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FRED
02-05-08, 05:00 PM
http://www.itulip.com/images/TheMercury1931MayMED.jpg (http://www.itulip.com/images/TheMercury1931May.jpg)Boom in the Doom

by Eric Janszen

Among dozens of old magazines I bought in 1998 when I was doing research for iTulip.com, I picked up a copy of the May 1931 issue of The American Mercury. From that issue, to the left (click here (http://www.itulip.com/forums/../images/TheMercury1931May.jpg) to enlarge), is a scan of an ad for a book New Russia's Primer published by Houghton-Mifflin that offers to reveal the promise of “Pan-Sovietism,” a follow-up to a previous book explaining the ambitions of “Pan-Germanism.” These ideas were the seeds of Nazi and Soviet expansionism planted more than two decades before The Great Depression, were discredited during the post WWI recovery and 1920s boom but flourished in the atmosphere of bitterness, deprivation, and anti-intellectualism that accompanied the greatest global economic disaster of that century. Sophistry and demagoguery drowned out analytical argument and reasoned debate.

No one knew it at the time – the book ad refers to the "Great War" without foresight of a next world war less than ten years away – but both Pan-Sovietism and Pan-Germanism were soon to turn the power of the Soviet and Nazi states against millions within their borders and without, to horrific result. The problems started with a subtle change in the way politics and economics were discussed when the going got tough. We need to keep our eyes open and stay vigilant to protect against such developments today.

I worry about the outcome of the collapse our broken credit system and the de-evolution of a lopsided US economy that is overly dependent on debt and finance. I am even more worried about the political backlash at a time when the Internet has created the most fertile breeding ground in history for sophistry and demagoguery from left to right. A few years into the kind of downturn I expect a lot of bad and discredited ideas may well become fresh, new and promising again, with the usual dreaded outcome. Readers need to get into the habit of challenging not only the beliefs of others but their own beliefs. This is where we can all make a difference: demand precision, respect expertise but always question motives and interests, and know that the truth is a journey not a place, and always be seeking.

Lecture over. Today is rebuttal day. So much ideological economics to refute, so little time. Where to start? My two favorites are an article by professional doomer James Howard Kunstler and a “missive” by the prolific and good hearted critic of greedy Wall Street bankers Mike (Mish) Shedlock.

Mishmash

We’ll kick it off with Mish. He does not write articles or post commentaries but pens “missives,” a term he insists on using for reasons understood only to him. If I don’t pay my taxes in April I’d expect to receive a missive from the IRS, an “official letter.” These are typically the kind of communications one seeks to avoid. But Mish’s are neither official nor disagreeable, are in fact helpful as far as they steadily and reliably counter the steady stream of advertising disguised as news and assorted sales blather pouring out of the mainstream business press nozzle.

Mike is nothing if not dedicated. I am certain he has saved thousands from the ill fate of the complacent debt serf (http://www.itulip.com/forums/showthread.php?p=7343#post7343) who, watching Jim Cramer during the tech stock and housing bubbles (http://www.itulip.com/awards.htm) or reading Ben Stein (http://www.itulip.com/forums/showthread.php?p=17036#post17036) as he continually beats the “buy stocks” and “buy homes” drum to the cadence of Wall Street’s every selling wave, will without Mish’s missives have few reliable sources for balance.

My quibble is with the made-up, mishmash economics. I understand where he’s coming from, though. Readers don’t trust professional economists. They make lousy forecasts and appear willing to sell their credibility to the highest bidder at the expense of anyone who casually lends trust to anyone speaking from a position of authority.

A favorite target among economics bloggers is economist for hire David A. Lereah, ex-chief economist for the Realtors association who during the housing bubble consistently denied its existence on every Wall Street PR outlet from CNBC to the Wall Street Journal. Last week I was on CNBC up against an economist from the University of Chicago, a school that has for decades churned out monetarists, economists whose ideology revolves around a hatred of wage inflation for the bottom 95% and taxes for the top 5% while never meeting an asset price inflation it didn’t like. Our argument was short and predictable. I say: The housing bubble rescued the US economy after the tech bubble collapsed. He says: No it didn’t. Blah, blah, blah. (http://www.youtube.com/watch?v=kqOOnbMMemE)

Economic and political influence over economists is not the only factor undermining public respect for economics. J. K. Galbraith said, "Economics exists to make astrology look respectable." Astrology was invented to help humans make sense of random events. Maybe economics was, too. When they are not busy making forecasts no better than astrologist's, economists are busy arguing over each other’s theories. With the combination of many contradictory schools of thought, bad forecasting, and grubbing after money paid out to economists by whatever industry is dominant in an era–such as the finance, insurance, and real estate industries of the FIRE sector for the past 30 years–the dismal science is in a dismal state in the US. Mish and others on the web can be forgiven for trying to make up their own.

They use terms common to professional economists, such as inflation and deflation, but in novel ways and not the same way from one article to the next. Sometimes deflation is falling prices.
Mish: “No one (well just a few of us deflationists) expected to see price drops. Well here they are, first in housing and now in restaurants. What's next? I expect we will see all kinds of drops in the price of goods and services. Someone emailed me just a few days ago about a price drop at the nail salon from $10 to $9. Hmmm. Is that a 10% drop? Why yes it is.”
The Psychology of Deflation (http://globaleconomicanalysis.blogspot.com/2006/08/psychology-of-deflation.html)
Other times inflation and deflation are solely monetary phenomena and prices are irrelevant.
Mish: “Caroline Baum seems to grasp what far too few others do: "the inflation process is always and everywhere a monetary phenomenon.”
Caroline Baum on Inflation (http://globaleconomicanalysis.blogspot.com/2007/02/caroline-baum-hit-nail-smack-on-head.html)
Professional economists may argue about which way inflation or deflation are going but there is general agreement on the meaning of the terms. This definition is as good as any, the first I picked off the web.
deflation (http://www.investorwords.com/1376/deflation.html): A decline in general price levels, often caused by a reduction in the supply of money or credit. Deflation can also be brought about by direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending. Deflation has often had the side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy. opposite of inflation.
In an article Mish writes today he asserts:
Mish: Two Viewpoints

* Gold is money.
* Money is going to do well in deflation.

Bubble Economy Endgame (http://www.minyanville.com/articles/index/a/15789/from/yahoo)
If one is going to make up one’s own school of economics, it needs to at least be self-consistent. Forecasting a future “deflation” (http://www.safehaven.com/article-3010.htm) in a world of floating exchange rates and without a gold standard and in the same breath recommending gold investment to readers is like forecasting a blizzard in the Bahamas and telling readers pack a bathing suit, sun tan lotion and an electric fan for the trip.

Deflation is not bullish for gold. In a deflation, no one has any money. How are they going to buy gold? In the current instance, unlike in the 1970s inflation when the personal savings rate was over 10%, today the savings rate among the bottom 90% of wealth holders has been under 2% for nearly 10 years so the majority have few savings to protect from inflation by buying gold. As gold prices have been rising over the past year and a half and the economy slowing, they are selling gold, silver and jewelry to raise cash to fund household cash flow. At the same time, the top 5% are buying gold hand over fist to protect their wealth from domestic inflation fueled by dollar depreciation. They are also investing in Asian currencies and other non-dollar assets. Some day, should the fashion for diversification by US wealth holders into non-dollar assets turn urgent, the less polite term "capital flight" may apply.

If you are expecting monetary deflation and a deflationary spiral accompanied by an appreciating dollar, then sell your gold, stuff the cash into a safe, and wait for the fire sale. If a visit to the nail salon costs $9 now after “deflation” then delight when more "deflation" pushes the price down to $5. Buy the same new car for $10,000 that used to cost $40,000. If on the other hand you're expecting the dollar to keep falling and inflation to therefore continue rising, as in truth it has, hang onto your gold so you may afford to pay $20 for the nail salon visit later, and $80,000 for a car with like value as the $40,000 one today.

Yet, in spite of repeated assertions of belonging to the “deflationist camp” there is reason to believe Mish in reality believes the post credit bubble recession will start off cold with disinflation (negative rate of inflation growth) then get warm, then hot – monetarily speaking – inflation.
Mish: “Perhaps we get a deflation scare first (people over-leveraged in gold for the wrong reasons are forced out) but the long term beauty of gold is that Bernanke does not have to succeed, he merely has to try.”
The Fed's Tight Monetary Policy (http://globaleconomicanalysis.blogspot.com/2007/08/feds-tight-monetary-policy.html)
We’ve called this Ka-Poom Theory (http://www.itulip.com/kapoomtheory.htm) since 1999. If so, then Mish needs to recommend to his readers they go to cash during the cooling off periods when the Fed is either not targeting or succeeding at producing negative real interest rates as they are today and later switch to gold and other assets that respond to central bank liquidity at the start of the warm.

We recommended gold at $265 in 2001 and haven’t recommended selling since. We’re anxious, of course, with prices so high and are keeping our eyes open for signs of disinflation. My observation is that every time the Fed in concert with global central banks tries to withdraw liquidity from the global credit system to cool inflation the entire complex of asset markets crashes. Today is looking like one of those days, with both the DJIA and gold off more than 2%. With so much debt leverage in the system, the central banks have little choice but to stop the process before it gets out of hand. This is not exactly a secret among the hedge fund community and is behind a lot of long bets on more central bank liquidity winding up in asset prices, despite occasional resets. I don’t think global central banks have the slightest idea what to do to end this stand-off – yet. While they try to work out a solution, the fall-back policy of depreciating the world’s primary currencies–US dollar, euro, and yen–to manage the ongoing debt deflation will continue to elevate gold as a Fourth Currency.

I appreciate what Mish is trying to do. The professional economics world is in a sorry state. It’s hard to believe much of what comes out of professional economists in the mainstream press. The analogy I used recently with a reporter for an independent radio station who asked me why most economists – Robert Shiller and Dean Baker among the notable exceptions – were not warning their audience about the housing bust and recession as iTulip and others did (http://www.itulip.com/housingbubblecorrection.htm). I replied that you don't expect a mechanic who works for a dealership to tell you that the used car they’re trying to sell you has a broken transmission with no second gear. It's not in his interest to do so. You take it to an independent, professional mechanic for a checkup. You could take it to your cousin Joe “who knows a lot about cars” and offers up contradictory and nonsensical explanations about the clutch plate and the flywheel and tells you to put it in reverse to get into second gear. But if you do, don't be surprised to find yourself one day rolling backwards over a little old lady. Caveat emptor.

http://www.itulip.com/images/nukeposter.jpgDoomer Central

James Howard Kunstler is the creator of the popular and contentious doomer blog Clusterfuck Nation. Hey, with a name like Kunstler, why not title your blog with a word that, according to Wikipedia, “is generally considered censurable and offensive in most formal circles.” Type “clusterfuck” into google and the very first link that comes up is Kunstler’s site. Bravo! Well done. Then again, enter “greenspan interview” and the first link listed is to an interview we never had with Alan Greenspan in 1999. You’d think 100 real interviews with Greenspan better fit the intent of such as search than our faux interview, or maybe a fake interview with Greenspan is more realistic than the real thing.

Yesterday James penned a entry, not a missive, Serial Bubbles? (http://kunstler.com/mags_diary23.html) in The Clusterfuck Nation Chronicle about my article The Next Bubble that appeared in this February’s Harper’s magazine. There are a number of reviews here (http://itulip.com/forums/showthread.php?p=23725#post23725). Below are excerpts James’ post with my comments.
James: "Eric Janszen of iTuilip.com has made a splash in the mainstream media with his Harper's Magazine cover story on the 'The Next Bubble.' His thesis is that a new tidal wave of investment will shortly roll toward 'infrastructure and alternative energy.' By this Janszen means a revived nuclear power push, refurbishing highways, bridges, and tunnels, "high-speed rail," solar and wind power, and alternative liquid fuels. This coming boom, he says, would be driven by political fear about energy security."
My Harper’s article goes into the workings of the asset price inflation “system,” covers key historical events such as the decline of the US industrial economy between the mid 1960s and 1980, the birth of the FIRE Economy (http://www.itulip.com/forums/showthread.php?p=6738#post6738) under the Volcker Fed (hat tip to Dr. Michael Hudson), and circumstances leading up to the technology and housing asset price inflations. No room to go into the structure of the Alternative Energy and Infrastructure boom, only the outlines. More details are offered in these interviews with Grist Magazine (http://www.itulip.com/forums/showthread.php?p=26328#post26328) and Renewable Energy Access (http://www.itulip.com/forums/showthread.php?p=25661#post25661), the leading web site covering the industry.

The elevator pitch is that the collapse of the housing bubble spells the beginning of the end of the FIRE Economy (http://www.itulip.com/forums/showthread.php?p=6738#post6738), unless all of the healthy elements of the US innovation system–entrepreneurs, VCs, PE firms, hedge funds, (some) investment banks, the business press, and government–can be redeployed but to a more fruitful purpose: to get the US out of what will be a deep Debt Deflation induced recession, now in its early stages. The goals are to reduce U.S. dependence on imported energy and lower the energy intensity (BTUs per dollar of GDP growth) of the U.S. economy to make the country more competitive, more economically and ecologically sustainable, less dependent on FIRE and borrowing, and more economically fair with less concentration of wealth and income gains in the top 5% and debt in the bottom 50% of net worth group.

High energy prices have set in motion a process of investment that is reshaping U.S. energy infrastructure. In 20 years the US will with respect to transportation and energy be nearly unrecognizable from what it is today.

It’s not just about bridges and tunnels and solar panels and wind farms. It's about revamping the entire ugly and antique transportation and communications infrastructure to lower energy intensity and lower the friction of commerce. This list of reports offered by Energy Business Reports (http://energybusinessreports.com/shop/) gives you an idea of the range and scale of what is happening. It’s about nanotech paints that reflect infrared from sunlight so that electric cars don’t use up more power than necessary on air conditioning, thus extending range. It’s about LED (Light Emitting Diode) based lighting that uses 1/10th of the energy of incandescent bulbs for the same output and can run continuously for 1,000 years without replacement. If the average person understood the kinds of technologies that become economical with sustained $100 and higher oil, they’d not be so worried about Peak Oil. They’d in fact demand an import tariff on oil to keep prices high and crank them up to $300 over a few years so that rather than going into debt to buy oil the proceeds of which are used to build Dubai’s infrastructure we instead build savings and form capital to invest in our own infrastructure and economy. How about that?
James: "On the face of it, Janszen's proposition seems more promising and intelligent than the previous engineered boom in suburban houses. But it raises a lot of questions and flags."
The last bubble was manufactured by Greenspan & Co. to save their political bacon. At least the tech bubble left some useable capital assets behind, such as fiber-optic cables for communications. Sure it cost several times more than it would have without the capital carnage, but it’s better than a bunch of half-finished casinos blighting The Strip and thousands of empty MacMansions baking in the Arizona sun, and tumbleweeds filling the driveways in Bakersfield. What future economic use can those possibly serve?
James: "For one thing, the term 'bubble' suggests something more like a financial Chinese fire drill than actual productive activity. It would be an excellent thing if Americans invested in a restored passenger rail system. But if it were merely a scheme for big banks to issue innovative new securities for gigantic fees without actually getting any trains running -- well that would be in the nature of just another old-fashioned swindle, as the bundling of mortgages into securitized debt paper has proven to be."
Uh, oh. Did James read the article? A footnote in the second word of the article notes that I don’t like the word bubble because of the connotations and ambiguity.

