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That really worked to turn the US around....
China's fooyucked!
Nostrovia,
1 billionth...
What will China do with all their dollars IS the trillion dollar quesion IMHO.
convert them to 2 ply
sc,
"convert them to 2 ply"
Plywood or toilet paper?
Nostrovia,
...and all the people moving from cities to cities.
China Daily Website - Connecting China Connecting the World
150 million migrant workers in China
But what happens to U.S. interest rates if China slows their investment in dollar denominated assets?
I like these type of questions!
We can get them to buy some other promisory note and then not honour it. Its not like defaulting but rather a point to discuss....
Inflaton is a coming...
That's the U.S. in a couple of years.
"China needs an annual GDP growth rate of something in the 6% to 8% range to provide jobs for all the people moving from the countryside to the cities. "
Everybody repeats this same meme. But it never makes any sense to me. If there are no more jobs then people won't come from the countryside. They will stay at home and farm. People always repeat this same statement but they are acting as if people do not react to changes in the economy. These people didn't just spring up out of the ground. They had some kind of occupation before.
Anyone care to explain this a bit more?
Barley,
/grumble
"Inflaton is a coming"
They're not honoring LOC's. That's debt destruction. In a fiat world debt destruction is the other 'flation.
Nostrovia,
On Tuesday, over 500 enraged toy factory workers smashed police vehicles and stormed factory gates, damaging computers and office property in Dongguan in the southern Guangdong province, State-run media Xinhua reported on Wednesday.
"The company's managers fled their offices on Tuesday night,'' Xinhua said, adding that about 1,000 police and security guards tried to control the mob.
China is the world's top toy exporter and this should have been its busiest season making Christmas gifts for American and European children.
http://www.tradingmarkets.com/.site/news/Stock%20News/2052252/
It's not so much that the rural cardholders move to the cities, as it is they go work there for 2-3 years before burning out and returning home to buy a farm
Even if the economy kept on booming, the rural labour supply would have been exhausted before long.
David Johnston - People are migrating from villages to cities in search for better life. If there are no jobs in cities, these people will stay in villages and in poverty.
Not good for social stability.
What countryside? China's turning into a desert.
The desertification of China
But what happens to U.S. interest rates if China slows their investment in dollar denominated assets?
That's the $10,000 question.
The short answer is, we're fooyucked (in the colorful vernacular of Comrade Misean.)
The long answer, is perhaps more complex.
Nobody I know of (including the usual gurus, Denninger, Mish) foresaw the long end of the curve getting bid up so ridiculously high (10 year yield = 2.98%)!
This may be a short term flight out of short-term treasuries into the longer end of the curve. As anything shorter in duration than 1 year is yielding essentially zero, the only way to get any return at all is to go further out the curve. John Jansen over at acrossthecurve.com had a good writeup on this today.
I have doubts as to how long this trend can last. The flattening of the entire yield curve down to zero is going to destroy the remaining banks that don't have access to the TARP (and there are some that don't, like FED and our dearly departed DSL.)
As for China, they'd be well served to diversify out of U.S. bonds just on the crappy yield alone. This has train wreck potential next year, kind of like driving a Ford pinto down a steep hill with a trunkful of nitro glycerin and a dump truck tail-gaiting you.
Misean,
I swear you balance this entire friggin' place out at least once a day.
Thank you Comrade, thank you!
m
aleister perdurabo,
"On Tuesday, over 500 enraged toy factory workers smashed police vehicles and stormed factory gates, damaging computers and office property in Dongguan in the southern Guangdong province, State-run media Xinhua reported on Wednesday.
"The company's managers fled their offices on Tuesday night,'' Xinhua said, adding that about 1,000 police and security guards tried to control the mob.
China is the world's top toy exporter and this should have been its busiest season making Christmas gifts for American and European children."
Hate to keep posting this, but damn relevant here:
Damn! Damn!
WSJ:
Santa to lay off 3500 elves, 2/3rds of his staff, and shuttering 90% of his toy making operations. The remaining staff is mostly administrative, to manage the shut down.
When asked why he was doing this, he replied "F**k this economy. No TARP, and FED won't let me become a bank holding company. It's always cold up here. Do you know what the energy bills were like when Goldman Sucks cornered that oil market! You can't run a proper nuclear power plant on ice you know. Then they won't roll my CP before Thanksgiving. Screw 'em."
We talked to several elves about to go unemployed. Adam Dollmaker:
"What are we supposed to do now? Go to Elfis's Eskimo Casino and become dealers? Who's going to play? Beancounters?"
July Dressmaker:
"I always thought if things got tough I could go back to Iceland. Yeah, that's gonna happen, now. I'm checking on jobs for cleaning dog doors in Sweeden right now."
Tough times, indeed. But is Santa hopeful about the future?
"Hell no. The Easter Bunny is having trouble getting money for the Easter egg runnup at his ranch, and the Tooth Fairy's Tooth Backed Securities have CDS rates at like 10000 bps. This thing is going into a hole. I might have to eat Donner this winter."
So things are looking a bit grim.
Nostrovia,
No offense to Bill, but many of his posts over the past . . . 3-4 years are trying to find a scenario where U.S. interest rates rise, or outright predicting such a rise. Yet it's been a consolidation and now outright decline in all yields, esp. the 10-year. I think it's confusing the issue.
The U.S. are the consumers of the world, period. We have the largest debt markets to handle such purchases, and when these markets rise because of our spending on products largely from China/Asia, then China receives those dollars and recycles them by purchasing Treasuries, keeping yields low.
Now, here's where people get sidetracked. Once our consumption of Chinese/Asian products falls, we no longer need such a large debt market (aside from these bailouts, which seem not to detract from the falling yield trend) and thus China/Asia both don't receive as many dollars and don't reinvest them in Treasuries. So it's a wash. In fact, the China/Asia slowdown lags behind the U.S., so they have more income relative to our need for debt purchases due to U.S. domestic consumption. I never felt this was too difficult an argument to understand.
Please dont associate comming higher interest rate with inflation.
This depression is different than 1929 depression.
We dont have any useful tool to control or manage this depression.
Interest rate is going to go up because of uncertanity in how USG is going to pay its debt and isssuing to much new debt in coming year.
We have higher rate of employement that last depression and most of this employemet is in service oriented which is prone to disapper during tough times.
All countries wiil close their borders for trade since USG cant devalue their $ (since every other countries still want to peg their currencies to
aleister perdurabo writes:
On Tuesday, over 500 enraged toy factory workers smashed police vehicles and stormed factory gates, damaging computers and office property in Dongguan in the southern Guangdong province, State-run media Xinhua reported on Wednesday.
It is a measure of my maturity, or lack thereof, that I can't read this story without hearing "Everybody was Kungfu fighting" in the background...
If the Chinese aren't buying US Treasurys, that means that their trade surplus has disappeared.
If that happened over the next year, that would imply that the U.S. switch from a trade deficit position to trade surplus, and the economy would grow at least 5%. The Chinese economy would swing from surplus to flat, and their economy would grow at 0% at best.
These growth impulses would be far more important than Chinese purchases of bonds in determining the outlook for rates.
c_s,
It's a $10T question.
"This has train wreck potential next year, kind of like driving a Ford pinto down a steep hill with a trunkful of nitro glycerin and a dump truck tail-gaiting you."
You owe me a 'tini and a keyboard.
Bwahaahahhahaahhahahahaha!
Nostrovia,
About 1,000 police and security guards this week attempted to break up a demonstration of fired workers that overturned a police car, smashed motorbikes and broke company equipment in southern Guangdong province, the state-run Xinhua News Agency reported yesterday.
We all know how this meme plays out.
Asians have savings. They have no social security safety net. So they cash in the bank and gold in the safe.
Asians will move back to farm if they can't find work. Asians will be ok.
People don't care about GDP. People adjust to situation. Politicians and economists care about GDP. And they implement policies that makes the economy worse, trying to make a flawed statistics better.
What's my point? None, I have given up.
"The World Bank forecasts that Chinas current account surplus will RISE not fall in 2009, going from an estimated $385 billion to $425 billion. How is that possible if real imports are forecast to grow faster than real exports? Easy the terms of trade moved in Chinas favor. The price of the raw materials China imports will fall faster than the value of Chinas exports. Chinas oil and iron bill will fall dramatically.
In macroeconomic terms, Chinas fiscal stimulus will offset a fall in domestic investment leaving Chinas current account (i.e. savings) surplus unchanged. The 2009 surplus is expected to be roughly the same share of Chinas GDP (9%) as the 2008 surplus.
In dollar terms, the World Bank forecasts that China will add almost as much to its reserves in 2009 than in 2008. That is a bit misleading: the 2008 reserve growth number leaves out the funds shifted to the CIC (ballpark, $100b in 08) and the rise in the foreign exchange reserve requirement of the state banks (ballpark, another $100b). But it captures a basis truth. Even if a fall in hot money inflows means that China will be adding $500b rather than $700b to its foreign assets, its foreign assets will still be growing incredibly rapidly. China already has counting its hidden reserves well over a $2 trillion. It is now rapidly heading for $3 trillion."
Brad Setser: Follow the Money » Page not found
"These people didn't just spring up out of the ground. They had some kind of occupation before."
It is my sense that it is hard to overstate the poverty created and reinforced in the darkest years of Mao (early 60s). It seems at a distance like an attempt to go from the 15th century to the 22nd for the folks in the rural interior there.
Pick me pick me...We get higher interest rates.
US Federal Government Bailout costs now at $8.5 trillion for financial institutions so far.
Roubini: Policies will lead to "much higher real interest rates on public debt"
Duh....but wonder how many Americans truly understand that they are on the hook for the policy implications of socializing the losses for the super rich.
If they don't understand now I suppose they'll find out the hard way over next few years
Click your heels 3 times and 11 Trillion USA debt and $55 Trillion in USA unfunded liabilities goes away magically without a substantial increase in USA interest rates.
Got Turkee !
Everybody repeats this same meme. But it never makes any sense to me. If there are no more jobs then people won't come from the countryside. They will stay at home and farm. People always repeat this same statement but they are acting as if people do not react to changes in the economy. These people didn't just spring up out of the ground. They had some kind of occupation before.
Anyone care to explain this a bit more?
David Johnston | Homepage | 11.26.08 - 8:34 pm | #
How about 24 million new babies a year. They do grow up.
Yep, Dawg, and it's nice to know Corporate America is in bed with that...in fact, learning from it, and selling into it.
China's All-Seeing Eye : Rolling Stone
matt,
"I swear you balance this entire friggin' place out at least once a day.
Thank you Comrade, thank you!"
I'm not sure what tickled your fancy. But thanks, and if you're US, Happy Thanksgiving.
Nostrovia,
The World Bank forecasts...
That's where I stopped.
