TIPS would have been good, too, as long as they weren't Argentine TIPS :D)

bart
05-01-07, 02:27 AM
No question that physical gold would have been good during the Argentine crisis . . . but so would investment in a gold ETF, had one existed at the time.

I'm not nearly as certain as you on an ETF, given all the foreign and local money controls - the corralito - and the general attitude of the government, etc..

raja
05-01-07, 09:33 AM
I ran across this in another forum . . . they are discussing the Argentine crisis:

The US now imports 80% of their manufactured goods and 70% of the energy products. That's not far off from Argentina. Big difference, however, the US debt is denominated in DOLLARS. All of it. Going forward a devaluation would have to pay Canada, Kuwait, China, etc more for goods, but their debt would be lifted, unlike in Argentina. Still ugly, but big difference.

Second, Argentina is a first-class country, but they are not the world's engine of obese consumption. If the US stops buying what do you think would happen to the world? To Chinese factories, to Saudi oil prices, to European car and tool manufacturers, to Canadan UAW and softwood prices, to Peruvean copper prices? Once you grasp that, imagine if they DID devalue and were competative, what if the US actually rebuilt factories (and how long would that take, ground-up????) and was EXPORTING, who would they export to? Argentina? China? I'm serious here. Even WITH American consumption we have goods overcapacity. Conclusion: there will be no wave of American exports to right the books. The law of large numbers says it cannot happen.

Third, given the above, what will US$ fall AGAINST? Will Europe volunteer to sacrifice Daimler and Bosch to have a nice, strong Euro? Or will China decide they no longer want to export? Or Japan, no longer needing income to pay for their complete lack of domestic oil? Maybe the Rand would like to get a little stronger? I don't think so. If the US$ falls, for quite a while the Euro, Yen, will follow it down. The USDX could hold at .80 Eur 1.40 and watch the prices of reality rise to $200 oil and $2000 gold. The Peso could fall because it's small, and although it made quite a dent in the ship, the world could suffer its collapse. Not so the US, at least not yet.

Not that the US is the center of the world--that's the myopia of economic and social Luddites--but unless you can come up with a new source of debt and consumption, the fall of the US=worldwide depression. That's why no one wants to shake the camel when he has so many straws aboard.

jk
05-01-07, 09:50 AM
Anyone know about this one?

Shorts junk bonds... AFBIX (http://finance.yahoo.com/q?s=AFBIX)

i've been in this fund for some time, at some cost. via the fund you are [in arcane ways] short junk bonds. being short, you've got to pay the yield of the bonds you're short, so there is a constant drain. it's like being short a stock that is paying a significant dividend. so of course my purchase was way early. i'm still holding it, expecting spreads to widen. but i'm no longer holding my breath.

grapejelly
05-01-07, 09:53 AM
I'm not nearly as certain as you on an ETF, given all the foreign and local money controls - the corralito - and the general attitude of the government, etc..

the Argentine banks renegged on their promises to pay US$. Why wouldn't any ETF reneg on its promises (whatever those are)?

A gold ETF is wishful thinking. You have no real gold, merely a paper claim. The point of gold to me is *not* to have a paper claim, but rather an asset that is not someone else's liability.

raja
05-01-07, 09:59 AM
Why wouldn't any ETF reneg on its promises (whatever those are)?
Another question to ask is, why would the ETF reneg on its promises?

During a gold bubble, money is pouring in. Why would they reneg at that point?

Yes, when the bubble started to collapse, and everybody is trying to get out, there might be some problems, but I hope to be long gone at that point.

jk
05-01-07, 09:59 AM
I ran across this in another forum . . . they are discussing the Argentine crisis:

the likelihood, imo, is that if the u.s. dollar drops dramatically in terms of buying power [more rapidly than it is already dropping], other fiat currencies will be dropping too, just not quite as much. as pointed out in the piece lifted from the other forum, no country or region will want a superstrong currency. so the dollar can go down markedly against real goods and pms, and down substantially but not as much versus the euro, yuan, yen, krona, won, ringitt, baht, zloty.....

grapejelly
05-01-07, 10:03 AM
I did sell most of my stocks today. I kept some of the very illiquid juniors as I think they are reasonable lottery tickets for the future.

But I liquidated my major holdings and took profits. I'll do some coupon clipping in the meantime and hopefully dive back in in about six months.

I have to admit that iTulip info was helpful in this regard. I also subscribe to Steve Saville's speculative-investor.com and think the world of Steve. He has progressively become more bearish on the short-term and intermediate-term prospects of stocks, namely precious metal stocks like I liquidated. And I have carefully considered his arguments and bought into them.

Saville expects that if gold rallies, the Fed will increase rates one more time. They must appear tough on inflation at any cost. Appearances above everything else. And that would cut any gold rally short. If the economy weakens quickly, that would temporarily bring down gold. So nothing now is particularly bullish for gold stocks.

And the Grantham thread showing a negative risk premium for bonds really got my attention.

The bubble could go on for a lot longer but I think there will be some type of "shot across the bow" as EJ called it, and it will be much messier than February 27.

The thing that is lacking in the world wide bubble is the parabolic increase in values, and the wide spread public participation. But but but...there is remarkable complacency in the world about financial stuff in generaly. Remarkable Goldilocks talk just continues. And hey, I lived through the Seventies and I know that things can really turn around quickly. Goldilocks is a fictitious character, ultimately. I judge a lot by social mood and I think things are ripe for a "panic".

I'm not saying the whole thing will pop. I'm just thinking it will correct for awhile.

The CB printing presses are very busy these days and I expect that after the dust settles, by Fall 2007 the stocks 'n' bonds will be back up there because of ballooning money supply.

But I also think long rates will be much higher than they are today. Risk premia will be much higher. Reversion to the mean.

I think the US$ is bottoming and will be rallying for at least a few months. Perhaps longer. There is nothing particularly so wonderful about Yen and Euros and Pounds. The dollar is way "oversold" to use a term I hate.

I already have physical precious metals in the safe deposit box so I'm covered there.

Finster
05-01-07, 12:03 PM
Just a mild observation...

In a thread entitled Sell Everything, there has been no mention made of shorting or using any of the shorting funds or ETFs designed for it or even the use of put options.

Reasonably so. If you're shorting something, you still have the question of what you're going long. There is no such thing as being long nothing.

Say you short a stock. To do this, you sell the stock in advance of buying it. While you are short, you are long cash. It's just the opposite of if you had borrowed cash to go long the stock.

So when you short something else, you're going long USD.

Do you really want to go long USD?

Leveraged, no less?

bart
05-01-07, 01:22 PM
Reasonably so. If you're shorting something, you still have the question of what you're going long. There is no such thing as being long nothing.

Say you short a stock. To do this, you sell the stock in advance of buying it. While you are short, you are long cash. It's just the opposite of if you had borrowed cash to go long the stock.

So when you short something else, you're going long USD.

Do you really want to go long USD?

Leveraged, no less?


Cool!... another *Fin* in progress? ;)

I'm surprised... nay shocked... that an esteemed relativist like thine self would miss that (an example only) if a short gains 10% while the USD loses 2% then one would be 8% ahead on a global purchasing power basis.

Finster
05-01-07, 02:45 PM
Cool!... another *Fin* in progress? ;)

I'm surprised... nay shocked... that an esteemed relativist like thine self would miss that (an example only) if a short gains 10% while the USD loses 2% then one would be 8% ahead on a global purchasing power basis.

