Announcement

Collapse
No announcement yet.

Jack Crooks Calls For Deflation And Long Term Bull Market USD. [wtf]

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • Jack Crooks Calls For Deflation And Long Term Bull Market USD. [wtf]

    This is not (or certainly should not be) a "theological position" one way or the other. We had all better be agnostics while examining these events. I'm interested in what iTuliper's think. I will of course be among the applauders of the most withering demolitions of Mr. Crooks' assertions! This guy is not bad at calling the currency bit moves. I have another advisor, who I would earnestly like to dump in January - who is calling a scenario much like Mr. Crooks! USD is in the very baby steps of embarking on a *very long* uptrend.

    Just so we can get a sense of what this other guy is saying, he's talking about a *multi-year* breakout in the USD, with consequent mirror opposite re-arrangement of a dozen other macro calls. Now it looks like people like Richard Russell and also Jack Crooks are beginning to drink that kool-aid too.

    We iTulipers look at the landscape and have a powerful urge to consign such babblers to the "retarded" category. I know I do looking at the US fundamentals. But cleverly, Mr. Crooks is saying "don't look at the US, look at all the rest, which are the second half of the USD equation, and he's got at least an argument there. So maybe if a few other iTulipers contribute arguments as to precisely why this is not in the cards we can "stress test" the iTulip consensus to the contrary here? C'mon guys. I'm looking for some really tough bullet-proof arguments as to why Mr. Crooks has it all wrong this time.

    Please contribute your arguments pro or con. Is Mr. Crooks a "naive ingenue" or is he an astute detective here? (Finster has already deposited some hints of his own views, which were definitely "food for thought"!) Anybody else got an idea whether Mr. Crooks may have been hanging out with the Martin D. Weiss [Phd.] group a little too long here? :rolleyes:

    QUOTES:

    Global Deflation Looms [ :eek: :eek: :eek: ]


    It surprises me to see how many have bought into the hyperinflationary theme. The best I can tell, them become wrapped around central bank easy-money policies and conspiracy in the government’s economic reports. The Austrians would say it is credit that matters. That is how you can decide between inflation and deflation. And as far as I can tell, we are pretty much locked in a credit repudiation stage for a while to come. The Fed can dish out money, but if the banks don’t lend, or no one shows up to borrow, it doesn’t matter. This is exactly what I see happening right now.

    And the impact is deflationary.

    Recall a little problem like this lasted for about 14 years in Japan. Even with the Bank of Japan’s famous, Zero Interest Rate Policy (ZIRP), no one showed up to borrow as debt was being worked off. Put another way, you can a lead horse to water but you can’t make him buy a new car. Or as our deep-thinking government sees it, you can dish out taxpayer money and they will all run to the nearest mall.

    Sorry, but “Nope!” I wonder if there is anyone in the current administration who’s ever heard of a guy named Milton Friedman: “There is no such thing as a free lunch.” Tumbling wealth — notably in homes and stocks — coupled with job concerns makes people nervous. When they are nervous, they don’t spend as much. They save more. Of course, savings is a dirty word in a consumer demand driven world. Even though it is ultimately the pool of accumulated savings properly allocated to the free market and the entrepreneur that makes a country wealthy.

    Many economists and other critics lament that U.S. consumers don’t save — the Chinese do. I would argue the massive investment in mutual and money market funds by U.S. citizens indicates we DO save. We just don’t save in banks, as do the Chinese prisoners (citizens). They tend to use banks because there are so few alternatives available to them — their money is locked in China, just as they are. This “forced savings” conveniently represents a ready pool of capital for Chinese manufacturing growth. Maybe as alternatives open up, and the Chinese move money into mutual funds etc., their savings pattern will begin to look more Western over time.

    I am not arguing the average U.S. citizen didn’t go on an incredibly irresponsible spending binge funded by consumer credit — Mr. Consumer definitely did. What I am saying is that now Mr. C will likely be extracting some “savings” held in the form of mutual fund investment and likely start to build real savings that the economists can label as such — this will of course be deflationary as it reduces the pool of collateral, the stock market is still a very big collateral pool, for lending and investment. And in a world of massive malinvestment, thanks to massive amounts of manufactured derivative credit, this future savings at both the consumer and institutional level will be part and parcel of the work-off of this malinvesment. This assumes the market works its cleansing magic despite our trusty government officials impeding it every step of the way.

    At this stage in the cycle, a natural market cleansing process is the most efficient (and painful) and deflationary.But there seems an overwhelming wallow from the collective for nanny government to save the economy from pain. Sadly! Why is deflation such a boogie man? Because there is no place to hide for the inefficient, over indebted, and those cocky crony capitalists who seem to love the “free” market on the way up (and take credit for success), but scream for help on the way down. Deflation restores real value to its rightful place. It tends to boost the value of money relative to goods, i.e. increasing general purchasing power for those with cash balances. It allows the most efficient users of scarce capital to survive, and those propped up by artificial manipulation of the rate of interest and crony capitalism to die — as it should be.

    We don’t have to have a crash. But the economics in my mind point more toward deflation over inflation — as heretical as that may sound.

    _______________


    Dollar Bullish Implication #1: Draining of Global Capital

    It’s all part of money flowing from the center to the periphery and now back to the center again. Let me elaborate ...

    The developed world provides the capital for the rest of the world. I like to think of it as the center to the periphery, i.e. credit created in the most efficient and deepest capital markets is used to fund investment (risky and otherwise) to markets outward on the periphery — those markets that don’t have their own domestic capital markets ready and available to do the job. Therefore, when money starts to move out of the periphery (that which is still left possibly after systemic shock) and back to the center, the dominant receiver of this flow back to the center is the U.S. capital market. That’s why receding global credit is dollar bullish. Because the supply of the world’s money, the U.S. dollar, is falling, boosting its value.
    _______________

    Dollar-Bullish Implication #2: The Commodity See-Saw

    I’m talking about the consequences of the Big Four’s declining demand as it impacts the demand for commodities. Logically, one would think there is little chance of current prices for energy and industrial metals (and gold) to be sustained. Of course, thinking “logically” has the potential to get us into trouble in a world often dominated by illogical players. But if these commodities served as hiding places for money fearing a U.S. dollar meltdown, then you’d have to think money eventually leaving this asset class, for whatever reason, must be dollar-bullish. And sticking to that theme, I am gaining more confidence in my theory that the fall in crude means a rapid closing of the “Oil/Dollar Carry Trade” — borrowing dollars to fund purchases of crude oil and paying back the dollar loans at cheaper rates in the future. Basically, this becomes a classic self-reinforcing process …


    _______________



    ... Lack of global credit leads to slowing global growth ... leads to slowing oil demand

    ... leads to more closing of the Crude Carry Trade ... leads to change in dollar sentiment ...

    leads to new price trend led by short-term players ... and leads to capitulation to the trend on the part of dollar perma-bears …

    Ultimately, as this trade closes, money flow benefits the dollar — big time.