The next asset inflation will not be funded the way the housing bubble was, nor the way the tech bubble was. I don’t know for certain but I believe this boom will be funded by sovereign wealth funds (SWFs) as a way for foreign lenders to spend their treasuries before they depreciate into oblivion. These will be for-profit projects. The larger infrastructure projects will be built by yet to be formed public private partnerships (P3s). If James doesn’t know what either of these things are (SWFs and P3s), then I don’t blame him for not seeing how a Alternative Energy and Infrastructure boom can occur and where the money is going to come from.
James: "In other words, does Janszen make a distinction between a boom and a 'bubble?' He seems to understand that the previous two bubbles in dot-coms and houses were essentially frauds that generated imaginary wealth, which sooner later evaporated off the balance sheets and out of the financial system. A boom, it seems to me, is not the same as a 'bubble.' While perhaps wasteful and messy, booms at least produce something of value beyond the fees paid to bankers for arranging the deployment of capital. A boom that resulted in citizens being able to take a train from Boston to Albany would produce a substantial public good. The creation by Goldman Sachs of a company on paper that never accomplished anything would be something else. This, of course, leads to a deeper question as to whether the USA is actually a serious society or just a nation of hopeless, greedy clowns? Are we even capable anymore of distinguishing between purposeful activity and the art of the grift?"
I emphasize the last sentences of the paragraph above because it’s James at his best. Indignant. Pissed off. Funny. But he’s missing the point. There will be a boom in Alternative Energy and Infrastucture. Time will tell whether it develops into a massive asset inflation. Maybe it only develops into an oasis of growth in an otherwise moribund economy going through a transition from debt dependent FIRE Economy-based to production and savings focused through a process I call “re-industrialization.” Even during The Great Depression, certainly as broken an economy can get, certain industries boomed.
James: "This leads to a further consideration of where the capital for 'the next bubble' supposedly comes from. Janszen doesn't account for the essentially bankrupt condition of the USA. The capital that was deployed and squandered in the previous two bubbles is not there anymore to be washed, rinsed, and recycled. It's gone. It was winkled out of hundreds of pension funds, millions of individual investors, and, in terms of eventual obligations, the federal government. There is a black hole of unresolved debt where that 'capital' used to be."
On the contrary, James. Read iTulip and you will see 10 years of careful documentation of just how broke we are. Start with The Big Bet (http://www.itulip.com/forums/showthread.php?p=4486#post4486); it's a rant almost worthy of your blog.

My argument isn’t that old bubbles can be brought back to life; they can’t. The game must move to a new venue. Governments will again supply credit to each other to create one, big happy government managed system of global state capitalism. The U.S. becomes more like China, where the largest 30 corporations are majority government owned, faster than China becomes like the U.S. I'm not nodding in approval of this development, just calling like I see it. (How about starting a second blog called Clusterfuck Planet?)
James: "Janszen's idea seems to be that the new investment comes from simple credit reflation. I don't see how this is possible while the current bubble in housing remains only fractionally 'worked out.' It has a long way to unwind yet, and a lot of damage to do. It will bring down banks, insurance companies, hedge funds, municipal governments, and leave a lot of individuals impoverished, literally out in the cold. As long as trillions in losses remain concealed or unresolved, the basic system for deploying capital will remain paralyzed."
That’s more dramatic than I predict but close enough. No bread lines but a lot of angry, disoriented and disappointed voters who may look for populist solutions that will make matters worse.
James: "I wonder if fixing all the infrastructure for happy motoring is not an exercise in futility and another layer of tragic misinvestment. After all, it's based on the assumption that we will still be running huge numbers of cars and trucks decades ahead, and I'm not convinced that this will be possible under any circumstances. The psychology of previous investment will exert a powerful pull to throw money at our highways. It might be more realistic to think of this as a triage process -- to ask ourselves how much of this stuff do we just let go of and which parts do we actually keep. Thousands of miles of suburban commercial strip highway six-laners may not be needed at that 'level of service.' What becomes of them? Do we run trains down the interstates? Surely, we don't want our bridges to crumble."
No, we need to continue to lower the energy intensity of our economy, lower our per capital energy footprint, and do it in a politically practical way. I say deploy a floating tariff on oil, crank the price up to $300 over five years. Watch what happens. Our system can do wonders with that “problem.” If you believe the Peak Oil doomers that’s going to happen anyway but without benefit of intent or design.
James: "By the same token, I wonder if our investments in alternative energy will prove to be chimerical -- things wished and hoped for but impossible to achieve. My own hunch is that our notions of scale are not consistent with what reality will permit in this field. I don't believe that we will build more than a few giant wind farm installations. Rather, I believe we'll discover that wind power is only really practical on the household or extremely local basis. Ditto solar. I also doubt that we will continue to get all the necessary exotic metals needed to fabricate the hardware for these things. Along similar lines, I believe our expectations for ethanol and bio-diesel fuel production will prove to be not only disappointing but destructive to the food production sector."
Not giant wind farms, a kinder, gentler nuclear industry.
James: "All of which is to say that an investment campaign aimed at sustaining the unsustainable by other means would end in tears. Personally, I don't think there will be a 'next bubble.' I think we're out of bubbles and that our current mode of life in this nation is running out of time. We're facing such an array of potential instabilities that even assuming we continue to live in an orderly society may be too much. Like every other activity in our lives, finance, too, may be in for an epochal downscaling."
Among us critics, who is offering constructive, plausible, practical, non-utopian, politically and operationally possible solutions? Within a year, the nation will be sick and tired of all the bad news, which I expect to come first in waves and then in torrents. No one will have any interest whatsoever in who did what to whom when or who’s fault it was, and anyway the guys who created the mess will be standing in the crowd with the victims acting and looking like victims and no one will be able to tell them apart or care.

I’ve been thinking about this for 10 years, since I went to libraries around the world, poured over the microfiche images of 1930s newspapers and noted among other things that there were hardly any news during The Great Depression about The Great Depression. That’s because it wasn’t news. The Depression just was. All anyone cared about was: how do we get out of it? My suggestion to anyone running a site that complains about how screwed up things are start now thinking about constructive solutions. Believe me when I tell you that plenty of unconstructive ideas that already exist that will come up again, including the resurrection of failed populist socialistic and isolationist solutions that will plunge the U.S. into a deep hole if they carry the day.

Make no mistake. Joe Sixpack is going to be very uphappy when he realizes that the pain of rising costs and falling real income is only just beginning. That die was cast when the U.S. decided to become dependent on foreign borrowing to fund the bulk of its merchandise trade and fiscal deficits. Poor distribution of wealth will form the political battleground for solutions over the next few years.

That does not mean the end of the world. I recommend James read Are You a Doomer? (http://www.itulip.com/forums/showthread.php?p=11355#post11355) and take our doomer survey to see where his psyche sits on our Mad Max Pessimist to Mary Poppins Optimist scale.

One final note. James also wrote yesterday:
February 1, 2008:

Yesterday I wrote

"Calling for a crash in the equity markets
Perhaps before the end of the week
Developments the past several days around the finace sector suggest to me that a crash in the stock indexes is imminent. . . ."

Bad call, I'd say....

The Dow then proceeded to shoot up 207 points (Nasdaq 40, S & P 23)
Tip: We haven't had any luck calling short term market moves, either. We tried it once in 1999 and failed. For the first time since April 5, 2000 when we called the start of a bear market we called the start of another Dec. 27, 2007. We told subscribers that a rare multi-year Debt Deflation Bear Market was starting (see Time, at last, to short the market (http://itulip.com/forums/showthread.php?t=2774)). The DJIA is off more than 1,000 points since then. I expect it will decline more than 20% this year. Doomy enough for you?

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grapejelly
02-05-08, 05:18 PM
EJ, excellent as usual.

Regarding Kuntsler, he makes the usual mistake we all make of taking our ability to project into the future seriously. He has said that suburbs are dead...energy prices will kill them...we should sell our houses and all move into the cities.

I am afraid that resurrection of failed populist socialistic and isolationist solutions that will plunge the U.S. into a deep hole" as you say is going to be the order of the day.

But I am very optimistic that it won't matter.

There are too many technological solutions and it is too easy to move capital around one way or the other. This will prevent the worst of these socialist and authoritarian "solutions" to our problems from being enacted.

sadsack
02-05-08, 05:32 PM
Nice.

Fred, the 6th paragraph in the Kunstler section needs a correction (bolded):


High energy prices have set in motion a process of investment that is reshaping U.S. energy infrastructure. In 20 years the US will with respect to transportation and energy be nearly indistinguishable (<-- perhaps "unrecognizable" is a better word?) from what it is today.

Contemptuous
02-05-08, 06:14 PM
We’ll kick it off with Mish. He does not write articles or post commentaries but pens “missives,” a term he insists on using for reasons understood only to him.

LOL !!! Missive - a self-consciously arch term striving energetically for 'literary' status. Lots of those AGORA 'financial journalists' use it, copy-catting each other's imagined literary flair.

The self-consciously gentrified modern-day term for what used to be humbly called a 'post' or a 'letter'. "Missive" is the kind of stuffily contrived term guaranteed to have you climb right out through the office window to stand on the 10th floor office building ledge, swearing you are going to take the big jump. A term with all the elegance of a side of french-fries with a jumbo coke.

baw
02-05-08, 07:04 PM
Deflationistas, Inflationistas or the Clusterfuck Planet. Things are getting downright interesting.

WDCRob
02-05-08, 07:08 PM
...self-consciously arch term striving energetically for 'literary' status. Lots of those AGORA 'financial journalists' use it, copy-catting each other's imagined literary flair.

The self-consciously gentrified...

Yeah, I hate it when people don't use plain language.

JoeSixpack
02-05-08, 08:01 PM
EJ, excellent piece of writing, i have to say the recent sum-it-up articles on iTulips take are a joy for everyone who has insufficient time to piece together the discussion from various threads.

Regarding "signs of disinflation", do you have hints what to look for ?

I am more concerned than ever that the debt deflation and demand destruction might outpace the attempts to keep the system going, especially in the election year.

I have read that well known "helicopter" speech numerous times. Re-reading it again today with a fresh mind, it gave me the creeps that, besides the well-elaborated concepts outlined within, the essence and make-or-break really comes down to a single sentence:

"We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation."

I feel very much inclined to replace the word "spending" by "nominal prices", which doesnt imply anyone spends/buys/invests anything discretionary.
The words "hope" or "in the long run" might find a good place in that statement, too.

This is my worst case sceanrio for a short-term Ka coming back with a vengeance.

jk
02-05-08, 09:18 PM
kunstler's writing is funny and oh so full of gleeful anger, as he imagines the suffering of the profligate and intemperate. it's "sinners in the hands of an angry god," jonathan edwards' famous puritan sermon, updated with A*L*L N*E*W 21st century references. many doomers seem to revel in the idea of the "well-deserved" suffering they envision, as if the textbooks of austrian economics were illustrated by hieronymus bosch.

sadsack
02-05-08, 09:26 PM
as if the textbooks of austrian economics were illustrated by hieronymus bosch.

Wow - someone else who actually digs HB (or is at least familiar in passing with same). . .

Contemptuous
02-05-08, 09:42 PM
While Kunstler's an entertaining read, I agree, as JK notes, that he does tend to wallow a bit excessively in the gleeful anger.

Just my own view, but I think it would be "risky" to indulge total skepticism of Kunstler's main points just becaue of his keyed up "over the top" writing style. The style is a bit too keyed up and "Calvinistic", but that's only one point. This is not sufficient rationale for discrediting the themes he's warned about. The risks in many of his topics are probably quite real in 2008. All in all, a full-fledged critique of Kunstler's themes seems a much tougher nut to crack, IMHO than an effective critique of Mish's theses.

Mish skates breezily over the inflationary implications to domestic CPI of a currency plunging in purchasing power internationally. As EJ notes succinctly, it appears Mish "does not travel". Anyone this breezily cavalier about the inflationary implications of a currency racing down in purchasing power is laying themselves wide open for a good old fashioned debunk - and debunk is what Mr. Janszen indeed does.

Mish might consider traveling even just briefly down to Argentina and talking to a few people there about their experiences with a currency evaporating in purchasing power quite recently. To skate over the implications of that, in his prolific array of missives through these recent years, missives whose entire subject matter was purportedly dealing with the "inflation / deflation" debate - well this seems to border upon the frivolous.

FRED
02-05-08, 10:46 PM
Nice.

Fred, the 6th paragraph in the Kunstler section needs a correction (bolded):

Muchas gracias!

Verrocchio
02-05-08, 10:47 PM
Kudos, EJ, on another meaty commentary. I particularly admire the apt title: Boom in the Doom. And pity the unfortunate readers of Mish's missives based on mishmash economics -- they'll surprise themselves by backing up over little old ladies! <grin>

godraz
02-05-08, 11:44 PM
EJ wrote:


If on the other hand you're expecting the dollar to keep falling and inflation to therefore continue rising, as in truth it has, hang onto your gold...

In trying to understand the mess we are in and what outcome may result I have been reading a lot -- so much so my head often spins trying to make heads or tails of the arguments such as this article is meant to address.

With respect to both EJ and Mish for their efforts at describing this mess and their understandings of it, I do think it is worthwhile to offer my 2¢ on these matters, which has to do with the often confusing use of the word "inflation" to describe different things.

Case in point is the quote above, whereby in contrast to Mish's definition ("Inflation is a net expansion of money and credit"), EJ is using the term "inflation" to describe a depreciation of currency valuation and a corresponding and compensating increase in prices to make-up the difference.

