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FRED
02-08-07, 08:02 PM
http://www.itulip.com/images/mistake.gifFor the duration of the Ka-Poom program, there are two main stories: the housing bubble and the U.S. trade deficit. These are as entwined as a central banker and his President, an Enron lawyer and his client, a drug addicted prostitute and his or her pimp... well, you get the idea. It kicks off with this from the Wall Street Journal.

In Home-Lending Push, Banks Misjudged Risk (http://online.wsj.com/article_email/SB117088245754201362-lMyQjAxMDE3NzAwODgwODgyWj.html)
February 8, 2007 (CARRICK MOLLENKAMP - WSJ)

When the U.S. housing market was booming, HSBC Holdings PLC raced to join the party. Sensing opportunity in the bottom end of the mortgage market, the giant British bank bet big on borrowers with sketchy credit records.

Such subprime customers have always been risky, but HSBC figured it could control that risk. In 2005 and 2006, it bought billions of dollars of subprime loans from other lenders, lured by the higher interest rates they carry.

Now, the party is over for HSBC -- and for lots of other bankers who aimed to cash in on the housing boom of the first half of this decade. When interest rates ticked up and the market cooled, HSBC reached a disconcerting conclusion: Its systems for screening subprime borrowers and for assessing the default risk they posed were flawed.

AntiSpin: "Systems for screening subprime borrowers and for assessing the default risk they posed were flawed"? Shocked, we are here at the Tulip. Shocked! Do they mean if mortgage originators encourage borrowers to lie about their income in order to qualify for a suicide or liar loan (http://www.itulip.com/glossary.htm#Suicide_Loan), so that the agent can make a commission, that the approved yet unqualified borrower may not be able to pay? That if lenders personally had no accountability in a loan process that, maybe, the loan might not turn out so well? Who could have known (http://www.itulip.com/frankensteineconomy.htm)?

Another "surprise" today.

http://www.itulip.com/images/stupidity.gif Home Lenders Plunge as More Subprime Mortgages Sour (http://www.bloomberg.com/apps/news?pid=20601087&sid=a2RKPr.UwE4A&refer=home)
February 8, 2007 (Bloomberg)

Shares of U.S. mortgage lenders plunged after New Century Financial Corp. and HSBC Holdings Plc said losses from bad home loans are piling up faster than they expected.

And another.

Toll's Orders Plunge, Forecasts Larger Land Writedown (http://www.bloomberg.com/apps/news?pid=20601087&sid=amHNVirfLNa8&refer=home)
February 8, 2007 (Bloomberg)

Toll Brothers Inc., the largest U.S. luxury home builder, reported a 33 percent plunge in first-quarter orders and said expenses to cut the value of its land may almost triple.

Orders declined to 1,027 units and homebuilding revenue slid 19 percent to $1.09 billion in the three months ended Jan. 31, Horsham, Pennsylvania-based Toll said today in a preliminary earnings statement.

The fact that two out of 100 employed humans in California in 2005 were real estate brokers was, at the time, no indication of a bubble. So now we're all treated to another surprise.

Plummeting commissions thin real estate's ranks (http://www.ocregister.com/ocregister/money/housing/article_1566248.php)
February 7, 2007 (JEFF COLLINS - The Orange County Register)

Agents and brokers earned a combined $1.16 billion in '06, or 20% less than in '05, research firm estimates. Lost income results in closed brokerages, career changes.

"There were payroll reductions. Offices closed. All kinds of things happened to … keep (offices) running with the total loss of commission revenue," said Rich Cosner, president of a chain of nine Prudential California Realty offices in Orange County and the Inland Empire.

Well, at least the resulting Risk Polution (http://www.itulip.com/riskpollution.htm) from all of these supposedly insured bad loans won't wreck the banks. They're all insured... ultimately by you and I, the tax-payer, that is... although I'm still sketchy on where my upside was on the deal... you know, my cut if the loans hadn't "mysteriously" defaulted.

http://www.itulip.com/images/pessimism.gif Mounting debt defies theories (http://www.twincities.com/mld/twincities/business/columnists/16647518.htm)
February 7, 2007 (EDWARD LOTTERMAN - Pioneer Press)

The president has delivered his budget to Congress. Though Congress can be expected to weigh in with much overblown rhetoric, the appropriation bills it passes probably won't differ much from the president's proposal.

Whatever the exact outcome, one thing is clear: No school of economic thought supports the current practice of increasing the national debt, year after year. Only history will tell whether it is economists or the U.S. government that is wrong.

Perhaps the economy is OK only because oil-exporting countries and Asian central banks are willing to lend us a lot of money cheaply, temporarily staving off the results of excess borrowing.

Our grandchildren will know the answer. Perhaps they will be grateful for our current profligacy. And perhaps they won't.

That's a big ask, Ed. Ken at The Guardian's got a take on it with less "one the hand this and the other that" equivocation.

Betting with the house's money (http://commentisfree.guardian.co.uk/kenneth_rogoff/2007/02/betting_with_the_houses_money.html)
February 7, 2007 (Kenneth Rogoff - Guardian Unlimited)

The US has been running trade deficits for over a decade - so why hasn't the dollar crashed yet?

Many people have been asking why the dollar hasn't crashed yet. Will the United States ever face a bill for the string of massive trade deficits that it has been running for more than a decade? Including interest payments on past deficits, the tab for 2006 alone was over $800 billion dollars - roughly 6.5% of US gross national product. Even more staggeringly, US borrowing now soaks up more than two-thirds of the combined excess savings of all the surplus countries in the world, including China, Japan, Germany, and the OPEC states.

As long as the status quo persists, with strong global growth and stunning macroeconomic stability, the US can continue to borrow and run trade deficits without immediate consequence. Over time, the dollar will still decline, but perhaps by no more than a couple of percent a year. Nevertheless, it is not hard to imagine scenarios in which the dollar collapses. Nuclear terrorism, a slowdown in China, or a sharp escalation of violence in the Middle East could all blow the lid off the current economic dynamic.

