The Next Crash - Part I: How the First Bounce of the Debt Deflation Bear Market Ends

[Jay]

Re: The Next Crash - Part I: How the First Bounce of the Debt Deflation Bear Market ends - Eric Jans

When ice cube is being quoted at itulip you know $hit is going down. /s

Love that.

[metalman]

Re: The Next Crash - Part I: How the First Bounce of the Debt Deflation Bear Market ends - Eric Jans

Essentially the same that has been made here -- realization that fiats are failing. Gold not falling is a result of people being far less willing to part with it, and more buyers coming in to buy on ever smaller dips.

Another point that has been made is that gold/silver miners are starting to show some teflon on stock falls as well.

nothing like the case made here... never seen the phrase 'fiat money' used by ej. the itulip argument has nothing to do with fiat money... 'fiat falling' is not the itulip case for stocks fall & gold rises... has nothing to do with fiat money. if that is the fleckenstein & hickey argument... they are right on stocks & gold but for the wrong reasons.

[jpatter666]

Re: The Next Crash - Part I: How the First Bounce of the Debt Deflation Bear Market ends - Eric Jans

nothing like the case made here... never seen the phrase 'fiat money' used by ej. the itulip argument has nothing to do with fiat money... 'fiat falling' is not the itulip case for stocks fall & gold rises... has nothing to do with fiat money. if that is the fleckenstein & hickey argument... they are right on stocks & gold but for the wrong reasons.

Shrug. I wasn't going for the perfect description. Basically, I find them in rough alignment with EJ for similar reasons. Fleckenstein in particular called for investing in gold as early as EJ, although I'll give EJ more credit for the "all-in" call.

I know I'll never convince you that anyone was as near brilliant in all this as EJ so I'm not even going to bother.

[icm63]

Re: The Next Crash - Part I: How the First Bounce of the Debt Deflation Bear Market ends - Eric Jans

stocks plunge, gold up... my kinda day! stocks fall on rising sovereign default risk, gold up as flight capital refuge... nice call. no 2nd 'deflation' plunge... did anyone else other than ej figure this out?

That wont last, if stocks fall 10% plus, there will be contagion selling. Its just a matter of cash flow redemptions for the funds..cant be stopped.

[icm63]

Re: The Next Crash - Part I: How the First Bounce of the Debt Deflation Bear Market ends - Eric Jans

Dear EJ

You state that USA has a pile of debt, and creditors will force interest rates up if they are not paid.

You argue for the negative that USA is a pile of debt with no ability to pay it off, or pay it off at a faster rate than today.

Well here is a few polices that can assist the paying off of debt at keep the USA creditors at bay.

1) VAT/GST at 10%
2) Sell off govt assets (parks, reserves, etc)
3) Drill for OIL

Assuming the revenue would be used to pay back debt and not fuel further govt spending etc.

The real danager is when the USA is like the UK and all govt revenue prospects have expired. The UK cant add any more taxes or increase GST, they are done, all over red rover !

USA is not at the UK stage yet...

[cjppjc]

Re: The Next Crash - Part I: How the First Bounce of the Debt Deflation Bear Market ends - Eric Jans

That wont last, if stocks fall 10% plus, there will be contagion selling. Its just a matter of cash flow redemptions for the funds..cant be stopped.

Did I miss the gold below $1,000 move. Never mind the gold to $850 move.

[hayekvindicated]

Re: The Next Crash - Part I: How the First Bounce of the Debt Deflation Bear Market ends - Eric Jans

No. We skipped the trip from 2007 completely, as of today leaving us 20% ahead of the game in real terms. In fact, readers who have been hanging around here since March 2000 have skipped the trip from NASDAQ 5000 to 2500 today and S&P500 1500 ten years ago to 2200 today. Now, if you got out in December 2007 with us but then got back in March 2009, then you’re a genius—unless of course the market crashes again.

Marc Faber went on Bloomberg and advised his clients (and listeners) to buy stocks on 6 March 2009. He was right. I didn't buy because I listened to your advice. Im glad you now admit that Faber is a genius.