While EJ's use of "inflation" is given in context here, more often than not I've found it is not readily done so, and the different meanings lead to different understandings -- which can be needlessly confusing.

In discussions such as these I wish we'd all settle on a singular definition.

Baring that it would help were we all to use the word with a preceding phrase that we intend it to be understood, such as the following:

1) monetary inflation

2) currency depreciation inflation

Both incur price or cost increases, yet both are the result of different actions, which do seem to have divergent implications and/or reactions. (Or am I simply confused here?)

In any event, I can't help but believe how an economy of definition with respect to "inflation" (and much other such financial jargon) might improve our collective abilities to understand one another in this infernal economic Tower of Babel as its been built and designed, but confounds us all to no good end.

I mention this merely as someone on the sidelines, trying to get a handle on this mess we are in, and thought it relevant as one thing that annoys me.

I do otherwise appreciate the thoughts given here by all. And Mish's blog too, despite where you think he is mistaken, does IMO offer a viewpoint of some merit too. Even EJ concedes this. Ultimately, until the final results are in on this predicament all I can do is keep reading all points of view. Thanks.

Jim Nickerson
02-05-08, 11:51 PM
EJ wrote:



In trying to understand the mess we are in and what outcome may result I have been reading a lot -- so much so my head often spins trying to make heads or tails of the arguments such as this article is meant to address.

With respect to both EJ and Mish for their efforts at describing this mess and their understandings of it, I do think it is worthwhile to offer my 2¢ on these matters, which has to do with the often confusing use of the word "inflation" to describe different things.

Case in point is the quote above, whereby in contrast to Mish's definition ("Inflation is a net expansion of money and credit"), EJ is using the term "inflation" to describe a depreciation of currency valuation and a corresponding and compensating increase in prices to make-up the difference.

While EJ's use of "inflation" is given in context here, more often than not I've found it is not readily done so, and the different meanings lead to different understandings -- which can be needlessly confusing.

In discussions such as these I wish we'd all settle on a singular definition.

Baring that it would help were we all to use the word with a preceding phrase that we intend it to be understood, such as the following:

1) monetary inflation

2) currency depreciation inflation

Both incur price or cost increases, yet both are the result of different actions, which do seem to have divergent implications and/or reactions. (Or am I simply confused here?)

In any event, I can't help but believe how an economy of definition with respect to "inflation" (and much other such financial jargon) might improve our collective abilities to understand one another in this infernal economic Tower of Babel as its been built and designed, but confounds us all to no good end.

I mention this merely as someone on the sidelines, trying to get a handle on this mess we are in, and thought it relevant as one thing that annoys me.

I do otherwise appreciate the thoughts given here by all. And Mish's blog too, despite where you think he is mistaken, does IMO offer a viewpoint of some merit too. Even EJ concedes this. Ultimately, until the final results are in on this predicament all I can do is keep reading all points of view. Thanks.

When there is increase in money and credit, it makes each existing dollar/bonar less valuable, thus it depreciates each bonar/dollar. It seems to me to be the same thing stated in two ways.

chrisk
02-06-08, 01:53 AM
A bit off-topic, but I'll state even more strongly that Mish is mished-up when it comes to economics. I had a discussion with him on the Motley Fool boards, in April of 2004, in which he tried to defend his new interest-only adjustable rate mortgage. Now there are valid defenses for ARMs, but his was straight out of the Free Luncher's handbook. He claimed that it would take X years for the initial savings from his ARM to be eaten up by higher rates in later years, and since he would sell within X years anyway, it was a no-brainer. I tried, but failed, to convince him that you can't ignore the latter years of the loan just because you plan to move soon. What might appear to be a free lunch is actually paid for with a greater vulnerability to falling house prices: if house prices drop, an ARM borrower may be forced to choose between paying higher rates or selling at a loss -- whereas a fixed rate borrower can ride out a bad market forever (barring loss of income, which hurts either type of borrower).

Mish kept insisting that house prices are irrelevant to the ARM versus FRM decision, and didn't seem to understand the connection: that buying at a high price makes it more likely an ARM buyer will be trapped into paying higher rates later. He seemed quite pissed off at me, in fact. I'm very curious what he thinks about the subject now that the housing environment has changed a bit.

Here's the thread, for the record (my name was GeekGod over there):

http://boards.fool.com/Message.asp?mid=20614218&bid=&sort=whole

donalds
02-06-08, 01:56 AM
I'm reminded of back when I was in graduate school in the 80's, during which I studied extensively alternative energy (less from a technical than from a social theoretical perspective), and read works by writers like Amory Lovins. Lovins had a nice concept back then, namely, that what was really important in terms of energy was not so much it's generation as it's end use. Ultimately, he argued in 'Soft Paths' and other works, it was the end use that determines the soundness of the forms in which energy generation take.

Now, it seems to me that Knustler is at least attempting to make this point, and frankly I found his reasoning worthy enough to read it in it's entirety.

What I have yet to determine is this: are you, EJ, engaging in a rhetorical argument for purposes of stimulating debate, or are you speaking from conviction? I suspect it is more the later than the former. However, until you flesh out how this will politically come to fruition - and it does seem that you are asserting, and for good reason, that expanding uses of alternative forms of energy generation (along with that of infrastructure development, which by necessity must coincide), will ultimately derive from political decisions and policies (along with the needed social investments) - your argument leaves one with the impression that it is simply rhetorical, aimed at stimulating debate.

So . . . I'd suggest that until you make do flesh out the political to substantiate your projections for the future, your argument will likely fall short in convincing. Once you do flesh this out, assuming you do and that it is made public, then from there the debate can really begin. But be aware that once you enter this turf, that is the sphere of the political (and thus also policy formation and linking it to just how these social investments will materialize), then you have entered a complex cobweb of entangled and competing/contending interests for which consensus (a social/political consensus which by necessity needs to be accomplished for your projections to materialize), will be difficult in obtaining to say the least, especially in a society such as ours where conflict and divisions have become the order of the day and the very fuel on which the political system runs.

Only when you begin to flesh this out politically, and just as important how this will carry over to needed social investments, especially difficult when capital is a private endeavor, only then will you have taken the needed next leap. I commend you for your success in taking your argument as far as you have, but the next leap will require a great deal of study. I doubt that a couple years of study will be adequate.

bart
02-06-08, 01:34 PM
...
Mish skates breezily over the inflationary implications to domestic CPI of a currency plunging in purchasing power internationally. As EJ notes succinctly, it appears Mish "does not travel". Anyone this breezily cavalier about the inflationary implications of a currency racing down in purchasing power is laying themselves wide open for a good old fashioned debunk - and debunk is what Mr. Janszen indeed does.
...


I'm not trying to defend Mish, and indeed we've had more than a few disagreements over the years both online and in private, but he has been in gold and recommending it for many years.
If you didn't know that, it's quite a different picture that emerges.

I agree with EJ too - good guy and he's in there trying and pitching, even though his economics is odd.

metalman
02-06-08, 01:54 PM
I'm not trying to defend Mish, and indeed we've had more than a few disagreements over the years both online and in private, but he has been in gold and recommending it for many years.
If you didn't know that, it's quite a different picture that emerges.

I agree with EJ too - good guy and he's in there trying and pitching, even though his economics is odd.

question is... why was he recommending gold? because "deflation is in the cards"? what the sense in that? and when do we sell gold if "deflation" is the reason the price is going up? when the fed prints and inflation happens? that's the problem with recommending the right thing for the wrong mishmashy reason.

bart
02-06-08, 02:02 PM
question is... why was he recommending gold? because "deflation is in the cards"? what the sense in that? and when do we sell gold if "deflation" is the reason the price is going up? when the fed prints and inflation happens? that's the problem with recommending the right thing for the wrong mishmashy reason.

Yes, as you know he's a deflationista... and having gold and the very good profits is I think one reason why he misses the boat on the full economic picture.

jk
02-06-08, 02:17 PM
what do you call what happened in argentina?

in terms of argentine pesos, the price of everything went through the roof.
in terms of dollars, argentine assets became dirt cheap.

so was it inflation or deflation?

now imagine that argentina's was an international reserve currency, with foreign cb's interested in seeing that it didn't decline too precipitously.

housing prices are still very high in terms of dollars. house prices are at a 20 year low in terms of gold. inflation or deflation? depends on the currency.

akrowne
02-06-08, 02:25 PM
Just to fire my two cents into this debate, here is an excerpt from a recent email three-way exchange with Eric and Mike, where I come down on the inflation/deflation question somewhere in between the two of them. Here it is me replying to Eric, quoted:



deflation: A decline in general price levels, often caused by a reduction in the supply of money or credit. Deflation can also be brought about by direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending. ...

> So, deflation is clearly bullish for gold, or at least bearish for the dollar and neutral for gold (unlikely) -- in which case I as a prisoner of the dollar zone still should buy gold because it will "appear" to rise for me.

Deflation is clearly NOT bullish for gold. Is this the state of economics discussion on the web these days? Horrific. In a deflation, no one has any money. What are they going to buy gold with?Once again, it DOES matter whether you're referring to catastrophic "spiral" deflation or gradual deflation. I don't care much about what one counts as "general prices"... when financial assets deflate (as they are unambiguously now), especially when its in the reserve currency, gold becomes more attractive.

There's no contradiction. Yes, there's less money available in the US to buy gold. But that isn't the case for the other 95% of the world.

Deflation is deflation is deflation. It's absurd to even discuss the
definitions. If you expect a deflation, sell your gold asap. It's at an all time high. Sell it now.We're having one in the financial-economy sense, and I'm holding my gold (stale definitions aside).

You know "gold is at an all time high" isn't true. Adjusted by monetary base (the appropriate measure), it is half to a third of the all time high.


Given the globalized setting of the current calamity, I expect it to go much higher than even the real value of the watermark from 1980.
I have greater faith in the price of oil, gold, and food as indicators of
inflation.Then I think you're ignoring an significant element of the picture here. I still contend a large percentage of the price increase in gold (and perhaps the non-financial commodities) is due to financial deflation (I honestly don't know what I could call it that you wouldn't find objectionable, but we clearly have financial asset prices falling.)

Its a bit of a funny dynamic, actually. You have Arab and Chinese investors "withdrawing" dollars and then buying gold. Maybe they're ostensibly worried about inflation, but they're motivated to act because of distrust of US financial assets, bringing about financial economy deflation here when they cash out their stocks and subprime securities!

Anyway, at the end of the day, I'm just saying this is an additional reason to buy gold. You can call it "Krownism" instead of "deflation" if you prefer, because I certainly don't mean CPI deflation.

-Aaron

As for the role of the internet in the social milieux of breakdown, I actually think it will help. While you may get more kooky views being posted on the internet, that doesn't mean they'll become popular. The best, most popular fora are open to debate and comment. Bloggers will provide a check on the MSM, and the MSM on bloggers. This is a massive improvement.

I hear Cramer even cited ml-implode the other day, hah!

metalman
02-06-08, 02:30 PM
Yes, as you know he's a deflationista... and having gold and the very good profits is I think one reason why he misses the boat on the full economic picture.

another thought with my comment "when do we sell gold if "deflation" is the reason the price is going up?" comment... his "argument" is... "gold is money, money is going to do well in a deflation, therefore buy gold".

let's "unpack" it to use jk's phrase...

1. "gold is money". that's a slogan not a fact.
2. "money is going to do well in a deflation". no CASH does well in a deflation.
3. therefore... uh, nothing logically follows from these antecedents.

is that what ej means by sophistry?

soph·ist·ry /ˈsɒfhttp://cache.lexico.com/dictionary/graphics/luna/thinsp.pngəhttp://cache.lexico.com/dictionary/graphics/luna/thinsp.pngstri/ Pronunciation Key - Show Spelled Pronunciation[sof-uh-stree] Pronunciation Key - Show IPA Pronunciation –noun, plural -ries. <table class="luna-Ent"><tbody><tr><td class="dn" valign="top">1.</td><td valign="top">a subtle, tricky, superficially plausible, but generally fallacious method of reasoning. </td></tr></tbody></table> <table class="luna-Ent"><tbody><tr><td class="dn" valign="top">2.</td><td valign="top">a false argument; sophism.</td></tr></tbody></table>
nope. not even superficially plausible. :rolleyes:

metalman
02-06-08, 02:38 PM
what do you call what happened in argentina?

in terms of argentine pesos, the price of everything went through the roof.
in terms of dollars, argentine assets became dirt cheap.

so was it inflation or deflation?

now imagine that argentina's was an international reserve currency, with foreign cb's interested in seeing that it didn't decline too precipitously.

housing prices are still very high in terms of dollars. house prices are at a 20 year low in terms of gold. inflation or deflation? depends on the currency.

dug up the itulip charts from the select area... hope that's ok!

http://www.itulip.com/images/argentinaGDP1970-2001.gif

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

http://www.itulip.com/images/argentinaGDPinflation2.gif

looks like in the extreme case currency depreciation makes for a shitload of inflation in the local currency, too.

p.s. jk, it's not pesos it's reals.

metalman
02-06-08, 02:49 PM
appears to be two voices here. who's who? is > ej?

here we make a distinction between asset price inflation/deflation and p/c econ inflation/deflation in goods and stuff... based on what we learned from dr. hudson about the fed managing the two separately policywise.

bart
02-06-08, 02:51 PM
As for the role of the internet in the social milieux of breakdown, I actually think it will help. While you may get more kooky views being posted on the internet, that doesn't mean they'll become popular. The best, most popular fora are open to debate and comment. Bloggers will provide a check on the MSM, and the MSM on bloggers. This is a massive improvement.

I would love it if someone would put together an article covering *all* the reasons that gold goes up - there are quite a few... and I have a partial one written but am out of round tuits.

http://www.nowandfutures.com/grins/bueller.wav ;)





I hear Cramer even cited ml-implode the other day, hah!


I'm glad I was sitting down when I read that... :eek: ;)

Congrats Aaron! :D

bart
02-06-08, 02:55 PM
another thought with my comment "when do we sell gold if "deflation" is the reason the price is going up?" comment... his "argument" is... "gold is money, money is going to do well in a deflation, therefore buy gold".

let's "unpack" it to use jk's phrase...