What other "surprises" are in store for U.S. taxpayers? Read the site over for numerous not too subtle hints.

http://www.itulip.com/images/converts.gifOn the whole "Deflation/inflation/Ka-Poom" debate front, looks like EJ's made two additional converts to the Ka-Poom side.

Convert #2: Michael Shedlock

Mish pre-Janszen:
Monday, April 25, 2005
Deflation is in the Cards (http://globaleconomicanalysis.blogspot.com/2005/04/deflation-is-in-cards.html)

Contrarian Debate: Janszen vs Mish
Saturday, December 16, 2006
Mish says Deflation, Janszen Inflation (http://globaleconomicanalysis.blogspot.com/2006/12/contrarian-debate-janszen-vs-mish.html)

Mish today:
Thursday, February 08, 2007
Counterfeiting Money - Crime or Good Economics? (http://globaleconomicanalysis.blogspot.com)

Convert #2: Jim Paplava

January 19, 2007
Forecast 2007: Disinflation then Inflation (http://www.financialsense.com/stormwatch/2007/0119.html)

Reads like a combination of No Deflation! Disinflation then Lots of Inflation (http://www.itulip.com/forums/showthread.php?t=417) and Recession 2007: Part III (http://www.itulip.com/forums/showthread.php?t=595).

The idea of a disinflation followed by an inflation had not been mentioned anywhere on Financial Sense before EJ's interview with Jim. In fact, you will not find the word "disinflation" anywhere on the Financial News site before Jim's November 18, 2006 article Don't Worry, Be Happy (http://www.financialsense.com/fsn/BP/2006/1118.html) which appears... surprise!... two months after EJ's "No Deflation! Disinflation then Lots of Inflation" piece.

Two down, one to go! Rick Ackerman and EJ face off shortly in an intellectual duel to the death* on... deflation versus Ka-Poom. Coming to iTulip and Rick's sites soon!

* Not really. As Uncle Jack says, "It's all fun and games 'til someone loses an eye." Neither Rick nor EJ are <a href="http://www.amazon.com/gp/product/031242227X?ie=UTF8&tag=wwwitulipcom-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=031242227X">Running with Scissors: A Memoir</a><img src="http://www.assoc-amazon.com/e/ir?t=wwwitulipcom-20&l=as2&o=1&a=031242227X" width="1" height="1" border="0" alt="" style="border:none !important; margin:0px !important;" />

akrowne
02-08-07, 11:04 PM
Well, it sure seems a turning point has been reached in the press.

I'm feeling pretty down, though. Besides having SouthStar threaten to sue me today, I mean.

I had dinner with a friend who is more or less the typical twenty-something with obscene amounts of debt (largely from school, mind you), an exurban house that needs to be sold and which she and her steady bf will probably be underwater on, low and stagnant earnings, and who feels totally unfulfilled in life because this would essentially be the time to have kids but they can't afford them.

And what can I say? "Tough it out, hopefully it won't get too much worse."

Jim Nickerson
02-09-07, 01:03 AM
EJ, exceedingly nice collection of good articles to support your thesis. Good work.

Reckon when SeanO is going to check back in with some real data regarding Kalee-fornee-ah?

DemonD
02-09-07, 04:37 AM
EJ, I remember one of the items you layed out in your housing bubble crash scenario is systematic fraud, accounting irregularities, and other criminal behaviors. I think we can safely say the evidence points that this prediction was 100% on the money. I like giving credit where it is due, and you nailed that one. (Not that I didn't believe it, but now we can safely say that that part of the prediction is certified as "correct.")

p.s. still looking for signs of ka
p.p.s. maybe MSM or other economist phd's would be more open to discussing/acknowledging ka-poom theory if it were named something really banal like "disinflation-hyperinflation macroeconomic cycle theory" or something. just a thought that popped into my head.

DanielLCharts
02-09-07, 05:04 AM
so what?

not affecting the economy. first ,show me the intial unemployment claims. really, show me. the unemployment claims numbers continue to defy itulip's dark thesis, and they are one of the defining tells of a recession's onset.

so far the reasoning for economic failure is succumbing to "dan wilkinson error". dan wilkinson was supposed to be a great d-lineman, picked first in his draft class by the bengals. problem was wilkinson was a huge bust as an nfl player. just as the scouts were right that wilkinson was huge, fast and strong, so has itulip been right about the appearance of events that characterize economic malaise, namely sub-prime bank failures and slumping house prices. so the properties leading to your outcome are all there, but the kicker - and the only thing that matters - is that the outcome of recession is not present and remains improbable.

i think the fact that a recession should have set in already in the last quarter, and the constant new highs in equity markets, which tend to discount (although not perfectly) a recession event about a half a year in advance, are two hugely irksome points that this community really has to struggle with. they are reality pills waiting to be swallowed.

another data point to gnaw on is that if unemployment claims did in fact bottom in the first quarter of 2006 and we are indeed heading for recession, then this is the LONGEST PERIOD EVER in which the 4 week moving average of unemployment claims has not spiked higher. a spike always tends to occur, but it's just not there, regardless of pending construction-related layoffs that every week is supposed to materialize but doesn't. even the non-recessionary slowdown of 1995 was more brutal on employment than this slowdown. this slow down is MILD, nothing like the horror show EJ has proposed.

members here might consider accepting that the probability of a recession occurring in 2007 is actually quite slim and getting slimmer. i didn't believe ECRI, who have a pretty good track record of using leading indicators to predict recessions, that a recession in 2007 was improbable, but i have to side with them now.

so the self-congratulatory tone of many of the contrubitors here is a little wierd. the assumption that the economy is going slip into an abyss like the titanic is not at all a foregone event. perhaps the set up is there, but right now it's only fair to assume right now that you guys are wrong. 4 weeks of unemployment rolls at 350K+ and we can talk. until then, i still propose a respite on the reporting of anything negative. the bengals management could high five and laud each other endlessley over how fast and strong wilkinson was, but at the end of the day, none of it mattered because he still sucked.

DanielLCharts
02-09-07, 05:05 AM
btw, jim, i'm not addressing you directly, it's a general rant.

