We Prefer A More Secure Financial Institution [Archive]

FRED

07-30-08, 12:02 PM

http://www.itulip.com/images/trustco.jpgWe Prefer A More Secure Financial Institution

By Paul Lamont

July 29, 2008

***We caution that this is not legal advice, so please consult your own legal representative and your own account agreement.***

As we referenced last April, it is very important in a deleveraging environment to hold your U.S. Treasury Bills at a secure financial institution. Calling brokers and reps up and asking them if your funds are safe at their institution is like asking the fox if the chickens he is guarding are safe. What do you expect them to say? Since we are independent and only work for our clients, we have been diligently researching the different types of asset custodians. Here is what we found:

Trust Company - According to the American Bankers Association: “Assets held in custodial accounts in the trust department of a bank do not become assets of the bank and are segregated from the bank’s assets.” More importantly, “Account ownership in the assets remains vested in the individuals or entities for whose benefit the bank is acting as custodian and the assets are not subject to the claims of creditors.” The FDIC has confirmed this. Since this is the strongest claim of ownership, retirement and high net worth accounts are held in custody accounts at a Trust Company when you open a LTA U.S. Treasury Bill Account.

Brokerage Firm – A conservative brokerage firm is the next step down in ownership claim. Only two brokerages in the country have made it through our selection process (the third we had to pull accounts from due to a merger). Why is this even a concern? Securities held at a brokerage firm are in ‘street name.’ This means they are registered under the name of the brokerage at the DTC, the system-wide clearing company. Brokerages then record on their books that they hold securities for the ‘benefit of the owner’ held at the DTC. What an individual client of a brokerage firm really owns is a percentage of the securities held in the client pool. This is not full ownership. If an investor has a margin account, the brokerage company may lend out those securities. (Even if you do not, but the brokerage firm promotes margin accounts, securities lending could diminish the client pool in a systemic crisis.) Also highly leveraged client bets may create losses that affect the entire client pool, as happened in the failure of MJK Clearing. So in our view, accounts held at Wall Street investment banks and brokerage firms that deal with leveraged players are not secure. When presented with the evidence, most folks would prefer to deal with only highly rated financially stable brokerage firms.

Bank – Frankly, we do not want to be depositors or creditors at any bank. Banks are even wary of lending to other banks. Instead, cash can be held at more secure institutions. Debit card and check writing capabilities can also be obtained at institutions less likely to be ‘bailed’ out by the government. As John Bovenzi, the FDIC's chief operating officer, recently stated: IndyMac bank “is as safe and as sound as any bank in the country right now.” (Cough.) As we discussed two months ago, comparing bank stock prices is the best determinant of financial health if you have to have a bank account. While stock prices can change, perceptions do create reality.

Worst Case Scenarios

We will continue to search for higher ground during this seventy year flood. If you have read our past reports, you know that we try to stay out ahead of the herd. But we also have to admit, that while we are doing everything we can, something may happen that we cannot stay ahead of. This credit crisis is one for the history books. Funds may be unavailable for extended periods of time. So with that, we give you the worst case scenarios:

Trust Company

“Since assets held in trust, fiduciary and custodial accounts do not become assets of the bank (title is held by the account’s owner(s)), it follows that none of this property is subject to the claims of the bank’s creditors. As a result, a failure of a bank will have no adverse effect. In the event that a bank with trust, fiduciary or custodial powers fails, the FDIC will seek to transfer responsibility for administration of the accounts to a successor trust institution as quickly as possible. Provided this effort is successful, the account beneficiaries would need to either accept this new arrangement or make provisions with the successor bank for alternative arrangements. Therefore, the safety of trust, fiduciary and custodial assets is not dependent upon whether the bank has assets greater than its liabilities. Property held in these accounts belongs to the owner(s) of the accounts and would be unaffected by a bank failure.” - American Bankers Association

Brokerage Firm

“When a brokerage firm is closed due to bankruptcy or other financial difficulties and customer assets are missing, SIPC steps in as quickly as possible and, within certain limits, works to return customers' cash, stock and other securities. Without SIPC, investors at financially troubled brokerage firms might lose their securities or money forever or wait for years while their assets are tied up in court. SIPC either acts as trustee or works with an independent court-appointed trustee in a brokerage insolvency case to recover funds. The statute that created SIPC provides that customers of a failed brokerage firm receive all non-negotiable securities - such as stocks or bonds -- that are already registered in their names or in the process of being registered. At the same time, funds from the SIPC reserve are available to satisfy the remaining claims of each customer up to a maximum of $500,000. This figure includes a maximum of $100,000 on claims for cash.” - SIPC

Bank

“Since deposit account assets become assets of the bank, it follows that the depositor would become a creditor in the event a bank failed. However, the FDIC insures depositors for up to $100,000 per individual per bank.” - American Bankers Association Over-the-limit depositors are at the mercy of the FDIC.
What’s Next

We have had quite a move down in the major stock indices over the last two months. We wouldn’t be surprised if we corrected upwards for a few weeks. This would set up the major down wave for the fall. We hope you are able to secure your funds. If you would like assistance, please contact us. Expect Friday afternoons to get more exciting, as that is when the FDIC historically announces bank failures. The fire sale forecast last October continues.

We are conducting a quick survey to better understand our current online readership. This will allow us to improve The Investment Analysis Report. We appreciate any feedback.

***No graph, chart, formula or other device offered can in and of itself be used to make trading decisions. This newsletter should not be construed as personal investment advice. It is for informational purposes only.

Copyright ©2008 Lamont Trading Advisors, Inc. Paul J. Lamont is President of Lamont Trading Advisors, Inc., a registered investment advisor in the State of Alabama. Persons in states outside of Alabama should be aware that we are relying on de minimis contact rules within their respective home state. For more information about our firm visit www.LTAdvisors.net (http://www.ltadvisors.net/), or to receive a copy of our disclosure form ADV, please email us at advrequest@ltadvisors.net (http://itulip.com/forums/advrequest@ltadvisors.net), or call (256) 850-4161.

iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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j4f2h0

07-30-08, 12:47 PM

We all heard about e trades hilarious attempt to profit from the subprime crisis, and their close brush with bankruptcy. I have my account with Scottrade and as of late have been trying to get into their financial disclosure sheet only to be block for seemingly bogus reasons. I am curious as to how Scottrade has managed it's money.
Anyone do any research on Scottrade?

dbarberic

07-30-08, 12:53 PM

Any thoughts on Fidelity? I'm a little unclear on how to start researching a brokerage firm.

Goldenhands

07-30-08, 01:09 PM

So.. Ditto about TD Ameritrade.

Charles Mackay

07-30-08, 07:00 PM

Wonder why he didn't report the most secure as direct treasury?

I would also like to know if a Treasury only MMF is as secure as actual bills?

dbarberic

07-31-08, 05:24 PM

Ironically, these dangers are exactly what Jim Sinclair has been warning and pounding the table on for the last 6-9 months, if not longer.