As another famous bart once said, "eat my shorts". What do you mean by "global purchasing power"? I dare you. Just try ... try and short "global purchasing power". Or for that matter, go long the same. In the world of investing, we are stuck with a limited menu. If we buy stock on margin, we are shorting USD and going long stock. If we short stock, we are shorting stock and going long USD. Whether you admit to being a relativist or not, you can't escape the fact that every trade that involves shorting something also involves going long something else, and that you are implicitly taking a position on the relative merits of two assets.

So if you short a stock, you can just as properly say you are making a bet that cash (the dollar) will outperform the stock as you are that the stock will underperform cash. And if you are advocating shorting a bunch of stuff - as you suggested above - that you are expressing a view that cash will outperform a bunch of stuff.

Consequently, you are a dollar bull.

Q.E.D., ipso facto, and all that jazz.

bart
05-01-07, 03:08 PM
As another famous bart once said, "eat my shorts".

If you insist: ;)
http://www.nowandfutures.com/grins/eat_short.mp3




What do you mean by "global purchasing power"? I dare you. Just try ... try and short "global purchasing power". Or for that matter, go long the same. In the world of investing, we are stuck with a limited menu. If we buy stock on margin, we are shorting USD and going long stock. If we short stock, we are shorting stock and going long USD. Whether you admit to being a relativist or not, you can't escape the fact that every trade that involves shorting something also involves going long something else, and that you are implicitly taking a position on the relative merits of two assets.

So if you short a stock, you can just as properly say you are making a bet that cash (the dollar) will outperform the stock as you are that the stock will underperform cash. And if you are advocating shorting a bunch of stuff - as you suggested above - that you are expressing a view that cash will outperform a bunch of stuff.

Consequently, you are a dollar bull.

Q.E.D., ipso facto, and all that jazz.

Far be it from me to once again look askance, and without even the normal quantity of baited breath, at your non relative relativistic shortcomings.

There's never been much question about your power (and I leave the "what" to more worthy folk than I to judge), and purchasing is something that I assume you do yourself rather than leave it up to other Manor denizens... and that only leaves global as the possible fly in the ointment. Perhaps you're further out than has so far been recognized and acknowledged?

I'll leave it up to the student and the necessary homework to figure out how to short (or go long for that matter) global purchasing power...

I do agree on the bull part of your statement though... and consequently I do have an investment in mind for you. I hear they're beginning to work on version 2 of the movie.

http://www.nowandfutures.com/grins/bullshit_the_movie.jpg



;)

Finster
05-01-07, 04:07 PM
If you insist: ;)
http://www.nowandfutures.com/grins/eat_short.mp3

Far be it from me to once again look askance, and without even the normal quantity of baited breath, at your non relative relativistic shortcomings.

There's never been much question about your power (and I leave the "what" to more worthy folk than I to judge), and purchasing is something that I assume you do yourself rather than leave it up to other Manor denizens... and that only leaves global as the possible fly in the ointment. Perhaps you're further out than has so far been recognized and acknowledged?

I'll leave it up to the student and the necessary homework to figure out how to short (or go long for that matter) global purchasing power...

I do agree on the bull part of your statement though... and consequently I do have an investment in mind for you. I hear they're beginning to work on version 2 of the movie.

...

;)

;)

Being that you are such a dollar bull, I'll just pop over to the "Too Many Dollar Bears" thread, where your services will provide a much needed balance ...

;)

Finster
05-03-07, 05:06 PM
For clarification, by "deflation" he means, and I mean, a debt deflation.

Whose debt? Everyone's, including the US government's. But it is the form of the deflation of the US government's debt that bears upon the question of the value of the dollar, "money," and "cash."

One of the potential avenues for a US government debt deflation is default, the other is currency depreciation. The iTulip take for quite a few years (e.g., our mock 2001 US bankrupcy filing (http://www.itulip.com/bankrupt.htm) -- Ha-ha!) is that the US is far more likely to choose debt deflation via the latter method than the former, as the latter is painful yet recoverable (see Can the US Have a Peso Problem? (http://www.itulip.com/faceofinflation.htm)) while the former tends to lead to mass unemployment, and severe self-reinforcing economic and political crisis. The "Poom" event versus a "Poom" event is no mere post crash reflation but a one time write-off of US government debt via dollar depreciation.

We'll try to interview Grantham directly, but I have spoken with enough professional money managers over the years to conclude that none of them have debt deflation via currency depreciation on the radar. Jim Rogers has discussed it with me, but he's not a money manager. The most extreme financial markets condition that can be expressed in the context of a professional money manager's letter to clients is the kind of post-bubble panic and rush to liquidity that Grantham is talking about in his April letter. You won't see the potential for a US currency crisis discussed even in the Twin Focus client letters (http://www.itulip.com/images/twinfocusheading.jpg), and non-traditional crisis events are part of their model. (We picked them as a sponsor for a reason.)

The traditional crisis model is the standard script: risky emerging market assets sell off first, then less risky exotic domestic assets, cascading all the way down the risk ladder to US bonds, the "safest" of all. A lot of rarefied paper gets dumped for good old red, white, and blue bonds.

A scenario that includes a rush to non-US bonds and hard assets–capital fight from the US–does not fit the standard crisis model, and you will not hear Grantham talk about gold. The reason is simple: it's not that professional money managers cannot imagine it happening, but if it does happen it may not be the end of the world, but at least for a time it will be the end of their world. So why propose it? Under what conditions is that scenario relevant in the context of that client relationship? Think about it. Grantham is telling his portfolio manager clients that the most rational thing they can do is go to cash–but they can't do that. Such an event will be a boon for the hard assets crowd, however.

Think about it this way. Most professional money managers kept their clients in the stock market in 2000, and many lost a bundle. Guess where they are keeping their clients today? To Grantham's credit, he is talking them out of risky assets, now in fashion, and into relatively safe ones. But how will they be regarded if the US defaults on its foreign debt via depreciation? January 1999 we called for a 87% decline in the NASDAQ (http://www.itulip.com/compare.htm). In 2001 years we predicted a 50% decline in the dollar. The former turned out to be optimistic if you count all the companies that went out of business. The latter prediction may also turn out to be optimistic. If you believe that, do you want to hold a lot of long term US bonds? TIPS if you trust the house to index the resulting inflation accurately, T-bills otherwise.

Grantham's letter analyzed in detail over on the Select forums next week.

Thanks for the illumination, EJ. Maybe if you do talk to Grantham, you could get some further clarification. When he says "all asset classes" will decline, it's not clear in exactly what terms he means. They will decline in dollar terms? Euros? Ounces of gold?

These are "asset classes", too, aren't they? And if he means they will decline, that still leaves the question of relative to what they will do so. It's no trivial point, either, since whatever it is they would declining against would appear to be those things one should have one's assets in! And if everything does indeed decline, then that implies that there is nothing the investor can do. Doesn't matter what he does, because cash, stocks, bonds, gold, commodities and real estate ... whatever ... all will go down.

I take it from your comments about debt deflation via currency depreciation that cash (USD) would be one of those depreciating assets. This, in turn implies that some other form of money, whether foreign currency or gold, would rise in dollar terms. On the other hand, Grantham in his missive cites "the probable exception of high-grade bonds" (in addition to some other of his long time favorites such as managed timber). So it sounds like he is saying that such bonds would appreciate in dollar terms. Is this an area of disagreement? Or are we still missing something?

bart
05-03-07, 06:30 PM
;)

Being that you are such a dollar bull, I'll just pop over to the "Too Many Dollar Bears" thread, where your services will provide a much needed balance ...

