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EJ
02-06-09, 03:33 PM
http://www.itulip.com/images/oceanheater.jpgNo such thing as a Treasury bond bubble

Fear never financed asset price inflation, but governments have

The common wisdom is that markets are driven by greed and fear. My observation is that markets are in fact driven by fear and fear, two kinds: fear of taking losses on past gains and fear of missing out on future gains. Call one loss-fear and the other greed-fear.

The bull-biased business press is financed with advertising by financial services firms that primarily sell equities-based mutual funds and stock index funds products, stock brokerage firms that sell stock brokerage services, and stock trading firms that sell trading platforms and tools. It plays up greed-fear in bull markets with the message that you can’t afford to stay out of the rising market, and never mind the bubble. During bear markets they play down loss-fear with the message that if you stay out of the market you’ll miss the big rally.

We sat out the most of the stock market circus in treasury bonds since 2000 and bonds and gold since 2001, and that's worked out well so far. But what about now? How can we stay in bonds during a "bond bubble"?

The latest greed-fear story making the rounds is the so-called US Treasury bond bubble. The storyline goes like this. Treasury bond yields are too low and prices too high, due, we are to believe, to investor enthusiasm for what James Grant calls “return-free risk.”

Here’s how the same story played out in Japan.
The fewer bond issues, the better

It has been a long time since Japan's bubble in stock and land prices collapsed. Now, however, there is concern that a new kind of bubble -- a "bond bubble" -- may be forming. Financial markets are already "saturated," according to analysts, with massive amounts of bonds that the government issues each year. If such borrowing continues at the current rate of over 30 trillion yen a year, sooner or later it will create a huge glut of bonds, possibly sending their prices into a tail spin.

The Finance Ministry seems well aware of the gravity of the situation. That helps explain why it is trying hard to develop new outlets for government bonds. Recently the ministry held briefing sessions abroad to lure foreign institutional investors. Here at home, it has increased special bond sales to individuals.

In the long run, the government has no choice but to reduce annual bond issues. The basic requirement is to maintain a reasonable supply-demand balance in the bond market. That makes it essential to pursue a prudent bond-management policy. Failing that, the nightmare of a bond crash could well become a reality. – The Japan Times, Jan. 25, 2005
That was three years ago. What happened after that?
Japanese bonds fall in wake of decade-high inflation

Japanese government bonds fell sharply Friday, triggering a trading halt to the lead futures contract mid-session on the Tokyo Stock Exchange before ending the day at their lowest level in six months.

The outlook for future monetary policy moves in Japan was shaken up after the release of government data Friday which showed core consumer prices climbed 1.2% in March from a year earlier, up from February's 1% rise, the fastest pace of gains in a decade, driven by food and transportation costs. Consumer prices in the Tokyo metropolitan area, generally regarded as better indicator of nationwide prices, climbed 0.7% in April from 0.6% in March, exceeding analysts' expectations. Consumer prices were expected to rise a softer 0.5% in April to reflect the expiry of a gasoline tax. See story.

"It's very unusual," said Masafumi Yamamoto, a foreign exchange strategist with the Royal Bank of Scotland in Tokyo, referring to the volatile trade. "The background to this is the rise of the U.S. yields last night and the stronger-than-expected CPI data (in Japan)." - Chris Oliver, MarketWatch, April 25, 2008
Two and a half years later, high inflation data sent Japanese bonds tumbling. Then, a mere eight months later, the situation reversed 180 degrees.
Japan govt bond issues to market to rise in FY09/10

Japan's total issuance of government bonds to the market will increase in fiscal 2009/10 for the first time in four years, the Ministry of Finance said, as an economy in recession reduces tax revenue and prompts the government to compile fiscal stimulus packages.

The MOF plans to issue 113.3 trillion yen ($1.3 billion) of JGBs directly to the market, according to the draft budget for the fiscal year starting on April 1 that it submitted to the cabinet on Saturday. - Shinichi Saoshiro, TOKYO, Reuters
Bond issuance indeed leveled off Japan’s after the so-called sovereign “bond bubble” appeared in 2005, but fears of “market saturation” proved unwarranted as issuance took off again in 2006.


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


The yield on the benchmark 10 year Japanese government bond ranged between its deflationary 0.6% lows in 2003 to a peak of almost 2% in 2006.


http://www.itulip.com/images/japan10yryield.gif


U.S. 10 year treasury bonds today are looking Japan 1998-ish.


http://www.itulip.com/images/us10tr1995-2009.gif


If the rush to Treasury bonds at the end of 2008 marked the beginning of a longer term trend away from risk, and if the risk-aversion period is anything like Japan's, it could go on for a decade. That does not strike us as a good shorting material.

No such thing as a bubble in government bonds

An asset bubble develops by a self-reinforcing process of optimism and inflation in the price of the asset of speculation, whether tech stocks, houses, or emerging market funds, as a growing pack of speculators, one group after another, piles in. Any number of loud noises can send the herd running, but we identified a list of usual triggers ten years ago (see What Will Pop the Internet Bubble? (http://www.bankrate.com/brm/news/investing/19991129f.asp?keyword=))

Global investors did not take to US Treasury bonds wild-eyed in pursuit of windfall gains in the closing quarter of 2008 hoping to get rich off debt securities heading to 0% yield any more than the passengers and crew of the Titanic who made it into life rafts paddled the dark sea that night for love of ice fishing. Investors desired safety of principal, to stay alive to fight another day.

No matter that the life rafts were cold and wet compared to the commodious staterooms that the passengers expeditiously abandoned, the rafts at least float; if the price of a life raft seat were open to bid the price might have been very high that night. But no sane person observing the spectacle of passengers abandoning an iron ship for open wooden boats bobbing in the open sea could mistake the resulting price spike in life raft seats for a frenzy of optimism. So with US Treasury bonds once emerging markets stocks, the yen carry trade, and the bubbles funded by central bank and credit market liquidity collapsed last fall, precipitated by a sudden withdrawal of creative credit from global markets, following the crash of the securitized debt market in the US the year before.

If not a Treasury bond bubble, then what?

For our analogy replace the Titanic with the stricken USS FIRE Economy. The securitized debt market is the iceberg that sank it, the frigid waters into which it sank the market for all equity and debt securities with the exception of the lifeboats -- US Treasury bonds. As US Treasury bonds are denominated in dollars, the rush for Treasury bonds corresponded to a spike in the demand for and price of dollars.


http://www.itulip.com/images/dollarUSbondpanic2007-2008.gif


After the event, those who went for the Treasury bond life rafts still appear to some market observers to be too many, and to have bid up the price of seat to incredible heights, taking the dollar higher than it “should” go, given the exhaustively lamented structural weaknesses and recent abuse heaped on the buck by the Federal Reserve via debt monetization, promises by the government to spend up to its sovereign credit limit and beyond, and other extreme acts of desperate debt deflation acrobatics. The market for US government bond credit default swaps responded with a Bronx cheer.
In the past three months, the US Federal Reserve has created more credit than it has ever done before. The sum of its earning assets, known in trade parlance as reserve bank credit, has grown at the outstanding rate of 2,922 per cent. The CDS price of the US has risen to a record 57 basis points in the face of deteriorating credit conditions of banks and non-finance companies and concerns over the $1,000 billion it needs to raise in bonds to tide over the crisis. - Sunil Kewalramani, Will 2009 be the year of sovereign defaults? Business Standard, Jan. 24 2009
But where to go? Spanish sovereign bonds perhaps? Or French? German? Certainly not the bonds of the UK, where recently a loose lipped City Minister Paul Myners disclosed in a Daily Mail story that, “on Friday, October 10, the country was 'very close' to a complete banking collapse after 'major depositors' attempted to withdraw their money en masse,” and that the Brown administration was hours away from closing and nationalizing the entire banking system. While the US Treasury lifeboats may be leaky, the others are positively sieve-like.

Municipal bonds, perhaps? With state and local tax revenues crashing, how will principal plus interest be paid on muni bonds, never mind the risks presented by the scandal in – you guessed it – credit default swaps sold during the day to “protect” cities and towns from interest rate volatility.

What might cause Treasury bond holders to leap en masse out of the life rafts and swim for it through the still frigid financial markets sea, to the rapidly submerging finance-based economy? Meanwhile, the financial markets, and thus the financed-based US economy, starves for capital for borrowing and investment. Debt deflation and asset price deflation continue unabated, while a crash in the supply of goods is resulting in the rising prices of goods that are not still temporarily on sale, as inventories are sold through (See Fed cuts dollar, Fire sales vs FIRE sales, Duh-flation, and Bezzle shrinks again (http://www.itulip.com/forums/showthread.php?p=66592#post66592)).

Enter the gods of government: the Treasury Dept. and Federal Reserve. Their task: get fearful investors out of the Treasury bond lifeboats, into the frigid high risk financial markets sea to the sinking USS FIRE Economy – where they can be put to work re-floating it.

The gods of government have so far taken a two-pronged approach: send rescue ships and boil the ocean.

Send Rescue Ships

First the government gods send rescue ships bearing taxpayer money – trillions of dollars for insurance companies, banks, auto manufactures, the first class passengers of the sinking USS FIRE Economy to be rescued. Dispatched with haste starting in 2007 by a government gods Paulson and Bernanke determined to try to refloat the stricken ship and motivate investors who abandoned it to climb back aboard.

A measure of the ineffectiveness is S&P 500 and DJIA performance since then, both off more than 30% since the bailouts began. Mission not accomplished. An armada of rescue ships continues to steam toward the foundering USS FIRE Economy, including new forms of TARP, stretching as far as the eye can see.