    _______________


    Dollar-Bullish Implication #3: Shifting Interest-Rate Policies

    If global demand is tanking, if global credit is receding, if commodities prices fall, then this great inflationary environment can’t possibly overwhelm us, right? I believe a financial system clogged with debt repudiation makes global deflation a far greater danger. I’ll explain this looming deflation scenario a side article that follows. Central banks can pump out money all they want, but if the financial institutions are using the money to save themselves and consumers are shoring up their own balance sheets and business see fewer decent capital investment prospects, then this money is not stimulative. In this environment, we expect central banks to aggressively cut interest rates. In reality, they will be playing catch-up to the U.S. Fed, which has already made significant strides in cutting back the cost of borrowing. What does this mean?

    It means the U.S. dollar yield disadvantage could narrow rather quickly. And you guessed it: an improving dollar yield differential is a huge positive for the dollar.

    _______________


    Dollar-Bullish Implication #4: Stocks Becoming a Catalyst

    Last but not least is the impact on credit from the world’s largest depository of collateral for loans — the stock market. In other words, falling stocks speed the process of credit draining from the economy, and it has broader psychological impact to boot. Institutions and individuals lose a key source of wealth and major source of collateral value to support existing loans. Financial institutions already in “save-thyself mode” are calling loans more


    quickly. Falling stocks will reinforce this trend. Looking at a chart of the Dow Jones World Stock Index Weekly I’d guess a major top is in place, and we are clearly entering a major bear market. We are already hearing howls from those that say it isn’t fair. It isn’t fair the U.S. dollar could benefit by being the cause of much of the problems now in the global economy. But the same crowd never thought of fair when the world’s money was funding risky asset investments and blowing bubbles of dubious wealth around the globe. I think we may be in the midst of what the economists wanted — global rebalancing. U.S. exports grew faster than did China over the last 12 months. The U.S. Current Account is improving. The U.S. consumer is buying less and saving more. Commodities prices are on the verge of breaking down even further.


    And inflation will be squeezed out of the developed world’s economies no matter what central bankers decide to do. Maybe rebalancing is what is needed to cleanse a global financial system chock full of malinvestment. I think it will be a very painful process. But I also think it will usher in a major long-term bull market for the U.S. dollar.


    Last edited by Contemptuous; September 09, 2008, 02:48 PM.

  • #2
    Re: Jack Crooks Calls For Deflation And Long Term Bull Market USD. [wtf]

    What was Crooks writing about the US$ during the "Great Deflation Scare" early this decade, and during the year long Dollar Dead Cat Bounce during calendar year 2005?

    Comment


    • #3
      Re: Jack Crooks Calls For Deflation And Long Term Bull Market USD. [wtf]

      GRGT55-

      I did not have a subscription to this (comment deferred!) newsletter until six months ago, which I confess I only obtained in a "moment of befuddlement".

      I'm not impressed with his "analysis", but seriously - would like to read some concise "demolitions" here in detail. Please note, regardless of Mr. Crooks' macro economic skills, he does tend to make decent currency timing calls. That is in fact his real area of expertise. Is this all it is? He's gotten infatuated with the fleeting dollar strength and has let his imagination extrapolate something grander out of it in terms of duration? Anyone feel like methodically demolishing Mr. Crooks here? Or anyone wishing to reiterate him in any details?

      Comment


      • #4
        Re: Jack Crooks Calls For Deflation And Long Term Bull Market USD. [wtf]

        Originally posted by Lukester View Post
        This is not (or certainly should not be) a "theological position" one way or the other. We had all better be agnostics while examining these events. I'm interested in what iTuliper's think. I will of course be among the applauders of the most withering demolitions of Mr. Crooks' assertions! This guy is not bad at calling the currency bit moves. I have another advisor, who I would earnestly like to dump in January - who is calling a scenario much like Mr. Crooks! USD is in the very baby steps of embarking on a *very long* uptrend.

        Just so we can get a sense of what this other guy is saying, he's talking about a *multi-year* breakout in the USD, with consequent mirror opposite re-arrangement of a dozen other macro calls. Now it looks like people like Richard Russell and also Jack Crooks are beginning to drink that kool-aid too.

        We iTulipers look at the landscape and have a powerful urge to consign such babblers to the "retarded" category. I know I do looking at the US fundamentals. But cleverly, Mr. Crooks is saying "don't look at the US, look at all the rest, which are the second half of the USD equation, and he's got at least an argument there. So maybe if a few other iTulipers contribute arguments as to precisely why this is not in the cards we can "stress test" the iTulip consensus to the contrary here? C'mon guys. I'm looking for some really tough bullet-proof arguments as to why Mr. Crooks has it all wrong this time.

        Please contribute your arguments pro or con. Is Mr. Crooks a "naive ingenue" or is he an astute detective here? (Finster has already deposited some hints of his own views, which were definitely "food for thought"!) Anybody else got an idea whether Mr. Crooks may have been hanging out with the Martin D. Weiss [Phd.] group a little too long here? :rolleyes:

        QUOTES:

        Global Deflation Looms [ :eek: :eek: :eek: ]


        It surprises me to see how many have bought into the hyperinflationary theme. The best I can tell, them become wrapped around central bank easy-money policies and conspiracy in the government’s economic reports. The Austrians would say it is credit that matters. That is how you can decide between inflation and deflation. And as far as I can tell, we are pretty much locked in a credit repudiation stage for a while to come. The Fed can dish out money, but if the banks don’t lend, or no one shows up to borrow, it doesn’t matter. This is exactly what I see happening right now.