DanielLCharts
02-09-07, 05:47 AM
EJ, You might reconsider writing that both Mish and Puplava are in agreement with you. I recently read some blog commentary on RGE that mentioned how a firm studied Puplava's picks and concluded that his stock market performance was just not good. i think they said he was poor timer who did not beat the market. I would wager that Mish is a terrible timer as well and almost certainly lags the market - probably in a big way. alas, I don't have data to back it up. (It's just that he's been a bear for about the past 4 years, during which it was about the worst time in the past 10 to be bearish)

Their recent conversion to ka-poom theory just might be the kiss of death. They are certainly quite accomplished directors of conspiracy theorist blogs and forums, but they're not guys i would want playing for my team when it comes down to being right.

Uncle Jack
02-09-07, 07:46 AM
The main problem with Puplava's argument, aside from jumping on the iTulip bandwagon, is that he mislabels "deflation" as "dis-inflation." They're two separate things, which makes me think he really hasn't caught on.

From the iTulip Glossary:

D

deflation : n. negative rate of inflation, e.g., "CPI inflation averaged -1.3% in 2007."

disinflation : n. declining rate of inflation, e.g., "CPI inflation declined to 2.1% in Q4 2007 from 2.5% in Q3 2007."

Of course, I think there is a problem any time we use the official "CPI" number to measure what's really happening, but this sums it up as well as anything.

For anyone or Puplava himself to believe what Puplava is saying is to believe that we'll still have inflation but at a declining rate, essentially saying, "_________(s) have reached what appears to be a permanently high plateau" - Fill in the blank with your favorite asset, the rest of the quote is Irving Fisher.

DanielLCharts
02-09-07, 08:53 AM
Yep. And to boot, that show of his is 1/3 finance, 1/3 x-files, 1/3 captain kangaroo.


The main problem with Puplava's argument, aside from jumping on the iTulip bandwagon, is that he mislabels "deflation" as "dis-inflation." They're two separate things, which makes me think he really hasn't caught on.

From the iTulip Glossary:

D

deflation : n. negative rate of inflation, e.g., "CPI inflation averaged -1.3% in 2007."

disinflation : n. declining rate of inflation, e.g., "CPI inflation declined to 2.1% in Q4 2007 from 2.5% in Q3 2007."

Of course, I think there is a problem any time we use the official "CPI" number to measure what's really happening, but this sums it up as well as anything.

For anyone or Puplava himself to believe what Puplava is saying is to believe that we'll still have inflation but at a declining rate, essentially saying, "_________(s) have reached what appears to be a permanently high plateau" - Fill in the blank with your favorite asset, the rest of the quote is Irving Fisher.

art
02-09-07, 08:57 AM
I think DanielLCharts has an interesting idea buried in his (self proclaimed) rant.

>4 weeks of unemployment rolls at 350K+ and we can talk.

Can the forum members agree (maybe via EJ) on a set of metrics that we can all watch to decide when Ka-Poom milestones have been hit or missed?

grapejelly
02-09-07, 09:25 AM
so what?

not affecting the economy. first ,show me the intial unemployment claims. really, show me. the unemployment claims numbers continue to defy itulip's dark thesis, and they are one of the defining tells of a recession's onset.

...

i think the fact that a recession should have set in already in the last quarter, and the constant new highs in equity markets, which tend to discount (although not perfectly) a recession event about a half a year in advance, are two hugely irksome points that this community really has to struggle with. they are reality pills waiting to be swallowed.

another data point to gnaw on is that if unemployment claims did in fact bottom in the first quarter of 2006 and we are indeed heading for recession, then this is the LONGEST PERIOD EVER in which the 4 week moving average of unemployment claims has not spiked higher. a spike always tends to occur, but it's just not there, regardless of pending construction-related layoffs that every week is supposed to materialize but doesn't. even the non-recessionary slowdown of 1995 was more brutal on employment than this slowdown. this slow down is MILD, nothing like the horror show EJ has proposed.

members here might consider accepting that the probability of a recession occurring in 2007 is actually quite slim and getting slimmer. i didn't believe ECRI, who have a pretty good track record of using leading indicators to predict recessions, that a recession in 2007 was improbable, but i have to side with them now.


Good points.

I think there are many stakeholders in the Great Asset Inflation and it could go on for years.

If we believe that M3 is really expanding 12% annually right now, that is big.

Of course the inflation is going to financial assets. But because of low *perceived* inflation of goods, investors don't perceive the inflation so they are happy.

The stock market keeps going up in nominal terms but in inflation-adjusted terms is actually below its 2000 peak. But investors don't notice or care because CPI inflation seems low.

And for much of the middle class and more affluent, the benefits of the Great Asset Inflation continue. People with houses don't feel poorer. Maybe in some areas they do in the abstract, but generally they do not. Sellers deny that their homes are worth less.

Okay, perhaps "social mood" is good with the more affluent segments.

Real wages have been declining. But there are plenty of jobs, both on the books and off the books, for poorer people, so they continue to get by.

And there is still the upward mobility in the US, where someone can work as a laborer and then buy a truck and become a self employed gardener. All to work for the more affluent segments still flush from the Great Asset Inflation.

Bears are eaten up every day from the seemingly illogical results of reflation and upbeat social mood that can continue far longer than we think. That's evidence for merit in Prechter's social mood theories. When social mood is in its cyclical high, anything bad can happen and it's all good. When social mood is negative, anything good can happen and it's all bad.

Of course its all timing, isn't it? We're all right in our stock picks, just not in their timing :D

You mentioned Greenspan's "irrational exhuberance" warning came in 1996 and then even he had capitulated several years later with "this time really is different" just in time for the crash.

When the last bear capitulates, we shall have the collapse. It could go on for some time because so many people are stakeholders in inflation. But that doesn't make us wrong. It may make us poor investors though :D

(I wouldn't trust Mish's investment recommendations or Puplava's or anyone elses anyway. I don't even trust my own :D )

DanielLCharts
02-09-07, 09:49 AM
art, i think that's a great idea. much better than the draconian respite on negative news that i proposed. i think milestones are much more concrete than pointing to articles on bank failures while at the same time ignoring news about how jobless claims remain extremely healthy. this sort of activity could go on for years. i think it might also be positive for the collective psyche of the community. my guess is we don't want to turn itulip into the daily reckoning.