Boil the ocean

Meanwhile, to entice terrified investors out of the Treasury bond life rafts, the gods turned up the heat on the frozen financial markets. Interest rates are determined by a mix of default and inflation risk, and while US Treasury bonds are “risk free” from default, they are exposed to inflation risk, as anyone who lived through the 1975 to 1980 era can attest. The financial markets ocean can be warmed from sub-zero temperatures (interest rates) by application of gigantic increases in the money supply (inflation), by exchange of Treasury bonds for securities that have no value until maturity -- those that create Credit Risk Pollution (http://www.itulip.com/riskpollution.htm) -- and buying across the yield curve. In theory, if the sea can be heated enough, the life raft squatters will climb out for a swim. The effort is the monetary equivalent of running 100 nuclear power plants at 100% capacity 7/24 for a year.


http://www.itulip.com/images/fed_all_short_stacked.gif
Source: Now and Futures (http://www.nowandfutures.com/)


We look for on increase in ocean water temperature for signs that the ocean heating is working, as measured by a narrowing credit spread, as the price of a US Treasury life boat seat falls and seat in a riskier commercial paper markets narrows.


http://www.itulip.com/images/tedspreadMar2006-jan2009.gif


The ocean is no longer solid ice as it was in the fall of last year, but it’s not exactly Caribbean tepid yet, either.

What if the government gods’ combination of efforts to re-float the USS FIRE Economy and boil the ocean fail to get investors' money back into the economy?

Should they fail, the government still has one option left to get investors out of the Treasury bond life rafts, into the ocean, and back on the USS FIRE Economy.

Sink the rafts

The government gods want to entice capital out of low risk assets like government bonds and into risky assets like stocks. If that cannot be accomplished by making government bonds appear more risky than stocks, why not do it the other way around? Let us return to our Japan “bond bubble” example.
Japan’s 10-year bonds completed their biggest decline in a month after rising Asian stocks reduced demand for government debt.

Bonds slid for a fifth day, the longest losing streak since July 2007, after U.S. shares rallied yesterday when Treasury Secretary Timothy Geithner said the government will step up efforts to fight the recession. Demand for debt also waned after the Bank of Japan said yesterday it will start buying equities owned by financial institutions to shore up their capital. - Japan’s Bonds Complete Biggest Drop in a Month as Stocks Rise, Theresa Barraclough, Bloomberg, Feb. 4, 2008
Statements like the one below used to shock us, but not anymore. In the desperate global scramble by governments to re-inflate asset prices, anything goes.
“We are facing hyper-deflation, so we need a policy to create hyper-inflation. We have to do something to undermine the central bank and government’s credibility or else we won’t be able to halt the yen’s rise. So, while we know this is drastic medicine, we will do it,” said Koutaro Tamura, an upper house Diet member who will chair the new group. - MPs step up clash with Bank of Japan, Michiyo Nakamoto in Tokyo, Financial Times, Feb. 5, 2009
If you wonder what is going on in Japan to inspire Japanese politicians to make public promises to override that nation's central bank, you have not been following Japan's stunning economic collapse.
The numbers coming out of Japan are no longer about degradation, but historically unprecedented destruction. If the government pointers are correct, they are no longer suggesting a recession or even a depression of the style of the 1930s but something like a massive "Reset button" with very different and far-reaching consequences. This downward spiral is much faster, much more synchronised, resulting in an impact equivalent to one year's worth of declines in the 1930s on a monthly basis, month-in month-out. It is as if the whole country has been visited by an army of King-Kongs, who are busy destroying the industrial output.

Japan's industrial production fell almost 10% in December compared with November, worse than the METI (Ministry of Economy, Trade and Industry) forecast. METI has re-done its forecasts for January to a 9% drop, and February down another 5%. That knocks almost 30% output since September, putting it back, at the level of the early 1980s. It took 25 years to reach levels that have been unwound in five months. For carmakers, production may fall by around 50% from last year in 2009. There has never been data this bad for any major economy: even during The Great Depression of the 1930s. If METI's January and February industrial production data is correct, the proportions are apocalyptic. Masaaki Shirakawa, Bank of Japan Governor, recently warned, “The outlook for the Japanese economy has deteriorated dramatically and there is a high probability that it will continue to do so.” more... (http://www.mi2g.com/cgi/mi2g/press/030209.php)
There you have it, a way to get to get frightened investors out of government bonds and back into stocks if all else fails -- central banks around the world print money and buy stocks -- and a motive to do it, a rapid global economic contraction.

Coming to a country and equity market near you.

In a world where interventionism is the order of the day, government purchases of stocks for the purpose of supporting the stock market is only, in my view, a matter of time. The question is, how to best prepare for it. For all we know, it's already started. And, because they are not really gods -- they can't foresee the consequences of all they do -- there will be myriad unintended consequences. One we're pretty sure of, the gold price will continue to climb.

Addendum

This forecast for governments to buy stocks does not translate directly into a decision to move money from Treasury bonds and gold into stocks.

For ten years iTulip has concerned itself with forecasting the future collective greed-fear and loss-fear actions of a poorly informed and unreasoning investing public during the final decade of the FIRE Economy (http://www.fireeconomy.com/), when a system of monetary policy, regulatory malfeasance, and government subsidy of the finance, insurance, and real estate industries produced asset price inflations as explained in detail in The Next Bubble (http://www.harpers.org/archive/2008/02/0081908). So far our record, based on this approach, has been good.


November 1998: Warns on Internet Bubble (http://www.itulip.com/knowyourmania.html)
August 1999: No Y2K Disaster (http://www.itulip.com/y2k.htm)
November 1999: How the Internet Bubble Will End (http://www.bankrate.com/brm/news/investing/19991129f.asp?keyword=)
March 2000: Internet Bubble Top (http://www.itulip.com/GlobeArchiveJanszen.htm)
April 2000: A Bear Market is Born (http://www.itulip.com/urgentmessage.htm#Bear)
January 2001: Post-Bubble Recession (http://www.itulip.com/recession2001.htm)
September 2001: Gold Price Bottom at US$270 (http://www.itulip.com/gold.htm)
August 2002: Warns of Housing Bubble (http://www.itulip.com/index_old.html#Today)
January 2004: How Housing Bubble will End (http://www.itulip.com/housingnotlikeequities.htm)
January 2005: Housing Bubble Correction (http://www.itulip.com/housingbubblecorrection.htm)
June 2005: Housing Bubble Top (http://www.itulip.com/forums/showthread.php?t=606)
October 2006: Recession Q4 2007
(http://www.itulip.com/forums/showthread.php?t=743)
December 27, 2007: Start of Debt Deflation Bear Market (http://itulip.com/forums/showthread.php?t=2774)
September 15, 2008: Fed Funds spread signals crash (http://itulip.com/forums/showthread.php?p=47860#post47860)

Since the system that created the bubbles that we have tracked for ten years has broken down, we have been this year forced to extend our role of mass behavioral finance experts to include the role of Kremlinologists, as market forecasting becomes increasingly a matter of trying to determine second order effects: the reactions of a poorly informed and unreasoning public to the actions of a poorly informed and unreasoning government, whose failing effort to resurrect the FIRE Economy will be compounded by new policy errors guided by economic nationalism; as contracting national economies around the world enter into political crisis, politicians never blame themselves for their nation's economic woes, they externalize them.


http://www.itulip.com/images/lightweightvehiclesales1976-2009.gif

US automobile demand has fallen to levels not seen since the 1982 recession that was induced by the Fed with a program of interest rate hikes. This time the crash in demand was brought on by the collapse of the finance-based US economy that developed since the early 1980s. The percentage decline in unit sales exceeds anything on record since 1976. The US has exported its economic woes to Asia.

Our global trade and monetary policy bodies are designed to cope with the challenges of global growth. They are not equipped to handle prolonged global economic contraction. That means trade barriers will rise and global trade will diminish. This is not a positive development for stock values.

Also, the US is entering its own period of political crisis. The news headlines, already quite depressing, will become more alarming, with incidents occurring frequently that a year ago were unimaginable. The nation will grow less confident, and that too is not stock market value positive.

Another reason my forecast for governments to buy stocks does not necessarily recommend the purchase of stocks is that when governments buy anything, they must drain one value pool to fill another. Governments don't create anything, except when they provide and maintain a sound system of property rights, institutions, and legal and physical infrastructure that allows free markets to operate, and does so with minimal cost in a burden on businesses in taxes and debt. Government cannot "create" jobs, only borrow them from the future, or take them from one area of the economy and move them to another. Likewise the government cannot increase the value of stocks by buying them, as the Bank of Japan has on occasion, only increase the price. As most people mistake price for value -- if they did not, the technology stock and housing bubbles would never have occurred -- a rise in stock prices caused by government buying may fool investors into joining the market. Or maybe the government only succeeds in maintaining a floor on stock prices, as the BoJ seems to have gotten for their money. In any case, if the government buys stocks the value of stocks will decline just as the value of anything the government buys declines, even if the price rises.

A forecast of eventual government purchases of stocks does not translate into a recommendation to buy stocks. As usual, we are going to have to talk through the implications.

iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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rabot10
02-06-09, 04:51 PM
"The question is, how to best prepare for it. For all we know, it's already started."

Lets start by getting out of my short positions, then going long.

Great work but it leaves me with a few questions that I will ask later.

thanks

zoog
02-06-09, 05:28 PM
Why oh why did I get on this stupid ship in the first place?;)


...There you have it, the foolproof way to get frightened investors out of Treasury bonds and back into stocks if all else fails: central banks around the world print money and buy stocks...

Seems to me the stock markets would have to gain considerably before significant amounts of money would leave the safety of treasury bonds and jump back in. More than just a typical bear market rally? I guess what I wonder is would the inevitable goods inflation, caused by printing so much money and thereby devaluing the currency, be concurrent with the stock inflation or would it come later? The investment side of that question being: would there be some actual gains in stocks, or would inflation be so high that the real value would remain steady or even declining even as nominal values rise.

Contemptuous
02-06-09, 05:44 PM
A new (major) stock market boom - dead ahead, seems quite likely. The career civil servant government gods want it. The gods in the heavens will smile on it - (if only because it is the last thing anyone is expecting as the outcome).