;)

It's much more fun to wait a few days so that you can see for yourself the error of your (short term) ways... ;)

EJ
05-04-07, 01:34 AM
Thanks for the illumination, EJ. Maybe if you do talk to Grantham, you could get some further clarification. When he says "all asset classes" will decline, it's not clear in exactly what terms he means. They will decline in dollar terms? Euros? Ounces of gold?

These are "asset classes", too, aren't they? And if he means they will decline, that still leaves the question of relative to what they will do so. It's no trivial point, either, since whatever it is they would declining against would appear to be those things one should have one's assets in! And if everything does indeed decline, then that implies that there is nothing the investor can do. Doesn't matter what he does, because cash, stocks, bonds, gold, commodities and real estate ... whatever ... all will go down.

I take it from your comments about debt deflation via currency depreciation that cash (USD) would be one of those depreciating assets. This, in turn implies that some other form of money, whether foreign currency or gold, would rise in dollar terms. On the other hand, Grantham in his missive cites "the probable exception of high-grade bonds" (in addition to some other of his long time favorites such as managed timber). So it sounds like he is saying that such bonds would appreciate in dollar terms. Is this an area of disagreement? Or are we still missing something?

Keep in mind, iTulip has been chronicling the imminent death of the dollar since 1998. Here are a few stories from 1997 - 2001 (http://www.itulip.com/dollar.htm).

What I try to get across to readers is the concept of very slow, discontinuous processes, with plenty of surprise turns–which can last for a decade.

In 2000, the jury was very much out on the euro. Recall it plummeted for the first few years. Not until the post stock bubble depreciation of the dollar did the euro get its shot. But the euro has its problems. We know it works well when all is well. Let's see how well the euro does in the next global economic and financial crisis. At some point Spain will need emergency 1% rates to cope with the aftermath of their extreme bubble created over the past decade as it become the special home for Russian money that's been stripped out of everything from oil refineries to Russian pensioners (a book will be written about that some day, a Russian friend tells me), while other countries will be suffering inflation. In the US, the Fed happily allows Michigan to go into a depression while Massachusetts booms. To heck with Michigan, says the Fed. The equivalent, allowing Spain to go into recession while Germany gooms, is politically impractical in Europe. Either the euro takes a credibility hit to save Spain, or Spain–if things get bad enough–splits off. Neither event will be good for the euro.

Ka-Poom Theory has, since 1999, theorized that the end of the cycle of bubbles will occur as a one time write-off of US domestic and foreign debt via currency depreciation. The mechanism of that depreciation is US creditors repatriating dollars already floating outside the US, either out of desperation because domestic political demands in a severe recession are more pressing than the geopolitical demands of the US, or due to some other forcing function, such as war. So far, that has not happened. Will it eventually? Still seems more likely than a debt deflation. Will it be sudden and dramatic? Perhaps at some stages. Can we die a death of 1,000 cuts? You bet.

I grow more convinced by the day, though, that we are in for at least one more great asset bubble after this one ends, that the process is by no means over.

Energy and Infrastructure.

Listen to the Republican presidential debate tonight? Watch the memes sprout like crocus in spring: "We need zero taxes on alternative energy to support long term investment to end our dependence on foreign oil and stop global warming!"

Who's going to argue with that program? How about taxing oil, too, to create extra demand for alternative energy and use the tax $$$ to fund Medicare and SS?

Hank Paulson was talking the game, using almost the same language, in an interview on Charlie Rose two weeks ago.

Hear that? That's the sound of the next bubble rising over the hill.

But, to your question, I will try to talk to Grantham to get clarification on which sovereign debt and whose cash.

flow5
05-04-07, 05:54 AM
WHITHER THE DOLLAR?
A nation has a TRADE DEFICIT when the cost of merchandise imports exceeds the receipts from merchandise exports. The CURRENT ACCOUNT balance encompasses merchandise, service items, commodities, and “current” financial transactions; while the BALANCE OF PAYMENTS includes the entire above plus capital flow items; all transactions involving foreign exchange.


The foreign exchange value of any currency is determined by the supply of and the demand for that particular currency. In international financial analysis supply and demand take on an unique role; for what is demand form our point of view is supply from the standpoint of foreigners – and vice versa.

All transactions that require the conversion of foreign currencies into dollars constitute a demand for dollars. These include exports, payments received for serves rendered to foreigners, interest and dividends collected from foreigners, etc. An increase in the volume of any one of these things will increase the demand for dollars and, ceteris paribus, the foreign exchange value of the dollar.

The opposite types of transactions, imports, etc., which involve payments to foreigners increase the supply of dollars and thereby reduce the foreign exchange value of the dollar.There is no “flow” of money internationally, only offsetting debits and credits on the books of the financial institutions involved in financing trade or other transactions. A slight modification of this statement is necessary to take account of the movement of paper and coin currencies. Their contribution to surpluses or deficits is extremely minor and short run, when not actually offsetting.In foreign exchange supply always equals demand at the current rates of exchange.

International debits equal international credits. The balance of payments always balances since there can be no credit transfer of funds.When the balance of payments is balanced by foreigners acquiring net holdings of our equities, bonds, and real estate, and capital outflows (interest, dividends, rentals, etc.) exceed inflows, we are either decreasing our net creditor position in the world, or increasing our net debtor position.

Beginning 1985 it has been the latter. The trade deficits, plus the unilateral transfers of funds by the Federal Government to foreigners, transformed this country from this world’s largest creditor to the world’s largest debtor – for the first time since 1917. Since 1985 we now have a net debtor position exceeding 5.7 trillion dollars, but the principle villain (since 1973) has been our dependence on foreign oil.

Trade deficits at any particular time for any given country can be beneficial or harmful; can represent economic strength or weakness. In the period before Worlds War I the By the end of World War I the <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-comhttp://www.itulip.com/forums/ /><st1:country-region w:st=U.S.</st1:country-region> had mostly trade deficits. We were a debtor country – and we thrived. Foreign investments accelerated our economic development and our standard of living rose faster as a consequence.

<font color=" /><st1:country-region w:st="on">U.S.</st1:country-region> was a creditor nation, but we refused to act like one. We opted for tariffs and other restrictions on imports, rather than free trade. Capped by the sky-high Hawley-Smoot tariff of 1931, <st1:country-region w:st="on">U.S.</st1:country-region> trade policy was an important contributor to the world wide depression of the 1930’s.

By 1933 there was not a single major nation on the gold standard except the U.S.The situation was further exacerbated when Roosevelt and his Treasury Secretary, Morgenthau, exercising the crisis powers delegated to the executive branch by Congress, took the <st1:country-region w:st="on">U.S.</st1:country-region> off the gold standard in April, 1933 by making the dollar inconvertible into gold at a fixed price. And to make matters worse they periodically kept raising the price of gold from $20.67 per ounce to a final price in Dec. 1933 of $35. This had the effect of depreciating the exchange value of the dollar. All of this was done by a creditor nation operating with a chronic surplus in its balance of payments.

The Bretton Woods Agreement of 1944 established, amount other things, the International Monetary Fund and confirmed the previous international status of the dollar, that an ounce of gold was equal to $35 and that all dollars were to be freely convertible into gold bullion at that price to foreign and confirmed the previous international status of the dollar, that an ounce of gold was equal to $35 and that all dollars were to be freely convertible into gold bullion at that price to foreigners but not to U.S. nationals.In 1949, the U.S. dollar was not only as “good as gold”, but it was also preferred over gold. There were not enough dollars to finance the legitimate needs of the world economy. So, the chronic balance of payments deficits which began in 1950 were for a number of years beneficial to the world economy and to the <st1:country-region w:st="on">U.S.</st1:country-region>

Because of our large and chronic balance of payments surpluses after World War II, foreigners were unable to accumulate sufficient dollar balances to efficiently finance world trade. These balances were desperately needed because of the total dominance of the dollar as the reserve custodian, standard of value and transactions currency of the world.

