I have a high position at--well, let's just say I'm the head of--a large government reserve bank of a country that I won't name. But I've got a problem!
I just lowered rates so that all the people who somehow got into trouble by borrowing too much money wouldn't be in so much trouble. But market rates aren't going down, and might even be going up! Hey, that's not supposed to happen!
You see, when I lower reserve bank rates, the market rates are supposed to go down, that's what they're supposed to do! But the markets aren't behaving, and people aren't bidding on bonds, which is raising rates, because, you see, normal peoples' rates are set by the market rate for bonds, not by reserve bank discount rates (I know, I was surprised to find that out too!) So the rates on my official statements are nice and low, but regular people are now paying more to borrow.
We had kind of the same thing a few years ago. Only, it's when my predecessor--we'll just call him Al for argument's sake--it's when Al lowered reserve bank rates, but market rates didn't go lower. He said it was a "conundrum", and well, it looks like I've got a conundrum of my own now.
And I think it's going to get worse. There's this guy on the television who's really loud and he called for a rate cut and I gave it, but now he's going to call for more action, but if I lower it again, market rates might go up even further! Help, what can I do--I want to be popular and look like I'm saving the economy, but when I do what they tell me to it seems to have the opposite effect!?
Why inflate wages when you can offshore or use undocumented workers?
I recently overheard two Canadians in a Tim Horton store discussing how many Latinos were illegally coming to Canada from the US. So much for chasing weak US dollars.
In my opinion, we have entered a classic flight to quality, with T-bond and PMs primarily representing quality.
For the first time in awhile, all sectors of the stock market are acting consistent with a flight to quality.
You may see the market split apart in weeks ahead, with quality holding up and non-quality coming down. I think most emerging markets and small-cap U.S. are non-quality.
I would just like it to be known that I owe it to Misean in part for my recent good fortune in silver. But based on his post today, I am buying and selling silver 8% cheaper than he is on a roundtrip basis by using SLV. I'm not going to sit on my silver profits too long. Trading PMs is where it's at in this market, IMHO.
Re: Federal Reserve Chairman Ben Bernanke told Congress Thursday that the nation isn't "anywhere near" the dangerous stagflation situation of the 1970s.
"I believe that our economy has got the fundamentals in place for us to ... grow and continue growing, more robustly hopefully than we're growing now," he said. "So we're still for a strong dollar."
Not only is inflation high, it is especially high in sectors like gasoline, electricity, heating oil, food, health care, and tuition, where spending is difficult to defer.
Prices are stable or decling for products like cars, appliances, computers and consumer electronics whose purchase can usually be deferred.
If total inflation was 6.8% annualized the past 3 months, inflation was likely well above 10% on basic necessities.
Well, the lynchpin in the entire economy is the CFC merger (nah bailout) by BofA- if that fails, all bets are off. My bet is that it will fail, causing a tremendous amount of panic in the markets. What will most likely happen is that BofA gets the servicing portfolio and the operations, and the OTS+FHLB gets the portfolio.
Meanwhile, BB continues to whine there is no 70's show going on. Well, news for ya buddy. It is here.
In technicolor, called $103 bucks a barrel oil, 971 gold, 19.71 silver. Wheat? Corn? Soybeans? Gasoline?
As was noted in a previous thread- but what about wages? They took forever to rise in the 70's that was what made stagflation so darned excruciating.
When the Bond Vigilantes show up- most likely in the form of Mrs. Watanabe, our goose is cooked. Funny thing is the housing market will be saved in about three years at this rate of inflation.
ALL THAT NEEDS TO HAPPEN IS WAGES RISE
The storm waters are rising, and once again folks are told the levess are sound, you don't need to evacuate.
With the FHLB credit extension to CFC, they essentially shelved the problem. I suspect they'll delay the close. What may smoke out that turd this year is investors in FHLB paper demanding an explicit guarantee.
Wages are not set to rise, and given more weakness on consumer finances, there will not be pressure on prices of consumer goods outside of necessities. What we have will be neither inflation nor deflation, but rather a rebalancing of prices, with necessities consuming a large portion of the budgets of increasingly low-income households, but with consumer goods relatively cheap for those few who have discretionary income.
Bernanke said it was ``fair'' to say it was tougher for the bank to respond now than to the recession of 2001.
There is very real concern that there is a possibility of a dollar crisis,'' said Paul Chertkow, head of global currency research at Bank of Tokyo Mitsubishi UFJ Ltd. in London, in an interview with Bloomberg Radio.I don't use the word crisis lightly; we are in uncharted territory for the dollar, especially against the euro.''
There is only one way out folks, and that would be for Bush, I mean Obama to begin a massive education fund for retraining, retooling and to invest in the future survival of America. The next bubble should be in people and job creation, and thus these retards are going to be a decade behind this reality!
Nemo,
Key statement from Meltzer link is this: "An independent central bank is supposed to maintain the value of the currency and prevent inflation...In the 1970s and again now, Federal Reserve officials repeatedly promised themselves and each other that they would lower inflation. But as soon as the unemployment rate ticked up a bit, the promises were forgotten"...that sounds familiar. Given GDP weakness Bernanke chops away at rates...as AllenM says we are going to relive the 1970s.
It's only too true about wages not keeping up with inflation. Not only have unions been neutered, but financial tv pundits actually cheer the fact that people aren't getting paid enough to keep up with the rising cost of living.
For years this has been papered over with MEW as many people, myself included, tapped home equity to bridge the gap.
What happens now that ordinary households are steeped in debt, face rising prices at the grocery store, and are happy just to have a job, let alone get an increase in pay that is a fraction of real CPI?
Yes, the gold bugs etc come out from under the matress in these discussions, even though they don't have anything to do with metals. And even though none of them can answer the question "value relative to what?" when I ask it when they say "gold will hold its value".
You'll know PMs are in the same class as Real Estate was when you're standing in line at the grocery store and some woman in front of you is talking about how she bought gold as an investment. That time will be here in about another 30 to 60 days.
Perhaps we will live in an alternate shadow of the 70s. One where we have all of the inflation and marginal increases in wages. Much worse. And likely to be much more damaging to manufacturing for domestic sales and for housing. Manufacturing exports and farming commodities will be nice but exactly how much of our economy does that represent?
I have heard that there is legislation coming through congress that will make it easier for foreigners to buy real estate here in the U.S.
As the dollar gets weaker and weaker and the U.S. home-buyer pool dries up, will we see foreign investors snapping up real estate on the coasts of the United States (L.A., San Francisco, New York, Miami)? Oftentimes if they have children of high school age and they can get residency in the states U.S. Colleges are still the best deal around.
For example I've heard that 1000sf condos in Seoul are now going for well over a million dollars $US.
Could definitely see this as a story for the 2012 Presidential elections, "America is being sold off acre by acre," that kind of stuff.
AllenM: Right you are....the next inflation step is in wages, and so the gov't will try to create a rapid artificial US labor shortage, w/ the aid of baby boomers leaving the workforce, no matter what BB says.
Listened to most of Bernankes testimony today....he sounded very nervous the entire time.
One quote that he had not been taken to task from today: (on rating agencies): there was fault on both sides, including investors that over-relied on the ratings.
Couldnt believe he said it even more surprised no one has made hay of that quote. A glass of caveat emptor anyone?
Allen C
BofA essentially shopped the federalization as a secret condition IMHO when they shopped their nationalization plan confidentially to Congresscritters, where they basically said, no way Jose.
Without taking all the bad paper, BofA endangers their own survival unless they intend to keep CFC separate and BK it. But way too many lawsuits, so they will make the Feds do the dirty work so they get the wheat leaving the feds with the chaff.
Without fast buyin by the Feds and congress, the deal really is dead, and BofA is just gathering data to get the valuables safely ensconced on their balance sheet.
Gotta makes some lemonade outta $2+ billion throw out the window.
Yes, I have bought SLV in the past along with GLD. When Misean posted here late one dark night a couple of weeks ago that he was going into silver, I followed him. The difference is that he keeps his silver in his house and lets' people come over and look at it, while I buy SLV that is theoretically held in a vault somewhere in the Andes Mountains. I can trade my SLV for pennies, where he has to watch out for thieves every time he tries to slip out of the house with his bullion to sell it. I am looking to exit SLV a bit above 200-210, and that would be a profit of about 25-30% over purchase. 1 share of SLV = 10 ounces.
When I sell SLV, I am going to put the whole amount on EEV.
My broker gave me a similar argument last summer; I'm sorry I didn't follow my gut then - instead of a bunch of blue chips wallowing as inflation eats away at them, I'd have ridden that bubble up.
I do think you're right about the long-term prospects of Gold, but right now they are looking good as a place to park value. Unfortunately, most of the ride up already appears to have taken place. If BB does cut the FFR to 2.0%, and we get another oil disruption, the energy costs at the wholesale level will drive a big inflationary bump through the price of everything this summer. Growth will stall regardless as long term rates climb.
I am principally concerned with finding a good inflation hedge, and as many have mentioned Real Estate used to be good for this. Right now, it looks like commodities are safest. Here's the problem with metals: what happens to demand as consumer demand falls? The current Chinese appetite for metals will drop off as soon as US consumer demand for non-essentials falls.