... But where else to go? Spanish sovereign bonds perhaps? Or French? German? Certainly not the UK bonds ... Municipal bonds, perhaps? ... What might cause Treasury bond holders to leap en masse out of the life rafts and swim for it through the still frigid financial markets sea, to the rapidly submerging finance-based economy? ... Enter the gods of government: the Treasury Dept. and Federal Reserve. Their task? Get fearful investors out of the Treasury bond lifeboats, into the frigid high risk financial markets sea to the sinking USS FIRE Economy – where they can be put to work re-floating it. ... Should they fail, the government still has one option left to get investors out of the Treasury bond life rafts ... sink the life rafts.

Sink the rafts

The government gods want to entice capital out of low risk assets like government bonds and into risky assets like stocks. If that cannot be accomplished by making government bonds appear more risky than stocks, why not do it the other way around?

Statements like the one below used to shock us, but not anymore. In the desperate global scramble by governments to re-inflate asset prices, anything goes.

“We are facing hyper-deflation, so we need a policy to create hyper-inflation. We have to do something to undermine the central bank and government’s credibility or else we won’t be able to halt the yen’s rise. So, while we know this is drastic medicine, we will do it,” said Koutaro Tamura, an upper house Diet member who will chair the new group. - MPs step up clash with Bank of Japan, Michiyo Nakamoto in Tokyo, Financial Times, Feb. 5, 2009
There you have it, the foolproof way to get frightened investors out of Treasury bonds and back into stocks if all else fails: central banks around the world print money and buy stocks.

Coming to an equity market near you. In a world where interventionism is the order of the day, government purchases of stocks for the purpose of supporting the stock market is only, in my view, a matter of time. The question is, how to best prepare for it. For all we know, it's already started.

grapejelly
02-06-09, 06:11 PM
I am more and more convinced that there is a huge mispricing of sovereign US bonds, and the US government likes it.

In previous years, the mispricing was kept alive thus: the Chinese sterilizing dollar inflows by buying US treasury debt, keeping interest rates in the US quite low.

Now, it's the crowding out effect of US government guarantees that drive all large pools of capital/debt into US treasurys.

Take the banks (please). The Fed has inflated its balance sheet and the banks have these huge reserves as a result. They are buying government paper, and paying depositors. It is a loser but that's what they are doing.

The US government has crowded out ALL borrowing from the private sector through a combination of "rescues" and "bailouts", via guaranteeing every large pool of debt in site, de facto or de jure nationalization, etc.

So now, I agree with you, the US government's next logical step is to purchase equities. But they are huge beneficiaries of the current financial state of affairs.

The US government's role in private finance is growing by leaps and bounds. They are taking over everything. And they are the world's largest debtor so this suits them just fine. They are looking to spend trillions more on this or that...what a wonderful state of affairs for those in power.

However, I think it will result in complete economic collapse because there is no return in this, no real investment in this, and therefore no real future in this other than stagnation and ruin.

grapejelly
02-06-09, 06:12 PM
and real quick, just to add: no real stock market gains will be had...only nominal gains, with real losses. Earnings in real terms are collapsing. This will be a horrible bear market in real terms...

Contemptuous
02-06-09, 06:49 PM
Grapejelly - You wrote: only nominal gains,

But - compared to what? USD may not collapse against other currencies. So you are going to have to get creative locating against just what assets the stock market's potential vertiginous rise is remaining "nominal".


and real quick, just to add: no real stock market gains will be had...only nominal gains, with real losses. Earnings in real terms are collapsing. This will be a horrible bear market in real terms...

metalman
02-06-09, 06:50 PM
and real quick, just to add: no real stock market gains will be had...only nominal gains, with real losses. Earnings in real terms are collapsing. This will be a horrible bear market in real terms...

yep, more of the same... damn safe forecast.

http://ichart.finance.yahoo.com/z?s=%5EDJI&t=5y&q=l&l=off&z=m&c=GOLD&a=v&p=s

except now direct vs indirect gov't manipulation... i mean... influence, er, assistance... or is it 'financial security'.

Jimzan
02-06-09, 07:44 PM
If EJ is correct in that central bank purchases of stocks will begin, is he abandoning his prediction of Dow 5000-6000?

Additionally, why has the call not yet been made to short treasuries? Seems like we might have already started to miss the boat over the past few weeks.

Can anyone calm my nerves on either of the above 2 items? Thanks!

metalman
02-06-09, 07:56 PM
"Coming to an equity market near you. In a world where interventionism is the order of the day, government purchases of stocks for the purpose of supporting the stock market is only, in my view, a matter of time."

If EJ is correct in that central bank purchases of stocks will begin, is he abandoning his prediction of Dow 5000-6000?

Additionally, why is it not yet time to short treasuries? Seems like we might have already started to miss the boat over the past few weeks.

because the fed doesn't plan to give up its treasury bond racket, it just wants some inflation.

i figure the dow 5000/6000 forecast is real not nominal.

D-Mack
02-06-09, 07:57 PM
If EJ is correct in that central bank purchases of stocks will begin, is he abandoning his prediction of Dow 5000-6000?

Additionally, why has the call not yet been made to short treasuries? Seems like we might have already started to miss the boat over the past few weeks.

Can anyone calm my nerves on either of the above 2 items? Thanks!

Wasn't there some talk about a currency event?

labasta
02-06-09, 08:02 PM
So in a nutshell: bank bailout, commercial paper bailout, auto company bailout, stockmarket bailout equals inflation, inflation, inflation and err... more inflation. But how much inflation will it be? And can they deflate it quick enough after mission accomplished?

Oh President Mugabe, we bow in your presence.

opps
02-06-09, 08:35 PM
EJ wrote: If the rush to Treasury bonds at the end of 2008 marked the beginning of a longer term trend away from risk, and if the risk-aversion period is anything like Japan's, it could go on for a decade. That does not strike us as a good shorting material.

If the government powers continue down the path of quant easing... including equities, how is that trade not a fade both on the bonds and equities. Or is this similar to hongkong in 98 which worked out well for the gov. This one threw me for a loop.

labasta
02-06-09, 08:42 PM
We are looking at (hyper)stagflation, aren't we? :(

Also, does this mean that the FIRE economy will be revived but much weaker?

What does this mean?

FRED
02-06-09, 08:44 PM
If the rush to Treasury bonds at the end of 2008 marked the beginning of a longer term trend away from risk, and if the risk-aversion period is anything like Japan's, it could go on for a decade. That does not strike us as a good shorting material.

If the government powers continue down the path of quant easing... including equities, how is that trade not a fade both on the bonds and equities. Or is this similar to hongkong in 98 which worked out well for the gov. This one threw me for a loop.

Mixing metaphors, think of US Treasury bonds as a kind of unexploded bomb that can never go off in one big blast but as a gradual burn-off.

It may go off on its own.

It may be set off by a random event.

It may be carefully and successfully diffused by the bomb squad.

It may go off while the bomb squad is trying to diffuse it.

Any of these may happen tomorrow or not for 20 years.

What probability to assign to each of these potential outcomes? How do you hedge all of them?

goadam1
02-06-09, 08:55 PM
Uh, at 9:30 Monday am I buying proshares ultralong?

goadam1
02-06-09, 09:02 PM
Okay, but gold is not the only hedge. And picking one hedge is always like betting it all on black or red. So what are the choices?

audrey_girl
02-06-09, 09:22 PM
Mixing metaphors, think of US Treasury bonds as a kind of unexploded bomb that can never go off in one big blast but as a gradual burn-off.

It may go off on its own.

It may be set off by a random event.

It may be carefully and successfully diffused by the bomb squad.

It may go off while the bomb squad is trying to diffuse it.

Any of these may happen tomorrow or not for 20 years.

What probability to assign to each of these potential outcomes? How do you hedge all of them?


it may be set off by a random event...

to make everyone even more uncomfortable....

oddities in the dakotas....

http://www.legitgov.org/minot_afb_nukes_oddities.html

Chief Tomahawk
02-06-09, 10:41 PM
The Geithner Plan to come Monday:

Item #3 is "Cleansing legacy assets" (discussed about two minutes into this CNBC clip http://www.cnbc.com/id/15840232?video=1024827668)

Isn't that the difference between the next 2,000 points in the Dow being up versus down???

SJ
02-06-09, 11:06 PM
No such thing as a perfect crime. Logic always wins. Excess money supply and rising UST yields counterbalance each other.

If you view an asset's value as PV (Num/Den) where Num = cashflows and Den = interest rates, then here is a simple test about human reason: If we know the Govt is printing infinite amounts of money so that Num--> infinity, then logic suggests that Den --> infinity also because the bond markets will react. Question is which goes to infinity faster? If Num --> infinity faster, that means the value of financial assets will have a market value of infinity. If Den --> infinity faster, that means the market will value financial assets at zero. If we know the largescale printing of fiat money is a sham (your dog would have figured this out by now), then would you bet on an infinite or zero value for financial assets as their natural limit? I know my answer.

goadam1
02-06-09, 11:35 PM
I'm not smart enough for this board.

Of all the recent EJ posts, this one has me the most confused and panicked.

I have no idea what you are trying to say.

My gut says we are on the verge of inflationary depression.

EasternBelle
02-06-09, 11:38 PM
The next step: buying equities-

I think this is what Malaysia did after the Asian crisis, they weathered the crisis much better than say South Korea at the time as they also imposed capital controls.

EasternBelle

icm63
02-07-09, 03:16 AM
BullSh*t...

Govts to buy stocks, for whatever reason, no matter that the earnings are just plain bad and so are the forecasts, the govt funds will just be what the short sellers want, a strong bear market rally so that can sell into it.

Stocks go up, interest rates go with them (as you say the money will come out of bonds), then when interest rates get high enough and attractive money will flow back into bonds at better rates.

So central bank buying is doing the smart money a favour of getting out of stocks at higher prices and getting into bonds at better yields...thanks Central Banks.