The Korean Conflict (1950-1953) temporarily solved the problem but, the longer term solution consisted in implementing our “containment policy” against the U.S.S.R. This involved the establishment of approximately 700 military bases, not only around the perimeter of the Soviet Union but throughout the world. We have paid hundreds of billions of dollars to foreigners to acquire the bases and to maintain a garrison of more than 400,000 military personnel abroad.

With diminishing merchandise surpluses this policy proved to be financial overkill.By the mid 1960’s foreigners found themselves in possession of excessive dollar balances, excessive in terms of the needs of trade. Some of these excess dollars came to be used as “prudential” reserves in the formation and growth of the Euro-dollar banking system.

Since 1970, the “western” world has functioned within a system of essentially free exchanges. Before 1973, exchange rates were in terms of a “fixed target”. Now the dollar is a “moving target”.

The Korean War, which began in June, 1950, initiated the chronic balance of payments deficits that persist to this time and which will probably continue as long as foreigners are willing to increase their net investments in this country.The U.S. has had a net liquidity deficit in every year since 1950 (with the exception of 1957), Up to 1976 (when the private sector contributed its first trade deficit ) these deficits were entirely the consequence of excessive U.S. government unilateral transfers to foreigners (re: foreign policy – solely our far flung military bases and personnel). During all this time the private sector was running a surplus in all accounts: merchandise, services and financial.

The <st1:country-region w:st="on">Vietnam</st1:country-region> Ten-year War administered the coup d’etat to our gold bullion standard. By 1968, in an effort to keep the dollar at the $35 par, we had exhausted nearly two thirds of our monetary gold stocks, or approximately 700 million ounces to about 260 million ounces.Although the dollar ceased to be freely convertible in March, 1968, institutional (central bank practices) and attitudinal lags were sufficient to offset, until late 1970, the excessive expansion in the supply of dollars. In August 1971, all convertibility was ended. This further accelerated the decline in the exchange value of the dollar.

All fluctuations in exchange rates prior to this time were the result of other currencies changing in value relative to the dollar.During the early seventies of the Nixon administration the dollar was twice devalued, raising the fictional price of gold to c. $41-43. These were non-events. When the dollar was no longer on a gold standard (after March, 1968), the dollar price of gold was determined by the open market. In response to the devaluations, the Federal Reserve Banks marked up the balance sheet values of their holdings of gold certificates. These were also nonevents; since the capacity of the Reserve banks to create credit (acquire Treasury Bills, etc. by creating Interbank Demand Deposits) was unaffected; nor did the devaluations alter the capacity of the fed to pay out Federal Reserve Notes in exchange for these IBDDs.

From late 1970 to 1978, the dollar depreciated relative to other major currencies.After the “Marshall Plan”, which did not produce a balance-of-payments deficit, most of this aid was in the form of various types of military assistance, or to maintain our numerous foreign stations and bases, and to finance approximately 400,000 military personnel abroad; except for the Korean and Vietnam wars, which more than doubled that figure. The policy that engendered the outlay of trillions of dollars for these purposes was called dollars for these purposes was called “containment”, i.e., containment of the U.S.S.R.By the end of the cold war in 1990, the United States had 395 major military bases and hundreds of smaller installations around the world. Most of the bases are part of military alliances formed to contain communism. By 1990, 435,000 American troops, 168,000 Defense Department civilians and 400,000 family dependents were living on foreign bases. Another 47,000 sailors and Marines were stationed aboard ships in foreign waters. A million Americans abroad were on the Defense Department payroll.

Even if we eliminated the trade deficit and ran a surplus sufficient to service our foreign debt, the dollar would still decline because of the war/containment/terrorist deficit. Since actions sufficient to eliminate these deficits are highly improbable, the dollar will eventually decline to a level which will eliminate them. At that level our standard of living, for this and other reasons including financing the federal debt, will be much lower than at present, and the capacity of the Pentagon to project conventional military power abroad will be severely circumscribed.

We have observed, given the situation of this country in the 19<SUP>th</SUP> century, (its people government and undeveloped resources) that it was advantageous both to lenders and borrowers for the U.S. to run a trade deficit.Conversely it is also economically advantageous for creditor nations, and for the world economy, if creditor nations operate with trade deficits: deficits proportionate to their creditor status. This is, the deficits should be large enough to enable the nationals of debtor nations to acquire a sufficient amount of foreign exchange to enable them to service their international debts.

Since the U<st1:country-region w:st="on">.S.</st1:country-region> is no longer an economically undeveloped nation, but is increasingly an international debtor, what evaluation should be places on our huge trade and current account deficits? For the very short run these deficits keep prices and interest rates lower than they otherwise would be and they subsidize our standard of living. But the deficits also are inexorably forcing the dollar down in terms of its foreign exchange value—and no consortium of central bankers, treasury secretaries, et al. can stop the process.

With a chronically depreciating dollar foreigners will be much less inclined to invest in the <st1:country-region w:st="on">U.S.</st1:country-region> on a creditor ship basis, thus pushing up interest rates. The rising cost and diminishing volume of imports will contribute to an increase in inflation, and the expectation of further inflation will also push up interest rates. This spells stagflation.

Under pressure from this country, the Pacific Rim, Oil Exporting, etc., central bankers try to support the dollar. They do not try to arrest the long-term downtrend of the dollar, but seek to erase some of the unnecessary short-term and destabilizing fluctuations. This is a correct statement of what the function of the central bank should be where the objective is to influence rates of exchange.

The net accounting effect of the Chinese buying U.S. dollars is 1) the importer pays in his own country’s currency, 2) the exporter receives payment in his country’s currency, 3) for very debit there is a credit, 4) there is no net transfer of funds, and 5) money is not flowing in or out of the respective countries. This is proved by using “T” accounts. The balance of payments always balances even though the statistics on payment balances never do. To correct this deficiency, the commerce Department inserts an item called “Errors and Omissions”. Thus, the triumph of theory over “facts”.

The Chinese loss of income and probable exchange rate losses, when the reverse of these operations is consummated at a later date, are, of course, compensated by the Federal Reserve. The adverse effects on the Chinese economy receive no such compensation.

For all of this reason, the policy of the U.S. Treasury and the Federal Reserve is to minimize overt intervention in the foreign exchange markets.Although the lags are sometimes unusually long between exchange rate changes and the changes in volume and value of trade, the present situation cannot be explained by these lags.Trade restrictions have some effect, but the U.S. is not immune from subsidizing exports and using numerous devious devices by the Customs Service to restrict imports.

A weak currency is not a cause; rather it is a symptom of a weak, noncompetitive economy. In time, of course, a declining dollar will eliminate the deficit in our balance-of-trade. But the price exacted will be a sharp decline in imports, principally oil, and the purchase of foreign services, reflecting our relative poverty and inability to compete in the international economy. The fact that we are the world’s number one producer of smart bombs will not arrest that trend.T

The real culprit seems to be the cost of our products relative to their quality. Inferior quality is not a good buy at any price. We are even getting a reputation for inferior products.