What other safe harbors can you recommend? If I could buy shares of Gazprom, that's where I'd put my money right now.
opodius
I'm sure you have much better ideas to share with regards instruments for preservation of wealth. I will be sure to record for posterity's sake.
Once again folks think it is 1980 and the ride is over. Right now there are tons of folks selling their precious metals, and very few buying on the street.
It is too expensive- silver in the 70s rode up from under 2 bucks to briefly over 50- a 25 fold increase.
From 3 and change to 18 is only 6 times.
And right now, a Volcker is far from being sworn in as Fed chief.
Why do you think I was willing to buy a house in 2005, in Phoenix, knowing it was going to be a bubble.
1) The wife never moves, lived in her last two houses 18 years each.
2) Reasonable fixed rate for the 80% financed. You really going to give me that money for 30 years? Hope you mean it!!!
3) Only way to fix an asset bubble is deflation in the asset bubble, combined with inflation in everything else.
What have I seen since then? Everything as predicted, although metals are rising faster than even I expected over the last three months, but Nos. 1,2, and 3 are starting to become obvious to our vendor finance providers.
How much more did the Chinese end up paying to Rio for iron ore?
I really doubt that Misean tells any personal acquaintances that he has PMs at home, let alone actually shows them. OTOH, I'm sure he does show them his Glock 10.
w writes:
rich, I think my question was confusing. I meant: are you saying that SLV is 8% cheaper?
Misean quoted what he paid to buy bullion yesterday, including shipping and insurance. It was 4% above the cost of bullion, which is what SLV tracks. So, I figure I'm saving about 8% on a roundtrip basis. Since I'm primarily trading it, where Misean is gonna hold it forever, it works out better for me, and also for him.
You can buy let's say 100 shares of SLV (100 ounces of silver) for a commission of $9 or so at ameritrade ($18 roundtrip), so it's very cheap. I try to minimize ETF bid-ask spreads by putting in limit orders about 3-4% out of the money. They always seem to hit over a few days.
rich,
I think the key word in your defense of SLV vs. physical holding was "theoretically". Certainly, the risks you mention with physical holding are real. However, there are those who simply don't trust the system at the moment. And the argument has been made that the PMs theoretically held in vaults in the Andes, Switzerland, etc, aren't.
tj & the bear writes:
I really doubt that Misean tells any personal acquaintances that he has PMs at home, let alone actually shows them. OTOH, I'm sure he does show
Misean told people on this board to come on over to his house and see his silver. Aren't we personal acquaintances?
OT to this thread - The muni market is falling apart again. Not only the insured garbage - but some state GO's. A lot of Washington State GO's on the market - cheap. Is there anything wrong with Washington these days (I hear a lot about California - but almost nothing about Washington). Perhaps there are just a couple of hedge funds unloading what they can to make margin calls. Roby
However, there are those who simply don't trust the system at the moment. And the argument has been made that the PMs theoretically held in vaults in the Andes, Switzerland, etc, aren't.
note that China is completing the chain that leads to an inflationary spiral, setting the expectation that high inflation will be matched by higher wages
Isn't their Indonesia?
Seriously, we have to balance the budget. With our need for oil and fear of SWF's...
I really doubt that Misean tells any personal acquaintances that he has PMs at home, let alone actually shows them. OTOH, I'm sure he does show them his Glock 10.
1) Many coworkers are buying PM's and keeping them at home. About 50% of the number that are stuck with flips, so its a significant number of them.
2) Everyone at work is talking guns! "I bought the wife a 38 special." Coworker #2: "I bought my wife a 9mm Barretta, military model." Later: "We have 1200 rounds for the new gun on hand." Another coworker just bought a 30-06 and a 357...
I wish I was kidding... Four years ago everyone was buying aircraft and boats. Now...
Marcus Aurelius wrote: "I recently overheard two Canadians in a Tim Horton store discussing how many Latinos were illegally coming to Canada from the US. So much for chasing weak US dollars."
There is a silver lining in every cloud. At last, NAFTA is working!
rich,
I agree with your earlier comment regarding your's and Misean's respective strategies. For short term speculation, SLV should be fine. This market has a long way to run before a short-sqeeze driven melt-up. You aren't likely to be caught holding worthless certificates if you get out in the low 20s.
As far as the ride up being over in Gold -- the Gold indexes tend to lag physical gold in the big moves up. We could see another 30-50% move in the HUI and XAU indexes here in the next 4-6 months.
--
The Fed & the USG (Feds) are there to aid and abet the Crooks at the expense of honest and hardworking Americans. Only a born-and-bred dope with blind faith in the system can fail to see the criminal nature of the USA Inc. (BFNYC and CCA). The leaders on the Japan Inc do care for the Japanese People, but the economic leaders of USA Inc. prey on American People. What a system!
Telling the unpopular truth about the real American system,
Re: BB being in over his head. Maybe so. But if he's scared, it could be because he understands what's happening more than we do -- not less.
He was teaching at Princeton before this, no? Could he have really been keeping up on the extent of the SLV shitstorm that was brewing? He was as blindsided as anyone.
If I lived anywhere but CA I'd already have a couple ARs, too. Glen over at Winter Watch has been teasing me with the Rock River Arms AR-15 chambered for .458 SOCOM.
Imagine! These are the "official" inflation statistics. Dispense with the abstruse geometric modeling and hedonics, and then what would we have?
Not to mind the loss of "M-3" and the hundreds of billions being given to banks for their "AAA" rated CDOs!
cmhappyrenter writes:
One thing to consider, it is my understanding that SLV and GLD gains are taxed as collectible 28% no matter if short / long term capital gains.
yes BB is in over his head...we all are and anybody in his position would be as well. this is like so many games of chess played where after so many moves there is no way out.
now it's time for the pain.
Scott:
gold still has lots of upside potential but who knows for sure...not me. my play in the last year has been palladium as an alternative to platinum AND because it is the only material on earth that filters hydrogen gas from all others (is also a sponge) H2 economy?!
i also recommend investing in a bicycle, a garden plot and seeds...throw in a roto-tiller or a horse with a plow.
what's all this talk about guns?? We have a slight (so far) economic downturn and people are imagining mobs running through their neighbourhoods looting and pillaging or worse?
Many have asked where the next bubble will be. Now we know: PM and other commodities, and like the past bubbles these will probably go on for much longer than we expect.
CFC is really crispy fried chicken served by the Tan Man.
"I'm not interested in bailing out investors, lenders and speculators," he said. "I'm focused on solutions targeted at struggling homeowners who want to keep their homes."
couldn't be clearer to wall street, you made it, now eat your crap sandwich. GS must be short just about all the homies and lenders left, plus all that cdo squared crap.
70's?
Hmmm... housing bust - check; Gold and silver moving up - check; Borrowings cost starting to rise - check; gas price shock - check; price inflation in basic items - check; 'Green' is the hot button - check; a budget-draining foreign war - check.
At least they were a golden age for music, today does not compare well. Plus, the boomers were moving up to earning and producing years; today they are moving in the opposite direction.
MT: i also recommend investing in a bicycle, a garden plot and seeds...throw in a roto-tiller or a horse with a plow.
Heh...funny you should mention that. I have about five acres of nice bottomland actually. No horse, but I do have the tiller. I've got a bicycle, but for the 35mile commute, I prefer the motorcycle, which gets about 42MPG.
Well, I'm late into the metals, but perhaps the bubble will last longer and run later than expected. Back in '03 I was telling everyone I knew that housing in our area was overvalued and made no sense. I lost most of those "friends" in the divorce, but the few I've run into this year do give kudos.
give yourself a choice other than deadly physical force if you need to defend.
most cops and others, who have had to take extreme measures are haunted and suffer... (unless you are a sociopath)...but sometimes you have little choice.
12 gauge pump with the double 0 removed from the first round and replaced with, salt or a bean bag is formidable and of course loud.
also, a mega can of bear spray is awesome (looks like a small fire extinguisher and is filled with 10% oleo-capsicum)..sprays 15 feet...,non lethal and feels like fire has been poured on you.
those fair weather friends you lost during the big D...hey since you own 5 acres of bottom land.. you are about to have a lot more...and better friends.
You guys are great.
Can you explain what is going on in the muni market. I am confused as to the implications of all the failed auctions.
THanks and again, this site is invaluable.
It's still not too late to impeach Bush and begin treason inquires:
Pelosi, D-Calif., demanded that the department pursue misdemeanor charges against former White House counsel Harriet Miers for refusing to testify to Congress about the firings of federal prosecutors in 2006 and against chief of staff Josh Bolten for failing to turn over White House documents related to the dismissals.
She gave Attorney General Michael Mukasey one week to respond and said refusal to take the matter to a grand jury will result in the House's filing a civil lawsuit against the Bush administration.
Could definitely see this as a story for the 2012 Presidential elections, "America is being sold off acre by acre," that kind of stuff.
Does this seem like a likely scenario?
jmay, who has the money to rescue the US banking system from their folly of leveraging their balance sheets to infinity ...(hint: no one here stateside, including the feds)...
