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EJ
01-01-09, 11:28 AM
http://www.itulip.com/images/greenswanMED.jpg 2008 review in pictures and 2009 forecast

by Eric Janszen, Jan. 2, 2009

2008? Let's just say the year did not go exactly as planned for most, but much as we expected. So much happened that if we tried to say it in words we'd need 33,000. We use 33 pictures instead to cover the year and make our 2009 forecast on the markets and economy.

The Fed's reputation for mastery over the economy via carefully crafted monetary policy grew for decades since the hard nosed Paul Volcker Fed rescued the institution from the ignominious tenure of George Burns under the thumb of the Nixon administration. It came apart in 2008 as the Bernanke Fed tried this and tried that when one circuit after another blew in the US credit markets and banking system. The Greenspan Fed was managed for 18 years by decisions guided in principle, but not practice, that markets know best. In practice, under the Greenspan Fed the most knowing markets are those of an economy and government run by banks. The accumulation of error and fraud over that period then fell on Bernanke's shoulders.

Running the Fed after Greenspan was a goat job (http://www.itulip.com/forums/showthread.php?p=2905#post2905), a surefire loser. We can only speculate as to why Bernanke took it. Savior complex? Delusions of grandeur? A bit of both?

But we're getting ahead of ourselves. We review 2008 in pictures we created to go along with our analysis and use these as jumping off points for our 2009 forecasts, starting with our depiction of investing hero Warren Buffett.


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


We thought Warren wasn't seeing things quite as clearly as he might have from a macro-economic standpoint. His rosy outlook contradicted ours. Not surprisingly, he lost money in 2008. In an article in the latest Barron's Magazine Joe Queenan opines in "A Bull Market in Lies":
INDEED, THERE IS SOMETHING ALMOST HEROIC about the sight of an entire nation's populace stepping forward to admit they have been annihilated by the recession. That's why those newspaper articles discussing the market losses of Buffett and Gates and Ellison are so uplifting. Some of us lost a few hundred thousand clams here and there, but those poor clowns lost billions. That's gotta take some of the sting out of it for the rest of us.
http://www.itulip.com/images/sell.jpgAn article noting that Buffett , Gates, and other "poor clowns" also lost fortunes along with the majority of the American middle class is intended to make Barron's readers feel better. Don't tell them about iTulip's December 27, 2007 forecast for a 40% decline in the DJIA for 2008, the first year of the Debt Deflation Bear Market (http://www.itulip.com/forums/showthread.php?p=61898#post61898). But even if they missed that, Jeremy Grantham told us to Sell Everything (http://www.itulip.com/forums/showthread.php?p=9607#post9607) back in April 2007 when he wrote about bubbles in everything and the inverted risk curve. Consider our December 2007 call a final warning.

We got out of the stock market back when iTulip opened shop in 1998 when the buy and hold stock market died (see Debt Deflation Bear Market Update Part I: 2009 Windup (http://www.itulip.com/forums/showthread.php?p=61898#post61898)). Our reasoning? A stock market run like a casino that demands investors posses the skills of a professional forensic accountant to make sound short term investment decisions is not for us. Further, with stock prices primarily driven long term by the forces of asset price inflation, as can be witnessed in our Real DOW section (http://www.itulip.com/realdow.htm) since early 2006, an ugly reversion to the mean was inevitable. As you can see from the graphs there, it isn't over.

When the market crashed on schedule per the Debt Deflation Bear Market forecast in 2008, the SEC responded by rounding up the usual suspects, "speculators" and "short sellers," just as in early 1930.


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


Toward the end of year the uncle of a woman who worked at the Fed let it be known that he'd bilked investors, allegedly, out of billions of dollars in what he described as a Ponzi scheme. His name? Bernard Madoff. Who will round up the regulators?

October 2006 we forecast a recession to start Q4 2007. Finally, after the recession had been on for a year in November 2008 the NBER confirmed it.


http://www.itulip.com/images/recession.gif
Recession, standard version


http://www.itulip.com/images/recession-itulip.gif
Recession, iTulip parody version

That's how the recession started back when we wrote the Dual Cycles of Demand Destruction and the Economic Face Plant (http://itulip.com/forums/showthread.php?t=3782&highlight=wage+inflation). Since then the inflationary impact of a weak dollar has backed off, and the demand destruction from rising unemployment, falling incomes and access to credit has intensified.

The stock market crash is not the only predictable development in the recession and debt deflation. The Fed's race to zero interest rates was depicted in the image below of the Fed's Funds Rate Airplane and its proximity to the Zero Bound Interest Rate Mountains from an article we published February 2008. Each position of the plane corresponds to a rate cut.


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

We forecast the Fed to reach what we called the Zero Bound Interest Rate Mountains between January and June 2009. This turned out to be optimistic. As of December 15, 2008 the Fed discontinued the Fed Funds Target Rate series started on September 27, 1982 and replaced it with two new series that establish upper and lower target bounds.


http://www.itulip.com/images/FF092707-122308.gif


In early fall 2008 when the global credit markets began to break down, the Effective Fed Funds Rate (orange line) stopped cooperating with Fed efforts to meet its 2% target through open market operations. After two rate cuts to 1% the effective rate never reached more than half the target (green line). So on December 15, 2008 the Fed dumped the old series after 26 years and replaced it December 16, 2008 with two new ones: one upper bound (red line) and another lower bound (blue line) Fed Funds Target. These just happen to be the range that the market had already set for the Fed Funds Rate before the switcheroo, between zero and 0.25%.

We are reminded of the famous Pee-wee Herman line in his 1985 film "Pee-Wee's Big Adventure" after he fell off his bicycle: "Hee, hee! I meant to do that!" If anyone had any illusion that the Fed had any significant influence over the money markets via cost of money after rates were lowered to 2%, by now they are gone. We figured back in February that the Fed was due to switch to a strategy of managing the quantity of money after 2%, and that appears to be what happened (see Zero Bound Diaries: Is Bernanke Volcker's Mirror Image? (http://itulip.com/forums/showthread.php?t=3223)). That leads us to make the following update to our ZIRP Mountains trajectory.


http://www.itulip.com/images/fedplaneJan2009.gif


We expect more Pee-wee Herman Fed adventures in 2009 but rather than being scripted by Hollywood writers, the Fed will continue to ad lib off the Fed's Deflation Playbook that we first presented to readers in April 2006.


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

Written in 2003, the playbook outlines a number of radical monetary measures that the Fed might take if by some odd confluence of unlikely factors, risk of an actual deflation spiral appeared. All of the items on the "Making sure it doesn't happen here" checklist have so far been checked and then some.

The Fed's latest gambit is printing money without a corresponding issuance of new debt, that is, true debt monetization.
The MBS purchases are significant; for the first time they turn the Fed into a direct lender to consumers. Many homeowners, though they do not know it, will be sending their monthly mortgage payments to the Fed. The Fed will finance these programmes with newly created reserves: that is, it will print money. Its balance-sheet, which has ballooned from $900 billion to $2.2 trillion since August, could grow by another $800 billion, making it a larger lender than any commercial bank. - The Economist, (http://www.economist.com/finance/displaystory.cfm?story_id=12689745)Plan C, Nov. 27, 2008 (http://www.economist.com/finance/displaystory.cfm?story_id=12689745)
In 2008, the Fed continued to confound the forecasts of anyone who believed in the inevitability of a deflation spiral in the US as the inexorable outcome of the 1980 to 2007 credit bubble that grew during the FIRE Economy era. They contended that there are statutory limits to poiu8iuthe Fed's and Treasury's largess. Our contention is that there are no rules, no limits, and even those that do exist will be thrown out the window to expedite a desperate attempt at asset price reflation.

The Fed provided a perfect Nth example in the bailout last week of GM financing arm GMAC. We have long contended that GM is a bank that makes cars. (http://www.npr.org/templates/player/mediaPlayer.html?action=1&t=1&islist=false&id=95906243&m=95906239) GM's 10-K filed 2/28/2008 reads:
A significant proportion of GMAC’s revenues and profits in recent years came from originating, servicing and securitizing residential mortgages, including subprime loans. In 2007 the real estate market in the United States declined significantly, with falling residential sales, decreased housing construction and rising rates of defaults and foreclosures. GMAC’s revenues and profits have been adversely affected by this decline, particularly at its residential mortgage subsidiary Residential Capital LLC (ResCap). GMAC had a net loss of $2.3 billion in 2007, compared to net income of $2.1 billion in 2006. ResCap’s 2006 net income of $705 million decreased in 2007 to a net loss of $4.3 billion, and in the third quarter of 2007, GMAC recognized an impairment loss of $455 million. Our consolidated financial results have been adversely affected by this decline in GMAC’s revenues and profits. For the year ended December 31, 2007, GMAC’s consolidated mortgage servicing fee income was approximately $2.2 billion.
The Wall Street Journal wrote yesterday that the Fed stipulated that GMAC raise $30 billion to meet the capital requirements to be anointed a bank-holding company by the Fed eligible for Treasury bailout funds. GMAC was apparently unable to do so but the Fed granted bank-holding company status on December 24 anyway. Whatever. If you found the 2008 no-rules for FIRE Economy (http://www.fireeconomy.com/) players policy disconcerting, gird yourself for outright chaos in 2009. Every possible effort will be made to attempt to stop the process of debt deflation.


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

The inflation/deflation debate continued in 2008 with some deflation spiral forecasters declaring victory as asset prices deflated, the dollar surged, commodity prices fell, and all bonds crashed except US Treasuries in the latter half of the year. But this development is also consistent with Ka-Poom Theory, that defines a period of disinflation after a credit driven asset bubble pops, followed by inflation when the Fed at last succeeds all too well in countering it. Tired of playing deflation whack-a-mole with market commentators who do not distinguish between asset price deflation in the FIRE Economy and all-goods and wages price deflation in the Productive Economy, we published Ka-Poom Theory deflation-inflation two-step (http://www.itulip.com/forums/showthread.php?p=60311#post60311) to tamp down the little guys that pop up to shout "Deflation spiral!" every time the dollar spikes or the price of a haircut or gallon of gasoline falls.

Hat tip to iTuliper GRG for calling our attention to our friend Jesse's post: Must-Have Titles for the Deflation Section of Your Financial Library (http://jessescrossroadscafe.blogspot.com/2008/12/must-have-titles-for-deflation-section.html):


Deflation by A. Gary Shilling (Paperback - 2002)
Deflation: How to Survive and Thrive in the Coming Wave of Deflation by A. Gary Shilling (Paperback - 1999)
Deflation: Why It's Coming, Whether It's Good or Bad, and How It Will Affect Your Investments, Business, and Personal Affairs by A. Gary Shilling, 1998
After the Crash : Recession or Depression : Business and Investment Stategies for a Deflationary World by A. Gary Shilling (Paperback - Mar 1988)
The World Has Definitely Changed by A. Gary Shilling ( Hardcover - 1986)
Is Inflation Ending: Are You Ready? A Sober Look At the Prospects for a Decline in Inflation by A. Gary Shilling and Kiril Sokoloff (Hardcover - Mar 1983)

Shilling didn't know it but he was documenting the unique disinflationary period of the birth and development of the FIRE Economy, born in 1980 and R.I.P. 2009. In a similar vein, current deflation commentators are inadvertently mistaking the disinflationary end of the FIRE Economy with the beginning of a deflation spiral ala 1930 to 1933.