        And the impact is deflationary.

        Recall a little problem like this lasted for about 14 years in Japan. Even with the Bank of Japan’s famous, Zero Interest Rate Policy (ZIRP), no one showed up to borrow as debt was being worked off. Put another way, you can a lead horse to water but you can’t make him buy a new car. Or as our deep-thinking government sees it, you can dish out taxpayer money and they will all run to the nearest mall.

        Sorry, but “Nope!” I wonder if there is anyone in the current administration who’s ever heard of a guy named Milton Friedman: “There is no such thing as a free lunch.” Tumbling wealth — notably in homes and stocks — coupled with job concerns makes people nervous. When they are nervous, they don’t spend as much. They save more. Of course, savings is a dirty word in a consumer demand driven world. Even though it is ultimately the pool of accumulated savings properly allocated to the free market and the entrepreneur that makes a country wealthy.

        Many economists and other critics lament that U.S. consumers don’t save — the Chinese do. I would argue the massive investment in mutual and money market funds by U.S. citizens indicates we DO save. We just don’t save in banks, as do the Chinese prisoners (citizens). They tend to use banks because there are so few alternatives available to them — their money is locked in China, just as they are. This “forced savings” conveniently represents a ready pool of capital for Chinese manufacturing growth. Maybe as alternatives open up, and the Chinese move money into mutual funds etc., their savings pattern will begin to look more Western over time.

        I am not arguing the average U.S. citizen didn’t go on an incredibly irresponsible spending binge funded by consumer credit — Mr. Consumer definitely did. What I am saying is that now Mr. C will likely be extracting some “savings” held in the form of mutual fund investment and likely start to build real savings that the economists can label as such — this will of course be deflationary as it reduces the pool of collateral, the stock market is still a very big collateral pool, for lending and investment. And in a world of massive malinvestment, thanks to massive amounts of manufactured derivative credit, this future savings at both the consumer and institutional level will be part and parcel of the work-off of this malinvesment. This assumes the market works its cleansing magic despite our trusty government officials impeding it every step of the way.

        At this stage in the cycle, a natural market cleansing process is the most efficient (and painful) and deflationary.But there seems an overwhelming wallow from the collective for nanny government to save the economy from pain. Sadly! Why is deflation such a boogie man? Because there is no place to hide for the inefficient, over indebted, and those cocky crony capitalists who seem to love the “free” market on the way up (and take credit for success), but scream for help on the way down. Deflation restores real value to its rightful place. It tends to boost the value of money relative to goods, i.e. increasing general purchasing power for those with cash balances. It allows the most efficient users of scarce capital to survive, and those propped up by artificial manipulation of the rate of interest and crony capitalism to die — as it should be.

        We don’t have to have a crash. But the economics in my mind point more toward deflation over inflation — as heretical as that may sound.

        _______________


        Dollar Bullish Implication #1: Draining of Global Capital

        It’s all part of money flowing from the center to the periphery and now back to the center again. Let me elaborate ...

        The developed world provides the capital for the rest of the world. I like to think of it as the center to the periphery, i.e. credit created in the most efficient and deepest capital markets is used to fund investment (risky and otherwise) to markets outward on the periphery — those markets that don’t have their own domestic capital markets ready and available to do the job. Therefore, when money starts to move out of the periphery (that which is still left possibly after systemic shock) and back to the center, the dominant receiver of this flow back to the center is the U.S. capital market. That’s why receding global credit is dollar bullish. Because the supply of the world’s money, the U.S. dollar, is falling, boosting its value.
        _______________

        Dollar-Bullish Implication #2: The Commodity See-Saw

        I’m talking about the consequences of the Big Four’s declining demand as it impacts the demand for commodities. Logically, one would think there is little chance of current prices for energy and industrial metals (and gold) to be sustained. Of course, thinking “logically” has the potential to get us into trouble in a world often dominated by illogical players. But if these commodities served as hiding places for money fearing a U.S. dollar meltdown, then you’d have to think money eventually leaving this asset class, for whatever reason, must be dollar-bullish. And sticking to that theme, I am gaining more confidence in my theory that the fall in crude means a rapid closing of the “Oil/Dollar Carry Trade” — borrowing dollars to fund purchases of crude oil and paying back the dollar loans at cheaper rates in the future. Basically, this becomes a classic self-reinforcing process …


        _______________


        ... Lack of global credit leads to slowing global growth ... leads to slowing oil demand


        ... leads to more closing of the Crude Carry Trade ... leads to change in dollar sentiment ...

        leads to new price trend led by short-term players ... and leads to capitulation to the trend on the part of dollar perma-bears …

        Ultimately, as this trade closes, money flow benefits the dollar — big time.


        _______________


        Dollar-Bullish Implication #3: Shifting Interest-Rate Policies

        If global demand is tanking, if global credit is receding, if commodities prices fall, then this great inflationary environment can’t possibly overwhelm us, right? I believe a financial system clogged with debt repudiation makes global deflation a far greater danger. I’ll explain this looming deflation scenario a side article that follows. Central banks can pump out money all they want, but if the financial institutions are using the money to save themselves and consumers are shoring up their own balance sheets and business see fewer decent capital investment prospects, then this money is not stimulative. In this environment, we expect central banks to aggressively cut interest rates. In reality, they will be playing catch-up to the U.S. Fed, which has already made significant strides in cutting back the cost of borrowing. What does this mean?

        It means the U.S. dollar yield disadvantage could narrow rather quickly. And you guessed it: an improving dollar yield differential is a huge positive for the dollar.