Re PMs and guns and that 70's show - There are 2 reasons to hold PMs. One is for catastrophes - in which case you want to hold physical gold/silver. I don't know that I'd keep it at home - I'd be more worried about something like a fire than theft - but a safe deposit box is fine. That's where I keep mine (have held it for a really long time - and it has been a lousy investment - which is what you want - the saying is always put a little in your portfolio and hope it does poorly).
The other reason is for investment/speculation. Some of the ETFs which have been mentioned are kind of new - haven't been tested in a big downturn in terms of bid/ask spread and/or liquidity. On my part - I use Fidelity Select Gold (which holds gold and other PM stocks). It's appropriate for medium term traders and longer term investors - not day traders.
I am not against guns or gun ownership. I will only note that people tend to shoot family and friends much more often than strangers - sometimes by mistake - and sometimes because they get mad. So don't get a gun if you're in the middle of an ugly divorce .
The timing of things in the 70's is different than it is now. The real estate boom was in the 70's - housing was viewed as an "inflation-proof" alternative investment. The back of the real estate market didn't really crack until Volcker pushed up interest rates to the sky (early 80's). Before then - rates weren't super low - they were kind of middling - we got a mortgage in 1973 at 6%. The real estate market didn't really start to recover until the disinflationary period which started in 1984 - and lasted for a long time.
Today - we had a demand for real estate that was inflated artificially by extraordinarily low interest rates - not by inflation (and a lot of funny money mortgages). When interest rates rose to reasonable levels - the market started to crack. And because there was so much speculation - even middling interest rates caused speculators to lose interest. And once the air started to come out of the balloon in certain markets - things went from ok - to bad. (Note that I am talking about bubble markets like Florida - not places in the midwest which have their own separate set of problems). Today - no matter how low interest rates go - I don't think they will be a short term fix for real estate.
I really haven't seen inflation as a problem until recently. But now I do - because the more the fed lowers rates - the higher commodity prices go in dollar terms. Note that I - unlike some people - look at total CPI instead of core CPI as the true indicator of inflation. Until people stop eating and using utilities and traveling - core CPI is a bunch of BS IMO. It is bad enough that the CPI doesn't include many things that a lot of people pay a lot for - like taxes - all kinds of insurance - etc. To ignore the things that it does include that people pay a lot for is nuts IMO. Note that the inflation of today is very mild compared to what was going on in the 70's (I remember gas going from 19 cents a gallon to a buck then - huge ROC) - it's just a change from what we've seen in recent years.
Anyway - the disconnect between rising rates of inflation and rising real estate values makes today very different than the 70's. BTW - I am old enough to remember the 70's as an adult - even though I'm not supposed to. It's the 60's I don't remember . (For those of you who are too young to get the allusion - there's a saying - if you remember the 70's - you didn't live through them.)
I am not quite sure what to do now - since I have never seen a market like this before (in terms of the dollar/credit markets/real estate/inflation/commodities/etc.). So I am going to sit on some cash - read - and think about it. Roby
In the Southern California real estate world, some of us discuss San Diego as a place that Orange County is soon to turn into: San Diego is a fantastic environment to live in, tolerant and multicultural, but extremely expensive with no job growth and is kind of a has-been. My recent point to someone is the entire US will soon be like San Diego; admired and a great place to live, but expensive, no jobs, and not much of a future.
--
Dr. N writes: "what's all this talk about guns?? We have a slight (so far) economic downturn and people are imagining mobs running through their neighbourhoods looting and pillaging or worse?"
Are you English or an Aussie (from spelling)? You are clueless about what is coming to America -- The Greater Depression. Burn-ass-ke was appointed to guarantee that outcome! Pre-emptive wars and pre-emptive actions against recessions and depressions don't work too well.
Let us hire academics to head everything and we will make the old Soviet Union look good. What a bunch of dopes who believe that Burn-ass-ke can avert depression.
BTW, things would be just as bad in jolly old Britain.
Time for another Zacks.com cross post:
It is easy to criticize the Federal Reserve, but they have a very tough, at times almost impossible job. They, unlike most central banks have a dual mandate. They have to both promote economic growth and prevent inflation. Most central banks only have to prevent inflation. Unfortunately they have only one major policy tool, raising or lowering the Fed Funds rate. This at times is like trying to solve one equation with two variables. There are times when one of the two mandates has to be ignored to do a good job on the other. This is one of those times. The economy is clearly slowing, and in my opinion we are already in a recession and it has the potential to be a rough one. At the same time inflation is above the Feds comfort zone and is accelerating quickly. At the same time (and related to the inflation side of the equation) the dollar is tanking again. One of the two objectives must be at least temporarily discarded.
With his testimony yesterday and today, Bernanke made it very clear that he is willing to throw the inflation mandate under the bus (and the value of the dollar with it). He is hoping that the slowdown in the economy will in and of it self bring inflation down, or at least that is his public posture. I seriously doubt he thinks that it will actually happen, but simply that he recognizes that the alternative is worse. Fed Fund futures are currently treating it as a near certainty that the Fed will lower rates by at least 50 basis points in the middle of March. To the extent there is any uncertainty, it is if they will cut by 75 basis points to 2.25%. Bernanke knows that easy money is the WD-40 that can free up the gears of the financial system. With out question things are jammed up, it seems like a rare day that another part of the financial system doesnt blow up, asset backed commercial paper one day, auction rate preferred the next. Banks have written off massive amounts in the fourth quarter, and make no mistake, there is much more to come in the first quarter. As banks lose money, they deplete their capital. Without capital, they cant lend. If there is no lending there is no economic growth.
The answer to this problem is to cut short rates far and fast, and to make the discount window more appealing. Since there is a stigma associated with borrowing the old fashioned way from the discount window (just over night and everyone knows you are doing it) he devised an alternative, the TAF process. TAF funds are secret (as to who is borrowing them, not the amount being offered) and are for longer periods of time. The collateral does not have to be as good either. This was a fairly brilliant move on his part. Cutting short term rates will not make long term rates go down, and indeed to the extent they make people think that inflation is going to rise, will cause long rates to go up. However, the basic economic function of a bank is to borrow short (and liquid, safe) and lend long (illiquid, risky). If the short end of the curve goes down, and the long end goes up, net interest margins expand significantly. High net interest margins make banks more profitable. If banks retain those profits (rather than piss them away by paying dividends or buying back stock) then they end up in a stronger capital position. More capital equals more ability to lend. If short rates are held below the rate of inflation, it almost forces people to lend for longer terms, since cash (broadly speaking, not just currency, but money market funds) is effectively being confiscated in real terms by inflation.
Cross post continued:
However, while higher inflation can kick start economic growth in the short term, it will not do so in the long term, indeed all economic experience is that it will lead to lower long term rates of economic growth. People will start to anticipate future inflation and will demand higher interest rates and will try to index prices to inflation. If it were know with certainty that inflation was going to be exactly 10% quarter after quarter for the next ten years, it wouldnt be that much of a problem, since every contract would be adjusted to reflect this. Unfortunately high inflation also tends to be very unstable inflation. This makes long term economic planning extremely difficult. As a result economic growth slows over time. After Dr. Bernanke deals with the patients heart attack (credit crunch) he will have to administer the chemotherapy (higher short term rates) to cure the cancer (inflation).
We are now in a period where we are seeing low U.S. growth, and by low I mean below zero for at least part of this year, and high and rising inflation. This is coupled with solid but not great economic growth outside the U.S. (has been very good in recent years but will slow in reaction to the slowdown in the U.S). How do you play this game? First, stay away from bonds. T-Notes are way over valued here. If you have to buy bonds, go for the inflation indexed TIPS. If you have a strong stomach, Junk bonds could become interesting at some point, but make sure you are buying at a big discount, real vulture investing stuff. Most people are not going to want to go down that path. Invest where the growth is, and that means outside the U.S. This can be done directly through ETFs or ADRs or through U.S. multinationals that get most of their revenue from overseas. Consider names like Coke (KO) and Proctor & Gamble (PG). To the extent the product is a necessity rather than a discretionary item, all the better. Export oriented firms will also benefit from the falling dollar. Aerospace firms like Boeing (BA) and Honeywell (HON) fall into this group. Investing abroad, I would still favor the emerging economies over Europe and Japan, but would favor Europe over the U.S. Russia, Brazil and India all look interesting to me, China is still a little overheated on the stock market front, but consider buying on dips. I still like commodity plays in this environment, starting with but not limited to the biggest commodity of them all, Energy. Oil is far more likely to see $150 before it sees $50. If oil were to hit $50 due to an economic slowdown, well your holdings in Exxon (XON) or Conoco (COP) would be the last of your worries. Personally I like base metals more than precious metals, but the miners of both should do well in this environment. Among my favorites are Southern Copper (PCU) and Vale do River Doce (RIO), but a case can also be made for most of the rest of the group like Rio Tinto (RTZ), Freeport McMoran (FCX) and BHP Billiton (BHP).
Re: This at times is like trying to solve one equation with two variables. There are times when one of the two mandates has to be ignored to do a good job on the other.
I think you mean "trying to solve two equations with one variable."
In this case, you can only solve one equation (or choose a value for the variable that approximately solves each equation).