For the people of limited foresight, which apparently includes a substantial majority, debt expansion can be very exhilarating. One’s standard of living can take a quantum leap forward. Taxpayers are currently being subsidized, in terms of taxes not paid, more than 248 billion annually. It is called the federal deficit. Consumers are being subsidized by approximately 875 billion annually, of which, 494 billion is for oil. It is called the foreign trade deficit. In the longer term the problem of servicing all this debt, consumer, corporate, and federal poses daunting problems. And that is a gross understatement. These circumstances, as we know, are of our own making. The country has not been invaded, nor have our productive resources have not been destroyed, or even impaired, by national calamities.

It is also important to note that imports decrease the money supply of the importing country while exports increase the money supply, and the potential money supply, of the exporting country. Purchasing the deficit countries currency will reduce its supply but sooner or later the central banks will have to reverse their positions and the foreign exchange dealers know this.The trade-off of reducing the pressure on the global dollar by temporarily decreasing the volume of the dollars requiring conversion into yaun is the cost of foisting an inflationary policy on China. Obviously, and for good reason, the Chinese have reason to resist this kind of assistance.

While the U.S. will have a temporary gain, as will foreign enterprises engaged in foreign trade who are momentarily freed from excessive fluctuations in the exchange rate, the overall financial effects are a loss to the Chinese and to the Chinese economy.

No country has become and remained a world power if it is a world debtor and has a weak currency. From these unwanted events we can expect a vicious level of stagflation that will become an enduring feature of our economic landscape. And the <st1:country-region w:st="on">United States</st1:country-region> will be forced into a high degree of economic isolation and perhaps into an increasingly totalitarian mold

flow5
05-04-07, 06:20 AM
ADOPTION OF A GOLD STANDARD
There are increasing numbers of advocates for the adoption of some form of gold standard. Gold standards of whatever type, gold coin, bullion or some modification of the gold bullion standard, all require that the unit of account be defined in terms of gold of a certain fineness, e.g., one dollar equals 25 grains, 9/10 fine, thus establishing the mint price. The other sine-qua-non requires the government, acting directly or through the agency of a central bank, to stand ready at all times to buy or sell gold at the mint price.

An operating old standard creates, or is associated with, many advantages: 1) stable foreign exchange rates; 2) free multilateral clearing of currencies among nations; 3) the maximization of multilateral foreign trade; and, 4) relatively stable price levels e.g., no chronic inflation. All that is required to achieve this economic utopia is a 1) world free of major wars, depressions and cartels (OPECs); 2) markets with downward price flexibility, that is , true price competition; 3) creditor nations which impose no significant restraints on imports; 4) monetary authorities who abide by the “rules of the game”, i.e., the central banks expand credit (create commercial bank legal reserves) when gold stocks expand, and vice versa; 5) monetary authorities who restrict the expansion an d contraction of central bank credit within a very narrow range, thus preventing the commercial banks from creating an unsupportable volume of credit money (demand deposits); and, finally, 6) a world where the reserve currency countries (those countries whose currency serves as a store and standard of value as well as a transactions currency) never operate with chronic deficits in their balance of payments.Note: deficits or surpluses refer to changes in a country’s gold stocks and net short-term claims (demand deposits, CDs, commercial paper, etc. – the “balancing items” in the balance of payments.) deficits result from gold exports and/or a decrease in short-term claims against foreigners relative to the short-term claims held by foreigners. The reverse is true for surpluses.

From 1816-1914 there conditions were achieved under the aegis of the Bank of England to an extent sufficient to provide international trade, and the British domestic economy, with all the advantages of a free gold standard. This period marked the heyday of the gold standard. The British pound sterling was the reserve and transactions currency of the world. International transactions were financed largely by transfers on the books of the “big five” World War I ended all this. Attempts to restore the gold standard in the 1920’s were swallowed up in the Great Depression. For most of the period from the end of World War I to 1968, the world was on a U.S. dollar standard, but never a free gold standard.

World War I transformed the <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-comhttp://www.itulip.com/forums/ /><st1:City w:st=London</st1:City> banks, thus minimizing the necessity to transport gold. So great was the faith in the convertibility of the pound sterling, that the Bank of England could, and did, operate with relatively small gold reserves. A change in the central bank’s discount rate, or a small change in the buying price of gold (not a devaluation or a revaluation, but simply a change in the price sufficient to offset implicit interest and shipping costs) usually was enough to prevent significant or unnecessary outflows of gold.
*
<font face=" /><st1:country-region w:st="on">U.S.</st1:country-region> into a creditor nation, left our industrial capacity expanded and intact, and set in motion forces which made our economy the safest haven for foreign capital seeking escape from foreign nationalization. World War II and the Great Depression accentuated these trends. But the <st1:country-region w:st="on">U.S.</st1:country-region> tended to ignore its responsibilities as the world’s principal creditor nation and reserve currency custodian. We severely restricted imports through sky-high tariffs (Hawley-Smoot, 1931, for example), customs red tape, commodity classifications and other devices. The volume of Federal Reserve Bank credit was determined more by domestic considerations than by gold flows.
<FONT face="Times New Roman">
<FONT face="Times New Roman">In April, 1933 we nationalized gold, made the dollar inconvertible and by administrative fiat capriciously raised the dollar price of gold in a series of steps from $20.67 to $35 per ounce. All of this was done even though were a creditor nation and had a chronic surplus in our b balance of payments. In January, 1934 the Congress codified these administrative actions into law. Under this modified gold b bullion standard, the dollar was convertible on foreign, but not domestic account at $35 per ounce.

<FONT face="Times New Roman">Before we commit ourselves to the naïve proposition that a successful gold standard requires only an Act of Congress, we should examine the reasons for the abandonment of gold convertibility in March, 1968. That was the month and year the U.S. Treasury ceased to sell gold on the open market. No longer could foreigners buy gold and the <st1:City w:st="on">London</st1:City> or any other exchange at $35 per once.

<FONT face="Times New Roman">The U.S. Treasury held approximately two thirds of the world’s monetary fold stocks in 1949. They resulted from years of surpluses in our balance of trade and “flights” from foreign currencies. In 1949, the U.S. dollar was not only as “good as gold”, but it was also preferred over gold. There were not enough dollars to finance the legitimate needs of the world economy.

<FONT face="Times New Roman">With the outbreak of the Korean War in 1950 surpluses turned to deficits. With the sole exception of 1957, these deficits (usually of increasing magnitude) have characterized our balance of payments in every year since. For the first few years, the deficits were beneficial. But a good thing can be over done and we did it. In our efforts to police the world, we overcommitted ourselves. This zealotry finally leg to the escalation of the Vietnam War in 1965 and the subsequent demise of the dollar as the reserve currency of the world.Note: Until 1971, the private sector always operated with a surplus. These surpluses were more than offset by the excessive unilateral foreign transfers by the Federal Government. Since 1971, the Federal Government can share the blame. U.S. industry has become less competitive, but the principal villain (since 1973) has been OPEC.

<FONT face="Times New Roman">By the mid 1960’s foreigners found themselves in possession of excessive dollar balances, excessive in terms of the n needs of trade. Some of these excess dollars come to be used as “prudential” reserves in the formation and growth of the Euro-dollar banking system. Other excess dollars were used to buy our under priced gold (under priced as a consequence of chronic inflation). Our gold stocks, which were about 700 million ounces in 1949, had fallen to about 260 million ounces by March, 1968. Had the Treasury not abandoned its effects to maintain the equality of the market price with the mint price, our entire monetary gold stocks probably would have been depleted by the end of 1968.

