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FRED
10-17-08, 09:41 AM
http://www.itulip.com/images/lehmanbrosdoor.jpgSix Questions for Eric Janszen on the Economic Collapse

By Rafil Kroll-Zaidi (http://www.harpers.org/subjects/RafilKrollZaidi)

Angel investor and iTulip.com (http://itulip.com/forums/../) founder Eric Janszen contributed to this month’s Forum, “How to Save Capitalism: Fundamental fixes for a collapsing system (http://www.harpers.org/archive/2008/11/0082249),” and wrote “The Next Bubble: Priming the markets for tomorrow’s big crash” (http://www.harpers.org/archive/2008/02/0081908) in the February 2008 Harper’s. Rafil Kroll-Zaidi interviewed Janszen via email; answers have been edited for length and clarity.

1. Is the Dow still inflated?

It is. My Dow target since 2006 has been around 5,000. Here’s why: The impact on the stock market of the 2003–2007 monetary and fiscal reflation (http://www.investopedia.com/terms/r/reflation.asp) was similar to that of the 1933–1937 reflation–except that this most recent reflation was enhanced by real estate asset-price inflation. Sure, by 1937, the stock market had nominally recovered 80 percent of what it lost between 1929 to 1933. But in real, inflation-adjusted terms, it recovered only 50 percent of what it lost.

Today, all of the pricing power that was temporarily injected into the economy with the credit expansion is running in reverse, with across-the-board debt deflation. Soon the dollar will resume its decline relative to commodities (although not currencies) increasing food and energy inflation pressures in the United States, even as unemployment rises and wages deflate.

2. What can we expect from federal intervention?

The government has been trying to manage the debt deflation for over a year, to no avail. The markets are “pricing in” the structural problems of the banking system and financial markets–problems, as I said, that cannot be addressed with ad-hoc and marginal national policies. The entire global financial and monetary system has to be overhauled. This will require immediate and unprecedented cooperation among governments and institutions. But America lacks the global political leadership needed to drive the process.

Time is short. The financial-markets crisis is now spilling over into the real economy. Soon unemployment and other hardships will limit the ability of governments to sell a global bailout package. This is how the first great era of globalism degenerated into political chaos in the 1930s.

The nationalization of the U.S. banking system is a bold step. The markets are pleased, as has been the pattern for government interventions in years past: when interventions are promised, the markets crash up; when the interventions are not delivered, the markets crash down. When the interventions vastly exceed expectations, as with the agreement among governments in the U.S., the U.K., and Europe to purchase shares in leading banks–nationalization in all but name–the stock markets react with manic enthusiasm.

Certainly short-term risks to investors have declined. The markets correctly understand that a functioning credit system is a prerequisite for a modern economy. But getting the credit system working again is like restarting a heart-attack victim’s heart. The underlying cause still has to be addressed, and that takes years, and other organs may fail while the patient is out.

http://www.itulip.com/images/ejMED.jpgPhoto by Victor Cruz

3. It seems like the whole finance economy was Long-Term Capital Management writ large: basically no one, not even regulators, appreciated just how precarious it all was. How do we create a stable regulatory structure?

The decline in regulation is a symptom of FIRE economy interests (Finance, Insurance, and Real Estate) taking control of the political machinery to increase profitability. But the profitability of the credit industry was a side effect of interest rates falling (after the Volcker Fed raised them to 20 percent). The incursion of the credit industry into every aspect of American life–college tuition, health care–was the result. But it’s worse than that. Manufacturing was financialized. Take the auto industry–a finance manager at one of the Big Three automakers told me, “We used to be a car company that sold financing on the side. Now we are a bank that makes cars.” Look at GM stock in recent days. It’s gotten hammered worse than during the Great Depression, not only because of a coming loss in production profitability but also because of the loss in profits from credit operations that had become such a large part of their operating profits. The regulators have to start over.

4. There have been warnings about how precarious it is for the $63 trillion credit-derivatives market to be bigger than the “world economy.” What are people talking about when they bring up this figure? [MORE . . .] (http://www.harpers.org/archive/2008/10/hbc-90003696)

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steveaustin2006
10-17-08, 01:43 PM
Great interview. Two things:

1 - Didn't the Fed LET Lehman go under because Lehman was the main derivatives seller and counterparty to European banks? i.e. didn't they let them go under so that the Europeans would wake up and realize that they need to help put out the fire of FIRE? From that perspective I always thought it was a smart move since little acknowledgment had been forthcoming until then that these problems are not contained to the U.S. One day later three European banks to be bailed out, but more importantly the ECB was shaken awake. Even though it was a risk to system, I had guessed that they judged the risk acceptable in the face of the return of Europeans getting involved on a much grander scale. And I think the second aim was to send a message about moral hazard.

2 - As someone new here, please excuse my ignorance or wishful thinking as I was caught with my pants down unlike iTulip subscribers.... Are you proposing that solely physical gold will flourish in the environment to come? Do you not think that commodities equities will reach stratospheric valuations within that scenario even if the broader market goes down? Viewed from a dollar tanking, perhaps inflationary recession, grab for hard assets point of view should we not see a similar push for these equities as in the late seventies? As Zulauf and Coxe say in that environment investors do not seek mining equities for profits, they seek them for what the value of the assets in the ground will be worth in the future.

Spartacus
10-17-08, 01:47 PM
remember the discussions of the exponential growth of money?

Are these latest moves the end game, or do they set the stage to extend the exponential growth by a couple more years?

Andreuccio
10-17-08, 02:44 PM
Soon the dollar will resume its decline relative to commodities (although not currencies) increasing food and energy inflation pressures in the United States, even as unemployment rises and wages deflate.