We have all learned that CBs are not good at anticipating, no?
They can only react and how do you react to two mandates when they require contrary actions?
In America, we are dealing with dopes and Crooks. Burn-ass-ke has said repeatedly that price stability is the best road to long-term and sustained growth. But the crook is now backing off his own clear long-standing statement. He is afraid of getting the blame and he wouldn't be able to avoid blame no matter what he does because the dirty deed was done a long time ago.
No thanks. Try to imagine the circumstances of any situation where you might use it to save your life. Only get one shot with a taser. Make you nervous? Now imagine how nervous you will be if your life is threatened to the point that you draw a weapon. One shot!
Nobel Prize winner Joseph Stiglitz is the first public figure to have the guts to say it:
The credit bubble was PURPOSELY ENGINEERED to give fiscal cover for the Iraq War--
Professor Stiglitz told the Chatham House think tank in London that the Bush White House was currently estimating the cost of the war at about $US500 billion, but that figure massively understated things such as the medical and welfare costs of US military servicemen.
The war was now the second-most expensive in US history after World War II and the second-longest after Vietnam, he said.
The spending on Iraq was a hidden cause of the current credit crunch because the US central bank responded to the massive financial drain of the war by flooding the American economy with cheap credit.
Right now, Bernanke is playing the role of General David Petraeus. Bernanke's "surge" will be a re-inflation bubble -- kick the can down the road long enough that no one will be able to directly link the meltdown of the U.S. economy with the war.
As economist Ludwig von Mises said: "There is no means of avoiding the final collapse of a boom brought on by credit expansion. The question is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."
Mises was a thinker and Burn-ass-ke is an agent of the NYC Banking and Finance Cabal. He is buying them time and screwing the American People in the process (rise in the crude oil price is the obvious sign).
Your analysis rings true to me. One thing I might add. A cynical thought occurred to me last week ... there are four basic components to GDP, as expressed by the following equation:
GDP = C + I + G + (X-M)
where
C = consumption
I = investment
G = Government spending
X = exports
M = imports
Of the four terms, clearly investment and government spending are now either falling hard or about to. That leaves consumption and (X-M) or exports - imports as the only potential positive contributors. A weak dollar should be neutral here, but all the cheap crap from China that we import may offset higher energy and food prices.
The real area for Blackhawk Ben to try and influence GDP right now is consumption. All of the higher gas, energy and food prices create higher consumption. This is really just inflation.
Bennie and the Feds strategy appears to be one of smoke and mirrors. Achieve a total GDP of maybe 2-3% through a negative real GDP plus 4% or so inflation. Maybe enough to keep the masses from revolting.
You know they're in cahoots
With Wall Street suits
Your budget's blown out on bread and gasoline, oh
B-B-B-Bennie and the Feds
"You'll know PMs are in the same class as Real Estate was when you're standing in line at the grocery store and some woman in front of you is talking about how she bought gold as an investment. That time will be here in about another 30 to 60 days."
No, a lot longer than that. The mass of people have to really get antsy about inflation first. And they haven't, because some things are up, but others are down or stable.
Precious metal fever hasn't hit the media bigtime. When that happens, it'll be the beginning of the end, though the end may be years off. Harry Browne, with his bestseller and media appearance and constant buy-silver-and-swiss-francs drumbeat was everywhere in the early-mid '70s. Then there was the Coming of the Krugerrands, and the Hunt Brother, and $50 silver, and ...
In short, things will get pretty darn wiggy before the end, and the beginning of the end may well be as drawn out as the buildup. It'll be hard to miss, though I'll probably bail early in any case. Heck, gold is already 2/3 of the way to my wildest-dream figure.
--
Just to show how born-and-bred American dopes get served by the Feds:
One side is doing the stimulus plan (at a future cost).
The other side is inflating the prices of necessities by artificially lowering rates (that don't help the American People, BTW) and driving down the dollar and driving up the prices of many necessities.
A system befitting dopes, no?
Americans are politically impotent to do anything when they get screwed royally by the Feds. Crooks have complete control of the Feds. The dopes do get to vote! (A useless exercise, I might add, because Crooks run the economic show no matter who is elected).
Jas
PS: Eddy, bonds are foreseeing the recession to be followed by depression.
I recently overheard two Canadians in a Tim Horton store discussing how many Latinos were illegally coming to Canada from the US. So much for chasing weak US dollars.
So we're exporting our immigration problems to Canada? Wow, I guess NAFTA really does work, after all!
CS,
More worried about C falling than G falling, but your core point is a good one, however, have to put (X-M) in the positive camp with the falling $. Net exports ex oil have been recovering nicely. Unfortunately in the 4Q the improvement came more from falling M and not rising X (although X was still up but much less than in 3Q). However, it would take a heroic effort on the part of net exports to pull the chestnuts out of the fire. Of the 4 elements C is far and away the biggest (70% of GDP). Historically it has also been the most stable, but with reall incomes falling and no more ability to borrow C is likely to head down. The stimulus checks will help a little bit, but the emp has to be more on little than on help, since so much of them will be saved (debt reduction = saving). Nominal C almost never falls negative, but will this year, possibly by quite a bit.
Only cowards who can't defend themselves need guns.
Ezra | 02.28.08 - 7:03 pm | #
Make sure you let me know where you live. I will send the thugs that were roaming around after Hurricane Charley over by your way. It took 4+ days to get the Guard up and running. My neighbors are pretty much 65-70 plus. Who the heck is gonna watch out for them ?? What dial 911? Oh wait,no phones.
So yes, I am the largest coward you will ever meet and damn proud of it...
I can appreciate your position Chris but that situation is the exception, not the rule. I've lived in metro Philly all my life and never...nope... not once have I ever needed a gun. Most of those I know that think they need a gun are gun knuts for the most part. I find their paranoia contemptible and their character coward like.
Debt is so out of hand at every level in the United States that a long period of inflation is NECESSARY?
Would the government and Fed policy of the last couple of years make any less sense if we described it as a DELIBERATE effort to run down the value of assets in real terms?
Dear CalculatedRisk,
I have a high position at--well, let's just say I'm the head of--a large government reserve bank of a country that I won't name. But I've got a problem!
I just lowered rates so that all the people who somehow got into trouble by borrowing too much money wouldn't be in so much trouble. But market rates aren't going down, and might even be going up! Hey, that's not supposed to happen!
You see, when I lower reserve bank rates, the market rates are supposed to go down, that's what they're supposed to do! But the markets aren't behaving, and people aren't bidding on bonds, which is raising rates, because, you see, normal peoples' rates are set by the market rate for bonds, not by reserve bank discount rates (I know, I was surprised to find that out too!) So the rates on my official statements are nice and low, but regular people are now paying more to borrow.
We had kind of the same thing a few years ago. Only, it's when my predecessor--we'll just call him Al for argument's sake--it's when Al lowered reserve bank rates, but market rates didn't go lower. He said it was a "conundrum", and well, it looks like I've got a conundrum of my own now.
And I think it's going to get worse. There's this guy on the television who's really loud and he called for a rate cut and I gave it, but now he's going to call for more action, but if I lower it again, market rates might go up even further! Help, what can I do--I want to be popular and look like I'm saving the economy, but when I do what they tell me to it seems to have the opposite effect!?
-- IN A CONUNDRUM IN WASHINGTON
I believe Al's conundrum was the opposite. He raised the FED rate, but mortgage rates didn't budge. This led to an inverted yield curve.
Dear BB,
Sit down and write two letters.
Love,
g
Will the "constant bid" in T-Bond stop sometime?
Why inflate wages when you can offshore or use undocumented workers?
I recently overheard two Canadians in a Tim Horton store discussing how many Latinos were illegally coming to Canada from the US. So much for chasing weak US dollars.
UBS Valentine's disclosure causes mortgage mayhem
Bank revealed big exposure to Alt-A loans, triggering margin calls for others
UBS Valentine's Day disclosure causes mayhem in mortgage market - MarketWatch
Dear BB,
Skip past Al and talk to guy named Paul.
repost from end of last thread...
We're up to $61B sloshing on top of $60B in TAFs. I highly suspect this is not economic demand.
With over $3T in money market accounts and treasuries at very low yields, it's clear that there is plenty of money. It's just not going to the banks!
What is our bank chief going to do? How long will he keep buying up paper? How much more will he have to buy to support a 50bps cut?
In my opinion, we have entered a classic flight to quality, with T-bond and PMs primarily representing quality.
For the first time in awhile, all sectors of the stock market are acting consistent with a flight to quality.
You may see the market split apart in weeks ahead, with quality holding up and non-quality coming down. I think most emerging markets and small-cap U.S. are non-quality.
I would just like it to be known that I owe it to Misean in part for my recent good fortune in silver. But based on his post today, I am buying and selling silver 8% cheaper than he is on a roundtrip basis by using SLV. I'm not going to sit on my silver profits too long. Trading PMs is where it's at in this market, IMHO.
If the banks are failing, the Fed lowers rates to help the banks make more money by raising their own interest rates, is how I understand it.
Why inflate wages when you can offshore or use undocumented workers?
Then who is going to pay the inflated prices, now that the MEW tap is turned off?