        _______________


        Dollar-Bullish Implication #4: Stocks Becoming a Catalyst

        Last but not least is the impact on credit from the world’s largest depository of collateral for loans — the stock market. In other words, falling stocks speed the process of credit draining from the economy, and it has broader psychological impact to boot. Institutions and individuals lose a key source of wealth and major source of collateral value to support existing loans. Financial institutions already in “save-thyself mode” are calling loans more


        quickly. Falling stocks will reinforce this trend. Looking at a chart of the Dow Jones World Stock Index Weekly I’d guess a major top is in place, and we are clearly entering a major bear market. We are already hearing howls from those that say it isn’t fair. It isn’t fair the U.S. dollar could benefit by being the cause of much of the problems now in the global economy. But the same crowd never thought of fair when the world’s money was funding risky asset investments and blowing bubbles of dubious wealth around the globe. I think we may be in the midst of what the economists wanted — global rebalancing. U.S. exports grew faster than did China over the last 12 months. The U.S. Current Account is improving. The U.S. consumer is buying less and saving more. Commodities prices are on the verge of breaking down even further.


        And inflation will be squeezed out of the developed world’s economies no matter what central bankers decide to do. Maybe rebalancing is what is needed to cleanse a global financial system chock full of malinvestment. I think it will be a very painful process. But I also think it will usher in a major long-term bull market for the U.S. dollar.




        If I understand his arguments correctly [my thoughts in italics], Crooks thinks:
        1. US$ denominated credit will be extinguished largely through default instead of by inflating it away over time, thus "reducing" the global supply of US$ and making each of them more valuable. I would imagine that the Fed and Treasury would prefer the more orderly, controlled and politically acceptable inflate-away-the-debt option. And what Ben and Hank want, they seem to be able to conveniently engineer these days, so I would be loathe to bet against them.
        2. Money leaving commodities will go into US$. Levered commodity positions being unwound (his oil carry trade) requires paying off the US$ denominated loan, thus creating demand for US$ increasing its value [this is the same argument that Richard Russell and others have called the "synthetic short" on the US$]. US$ & commodities...two sides of the same coin. To believe in a long term rising US$ one really has to believe there has been a substantial shift in US policy towards its currency. I don't believe a substantial or sustainable rise in the US$ is possible and therefore I'm in EJ's $ Ratchet camp.
        3. Number 3 is a variation of the "Fed cut first and furthest, and therefore everyone else has to play catch up" [cutting their administered rates]. Apparently the BoE and the ECB didn't hear that story this past week, as they both left rates unchanged, while the Swedes raised their rate. My guess is that if the US$ continues its romp, the Fed may use that as cover to cut the funds rate to goose the faltering stock market, and also to try to create some steepening of the [now flattening] yield curve, before the election.
        4. Falling stock prices means more credit gets extinguished to the benefit of the US$. US exports are rising faster than China, the current account balance is therefore shrinking, US consumers have en mass rediscovered the savings ethic, and inflation will be wrung out of the developed world economies. The first part of this is just a sub-set of his first argument - applied to stocks as one asset class. The rest of it fails to note that a rising US$ won't help US exports continue to rise, nor will developing countries just stand by and not respond. And the idea that overburdened US consumers are in a position to dramatically increase their savings is a dubious proposition, and its a trend the Fed & Treasury will fight with all their considerable large-bore artillary, up to and including the confiscation of savings [such as pension plans] if necessary. Count on it.
        A long term bull market for the US$ will only occur once the world is able to invest in the New, New Deal enterprises. If a successful shift to the "next bubble" becomes first possible, and then probable, the amount of capital that is likely to flood ashore to the USA will be considerable. But I sense we are some ways from that right now.
        Last edited by GRG55; September 05, 2008, 11:50 PM.

        Comment


        • #5
          Re: Jack Crooks Calls For Deflation And Long Term Bull Market USD. [wtf]

          Good topic, Luke, the ole deflation issue just doesn't seem to want to disappear, does it?

          When was Crooks' article written?

          For my money, despite what is not known in its construction, I am sticking with the Finster Dollar Index--FDI. The FDI usually is updated every Saturday, if ole Finster has not been out too late on Friday nights playing with his band. The FDI in its final presented form each week is just a line that either goes down (usually: inflation), sideways (occasionally), or up (rarely:disinflation or deflation). Thus it carries with it no innuendo, and Finster avers it is a reflection of what is happening now. Because in some ways I have more familiarity with how Finster thinks than any of the above pundits, I can go with the Finster.

          In the meanwhile the pundits can argue as they wish, and iTulipers can write as they see it.

          I'll stick with simplicity, and hope the Finster stays on top of things.
          Last edited by Jim Nickerson; September 06, 2008, 12:05 AM.
          Jim 69 y/o

          "...Texans...the lowest form of white man there is." Robert Duvall, as Al Sieber, in "Geronimo." (see "Location" for examples.)

          Dedicated to the idea that all people deserve a chance for a healthy productive life. B&M Gates Fdn.

          Good judgement comes from experience; experience comes from bad judgement. Unknown.

          Comment


          • #6
            Re: Jack Crooks Calls For Deflation And Long Term Bull Market USD. [wtf]

            Jim -

            Article is "fresh off of Jack Crooks' desk". :rolleyes: Thanks for your input. Thanks also to GRG55, who's already dug him a nice square plot in the "thesis cemetery" and has the daisys all ready to plant on top of the mound. Very considerate gesture. I would like to read another TWENTY iTulipers weigh in on this topic. C'mon all of you brainiacs. Weigh in here! GRG55 kicked it off, Jim volunteered another boot. Who else here has a firm idea on this guy's thesis??

            Comment


            • #7
              Re: Jack Crooks Calls For Deflation And Long Term Bull Market USD. [wtf]

              I believe he is about 80% right in his arguments, but he misses some important points, or the article is incomplete, therefore his conclusions are rather simplistic if not wrong. I saw no detailed analysis of what will happen to the countries that are buying US treasuries, and there is nothing about the deleveraging effect produced by the seizure of the US deficit/debt recycling mechanism and the deflationary effect of using the non-recyclable residue of sovereign reserves of the treasuries-vacuumcleaner countries in order to shore up in crisis-mode their own national economies. (uhh ... that was long )

              If played well, this game can turn into Bernanke's wet dream: high speed printing of treasuries, low inflation, low unemployment, decent economic growth (while the rest of the world struggles) and a long term bull in stocks.

