From McHugh
Friday's internals were weak, in spite of being a mixed market. The NASDAQ 100 had a huge price move up, but a significant chunk of the price gain came from one stock, Google. Google rose $60.52 per share, or 11.10 percent, in one day, Friday. Google is one of those stocks that a market manipulator can buy to move an index in the hopes it starts bandwagon buying. During the 2003 and 2006 rallies, we saw MMM move the Industrials with bizarre isolated rising price days. At the time, it appeared to us a market manipulator was moving the Industrials higher with 3M purchases. From time to time we see concerted efforts to push markets higher. Now is one of those times. But each time this happens, it causes the subsequent decline to be worse than would otherwise have been the case, like stretching a rubber band too far. The snapback is nasty. Deep pockets can only delay the inevitable. They cannot stop it. Quantitative Easing talk is raising expectations for liquidity infusions that people think will seep into stock markets. Hedge funds are buying stocks ahead of the actual Quantitative Easing from the Fed. QE2 is simply a fancy name for the Federal Reserve printing U.S. Dollars and buying fixed income securities from large Wall Street firms, buying junk bonds, corporate bonds, mortgage backed securities or Treasuries. It is essentially a fraud on U.S. Dollar holders, is a fraud on the taxpaying U.S. Consumer and Small Business, a fraud on the working person who has to get his money through hard labor. We will discuss this further later, and why this policy will destroy what is left of this fragile economy, and will eventually help drive stock market values down toward zero, and drive the U.S. Dollar down toward 40ish. QE2 is wonderful for large Wall Street firms' short-term profits. They love it. Imagine having a business where the Federal Reserve is interested in helping you make as much money as possible at the expense of everyone else? That is QE2.
We learned Friday that the U.S. Federal Deficit for the Fiscal Year Ending September 30th, 2010, was $1.3 trillion. With a total Federal Budget of $3.5 trillion, this means that for every dollar spent by the Federal Government, they had to borrow 37 cents to cover that expense. Can you imagine running your household or small business like that? You would go bankrupt in short order.
Quantitative Easing will some day be looked back upon as we now look at healing the sick through bleeding back in the 1700s. It is terrible economic policy, in fact should be considered criminal activity. Criminal for many reasons, such as debasing the value of the Dollar, but more importantly because it will be the final nail that destroys our economy. Wall Street is the key beneficiary. Households (consumers) which account for 70 percent of GDP, and small businesses, which account for 70 percent of employment, will not benefit from this fraudulent activity by the Federal Reserve. Where on earth is it right for someone to print trillions of Dollars out of thin air and then buy legitimate legally binding debt instruments in exchange for this printed paper? Anyone else doing this would be arrested and thrown in jail, with the key tossed into the deep blue sea.
But forgetting that this is probably a criminal act, and assuming that it is legally acceptable because the Central Planners enact legislation to permit QE2, let's explore why it is a fraud on pretty much everyone except the sellers of the fixed income securities the Fed will be buying, primarily mega Wall Street firms, surrogates for the president's Working Group (the Plunge Protection Team).
Bernanke suggested in his speech in Boston Friday on the subject of QE2, that he is justified in doing this to raise the inflation rate, which he believes is too low, and to increase employment. His economics are dead wrong. He believes it is perfectly appropriate to print trillions of dollars of U.S. Federal Reserve notes (Dollars) out of thin air, and then send this money from the Fed's print shop across the invisible wall that separates the real economy from the non-economy (the Fed) to the lucky recipients of this cash. Here is the problem: This transfer of printed cash for securities in the market are normally known as open market operations, and the point of this exercise is to lower interest rates in the market to spur lending and filter cash through Wall Street intermediaries to banks to borrowers which would stimulate the economy and multiply the money supply in the market. However, short-term interest rates are already zero, and long-term interest rates are at historic lows. So QE2 will not reduce interest rates. Therefore it will not increase borrowing. Therefore it will not multiply the money supply or spur spending, ergo it will not improve GDP, will not help households or small businesses. The cash will simply move from the Fed to Wall Street where the mega banks can then leverage their investing and trading activities which will improve their short-term profits. There will be no trickle down benefits to households or small businesses. Without benefits to households or small businesses, there will be no improvement in spending (GDP) or employment.
What will result from QE2 is the devaluation of the U.S. Dollar as there will be too many Dollars floating around, in relation to hard assets such as precious metals, and foreign currencies. This reduces the purchasing power of Dollars, and reduces the value of cash in bank accounts. In other words, the consumer gets hurt.
The only way QE2 makes any sense at all is if it is conducted in such a way that the cash being printed by the Fed finds its way directly into the hands of households and small businesses, instead of Wall Street. The only way for this to happen is if newly issued debt from the U.S. Treasury is sold to the Fed for newly printed Dollars, and then the trillions of QE2 Dollars sent to the Treasury from the Fed are sent directly to U.S. Households in the form of a massive income tax rebate, and tax cut, with a minimum amount of $50,000 rebated to every household, since many good folks did not have jobs over the past few years to receive rebated taxes. Then half the income tax rebates, which would be ideally two years worth, would be required to pay down debt, with the other half available to be used at households' discretion. The result would be an immediate improvement in household and bank balance sheets, and an increase in comsumer spending (GDP). This would increase small business revenue, which would increase hiring, which would result in an increase in demand for large firms' products and services, which would mean more investment banking business for Wall Street. The economy would grow, increasing the overall pie for all to share and prosper, with a resultant corresponding desirable modest level of inflation. Local, State and Federal governments would benefit immensely as they get an increase in tax revenues from the trickle up economic growth, capturing taxes at every level of spending, which can be used to reduce government deficits and debt. Stock Markets would rise as corporate revenues and profits rise.
If the intent of QE2 fails to include the household, it should not be allowed to happen. Congress must put a stop to QE2 immediately, and require a full explanation of the intended program before Bernanke destroys our economy. There should be an open debate in Congress on the merits of QE2, with testimony from all interested parties, in front of television cameras, for the American public to study before QE2 is effectuated. This is not something the Fed should conduct in secret. This is new turf, new territory for the Fed, and warrants careful scrutiny. The Justice Department needs to study if in fact the Fed is legally empowered to conduct QE2. This is serious stuff, an intentional devaluation of the U.S. Dollar, and thus needs to be treated as such. Intelligent, thoughtful contemplation is essential in an open public forum. Households and small businesses need to be able to weigh in by calling their congressional representatives before QE2 happens. QE2 should require an act of Congress. The Fed should not be allowed to do this on their own.
Unfortunately, the language of the markets, price patterns and indicators, have been warning for months that the U.S. Dollar is headed to 40ish (it knew QE2 was coming), and is telling us the stock market will react very badly once QE2 starts.
It does not look like there is any stopping QE2. The Central Planners are convinced that the more they do, the more control they take, the more they couch their activities with terminology that makes it impossible for the average Joe and Mary to understand what they are doing, the more they involve mega Wall Street firms in their fixes, the better. It is becoming very difficult to know if the Central Planners are simply misguided in their policies, that their intentions are good, that they really care about households and small businesses and the economy, or is this all an intentional game to benefit only the few large and powerful Wall Street banks, to build an oligarchy of Centralized power by design. That is for those who can figure out the schemes to decide for themselves.
The market's language, technical analysis, suggests that regardless of intention, mistakes will be conducted, and the worst will occur.
This weekend we see that the Bearish Divergences between stock prices and the 10 day average of Advancers/Decliners are worsening, extending, which is a leading indicator warning that a nasty stock market decline, albeit delayed, is coming.
We got a new Sell Signal in the VIX on Wednesday, as the VIX closed back inside its upper and lower Bollinger Bands Wednesday, and remains in effect this weekend. Sell Signals in the VIX have been very reliable and led to sharp declines over the past three years, however we did not get a sharp decline after September 7th, 2010's VIX Sell. For two consecutive VIX Sell Signals to fail in a row would be extremely rare, so the odds are that today's Sell Signal will lead to a sharp decline, starting sometime over the next week. Sometimes VIX Sell Signals come early. We show charts of these Sell Signals over the past three years and the subsequent declines on pages 10 through 13 in this weekend's newsletter to subscribers.
Both Gold and the HUI Mining Stocks Index hit new All-time Record Highs Thursday, October 14th, 2010, great for our Conservative Portfolio.
technicalindicatorindex.com
http://www.technicalindicatorindex.com/
Showing posts with label inflation. Show all posts
Showing posts with label inflation. Show all posts
Saturday, October 16, 2010
Monday, June 28, 2010
RBS tells clients to prepare for 'monster' money-printing by the Federal Reserve - Telegraph
Hey! Conventional investment advisors are now warning us....Central Banks will be printing money. What have you done to get ready? Personally, it looks like first a collapse (debt deflation/depression) follow quickly by government printing. Economies and finances will be in a mess.