(http://www.itulip.com/GeneralDisclaimer.htm)

Eric (or Fred), here you say "soon the dollar will resume its decline ...". Any sense of how soon is "soon"? Weeks? Months? Years?

Contemptuous
10-17-08, 04:08 PM
My ($63 trillion dollar) question is: Will, or can the unwind of this $63 trillion dollar derivatives pile actively work to put a continuing bid under the US dollar. If the answer to that is yes, and the unwind of 63 trillion is of a scale which requires years rather than months, you have a clear and directly actionable suggestion right there: "get out of USD short positions" because $63 trillion USD takes a very, very long time to close out. That bid under the USD would whittle dollar short trades down to nothing before it concluded.

Thoughts?


There have been warnings about how precarious it is for the $63 trillion credit-derivatives market to be bigger than the “world economy.” What are people talking about when they bring up this figure? [MORE . . .] (http://www.harpers.org/archive/2008/10/hbc-90003696)

aps1087
10-18-08, 05:32 AM
Yes, the big question is these derivatives. What is to keep a disinflation/deflation from taking gold down to $100 before we have a 500% inflation taking it to $500? That was a previous question I had. I don't see how poom has to result in higher prices than TODAY's.

Contemptuous
10-18-08, 06:28 AM
Well we might keep our feet on the ground and remember what it costs to mine the stuff. The absolute cheapest gold mines are at about $450 an ounce, and the average for silver mining is around $16-$17 an ounce. You might knock a dollar or two off that in a severe recession. Plus you have peak cheap oil scheduled to arrive regardless of practically anything (with considerable pricing force) in the next five years jacking all your fuel costs.

It may seem like a radical notion to some, but it is likely important to not overly "financialize" gold, silver, petroleum or any commodities base costs going into the 2020's. There's a lot of fiat money involved, but that sure as heck isn't going to be the major story going forward - due to what oil is going to do. Petroleum price will put a floor under the entire mining complex, and the entire commodities complex too. Give it five years max and the commodities complex should be percolating to the tune of $300++ oil, at the least.

That is the set of "trycicle wheels" or "kiddie wheels" strapped onto any commodities or PM position today. We have an appointment with a very large and unpleasant energy squeeze dead ahead. Anyone getting severely mangled in commodities today should keep that appointment in mind, because five years is not a very long time to wait for payola. Bottom line is the next decade should be inflationary, due to events which will have a fair bit less to do with central bankers and mere money than our more financially minded wonks and propeller heads are willing to acknowledge.


Yes, the big question is these derivatives. What is to keep a disinflation/deflation from taking gold down to $100 before we have a 500% inflation taking it to $500? That was a previous question I had. I don't see how poom has to result in higher prices than TODAY's.

phirang
10-18-08, 07:00 AM
Yes, the big question is these derivatives. What is to keep a disinflation/deflation from taking gold down to $100 before we have a 500% inflation taking it to $500? That was a previous question I had. I don't see how poom has to result in higher prices than TODAY's.

I agree: this is why physical gold is a small part of my portfolio. The better value is in the MINERS, who are getting crushed because of massive DEFLATION.

aps1087
10-18-08, 07:28 AM
Well we might keep our feet on the ground and remember what it costs to mine the stuff.

I understand that, but I do not think it is entirely unreasonable to believe that mining costs come down along w/ the price of oil. Your thesis for the increase in the price of oil is understandable, but could the strength of the USD outpace any decrease in supply or possible increase in demand for oil? Whatever the reason for this USD strengthening (synthetic short, deleveraging, flight to "quality"), it could continue for far longer and be much deeper than many are expecting. If people are not positioned properly, they could be wiped out in this deflation, and have nothing left to invest in the coming inflation. Alternatively, they could be correctly positioned now for a coming deflation, and not be able to get out of the USD in time. For these reasons, I am in a 50/50 cash/gold position. It is just too unpredictable at this time.

bda_guy
10-18-08, 07:31 AM
If a significant geopolitical shift away from financial support of the U.S. takes place–due to, say, military conflict between U.S. creditors, or perhaps due to rising economic and financial crisis at home–the source of those inflows may quickly dry up.




Given the view I take from EJ's previous comments that the great unwind in USD support is soon upon us, I'm curious about the military conflict reference made in the article. EJ, are you implying that you believe some US creditors are on the verge of duking it out within the next six months? If so, which ones? :confused:

metalman
10-18-08, 09:27 AM
Given the view I take from EJ's previous comments that the great unwind in USD support is soon upon us, I'm curious about the military conflict reference made in the article. EJ, are you implying that you believe some US creditors are on the verge of duking it out within the next six months? If so, which ones? :confused:

my impression is that it is one of many 'accidents waiting to happen'. russia and china ain't pals, for example, but the usa owes them both money.

Chris Coles
10-18-08, 09:49 AM
Given the view I take from EJ's previous comments that the great unwind in USD support is soon upon us, I'm curious about the military conflict reference made in the article. EJ, are you implying that you believe some US creditors are on the verge of duking it out within the next six months? If so, which ones? :confused:

Israel taking out Iran's nuclear facilities would do the trick short term, but I believe that the greatest threat is about 4-5 years over the horizon, the Greenland Ice Sheet. If that suddenly melted, (as other ice sheets have suddenly melted, within months), you would have utter chaos world wide. Thus the greatest threat is not financial, nor immediate military action, but environmental. In the 1930's, no one had any worries about any form of environmental effects. But right now, things are happening so fast, it beggers belief.