I think DanielLCharts has an interesting idea buried in his (self proclaimed) rant.

>4 weeks of unemployment rolls at 350K+ and we can talk.

Can the forum members agree (maybe via EJ) on a set of metrics that we can all watch to decide when Ka-Poom milestones have been hit or missed?

Uncle Jack
02-09-07, 10:22 AM
Yep. And to boot, that show of his is 1/3 finance, 1/3 x-files, 1/3 captain kangaroo.

Hey, I really miss Captain Kangaroo, especially when all those ping pong balls dropped from above. That always generated a giggle.
<object width="425" height="350"><param name="movie" value="http://www.youtube.com/v/ilnFkDWKduQ"></param><param name="wmode" value="transparent"></param><embed src="http://www.youtube.com/v/ilnFkDWKduQ" type="application/x-shockwave-flash" wmode="transparent" width="425" height="350"></embed></object>
Still does.

WDCRob
02-09-07, 10:32 AM
It's not an article of faith that the deficits/imbalances will eventually cause serious trouble -- that's pretty well been proved by history.

And while I'm not well versed enough in global finance to hazard a guess as to when or exactly how the house of cards comes down, I know it will fall eventually absent meaninful policy changes to address the imbalances. More generally, I think the idea of "American Exceptionalism" (it won't happen in the United States because blah blah blah) is rotten to the core no matter what social/economic/political field it's applied to.

So I just don't pay a lot of attention to the daily this and that. Anyone got consumer confidence data from Summer of 1929?

Ultimately I have no idea if KaPoom is correct, but I respect that it's an internally consistent hypothesis and that EJ has made some fairly concrete predictions on both the path and the end result. And if his underlying theory is correct, it doesn't really matter to me if it all kicks off in September 2007, or January 2009. The important thing would be that it happened and that I would have taken steps to protect myself.

ablevin
02-09-07, 10:45 AM
EJ, I love your site and I hope to contribute more as I gain the confidence that what I have to say is meaningful to your discussion.

I am a believer in the Ka-Poom hypothesis. I believe that timing is everything, and that timing the markets is incredibly difficult, and possibly even futile. That said, what fun would it be not to try? I mean, the point of all this is to maximize my purchasing power relative to the game's other players, is it not?

I think what myself and others are looking for is a suggestion as to what might be the catalyst for the "Ka". In Spring 2000, you claim it was the capital gains selling that tanked the stock market that caused the recession. I would argue that the hangover from Y2K CapEx spending also had something to do with it, but, that is somewhat irrelevant. My point is: what fundamental change in the current situation will cause people to spend less, or lend less, etc.?

I welcome everyone's ideas. Perhaps it is already happening with the mortgage lender failures. My personal opinion is that nothing really tanks until Japan increases interest rates further, causing the carry trade to unravel some. We saw a harbinger of that last Spring when Japan moved from 0% to 0.25%.

EJ
02-09-07, 11:05 AM
I'll remind everyone of the underlying reason for the success of these predictions: it is in understanding the "economy" as a Finance Economy, and in the analysis of its rise and fall as a process, not an event. It is a mistake to expect that the press will notice a fall in housing prices one quarter and that we'll see a recession at the same time. If you look back at the predictions, such as a call in the top of the housing market in June 2005, I also said a year was to pass before expectations of declining prices start to influence consumption, and perhaps another year after price declines are widely experienced before meaningful changes in actual consumer purchase decisions result, and then some time after that, recession. Barring any unexpected events that hammer consumer confidence and cause a recession to start sooner, that puts us into Q4 2007, more or less, as I explain in the Recession 2007 series.

At the risk of presenting information prematurely, I'm working on an analysis that helps our readers understand the evolution of the process that started with the peak in housing prices 2005 and, simultaneously, of foreign purchases of net issuance of U.S. financial assets. According to our best estimates, the dual process of real estate price and foreign lending declines will continue into 2010 to 2015. With respect to government policy decisions to preserve elements of the savings/creditor class from the costs of the failure of leveraged bets, there appear to be five warning signs or symptoms of an impending inflation via monetization of debt:

1) The central bank lessens the bond market's visibility into operations, such as by discontinuing long running reports of monetary aggregates. The elimination of M3 last year falls into that category. The purpose is to create uncertainty, making it difficult for the bond market to know which way to bet on the direction of the inflation risk premium. The result is that while confusion reins, the bond markets tread water. This presumably buys time for the Fed and Treasury to hit the road to make their last ditch sales pitch to Asia and "friendly" oil producers, to sell more bonds.

2) The discontinuance or reformulation of long standing of inflation indexes and measures. This can take the form of outright lying, as occurred under the Nixon administration. The practice of changing inflation measures and indexes, especially the CPI, has been ongoing since the Nixon administration, so is hard to correlate short term changes with the start of an inflation. Again, this keeps the bond market guessing. The purpose is not to try to trick the bond market into seeing less inflation than exists, but rather to present data that confronts the bond market with a wide range of plausible data for interpretation. The bond market has to guess, for example, whether future inflation is likely to be 2% or 4%, with an even distribution of probabilities between the two extremes.

3) Anecdotal evidence of net savers, especially high net worth, diversifying assets overseas. I see this as a trend over the past several years and accelerating now.

4) Introduction of new ways to avoid monetizing debt, such as: An Insider Spills the Beans on Offshore Banking Centers
(http://www.michael-hudson.com/interviews/040325_counterpunch.html)
5) Inverted yield curve. This can, of course, have other meanings, but in the presence of these other conditions can mean that the bond markets smell an imminent monetization, as explained here (http://itulip.com/forums/showthread.php?p=6849#poststop).

Keep in mind is that you are witnessing a slow, long term process, not a sudden event, like the crash in a stock market. When a stock market crashes, everyone's portfolio is marked to market the next quarter. When housing bubbles deflate, millions of home owners only mark to market when they either try to sell or refi. One at a time, gradually. That means no post NASDAQ crash type "Ka" event, but a more gradual deflation. The loss in confidence of foreign lenders is also gradual, although sudden crisis-like events are quite possible, such as Charles de Gualle's demand for his country's gold in 1968. Even then, the general policy response didn't occur until three years later, in 1971.