1. "gold is money". that's a slogan not a fact.
2. "money is going to do well in a deflation". no CASH does well in a deflation.
3. therefore... uh, nothing logically follows from these antecedents.

is that what ej means by sophistry?

soph·ist·ry /ˈsɒfhttp://cache.lexico.com/dictionary/graphics/luna/thinsp.pngəhttp://cache.lexico.com/dictionary/graphics/luna/thinsp.pngstri/ Pronunciation Key - Show Spelled Pronunciation[sof-uh-stree] Pronunciation Key - Show IPA Pronunciation –noun, plural -ries. <table class="luna-Ent"><tbody><tr><td class="dn" valign="top">1.</td><td valign="top">a subtle, tricky, superficially plausible, but generally fallacious method of reasoning. </td></tr></tbody></table> <table class="luna-Ent"><tbody><tr><td class="dn" valign="top">2.</td><td valign="top">a false argument; sophism.</td></tr></tbody></table>
nope. not even superficially plausible. :rolleyes:



See my last post about a "missive" ( :D ;) ) covering all the major reasons that gold goes up. It's far from simple and there's lot of false data and sophistry (and vested interests) out there... and it's also very time frame related. (edit/add for clarification - I actually like the word missive, all it means is a written letter or message.)

For example, the "gold is money" item is mostly true if the time frame is long enough:

http://www.nowandfutures.com/images/gold_cpi_lies1900-current.png

bart
02-06-08, 02:58 PM
More on Argentina from my page on it:


http://www.nowandfutures.com/download/argentinaM1-3CreditReserves1993-2005.png



http://www.nowandfutures.com/download/ArgentinaGold2001-2005.png

metalman
02-06-08, 03:00 PM
i wonder... why didn't the argentines buy shitloads of gold to protect their wealth? i figure... the rich could hedge with dollar assets and the poor didn't have any money. hey, sounds familiar, except now it's hedge with non-dollar assets and gold for the rich.

FRED
02-06-08, 05:12 PM
And EJ replies:


Mish replies:
Eric I have a few quick comments.

Point #1
I am not aware that I have ever used the term missive.
If I ever did, I sure did not insist on that term.
Are you sure you don’t have me confused with someone else?"Anyone that thinks the FED has any credibility needs to read this missive about FED Bubble Talk from 1999 (http://www.safehaven.com/article-3015.htm)."
Etc.


Point #2
“Sometimes deflation is falling prices.”
No that is a misrepresentation of my position.That is an accurate representation of your position until recently when you stopped using it and started to refer to a decline in the monetary base as deflation. But prices are the only meaningful result of inflation and deflation. Not talking about inflation and deflation in the context of prices is like talking about obesity without talking about weight but only caloric input and exercise.

The discussion goes: the problem is obesity, the cause is excess caloric input and lack of exercise. Same deal with inflation: the problem is high prices, the cause is excessive money creation. If you could eat all you wanted and not exercise and not get fat, who'd care about diets and gyms? If not for rising prices which are the result of excessive money creation, who'd care about the money supply and the Fed? The answer is the same in both cases: no one.


I expect prices to go down but I have repeated stated and repeat now that falling prices are not proof of deflation nor are rising prices proof of inflation. I often talk about prices but never as proof of either inflation or deflation. Nonetheless I am on official record of saying prices will likely fall on all kinds of goods and services. It simply is not a requirement they do so.You've been expecting prices to go down for years, but they keep going up. Rather than admit your model is wrong and go back and fix it, as we had to years ago, you'd rather pretend that prices are persistently rising because prices are not related the money supply; if facts don't conform to model, the model can't be wrong, it's the facts that are wrong, not the model. This approach will not serve you well in the long term. Why not say, "Well, prices sure are rising everywhere. That's not what our model anticipated. What we didn't build into our model was the impact of dollar depreciation because not in our wildest dreams when we developed our model did we expect that the Fed and Treasury would allow the dollar to fall more than 30% against major currencies." Then move on, try to determine whether the trend will continue or not.

Point #3
I believe gold is money.
You counter that I need to be consistent.
I am consistent.
I consistently say gold is money.
Obviously you do not believe gold is money.
Once again you are imposing a definition of money on me.
The inconsistency is once again, you using definitions I do not agree with.The phrase "Gold is money" is good ideology but has little practical meaning to investors. I recall hearing the "Gold is money" rallying cry in 1980, 1981, 1982, and on through 2001 during which time it meant "I'm a stubborn gold bug getting my ass handed to me for 20 years." It will have that meaning again some day in the future after the global monetary system gets it's act together again, whenever that is. Then all the gold owner will have left is a slogan, but no money.

Point #4
You claim “Deflation is not bullish for gold. In a deflation, no one has any money.”
My reply is “Gold is money. In deflation, those with gold will have money by definition.”
The gold will not disappear will it?If the dollar is deflating against gold, gold prices are rising in dollar terms. If gold is deflating against the dollar, then gold prices are falling in dollar terms. In the first case the purchasing power of gold is rising, in the second of cash dollars. It's either one way or the other and cannot be both at once. It can be one THEN the other, and that's Ka-Poom Theory. At some point it will be time to trade out of gold and into assets that appreciate against dollars.

Point #5
There are numerous Austrian economists that agree with my definitions. If you choose to have a different viewpoint then I cannot change that. My viewpoint at least explains why gold is soaring and treasury yields are dropping.The Austrian school, as a lot of classical economists (my personal favorite is Joseph Schumpeter due to his focus on the importance of entrepreneurs in the economy) have a lot to offer, and I agree that a lot of modern economists have lost sight of basic principles of the classicists, such as the relationship between credit and innovation. But there was a lot they did not understand about economics, just as there is much that was not understood then about physics and human psychology.

I know you're no fan of Keynes. Have you read him? Keynes' contribution is in seeing an economy as a business that governments can influence but not control. The free market utopians think that's awful, that the economy should not be influenced by government at all. What we have learned over the past 30 years is that this in practice means ceding influence over the economy to finance, culminating in serial bubbles in asset prices and an absurd concentration of wealth. The results, I hope you will agree, have been less than delux. Leave any business to run itself and shortly the thugs and bullies take over.

Point #6
Pull up a long term chart of gold.
Gold fell from 800 to 250 with positive inflation the entire time.
Gold is a very poor inflation hedge by that measure.
However, gold as a currency (money) handles the situation nicely. In periods of monetary disinflation, money does poorly compared to assets. Positive inflation, to be sure. But not a weak dollar and positive inflation. You really need to plug currency depreciation into your model.

Less relevant model: demand is collapsing, economy in recession, money supply falling, currency appreciating.


http://www.itulip.com/images/japanzero.jpg


http://www.itulip.com/images/japandeflation.jpg


More relevant model: demand is collapsing, economy in recession, money supply exploding, currency depreciating.


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


Thank you for the otherwise favorable comments. I appreciate them. I was hoping this debate would not get acrimonious. I think it has been kept mostly within bounds. I too think you have done your readers a great service. You have made some extremely good calls. I mean what I said: thousands if not millions are better off for your diligent coverage of the fraud and greed, and I'm sure you get many letters of thanks from readers. We do, and it's very gratifying.

However, your rebuttals against deflation, even your current post, continue to debate without agreement as to definitions. If you look it up, the meaning of inflation has changed over time. I believe this is on purpose. It is of the central bank’s interest to not have people understand what inflation is. This give bankers the ability to inflate until it all blows up . And it blows up when no more debt can be forced into the system. That is, at least in my opinion, a very favorable environment for gold. It is also consistent with my definitions. From 1980 to 2000 you simply cannot make the same claim. Gold was a horrid inflation hedge.

To say that gold is rising because of inflation conveniently overlooks 20 year periods where there was inflation by either your definition or mine, and gold fell like a rock. No matter how hard you try, your gold responds to inflation theory does not hold up for considerable periods of time, decades in fact.The measures of inflation have changed, not the meaning of the term. The CPI was politicized under the Nixon administration.

Gold is a currency depreciation hedge, with inflation a secondary effect of currency depreciation.


Since I cannot reply on iTulip, I would appreciate it if you would post this for me.Make you a deal. Let me post to your site and you are welcome to post to mine. Fair enough?


I am not inclined to do another blog on it, we have both had our say.

Thanks
MishYou are welcome to have the final word on this discussion, if you wish. I won't reply.

Eric

jk
02-06-08, 05:23 PM
i wonder... why didn't the argentines buy shitloads of gold to protect their wealth? i figure... the rich could hedge with dollar assets and the poor didn't have any money.
they did. iirc what finally triggered the revaluation was accelerating capital flight.


re "inflation" and "deflation," i brought up the argentine example to illustrate the lack of clarity we have most of the time when using those words. argentina had a severe inflationary depression viewed in local currency terms, and a severe deflationary depression viewed in global currency terms - i.e. the dollar or gold.

i think we should stop using these words except when specifying the currency in which the term is to be interpreted. or just stop using them altogether. reminds me of alfred kahn who, warned not to use the word "depression," said the country was heading for the worst banana in 45 years if it didn't get inflation [there's that pesky word again] under control.

Contemptuous
02-06-08, 06:00 PM
Don't all local 'inflations' have a severely weakening currency as central component? Couldn't this always be percieved from outside that currency zone as 'deflation' or 'cheapening' of assets or goods & service prices?

Mish lavishes attention upon 'deflation of assets', which is in fact readily observable from outside an affected weakening currency zone. Concurrent depreciation of an asset might also be very observable even within that currency zone. But does Mish make any mention of the corollary - that this environment's prime symptom, a sharply weakening currency - without gold backing, seems most often to coincide with generally rising net costs for people trapped within that currency?

Maybe an Argentine would have found it whimsical, if anyone addressed them with a comment about their 'asset deflation', if all they noted meantime was a soaring cost of living? What can we recognize meantime here in the US that is strikingly similar? A weakening dollar perhaps? Maybe a rising cost of living? Are these fantastic notions, or do they appear to be readily observable?

According to Mish everyone outside the US dollar zone might more readily observe asset deflation going on over here? Yes, OK. That's perhaps even understated, as the US dollar is global reserve currency, and it's rate of descent is disguised by the fact other currencies are drifting downwards with it. So the full extent of this USD event is not even readily apparent.

But am I to understand the plunging US dollar, (even if it's a milder version of Argentina's currency implosion), has departed from the above standard corollary effects, and is now not conducive to prices rising inside the dollar zone?

It seems the great majority of sharply or chaotically weakening currencies in history caused rising prices within their currency zone (denominator of prices shrinking) - but in our case, the US dollar which is quite obviously devaluing vs. other currencies, is not supposed to exert an upward pressure upon the cost of goods here?

This is a startlingly novel idea, which must be why I am finding it so difficult to grasp.

zmas28
02-06-08, 09:39 PM
What I am struggling with is the apparent disconnect in dollar de(valuation) in the domestic US economy and in global markets.
The trade weighted dollar has declined significantly over the last few years as we all know. This shows up recently (as EJ and Fred point out) in high commodity valuations (there is a supply demand driver also, but since 2004 I think, the dollar story has been more important).
However, the higher commodity prices have not fed into inflation -- yet, but is poised to do so. Yes, I know the widely held belief that the government is faking the numbers, but I don't think that purchasing power loss due to general price inflation is at the same level as that due to trade weighted dollar decline. Said in another way, commodity price inflation appears to be higher than general price inflation.
So if one is talking about inflation or deflation, which of the two "dollars" is the right measuring stick? Or is it different depending on what is being measured?
Or am I completely off-base here?

godraz
02-06-08, 11:03 PM
OK. I don't know much when it comes to all the nuances of economic theory and practice, but I do appreciate this discussion and many of the insightful, open and learned contributions made here.

With respect to what EJ wrote above:


The measures of inflation have changed, not the meaning of the term.

I think that is not entirely true. While it may be true for purposes of discussion among economically minded folk of the jargon and context involved, the understanding at street level is (no thanks to MSM, poor education, etc.) is one of much obfuscation.

For instance, we often read (or are told via TV) that "inflation" of whatever is on the rise, without any explanation as to what is actually causing this rise in prices. It's always couched in some other factor -- i.e., supply/demand, rising wages, other cost increases -- rather than telling it like it is: money and credit has been increased to such an extreme that our currency is depreciated in the process!

Yet right now, despite all the massive infusions of money/credit of late to fend off what akrowne identifies as "financial deflation" of falling prices of financial assets, which clearly is due to all the speculative excesses of the housing bubble coming home to roost, a lot of other prices have reset higher and look to stay high. Some things are in deflationary mode and others are not. And why they are isn't always so straight forward.

For instance we had the sudden price rise in oil, of which some would say our currency increase/depreciation finally caught wind of and responded to. To an extent I agree, but I also think there is another aspect of this problem that is overlooked or diminished, and that is the theory that any commodity in demand higher than readily available supply will accordingly price itself higher.

Without intending to open another can of worms I suspect that within this astonishing oil price rise was a signal of supply/demand constraints above and beyond simple monetary "inflation" explanation. Hence I think peak oil is a relevant factor too. Calling it "peak 'cheap' oil" doesn't alter it's geologic and production/extraction rate reality -- one of an absolute limit against unlimited demand.

In any event, metalman makes fine note that:


here we make a distinction between asset price inflation/deflation and p/c econ inflation/deflation in goods and stuff.

As a lay person in all the finer points of economics raised here, I agree that in this "inflation" discussion/debate, it is such distinctions that can cause befuddlement when not sufficiently distinguished beforehand as such!

I think too jk's Argentine example follow-up reply also sheds light of further illustration upon "the lack of clarity we have most of the time when using these words." About which he concludes:


i think we should stop using these words except when specifying the currency in which the term is to be interpreted. or just stop using them altogether. reminds me of alfred kahn who, warned not to use the word "depression," said the country was heading for the worst banana in 45 years if it didn't get inflation [there's that pesky word again] under control.

Baring an outright ban on the word, what I would like to see is that where the word "inflation" is used, we would be mindful that it can be and is often used too vaguely (particularly in common usage -- perhaps purposely so as to mask the real problem -- as opposed to distinct in-depth economic usage), and hence a definition/distinction should be established ahead of or clearly within the discussion context to try and minimize any confusion that could and does arise. At least to me. :D

Alas, as to whether Mish's dogged reporting on the deflationary housing/financial debacle and his apparent belief that it is or will result in a "catastrophic 'spiral' deflation" (hat tip to akrowne) does pose a possibility which JoeSixpack expresses: "I am more concerned than ever that the debt deflation and demand destruction might outpace the attempts to keep the system going..." This is IMHO a valid question. To the extent that our economy involves a pyschological component, no one knows the extent that this present unwinding may bring to bear upon our "expectations" despite all the efforts to "manage" them while also not allowing the pyramid of unwinding debt to get out of control.