The market was "extremely oversold" as he explained. That was precisely the kind of period in which a contrarian buys stocks - unless of course you are the kind of contrarian who has a certain theory about the world which tries to explain everything in the economy. And buying stocks doesn't fit within that theory. So you don't buy. Some emerging market indices have more than doubled in a year. Im sure iTulip readers are happy to keep 70 percent of their money in short term UST. That's a great investment strategy.

I've learnt my lessons from here going forward.

In periods of inflation such as we have been in since 2001, talking about market price levels over multi-year periods is tricky. For example, DJIA 10,000 in 2010 is roughly equivalent to DJIA 6,000 in 2000, yet everyone seems perfectly happy to celebrate DJIA 10,000 now as if it were some kind of achievement when in fact it represents a 40% loss in real market value over ten years. So how shall I talk about another 50% loss over the next ten years? Shall I forecast DJIA 10,000 and explain each time that I mean DJIA 5,000 in 2010 dollars, or shall I talk about DJIA 5,000 in which case when the market is trading around 10,000 it appears that the forecast is off by 50%? It's a conundrum that I have yet to solve.

Your advice indicated the DOW heading to 5000 in nominal terms (not real terms). Anyone can dig out the references from that time and check for oneself. To now infer that it is 5000 in "real terms" is disingenuous to say the least.

After several months of public bickering with Germany, the IMF showed up. Then the shit really hit the fan. The Greeks, it turns out, can read. And what they read about the past behavior of the IMF in Latin America and Asia and everywhere else they’ve shown up to “rescue” a country in debt is a 100% consistent record of bailing out the ruling elite while imposing austerity on everyone else and leaving the country even more indebted than before. The Greek people are not buying the line, "We're the IMF and we're here to help you."

While Im no expert on IMF bail-outs, I can speak with some authority about the impact of the IMF's bail-out of India in 1991. India is an IMF success story. The Indian Government was close to broke in 1991 and the only alternative left was to ask the IMF for money. The IMF as usual offered a loan but on certain conditions (de-regulation of industry, devaluation of the currency etc). It worked. No one talks about it. Had the IMF not stepped in, India would be stuck in its socialist five year plans and 2 percent GDP growth. The opening up of the economy had a transformative effect and India is where it is today largely because of that seminal event.

I understand why people don't mention this because once again it doesn't fit the ideology. Anyway, one could posit that the many African, Asian and Latin American countries that have got into more trouble after the IMF's bailouts got into trouble because of the way they are run (which the IMF doesn't control and cannot control). They would probably be a shambles even if the IMF didn't step in. One should perhaps consider this before positing the IMF as the dragon representing international financial interests.

[metalman]

Re: The Next Crash - Part I: How the First Bounce of the Debt Deflation Bear Market ends - Eric Jans

Marc Faber went on Bloomberg and advised his clients (and listeners) to buy stocks on 6 March 2009. He was right. I didn't buy because I listened to your advice. Im glad you now admit that Faber is a genius.

The market was "extremely oversold" as he explained. That was precisely the kind of period in which a contrarian buys stocks - unless of course you are the kind of contrarian who has a certain theory about the world which tries to explain everything in the economy. And buying stocks doesn't fit within that theory. So you don't buy. Some emerging market indices have more than doubled in a year. Im sure iTulip readers are happy to keep 70 percent of their money in short term UST. That's a great investment strategy.

I've learnt my lessons from here going forward.

he said genius if he did both... got out in dec 2007/mar2000 and back in mar 2009. did faber advise his clients to get out of the market dec. 2007 & before in mar 2000? nah.... he's still down 20% or 40%... respectively.

While Im no expert on IMF bail-outs, I can speak with some authority about the impact of the IMF's bail-out of India in 1991. India is an IMF success story. The Indian Government was close to broke in 1991 and the only alternative left was to ask the IMF for money. The IMF as usual offered a loan but on certain conditions (de-regulation of industry, devaluation of the currency etc). It worked. No one talks about it. Had the IMF not stepped in, India would be stuck in its socialist five year plans and 2 percent GDP growth. The opening up of the economy had a transformative effect and India is where it is today largely because of that seminal event.

india is not an oligarchy ala argentina/greece/etc ... imf worked there for that reason?