Govt Buying mortgages, then stocks, with declining tax take, deficits growing, how stupid will that be..Germany 1935!!!

magicvent
02-07-09, 08:05 AM
It would be nice to receive some guidance regarding what to do. If you believe the fed is buying stocks, then why aren't you recommending that your readers do the same?

opps
02-07-09, 09:04 AM
The charts EJ used to put the market in the 5000-6000 range were nominal.

It seems to me that he is basically calling for a mother of a bear market rally in the context of the kapoom theory.

labasta
02-07-09, 09:07 AM
I'm not smart enough for this board.

Of all the recent EJ posts, this one has me the most confused and panicked.

I have no idea what you are trying to say.

My gut says we are on the verge of inflationary depression.


My view too.

I'm not sure what to make of it.

goadam1
02-07-09, 09:12 AM
Many of us revise our theories based on facts on the ground. Ej's comments seem like an obtuse way of saying that something may be afoot (does he have inside information). Or is this a trial balloon lofted into the itulip hive mind?

Sharky
02-07-09, 09:17 AM
I thought the charter of the Plunge Protection Team included the ability to intervene in the markets, so haven't we already been seeing some of this?

Government purchase of stocks with declining earnings is more likely to result in current stockholders selling into the rally than in causing funds to move out of bonds. Of course that doesn't mean that they won't try it (or try more of it than they are already doing).

It seems to me that if a solid floor in the markets were to become apparent, that might be enough to entice a considerable flow of funds from Treasuries into stocks, simply on a yield basis. The problem is that the bottom for earnings isn't yet in sight.

grapejelly
02-07-09, 09:39 AM
I think they regularly intervene in the Dow and S&P futures market. I have no proof of course. But picking up large baskets of stocks through offshore funds they control would completely not surprise me.

There was, BTW, an article in today's NY Times showing that the return over the past 10 years on S&P is the worst ever.

llanlad2
02-07-09, 10:20 AM
It would be nice to receive some guidance regarding what to do. If you believe the fed is buying stocks, then why aren't you recommending that your readers do the same?


the people in government are so out of touch they can't seem to realise that the average earning worker/consumer has reached their debt limit and so can't buy any more.

if people can't afford stuff , company earnings will decline.

So why would you buy stocks in companies that are going to lose money or have much lower earnings?

metalman
02-07-09, 10:29 AM
It would be nice to receive some guidance regarding what to do. If you believe the fed is buying stocks, then why aren't you recommending that your readers do the same?

note he added an addendum this a.m. on that topic. we're not in kansas anymore, toto.

metalman
02-07-09, 10:34 AM
Many of us revise our theories based on facts on the ground. Ej's comments seem like an obtuse way of saying that something may be afoot (does he have inside information). Or is this a trial balloon lofted into the itulip hive mind?

it's along the line of his 'there are no rules' posts... for readers who are having difficulty imagining how much more fucked up things can get... get ready to see the gov't messing directly with the stock market. what to do? play along? run away?

we_are_toast
02-07-09, 10:39 AM
Enter the gods of government: the Treasury Dept. and Federal Reserve. Their task: get fearful investors out of the Treasury bond lifeboats, into the frigid high risk financial markets sea to the sinking USS FIRE Economy – where they can be put to work re-floating it.
As I continue my economic education here on iTulip, postings by EJ always bring up a whole lot of questions and send me off on a quest to try and figure out what he's getting at.

Is there an assumption being made that there are an excess of dollars tied up in U.S. Treasury bonds that are essentially being taken out of the economy and not being put to work?

Doesn't the Treasury simply issue the bonds it needs to pay for government? So the drop in interest rate is a reflection of the demand, but does not reflect quantity. The same number of dollars enter the treasury whether the interest rate is 5% or 1/4% as long as the bonds are sold. And those dollars are almost immediately spent by the government and injected into the economy.

So why would the government want to kick them out of the lifeboat when they need those dollars and they're getting them at a low interest rate?

Send the dollars to buy equities? For the most part, buying equities simply parks dollars and takes them out of circulation (except for new issues). Most stock buying is one long term trader buying from another, and the dollars just bounce around in the market without doing any real work in the real economy. So why would the government want to send treasury dollars it needs, to an economic nonproductive stock market?

So I'm having a hard time understanding the concept of there being an excess number of dollars in Treasuries (although there is great demand). If this is true, where are the dollars? And I'm having an even more difficult time understanding why the government would want to chase them out, when all it would do is drive up interest rates and cost the government more.

SJ
02-07-09, 10:42 AM
Sorry for the confusion. What I am saying: Don't expect equities to rally (except for a few days/weeks at best) because the Treasury/Fed starts buying them. In fact, you should expect them to fall (after the initial sucker's rally) because US Treasury yields will rise rapidly.

Based on the insanely rapid rate at which the Fed is increasing money supply, the only items whose nominal value we can expect to increase are (1) real assets with relatively inelastic supply (precious metals, oil, usable land) and (2) interest rates.

Hope that helps.

metalman
02-07-09, 11:17 AM
Sorry for the confusion. What I am saying: Don't expect equities to rally (except for a few days/weeks at best) because the Treasury/Fed starts buying them. In fact, you should expect them to fall (after the initial sucker's rally) because US Treasury yields will rise rapidly.

Based on the insanely rapid rate at which the Fed is increasing money supply, the only items whose nominal value we can expect to increase are (1) real assets with relatively inelastic supply (precious metals, oil, usable land) and (2) interest rates.

Hope that helps.

makes total sense. means... stay out of the stock market and stay in your 10 yr old gold and treasury debt. will interest rates tend to rise on the short or the long end first?

metalman
02-07-09, 11:19 AM
mega posed this just now...

Bank of England to buy up short-term company debt
Saturday, 7 February 2009

The Bank of England will start buying short-term company debt as early as next week as a first move in its £50bn plan to unfreeze the markets for corporate credit.

The central bank said yesterday that it would be ready to buy commercial paper, debt issued by companies for up to 90 days, from Friday. But it said it was still working on a more important proposal to buy longer-term corporate bonds and was consulting market participants so that it could launch as soon as possible.

Companies had hoped that the plan would be fully up and running this week after the Bank’s Governor, Mervyn King, exchanged letters with the Chancellor last week agreeing terms for the radical operation. In his letter to Alistair Darling, Mr King said that commercial paper was not a particularly important form of company debt in Britain compared with the US.

Mr King and the Government have focused their recent plans on freeing the supply of credit to cash-starved businesses to prevent viable companies folding.

http://itulip.com/forums/showthread.php?t=7877

labasta
02-07-09, 11:55 AM
The problem is that the bottom for earnings isn't yet in sight.


That's it, isn't it. It seems like they are trying to put the cart before the horse.

Rather than get the real economy going in the solid slow traditional way of good business and then have the FIRE economy naturally boosted by this, they are boosting the FIRE hoping that there's a spin off to the real economy. The real econ. can't be revived through FIRE anymore, can it? This means (hyper)inflation coupled with depression, doesn't it?

How's this for an analogy (if may be crap, but it's my first one):
The economy is like a big bonfire. The real econ. is the sticks and logs, the FIRE econ. is the flames. If you light the logs, it takes a while for the flames to take hold, with lots of smoke at the beginning. The flames live off the logs which are replaced every so often (new business). The FIRE econ. has burnt out the logs without replacing it with new real businesses. The government is now applying a flame thrower to the burnt out logs hoping to get a fire going again, which can't happen. Instead it should be finding new businesses (and then maybe using a flamethrower to get it going quickly). Maybe the new logs is the alt energy business.

Ok, a bit long winded.

don
02-07-09, 12:17 PM
"Investors desired safety of principle, to stay alive to fight another day."

That's funny. Well stated. Like a good martini, irony is best served dry :):):cool:

Quincy K
02-07-09, 12:28 PM
the people in government are so out of touch they can't seem to realise that the average earning worker/consumer has reached their debt limit and so can't buy any more.

if people can't afford stuff , company earnings will decline.

So why would you buy stocks in companies that are going to lose money or have much lower earnings?

you would buy stocks because they are going up regardless of fundamentals(casino) and you reap the capital gains. would you want to be short if you knew the USG was goign to start monetizing equities? it wouldn't surprise me if the USG created 1 trillion in gvrnmnt works programs to destroy excess housing just to rebuild it again. anything and everything is possible at this point.

IMO, the USG and all the CB's are just hoping for an orderly controlled decline and doing anything in their power to assure that. they do not want to see anarchy and chaos which could very well happen if everyone simultaneously runs for the exits.

jk
02-07-09, 12:34 PM
if the gov't is going to buy equities, they will want to do so in sufficient size to have an impact. the deepest, most liquid markets will be required to handle the flow. the only candidate is the s&p500. purchases can be made quickly via the futures market [the playpen of the hypothetical ppt], or via spy or just baskets or programmed trades. money will then flow into other equities as players take profits in the s&p to move into lagging names. if -unlike me - you are into trading and have a knack for deft timing, you can spread the big caps against the small caps and then reverse that trade at the proper moment. or you can just buy the spy's and then get off the elevator at the proper time.

if - like me- you think the fire economy can't be resurrected [or - in ej's metaphor- refloated], then it's hard to see equities really performing well without an even more severe washout - "hitting the reset button." thus this analysis doesn't tempt me to move heavily into equities. pm's, and perhaps oil, remain the most likely beneficiary of all these scenarios.

btw, allowing people to sell equities to the government also provides another channel to move cash into the economy. how many investors are praying for their stocks to get back to where they were purchased so that they can "get even.?" will they sell at that point to the government purchaser? and if so, what will they do with the proceeds?

icm63
02-07-09, 12:48 PM
It would be nice to receive some guidance regarding what to do. If you believe the fed is buying stocks, then why aren't you recommending that your readers do the same?


Itulip are LONG Gold - However entry around 60 week MA is wise.