I think here is the bone that strikes at the heart of this contretemp with Mish and the deflasionistas camp. As someone who has played a certain amount of my chips in PM (awhile ago due to economic turmoil concerns) it would seem to follow that I think iTulip is going to prove right. But quite honestly I don't believe any of us can know for certain what comes our way. Sometimes I think my wife said it best: "All my facts are based on opinion." :D Well, at least when it comes to predicting the future.

I also think donalds raises an extremely relevant issue whereby iTulip's thesis of KaPoom (and the potential ensuing alt. energy/infrastructure boom) does entail "the sphere of political" decisions, policies and all that this involves. As someone who is involved in a community effort to see our town use town owned land for wind power installations I am well aware of this political process, about which I do have more hope for local success than that which is practiced in D.C.

This communal effort along with many ongoing individual and private enterprise installation efforts may well provide the lift-off base for the Poom phase, but I am also mindful of unforeseen exogenous events (geo-politically, economically, and thus too psychologically, to go along with climatological and/or ecological ones, and even peak oil/energy ones), that could delay, if not derail entirely, this future envisioned economic boom.

I can hope our better angels or sheer luck in conjunction with sufficent profitability may prove correct. Still there is no denying we do live in a time that is fraught with more potential tipping points of whose irreversibility we can't know ahead of time where a crossing occurs and suddenly find ourselves no longer in control of all that we think we can control.

All I can do is wait and see how it all plays out while listening in (and chiming in like now) on interesting discussions as happens here. Thanks and Ciao!

GRG55
02-06-08, 11:05 PM
i wonder... why didn't the argentines buy shitloads of gold to protect their wealth? i figure... the rich could hedge with dollar assets and the poor didn't have any money. hey, sounds familiar, except now it's hedge with non-dollar assets and gold for the rich.

A friend of mine runs a company that was selling lots of oil and gas equipment into Argentina in the years before and during the inflation. He told me his partners and business contacts were doing all sorts of creative things to get out of the currency. Buying fully loaded 7-Series BMW sedans and storing them in secure garages out in the countryside (the 12 cyl models got cleaned out the dealerships first). Buying the whole family the most expensive 1st-Class round-the-world air tickets, make the first leg from BA to NY, cash in the rest of the ticket for US$ and stuff it into a Manhattan bank account.

No end to the ways we humans will find to get around the "rules", even bans on the ownership of gold, or capital controls.:)

GRG55
02-06-08, 11:39 PM
Boom in the Doom

by Eric Janszen



"...The last bubble was manufactured by Greenspan & Co. to save their political bacon. At least the tech bubble left some useable capital assets behind, such as fiber-optic cables for communications. Sure it cost several times more than it would have without the capital carnage, but it’s better than a bunch of half-finished casinos blighting The Strip and thousands of empty MacMansions baking in the Arizona sun, and tumbleweeds filling the driveways in Bakersfield. What future economic use can those possibly serve? ...

I disagree with the sentiment of this statement.

I don't believe that housing is ever a productive investment in an economy, in the sense that national resources consumed by housing do not create a sustainable economy by producing something that someone else in the world wants to purchase or exchange, for something they produce.

However, housing a nation's workers can't be done at zero cost. I believe that rapidly escalating national housing costs, which eventually manifest in some form of increased labour cost for employers, were a material contributor to the steady decline in US labour competitiveness (Who wants to invest in a new plant in Southern California when your workers have to paid so highly just to afford a place to house their kids?).

Coming back to the statement above...most of the houses were not Toll Brothers McMansions, and hell-holes like Bakersfield were "discovered" only late in the housing bubble (EJ: Does your brother-in-law still live there?).

Although construction booms always create quality problems due to lack of skilled trades, for the most part the housing stock built in the recent boom/bubble has far better plumbing and electrical, and more energy-efficient windows, doors, HVAC, and appliances than the post-war pink stucco bunagalows that our parents purchased.

The grossly overbuilt inventories and recent affordability trends suggest that the US will not have to divert nearly as much of its national investment resources into the housing sector for a long, long time. As housing deflates (even in US $ terms!!!) it will compound the improving labour competitiveness from the falling US$. Desirable jurisdictions with cheaper housing eventually attract both talent and employers.

As for the McMansions...well who knows, maybe some of them will be converted into apartments for students or sorority houses, just like some of the mansions of the formerly wealthy left over from the various booms & busts in the last century.

EJ
02-06-08, 11:56 PM
I disagree with the sentiment of this statement.

I don't believe that housing is ever a productive investment in an economy, in the sense that national resources consumed by housing do not create a sustainable economy by producing something that someone else in the world wants to purchase or exchange, for something they produce.

However, housing a nation's workers can't be done at zero cost. I believe that rapidly escalating national housing costs, which eventually manifest in some form of increased labour cost for employers, were a material contributor to the steady decline in US labour competitiveness (Who wants to invest in a new plant in Southern California when your workers have to paid so highly just to afford a place to house their kids?).

Coming back to the statement above...most of the houses were not Toll Brothers McMansions, and hell-holes like Bakersfield were "discovered" only late in the housing bubble (EJ: Does your brother-in-law still live there?).

Although construction booms always create quality problems due to lack of skilled trades, for the most part the housing stock built in the recent boom/bubble has far better plumbing and electrical, and more energy-efficient windows, doors, HVAC, and appliances than the post-war pink stucco bunagalows that our parents purchased.

The grossly overbuilt inventories and recent affordability trends suggest that the US will not have to divert nearly as much of its national investment resources into the housing sector for a long, long time. As housing deflates (even in US $ terms!!!) it will compound the improving labour competitiveness from the falling US$. Desirable jurisdictions with cheaper housing eventually attract both talent and employers.

As for the McMansions...well who knows, maybe some of them will be converted into apartments for students or sorority houses, just like some of the mansions of the formerly wealthy left over from the various booms & busts in the last century.

My cousin, actually. Was there a year ago with my niece. I pulled over to pick up a tumbleweed that she thought might make an interesting thing to bring back to my sister's house. I figured a tumbleweed was just a loose bush that got blown around until it was round. Turned out it was a very prickly loose bush and getting it into the back of my sister's BMW was no picnic, and she wasn't all that happy to see it, either.

I'm comparing the economic value of homes left over from the housing bubble to the economic value of fiber-optic cable left over from the telco bubble. The latter enables all kinds of economic activity, much as a road does, provided it isn't a road to nowhere. You can argue that a house does, too, but not if it's half finished, or abandoned and need of repair before it can be used, and is likely to stay abandoned because it is too far from areas of job growth. A house has only one use – to house people, who may or may have no economic reason for being where the house is. That's why Bakersfield came to mind. It only exists because the housing bubble made houses too expensive in suburban LA. As the housing in LA gets cheaper, guess what happens to the abandoned houses in Bakersfield? (http://www.itulip.com/housingpriceregionscascade.htm)

FRED
02-07-08, 11:48 AM
OK. I don't know much when it comes to all the nuances of economic theory and practice, but I do appreciate this discussion and many of the insightful, open and learned contributions made here.

With respect to what EJ wrote above:



I think that is not entirely true. While it may be true for purposes of discussion among economically minded folk of the jargon and context involved, the understanding at street level is (no thanks to MSM, poor education, etc.) is one of much obfuscation.

For instance, we often read (or are told via TV) that "inflation" of whatever is on the rise, without any explanation as to what is actually causing this rise in prices. It's always couched in some other factor -- i.e., supply/demand, rising wages, other cost increases -- rather than telling it like it is: money and credit has been increased to such an extreme that our currency is depreciated in the process!

Yet right now, despite all the massive infusions of money/credit of late to fend off what akrowne identifies as "financial deflation" of falling prices of financial assets, which clearly is due to all the speculative excesses of the housing bubble coming home to roost, a lot of other prices have reset higher and look to stay high. Some things are in deflationary mode and others are not. And why they are isn't always so straight forward.

For instance we had the sudden price rise in oil, of which some would say our currency increase/depreciation finally caught wind of and responded to. To an extent I agree, but I also think there is another aspect of this problem that is overlooked or diminished, and that is the theory that any commodity in demand higher than readily available supply will accordingly price itself higher.

Without intending to open another can of worms I suspect that within this astonishing oil price rise was a signal of supply/demand constraints above and beyond simple monetary "inflation" explanation. Hence I think peak oil is a relevant factor too. Calling it "peak 'cheap' oil" doesn't alter it's geologic and production/extraction rate reality -- one of an absolute limit against unlimited demand.

In any event, metalman makes fine note that:



As a lay person in all the finer points of economics raised here, I agree that in this "inflation" discussion/debate, it is such distinctions that can cause befuddlement when not sufficiently distinguished beforehand as such!

I think too jk's Argentine example follow-up reply also sheds light of further illustration upon "the lack of clarity we have most of the time when using these words." About which he concludes:



Baring an outright ban on the word, what I would like to see is that where the word "inflation" is used, we would be mindful that it can be and is often used too vaguely (particularly in common usage -- perhaps purposely so as to mask the real problem -- as opposed to distinct in-depth economic usage), and hence a definition/distinction should be established ahead of or clearly within the discussion context to try and minimize any confusion that could and does arise. At least to me. :D

Alas, as to whether Mish's dogged reporting on the deflationary housing/financial debacle and his apparent belief that it is or will result in a "catastrophic 'spiral' deflation" (hat tip to akrowne) does pose a possibility which JoeSixpack expresses: "I am more concerned than ever that the debt deflation and demand destruction might outpace the attempts to keep the system going..." This is IMHO a valid question. To the extent that our economy involves a pyschological component, no one knows the extent that this present unwinding may bring to bear upon our "expectations" despite all the efforts to "manage" them while also not allowing the pyramid of unwinding debt to get out of control.

I think here is the bone that strikes at the heart of this contretemp with Mish and the deflasionistas camp. As someone who has played a certain amount of my chips in PM (awhile ago due to economic turmoil concerns) it would seem to follow that I think iTulip is going to prove right. But quite honestly I don't believe any of us can know for certain what comes our way. Sometimes I think my wife said it best: "All my facts are based on opinion." :D Well, at least when it comes to predicting the future.

I also think donalds raises an extremely relevant issue whereby iTulip's thesis of KaPoom (and the potential ensuing alt. energy/infrastructure boom) does entail "the sphere of political" decisions, policies and all that this involves. As someone who is involved in a community effort to see our town use town owned land for wind power installations I am well aware of this political process, about which I do have more hope for local success than that which is practiced in D.C.

This communal effort along with many ongoing individual and private enterprise installation efforts may well provide the lift-off base for the Poom phase, but I am also mindful of unforeseen exogenous events (geo-politically, economically, and thus too psychologically, to go along with climatological and/or ecological ones, and even peak oil/energy ones), that could delay, if not derail entirely, this future envisioned economic boom.

I can hope our better angels or sheer luck in conjunction with sufficent profitability may prove correct. Still there is no denying we do live in a time that is fraught with more potential tipping points of whose irreversibility we can't know ahead of time where a crossing occurs and suddenly find ourselves no longer in control of all that we think we can control.

All I can do is wait and see how it all plays out while listening in (and chiming in like now) on interesting discussions as happens here. Thanks and Ciao!

Welcome, godrad, and thank you for the thoughtful and detailed post, very much in the iTulip spirit.

JoeSixpack's point is key: "I am more concerned than ever that the debt deflation and demand destruction might outpace the attempts to keep the system going..." (That's the iTulip user JoeSixpack, not to be confused with term Joe Sixpack, commonly used to describe the average, middle-class American.)

We predicted a demand implosion in 2000 and were quite wrong. We misjudged the Fed's Bag of Tricks (BOT). As it is not in the Fed's interest to make the entire contents of the public, but reveal only enough to convince markets to not panic but not so much to induce further moral hazard, it is something of an article of faith that the bag is not already nearly empty at a time when it better have a lot more really good policy stuff in it.

Ultimately our error was in underestimating the depth of the Fed BOT, the volume of the contents, and the effectiveness of their application. Perhaps we are overestimating it this time. Only time will tell.

GRG55
02-07-08, 12:13 PM
My cousin, actually. Was there a year ago with my niece. I pulled over to pick up a tumbleweed that she thought might make an interesting thing to bring back to my sister's house. I figured a tumbleweed was just a loose bush that got blown around until it was round. Turned out it was a very prickly loose bush and getting it into the back of my sister's BMW was no picnic, and she wasn't all that happy to see it, either.

I'm comparing the economic value of homes left over from the housing bubble to the economic value of fiber-optic cable left over from the telco bubble. The latter enables all kinds of economic activity, much as a road does, provided it isn't a road to nowhere. You can argue that a house does, too, but not if it's half finished, or abandoned and need of repair before it can be used, and is likely to stay abandoned because it is too far from areas of job growth. A house has only one use – to house people, who may or may have no economic reason for being where the house is. That's why Bakersfield came to mind. It only exists because the housing bubble made houses too expensive in suburban LA. As the housing in LA gets cheaper, guess what happens to the abandoned houses in Bakersfield? (http://www.itulip.com/housingpriceregionscascade.htm)


Bakersfield doesn't qualify as one of those desirable locations I was thinking about. I know. For reasons I won't elaborate, I've made at least one visit to Bakersfield EVERY year since 2003 (and that's not exactly a cross-town jaunt from where I live).:p
You and I are in agreement about the relative economic value of housing - I tried to make the same point.
Only a small amount of the money that got poured into new housing in the past decade or more has been left half-finished. Yes, that part of it will prove to be useless, but so did a bit of the tech investment that was put in late in that game. Doesn't mean most of the stuff, in both cases, isn't of some use.
Nothing caused me to rethink my views on modern housing more than the experience of hunting for a decent flat in Central London a few years ago. I got a concentrated lesson on the general state of the UK urban housing stock. My budget was not the issue. Just about every place I got dragged around to look at had serious problems - 150 year old plumbing that didn't work, problematic heating systems, electricals that threatened to burn the place down if one attempted to toast a crumpet, crumbling masonry and damp, damp, damp, mouldy interiors everywhere. What truly amazed was that the owner-occupied residences I was privileged to be invited to were largely in the same state, with only the occasional exception. We Canadians and Americans have it good in comparison.