RBS tells clients to prepare for 'monster' money-printing by the Federal Reserve - Telegraph
RBS tells clients to prepare for 'monster' money-printing by the Federal Reserve - Telegraph
Sunday, August 16, 2009
Saturday, August 1, 2009
The Great Reflation Experiment
From John Mauldin - July 31, 2009
By Tony Boeckh and Rob Boeckh
The Crash of 2008/9 should be seen as yet another consequence of long-term, persistent US inflationary policies. Inflation doesn't stand still. It tends to establish a self-reinforcing cycle that accelerates until the excesses in money and credit become so extreme that a correction is triggered. The bigger the inflation, the bigger the correction. Once a dependency on credit expansion is well established, correcting the underlying imbalances becomes extremely difficult. Reflation has occurred after each major correction, and this one is proving no exception. Return to discipline in the current environment would be too painful and dangerous. Once on the financial roller coaster, it is very hard to get off. Moreover, the oscillations between peaks and valleys become increasingly large and unstable.
Policymakers, money managers, and most forecasters have argued that the crash was a "black swan" event, meaning that it had an extremely low probability of occurrence. That is grossly misleading, as it implies that the crash was so far beyond the realm of normal probabilities that it was unreasonable to expect anyone to have foreseen it. That argument has been used to justify the widespread complacency that prevailed in the years leading up to the crash. Policymakers are still failing to recognize the systemic causes of the crash and seem to believe that enhanced regulation will prevent history from repeating. While it is true that regulators were asleep at the switch or looking the other way, they were not the cause.
The Debt Super Cycle
The real culprit is the US debt super cycle, which has operated for decades, mostly in a remarkably benign manner.
Link to article
By Tony Boeckh and Rob Boeckh
The Crash of 2008/9 should be seen as yet another consequence of long-term, persistent US inflationary policies. Inflation doesn't stand still. It tends to establish a self-reinforcing cycle that accelerates until the excesses in money and credit become so extreme that a correction is triggered. The bigger the inflation, the bigger the correction. Once a dependency on credit expansion is well established, correcting the underlying imbalances becomes extremely difficult. Reflation has occurred after each major correction, and this one is proving no exception. Return to discipline in the current environment would be too painful and dangerous. Once on the financial roller coaster, it is very hard to get off. Moreover, the oscillations between peaks and valleys become increasingly large and unstable.
Policymakers, money managers, and most forecasters have argued that the crash was a "black swan" event, meaning that it had an extremely low probability of occurrence. That is grossly misleading, as it implies that the crash was so far beyond the realm of normal probabilities that it was unreasonable to expect anyone to have foreseen it. That argument has been used to justify the widespread complacency that prevailed in the years leading up to the crash. Policymakers are still failing to recognize the systemic causes of the crash and seem to believe that enhanced regulation will prevent history from repeating. While it is true that regulators were asleep at the switch or looking the other way, they were not the cause.
The Debt Super Cycle
The real culprit is the US debt super cycle, which has operated for decades, mostly in a remarkably benign manner.
Link to article
Wednesday, June 10, 2009
Tuesday, June 9, 2009
History lesson for economists in thrall to Keynes
Very good points by Niall Ferguson regarding why interest rates will be going up.
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From the FT London May 29, 2009 By Niall Ferguson May 29, 2009
On Wednesday last week, yields on 10-year US Treasuries – generally seen as the benchmark for long-term interest rates – rose above 3.73 per cent. Once upon a time that would have been considered rather low. But the financial crisis has changed all that: at the end of last year, the yield on the 10-year fell to 2.06 per cent. In other words, long-term rates have risen by 167 basis points in the space of five months. In relative terms, that represents an 81 per cent jump.
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From the FT London May 29, 2009 By Niall Ferguson May 29, 2009
On Wednesday last week, yields on 10-year US Treasuries – generally seen as the benchmark for long-term interest rates – rose above 3.73 per cent. Once upon a time that would have been considered rather low. But the financial crisis has changed all that: at the end of last year, the yield on the 10-year fell to 2.06 per cent. In other words, long-term rates have risen by 167 basis points in the space of five months. In relative terms, that represents an 81 per cent jump.
Most commentators were unnerved by this development, coinciding as it did with warnings about the fiscal health of the US. For me, however, it was good news. For it settled a rather public argument between me and the Princeton economist Paul Krugman.
Wednesday, June 3, 2009
Julian Robertson's Steepener Swap Play
From Market Folly - Short Treasuries and Bonds, inflation is coming. But not now, there has been a huge drop in bond prices eg 25% ytd 2009. They should be finally due for a correction.
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Simply put, Julian Robertson is the definition of a hedge fund legend. And, his success is noted by the fortune he has amassed as he now graces the Forbes' billionaire list. He has pioneered a successful investment methodology, he has generated outstanding returns at his famous hedge fund Tiger Management, and his influence has sprouted some of the most successful modern day hedge funds in the form of the 'Tiger Cubs.' And, most importantly, he predicted the financial crisis two and a half years ago in an interview with Value Investor Insight. When he talks, you listen.....
The sudden and rapid decline is most likely due for a correction and we do not feel that the current time is ideal to initiate a position in shorting treasuries. We would look for any sign of a rebound before putting on a new short position. That said, we still feel the move in treasuries will take many years to fully play out and this is a very long-term inflationary bet. While short-term moves like the one we've seen this year are nice, things could take much longer to play out than people realize. We consider the publication of our post on this topic to be a contrarian indicator. After all, when there are headlines saying for you to get into something after a big move has already taken place, it's time to at least take some profits. So, place your bets with caution, as you'll have plenty of time before inflation truly rears its ugly head.
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Simply put, Julian Robertson is the definition of a hedge fund legend. And, his success is noted by the fortune he has amassed as he now graces the Forbes' billionaire list. He has pioneered a successful investment methodology, he has generated outstanding returns at his famous hedge fund Tiger Management, and his influence has sprouted some of the most successful modern day hedge funds in the form of the 'Tiger Cubs.' And, most importantly, he predicted the financial crisis two and a half years ago in an interview with Value Investor Insight. When he talks, you listen.....
The sudden and rapid decline is most likely due for a correction and we do not feel that the current time is ideal to initiate a position in shorting treasuries. We would look for any sign of a rebound before putting on a new short position. That said, we still feel the move in treasuries will take many years to fully play out and this is a very long-term inflationary bet. While short-term moves like the one we've seen this year are nice, things could take much longer to play out than people realize. We consider the publication of our post on this topic to be a contrarian indicator. After all, when there are headlines saying for you to get into something after a big move has already taken place, it's time to at least take some profits. So, place your bets with caution, as you'll have plenty of time before inflation truly rears its ugly head.
Wednesday, May 27, 2009
U.S. Inflation to Approach Zimbabwe Level, Faber Says
I do not see the US (or other countries) prepared to do what they should be doing. The political leaders do not have the will, and given what we have seen in the UK and US, the leaders can not be trusted to do what is right. I have to agree with Marc Faber to an extent.....there is lots of inflation risks. The bond markets and currency markets are agreeing.
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May 27 (Bloomberg) -- The U.S. economy will enter “hyperinflation” approaching the levels in Zimbabwe because the Federal Reserve will be reluctant to raise interest rates, investor Marc Faber said.
Tuesday, May 26, 2009
...As Fed Fights The Last Depression Is It Losing The Inflation Battle?
By David Cribbin
General Bernanke and his Federal Reserve now find themselves hip deep in the time honored military tradition of fighting the last war, and as with all armies who fight the last war General Bernanke is in danger of losing his current battle with inflation. While fighting a deflation with an increase in the money supply is a correct policy action, seeing a deflation where there is none, the Fed Chairman reveals that he has read his history of the Great Depression and learned the wrong lessons from it.
This problem of seeing falling prices as deflation and not the result of economic contraction can't be helped as long as he views events through the lens of a Keynesian Economic Model. Keynesians see only inflation and deflation. In their economic world view they don't grasp the differences between contraction and deflation, nor expansion and inflation .
The problem he faces is similar to that of a fireman who doesn't understand the difference between the paper fire in a kitchen trash can and the grease fire on a stove. Dousing both with water, he puts one out but intensifies the other.
Had the economy actually been in a deflation, the extra liquidity the Fed added would have been the correct monetary lever to bring relief . The problem for the Fed was that we were not in a deflation, but a contraction, which can also be marked by falling prices, but will not be fixed by additional monetary ease. As a result, even with the Fed's massive expansion of it's balance sheet, prices continued to fall.