Wanna get rich:
Play the massive swings in GOLD STOCKS that will happen over the next 5 or so years. Rising gold and rising stocks, GDX will rally hard, falling stocks GDX will sell off, falling gold and falling stocks GDX will fall hard. (GDX = Gold miners ETF : see also ASA, ABX etc)

Watch the $USD, once that tops out, GO LONG non-USD currency (EURO, YEN, EUAN)

When $USD falls hard, BUY USA exporters (like before: MOS, POT) and CRUDE as USA fund managers will want purchasing power protection (just like what happened in 2006/07). Thus commodities will rally back up.

The trades in the future will have a lot to do where the $USD will trend. However if this disinflation falls into deflation, then the $USD may not turn down. Ituilp do not support general wide deflation expectations, they support a limited view that is debt deflation not general goods deflation, with inflation pressures to follow.

My view is the $USD will tell us what USA (world) will get...disinflation, deflation, inflation, hyperinflation. Currency and bond markets are smarter than stock markets. :)

Timing these markets..well that's a whole thesis !!

Contemptuous
02-07-09, 01:40 PM
Great tactical macro calls icm63.

I'm copying this to a memo and pasting it to my refrigerator to try to remember and execute on. I think you are spot on. With regard to the USD index moves giving the signal as to how the chips will fall, you are also spot on IMO, but beware of placing too much emphasis because we may (likely will) get an "anomaly" as all currencies act like minnows and pilotfish, either trailing, or possibly even leading the USD down in the next couple of years. So that would yield a USD index which was not apparently "doing very much" in response to accelerating USD debasement.

Also using the CRB as a benchmark may prove treacherous in that the CRB may not be reacting "normally" to a submerged USD plunge. The distortions in purchasing power may instead accumulate under the surface and only break out once the tectonic pressures become large enough. In effect the USD progress of disintegration, observed on the surface of things, may proceed in a very herky-jerky way so that timing your various macro trades descibed below will be difficult due to the difficulty of getting a firm "read" on where we are. Otherwise I think your assessment has a beautiful simplicity about it and is spot on.


Itulip are LONG Gold - However entry around 60 week MA is wise.

Wanna get rich:
Play the massive swings in GOLD STOCKS that will happen over the next 5 or so years. Rising gold and rising stocks, GDX will rally hard, falling stocks GDX will sell off, falling gold and falling stocks GDX will fall hard. (GDX = Gold miners ETF : see also ASA, ABX etc)

Watch the $USD, once that tops out, GO LONG non-USD currency (EURO, YEN, EUAN)

When $USD falls hard, BUY USA exporters (like before: MOS, POT) and CRUDE as USA fund managers will want purchasing power protection (just like what happened in 2006/07). Thus commodities will rally back up.

The trades in the future will have a lot to do where the $USD will trend. However if this disinflation falls into deflation, then the $USD may not turn down. Ituilp do not support general wide deflation expectations, they support a limited view that is debt deflation not general goods deflation, with inflation pressures to follow.

My view is the $USD will tell us what USA (world) will get...disinflation, deflation, inflation, hyperinflation. Currency and bond markets are smarter than stock markets. :)

Timing these markets..well that's a whole thesis !!

icm63
02-07-09, 04:00 PM
I use 60 week EMA for marco trends. What you are talking about is whipsaws, and getting in too quick. Timing, is tough.

MY guess

$USD will see 100 before it sees75 again..
Gold will see 800 before it sees 1000 again..
Stocks will rally to 1000 SP500 (or close to it....thats a long shot)..

metalman
02-07-09, 04:05 PM
I use 60 week EMA for marco trends. What you are talking about is whipsaws, and getting in too quick. Timing, is tough.

MY guess

$USD will see 100 before it sees75 again..
Gold will see 800 before it sees 1000 again..
Stocks will rally to 1000 SP500 (or close to it....thats a long shot)..

after reading the japan data in this article then snooping around, i put high odds on some gov't freaking out and doing something stupid in the next 6 months.

Contemptuous
02-07-09, 04:15 PM
ICM63 - I read you and agree with you on all of that - 4X4.


I use 60 week EMA for marco trends. What you are talking about is whipsaws, and getting in too quick. Timing, is tough.

MY guess

$USD will see 100 before it sees75 again..
Gold will see 800 before it sees 1000 again..
Stocks will rally to 1000 SP500 (or close to it....thats a long shot)..

santafe2
02-07-09, 04:34 PM
Statements like the one below used to shock us, but not anymore. In the desperate global scramble by governments to re-inflate asset prices, anything goes.

“We are facing hyper-deflation, so we need a policy to create hyper-inflation. We have to do something to undermine the central bank and government’s credibility or else we won’t be able to halt the yen’s rise. So, while we know this is drastic medicine, we will do it,” said Koutaro Tamura, an upper house Diet member who will chair the new group. - MPs step up clash with Bank of Japan, Michiyo Nakamoto in Tokyo, Financial Times, Feb. 5, 2009

Thanks EJ. I've been considering exiting Yen holdings. The Japanese government can't possibly pull this off without unintended consequences. BTW, I still find the above quote shocking.

metalman
02-07-09, 04:58 PM
Thanks EJ. I've been considering exiting Yen holdings. The Japanese government can't possibly pull this off without unintended consequences. BTW, I still find the above quote shocking.

a government official of a first world country telling the financial times that they 'will' override their independent central bank? shocking? it's unfuckingbelievable. the leading edge of chaos. all those fed and central bank haters are about to learn why central banks are bad except for the alternative... direct political control of the money supply by desperate pols.

jk
02-07-09, 06:35 PM
a government official of a first world country telling the financial times that they 'will' override their independent central bank? shocking? it's unfuckingbelievable. the leading edge of chaos. all those fed and central bank haters are about to learn why central banks are bad except for the alternative... direct political control of the money supply by desperate pols.
this guy is a MEMBER of the UPPER HOUSE of the japanese diet. an institution with relevance somewhere between that the u.s. senate and u.k. house of lords. so if someone in japan were read that a MEMBER of the U.S. SENATE said something stupid, how much should they care? hey, it's a U.S. GOVERNMENT OFFICIAL! how about a member of the u.s. house of lords?

metalman
02-07-09, 06:41 PM
this guy is a MEMBER of the UPPER HOUSE of the japanese diet. an institution with relevance somewhere between that the u.s. senate and u.k. house of lords. so if someone in japan were read that a MEMBER of the U.S. SENATE said something stupid, how much should they care? hey, it's a U.S. GOVERNMENT OFFICIAL! how about a member of the u.s. house of lords?

maybe i'm overreacting, but i cannot recall a precedent.

metalman
02-07-09, 07:00 PM
maybe i'm overreacting, but i cannot recall a precedent.

i take it back. read the whole article (http://www.ft.com/cms/s/0/c304a1d8-f3b8-11dd-9c4b-0000779fd2ac.html?nclick_check=1). this guy koutaro tamura ain't ron paul's antimatter japanese counterpart talking here...


The politicians include Yoshihide Suga, deputy chairman of the LDP’s election strategy council and a close aide to prime minister Taro Aso, and want the government to issue its own notes to fund projects.

The group wants Y30,000bn of the new money to fund programmes supporting new industries and infrastructure projects, including doubling the size of Tokyo’s Haneda airport. The remaining Y20,000bn would be earmarked for government purchases of stocks and real estate.


“We are facing hyper-deflation, so we need a policy to create hyper-inflation. We have to do something to undermine the central bank and government’s credibility or else we won’t be able to halt the yen’s rise. So, while we know this is drastic medicine, we will do it,” said Koutaro Tamura, an upper house Diet member who will chair the new group.


who is Koutaro Tamura?

K
outaro Tamura
Former Parliamentary Secretary for Financial Services
Japan Cabinet Office
Koutaro Tamura served in the last administration as a Parliamentary Secretary for Financial Services in the Cabinet Office and Vice Minister in charge of fiscal and economic policy. He continues to play an important role in the government’s project of promoting Japan as a financial centre in Asia. A member of the ruling Liberal Democratic Party, Mr Tamura sits in the House of Councillors, the upper house of the Diet. Before becoming a politician, Mr Tamura was an investment banker at Yamaichi in charge of mergers and acquisitions and also took care of his family business, which consists of newspaper publishing, cable television broadcasting and menswear. He has an MA from Yale, an LLM from Duke Law School and an MBA from Keio University, and has lectured in law at both Duke and Keio.

not your run of the mill theatrical pol playing to the fringe.

santafe2
02-08-09, 12:43 AM
a government official of a first world country telling the financial times that they 'will' override their independent central bank? shocking? it's unfuckingbelievable. the leading edge of chaos.

I don't have direct dealings with the Japanese government but the fear in large Japanese corporations is palpable. The dissonance created by the swift turn in the world's requirement for high grade Japanese products has been unnerving for both our suppliers and for those of us who distribute their products. We are trying to balance on an ever narrowing beam.

How can a high grade consumer product be delivered from a country who's products are priced in a currency the world values too much? I own zero interest Yen. A piece of paper that represents the value of Japanese culture. I'm going to sell it now that one of their representatives has made a statement equivalent to the speech Steve Ballmer made regarding Microsoft stock in 1999, but a peak in MSFT is not the same as a peak in the Yen.

As for the 'leading edge of chaos' comment, I really want to discount/devalue that idea, but it has the ring of truth and I've no counterpoint that makes sense to me. I hope this is not how the downturn plays out. It's the WW III scenario and none of us want to watch that baby take its first breath.

SJ
02-08-09, 12:46 AM
Long rates will rise - Fed controls short rates through Fed Funds rate

santafe2
02-08-09, 12:59 AM
this guy is a MEMBER of the UPPER HOUSE of the japanese diet. an institution with relevance somewhere between that the u.s. senate and u.k. house of lords. so if someone in japan were read that a MEMBER of the U.S. SENATE said something stupid, how much should they care? hey, it's a U.S. GOVERNMENT OFFICIAL! how about a member of the u.s. house of lords?