              And of course .... Obama will be credited for this amazing economic performance

              My guess is that all this will end with the true peak cheap oil, when only a few countries (G-7 + a few others affiliated to G-7 circuit) will have the economic flexibility and the technological capability to make the transition to something else (probably a mix of renewables and some funky form of nuclear - fusion or a good fission rebreader technology)

              But honestly I don't see a long term $ bull, but a huge opportunity in manufacturing, some good hopes in in some parts of retail and only a few techs and financials doing well.

              What will happen in the next 2-6 months with China (for which the treasuries recycling process is close to a complete stop) will give the best picture of what happens next.

              Comment


              • #8
                Re: Jack Crooks Calls For Deflation And Long Term Bull Market USD. [wtf]

                Good topic Lukester. Thanks for posting it and for what it is worth, here are my thoughts

                Firstly I will iterate that I am by no means an economist nor any sort of monetary expert. I grew up a kiwi farm boy, who happened to believe in the early 90's that the future money would be made in intellectual property rather than Real Property. Guess I was wrong for quite a few years. I have a small business that has offices in NZ, USA and the UK. We deal in USD GBP, AUD and NZD. For the first time I am at a loss to determine which currency will come through the strongest. My Dentist asked me yesterday to pick a currency to invest in and I actually told him Chinese Yuan RMB. Today I think not. They have too much to loose with a low USD.

                Please all feel free to criticize my thoughts or reasoning here as this is an important topic for me and my business depends upon what happens. So any comments will be of help, thanks.

                I feel that in these times traditional economic theory seems to have gone out the window. I look at the current situation as being driven more by emotion than economics. The money people are afraid and fear activates emotion and/or panic. Everyone everywhere is trying to save their own butts both locally and globally. The piper has turned up and he is pissed. I feel it is fair to say that nothing that was, will be again. We have had an extended period of greed, deceit and ignorance on the part of many influential people, Governments and Corporates, plus a lot of financial decisions have been made by people whom I would call idiots, who had control of too much money and not enough sense. My apologies to all the genuine, sincere idiots out there lol.

                In July my Chinese factory asked me to start paying them in either Euros or AUD because they were being hammered by the fluctuating USD. While I was in China in early August we agreed on this policy. Before I got back to NZ on the 8th the situation had changed with Euro and AUD faltering. Thus we are still paying them in USD.

                I hear comments here about the race to the bottom and it seems to be true but one fact sticks in my mind and that is, no matter who wins the fight to be bottom, someone must lose and remain at the top. So who will it be.

                Euro?? Not a currency I have had too much faith in. It is used by a family whose cousins have fought and disliked each other for centuries. Spains collapse, I have read, could harm it and who would have thought Germany would go into decline. AUD was strong probably because of minerals. Drop the Commodities index and I would suggest drop the AUD. The kiwi ha ha ha. Been to damn high for too long mainly because of high interest rates. (Borrow cheap Jap Yen and invest in high yield kiwis) Kiwi took a dump on Friday so we might win that race to the bottom if the investors keep pulling out. The GBP. hmmmm look at the past week, their economy is not in very good shape. Maybe the RMB. However that will make China's exports too expensive.

                Drop the value of USD and everyone suffers. Destroy the USD everyone looses 60% odd of their reserves. I don't think many will be too happy with that. Something about a bird in the hand springs to mind.

                In these tough time, people will save because they are scared. Money people will intimidate and manipulate markets to try and save their own butts by doing what ever they can to make a buck. Most of them only know good times and easy money and don't know or care about the "real" economy. So how can one follow markets by traditional analysis when there is fear, intervention and possible manipulation. It is hard to apply fundamentals to markets when the sharks are looking to eat each other (and anything else that moves) and the shark gun is out of bullets.

                So if US citizens are scared they will save and thus push up the savings rate. They will repay their loans if they can else their lenders will go broke if they can't. (unless "Saved" by the FED i.e. Foreign Equity Dollars) They will spend less, thus retailers will suffer, imports will drop which will hurt foreign exporters. Foreign investors will make decisions like "Should I make a big short term loss in that US bank investment and go for a longer term gain via exporting and investment, assisted by an ever strengthening USD hmmm I can make currency gains as well as ROI if I play this right. Asians are generally more long term thinkers and they will have much more influence over the USD than most other people because they own so much of it. They have invested lots into the great corporation called USA Inc. What would you do if you were in their shoes??. Would you chew off your nose, shoot yourself in the foot, cut and run or pump in a bit more money. It is merely a matter of perspective, so one must look at it from their perspective too, cause they are the other side of the $ coin.

                When we are scared we run to what we know. We know the USD so we will try to stick with it whether it is fundamentally right or wrong to do so. We will stick with it because in this horrible world of turmoil we see it as something that is safe or at least it seems to be the best of a bad bunch. Given time we might change to something else, but now is not the time, cause there is too much uncertainty. Lets wait till the seas calm and hope like hell that there is something left to salvage.

                Sorry this is so long and not full of economic speak but for what it is worth those are some of my thoughts. So whether his reasons are fundamentally right or wrong, I feel his conclusion is correct. But then I guess I have to say that cause it means I will make more money lol.

                Whatever does happen, and whomever guesses it right, I am sure it is not going to be an easy ride. I feel there are still many bumps in the road and raging rivers to cross before we see the end of this current Debt inspired glitch in economic history.

                On the bright side, I have it on good authority, that the sun will rise again tomorrow morning irrespective of what the economic uncertainty of tomorrow will be.

                Like the Phoenix from the ashes so might the USD rise, to the disbelief of most, the relief of many and the demise of some.

                Cheers ;-)

                Comment


                • #9
                  Re: Jack Crooks Calls For Deflation And Long Term Bull Market USD. [wtf]

                  Originally posted by Lukester View Post
                  GRGT55-

                  Please note, regardless of Mr. Crooks' macro economic skills, he does tend to make decent currency timing calls.
                  I followed Jack Crooks for several months.
                  In the beginning he made some good calls, but at one point when he picked something like 11 losers in a row (IIRC), that's when I bailed out.
                  Maybe he's done better since then, and perhaps his overall record is good, but I was losing too much money over too short a time to continue.

                  As far as Crook's analysis posted by Lukester, it may be right . . . . but from my experience I wouldn't use his track record as one of the justifications of possible correctness.