The sharp contraction of the economy, ignited by a breakdown of the loan securitization market, helped to cause falling prices. The financial hardship of falling home and securities prices, while painful to many, was providing the economic cure to the recession by once again rationalizing market prices. This, in turn, would bring private capital back to the markets in search of newly created value. The Fed, in trying to prevent the deflation that wasn't, by injecting additional liquidity into markets that didn't need it, took exactly the wrong course of action. The Fed's misstep is resulting in a fanning of the sparks of a new inflation that, along with the recovery, is just now getting underway.
As the economy slowly continues to show signs of a recovery, the Fed needs to quickly do an about face and withdraw it's monetary surge, or the battle to tame inflation will be long and hard fought, but ultimately a losing one. The Federal Reserve should then play it's part in securing our economic future by once again fixing the value of the dollar,thereby eliminating the risk of inflation and assuring economic actors that the profit negotiated in today's contracts will not be diminished by the hidden tax of inflation. Economic growth and a return to a sound currency would unwind a lot of the negative effects of the increased liquidity the Fed has produced.
What was, and is still needed, are incentives to encourage risk taking by investors and entrepreneurs. Increasing the after tax returns to capital for successful risk takers is the road to an expanding economy that will create real jobs in the private sector. Economic expansion, along with the growing profits it produces, would also provide the additional revenue the Treasury seeks. Instead, we hear talk of higher taxes, closing loopholes, and hiring additional IRS agents to beef up enforcement . None of these are pro-growth policies. Unfortunately, pro-growth incentives will probably not be forthcoming from this Congress, as Government is firmly stuck in the muddied Keynesian view that the economy is suffering from a "shortfall in aggregate demand", which in their construct can only be addressed by additional government spending when the private sector retreats.
My guess is that when the economic history of this period is written, the Feds policy of fighting a contraction with monetary stimulus, coupled with the unusually large government interventions in just about every aspect of the economy, will show that it actually resulted in prolonging the depth and breadth of this recession .
General Bernanke and his Federal Reserve now find themselves hip deep in the time honored military tradition of fighting the last war, and as with all armies who fight the last war General Bernanke is in danger of losing his current battle with inflation. While fighting a deflation with an increase in the money supply is a correct policy action, seeing a deflation where there is none, the Fed Chairman reveals that he has read his history of the Great Depression and learned the wrong lessons from it.
This problem of seeing falling prices as deflation and not the result of economic contraction can't be helped as long as he views events through the lens of a Keynesian Economic Model. Keynesians see only inflation and deflation. In their economic world view they don't grasp the differences between contraction and deflation, nor expansion and inflation .
The problem he faces is similar to that of a fireman who doesn't understand the difference between the paper fire in a kitchen trash can and the grease fire on a stove. Dousing both with water, he puts one out but intensifies the other.
Had the economy actually been in a deflation, the extra liquidity the Fed added would have been the correct monetary lever to bring relief . The problem for the Fed was that we were not in a deflation, but a contraction, which can also be marked by falling prices, but will not be fixed by additional monetary ease. As a result, even with the Fed's massive expansion of it's balance sheet, prices continued to fall.
The sharp contraction of the economy, ignited by a breakdown of the loan securitization market, helped to cause falling prices. The financial hardship of falling home and securities prices, while painful to many, was providing the economic cure to the recession by once again rationalizing market prices. This, in turn, would bring private capital back to the markets in search of newly created value. The Fed, in trying to prevent the deflation that wasn't, by injecting additional liquidity into markets that didn't need it, took exactly the wrong course of action. The Fed's misstep is resulting in a fanning of the sparks of a new inflation that, along with the recovery, is just now getting underway.
As the economy slowly continues to show signs of a recovery, the Fed needs to quickly do an about face and withdraw it's monetary surge, or the battle to tame inflation will be long and hard fought, but ultimately a losing one. The Federal Reserve should then play it's part in securing our economic future by once again fixing the value of the dollar,thereby eliminating the risk of inflation and assuring economic actors that the profit negotiated in today's contracts will not be diminished by the hidden tax of inflation. Economic growth and a return to a sound currency would unwind a lot of the negative effects of the increased liquidity the Fed has produced.
What was, and is still needed, are incentives to encourage risk taking by investors and entrepreneurs. Increasing the after tax returns to capital for successful risk takers is the road to an expanding economy that will create real jobs in the private sector. Economic expansion, along with the growing profits it produces, would also provide the additional revenue the Treasury seeks. Instead, we hear talk of higher taxes, closing loopholes, and hiring additional IRS agents to beef up enforcement . None of these are pro-growth policies. Unfortunately, pro-growth incentives will probably not be forthcoming from this Congress, as Government is firmly stuck in the muddied Keynesian view that the economy is suffering from a "shortfall in aggregate demand", which in their construct can only be addressed by additional government spending when the private sector retreats.
My guess is that when the economic history of this period is written, the Feds policy of fighting a contraction with monetary stimulus, coupled with the unusually large government interventions in just about every aspect of the economy, will show that it actually resulted in prolonging the depth and breadth of this recession .
David Cribbin is as ALG News Contributor and the President of the TailWind Capital Group. His blog can be read at http://therightsideofdave.blogspot.com.
Monday, May 25, 2009
Gold bugs at last have their perfect trinity
From the UK Telegraph Will it be inflationary or deflationary and what is the direction for gold?
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China has doubled its bullion reserves and left us in no doubt that it will spend more of its $40bn monthly surplus on hard assets rather than the toxic paper of Western democracies.
...It is striking how many of those most alert to the deflation danger are either veterans of Japan's Lost Decade or close students of it: Albert Edwards at Société Générale, Russell Jones at RBC Capital, Nobel laureate Paul Krugman, the Fed's Ben Bernanke, and Athanasios Orphanides, who helped draft the Fed's study on the Japan trap. "People always thought Japan's bond yields had to rise, but they kept falling and Japan is still not really out of deflation," said Mr Edwards. Indeed, 20 years after the Nikkei peaked at over 39,000 it stands today at 9,280. Interest rates are 0.01pc. The yield on two-year state bonds is 0.34pc. Still there is not a whiff of inflation.
....America's debt-gearing has exploded, as it has in the UK and Europe. This looks awfully like Irving Fisher's "debt deflation" trap of 1933. It will be a long slog for households to bring their debt-to-wealth ratios down to manageable levels.
......Still, we think it is highly significant that both China and Russia – two of the biggest holders of foreign reserves – are both buying gold," he said.
Monday, March 30, 2009
Inside the world's biggest hedge fund
Bridewater Founder Ray Dalio had a great year last year. His fund, Pure Alpha generated a return of 14% when 70% of hedge funds lost money last year and the average fund fell 18%.
Where does Dalio think then economy is going? He call it a D-process, which is when an economy has an unsustainable high debt burden and monetary policy ceases to be effective (interest rates being close to zero) and as a result the central banks has no way to stimulate the economy. To compensate, the value of debt must be written down (depression) or the central bank must print money (inflation).
The level of debt as % of GDP in the US has skyrocketed past the previous highs last seen in the early 1930s.
Dalio's view is that stocks will get materially cheaper and that we will have to go through an important debt restructuring program; lots of assets will be going on sale and there will be a shortage of buyers.
Hedge funds will not be immune. Hedge funds are 75% correlated to the S&P.
Fortune Magazine - March 30, 2009
Where does Dalio think then economy is going? He call it a D-process, which is when an economy has an unsustainable high debt burden and monetary policy ceases to be effective (interest rates being close to zero) and as a result the central banks has no way to stimulate the economy. To compensate, the value of debt must be written down (depression) or the central bank must print money (inflation).
The level of debt as % of GDP in the US has skyrocketed past the previous highs last seen in the early 1930s.
Dalio's view is that stocks will get materially cheaper and that we will have to go through an important debt restructuring program; lots of assets will be going on sale and there will be a shortage of buyers.
Hedge funds will not be immune. Hedge funds are 75% correlated to the S&P.
Fortune Magazine - March 30, 2009
Tuesday, March 24, 2009
Inflation or Deflation? That is the Question.
I think we all recognize that we are in a time of change. The leader of the US has promised change. We are all beginning to wonder what this change will actually be. Some are now having second thoughts for voting for change. We are where we are now. And the question is where are things going.
I do think we are in for change...we have seen it start. What I am assessing is what will this change be. Will it be more of the same? I think we can easily concluded that the answer is no. We are in a major state of change...more financially, economically and politically. This change could have serious and significant affect upon us all.