We discount these representatives at our own peril. If we've no respect for them, we've no respect for ourselves. For better or worse, they speak for all of us. Their hopes and fears are ours until we elect a new group to lead us forward. If we're sufficiently dissatisfied, we can choose to run for office and lead ourselves.

santafe2
02-08-09, 01:20 AM
Long rates will rise - Fed controls short rates through Fed Funds rate

I hope you're right since I have a significant investment in this direction but you may be missing something. The Fed has said they will buy long term government obligations. That is, the US Treasury needs to sell and the Fed is a willing buyer. I've walked through these chess moves a dozen times and I'm wondering if I should take my 10% loss and exit. Your conclusion may prove to be correct but your analysis is flawed.

Sharky
02-08-09, 02:52 AM
Do the "too big to fail" get supported, leaving everyone else to flounder? Further government intervention in the market leads me to think about possible spreads: maybe long S&P 500 (SPY) and short the broad market (something like IWV or RWM)?

If or when this moves ahead, I wouldn't be surprised to see a flurry of acquisitions, as those with access to cheap money buy out their competitors and/or suppliers at dime-on-the-dollar prices.

magicvent
02-08-09, 07:33 AM
Thanks for the addendum.

SJ
02-08-09, 08:57 AM
This is a response to Santa Fe (#11 above)

I have a significant short position in long treasuries. So I am putting my money where my mouth is as well. I would rephrase your last sentence: my analysis is not flawed, but my prediction may end up being wrong in the short run.

Look at it from a contrarian standpoint. If the Fed feels compelled to buy long treasuries, how convinced are they that long rates will rise?Corollary: When was the last time that govt intervention of any kind worked except in the short run?

Keep the faith and trust your economic principles. Don't try to time the market.

goadam1
02-08-09, 09:50 AM
Is your "buying assets" theory based on information, theory, rumor, inside info or something else?

Many Arrows
02-08-09, 10:50 AM
I think it will result in complete economic collapse because there is no return in this, no real investment in this, and therefore no real future in this other than stagnation and ruin.

Very succinctly and well put.

stockman
02-08-09, 11:30 AM
U.S. 10 year treasury bonds today are looking Japan 1998-ish.


http://www.itulip.com/images/us10tr1995-2009.gif


If the rush to Treasury bonds at the end of 2008 marked the beginning of a longer term trend away from risk, and if the risk-aversion period is anything like Japan's, it could go on for a decade. That does not strike us as a good shorting material.




I agree with the idea that shorting bonds could prove hazardous.

1050

But the intermediate term low in Japan yields did coincide with a substantial rally in equities in 1999-

1051

The US markets have also been directionally correlated with rates since our bubble burst-

1052

So you could make the case for owning US stocks if you think a temporary low in yields has been reached. But it's worth note that in the most recent wave up in yields 2002-2007 GOLD outperformed the SPX. But that's why you hold the GOLD right?

1054

BUT SILVER OUTPERFORMED GOLD... so I am also long there-

1055

That being said history doesn't repeat, just rhymes right? In 1999 the global economy was expanding AND Japan is an export economy. Is 2009 growth in the cards? Is the US suddenly going to become an export economy? So in this rhyme- bond yields may not have the upside that some expect; stocks rally may fall short of bull's hopes; but just in case I'll hold onto my silver and gold to hedge my cash, bonds and short equity positions.

bill
02-08-09, 12:34 PM
I'm going to sell it now that one of their representatives has made a statement

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aeD4ZWA0j8M4


Feb. 5 (Bloomberg) -- Japan’s plan to waive taxes on profits companies bring home from overseas may limit fund inflows before the financial year ends next month, damping any gains in the yen, Daiwa Institute of Research (http://www.dir.co.jp/english/index.html) says.
Many Japanese companies repatriate overseas earnings before the accounting period ends on March 31, helping strengthen the yen. Japanese corporations had accumulated about 17 trillion yen ($190 billion) of overseas earnings, which they had not yet brought home at the end of the fiscal year 2006, according to the Trade Ministry. The firms were reluctant to do so because of Japan’s relatively high national tax rates.
Expectations for the proposed legislation “may create downward pressure on the yen” as companies delay repatriating funds on speculation the new policy will be passed, said Yuji Kameoka (http://search.bloomberg.com/search?q=Yuji%0AKameoka&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 economist in Tokyo at Daiwa Institute of Research, a unit of Japan’s second-largest brokerage.
Japan’s corporate tax rate is among the highest of developed countries, being around 40.7 percent when both national and local taxes are taken into account, according to government calculations.
The planned legislation aims at giving companies greater scope to make new investments in Japan with the goal of helping shore up the faltering local economy.

brucec42
02-08-09, 12:36 PM
I am more and more convinced that there is a huge mispricing of sovereign US bonds, and the US government likes it.

In previous years, the mispricing was kept alive thus: the Chinese sterilizing dollar inflows by buying US treasury debt, keeping interest rates in the US quite low.

Now, it's the crowding out effect of US government guarantees that drive all large pools of capital/debt into US treasurys.

Take the banks (please). The Fed has inflated its balance sheet and the banks have these huge reserves as a result. They are buying government paper, and paying depositors. It is a loser but that's what they are doing.

The US government has crowded out ALL borrowing from the private sector through a combination of "rescues" and "bailouts", via guaranteeing every large pool of debt in site, de facto or de jure nationalization, etc.

So now, I agree with you, the US government's next logical step is to purchase equities. But they are huge beneficiaries of the current financial state of affairs.

The US government's role in private finance is growing by leaps and bounds. They are taking over everything. And they are the world's largest debtor so this suits them just fine. They are looking to spend trillions more on this or that...what a wonderful state of affairs for those in power.

However, I think it will result in complete economic collapse because there is no return in this, no real investment in this, and therefore no real future in this other than stagnation and ruin.

I propose that Itulip hire grapejelly to edit EJ's long and often purposely cryptic columns.

Remember, itulip members pay by the month, not the word. Lay out your case, THEN fill in the details, then sum it up. This is not a creative writing class. The attempts at wit and dancing around the point do not make it more effective, they just waste time.

EJ's columns are usually right and contain a lot of useful information. But reading them takes 4x as long as it should and some sentences don't make sense even after repeated readings. Get the man an editor.

CanuckinTX
02-08-09, 02:02 PM
EJ's columns are usually right and contain a lot of useful information. But reading them takes 4x as long as it should and some sentences don't make sense even after repeated readings. Get the man an editor.

I like reading EJ's commentaries - the longer the better because I get more for my monthly subscription (just kidding :D). But seriously he makes the learning interesting.

I can understand that it's natural for many readers to be sifting through looking for the investment recommendations buried within. I don't think it's that cut and dried though and I trust when he sees something that is actionable he will let us know. This isn't a trading site so I'd be surprised if every article had an investment recommendation.

In the meantime I assume there might be some clues as to what to do in his writings but his conviction on the idea isn't sufficient for him to make a call like "Short treasuries now!". So it's up to me if I want to act on it.

EJ
02-08-09, 02:26 PM
Is your "buying assets" theory based on information, theory, rumor, inside info or something else?

It is 1) a logical extension of the theory that I put forward in March 2006 when every deflation forecaster asserted that the Fed was never going to do more than buy and sell Treasury bonds, 2) based on global trends published in the newspaper such as the one quoted, and 3) based on rumors I am hearing from colleagues. If the purchase of stocks by government occurs, I will count it as my 14th lucky guess in a row.

As I used to tell my management team, the harder we work, the luckier we get.

goadam1
02-08-09, 04:02 PM
Thanks. I believe you are right. If you look in the Nytimes today, you see all companies with bad news and stocks slopping up.

No doubt you were the first person to call the fed buying other assets. Long before TARP you said their powers would be expanded.

Is there any evidence you can let us in on? Just curious what the tactic would be. I would imagine the easiest would be to start buying put options to start a short squeeze.

donalds
02-08-09, 07:34 PM
EJ wrote: If the rush to Treasury bonds at the end of 2008 marked the beginning of a longer term trend away from risk, and if the risk-aversion period is anything like Japan's, it could go on for a decade. That does not strike us as a good shorting material.

So the Masters of the Universe won't succeed in getting investors/speculators out of Ts.

Yet it seems the piece is arguing the opposite, that the Masters will succeed in forcing a rush out of Ts and into risk.

What gives?

Guess I missed it.

metalman
02-08-09, 07:46 PM
EJ wrote: If the rush to Treasury bonds at the end of 2008 marked the beginning of a longer term trend away from risk, and if the risk-aversion period is anything like Japan's, it could go on for a decade. That does not strike us as a good shorting material.

So the Masters of the Universe won't succeed in getting investors/speculators out of Ts.

Yet it seems the piece is arguing the opposite, that the Masters will succeed in forcing a rush out of Ts and into risk.

What gives?

Guess I missed it.

metalman's summary:

bonds are not a bubble about to pop... but we need to keep an eye on the crazy shit gov't will do to try to crash them... like buy stocks.

stocks are not about to go into a big rally, but we need to be ready for the gov't to make crazy moves there, too.

if you're long stocks, you're nuts... you're betting against a crashing economy.

if you're short stocks, you're nuts... you're betting against the crazy shit the gov't will do to try to reflate the economy.

if you are in cash & gold, you will continue to survive. (cash = 13 wk tbills)

LargoWinch
02-08-09, 08:05 PM
Okay, but gold is not the only hedge. And picking one hedge is always like betting it all on black or red. So what are the choices?

All right, I will go out on a limb:

I suggest you consider crude oil. I am unclear about other iTulipers view on this, but I understand that EJ and GRG55 are saying that crude oil prices are too hard to forecast at the moment (not during Poom of course). Luke on the other hand appears quite bullish on crude.

As for me, given the relatively high gold/crude ratio (especially in $CAD), I have been buying crude instead of gold for the time being.