This recently turned up on Slashdot. One thing that immediately springs to mind is what if the methane catches Fire? This is millions of tons of gaseous Methane spread over thousands of square miles. Perhaps now we have a credible mechanism to warm the planet quite literally overnight. - Very very scary!

| Strong Methane Emissions On the Siberian Shelf |
| from the carbon-dioxide-times-twenty dept. |
| posted by kdawson on Tuesday September 30, @00:05 (Earth) |
| http://news.slashdot.org/article.pl?sid=08/09/30/022246 (http://news.slashdot.org/article.pl?sid=08/09/30/022246) |
+--------------------------------------------------------------------+
rrohbeck writes "The Independent reports brand-new results of [0]high concentrations of methane 100x normal above the sea surface over the Siberian continental shelf. A [1]large number of methane plumes have been discovered bubbling up from the sea floor. This is probably due to [2]methane clathrate, buried under the sea floor before the last ice age, breaking up as higher water temperatures melt the permafrost that had contained it."

Discuss this story at:
http://news.slashdot.org/comments.pl?sid=08/09/30/022246 (http://news.slashdot.org/comments.pl?sid=08/09/30/022246)
Links:
0. http://www.independent.co.uk/environment/climate-change/exclusive-the-methane-time-bomb-938932.html (http://www.independent.co.uk/environment/climate-change/exclusive-the-methane-time-bomb-938932.html)
1. http://www.independent.co.uk/news/science/hundreds-of-methane-plumes-discovered-941456.html (http://www.independent.co.uk/news/science/hundreds-of-methane-plumes-discovered-941456.html)
2. http://en.wikipedia.org/wiki/Methane_clathrate#Methane_clathrates_and_climate_c hange (http://en.wikipedia.org/wiki/Methane_clathrate#Methane_clathrates_and_climate_c hange)

bda_guy
10-18-08, 10:19 AM
my impression is that it is one of many 'accidents waiting to happen'. russia and china ain't pals, for example, but the usa owes them both money.

Digressing on the point of "accidents", my favorite throw-out that I've heard as a black swan event would be a major earthquake under Tokyo causing economic damage into the hundreds of billions. In an instant, Japan would need to sell foreign (ie. mainly USD) investments to raise Yen-denominated funds for rebuilding efforts. Once you get a major creditor like that reversing US capital flows from in to out, it's a slippery slope for the USD and plays into the themes discussed on Itulip.

Having said that, the chances of this happening are not very high. There are other political/economic/environmental issues more likely to be the trigger. :D

we_are_toast
10-18-08, 10:25 AM
Israel taking out Iran's nuclear facilities would do the trick short term, but I believe that the greatest threat is about 4-5 years over the horizon, the Greenland Ice Sheet. If that suddenly melted, (as other ice sheets have suddenly melted, within months), you would have utter chaos world wide. Thus the greatest threat is not financial, nor immediate military action, but environmental. In the 1930's, no one had any worries about any form of environmental effects. But right now, things are happening so fast, it beggers belief.

This recently turned up on Slashdot. One thing that immediately springs to mind is what if the methane catches Fire? This is millions of tons of gaseous Methane spread over thousands of square miles. Perhaps now we have a credible mechanism to warm the planet quite literally overnight. - Very very scary!

| Strong Methane Emissions On the Siberian Shelf |
| from the carbon-dioxide-times-twenty dept. |
| posted by kdawson on Tuesday September 30, @00:05 (Earth) |
| http://news.slashdot.org/article.pl?sid=08/09/30/022246 (http://news.slashdot.org/article.pl?sid=08/09/30/022246) |
+--------------------------------------------------------------------+
rrohbeck writes "The Independent reports brand-new results of [0]high concentrations of methane 100x normal above the sea surface over the Siberian continental shelf. A [1]large number of methane plumes have been discovered bubbling up from the sea floor. This is probably due to [2]methane clathrate, buried under the sea floor before the last ice age, breaking up as higher water temperatures melt the permafrost that had contained it."

Discuss this story at:
http://news.slashdot.org/comments.pl?sid=08/09/30/022246 (http://news.slashdot.org/comments.pl?sid=08/09/30/022246)
Links:
0. http://www.independent.co.uk/environment/climate-change/exclusive-the-methane-time-bomb-938932.html (http://www.independent.co.uk/environment/climate-change/exclusive-the-methane-time-bomb-938932.html)
1. http://www.independent.co.uk/news/science/hundreds-of-methane-plumes-discovered-941456.html (http://www.independent.co.uk/news/science/hundreds-of-methane-plumes-discovered-941456.html)
2. http://en.wikipedia.org/wiki/Methane_clathrate#Methane_clathrates_and_climate_c hange (http://en.wikipedia.org/wiki/Methane_clathrate#Methane_clathrates_and_climate_c hange)


The glaciers on Greenland are receding rapidly, but I wouldn't be too concerned of a sudden melt. A greater concern would be something like a sudden disintegration of portions of the Ross in Antarctica like what happened to Larsen B a few years ago (an ice shelf the size of Rhode Island that turned into a giant slushy in a matter of days).

Wouldn't be too concerned about the methane from the seabed catching fire; bigger concern of reinforcing positive feedback global warming mechanism. The same thing is happening with the melting of permafrost.

Chomsky
10-18-08, 11:19 AM
Digressing on the point of "accidents", my favorite throw-out that I've heard as a black swan event would be a major earthquake under Tokyo causing economic damage into the hundreds of billions. In an instant, Japan would need to sell foreign (ie. mainly USD) investments to raise Yen-denominated funds for rebuilding efforts. Once you get a major creditor like that reversing US capital flows from in to out, it's a slippery slope for the USD and plays into the themes discussed on Itulip.