On Tuesday, over 500 enraged toy factory workers smashed police vehicles and stormed factory gates
That's awesome!
I wish it would happen in Washington, D.C.!
Anyone who lived in the farm land doest mean he had a job while he lived there.
bond guy - trade surplus can appear while the overall trade volume drops.
Imagine that the US purchase of goods from China dropped 90%. That means China will be buying very little Ts.
MUCH less that what will be needed by the USG given it plans and promises.
So, let me guess, the last time the Detroit Lions won on Thanksgiving was... 1933?
Did you know that in brutal bear markets, a Jets and Giants win in the same weekend results in 3-day rallies 99% of the time?
Yeah, I thought the same thing, Broward. Not until they take away the Bread & Circuses, I'm afraid.
Persecuted Comrade Anonymouse writes:
"Now, here's where people get sidetracked. Once our consumption of Chinese/Asian products falls, we no longer need such a large debt market (aside from these bailouts, which seem not to detract from the falling yield trend) and thus China/Asia both don't receive as many dollars and don't reinvest them in Treasuries"
PCA, aren't you foregtting the continuing need to finance the existing debt - irrespective of whether trade deficit continues? Who will "refi" our debt should China/US trade flatten or reverse?
"kind of like driving a Ford pinto down a steep hill"
The famous scene from Top Secret
YouTube -
Lionel,
Kung Fu fighting:
YouTube - EVERYBODY WAS KUNG FU FIGHTING
Nostrovia,
or parking a pinto on the autobahn.
Persecuted Comrade Anonymouse writes:
"Now, here's where people get sidetracked. Once our consumption of Chinese/Asian products falls, we no longer need such a large debt market (aside from these bailouts, which seem not to detract from the falling yield trend) and thus China/Asia both don't receive as many dollars and don't reinvest them in Treasuries. So it's a wash."
Exact-a-mundo.
People have a tendency to look at one side of the trade, and forget that there is a flow on the other side. You can't ignore this if you are making arguments based on capital flows.
Another way of looking at this is that people view the market as an impersonal machine that generates prices that they can unilaterally act upon. This "model" make sense for modelling financial assets, and matches the experience of retail investors. But it does not reflect the reality faced by large institutions who have some ability to determine market pricing.
Misean,
I'm not in the US, but will honor your country by slaughtering 3 different birds and consuming them as if it was one awesome bird.
Why isn't the Turducken the symbol of freedom yet?
Thanks for a great blogspot CR & Tanta.
Happy Thanksgiving.
The idea that foreign sovereigns are even real participants in the contemporary treasury market is absurd.
This is just the Fed jerking itself around as it moves TARP money into escrow as... wait for it... treasuries.
Same with equities - some people are buying, but 90% of it is shorts jerking each other off.
dc - if still around, i have to go, but it looks like CR decided to post a piece that perhaps most succinctly addresses this question of future US real interest rates
get ready for the ride
Comrade Misean - re: 'Santa's Rant' upthread = +1
"Comrade Misean is Dope"
I sent your story from the North Pole to a couple of friends. I thought they would be amused. I was. Hope you don't mind.
matt,
"I'm not in the US, but will honor your country by slaughtering 3 different birds and consuming them as if it was one awesome bird."
Cool, I'm having squirrel, pigeon, and Somali pirate Trojan Horse pony.
Yeah, I know, "Soylient Green is people."
Yeah, yeah.
Tastes fine with gravy.
Nostrovia,
MrM writes:
"bond guy - trade surplus can appear while the overall trade volume drops.
Imagine that the US purchase of goods from China dropped 90%. That means China will be buying very little Ts.
MUCH less that what will be needed by the USG given it plans and promises."
The Chinese economy would collapse if that happened - that would represent a huge subtraction from growth. It;s a safe bet that they would drive the CNY down to avoid that problem.
If the U.S. current account deficit disappears, then by definition there is no need for foreign financing for the U.S.
If the U.S. Treasury is running a deficit (and no current account imbalance), it implies that the private sector in aggregate is running a financial surplus. Pretty much by definition, that money has to be lent to the Treasury.
If you think that money goes anywhere else, please explain (1) who receives the money and (2) what do they do with it?
Accounting identities are your friend.
lay off the Keynsian hater aid for just a mommnet...
inflation is present at all times especially when USG goverment expenditures are a claim on goods and services...
the irrationality of spending 40% of GDP in 4 months, after Japan spent what? like 10% for ten years?
When this deflation runs out, you best be ready to pull the ripcord.
Who gives a crap about China...do you think that they cared about the millions of American jobs that they took? Yeah, right. They should give every man pedal-generator and say, "pedal all day to generate electricity". 500 million times 0.8 kWhr = 400 MWhr. That'll keep them busy.
Meanwhile I've been following the horrible events in Mumbai. I find them Black Swanish.
Someone may come up with the idea of holding the olympics every year (that would actually be twice a year, considering summer/winter games). Consider the advantages.
cr writes: But what happens to U.S. interest rates if China slows their investment in dollar denominated assets?
A process of price discovery would commence. As I understand it, and I could well be wrong, but the Fed must have a settling of accounts from time to time and may not be able by law to not monetize it. Let the bidding begin!
Pavel Chichikov,
"I sent your story from the North Pole to a couple of friends. I thought they would be amused. I was. Hope you don't mind."
Public blog. I'm just some lowly poster. Hell take credit for it if you like. If it gives a laugh, what do I care who claims they wrote it.
I'm a big open...OPEN...sourrce software guy. I post code all over the place. Brain code too.
Happy Thanksgiving!
Nostrovia,
There should be no more Olympics.
Pavel- follow what is happening in the House of Saud- that will be much more important in the long run.
Someday this war's gonna end...
from old thread:
MrM
i dont know that they do actually.
if you've got facts and experience to back up your statement, i sincerely am open to hearing them.
when i was a junior trader on the desk of a global hedge fund (yes folks, hedge fund trader prior to being a real estate developer), i was laughed off the desk when i suggested we short treasuries to build capital for other trades. sure, there were the paired trades, but generally speaking LOC's and new equity were the best way to raise capital. and margin of course.
so no, i dont think that short covering of paired UST trades or outright short interest in the UST market (hello, why would you be short?) is the main driver here...
but totally open to discussions beyond my nascent hedgie days....(as translated into semi mature trading at a later date)
and PS sorry for the delay, dealing with bed time here at the dc1000 homestead.
We have a lot of crows around here. Why do people talk about eating them as if it's a bad thing?
bond guy writes:
. . .it implies that the private sector in aggregate is running a financial surplus.
It's just a matter of when not if this occurs. I was way too optimistic about how long it would take for house prices to decline. As someone mentioned last thread, if savings rate rises too quickly - as it may well be doing via shock and capitulation to crashing asset prices - then we'll unintentionally contract the domestic and world economies even more. But I still advocate the coming rise in domestic savings rates. The developing world needs a New Deal more than the U.S.
"Hell take credit for it if you like."
I would never do that. I'm a writer.
I thought it was very well written.
Certainly, the long term treasury rates will accelerate, upwards. I think the current yield curve is a joke. Private sector rates are sky high, in some cases approaching infinity while the Treasury rates are in a fools paradise of flight to quality.
Under the cover of the Treasury yield curve, Bernanke continues to destroy any real hope of a strong bottom.
IMO, the Fed should immediately raise the short term treasury rates to 4 pct. I believe it would be less destabilizing than what he is doing now. Investors will flock to Treasuries as an investment rather than a panic.
Ben Bernanke has been a disaster.
I have never understood exactly why Chinese people just don't put another toy under the tree for each Chinese child.
1 billion Chinese X 1 toy each = 1 billion toys.
Now, that's stimulus!
dc1000 - no direct knowledge, only hearsay
bond guy and comrade persecuted anonymous:
spot on folks.
sorry all, got derailed by bed time here at the dc1000 household, as well as t day prep and tini time and gettin wife set up with ugly betty on HD streaming from her laptop to the big screen.
sigh
now back to business
no
the UST market is right. everything sucks. no inflation. no default in the US. eek yields anywhere you can. don't lose is better than trying to gain yield.
all this means that if you've got steady income you're doing well and loving the low interest environment.
and please dont forget:
the tech infrastructure boom of the late 90's has laid the way for a productivity deflation boom of love that we're just starting to really realize.
the internet and mass dissemination of the PC (hello, solar powered laptops with wifi for 299?) is the most transformative event in our history. and by OUR i mean HUMANS.
dont forget this.
it is bigger than debts.
it is bigger than housing.
and to whomever said that the residential housing market was a signal and equated it to my taking market signals from the UST market - HARH HAR HARHAHAHRAHRARAARHA!!! resi markets were distorted by FRAUD. UST, NO FRAUD.
/rant
"Pavel- follow what is happening in the House of Saud- that will be much more important in the long run."
Maybe so, but we are not talking about a linear process here. More like four dimensional billiards on a table the size of the planet. Maybe the Saudis are watching Mumbai. And someone else is watching the Saudis watching Mumbai........n
In any case, it's giving me the creeps.
Pavel, re Mumbai. Thailand might blow up today.
On a less important note and as noted 10 times already.
Mark this down and note it as the beginning of the end.
Something is gonna happen next with Israel in the headlines.
And it won't be good news.
Pavel Chichikov,
"I would never do that. I'm a writer."
And by some of your posts, a damned fine one.
My point was I flung it out there. Take it and run with it. It took me 5 minutes. If it even entertains a 100 people for as long as it entretained me...the Donner punch still gives me a chuckle...what do I care who says they wrote it. I know I did. and that's at least 500 minutes of chuckle in this world.
So I get that much Karma. Fair trade.
Karma dude knows I wrote it too.
Nostrovia,
"IMO, the Fed should immediately raise the short term treasury rates to 4 pct."
good idea, let's get to 1981 mortgage rates in a few months. that will help stabilize housing. yesiree.
Comrade Misean,
Glad to oblige ... Happy Thanksgiving!
Pavel Chichikov writes:
"Pavel- follow what is happening in the House of Saud- that will be much more important in the long run."
Recommended reading: Siege of Mecca
Amazon.com: The Siege of Mecca: The Forgotten Uprising in Islam's Holiest Shrine and the Birth of al-Qaeda (9780385519250): Yaroslav Trofimov: Books
No, follow who is dying- the Crown Prince, and the succession is not clear!
That is the kind of instability that can cause problems worldwide.
See the small article on debka and apparently behind the paywall on stratfor.
Someday this war's gonna end...
bond guy - assume that US buys zero from China (yes, the Chinese economy will collapse, and that's precisely the point but for a different discussion). However, the USG needs to borrow to stimulate the economy and recapitalize the banks. The planned stimulus package is greater than US private savings.
What happens next?