I have been thinking about this for some time, concerned with the situation. The question that we all need to ask ourselves and assess is whether the change will be (1) inflationary or deflationary or (2) hyper inflation or Great Depression 2.
I reject the first option of inflationary/deflation case. We are not in a situation that we will have either moderate inflation or deflation/recession.
The current environment indicates major forces in play; with economic events that have not been seen for 50-80 years.
So what will it be? HyperInflation or the Great Depression 2? Or will all of the action by the governments be successfull and return us to the norm?
Enough for now. Post your comments...what do you think? And what do you think should be done, and what are you doing ?
I do think we are in for change...we have seen it start. What I am assessing is what will this change be. Will it be more of the same? I think we can easily concluded that the answer is no. We are in a major state of change...more financially, economically and politically. This change could have serious and significant affect upon us all.
I have been thinking about this for some time, concerned with the situation. The question that we all need to ask ourselves and assess is whether the change will be (1) inflationary or deflationary or (2) hyper inflation or Great Depression 2.
I reject the first option of inflationary/deflation case. We are not in a situation that we will have either moderate inflation or deflation/recession.
The current environment indicates major forces in play; with economic events that have not been seen for 50-80 years.
So what will it be? HyperInflation or the Great Depression 2? Or will all of the action by the governments be successfull and return us to the norm?
Enough for now. Post your comments...what do you think? And what do you think should be done, and what are you doing ?
Sunday, March 22, 2009
Economic Policy Conundrum
The world's economy is facing years of ill-begotten economic policies. The worst economic downturn in 80 years is the result of these policies. Healthy economic growth is savings based and thus is sustainable. However, the economic growth that has occurred was not based on savings and production, but was credit and policy induced. It was and is artificial and thus unsustainable.
The policies that were implemented included:
The current world's view is that the solution lies in re-inflating the assets values. The proposal is to create more debt and more demand to lift the asset values. But this was the cause of the problem! Debt-financed demand can't not be sustained indefinitely and that is why the policy is doomed to fail in the long-term.
Economic demand has to be savings driven to be sustainable.
What now the governments has recently announced that in addition to debt driven demand, that they are now will use the nuclear option....of printing money which is a debasement of the currency. That will push up asset values in nominal terms but not real; as well as pushing up costs. Inflationary environments....everyone losses.
What is needed? It is an economic Marshall Plan for the world markets and economies. It requires work, it requires sacrifice, it requires lower expectations.
I think the people want change, and are willing to go with lower growth based on real economic principles and values.
However, what is required is need real leadership, leadership on savings and reducing costs. The US Congress needs to be an example and they are failing the world. Instead they are delivering empty promises, rhetoric and phony legislation. Appalling and disappointing.
The policies that were implemented included:
- Monetary policies - these kept interest rates low (artificially) for years
- Tax policies - favour debt financing over equity
- Regulatory policy - that allowed financial institutions to mismanage their operations eg excessive leverage
- Social policy - which pushed home ownership regardless of affordability
The current world's view is that the solution lies in re-inflating the assets values. The proposal is to create more debt and more demand to lift the asset values. But this was the cause of the problem! Debt-financed demand can't not be sustained indefinitely and that is why the policy is doomed to fail in the long-term.
Economic demand has to be savings driven to be sustainable.
What now the governments has recently announced that in addition to debt driven demand, that they are now will use the nuclear option....of printing money which is a debasement of the currency. That will push up asset values in nominal terms but not real; as well as pushing up costs. Inflationary environments....everyone losses.
What is needed? It is an economic Marshall Plan for the world markets and economies. It requires work, it requires sacrifice, it requires lower expectations.
I think the people want change, and are willing to go with lower growth based on real economic principles and values.
However, what is required is need real leadership, leadership on savings and reducing costs. The US Congress needs to be an example and they are failing the world. Instead they are delivering empty promises, rhetoric and phony legislation. Appalling and disappointing.
Quant Easing: Central Banks Unleash the 'Nuclear' Option
Printing Money....Is this really the solution to the financial and economic problems?
Well, the Central Banks and Government think that is the only solution left. That is somewhat of a concern, isn't it? I do not think the people really think that is a good answer. No one wants hyper inflation; that is just a crazy environment that no one enjoys. It is a wealth destoyer.
I think we and the governments need to be honest. There are no quick fixes. We have over spent; and the debt that has been created needs to be reduced to a more reasonable level. The solution of more spending and more debt does not solve the problem.
The solution of QE or printing money, is not a real solution. It is a fraud; and it it is accepted then, the economy will suffer more.
More on QE -
Desperate times call for desperate measures. As the global “credit crunch” has grown increasingly severe, central bankers are examining the Great Depression of the 1930s for possible parallels that are relevant to today’s situation. Most worrisome, is the synchronized meltdown of the global stock markets, which had wiped-out $32-trillion of wealth, on top of another $10-trillion in losses in real estate.
Well, the Central Banks and Government think that is the only solution left. That is somewhat of a concern, isn't it? I do not think the people really think that is a good answer. No one wants hyper inflation; that is just a crazy environment that no one enjoys. It is a wealth destoyer.
I think we and the governments need to be honest. There are no quick fixes. We have over spent; and the debt that has been created needs to be reduced to a more reasonable level. The solution of more spending and more debt does not solve the problem.
The solution of QE or printing money, is not a real solution. It is a fraud; and it it is accepted then, the economy will suffer more.
More on QE -
Desperate times call for desperate measures. As the global “credit crunch” has grown increasingly severe, central bankers are examining the Great Depression of the 1930s for possible parallels that are relevant to today’s situation. Most worrisome, is the synchronized meltdown of the global stock markets, which had wiped-out $32-trillion of wealth, on top of another $10-trillion in losses in real estate.
Saturday, March 21, 2009
The US Fed Announcement March 18, 2009
On March 18, 2009, the US Fed announces its further program of devaluation of the US dollar. It plans to "purchase" a Trillion dollars of debt ($1,000,000,000,000).
Since last Fall, the Fed's lending programs have roughly doubled the size of its balance sheet, to about $1.8 trillion. The actions announced on Wednesday are likely to expand that to well over $3 trillion over the next year.
This announcement by the Fed is pretty scary. In it self, it does not look very good (link to the announcement). However, what are they seeing that makes them take this very unusal heavy action? And that is the scary part.
In reaction, the markets jumped up but then fell back, realizing that something is not right. Gold, naturally moved up on this announcement.
Since last Fall, the Fed's lending programs have roughly doubled the size of its balance sheet, to about $1.8 trillion. The actions announced on Wednesday are likely to expand that to well over $3 trillion over the next year.
This announcement by the Fed is pretty scary. In it self, it does not look very good (link to the announcement). However, what are they seeing that makes them take this very unusal heavy action? And that is the scary part.
In reaction, the markets jumped up but then fell back, realizing that something is not right. Gold, naturally moved up on this announcement.
Wednesday, March 18, 2009
Fed Ignites Markets with...
Quantitative easing (printing money). Interest rates fall, Bonds are up, Stock Markets up and of course with printing of money, Gold and Gold Stocks rocket up. Gold stocks up ~10% on the day.
Is it surprise? Think not....it was just a matter of time. We know the new US administration and direction that it is heading and what it means. So....there are no real surprises coming.
China must be real happy.
US Fed to Buy $300 Billion of Longer-Term Treasuries
Is it surprise? Think not....it was just a matter of time. We know the new US administration and direction that it is heading and what it means. So....there are no real surprises coming.
China must be real happy.
US Fed to Buy $300 Billion of Longer-Term Treasuries
Friday, March 13, 2009
Panics and Booms, a lesson from 1897
Panics and Booms, a lesson from 1897
March 11, 2009 – 4:24 pm
by Rolfe Winkler, CFA
Thanks to Patrick for an absolute gem. Earlier this week, he linked to a fantastic newspaper article written in 1902. That article actually reprinted a paper written five years previously, entitled “Panics and Booms” by L.M. Holt. When Holt wrote the paper, the economy was at the tail end of a depression. Holt argued that booms always follow busts, so folks should anticipate the return of flush times. Fast-forward five years, a new boom was in full swing, and the newspaper republished Holt’s paper as a warning that the next depression was due around 1910, give or take. The Bank Panic of 1907 arrived a bit ahead of schedule.
It’s a great read, particularly now when most observers remain conflicted about what kind of economic funk we’re in. Mr. Holt described quite clearly the economic conditions we face today, a depression created by over-indebtedness. And he offers a prescription for how to dig ourselves out: pay back debt. It’s a prescription I endorse wholeheartedly.
The paper is so good, for posterity’s sake, I have reproduced it here in full. Another reason: Irving Fisher generally gets credit for having created the “debt deflation theory of depressions,” but Holt beat him to it by 36 years. Enjoy!