You may also want to consider other precious metal like Silver and Palladium to diversify your portfolio.

Contemptuous
02-08-09, 08:59 PM
You may also want to consider other precious metal like Silver and Palladium to diversify your portfolio.

If you buy silver, remember to hang onto your britches, because it will take you for a hell of a bronco ride. That metal is cantankerous.

jiimbergin
02-08-09, 09:57 PM
This is a response to Santa Fe (#11 above)

I have a significant short position in long treasuries. So I am putting my money where my mouth is as well. I would rephrase your last sentence: my analysis is not flawed, but my prediction may end up being wrong in the short run.

Look at it from a contrarian standpoint. If the Fed feels compelled to buy long treasuries, how convinced are they that long rates will rise?Corollary: When was the last time that govt intervention of any kind worked except in the short run?

Keep the faith and trust your economic principles. Don't try to time the market.

I too have a short position in long treasuries. I have been debating closing it and taking my 10% gain. But I really believe that this is a good long term position to have. Since we will be on a cruise for much of February, I guess I will just put a trailing stop on it and see what happens.

bpr
02-08-09, 11:29 PM
Thought provoking piece, and great contributions from the group as well.


Doesn't the Treasury simply issue the bonds it needs to pay for government? So the drop in interest rate is a reflection of the demand, but does not reflect quantity. The same number of dollars enter the treasury whether the interest rate is 5% or 1/4% as long as the bonds are sold. And those dollars are almost immediately spent by the government and injected into the economy.

So why would the government want to kick them out of the lifeboat when they need those dollars and they're getting them at a low interest rate?

This also has my head spinning: why would the government want the bond market to weaken? Doesn't a strong bond market mean that the government can continue to borrow more at lower rates?

I see the correlation in getting more money out of the "parking lot" and into the real economy, so to speak, but all of the government's future spending committments are dependent on borrowing outlandish sums at miniscule rates.

Maybe I'm just thinking as a businessman/investor rather than a policymaker here, but if I were the government I'd be very happy to auction more bonds off at under 3%.


I am more and more convinced that there is a huge mispricing of sovereign US bonds, and the US government likes it.

In previous years, the mispricing was kept alive thus: the Chinese sterilizing dollar inflows by buying US treasury debt, keeping interest rates in the US quite low.

Now, it's the crowding out effect of US government guarantees that drive all large pools of capital/debt into US treasurys.

Take the banks (please). The Fed has inflated its balance sheet and the banks have these huge reserves as a result. They are buying government paper, and paying depositors. It is a loser but that's what they are doing.

The US government has crowded out ALL borrowing from the private sector through a combination of "rescues" and "bailouts", via guaranteeing every large pool of debt in site, de facto or de jure nationalization, etc.

So now, I agree with you, the US government's next logical step is to purchase equities. But they are huge beneficiaries of the current financial state of affairs.

The US government's role in private finance is growing by leaps and bounds. They are taking over everything. And they are the world's largest debtor so this suits them just fine. They are looking to spend trillions more on this or that...what a wonderful state of affairs for those in power.

However, I think it will result in complete economic collapse because there is no return in this, no real investment in this, and therefore no real future in this other than stagnation and ruin.

Is that what this piece is all about? Complete econoic collapse? If so, this is not about equities or notes or gold. It's about the large game to human ratio.

grapejelly
02-08-09, 11:38 PM
In Why Ben's Helicoptors Are Doomed (http://www.itulip.com/forums/showthread.php?t=7906), I talk about an article that lays this out, that money is created by borrowing demand pulling money into the system...and that pushing money out in the form of reserves or helicoptor drops doesn't do it.

However, I think what EJ is saying, or what I think he should be saying, is that the money creation can and will be conducted by US government operations. The government will borrow money into existence in sufficient quantities to create inflation, and will buy assets in sufficient quantities so as to drive up their price.

One very simple way of looking at the economic crisis is that prices of assets are too low. By driving them up, (by buying them), the government can eliminate the crisis by jumpstarting inflation again, and by lifting asset values to a point where they comfortably exceed the underlying loans against them.

EJ
02-09-09, 12:34 AM
In Why Ben's Helicoptors Are Doomed (http://www.itulip.com/forums/showthread.php?t=7906), I talk about an article that lays this out, that money is created by borrowing demand pulling money into the system...and that pushing money out in the form of reserves or helicoptor drops doesn't do it.

However, I think what EJ is saying, or what I think he should be saying, is that the money creation can and will be conducted by US government operations. The government will borrow money into existence in sufficient quantities to create inflation, and will buy assets in sufficient quantities so as to drive up their price.

One very simple way of looking at the economic crisis is that prices of assets are too low. By driving them up, (by buying them), the government can eliminate the crisis by jumpstarting inflation again, and by lifting asset values to a point where they comfortably exceed the underlying loans against them.

It's interesting, when I write a piece like this I'm usually inundated with "Ok, so what do I buy or sell?" type questions. Apparently, even iTulipers are conditioned to ask what to trade, what is "actionable" in every opinion.

This is what 20 yeas of trading industry advertising has done to the American brain, conditioned it this way.

"The government is going to buy stocks. So that means I buy stocks?"

It means that the next stage of economic and financial chaos is beginning, the kind you get when a nation develops an unstable finance-based economic system and it collapses, and then the government tries to put it back together again, and every effort to do so has unintended consequences that make the problem even worse than before, the first problem being the government's interventions in the economy that caused it to become finance-based in the first place.

I've been out of the stock market for a decade because it's not kosher.

Will direct government intervention in the stock market, should it come to pass, make it more or less kosher? No?

I'd never recommend shorting anything at this point. Shorting is about timing, and last geat timing bets were in 2008. Now it's all life rafts, a sinking USS FIRE Economy, and frigid ocean all around.

As for the government creating inflation, I have nothing new to add to a subject I have written dozens of articles about, except for the Steve Keen discussion we'll post tomorrow. A google search should cover all questions on this topic. Several of them use this graphic. It depicts the government lending money into existance after the endogenous credit markets collapse. We came up with the chart years before that happaned by way of explaining to readers what was going to happen.

Embed this diagram in your head. Don't forget it.


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




When consumers and businesses reduce their lending of money into existance AND the endogenous credit market cannot meet the demand for credit, government steps in an suppies credit that allows loans to be made that causes new money to be created. These efforts are not without unintended consequences, of course.

Me
02-09-09, 01:48 AM
Forget for a minute all the tinkering taking place by governments the world over. There exists something called supply and demand. Demand for oil is down over the last 8 months or so and this trend may well be only getting going....however, supply is being impacted already with fewer exploration projects being considered let alone continued. Looking at all the major oil fields we are left with Gewaar as the only elephant not in decline. This according to the Saudi's. mmmm.

Venezuela, Mexico, Iran, Indonesia, Russia.
What do these countries have in common?
All of them are currently net oil exporters, and combined they make up 20-25% of world oil exports. All of these countries have some unique things in common.
1. They are all experiencing massive declines in oil production.
2. They all control their oil through state run entities, entities which do not re-invest in their businesses but rather spend their cash flows on social programmes. Everything from free housing to free medical care and of course massively subsidized oil for their populace, which incidentally creates artificial demand.
3. They will all in the 3-5 years no longer be oil exporting nations.

A 20% take off in supply of crude in the world markets, irrespective of the greater depression will do some very interesting things to the price. That is not even considering that we have the monetary inflation that will soon rise like a giant tsunami in world financial markets.

Me
02-09-09, 02:15 AM
OK EJ I agree with your reasoning on this. Back to T-Bonds what I don't fully understand is how the USG will manage to do either of the following two things

1. Borrow an additional $2 Trillion or more in fiscal 09 and maintain current rates. (Foreign creditors are up to their eyeballs in problems of their own and bailout programmes of their own). Sure they can print the money to buy same. Consequences???

2. The credit market contraction was met with credit stimulas amongst other actions. None of which was effective in stemming the collapse. The Fed may be warming up to the game at hand like a boxer who gets knocked about in the first round but comes back with a few good punches later on however given their record and the size of the bond market, it is my assumption that they will be ineffective in dealing with any collapse due to the fact that government is always inadequate compared to private enterprise.

Any actions taken will likely be too late (like arriving to party only to find it is almost over) and then be overdone (going wild and dancing on the tables to make up for the error in timing). The effects of many actions are often not felt for some time. As such the reaction to actions taken (printing of money, buying equities etc) more often than not do not register immediately. This creates a feedback loop whereby the Fed provides more of the same assuming (incorrectly) that the action taken is either ineffective or insufficient in size.

I for one cannot see that with the massive issuance of new bonds there will not be foreigners who either simply don't come to the party as they have parties of their own they need to maintain. When they don't come to the party and the Fed starts playing the part of the guests then those foreigners will realise the dollar itself is in jeopardy.

The only question to me seems to be in jeopardy against what as most currencies are in some form backed by the USD itself.

Anyone that can point out any flaws in this thought process please lay into me. I've found that it is more important to find where you are or could be wrong than to be right. Correct analysis of investments take care of themselves, it's the ones that you get surprised by that cause the most pain.

junkacc
02-09-09, 07:29 AM
I for one cannot see that with the massive issuance of new bonds there will not be foreigners who either simply don't come to the party as they have parties of their own they need to maintain. When they don't come to the party and the Fed starts playing the part of the guests then those foreigners will realise the dollar itself is in jeopardy.

The only question to me seems to be in jeopardy against what as most currencies are in some form backed by the USD itself.

Anyone that can point out any flaws in this thought process please lay into me. I've found that it is more important to find where you are or could be wrong than to be right. Correct analysis of investments take care of themselves, it's the ones that you get surprised by that cause the most pain.

This is called the "race to the bottom", where all foreign CBs try to inflate, be it so they can maintain currency pegs, or get rid of their own debts.