Dear CIGAs,
The financial system is broken and all that can be done by the US Federal Reserve and the US Treasury is monetize all major financial entities.
The reason that all this has happened is the $1.114 QUADRILLION dollar mountain of crap paper made of unfunded, unlisted, unregulated and non-transparent financial specific performance contracts called OTC derivatives.
Those that create and peddle OTC derivatives are guilty of financial murder one.
I cannot imagine you reading the information above and failing to protect yourself, but knowing mankind, I doubt many did.

You should hold no dollars except what is required to pay bills for six months. You know now that FDIC is grossly under-financed compared to potential claims. Get all your money out of financial entities now before you have to stand in line to get it. Screw interest rates. Keep six months of cash in your safety deposit box, invest the balance in short term treasuries of other currencies.
You should put a minimum 1/3 of your LIQUID net worth in gold and gold equivalents.
You surely know by now that SIPC is grossly under-financed when it comes to covering potential claims. The secondary insurance held by brokers is written to them for you, but not for you.

There are three ways you can protect your securities:

Have your shares delivered to you as paper shares registered in your name.
Have your shares put in direct registration as a book entry at the transfer agent of the company you are invested in.
After consulting a tax counsel and receiving their blessing, order your retirement 401K, Roth and other like investments transferred into the name of your Trust Company, for the benefit of you.
Failing to do this because your broker disagrees or makes a fuss is you becoming complacent.
The basic thesis is please distance yourself and your assets from financial agents.

Monty Guild wrote the following excerpt in early April of this year:
"REMINDER--HAVE YOU CHECKED THE SAFETY OF YOUR CUSTODIAN? HAVE YOU CAREFULLY READ THE LANGUAGE OF YOUR CUSTODIAN'S AGREEMENT WHICH GOVERNS THE DISPOSITION OF YOUR ASSETS IN THE CASE OF SERIOUS FINANCIAL PROBLEMS IN THE WORLD ECONOMY, OR WITH THE CUSTODIAN ITSELF?
In our opinion, all investors and all recipients of pension plans or holders of IRAs should check the financial stability of the custodians of the assets that they own. Equally important, is the legal wording of your relationship with your custodian. Have your attorney look over the wording and make sure that the custodian is segregating your assets and will audit your assets annually to make sure that they are segregated from other clients and from the assets of the firm itself.
We have spent money on attorneys who review the legal language in our custodial agreements as we believe that it is essential knowledge. We are money managers, not attorneys. Please have an attorney look over the legal language of your relationship with your custodian...what you find may surprise you."

That which remains in any bank or trustee financial agency should be in true custodial form. Assuming you have your tax counsel bless the above actions with regards to your 401K, Roth, and other similar investments, the end result will be the trustee acting as a true custodial-ship.
You must own gold and gold equivalents. Gold is headed to a minimum of $1650, a number that now looks quite low.
Gold is a currency. Do not forget that.
The US Budget Deficit is going ballistic. The US dollar will trade at .5200. The Euro will trade at $2. The collapse of banks is far from over. Default derivatives will fail to function when called upon to function in any significant amount. Many major companies will fade away due to hidden OTC derivatives.
Pakistan will take crude up $100 from the point it is trading at now when the event occurs.
Monetization of all primary dealers of US Treasuries and all major manufacturers of OTC derivatives will be bailed out.
If you delay or do not act by doing the above simple and easy steps you will be financial finished. Mark my words. Those of you out there who freeze up make yourself targets.

phirang

07-31-08, 05:26 PM

Ironically, these dangers are exactly what Jim Sinclair has been warning and pounding the table on for the last 6-9 months, if not longer.

I like JS, I really do! However, when he speaks of currency, he talks beyond his pay-grade, frankly.

dbarberic

07-31-08, 08:03 PM

I like JS, I really do! However, when he speaks of currency, he talks beyond his pay-grade, frankly.
What are you referencing? His target for the dollar to go to .52?

Thailandnotes

07-31-08, 08:11 PM

"Only two brokerages in the country have made it through our selection process."

Which 2?

raja

07-31-08, 08:36 PM

invest the balance in short term treasuries of other currencies
How does one invest in short term treasuries of other countries???

pauljlamont

08-01-08, 10:03 AM

pauljlamont

08-01-08, 10:09 AM

FRED

08-01-08, 10:45 AM

jimmygu3

08-01-08, 12:27 PM

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

Who says currency depreciation doesn't lead to wage inflation?!? Can't wait to get my bale of Hoovers! :D

Seriously, wouldn't a scenario like this work out somewhat ok for heavily indebted US consumers? Homeowners could pay off their mortgages & other debts and start living more frugal lives? Gold & silver would buy a lot of bales of cash.

IMO A big difference between the US and other past hyperinflationary examples is that we have millions of people with claims on real assets paired with loans in the depreciating currency. It's creditors who get screwed when they start handing out Franklin footballs. I know EJ did a piece on how a 100% inflation over 5 years could save the American consumer's ass.

FRED

08-01-08, 01:10 PM

Who says currency depreciation doesn't lead to wage inflation?!? Can't wait to get my bale of Hoovers! :D

Seriously, wouldn't a scenario like this work out somewhat ok for heavily indebted US consumers? Homeowners could pay off their mortgages & other debts and start living more frugal lives? Gold & silver would buy a lot of bales of cash.

IMO A big difference between the US and other past hyperinflationary examples is that we have millions of people with claims on real assets paired with loans in the depreciating currency. It's creditors who get screwed when they start handing out Franklin footballs. I know EJ did a piece on how a 100% inflation over 5 years could save the American consumer's ass.

Inflation is Dead! Long Live Inflation! - Janszen (http://www.itulip.com/forums/showthread.php?p=2080#post2080)
The Five Year, 100% Inflation Scenario (http://www.itulip.com/forums/showthread.php?p=2080#post2080)

pauljlamont

08-01-08, 02:27 PM

From 2001-2008, gold has been the correct call. This period was not the downside of the credit bubble, it was the hyperbolic rise. Gold is the asset of choice when you can create inflationary credit to the extent of the housing bubble/global credit bubble. In our view that period is over.

”All other similar periods of debt deflation since then have been inflationary. All of them.” This is a 50-70 year credit cycle, with busts occurring in 1837, 1873, 1929, and now 2007. Also the dollar has not always been backed by gold. In 1873, investors hoarded cash as the repayment of debt was the main concern. Dollars went up against gold (gold fell).

I also would like to point out the 1980-1983 recession. High inflation led to disinflation. The dollar strengthened during the deflating. Since we were falling from such a high level in interest rates, it didn't create the extent of the institutional failures of 1929-1933. Today we aren't starting from as high a peak.

How does the Fed print money? Is its printing press broken?

Jim Nickerson

08-01-08, 04:21 PM

<META content=Word.Document name=ProgId><META content="Microsoft Word 11" name=Generator><META content="Microsoft Word 11" name=Originator><LINK href="file:///C:%5CDOCUME%7E1%5CPAULJ%7E1.LAM%5CLOCALS%7E1%5CTem p%5Cmsohtml1%5C01%5Cclip_filelist.xml" rel=File-List><STYLE>  </STYLE> From 2001-2008, gold has been the correct call. This period was not the downside of the credit bubble, it was the hyperbolic rise. Gold is the asset of choice when you can create inflationary credit to the extent of the housing bubble/global credit bubble. In our view that period is over.