At some level I believe that the Chinese are more sensitive to the needs of their workers than we are. They really do pay attention to social problems caused by unemployment. In China when major social disruptions caused by unemployment happen, there will be millions of angry workers on the streets demanding change. The government knows this. Here in the US we can displace millions of workers from their manufacturing jobs through Nafta and other devices designed to make our workers irrelevant and there is nary a peep of protest, at least by Chinese standards.
I know there are many references to pitch forks and torches proliferating on the blogs these days, but these are just allusions to a long ago past. In reality, we know that this is not something we could ever do, but that is not so for a disgruntled Chinese worker.
"...what do I care who says they wrote it. "
If I knew what name to credit I would certainly give proper credit.
anon @ 859: who cares what private sector interest rates are like? that is no indicator of nothing. yes double negative. it means liquidity issues, market issues, regulatory issues etc. private sector rates at these levels dont mean, hey this is the rate we're willing to lend to you on, it means, DONT FUCKING ASK ME FOR MONEY.
its the UST yields that require the analysis because in them is the most important quantitative measure: inflation expectations.
its the UST yields that require the analysis because in them is the most important quantitative measure: inflation expectations.
~~~~~~~~
and measurement of risk ?
Well now. Some very bright minds. Now, in English, interest rates will go up, a price will be discovered at every auction/sale. Get yer cash ready if you want to lock in double digit 30 year.
"its the UST yields that require the analysis because in them is the most important quantitative measure: inflation expectations."
that's just silly. when petroshieks and toxic toy exporters stuff their trillions into the pillow case, they don't care about inflation. it's a mercantile ploy to keep gringo consumers happy and the default for lack of other options.
why do you think crude quintupled without rates reflecting this fact at all over 6 years?
treasury prices are a function of supply and demand, and nothing else.
dc1000,
"the tech infrastructure boom of the late 90's has laid the way for a productivity deflation boom of love that we're just starting to really realize."
Well we're in the same camp. Just different resolutions. We'll see.
Now, for me (single...GF doing TD with ex, and his new..cuz 17 yo son wants to be with dad this year) off to the funnies.
Enough econ debate for the next few days.
Nostrovia,
MrM:
Petro dollars. Countries flush with reserves that are 10000 times higher than they ever imagined.
russia is the one to watch
watch them freak out as oil collapses to $20/barrel and with it their economy, their power, their control. the only way to save their wealth and power is to...
drum roll please......
buy fucking UST.
"...and apparently behind the paywall on stratfor."
I saw that but didn't read it. I'm a subscriber but I don't have the patience to read all the articles they send. I'll look for it, though. Agreed, serious instability in Saudi Arabia would be very bad news.
Rollling Stone article is interesting, it's a confirmation that a certain degree of conformity == productivity.
People have finite bandwidth, finite capacity, finite time. There's an optimum degree of conformity / diversity, depending on your definition of efficiency.
For Information Technology that's not so true, it's considerably more flexible. Productivity is a function of transaction costs. People have finite transaction costs so productivity is finite. So we leverage it higher through devices.
Theoretically, you could create technology to handle almost infinite transaction costs internally but expose a finite interface to people.
This security shield in China, for instance. No doubt they're brute-forcing the surveillance right now with people. But you could eventually write software to identify behavior, and dial down the human transaction cost very low.
I've toyed with this idea for many years. One qualitative difference between the IT revolution and other industrial revolutions is rate of change and autonomy aspects.
It should be possible to build technology to support almost inifinite diversity. But now your bottleneck is not production, but consumption and community.
The cost of maintaining a commumity, common language, common goals, etc.
Anyway, it also pushes the cost equation back on commodities. Physical materials become a bottleneck.
I wish I could figure it out better. I wish I could quantify this a bit with real trend data.
Pavel,
"If I knew what name to credit I would certainly give proper credit."
Thank you so very much. Truly mean it.
Nostrovia,
"watch them freak out"
uh, rsx moved from 60 to 12 in 4 months. is that not enough of a 'freak out' for you?
bgates:
sorry but you express your rudimentary understanding of markets with that statement.
oil and other hard assets are susceptible to bubbles like they've seen because one worries about supply.
but HELL O MO FO - no one worries about the supple of UST.
they only worry about the intrinsic nature of the fixed income market:
risk free
plus
default risk
plus
inflation expectations
Russia is going to sell its reserves (in UST and agency paper) to support its economy and companies which borrowed heavily in USD and EUR.
So Russia will push the T yields up.
"Only rarely does the Saudi royal house issue medical bulletins on its rulers. DEBKAfiles Saudi experts say that the bare announcement Monday, Nov. 23, that Crown Prince Sultan bin Abdulaziz, 83 or 85, had left for the United States Sunday for medical checkups and treatment for cancer indicates that his condition is seen as terminal."
If I remember correctly, Treasury called those bonds of the early 80s, the ones with double-digit yields.
Hi all.
Happy thanksgiving all.
I don't get it, why does everyone thinks China is slowdown invincible. If you ask me, they are the largest bubble of the last 5 years. It reminds me the slogan: "Re prices never go down" (China never slows down).
I doubt they will record negative growth just because their government will fix the statistics. However, I bet they will be much closer to 1% then 5%.
Just wait till 1 Q of 2009, and their realization that our stores won't need new inventory anytime soon.
MrM:
negative on that assumption sorry.
what they will do is stash reserves in treasuries, end banking in russia, cause a run on the ruble and default on domestic bonds
all in the name of protecting reserves.
um, been done before!
reptillian,
I wasn't even born yet but I recall they were non-callable
Hey, I think I misread that Bloomberg piece:
The US biggest interest-rate cut in 11 years highlights government concerns that the country risks spiraling unemployment, social unrest and the deepest economic slowdown in almost two decades.
...
The US is trying to draw a line under financial executives' bonuses and free market economists' reputation, said Hong-Fu Min, chief North-Atlantic economist at ´JackiChan Ltd in NY.
...
Gross domestic product may grow -5.5 percent next year, ...
thats right bull in bearskin
and in the face of that economy, where do you want your money?
I see no slow down in activity, only happy people with open mouths, who are willing to discuss how things are going
so you really don't believe there was a positive feedback loop between petrodollars, mercantile exporters and appetite for treasuries? from '03-'07?
wash out chaps:
Chinas exports are crashing, receiving less dollars and so less to recycle... that seems fair.
So what happens when you factor in the MASSIVE increase in debt being issued by the US gov? The calculator is up to about $4.3tn for the current crisis. This is debt issued out of a cycle, isn't it?
China can't/(won't?) buy it all, petros can't/(won't?) swallow it all, Japan can't/(won't?) take it and the euros certainly aren't going to step up and take a slice of the US action.
So what actually happens? Fire up the presses?
"Would you like some turnip with your Thanksgiving cabbage soup Comrade/Citizen?"
The Putin government is not interested in repeating Yeltsin's fate. It is going to support consumers which means giving hard currency (cash) to importes. Plus the gov't will save/support its key allies in key industries. That means helping them roll over teir debt.
Domestic default is not an option for Putin.
DrChaos,
"I don't get it, why does everyone thinks China is slowdown invincible. If you ask me, they are the largest bubble of the last 5 years. It reminds me the slogan: "Re prices never go down" (China never slows down)."
Oh it will. Already is. Those who think not are deluding themselves. The Bombay problems are likely tied in here somehow.
Nostrovia,
"So what actually happens? Fire up the presses?"
sadly, there's no instant devaluation trick available like FDR's repricing of gold from 20 to 35 or thereabouts. hard to devalue things with zero inherent value.
the internet and mass dissemination of the PC (hello, solar powered laptops with wifi for 299?) is the most transformative event in our history
I'm tempted to agree but the Industrial Revolution was a similar era.
The biggest difference that I know is the quantitative difference of IT technology feedback loop back into itself. The rate of change compared to other eras is astounding but it's trapped within that loop, most of it doesn't escape out into reality.
Most of it recycles back into doing more faster, with slightly better detail, with better reliability.
Right now, I'd judge the eras about equal but the IT era might have some escape velocity if software can develop real intelligence.
The boundary of IT is not in faster cycles or hardware or quicker software, the current boundary is in the interfacing to people.
People are finite. Finite time, finite ability to absorb material, finite capacity to store memories and ideas.
interestingly, bgates, i do. and yet, that world is turned on its head because the players fundamental positions have changed.
when that cycle kicked off, the BRIC countries et al and arab petro fiefdoms, had a much different global and domestic situation.
CR ARE YOU LISTENING???
NOW, they need to preserve what they've built whic means an entirely new set of guidelines for their decision making.
preserve reserves at all costs.
prohibit transfer of local currency into USD.
outright default on local bonds in the name of maintaining foreign reserves and with the added benefit of bankrupting local competition and business (whom they've tried to extinguish through other nefarious means all along).
the whole world is different than two months ago because people's expectations are different.
Dr Chaos, the smart money has been short China and commodities since early this year.
Now the crowd moves in.
China is basic Austrian Theory. Capital goods. Overcapacity and bust.
MrM:
as someone who has close ties to russian oil and gas traders, i can tell you that your assumption is wrong.
russia will use this opportunity to squash all private interest and reabsorb it into the communal fold.
i was just in moscow and heard this very same cry from those who have the most to lose from it.
if you think the russian market will sacrifice its international standing for the sake of its domestic companies it does not control, youz crazy.
russia is entering a period of consolidation of power by the govt and one way to do that is to restrict currency movements and allow for the BK of domestic entities and devaulation of its own currency while maintaining its international reserves.
dont get all american on us by applying our perspective to their way of thinking.
it aint the same
Not entirely OT: Lehman's Asia risk is revealed
From Financial Times.
"Recommended reading: Siege of Mecca
404 - Document Not Found 0385519257"
Comrade V | Homepage | 11.26.08 - 9:06 pm | #
Thanks for the link. I ordered it...
Chris
dc1000 - Why did you assume I am American?
Я вообще-то не американец
Fire up the presses?
~~~~~~~~
They'll have to print money without debt. Taking dollars out of the system just to spend them again won't fix the problem, just aggravate it.
Cobradriver @ 9:30.
You are most welcome. Nothing is what it seems.
MrM:
Y yo soy un hombre del mundo sin ancias en paises, con un mentalidad del universo.
hard to devalue things with zero inherent value.
~~~Zimbawe did it ...
MrM
and by the way, i didnt assume you were american or anything else other than what was represented by your posts. i've been a global citizen long enough to know not to make those assumptions.
did you know there were chinese people in brazil????
LOL j/k
People are finite. Finite time, finite ability to absorb material, finite capacity to store memories and ideas.
Broward Horne
~~~
touche
Russia Suffers Plunging Reserves as Ruble Struggles (Update3) - Bloomberg.com
Nov. 19 (Bloomberg) -- Russia's foreign-exchange reserves are draining fast and may take almost a decade of economic stability with them.