Having said that, the chances of this happening are not very high. There are other political/economic/environmental issues more likely to be the trigger. :D

My favorite "black swan event" scenario is the Cumbre Vieja mega tsunami that some day will destroy the eastern seaboard of the US, the southwest of England, the Caribbean, and Brazil.

http://www.rense.com/general56/tsu.htm

steveaustin2006
10-18-08, 12:39 PM
Yes, the big question is these derivatives. What is to keep a disinflation/deflation from taking gold down to $100 before we have a 500% inflation taking it to $500? That was a previous question I had. I don't see how poom has to result in higher prices than TODAY's.

If those derivatives were to destroy paper wealth on a much greater scale I would expect gold to rise at the same time as the dollar rises - nothing precludes from both occurring at the same time. The question for me on a dollar rise is how much pain will citizens and politicians be able to accept from a sharp dollar rise from a permanent bid under it from further repatriation.

From a commodities perspective I see little reason for China not to continue down its infrastructure buildout path being largely insulated from these banking problems.

ronin
10-18-08, 03:13 PM
Well we might keep our feet on the ground and remember what it costs to mine the stuff. The absolute cheapest gold mines are at about $450 an ounce, and the average for silver mining is around $16-$17 an ounce. ...

Lukester,
Do you have a source for the costs of production? If there is an existing industry metric, I would like to know the source. I agree that the marginal cost of production should be a pretty good floor for a precious metal.
Just trying to learn. Thanks.

Ronin

Verrocchio
10-18-08, 04:21 PM
The glaciers on Greenland are receding rapidly, but I wouldn't be too concerned of a sudden melt. A greater concern would be something like a sudden disintegration of portions of the Ross in Antarctica like what happened to Larsen B a few years ago (an ice shelf the size of Rhode Island that turned into a giant slushy in a matter of days).

Wouldn't be too concerned about the methane from the seabed catching fire; bigger concern of reinforcing positive feedback global warming mechanism. The same thing is happening with the melting of permafrost.

Agreed.


The tipping point concept is operative here. It means that the checks in the natural system against runaway global warming are overcome. The release of methane gases stored in the seabed off the Siberian coast (above) and from the bubbling Siberian permafrost (http://www.guardian.co.uk/environment/2005/aug/11/science.climatechange1) -– a million square kilometers, the size of <st1:country-region w:st="on">France</st1:country-region> and <st1:place w:st="on"><st1:country-region w:st="on">Germany</st1:country-region></st1:place> combined -- could very well tip the planetary temperature system into a runaway state, and at that point reducing man-made emissions to zero would be an futile gesture.

Chris Coles
10-18-08, 04:45 PM
Agreed.


The tipping point concept is operative here. It means that the checks in the natural system against runaway global warming are overcome. The release of methane gases stored in the seabed off the Siberian coast (above) and from the bubbling Siberian permafrost (http://www.guardian.co.uk/environment/2005/aug/11/science.climatechange1) -– a million square kilometers, the size of <?xml:namespace prefix = st1 /><st1:country-region w:st="on">France</st1:country-region> and <ST1:place w:st="on"><st1:country-region w:st="on">Germany</st1:country-region></ST1:place> combined -- could very well tip the planetary temperature system into a runaway state, and at that point reducing man-made emissions to zero would be an futile gesture.

Found this on Wikipedia: http://en.wikipedia.org/wiki/Clathrate_gun_hypothesis

"According to Gregory Ryskin, a sudden release of methane from the ocean may lead to either global cooling (http://en.wikipedia.org/wiki/Global_cooling) or global warming (http://en.wikipedia.org/wiki/Global_warming). The explosions and burning of methane would produce lots of smoke and dust, which would lead to global cooling. The methane and carbon dioxide would "create the greenhouse effect, which may lead to global warming". Professor Ryskin writes that it is "difficult to predict" whether global cooling or warming would result.

The consequences of a methane-driven oceanic eruption for marine and terrestrial life are likely to be catastrophic. Figuratively speaking, the erupting region "boils over," ejecting a large amount of methane and other gases (e.g., CO2, H2S) into the atmosphere, and flooding large areas of land. Whereas pure methane is lighter than air, methane loaded with water droplets is much heavier, and thus spreads over the land, mixing with air in the process (and losing water as rain). The air-methane mixture is explosive at methane concentrations between 5% and 15%; as such mixtures form in different locations near the ground and are ignited by lightning, explosions and conflagrations destroy most of the terrestrial life, and also produce great amounts of smoke and of carbon dioxide. Firestorms carry smoke and dust into the upper atmosphere, where they may remain for several years; the resulting darkness and global cooling may provide an additional kill mechanism. Conversely, carbon dioxide and the remaining methane create the greenhouse effect, which may lead to global warming. The outcome of the competition between the cooling and the warming tendencies is difficult to predict.[3] (http://pangea.stanford.edu/Oceans/GES205/methaneGeology.pdf)"

bda_guy
10-19-08, 02:44 PM
Found this on Wikipedia: http://en.wikipedia.org/wiki/Clathrate_gun_hypothesis
The consequences of a methane-driven oceanic eruption for marine and terrestrial life are likely to be catastrophic. Figuratively speaking, the erupting region "boils over," ejecting a large amount of methane and other gases (e.g., CO2, H2S) into the atmosphere, and flooding large areas of land. Whereas pure methane is lighter than air, methane loaded with water droplets is much heavier, and thus spreads over the land, mixing with air in the process (and losing water as rain). The air-methane mixture is explosive at methane concentrations between 5% and 15%; as such mixtures form in different locations near the ground and are ignited by lightning, explosions and conflagrations destroy most of the terrestrial life, and also produce great amounts of smoke and of carbon dioxide. Firestorms carry smoke and dust into the upper atmosphere, where they may remain for several years; the resulting darkness and global cooling may provide an additional kill mechanism. Conversely, carbon dioxide and the remaining methane create the greenhouse effect, which may lead to global warming. The outcome of the competition between the cooling and the warming tendencies is difficult to predict.[3] (http://pangea.stanford.edu/Oceans/GES205/methaneGeology.pdf)"



Let's get real here for a second. Methane represents less than < 0.0002% of the air that we breath. The Russian expedition that noted levels of methane 100x greater than normal would still represent < 0.02% of the air. I could imagine specific localized pockets of methane that would develop where the concentration > 5%. However, how realistic is it for there to be significant regions of the world with concentrations so high to so as to an actual firestorm threat?