”All other similar periods of debt deflation since then have been inflationary. All of them.” This is a 50-70 year credit cycle, with busts occurring in 1837, 1873, 1929, and now 2007. Also the dollar has not always been backed by gold. In 1873, investors hoarded cash as the repayment of debt was the main concern. Dollars went up against gold (gold fell).
<O:p> </O:p>
I also would like to point out the 1980-1983 recession. High inflation led to disinflation. The dollar strengthened during the deflating. Since we were falling from such a high level in interest rates, it didn't create the extent of the institutional failures of 1929-1933. Today we aren't starting from as high a peak.

<O:p> </O:p>
How does the Fed print money? Is its printing press broken?

1. So if "that period is over," what in your (which seems to be a group of thinkers as you used "our") expectation for gold from where it is now?

2. As you point out, currently interest rates are no where near the early 80's level, so what is your ("our") view as to what happens now?

FRED

08-01-08, 04:22 PM

From 2001-2008, gold has been the correct call. This period was not the downside of the credit bubble, it was the hyperbolic rise. Gold is the asset of choice when you can create inflationary credit to the extent of the housing bubble/global credit bubble. In our view that period is over.

”All other similar periods of debt deflation since then have been inflationary. All of them.” This is a 50-70 year credit cycle, with busts occurring in 1837, 1873, 1929, and now 2007. Also the dollar has not always been backed by gold. In 1873, investors hoarded cash as the repayment of debt was the main concern. Dollars went up against gold (gold fell).

I also would like to point out the 1980-1983 recession. High inflation led to disinflation. The dollar strengthened during the deflating. Since we were falling from such a high level in interest rates, it didn't create the extent of the institutional failures of 1929-1933. Today we aren't starting from as high a peak.

How does the Fed print money? Is its printing press broken?

Will not get into this debate again. Apologies but after ten years it's easier just to point readers to our original arguments. Google search "inflation itulip" and you'll get the main ones going back many years. In the subscription area we offer dozens of papers on deflation and inflation.

My specific recommendation to you is: : The Face of Inflation: Does the U.S. Have a "Peso Problem" (http://www.itulip.com/forums/showthread.php?p=16355#post16355)

http://www.itulip.com/images/20000MexsPesos1988_50.gif

You could pay back a lot of old peso debt with these.

pauljlamont

08-01-08, 06:59 PM

Our outlook is for (at minimum) a two year correction in oil and gold. A sixty to eighty percent decline is not out of the question for oil. We expect gold to decline roughly 40% peak to trough.
<o></o>
We expect short term rates to fall to close to zero. Long term rates will spike higher as the government tries to monetize debt.

sn1p3r

08-01-08, 07:17 PM

I love this part "Keep six months of cash in your safety deposit box" right after talking about standing in line to get to those same banks...doesn't anyone remember this post?

http://www.itulip.com/forums/showthread.php?t=4209

pauljlamont

08-01-08, 07:18 PM

Yes we know all about the Peso problem. But we don't believe we have a interest rate differential problem with China. Aren't Chinese rates higher than here in the U.S.?
http://asianbondsonline.adb.org/china/china.php

As regards to the Yen, we do expect the Yen to appreciate against the dollar, as we stated last September:
http://www.ltadvisors.net/Info/BankRuns

But we expect the purchasing power of the dollar to increase and the euro, oil, and gold to fall.

As you state in the Peso Problem: "our only major revision is to note that the process is happening sooner than we expected, and rather than being triggered by an oil shock in 2008 was triggered by a crisis in U.S. credit markets in mid 2007." Our view is that we have reached the 'Minsky Moment.'

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/30/cnbis130.xml

Lukester

08-02-08, 12:45 AM

Mr. Lamont -

This will be the global backdrop for your falling gold and oil. There is a context at the global level within which American credit events must play out. When viewed from multiple points outside the US, collapsing oil and gold prices require a rather large and very abrupt global change of trend. I think a lot of people in this community just don't see that. :

_____________

Global Inflation Turmoil Watch:

July 7 - The Wall Street Journal (Roger Bate): "Amid Zimbabwe's political violence is an economic lesson for anyone who doesn't keep an eye on inflation... With food aid only trickling back into the country and hundreds of thousands without enough cash to buy food, it was clear during a trip there last month that the crisis is deepening. Consumer prices have more than doubled every month this year, in some cases doubling every week. A conservative estimate provided by Robertson Economic Information Services, a Southern African consultancy, says that prices are now three billion fold greater than seven years ago...

The exchange rate is currently an astronomical 90 billion Zimbabwe dollars to one U.S. dollar... Buying anything is a 'bizarre experience,' said Lucy Chimtengwende from Bulawayo, who spent $12 U.S. on lunch recently, with the bill in local currency being an astonishing 1.1 trillion Zimbabwe dollars. The menu had no prices on it, she told me by phone, prices are quoted to you and are constantly changing. And if you want to pay by check, good luck. Most proprietors don't accept them, and for those that do, the price is double, given the time it takes the vendor to receive payment."

July 8 - AFP: "Soaring food and fuel prices could spark widespread political unrest, Malaysia's Prime Minister Abdullah Ahmad Badawi said... Abdullah said the inflation crisis has erupted as a global recession looms, spelling trouble for the D8 group meeting in Malaysia. The countries represented at the forum were Bangladesh, Egypt, Indonesia, Iran, Malaysia, Nigeria, Pakistan and Turkey. Abdullah also called on member nations to boost food production to avert conflict. 'The price of oil has skyrocketed to levels never anticipated... The price of food has increased beyond the normal abilities to pay by the poor, which form the majority of the world's people... There is also the danger of the food crisis creating political unrest in many societies.'"

July 7 - Associated Press: "Saudi Arabia: Sultan al-Mazeen recently stopped at a gas station to fill up his SUV, paying 45 cents a gallon -- a price Americans could only dream of as they pay nearly 10 times that at the pump. But cheap gas and the record wealth pouring into Saudi Arabia's coffers from high oil prices are little relief for al-Mazeen. The 36-year-old Saudi technician and many other Saudis say they're only feeling poorer amid the oil boom because of inflation that has hit 30-year highs in the kingdom. 'I tell the Americans, don't feel envious because gas is cheaper here,' said al-Mazeen. 'We're worse off than before.'"

July 9 - Bloomberg (Janice Kew): "Higher fuel costs may make taxi fares unaffordable for poorer South Africans, threatening jobs, Business Report said, citing Carel van Aardt, a research professor at University of South Africa... About 60% of commuters in South Africa use minibus taxis and most users earn 700 rand ($91) to 4,000 rand a month..."