If you are looking for employment to drop off a cliff tomorrow, because the housing and foreign investment in the U.S. bubbles are deflating, you will be disappointed. The process doesn't work that way. Expect to experience the process the way you experience the condition of the fence deteriorating in your front yard. For years you see it every day when you come home, but do not notice. Only after you go away on a trip for a while and return do you may notice that the paint has peeled off and the fence isn't looking so good. To understand such a gradual process as I am describing, even though it is likely to be punctuated with crises, you need to "go away" from it in your mind and "see" what the economy looked like ten years ago, then five, and imagine what it might look like in five or ten. As I mentioned before, we are developing "peeling paint" indicators that help us detect these gradual otherwise imperceptible changes as the process continues.

Jim Nickerson
02-09-07, 11:19 AM
btw, jim, i'm not addressing you directly, it's a general rant.

I didn't take it that you were, Daniel, but thanks for clarifying you weren't, for all you know I could be thin-skinned.

I think it is good to see some counter-arguments here. About the only bullish individuals who express themselves and of whom I can readily think are DemonD and Finster in just thinking about equities, sorry if I am leaving anyone out.

I wish I were compulsive enough and had the time to go back and read all you have posted, Daniel, to see if I could determine a change in the tenor of your thinking. It has not previously struck me that you were particularly bullish, but after your comments here, is it correct to say you are generally bullish on equities? Are you a bear that has capitulated? I hope you get back to this thread and will answer that.

When I made a post last night on another thread, I questioned whether or not I should possibly find another place to post it, and perhaps this is the more appropriate place. http://www.itulip.com/forums/showthread.php?p=6969#post6969 post #53.


Now to discuss where we think interest rates are headed...


to which I replied,



Thanks for your equanimity, Stretch.

Interesting is that your last comment is something that has been on my mind, and I am sure many others' too.

Last night I ran across an article by Paul Kasriel who is someone who strikes me as generally rational in his interpretation of data. He wrote an article: The Fed Probably Thinks It Is On Hold for All of 2007, February 7, 2007 http://www.financialsense.com/editorials/kasriel/2007/0207.html (http://www.financialsense.com/editorials/kasriel/2007/0207.html) in which he posits that the next move by the Fed will be later this year "perhaps on August 7" and will be a rate cut.

His article is devoted to contradicting the title of it. To me his arguments seem solid. He thinks the bottom in the housing market decline of real residential investment expenditures could go a bit further from about the -13% so far from their Q3:2005 peak, and notes that the average peak to trough since WWII is about 25% unless this time it is milder.

For those who pay attention to EJ's Ka-Poom theory, he proposes there will be a period of disinflation. Kariel notes that core consumer inflation was decelerating in past two quarters of 2006. So my little mind's impression from this is that a period of disinflation is perhaps upon us or is still to be more manifested in the next 6-7 months.


Quote:
<TABLE cellSpacing=0 cellPadding=6 width="100%" border=0><TBODY><TR><TD class=alt2 style="BORDER-RIGHT: 1px inset; BORDER-TOP: 1px inset; BORDER-LEFT: 1px inset; BORDER-BOTTOM: 1px inset">Originally Posted by Richard Russell, 2/8/07
From MoneyNews
Wednesday, Feb. 7, 2007

NEW YORK –- Merrill Lynch is sounding the alarm on a global liquidity crunch as central banks in Europe and Asia tighten monetary policy and advise clients to avoid risk and switch to safer assets over the coming months.

The bank said 2007 would be the "year of the dividend", with concern returning as the VIX and VDAX volatility indexes that are widely used in option trading rise from record lows.

Merrill Lynch's chief European strategist Khuram Chaudhry said the bank thinks "global interest rates are going to rise a lot more than investors are discounting, and this is a worrisome outlook for profits.

"We've seen liquidity everywhere, in equities, property, bonds. It's been a one-way bet for investors, and they've taken on a lot of risk. But they're not looking beyond the news to the slow drip-drip effect of interest rates. It matters when central banks tighten monetary policy," he continued.

Although the Federal Reserve left interest rates unchanged at 5.25 percent at its last meeting for the fifth consecutive time, it's raised rates 17 times already since June 2004. But the bank pointed out that Europe has been slower and the Bank of Japan is still holding rates steady.

Russell Comment -- Interesting and certainly not in tune with the PIMCO crowd. Bill Gross continues to think that rates in the US will be coming down during the second half of this year.





</TD></TR></TBODY></TABLE>

So on one hand a bigwig at Merrill Lynch is suggesting international rates are going to tighten, which I presume will result in some cooling off of equity markets around the world. If Kasriel and Gross think rates will be coming down later this year, then it suggests to me that there is going to be something happening that will stop the runups that have occurred rather much worldwide in the equity markets.

So back to you, Stretch (and I thought you would tell us your car was a long limo), rates may go down, and equities may go down, so ridding yourself of $50K now might turn out to be brilliant, unless I am missing something--which odds are, I am.


Then last night Victoria Marklew http://www.safehaven.com/article-6875.htm thinks the ECB will likely hike rates to 3.75% in March, but she thinks that is unlikely to be the peak, and she wonders if the BoE will stop at its present 5.25% or perhaps go to 5.5%.

Being there is a lag in rate hikes and subsequent "cooling" on inflationary pressures, it seems to me all this suggests a slowdown to come and I'll specify to come in the equity markets--something that certainly has not yet happened in the US. If Kasriel is correct, which only time will bear out, then I think something to the downside still lies ahead this year.

I'm way over my head here in that I lack any expertise in these matters, so I hope no one "kills" me with counter-arguments; nevertheless, bring them on.

c1ue
02-09-07, 11:40 AM
Analysts had expected HSBC’s 2006 loan impairment charge to be $8.8 billion, according to the average of 11 analysts’ forecasts, the bank said.

That figure is now expected to be about $1.8 billion higher, or about $10.6 billion.

....

It said apart from its mortgage services operations in the United States, the performance of HSBC’s businesses for 2006 was in line with expectations.

A little more color to the HSBC announcement.