Russia's international reserves, the third-biggest after China's and Japan's, have fallen $122.7 billion, or 21 percent, since Aug. 8 as the central bank tried to shore up the ruble. At the same time, President Dmitry Medvedev, 43, has pledged more than $200 billion of tax cuts, loans and other measures to maintain economic growth, threatened by plummeting oil prices and investor flight.
Doesn't look like they are really trying to protect the reserves
"I don't get it, why does everyone thinks China is slowdown invincible. If you ask me, they are the largest bubble of the last 5 years.
Just wait till 1 Q of 2009, and their realization that our stores won't need new inventory anytime soon."
DrChaos | 11.26.08 - 9:16 pm | #
DrChaos,
My personal "Oh shit indicator?". For the first time ever I heard adds on the local radio station for Harbor Freight. There is a decent sized store in Sarasota. Lots of "50% off","2 for one","Best price of the year" in the add.
Methinks inventory is piling up quickly. I am going to stop next week after work and check it out...
Chris
Chinas biggest interest-rate cut in 11 years highlights government concerns that the country risks spiraling unemployment, social unrest and the deepest economic slowdown in almost two decades.
It's funny how persistent the belief is that there's some natural tie between the money supply and the economy and that by expanding the money supply you can expand the economy in a sustainable way.
It ignores the reality that this relationship is completely artificial - it exists only because we have enforced it in the past.
In the long run trying to "reflate" the economy by reflating the money supply simply breaks this artificial man-made bond between money and economic activity and renders money useless (as well as destroying any economic activity dependent on it).
dreadletterday:
what you're not taking into account is the ten year track record of the shadow banking system both providing for avenues of capital and as well soaking up capital sloshing around.
now that its dead, all that money gotta go somewhere.....
UST's baby.
again, i'm a dollar bull and have been since april.
i'm out there with my calls and have been.
MrM writes:
"bond guy - assume that US buys zero from China (yes, the Chinese economy will collapse, and that's precisely the point but for a different discussion). However, the USG needs to borrow to stimulate the economy and recapitalize the banks. The planned stimulus package is greater than US private savings.
What happens next?"
OK, let's ignore the foreign sector. What happens?
If there is a deep recession, it is because private sector entities want to increase their savings/liquidity.
Important Note: If that increase in savings does not occur, it implies there will not be a deep recession. If there is not a deep recession, Treasurys will get annhilated. So, take that as a disclaimer - Treasury prices can go down as well as up, and if they go down from here, they will go down very, very fast.
But if we are in deep recession, as I noted, private sector savings will be rising. What do they do with the money?
(1) Are they going to invest in real estate? Ha ha.
(2) Will they buy stocks? If they do, it implies someone is selling the stocks to them, and what does that entity do with the cash? (Ditto commodities, etc.)
(3) Will they buy Treasurys? Some obviously will.
(4) Will they pay down debt? Sure they will. The entity who had their debt paid down will need to put the money somewhere, returning as back to square 1.
(5) Will they put money in the bank? Yes. Guess what the banks will do with the money?
The flows will always balance. All that can happen is that alternative investments are so attractive that Treasury yields are forced up. So what alternative assets are out there that are actually investible by institutional investors (e.g., I exclude double short ETFs or dubious commodity plays) that are screaming buys?
the shadow banking system both providing for avenues of capital and as well soaking up capital sloshing around.
~~~~~~~~~~~
They created the sloshing capital ... they virtually printed money using CDS ...
Now comes the de-leveraging ... deflation on a grand scale.
dc1000
"again, i'm a dollar bull and have been since april.
i'm out there with my calls and have been."
Good for you. Care to be more specific relative to other Forex/assets? At what point would you reverse and when?
Shore up the Ruble??? Perhaps shore up the rubble!
Russia lives and dies with commodities prices. Think Gazprom, Norilsk, Lukoil. I covet Norilsk....
Give it 3 or 4 more quarters and 'stuff' will go to the MOON!
bond guy - I wold imagine that in a deep recession the overall amount of debt will reducing, hence no need to place the savings anywhere. The private sector becomes les leveraged.
asia news civil unrest - Google Search
Check the sources for yourselves, I'm not posting all those links.
I googled 'asia news civil unrest'.
So far I scanned to:
Thailand
Tibet
Mainland China
Mumbai
You take it from there. But check out some of these pre-views of coming attractions.
Whoever hasn't seen this black Friday Steely vid it's best after 3 cocktail min...
YouTube - Steely Dan - Black Friday
MrM:
if you are going to take a 20% reduction in those reserves and the public declarations of the russian government to be FACT, then i can't help you.
just wait til that number is 30 or 40% of the reserves.
defending the local economy and currency will fly right out the window and for real, the powers that be in RUSSIA will seize the opportunity to use the economic destruction of their own country as a way to consolidate power.
tis been done before and shall be done again.
if you think that anything the russian government says about defending local this or that is anything more than window dressing, then you REALLY ARE AMERICAN.
a russian would say, hell yeah theyze gonna fuck us, rob us, imprison us and make us eat shoes!!
"People are finite. Finite time, finite ability to absorb material, finite capacity to store memories and ideas."
And yet you have have a finite group accessing just finite info that applies to them. Why do chip makers need to know what ski facilities are doing?
Not quite buying your
Bond Guy @ 9:40 PM
Thank you, very lucid summary. If I follow your train, you and dc1000 are on the same track? Unless there is an alternative "screaming buy" where else will the money go?
Opinion on Setzer's latest?
Link at right.
M1 multiplier
St. Louis Fed: Series: MULT, M1 Money Multiplier
dc1000 - plese be more civil. Being American is not derogatory. And you Russia needs work.
DC1000, you need to re-post and replace Russia with USA in your text.
Comrade Peronista: when did this hit the shitter? what week, I'm just now coming up out of the ether.
sorry - keyboard problems:-)
I meant to say "your Russian needs work". But they way it came out was also to the point, I guess
VV, last week
MrM writes:
"bond guy - I wold imagine that in a deep recession the overall amount of debt will reducing, hence no need to place the savings anywhere. The private sector becomes les leveraged."
Yes; the private sector reduces debt, while the government increases its debt level.
The reason why the Great Depression featured such a large contraction in incomes/output is that the government was unable or unwilling to expand its balance sheet (a.k.a. issue debt) by a large enough amount to counteract the contraction of private sector balance sheets.
Post-WWII, government sectors are much larger, and so governments automatically expand their balance sheets in recession. You can complain all you want about "Keynesianism", but 20% contractions in GDP are no longer common events in countries that are not on currency pegs (or just plain screw up like Iceland).
Why do chip makers need to know what ski facilities are doing?
~~~~~~~~
How many sets of skis can a person use at one time ?
MrM:
1) i am american.
2) my russian is fine, you said, you're not normally/usually/typically/don't do/ american.
adin piva pajousta
I know thats horrible phonetics, but what can i do
Comrade Peronista: Damn, I hate overlooking stuff
what on earth does it implicate for the short tp mid term?
Volker, if you are referring to the Multiplier?
The FED has started to pay interest on the reserves the Lucky 9 place at the FED. So they are draining liquidity out of the market. That's why multiplier off the cliff. Repeat: We have thaz cliff diving.
dc1000, good post. By productivity deflation, you mean the driving down of costs due to technological and outsourcing measures?
I live in Atlanta and at Hartsfield Jackson, I don't need a person to get my ticket from as the kiosks are literally everywhere. I don't need a person to pay for my parking on the way out. Small indicator, but you can see the world is flat (investment in technology and outsourcing) showing up everywhere.
We better do a phenomenal job of getting our children prepared for the new world where mediocrity/ordinary workforce will be fighting for work at reduced wages. Entrepreneurs and value creation will be king.
peronista,
yo soy un estudiante de latinoamerica mas que todos, y entiendo lo que una peronista es...
but i'll say, that no i dont need to replace russian with american because the US has the dollar. period of story.
i've studied, lived in, loved, cried for (har har) argentina my whole life and i know the difference...
The FED has started to pay interest on the reserves the Lucky 9 place at the FED. So they are draining liquidity out of the market. That's why multiplier off the cliff. Repeat: We have thaz cliff diving.
Comrade Peronista | 11.26.08 - 9:53 pm
And as I understand it further, Bernanke seems to think he can drain the liquidity fast enough to counter balance inflation. Perhaps he's stumbled across perpetual motion.
bond guy - thanks, this is helpful.
So, how does the gov't grows its balance sheet without accessing foreign markets? The gov't will issue liabilities, but who will buy them without creating inflation?
Don't feel bad VV. I follow two things and two things only in this world. M1 and M1 multiplier. It has done me very well. Sadly I can no longer use them as indicators due to extreme actions from BB.
bond guy,
It ultimately comes down to if a there is capital flight from the US. I think because the USG is acting early, before there is a glimmer of growth anywhere else, that is unlikely. If there is no capital flight, then the government can freely act as the borrower of last resort (due to its lower risk premium) to maintain money supply.
But we can still see a weaker dollar without a panic. That is in concert with rebalancing trade, and funding increased government borrowing.
It's up to China and other large surplus countries to allow more domestic demand, or we can continue shuffling currency valuations/imported inflation, or even outright trade barriers.
One interesting thought is that unlike 1929 USA, the too large current account surplus countries this time are major importers of food. If they try to prop up those trade surpluses, then it is a natural response to have higher food prices.
And as I understand it further, Bernanke seems to think he can drain the liquidity fast enough to counter balance inflation. Perhaps he's stumbled across perpetual motion.
Volker the Viking | 11.26.08 - 9:54 pm | #
BINGO
What does any world dominant manufacturing power want more than anything? Secure access to raw materials. Seems to me that one place that the chinese will diversify their holdings of $T notes would be into mining compaies. They are already doing this in Africa. However, seems to me buying into South American mines and oil fields would make sense as well (long term deal with Chavez) and also continue to cozy up to iran. As for consumers, perhaps some of that big stimulus package would provide higher incomes to the 600 million dirt poor folks in china, who could then consume some of the cheap wal-mart filling stuff they send us. People who say that ultimately the dollars have to be spent in the U.S. on tradable goods are simply wrong. Since we are the global reserve currency (with all the benefits that brings) the downside is that there are lots of economies that will currently acceppt $ for their goods. Of course if we lose reserve currency status....
CRFaN writes:
Opinion on Setzer's latest?
I'm an on-and-off reader over the last couple of years. He presents very intelligible, useful information. I get the feeling Brad doesn't begin to understand the game change underway in the equity markets. We're retracing the entire bull that began in 1974 and ended last October. How much do we retrace - 61.8%, 78.2% (common numbers), or 100%? Put me down for the last, but we ain't heading for highs anytime ever. SWF, hedge funds, mutual funds, all dead. No big loss IMO
dc1000 - I have no idea what you meant to say in transliterated Russian but I am sure it was good
Well, think about that some more. You just need to think through the ramifications of perpetual motion as it relates to what will certainly become a more evident scheme to be constructed that would take advantage of the changed situation.
