Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

[Sharky]

Re: Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

Obviously, the charts were displayed in US dollars. In that sense, they are correlated. Perhaps I was reading too much into his comment.

That's not what I meant.

The USD is a flexible yardstick. It's the international value of the dollar that's one of the major drivers of the markets. When the value of the USD with respect to other currencies goes down, stocks, commodities and other assets priced in USD go up, and vice versa. For example, if the market starts to look cheap in EUR or JPY as a result of a weaker dollar, then investors with their primary holdings in those currencies tend to buy.

[Guest]

Re: Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

Sincere apologies to Charles Mackay for derailing his dedicated thread posing this same question specifically - "the bubble to end all bubbles" - in truth, my posts there which got off topic were only a response to a sharpish comment volunteered to me to begin with.

What seemed to prompt this person to volunteer those sharpish comments, was a fairly standard Lukester post droning on about how the markets are likely going to be exploding up from here in the next five years into the 30K DOW range. ... :confused: (30K DOW!?? :eek: Fancy that!! Preposterous.)

Sorry for clogging up the thread with the subsequent replies, Mr. Mackay! I always follow your posts here with interest. Now what were we discussing - oh yeah, Celente's call for a bubble to end them all, right up ahead ... What a wacko nutcase he is, eh? :rolleyes:

Looks like your previous thread was hijacked! It would appear that you have found new evidence to support your thesis here.

When EJ wrote "The Next Bubble" he certainly could not have possibly imagined that there would be a $14 Trillion dollar BANKSTER BAILOUT BUBBLE in front of it. We have been discussing this in the iTulip forums within the context of Gerald Celente's postulation that the BAILOUT BUBBLE is the bubble to end all bubbles. Any comments?

Here is that Celente article:

http://yonkerstribune.typepad.com/yo...l-bubbles.html

and the forum link:

http://itulip.com/forums/showthread.php?t=9903

[Charles Mackay]

Re: Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

Looks like your previous thread was hijacked!

It would appear that you have found new evidence to support your thesis here. The implications are dark. No money to be made on that bubble.

Short Treasuries, your right, then how do you get paid?

Maybe we should all move down to your neck of the woods??? :eek:

[Sharky]

Re: Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

There was no key to this table to explain the abbreviations or how this adds up to a $45 trillion dollar liability? Please explain. Thank you.

Key:

ARM = Adjustable Rate Mortgage
OAD = Option Adjusted Duration
FNCL OAD = Loan duration (years)
t = $trillion

As I mentioned in my earlier post, the OAD is an estimate of the current economic weight of the debt. As I understand it, it's basically the present value of the debt, given current interest rates and expected loan duration, using an option-type pricing model. As interest rates or loan duration increase on ARMs, OAD goes up (oh, and as rates go up, duration also tends to increase, so it's an exponential effect).

The Fed and the Treasury have now stepped in, and without adding any additional capital to the banks, they have placed a floor on the mortgage market by way of the FDIC. Banks have effectively been turned into GSEs like Freddie and Fannie; they've been told that they will not lose money on the loans they've issued. The $45t number from the table is an estimate of the size of that market. The government is effectively backstopping the whole thing.

[Smitty]

Re: Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

Deflation spiral nipped in the bud

So swift and extreme were the Fed’s printing and pumping operations that commodity prices barely registered half the price declines of the previous 2001 to 2002 disinflation cycle, despite a horrific demand crash that the FIRE Economy’s 2008 collapse produced.

----------------------------------------------------------------
The above words do not appear to match the above chart: It appears to me that the CRB declined by nearly a third from July 2008 through the end of 2008 much more than occurred in 2001-2002.

Can somebody explain the discrepancy?

[dummass]

Re: Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

Panama lacks the private debt burden of the US, but is still a victim of US monetary policy. In other words, we missed the "Ka" phase, but are getting extra helpings of "poom."

There is no housing crises, no bank crises, no consumer retrenchment...

In other words, there is nothing to off-set EJ's inflation bias arguments:
-- Supply shock, Yup
-- Weakening $, Yup
-- Money growth, Yup
-- Bankruptcies / industrial concentration, Not here
-- Inflationary institutional policy, Victim of US monetary policy

Panama has it's challenges, to be sure. In the event of $ collapse, however, it should fair better than most places. With a population of 3 million people, most of which have agrarian roots and family farms, the transition should be easier.

[Charles Mackay]

Re: Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

Key:

ARM = Adjustable Rate Mortgage
OAD = Option Adjusted Duration
FNCL OAD = Loan duration (years)
t = $trillion

As I mentioned in my earlier post, the OAD is an estimate of the current economic weight of the debt. As I understand it, it's basically the present value of the debt, given current interest rates and expected loan duration, using an option-type pricing model. As interest rates or loan duration increase on ARMs, OAD goes up (oh, and as rates go up, duration also tends to increase, so it's an exponential effect).

The Fed and the Treasury have now stepped in, and without adding any additional capital to the banks, they have placed a floor on the mortgage market by way of the FDIC. Banks have effectively been turned into GSEs like Freddie and Fannie; they've been told that they will not lose money on the loans they've issued. The $45t number from the table is an estimate of the size of that market. The government is effectively backstopping the whole thing.