Note the emphasis on the United States - no singling out of Household as the reason either in the PR or the conference call.

This is a little surprising as the UK has also quite a real estate bubble going - on the other hand the UK has been much more active at the pump :rolleyes:

c1ue
02-09-07, 12:00 PM
Daniel,

A lot has already been said, but I use this forum to gain a 'macro' understanding of what might be happening.

Having said that, the call for independent metrics is a very reasonable request.

Nonetheless I believe all along the 'trigger' for the potential forecast catastrophic events has always been stipulated as some type of unforeseen outside event - a terror attack, a sudden financial decision in one or more of various reserve banks/financial institutions, a trade war starting, etc.

It is never wise to try and trade short-term on macro events, but the point of macro financial planning is to understand the areas which could be severely negatively impacted and to consider whether to commit resources to areas which might benefit.

The example I would use is my own behavior during the housing boom which I have been observing since 1995.

I deliberately chose to move to Texas from California because housing was highly unaffordable - while I would have been paid more in CA, I could not possibly have bought any reasonable type of housing for several years and would also have had to devote a major part of my income to rent and CA taxes.

Had I done so, I would have seriously impacted my lifestyle and career choices.

I wound up buying a property in Texas because the 3 BD/2 BA, 2 level house wound up costing me net about $100 more a month than rent of $500/month.

Having the property with such a low cost enabled me to be flexible in many other things - including moving to Japan as an ex-pat for 3 years.

I returned to California after this wonderful experience and having saved up nearly all of my ex-pat benefit package - I could have then bought a property in 2001, but again I made a macro choice not to.

I did so because while housing was still as generally unaffordable as before, I noticed then that the wage price/employment growth was no longer keeping up with housing growth. This was a huge red flag to me.

Certainly on the short term I missed out on a number of chances to cycle through properties and make some short term money in this process, but I again rather focus on my work and personal life than to try and sneak nickels out from in front of the steamroller.

Now I am looking at ways to hedge against potential hyper-inflation - buying income-producing property outside of the US (but where!), looking at gold as a hedge, etc.

I also am keeping a small put position out on a few stocks which I feel would most benefit (i.e. fall) in a number of best (worst) case scenarios, and am actively ending my position in financial stocks.

As has been beat to death in other parts of this forum as well as elsewhere in the Internet, the true trigger in any final collapse is never predictable except in retrospect.

The triggers are also pretty much always different - unsurprising as there are many vested interests militating against known factors.

Trying to identify a trigger to make short term money is admirable, but very dangerous. As many others have said, the economy has more bank than any individual - just like the casino. You're better off staying out of games rigged against you!

SSmith
02-09-07, 01:52 PM
EJ: Your time-frame takes us into the era when the baby boomers will begin to retire en masse, which poses problems of its own. Will your analysis touch on this at all?

jk
02-09-07, 03:40 PM
ej, you said

Inverted yield curve. This can, of course, have other meanings, but in the presence of these other conditions can mean that the bond markets smell an imminent monetization, as explained here.

although you asserted this is the post to which you link, you never explained why it made sense. the example that preceded that statement was one in which long rates went UP, not down. if the markets "smell" monetization, wouldn't bonds sell off and long rates be higher? could you please clarify?

jk
02-09-07, 03:45 PM
daniel, iirc the crash of '29 and the great depression were originally triggered by the failure of a small bank in austria. [see kindleberger] you can't predict things like that. all you can do is try to analyze 1. whether a system is becoming progressively unstable and fragile, 2. what are the assumptions underlying current processes and market levels and are any of those assumptions questionable.

DemonD
02-09-07, 05:48 PM
so the self-congratulatory tone of many of the contrubitors here is a little wierd. the assumption that the economy is going slip into an abyss like the titanic is not at all a foregone event. perhaps the set up is there, but right now it's only fair to assume right now that you guys are wrong. 4 weeks of unemployment rolls at 350K+ and we can talk. until then, i still propose a respite on the reporting of anything negative. the bengals management could high five and laud each other endlessley over how fast and strong wilkinson was, but at the end of the day, none of it mattered because he still sucked.

Danny, just to let you know, I just was giving EJ credit for something that he got right, and that was that the system would be found to have been inundated with fraudulent activity. The evidence makes it clear that this is what, indeed, has happened, and I'm betting there will be a lot of people trying to get their last little bit of cash out of the RE boom this year with more fraudulent activity.

Other than that, I'm highly critical of the voices that are shouting down US based companies that are publicly traded, at least for the near term. I personally try to calibrate my decisions and opinions based on hard facts of reality... I consider myself a realist. Which means that if stocks go up another 10-15% this year, while there are bears here shouting them down, then I'm just as happy to be critical of that advice.

The reason I personally read itulip is that it gives a perspective that is grounded in reality but deals with issues that above and beyond normal financial reporting. Connecting the dots on some very widespread issues to the hows and whys of financial markets bringing together the chinese purchasing of us debt, the war in iraq, the yen carry trade, the gold reserves of the IMF... etc. etc. I feel it gives me a leg up in terms of confidence I have in my own investment decisions. It may not completely change or dictate how I invest, but it's part of my own fundamental analysis of how to maximize my own returns.

In any case, I think my kudos to EJ were deserved, and if the ka-poom theory does play out as predicted I will give him credit then too, and if it doesn't, well then I'll be right up there criticizing that too.

bart
02-09-07, 05:51 PM
Good points overall but...




i think the fact that a recession should have set in already in the last quarter, and the constant new highs in equity markets, which tend to discount (although not perfectly) a recession event about a half a year in advance, are two hugely irksome points that this community really has to struggle with. they are reality pills waiting to be swallowed.


I think "not perfectly" is an understatement on how well the supposed stock market 6 month lead is as a recession indicator. Here's the actual record, and it's far worse than most believe. Yield curve inversion as well as some other stats do much better.

http://www.nowandfutures.com/daily/sp500_recessions.png





i didn't believe ECRI, who have a pretty good track record of using leading indicators to predict recessions, that a recession in 2007 was improbable, but i have to side with them now.