Global warming through increased methane in the atmosphere - definitely.

Firestorm threat through increased methane in the atmosphere - highly unlikely.

Chris Coles
10-19-08, 04:57 PM
Let's get real here for a second. Methane represents less than < 0.0002% of the air that we breath. The Russian expedition that noted levels of methane 100x greater than normal would still represent < 0.02% of the air. I could imagine specific localized pockets of methane that would develop where the concentration > 5%. However, how realistic is it for there to be significant regions of the world with concentrations so high to so as to an actual firestorm threat?

Global warming through increased methane in the atmosphere - definitely.

Firestorm threat through increased methane in the atmosphere - highly unlikely.

Thanks for the heads up.

tombat1913
10-20-08, 06:28 PM
Yes, the big question is these derivatives. What is to keep a disinflation/deflation from taking gold down to $100 before we have a 500% inflation taking it to $500? That was a previous question I had. I don't see how poom has to result in higher prices than TODAY's.

They are going to do everything they can to compensate for the deflationary effects of the defaults with massive money creation to make sure that doesn't happen. They will print to compensate for the defaults, and then they will print more to stimulate economic growth. Helicopter Ben has made his intentions pretty clear. Unless Volcker comes back I don't foresee anything but large scale inflation.

Plus what you described is more like Poom-Ka, which doesn't sound as good.:D

BobH
10-21-08, 05:05 PM
>>Soon the dollar will resume its decline relative to commodities (although not currencies) increasing food and energy inflation pressures in the United States, even as unemployment rises and wages deflate.<<

Could someone explain how in a deflationary environment commodities will go up relative to the dollar? Thanks

Chris Coles
10-21-08, 06:03 PM
>>Soon the dollar will resume its decline relative to commodities (although not currencies) increasing food and energy inflation pressures in the United States, even as unemployment rises and wages deflate.<<

Could someone explain how in a deflationary environment commodities will go up relative to the dollar? Thanks

In very simple terms, the value of the dollar has been damaged and it will decline. The holders of commodities, in trying to maintain the value of their sales, increase price, valued in dollars. The cost of commodities increase, in dollar terms, but the value of the dollar decreases.

grapejelly
10-21-08, 06:13 PM
>>Soon the dollar will resume its decline relative to commodities (although not currencies) increasing food and energy inflation pressures in the United States, even as unemployment rises and wages deflate.<<

Could someone explain how in a deflationary environment commodities will go up relative to the dollar? Thanks

once all these margin calls have cleared (the deleveraging) there will be a ton of money on the sidelines in short term treasurys. Where's it gonna go?

Into tangibles.

Redwoods
10-21-08, 08:20 PM
Quote:
<table border="0" cellpadding="6" cellspacing="0" width="100%"> <tbody><tr> <td class="alt2" style="border: 1px inset ;"> Originally Posted by FRED http://itulip.com/forums/images/buttons/viewpost.gif (http://itulip.com/forums/showthread.php?p=55057#post55057)


Soon the dollar will resume its decline relative to commodities (although not currencies) increasing food and energy inflation pressures in the United States, even as unemployment rises and wages deflate.

</td> </tr> </tbody></table>
Can people help me understand what the above means for the future of the Euro-dollar exchange rate?

I have some investments that are Euro/bond based. I've been interpreting the iTulip thesis that in 2-6 months we'll see the dollar stop its recent strengthening and start going down in value and at that time the Euro will start getting stronger relative to the dollar again.

But I think Eric is saying something else above.

What is the iTulip thesis' position on holding Euros for the next few years, 3-5 year perspective? Long or short?

Thanks Team Tulip!

tastudios
10-21-08, 09:03 PM
once all these margin calls have cleared (the deleveraging) there will be a ton of money on the sidelines in short term treasurys. Where's it gonna go?

Into tangibles.


Its so simple, I can't believe I'd missed it so far... We're in pure disinflation (XdeflationX) mode - All commodities and PMs get crushed and cash is king. Since disinflation absolutely kills the stock market (and treasury yields), the best play now seems to be shorting the market. I'm watching for oil to level off for a while and slowly begin an ascent. It could take a few months, to a few years; hopefully the former.

GRG55
10-21-08, 09:14 PM
>>Soon the dollar will resume its decline relative to commodities (although not currencies) increasing food and energy inflation pressures in the United States, even as unemployment rises and wages deflate.<<

Could someone explain how in a deflationary environment commodities will go up relative to the dollar? Thanks

A declining US $ is NOT a deflationary environment...

FRED
10-21-08, 09:50 PM
Quote:
<table border="0" cellpadding="6" cellspacing="0" width="100%"> <tbody><tr> <td class="alt2" style="border: 1px inset ;"> Originally Posted by FRED http://itulip.com/forums/images/buttons/viewpost.gif (http://itulip.com/forums/showthread.php?p=55057#post55057)


Soon the dollar will resume its decline relative to commodities (although not currencies) increasing food and energy inflation pressures in the United States, even as unemployment rises and wages deflate.

</td> </tr> </tbody></table>
Can people help me understand what the above means for the future of the Euro-dollar exchange rate?