I understand why people don't mention this because once again it doesn't fit the ideology. Anyway, one could posit that the many African, Asian and Latin American countries that have got into more trouble after the IMF's bailouts got into trouble because of the way they are run (which the IMF doesn't control and cannot control). They would probably be a shambles even if the IMF didn't step in. One should perhaps consider this before positing the IMF as the dragon representing international financial interests.

the standard coverage from the wsj...

Athens Confronts Sisyphean Task in Austerity Program

Greeks face years of austerity as their government seeks to get its heavy debt burden under control and meet conditions for a bailout from the International Monetary Fund and fellow governments of the euro zone.

With Greeks already taking to the streets of Athens to protest measures announced so far, many analysts say the Greek government will be unable to impose the spending cuts needed to trim its budget deficit by 12% of its gross domestic product in three years. But history suggests that such efforts aren't that unusual.

Harvard economics professor Alberto Alesina says that from an economic perspective such cuts are feasible: "The question is political more than economic. Economically, it's possible, but whether it can be done politically is the issue."

not one mention in the story re the cause... fiscal crisis... the rich don't pay taxes.

Studies by the IMF and others show that major austerity programs of the size Greece is now promising are far from rare, even in Western Europe. Finland in 1993, Denmark in 1983 and Sweden in 1994 all began programs and cut their budgets by more than Greece is expected to now. In fact, Greece itself has done it before, IMF data show, twice in the past 35 years.

But if governments have often succeeded in slashing budgets deficits, in Europe at least, they have rarely achieved their ultimate objective: to bring down their debt burdens. A new study of European austerity packages over the last three decades by the Centre for European Policy Studies in Brussels concludes: "The goal of the large fiscal adjustments is to make public finances sustainable. However ... this goal was rarely achieved."

but why? the reporter never says... because the tax system in greece is a friggin joke.

The study has further bad news for Greece: If a budget deficit starts out large, like Greece's, the less likely an austerity program is to cut debt. Moreover, the higher a country's debt is to start with, the tougher it is to bring down.

Many countries in the past have escaped Greece's current trap through devaluation. In fact, the IMF regularly used to prescribe devaluation as part of its programs. When Asian economies suffered financial crises in 1998, they allowed their currencies to sink. Indonesia's currency dropped by 83%; Thailand and Malaysia's by 40% and South Korea's by 35%. But within a year or so, they were growing again: crisis-hit South Korea's economy contracted 6.7% in 1998; in 1999, it grew 10.7%

Most assessments of the Asian crisis suggest devaluations played a big role in reviving growth, helped by favorable winds in the global economy and expansionary domestic policies.

really? "most assessments of the asian crisis suggest devaluations' were a disaster & were caused by taking the imf's advice & not imposing currency controls. china & taiwan ignored the imf & came thru with flying colors.

But these three positive factors are entirely absent in Greece. It is being forced to shrink its budget, the global economy is sluggish, and, because it is in the euro zone, it cannot devalue its currency to boost exports and growth.
Cinzia Alcidi, one of the authors of the CEPS report, says not being able to devalue "makes everything more complicated." Argentina, which had locked its currency to the dollar, was a decade ago struggling with low growth and heavy debts. In January 2002, it abandoned the peg to the dollar, defaulted on its debts, and within a year the country was growing again.

after the imf abandoned the country. argentina learned its lesson, tho...
Argentina says it better off without IMF advice | Reuters

Some economists aren't persuaded that devaluation would work for Greece. They say the country's powerful trade unions would press for wage increases that would quickly erase any competitive advantage. Furthermore, the disruption from leaving the euro would be far higher than from a typical devaluation, because all domestic contracts and bank deposits are in euros and the economy would be hit by a wave of defaults.

ah, there we go. no... it's not the fact that the ruling elites in greece don't pay taxes... no it's those all powerful trade unions that are the problem. gimme a break.

However, without devaluation, Greece must follow the example of Ireland and Latvia: imposing austerity, cutting public-sector wages, curbing social programs and raising taxes. Ireland's efforts so far appear to have been relatively successful—but unlike Greece, Ireland is an economy open to foreign trade and finds it easier to export its way out of its troubles.