Ultimately, from a monetary management standpoint, the Fed will get its inflation, but toward the end of 2009 from the goods supply side of the pricing equation a la 1975 rather than the asset price re-inflation as it prefers. At the same time, the dollar has resumed its downward trend after a massive spike of panic buying of Treasury bonds by holders of assets denominated in other currencies, except yen. That process appears to be coming to an end earlier than expected. In fact, one thing we can say categorically about all of our forecasts in 2008 is that processes that typically take years or months were compressed to months and weeks. Does this mean that the credit markets, banks, and the economy might recover as quickly in 2009 as they collapsed in 2008 once the markets and economy stabilize? No. Only the acute phase of the credit crisis appears rapid. The US and global economy have been getting into this trouble for more than 20 years and will not get out of it quickly.


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

The Fed's heroic effort in 2008 to reflate the US banking system via increased reserves will in our opinion continue to fail.
Total Reserves = Required reserves plus excess reserves


Required Reserves = Deposits X Reserve Requirement
Excess Reserves = Total Reserves - Required Reserves


http://www.itulip.com/images/TOTRESNS01011925-11012008.gif

We agree with TIME Magazine’s take on why the Fed's attempts to get the banking system moving again are failing.
It is true that the Great Depression of the 1930s was a crisis of liquidity. Stocks plunged, banks went under, and the value of assets disintegrated. Our current policies would have been appropriate in the Great Depression, but they are not appropriate now. Liquidity problems are not the source of our current financial and economic woes. Incredibly, excess reserves of depository institutions have increased from under $2 billion in August to a record $774 billion in mid-December, according to the Federal Reserve's Dec. 18 release. But the banks have not taken advantage of this liquidity to increase their lending.

Why not? Because what we have is not a crisis of liquidity but rather a crisis of confidence. With tremendous excess reserves, it is obviously not the case that banks are not lending money because they do not have the money to loan. Instead, they are afraid that other institutions, including other banks, will not pay it back. The banks do not have confidence in each other. - TIME Magazine, Fighting the Last Depression: The Fed's Policy Errors, Dec. 30, 2008 (http://www.time.com/time/business/article/0,8599,1868969,00.html)
The Fed is not addressing the crux of the issue: Bank X with crud loans on its balance sheet won't lend to Bank Y with equally cruddy loans on its balance sheet. The crud is proportionate to the credit default swaps purchased to insure against defaults on the bad loans. The largest banks have the largest proportion of credit default swaps, medium sized banks less, small banks hardly any at all.

The TIME writer does not propose a solution. Here's ours. If the market won't clear on its own, the Fed will have to clear if for them. The Fed did this with the banking system as a whole in 1934 and with the S&Ls in the late 1980s. How about this solution broken down into three steps:

http://www.itulip.com/images/bankcrisissolution.gif
Functionally, this is clearly what needs to be done. Why hasn't it? Is the process operationally impossible, like changing tires on a moving car, the banks too big and too integral to daily business and market operations? Will a modern bank holiday that shuts down banks holding collectively $20 trillion in assets be done without crashing the system? Or are the big banks politically off limits?

We have no idea how this conundrum will work out in 2009 but suffice it to say that continuing the same program of adding excess reserves until the cows come home will not work any better this year than it did last year. The largest banks in the US banking system will at some point have to be toaster-reset, as they say in the computer business -- a phrase that refers to the practice of unplugging and plugging back in a computer that is not responding to traditional operator efforts to restart it. When that happens, expect sparks to fly. We do not believe this eventuality is yet priced into the markets.

Another unfortunately predictable event in 2008 was the complete collapse of the wider credit market due to widespread credit market risk pollution by toxic debt as we warned about in early 2006 (http://www.itulip.com/riskpollution.htm).


http://itulip.com/images/riskpollution50.gif

The combination of money running away from corporate bond default risk; risk in securities denominated in rubles, rupees, pesos, and everything but yen and dollars; a predictable run on hedge funds (http://www.itulip.com/forums/showthread.php?p=5461#post5461); and widespread avoidance of the mundane bank savings or money market account; these factors all together have driven trillions into "safe" US government Treasury bonds in a short period producing what many have termed a "Treasury bond bubble." Same deal in 1930 debt deflation. The question is, what will dislodge the bond hoarders this time? Will the government pull another drastic 1934 style maneuver to crash the bond market with a radical currency depreciation? We don't think so. We think the central banks of US trade partners will do it for us, first by not buying more Treasuries, which with that market being dependent on continuous inflows will in and of itself weaken prices, perhaps leading to a run in the manner of all bubbles. Subscribers will note that we have not issued a "Time at last to short US Treasuries" call yet in the manner of our December 2007 "Time at last to short stocks" and June 2008 "Time at last to short commercial real estate (http://itulip.com/forums/showthread.php?t=4307)." We're keeping an eye on it, but we're not there yet. When it does happen it will be decided by a currency-related event, as in 1934.

To complicate the issue, the eventual end of the love affair with Treasuries will be more politically than market driven. Let's review the characters involved.


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

Bernanke was hired by the Bush White House in 2005, billed as a scholar of the Great Depression. His "What Me Worry?" approach early in the credit debacle did not instill confidence in those of us who understood the gravity of the crisis. It meant that either Bernanke didn't understand what he'd gotten himself into or that he was overestimating his ability to manage the crisis. In either case, Bernanke was an easy short in 2008.


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

Predictably, the Fed chairman's job quickly turned into what we call a "goat rodeo."


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

There was nothing he could do to undo decades of errors, so everything he did or didn't do drew criticism. He was criticized for acting too slowly, too quickly, for not acting at all, or for acting when he should do nothing. He made a fine target, and the whooping and hollering across the financial press and blogosphere was a major source of entertainment in 2008. We doubt he was having as much fun. Notice how we refer to him in the past tense?

Running the Fed through a depression is not a long term gig. Our forecast is that Bernanke is the Eugene Meyer (http://en.wikipedia.org/wiki/Eugene_Meyer) of our modern debt deflation era. Meyer's September 16, 1930 to May 10, 1933 stint ended when the White House turned over; we expect that Bernanke will be sent packing in 2009.

The signature character of the 2008 financial crisis drama was Henry Paulson. The best quote on Paulson all year came out of Larry Lindsey in a Robert Novak article. (http://www.itulip.com/forums/showthread.php?p=44283#post44283) Commenting on Paulson's efforts to sell Fannie Mae and Freddie Mac bonds:

Financial consultant Lawrence Lindsey, President Bush's former national economic director, told clients Sunday, "Surely things are somewhat amiss when a country's finance minister plays bond salesman for a supposedly privately owned company."

That about sums it up. When he wasn't blowing his credibility on bailout decisions from which he should have been eliminated due to the appearance of, if not in fact, conflicts of interest, he was busy making absurd assertions about the credit crisis and economy. The award in the lower right hand corner, by the way, is a Flying Monkey of the FIRE Economy award. We issue them to anyone who works as a financial reporter, academic or industry economist, or other professional in support of FIRE Economy policies. You can find them saying things like "Housing prices only go up" and "buy and hold stocks" even as they are selling.


http://www.itulip.com/images/FMFE2008.gif

One incredible statement and decision by Paulson was followed by another. On more than one occasion, such as when his initial demand for $700 billion in bailout funds included a "No meddling from Congress" clause, we asked, is he serious?


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


But he was serious. In any case, Paulson will shortly be on his way, and later in the year followed by Bernanke.



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



Not that either he or Bernanke will mind. We suspect they have both had enough of pretending that The System, as Greenspan liked to call it, is reparable.



http://www.itulip.com/images/3econstooges.jpg



In 2009 turnover of personnel in the first first two of the three positions shown above is guaranteed.


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

The question remains, how much will a personnel change effect the modus operandi of the Fed and Treasury? Confronting the private sector debt hangover of the FIRE Economy with only 15% unemployment versus 25% (http://www.itulip.com/forums/showthread.php?p=59666#post59666) means exploding the public sector debt at a time when foreign creditors will rightly wonder who, politically, the US will pay back first, foreign creditors or domestic, and with what? Exactly how much credit creation capacity does the US government have by borrowing against claims on the economic surplus of the American people?

Larry Summers at least acknowledged the extent of the problems facing the economy at a time when others were waxing optimistic. Of course, he was running for office at the time, and appears to have won it as Obama's key political adviser. He has immediately set to work setting very low expectations, forecasting a mini depression in 2009. He may not be setting expectations low enough.

He is also laying the groundwork for massive spending programs, stating that the economy will run $1 trillion under capacity, and implying that an offset of $1 trillion in government spending is therefore needed.


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

The fact is, there is no painless path out of this corner. Especially difficult is the task of roping in US trade partners to bail the US out again as in 2003 with the globe in its first contraction since the late 1950s. No matter what, we expect more of this.


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

And this.


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

As the government attempts to keep families in "their" homes making payments into the FIRE Economy.


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

The excitement over investing in emerging markets, including China, was lost on us in 2008. Greenspan was right about this one.


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

China's political response to its first recession in 30 years will challenge the world in 2009 as rising global unemployment challenges governments world wide. Formerly cocky dictators and single party governments will have to reconsider strategies and alliances.


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

We had a few lively discussions early in 2008 about whether oil was a bubble or not. As oil prices surged to $147, Congress claimed OPEC was holding back supply in the face of surging demand. OPEC claimed dollar weakness as the culprit.


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


The argument died in a hurry when the credit market collapsed in Q4 2008, the dollar surged on US Treasury bond sales and oil prices fell. Surprisingly, they remain today only $7 below the $50 level called a "bubble" in 2004 when in the National Review stated, "...oil prices today should be in the $20-per-barrel range." If so, they "should" be in the $10 range today, with global demand declining. The question is, why aren't they? In 2009, oil prices will confound most forecasters by going more or less nowhere as falling oil supply races against falling demand, and the dollar continues to act as the worst currency except for all the others -- but one: the fourth currency (http://www.fourthcurrency.com/).


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


No annual review and forecast is complete without at least a glancing blow at a gold price forecast. As readers know, our DJIA bottom forecast from 2006 is 5000 and top for gold $2500 in the current cycle, representing a 2:1 DJIA/gold ratio. That DOW 5000 forecast sounded outlandish in 2006 when we made it, when the DOW traded over 11,000, just as gold at $2500 looked nutty when gold traded under $650 as it did at the time. Yes, gold is down from its peak over $1000, but pricing other assets in gold reveals interesting truths.


http://www.itulip.com/images/goldinoil.gif
Gold priced in barrels of oil


http://www.itulip.com/images/golddow.gif
Gold priced in the DJIA

We see gold in 2009 continuing to act as a hedge against the tendency of nations to devalue currencies to create inflation to deflate debt.

Some day we will sell our gold, but we are sticking to our thesis since 2001 that gold is worth holding by individuals for the same reason central banks hold it, even though gold is officially no longer a monetary metal. They hold gold is as a fall-back, in case the floating exchange rate and bond-backed currency system suffers an untimely fate. So do we. If they don't trust their own monetary system enough to sell off gold as a reserve asset, then neither do we. We think of gold as a reserve asset in our portfolio. There it stays until we see evidence to change our thesis.

Summary


If you look back at our doomerish 2006 forecast for 2007 Twelve Days of Christmas Bust 2007 (http://www.itulip.com/forums/showthread.php?p=5198#post5198) note that none of the events darkly noted there -- the market crash, investors fleeing from emerging markets and hedge funds, bank runs, global recession -- were on the mainstream radar yet. We presented them in a lurid way to get your attention at a time of widespread complacency. The only event of twelve noted that has not occurred since then: a currency dislocation. We do not know how it will unfold but expect to see a major currency event this year.