“Panics and Booms”
L.M. Holt
Ever since the establishment of the human race on this planet there has been a gradual increase of population and a more rapid consumption of wealth.
Wealth is the result of labor, and without labor there can be no wealth.
Men live and pass away, but as they cannot take their wealth with them a large percentage accumulates for the benefit of their successors. Hence the wealth of the world today, per capita, is much greater than ever before, and it is continually on the increase.
The transfer of wealth, or property, from one person to another creates business. Under favorable conditions, transfers are numerous and business is brisk. Under unfavorable conditions transfers are few and business is dull.
During periods of business activity there is work for all, and this of itself makes greater business activity. During periods of business depression there is not work for all, and this of itself makes business dull and unprofitable.
The existence of either one of these conditions leads necessarily to the other. It is an impossibility for either prosperous times or depressed times to continue permanently.
This is where it starts to get good…
During prosperous times, there being work for all, all are supplied with the means of accumulating wealth, and thus all are enabled to provide themselves, and families with all the necessaries, and many of the luxuries, of life; and hence, during the prosperous times the demand for goods and property increases and soon the demand exceeds supply, and then prices advance.
This rule, which is applied to the laborer, is also applied to the business man. Prosperous times induce business men to branch out in their several lines of trade….The volume of trade being large, each gets a corresponding proportion of it. Many business men find that they can do more business than is allowed by their limited capital. They then buy on credit.
Prices are continually advancing, therefore they are able to make margins of profit not only on the capital furnished by themselves, but on the capital furnished through their credit.
This rule also applies to people dealing in real estate. The country is growing; money is easy; the times are good; business is prosperous and therefore speculation is favored. A man worth $5000 can buy four times that amount of property using his credit, and sometimes he buys ten times that amount or more. While prices are advancing he not only gets the benefits of the advance in the price of the property represented by the capital furnished by himself, but also on the capital furnished by his credit.
When prices of property and goods during a period of business depression are falling, the loss does not come on the entire property, but only on that portion of it represented by the cash capital the man has invested in it. The debt never shrinks until the real investment is all gone.
A fantastically simple description of leverage, that is, investing with borrowed money as a way to amplify potential gains at the risk of greater losses. How quaint that Holt seems impressed by “ten times” leverage. He would blush at the leverage ratios permissible today.
A quick tutorial on leverage for the unfamiliar. The more money borrowed to buy an asset, the higher the buyer’s return on equity when times are flush. If you buy a $100,000 house with only $5,000 down and the price increases to $125,000, the return on your equity investment is 400%. ($25,000 increase in price / $5,000 initial investment = 400% return). A cash basis investor who pays the full price of the house up front has a much more meager return, 25%. ($125k / $100k = 25% return). The flip side is that when prices fall, the leveraged investor sees his equity wiped out quickly. The guy who paid cash has lots of cushion.
All people in a given section of country use their credit at the same time because they are all governed by the same local conditions. Hence, there is a fictitious stimulation of prices which must come to an end. This end brings a financial depression which must necessarily follow a period of business activity.
A “fictitious stimulation of prices.” We have our own word for that: “bubble.”
When the people arrive at a point where their credit limit is reached there is necessarily a decrease in the demand for goods and property, and soon the supply becomes greater than the demand and prices begin to decline. This stops speculation. Thousands of people engaged in manufacturing or producing articles of general use are thus thrown out of employment, and this causes a still further decrease in the demand for goods and hence a further decline in prices. Those who have purchased on credit find themselves subjected to heavy losses because they are compelled to sustain the depreciation on goods they do not own—that is, goods bought on credit. Because of this decrease in valuations all are compelled to economize in order to adjust their expenses to the new order of things, they being compelled to pay off the accumulated indebtedness with the decreased income. This economy of the masses still further decreases the demand for goods and property and this still further increases the supply over the demand, and decreases the prices, throwing more people out of employment and increasing the depressed condition of business.
Fisher, eat your heart out!
The business man feels the change in conditions as well as the laborer. Doing business largely on borrowed capital he loses all the capital employed in the business, not alone on the money furnished by himself. The value of the business shrinks, but the debt remains the same or increases. Bankruptcy stares the business world in the face. The weaker go under while the stronger pull through, and sometimes make fortunes at a little later date out of the misfortunes of others.
Here is a condition of hard times. A large percentage of laboring people of the world are thrown out of employment. Every time a man stops work—stops producing—his purchasing ability is impaired, the demand for goods becomes less and prices are lowered.
During the period of depression—the debt-paying period—the people at large are forced to economize. The earning capacity of all classes has been decreased. A large percentage of people are thrown out of steady employment and wages are reduced for those who do secure labor. Some earn enough to pay expenses of living economically, while others do not and are compelled to live in part on the limited accumulation of former more prosperous years.
Holt notes that depression coincides with the period during which debt gets paid back. Economic expansion coincides with the expansion of debt, with the period during which debts are rolled over rather than paid back. [I made this point in my post on The Great American Ponzi.] The bigger the debt hole we dig for ourselves—via bailouts, stimulus, etc.,—the longer our payback period. More debt, in other words, will only exacerbate the depression.
Many business men continue in business: some are able to meet running expenses, while others prefer to lose a little each month, awaiting a return of better times rather than to lose more heavily by retiring entirely from business. Many cannot stand the pressure and quite business, forced to lose the accumulation for years.
During the years of depression, values of all kinds of property shrink. In the case of incumbered property this shrinkage falls entirely on the margin and not on the debt. Sometimes it wipes out the margin and a portion of the debt also. Sometimes the margin is so nearly wiped out that the alleged owner of the property transfers his interest in the property to the one who holds the claim against it, and another debt is paid. Sometimes the holder of the debt declines to thus take the property and releases the owner.
More on leverage. Assets “incumbered” with debt leave their owners very vulnerable. What Holt refers to as “margin” we refer to as equity. Equity, “during the years of depression,” may be substantially “wiped out.”
A person who does business on a partial credit basis, on borrowed capital, makes larger profits during periods of prosperity when the prices are advancing than he who is on a cash basis, but he sustains larger losses during periods of depression when prices are dropping.
If a man could change quickly from a credit system to a cash basis as soon as the period of prosperity closes he would be all right, but he is in debt, and the debt must be paid, and hence it is not usually practical to make the change. If it were he would not be in debt.
Gradually the surplus debts of the country are paid and the people breathe easier again. People live within their incomes and temporarily learn economical habits. Men smoke fewer and cheaper cigars and ladies purchase fewer ribbons and occasionally fix over a bonnet and dress instead of getting new ones.
A time is finally reached when people begin to get out of debt and they begin to live a little better, buy more of the necessities of life and some of the luxuries. As the number of people in such improved condition increases, trade begins to pick up, larger orders are sent to the factories, more wheels are set in motion, more operatives are employed and more people are placed in position to buy more goods, which in turn starts more mills and gives employment to still more men.
Note how the pre-existing condition for healthy economic growth is first getting out of debt.
Deficit spending won’t stimulate anything. It will just sow the seeds of an even deeper depression. The sooner we get out of debt, the better off we’ll be.
Thus the business of the country is forced into an active condition, and thus business activity increases in geometrical progression until wages reach their maximum point, factories are running to their utmost capacity, prices of all kinds of goods and all kinds of property advance, and people begin to purchase again more than they have the money to pay for—some because they want profits on increasing valuations and others simply because of extravagant ideas of living.
Money is plenty, credits are good, and the masses are good pay because all kinds of property are convertible into legal tender. Improvements, public and private, are pushed to their utmost extent, fancy prices are paid for real estate because it can be sold readily again at still more fancy prices. Individuals of limited capital hold thousands and hundreds of thousands of dollars worth of property on which only a small payment has been made. An advance of five per cent on the price of the property is an advance of 50 or 100 per cent or more on the cash investment. Another transfer is made and another soul is made happy. In short a speculative boom has struck the country again gradually but surely. This speculative boom is not the result of any movement on the part of the people or any portion of them to create a boom, but it is the result of natural laws of business and is just as certain to materialize as a good crop is sure to be the result of favorable climatic conditions.
It is not, perhaps, in order here to discuss the millionaire question or inquire into the trust combinations which threaten to disturb so seriously the business interests of the country. It is, however, safe to say that those who think during a period of business activity that such activity will always continue are just as much mistaken as are those who believe during a period of business depression that such business depression will never come to an end.
Good times will follow bad times and bad times will follow good times just as surely as darkness follows day and day follows darkness. Those periods always have followed each other and they always will.