Someone earlier posted this earlier.
Very interesting interview.
Hugh Hendry Interview: Invest in Long Government Bonds | AdvisorAnalyst Views
The paper Setzer sites claims that there will be no let up in Chinese demand for US Treasuries.
Agencies are another matter, the Fed apparently is getting stuck with all of those.
People here have been posting about the inevitability of a slowdown in Chinese demand for our treasuries and its implications.
Any thoughts on what the above predicts?
VV, I am not smart enough to understand what will happen now. I am just watching from the sidelines. I even no longer get angry when politicians come out every morning with their centrally planned trillion dollar interferences.
I have given up. I am now concentrating on my job. Good luck. Talk later.
We're retracing the entire bull that began in 1974 and ended last October. How much do we retrace - 61.8%, 78.2% (common numbers), or 100%? Put me down for the last,
Persecuted Comrade Anonymouse | Homepage | 11.26.08 - 9:57 pm
Chart of the Dow Jones Industrial Averages since 1974
And I thought my 1450 was a bold call. Holy Mary mother of god! You're saying 600m/l which would implicate 60 on the S&P. Won't for a moment disagree with you. I will not however help you carry any water in support.
CRFaN,
No way China reverses course and lets the Renminbi appreciate. That money stays in USD assets, they've lost their adventurous appetite so it will stay in Treasuries for the foreseeable future.
Russia's international reserves, the third-biggest after China's and Japan's, have fallen $122.7 billion, or 21 percent, since Aug. 8 as the central bank tried to shore up the ruble. At the same time, President Dmitry Medvedev, 43, has pledged more than $200 billion of tax cuts, loans and other measures to maintain economic growth, threatened by plummeting oil prices and investor flight.
Wow, even Russia has been taken over by the "Reagan conservatives".
And I thought my 1450 was a bold call.
~~~~
Is that real or nominal ?
MrM:
Adin - one
piva - beer
pajousta - please
Comrade V writes:
"Thank you, very lucid summary. If I follow your train, you and dc1000 are on the same track? Unless there is an alternative "screaming buy" where else will the money go?"
I think I generally agree; I have not had time to read everything he wrote.
The U.S. issues debt in its own currency. That is very unlikely to change any time soon. Thus, there is no chance of a reserves crisis. Also there is no need to defend gold reserves, or whatever. This means that there is no arbitrary limit too borrowing, which people subconciously appear to be assuming. (Presumably too many people read textbooks written in the gold standard era.)
If you ignore the possibility of such a limit, you come to a basic realization: the Treasury curve is what all risky USD assets are priced off of. Treasury valuation is relative to all other investible USD assets, not relative to some external measure of value.
So we get what happens in every downturn: Treasury prices tend to rise until other assets become attractive to investors again. That has not happened yet, but it would unsafe to assume that current trends will continue forever.
And yet you have have a finite group accessing just finite info that applies to them. Why do chip makers need to know what ski facilities are doing?
They don't. That's the dichotomy of diversity vs commonality. It's possible to expand the entire knowledgebase by subsetting data into more groups but they each have fewer members.
The cost is lack of common context.
Eventually this manifests itself as communication failures.
There's an optimum price/cost point, depending on environment.
Here's an interesting exercise in paradox - The more data you collect, the fewer people that know about any single item, the less chance that they'll be able to discuss it.
It's one of the failure points of globalization that nobody talks about. Infinite diversity is not an option because the communication costs are infinite.
By definition, the only way to make globalization work is through a certain level of cultural standardization, which is exactly what the US has been doing through the Internet, television, language and corporations.
ac:
that is all just an act for the time being. wait til the shit hits the fan and RUS will being fucking its domestic peoples (that it control with tanks) and sucking on the teet of the international economy so as to maintain some sense of importance in this global environment beyond its arsenal of nukes no one ever believes they will use/sell/loose or whatever.
putin's power is fundamentally due to its international reserves.
dc1000 -
One beer, please = Odno pivo, pozhaluista
Wow, even Russia has been taken over by the "Reagan conservatives".
ac | 11.26.08 - 10:03 pm | #
I live in Boise, Idaho, a lot the Regan conseratives have moved here from California, and they don't know what they are in for because "it's different here." Yah, right.
BTW - mortgage rates were up 50 bps today, so much for the 5.1% APR...now at 5.6%+
Setser is right.
China will continue to debase its currency and buy Treasuries in a vain effort to hold the value down to maintain the export sector. This is a political decision for China because they are communists. Politics before reality. They will make the Bushistas look rational, and stick to their plan long after it stopped working.
Get ready for some really ugly unrest in China.
Yes; the private sector reduces debt, while the government increases its debt level.
The reason why the Great Depression featured such a large contraction in incomes/output is that the government was unable or unwilling to expand its balance sheet (a.k.a. issue debt) by a large enough amount to counteract the contraction of private sector balance sheets.
Post-WWII, government sectors are much larger, and so governments automatically expand their balance sheets in recession. You can complain all you want about "Keynesianism", but 20% contractions in GDP are no longer common events in countries that are not on currency pegs (or just plain screw up like Iceland).
I thought Keynes warned against using deficits to fund growth.
What you're describing sounds more like ponzi finance - e.g. becoming dependent on debt for current income.
bond guy,
so well said.
UST curve, sets the foundation upon which all other assets are assessed which means that the UST is thus itself analyzed in this very same context.
crowding out is a relic of gold standards and 20th century econ ( lol).
truth is that you buy a UST or you buy something else and thats how its decided.
the gold standard has been replaced with the marginal standard as in:
its all decided on the margins.
fuck, i just might go get my PhD with that one.
EvilHenryPaulson writes:
"It ultimately comes down to if a there is capital flight from the US. I think because the USG is acting early, before there is a glimmer of growth anywhere else, that is unlikely. If there is no capital flight, then the government can freely act as the borrower of last resort (due to its lower risk premium) to maintain money supply"
There was capital flight already; remember when the dollar was falling, and the emerging markets were going up? That was money flowing out of the U.S. That money is now coming home. However, it was hardly a traumatic period.
Ultimately, the U.S. needs a weaker currency so that the trade balance can revert to surplus. Pretty well every policy maker in the OECD agrees on this. This would reduce the stress of global imbalances. However, that's not happening, nor are there any signs of the more mercantilist governments out will allow that to occur.
MrM:
perhaps
. but it worked for me innumerable times!!
The additional cost to borrow if there was no foregin investment is thought to only increase by roughly 1%. That is to say, we have US investors willing to buy at 5-6%, to the tune of up to $2t a year for a few years. If this drags on. . .
Here's an interesting exercise in paradox - The more data you collect, the fewer people that know about any single item, the less chance that they'll be able to discuss it.
Exactly why the big banks are guaranteed to fail. Their functions are too deep and too many for effective management. The banks weren't entirely stupid they also knew that by engaging in so many activities they were effectively beyond regulation.
Gee, how's that been working?
bond guy,
here is where we divert.
i dont think a lower USD is necessary. but like you, i do think a higher USD is likely.
ac,
If you have deflation it acts like a wild fire and razes any and all debtors no matter how responsible they were. This scares the crap out of people from borrowing money for their entire lifetime. In the mean time many jobs are destroyed and it takes a long time for them to reform.
Yes the government may be shouldering the burden, but it can pay for itself by virtue of maintaining current production levels.
Oh, and don't forget with deflation the US would default on its national debt if the capital had not already fled.
Standards reduce transaction costs, so that is their value. But they can only function when they're used altruistically.
Once they become the exlusive domain of one player and used for their personal benefit at the expense of others, standards no longer have value.
That's where with the dollar.
The paradox of free markets is that they are dependent upon altruistic standards.
Interesting, yes?
dc1000 - I just opened a Baltika N4 in your name (honestly). Cheers!
That is, the majority of the GDP increase over the years from 2003-2007 was due to the granting of bad credit, not organic growth in wages and productivity.
~~~~~
We've had 30 years of credit expansion not just 4 or 5 ... The problem the economy faces is much worse ...
ac writes:
"I thought Keynes warned against using deficits to fund growth."
Only outside of recession/depression; at that point, fiscal policy is the only way out. (Monetary policy become useless as a result of the dreaded "liquidity trap", which is what we are effectively in now.)
The problem with the "Keynesians" (who came after Keynes was dead) largely interpreted this as running deficits pretty much all the time in order to hit a high growth target. Very simply, that proved to be a bad idea.
bond guy,
I am in agreeance. However my use of the word flight has connotations of Asian '98 flu where it is a self-sustaining avalanche of panic
dc1000,
Have you looked at the US dollar index? How on earth would it stop falling now to go even higher?
We've had 30 years of credit expansion
That's why I am not clear if the USG can expand its balance sheet sufficiently to compensate for shrinking private balance sheet and without pushing the long-term yields way up
"But what happens to U.S. interest rates if China slows their investment in dollar denominated assets?"
Uh "country risks spiraling unemployment, social unrest and the deepest economic slowdown in almost two decades."
bond guy writes:
The problem with the "Keynesians" (who came after Keynes was dead) largely interpreted this as running deficits pretty much all the time in order to hit a high growth target. Very simply, that proved to be a bad idea.
Esp. when it's spent on waste like the Pentagon. No societal use. Just more rusting garbage. Spend it on schools, hospitals, public transportation, parks, libraries, anything but a new jet fighter.
ac,
If you have deflation it acts like a wild fire and razes any and all debtors no matter how responsible they were. This scares the crap out of people from borrowing money for their entire lifetime. In the mean time many jobs are destroyed and it takes a long time for them to reform.
Yes the government may be shouldering the burden, but it can pay for itself by virtue of maintaining current production levels.
Oh, and don't forget with deflation the US would default on its national debt if the capital had not already fled.
I don't disagree that deflation is a disaster, but recognizing that something is a problem doesn't necessarily imply a solution. We've known for years what causes many diseases that we can't cure.
Again, it seems to me if governments could effectively borrow and spend their way out of economic problems there would be no economic problems.
Why don't all governments just borrow and spend and live happily ever after?
"The reason why the Great Depression featured such a large contraction..."
I'd almost believe that someone is comparing the gold-backed system of the 30s with the post-1974 world - but then I know that Bernanke's academic work was really an elaborate in-joke, much as his current management of policy is an epic Andy Kaufman-style work of parody.
MrM:
i bought a ton of those'ens on the streets for pocket change, drinking litre bottles walking down Tverskaya on my way to somewhere....fun.
ac,
Well there is another option. Forced effective principal write downs on debt at the wholesale level. It won't be touched for political reasons among others.
