Negative "Positive Feedback Loop" of Employment and Housing

[metalman]

Re: Negative "Positive Feedback Loop" of Employment and Housing

it is going to be very hard, emotionally, to sell gold when chaos is at its peak. and it is going to be very hard, intellectually, to know where to put the proceeds.

amen on both. my guess is we're gonna be doing lots talking through it here if and when it happens. given his experience (w/his dad buying at just thr right time last time bbut not selling) i'll tend to go with EJ. gonna take some big yabbles to sell when everyone is running around screaming and lining up to buy. and then what? go to cash, or aaron's New Dollars?

[jk]

Re: Negative "Positive Feedback Loop" of Employment and Housing

the time to sell gold will be when the chaos is at its peak and no one seems to know what they are doing.

it is going to be very hard, emotionally, to sell gold when chaos is at its peak. and it is going to be very hard, intellectually, to know where to put the proceeds.

[EJ]

Re: Eric, are Gold and Silver still in your good books?

I agree with pretty much every thing else you said, but I have to pick at the gold analysis =)

I think history clearly shows that gold had a monetary status prior to central banks. Gold has always been rare, non-perishable, and desireable for its decorative qualities. Central banks did not supply any of these properties.

Gold was used as a currency before banks. It continued during the rise of modern banks because private, competitive banks had a limited ability to create "funny money". Command regimes that minted their own coin, by contrast, have had a sorry history of debasing precious-metal currency in opposition to popular sentiment--not the reverse (propping up its value).

Modern central banks have been a different beast from private, competitive banking, and in fact are just a throwback to the command monetary regimes of old. This is because the factor of competition for the robustness and solvency of the monetary base has been removed. Gold in a fractional reserve system is a de facto debased currency; this is an effective dilution and distortion of the popular support for gold's value--just like in the empires of old.

Even worse, in the US during the depression, there was no domestic free market for gold (it was confiscated), so one cannot really argue that the Fed was saying much of anything about its value. There was no convertability of reserve notes to gold, except in a tiny, rigged market between nations.

In this sense, yes, the value of something as "universal" as gold can be commanded up or down by modern central banks, but this doesn't appear to be either a permanent or robust intervention. Really this is just like any other intervention in a market which is driven by supply and demand fundamentals that are disliked by the regime in power; effective for a while but futile and destructive in the long run.

As for what happens in a Ka-Poom style event, the temporary and abrupt scarcity of money which can be used to buy gold in the 'Ka' phase will certainly lower its price, all other things equal. But in the 'Poom' phase, assuming a free market, the opposite should occur, quite dramatically. We never had this free market after the depression--at least not until after the mid-70s, and we saw what happened then (nor did we have a 'Poom' right after the depression).

What is interesting to me about the current 'Ka-Poom' is that gold is much more of a financial economy animal now, due to futures and ETFs and other financial instruments. This means it is more vulnerable to the 'Ka' deflation and deleveraging; which explains its "collapse" from the highs of May. But it has held out surprisingly, suggesting to me that strong 'Poom' fundamentals remain beneath the surface; central banks or not.

I agree with all of your points. Gold was certainly money before central banks took it up, and that's in fact why they did. My point is that by using it to back currency, central banks in a way usurped its value as money. They may do so again, if the poop hits the fan Poom-wise. Alan Greenspan alluded to this when he told Congress in 1999: "Gold still represents the ultimate form of payment in the world. Fiat money, in extremis, is accepted by nobody. Gold is always accepted."

My observation is that the most important things Greenspan says are these seemingly oddball, throw-away comments. He said something similar in 1999 to not fret about a collapsing stock market bubble, 70% of US household wealth is tied up in housing. A fairly big clue, if one was paying attention, as to what the Fed had in mind in the rescue plan.

I'll add that ETFs make gold and silver, and perhaps some day platinum (although the stuff is so scarce that the market may not be liquid enough), make these metals more marketable to Joe and Jane Sixpack and their brokerage account. No buying metals off the web or going to coin stores.

There are probably a few million people holding gold today who are dying to know if they're going to have to ride out a crash in gold prices in the wake of the collapse of the various bubbles we're seeing today (real estate, private equity, etc.) as we experienced in the 2001 deflationary Ka bottom of the downdraft following the collapse of the stock market bubble in 2000, before the printing press, tax cuts and dollar depreciation kicked in and gold headed into a steep rise.