As much as it pains us to say it, we cannot shirk from our responsibility to note that the politics of a shrinking global economic pie will not improve prospects for peace in 2009. Our international institutions for regulation of trade and economic development are geared to managing the challenges of growth, not shrinkage. The tendency of nations to withdraw into themselves in times of economic trouble when increased cooperation is all the more critical must be countered with a concerted effort to maintain close and constructive economic and political ties. Europe is especially vulnerable, and we hope that US leadership stays particularly close to its European allies during the year ahead.

After an asset bubble collapses, the State is confronted with a political question, to use the power of the State to intervene in the inevitable economic correction or not? This question has confronted governments since at least the time of the 1718 to 1720 South Sea Bubble, the world's first true global financial bubble and implosion. As these two playing cards from the era attest, the question of intervention is not a new one.



Birth of Keynesian Economics?


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


Ladies whose husbands are undone by Bubbles,
Meet at a Tavern to Lament their Troubles,
At length they all agree upon Petition,
To Pray the State to Mend their Bad Conditions.




Birth of Austrian Economics?
http://www.itulip.com/images/fiveclubs.jpg
Three Merry Doctors meet in Consultation,
To Cure the South Sea Plague that Spoils the Nation,
But all agreed the Fools should still endure it,
Till smarting Poverty alone should cure it.




As you can see, our view of 2009 is less specific at this point than our view of 2008 at this point last year.
In retrospect, the two best strategies in 2008 were to hold cash and to short the market. I did a bit of both but certainly nowhere near enough. Bravo to Eric Janszen and the iTulip team (http://www.itulip.com/forums/../) who as usual called everything pretty much perfectly (see "You too can forecast recessions! Secrets revealed! Here’s how! (http://www.itulip.com/forums/showthread.php?p=63930)"). - 2008 Report Card, DeForest McDuff, December 18, 2008 (http://www.princeton.edu/%7Ermcduff/Market/0812/0812.html)
There is no over-priced stock market to short, no over-hyped commodities and emerging markets to avoid, and unpopular short term Treasuries and gold to buy. That made shorting stocks, going to cash, and holding a rump of gold a simple choice for 2008. In 2009, determinants will be driven more by domestic and global political considerations than market mean reversion. We are working on a more specific update for iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032) subscribers, "2009: Year of the Jump Ball" that wrestles with the outlandish array of variables that will come into play as established economic and political relationships go through a period of rapid change.

As has been the case since 1998, in 2009 preserving wealth will be for the nimble, the quick, the attentive, the fleet of foot. Staying on top of developments is a community effort. We look forward to your lively and active support in the tough year ahead.

See also:
Pop goes the Globaloney Economy - Eric Janszen (http://www.itulip.com/forums/showthread.php?p=67290#post67290)
Fed cuts dollar, Fire sales and F.I.R.E. sales, Duh-flation, and the Bezzel is shrinking... again - Eric Janszen (http://www.itulip.com/forums/showthread.php?p=66592#post66592)
Deflation - A banker's view. What does iTulip say? - Eric Janszen (http://www.itulip.com/forums/showthread.php?p=66088#post66088) ($ubscription)
The US economy glides like a box of rocks. Don't stand under it. - Eric Janszen (http://www.itulip.com/forums/showthread.php?p=66023#post66023)
Lessons from Japan: The Devil's in the Details Part I - Asset price deflation versus general prices deflation - Eric Janszen (http://www.itulip.com/forums/showthread.php?p=65602#post65602) ($ubscription)
Report from the Front: Conditions of employers (http://www.itulip.com/forums/showthread.php?p=65046#post65046)
You too can forecast recessions! Secrets revealed! Here’s how! - Eric Janszen (http://www.itulip.com/forums/showthread.php?p=63930#post63930)


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

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metalman
01-02-09, 01:38 PM
pee-wee herman fed... yep. all pretense that anyone is in control of anything vanishes this year. wonder who comes after bernanke? any thoughts on a successor?

Verrocchio
01-02-09, 02:49 PM
EJ, thank you for the incisive recap of 2008. A few comments follow.

I doubt that the small investors who suffered major losses to their portfolios in 2008 will feel sympathy for the poor clowns who still have billions in their individual portfolios.:) Signs that the middle class's tolerance for the wage and wealth gap that arose in the past twenty years is no more may be seen in 2009. The electorate has changed horses with the election of Obama, and is now thought by many to have returned to political quiescence for now. This inactive period may come to an end before the mid-term elections. If I were Obama, I'd buy time by scheduling the replacement of Paulson and then Bernake to show responsiveness to this expected dissatisfaction with the economy.

The most worrisome idea is the dollar's resumption of a downward trend. I for one will be most eager to learn when it is indeed time at last to short US Treasuries.

To me your two most specific forecasts concern (1) the Fed's eventual success in stimulating inflation and (2) oil prices will go nowhere. Hopefully, we'll see more threads along the lines of Best Car Deal in 2009 (http://itulip.com/forums/showthread.php?t=7115&highlight=Pontiac)to inform us about opportunities to buy before prices jump. As part of my year end portfolio revisions, I have been leaning toward going long an oil ETF. I think I'll give that one further thought.

While your crystal ball is less clear this year than last, today's post will help many to shape their investment and living decisions in 2009. Happy New Year to all!

FRED
01-02-09, 03:05 PM
EJ, thank you for the incisive recap of 2008. A few comments follow.

I doubt that the small investors who suffered major losses to their portfolios in 2008 will feel sympathy for the poor clowns who still have billions in their individual portfolios.:) Signs that the middle class's tolerance for the wage and wealth gap that arose in the past twenty years may be seen in 2009. The electorate has changed horses with the election of Obama, and is now thought by many to have returned to political quiescencefor now. This inactive period may come to an end before the mid-term elections. If I were Obama, I'd buy time by scheduling the replacement of Paulson and then Bernake to show responsiveness to this expected dissatisfaction with the economy.

The most worrisome idea is the dollar's resumption of a downward trend. I for one will be most eager to learn when it is indeed time at last to short US Treasuries.

To me your two most specific forecasts concern (1) the Fed's eventual success in stimulating inflation and (2) oil prices will go nowhere. Hopefully, we'll see more threads along the lines of Best Car Deal in 2009 (http://itulip.com/forums/showthread.php?t=7115&highlight=Pontiac)to inform us about opportunities to buy before prices jump. As part of my year end portfolio revisions, I have been leaning toward going long an oil ETF. I think I'll that one further thought.

While your crystal ball is less clear this year than last, today's post will help many to shape their investment and living decisions in 2009. Happy New Year to all!

We are working on a specific analysis and forecast for iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032) subscribers that draws more from the book research. The title?


2009: Year of the Jump Ball

http://www.itulip.com/images/jumpball2009.jpg

necron99
01-02-09, 04:47 PM
Thanks for the article, the illustrations gave me a lot of laugh-out-loud moments! (As has been noted on this site, I have a lugubrious sense of humor.)





http://www.itulip.com/images/fedplaneJan2009.gif




... brings a whole new meaning to the phrase "Ka-Poom Theory"

don
01-02-09, 04:50 PM
Your all-seats-cheap theater ticket was spot on. My wife and I have patronized Sam Shepard's The Magic Theater for many years. Yesterday's front page of the SF Chronicle was that they may not make it through this season. They've been around for decades and have always had a modest, if not threadbare, budget :(

Charles Mackay
01-02-09, 05:20 PM
The speed of the collapse of the real economy has been astonishing hasn't it? Stores closing left and right and John Williams now reporting 16% unemployment and the line is going vertical!

http://webpages.charter.net/bigboard/sgs-emp.gif

EJ's forecast looks good to me, with the possible caveat that I'm not sure that there won't be an Obama/FDR type political solution or a G20 solution in a radical revaluation of gold or the dollar. The GCC is creating a common currency with gold possibly in the mix http://news.goldseek.com/PeterCooper/1230733632.php, the EU's objective was to be 15% backed by gold, and there are rumblings in Russia. So I am going to remain vigilante to this possible devaluation of the dollar by hook or by crook.

Good Luck in 2009!

tree
01-02-09, 06:31 PM
Needing someone to blame, I choose Ayn Rand.

FRED
01-02-09, 06:35 PM
Needing someone to blame, I choose Ayn Rand.

We see it as an issue of interpretation.


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

MikePal1
01-02-09, 07:34 PM
What do people think about buying Chinese renminbi (yuan) against the dollar? I view the U.S. as being similar to Great Britain during the GD and China (because of its huge trade surplus) alot like we were back in the 30s. When backed into a corner the British devalued the pound and went off the gold standard and by World War II it was worth half of what it was against the dollar a decade earlier.

There could be a case made for the renminbi being too low in 2007 let alone now. Any thoughts? fyi, it trades on the CME, although rather thinly.

cmraynew
01-02-09, 08:59 PM
What do people think about buying Chinese renminbi (yuan) against the dollar? I view the U.S. as being similar to Great Britain during the GD and China (because of its huge trade surplus) alot like we were back in the 30s. When backed into a corner the British devalued the pound and went off the gold standard and by World War II it was worth half of what it was against the dollar a decade earlier.

There could be a case made for the renminbi being too low in 2007 let alone now. Any thoughts? fyi, it trades on the CME, although rather thinly.

The historical similarity sounds interesting.

Let me isolate one variable though. Your bet seems to be saying that China has less excess economic capacity than the USA. Or, that China's current excess productive capacity may be more easily redirected toward producing goods for non-Americans than the USA's can be. I'm not so sure.

In other words, China may be hurt more deeply in this disinflationary phase than the USA, because the majority of its productive capacity has been inflexibly deployed. Recall EJ's interpretation of the US-China trade partnership as eventuating in 'mutually assured destruction'. Thoughts?

GRG55
01-02-09, 11:52 PM
pee-wee herman fed... yep. all pretense that anyone is in control of anything vanishes this year. wonder who comes after bernanke? any thoughts on a successor?

My guess is Tim Geithner. Admittedly his office won't be in the Eccles Building, but perhaps he will be to Bernanke's successor as Putin is to Medvedev.

Paulson saved his buddies, except Fuld, and their Wall Street banks. Maybe Geithner's task in Treasury will be to save the Federal Reserve Banks?

In the meantime, back on Main Street...

http://www.dilbert.com/dyn/str_strip/000000000/00000000/0000000/000000/30000/7000/300/37302/37302.strip.gif

MikePal1
01-03-09, 01:17 AM
Interesting counter to my argument. China may be hurt worse by the ka, given the huge softening of demand for their products, but I bet it does much better during the poom, as it would have (if they didn't control its value) during the inflationary period prior to July, '08. I guess this may not be the best time, but I do still think the trade would be a pretty big winner once the inflationary stage kicks in, although gold still should do better than either.

Again, if anyone else has some comments or other currencies they think will hold up during this race to print the most money. The way the past few trading sessions have gone it looks like the dollar may hang in there for awhile, although now until Obama takes over looks as though its going to be nothing more than one big short squeeze for oil, retailers, and possibly in the dollar as well.

GRG55
01-03-09, 02:07 AM
...Again, if anyone else has some comments or other currencies they think will hold up during this race to print the most money...