Andreuccio
02-07-08, 01:37 PM
That's why Bakersfield came to mind. It only exists because the housing bubble made houses too expensive in suburban LA. As the housing in LA gets cheaper, guess what happens to the abandoned houses in Bakersfield? (http://www.itulip.com/housingpriceregionscascade.htm)

Did people really go as far as Bakersfield because of LA housing prices? It's over 100 miles and nearly 2 hours away (assuming no traffic, so double that during rush hour). I can see places like Santa Clarita, Palmdale, Ontario, Riverside. These are all about 60 miles, and less than 1 hour away. (Again, when there's no traffic.) Another advantage all these places have, desolate as they are, over Bakersfield, is that at least they are not Bakersfield.

Apparently, people would have been willing to move to the banks of the river Styx itself to buy a house, despite the commute.

FRED
02-07-08, 01:40 PM
Bakersfield doesn't qualify as one of those desirable locations I was thinking about. I know. For reasons I won't elaborate, I've made at least one visit to Bakersfield EVERY year since 2003 (and that's not exactly a cross-town jaunt from where I live).:p
You and I are in agreement about the relative economic value of housing - I tried to make the same point.
Only a small amount of the money that got poured into new housing in the past decade or more has been left half-finished. Yes, that part of it will prove to be useless, but so did a bit of the tech investment that was put in late in that game. Doesn't mean most of the stuff, in both cases, isn't of some use.
Nothing caused me to rethink my views on modern housing more than the experience of hunting for a decent flat in Central London a few years ago. I got a concentrated lesson on the general state of the UK urban housing stock. My budget was not the issue. Just about every place I got dragged around to look at had serious problems - 150 year old plumbing that didn't work, problematic heating systems, electricals that threatened to burn the place down if one attempted to toast a crumpet, crumbling masonry and damp, damp, damp, mouldy interiors everywhere. What truly amazed was that the owner-occupied residences I was privileged to be invited to were largely in the same state, with only the occasional exception. We Canadians and Americans have it good in comparison.

EJ writes in:

No argument. Modern houses are better, cars are better, bicycles are better, medical care is better, and on and on. Visiting a museum and living in one are two entirely different experiences. Whenever I visit the kinds of flats you're talking about I'm reminded that those who complain about how the dollar has losing 95% of its purchasing power over the past 60 years are losing sight of how much our standard and quality of living has improved, romantic ideas of rustic living aside. You may need $10 to buy a lunch that cost $0.25 during the 1930s but you can buy with a few month's salary a car that $1,000,000 would not buy 20 years ago.

In my original projection of the housing bust from Dec. 2005 I figured MacMansions were destined to be divided up into multifamily dwellings. I have no idea what might happen to improve the picture in Bakersfield. Maybe if oil prices rise to $200 there's something under the ground there that will help? I recall an oil pump or two in the area.

http://www.itulip.com/images/10milesBakersfieldCA4399.jpg
Pictured are 4399 homes within a 10 mile radius of Bakersfield now in
pre-foreclosure, foreclosure, or bank owned as of Feb. 7, 2008. From ForeclosureRadar.com
(http://www.foreclosureradar.com)

bart
02-07-08, 02:19 PM
Did people really go as far as Bakersfield because of LA housing prices? It's over 100 miles and nearly 2 hours away (assuming no traffic, so double that during rush hour).

Yes, years ago I worked with folk who bought in Bakersfield and the Inland Empire and worked in LA.

Slimprofits
02-07-08, 09:42 PM
Are places such as Bakersfield going to be abondanded similar to some of the old factory cities and towns in the midwest?

How many Bakersfields are there in the U.S.? I've traveled a little bit, but not that much.

Verrocchio
02-07-08, 11:30 PM
American housing stock may have more to contend with than foreclosures.

In an article in the March 08 Atlantic Monthly, The Next Slum, Christopher Leinberger describes a major structural change in the housing market, a reversal of the decades-old flight to the suburbs. His article is based in large part on the analysis of Arthur Nelson, who forecasts a surplus of 22 million large-lot homes by 2025.

Babbitd, Leinberger reports that 81 of 132 houses are in foreclosure in Windy Ridge, seven miles northwest of Charlotte, NC; and the Franklin Reserve neighborhood in Elk Grove, CA, has many empty homes. Graffiti and broken windows have multiplied there.

GRG55, Leinberger doesn't think that your "grossly overbuilt inventories" will hold up well, because even the "high end McMansions" are cheaply built, as compared to the tough rowhouses built in the cities at the turn of the (previous) century.

GRG55
02-07-08, 11:48 PM
EJ writes in:
No argument. Modern houses are better, cars are better, bicycles are better, medical care is better, and on and on. Visiting a museum and living in one are two entirely different experiences. Whenever I visit the kinds of flats you're talking about I'm reminded that those who complain about how the dollar has losing 95% of its purchasing power over the past 60 years are losing sight of how much our standard and quality of living has improved, romantic ideas of rustic living aside. You may need $10 to buy a lunch that cost $0.25 during the 1930s but you can buy with a few month's salary a car that $1,000,000 would not buy 20 years ago.


In my original projection of the housing bust from Dec. 2005 I figured MacMansions were destined to be divided up into multifamily dwellings. I have no idea what might happen to improve the picture in Bakersfield. Maybe if oil prices rise to $200 there's something under the ground there that will help? I recall an oil pump or two in the area.
One possible outcome is Bakersfield becomes a college town. The McMansions go multi-tenant, and students sensitive to the tuition and living costs in the Bay Area & LA head inland. Let's face it, students are not only acutely price sensitive, but can put up with anything for 4 years. Besides they don't have to spend the gawdawful summers there. I've driven by a large campus that I think is a Cal State U outpost there. Okay, okay, it's not Amherst, but it might work.;)

There's always a solution...:)

GRG55
02-08-08, 12:22 AM
American housing stock may have more to contend with than foreclosures.

In an article in the March 08 Atlantic Monthly, The Next Slum, Christopher Leinberger describes a major structural change in the housing market, a reversal of the decades-old flight to the suburbs. His article is based in large part on the analysis of Arthur Nelson, who forecasts a surplus of 22 million large-lot homes by 2025.

Babbitd, Leinberger reports that 81 of 132 houses are in foreclosure in Windy Ridge, seven miles northwest of Charlotte, NC; and the Franklin Reserve neighborhood in Elk Grove, CA, has many empty homes. Graffiti and broken windows have multiplied there.

GRG55, Leinberger doesn't think that your "grossly overbuilt inventories" will hold up well, because even the "high end McMansions" are cheaply built, as compared to the tough rowhouses built in the cities at the turn of the (previous) century.

I've seen my fill of the British equivalent of Leinberger's "tough row houses". Structures are fine, but try living in one (that hasn't been totally gutted and completely rebuilt using modern glazing, plumbing, electrical, insulation, HVAC, fixtures, the works) before one falls for the romanticism that Leinberger promulgates.

There's always going to be cycles of rebuilding and rejuvenation in the cities, and there will always be a good number of people that prefer inner city living to the suburbs. For my last 12 years before I left Canada I lived within walking distance of my downtown office, and my flat was in Central London, so I understand the attraction. But there are serious trade-offs.

For example, most inner city rowhouses/townhouses involve lots of stairs. An aging population of Boomer retirees doesn't mesh well with that situation (I am dealing with this problem right now with my in-laws). Of course an aging population of Boomer retirees probably won't want to be rattling around in oversized McMansions either. Fair point. But my point is that most of the new housing in the last 15 or 20 years wasn't McMansions, and most of it wasn't in undesirable locations either. But it's these horror stories that make the headlines and the evening news on TV, and leave people with the incorrect impression that all construction was crappy, all new homes were oversized, all of them are in places that are depopulating right before our very eyes (that seems to be Leinberger's angle), and "nothing will ever be the same again".

I witnessed first-hand, up close, the melt down in housing when the last resource boom went bust (anyone in Houston at that time will remember it well). Where I was median home prices fell more than 25% between 1981 and January 1986, when they finally bottomed. There was a lot of doom and gloom on housing, the "death of the suburbs", the "end of commuter towns", "real estate will never recover", "the sky is falling", etc. being passed around then too. Didn't happen. Short of another Great Depression it won't happen this time either.

GRG55
02-08-08, 12:35 AM
Are places such as Bakersfield going to be abondanded similar to some of the old factory cities and towns in the midwest?

How many Bakersfields are there in the U.S.? I've traveled a little bit, but not that much.

Contrary to EJ's pessimism, Bakersfield could do just fine. It's a large distribution and processing center for one of the biggest food growing regions in the world. Believe it or not we get huge amounts of fruits and vegetables here in the Arabian Gulf that are labelled from Bakersfield growers (plums, apricots, baby carrots, and so forth). As the US $ has declined I notice that US sourced food seems to be displacing stuff we used to get from South Africa and Australia.

If you believe the talk about an agricultural boom, Bakersfield may surprise us all - as long the water doesn't run out that is...:cool:

EJ
02-08-08, 12:50 AM
Contrary to EJ's pessimism, Bakersfield could do just fine. It's a large distribution and processing center for one of the biggest food growing regions in the world. Believe it or not we get huge amounts of fruits and vegetables here in the Arabian Gulf that are labelled from Bakersfield growers (plums, apricots, baby carrots, and so forth). As the US $ has declined I notice that US sourced food seems to be displacing stuff we used to get from South Africa and Australia.

If you believe the talk about an agricultural boom, Bakersfield may surprise us all - as long the water doesn't run out that is...:cool:


I http://www.itulip.com/images/heart.gifBakersfield!

metalman
02-08-08, 01:30 AM
Oh please... cut the crap.

means http://i30.tinypic.com/8vt5qr.gif + http://i32.tinypic.com/1zwofm9.gif

bart
02-08-08, 01:33 AM
means http://i30.tinypic.com/8vt5qr.gif + http://i32.tinypic.com/1zwofm9.gif

Your choice:
http://www.nowandfutures.com/grins/rimshot.mp3
or
http://www.nowandfutures.com/grins/eat_short.mp3
:D


(by the way, my post was based on a misunderstanding)

FRED
02-08-08, 02:48 AM
means http://i30.tinypic.com/8vt5qr.gif + http://i32.tinypic.com/1zwofm9.gif

This has GOT to be related to the inflation/deflation debate. But I don't know how!


http://www.itulip.com/images/heart.gif = http://i30.tinypic.com/8vt5qr.gif + http://i32.tinypic.com/1zwofm9.gif

GRG55
02-08-08, 07:13 AM
...I'm comparing the economic value of homes left over from the housing bubble to the economic value of fiber-optic cable left over from the telco bubble. The latter enables all kinds of economic activity, much as a road does, provided it isn't a road to nowhere. You can argue that a house does, too, but not if it's half finished, or abandoned and need of repair before it can be used, and is likely to stay abandoned because it is too far from areas of job growth. A house has only one use – to house people, who may or may have no economic reason for being where the house is. That's why Bakersfield came to mind. It only exists because the housing bubble made houses too expensive in suburban LA. As the housing in LA gets cheaper, guess what happens to the abandoned houses in Bakersfield? (http://www.itulip.com/housingpriceregionscascade.htm)

Given the relative difference in economic value between housing and other capital investment, does it follow then that the so-called gargantuan housing bubble wasn't (in real economic value terms) nearly as "big" as it has been made out to be?

If so, then perhaps the "next bubble" doesn't need to be nearly as "big" as we have assumed, in order to be enough to sufficiently offset the negatives of the housing bubble collapse and keep the wheels on the wagon?

c1ue
02-08-08, 08:29 AM
GRG,

I don't see the suburbs getting depopulated; there are always those people who want big spreads and are willing to drive 30 miles to get it.

However, I equally don't see prices holding up.

Between the costs of maintenance, heating/cooling, and commuting, I'd estimate 50%+ price drops to maintain attractiveness.

As for Bakersfield for students - actually I disagree.

I'm seeing a gigantic surge in academy here in SF: weather isn't the greatest, but far better than month-long 100 degree spells in Bakersfield.

Just the Academy of Art alone has expanded to 3 different locations within a 10 block radius of my place.

Furthermore from a social/creative/propaganda perspective, you can trivially beat Bakersfield (I spent some formative years in the Central Valley). There is no coincidence that alcohol is the principal entertainment vehicle there.

dbarberic
02-08-08, 11:21 AM
I sniff a business opportunity to retro-fit the existing housing stock for energy efficiency with the latest, best practice technology.

Hmmm... how can this work?

bart
02-08-08, 11:33 AM
I sniff a business opportunity to retro-fit the existing housing stock for energy efficiency with the latest, best practice technology.

Hmmm... how can this work?

A 25+ page E-book sold on Amazon for under $10?

Verrocchio
02-08-08, 12:05 PM
Leinberger did tend to stretch his case a bit. To support his point that today's houses are poorly made, elsewhere in his article he wrote that the drywall is about all that's holding up the wooden frame in these houses. Having worked on a framing crew on summer "vacations" while in college, I'd say that is a fair description of some stick-built houses, but it all depends on the quality of the design, the contractor, the subs, and the workmanship; so, YMMV.

You're right, too, about cycles. Preferences for urban, suburban, or rural living are fickle, and trends go up and down. Still, his thesis lies within the realm of probability. In times like these, when major assumptions have been shown to be false, speculation about the future flourishes.

dbarberic
02-08-08, 04:18 PM
A 25+ page E-book sold on Amazon for under $10?
I can't tell if your sarcastic or not.

I'm thinking bigger. More like a general contractor that sells retrofits at a fixed price levels where a team comes in and does everything at one.

May work in the future if the federal government starts offering tax incentives to perform energy efficent home improvements.

Slimprofits
02-08-08, 10:34 PM
In an article in the March 08 Atlantic Monthly, The Next Slum, Christopher Leinberger describes a major structural change in the housing market, a reversal of the decades-old flight to the suburbs. His article is based in large part on the analysis of Arthur Nelson, who forecasts a surplus of 22 million large-lot homes by 2025.

thanks for the tip!

The Next Slum? (http://www.theatlantic.com/doc/print/200803/subprime)



This future is not likely to wear well on suburban housing. Many of the inner-city neighborhoods that began their decline in the 1960s consisted of sturdily built, turn-of-the-century row houses, tough enough to withstand being broken up into apartments, and requiring relatively little upkeep. By comparison, modern suburban houses, even high-end McMansions, are cheaply built. Hollow doors and wallboard are less durable than solid-oak doors and lath-and-plaster walls. The plywood floors that lurk under wood veneers or carpeting tend to break up and warp as the glue that holds the wood together dries out; asphalt-shingle roofs typically need replacing after 10 years. Many recently built houses take what structural integrity they have from drywall—their thin wooden frames are too flimsy to hold the houses up.