Cull from Greg Mankiw's blog:
Allan Meltzer, the eminent economist and monetary historian, thinks the Fed is repeating the mistakes of the 1970s.
What goes around, comes around
From Bush news conference today:
GB: "I'm concerned about the economy, I don't think we're headed to recession. But no question, we're in a slowdown."
Question: "There are indications that paying $4 for a gallon of gasoline is not out of the question once the summer driving season arrives."
GB: "That's interesting. I hadn't heard that."
Re: Federal Reserve Chairman Ben Bernanke told Congress Thursday that the nation isn't "anywhere near" the dangerous stagflation situation of the 1970s.
I think he is thinking more about 1932 than 1970
More from news conference:
"I believe that our economy has got the fundamentals in place for us to ... grow and continue growing, more robustly hopefully than we're growing now," he said. "So we're still for a strong dollar."
It's interesting that so many senators were focused on inflation. That tells you a bit about their constituents' concerns.
how'd BB get such a long post in first...
must have a sweet computer system down at the fed.
rich, are you saying you buy SLV?
Not only is inflation high, it is especially high in sectors like gasoline, electricity, heating oil, food, health care, and tuition, where spending is difficult to defer.
Prices are stable or decling for products like cars, appliances, computers and consumer electronics whose purchase can usually be deferred.
If total inflation was 6.8% annualized the past 3 months, inflation was likely well above 10% on basic necessities.
Three cheers for Helicopter Ben! Horray! Horray! Horray!
Well, the lynchpin in the entire economy is the CFC merger (nah bailout) by BofA- if that fails, all bets are off. My bet is that it will fail, causing a tremendous amount of panic in the markets. What will most likely happen is that BofA gets the servicing portfolio and the operations, and the OTS+FHLB gets the portfolio.
Meanwhile, BB continues to whine there is no 70's show going on. Well, news for ya buddy. It is here.
In technicolor, called $103 bucks a barrel oil, 971 gold, 19.71 silver. Wheat? Corn? Soybeans? Gasoline?
As was noted in a previous thread- but what about wages? They took forever to rise in the 70's that was what made stagflation so darned excruciating.
When the Bond Vigilantes show up- most likely in the form of Mrs. Watanabe, our goose is cooked. Funny thing is the housing market will be saved in about three years at this rate of inflation.
ALL THAT NEEDS TO HAPPEN IS WAGES RISE
The storm waters are rising, and once again folks are told the levess are sound, you don't need to evacuate.
Yeah right. I note Banker has his Bankerdome.
Someday this war's gonna end...
Ah, these asses have gotten us into so much economic trouble. I hate to say it, but I think we need to take our medicine, and keep a stiff upper lip.
AllenM,
With the FHLB credit extension to CFC, they essentially shelved the problem. I suspect they'll delay the close. What may smoke out that turd this year is investors in FHLB paper demanding an explicit guarantee.
Wages are not set to rise, and given more weakness on consumer finances, there will not be pressure on prices of consumer goods outside of necessities. What we have will be neither inflation nor deflation, but rather a rebalancing of prices, with necessities consuming a large portion of the budgets of increasingly low-income households, but with consumer goods relatively cheap for those few who have discretionary income.
Ok, I give up: what are "PMs"?
Precious Metals!
I have a chunk of change to invest and I have no idea where to put it.
Everything is looking shaky.
Ok, I give up: what are "PMs"?
Precious metals.
rich, I think my question was confusing. I meant: are you saying that SLV is 8% cheaper?
Bernanke said it was ``fair'' to say it was tougher for the bank to respond now than to the recession of 2001.
There is very real concern that there is a possibility of a dollar crisis,'' said Paul Chertkow, head of global currency research at Bank of Tokyo Mitsubishi UFJ Ltd. in London, in an interview with Bloomberg Radio.I don't use the word crisis lightly; we are in uncharted territory for the dollar, especially against the euro.''
There is only one way out folks, and that would be for Bush, I mean Obama to begin a massive education fund for retraining, retooling and to invest in the future survival of America. The next bubble should be in people and job creation, and thus these retards are going to be a decade behind this reality!
Nemo,
Key statement from Meltzer link is this: "An independent central bank is supposed to maintain the value of the currency and prevent inflation...In the 1970s and again now, Federal Reserve officials repeatedly promised themselves and each other that they would lower inflation. But as soon as the unemployment rate ticked up a bit, the promises were forgotten"...that sounds familiar. Given GDP weakness Bernanke chops away at rates...as AllenM says we are going to relive the 1970s.
Ok, I give up: what are "PMs"?
I googled this, but the only results I got back had to do with women's hormones....
It's only too true about wages not keeping up with inflation. Not only have unions been neutered, but financial tv pundits actually cheer the fact that people aren't getting paid enough to keep up with the rising cost of living.
For years this has been papered over with MEW as many people, myself included, tapped home equity to bridge the gap.
What happens now that ordinary households are steeped in debt, face rising prices at the grocery store, and are happy just to have a job, let alone get an increase in pay that is a fraction of real CPI?
PMs = precious metals
tj - Doh! (smacks forehead)
Ok, well, good...I have some of those already. Actually, I have miners.
I've been feeling inflation for years. Nobody seemed to care about inflation while asset prices were rising.
Most are already on the verge of bankruptcy. Bernanke's going to finish them off with inflation.
Hedge Fund down 50%:
Richmond Capital fund loses more than 50%
Richmond Capital hedge fund loses more than half its value - MarketWatch
PMs = precious metals
Yes, the gold bugs etc come out from under the matress in these discussions, even though they don't have anything to do with metals. And even though none of them can answer the question "value relative to what?" when I ask it when they say "gold will hold its value".
You'll know PMs are in the same class as Real Estate was when you're standing in line at the grocery store and some woman in front of you is talking about how she bought gold as an investment. That time will be here in about another 30 to 60 days.
Perhaps we will live in an alternate shadow of the 70s. One where we have all of the inflation and marginal increases in wages. Much worse. And likely to be much more damaging to manufacturing for domestic sales and for housing. Manufacturing exports and farming commodities will be nice but exactly how much of our economy does that represent?
I have heard that there is legislation coming through congress that will make it easier for foreigners to buy real estate here in the U.S.
As the dollar gets weaker and weaker and the U.S. home-buyer pool dries up, will we see foreign investors snapping up real estate on the coasts of the United States (L.A., San Francisco, New York, Miami)? Oftentimes if they have children of high school age and they can get residency in the states U.S. Colleges are still the best deal around.
For example I've heard that 1000sf condos in Seoul are now going for well over a million dollars $US.
Could definitely see this as a story for the 2012 Presidential elections, "America is being sold off acre by acre," that kind of stuff.
Does this seem like a likely scenario?
AllenM: Right you are....the next inflation step is in wages, and so the gov't will try to create a rapid artificial US labor shortage, w/ the aid of baby boomers leaving the workforce, no matter what BB says.
damn the torpedoes, full speed ahead.
Ok, I give up: what are "PMs"?
Scott | 02.28.08 - 3:57 pm | #
It's the one aspect of my job I really don't like...You know,oil,filters,tires,I would much rather rebuild differentials.
Oh,you mean Precious Metals? I do like those...
Chris
Listened to most of Bernankes testimony today....he sounded very nervous the entire time.
One quote that he had not been taken to task from today: (on rating agencies): there was fault on both sides, including investors that over-relied on the ratings.
Couldnt believe he said it even more surprised no one has made hay of that quote. A glass of caveat emptor anyone?
This friggin guy is so over his head.........
Allen C
BofA essentially shopped the federalization as a secret condition IMHO when they shopped their nationalization plan confidentially to Congresscritters, where they basically said, no way Jose.
Without taking all the bad paper, BofA endangers their own survival unless they intend to keep CFC separate and BK it. But way too many lawsuits, so they will make the Feds do the dirty work so they get the wheat leaving the feds with the chaff.
Without fast buyin by the Feds and congress, the deal really is dead, and BofA is just gathering data to get the valuables safely ensconced on their balance sheet.
Gotta makes some lemonade outta $2+ billion throw out the window.
Someday this war's gonna end...
Haven't some wages actually decreased as benefits like medical and pensions have been cut or scaled back?
ipodius,
Value relative to food.
Ask the folks in Argentina.
Someday this war's gonna end...
w writes:
rich, are you saying you buy SLV?
Yes, I have bought SLV in the past along with GLD. When Misean posted here late one dark night a couple of weeks ago that he was going into silver, I followed him. The difference is that he keeps his silver in his house and lets' people come over and look at it, while I buy SLV that is theoretically held in a vault somewhere in the Andes Mountains. I can trade my SLV for pennies, where he has to watch out for thieves every time he tries to slip out of the house with his bullion to sell it. I am looking to exit SLV a bit above 200-210, and that would be a profit of about 25-30% over purchase. 1 share of SLV = 10 ounces.
When I sell SLV, I am going to put the whole amount on EEV.
iPodius -
My broker gave me a similar argument last summer; I'm sorry I didn't follow my gut then - instead of a bunch of blue chips wallowing as inflation eats away at them, I'd have ridden that bubble up.