July 9 - Bloomberg (Radoslav Tomek): "The Slovak government is ready to regulate prices after the eastern European nation switches to the euro to prevent 'speculative' increases that would accelerate inflation, Economy Minister Lubomir Jahnatek said. The government approved establishing a so-called Price Council which will monitor consumer prices throughout 2009.

The council will have powers to ask the government to regulate prices of particular goods or services, should it discover any ``anomalies' in their development, according to a document of the proposal discussed by the Cabinet today."

July 11 - Bloomberg (Khalid Qayum): "Pakistan's inflation accelerated to a 30-year high in June... Consumer prices in South Asia's second-largest economy jumped 21.53% from a year earlier..."

July 9 - Bloomberg (Abeer Allam and Abdel Latif Wahba): "Egyptian inflation accelerated to an average 11.7% in the fiscal year that ended June 30..."
July 7 - Bloomberg (Daryna Krasnolutska and Halia Pavliva): "Ukraine's inflation, the fastest in Europe... fell to 29.3% in June from 31.1% in May, which was the highest in Europe..."

July 9 - Bloomberg (Milda Seputyte): "Lithuanian inflation accelerated in June to the fastest pace in more than 11 years... The inflation rate rose to 12.5%, the third-highest in the EU, from 12 percent in May..."

July 7 - Bloomberg (Ott Ummelas): "Estonian inflation accelerated in June, returning to the fastest pace in 10 years, as energy and accommodation costs jumped. The rate increased to 11.4%..."

July 9 - AFP: "Inflation in some emerging countries in Latin America and Africa 'is getting out of control,' International Monetary Fund head Dominique Strauss-Kahn said..."

Currency Watch:

July 9 - Bloomberg (David M. Levitt): "New York's Chrysler Building, once the world's tallest skyscraper, was acquired yesterday by the Abu Dhabi Investment Council, a Middle Eastern sovereign wealth fund, for an undisclosed price."

The dollar index declined 0.9% to 72.1. For the week on the upside, the South Korean won increased 3.8%, the Euro 1.3%, the Danish krone 1.3%, the South African rand 1.3%, the Swiss franc 1.1%, and the Australian dollar 1.0%. On the downside, the Taiwanese dollar and the Brazilian real both declined 0.1%.

Commodities Watch:

July 7 - Bloomberg (Chanyaporn Chanjaroen): "Aluminum rose to a record in London as a power shortage forced smelters in the north of China, the world's largest producer of the metal, to reduce output."

Gold rose 3.3% to $964 and Silver 2.4% to $18.82. August Crude added 40 cents to $144.52. August Gasoline declined 0.6% (up 43% y-t-d), while August Natural Gas sank 12.9% (up 58% y-t-d). September Copper dropped 5.3%. September Wheat dropped 6.2% and August Corn sank 8.8%. The CRB index declined 2.3% (up 28.6% y-t-d). The Goldman Sachs Commodities Index (GSCI) fell 1.2% (up 44% y-t-d and 73% y-o-y).

China Watch:

July 7 - Wall Street Journal Asia (Lawrence J. Brainard): "It's becoming ever clearer that China's inflation problem is a monetary phenomenon after all, and not just a temporary spike in the prices of a couple food staples. But consensus on how to solve that monetary problem is still elusive. Beijing's adoption last week of administrative measures to combat speculative 'hot money' inflows shows policy makers still believe... that tightening regulation alone can do the trick.

That may prove a costly mistake. Consider the scale of the problem facing policy makers. Headline consumer price inflation has clocked in at or above 7.1% every month this year. Supply shocks for foods like pork play a role, but the fundamental problem is too much money pouring into the economy, chasing too few assets. One indicator of this is that China has recently been accumulating foreign assets at the astonishing rate of $75 billion a month."

July 8 - Bloomberg (Tian Ying): "China's car sales rose 17% in the first half as economic growth spurred demand in the world's fastest growing major vehicle market. Automakers sold a total of 3.61 million cars, sport-utility vehicles and multipurpose vehicles..."

July 11 - Bloomberg (Li Yanping and Nipa Piboontanasawat): "Foreign direct investment in China rose 45.6% in the first half from a year earlier, swelling inflows of cash that may stoke inflation in the world's fastest-growing major economy. Spending by overseas companies increased to $52.4 billion..."

Japan Watch:

July 10 - Bloomberg (Mayumi Otsuma): "Japan's wholesale inflation rate rose to a 27-year high in June as companies raised prices to counter record oil and commodity costs. Producer prices climbed 5.6% from a year earlier, after a revised 4.8% gain in May..."

July 11 - Bloomberg (Toru Fujioka): "Japanese consumers became the most pessimistic they've been in at least 26 years as higher gasoline prices and food costs eroded their spending power."

India Watch:

July 11 - Bloomberg (Kartik Goyal): "India's inflation accelerated to the fastest pace since 1995... Wholesale prices rose 11.89% in the week to June 28..."

July 11 - Bloomberg (Cherian Thomas and Kartik Goyal): "India's industrial production grew at the slowest pace in more than six years and Standard & Poor's said it may cut the nation's credit rating to junk if the economy deteriorates further... Bonds dropped after S&P said its BBB- ranking on India's long-term local currency debt may be lowered to 'speculative grade.' 'A rating downgrade would be a blow to India,' said Ramya Suryanarayanan, an economist at DBS Bank Ltd... 'Heading in that direction isn't good as investors are already panicking about inflation, growth and fiscal prospects.'"

Asia Bubble Watch:

July 9 - Bloomberg (Seyoon Kim): "South Korea's retail sales rose 10.2% in May as consumers paid more for gasoline and bought more cars and computers."

July 7 - Bloomberg (James Peng): "Taiwan's export growth unexpectedly accelerated in June on demand from China, Europe and Japan. Overseas shipments rose 21.3% from a year earlier after increasing 20.5% in May..."

July 9 - Bloomberg (Soraya Permatasari): "Malaysia's central bank said inflation probably exceeded 6% in June, higher than earlier estimated and bolstering expectations it will raise interest rates as early as this month."

July 8 - Bloomberg (Kyung Bok Cho): "Asian companies outside Japan will face a 'perfect storm' of rising commodities costs and slowing growth in export volumes, triggering earnings-estimate downgrades by analysts, Citigroup Inc. said. Materials and industrials stocks... have 'lofty' valuations and should be avoided..."

July 8 - Bloomberg (Naila Firdausi): "Indonesia's consumer confidence index dropped to a record low in June after the government increased fuel prices a month earlier and on concern that food costs will continue rising, a research body said."

July 8 - Bloomberg (Woro Widya Utami and Berni Moestafa): "Indonesia may have to spend as much as 300 trillion rupiah ($33 billion) to cap fuel prices next year as oil surges, Finance Minister Sri Mulyani Indrawati said."

Latin America Watch:

July 9 - Bloomberg (Jens Erik Gould): "Mexican inflation accelerated to the fastest in almost four years last month on higher costs for food and housing... Consumer prices climbed 5.26% in June from a year earlier..."