Singapore Dollars. Once this horror show is finally over, Asia will have closed ranks. If there is one region where the demographics are still favourable for growth it'll be there. And Singapore has the potential to be the new Switzerland in due course.

xela
01-03-09, 04:58 AM
[wrapright]

...
The only event of twelve noted that has not occurred since then: a currency dislocation. We do not know how it will unfold but expect to see a major currency event this year.


As much as it pains us to say it, we cannot shirk from our responsibility to note that the politics of a shrinking global economic pie will not improve prospects for peace in 2009. Our international institutions for regulation of trade and economic development are geared to managing the challenges of growth, not shrinkage. The tendency of nations to withdraw into themselves in times of economic trouble when increased cooperation is all the more critical must be countered with a concerted effort to maintain close and constructive economic and political ties. Europe is especially vulnerable, and we hope that US leadership stays particularly close to its European allies during the year ahead.
...


I read this like you rather lean to a currency dislocation event in the euro and not in the dollar.
Was this intended or did I misread you? I'd apreaciate if you could clear this doubt up.

tree
01-03-09, 06:36 AM
We see it as an issue of interpretation.


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


Yes, many are surprised when I inform them of Greenspan's association with the Russian temptress.

History and Literature: Can't beat it!

bill
01-03-09, 08:58 AM
Once this horror show is finally over, Asia will have closed ranks. If there is one region where the demographics are still favourable for growth it'll be there.

http://www.foreignaffairs.org/20090101faessay88101/roger-c-altman/the-great-crash-2008.html

audio:http://www.cfr.org/publication.html?id=18007

ax
01-03-09, 11:59 AM
We are working on a specific analysis and forecast for iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032) subscribers that draws more from the book research. The title?


2009: Year of the Jump Ball


http://www.itulip.com/images/jumpball2009.jpg



I think you guys have already provided a suitable framework for the next year if not the next several years. Gold will rise, hyperinflation hits at some point, many retailers will go bust, CRE will implode.....this is plenty of info to position your portfolio around.

tastymannatees
01-03-09, 12:11 PM
Singapore Dollars. Once this horror show is finally over, Asia will have closed ranks. If there is one region where the demographics are still favourable for growth it'll be there. And Singapore has the potential to be the new Switzerland in due course.


I was leaning Singapore Dollars but after looking it over I found that half the GDP was fire economy based. I am back to the hard assets at this stage of the game.

dtimwinn
01-03-09, 01:54 PM
To me your two most specific forecasts concern (1) the Fed's eventual success in stimulating inflation and (2) oil prices will go nowhere. Hopefully, we'll see more threads along the lines of Best Car Deal in 2009 (http://itulip.com/forums/showthread.php?t=7115&highlight=Pontiac)to inform us about opportunities to buy before prices jump. As part of my year end portfolio revisions, I have been leaning toward going long an oil ETF. I think I'll give that one further thought.

If the thought is that oil prices will not go anywhere in 2009, does the same rationale apply to natural gas prices -- or is there any liklihood that oil and natural gas prices will uncouple?

raja
01-03-09, 02:11 PM
The only event of twelve noted that has not occurred since then: a currency dislocation. We do not know how it will unfold but expect to see a major currency event this year.
What is a "currency dislocation"?
Can you please provide an historical example, so that I may read up on it?

Thanks

Chris Coles
01-03-09, 03:20 PM
What is a "currency dislocation"?
Can you please provide an historical example, so that I may read up on it?

Thanks

You wake up and find that overnight your government has devalued your national currency by, say, 14% and as we once heard our Prime Minister say; "It does not mean that the pound here in Britain, in your pocket or purse or in your bank, has been devalued." Prime Minister Harold Wilson

http://news.bbc.co.uk/onthisday/hi/dates/stories/november/19/newsid_3208000/3208396.stm

cobben
01-03-09, 04:02 PM
Again, if anyone else has some comments or other currencies they think will hold up during this race to print the most money.

SEK + NOK.

The Norwegians have oil but not much else, the Swedes have no oil but most other resources. Both countries are stable and rather, er, well, boring, which works to their advantage in times like these.

Neither country has great demographics compared to the Islamic areas, you should invest in them if you believe demographics will save you. Uz is one of the best demographically, that should mean the "sum" is a great currency to hold longterm.

50 EUR converted to Uzbek sum:
http://www.youtube.com/watch?v=hxPvufIivaQ

(Full disclosure: please buy some SEK to help support my future Swedish pension.)

Osmose
01-03-09, 04:36 PM
Good day and a Happy New Year! I was wondering if someone could expand a bit on the notion of "currency event" and "currency dislocation"? What is meant, broadly, by these two? A USD collapse or something else as well? Thank you very much!

Adeptus
01-03-09, 06:58 PM
Hi,
Please excuse my newbie question, but how exactly does one go about shorting US Treasuries? Can somebody provide some examples? I'd like to be ready for when iTulip says "go".

Thanks,
Adeptus

PS. I'm Canadian.

krakknisse
01-03-09, 07:39 PM
SEK + NOK.

The Norwegians have oil but not much else, the Swedes have no oil but most other resources. Both countries are stable and rather, er, well, boring, which works to their advantage in times like these.


Hate to dampen your illusions, but the property bubble here (Norway') was quite severe. Real estate prices down 15% in 2008 (according to official statistics), but if you actually want to sell, you're talking a 25% hair cut. Banks are reeling. Real estate prices are up 171% inflation-adjusted from the last bottom in 1992, and up 54% inflation adjusted from the very bubbly 1987 top. Linky: http://www.nef.no/asset/1939/1/1939_1.pdf (page 5, figure 6 of the PDF shows nominal and real (inflation-adjusted) prices 1985-2008). Our last crash lead to a very severe recession (top 5 post-WW2 financial crises).

Doom and gloom is commonplace now, but it has slowed a little. Everybody think's we'll be saved by interest rate reductions.

I'd think in Norway in terms of oil. If oil rebounds, we'll be less hard hit. The key word is "less hard". Our government is a net creditor to the world, which is also very good. But there's always the big question about unfunded pension and social obligations. And private debt exploded during the last few years. Not quite Iceland, though.

And don't forget, we only have about 20 kg of gold left. So we're last in line in case a gold-based international currency regime pops up.

I live here, have a quite secure job, good career and no debt. But I'm still looking for a farm or smallholding. I'm not enthusiastic about the NOK.

GRG55
01-03-09, 07:51 PM
Hi,
Please excuse my newbie question, but how exactly does one go about shorting US Treasuries? Can somebody provide some examples? I'd like to be ready for when iTulip says "go".

Thanks,
Adeptus

PS. I'm Canadian.

Click here (http://www.itulip.com/forums/showthread.php?t=6996) for an active thread on iTulip that is discussing one way to short Treasuries.

[You can put your location in your profile so others can see where you are from/at]

GRG55
01-03-09, 08:06 PM
You wake up and find that overnight your government has devalued your national currency by, say, 14%...
http://news.bbc.co.uk/onthisday/hi/dates/stories/november/19/newsid_3208000/3208396.stm

...and you discover all that talk about DEflation forever and ever, really was complete hooey...because suddenly everything you need to survive requires more of your newly devalued fiat currency to acquire.

It's not nice to fool with Mother Nature. Or your friendly local Central Banker...

rchdenton
01-03-09, 08:11 PM
Yes, excellent stuff as usual.

I too would like know more of your thoughts on currency issues.

As regards the Renminbi and the Yen, it occurs to me that the Chinese and Japanese economies will very likely be far harder hit than the US economy. Yes, they have their best and brightest as their government officials, but I suspect a large part of their "wealth" is in fact due to false book entries.

Remember, it takes two to create a bad debt - in this case a debtor who is a bad credit risk (in this case America) and a lender with poor credit control (China and Japan).

So, did the credit bubble originate in America or in Asia? The US silliness has been at least partly exposed, but the Asian stupidity has yet to be widely acknowledged. If you have messed up you will lose face sooner or later.

I read elsewhere that Keynes, in discussions after WW2 put forward an international currency mechanism that would have prevented foreign currency surpluses as well as deficits, both being part of the same problem. A debt cannot exist without a corresponding credit somewhere. Of course the US was top dog then so we all got what the US government of the time thought best. We are all now reaping the harvest.

I feel I have learned a great deal about the nature of credit and the expansion and contraction of credit on this site. It seems suspiciously similar to the expansion and contraction of my own balance sheet as I buy and sell properties, taking on additional borrowing or paying off debt as I go.

However, I feel I have never really got a proper handle on what drives currencies, although I do remember a comment by George Soros that exchange rate trends tend to be quite long lasting and that in general it wasn't actually that hard once you understood it.

Chris Coles
01-04-09, 03:50 AM
So, did the credit bubble originate in America or in Asia? The US silliness has been at least partly exposed, but the Asian stupidity has yet to be widely acknowledged. If you have messed up you will lose face sooner or later.

Look at it this way, you are a senior individual in a relatively minor department of a second tier government department and someone from an organisation called, for example, Goldman, or Lehman's - invites you to their huge office staffed by zillions of "bankers" and looking for all intents and purposes like the banking equivalent of IBM, the Big Blue, and you fall for it hook line and sinker. Why, because everybody else has already. You fall into the same instinctive 'follow the leader' sheep like state that everyone else has adopted.

Once the US regulators took their eye off the ball and permitted the vast expansion of Vapourware Bonds to create that mythical "Wall of Money" that was chasing YOU for all it was worth, then no one stood any chance of not getting swept up into the Maelstrom that followed.

So, for the record, I do not place any blame at all on the likes of China or Japan. The core responsibility for the systematic failures lay at the feet of the regulators in the United States and those failures were, and remain, theirs.

GRG55
01-04-09, 07:26 AM
Yes, excellent stuff as usual.

I too would like know more of your thoughts on currency issues.

As regards the Renminbi and the Yen, it occurs to me that the Chinese and Japanese economies will very likely be far harder hit than the US economy. Yes, they have their best and brightest as their government officials, but I suspect a large part of their "wealth" is in fact due to false book entries.

Remember, it takes two to create a bad debt - in this case a debtor who is a bad credit risk (in this case America) and a lender with poor credit control (China and Japan).

So, did the credit bubble originate in America or in Asia? The US silliness has been at least partly exposed, but the Asian stupidity has yet to be widely acknowledged. If you have messed up you will lose face sooner or later...

The data, such that it is, seems not to support your contention. So far it would appear that Japan and China have avoided the worst of the excesses that have plagued European banks, communities in Norway north of the Arctic Circle, and the outback of Australia. China and Japan holdings seem concentrated less in CDOs and more in holdings of Treasuries and US agencies, the latter which now has explicit US government backing. The losses they have seen, especially Japan, are related to the currency risk of holding US$ denominated instruments, not due to risk of outright default.

Many others also suspect that much of the "wealth" in Asia is "false book entries"...but I haven't seen anyone actually back that up with any facts.

And at the end of the day whether China has $2 T, $2 B, or just $2.00 of actual reserves, it would seem it is still a hell of a lot more solvent than the United States of America or the United Kingdom at this moment in history.

metalman
01-04-09, 11:12 AM
The data, such that it is, seems not to support your contention. So far it would appear that Japan and China have avoided the worst of the excesses that have plagued European banks, communities in Norway north of the Arctic Circle, and the outback of Australia. China and Japan holdings seem concentrated less in CDOs and more in holdings of Treasuries and US agencies, the latter which now has explicit US government backing. The losses they have seen, especially Japan, are related to the currency risk of holding US$ denominated instruments, not due to risk of outright default.