The seeds of prosperity are sown during the periods of financial depression and the seeds of hard times are just as surely down during the period of business activity and speculative boom. There is not question as to the soundness of this conclusion. There is no question that these changes will come. The only question is—when?
At the close of a speculative boom the change comes like a thief in the night. In fact a thief in the night would be a welcome visitor to many instead of the change which puts in an appearance, but the change from a financial depression to better times comes gradually—so gradually that for months there is a difference of opinion as to whether a change for the better has actually commenced or not.
Glance for a moment over the financial history of the century just closing, and see what has been the condition of the country. During 1837 the country was in the midst of a financial panic. Again during the year 1857—twenty years later—there was another panic. In 1837 a financial crisis struck the eastern states and the great banking house of Jay Cook & Co. was found among the financial wrecks scattered throughout that section of the country. In 1875 that same panic reached the Pacific Coast, closing the doors of the Bank of California of San Francisco, together with many other banking institutions, including the then popular banking house of Temple and Workman in our own Los Angeles—a bank that failed for over a million dollars and never paid a cent on the dollar to the many unfortunate depositors.
In 1893 the next panic struck the United States after having wrecked so many banking institutions in South America, Australia, and other parts of the world.
During the year 1886, when the late speculative boom was getting under good headway in Southern California, Hon. D.C. Reed, now mayor of the City of San Diego, gave a banquet at the Horton House in that city, to which he invited business men from all points in Southern California. In response to the sentiment, “The Prosperity of Southern California,” the writer, among others, briefly reviewed many of the principles herein laid down and following the line of thought that waves of prosperity and depression follow each other with more or less regularity, predicted that somewhere between the years of 1892 and 1895 this country would again enter upon a period of business depression that would be very severe on the business activity of the country. The local speculative boom of 1886-7 broke long before this predicted period, but the universal panic which swept over the civilized world did not appear until the time predicted—1893. It appears to require, under present business conditions, from eighteen to twenty years for the country to pass through a complete cycle from one business depression to another.
After the panic of 1875 it took the people of Southern California five years to get ready for business again in 1880. A similar period after the panic of 1893 ought to place this country again in line for business activity. The panic of 1893 was more widespread in its operations that that of 1875; but locally, it was not so severe, as comparatively little money was lost by depositors by falling banks in Southern California four years ago, whereas in 1875 the loss was heavy.
Again so far as Southern California is concerned the past five years has dealt very kindly with our people. Southern California increased its population from 200,000 in 1890 to over 300,000 in 1896. Los Angeles city has increased in population from 50,000 in 1890 to 103,000 in 1897, more than doubled.
In actual wealth, Southern California has kept pace with the increase of population, although on account of the business depression of the country and the decrease in valuation all over the world, this increase in wealth is not so apparent. With the extraordinary increase in population and wealth in Los Angeles city during the past seven years, nothing short of a financial depression all over the country could have prevented that city from experiencing a speculative boom of great magnitude.
If Southern California in general and Los Angeles city in particular can make such a showing during a period of financial depression, what will be the result when the clouds roll by and prosperous times are enjoyed again throughout the country at large?
It is a difficult matter to make the people believe that our country is now entering upon another period of prosperity. Each one has a remedy for hard times. And each one sticks firmly to the proposition that better times cannot come again until his remedy has been applied. These remedies are mostly of a political nature. One man believes that a high protective tariff is all that is necessary to restore prosperity to the country, and another thinks the free coinage of silver and gold on a basis of 16 to 1 without making any suggestion to any other nation about the matter would bring good times. There is no question but the legislation on both these questions or either of them would affect the main proposition. Wise legislation will always assist in bringing prosperity, and unwise legislation will always retard the coming of better times, but no legislation, no matter what it be, can prevent the incoming tide any more than the little child on the sandy beach with its little shovel can, by piling up a ridge of sand, stay the incoming surf.
“The statement that, except for the temporary depression in prices the volume of business transacted is now larger than it was in 1892—the year of the greatest prosperity—has been questions by some. But a comparison of prices this week in the leading branches of manufacture, not only confirms that view, but shows a remarkable similarity to the course of prices in the early months of 1879, when the most wonderful advance in production and prices ever known in this or any other country was close at hand. The key of the situation is the excessive production of some goods in advance of an expected increase in demand. So, in 1879, consumption gradually gained, month by month, until suddenly it was found that the demand was greater than the possible supply. All know how prices then advanced and the most marvelous progress in the history of any country resulted within two years. Reports from all parts of the country now show that retail distribution of products is unusually large and increasing.”
This is a remarkably clear statement of the facts of the case, and is evidence from unquestionable authority that the position taken herein is correct.
Local conditions in Southern California will affect the issue here, and they appear in our favor. The building of the breakwater at San Pedro by the government will insure another transcontinental railroad from the east to Los Angeles via Utah. Then a 1 cent a pound tariff on citrus fruits, the building or more beet-sugar factories and the improvement of the vast water power of the mountain streams, and the setting of that power to work building up and enriching the country—all these and more will help along the good work.
Capitalists are now active, laying the foundations solidly for future operations in this, God’s corner of the universe; and while we would not advise people to stand still and see the salvation of the Lord, still it is pretty certain that those who stand will see it, although they will not be benefited thereby so much as they would be if they didn’t stand still.
The coming boom is not here today and it will not be here tomorrow, but he who has no faith that a period of very busy business activity, accompanied by a speculative boom is close at hand, would do well to place himself under the fostering care of a good, reliable guardian.
March 11, 2009 – 4:24 pm
by Rolfe Winkler, CFA
Thanks to Patrick for an absolute gem. Earlier this week, he linked to a fantastic newspaper article written in 1902. That article actually reprinted a paper written five years previously, entitled “Panics and Booms” by L.M. Holt. When Holt wrote the paper, the economy was at the tail end of a depression. Holt argued that booms always follow busts, so folks should anticipate the return of flush times. Fast-forward five years, a new boom was in full swing, and the newspaper republished Holt’s paper as a warning that the next depression was due around 1910, give or take. The Bank Panic of 1907 arrived a bit ahead of schedule.
It’s a great read, particularly now when most observers remain conflicted about what kind of economic funk we’re in. Mr. Holt described quite clearly the economic conditions we face today, a depression created by over-indebtedness. And he offers a prescription for how to dig ourselves out: pay back debt. It’s a prescription I endorse wholeheartedly.
The paper is so good, for posterity’s sake, I have reproduced it here in full. Another reason: Irving Fisher generally gets credit for having created the “debt deflation theory of depressions,” but Holt beat him to it by 36 years. Enjoy!
“Panics and Booms”
L.M. Holt
Ever since the establishment of the human race on this planet there has been a gradual increase of population and a more rapid consumption of wealth.
Wealth is the result of labor, and without labor there can be no wealth.
Men live and pass away, but as they cannot take their wealth with them a large percentage accumulates for the benefit of their successors. Hence the wealth of the world today, per capita, is much greater than ever before, and it is continually on the increase.
The transfer of wealth, or property, from one person to another creates business. Under favorable conditions, transfers are numerous and business is brisk. Under unfavorable conditions transfers are few and business is dull.
During periods of business activity there is work for all, and this of itself makes greater business activity. During periods of business depression there is not work for all, and this of itself makes business dull and unprofitable.
The existence of either one of these conditions leads necessarily to the other. It is an impossibility for either prosperous times or depressed times to continue permanently.
This is where it starts to get good…
During prosperous times, there being work for all, all are supplied with the means of accumulating wealth, and thus all are enabled to provide themselves, and families with all the necessaries, and many of the luxuries, of life; and hence, during the prosperous times the demand for goods and property increases and soon the demand exceeds supply, and then prices advance.
This rule, which is applied to the laborer, is also applied to the business man. Prosperous times induce business men to branch out in their several lines of trade….The volume of trade being large, each gets a corresponding proportion of it. Many business men find that they can do more business than is allowed by their limited capital. They then buy on credit.
Prices are continually advancing, therefore they are able to make margins of profit not only on the capital furnished by themselves, but on the capital furnished through their credit.
This rule also applies to people dealing in real estate. The country is growing; money is easy; the times are good; business is prosperous and therefore speculation is favored. A man worth $5000 can buy four times that amount of property using his credit, and sometimes he buys ten times that amount or more. While prices are advancing he not only gets the benefits of the advance in the price of the property represented by the capital furnished by himself, but also on the capital furnished by his credit.
When prices of property and goods during a period of business depression are falling, the loss does not come on the entire property, but only on that portion of it represented by the cash capital the man has invested in it. The debt never shrinks until the real investment is all gone.