I can't call it any more than an intuition, and no one knows, but my expectation is of a much more chaotic period than after the collapse of the stock market bubble in 2000. I expect an environment more similar to the one that happened after the collapse of the US stock market in 1929. Bernanke's written a lot about it, but I think he's missing a key lesson. Only with the benefit of hindsight does it appear obvious what the Fed did wrong in the 1930s. But Ben and a lot of observers forget that the Fed was doing the best it could with the data, tools and understanding of their system at the time.

I've read a lot about it over the years and conclude that at the time they were looking at the wrong data, interpreting it the wrong way, and doing the wrong things based on their understanding of what the data meant. Plus the data were coming at them too fast; they were overwhelmed by the sheer volume of data that didn't seem to make any sense.

That's what I expect will happen. The Fed will be ready with their "buying across the yield curve" and all the other well planned defenses, but the data will be confusing, contradictory and rushing at them in torrents. They will look at the wrong data, interpret it the wrong way, and do the wrong things, for that time, although the right things for an earlier time.

In that kind of environment there may be periods where the pricing of many securities and currencies may be unknowable. If that happens it will instill the kind of fear that will tend to drive money into safe havens like gold. But! They will sort it out, and the time to sell gold will be when the chaos is at its peak and no one seems to know what they are doing.

Again, just a carefully developed hunch.

[Spartacus]

Re: Negative "Positive Feedback Loop" of Employment and Housing

Just spitballing an idea --

How about some kind of debt amnesty structured to not hurt the banks? Maybe forgive mortgages, and give each bank an electronic deposit so the bank loses nothing to bad loans.

This would leave housing prices at a "permanently high plateau".

It has not been done in recent history but has been done.

What good will more broad-money bucks do me if there are no rising asset classes to place them into?

How about all assets, not just targeted industries? (this has been happened to some extent already, with bonds, stocks, commodities, real estate ALL rising in tandem for several years.

The only conceivable alternative to prop up the financial economy is, as you suggested, to print money to buy the assets directly (plunge protection); but this is obviously real-inflationary. Hyper-inflationary, I'd bet.

With a debt amnesty neither the FED nor the government buy anything, but it would be definitely be inflationary.

They've really gotten themselves into a mess. If they'd have stopped after the initial stock market deflation and enacted fundamental capital/banking reform, we could have truly had a soft landing. But now, as you point out, the inflated assets are more widely-held, and there is extensive cross-over into the real economy. Now they can't just deflate the financial economy: they have to inflate the real one.

[EJ]

Re: Negative "Positive Feedback Loop" of Employment and Housing

It does not seem to me that the Fed can "liquify" the system any more than it has. This won't work on the down side of a financial sector bubble. What good will more broad-money bucks do me if there are no rising asset classes to place them into?

The only conceivable alternative to prop up the financial economy is, as you suggested, to print money to buy the assets directly (plunge protection); but this is obviously real-inflationary. Hyper-inflationary, I'd bet.

They've really gotten themselves into a mess. If they'd have stopped after the initial stock market deflation and enacted fundamental capital/banking reform, we could have truly had a soft landing. But now, as you point out, the inflated assets are more widely-held, and there is extensive cross-over into the real economy. Now they can't just deflate the financial economy: they have to inflate the real one.

Ben's talked about "buying across the yield curve" and other neat tricks that he believes are wonderous tools available to the modern central banker in the crisis the he appears to expect, else why keep making speeches about it? The central banker doth protest too much?

Anyway, Arthur Burns also had these tools available to him. But before he had a chance to use them, my Dad went out and bought a bunch of these Mexican 50 Peso coins. I saved three that I inherited in the early 1990s.

He bought the coins in early 1973. Note the price on the package: $79 ($361 in 2006 dollars). By coincidence, just looked at the buy price today: $779 ($170 in 1973 dollars).

Now if he'd sold at the monthly average price of around $700 ($3,200 in 2006 dollars) in 1980, that'd be a 10x return in seven years. But he didn't. He wasn't expecting Paul Volcker to come along and put the hammer down, followed by Greenspan's faux-gold standard.

Morals of the story:
1) Yes, Ben, the printing press works! Will it work this well again?
2) Gold is still cheap, trading at about 20% of its previous peak price.
3) After the next gold bubble pops, don't forget to sell!