I have some investments that are Euro/bond based. I've been interpreting the iTulip thesis that in 2-6 months we'll see the dollar stop its recent strengthening and start going down in value and at that time the Euro will start getting stronger relative to the dollar again.

But I think Eric is saying something else above.

What is the iTulip thesis' position on holding Euros for the next few years, 3-5 year perspective? Long or short?

Thanks Team Tulip!

We are long term euro bears.
We are long term dollar bears.
With Japan heading into yet another recession but this time with public debt at 193% of GDP, the yen has probably had its run.
Switzerland is looking very Iceland about now. These mini-FIRE Economies have had their day.
The pound sterling is teetering.

You might reasonably ask, what currency then is viable long term?

That is why we remain long gold and will remain long gold until we can answer that question.

drumminj
10-21-08, 10:44 PM
Fred, I'm having a hard time reconciling your post here with some others in recent days (from you and EJ), but perhaps I am just being dense.

EJ puts forth gold as an insurance play, and has a relatively small allocation (~15% if I recall correctly). EJ's comments on this make sense to me.

By saying that "you" remain long gold here seems to imply that you (whichever personality this is posting today) would not view gold as insurance, but rather as an alternative investment to equities, the euro, yen, franc, etc. It would also seem to imply that a greater allocation in gold would be called for, assuming iTulip still feels that equities are a bad play at the moment.

I don't want to beat a dead horse here, and I know that there are several similar threads going on right now, but if you're a dollar bear, euro bear, swissie bear, yen bear, don't feel equities are the place to be, and LONG gold, I can't imagine where the other 85% of "your" portfolio might be allocated given this outlook.

Please note I'm not asking for the sake of looking for guidance of portfolio allocation. I'm just trying to put all the pieces together and better understand the differences in iTulip's short-term and long-term economic outlook.

Thanks.

J

FRED
10-22-08, 12:06 AM
Fred, I'm having a hard time reconciling your post here with some others in recent days (from you and EJ), but perhaps I am just being dense.

EJ puts forth gold as an insurance play, and has a relatively small allocation (~15% if I recall correctly). EJ's comments on this make sense to me.

By saying that "you" remain long gold here seems to imply that you (whichever personality this is posting today) would not view gold as insurance, but rather as an alternative investment to equities, the euro, yen, franc, etc. It would also seem to imply that a greater allocation in gold would be called for, assuming iTulip still feels that equities are a bad play at the moment.

Currency depreciation is one of several tools that the Fed can use to fight deflation. With the Fed funds rate at 1.5%, huge public and external debt, no assets to inflate, how are we going to get out of this one? Dollar depreciation is starting to look like the only tool left on the Fed's menu except for outright debt monetization.


I don't want to beat a dead horse here, and I know that there are several similar threads going on right now, but if you're a dollar bear, euro bear, swissie bear, yen bear, don't feel equities are the place to be, and LONG gold, I can't imagine where the other 85% of "your" portfolio might be allocated given this outlook.


Short term treasuries ala Treasury Direct.


Please note I'm not asking for the sake of looking for guidance of portfolio allocation. I'm just trying to put all the pieces together and better understand the differences in iTulip's short-term and long-term economic outlook.

Thanks.

J

Gold allocation depends on:
- Risk tolerance
- Age
- Employment
- What else is in your portfolio
- Etc., etc.

There can be no one size fits all allocation of any asset class.

drumminj
10-22-08, 12:42 AM
Currency depreciation is one of several tools that the Fed can use to fight deflation. With the Fed funds rate at 1.5%, huge public and external debt, no assets to inflate, how are we going to get out of this one? Dollar depreciation is starting to look like the only tool left on the Fed's menu except for outright debt monetization.

Understood.




Short term treasuries ala Treasury Direct.


Here's where you lose me. If one is a long-term dollar bear, why would one want to be holding US dollar-denominated assets with a US dollar revenue stream? I can certainly understand why short-term versus longer-term due to the fact that rates will have to rise as inflation takes hold. However, why US Treasuries at all if you're a dollar bear? If one expects the $US to depreciate, it must be measured against some other currency or asset. Wouldn't one rather be significantly invested in such currencies or assets?

Or are US treasuries put forth as the likeliest "safe" place to sit on the sidelines and wait and see what currencies are likely to be depreciated the least and which assets are likely to hold their value (or appreciate) in real terms?

Again, I'm not looking for anyone to tell me where to put my money. I'm just trying to reconcile what appears to me to be an inconsistency.

Jim Nickerson
10-22-08, 01:35 AM
drumminj,

Personally it sort of pisses me off when I ask someone here a question and one or two who I don't ask pop in with answers.

What follows is not any attempt to answer your question, but are possibly some relevant considerations that exist at the moment.


From du Plessis's site highlighting remarks in a Jeremy Grantham report http://www.investmentpostcards.com:80/



“At under 1,000 on the S&P 500, US stocks are very reasonable buys for brave value managers willing to be early. The same applies to EAFE and emerging equities at October 10 prices, but even more so. History warns, though, that new lows are more likely than not.

“Fixed income has wide areas of very attractive, aberrant pricing.

“The dollar and the yen look okay for now, but the pound does not.

“Don’t worry at all about inflation. We can all save up our worries there for a couple of years from now and then really worry!

“Commodities may have big rallies, but the fundamentals of the next 18 months should wear them down to new two-year lows.

“As for us in asset allocation, we have made our choice: hesitant and careful buying at these prices and lower. Good luck with your decisions.”

Click here (http://www.investmentpostcards.com/wp-content/uploads/2008/10/gmo-quarterly-letter-oct-2008.pdf) for the full report on Grantham’s views on the fallout from the financial crisis and what investment opportunities he sees. (Grantham will be publishing a second part to this report, entitled “Silver Linings” in two weeks’ time. This article will also be posted on Investment Postcards.)