I do think you're right about the long-term prospects of Gold, but right now they are looking good as a place to park value. Unfortunately, most of the ride up already appears to have taken place. If BB does cut the FFR to 2.0%, and we get another oil disruption, the energy costs at the wholesale level will drive a big inflationary bump through the price of everything this summer. Growth will stall regardless as long term rates climb.
I am principally concerned with finding a good inflation hedge, and as many have mentioned Real Estate used to be good for this. Right now, it looks like commodities are safest. Here's the problem with metals: what happens to demand as consumer demand falls? The current Chinese appetite for metals will drop off as soon as US consumer demand for non-essentials falls.
What other safe harbors can you recommend? If I could buy shares of Gazprom, that's where I'd put my money right now.
opodius
I'm sure you have much better ideas to share with regards instruments for preservation of wealth. I will be sure to record for posterity's sake.
Thanks rich,
I agree. A guy I know keeps a big stash of gold in his fridge. He doesn't trust a safe deposit box. I don't get it.
Once again folks think it is 1980 and the ride is over. Right now there are tons of folks selling their precious metals, and very few buying on the street.
It is too expensive- silver in the 70s rode up from under 2 bucks to briefly over 50- a 25 fold increase.
From 3 and change to 18 is only 6 times.
And right now, a Volcker is far from being sworn in as Fed chief.
Why do you think I was willing to buy a house in 2005, in Phoenix, knowing it was going to be a bubble.
1) The wife never moves, lived in her last two houses 18 years each.
2) Reasonable fixed rate for the 80% financed. You really going to give me that money for 30 years? Hope you mean it!!!
3) Only way to fix an asset bubble is deflation in the asset bubble, combined with inflation in everything else.
What have I seen since then? Everything as predicted, although metals are rising faster than even I expected over the last three months, but Nos. 1,2, and 3 are starting to become obvious to our vendor finance providers.
How much more did the Chinese end up paying to Rio for iron ore?
Yeah, I thought so.
Someday this war's gonna end...
MarkIt roundup (partial):
ABX - about half new lows, concentrated in the AA & A it looked like
CMBX - about 2/3 new highs, with sharp deterioration in all
I really doubt that Misean tells any personal acquaintances that he has PMs at home, let alone actually shows them. OTOH, I'm sure he does show them his Glock 10.
Misean quoted what he paid to buy bullion yesterday, including shipping and insurance. It was 4% above the cost of bullion, which is what SLV tracks. So, I figure I'm saving about 8% on a roundtrip basis. Since I'm primarily trading it, where Misean is gonna hold it forever, it works out better for me, and also for him.
You can buy let's say 100 shares of SLV (100 ounces of silver) for a commission of $9 or so at ameritrade ($18 roundtrip), so it's very cheap. I try to minimize ETF bid-ask spreads by putting in limit orders about 3-4% out of the money. They always seem to hit over a few days.
That time will be here in about another 30 to 60 days.
I've been hearing that for the last five years.
rich,
I think the key word in your defense of SLV vs. physical holding was "theoretically". Certainly, the risks you mention with physical holding are real. However, there are those who simply don't trust the system at the moment. And the argument has been made that the PMs theoretically held in vaults in the Andes, Switzerland, etc, aren't.
Misean told people on this board to come on over to his house and see his silver. Aren't we personal acquaintances?
OT to this thread - The muni market is falling apart again. Not only the insured garbage - but some state GO's. A lot of Washington State GO's on the market - cheap. Is there anything wrong with Washington these days (I hear a lot about California - but almost nothing about Washington). Perhaps there are just a couple of hedge funds unloading what they can to make margin calls. Roby
Sebastian,
Who cares if you can make 30% in 3 weeks?
note that China is completing the chain that leads to an inflationary spiral, setting the expectation that high inflation will be matched by higher wages
Isn't their Indonesia?
Seriously, we have to balance the budget. With our need for oil and fear of SWF's...
I really doubt that Misean tells any personal acquaintances that he has PMs at home, let alone actually shows them. OTOH, I'm sure he does show them his Glock 10.
1) Many coworkers are buying PM's and keeping them at home. About 50% of the number that are stuck with flips, so its a significant number of them.
2) Everyone at work is talking guns! "I bought the wife a 38 special." Coworker #2: "I bought my wife a 9mm Barretta, military model." Later: "We have 1200 rounds for the new gun on hand." Another coworker just bought a 30-06 and a 357...
I wish I was kidding... Four years ago everyone was buying aircraft and boats. Now...
Got Popcorn?
Neil
ot sebastian,
Divesification is always advisable.
Neil has got a point.
The mood around the office has gotten quite surly lately.
I had the thought of arming up.
Marcus Aurelius wrote: "I recently overheard two Canadians in a Tim Horton store discussing how many Latinos were illegally coming to Canada from the US. So much for chasing weak US dollars."
There is a silver lining in every cloud. At last, NAFTA is working!
rich,
I agree with your earlier comment regarding your's and Misean's respective strategies. For short term speculation, SLV should be fine. This market has a long way to run before a short-sqeeze driven melt-up. You aren't likely to be caught holding worthless certificates if you get out in the low 20s.
As far as the ride up being over in Gold -- the Gold indexes tend to lag physical gold in the big moves up. We could see another 30-50% move in the HUI and XAU indexes here in the next 4-6 months.
Wasn't AMBAC supposed to be closing a major deal this week?
Any news?
--
The Fed & the USG (Feds) are there to aid and abet the Crooks at the expense of honest and hardworking Americans. Only a born-and-bred dope with blind faith in the system can fail to see the criminal nature of the USA Inc. (BFNYC and CCA). The leaders on the Japan Inc do care for the Japanese People, but the economic leaders of USA Inc. prey on American People. What a system!
Telling the unpopular truth about the real American system,
Jas
Re: BB being in over his head. Maybe so. But if he's scared, it could be because he understands what's happening more than we do -- not less.
He was teaching at Princeton before this, no? Could he have really been keeping up on the extent of the SLV shitstorm that was brewing? He was as blindsided as anyone.
One thing to consider, it is my understanding that SLV and GLD gains are taxed as collectible 28% no matter if short / long term capital gains.
I'm itching to get a new 12 gauge.
If I lived anywhere but CA I'd already have a couple ARs, too. Glen over at Winter Watch has been teasing me with the Rock River Arms AR-15 chambered for .458 SOCOM.
Imagine! These are the "official" inflation statistics. Dispense with the abstruse geometric modeling and hedonics, and then what would we have?
Not to mind the loss of "M-3" and the hundreds of billions being given to banks for their "AAA" rated CDOs!
Tanta, are we ENRON yet!?
Nope, always buy them in IRAs.
tieornot,
yes BB is in over his head...we all are and anybody in his position would be as well. this is like so many games of chess played where after so many moves there is no way out.
now it's time for the pain.
Scott:
gold still has lots of upside potential but who knows for sure...not me. my play in the last year has been palladium as an alternative to platinum AND because it is the only material on earth that filters hydrogen gas from all others (is also a sponge) H2 economy?!
i also recommend investing in a bicycle, a garden plot and seeds...throw in a roto-tiller or a horse with a plow.
what's all this talk about guns?? We have a slight (so far) economic downturn and people are imagining mobs running through their neighbourhoods looting and pillaging or worse?
Many have asked where the next bubble will be. Now we know: PM and other commodities, and like the past bubbles these will probably go on for much longer than we expect.
Paulson just gave BofA a big not happening now shout out.
Expired
CFC is really crispy fried chicken served by the Tan Man.
"I'm not interested in bailing out investors, lenders and speculators," he said. "I'm focused on solutions targeted at struggling homeowners who want to keep their homes."
couldn't be clearer to wall street, you made it, now eat your crap sandwich. GS must be short just about all the homies and lenders left, plus all that cdo squared crap.
Someday this war's gonna end...
Neil,
Wherever you work, watch your back.
http://www.energy.ca.gov/gasoline/statistics/nytimes_gasoline_price.jpg
70's?
Hmmm... housing bust - check; Gold and silver moving up - check; Borrowings cost starting to rise - check; gas price shock - check; price inflation in basic items - check; 'Green' is the hot button - check; a budget-draining foreign war - check.
At least they were a golden age for music, today does not compare well. Plus, the boomers were moving up to earning and producing years; today they are moving in the opposite direction.
MT: i also recommend investing in a bicycle, a garden plot and seeds...throw in a roto-tiller or a horse with a plow.
Heh...funny you should mention that. I have about five acres of nice bottomland actually. No horse, but I do have the tiller. I've got a bicycle, but for the 35mile commute, I prefer the motorcycle, which gets about 42MPG.
Well, I'm late into the metals, but perhaps the bubble will last longer and run later than expected. Back in '03 I was telling everyone I knew that housing in our area was overvalued and made no sense. I lost most of those "friends" in the divorce, but the few I've run into this year do give kudos.
i got yer commodities right here! have you seen the price of hops?
Define PM please.
PM is Precious Metals
Ah, thank you JoeMortgage.
suggestions to my friends in the gun crowd,
(i'm pro 2nd amend)
give yourself a choice other than deadly physical force if you need to defend.
most cops and others, who have had to take extreme measures are haunted and suffer... (unless you are a sociopath)...but sometimes you have little choice.