EJ

[akrowne]

Re: Eric, are Gold and Silver still in your good books?

Gold bugs hate it when I say this, but gold was only ever "money" because central banks said it was. Cigarettes are "money" if you're in prison, candy bars if you're in a war zone. Money is anything which in its time and place is agreed upon by those who exchange goods and services with each other as 1) a means of exchange and 2) a store of value.

Gold is still "money" in the monetary sense, by proxy, because central banks aren't confident enough in their global fiat money sytem to sell off their gold reserves. If it has no monetary value, why not just sell it? They've had 30 years to do so. What is each central bank worried about? An event that causes them to need to act unilaterally and nationalistically, just as the US always has in the past. Except the world is not as US centric as it used to be.

I agree with pretty much every thing else you said, but I have to pick at the gold analysis =)

I think history clearly shows that gold had a monetary status prior to central banks. Gold has always been rare, non-perishable, and desireable for its decorative qualities. Central banks did not supply any of these properties.

Gold was used as a currency before banks. It continued during the rise of modern banks because private, competitive banks had a limited ability to create "funny money". Command regimes that minted their own coin, by contrast, have had a sorry history of debasing precious-metal currency in opposition to popular sentiment--not the reverse (propping up its value).

Modern central banks have been a different beast from private, competitive banking, and in fact are just a throwback to the command monetary regimes of old. This is because the factor of competition for the robustness and solvency of the monetary base has been removed. Gold in a fractional reserve system is a de facto debased currency; this is an effective dilution and distortion of the popular support for gold's value--just like in the empires of old.

Even worse, in the US during the depression, there was no domestic free market for gold (it was confiscated), so one cannot really argue that the Fed was saying much of anything about its value. There was no convertability of reserve notes to gold, except in a tiny, rigged market between nations.

In this sense, yes, the value of something as "universal" as gold can be commanded up or down by modern central banks, but this doesn't appear to be either a permanent or robust intervention. Really this is just like any other intervention in a market which is driven by supply and demand fundamentals that are disliked by the regime in power; effective for a while but futile and destructive in the long run.

As for what happens in a Ka-Poom style event, the temporary and abrupt scarcity of money which can be used to buy gold in the 'Ka' phase will certainly lower its price, all other things equal. But in the 'Poom' phase, assuming a free market, the opposite should occur, quite dramatically. We never had this free market after the depression--at least not until after the mid-70s, and we saw what happened then (nor did we have a 'Poom' right after the depression).

What is interesting to me about the current 'Ka-Poom' is that gold is much more of a financial economy animal now, due to futures and ETFs and other financial instruments. This means it is more vulnerable to the 'Ka' deflation and deleveraging; which explains its "collapse" from the highs of May. But it has held out surprisingly, suggesting to me that strong 'Poom' fundamentals remain beneath the surface; central banks or not.

[akrowne]

Re: Negative "Positive Feedback Loop" of Employment and Housing

It does not seem to me that the Fed can "liquify" the system any more than it has. This won't work on the down side of a financial sector bubble. What good will more broad-money bucks do me if there are no rising asset classes to place them into?

The only conceivable alternative to prop up the financial economy is, as you suggested, to print money to buy the assets directly (plunge protection); but this is obviously real-inflationary. Hyper-inflationary, I'd bet.

They've really gotten themselves into a mess. If they'd have stopped after the initial stock market deflation and enacted fundamental capital/banking reform, we could have truly had a soft landing. But now, as you point out, the inflated assets are more widely-held, and there is extensive cross-over into the real economy. Now they can't just deflate the financial economy: they have to inflate the real one.

[jk]

Re: Negative "Positive Feedback Loop" of Employment and Housing

i think there are too many variable to be able to choose a "best" investment, and that the best we can do is to choose investments compatible with what we think are the several most likely scenarios. in a truly deflationary environment your best investment is long-dated zero coupon tbonds. but as ej has pointed out, the government could in theory play with maturities of already issued securities and thus severely impact that investment. maybe gold holds its value even in the face of deflation because so many of us expect the reflex reaction to produce inflation. maybe gold and bonds both tank and we want to hold cash. does the dollar rise in a flight to traditional safety, so we hold our cash in dollars? or does the dollar tank in anticipation of the inflation to come, and our cash should be in other currencies? in long bonds in other currencies?

so, for myself anyway, i have a variety of investments that will perform well in a variety of environments, and i have my fingers crossed that i've structured them in a way that my gains will outweigh my losses, come what may. we'll see.