Many others also suspect that much of the "wealth" in Asia is "false book entries"...but I haven't seen anyone actually back that up with any facts.

And at the end of the day whether China has $2 T, $2 B, or just $2.00 of actual reserves, it would seem it is still a hell of a lot more solvent than the United States of America or the United Kingdom at this moment in history.

origins of the asian dollar accumulation? itulip search function says...


Politics of Foreign Debt - Part I: Why the government had to bail out the GSEs (http://itulip.com/forums/showthread.php?p=42087#post42087)

To make a long story short, the practice of keeping foreign holdings of US agency and treasury debt on Fed account started under Arthur Burns in the early 1970s as a way for the US to regain control of its currency that the US was losing to the euro dollar market.

Banking expert Martin Mayer, author of The Bankers: The Next Generation The New Worlds Money Credit Banking Electronic Age (http://www.amazon.com/gp/product/0452272645?ie=UTF8&tag=wwwitulipcom-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=0452272645)http://www.assoc-amazon.com/e/ir?t=wwwitulipcom-20&l=as2&o=1&a=0452272645 and a dozen other books on banking and frequent writer for Barron’s Magazine, Institutional Investor, and others explains:Exporters to America who keep the dollars and use them for American purchases and investments create what economists call an autonomous flow of funds back to the United States, financing the American trade deficit with an American investment surplus.

This produces the argument most closely associated with the new Federal Reserve chairman, Ben Bernanke (though Alan Greenspan believed it, too), that our trade deficit is caused by a surplus of savings that can't be profitably invested in the home countries of our trading partners. Financing for our trade deficit comes before — and actually causes — the deficit itself.

If instead of investing their dollars in the United States, foreign exporters want to take the proceeds of their sales in their own currency, their central banks will in effect sell them that currency for their dollars. Back in the late 1960's, when Great Society deficits and the Vietnam War prompted the first serious sell-off of dollars (and forced the United States to abandon the gold standard because too many holders of dollars, led by President Charles de Gaulle of France, wanted gold), those central banks lent those dollars into the new Eurodollar market, where they traded somewhat separately from domestic dollars.

This created a nightmarish prospect of the United States losing control of its own currency, and in 1971 the Fed chairman, Arthur Burns, negotiated a deal with the European and Japanese central banks. The deal was that they would return to America the dollars they acquired in their own economies, and the Fed would invest the money on their behalf, in absolutely safe government securities, without charge and at the best rates.

Today, the Fed continues as custodian of the "foreign official holdings" of such government obligations. During the Clinton administration, the Fed agreed to invest in federally guaranteed housing securities for those foreign central banks that wanted a better yield on their dollar reserves than they would get from government bonds, and now half a trillion dollars* of the total official holdings are invested in agency paper.

Foreign official holdings of government paper is a miner's canary number. It tells you if there is big trouble ahead. The most common worry is that the number will shrink suddenly, with foreign governments dumping their dollar holdings, driving down the dollar's value and driving up American interest rates, but that's not a real danger. If the price of our government securities dived, the foreign central banks would have to bear the loss. This would be a budget item for their governments, whose leaders would not like it at all.

- Federal Reserve System: The Mark of the Bust, Martin Mayer, June 14, 2006

* Half a trillion two years ago, almost a trillion today.

GRG55
01-04-09, 12:13 PM
origins of the asian dollar accumulation? itulip search function says...

I have a not yet completely thought out view that the USA also wanted to take large amounts of current claims and convert them into [U]deferred claims [T-bonds in the hands of foreign governments].

The risk of allowing foreign interests to hold current claims in the form of actual US Dollars is the temptation to convert those Dollars into ownership of the means of production in the United States [e.g. China buying Unocal, or Dubai's DP Ports buying P&O with its USA port operations businesses]. As long as it is in the form of T-bonds the claim, and that risk, is put off into the future, and additionally, that option can never be exercised by T-bond holders without their first finding a willing buyer who will allow them to convert their T-bonds into Dollar currency with which to make the purchase [Notwithstanding that at maturity the US Government will presumably always honor the redemption and pay in US Dollars, perhaps "unwillingly", if the foreign holder declines to "re-invest" the proceeds in a new Treasury issue].

The purchase of Agencies is interesting because technically they did not represent any future claim against the US economy [other than to the degree that mortgage debtors ability to pay is related to their employment in the US economy] but instead were a claim against a so-called "asset". The change to an explicit US government backing for agencies altered that situation more dramatically than perhaps the financially illiterate in Congress truly appreciated.

j4f2h0
01-04-09, 12:18 PM
Is EJ's assertion that oil will go nowhere this year based on an assumption of peace? It seems to me with very large budding conflicts in Pakistan v India, Israel v Palestine, and our war with the Afgans ramping up, that it is possible for the supply chain to be damage to the point that supply drops further than demand creating a price spike?
I obviously dont know much but this seems very logical and plausible, any thoughts from the community?

GRG55
01-04-09, 12:41 PM
Is EJ's assertion that oil will go nowhere this year based on an assumption of peace? It seems to me with very large budding conflicts in Pakistan v India, Israel v Palestine, and our war with the Afgans ramping up, that it is possible for the supply chain to be damage to the point that supply drops further than demand creating a price spike?
I obviously dont know much but this seems very logical and plausible, any thoughts from the community?

Oil may "go nowhere" in US Dollar terms in 2009, just as gold went nowhere in US Dollar terms in 2008.

However, depending on how the US Dollar performs in the currency markets in 2009, oil may go up considerably in terms of other currencies, just as gold in 2008 went up considerably in terms of Euros, and spectacularly in terms of Canadian/Aussie/Kiwi Dollars and the British Pound [something that both Mega and hayekvindicated said they took advantage of].

Regarding the prospects of "peace" in 2009, I am doubtful. But let's remember that in times of elevated conflict and global uncertainty, there is always a rush to the senior [reserve] currency...over the past 70+ years that's been the US Dollar. Since there appears no obvious alternative today [other than the minority who prefer gold] it would not be surprising if the present, increasingly hostile, global political climate maintains a bid under the greenback. For at least a little while longer...:p

btw: This is not a trivial effect. While we go on about an oil price "crash", let us have a quick peek at two situations. In January 2008, near-month Brent crude oil was selling for about US $90 per barrel and the UK Pound exchange was about US $2.00. A domestic purchaser of North Sea Brent [like a refinery in Aberdeen] would have paid about GBP 45 for a barrel back then. Brent is currently selling for about $46.00 per barrel and the UK Pound exchange is US $1.452, meaning that same Aberdeen refiner is buying a barrel of domestic crude in its local currency for about GBP 32, a reduction of "only" 29%. Now compare that to its US competitor refiner, bidding for Brent, who has seen an input cost reduction of 49% over that same time period.

Edit added: Supply chain interruptions can have a rapid and dramatic influence over crude oil prices, but the effects are never long lasting. Even such drama as the 1979 Iranian Revolution and Iraq's 1990 invasion of Kuwait did not have long-lasting, durable influence over oil prices. It is the larger, slower macro trends that are important...political nationalism that reduces exploration and reserves development in country after country across the world; large scale shifts in populous regions from bicycles to scooters to automobiles; major increases in global air travel, that sort of thing.

jk
01-04-09, 12:48 PM
the paradox i see is that the u.s. dollar will be strong as long as the u.s. economy sucks, provided that the rest of the world is in the same bad shape. the demise of the dollar will result from any recovery here, or the rise of a strong regional economy elsewhere in the world - presumably in asia.

edit:
the old "conundrum" was that the fed lowering short rates didn't bring down long rates. now that the fed is at the zero bound, and long rates are down to a "2" handle, the new conundrum will be that the dollar stays firm, frustrating short dollar and commodity reflation plays, and frustrating hopes for an export led rebound.

domestic stimulus will be funded by the issuance of ever more treasuries, but - as long as the economy sucks - rates will stay low and the dollar firm. this leads to a paradoxical conclusion: the only hope for the dollar is that stimulus doesn't work.

if stimulus does work and the u.s. domestic economy perks up, risk aversion will diminish and investors flee low-yielding treasuries. velocity will rise as sharply as it has dropped, and the mass of money "frozen" in treasury holdings will liquify.

we are experiencing a "sudden stop" in the economy- many commentators have noted the rapidity of recent recessionary trends. the scenario described above is a "sudden start," unlocking implicit but long-standing inflationary forces. i.e. "poom."

am i making sense here? comments welcome.

GRG55
01-04-09, 01:38 PM
the paradox i see is that the u.s. dollar will be strong as long as the u.s. economy sucks, provided that the rest of the world is in the same bad shape. the demise of the dollar will result from any recovery here, or the rise of a strong regional economy elsewhere in the world - presumably in asia.

edit:
the old "conundrum" was that the fed lowering short rates didn't bring down long rates. now that the fed is at the zero bound, and long rates are down to a "2" handle, the new conundrum will be that the dollar stays firm, frustrating short dollar and commodity reflation plays, and frustrating hopes for an export led rebound.

domestic stimulus will be funded by the issuance of ever more treasuries, but - as long as the economy sucks - rates will stay low and the dollar firm. this leads to a paradoxical conclusion: the only hope for the dollar is that stimulus doesn't work.

if stimulus does work and the u.s. domestic economy perks up, risk aversion will diminish and investors flee low-yielding treasuries. velocity will rise as sharply as it has dropped, and the mass of money "frozen" in treasury holdings will liquify.

we are experiencing a "sudden stop" in the economy- many commentators have noted the rapidity of recent recessionary trends. the scenario described above is a "sudden start," unlocking implicit but long-standing inflationary forces. i.e. "poom."

am i making sense here? comments welcome.

I thought that the "old conundrum" [as expressed by Greenspan in early 2005] was one of persistently low T-bond yields, despite the Fed's repeated increase of the funds rate? [as the Fed was coming under more frequent criticism for the increasingly obvious credit-fueled housing boom/bubble]

Otherwise, I am in broad agreement with the scenario. However, temporary euphoria around the anticipated success of the government's latest stimulus announcement may result in one or more "false starts" to reapplication of the risk trade in earnest, resulting in a rocky, perhaps volatile 2009 [for all markets] such that the "sudden start" may still be an extended affair.

rchdenton
01-04-09, 02:43 PM
So, for the record, I do not place any blame at all on the likes of China or Japan. The core responsibility for the systematic failures lay at the feet of the regulators in the United States and those failures were, and remain, theirs.


Sorry Chris, the US merchant banks and others in the US just took (unscrupulous and sometimes criminal) advantage of dumb overseas lenders.

You actually reinforce my point that the finger of blame has only thus far been acknowledged in the debtor, not as yet in the equally culpable creditor.

Look at it this way, when the bank lends me money it asks for colleratal. No collateral, no lending. I have learned that if the bank don't like the look of the deal I'm trying to put together then I should seriously question why the hell I think it's so good.

You cannot have a dodgy debt without a failure on the part of the creditor. As yet the creditor nations have not acknowledged this. There is always a loss of face to do so.

rchdenton
01-04-09, 03:06 PM
origins of the asian dollar accumulation? itulip search function says...


Thanks metalman, you obviously understand where I'm coming from. Good to get to reread that.

The situation here in New Zealand is a little different and I think we are now a cycle ahead of the US.

Our currency floats freely. Our reserve bank is transparent. Our current account is in balance, we produce and sell the same value of goods and services as we buy from overseas. So the production/consumption economy is in balance with the rest of the world.