July 8 - Bloomberg (Daniel Cancel and Matthew Walter): "Venezuelan annual consumer prices in June rose the most since 2003 as the easing of price caps on foods caused supermarket prices to surge. Consumer prices rose 32.2% in June from a year earlier..."

pauljlamont

08-02-08, 10:39 AM

Yes, I am aware of what is going on now. And you've basically proven my point. Investment trends don't start with this kind of exposure (they end with it). Was gold in the news this much in 2000?

Meanwhile, has the inflation engine broken down?

http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=A1YourView&xml=/money/2008/07/11/cnmoney111.xml

We are not emotionally invested in this topic. We just call 'em like we see 'em. We were able to warn of higher food prices last September: http://www.ltadvisors.net/Info/ReturnofCapital.htm

If we are wrong on our analysis, we will change our position. But it won't be to join "a lot of people in this community" just for the security of numbers.

charliebrown

08-02-08, 10:43 AM

what are ownership issues with mutual fund companies?
I see repos in their reports. Am I at risk here besides the value of the
securities declining? Should I be under 500K? Is this a per account SIPC limit. I have an IRA and non-ira accounts

Lukester

08-02-08, 03:17 PM

Paul -

I personally find pure contrarianism more confusing than helpful. "Crowded trade" can just as easily be a description of a non-financial trend rooted in intractable real and quite predictably permanent long term secular events, in which case contrarianism would lead one to make a contrary bet that would merely get stampeded by events. Also there seems a common tendency by equities analysts to refer to commodities as an "asset class", but that may be overlooking that in fact they are non-discretionary strategic raw materials in their primary role. I'm thinking that the notion of a crowded trade is a term anchored in financial and equities markets. It's maybe then inapplicable to apply contrarianism to resource tightness in global markets (e.g. oil availability relative to supply, grains availability, etc). As these are also global markets who are all uniformly reporting runaway inflation I would be wary of imputing that something like oil's price in these countries could become a direct extension to the deflation going on in (primarily financial) asset classes over here.

iTulip has more finance or currency based views and explanations as to why significant deflation in any commodities (as opposed to "financial asset classes") is inapplicable in the USD zone today. They explicitly acknowledge the financial assets are deflating hard, but point out this is clearly to date a financial assets deflation, and a quite manifestly roaring inflation occurring right alongside that in commodities like oil. The inflation in oil is described by iTulip I believe as by no means solely a financially driven event - I'm talking about that non-financial part. I only suggest as a corollary that the actual consumption bid underlying those commodities, which along with currency debasement are feeding so much inflation today, is a good deal less linked to our deflating financial assets than a lot of commentary at large seems to acknowledge.

I figure that a call for oil and gold to plunge here is an argument overly influenced by US financial asset declines, which imputes to global strategic goods like petroleum an "asset like" quality which is an economists or financial analyts bias. Obviously oil can go down here even very hard, but if it responds primarily to the global consumption bid rather than to the financial hedge function to the USD, it seems to me it's not going to be easily linked in a chain of falling assets just because our financial assets in North America are severely deflating. A great number of the markets that actually bid on oil (and they are deadly serious to acquire it at all costs) are (obviously) in places very far removed from imploding US asset markets. Sorry, this all must be self evident to you also as a professional analyst, only I did not see it explicitly factored here. I only suggest that when referencing dozens of countries worldwide far removed from our financialized economy in the US, who are bidding very firmly on oil, I think we need to make a conscious effort to hold imploding US asset markets at arms length.

Their economies are clearly not nearly as financialized as ours, and the financial assets here are what is doing the serious deflating. What's to deflate in developing countries? Estimates are they have desperate need for 22 trillion USD in infrastructure development in the next decade alone. This is a far cry from our overstock and overvaluation of existing non-productive residential real estate. To see gold and oil plunging in price all across all these countries we have to assume that it achieves some degree of supply glut relative to all of them which at least to me seems manifestly a tall order in 2008. This is the strategic resource that is fueling their growth in a world of less than 1 million BPD of global spare capacity. Even if oil were responding as just another deflating financialized asset class responding to US deflation, these nations simply don't have any of the asset bloat we've achieved in the US. My difficulty here is in conceiving that oil and gold can plunge in USD price in a world where (certainly oil) these commodities prices are subject to a very diffuse and powerful price arbitrage from countries with growth and debt profiles that are the diametric opposite of the US today.

Thank you for your participation here. I much appreciate your availability to discuss this article and the general theme!

Respectfully.

Yes, I am aware of what is going on now. And you've basically proven my point. Investment trends don't start with this kind of exposure (they end with it). Was gold in the news this much in 2000?

Meanwhile, has the inflation engine broken down?

http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=A1YourView&xml=/money/2008/07/11/cnmoney111.xml

We are not emotionally invested in this topic. We just call 'em like we see 'em. We were able to warn of higher food prices last September: http://www.ltadvisors.net/Info/ReturnofCapital.htm

If we are wrong on our analysis, we will change our position. But it won't be to join "a lot of people in this community" just for the security of numbers.

pauljlamont

08-06-08, 05:17 PM

Lukester

08-06-08, 09:53 PM

<META content=Word.Document name=ProgId><META content="Microsoft Word 11" name=Generator><META content="Microsoft Word 11" name=Originator><LINK href="file:///C:%5CDOCUME%7E1%5CPAULJ%7E1.LAM%5CLOCALS%7E1%5CTem p%5Cmsohtml1%5C01%5Cclip_filelist.xml" rel=File-List><STYLE>  </STYLE> When credit contracts, the Ponzi aspect of financial prices correct. If severe, the real economy shuts down.

Paul - I understand your viewpoint. But my money's on Gary Dorsch reading this juncture correctly. (And John Williams, and Doug Noland, and Marc Faber, and Eric Janszen - and others of like view. No "deflation" here, but lots of unnervingly convincing "head fakes".)

481

Brazil M3 +17.0%
Canada M3 +12.9%
China M2 +18.5%
Euro zone M3 +12.3%
Hong Kong M3 +31.5%
India M3 +21.5%
U.S. M3 +15.8%
Russia M3 +50+%

_______________

[ COMMENT : STUBBORNLY PERSISTENT INFLATION SIGNALS ]

By Glenn Somerville

WASHINGTON (Reuters) - Consumer prices jumped at the sharpest rate in more than a quarter century during June, and consumers coping with soaring costs received their smallest income gain in a year, the government said on Monday.

The Commerce Department said personal incomes edged up 0.1 percent after rising 1.8 percent in May. June's rise was the smallest since April 2007, when income was flat.

On a year-over-year basis, prices rose 4.1 percent in June, up from 3.5 percent in May, for the biggest annual gain since May 1991.

An inflation gauge tied to consumer spending jumped 0.8 percent in June, its steepest gain since a 1 percent rise more than 27 years ago, in February 1981.

"Household consumption surged in June but much of that went to purchase higher-priced food and energy," said Joel Naroff, chief economist for Naroff Economic Advisors in Holland, Pa.

Separately, Commerce said June factory orders rose a bigger-than-forecast 1.7 percent after an upwardly revised 0.9 percent gain in May.