A fantastically simple description of leverage, that is, investing with borrowed money as a way to amplify potential gains at the risk of greater losses. How quaint that Holt seems impressed by “ten times” leverage. He would blush at the leverage ratios permissible today.
A quick tutorial on leverage for the unfamiliar. The more money borrowed to buy an asset, the higher the buyer’s return on equity when times are flush. If you buy a $100,000 house with only $5,000 down and the price increases to $125,000, the return on your equity investment is 400%. ($25,000 increase in price / $5,000 initial investment = 400% return). A cash basis investor who pays the full price of the house up front has a much more meager return, 25%. ($125k / $100k = 25% return). The flip side is that when prices fall, the leveraged investor sees his equity wiped out quickly. The guy who paid cash has lots of cushion.
All people in a given section of country use their credit at the same time because they are all governed by the same local conditions. Hence, there is a fictitious stimulation of prices which must come to an end. This end brings a financial depression which must necessarily follow a period of business activity.
A “fictitious stimulation of prices.” We have our own word for that: “bubble.”
When the people arrive at a point where their credit limit is reached there is necessarily a decrease in the demand for goods and property, and soon the supply becomes greater than the demand and prices begin to decline. This stops speculation. Thousands of people engaged in manufacturing or producing articles of general use are thus thrown out of employment, and this causes a still further decrease in the demand for goods and hence a further decline in prices. Those who have purchased on credit find themselves subjected to heavy losses because they are compelled to sustain the depreciation on goods they do not own—that is, goods bought on credit. Because of this decrease in valuations all are compelled to economize in order to adjust their expenses to the new order of things, they being compelled to pay off the accumulated indebtedness with the decreased income. This economy of the masses still further decreases the demand for goods and property and this still further increases the supply over the demand, and decreases the prices, throwing more people out of employment and increasing the depressed condition of business.
Fisher, eat your heart out!
The business man feels the change in conditions as well as the laborer. Doing business largely on borrowed capital he loses all the capital employed in the business, not alone on the money furnished by himself. The value of the business shrinks, but the debt remains the same or increases. Bankruptcy stares the business world in the face. The weaker go under while the stronger pull through, and sometimes make fortunes at a little later date out of the misfortunes of others.
Here is a condition of hard times. A large percentage of laboring people of the world are thrown out of employment. Every time a man stops work—stops producing—his purchasing ability is impaired, the demand for goods becomes less and prices are lowered.
During the period of depression—the debt-paying period—the people at large are forced to economize. The earning capacity of all classes has been decreased. A large percentage of people are thrown out of steady employment and wages are reduced for those who do secure labor. Some earn enough to pay expenses of living economically, while others do not and are compelled to live in part on the limited accumulation of former more prosperous years.
Holt notes that depression coincides with the period during which debt gets paid back. Economic expansion coincides with the expansion of debt, with the period during which debts are rolled over rather than paid back. [I made this point in my post on The Great American Ponzi.] The bigger the debt hole we dig for ourselves—via bailouts, stimulus, etc.,—the longer our payback period. More debt, in other words, will only exacerbate the depression.
Many business men continue in business: some are able to meet running expenses, while others prefer to lose a little each month, awaiting a return of better times rather than to lose more heavily by retiring entirely from business. Many cannot stand the pressure and quite business, forced to lose the accumulation for years.
During the years of depression, values of all kinds of property shrink. In the case of incumbered property this shrinkage falls entirely on the margin and not on the debt. Sometimes it wipes out the margin and a portion of the debt also. Sometimes the margin is so nearly wiped out that the alleged owner of the property transfers his interest in the property to the one who holds the claim against it, and another debt is paid. Sometimes the holder of the debt declines to thus take the property and releases the owner.
More on leverage. Assets “incumbered” with debt leave their owners very vulnerable. What Holt refers to as “margin” we refer to as equity. Equity, “during the years of depression,” may be substantially “wiped out.”
A person who does business on a partial credit basis, on borrowed capital, makes larger profits during periods of prosperity when the prices are advancing than he who is on a cash basis, but he sustains larger losses during periods of depression when prices are dropping.
If a man could change quickly from a credit system to a cash basis as soon as the period of prosperity closes he would be all right, but he is in debt, and the debt must be paid, and hence it is not usually practical to make the change. If it were he would not be in debt.
Gradually the surplus debts of the country are paid and the people breathe easier again. People live within their incomes and temporarily learn economical habits. Men smoke fewer and cheaper cigars and ladies purchase fewer ribbons and occasionally fix over a bonnet and dress instead of getting new ones.
A time is finally reached when people begin to get out of debt and they begin to live a little better, buy more of the necessities of life and some of the luxuries. As the number of people in such improved condition increases, trade begins to pick up, larger orders are sent to the factories, more wheels are set in motion, more operatives are employed and more people are placed in position to buy more goods, which in turn starts more mills and gives employment to still more men.
Note how the pre-existing condition for healthy economic growth is first getting out of debt.
Deficit spending won’t stimulate anything. It will just sow the seeds of an even deeper depression. The sooner we get out of debt, the better off we’ll be.
Thus the business of the country is forced into an active condition, and thus business activity increases in geometrical progression until wages reach their maximum point, factories are running to their utmost capacity, prices of all kinds of goods and all kinds of property advance, and people begin to purchase again more than they have the money to pay for—some because they want profits on increasing valuations and others simply because of extravagant ideas of living.
Money is plenty, credits are good, and the masses are good pay because all kinds of property are convertible into legal tender. Improvements, public and private, are pushed to their utmost extent, fancy prices are paid for real estate because it can be sold readily again at still more fancy prices. Individuals of limited capital hold thousands and hundreds of thousands of dollars worth of property on which only a small payment has been made. An advance of five per cent on the price of the property is an advance of 50 or 100 per cent or more on the cash investment. Another transfer is made and another soul is made happy. In short a speculative boom has struck the country again gradually but surely. This speculative boom is not the result of any movement on the part of the people or any portion of them to create a boom, but it is the result of natural laws of business and is just as certain to materialize as a good crop is sure to be the result of favorable climatic conditions.
It is not, perhaps, in order here to discuss the millionaire question or inquire into the trust combinations which threaten to disturb so seriously the business interests of the country. It is, however, safe to say that those who think during a period of business activity that such activity will always continue are just as much mistaken as are those who believe during a period of business depression that such business depression will never come to an end.
Good times will follow bad times and bad times will follow good times just as surely as darkness follows day and day follows darkness. Those periods always have followed each other and they always will.
The seeds of prosperity are sown during the periods of financial depression and the seeds of hard times are just as surely down during the period of business activity and speculative boom. There is not question as to the soundness of this conclusion. There is no question that these changes will come. The only question is—when?
At the close of a speculative boom the change comes like a thief in the night. In fact a thief in the night would be a welcome visitor to many instead of the change which puts in an appearance, but the change from a financial depression to better times comes gradually—so gradually that for months there is a difference of opinion as to whether a change for the better has actually commenced or not.
Glance for a moment over the financial history of the century just closing, and see what has been the condition of the country. During 1837 the country was in the midst of a financial panic. Again during the year 1857—twenty years later—there was another panic. In 1837 a financial crisis struck the eastern states and the great banking house of Jay Cook & Co. was found among the financial wrecks scattered throughout that section of the country. In 1875 that same panic reached the Pacific Coast, closing the doors of the Bank of California of San Francisco, together with many other banking institutions, including the then popular banking house of Temple and Workman in our own Los Angeles—a bank that failed for over a million dollars and never paid a cent on the dollar to the many unfortunate depositors.
In 1893 the next panic struck the United States after having wrecked so many banking institutions in South America, Australia, and other parts of the world.
During the year 1886, when the late speculative boom was getting under good headway in Southern California, Hon. D.C. Reed, now mayor of the City of San Diego, gave a banquet at the Horton House in that city, to which he invited business men from all points in Southern California. In response to the sentiment, “The Prosperity of Southern California,” the writer, among others, briefly reviewed many of the principles herein laid down and following the line of thought that waves of prosperity and depression follow each other with more or less regularity, predicted that somewhere between the years of 1892 and 1895 this country would again enter upon a period of business depression that would be very severe on the business activity of the country. The local speculative boom of 1886-7 broke long before this predicted period, but the universal panic which swept over the civilized world did not appear until the time predicted—1893. It appears to require, under present business conditions, from eighteen to twenty years for the country to pass through a complete cycle from one business depression to another.
After the panic of 1875 it took the people of Southern California five years to get ready for business again in 1880. A similar period after the panic of 1893 ought to place this country again in line for business activity. The panic of 1893 was more widespread in its operations that that of 1875; but locally, it was not so severe, as comparatively little money was lost by depositors by falling banks in Southern California four years ago, whereas in 1875 the loss was heavy.