What is entirely messed up is our investment balance. Due to financial and monetary mismanagement in the 70s and 80s (very similar to the current US situation) we have a massive imbalance with foreign investors. Quite simply we messed up big time and had to sell half the country to Japan. The other half has massive debts to Japan. So far the Japanese continue to lend us the money to pay the interest on our debts provided we pay them a stiff rate.

As I see it we are where the US will be in 20 years time, except the US will still be very much bigger and in the northern hemisphere.

My above summary is a gross oversimplification but not entirely unfounded.

rchdenton
01-04-09, 03:14 PM
the paradox i see is that the u.s. dollar will be strong as long as the u.s. economy sucks, provided that the rest of the world is in the same bad shape. the demise of the dollar will result from any recovery here, or the rise of a strong regional economy elsewhere in the world - presumably in asia.




Thank you jk. Yes, that is exactly what I would like to make sense of.

I think you are on the right track there. Care to be more expansive?

jk
01-04-09, 03:27 PM
I thought that the "old conundrum" [as expressed by Greenspan in early 2005] was one of persistently low T-bond yields, despite the Fed's repeated increase of the funds rate? [as the Fed was coming under more frequent criticism for the increasingly obvious credit-fueled housing boom/bubble.
you're right.:o i got mixed up.

The Outback Oracle
01-04-09, 04:03 PM
rchdenton...I thought your CAD was something like 6-8% of GDP? Slightly worse even than ours here in OZ. In OZ we have sold a lot more than half the country off! (and we have the $640B debt as well)

The Outback Oracle
01-04-09, 04:07 PM
http://www.rbnz.govt.nz/keygraphs/Fig6.html

I don't know how to add a link in here but this is a graph of NZ CAD's showing a current CAD of 8% of GDP

rchdenton
01-04-09, 04:23 PM
http://www.rbnz.govt.nz/keygraphs/Fig6.html

I don't know how to add a link in here but this is a graph of NZ CAD's showing a current CAD of 8% of GDP

942

You are quite correct, but it is the investment imbalance that causes it.

rchdenton
01-04-09, 04:29 PM
Presumably we have got to the point where we have to pay off principal and interest or sell some more of NZ.

I still don't understand why the Japanese keep lending us more dosh to pay the interest. Is the idea of capitalising interest a banker's way of gaining ownership? Keep lending until you've got them by the balls?

c1ue
01-04-09, 04:47 PM
the paradox i see is that the u.s. dollar will be strong as long as the u.s. economy sucks, provided that the rest of the world is in the same bad shape. the demise of the dollar will result from any recovery here, or the rise of a strong regional economy elsewhere in the world - presumably in asia.

While of course anything is possible given the present uncertainty levels, I personally still do not see how the sudden start can happen. An 'animal forces' snap back, yes, but not a fundamental change, because several things aren't going to change in the next 2 quarters - or perhaps much much longer:

1) US economy continues its downward path

2) US continues to run significant (but likely smaller) currency account deficits

3) As a consequence to 1) and 2), the need for ROW CBs to sterilize incoming dollar flows drops

4) US federal fiscal deficit worsens considerably

The variables are as follows:

a) China/East Asia does worse than the US, stays the same, or does better

b) EU does worse than the US, stays the same, or does better

c) Oil producing nations do worse than the US, stay the same, or do better

(UK is going down no matter what)

Of the multiple possibilities outlined above, under which scenario does the US dollar stay strong due to relative economic status?

Note that while all nations consume something and produce something, the US outconsumes everyone by a significant margin:

http://www.worldwatch.org/node/1783



<TABLE class=mainText cellSpacing=0 cellPadding=2 width="100%" bgColor=#e6e6e6 border=0><TBODY><TR align=left><TD colSpan=3>Table 1–1. Consumer Spending and Population, by Region, 2000</TD></TR><TR align=left><TD colSpan=3><HR noShade></TD></TR><TR vAlign=bottom align=middle><TD align=left>Region</TD><TD>Share of World Private Consumption Expenditures</TD><TD>Share of World Population</TD></TR><TR align=left><TD colSpan=3><HR noShade></TD></TR><TR><TD></TD><TD align=middle colSpan=2>( percent )</TD></TR><TR align=left><TD noWrap>United States and Canada</TD><TD vAlign=bottom align=middle>31.5</TD><TD vAlign=bottom align=middle>5.2</TD></TR><TR><TD noWrap>Western Europe</TD><TD vAlign=bottom align=middle>28.7</TD><TD vAlign=bottom align=middle>6.4</TD></TR><TR><TD noWrap>East Asia and Pacific</TD><TD vAlign=bottom align=middle>21.4</TD><TD vAlign=bottom align=middle>32.9</TD></TR><TR><TD noWrap>Latin America and the Caribbean</TD><TD vAlign=bottom align=middle>6.7</TD><TD vAlign=bottom align=middle>8.5</TD></TR><TR><TD noWrap>Eastern Europe and Central Asia</TD><TD vAlign=bottom align=middle>3.3</TD><TD vAlign=bottom align=middle>7.9</TD></TR><TR><TD noWrap>South Asia</TD><TD vAlign=bottom align=middle>2.0</TD><TD vAlign=bottom align=middle>22.4</TD></TR><TR><TD noWrap>Australia and New Zealand</TD><TD vAlign=bottom align=middle>1.5</TD><TD vAlign=bottom align=middle>0.4</TD></TR><TR><TD noWrap>Middle East and North Africa</TD><TD vAlign=bottom align=middle>1.4</TD><TD vAlign=bottom align=middle>4.1</TD></TR><TR><TD noWrap>Sub-Saharan Africa</TD><TD vAlign=bottom align=middle>1.2</TD><TD vAlign=bottom align=middle>10.9</TD></TR><TR align=left><TD colSpan=3><HR noShade></TD></TR></TBODY></TABLE>


The US consumes 6x its relative population share vs. 4.5x for Europe vs. 0.65x for Asia vs. 0.34x for Middle East/North Africa.

If I use the Middle East/North Africa as a rough proxy for the oil producing nations, it is clear from a consumption and production standpoint that they don't matter - especially with oil prices low.

Clearly the 'burden' of consumption lies with the US and Europe.

What about the production side?

http://www.visualizingeconomics.com/2008/01/20/share-of-world-gdp/

941

So US produces 22% of world GDP, but consumes 31.5%
Europe produces 21% of world GDP, but consumes 28.7%
Asia, just counting China Japan, produces 19%, but consumes 21.4% for the whole region. Likely overall production is in the low to mid 20s%.

No matter how you slice it, the US produces too little relative to consumption, Europe as well but less so, and Asia is the means by which US/EU overconsumption has occurred.

In the scenario above - clearly the risks are not with the Asian economies. Sure, lots of easy money being made via outsourcing and what not is going to disappear, but this production will find a way to meet internal demand needs because said internal demand is much less elastic and starting from a lower base.

From this viewpoint it is Europe and the US who are both at risk: 30% and 27% drops in order for consumption to match production.

But Europe's population share vs. consumption is lower: 4.5x vs. the US' 6x. Exclude the nuclear kill zone called the UK, and likely the overall numbers are even lower.

Why does this matter? Because population represents some minimum need: food, housing, etc. More population means less elasticity of demand. To me this says that consumption in Europe will hold up better than the US relatively speaking.

So how again is a sudden start to occur? Where will the excess production come from to subsidize the US and European overconsumption? How much will consumption fall in the US and Europe? esp. relative to production falls?

The Chicago economists and their media minions gloss over this, but the fact remains that China and India have survived on relatively nothing well within recent memory. They can do so again.

On the other hand, for the US and Europe, even a return to parity (i.e. production = consumption) means catastrophic falls in standards of living. Thus the US cannot even get by just with a stable production vs. consumption ratio, the US MUST have subsidies in order to continue its ways.

How can the US and Europe compel the rest of the world to continue to do so? The bargain in the past was consumption subsidy in return for income to build infrastructure.

Now that income is not forthcoming, why should the consumption subsidy continue? How, even, can the consumption subsidy continue?

Rome was able to survive by transporting wheat from Egypt to Italy, but it was military force which occupied Egypt and provided the slaves for labor.

The US has been using the fiat dollar and its savings to effect the same. The savings are largely gone, and the fiat dollar is wobbling mightly.

Can the US militarily force a continuation of consumption subsidies?

I think not.

So whatever happens in the next few months, don't forget the big picture.

Edit: Japan is an example where a nation has chosen to subsidize US overconsumption in return for military protection against Russia and China. But Japan is now losing more from its economic protectorate role than it saved by not having to build up a military of its own nor forge alliances with one or more of its large immediate neighbors.

The Outback Oracle
01-04-09, 05:11 PM
This CAD is a real chicken and egg story. I ascribe blame the other way and it has to do with my arguments on interest rates around this forum. We have too high a propensity to consume and too low a propensity to save. Given that the real savings rate after tax and inflation has been negative, almost continuously, for 50 damned years I guess that is not much of a surprise. Hence as nations we have spent more than we've earned therefore we need to borrow or sell the country off. Now I do see the other side where too much money coming in, means too high an exchange rate, means more imports and less exports. It is a self-reinforcing cycle if you like.
The last time we ran a Current Accout Surplus was also in the early 70's.
Aus is like you as well. We have great trumpeting in the MSM when our Balance of Trade gets into surplus. It is a meaningless number as, like you, our services bill, our interest bill and repatriation of dividends is now monstrous leading to massive CAD's.
Our real question for the future is will the Japanese and the Chinese continue to fund the deficits? Also how long before we run out of assets we can sell given that our food chain is gone, our industry of any size is all overseas owned and our mining industry is 80% foreign owned. $80 Billion a year soon cleans up a lot of assets.
I posed the question in another thread on this subject. If the Japanese and Chinese are now not running such massive Surpluses, will they still be able to send money to the Antipodes?
I suspect we are about to find out and I think the answer might not please those who rule us.
On the other hand, as of a few months ago, the Chinese were buying every piece of resource they could get their hands on here. So maybe. Yet, my first hand experience of what is happening in China suggests they are going to be very busy with thier own immediate problems over the next 2 years.
One other comment, I suggest we are maybe 12 to 18 months behind the US in this cycle. The US (and Europe) go down, this eventually washes, as of November, onto the shores of China. The wave will (imo) then spread from China to Aus and NZ. The worst is yet to come, I'd think, beginning maybe 2nd quarter 2009.
Remember I'm just an ignorant small businessman (with a bit of Tertiary Economic education 40 damned years ago) with an intense interest in things Economic.

rchdenton
01-04-09, 05:24 PM
If the Japanese and Chinese are now not running such massive Surpluses, will they still be able to send money to the Antipodes?
I suspect we are about to find out and I think the answer might not please those who rule us.
On the other hand, as of a few months ago, the Chinese were buying every piece of resource they could get their hands on here. So maybe. Yet, my first hand experience of what is happening in China suggests they are going to be very busy with thier own immediate problems over the next 2 years.
One other comment, I suggest we are maybe 12 to 18 months behind the US in this cycle. The US (and Europe) go down, this eventually washes, as of November, onto the shores of China. The wave will (imo) then spread from China to Aus and NZ. The worst is yet to come, I'd think, beginning maybe 2nd quarter 2009.
Remember I'm just an ignorant small businessman (with a bit of Tertiary Economic education 40 damned years ago) with an intense interest in things Economic.


Hmm. Yes, quite agree with you there. I guess I'm hoping to play it both ways - sell assets when they are buying (done) and buy when they are selling (if I can afford to). So your thoughts on timing are very relevant. I expect next winter here to be very unhappy.