12 gauge pump with the double 0 removed from the first round and replaced with, salt or a bean bag is formidable and of course loud.
also, a mega can of bear spray is awesome (looks like a small fire extinguisher and is filled with 10% oleo-capsicum)..sprays 15 feet...,non lethal and feels like fire has been poured on you.
let's pray non of this comes to pass.
Tazer anyone?
rthomas, well said. The way bubble economics seems to work is that the best profits are during the parabolic period. Just don't let it all ride.
Bernanke Says Inflation, Slowdown Complicate Policy (Update4) - Bloomberg.com
Fed chairmen need to practice talking out of both sides of their mouth, and I am not sure Bernanke has got the nack of it yet.
Scott
those fair weather friends you lost during the big D...hey since you own 5 acres of bottom land.. you are about to have a lot more...and better friends.
hang in there.
mt
You guys are great.
Can you explain what is going on in the muni market. I am confused as to the implications of all the failed auctions.
THanks and again, this site is invaluable.
It's still not too late to impeach Bush and begin treason inquires:
Pelosi, D-Calif., demanded that the department pursue misdemeanor charges against former White House counsel Harriet Miers for refusing to testify to Congress about the firings of federal prosecutors in 2006 and against chief of staff Josh Bolten for failing to turn over White House documents related to the dismissals.
She gave Attorney General Michael Mukasey one week to respond and said refusal to take the matter to a grand jury will result in the House's filing a civil lawsuit against the Bush administration.
In my opinion, we have entered a classic flight to quality, with T-bond and PMs primarily representing quality.
PM's I get, but with inflation getting ugly(er), aren't T-bonds a somewhat iffy investment?
I agree. A guy I know keeps a big stash of gold in his fridge. He doesn't trust a safe deposit box. I don't get it.
If his fridge is anything like mine, ain't nobody going to go looking to closely in there.
Could definitely see this as a story for the 2012 Presidential elections, "America is being sold off acre by acre," that kind of stuff.
Does this seem like a likely scenario?
jmay, who has the money to rescue the US banking system from their folly of leveraging their balance sheets to infinity ...(hint: no one here stateside, including the feds)...
Why not fight inflation first and deflation - aka home prices - second?
On one hand we've got a few million people being foreclosed on who have to move to some vacant condo someone's renting at rates that don't pencil.
On the other hand we've got three hundred million people paying prices that are 4-6% higher.
daveNYC, "perceived" quality.
Re PMs and guns and that 70's show - There are 2 reasons to hold PMs. One is for catastrophes - in which case you want to hold physical gold/silver. I don't know that I'd keep it at home - I'd be more worried about something like a fire than theft - but a safe deposit box is fine. That's where I keep mine (have held it for a really long time - and it has been a lousy investment - which is what you want - the saying is always put a little in your portfolio and hope it does poorly).
The other reason is for investment/speculation. Some of the ETFs which have been mentioned are kind of new - haven't been tested in a big downturn in terms of bid/ask spread and/or liquidity. On my part - I use Fidelity Select Gold (which holds gold and other PM stocks). It's appropriate for medium term traders and longer term investors - not day traders.
I am not against guns or gun ownership. I will only note that people tend to shoot family and friends much more often than strangers - sometimes by mistake - and sometimes because they get mad. So don't get a gun if you're in the middle of an ugly divorce
.
The timing of things in the 70's is different than it is now. The real estate boom was in the 70's - housing was viewed as an "inflation-proof" alternative investment. The back of the real estate market didn't really crack until Volcker pushed up interest rates to the sky (early 80's). Before then - rates weren't super low - they were kind of middling - we got a mortgage in 1973 at 6%. The real estate market didn't really start to recover until the disinflationary period which started in 1984 - and lasted for a long time.
Today - we had a demand for real estate that was inflated artificially by extraordinarily low interest rates - not by inflation (and a lot of funny money mortgages). When interest rates rose to reasonable levels - the market started to crack. And because there was so much speculation - even middling interest rates caused speculators to lose interest. And once the air started to come out of the balloon in certain markets - things went from ok - to bad. (Note that I am talking about bubble markets like Florida - not places in the midwest which have their own separate set of problems). Today - no matter how low interest rates go - I don't think they will be a short term fix for real estate.
I really haven't seen inflation as a problem until recently. But now I do - because the more the fed lowers rates - the higher commodity prices go in dollar terms. Note that I - unlike some people - look at total CPI instead of core CPI as the true indicator of inflation. Until people stop eating and using utilities and traveling - core CPI is a bunch of BS IMO. It is bad enough that the CPI doesn't include many things that a lot of people pay a lot for - like taxes - all kinds of insurance - etc. To ignore the things that it does include that people pay a lot for is nuts IMO. Note that the inflation of today is very mild compared to what was going on in the 70's (I remember gas going from 19 cents a gallon to a buck then - huge ROC) - it's just a change from what we've seen in recent years.
Anyway - the disconnect between rising rates of inflation and rising real estate values makes today very different than the 70's. BTW - I am old enough to remember the 70's as an adult - even though I'm not supposed to. It's the 60's I don't remember
. (For those of you who are too young to get the allusion - there's a saying - if you remember the 70's - you didn't live through them.)
I am not quite sure what to do now - since I have never seen a market like this before (in terms of the dollar/credit markets/real estate/inflation/commodities/etc.). So I am going to sit on some cash - read - and think about it. Roby
In the Southern California real estate world, some of us discuss San Diego as a place that Orange County is soon to turn into: San Diego is a fantastic environment to live in, tolerant and multicultural, but extremely expensive with no job growth and is kind of a has-been. My recent point to someone is the entire US will soon be like San Diego; admired and a great place to live, but expensive, no jobs, and not much of a future.
--
Dr. N writes: "what's all this talk about guns?? We have a slight (so far) economic downturn and people are imagining mobs running through their neighbourhoods looting and pillaging or worse?"
Are you English or an Aussie (from spelling)? You are clueless about what is coming to America -- The Greater Depression. Burn-ass-ke was appointed to guarantee that outcome! Pre-emptive wars and pre-emptive actions against recessions and depressions don't work too well.
Let us hire academics to head everything and we will make the old Soviet Union look good. What a bunch of dopes who believe that Burn-ass-ke can avert depression.
BTW, things would be just as bad in jolly old Britain.
Jas
Define PM please.
...glod and sliver.
Time for another Zacks.com cross post:
It is easy to criticize the Federal Reserve, but they have a very tough, at times almost impossible job. They, unlike most central banks have a dual mandate. They have to both promote economic growth and prevent inflation. Most central banks only have to prevent inflation. Unfortunately they have only one major policy tool, raising or lowering the Fed Funds rate. This at times is like trying to solve one equation with two variables. There are times when one of the two mandates has to be ignored to do a good job on the other. This is one of those times. The economy is clearly slowing, and in my opinion we are already in a recession and it has the potential to be a rough one. At the same time inflation is above the Feds comfort zone and is accelerating quickly. At the same time (and related to the inflation side of the equation) the dollar is tanking again. One of the two objectives must be at least temporarily discarded.
With his testimony yesterday and today, Bernanke made it very clear that he is willing to throw the inflation mandate under the bus (and the value of the dollar with it). He is hoping that the slowdown in the economy will in and of it self bring inflation down, or at least that is his public posture. I seriously doubt he thinks that it will actually happen, but simply that he recognizes that the alternative is worse. Fed Fund futures are currently treating it as a near certainty that the Fed will lower rates by at least 50 basis points in the middle of March. To the extent there is any uncertainty, it is if they will cut by 75 basis points to 2.25%. Bernanke knows that easy money is the WD-40 that can free up the gears of the financial system. With out question things are jammed up, it seems like a rare day that another part of the financial system doesnt blow up, asset backed commercial paper one day, auction rate preferred the next. Banks have written off massive amounts in the fourth quarter, and make no mistake, there is much more to come in the first quarter. As banks lose money, they deplete their capital. Without capital, they cant lend. If there is no lending there is no economic growth.
The answer to this problem is to cut short rates far and fast, and to make the discount window more appealing. Since there is a stigma associated with borrowing the old fashioned way from the discount window (just over night and everyone knows you are doing it) he devised an alternative, the TAF process. TAF funds are secret (as to who is borrowing them, not the amount being offered) and are for longer periods of time. The collateral does not have to be as good either. This was a fairly brilliant move on his part. Cutting short term rates will not make long term rates go down, and indeed to the extent they make people think that inflation is going to rise, will cause long rates to go up. However, the basic economic function of a bank is to borrow short (and liquid, safe) and lend long (illiquid, risky). If the short end of the curve goes down, and the long end goes up, net interest margins expand significantly. High net interest margins make banks more profitable. If banks retain those profits (rather than piss them away by paying dividends or buying back stock) then they end up in a stronger capital position. More capital equals more ability to lend. If short rates are held below the rate of inflation, it almost forces people to lend for longer terms, since cash (broadly speaking, not just currency, but money market funds) is effectively being confiscated in real terms by inflation.