We're in a spending world
Again, it seems to me if governments could effectively borrow and spend their way out of economic problems there would be no economic problems.
~~~~~~~~~
The government and regulation are the root of almost all problems, due to their decisions or lack thereof.
Fooyucked already if you live in Western and Central China.
Economic crisis makes central and western China suffer more
Compared with coastal regions, China's less-developed central and western parts are likely to suffer more in the unfolding global economic slowdown, warned a senior official from the National Development and Reform Commission (NDRC).
Fledging industrial structures, sharp resource price declines and a weaker capability to handle risks and social conflicts have increased western and middle regions' exposure, said the NDRC's vice-minister Du Ying.
This is the first time the government has made public such a regional risk assessment. Du's judgment, made at a recent national meeting, was posted on the NDRC's website yesterday.
Contrary to conventional thinking that coastal regions in East China will be worst hurt by global financial woes which had already brought many of its export-oriented manufacturers to closure, Du believes the financial crisis will have a deeper impact on less-developed central and western regions in a longer term, though it is not yet visible.
China is All Deflated Now
Remember Comrades: The Chinese Government has a stake in every fooyucking business. China made WalMart possible. So how low can China go down on WalMart and not find the experience somewhat one-sided?
Walmart is gonna get hammered in a deflationary environment. Their profit margin was already tight as their markups were very thin and they relied on our Comrades in China to eat a lot of profits on the production side. Folks focus too much on volume of sales and not on actual profit Y to Y.
As Goes Walmart so Goes America.
We Are All Fooyucked Now
ac writes:
"Again, it seems to me if governments could effectively borrow and spend their way out of economic problems there would be no economic problems.
Why don't all governments just borrow and spend and live happily ever after?"
Government spending will generate nominal growth in incomes. However, if there's no private sector to generate real goods and services, all that happens is that same level of real goods production corresponds to rising nominal values - a.k.a., inflation.
This is what was discovered in the 1970s, at considerable cost.
So it comes down to this, the world lets us devalue the dollar and accepts the effects or they continue to by our debt to sell us goods. Catch 22 ?
EHP:
please dont take momentary trading vol for a long term trend. please.
USD/EUR Currency Conversion Chart - Yahoo! Finance
just look at it.
shadow banking
gone
dollar demand on fire to close out these bullshit structured credit trades.
dollar demand on fire to buy oil, gold, timber, copper, anything.
dollar demand even HIGHER when people think, fuck, you aint even got these dollars, give me dollars now!!
bond guy:
"If the U.S. Treasury is running a deficit (and no current account imbalance), it implies that the private sector in aggregate is running a financial surplus."
i suspect we will have smaller deficits, perhaps much smaller but they will still be deficits because we are still going to need more stuff and energy from outside the country than we will be able to sell to the world.
our manufacturing base has been decimated. we have no relative comparative advantage.
if there no trade deficit it does imply a positive balance of payments but i am not sure it is a causal relationship. i think the financial sector is also a part of the balance of payments,.
Only outside of recession/depression; at that point, fiscal policy is the only way out. (Monetary policy become useless as a result of the dreaded "liquidity trap", which is what we are effectively in now.)
The problem with the "Keynesians" (who came after Keynes was dead) largely interpreted this as running deficits pretty much all the time in order to hit a high growth target. Very simply, that proved to be a bad idea.
OK, I don't necessarily have a problem with what you've just stated in general terms.
But what if a country is in recession because it took on too much debt? What if a country is in crisis because it funded it's past expansion by relying too much on credit?
Are we possibly making an artificial distinction between public and private debt in order to justify a solution?
bgates writes:
""The reason why the Great Depression featured such a large contraction..."
I'd almost believe that someone is comparing the gold-backed system of the 30s with the post-1974 world..."
The gold standard is just a currency peg; we've seen plenty of pegged currencies blow sky high since 1974. The analysis doesn't really change that much.
most of you people know too much
Wha? Deflation hard on farmers? Any chance we can run that Bryan guy in 2016?
bond guy and ac:
as well, given considerations to the more money chasing the same goods concept, other countries can't do it because they owe in dollars.
we owe in dollars and print in dollars.
wrt to the 70's. yeah man, pump it up and have stagnation is a problem. but in this case, we're not pumping it up NET NET NET.
two major things no one talking about:
productivity due to tech infrastructure boom bust
and
destruction of shadow banking system causing a net decrease in money supply even in the face of 10T bailouts.
CR I BEG YOU TO DO A REAL ANALYSIS OF THIS
otherwise, its off to doctoral studies at MIT for me in econ, if no one else will do it.
But what if a country is in recession because it took on too much debt? What if a country is in crisis because it funded it's past expansion by relying too much on credit?
That is precisely the questio
You pseudo Russians need to run cyrilic on your laptops. Nyet problema.
Putin's 'power' derives from the Russian need for a Czar. He happens to be the best one in 400 years.
EvilHenryPaulson writes:
Have you looked at the US dollar index? How on earth would it stop falling now to go even higher?
or
sporked,
we already devalued the dollar
why else would the dollar be in the shitter vis a vis the euro if we werent blowing the fuck up the money supply though structured credit products?
all thatz going away now.
dollar UP!!!!
"The gold standard is just a currency peg; we've seen plenty of pegged currencies blow sky high since 1974. The analysis doesn't really change that much."
I strongly recommend the essay "Gold and economic freedom", though I'm sure you're familiar with it.
But I really do admire Bernanke's sense of theater, following up a joke of an academic career with a Chevy Chase impersonation which recreates the historical scenario in the "research" involved. Like something from Camus or Beckett as produced by Lorne Michaels.
Check out naked capitalism - Yves Smith reveals her inner disdain for W
Gentrifying Gitmo
I wonder who they would hire as special prosecutor -
So it comes down to this, the world lets us devalue the dollar and accepts the effects or they continue to by our debt to sell us goods. Catch 22 ?
The domestic population also has to accept the devaluation of the dollar.
Also the lack of trust potentially created by this devaluation has to be offset by the benefits.
This is where the equation gets very tricky IMO.
If the devaluation only temporarily restores economic growth, then it's pretty much game over.
Again this is historically how fiat currencies collapse - devaluations that fail to produce sustainable recoveries.
Ross - it is "net problem" = Нет проблем
Dollar up? Not against the Yen...not lately.
Dollar up against everything else, for now yes...I think we see deflation for another year or so. Oil and other commodities will go much lower.
What is the end game for the dollar and rates and glod? Dc1000 was dead wrong on housing in 2005/2006, why should we believe him now?
Check out naked capitalism - Yves Smith reveals her inner disdain for W and his henchmen
Gentrifying Gitmo
I wonder who would be the special prosecutor - maybe Obi's pal from Chicago
Overcapacity in China across many industries coming home to roost. Just as the western consuming countries have overleveraged financially, in China they overleverage operationally. When ftys go out, they go in chunks. We just heard about another one going down this morning.
Return to the farm? Actually policy initiatives in land reform has been attempting to build scale in the ag sector, consolidate holdings through easier transfer of 30 yr land leases (the state owns all ag land).
A wave of unemployed will have little to do back on the farms. And as others have pointed out, it is a century wide gap in prospects and quality of life.
Back in the early '90's the term "mang liu" was coined to describe the huge exodus from the farm: blind flow. People didn't know exactly what they were seeking in the east, they just hitched their fortune to the every rising tide of m'fg.
No way to return in triumph means a lot of frustration...
.
ac writes:
"But what if a country is in recession because it took on too much debt? What if a country is in crisis because it funded it's past expansion by relying too much on credit?
Are we possibly making an artificial distinction between public and private debt in order to justify a solution?"
A recession is caused by the stoppage of the growth of private sector debt. You need previous growth for it to stop, so it always happens this way.
The important difference between private sector and (federal) government debt is that there is no real risk of default on the government debt - they have the printing presses.
Investors thus can view Treasury debt as a very liquid and safe investment, which is not true of private sector obligations. This means that portfolios are more liquid when they have large Treasury holdings. And investors with liquid portfolios are better placed to take on other risks.
dc1000,
St. Louis Fed: Series: DTWEXM, Trade Weighted Exchange Index: Major Currencies
We have seen the structured swaps ease up. Notice how it's been going down since the stock market has started to go up? That's fewer collateral demands partly
As for needing dollars to purchase commodities. If it is a cash transaction the velocity amongst brokers nullifies that benefit, and the one risk out there is those structured swaps.
I don't see a sudden rush to sign up for new structured products given the forecast is for lower demand across the board. So don't expect another hidden trigger dollar rally
The USD must go lower to balance trade -- it's a good thing. To go higher is global economic suicide because it implies the surplus countries (eg China) are pumping things so hard that they supply even more credit wrt volume and rate, than during the housing boom.
We are in a Kenyansian Trap.
Neither Princeton professors, Wall St.
tycoons nor third world demagogues can
bail us out of this one.
The rot goes too deep. It has eaten its way into our society so deeply that to expunge it would make 1861-65 seem as childs play.
This has been going on for ten years plus. I don't see anyone calling specific and endogenous problems.
That said, endogenous problems have been a risk for 15 years or so. Esp on triangular debt.
Cleanup time.
C
"1861-65 seem as childs play"
except that in this round 99% of us are the equivalent of southerners who saw no real inherent moral problem with slavery, insofar as we see no moral problem with debt. there is no righteous abolitionist spur to the conscience to make it an interesting fight.
EHP:
lack of structured credit means MORE USD calls. not less.
C&C: stop being such a fucking troll with no basis in shit. in 2005 I publicly, on this board said:
"residential housing sucks. i've emptied my portfolio and am no longer building houses and condos for purchase in the near term"
of anyone here, i've been public in my calls, i've actually done it, and i live and breath this industry.
go google search this site and tell me i'm wrong.
i'm not.
i've said 10000 times here and in private to CR that what i learned here in 2005 changed my business plan fundamentally and i have survived because of it.
C&C as far as i can tell you spend your time trolling housing blogs starting with Ben's in about 2004.
The dollar is soggy toast. Only a drunkin whore in Singapore would think otherwise.
When the trillions of new liquidity gains traction with volocity, we'll see beans in the $20's and $2,500 glod.
Problem is, there are no safe currencies and I include the Swissie. For a very long term, the Chinese is best positioned.
Stuff has no counter party. It is enert until put to use. Lots of stuff will be required for many generations to come.
Two steers = 2 fat hogs and chickens to boot. It was the same in 1808, 1908 and 2008.
Trolling?
I have been 100% correct for 4 years!
I agree with you on some of your points tonight, however, I am not 100% on deflation as the end game. I think we could see the long end of the curve shoot up well above 8-9% in the next 1-2 years. while the short end is near zirp
why should we believe him now?
~~~~~~~~~
I don't ... I see conjecture into a model with far too few moving unknowns ...