Source: Jeremy Grantham, GMO (http://www.gmo.com/), October 2008.


and here is another opinion about the recent strength in the US$



US Dollar: A Nice Move, But A Long Way To Go (http://bespokeinvest.typepad.com/bespoke/2008/10/us-dollar-a-nic.html)


The US Dollar index is now up 16.5% since it bottomed earlier this year, which is a significant rally for a currency that many had begun to jokingly call the US Peso. The Dollar is currently in a very nice short-term uptrend, trading 5.5% above its 50-day moving average and 11% above its 200-day. However, it's important to remember that the currency has a long, long way to go to get back to levels seen in the earlier part of this decade. As shown in the chart below, we need about 5 times the rally we've seen over the past couple of months to get back to 2000 levels. But the Dollar has historically had very long bull and bear market cycles, and once it gets going in one direction, it usually stays on track for quite some time.
(http://bespokeinvest.typepad.com/bespoke/2008/10/us-dollar-a-nic.html)http://bespokeinvest.typepad.com/bespoke/images/2008/10/20/dollarlt.png (http://bespokeinvest.typepad.com/.shared/image.html?/photos/uncategorized/2008/10/20/dollarlt.png)

From Bespoke 10/21/08 8:57AM


(http://bespokeinvest.typepad.com/bespoke/2008/10/us-dollar-a-nic.html)http://bespokeinvest.typepad.com/bespoke/

The underlined remarks are something the system or I did unintendingly. It does not represent emphasis.

The Outback Oracle
10-22-08, 02:08 AM
Fred "Dollar depreciation is starting to look like the only tool left on the Fed's menu except for outright debt monetization."

Given tne nature of his speech today, I think the Chinese are having a wee whisper in Paulson's ear about such thoughts.

Next solution?

drumminj
10-22-08, 09:01 AM
drumminj,

Personally it sort of pisses me off when I ask someone here a question and one or two who I don't ask pop in with answers.

What follows is not any attempt to answer your question, but are possibly some relevant considerations that exist at the moment.

Jim, I really don't care who answers. I directed my question and FRED since it's a question regarding things FRED and EJ have said that appear contradictory. If anyone else can shed insight, I'm certainly happy to hear it.

The information you included is interesting. Always good to know what moves other people are making, assuming one can get a good feeling for what their qualifications and motivations are.

Am I the only one who feels there's an inherent contradiction in someone who's a long-term dollar bear suggesting being in US Treasurys right now, especially given the fact iTulip looks for long-term investments rather than short-term trades?

BTW - Any chance I could fly you to Austin to meet my ex-girlfriend? She always considered me such a pessimist, but after meeting you (given your outlook on the future of the country and politics) I think she might find me to be quite the optimist! :D

phirang
10-22-08, 09:17 AM
Understood.



Here's where you lose me. If one is a long-term dollar bear, why would one want to be holding US dollar-denominated assets with a US dollar revenue stream? I can certainly understand why short-term versus longer-term due to the fact that rates will have to rise as inflation takes hold. However, why US Treasuries at all if you're a dollar bear? If one expects the $US to depreciate, it must be measured against some other currency or asset. Wouldn't one rather be significantly invested in such currencies or assets?

Or are US treasuries put forth as the likeliest "safe" place to sit on the sidelines and wait and see what currencies are likely to be depreciated the least and which assets are likely to hold their value (or appreciate) in real terms?

Again, I'm not looking for anyone to tell me where to put my money. I'm just trying to reconcile what appears to me to be an inconsistency.

Buying short-term treasuries now is idiotic: keep the money in some crappy bank under the limit and get your 3.x%.

It's only a matter of time before yields improve on t-bills, and then you're totally hosed if you bought now.

BobH
10-22-08, 11:04 AM
A declining US $ is NOT a deflationary environment...

Thank you for the response and thanks to the other two who also responded.

In re-reading EJ's statement the word that I now see is 'relative'. So he is stating that with the future dollar decline, 'relative' to commodities, this will cause inflation in food and energy. Sorry I was just slow in the uptake on that one! but of course, that causes me to ask this.

In a deflationary world, what would cause the dollar to fall faster 'relative' to commodities? As it seems that if it didn't fall faster there most likely wouldn't be any inflationary problems.

What am I not seeing here? Thanks

Jim Nickerson
10-22-08, 11:22 AM
Jim, I really don't care who answers. I directed my question and FRED since it's a question regarding things FRED and EJ have said that appear contradictory. If anyone else can shed insight, I'm certainly happy to hear it.

The information you included is interesting. Always good to know what moves other people are making, assuming one can get a good feeling for what their qualifications and motivations are.

Am I the only one who feels there's an inherent contradiction in someone who's a long-term dollar bear suggesting being in US Treasurys right now, especially given the fact iTulip looks for long-term investments rather than short-term trades?

BTW - Any chance I could fly you to Austin to meet my ex-girlfriend? She always considered me such a pessimist, but after meeting you (given your outlook on the future of the country and politics) I think she might find me to be quite the optimist! :D


That is important. Grantham is a repected pundit, though I don't know his motivations just as I don't generally know those of most people whose opinions I read. At least you can determine his name, assess his age, know where he works, so his comment is not put forth in total anonymity. As far as the Bespoke comment, I have no idea as to who made it. One can check out a long term chart on the $USD and decide for oneself.

I don't consider myself a pessimist, but rather I try to be realistic. The politics in this country is in deep, deep, deep shit. If you are in Texas, have you seen any of the TV ads by Cronyn? Listening to the couple I have, you'd think the pissant is newly seeking to be a senator and has not been sitting on his ass in Washington for the past six years--it makes me want to throw up firstly, and, secondly, there ought to be a law against politicians lying--that would certainly cut down on noise pollution.

we_are_toast
10-22-08, 11:39 AM
Thank you for the response and thanks to the other two who also responded.