                  Perhaps someone with a longer experience than mine with the Crook's service would like to provide some different opinion . . . .
                  raja
                  Boycott Big Banks • Vote Out Incumbents

                  Comment


                  • #10
                    Re: Jack Crooks Calls For Deflation And Long Term Bull Market USD. [wtf]

                    Crooks effects are all real, but the context is important. Crooks does not address the issue of massive (bad) debt - the effect of this debt is what is driving events in the US dollar right now. As a trader, it is unsurprising that his effects are all 'financial trade' related.

                    #1: US$ denominated credit will be extinguished largely through default instead of by inflating it away over time, thus "reducing" the global supply of US$ and making each of them more valuable.

                    Unfortunately we're seeing that for each credit 'destroyed' in the private sector, the credit is replaced by the government. Therefore just how much net US$ credit supply is being reduced? After all, the US government borrows money by selling Treasuries. Secondly Crooks is confusing credit with cash - they are related but are not the same thing.

                    #2: Money leaving commodities will go into US$. Levered commodity positions being unwound (his oil carry trade) requires paying off the US$ denominated loan, thus creating demand for US$ increasing its value [this is the same argument that Richard Russell and others have called the "synthetic short" on the US$].

                    First of all, I don't see why all the money leaving commodities would necessarily go into the US$. Secondly if there was indeed an inverse relationship between the dollar and commodities due solely to supply/demand of dollars, then the petrodollar standard is in grave danger as the rest of the earth wrestles with high energy costs. Thirdly Crooks is assuming all this money in commodities is borrowed. From the traders and hedgies perspective, this might be true but there are plenty of SWFs, pension funds, and what not who aren't using leverage.

                    #3: Number 3 is a variation of the "Fed cut first and furthest, and therefore everyone else has to play catch up" [cutting their administered rates].

                    There is a huge difference between leading the pack and being in the middle. I don't see anyone fighting the US for the 'lead' - Japan already taking a shower in the locker room. Either way, I do not see any of the other major nations cutting their rates to BELOW the US - not until we achieve the hyperinflationary orbit and its resulting spike in interest rates. But that won't be because other nations cut their rates.

                    #4: Falling stock prices means more credit gets extinguished to the benefit of the US$. US exports are rising faster than China, the current account balance is therefore shrinking, US consumers have en mass rediscovered the savings ethic, and inflation will be wrung out of the developed world economies.

                    Inflation will be wrung out of the developed world countries only in the most short term and relative sense. Inflation by any reasonable time frame measure (i.e. 2004 or earlier) is not going to be wrung out.

                    The currency account balance didn't shrink when the dollar got weaker because energy import costs rose, and the currency account balance won't shrink when the dollar gets stronger because exports get hurt. Only less consumption will do it - and that is starting to occur. But in the meantime there is no net positive effect on the dollar.

                    More importantly, the investment income from investments in the US owned by foreigners is now LARGER than the investment income outside of the US held by Americans. How does a stronger dollar then help? These investments aren't all from borrowing - in fact, the foreign investments are likely mostly cash.

                    Comment


                    • #11
                      Re: Jack Crooks Calls For Deflation And Long Term Bull Market USD. [wtf]

                      Originally posted by Lukester View Post
                      Jim -

                      Article is "fresh off of Jack Crooks' desk". :rolleyes: Thanks for your input. Thanks also to GRG55, who's already dug him a nice square plot in the "thesis cemetery" and has the daisys all ready to plant on top of the mound. Very considerate gesture. I would like to read another TWENTY iTulipers weigh in on this topic. C'mon all of you brainiacs. Weigh in here! GRG55 kicked it off, Jim volunteered another boot. Who else here has a firm idea on this guy's thesis??
                      Luke, allow me to be one of these guys;

                      In a nutshell; I simply do not buy the author's arguments. There may be some short periods when everything is going down due to "deleveraging" (like July/Aug of this year) but in my view all signs are clearly inflationary.

                      The main reason is that the author's thesis is "US-centric" and too narrow for such a complicated and broad subject. How can global deflation be addressed without discussing Chindia growth in the years ahead? Peak Cheap Energy? M3? Unfunded government liabilities?

                      Swapping bad debt for US Treasury bonds, printing money like mad to buy the stock of fallen GSEs is inflationary but like a tsunami it can be hard to spot at first, but once it comes ashore everyone will run for the hills.

                      The government demonstrated that they will debase the currency to prevent large financial institutions to fail. If we had free markets, then yes I would consider deflation, but these markets are anything but free.

                      The electronic bread line started during Greenspan era i.e. consumer checks in the mail is also a sign that governments will do everything to print money and debase the currency.

                      I realise the above as been discussed like a million times and not much is new, but it remains valid in my view. As such for the foreseable future I will keep some dry powder in reserve and make sure to keep my inflation edges in place.

                      Comment


                      • #12
                        Re: Jack Crooks Calls For Deflation And Long Term Bull Market USD. [wtf]

                        I have recommended Jack to readers who want to make currency trades. I've known him for years as one of the best, if not the best, short term FX guys in the business. Long term macro forecasts, as they relate to interest rates, currency values, economic growth and output, demand, inflation, stock markets, and so on, is my area of expertise, and very different from Jack's. While I've been doing macro analysis and forecasting for over a decade, I can't claim neither track record nor skill in short or medium term currency trading; you will never see me devise a serious short term currency trade, commodity trade, or stock trade, but I may at times offer an educated guess, as Jack is doing here in his macro deflation call.

                        It's a plausible argument, given what he knows about macro economics, geopolitics, the credit and banking system, and history. This is true of many other commentators offering views on this subject who are commodities or equities traders, for example. Here's an expert's view.

                        We are all talking about debt deflation

                        First of all, everyone who is commenting on deflation, inflation, or hyperinflation occurring in the future is talking about what happens to GDP and inflation as the US and other over-indebted nations lose our ability to create more debt both to roll over existing debt and fund the portion of demand that is debt financed. By debt I mean household and business sector debt. Government debt, especially foreign debt, is another factor that plays a part in how debt deflation tends to occur for net creditor and net debtor countries and this leads to a lot of confusion about what happens when the debts of households and firms deflates in one country versus another.