<FONT face="Times New Roman">Paradoxically, the Euro-dollar System, (now a foreign-dollar prudential reserve banking system) which was established both because the dollar was in excess supply and the reserve currency of the world, is now one of the principal factors militating against any attempt to reestablish the convertibility of the dollar into gold’s at a fixed price. We are not even willing to give the Fed the degree of control over our own domestic money creating institutions.

<FONT face="Times New Roman">Regardless of whether or not our objective is establishing a gold standard, the situation requires measures be taken which well reverse the deterioration of the dollar’s integrity. What is required is no less than an end to the chronic liquidity deficits in our balance of payments, and a halt to the excessive creation of <st1:country-region w:st="on">U.S.</st1:country-region> and Euro-credit dollars. But the alternative is, at some point in time, a flight from the U.S. dollar and, therefore, the Euro-dollar. This will generate hyperinflation in terms of <st1:country-region w:st="on">U.S.</st1:country-region> and Euro/Yen/Yaun/Petro/-dollars, etc., and an international financial crisis of unprecedented proportions

flow5
05-04-07, 06:34 AM
FOREIGN-DOLLAR MARKET <O:p</O:p
A common misconception is that Euro-dollars (E-Ds) are U.S. dollars that have somehow contrived to leave this country, whereas in fact all E-Ds are created abroad. The foreign commercial banks, and foreign branches of U.S. banks, which create this money, operate on the premise that they will always be able to convert E-Ds into U.S. dollars on demand on a one-to-one basis.

This exchange equivalence privilege may suggest to the E-D borrower that there is no meaningful difference between E-Ds and U.S. dollars. But in terms of our national and the international economy this is an illusion. In both an economic and legal sense the E-D is no more a part of the lawful money supply of the U.S. than is the Canadian dollar, or any other national currency.

Two principal factors were responsible for the origin of the E-D banking system; (1) the possession by foreign commercial banks of an excess volume of short-term claims against the U.S. dollar, and (2) the preeminence (at that time) of the U.S. dollar as the reserve, standard-of-value, and transactions currency of the world.

Beginning in 1950 the U.S. incurred the first of a chronic series of net liquidity deficits in its balance of payments. These deficits have grown in magnitude and continued uninterrupted ever since 1950 with the exception of 1957. By the mid sixties foreign banks had acquired more dollar balances than were required to cover their own international transaction needs – so they started lending their excess U.S. dollar balances: (described by Bernanke as part of the global savings glut; Greenspan’s so-called interest rate conundrum, i.e., artificially low, short-term and long-term interest rates).

E-D banking originated in the City of London and London based banks still dominate the E-D banking system. As the number of banks participating in the E-D transactions increased (G7), the E-D bankers discovered that the E-D deposits they created for borrowers often did not result in any diminution of their U.S. dollar balances – the System was merely shifting balances within itself. That is, drafts drawn on E-D banks increasingly were deposited in other E-D banks.

Thus was laid the economic basis of an international system of “prudential” reserve banking – the discovery that the amount of actual U.S. dollar reserves required to support the E-D loans made – and E-D deposits (money) created.

The prudential reserves of the E-D banks consist of various U.S. dollar-denominated liquid assets (U.S. Treasury bills, U.S. commercial bank CDs, etc.) and interbank demand deposits held in U.S. banks. The volume of prudential reserves held by each E-D bank presumably is dictated by “prudence” – not by any legal requirement administered by a monetary authority.


All prudential reserve banking systems have heretofore “come a cropper”. Money creation by private profit institutions is not self-regulatory- the “unseen hand” simply does not function in this area. Invariably the systems created too much money, speculation became rampant, inflation distorted and destroyed economic relationships, confidence that the banks could meet their convertibility obligations eroded, “runs” on the banks caused mass banking failures, and entire economies were left in ruin.

With this historical record to draw from the pertinent question is: Why did the various governments and monetary authorities allow E-D banking to grow on an unregulated, prudential reserve basis? The situation obviously required that the E-D banks be constrained in their money creating activities through the standard devices of legal reserves and reserve ratios, the volume and level of which are controllable by the monetary authorities. There is no assurance, of course, that the monetary authorities having such powers will use them to prevent and excessive creation of money.

Until the early sixties there was a chronic shortage of U.S., dollars available to finance international transactions. But the E-D system came about precisely because the <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-comhttp://www.itulip.com/forums/ /><st1:country-region w:st=U.S.</st1:country-region> banks. The volume of prudential reserves held by each E-D bank presumably is dictated by “prudence” – not by any legal requirement administered by a monetary authority.
*
<font face=" /><st1:country-region w:st="on">U.S.</st1:country-region> balance of payments deficits had finally supplied a more than adequate volume of international liquidity (fed continuously by <st1:country-region w:st="on">U.S.</st1:country-region> trade deficits). The E-D has been a superfluous and harmful addition to the world’s monetary stocks and E-D bankers have increased their earnings assets by approximately this ? addition.. This figure is many times the <st1:country-region w:st="on">U.S.</st1:country-region> means-of-payment money supply.As of April 2006, <st1:country-region w:st="on">China</st1:country-region> holds the largest foreign exchange reserves, much of which are denominated in <st1:country-region w:st="on">US</st1:country-region> currency.

<FONT face="Times New Roman"><FONT size=3>Such deposits are now available in many countries worldwide, but they continue to be referred to as "Eurodollars" regardless of the location. E-Ds, Yuan, Yen, Rupee, Rial, Ruble, Naira, Rupiah, Bolivar; (U.S. trading partners and Petro-dollars), etc.. are now contributing to this excess.This vast addition to the world’s money supply has substantially contributed to the high rates of inflation that have prevailed since 1965 with U.S. trading partners. Nor can the E-D be defended as being in any way superior to the U.S. dollar as an international reserve and transactions currency since the acceptability of the E-D is totally dependent on the acceptability of the U.S. dollar.

<FONT face="Times New Roman"><FONT size=3>If the E-D system is not to repeat the tragic record of all previous prudential reserve banking systems two thins are necessary: (1) the U.S. dollar must remain acceptable as the world’s transactions currency (This requires that the chronic deficits in the U.S. balance of payments cease), and (2) the E-D system must be subjected to the restraints of controllable legal reserves and reserve ratios.But this is only the beginning. After the legal structure has been put in place we will still need monetary authorities who understand the economics of money creation, the consequences of excessive money creation – and are willing to force on the governments and business communities of their respective countries the discipline of a properly regulated money supply. The latter problem will be with us whether control is vested in the central bankers, or the International Monetary Fund is made a world central bank and control of the E-D is vested in it.

<FONT face="Times New Roman"><FONT size=3>If history is a guide it is obvious these requisite conditions will not be achieved.

Sapiens
05-04-07, 07:24 AM
Flow5,

Are you quoting someone's writings or is this your original work?

-Sapiens

flow5
05-04-07, 08:30 AM
They are my writings though not my propositions or principles. I was schooled by a friend. Most people thought he was obsolete or worse. He was a self-described rates-of-change / flow-of-funds economist. However, papers in the early 50's called him a monetarist. He's unique. He alone understands money & central banking.

He stopped researching and publishing in the early 60's. He became sort of an arm chair theorist. I believed every word he said. So I keep tinkering until I discovered the "holy grail", i.e., "considering the distortions in the def of M1A and the rapid increase in the currency componet, the correlation of the time series is remarkable", i.e., monetary flows (MVt) 28 years ago.