As the residents of inner-city neighborhoods did before them, suburban homeowners will surely try to prevent the division of neighborhood houses into rental units, which would herald the arrival of the poor. And many will likely succeed, for a time. But eventually, the owners of these fringe houses will have to sell to someone, and they’re not likely to find many buyers; offers from would-be landlords will start to look better, and neighborhood restrictions will relax. Stopping a fundamental market shift by legislation or regulation is generally impossible.

Of course, not all suburbs will suffer this fate. Those that are affluent and relatively close to central cities—especially those along rail lines—are likely to remain in high demand. Some, especially those that offer a thriving, walkable urban core, may find that even the large-lot, residential-only neighborhoods around that core increase in value. Single-family homes next to the downtowns of Redmond, Washington; Evanston, Illinois; and Birmingham, Michigan, for example, are likely to hold their values just fine.

On the other hand, many inner suburbs that are on the wrong side of town, and poorly served by public transport, are already suffering what looks like inexorable decline. Low-income people, displaced from gentrifying inner cities, have moved in, and longtime residents, seeking more space and nicer neighborhoods, have moved out.
But much of the future decline is likely to occur on the fringes, in towns far away from the central city, not served by rail transit, and lacking any real core. In other words, some of the worst problems are likely to be seen in some of the country’s more recently developed areas—and not only those inhabited by subprime-mortgage borrowers. Many of these areas will become magnets for poverty, crime, and social dysfunction.

GRG55
02-08-08, 10:41 PM
I can't tell if your sarcastic or not.

I'm thinking bigger. More like a general contractor that sells retrofits at a fixed price levels where a team comes in and does everything at one.

May work in the future if the federal government starts offering tax incentives to perform energy efficent home improvements.

There is a very good chance that the trend you've identified is real. Depends in part on the location. The places where new build tends to beat renovations are in locations where the city is not "downtown" oriented in terms of the offices and jobs (if people can easily work in the suburbs, they'll buy new in the suburbs; but if the jobs are downtown then some will pay/renovate to reduce the ever increasing commute).

The relative cost and availability of land is another factor. If you compare Seattle or Vancouver, BC with Phoenix or Vegas, the availability of land (because of geography) is much more constrained, so there wasn't the same sort of mass tract house building by the giant national builders. These might be locations where renovating and upgrading older existing homes is a growth industry.

The neighbourhood I grew up in was new in the 1950's, and is now considered close in to downtown Vancouver. The lots are huge compared to today, and its starting to attract the attention of buyers who are doing major renovations/rebuilds. By major, I mean gutting them and replacing everything to current standards - windows, insulation, plumbing, electrical...

cobben
02-09-08, 08:08 AM
Some odd thoughts . . .

Comparing current situation to "The Great Depression", many things are turned around, or converse, such as now the US is a debtor, then a creditor . . .

Then there was a glut in oil, depressing prices, as the oil industry was new and expanding at breakneck speed going into the crash, when a lot of oil companies went bust and got taken over by their competiton or by predatory bankers.

A good read is the Frank Phillips biography "Oil Man", Phillips also by the way, besides being an extreme risk taker / wildcatter by nature, also owned the main bank in Tulsa, having learned fron his banker father-in-law how to grind the bank ax.

Phillips pushed through construction of an innovative gasoline pipeline, which many said would not work, during the worst period of the depression, with the uneasy bankers hanging around his neck like albatrosses, keeping folks employed during those hard times as well as could be arranged.

Another unrelated thought, Gene Inger has suggested that the current situation might more resemble the 1880's railway bond debacle, about which I know nothing as of yet.

FRED
02-09-08, 08:59 AM
Some odd thoughts . . .

Comparing current situation to "The Great Depression", many things are turned around, or converse, such as now the US is a debtor, then a creditor . . .

Then there was a glut in oil, depressing prices, as the oil industry was new and expanding at breakneck speed going into the crash, when a lot of oil companies went bust and got taken over by their competiton or by predatory bankers.

A good read is the Frank Phillips biography "Oil Man", Phillips also by the way, besides being an extreme risk taker / wildcatter by nature, also owned the main bank in Tulsa, having learned fron his banker father-in-law how to grind the bank ax.

Phillips pushed through construction of an innovative gasoline pipeline, which many said would not work, during the worst period of the depression, with the uneasy bankers hanging around his neck like albatrosses, keeping folks employed during those hard times as well as could be arranged.

Another unrelated thought, Gene Inger has suggested that the current situation might more resemble the 1880's railway bond debacle, about which I know nothing as of yet.

You're on the right track. In the context of iTulip Ka-Poom Theory (http://www.itulip.com/kapoomtheory.htm) going back to 1999. looks like the US gets a Japan style grinding debt deflation workout but inflationary vs deflationary due to US net debtor status vs Japan net creditor status.

We do enjoyed sparring with the Deflationistas, though. They are very entertaining.


http://www.itulip.com/images/deflationdoomers.jpg


If deflation is a threat anywhere on the planet, wouldn't someone be talking about it? Here's a googletrends analysis of instances of the words "deflation" and "inflation" in news stories worldwide since 2003.


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

Jim Nickerson
02-09-08, 12:38 PM
You're on the right track. In the context of iTulip Ka-Poom Theory (http://www.itulip.com/kapoomtheory.htm) going back to 1999. looks like the US gets a Japan style grinding debt deflation workout but inflationary vs deflationary due to US net debtor status vs Japan net creditor status.

We do enjoyed sparring with the Deflationistas, though. They are very entertaining.


http://www.itulip.com/images/deflationdoomers.jpg


If deflation is a threat anywhere on the planet, wouldn't someone be talking about it? Here's a googletrends analysis of instances of the words "deflation" and "inflation" in news stories worldwide since 2003.



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


On a contrarian basis, deflation might be in the picture. You know like lemmings and the madness of crowds behaviors.

I'm not smart enough to argue there is deflation laying ahead. I tend to find little fault, in any, with EJ's thinking, but when everyone is on the same side of an argument, it truly makes me want to run away from the crowd.

FRED
02-09-08, 03:03 PM
On a contrarian basis, deflation might be in the picture. You know like lemmings and the madness of crowds behaviors.

I'm not smart enough to argue there is deflation laying ahead. I tend to find little fault, in any, with EJ's thinking, but when everyone is on the same side of an argument, it truly makes me want to run away from the crowd.

Too bad googetrends data don't go back ten years. I bet they'd show a spike in the occurrence of the word "deflation" in the 2001 - 2002 period before Greenspan: Deflation dead (http://money.cnn.com/2004/04/20/news/economy/greenspan_inflation/index.htm).

Contemptuous
02-09-08, 04:09 PM
Jim -

As a critical complement to technical indicators and contrarian formulas, it's often also useful to just take a glance around the world.

Inflation fans out across the globe - Asian Bubble Watch:

February 1 - Bloomberg (Shamim Adam): "Inflation is accelerating in Asia as South Korea, Indonesia and Thailand join regional counterparts in reporting rising prices that are making it harder for their central banks to follow the U.S. in cutting interest rates. Consumer price gains in Sri Lanka exceeded 20% in January, while those in Australia reached levels not seen in 16 years. Inflation is accelerating even as China, India and Australia today reported a slowdown in manufacturing in January."

February 1 - Bloomberg (Seyoon Kim): "South Korea's inflation accelerated in January at the fastest pace in more than three years as costs of industrial goods and fuel rose following a surge in crude oil prices. The consumer price index rose 3.9% from a year earlier..."

January 28 - Bloomberg (Yu-huay Sun): "Taipei fruit prices jumped 70% from a year earlier because typhoons reduced supplies by about a fifth, the China Times reported..."

January 28 - Bloomberg (Glenys Sim): "Singapore's overall concern in 2008 is inflation on the back of high oil prices and rising food costs, the Business Times reported, citing Tony Tan, deputy chairman of Government of Singapore Investment Corp."

India Watch:

February 1 - Bloomberg (Kartik Goyal): "India's exports rose to $12.3 billion in December from a year earlier as companies shipped more gems, machinery and fuel products to overseas markets. Shipments increased 16%... Imports advanced 18.1%."

February 1 - Bloomberg (Anil Varma): "Indian banks' loans rose 203.3 billion rupees ($5.2 billion) in the two weeks ended Jan. 18... Credit climbed 22.5% in the 12 months..."

January 31 - Bloomberg (Kartik Goyal): "India's economy expanded 9.6% last fiscal year, the fastest pace since 1989, as rising incomes spurred demand for cars, mobile phones and motor-bikes."

Unbalanced Global Economy Watch:

January 31 - Financial Times (Ralph Atkins): "Eurozone inflation has soared to a 14-year high of 3.2%, adding to the European Central Bank's case a hard-line stance on future interest rate moves. The unexpected rise from 3.1% in December suggests that the 'hump' in inflation caused by higher energy and food prices will prove larger and longer-lasting than anticipated by the ECB. January's rate was the highest since the Frankfurt-institution took responsibility for monetary policy in the region in 1999."

January 28 - Bloomberg (Gabi Thesing): "Money-supply growth in the euro region cooled in December more than economists forecast, led by a slowdown in overnight deposits. M3 money supply...rose 11.5% from a year earlier, after gaining 12.3% in November..."

January 30 - Bloomberg (Christian Vits): "German retail sales fell for a fourth month in January as surging inflation eroded spending power, according to the Bloomberg purchasing managers' index... 'Pressure on disposable incomes from rising food, fuel and utility bills continued to exert a downward influence on consumer expenditure,' NTC said... German households curbed spending after inflation accelerated last year to the fastest pace since records began in 1996, driven by a higher sales tax and rising energy prices."

January 29 - Bloomberg (Thomas Mulier): "Swiss watch exports increased 16% last year, the fastest pace in 18 years, as a surging Chinese stock market fueled consumption in Hong Kong."

January 28 - Bloomberg (Jonas Bergman): "Swedish household credit growth slowed in December from a five-month high as higher borrowing costs and slipping real estate prices crimped demand. Total household lending grew an annual 10.8% in December, down from 11.9% in November..."

January 29 - Bloomberg (Alex Nicholson): "The cost of goods leaving Russian factories and mines rose at the fastest annual pace in almost three years in December as global energy and metals prices soared. Producer prices in the world's biggest energy exporter increased 25.1%, up from 22.2% in November..."

January 28 - Bloomberg (Massoud A. Derhally): "Jordan's inflation rate will probably jump to the highest in 18 years in 2008 as the government ends oil subsidies and increases expenditure, Finance Minister Hamed al- Kasasbeh said. Inflation will accelerate to between 8% and 9% from 5.4% last year..."
January 30 - Bloomberg (Nasreen Seria): "South African inflation accelerated to an annual 8.6% in December, exceeding forecasts and staying above the central bank's target range for a ninth consecutive month as food and gasoline costs rose."

Crude Liquidity Watch:

January 29 - Bloomberg (Matthew Brown): "Persian Gulf states, including Saudi Arabia and the United Arab Emirates, may create an 'inflationary spiral' as governments boost spending in response to higher prices, Moody's... said. Increased government spending on salaries and subsidies, aimed at alleviating the effects of inflation, may stimulate demand, leading to further price rises, said senior analyst Tristan Cooper... Inflation accelerated to records in all six Gulf Cooperation Council states during the past year... 'The danger is that governments across the GCC may find it increasingly difficult to limit expenditure growth in the face of rising inflation, thereby locking themselves into higher and higher oil prices in order to balance their budgets,' Cooper said..."

January 29 - Bloomberg (Matthew Brown): "Kuwait's annual M3 money supply growth, an indicator of future inflation, slowed to 19% in December from 20% in November. M1 money supply growth increased to 21% in December from 18% in November, while M2, which includes savings and investment instruments, fell to 19% from 20%..."

____________

PS - Yes Jim, it is indeed Doug Noland. My omission was inadvertent. The little "BLOOMBERG" tag on each posted news quote might however be considered helpful?

Jim Nickerson
02-09-08, 07:27 PM
Jim -

As a critical complement to technical indicators and contrarian formulas, it's often also useful to just take a glance around the world.

Inflation fans out across the globe - Asian Bubble Watch:

February 1 - Bloomberg (Shamim Adam): "Inflation is accelerating in Asia as South Korea, Indonesia and Thailand join regional counterparts in reporting rising prices that are making it harder for their central banks to follow the U.S. in cutting interest rates. Consumer price gains in Sri Lanka exceeded 20% in January, while those in Australia reached levels not seen in 16 years. Inflation is accelerating even as China, India and Australia today reported a slowdown in manufacturing in January."

February 1 - Bloomberg (Seyoon Kim): "South Korea's inflation accelerated in January at the fastest pace in more than three years as costs of industrial goods and fuel rose following a surge in crude oil prices. The consumer price index rose 3.9% from a year earlier..."

January 28 - Bloomberg (Yu-huay Sun): "Taipei fruit prices jumped 70% from a year earlier because typhoons reduced supplies by about a fifth, the China Times reported..."

January 28 - Bloomberg (Glenys Sim): "Singapore's overall concern in 2008 is inflation on the back of high oil prices and rising food costs, the Business Times reported, citing Tony Tan, deputy chairman of Government of Singapore Investment Corp."

India Watch:

February 1 - Bloomberg (Kartik Goyal): "India's exports rose to $12.3 billion in December from a year earlier as companies shipped more gems, machinery and fuel products to overseas markets. Shipments increased 16%... Imports advanced 18.1%."

February 1 - Bloomberg (Anil Varma): "Indian banks' loans rose 203.3 billion rupees ($5.2 billion) in the two weeks ended Jan. 18... Credit climbed 22.5% in the 12 months..."

January 31 - Bloomberg (Kartik Goyal): "India's economy expanded 9.6% last fiscal year, the fastest pace since 1989, as rising incomes spurred demand for cars, mobile phones and motor-bikes."

Unbalanced Global Economy Watch:

January 31 - Financial Times (Ralph Atkins): "Eurozone inflation has soared to a 14-year high of 3.2%, adding to the European Central Bank's case a hard-line stance on future interest rate moves. The unexpected rise from 3.1% in December suggests that the 'hump' in inflation caused by higher energy and food prices will prove larger and longer-lasting than anticipated by the ECB. January's rate was the highest since the Frankfurt-institution took responsibility for monetary policy in the region in 1999."

January 28 - Bloomberg (Gabi Thesing): "Money-supply growth in the euro region cooled in December more than economists forecast, led by a slowdown in overnight deposits. M3 money supply...rose 11.5% from a year earlier, after gaining 12.3% in November..."