Cross post continued:
However, while higher inflation can kick start economic growth in the short term, it will not do so in the long term, indeed all economic experience is that it will lead to lower long term rates of economic growth. People will start to anticipate future inflation and will demand higher interest rates and will try to index prices to inflation. If it were know with certainty that inflation was going to be exactly 10% quarter after quarter for the next ten years, it wouldnt be that much of a problem, since every contract would be adjusted to reflect this. Unfortunately high inflation also tends to be very unstable inflation. This makes long term economic planning extremely difficult. As a result economic growth slows over time. After Dr. Bernanke deals with the patients heart attack (credit crunch) he will have to administer the chemotherapy (higher short term rates) to cure the cancer (inflation).
We are now in a period where we are seeing low U.S. growth, and by low I mean below zero for at least part of this year, and high and rising inflation. This is coupled with solid but not great economic growth outside the U.S. (has been very good in recent years but will slow in reaction to the slowdown in the U.S). How do you play this game? First, stay away from bonds. T-Notes are way over valued here. If you have to buy bonds, go for the inflation indexed TIPS. If you have a strong stomach, Junk bonds could become interesting at some point, but make sure you are buying at a big discount, real vulture investing stuff. Most people are not going to want to go down that path. Invest where the growth is, and that means outside the U.S. This can be done directly through ETFs or ADRs or through U.S. multinationals that get most of their revenue from overseas. Consider names like Coke (KO) and Proctor & Gamble (PG). To the extent the product is a necessity rather than a discretionary item, all the better. Export oriented firms will also benefit from the falling dollar. Aerospace firms like Boeing (BA) and Honeywell (HON) fall into this group. Investing abroad, I would still favor the emerging economies over Europe and Japan, but would favor Europe over the U.S. Russia, Brazil and India all look interesting to me, China is still a little overheated on the stock market front, but consider buying on dips. I still like commodity plays in this environment, starting with but not limited to the biggest commodity of them all, Energy. Oil is far more likely to see $150 before it sees $50. If oil were to hit $50 due to an economic slowdown, well your holdings in Exxon (XON) or Conoco (COP) would be the last of your worries. Personally I like base metals more than precious metals, but the miners of both should do well in this environment. Among my favorites are Southern Copper (PCU) and Vale do River Doce (RIO), but a case can also be made for most of the rest of the group like Rio Tinto (RTZ), Freeport McMoran (FCX) and BHP Billiton (BHP).
I live in Oakland. I really like living in Oakland.
But sometimes reality rears it's ugly head.
The previous sale must have been fraudulant.
Re: This at times is like trying to solve one equation with two variables. There are times when one of the two mandates has to be ignored to do a good job on the other.
I think you mean "trying to solve two equations with one variable."
In this case, you can only solve one equation (or choose a value for the variable that approximately solves each equation).
--
Dirk van Dijk,
We have all learned that CBs are not good at anticipating, no?
They can only react and how do you react to two mandates when they require contrary actions?
In America, we are dealing with dopes and Crooks. Burn-ass-ke has said repeatedly that price stability is the best road to long-term and sustained growth. But the crook is now backing off his own clear long-standing statement. He is afraid of getting the blame and he wouldn't be able to avoid blame no matter what he does because the dirty deed was done a long time ago.
Jas
Ella writes: "Tazer anyone?"
No thanks. Try to imagine the circumstances of any situation where you might use it to save your life. Only get one shot with a taser. Make you nervous? Now imagine how nervous you will be if your life is threatened to the point that you draw a weapon. One shot!
Only cowards who can't defend themselves need guns.
Charlie, Charlie!
It's Thursday, almost Friday
Where's that Ambac Deal?
Charlie?
Nobel Prize winner Joseph Stiglitz is the first public figure to have the guts to say it:
The credit bubble was PURPOSELY ENGINEERED to give fiscal cover for the Iraq War--
Professor Stiglitz told the Chatham House think tank in London that the Bush White House was currently estimating the cost of the war at about $US500 billion, but that figure massively understated things such as the medical and welfare costs of US military servicemen.
The war was now the second-most expensive in US history after World War II and the second-longest after Vietnam, he said.
The spending on Iraq was a hidden cause of the current credit crunch because the US central bank responded to the massive financial drain of the war by flooding the American economy with cheap credit.
Iraq war 'caused slowdown in the US' | The Australian
Right now, Bernanke is playing the role of General David Petraeus. Bernanke's "surge" will be a re-inflation bubble -- kick the can down the road long enough that no one will be able to directly link the meltdown of the U.S. economy with the war.
As economist Ludwig von Mises said: "There is no means of avoiding the final collapse of a boom brought on by credit expansion. The question is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."
Anon,
Mises was a thinker and Burn-ass-ke is an agent of the NYC Banking and Finance Cabal. He is buying them time and screwing the American People in the process (rise in the crude oil price is the obvious sign).
Jas
Dirk van Dijk,
Your analysis rings true to me. One thing I might add. A cynical thought occurred to me last week ... there are four basic components to GDP, as expressed by the following equation:
GDP = C + I + G + (X-M)
where
C = consumption
I = investment
G = Government spending
X = exports
M = imports
Of the four terms, clearly investment and government spending are now either falling hard or about to. That leaves consumption and (X-M) or exports - imports as the only potential positive contributors. A weak dollar should be neutral here, but all the cheap crap from China that we import may offset higher energy and food prices.
The real area for Blackhawk Ben to try and influence GDP right now is consumption. All of the higher gas, energy and food prices create higher consumption. This is really just inflation.
Bennie and the Feds strategy appears to be one of smoke and mirrors. Achieve a total GDP of maybe 2-3% through a negative real GDP plus 4% or so inflation. Maybe enough to keep the masses from revolting.
You know they're in cahoots
With Wall Street suits
Your budget's blown out on bread and gasoline, oh
B-B-B-Bennie and the Feds
"You'll know PMs are in the same class as Real Estate was when you're standing in line at the grocery store and some woman in front of you is talking about how she bought gold as an investment. That time will be here in about another 30 to 60 days."
No, a lot longer than that. The mass of people have to really get antsy about inflation first. And they haven't, because some things are up, but others are down or stable.
Precious metal fever hasn't hit the media bigtime. When that happens, it'll be the beginning of the end, though the end may be years off. Harry Browne, with his bestseller and media appearance and constant buy-silver-and-swiss-francs drumbeat was everywhere in the early-mid '70s. Then there was the Coming of the Krugerrands, and the Hunt Brother, and $50 silver, and ...
In short, things will get pretty darn wiggy before the end, and the beginning of the end may well be as drawn out as the buildup. It'll be hard to miss, though I'll probably bail early in any case. Heck, gold is already 2/3 of the way to my wildest-dream figure.
--
Just to show how born-and-bred American dopes get served by the Feds:
A system befitting dopes, no?
Americans are politically impotent to do anything when they get screwed royally by the Feds. Crooks have complete control of the Feds. The dopes do get to vote! (A useless exercise, I might add, because Crooks run the economic show no matter who is elected).
Jas
PS: Eddy, bonds are foreseeing the recession to be followed by depression.
I recently overheard two Canadians in a Tim Horton store discussing how many Latinos were illegally coming to Canada from the US. So much for chasing weak US dollars.
So we're exporting our immigration problems to Canada? Wow, I guess NAFTA really does work, after all!
CS,
More worried about C falling than G falling, but your core point is a good one, however, have to put (X-M) in the positive camp with the falling $. Net exports ex oil have been recovering nicely. Unfortunately in the 4Q the improvement came more from falling M and not rising X (although X was still up but much less than in 3Q). However, it would take a heroic effort on the part of net exports to pull the chestnuts out of the fire. Of the 4 elements C is far and away the biggest (70% of GDP). Historically it has also been the most stable, but with reall incomes falling and no more ability to borrow C is likely to head down. The stimulus checks will help a little bit, but the emp has to be more on little than on help, since so much of them will be saved (debt reduction = saving). Nominal C almost never falls negative, but will this year, possibly by quite a bit.
Only cowards who can't defend themselves need guns.
Ezra | 02.28.08 - 7:03 pm | #
Make sure you let me know where you live. I will send the thugs that were roaming around after Hurricane Charley over by your way. It took 4+ days to get the Guard up and running. My neighbors are pretty much 65-70 plus. Who the heck is gonna watch out for them ?? What dial 911? Oh wait,no phones.
So yes, I am the largest coward you will ever meet and damn proud of it...
Chris
I can appreciate your position Chris but that situation is the exception, not the rule. I've lived in metro Philly all my life and never...nope... not once have I ever needed a gun. Most of those I know that think they need a gun are gun knuts for the most part. I find their paranoia contemptible and their character coward like.
CobraDriver,I managed property in east Oakland for 15 years.Enough said.
I have heard that there is legislation coming through congress that will make it easier for foreigners to buy real estate here in the U.S.
Easier than what? There are no restrictions at all on foreigners purchasing US RE. You've got the cash, you've got yourself the property.
Are they going to give foreigners VA loans or something?
What if this is the official thinking:
Debt is so out of hand at every level in the United States that a long period of inflation is NECESSARY?
Would the government and Fed policy of the last couple of years make any less sense if we described it as a DELIBERATE effort to run down the value of assets in real terms?