Chris Coles
01-04-09, 05:29 PM
Sorry Chris, the US merchant banks and others in the US just took (unscrupulous and sometimes criminal) advantage of dumb overseas lenders..

No, in a very real sense, you are missing my point. In a correctly regulated financial system, the regulators would leave the rest of the world with a sound foundation of ethics and law to permit the view of respectability you get when you deal with the likes of IBM. Few of us indeed, anywhere, saw this coming, (or even more correctly, wanted to see this coming).

If you pick up the phone and ring IBM you know from a very long term reputation, built up over many decades, of the quality of the company you are dealing with. You know two things with IBM, it will cost an arm and a leg and you get first class service and reliable product. A solid reputation.

In the financial world, there were no indicators to the majority that those US merchant banks were a bunch of crooks. Everybody, from the White House down, gave a visible 'nod' to a similar reputation for those merchant banks. If an IBM says the software will work it does. Period. If a similarly financial business, given the same credentials by the highest level individuals in the US nation say the same about a US merchant bank, then everybody dealing with those banks had every reason to believe their opinion was sound and the product would work.

Instead, what you had was a complete abrogation of responsibility by the regulatory authorities leading to a complete abrogation of any ethical business standards right across the board. The whole idea of the top tier of individuals running financial institutions was always, (in the now long distant past), total honesty, respectability, constant vigilance, never any suggestion of a stain on the reputation or be thrown out on your ear.

My opinion stands. The buck stops with the regulators.

rchdenton
01-04-09, 05:55 PM
Instead, what you had was a complete abrogation of responsibility by the regulatory authorities leading to a complete abrogation of any ethical business standards right across the board. The whole idea of the top tier of individuals running financial institutions was always, (in the now long distant past), total honesty, respectability, constant vigilance, never any suggestion of a stain on the reputation or be thrown out on your ear.

My opinion stands. The buck stops with the regulators.


Quite agree with Chris. The regulators were hopeless.

You might like this link. I think it rather suggests that the problem was far from invisible to other central bankers.

http://news.bbc.co.uk/2/hi/middle_east/7764657.stm

Lebanon 'immune' to financial crisis


According to the country's chief banker all of this is because while the world was shocked when in September the banking giants began to wobble, Lebanon was prepared.
"I saw the crisis coming and I told the commercial banks in 2007 to get out of all international investments related to the international markets", says Riad Salameh, the governor of Lebanon's Central Bank.
<!-- S IBOX -->
<!-- E IBOX --> There is a tradition of conservative regulation at the Central Bank in Lebanon, which kept the banks safe.
Banks weren't allowed to take on too much debt and they had to have at least 30% of their assets in cash.
They were not allowed to speculate in risky packages of bundled up debts.







As I said earlier - it takes two parties to make a bad debt - a debtor and a creditor. The mistakes of the debtor nation are being exposed, but we have not heard of the mistakes of the creditor nations.



Crying foul is all well and good but if a reserve bank makes a bad investment it should be held to account. I think the people of China and Japan will want an explanation from their governments.

jk
01-04-09, 08:07 PM
Presumably we have got to the point where we have to pay off principal and interest or sell some more of NZ.

I still don't understand why the Japanese keep lending us more dosh to pay the interest. Is the idea of capitalising interest a banker's way of gaining ownership? Keep lending until you've got them by the balls?
capitalized interest represents GROWTH in the loan portfolio, while the ever increasing "income" of the interest payments represents GROWTH in earnings. it's all in the accounting. the reality becomes ever more untenable, but the financial reports look great. [same game as that played with pay option mortgages with capitalization of underpayments.]

GRG55
01-04-09, 09:11 PM
you're right.:o i got mixed up.

Well it's not often that happens, jk. :eek:

But it's not the central point of your post, so I apologize for the distraction.

The Outback Oracle
01-04-09, 09:22 PM
Sounds good till Mr & Mrs Okinawa want a bit of extra to get them through the recession!;)

rchdenton
01-04-09, 09:32 PM
capitalized interest represents GROWTH in the loan portfolio, while the ever increasing "income" of the interest payments represents GROWTH in earnings. it's all in the accounting. the reality becomes ever more untenable, but the financial reports look great. [same game as that played with pay option mortgages with capitalization of underpayments.]


Of course! How silly of me to question their good sense.

Presumably the realisation of the untenable nature of the situation leads to the sort of currency dislocation that EJ tantalisingly refers to. If it hasn't already.

jk
01-04-09, 10:00 PM
Of course! How silly of me to question their good sense.

Presumably the realisation of the untenable nature of the situation leads to the sort of currency dislocation that EJ tantalisingly refers to. If it hasn't already.
in the pay option mortgage case, it leads to a sudden default and foreclosure, i.e. the seizure of the collateral. so, in the case of new zealand....

GRG55
01-04-09, 10:04 PM
...Crying foul is all well and good but if a reserve bank makes a bad investment it should be held to account. I think the people of China and Japan will want an explanation from their governments.


And just like the good people of the USA, who would like an explanation for this unfolding catastrophe from their government [good luck :rolleyes:], I doubt the people of China or Japan have particularly high expectations in that regard. I don't sense that the reserve banks are accountable to rank and file citizens in any of these cases.



Fed Refuses to Disclose Recipients of $2 Trillion (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aGvwttDayiiM)

Dec. 12 (Bloomberg) -- The Federal Reserve refused a request by Bloomberg News to disclose the recipients of more than $2 trillion of emergency loans from U.S. taxpayers and the assets the central bank is accepting as collateral.

Bloomberg filed suit Nov. 7 under the U.S. Freedom of Information (http://www.usdoj.gov/oip/) Act requesting details about the terms of 11 Fed lending programs, most created during the deepest financial crisis since the Great Depression.

The Fed responded Dec. 8, saying it’s allowed to withhold internal memos as well as information about trade secrets and commercial information. The institution confirmed that a records search found 231 pages of documents pertaining to some of the requests.

“If they told us what they held, we would know the potential losses that the government may take and that’s what they don’t want us to know,” said Carlos Mendez (http://search.bloomberg.com/search?q=Carlos+Mendez&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), a senior managing director at New York-based ICP Capital LLC...

rchdenton
01-04-09, 10:33 PM
And just like the good people of the USA, who would like an explanation for this unfolding catastrophe from their government [good luck :rolleyes:], I doubt the people of China or Japan have particularly high expectations in that regard. I don't sense that the reserve banks are accountable to rank and file citizens in any of these cases.




Yes, transparency is a requirement for confidence is it not?

I suppose my point was the s and fan collision will probably be worse at the periphery than at the centre. It usually is. Presumably that will be the next major focus of attention as the process rolls on.

jk
01-05-09, 09:45 AM
I suppose my point was the s and fan collision will probably be worse at the periphery than at the centre. It usually is. Presumably that will be the next major focus of attention as the process rolls on.
i think a major underlying process is that the "centre" is no longer so clearly located, i.e. is in the process of shifting. so it's not clear to me that the "periphery" will do worse than the u.s., which is losing its status as centre.
i think the u.s. will remain a major power in every sense, but not THE major power, in a multi-nodal world.

D-Mack
01-05-09, 10:13 AM
Yes, transparency is a requirement for confidence is it not?

I suppose my point was the s and fan collision will probably be worse at the periphery than at the centre. It usually is. Presumably that will be the next major focus of attention as the process rolls on.

They are really worried about independence, even working with Hanky P. is too much for them.


Fed's Bullard says must preserve Fed independence (http://www.reuters.com/article/pressReleasesMolt/idUSTRE50300P20090104)
Sat Jan 3, 2009 7:32pm EST


SAN FRANCISCO (Reuters) - Close collaboration between the U.S. Treasury and the Federal Reserve to fight the country's economic crisis has been crucial but raises questions over Fed independence, a top Fed policy-maker said on Saturday.

"We are blurring the institutional arrangements a little," said St Louis Federal Reserve President James Bullard.

"I am concerned about independence. Fed independence is very important," he told reporters on the sidelines of the annual American Economics Association meeting.







Economist Martin Feldstein told CNBC the economy could be in worse shape in a year, while former under secretary for international affairs John Taylor warned the explosive growth of the Federal Reserve's balance sheet since September was "unbelievable" and could lead to the Fed losing independence.

http://www.cnbc.com/id/28504322

rchdenton
01-05-09, 02:48 PM
i think a major underlying process is that the "centre" is no longer so clearly located, i.e. is in the process of shifting. so it's not clear to me that the "periphery" will do worse than the u.s., which is losing its status as centre.
i think the u.s. will remain a major power in every sense, but not THE major power, in a multi-nodal world.

Clearly there will be changes to the economic power structures of the world as a result of the current process. I guess I'm expecting a more responsible United States of America to emerge. Still top dog but a little chastened and a little less inclined to try to force its way in the world. A more cooperative USA, more trade focussed. In the same way Europe has become more cooperative and more trade focussed.

I am aware there are more unpleasant possible outcomes, but then I live in a small country with a "she'll be right" attitude, which suits me as I am basically optimistic. You live in a country which, dare I say it, is prone to Paranoia. This can be a good thing as it certainly is a spur to action (rather than talk and no action, which I think is another US national trait). I'm not trying to be rude and offensive here, its just that it is important to be aware of the tendencies of those around you as you will be affected by them.

Which brings me to my reason why I think the US will continue to be top dog. Adaptability. Darwin's key to survival. (Note: NOT survival of the fittest - which was Herbert Spencer's justification for social inequality, nothing to do with Darwin except it purported to apply Darwin's observations to human society using a subtle deception). One hallmark of US society is its ability to adapt rapidly. Basically you make changes, not always the right ones but you do act.

Back to my original comment, your merchant bankers adapted to over eager lenders by inventing a "new" banking model, originate and distribute. The fact that this allows infinite credit creation because it lacks a reserve requirement was conveniently overlooked. The lenders are equally culpable - if they had not made mistakes in assessing risk they would not have lent the money to the merchant banks. In many ways they are a more fundamental layer of causation than the more obvious culprits.

That the cdo etc markets were unstable was widely known before the event; Warren Buffet famously warned about financial weapons of mass destruction; the Lebanese central bank, used to dealing with difficulty, told its banks to sell them and increase their reserves to 30% (see link I posted earlier in this thread); our own NZ Reserve Bank thought it all very dodgy (personal conversation after the event). I find it hard to believe the central bankers of the key players really did not see this coming - this is their world.

rabot10
01-08-09, 06:50 PM
I am a little bigger than most people so that may be why I want to know when we get to hear about jump ball? Looking forward to it

Hey it says "Senior iTuliper" under my name!! Just for your info I'm only a year or so older than Ej!! It should say Spring Chicken!

Slimprofits
01-15-09, 05:34 PM
The TIME writer does not propose a solution. Here's ours. If the market won't clear on its own, the Fed will have to clear if for them. The Fed did this with the banking system as a whole in 1934 and with the S&Ls in the late 1980s. How about this solution broken down into three steps:

http://www.itulip.com/images/bankcrisissolution.gif
Functionally, this is clearly what needs to be done. Why hasn't it? Is the process operationally impossible, like changing tires on a moving car, the banks too big and too integral to daily business and market operations? Will a modern bank holiday that shuts down banks holding collectively $20 trillion in assets be done without crashing the system? Or are the big banks politically off limits?