It was the strongest monthly gain in orders since last December and beat Wall Street economists' forecasts of a 0.7 percent rise. But investors took their cue from the inflation data and concluded consumers were under growing pressure.

Stock prices fell modestly despite a drop in oil prices to $121.41 on the New York Mercantile Exchange. The Dow Jones industrial average, which had turned positive briefly in the afternoon, ended down 42.17 points at 11,284.15, while the Nasdaq composite index slipped 1.10 to 2,285.56.

U.S. Treasury debt prices were lower on concern that inflation might erode the value of longer-term securities. Benchmark 10-year Treasury note prices, which move inversely to their yield, traded down 6/32 for a yield of 3.97 percent, versus 3.94 percent late Friday.

The tiny rise in June incomes came as government stimulus payments eased to $27.9 billion from $48.1 billion in May. The department said that except for the stimulus payments, disposable incomes would have shrunk in June.

Incomes are under stress as job markets wither. A report on Monday from employment consulting firm Challenger, Gray & Christmas Inc. underlined the fact that employment prospects are likely to get worse.

It said planned layoffs at U.S. companies jumped 26 percent in July from June. Planned layoffs totaled 103,312 in July, compared with June's 81,755, the survey found.

Another report from the Conference Board, a private business group in New York, showed its Employment Trends Index edged down to 112.1 in July from a revised 113.1 in June. That was consistent with last Friday's Labor Department report showing employers cut payrolls for a seventh consecutive month in July.

The Commerce Department said consumer spending rose 0.6 percent in June after gaining 0.8 percent in May. But after accounting for inflation, consumer spending, which fuels two-thirds of national economic output, fell 0.2 percent.

The core PCE index, which excludes food and energy items, was up 2.3 percent in June, the highest since a matching rate last December, after rising 2.2 percent in May.

That will worry Fed policy-makers, who are expected to keep the federal funds lending rate at 2 percent but to sharpen a warning about the potential risk from rising prices.

Such a warning would help signal that the next rate move likely will be upward, but the timing of it is uncertain as the Fed balances the necessity of controlling inflation with the need to avoid further hurting a limping economy.

"Troubles with the financial sector, the economy, the U.S. consumer -- there's no quick fix," said Gail Dudack, chief investment strategist with Dudack Research Group in New York.

Doug Roberts, chief investment strategist with Channel Capital research in Shrewsbury, New Jersey, said the price data puts the U.S. central bank in a tough spot.

"It means there is some inflation leaking into the system, and it puts the Fed in a difficult position," Roberts said. "But given the weakness of the economy, it means they're going to have to tolerate more inflation than they like."

(Additional reporting by Richard Leong and Herbert Lash; Editing by Dan Grebler)

____________

AND GARY DORSCH - COMMENTING ON THE PRESENT (AND FUTURE) TOOTHLESS FED "TIGHTENING" RHETORIC

(All talk and no action. Or as they say in Texas: "All hat and no cattle")

New Buzzword for Commodities - "Demand Destruction"

by Gary Dorsch - August 06, 2008

Jesse Livermore, the world's greatest trader used to say, "Remember, the market is designed to fool most of the people most of the time. Sometimes, the market will go contrary to what speculators have predicted. At these times, speculators must abandon their predictions and follow the action of the market. Never argue with the tape. Markets are never wrong, but opinions often are. I only try to react to what the market is telling me by its behavior," he said.

After Reuters CRB Index of 19-exchange traded commodities plunged by 10% in July, its biggest monthly decline since March 1980, the five-year bull-run for the "Commodity Super Cycle" appears to have peaked out, and speculators are building net short positions in commodities. "I came to learn that even when one is properly bearish at the very beginning of a bear market, it is not well to begin selling in bulk until there is no danger of the engine back-firing," Livermore warned.

"The bull market in crude oil started in 1999, and in the last nine-years the oil market has gone down over 40% three times. Was that the end of the bull market?" asked famed investor Jimmy Rodgers on July 29th. In a world of limited resources, the world's population is expected to double over the next 40-years, with more than 95% of the increase in demand concentrated in developing countries.

Still the new buzzword in the trading pits is "demand destruction," a favorite slogan for short-sellers in the commodity markets. After setting an all-time high a month ago on July 2nd, and up 40% from a year earlier, the Dow Jones Commodity Index (DJCI) suddenly finds itself on the brink of bear market territory, after an -20% slide from its peak, and faring no better than the MSCI All-World Stock Index, which has been mutilated by the bear's claws, for the past nine months.

"Demand destruction," the new flavor of the month, refers to a sustained reduction in demand for a commodity, following a prolonged period of extra-ordinary high prices. ... History will show that the July 2nd peak in the "Commodity Super Cycle," coincided with the European Central Bank's courageous move on July 3rd, to lift its repo rate by a quarter-point to 4.25-percent. The ECB hawks refused to be bullied by Euro-zone politicians into a series of rate-cuts, or join the Fed's money printing orgy, even while banks and brokers worldwide had recognized $480 billion of write-offs from toxic-sub-prime mortgages, over the previous 12-months.

Instead, the ECB held its repo rate steady at 4% through the first-year of the global banking crisis, then guided German schatz yields to a six-year high. The ECB got the pay-off it was hoping for, when the commodity markets subsequently plunged, led by a $30 /barrel drop in crude oil, and 20% losses in the agricultural sector.

The world economy needed a powerful central bank to go against the "Big-Easy" at the US Treasury and the Fed, and the "yen carry" traders at the Bank of Japan, in order to deflate the oil and commodity "bubble" with a classic dose of higher interest rates. The ECB's baby-step rate hike was the tipping point, where market psychology switched from "fears of inflation" to worries about "demand destruction."

The ECB hawks received back-up support from central bankers in Brazil, China, India, and Russia, which tightened their monetary policies in July, in order to combat inflation and slow their economies. Later this week, the Bank of Korea is expected to hike its overnight loan rate to 5.25%, to shore-up the value of the Korean-won and rein-in the explosive growth of the money supply.

... Six weeks later, the ECB hiked its repo rate to 4.25%, and greased the skids under the commodity and global stock markets. The annual rate of change for the DJ Commodity Index has plunged to +14% today, from a record high of +40% a month ago. Government apparatchniks will soon begin to report a significant slowdown in official inflation rates, giving central banks more time to keep interest rates low, or the leeway to ease monetary policy where interest rates are historically high.

But the ECB's tonic for curing global inflation was a bitter pill to swallow. Global stock markets lost $3 trillion in value over the past two months, and the "reverse wealth" effect" threatens to grind the Euro-zone economy to a halt in the third quarter. The Euro-zone's manufacturing and services sector composite index fell to seven-year low of 47.8 in July, and Spain's jobless rate jumped to 10.4%, a 10-year high.

... One of the most curious developments is the recent strengthening of the US dollar compared to the Euro, in-line with sharply lower oil prices. The US imports 4.5 billion barrels of oil per year, so the latest $30 /barrel decline, if sustained, can reduce America's oil import bill by roughly $135 billion per year. On the other hand, the US is also the world's largest exporter of grains, and projections of foreign sales revenue has just been sliced by 20% in the past four weeks.