I wish I could post a chart of ECRI's accuracy in recession prediction but it would be a copyright violation and unethical as well. But the data I've seen shows that it leads very little and I don't use them other than as a sentiment indicator. They actually do better with bottom calling by far, in my opinion.

SSmith
02-09-07, 07:09 PM
In fact, there would never be a crash or any other sort of financial panic if people could see them coming. If people knew there would be a panic, they would act to protect themselves, eliminating the vulnerabilities that would have created the crash had they not acted. Yet, these things happen.

EJ
02-09-07, 08:23 PM
ej, you said


although you asserted this is the post to which you link, you never explained why it made sense. the example that preceded that statement was one in which long rates went UP, not down. if the markets "smell" monetization, wouldn't bonds sell off and long rates be higher? could you please clarify?
Attached is the relevant part of the chapter from Dr. Langdana's book, <a href="http://www.amazon.com/gp/product/1402071469?ie=UTF8&tag=wwwitulipcom-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=1402071469">Macroeconomic Policy Demystifying Monetary and Fiscal Policy</a><img src="http://www.assoc-amazon.com/e/ir?t=wwwitulipcom-20&l=as2&o=1&a=1402071469" width="1" height="1" border="0" alt="" style="border:none !important; margin:0px !important;" /> reprinted with permission of the author. Analysis to follow.





http://www.itulip.com/images/Langdana1.jpg

akrowne
02-09-07, 11:07 PM
Daniel:

As a trader, I think to a great extent, you're falling into the trader's mindset that the market is identical with reality. It isn't. Yes, the market is the thing you play to make money, and as a trader this money is real to you. But eventually reality will come to bear on the market, and traders generally will not be ready.

I don't think I need to repeat the Keynes quote for you.

Anyway, here's a rundown of my recession indicators:

- dramatically rising crime
- inverted yield curve (not just fleeting; almost a year now)
- deteriorating median income
- obviously deteriorating consumer spending
- unbelievably high debt burden -- both public and household
- rising delinquencies and foreclosures
- virtual armageddon in the subprime sector, which is only just beginning to spread (my article of last week which you took issue with was if anything too conservative by saying "could" instead of "will")
- collapsing home building, which in itself should be enough proof (I got some great charts from you, but you seem to imply the chart of the stock market is a better prognosticator?)
- troughing unemployment (yes, troughing; as Mish aptly posted this past week, a recession has followed every dip below 5.5% unemployment)
- ... I could dredge up more but I'm tired ;)

Asking "when the recession will come" is asking the wrong question. It's already here. The question is when will the market (be forced to) realize, and secondarily when will the obtuse NBER finally classify it as a recession (note that, even by their own narrow criterion, they only do so 6 months to a year after the fact, which isn't exactly helpful for financial planning).

As far as subprime, you can't make this shit up:

http://br.endernet.org/~akrowne/econ/charts/ABX-HE-BBB-06-2_070209.png

And as far as Eric, Mish, and Jim's performance (which I'm sure has actually been spectacular if they've just bought and held a fair amount of gold and natural resources over the past few years), past performance is no indicator of future results.

I want to be ready for tomorrow, not yesterday. The coverage on this site is, in my opinion, top-notch for determining the fundamentals that will set the stage for tomorrow.

akrowne
02-09-07, 11:14 PM
I'll bet that if NBER's recession classification was comprehensive instead of based on the GDP and associated lies and hence unrealistically narrow, the stock market's predictive power would look even worse (in other words, the market would typically crash when a recession is contemporaneous).

akrowne
02-09-07, 11:18 PM
It's also hard to read inflation expectations from the bond market when most of the buying consists of a bunch of price-insensitive FCBs.

It also probably distorts things when the government plays games like what it did from 2001-2006 in eliminating the long bond (a move to crash yields on 10-year-based RMBS?)

DemonD
02-10-07, 12:00 AM
Daniel:

As a trader, I think to a great extent, you're falling into the trader's mindset that the market is identical with reality. It isn't. Yes, the market is the thing you play to make money, and as a trader this money is real to you. But eventually reality will come to bear on the market, and traders generally will not be ready.


Aaron, I wholeheartedly agree. The way I see it is that the market reflects the economy, it does not predict it. Decreases in housing permits and inverted yield curves in the past have been much better indicators for prediction. The market is great for discounting and reflecting current news and earnings, it is not a leading indicator to my way of thinking. NEW reports that they will have to restate earnings and that their current earnings are going to take a hit, and their stock drops 50% in one day. Therefore this is a lagging indicator (the stock price). A leading indicator would have been the foreclosure rates that are accelerating, the decrease in housing starts, decrease in housing volume and prices, which the market has just barely started to price in.

If the market was a leading indicator, then all these subprime mortgage companies would have had 25-75% declines in the past 6 months instead of the past 6 days.

Spartacus
02-10-07, 07:48 AM
commentary on RGE that mentioned how a firm studied Puplava's picks and concluded that his stock market performance was just not good.

Puplava manages money privately, I don't think he puts out any specific testable stock picks. I'd be curious to know how this stock tracker found out Puplava's picks.
EDIT: now I've recalled that on several occasions P's claimed that the regulations governing him prevent him from publicly discussing his stock picks. On occasions where we've found out his picks, it's because he was required to make his position publicly known, like having to file paperwork in Ontario about his involvement in Kimber.

There was the incident where he chortled about having gotten out of one of the markets (I forget which -Silver, IIRC) just before a sharp drop, but then the market rebounded sharply and apparently he got back in at a "loss".

One or 2 stocks have slipped out. It's hard to hide your Silver picks, for example - there are only so many Silver producers. I've not rigorously tracked all the stocks that slip out once in a while, but from what I remember - based on the industries he's talked about, for example, they've done extremely well.

Uranium, Gold, Silver and Petroleum producers over the last 4 years - there have not been any much better places to be invested.

tree
02-10-07, 08:02 AM
Are unemployment statistics (as measured by the federal Bureau of Labor Statistics) a valid barometer of citizens' well being? I always thought they weren't, what with part-time work, underpaid work, etc., but then an economist I respect said they were. Thoughts?

Spartacus
02-10-07, 08:02 AM
Yep. And to boot, that show of his is 1/3 finance, 1/3 x-files, 1/3 captain kangaroo.