                        No deflation spirals anywhere in the world since the US case in the early 1930s

                        There is not a single example of a deflation spiral in any nation since the world's central banks abandoned the gold standard after WWII. There is one famous example of a deflation spiral in the past 100 years that broke all records and has not been repeated since. It happened under the gold standard and won't happen again unless the gold standard is reinstated by central banks, a development that has no higher probability than the adoption of the use of steam engines for trains.

                        The US 1930s deflation spiral case

                        The one and only historic monetary deflation: US 1930 to 1933. This graph is from the Fed's 2003 "Deflation Handbook" (PDF).



                        • The US remained on the gold standard from the time of the 1929 crash until 1933
                        • A debt deflation and monetary deflation spiral took inflation rates down to negative 14% in 1933
                        • A negative inflation rate indicates true "deflation," whereas a declining rate of inflation is called "disinflation"
                        • The US went off the gold standard in 1933, and gold was re-priced 40% from $20.67 to $35
                        • At the time, the banking system was for all intents and purposes broken
                        • Loans and investments of Federal Reserve member banks had declined 31% and loans overall by 50% (1)
                        • The money supply had contracted by over over 30% (2)
                        • Nonetheless, the result of the 40% dollar depreciation was 28% rise in inflation from -14% to +14% as shown by the Fed in the chart above

                        Moral: Currency depreciation is the foolproof way out of a deflation spiral, irrespective of credit and money creation by government or the endogenous credit markets.

                        Anyone in long bonds betting on a continuation of deflation in 1933 got wiped out in the ensuing government engineered inflation and bond market crash. Governments have been engineering inflations before and ever since.


                        Currency speculators betting on an appreciating dollar were of course wiped out, too.

                        That said, you will never, ever hear a central bank say, "If we really get into trouble with deflation we can always depreciate the currency." Even the appearance of intention, never mind an explicit policy assertion, can destroy the central bank's credibility and lead to a major crisis.

                        There is one other case of deflation since WWII, but a moderate deflation, but not a deflation spiral: Japan since 1990.

                        The Japan since 1990 moderate deflation case

                        Unlike the US in the 1930s, Japan did not suffer a deflation spiral with GDP falling year after year and negative inflation rates reaching double digits.



                        The Japanese experience with deflation has been periodic and only once ever reached -2%, not even close to the -14% rate of deflation that the US experienced in 1932.

                        What happened in Japan is that the Bank of Japan raised interest rates during the early stages of debt deflation in 1990 to defend the yen. Good for the yen, bad for the money supply.



                        The Fed has not raised interest rates in the first year of the US debt deflation in 2008 to defend the dollar – quite the opposite. The US has intentionally used dollar depreciation to create inflation to avoid the zero bound, but not because they fear a repeat of the deflation spiral the US experienced in the 1930s. This is where so many commentators make the most egregious error.

                        At the zero bound, funny things happen, but very different things to a net creditor versus a net debtor country. The reason has to do with the reversal of money flows in each case.

                        For a net creditor, at the zero bound net demand for the national currency increases. The opposite occurs for net debtor countries as they approach the zero bound.

                        Here's what happened to heavily indebted Russia in 1998 as inflation approached zero. Compare this to the zero bound case for Japan above.


                        In my view, Russia is headed for a repeat except starting from a much higher inflation basis. The war in Georgia caused a surge in capital flight; the central bank has had to defend the ruble and is quickly exhausting foreign exchange reserves in the process. Meanwhile, oil and gas prices are falling, reducing the ability of Russia to earn foreign exchange.

                        Russia is set up for a major currency crash. You heard it here first.

                        Two cases of deflation, all others are of various flavors of inflation

                        Two cases of monetary deflation occurred following over-indebtedness and debt deflation since 1930. One, the US 1930s case, does not apply today because the US is not on a gold standard. The other, Japan since 1990, does not apply because the US is a net debtor. That leaves dozens of other examples of hyperinflations and major inflations since 1980.

                        The rarity of deflation the two deflation events commonly cited to make the deflation case for the US today speaks to the uniqueness of the circumstances of those events. The current US circumstances are mundane: over-indebtedness of households and businesses and of the nation to foreign creditors. What makes the current US case unusual compared to, say, Russia's is that Russia's debts were denominated in rubles and it's economy is completely dependent on oil and gas. While the US as a net debtor faces similar vulnerabilities as output falls, the US is protected by four factors that were not in Russia's favor: 1) the interest of US lenders to maintain the value of the dollar reserves they hold, 2) the US has a diversified, highly functioning economy that is not dependent on a single industry – energy – for economic growth, 3) political stability, and 4) relatively higher level of honesty in business dealings, although this advantage is eroding in the US.

                        Add up these advantages and the outcome is still a matter of the extent of the dollar depreciation process, not the underlying dynamics.

                        Hyperinflation versus major inflation for transitional versus non-transitional economies

                        Jack makes a mistake of framing the debate as between a deflation spiral or a hyperinflation spiral. I have argued for years, for example in Door Number Two, that a kind of grinding inflation, caused by managed global currency depreciations, is the more likely outcome of the current debt deflation.

                        Hyperinflations:
                        • 1985 Bolivia >10,000%
                        • 1989 Argentina 3,100%
                        • 1990 Peru 7,500%
                        • 1993 Brazil 2,100%
                        • 1993 Ukraine 5,000%

                        All are cases of currency collapses associated with defaults on foreign debts that are not denominated in each nation's currency. The hyperinflation case does not apply to the US.

                        Major Inflations, not hyper-inflations, non-transitional economies:
                        • Israel
                        • Argentina
                        • Brazil
                        • Mexico
                        • Peru
                        • Bolivia

                        All of these inflations related to foreign debt but not major political or economic restructuring of the economy.

                        Major Inflations, not hyper-inflations, transitional economies since 1990:
                        • Czech Republic
                        • Poland
                        • Estonia
                        • Moldova
                        • Russia

                        All of the inflations above were a function of economic and political restructuring.

                        The next US major inflation will be unlike any of the above, and unlike the US 1970s experience, for reasons I go into in greater detail in my book. The next US inflation will be unique in history.