In re-reading EJ's statement the word that I now see is 'relative'. So he is stating that with the future dollar decline, 'relative' to commodities, this will cause inflation in food and energy. Sorry I was just slow in the uptake on that one! but of course, that causes me to ask this.

In a deflationary world, what would cause the dollar to fall faster 'relative' to commodities? As it seems that if it didn't fall faster there most likely wouldn't be any inflationary problems.

What am I not seeing here? Thanks

Does this mean that watching the dollar index is pretty much a waste of time? Can we assume gold is representative of the commodities that the dollar will fall against? Is there a basket of commodities where an index can be built such that when that index starts turning up it would indicate we are entering Poom?

Can the dollar dropping relative to commodities theory be declared as the currency theory of general relativity? If Bernanke and Paulson print money at a fast enough rate, will time slow down and dollars become shorter?

Contemptuous
10-22-08, 01:07 PM
BobH -

"In a deflationary world" - From what little of macro economics has been pounded into my head from reading here the past two years, iTulip finally got me to GROK that in any economy where the unit of commerce was fiat, where a speculative bubble pops, you have two options. One: the country has a large pool of internal savings for the public debt to draw on as asset values collapse. Two: the country does not have any savings, but rather the opposite, has only large debts.

In the example one with the large internal savings disinflation is possible and can be long lasting. In example two with only piles of internal debt disinflation is highly unlikely, verging upon impossible. Only inflation is the likely net outcome there. In neither case can the currency appreciate in the strict deflationary sense vs. assets because the currency is fiat. When the currency is linked to gold one might have deflation due to collapsing asset values, but not otherwise.

Now we have lots of people starting to refer to the international "deflation", but there are no currencies anywhere in the world linked to gold. Gold is soaring against all currencies other than the USD, which it could not do in a real deflation. It is very weak right now vs. the USD, and the USD appears very "strong". This creates the illusion that gold and the USD are both "strong" in the same way, because there is "deflation". All currencies are weakening sharply against the USD, and they are also weakening against gold.

So my objection to the use of the term "global deflation" is that while there is a very strong current in effect that is very similar to classic "deflation, assets in fact are weakening against these two forms of money for very different reasons. Once people begin to recognize that gold and the USD are strong for profoundly different reasons, you won't see "deflation" talk around any more. So referring to "deflation" internationally even today, is incorrect.

Gold today while really being a form of money, is in a very unnatural state to be moving in tandem with a fiat paper money like the USD while soaring against all other fiat money. The fiat money (USD) is of course seeing brisk expansion of aggregate quantity. The fact it's moving in tandem with gold is the aberration - because normally any un-gold-backed fiat money would be most certainly inversely correlated to gold in that environment, and gold would then be soaring vs. ALL currencies, confirming 100% inflation as the backdrop. So as gold is indeed rising against all fiat money other than USD, one should recognize actually that what is occurring in the world is really a broadening in-flation.

Asset values are collapsing, paper derivative values are collapsing, and all the paper currencies (including the tempoarily aberrant USD) are collapsing against gold. The current dive in the gold price is STILL just noise in the overall trend. So I would suggest that there is some "disinflation" internationally relative to gold, but what is happening in all assets relative to the USD is a very strange hot-house flower indeed. It has a "much shorter lifespan" than the gold and the deflationary signals it emits are false.


Thank you for the response and thanks to the other two who also responded. In re-reading EJ's statement the word that I now see is 'relative'. So he is stating that with the future dollar decline, 'relative' to commodities, this will cause inflation in food and energy. Sorry I was just slow in the uptake on that one! but of course, that causes me to ask this. In a deflationary world, what would cause the dollar to fall faster 'relative' to commodities? As it seems that if it didn't fall faster there most likely wouldn't be any inflationary problems. What am I not seeing here? Thanks

friendly_jacek
10-22-08, 02:29 PM
once all these margin calls have cleared (the deleveraging) there will be a ton of money on the sidelines in short term treasurys. Where's it gonna go?

Into tangibles.

When I studied the IMF reports lately, I learned that the deleveraging is supposed to last at least till the end of the decade. Did you know that hedge funds were leveraged 70x in 2007 and deleveraged to "only" 40x in 2008?

It's too bad I'm learning this now (the data was available for a while).

Contemptuous
10-22-08, 02:38 PM
FJ - That is likely the answer to the question many have been asking here, "how long does the USD strength persist". If deleveraging implies a continuing bid for USD, we already know this event will last "multiple years", no?


When I studied the IMF reports lately, I learned that the deleveraging is supposed to last at least till the end of the decade. Did you know that hedge funds were leveraged 70x in 2007 and deleveraged to "only" 40x in 2008?

It's too bad I'm learning this now (the data was available for a while).

phirang
10-22-08, 04:37 PM
Oh, crap, gold is fked now!!!

Quick, can someone else pretend they understand what is going on?!

Contemptuous
10-22-08, 05:37 PM
Phirang - with your comments about a "global deflation where everything collapses against a fiat US dollar", I really do wonder whether you understand the relationship between deflation and fiat money. Do you?


Oh, crap, gold is fked now!!! Quick, can someone else pretend they understand what is going on?!

phirang
10-22-08, 07:10 PM
Phirang - with your comments about a "global deflation where everything collapses against a fiat US dollar", I really do wonder whether you understand the relationship between deflation and fiat money. Do you?

Have you heard of this "reserve currency" thing?

Contemptuous
10-22-08, 09:47 PM
Good luck with that "reserve currency thing" guy.