The interviews are awesome. I found Saber and Taleb through those. I was high on Sornette for a while too.

BUT ...

Have you ever been able to tell which 1/3rd is which?

I never have.

OH, and
You forgot the other 3/4, the "axe-grinding" segment, (which is mixed in with all the other segments).

And if you look up Loeffler, you'll see some other interesting stuff ... When I first came across that it was like finding out that Gary North is a Christian Reconstructionist (which he never mentioned, ever, while pushing his y2k paranoia).

hidden agenda? NOT US? What hidden agenda?

bart
02-10-07, 10:44 AM
Puplava manages money privately, I don't think he puts out any specific testable stock picks. I'd be curious to know how this stock tracker found out Puplava's picks.


All stock positions & holdings are shown on the most recent filing for Puplava Financial Services/Inc

http://www.secinfo.com/d19eV3.uc.htm

dbarberic
02-12-07, 01:02 PM
Attached is the relevant part of the chapter from Dr. Langdana's book, Macroeconomic Policy Demystifying Monetary and Fiscal Policy (http://www.amazon.com/gp/product/1402071469?ie=UTF8&tag=wwwitulipcom-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=1402071469)http://www.assoc-amazon.com/e/ir?t=wwwitulipcom-20&l=as2&o=1&a=1402071469 reprinted with permission of the author. Analysis to follow.




From Dr. Langdana's book, Macroeconomic Policy Demystifying Monetary and Fiscal Policy;
“Another reason for inversion could be simply the fact that the demand for long term borrowing may have gone down”.
<O:p</O:p
This still does not make sense to me. I would have thought that a lack of demand for long term borrowing would cause interest rates to increase, not go down. I thought that interest rates rise and fall based on demand. If there are not enough investors to purchase long term bonds, wouldn’t the interest rate increase until the rate was high enough to entice investors to purchase the bonds? How does this show a forecast for hyper-inflation?
<O:p</O:p
Unless….. Foreign buyers of bonds are already stepping away from the table and the Fed is already monetizing the debit, thus building instant demand for long term bonds and keeping the long rate artificially low and the yield curve inverted. Is this what EJ is implying?

:confused:

Charles Mackay
02-12-07, 01:38 PM
The REITS have been soaring in almost vertical moves ever since that mid 2005 bubble top call ...while the residential bubble has rolled over. I wonder why the dichotomy there? Take a look at the REIT ETFs... VNQ, IYR, AVB, ASN
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bart
02-12-07, 04:38 PM
...
Anyone got consumer confidence data from Summer of 1929?
...


1/1/1929 100.0
2/1/1929 99.8
3/1/1929 99.3
4/1/1929 100.4
5/1/1929 100.0
6/1/1929 98.4
7/1/1929 102.4
8/1/1929 100.6
9/1/1929 98.8
10/1/1929 97.9
11/1/1929 88.9
12/1/1929 89.1
1/1/1930 86.1
2/1/1930 87.8
3/1/1930 85.3
4/1/1930 87.0
5/1/1930 85.6
6/1/1930 83.0
7/1/1930 80.8
8/1/1930 77.9
9/1/1930 79.2
10/1/1930 76.8
11/1/1930 73.9
12/1/1930 72.9
1/1/1931 69.7
2/1/1931 74.3
3/1/1931 74.4
4/1/1931 72.9
5/1/1931 73.7
6/1/1931 70.5
7/1/1931 69.6
8/1/1931 67.0
9/1/1931 64.4
10/1/1931 62.4
11/1/1931 61.5
12/1/1931 59.3

Green Bear
02-12-07, 05:52 PM
Read what you will into this, the Federal reserves expert on banking and risk management is bailing, before her term expires in 2011.



WASHINGTON: Susan Bies, who has been a governor at the Federal Reserve since 2001, announced Friday that she will leave at the end of March, giving President George W. Bush a fresh opportunity to put his stamp on the central bank.

Bies, 59, said she plans to spend more time with her family.

With her expertise in banking and risk management, Bies has played at key role in shaping regulatory policy at the Fed, which is responsible for making sure the U.S. financial system remains sound. That is also an important ingredient to the country's economic health.

With Bies' departure, Bush will have a total of two vacancies to fill on the central bank, whose policy affects interest rates and thus influences economic activity.

The president appointed Bies as well as the rest of the current members on the Federal Reserve's Board of Governors, including chairman Ben Bernanke.
more>>>

Susan Bies to leave U.S. central bank at the end of March
http://www.iht.com/articles/ap/2007/02/09/business/NA-FIN-US-Federal-Reserve.php

EJ
02-12-07, 06:09 PM
I'd be leaving, too.

WDCRob
02-12-07, 06:46 PM
1/1/1929 100.0
2/1/1929 99.8
3/1/1929 99.3
4/1/1929 100.4
5/1/1929 100.0
6/1/1929 98.4
7/1/1929 102.4
8/1/1929 100.6
9/1/1929 98.8
10/1/1929 97.9
11/1/1929 88.9

Ha! Had no idea that this series went back so far, so it was intended as a rhetorical question. Thanks Bart.

jk
02-13-07, 10:42 AM
From Dr. Langdana's book, Macroeconomic Policy Demystifying Monetary and Fiscal Policy;
<o>:p</o>:p
This still does not make sense to me. I would have thought that a lack of demand for long term borrowing would cause interest rates to increase, not go down. I thought that interest rates rise and fall based on demand. If there are not enough investors to purchase long term bonds, wouldn’t the interest rate increase until the rate was high enough to entice investors to purchase the bonds? How does this show a forecast for hyper-inflation?
<o>:p</o>:p
Unless….. Foreign buyers of bonds are already stepping away from the table and the Fed is already monetizing the debit, thus building instant demand for long term bonds and keeping the long rate artificially low and the yield curve inverted. Is this what EJ is implying?

:confused:

low demand for borrowing means fewer bonds issued, thus bond prices rise and interest rates drop. don't forget, buying a bond is LENDING, so demand for bonds = demand to LEND. selling a bond is BORROWING, so supply of bonds = demand to BORROW.