Dr. Leland James Pritchard (Feb 20 1908 – Nov 15 1991) had a political science degree from Syracuse Unviersity and taught political science while getting his masters in statistics, and received a Ph.D. from the <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-comhttp://www.itulip.com/forums/ /><st1:City w:st=yracuse</st1:City>, he taught political economy courses at Syracuse University Univestiy Maxwell School of Public Administration. He taught<font face=" /><st1:PlaceType w:st="on">University</st1:PlaceType> of <st1:PlaceName w:st="on">Chicago</st1:PlaceName> in 1933, where he was elected Phi Beta Kappa. Dr. Pritchard served with the Federal Emergency Relief Administration, The Works Projects Administration, and The War Labor Board. He served both as the Chairman of the Economics Department from 1955 to 1962 and Dean of the <st1:PlaceType w:st="on">School</st1:PlaceType> of <st1:PlaceName w:st="on">Business</st1:PlaceName> from 1955 to 1962. He was a Fulbright lecturer and President 1963-1964 of the Midwest Economics Association. His extensive research and publication record display a broad knowledge of both Finance and Economic Statistics. His Money and Banking Texts (1958, 1964) were widely used and are perhaps the most literate of all recent American texts in economics. He became professor emeritus in 1976 but continued to serve the university. He left an economic scholarship fund. The only thing he bought on time in his life was his house. He owned a credit union and died a multi-millionaire. He passed of pancreatic cancer in 1992<FONT size=3>.

<FONT color=maroon><FONT face=Arial>While he was in Chicago, Milton Friedman was there getting his masters. But unlike Leland, Milton Friedman is retarded.

<FONT color=maroon><FONT face=Arial>If you want, I have his publication list.

Sapiens
05-04-07, 08:49 AM
The prudential reserves of the E-D banks consist of various U.S. dollar-denominated liquid assets (U.S. Treasury bills, U.S. commercial bank CDs, etc.) and interbank demand deposits held in ffice:smarttags" All prudential reserve banking systems have heretofore “come a cropper”. Money creation by private profit institutions is not self-regulatory- the “unseen hand” simply does not function in this area. Invariably the systems created too much money, speculation became rampant, inflation distorted and destroyed economic relationships, confidence that the banks could meet their convertibility obligations eroded, “runs” on the banks caused mass banking failures, and entire economies were left in ruin.



Can you please clean and clear this up?

Where are the demand deposits held?

Also, when did it happen, where?

-Sapiens

jk
05-04-07, 09:52 AM
At some point Spain will need emergency 1% rates to cope with the aftermath of their extreme bubble created over the past decade as it become the special home for Russian money that's been stripped out of everything from oil refineries to Russian pensioners (a book will be written about that some day, a Russian friend tells me), while other countries will be suffering inflation. In the US, the Fed happily allows Michigan to go into a depression while Massachusetts booms. To heck with Michigan, says the Fed. The equivalent, allowing Spain to go into recession while Germany gooms, is politically impractical in Europe. Either the euro takes a credibility hit to save Spain, or Spain–if things get bad enough–splits off. Neither event will be good for the euro. the gavekal folks think italy is the weak link. prior to the euro, italy did fine while continuously devaluing the lira. stuck with euro, the italian economy is having hard times. if the eurozone economy slows materially, expect more calls for italy to withdraw. [there were a bunch of such statements last year.] gavekal's new book, the end is not nigh, contains a lengthy discussion of the issues involved, including the relevent international law and the legal issues re: italy's euro denominated bonds should they indeed withdraw.



Ka-Poom Theory has, since 1999, theorized that the end of the cycle of bubbles will occur as a one time write-off of US domestic and foreign debt via currency depreciation. The mechanism of that depreciation is US creditors repatriating dollars already floating outside the US, either out of desperation because domestic political demands in a severe recession are more pressing than the geopolitical demands of the US, or due to some other forcing function, such as war. ej, have you addressed the question of what assets are purchased in the course of this repatriation? buying bond doesn't really get the purchaser out of dollars. that leaves the other major asset classes: real estate and equity. so is poom accompanied by a stock market moonshot? [making the poom differ in this way from what happened in the inflationary '70's.]

Finster
05-04-07, 10:16 AM
Keep in mind, iTulip has been chronicling the imminent death of the dollar since 1998. Here are a few stories from 1997 - 2001 (http://www.itulip.com/dollar.htm).

What I try to get across to readers is the concept of very slow, discontinuous processes, with plenty of surprise turns–which can last for a decade.

In 2000, the jury was very much out on the euro. Recall it plummeted for the first few years. Not until the post stock bubble depreciation of the dollar did the euro get its shot. But the euro has its problems. We know it works well when all is well. Let's see how well the euro does in the next global economic and financial crisis. At some point Spain will need emergency 1% rates to cope with the aftermath of their extreme bubble created over the past decade as it become the special home for Russian money that's been stripped out of everything from oil refineries to Russian pensioners (a book will be written about that some day, a Russian friend tells me), while other countries will be suffering inflation. In the US, the Fed happily allows Michigan to go into a depression while Massachusetts booms. To heck with Michigan, says the Fed. The equivalent, allowing Spain to go into recession while Germany gooms, is politically impractical in Europe. Either the euro takes a credibility hit to save Spain, or Spain–if things get bad enough–splits off. Neither event will be good for the euro.

Ka-Poom Theory has, since 1999, theorized that the end of the cycle of bubbles will occur as a one time write-off of US domestic and foreign debt via currency depreciation. The mechanism of that depreciation is US creditors repatriating dollars already floating outside the US, either out of desperation because domestic political demands in a severe recession are more pressing than the geopolitical demands of the US, or due to some other forcing function, such as war. So far, that has not happened. Will it eventually? Still seems more likely than a debt deflation. Will it be sudden and dramatic? Perhaps at some stages. Can we die a death of 1,000 cuts? You bet.

I grow more convinced by the day, though, that we are in for at least one more great asset bubble after this one ends, that the process is by no means over.

Energy and Infrastructure.

Listen to the Republican presidential debate tonight? Watch the memes sprout like crocus in spring: "We need zero taxes on alternative energy to support long term investment to end our dependence on foreign oil and stop global warming!"

Who's going to argue with that program? How about taxing oil, too, to create extra demand for alternative energy and use the tax $$$ to fund Medicare and SS?

Hank Paulson was talking the game, using almost the same language, in an interview on Charlie Rose two weeks ago.

Hear that? That's the sound of the next bubble rising over the hill.

But, to your question, I will try to talk to Grantham to get clarification on which sovereign debt and whose cash.

Thanks again!

What we've been hearing from both the Dem and Rep candidates gives me no cause for optimism. They are seemingly willing to do anything but let the free market work. The pattern is the government interferes in the market place with its overreaching programs and money creation, makes a mess of things, and then presents itself as the doctor who will cure the disease of its own creation. This in turn creates another mess, which naturally then requires another cure, which creates another disease ... :mad:

EJ
05-09-07, 08:45 AM
the gavekal folks think italy is the weak link. prior to the euro, italy did fine while continuously devaluing the lira. stuck with euro, the italian economy is having hard times. if the eurozone economy slows materially, expect more calls for italy to withdraw. [there were a bunch of such statements last year.] gavekal's new book, the end is not nigh, contains a lengthy discussion of the issues involved, including the relevent international law and the legal issues re: italy's euro denominated bonds should they indeed withdraw.

ej, have you addressed the question of what assets are purchased in the course of this repatriation? buying bond doesn't really get the purchaser out of dollars. that leaves the other major asset classes: real estate and equity. so is poom accompanied by a stock market moonshot? [making the poom differ in this way from what happened in the inflationary '70's.]