January 30 - Bloomberg (Christian Vits): "German retail sales fell for a fourth month in January as surging inflation eroded spending power, according to the Bloomberg purchasing managers' index... 'Pressure on disposable incomes from rising food, fuel and utility bills continued to exert a downward influence on consumer expenditure,' NTC said... German households curbed spending after inflation accelerated last year to the fastest pace since records began in 1996, driven by a higher sales tax and rising energy prices."

January 29 - Bloomberg (Thomas Mulier): "Swiss watch exports increased 16% last year, the fastest pace in 18 years, as a surging Chinese stock market fueled consumption in Hong Kong."

January 28 - Bloomberg (Jonas Bergman): "Swedish household credit growth slowed in December from a five-month high as higher borrowing costs and slipping real estate prices crimped demand. Total household lending grew an annual 10.8% in December, down from 11.9% in November..."

January 29 - Bloomberg (Alex Nicholson): "The cost of goods leaving Russian factories and mines rose at the fastest annual pace in almost three years in December as global energy and metals prices soared. Producer prices in the world's biggest energy exporter increased 25.1%, up from 22.2% in November..."

January 28 - Bloomberg (Massoud A. Derhally): "Jordan's inflation rate will probably jump to the highest in 18 years in 2008 as the government ends oil subsidies and increases expenditure, Finance Minister Hamed al- Kasasbeh said. Inflation will accelerate to between 8% and 9% from 5.4% last year..."
January 30 - Bloomberg (Nasreen Seria): "South African inflation accelerated to an annual 8.6% in December, exceeding forecasts and staying above the central bank's target range for a ninth consecutive month as food and gasoline costs rose."

Crude Liquidity Watch:

January 29 - Bloomberg (Matthew Brown): "Persian Gulf states, including Saudi Arabia and the United Arab Emirates, may create an 'inflationary spiral' as governments boost spending in response to higher prices, Moody's... said. Increased government spending on salaries and subsidies, aimed at alleviating the effects of inflation, may stimulate demand, leading to further price rises, said senior analyst Tristan Cooper... Inflation accelerated to records in all six Gulf Cooperation Council states during the past year... 'The danger is that governments across the GCC may find it increasingly difficult to limit expenditure growth in the face of rising inflation, thereby locking themselves into higher and higher oil prices in order to balance their budgets,' Cooper said..."

January 29 - Bloomberg (Matthew Brown): "Kuwait's annual M3 money supply growth, an indicator of future inflation, slowed to 19% in December from 20% in November. M1 money supply growth increased to 21% in December from 18% in November, while M2, which includes savings and investment instruments, fell to 19% from 20%..."

Did you search out all those headlines yourself or just copy and paste someone else's work without the respect for attribution?

If something is so widely, universally known, it would be truly amazing if most of the market participants have not already factored it into their thinking. Your post from wherever it was derived tends to prove the same thing FRED's googlism proved.

Six months ago there was a nadir in FRED'S chart, though it wasn't stated what "B" meant. Back then might have been a better point to be worried and acting about inflation. A lot has happened in the markets since then, and now "inflation" concerns might be described as rampant. Thus the behavior of crowds and lemmings.


My contrarian point has nothing to do with technical analytical tools or contrarian formulae (I don't even know any of the latter I don't think), it simply has to do with opening one's eyes and looking around.

jk
02-09-08, 07:41 PM
jim, i haven't checked, but based on the labels and style, i assumed that lukester's post was excerpted from doug noland's credit bubble bulletin at prudentbear.com. he may have assumed that others would know that [assuming i'm correct], but i agree that attribution would be a good idea. on contrarianism, i think you have to be very careful. it only works at extremes. it was truly contrarian to think about ultimate inflation and buy gold in 2000. but since that time there is a growing acceptance of these themes. we need a growing acceptance for the price to keep rising, as more and more purchasers are recruited. it is only after all possible recruits have "enlisted" and bought that the top is reached. in the meantime, expect increasing mentions of inflation and gold.

godraz
02-09-08, 07:43 PM
In my attempt to try and see through all the short term noise signals and instead focus on the long term big signal picture is where I think this whole divide lies. Yet the effort to see the forest as a whole with all the new-fangled growth of the tree's global branches, imbalances, and unwinding of bad debt and bets gone wild threatening to clear cut the entire forest is not easy.

The Deflationistas presume the economic forest system is so imbalanced as to be beyond control or containment, all of which is readily reinforced by their daily raking over of the trees going up in smoke. Hence where there is smoke there is fire, and in this, by their reckoning, forest filled with deadwood the conflagration underway can not be mitigated.

In some respects I think their alarm is entirely merited, but their extended belief that it is now an inescapable uncontrollable end game is a projection of no absolute certainty.

This is where iTulip attempts to offer an alternate take on the outcome, particularly as they are mindful, despite all the threatening flames present and potential, that there are very substantial and interlocked other vested entities and interests involved here. Whether they can coordinate or otherwise act in such a way to off-set, tame and mitigate the debt deflation now underway is unknown, but I have little doubt they will try to do what they can or see as necessary.

A deflationary spiral and catastrophic one at that may well befell us all globally in the future, which by the Deflationistas reckoning is settling in upon us now. Not that I am particularly optimistic about our future prospects but I'm inclined to suspect their vision of this happening without every conceivable and some presently unconceivable efforts to postpone or forgo this event is blinkered.

They may well prove correct, but just how long this may take is worth considering. In this I am inclined to believe it could well take a lot longer to unfold than they seem to imagine, as in: Folks, it's all a done deal right now!

The main supporting corollary belief in this is that all governments suck, especially when they meddle in free markets, CBs and their fiat based schemes of re-inflation is dead, and anyone who doesn't agree with us is a poopy-head! :D

Not with standing the relative merits of such beliefs, the point remains that governments and CBs, and whatever other array of players known as TPTB one wants to include, will nonetheless attempt to do whatever they can! And I'm supposing, along with iTulip, that it might well be just enough to stem and deflect the tide of an end-game deflationary wolf howling in the forest.

In this I think EJ's belief (http://www.itulip.com/forums/showpost.php?p=27103&postcount=41) that "Investors do not want to give up on USA, Inc. for to do so is very expensive", and with the election process underway there is still a window of opportunity to use the Box-of-Tricks to be had out there by all concerned system wide overseers and investors.

At least iTulip tries to reconcile such an outlook with the smoke signals as they unfold, of which I have no real advice or insight to offer. Only this interjectory ramble, which for a variety of unstated reasons (global economy is huge and should stumble along; BRIC, Persion Gulf state, Russian growth pull; Govt/CB tricks of triage debt deflation and currency depreciation; combined vested interests, etc.), I'm guessing this game's end-life isn't pre-determined yet.

Still it does seem to depend on how hard and fast as opposed to sluggish and less swift the debt deflation goes this year and any ensuing panic. Should we make it thru this year without crashing the banking system or the stock market, who and how the next US government responds leaves us largely in the dark until next year.

Accordingly, it's hard to make predictions, especially about the future in such matters where profitability and panic meet.

Contemptuous
02-09-08, 11:05 PM
Godraz -

Your avatar looks like he was just hauled into the local police precinct for disturbance of the peace, after a week-long bender. Or maybe he's the "grand-duke" of juvenile delinquents, hauled in for running cigarettes and booze contraband on the rough side of town? That is one sinister looking mug-shot pal.

Jim Nickerson
02-09-08, 11:10 PM
on contrarianism, i think you have to be very careful. it only works at extremes. it was truly contrarian to think about ultimate inflation and buy gold in 2000. but since that time there is a growing acceptance of these themes. we need a growing acceptance for the price to keep rising, as more and more purchasers are recruited. it is only after all possible recruits have "enlisted" and bought that the top is reached. in the meantime, expect increasing mentions of inflation and gold.

Perhaps I am going to take this discussion out of the realm about which it is directed; nevertheless, here goes.

When is a market at an extreme? It is not always easy to discern that in real time as opposed to looking back through the great retrospectroscope.

Are the equity markets at an extreme now? Are the precious metals at an extreme now? As Reagan answered when asked whether he wore briefs or boxer shorts, "Depends." The answers to my two questions similarly "depends" on what happens next. If equities go lower from here, then they are not at the extreme. If gold goes higher here it is not at its ultimate or intermediate extreme (nominally). But if the reverse in each case comes to past, then equities are at an extreme (perhaps momentary) low, and gold is at an extreme (perhaps momentary) high.

The problem for me with a bent toward trading the shorter trends is determining where we are now and which way will things break?

In looking at equities, which is where I guess most regular sorts of "investors" are focused as opposed to perhaps how managers of other people's monies who have more knowledge and methods available (Jeremy Grantham in Barron's today said he was happy owning a packet of emerging market currencies with a time horizon of several years--shit, I can't do that I don't think) may be focused, today I noted an interesting datum.

From today's Barron's the put/call ratio on the OEX (S&P 100) is 0.65. http://online.barrons.com/public/page/mlab_cboe_market_report.html Subscripton.

Barron's explains in the table where these data are reported: "Investors rely on the equity put-call ratio, which tends to track individual trades, and the index put-call ratio, which reflects professional and institutional strategies, as contrary sentiment indicators. The higher the put trading, the more bullish the indication and vice-versa. Readings in the CBOE equity put-call ratio of 60:100 and in the S&P 100 of 125:100 are considered bullish, for instance. Bearish signals flash when the equity put-call level reaches the vicinity of 30:100 and the index ratio hits 75:100."

The "index put-call ratio" remarks refer to the OEX or S&P 100. If one wishes to see it, here is a chart of the OEX http://bigcharts.marketwatch.com/interchart/interchart.asp?symb=oex&draw.x=25&draw.y=12

I only have weekly data on the OEX put-call ratios back to 11/5/99. The reading 0.65 is the lowest it has ever been in this time frame (assuming I have collected the data correctly, and that the data have been reported correctly, and I haven't screwed up my spreadsheet at any point since then).

If one uses the explanation offered by Barron's that put:call readings below 0.75 (75:100) are bearish when interpreted with a contrarian eye, then one would expect such a case to be true when markets are seemingly near tops, and thus those betting on the OEX to continue higher would result in a low put/call ratios--and contrary opinion would have it that they are wrong.

In my data there are two previous readings of OEX put-call ratios below 0.70--that is over 8+ years: 0.67 for weekending 1/12/01, and 0.68 for weekending 7/2/04.

If this is the least bit interesting to anyone, go back to chart in the last link above and under Chart Options choose "1 Decade," and you'll see that low reading on 1/12/01 was associated with a significant top occurring 12 market days later. So on one hand, the low reading could be considered wrong on a contrarian basis, but it took 12 days to happen and during which 12 days the OEX went up 4.6%--so the bullishness of those playing OEX put-call game was correct for 12 days.

The 0.68 reading from 7/2/04 occurred 10 points off a high and was clearly wrong as the market decreased from then until 8/12/04, never being higher than it was on 7/2 for even a day, and losing 5%.

Now go back to the OEX chart and put in 6 month time-frame. Is there any argument as to where the market is relatively now? It is not a market that has just been recently achieving new highs--at least that is how I see it. So the most extreme incidence of actual bullishness in the OEX put-call ratio in over 8-years is at a time in which the market in four months has lost 16% from closing high to closing low and is less than 2 points off its recent closing low, and the "correction" so far has been the biggest in 6 years (I didn't actually check this to know it is correct, but based on behavior of all other indices I follow, it should be correct.)

Now to interpret the actual bullishness of the 0.65 reading contrarily and say it is a negative for the market right now to me would be a serious error.

Let's see, this was about extremes in awareness of inflation and deflation. I think those inflationista's think the world is doomed--EJ has put in a call to short the markets, and the world may be doomed, but for the moment I think the contrarian bet is that equities are going to go up a while and PM's down a while.

What's a "while." A "while" could be a 50% retracement of the 254 point loss of the SPX on closing bases, so that might be a gain of 9.5% off the 1/23 low or about 8% from here, but hey, that is just a wild-assed guess with regard to the future playing out.

jk
02-10-08, 10:16 AM
you may well be right, jim. i just can't feel confidant enough about my short term analyses to put real money at stake. i trade a bit by adding and subtracting to my put positions. but i feel much more strongly about longer term trends and allocate my assets on that basis.

each of us has to find an approach with which we're comfortable. bart, for example, is a very short term trader - you can see the evidence in his blog comments at his website. finster is more of an intermediate-long term investor, from what i gather from his comments. to each his own.

Jim Nickerson
02-10-08, 11:01 AM
jk, I don't think I was arguing that others should act upon the analysis of the three data points at which I looked. Actually writing that up was a good exercise for my thinking, as when I first saw the 0.65 yesterday AM I didn't know quite what to make of it.

On dreaming about this over night, I believe in deciding to go long or short on a single issue we face making decisions about where the entity is we wish to buy or sell relative to where it has been and may be going. Buying a stock may be different from buying an index, but besides the price action it is nice, or theoretically would be nice, to have other indicators to access in reaching a decision.

Sentiment, breadth, RSI, MACD (and of course many other things that I don't know about, understand, or use) all may provide insight about when to pull the trigger. For sure, one cannot trade RSI's, MACD's and breadth, so their value is to help estimate where the entity is and how to act upon it--long or short--that may provide us with gains.

Slimprofits
02-18-08, 05:40 PM
Deep home discounts dream for some, worry for others (http://www.tradingmarkets.com/.site/news/Stock%20News/1105558/)



D.R. Horton Inc., a national homebuilder based in Fort Worth, Texas, is selling homes at up to a 50 percent discount in 23 Southern California developments starting this weekend. Bakersfield's Contessa's Vineyard II and Lavender Trails neighborhoods, both located in the larger City in the Hills development, are part of the first-come, first-served sale.

One home plan, formerly listed for $380,000, has been reduced 48 percent to $199,990, according to a company sales flier.

[..]

Jon Hess, a 29-year-old flight instructor, is betting on securing one of those bargains. He set up camp in front of the Contessa's Vineyard II sales office Sunday, and was still in line Friday afternoon, with the goal of buying a specific floor plan for his wife and three kids.

"I think it's a good value," Hess said of the model home he had in mind. "I like the area. It's better than the northwest."

Still, he was realistic about what this kind of sale might say about the health of the real estate market.

"Who knows?" Hess said. "Maybe by this time a year from now it's going to be worth half of what I paid for it."