Two months ago, on June 3rd, Fed chief Bernanke warned the US central bank "is working with the Treasury to carefully monitor developments in foreign exchange markets, and is aware of the effect of the dollar's decline on inflation and price expectations," a subtle threat of stealth intervention in the currency markets. Yet Bernanke never had any intention of lifting US interest rates to bolster the dollar. Instead, the ECB turned its tough words into action, by hiking its repo rate, yet the US dollar, (not the Euro), was the eventual winner from lower oil prices.

... The Fed was successful in scaring the gold bugs in July, by sending false signals to the mainstream media, about a tighter Fed policy, sooner rather than later. On July 18, with gold trading near $960 /oz, Minneapolis Fed chief Gary Stern warned, "headline inflation is clearly too high, and the Fed can not wait until financial and housing markets stabilize before raising interest rates," he said.

Then on July 22nd, Philadelphia Fed chief Charles Plosser warned that keeping monetary policy too-loose for too-long could worsen inflation by allowing expectations to get entrenched into consumer and business psychology. "To keep inflation expectations anchored means that monetary policymakers will have to back up their words with actions. We need to reverse course. I anticipate the reversal will need to be started sooner rather than later," he warned.

Then on July 23rd, Plosser warned again, "Real interest rates are negative, and we can't stay there indefinitely. We've got price pressures clearly throughout the economy. Ultimately, rates are going to have to go up," he said. Stern and Plosser duped the gold bugs into a selling frenzy, and on August 4th, the dynamic duo flip-flopped, and voted to keep the fed funds rate steady at 2-percent.

The Fed's propaganda artists could hardly believe their good fortune, as gold and oil prices sank, even as they signaled no change in "negative" US interest rates for the remainder of the year. But as the charts above indicate, bottom fishing in US financial shares, after the US government's bailout of Fannie and Freddie, combined with sharply lower agricultural and oil energy futures, and a stronger dollar, were the chief culprits behind gold's latest plunge below $900 /oz.

... In the commodities markets, sentiment can turn instantly on a dime. Livermore said the market is 90% emotional and 10% logical. It's difficult to catch a falling knife, without getting hurt. For commodity bulls, OPEC's upcoming meeting on Sept 6th could be a turning point. "If there are expectations that demand will fall, or if supply is actually more than demand, OPEC will act to balance supply and demand," said Qatari Oil Minister Abdullah al-Attiyah on August 1st. Beyond OPEC, contrarians might see the dismal readings on global factory orders as nearing a bottom.<SCRIPT src="http://s7.addthis.com/js/152/addthis_widget.js" type=text/javascript></SCRIPT>

Gary Dorsch - www.sirchartsalot.com (http://www.sirchartsalot.com)

______________

AND A COUPLE OF PITHY QUOTES FROM JIM SINCLAIR

Question:

I hear that there is something called a “synthetic dollar short,” the covering of which will give great strength to the dollar. It says that the rush of all debtors to pay their debt will create a demand for dollar. Then as the dollar rises, gold will depreciate.

Answer:

With respect for the promulgator of that theory, it is total nonsense. It stands on the premise that people, government, businesses will create demand to pay off their debts. Like hell they will pay off their debts! Deflation is debt failure. Deflation is what has motivated the Fed and Treasury to walk the road of major bailouts. In doing these massive bailouts there has been a major, unprecedented increase in monetary expansion. Inflation is monetary expansion that results in price inflation regardless of business conditions.

There is no “synthetic dollar short.” It sounds nice but it is total non-sense.

Deflation, which is defined as debt failure in today’s OTC derivative world, leads to monetary inflation which in turn creates price inflation regardless of business conditions. That is the entire story. Forget the non-existent “synthetic dollar short.”

Question:

I heard a lady reporter saying yesterday on Bloomberg that crude was off 20% and it is in a CONFIRMED bear market. Is this true?

Answer:

No, 20% is a tidbit of Dow Theory concerning a thesis of measuring various equity indices. Crude like anything else allows Fibonacci retracements that in some cases exceed 50%. A bull market can still be intact when considering the high point and the time taken to get there. The Bloomberg lady thinks she knows everything and repeatedly makes a fool of herself publicly. The amazing part is she seems never to know that.

Between now and early 2011, crude will put on a show to which the entire move we have seen so far will seem only to be preliminary. Crude is presently in a violent correction within a more violent bull market. $110 to $115 should be the limiting factor to this.

pauljlamont

08-10-08, 12:21 PM

"With respect for the promulgator of that theory, it is total nonsense. It stands on the premise that people, government, businesses will create demand to pay off their debts. Like hell they will pay off their debts! Deflation is debt failure. Deflation is what has motivated the Fed and Treasury to walk the road of major bailouts. In doing these massive bailouts there has been a major, unprecedented increase in monetary expansion. Inflation is monetary expansion that results in price inflation regardless of business conditions."

This is where we totally disagree with the inflationists. Massive bailouts are not expansive. Where is the bailout for the millions of homeowners? The Fed is only 'bailing out' one side of the transaction. In reality, the Fed is pouring money into the blackhole of bank balance sheets hoping they will continue to extend credit. But with millions of foreclosures, the Fed is pushing on a string. Are these customers of the bank going to be able to (or want to) ever borrow? Nope. So the debt bubble deflates.
http://www.ltadvisors.net/Info/research/debtversusgdp.png

In the 50s, most folks paid for everything in cash. But with the debt bubble inflated to its maximum over the last few years, prices were so high that people had to (and were willing to) pay for things with credit. They won't be able to in the future.

CPI is a lagging indicator. Thailand's CPI didnt start falling until 1998:
http://www.mof.go.th/emof/emof_dec99_4.gif
After the crash of 1929, it wasn't until 1930, that the CPI began falling.
http://www.marketoracle.co.uk/images/2008/inflation-1930s.jpg

Some inflationists believe that the Fed can prevent Panic. That thesis will probably be tested this fall.

touchring

08-10-08, 12:31 PM

You're talking about consumer or asset deflation?

There's a great difference.

Asset deflation is going to worsen for America and any country experiencing the same credit inflation the last few years.

Prices of homes are going to plunge back to 2001 levels, but yet oil prices can continue shooting.

There is asset deflation amid consumer price inflation.

If consumer price inflation levels out and changes into consumer price deflation, then we'll have a depression.

"With respect for the promulgator of that theory, it is total nonsense. It stands on the premise that people, government, businesses will create demand to pay off their debts. Like hell they will pay off their debts! Deflation is debt failure. Deflation is what has motivated the Fed and Treasury to walk the road of major bailouts. In doing these massive bailouts there has been a major, unprecedented increase in monetary expansion. Inflation is monetary expansion that results in price inflation regardless of business conditions."