We are in a Kenyansian Trap.
Neither Princeton professors, Wall St.
tycoons nor third world demagogues can
bail us out of this one.
The rot goes too deep. It has eaten its way into our society so deeply that to expunge it would make 1861-65 seem as childs play.
Well rot always gets expunged or it kills the host.
That's why it's critical to get to the expunging ASAP.
ross
how do you reconcile the destruction of a $50T market that is to be replaced by a $10T bailout and its net effect on monetary supply?
Anak,
Perhaps we will see China do more deals with foreign countries, whereby China provides infrastructure (built with imported labour) in return for a good deal on resource extraction
+ inflation hedge
+ export surplus human capital temporarily
+ alternative way of spending USD
They have that pipeline through Myanmar, recent progress in Latin America, and ongoing mines in Africa.
Maybe they will just expedite some of those domestic roads, canals, and railways.
They need to spend more, or the US government will do it for them.
C&C you're trolling because you unabashedly consistently bash me because of my industry position and not because of anything i've said or done.
again, read back through the old posts where in 2005 and 2006 i said, resi sucks. commercial is where its at. and then again in 07 and 08 where i said commercial sucks, institutional is where its at..and lately, where i've been for the last few months is, time to buy up busted land deals because now is the time to prep for the hot resi market in 5 to 7 to 10 years. selectively of course. but then again i operate in the DC area where we've seen consistent 250% increases YOY in sales and a net 50,000 job increase year upon year upon year, just like thus far in 2008.
We are in a Kenyansian Trap.
~~~~~~~~~
No, we are in a supply side trap sprung by easy credit over 20 years.
Dollar tracks petro costs fairly well. So we need to get off petro. Deflation and recession will help with that. Interesting times. And it will get worse before it gets better. The is still some more banks (Advanta? Capital One?)will fail that were generous with lending to small business and C&D / CRE or bigger boys that require partial nationalization (BofA comes to mind).
And yes indeed, housing is toast. More of this surplus will be rental or need to be plowed under.
A massive government expenditure as investment in our capacity of producing actual useful goods and services to compete in a globalized and green economy pans out....well...KNOW HOPE NOW.
Listen there are some smart folks coming to town. One of which Volcker, gets to look at this from the opposite side of fighting inflation. There is still much unwinding to do. But hopefully, we will have competent adults managing the commonweal not just crony capitalists looking for an exit strategy and a cash filled landing pad.
mmckinl
welcome to economics, son.
Take a look at your fellow 'citizen'. If you do you will be shocked.
There, sitting in an automobile it cannot afford, is a 'citizen' chatting on a 'cell phone' the creature has no concept of what technology created it as it looks dimly out upon a world he cannot understand.
Overweight, it stinks and shines like rotten mackeral as it makes its way to a job that has been dumbed down to a level that a trained animal could do perform it.
"because now is the time to prep for the hot resi market in 5 to 7 to 10 years."
won't argue with your superior industry sense, and won't argue with your take on DC - NoVa traffic would not have become horrific without that kind of job growth.
but i don't get your optimism on that time frame. our demographics do not support that scenario, nor does our recent fetish for mimicking every Japanese policy move from 15 years ago.
dc1000,
Not a problem. Destroy 50 trillion and replace with 10 trillion with 10 to 1 bank leverage. But if it takes the whole 50 trillion, rest assured it will be supplied.
There are no constraints. There is no moral responsibility.
I love realtors!
In a year or two we will find out who is right on this one...I see a very steep yield curve and no one can tell me any differently.
dc1000
How much money was waiting on the sidelines ?
EHP: They need to spend more, or the US government will do it for them.
LOL the fat kid will nab the candy savers every time. Teach 'em good.
ON that resource extraction tied to export labor idea, as you know they've been all over the world, but mostly in tentative steps. Used to be called "soft power" or "Beijing consensus". Maybe in 10 years it will be the status quo.
But this raises the game to a whole different level, and one they've been only gradually accepting.
Man does the CCP need to step up to the plate, forgive the baseball analogy.
Counterpointer,
Once we get the endogenous failures rolling in, how do you think the cleanup will proceed?
Mix of scape-goats, or mostly state enterprise mgmt? Structural reform to boost independence? Public or private (acknowledged/secret) recapitalization?
dc1000
Is that what you are doing ?
Anak,
the kid is only fat because little hu keeps on giving the fat kid his candy bars so that he doesn't get fat
co-dependency: drugs & economics
by EHP, coming to a publisher near you in 2009
Bond Guy
"Investors thus can view Treasury debt as a very liquid and safe investment, which is not true of private sector obligations. This means that portfolios are more liquid when they have large Treasury holdings. And investors with liquid portfolios are better placed to take on other risks."
You are so right. It was a rude awakening to find sharp (meaning sudden) significant loss in value in otherwise good quality short term corporate and muni bond funds (which can not be recovered simply by holding to maturity). No way would I have ever bothered with MM in treasuries until last month.
unit 472, awesome picture you paint. tis true. but we need deltas just like we need alphas.
ross, you are very right. $10T is way beyond anything anyone is predicting now, so i thought i was safe. call it $20T and we're still net net short dollars.
bgates, its not about demo's here its just about job growth. my favorite saying is that the party opposed to budget growth is the opposition party. and now that a damn democrat is in office, there'ze gonna be plenty of spending and plenty of jobs and plenty of growth here.
we're selling about 1 unit a week in a greenfield development right now. steady but slow. just wait when the administration turns over and we're injecting another T or two into this local economy. i can't help it that i operate in Rome. if i was a land developer Nevada or Florida i'd be singing a different tune. the stats here dont lie. for four months we've had 250% YOY growth in sales volume. sure prices are down, but from my perspective i dont care what the prices are (more or less) i just care that there is velocity.
crispy is looking at the flattest yield curve ever and telling me its steep and steepening. and has not one argument as to why one of the following three things would change:
1) risk free rate
2) default risk
3) inflation expectations
sure credit spreads can run out but thank godz weze got TARPS for that.
co-dependency: drugs & economics
Quoting Professor Sedaka:
"Don't take your love away from me
Don't you leave my heart in misery
If you go then I'll be blue
'Cause breaking up his hard to do"
.
I see a very steep yield curve and no one can tell me any differently.
~~~~~
If they are still issuing long term bonds ...
ceterus parabus , ceterus parabus, ceterus parabus ...
I said it before and I will say it again, just about everything depends on the decisions or non-decisions that are yet to come.
I said we will see deflation for now...and in 1-2 years things will change...dont let your hatred for me get in the way of reading my posts.
The important difference between private sector and (federal) government debt is that there is no real risk of default on the government debt - they have the printing presses.
Currency depreciation is default.
You're conflating the nominal with the real.
We live in a real world, not a paper world.
The inability to make this disinction I think may reduce the global economy to ash.
mmckinl
you know its the bane of this damn enterprise is that there is only one laboratory to test things out in and thats reality.
so conjecture and pontification with a set of assumptions and a million moving parts is actually, the name of the game.
dc1000,
So how about outside the beltway? Life in the beltway, unless you are one of the unfortunate poor whom serves the power elite, is a bubble. I worked in the beltway during the 1990s recession. Looked good in the beltway. Once you got out in the world a bit....man what a mess.
I suspect anywhere there is some serious concentration of Uncle Sam's pocket change, it don't look so bad.
BTW : I agree on the dollar call. We are going to look more like the Yen and the Euro and the GBP are going to be taken down a notch or so. Why the GBP rules the roost is a wonder. What is the basis of their economy anyway? The Euro gets it because a recession makes for a balkanized Euro zone with too many mouths to feed and too many rules to follow. You just need a few Euro kids to starting pouting, crying, and then going home(land) on yah and then all hell breaks out.
.. and there have been examples when gov'ts chose to default on their debt denominated in their own currency in order to reset the economy - Ex.1: Russia 1998
Heterogenuity ( biodiversity)
Schramm (set theory, really)
Transaction costs (Coase)
I've been working these three concepts over in terms of software design & memes for several years. They are surprisingly simple yet powerful at guiding design decisions
I doubt if many of the globalist circus clowns have done much quantitative measurements or extrapolations along these lines. They're just cuttin deals and grabbing money because they "know" that free markets are magically delicious and can fix all things , even dubious goals and grandiose assumptions.
ac:
i just can not see how the USD depreciates right now.
we WAY overshot the downside with the shadow banking system creating all that new money sloshed around the world.
interest rate differentials worked against the USD.
and now
we're destroying dollars while increasing dollar demand and interest rate differentials will long term be in our favor.
please, pray tell, paint a scenario in which the dollar depreciates farther from here?
so conjecture and pontification with a set of assumptions and a million moving parts is actually, the name of the game.
~~~~~~~~~~
Then you must have more than one scenario.
Unless you have perfect information and interpretation in real time ...
"If they are still issuing long term bonds ..."
Why wouldn't they? How else are they going to fund the alphabet soup of bailout programs and infrastructure building?
"i operate in the DC area where we've seen consistent 250% increases YOY in sales and a net 50,000 job increase year upon year upon year, just like thus far in 2008."
scary.
dc1000,
thanks for bringing your insights. you are making me think. could you help me understand the implications of treasury fails in the repo market. the treasury is investigating this. is this fraud?
"its just about job growth."
that assumes that debt service and h & hs entitlement won't crowd out the normal job-creating other trillion bucks of garbage. I don't know if I'd assume that.
ten years from now, when debt payments are 60% of federal spending and SS alone is 60% of what remains after that, I wouldn't bet on the streets of bethesda flowing with gold. I also wouldn't be surprised if the new developments in that part of the area look badly dated, with even a bit of b-more style blight creeping in.
It's housing, stupid!
Not really but in my Dallas Burb, McMansions are going for 70% of replacement cost. I can tell you that they are being snapped up quickly.
Replacement cost is a function of hard costs, costs of labour, land costs and location location location.
When one can buy a 4,700 sq ft house on a half acre with a killer pool and and home theatre, built in 2005 and now selling for $101 sq ft. with no impairments.........go for it.
Idiot bankers will make you a 30 year loan at 6.25% for 30 years. What a damned gift.
fallonpdx:
funny you should bring that up. my comments have no consideration for the performance of the real economy, and thus, in my mind, have more weight.
i dont really care what happens in the real economy (as it relates to this conversation). the forces at work here are far far far far bigger than the real economy to make a difference. we're talking about the destruction of a $50T market and the capital flows involving multiples of US annual GDP in months.
the real economy gets whipsawed by the financial and governmental one.
MrM: GREAT POINT. just watch. when defending the ruble and protecting the domestic economy becomes too great, russia will fuck it all and protect its reserves.
listen, we made millions for our clients buying Russia '30s at 20 cents on the dollar in 1999. I've studied this from every which way possible.
i've traded international fixed income products, emerging markets sovereign debt, invested private equity here and abroad, AND been on the ground building and selling houses, commercial properties and mixed use developments. lucky for me i have a unique perspective.