As long as the USD is the reserve currency, it is the safest bet. In other words, as long as the US has aircraft carriers in every ocean and bases on every continent, exerting its will on client states, it would be unwise to bet against it. That is ofcourse, unless things get so bad there is a concerted effort by other powers. But that would lead to WWIII.

Next time a collegue complains about military spending, remind them of this fact. Its a choice between slowly bleeding to death maintaining a huge military or having a swift death if you don't. That's why all empires fail in the end.

LargoWinch
02-09-09, 11:35 AM
If you buy silver, remember to hang onto your britches, because it will take you for a hell of a bronco ride. That metal is cantankerous.

Yep; my understanding is that it magnifies gold losses/returns.

It does provide for some diversification however, and maybe some protection against confiscation (?).

PS: "Cantankerous", that is worth saying over and over again!

bpr
02-09-09, 01:22 PM
In Why Ben's Helicoptors Are Doomed (http://www.itulip.com/forums/showthread.php?t=7906), I talk about an article that lays this out, that money is created by borrowing demand pulling money into the system...and that pushing money out in the form of reserves or helicoptor drops doesn't do it.

However, I think what EJ is saying, or what I think he should be saying, is that the money creation can and will be conducted by US government operations. The government will borrow money into existence in sufficient quantities to create inflation, and will buy assets in sufficient quantities so as to drive up their price.

One very simple way of looking at the economic crisis is that prices of assets are too low. By driving them up, (by buying them), the government can eliminate the crisis by jumpstarting inflation again, and by lifting asset values to a point where they comfortably exceed the underlying loans against them.

That article is great, thanks. I look forward to the Keen piece here.

zoog
02-09-09, 01:27 PM
...btw, allowing people to sell equities to the government also provides another channel to move cash into the economy. how many investors are praying for their stocks to get back to where they were purchased so that they can "get even.?" will they sell at that point to the government purchaser? and if so, what will they do with the proceeds?

I can only speak for myself of course, but if the government does manage to induce a noticeable rise in the stock market, even if only nominal, I would be inclined to take the opportunity to get the rest of my 401k out of mutual funds and into the money market fund, where it will likely sit for the next few years. I have no stock investments outside of my 401k and have no intention of adding any at this point. I have more than enough risks and unrealized losses with commodity funds.

metalman
02-09-09, 01:31 PM
btw, allowing people to sell equities to the government also provides another channel to move cash into the economy. how many investors are praying for their stocks to get back to where they were purchased so that they can "get even.?" will they sell at that point to the government purchaser? and if so, what will they do with the proceeds?

really, really good point. helps consumer confidence, too ej did a piece a long time ago that shows the correlation of the stock market to consumer confidence is very high.

grapejelly
02-09-09, 01:47 PM
the whole deal is to get asset prices up again...at virtually any price. At least nominal prices of assets...

c1ue
02-09-09, 02:51 PM
I've been noodling and monkeying with models on the bond front - and here's what percolating out so far:

1) Option ARMs and their related security holders are f***ed. No way out so far for these.

2) Alt-A are presently in relatively good shape due to LIBOR rates.

3) Fixed rates are low also

Basically what 2) and 3) mean is that so long as these rates (LIBOR, 30 year fixed) are low, the government won't intervene in the 30 year (and other) Treasury market.

As soon as we see these tick up, then the intervention will return.

Thus TBT is a good short term trade, but watch out for when the next credit event occurs. Could be sovereign, could be another biggie taking a massive Fed hit (and who is left but Wells Fargo and JPM?), could be a death by 1000 failed small bank cuts, could be something else.

But very clearly in the vacuuming in front of steamroller mode. Whether vacuum is getting nickels or half dollars, that I am still pondering.

ProdigyOfZen8
02-09-09, 04:42 PM
I believe the government is going to have the hedge funds and private equity buy all the bad assets so that they can sneak their way in to regulate and put a stranglehold on these firms.!

grapejelly
02-09-09, 04:45 PM
I've been noodling and monkeying with models on the bond front - and here's what percolating out so far:

1) Option ARMs and their related security holders are f***ed. No way out so far for these.

2) Alt-A are presently in relatively good shape due to LIBOR rates.

3) Fixed rates are low also

Basically what 2) and 3) mean is that so long as these rates (LIBOR, 30 year fixed) are low, the government won't intervene in the 30 year (and other) Treasury market.

As soon as we see these tick up, then the intervention will return.

Thus TBT is a good short term trade, but watch out for when the next credit event occurs. Could be sovereign, could be another biggie taking a massive Fed hit (and who is left but Wells Fargo and JPM?), could be a death by 1000 failed small bank cuts, could be something else.

But very clearly in the vacuuming in front of steamroller mode. Whether vacuum is getting nickels or half dollars, that I am still pondering.

Beyond that...

...there is the simple difficulty of anyone meeting challenging payments for a loan balance that EXCEEDS what they owe.

Why should they keep paying and struggling?

And life intervenes, things turn south, and they stop.

And this drives values down and means more people who *could* make payments also decide not to continue.

Laws such as California's let people walk away from a first lien without any personal liability, so things go south in California quicker and sharper than in many other states, and I believe that is a big reason.

Thailandnotes
02-10-09, 06:38 AM
It's interesting, when I write a piece like this I'm usually inundated with "Ok, so what do I buy or sell?" type questions. Apparently, even iTulipers are conditioned to ask what to trade, what is "actionable" in every opinion.

This is what 20 yeas of trading industry advertising has done to the American brain, conditioned it this way.

"The government is going to buy stocks. So that means I buy stocks?"


"TPM Reader JC sent me to this interview with Nouriel Roubini and Nassim Taleb on CNBC. Here's what JC wrote: "In this clip, Nouriel Roubini and Nassim Taleb are still being treated as a circus sideshow by CNBC... They're predicting the end of finance, and offering the only clear path out of this mess that I've seen offered (with the knowledge to back it up), and CNBC keeps asking them for stock tips. It's ludicrous."

From:
http://www.talkingpointsmemo.com/

link to video

http://www.cnbc.com/id/15840232?video=1027496846&play=1

Willette
02-11-09, 10:38 AM
So why, in the wide, wide world of sports, do people not begin to buy gold en masse???? I cannot understand the preference for T-Debt over gold. Never have. EJ makes the case that everything is going to shit, but does not suggest that people will abandon the mess for gold in large numbers. What would it take?

nero3
03-16-09, 06:59 PM
This is called the "race to the bottom", where all foreign CBs try to inflate, be it so they can maintain currency pegs, or get rid of their own debts.

As long as the USD is the reserve currency, it is the safest bet. In other words, as long as the US has aircraft carriers in every ocean and bases on every continent, exerting its will on client states, it would be unwise to bet against it. That is ofcourse, unless things get so bad there is a concerted effort by other powers. But that would lead to WWIII.

Next time a collegue complains about military spending, remind them of this fact. Its a choice between slowly bleeding to death maintaining a huge military or having a swift death if you don't. That's why all empires fail in the end.


In a race to the bottom, I think it's likely that the dollar, yen and even the swiss franc will weaken significantly and that the "liquidity pump" restarts giving way to new bubbles.

It have been some tendencies the last week. I don't think it takes a very large push now, to get the thing going, with the tide coming back in, lifting all boats.


That will render "commodity currencies the winners, and the EUR will then outperform the USD. The only chance for the dollar to be strong in this enviroment is if the bubble is in the US, and cause massive inflow of capital to the US.

metalman
03-16-09, 07:12 PM
In a race to the bottom, I think it's likely that the dollar, yen and even the swiss franc will weaken significantly and that the "liquidity pump" restarts giving way to new bubbles.

It have been some tendencies the last week. I don't think it takes a very large push now, to get the thing going, with the tide coming back in, lifting all boats.


That will render "commodity currencies the winners, and the EUR will then outperform the USD. The only chance for the dollar to be strong in this enviroment is if the bubble is in the US, and cause massive inflow of capital to the US.

is it me? am i having a de ja vous? i recall hearing this exact argument before...

nero3
03-17-09, 07:04 AM
is it me? am i having a de ja vous? i recall hearing this exact argument before...


I don't know. The problem is of course that the US consumer is maxed out, and that it takes a very big inflationary push, to take the debt to gdp levels even higher, if it is possible.

On the japanese market vs the US, I don't think they will part in the way that the US market will go down, as the Japanese goes up. In my study of the Japanese market, they will track eachother, but the US market have been a bit worse because of the financials. The Japanese market have tracked US 10 year treasury notes since around 1990. However, if 10 year notes, and yields in the US starts to rise, I think the japanese market will outperform the US market, if yields in the US get to a certain point, it will signal an inflation problem, and in that scenario, stocks in the US will move flat, maybe they will hit back up to around 10-12000 on the dow, however that does not have to hurt the japanese market. If 10 year notes goes to 8 %, it could certainly mean the dow jones would be at 10-12000 while the nikkei could go to 16000-20000.



I just add a link here to prove my point:

http://finance.yahoo.com/echarts?s=%5EGDAXI#chart3:symbol=^gdaxi;range=my;c ompare=^tnx+^n225;indicator=volume;charttype=line; crosshair=on;ohlcvalues=0;logscale=on;source=undef ined

What you will see here is that the nikkei track US 10 year notes. If the US have debt deflation for 10-20 years, then the treasury bond will extend it's bull to 38-48 years, instead of what it is at now, and the nikkei will drop even further, because the nikkei track 10 year notes.

I think the FTSE, Dow, Nikkei, will increase as 10 year notes rise, and I think this reasoning between these indexes and 10 year notes, is the reasoning behind berkshire hathaway's insurance policy on the worldwide stock indexes that Warren Buffet have written. So is it likely that the US now will start off where japan was in 1992, dragging the Dow, Nikkei,down to 2000-3000, 10 year notes down to 1,5-2 %? I don't think so.


Secondly I think the nikkei was an extreme bubble in 1989, extending all the way back to the late 1960-s, in 2003, after the dotcom bust I think the nikkei and dow was in at around the same level.