We have no idea how this conundrum will work out in 2009 but suffice it to say that continuing the same program of adding excess reserves until the cows come home will not work any better this year than it did last year. The largest banks in the US banking system will at some point have to be toaster-reset, as they say in the computer business -- a phrase that refers to the practice of unplugging and plugging back in a computer that is not responding to traditional operator efforts to restart it. When that happens, expect sparks to fly. We do not believe this eventuality is yet priced into the markets.

I posted this in the news section, but should have just put it up here. On Tuesday Bernanke addressed the idea of "Bad Banks" fop the purpose of clearing the bad assets. Is it the first time he has talked about this publicly?

Before the London School of Economics (http://www.lse.ac.uk/collections/LSEPublicLecturesAndEvents/events/2008/20081203t1159z001.htm):


However, with the worsening of the economy’s growth prospects, continued credit losses and asset markdowns may maintain for a time the pressure on the capital and balance sheet capacities of financial institutions. Consequently, more capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets. A continuing barrier to private investment in financial institutions is the large quantity of troubled, hard-to-value assets that remain on institutions’ balance sheets. The presence of these assets significantly increases uncertainty about the underlying value of these institutions and may inhibit both new private investment and new lending. Should the Treasury decide to supplement injections of capital by removing troubled assets from institutions’ balance sheets, as was initially proposed for the U.S. financial rescue plan, several approaches might be considered. Public purchases of troubled assets are one possibility. Another is to provide asset guarantees, under which the government would agree to absorb, presumably in exchange for warrants or some other form of compensation, part of the prospective losses on specified portfolios of troubled assets held by banks. Yet another approach would be to set up and capitalize so-called bad banks, which would purchase assets from financial institutions in exchange for cash and equity in the bad bank.

Slimprofits
01-16-09, 07:42 PM
EJ, Did you call this one into Bernanake and company?

Fed's Lacker: 'Bad bank' good way to tackle crisis (http://uk.reuters.com/article/marketsNewsUS/idUKN1641357420090116)


A top Federal Reserve official on Friday said lifting bad assets from troubled banks would be a "compelling" way to recapitalize the financial system, hours after the Fed backed major aid for Bank of America.

"As long as you have some material risk that remains on the bank's books, any new equity investor is going to be subsidizing existing debt holders," Richmond Federal Reserve Bank President Jeffrey Lacker told reporters after a speech.

"That is going to pose an impediment to raising new equity and recapitalizing the banking system from the private sector, which is what, ultimately, we want to do," he said.

U.S. ‘Bad Bank’ Plan Gets Momentum to Revive Lending (http://www.bloomberg.com/apps/news?pid=20601068&sid=amhKS1g61_J4&refer=home)


President-elect Barack Obama’s advisers see an increasingly grave banking crisis and are considering proposals far more sweeping than any steps that have been taken so far, according to people who’ve discussed the outlook with them.

“They need to do something dramatic,” said Harvard University Professor Kenneth Rogoff, a former chief economist at the International Monetary Fund, and member of the Group of Thirty counselors on financial matters, a panel that includes Treasury Secretary-designate Timothy Geithner and Lawrence Summers, incoming director of the National Economic Council.

Officials at the Federal Reserve and other agencies are focusing on the option of setting up a so-called bad bank that would acquire hundreds of billions of dollars of troubled securities now held by lenders. That may allow banks to reduce write-offs, free up capital and begin to increase lending. Paul Miller, a bank analyst at Friedman Billings Ramsey & Co. in Arlington, Virginia, estimates that financial institutions need as much as $1.2 trillion in new aid.

[..]

A big new initiative “is going to be necessary,” said Peter Wallison, who was U.S. Treasury general counsel under President Ronald Reagan and is now a fellow at the American Enterprise Institute in Washington. “Once they have stable capital, once they feel they are not going to be run on by people who doubt the quality of their capital position, they will start lending.”

Obama’s Treasury could use much of the funds to back a bigger Fed campaign to buy the illiquid assets, Wallison said. The FDIC, which has emergency authority to take “any action” with insured deposit-taking firms deemed necessary to counter “adverse effects on economic conditions or financial stability,” could also play a role.

Bair and Treasury Secretary Henry Paulson gave fresh momentum today to the idea of creating a government-backed “aggregator” bank to help take bad assets off the balance sheets of U.S. financial institutions.

“There’s a lot of work that has been done on an aggregator bank, other ways of leveraging TARP funding to let it go further when it comes to dealing with illiquid assets,” Paulson told reporters in Washington.

EJ
01-16-09, 07:48 PM
EJ, Did you call this one into Bernanake and company?

Fed's Lacker: 'Bad bank' good way to tackle crisis (http://uk.reuters.com/article/marketsNewsUS/idUKN1641357420090116)



U.S. ‘Bad Bank’ Plan Gets Momentum to Revive Lending (http://www.bloomberg.com/apps/news?pid=20601068&sid=amhKS1g61_J4&refer=home)

Actually, yes. I have been contacted by members of Congress. There have been several conversations and emails. They are aware of the gravity of the crisis. They are reaching out to a wide group of advisers and I have brought others into the conversations. I'm doing what I can to help. At this point everyone has to think and work constructively. There is no time for politics or reviewing past errors.

tsetsefly
01-17-09, 07:37 PM
EJ, Did you call this one into Bernanake and company?

Fed's Lacker: 'Bad bank' good way to tackle crisis (http://uk.reuters.com/article/marketsNewsUS/idUKN1641357420090116)



U.S. ‘Bad Bank’ Plan Gets Momentum to Revive Lending (http://www.bloomberg.com/apps/news?pid=20601068&sid=amhKS1g61_J4&refer=home)

I dont see how this could work though?

its not like the losses can magically dissapear someone will have to "pay" for it...
and why is the focus on trying to bring the FIRE economy back to life???

we_are_toast
01-17-09, 07:37 PM
Actually, yes. I have been contacted by members of Congress. There have been several conversations and emails. They are aware of the gravity of the crisis. They are reaching out to a wide group of advisers and I have brought others into the conversations. I'm doing what I can to help. At this point everyone has to think and work constructively. There is no time for politics or reviewing past errors.

I have expressed my extreme pessimism many times on the threads here.
I now see a ray of hope.

Slimprofits
01-17-09, 07:57 PM
I dont see how this could work though?

its not like the losses can magically dissapear someone will have to "pay" for it...
and why is the focus on trying to bring the FIRE economy back to life???

Are you familiar with the Resolution Trust Corporation?

The Resolution Trust Corporation pioneered the use of so-called “equity partnerships” to help liquidate real estate and financial assets which it inherited from insolvent thrift institutions. While a number of different structures were used, all of the equity partnerships involved a private sector partner acquiring a partial interest in a pool of assets, controlling the management and sale of the assets in the pool, and making distributions to the RTC reflective of the RTC’s retained interest.

The RTC used equity partnerships to achieve a superior execution through maintaining upside participation in the portfolios. Prior to introducing the equity partnership program, the RTC had engaged in “bulk sales” of asset portfolios. The pricing on certain types of assets often proved to be disappointing because the purchasers discounted heavily for “unknowns” regarding the assets, and to reflect uncertainty at the time regarding the real estate market. By retaining an interest in asset portfolios, the RTC was able to participate in the extremely strong returns being realized by portfolio investors. Additionally, the equity partnerships enabled the RTC to benefit by the management and liquidation efforts of their private sector partners, and the structure helped assure an alignment of incentives superior to that which typically exists in a principal/contractor relationship.

As to your second question, are you looking for an explanation for the behavior of Paulson, Bernanake, Obama? We know EJ isn't trying to save the FIRE economy though.

tsetsefly
01-17-09, 08:56 PM
Are you familiar with the Resolution Trust Corporation?


As to your second question, are you looking for an explanation for the behavior of Paulson, Bernanake, Obama? We know EJ isn't trying to save the FIRE economy though.
1. yes, but i still dont understand how it could work.

2. I know, that is why I was surprised to see EJ in support of this, however after reading up on this and other post it seems to me EJ suggest some banks will have to be "terminated" but it seems the article posted in the reply I was responding to does not say that will be done.

3. If 1 and 2 dont make sense then I clearly dont get it, : / ... in which case a layman explanation would be welcomed :o

Chris Coles
01-18-09, 12:36 PM
We have to assume that a Resolution Trust is another form of bankruptcy. When a business declares itself, or is declared, bankrupt; the business is placed into the hands of The Official Receiver. They in turn have a simple remit, to produce as much value as possible from the sale of the remaining assets. To permit that process, the rules make the accountants, normally acting for the Official Receiver, first in line for any monies as normal accountancy fees as they act for everyone, including the tax revenue authorities such as here in the UK, The Inland Revenue.

So in essence, the assets are liquidated in as efficient a manner as possible, within a very short timescale.

It is usually a very efficient process. Anything that can be sold quickly in an auction, for example, is sold on to the highest bidder. If you know a business is bankrupt and have a use for the assets, then you, or anyone, can approach the Official Receiver and make an immediate cash offer for anything you want to buy. In many cases, the process can be concluded within days. So liquid assets can be back into use sometimes very quickly indeed.

Bankruptcy is a very efficient process. It brings useful assets back into productive use very quickly and efficiently.

I should imagine that people in the know with plenty of cash will be watching the process to make a considered bid for those assets that they feel are, at the point of opportunity, worth more than the price they are being asked to pay.

Some are going to make a great killing out of such a process.

metalman
01-18-09, 12:38 PM
1. yes, but i still dont understand how it could work.

2. I know, that is why I was surprised to see EJ in support of this, however after reading up on this and other post it seems to me EJ suggest some banks will have to be "terminated" but it seems the article posted in the reply I was responding to does not say that will be done.

3. If 1 and 2 dont make sense then I clearly dont get it, : / ... in which case a layman explanation would be welcomed :o

the way i read it... problem: banks don't know who is and who is not solvent so do not want to lend to each other. ej's solution: gov't reviews the balance sheets of all the banks, SHUTS DOWN the insolvent banks and transfers the marketable assets to a gov't entity he calls resolution trust corp. ii, from that corp. sell the assets to the solvent banks at market prices to the solvent banks. problem solved.

tsetsefly
01-19-09, 01:25 PM
the way i read it... problem: banks don't know who is and who is not solvent so do not want to lend to each other. ej's solution: gov't reviews the balance sheets of all the banks, SHUTS DOWN the insolvent banks and transfers the marketable assets to a gov't entity he calls resolution trust corp. ii, from that corp. sell the assets to the solvent banks at market prices to the solvent banks. problem solved.


We have to assume that a Resolution Trust is another form of bankruptcy. When a business declares itself, or is declared, bankrupt; the business is placed into the hands of The Official Receiver. They in turn have a simple remit, to produce as much value as possible from the sale of the remaining assets. To permit that process, the rules make the accountants, normally acting for the Official Receiver, first in line for any monies as normal accountancy fees as they act for everyone, including the tax revenue authorities such as here in the UK, The Inland Revenue.


Okay, so i wasnt as lost as I thought it was, but if this is the case why not let the bank go bankrupt in the first place?
Then the marketable assets can be sold.

c1ue
01-19-09, 03:09 PM
I agree a Resolution Trust will help complete the bad debt nullification process, but again how will the overall economy continue?

The FIRE engine is broken. Even a removal of the dead weight of bad debt will not restart it.

Sure, the talk about spending on infrastructure might provide a new engine. But the cost of this spending is ... more debt?

How is this different than a 3 card Monty scheme?

On this hand, bad debt disappears. On this other hand, good debt appears.