This is where we totally disagree with the inflationists. Massive bailouts are not expansive. Where is the bailout for the millions of homeowners? The Fed is only 'bailing out' one side of the transaction. In reality, the Fed is pouring money into the blackhole of bank balance sheets hoping they will continue to extend credit. But with millions of foreclosures, the Fed is pushing on a string. Are these customers of the bank going to be able to (or want to) ever borrow? Nope. So the debt bubble deflates.
http://www.ltadvisors.net/Info/research/debtversusgdp.png

In the 50s, most folks paid for everything in cash. But with the debt bubble inflated to its maximum over the last few years, prices were so high that people had to (and were willing to) pay for things with credit. They won't be able to in the future.

CPI is a lagging indicator. Thailand's CPI didnt start falling until 1998:
http://www.mof.go.th/emof/emof_dec99_4.gif
After the crash of 1929, it wasn't until 1930, that the CPI began falling.
http://www.marketoracle.co.uk/images/2008/inflation-1930s.jpg

Some inflationists believe that the Fed can prevent Panic. That thesis will probably be tested this fall.

EJ

08-10-08, 06:22 PM

Paul,

Thank you for engaging with our members. A couple of points on a Sunday evening.

This is where we totally disagree with the inflationists. Massive bailouts are not expansive. Where is the bailout for the millions of homeowners? The Fed is only 'bailing out' one side of the transaction. In reality, the Fed is pouring money into the blackhole of bank balance sheets hoping they will continue to extend credit. But with millions of foreclosures, the Fed is pushing on a string. Are these customers of the bank going to be able to (or want to) ever borrow? Nope. So the debt bubble deflates.
http://www.ltadvisors.net/Info/research/debtversusgdp.png

Good point. Indeed if the endogenous credit machine cannot be restarted, there are a nearly infinite number of moves the US government can make.

In 1994 when many US banks were approaching insolvency, the Fed changed the rules: by lowering reserve requirement on some accounts to zero, insolvent banks were, with the stroke of a pen, deemed solvent. (http://www.iea-macro-economics.org/flyblind.html)

A near endless range of new rule changes can be created. Here are a couple of creative ideas:

1) Nationalization of GSEs and extension of their charter to include credit card debt: roll over credit card debts into new loans.
2) Or create a new GSE called, say, MasterVisaMac (Ok, a bit clunky) that backs credit card debt sold by credit card companies in a secondary market like mortgages and student loans today.

I'm sure you can think of others.

In the 50s, most folks paid for everything in cash. But with the debt bubble inflated to its maximum over the last few years, prices were so high that people had to (and were willing to) pay for things with credit. They won't be able to in the future.

CPI is a lagging indicator. Thailand's CPI didnt start falling until 1998:
(http://www.marketoracle.co.uk/images/2008/inflation-1930s.jpg)http://www.mof.go.th/emof/emof_dec99_4.gif
After the crash of 1929, it wasn't until 1930, that the CPI began falling.
http://www.marketoracle.co.uk/images/2008/inflation-1930s.jpgApples and oranges cases. In the 1930s the dollar deflated against gold. The US is no longer against a gold standard.

In 1998 the Thai baht deflated over 100% against dollars, then retraced half the loss.

http://research.stlouisfed.org/fred2/data/DEXTHUS_Max_630_378.png

Ten years later, what is the outcome?
Thai FM: Gov’t alert to prevent simultaneous deflation, inflation (http://news.xinhuanet.com/english/2008-07/12/content_8535142.htm)

BANGKOK, July 12 (Xinhua) -- The Thai government is trying to prevent simultaneous occurrence of deflation and inflation as rising oil prices have brought increases in goods prices in the country, Finance and Deputy Prime Minister Surapong Suebwonglee said Saturday.

Surapong was quoted by Thai News Agency (TNA) as saying that the government has been seeking measures to prevent and rectify problems of deflation and inflation, so that they do not happen simultaneously, because such an economic problem would be difficult to solve.
Sound familiar?

Some inflationists believe that the Fed can prevent Panic. That thesis will probably be tested this fall.Here we concur. Question is, whose panic? So many to choose from. Which political constituency will be cared for? The mistake is to think the issue is technical and operational, that there are things that can't be done. Anything can be done, but not without consequences.

Our biggest error in 1999 was the one you are making, under-estimating the will and capabilities of the Fed, Treasury, and Congress. Even after that error I'd have not put a dollar bet on the Treasury backing GSE shareholders on top of creditors, but here we are.

You ain't seen nothing yet.

jimmygu3

08-10-08, 10:08 PM

2) Or create a new GSE called, say, MasterVisaMac (Ok, a bit clunky) that backs credit card debt sold by credit card companies in a secondary market like mortgages and student loans today.

How about they call it the American Revolving Credit Maintenance Corporation: Archie Mac.

Spartacus

08-10-08, 10:19 PM

How about they call it the American Revolving Credit Maintenance Corporation: Archie Mac.

Since these things come in pairs, dare we expect a Jughead mac?

Or since they would be rivals, a Reggie mac?

pauljlamont

08-11-08, 01:21 PM

Good point. Indeed if the endogenous credit machine cannot be restarted, there are a nearly infinite number of moves the US government can make.

The government can't make borrowers borrow and lenders lend. The end point of the cycle (deflationary depression) historically has occurred when both parties have been stretched to the max. With the savings rate negative, debt seen as evil (psychological shift) and banks left with a capital gap, we believe we have arrived. Even if the 'Working' Group bailed out the banks 100%, Asians would dump their bonds (long term rates much higher). But the private sector/tightening forces would up the ante with Americans defaulting/walking away from their houses in surprising numbers. Sure the bailouts will continue to come, we just don't think they will work.
The private sector/tightening forces have the upper hand.

Our biggest error in 1999 was the one you are making, under-estimating the will and capabilities of the Fed, Treasury, and Congress. Even after that error I'd have not put a dollar bet on the Treasury backing GSE shareholders on top of creditors, but here we are.

This isn't 1999. And it is still undetermined whether we are making an error or not. The Fed/Treasury/Congress/Illuminati does not control long term interest rates. If you look around the globe, it was a global credit boom fueled by the credit creation and low long term interest rates.

As Dr. Marc Faber recently stated 'the global boom will go bust':
"A deflationary stabilization crisis will follow in phase four of our road to financial fiasco. Large segments of the population will be totally impoverished. Smart hedge fund managers will all have sold their businesses to banks and will have left the US to live in the Caribbean, Brazil, Singapore, or Thailand, while Ben Bernanke will flee the US in a hurry."

http://www.theaustralian.news.com.au/story/0,25197,24062055-30538,00.html

"If US consumption collapses, the US trade and current account deficit will be halved and will lead to a drying up of global liquidity. I have discussed this relationship many times in the past and have clearly shown the relationship between the growth rate in Foreign Official US Dollar Reserves and the US dollar. Declining US consumption will be positive for the US dollar and will certainly bring down commodity prices because of lower demand (at least temporarily). But if you really think that such an outcome will be good for stocks, then dream on!"

http://www.dailyreckoning.com/Issues/2008/DR080608.html#esssay

http://www.marketoracle.co.uk/images/mauldin_16_6_07a.jpg