Several things are going on during the self-reinforcing dollar repatriation process, which some I've talked to recently believe has already begun. Different things happen at different stages of the process.

In the early stages, there is a shift from more to less risky securities within a class–from less to more blue chip within the stock market, from junk bonds to munis and treasuries within the bond market. Rather than chasing yield as in a "bubble in everything" market, investors seek liquidity and wealth preservation.

If there is a sense of panic in the market and the process becomes disorderly, then the rush to liquidity, to cash, can become intense. If you are in Europe and are worried that your US treasury bonds or agency paper is going to lose purchasing power suddenly, you sell them and get dollars in return. You then need to exchange those dollars for local currency in order to purchase safe domestic bonds, or simply hold the cash in a local money market account. Multiply this by a few million transactions and its clear how you wind up with a lot of dollar sellers and few dollar buyers, thus causing the depreciation that the bond holders fear–that's the self-reinforcing aspect of "Poom".

We're working up an anaysis to try to anticipate the process. There are a wide range of potential scenarios. For example, there is the possibility of a 1997-1998 Asian currency crisis in reverse, where instead of capital fleeing to the US, pumping up stocks and bonds, the opposite occurs.

Then you have to consider policy responses, which is unknowable, such as capital controls.

Our survey of professionals in the precious metals business tells a tale of two markets. Joe and Jane sixpack have been sellers for years. Squeezed by inflation and less access to home ATM refi money, they are selling PMs (and jewelry and coin collections) to raise cash. At the same time, people with money are buyers to hedge dollar depreciation risk. On balance, there is more $$$ coming from the latter than the former, so PMs continue to rise. Hard to see why in a "Poom" process that trend will not accelerate.

By the end of the process, the most liquid assets denominated in the most stable currencies will hold the greatest value.

grapejelly
05-09-07, 09:10 AM
EJ, where do the sovereign (Asia et al) US$ investment funds play into things? Shouldn't the investment of, say US$300 billion shore up US stock prices and forestall a rush to liquidity?

bill
05-09-07, 12:09 PM
We experience a little liquidity crisis everyone runs for short term secure liquid cover, experience asset pricing correction, get ready for the next asset bubble, Alternative Energy and Infrastructure.

The foundation of Alternative Energy is being formulated now.
http://www.ipcc.ch/
http://ipcc.bravehost.com/

Ca. has 3 billion set up for solar credits (AB32) the program is booming solar sales
http://www.sce.com/RebatesandSavings/CaliforniaSolarInitiative/

Have the smart PE Firms already set up for the repudiation of dollars back to the US, purchasing assets in the US pooling with limited partners with limited control and limited returns setting idle while they run to Asia setting up shop to funnel dollars back to their controlled assets in the US? The PE firms are purchasing Asia Co. in Asia that would benefit exporting to the US for needed items in next bubble of Alt. Energy and Infrastructure.

<!-- toctype = X-unknown --><!-- toctype = text --><!-- text -->

raja
05-10-07, 10:33 PM
Any investment suggestions on Alternative Energy and Infrastructure?

bill
05-10-07, 11:28 PM
Any investment suggestions on Alternative Energy and Infrastructure?

A lot of policy is in draft form now,,,follow this web site and don’t miss the live web cast.

http://transportation.house.gov/

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read about PPP,,look at PPP legislation,,working draft of the model PPP legislation
http://www.fhwa.dot.gov/ppp/index.htm

I have posted a lot of links and data to my previous post,,,take a look





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Mega
05-12-07, 07:45 PM
Just a quick word from a non-banker type, from what you guys are saying, with in the 6-12 months i can expect one hell of a crash, yes?

Big worry for me here in the UK is that its Japan in the early 90's....very low-negative bank rates. I much rather wake up and find high bank rates (early 80's recession) at lest my savings would carry me well.

(Yes, some of us do still SAVE!)
Cheers
Mike/Liverpool

Jim Nickerson
05-13-07, 01:14 PM
Just a quick word from a non-banker type, from what you guys are saying, with in the 6-12 months i can expect one hell of a crash, yes?

Big worry for me here in the UK is that its Japan in the early 90's....very low-negative bank rates. I much rather wake up and find high bank rates (early 80's recession) at lest my savings would carry me well.

(Yes, some of us do still SAVE!)
Cheers
Mike/Liverpool

Mike,

I don't know who the bankers are that post on iTulip. I would surmise most people who post are non-bankers. Your suggestion that you are led to think "one hell of a crash" will occur in the next 6-12 months is a bit troublesome to me at least. Crashes are not common, and I would think odds are greater of there being some grindingly slow downtrend vs. there being anything like the one-day "crash" in 87, or the October "crash" in 1929 http://stockcharts.com/charts/historical/djia1900.html. '87 was nothing compared to '29-'32, and in the '29 "crash" that was just the beginning of an incredible period of loss. Maybe there will be another "crash" in the next 12 months; nobody really knows.

I take "high bank rates" to mean high interest rates. The problem with that is such rates exist when inflation is rampant, so even if one gets more interest on one's savings, the interest earned probably will go no further than lower earned interest in times of lesser inflation. Personally, I think we all are better off when inflation stays low, and we would be better off if we could truly discern what is the inflation rate.

Mega
05-13-07, 06:21 PM
Thanks for your thoughts Jim<O:p</O:p
I happened on this site after visiting Aaron’s excellent site. Like a child who has suddenly learnt to read I have been reading EJ’s “Back catalogue”…..and I found it fascinating.<O:p</O:p
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I would like to thank you all, expressly EJ……I thought I was insane. I thought I was completely out of my mind, thank you sir for restoring it!<O:p</O:p
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I am a humble Engineer living in Liverpool/UK Here in Blighty there is an illness called CREDIT. Almost everyone I know is hooked, plastic-fantastic or if that gets a bit too high for you just turn your house into an ATM machine!<O:p</O:p
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Watched a program were somebody wanted to raze some cash from the value their house. The Estate agent came round and said it was worth 40% more than they brought it for. The Couple went crazy, jumping about like they just scored the winning touch down in the Super bowl!<O:p</O:p
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Mega
05-13-07, 06:23 PM
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What!?...............Do they think this is “Free” money?.........don’t they like have to pay it back?<O:p</O:p
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Here in Blighty everyone is Maxed out, they spent their savings, borrowed more raided their mortgage ………….its like a never ending drugs party. Oh they been “so” clever! I see people driving into work in top of the range Merc’s, BMW’s, Landrovers……I KNOW that they are NOT doing that great………….but everyone wants to show their wealth (Debit) .<O:p</O:p
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I feel like an alien from another World, on my planet owning money is BAD!.............Just couldn’t understand………….until now.<O:p</O:p
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Mega
05-13-07, 06:24 PM
The next recession:-<O:p</O:p
I guess that it will be like 1980, brought on by high rates, throw in an odd hedge fund going belly up and more housing grief. Collapse…?...........No but the $ will take a beating, with less demand for them seeing how lots of oil trades don’t need them and the IMF has been sent packing by Cheap loans from China etc<O:p</O:p
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Trade War with China</ST1:p?............No, too much for both sides to lose<O:p</O:p
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Gold rocketing?................Up to a point, but the central banks will KILL stone dead any attempt at a day-fact-o return to a Gold standard. I have a lot of Cash, few investments (BT) I like to see high rates, it would sort out a few people !<O:p</O:p
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I just wish we had a company like “Prudent Bear”……We don’t <O:p</O:p
Mike<O:p</O:p