                        Short term, anything is possible

                        Note the name of the Fed's handbook when it was written in 2003: The Debt Deflation Handbook. Who is the intended audience? Bankers, bond traders, currency traders, perhaps? What's the message? Ben Bernanke was billed as a scholar of The Great Depression when he came on board in 2006. What's the message? You can find papers written on deflation by Bernanke going back to 1983, and I have.

                        If you listen to the Fed, what they have been saying for years on end is that they are well aware of the risk of debt deflation, and that they stand ready to do everything to prevent it.

                        Two years ago when I was debating the deflationists one of their key arguments was that the Fed's charter prevented them from doing X, Y, and Z to prevent asset price inflation from spilling over into the real economy. They can only monetize government debt, the deflationists claimed, not all of the CDOs and mortgages and so on that were going to become worthless and destroy the ability of banks to extend credit and expand debt. I told them the Fed was going to change the rules.

                        That is exactly what they have done. Central banks can and will maintain the global money supply but they cannot guarantee its purchasing power.

                        Later this weekend in the subscriber area I'll disabuse Jack of his misconceptions:
                        Dollar Bullish Implication #1: Draining of Global Capital

                        Yes, but at the same time currency depreciation reduces the purchasing power of fiat money.

                        Dollar-Bullish Implication #2: The Commodity See-Saw

                        Commodities prices are both a commodity supply/demand and a currency supply/demand story. The commodity sea-saw is the flip side of the dollar ratchet.

                        Dollar-Bullish Implication #3: Shifting Interest-Rate Policies

                        Jack says, "
                        Inflation will be squeezed out of the developed world’s economies no matter what central bankers decide to do." This is the old "central banks can't make people borrow" argument. All of my mistakes in forecasting inflation in the past have followed from underestimation of central banks. Central banks can buy not only assets such as bonds and stocks but via existing institutions such as the GSEs can and have purchased houses, and via institutions they can create in the future can buy credit card securities portfolios, auto loans, you name it. Central banks can offer negative nominal interest rates through member banks, paying households and businesses to borrow. It takes imagination, but the range of options for central banks to avoid deflation in the absence of a gold standard is virtually endless.
                        Short term if you are in the FX markets you are betting with funds, medium term with funds and governments, long term the logic of the global political economy. More later.

                        iTulip Select: The Investment Thesis for the Next Cycle™
                        __________________________________________________

                        To receive the iTulip Newsletter or iTulip Alerts, Join our FREE Email Mailing List


                        Copyright © iTulip, Inc. 1998 - 2007 All Rights Reserved


                        All information provided "as is" for informational purposes only, not intended for trading purposes or advice.
                        Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer
                        Last edited by EJ; September 06, 2008, 01:10 PM.

                        Comment


                        • #13
                          Re: Jack Crooks Calls For Deflation And Long Term Bull Market USD. [wtf]

                          Originally posted by EJ View Post
                          In my view, Russia is headed for a repeat except starting from a much higher inflation basis. The war in Georgia caused a surge in capital flight; the central bank has had to defend the ruble and is quickly exhausting foreign exchange reserves in the process. Meanwhile, oil and gas prices are falling, reducing the ability of Russia to earn foreign exchange.

                          Russia is set up for a major currency crash. You heard it here first.
                          The Canadian dollar is holding up fairly well so far despite the commodities crash (down 7% or so this year, but more since fall of 07).

                          As such, the question is; can the same be said about Canada, Brasil and Australia's currencies?

                          1$CAD = 1$US
                          Last edited by LargoWinch; September 06, 2008, 01:55 PM. Reason: Added the graph, cause I am such a nice guy...

                          Comment


                          • #14
                            Re: Jack Crooks Calls For Deflation And Long Term Bull Market USD. [wtf]

                            Many thanks to the iTulip "demolition crew". Thanks to EJ for the "neutron bomb" rebuttal - flattening deflationist arguments like a steamroller over hot asphalt. This topic is not closed due to EJ's reply. Other iTuliper's please have your say! It is fascinating to observe as this USD hedge correction plays out, a widening circle of commentators get drawn into the deflationista arguments. They are popping up like mushrooms in the springtime.

                            Rick Ackerman (senior mushroom - rediscovering his springtime)
                            Mish (senior mushroom - rediscovering his springtime)
                            Elliott Wave band of fruit-loops (senior mushrooms all romping around in their springtime)
                            Jim Shepherd (hoary senior mushroom now romping about gloriously in his springtime)
                            John Mauldin (senior mushroom - springtime)
                            Paul Lamont (fresh new mushroom)
                            Richard Russell (fresh new mushroom)
                            Jack Crooks (fresh new mushroom?)
                            et. al. (fresh baby new mushrooms popping up all over the place)

                            Maybe EJ could design a "rapid response first aid kit" for humanitarian administration to "at risk" potential mushrooms? Well intentioned iTulipers can carry one in a handy pocket canister and so be able to administer it instantly, whenever they may see another pundit or otherwise intelligent acquaintance suddenly getting that fogged up look, like they are about to succumb to "the virus". :rolleyes:

                            Many thanks to all for your arguments. Thanks to GRG55, Jim Nickerson, Raja, C1ue, Louie.G, LargoWinch, $#*. One thing that is notable - we haven't seen any deflationist mushroom post a contrary opinion here.
                            Last edited by Contemptuous; September 07, 2008, 10:24 PM.

                            Comment


                            • #15
                              Re: Jack Crooks Calls For Deflation And Long Term Bull Market USD. [wtf]

                              Originally posted by EJ View Post
                              In my view, Russia is headed for a repeat except starting from a much higher inflation basis. The war in Georgia caused a surge in capital flight; the central bank has had to defend the ruble and is quickly exhausting foreign exchange reserves in the process. Meanwhile, oil and gas prices are falling, reducing the ability of Russia to earn foreign exchange.

                              Russia is set up for a major currency crash. You heard it here first.
                              For the first time since I've arrived on this (bulletin) board I find one detail on which I'm in complete agreement with EJ ... That is really strange and disturbing

                              And back to Lukester's question. I haven't seen yet anywhere a solid and complete argumentation for for a long term dollar bull.

                              Comment

                              Working...
                              X