Thanks for the explanation Sharky. "The value of all outstanding residential mortgages, owed by USA households to purchase residences housing, was US$9.9 trillion as of year-end 2006, and US$10.6 trillion as of midyear 2008" ..that from Wikipedia. So I still don't understand the calculation that gets FNCL OAD to $45 trillion? What am I missing? :confused:

[bart]

Re: Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

Deflation spiral nipped in the bud

So swift and extreme were the Fed’s printing and pumping operations that commodity prices barely registered half the price declines of the previous 2001 to 2002 disinflation cycle, despite a horrific demand crash that the FIRE Economy’s 2008 collapse produced.

----------------------------------------------------------------
The above words do not appear to match the above chart: It appears to me that the CRB declined by nearly a third from July 2008 through the end of 2008 much more than occurred in 2001-2002.

Can somebody explain the discrepancy?

The CRB itself was redefined in July 2005, and energy components were given a much bigger weight.

The old definition has been maintained in the CCI (Continuous Commodity Index), and does show a much smaller drop than the CRB. There is no CCI spot index, but right now the CCI is about 65% higher than the CRB.

[metalman]

Re: Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

Deflation spiral nipped in the bud

So swift and extreme were the Fed’s printing and pumping operations that commodity prices barely registered half the price declines of the previous 2001 to 2002 disinflation cycle, despite a horrific demand crash that the FIRE Economy’s 2008 collapse produced.

----------------------------------------------------------------
The above words do not appear to match the above chart: It appears to me that the CRB declined by nearly a third from July 2008 through the end of 2008 much more than occurred in 2001-2002.

Can somebody explain the discrepancy?

he's talking about the level commodity prices declined to, now how much they declined. the last cycle they started down from a 'bubbles in everything' top... last time from no bubble in commodities. both times the decline was halted by central banks. this time at a much higher price level. make sense? the implication... they maybe rise to surpass previous 'bubbles in everything' levels but... per the title... they ain't falling to 2002 levels... disinflation's over.

[Ed]

Daniel Kahneman and I do this

April 2009 interview of DK at
http://www.haaretz.com/hasen/spages/1077151.html
includes:

So in what have you invested?
DK-- "Index-linked bonds. I know this is not popular. Many people think it's a mistake, but that's the mistake I make."

[Spartacus]

Re: Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

I wish I had one of those!

I have "agree" "disagree" and "fuckingpissedoff" butons. Where is the "ignore" button?:rolleyes:

I was half joking, but seeing as how you asked,

Click on "user cp". This is just above and to the left of the box holding the list of threads, or just above (usually 2 lines of text above I think) the box containing the "reply to thread" text box

on the new screen, down the left hand side
under "your control panel",

the third box down is
"Settings & Options"


The last entry on there is "edit ignore list"

click on that and add names as you please

A rule I usually follow is that I don't ignore because I disagree. The CIA practice of intelligence analysis book I linked to will give you lots of reasons not to ignore those you disagree with.

I've added lots of people I agree with.

[knaschti]

Re: Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

Current S@P 500 882
March low 666

That makes it 32%.

[cjppjc]

Re: Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

Current S@P 500 882
March low 666

That makes it 32%.

You've kept your powder dry since Jan 2007, for this

[Sharky]

Re: Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

Thanks for the explanation Sharky. "The value of all outstanding residential mortgages, owed by USA households to purchase residences housing, was US$9.9 trillion as of year-end 2006, and US$10.6 trillion as of midyear 2008" ..that from Wikipedia. So I still don't understand the calculation that gets FNCL OAD to $45 trillion? What am I missing? :confused:

The $10.6t you quoted is the "market size" shown in the table as $10.40t.

Market size is not an adequate description of the economic weight of that debt, because it doesn't include interest and other factors. When a loan is first written, it has a value that's higher than the amount of the principle. That's why banks can give you the principle, sell the loan to someone else, and still make a profit.

On a much smaller scale, what would the economic weight be for you personally if you took out a $1,000 loan that you were planning to hold several years? It's more than just the principle, right?

In addition to interest, you also need to take into account how long the loans are usually held (FNCL OAD). A loan might have 30 year terms, but most are paid off well before that. The longer a loan is held, the more the bank earns.

Think of the $45t number this way: it's an estimate of the amount of money that the banks have at risk with mortgages, including potential interest income.

The reason the option pricing model comes into play is because in effect the banks have sold covered call options to borrowers. For a fixed rate loan, if rates go down, borrowers can refinance at a lower rate, and the bank loses future income (OAD goes down). But if rates go up, the borrower sits tight. One of the ideas behind ARMs, of course, is that they transfer the interest rate risk to the borrower -- who, unfortunately, is poorly equipped to handle it.

The net effect of increasing interest, though, is a higher OAD. The $45t that the FDIC has effectively underwritten today could easily balloon into $90t or more if rates spike. Not a pretty picture.

[Smitty]

Re: Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

Got it. Thank you!