[hayfield]

Re: Negative "Positive Feedback Loop" of Employment and Housing

ka

Does that make PM a buy now, because they do the least worst in a deflationary environment?

poom

Or after the ka, because deflated dollars buy more at the turning point? And in the mean time load up on T-Notes while interest rates plummet?

Seems an impossible feat to get the timing right.

[jk]

Re: Negative "Positive Feedback Loop" of Employment and Housing

Prechter also said that after the initial deflation (NOW)

ka

that gold will be the ONLY asset to own.

poom

[Charles Mackay]

Re: Negative "Positive Feedback Loop" of Employment and Housing

Quote:

Originally Posted by Spartacus What do you make of Prechter's contention that in the great depression the only reason Gold and Silver held their price levels was because of government intervention? Initially both Gold and Silver prices fell, until the US Federal Government put price floors on them.

Prechter also said that after the initial deflation (NOW) that gold will be the ONLY asset to own. I'm not a Prechter fan but I've looked around and don't see anything else. Remember that a great percentage of stocks will go to zero, many if not most bonds, munis, mortgage backed securites, money market funds, etc. go to zero, banks fail and your checking account goes to zero. Who ya gonna call? Gold. It's hard to transport a million dollars in corn or soybeans when you're flleeing to Canada or Australia.

[Charles Mackay]

Re: Eric, are Gold and Silver still in your good books?

What do you make of Prechter's contention that in the great depression the only reason Gold and Silver held their price levels was because of government intervention?

Initially both Gold and Silver prices fell, until the US Federal Government put price floors on them.

Prechter also said that after the initial deflation (NOW) that gold will be the ONLY asset to own. I'm not a Prechter fan but I've looked around and don't see anything else. Remember that a great percentage of stocks will go to zero, many if not most bonds, munis, mortgage backed securites, money market funds, etc. go to zero, banks fail and your checking account goes to zero. Who ya gonna call? Gold. It's hard to transport a million dollars in corn or soybeans when you're flleeing to Canada or Australia.

[jk]

Re: Negative "Positive Feedback Loop" of Employment and Housing

i have to agree and congratulate you, eric, on the quality of the dialogue here. i've been impressed again and again, with the new and knowledgable people contributing.

[EJ]

Re: Negative "Positive Feedback Loop" of Employment and Housing

the arms adjust to short rates [not the shortest, but short]. so the boys in the yen trade get warnings and joe sixpack is told to finance with an arm?

yep

i have heard of forced conversions of short bonds into longer ones. but i wonder if that could happen today without making things even worse. we have huge edifices of hedges built on the price of the tbond - i don't see how they pull that kind of move in bonds without nationalizing fannie, freddie and just about every big investment and commercial bank. otherwise all those institutions go broke when the bond price discontinuously and drastically resets. doesn't seem likely.

Takes a certain amount of imagination to guess at what they're likely to do, but not too much imagination.

I honestly don't know, and neither does anyone else. All we can do is list possibilties, assign probabilities, place our bets and pray. As usual, proper diversification and a willingness to move quickly out of one position and into another when a trend change is in the offing are key. As long as we keep the quality of dialogue we have going on here at iTulip through this period, I don't see why we have much to worry about. We'll know.

[jk]

Re: Eric, are Gold and Silver still in your good books?

What is each central bank worried about? An event that causes them to need to act unilaterally and nationalistically, just as the US always has in the past. Except the world is not as US centric as it used to be....

Then confidence in the dollar as both 1) a means of exchange and 2) a store of value may quite suddenly decline, as the pound sterling did in the 1930s.

To hedge this risk, for insurance (not to get rich), I do the same thing the central banks do: own some gold, and also silver and platinum for diversification.

i can see foreign cb's "diversifying" away from the dollar over time. it's hard for me to imagine them engaging in some more precipitate action. yes, the world is not as u.s. centric as it used to be, but the dollar is embedded in transactions and asset values and savings around the world. i think the consequences of rapid action might be worse than the cure. what do you picture the foreign cb's doing? none of them want a strong currency. isn't it going to turn into a race for the bottom, at least until foreign [especially chinese] domestic markets grow and mature?