How else are they going to fund the alphabet soup of bailout programs and infrastructure building?
~~~~~~
Why are they buying down long treasuries now ? Just to issue them later ?
Because they are throwing everything they can to stop the system from crumbling...their little trick to buy up GSE paper worked for one whole day. rates shot back up today by 50bps, more failure for Paulson.
Replacement cost is a function of hard costs, costs of labour, land costs and location location location.
~~~~~
Replacement cost is the lower cost of the house next door ... As long as the economy stays intact and Dallas grows in population you probably have a good deal.
"rates shot back up today by 50bps, more failure for Paulson."
junk bonds had yet another great day. funny that FNM paper wasn't so perky.
dc1000 - Help me understand the following: the shadow banking system was/is not unique to the US. Europe had it too, and since Europe did not constrain the leverage ratio, I can expect that the European shadow banking system was at least comparable to the US, if not bigger.
On the other hand, I would expect that the shadow banking system in Japan was smaller than in the US.
Yet EUR is losing against USD and JPY is gaining against both EUR and USD. Why?
ew thread
mmckinl
i do have alternate scenarios, i'm just mouthing off with the one that i think is right.
comrade v: it is kinda scary but the numbers dont lie. i know its more of REO clearing out and people getting real than anything, but its still progress. there are, for real, positive cash flow residential deals out there right now (where they've given up the ghost of condo sales).
otishertz:
i'll be the first to say that I dont understand the repo market as well as i do some other markets. so i'll just leave that to others.
ross:
we're seeing that same thing all over here. you can now buy a 5 br 3 ba lakefront property 40 minutes from dc for 300k. which i know sounds like a lot but its really down about 50% locally. its the reality. there are houses in my 'hood that come on the market for $700k, 4 br 2.5 ba, built in the 50's, that have multiple offers and get bid up. whats $120k each between a married couple in this town? these people are junior at best in the E and C levels. and there's tons here.
JPY has carry trade de-leveraging , we have shadow bank deleveraging ...
these are not forever...
dc1000
Just wondering why you come to this site. It's clear that you're have more knowledge and experience and may be smarter than most of us here. Not much you can learn here. If its just to educate us, Thank you, I apprecitate that. Just lighten up on the anger tho.
MrM,
i 'll say it here and repost on the next thread but:
here is the crux of your own argument with your own words:
" I can expect that the European shadow banking system was at least comparable to the US, if not bigger."
well, you expect it, but is it true?
we all know and have read and have seen and have been beaten over the head with the fact that the US is the source of and the blamed of the explosion in structured credit products and other derivatives that lead to this explosion in new money creation.
if i were on my way to a PhD i'd have all the current stats on hand but instead i've got good sense and an absorption of data over the last ten years to lead me to this conclusion.
and fucking hell, dont listen to me and invest money based on what i say, i'm just telling you what i'm basing my decisions upon.
OnTheRun,
not angry, just passionate.
i come here because Bill (calculated risk) and Tanta and some of the old old old old timers, think back to when brad setser, mish and the rest used to post in the comments- helped me shape my world view.
i've read, posted, followed, participated in these discussions before "blog" was even a word. it is these exercises that have sharpened my senses.
it is these exploratory conversations that shape my world view.
i live and breath, love and learn from these blogs.
i thank you all.
and i dont know shit.
just what i think i know
Paulson, ningen to shite douyo? Noryoku yori seikaku ^_^
dc1000,
$50tn of derivatives indicates a high level of intermediation. We can maintain demand levels on a looser market bid basis, despite erosion in complex fixed income. You like a macro view, and to that I would appeal to international trade balances.
The pound will be heading lower, but that does not mean the USD rises overall. In the short term the Euro's price will come from politics, but a country like Germany had loads of export strength to carry the Euro higher and that will be in place upon a recovery. Canada covers a lot of US trade, the loonie does not go lower. South Korea is no longer in crisis mode, same with Brazil thanks to swap lines.
FTD - Top Trading Partners
How does the trade balance repair itself without the USD falling in price?
dc100,
got you on the shadow finance system. have been following that for sometime every since reading CR, Mish, Yves, et al.
but it is not directly observable: it is not regulated and no one knows what is really on the books.
so the effects of the destruction of the shadow finance system are observable on the ground and in multiple places. China is one place. DC is another. As is Portland. Just as was it expansion.
i am interested in the economic geography of this shadow finance system (it particular urbanism and development), its flows, pathways, where it lands, how it is concertized in actual made/built stuff or shows up again in say...US T-Bonds.
EHP:
are you talking trade overall or trade ex-oil?
because if you're talking the former, then the bust in the ultra manipulated oil market will that deficit lower.
and then again, i resort to interest rate differentials to lead the way on currencies. i can not see how the US leads us into recession but then doesn't lead us all out of it, as always, and thus we're at the low point in interest rate differentials and can expect those differentials to increase in the USD's favor.
add to that the demand for actual real dollars in place of commodities.
dont forget the opposite of a falling dollar vis a vis rising commodities is a rising dollar in the face of falling commodities.
i mean, fuck, if i've got a mine full of copper here in chile, and i want stuff for it, i better convert it to dollars ASAFP!
fallon,
i dont really have an answer for you. i think i liken it to setsers dark matter. its one of those things you can identify from its consequences without actually putting your finger on it.
but since i'm talking into a vacuum in this dead thread, i'll move on to the next one
mmckinl writes:
JPY has carry trade de-leveraging , we have shadow bank deleveraging ...
these are not forever...
That's about a good one line summary of the 'shadow banking' system's impact on currency as there is.
We have seen large and rapid movements to shake out as many unwinds as possible wrt fixed income structures. Those pressure triggers ease up from here (assuming no deflation apocalypse)
With demand low, we won't see the same rush back in to new positions to create new hidden triggers
Ergo, we're moving back into the realm where trade balances and government borrowing dictate currency valuations as the financial sector of the economy contracts alongside private credit
dc1000 - posted on the new thread - I only know that European banks are/were more leveraged than US banks, which suggests that the European shadow banking system is no less if not bigger than the US
dc1000,
I don't think the US bounces back. This is from a bottom up perspective where there will not be the private credit growth of the past 30 years which will invalidate many business models. It is also from a top down perspective where Japan never really bounced back. I think the increase in interest rates/growth will happen outside of the US. It needs a slow shift to manufacturing to rebalance trade
If oil crashes and goes to $40 or below and stays there for a while, then halting capital investment halting will tighten supply to raise the price with whiplash. Same thing in mining. This is based on simple production level budgeting.
What we saw earlier this year was the effective synthetic drain of ~1-2mn bpd of oil supply that brought it from 'market price' up to 'user price'. It did not alleviate because there was not going to be enough new supply on stream until Q3 2008 from Saudi Arabia (it was the speculators that pre-emptively crashed it). Without new drilling, oil production declines by 8% annually (highest production is about 92(?)mn bpd, 21mn bpd to the US 14mn bpd of which is domestic) -- so I am not considering $20 oil
MrM,
european banks had higher leverage, but better assets valuations
american banks had lower leverage, but worse assets valuations
both are effectively the same situatio
EVP - that's why I believe the the European shadow banking system should be similar in size to the US. Frankly, I am not so sure about better asset quality of European banks (Southern and Eastern European RE, binge buying of US-originated paper), so it seems plausible to me that the European shadow banking system can be even bigger than the US
EHP, don't know what you are looking out for but Chris Whalen had a much simpler look at what default on 50T of CDS means.
It's what Meredith Whitney has been saying.
Banks are cooked. As Chris put it 50T is too big a bet. No one can afford to win, much less lose. Central Bankers can't deal with those numbers either.
dc1000 | 11.26.08 - 10:26 pm | #
That sure sounds like a short squeeze - what is your estimated duration?
What is it that happens after the squeeze?
"Why isn't the Turducken the symbol of freedom yet?"
because the Porkturkduckin is.
If the US doesn't bounce back, and Japan hasn't - then don't expect the rest of the world to anytime soon.
I'll stick with the US because of its constitutional design, geography, and general tolerance.
Look at a map of East Asia sometime and envision it as a powder keg.
if tenants in my apartment wrote 1000 insurance policies on my refrigerator breaking down the payout would be many times the value of the fridge when it eventually broke, causing some distortions in the building's finances.
furthermore, if the policies were payable in cookies i bake in my kitchen the demand for the cookies i make would shoot through the roof after the fridge died since every contract would have to be settled in my cookies (money).
this is what is going on globally and it is absurd. the dollar has risen solely due to the short squeeze from the settling the fraudulent, unbacked insurance derivatives (cds etc.). the liquidity black hole lets the fed print as it pleases with no immediate ramifications. the printed money is being used to take over corporate america at fire sale prices. this is how ben's helicopter works.
In order for the scam to continue it is absolutely imperative that the entire world pretend that there are not maybe 4 or 5 times more credit default swap derivatives out there than the value of world gdp.
This is the white elephant in the room that few will mention. Except, in this case, it is more like a trojan white elephant with a short sparking fuse for a tail.
the dollar rally is a short covering rally.
Sometime, maybe soon. We must face JPM's $90,000,000,000,000 (trillion)gross notional exposure to derivatives.
using your own logic above, more settling of derivatives means even more demand for usd and less credit creation. a cycle. not a short covering rally.
Great, a prediction on interest rates. My theory is that if you predict enough things, some are bound to happen!
I think the Phelps equilibrium (inflation vs unemployment) will remain a very small equilibrium point for some time, and the result will be volatility in interest rates for a long time.
Any hint of growth will drive commodity futures higher, faster than before; forcing the economy back to lower growth and deflation.
The sweet spot between inflation and deflation becomes very hard to locate for a long time. The sweet spot remains small until we get natural trade balancing and government expenditure balancing.
The volatility effect will keep interest rates, on average, a moderately higher than the natural rate; and slow adaption to the new realities will continue to depress overall economic performance.
The new and old operating points of the economy are very different ($150/barrel oil vs $50/barrel oil), caused by technology IMHO. So, there will be continued unwinds and winds as each sector and component of the economy tries, first, to test the old operating point, then adapts to the new.
But first, evidently, the government has to learn about the new order of things, and government will try for some time to restore the old order.
"On Tuesday, over 500 enraged toy factory workers smashed police vehicles and stormed factory gates, damaging computers and office property in Dongguan in the southern Guangdong province, State-run media Xinhua reported on Wednesday."
THOSE ARE ANGRY ELVES!
Can someone explain why if trillions of liquidity were pumped into the market to ease the financial crisis, why is it being parked at the Fed with interest, for the purpose of curbing the same liquidity?