Again so far as Southern California is concerned the past five years has dealt very kindly with our people. Southern California increased its population from 200,000 in 1890 to over 300,000 in 1896. Los Angeles city has increased in population from 50,000 in 1890 to 103,000 in 1897, more than doubled.
In actual wealth, Southern California has kept pace with the increase of population, although on account of the business depression of the country and the decrease in valuation all over the world, this increase in wealth is not so apparent. With the extraordinary increase in population and wealth in Los Angeles city during the past seven years, nothing short of a financial depression all over the country could have prevented that city from experiencing a speculative boom of great magnitude.
If Southern California in general and Los Angeles city in particular can make such a showing during a period of financial depression, what will be the result when the clouds roll by and prosperous times are enjoyed again throughout the country at large?
It is a difficult matter to make the people believe that our country is now entering upon another period of prosperity. Each one has a remedy for hard times. And each one sticks firmly to the proposition that better times cannot come again until his remedy has been applied. These remedies are mostly of a political nature. One man believes that a high protective tariff is all that is necessary to restore prosperity to the country, and another thinks the free coinage of silver and gold on a basis of 16 to 1 without making any suggestion to any other nation about the matter would bring good times. There is no question but the legislation on both these questions or either of them would affect the main proposition. Wise legislation will always assist in bringing prosperity, and unwise legislation will always retard the coming of better times, but no legislation, no matter what it be, can prevent the incoming tide any more than the little child on the sandy beach with its little shovel can, by piling up a ridge of sand, stay the incoming surf.
“The statement that, except for the temporary depression in prices the volume of business transacted is now larger than it was in 1892—the year of the greatest prosperity—has been questions by some. But a comparison of prices this week in the leading branches of manufacture, not only confirms that view, but shows a remarkable similarity to the course of prices in the early months of 1879, when the most wonderful advance in production and prices ever known in this or any other country was close at hand. The key of the situation is the excessive production of some goods in advance of an expected increase in demand. So, in 1879, consumption gradually gained, month by month, until suddenly it was found that the demand was greater than the possible supply. All know how prices then advanced and the most marvelous progress in the history of any country resulted within two years. Reports from all parts of the country now show that retail distribution of products is unusually large and increasing.”
This is a remarkably clear statement of the facts of the case, and is evidence from unquestionable authority that the position taken herein is correct.
Local conditions in Southern California will affect the issue here, and they appear in our favor. The building of the breakwater at San Pedro by the government will insure another transcontinental railroad from the east to Los Angeles via Utah. Then a 1 cent a pound tariff on citrus fruits, the building or more beet-sugar factories and the improvement of the vast water power of the mountain streams, and the setting of that power to work building up and enriching the country—all these and more will help along the good work.
Capitalists are now active, laying the foundations solidly for future operations in this, God’s corner of the universe; and while we would not advise people to stand still and see the salvation of the Lord, still it is pretty certain that those who stand will see it, although they will not be benefited thereby so much as they would be if they didn’t stand still.
The coming boom is not here today and it will not be here tomorrow, but he who has no faith that a period of very busy business activity, accompanied by a speculative boom is close at hand, would do well to place himself under the fostering care of a good, reliable guardian.
Monday, March 9, 2009
Buffett says economy fell off a cliff
Warren is stating the obvious! The economy is hurting. The is the debt bubble unwinding.
High risks in future is the restart of inflation.
LR
**************
Jonathan Stempel
Monday, March 09, 2009
NEW YORK — Warren Buffett said Monday that the U.S. economy had “fallen off a cliff” and eventually would recover, although a rebound could rekindle inflation worse than experienced in the late 1970s.
Speaking on CNBC television, the 78-year-old billionaire also said the economy was mere hours away from collapse in September, when credit markets seized up, Lehman Brothers Holdings Inc. went bankrupt and insurer American International Group Inc. got its first bailout. “The world almost did come to a stop,” he said.
Mr. Buffett also called on banks to “get back to banking” and said an overwhelmingly number would “earn their way out” of the recession, even if stockholders don't go along for the ride.
“A bank that's going to go broke should be allowed to go broke,” but customers should not worry about their insured deposits, he said. Mr. Buffett said there was a “paralysis of confidence” in banks, which he called “silly” because of safeguards such as deposit insurance.
Mr. Buffett spoke nine days after telling shareholders of his Omaha, Nebraska-based insurance and investment company Berkshire Hathaway Inc. that the economy was in a “shambles” likely to persist beyond 2009.
On Monday, Mr. Buffett said the economy was experiencing “close to the worst-case” scenario, with business activity declining and unemployment rising, and that the economy “can't turn around on a dime.”
He said Americans, including himself, did not predict the severity of the decline in the housing prices, which then led to problems with securitizations, complex debt and other instruments whose value depended on home prices continuing to rise, or at least not plummet.
“It was like some kids saying the emperor has no clothes, and then after he says that, he says now that the emperor doesn't have any underwear either,” Mr. Buffett said.
Maintaining his long-term optimism, Mr. Buffett said that “five years from now, I can guarantee you that the machine will be running fine,” although he hoped it would not take that long.
“We do have the greatest economic machine that man has ever created,” he said.
But he said an economic rebound could trigger higher inflation once demand rebounds. “In economics there is no free lunch,” he said. “We are going to attempt to have a lunch that to some extent we're going to pay for later.”
Mr. Buffett also urged Democrats and Republicans in Washington to work better together, and to communicate bipartisan efforts to fix the economy to voters. “You can't expect people to unite behind you if you're trying to jam a whole bunch of things down their throat,” he said.
Mr. Buffett also said the ailing Citigroup Inc., which Berkshire does not own, would probably keep shrinking, but that depositors should not be worried.
High risks in future is the restart of inflation.
LR
**************
Jonathan Stempel
Monday, March 09, 2009
NEW YORK — Warren Buffett said Monday that the U.S. economy had “fallen off a cliff” and eventually would recover, although a rebound could rekindle inflation worse than experienced in the late 1970s.
Speaking on CNBC television, the 78-year-old billionaire also said the economy was mere hours away from collapse in September, when credit markets seized up, Lehman Brothers Holdings Inc. went bankrupt and insurer American International Group Inc. got its first bailout. “The world almost did come to a stop,” he said.
Mr. Buffett also called on banks to “get back to banking” and said an overwhelmingly number would “earn their way out” of the recession, even if stockholders don't go along for the ride.
“A bank that's going to go broke should be allowed to go broke,” but customers should not worry about their insured deposits, he said. Mr. Buffett said there was a “paralysis of confidence” in banks, which he called “silly” because of safeguards such as deposit insurance.
Mr. Buffett spoke nine days after telling shareholders of his Omaha, Nebraska-based insurance and investment company Berkshire Hathaway Inc. that the economy was in a “shambles” likely to persist beyond 2009.
On Monday, Mr. Buffett said the economy was experiencing “close to the worst-case” scenario, with business activity declining and unemployment rising, and that the economy “can't turn around on a dime.”
He said Americans, including himself, did not predict the severity of the decline in the housing prices, which then led to problems with securitizations, complex debt and other instruments whose value depended on home prices continuing to rise, or at least not plummet.
“It was like some kids saying the emperor has no clothes, and then after he says that, he says now that the emperor doesn't have any underwear either,” Mr. Buffett said.
Maintaining his long-term optimism, Mr. Buffett said that “five years from now, I can guarantee you that the machine will be running fine,” although he hoped it would not take that long.
“We do have the greatest economic machine that man has ever created,” he said.
But he said an economic rebound could trigger higher inflation once demand rebounds. “In economics there is no free lunch,” he said. “We are going to attempt to have a lunch that to some extent we're going to pay for later.”
Mr. Buffett also urged Democrats and Republicans in Washington to work better together, and to communicate bipartisan efforts to fix the economy to voters. “You can't expect people to unite behind you if you're trying to jam a whole bunch of things down their throat,” he said.
Mr. Buffett also said the ailing Citigroup Inc., which Berkshire does not own, would probably keep shrinking, but that depositors should not be worried.
Friday, March 6, 2009
Is it Inflation or Deflation / Depression?
Is it Inflation or Deflation / Depression??
Your call
**************
Hans-Werner Sinn, president of the German Ifo Institute, said Japanese-style deflation with surging government debt is the “true danger” the world is facing and inflation fears due to central banks’ liquidity provisions are unfounded.
Your call
**************
Hans-Werner Sinn, president of the German Ifo Institute, said Japanese-style deflation with surging government debt is the “true danger” the world is facing and inflation fears due to central banks’ liquidity provisions are unfounded.
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