Latvia, which isn't part of the euro zone but has anchored its domestic currency to the euro, has embarked on a program more austere than Greece's. Its economy has collapsed, shrinking by more than a fifth since 2008. (Unlike Greece, it is unwinding from a housing boom financed by mortgages from foreign banks.)

2 points for the wsj... got this part right.

Greece's economy is expected to contract this year and many economists say the official forecast of a 2% contraction is way too optimistic. Jürgen von Hagen, economics professor at the University of Bonn, says countries such as Latvia and Greece that are trying to slash budgets by more than 10% risk a downward spiral. "When you cut by that much, the economy tanks," he says.

Tax revenues fall, making deficit targets harder to achieve. Meanwhile, the shrinking economy expands the ratio of debt-to-GDP.

not only makes deficit targets harder to achieve, but debt payments, too. downward spiral begins.

European officials insist a Greek restructuring isn't an option and IMF officials say it isn't under consideration. "For the moment, restructuring is not being contemplated at all, which means there is a Plan A but not a Plan B," says Ms. Alcidi. "I believe that is not the right approach."

and there ya have it... the one option that will work is 'not under consideration'.

now, what were you saying about the imf?

[bill]

Re: The Next Crash - Part I: How the First Bounce of the Debt Deflation Bear Market ends - Eric Jans

now, what were you saying about the imf?

SAVAGE

http://www.bloomberg.com/apps/news?p...t34w8ha4&pos=1

May 2 (Bloomberg) -- Greece accepted an unprecedented bailout from the European Union and International Monetary Fund valued at more than 100 billion euros ($133 billion) to prevent default, agreeing to budget cuts that unions called “savage.”
The measures are worth 30 billion euros, or 13 percent of gross domestic product, and include wage cuts and a three-year freeze on pensions, Finance Minister George Papaconstantinou said in Athens today. Greece’s main sales tax rate will rise to 23 percent from 21 percent. The exact bailout amount will be announced later, he said. Euro-region finance ministers meet at 4 p.m. in Brussels. Germany will provide 28 percent of the euro region’s contribution.
“Greece will be shielded from the international markets and will be able to put its house in order,” Papaconstantinou said in Athens before heading to the EU capital. Prime Minister George Papandreou said “avoiding bankruptcy is a national red line” and the agreement will demand “big sacrifices” from Greeks to avoid “catastrophe.”
Policy makers are trying to prevent a Greek default as its fiscal crisis shows signs of spreading through the euro region. The agreement, following 10 days of talks and protests, comes after a surge in Greek borrowing costs left the government struggling to finance its debt and investors speculating that Portugal and Spain could also suffer their fate.
Daily Attacks
The bailout plan will give Greece time to fix its budget before returning to the market, which it wants to do “as soon as possible,” Papaconstantinou said.
“We want to implement our plan without the daily attacks of markets on Greek bonds,” he said. Other measures include abolishing the 13th and 14th wage payments that civil servants get annually for workers earning more than 3,000 euros per month, he said. Payments for those earning less than that will be capped at 1,000 euros, he said.
About two-thirds of the funds will come from Greece’s 15 euro-area partners, which must still sign off on the disbursement by a unanimous decision. The European Commission said today it approves of Greece’s request for aid. The International Monetary Fund will provide the rest of the funds.
The financial lifeline will last three years and will force Greece to cut its budget deficit below the EU’s limit of 3 percent of gross domestic product by the end of 2014. That’s one year later than originally planned. The shortfall was 13.6 percent in 2009.
‘Deep, Deep Recession’
The scale of the budget cuts has prompted some economists to speculate that Greece will have to restructure its debt because the strains placed on the economy will be too great. The government now expects the economy to shrink 4 percent this year and 2.6 percent in 2011 before expanding 1.1 percent in 2012 and almost double that in the following two years. In January it forecast a 0.3 percent contraction for 2010.
“There is a very real possibility that at the end of two or three years, Greece will still have an unsustainable debt and will have to restructure because it will have a deep, deep recession in the meantime,” said Barry Eichengreen, economics professor at the University of California, Berkeley.
“We find ourselves before the most savage, unprovoked and unjust attack,” Spyros Papaspyros, head of the ADEDY civil servants union, said last week after seeing an outline of the cuts.
At stake is the future of the euro 11 years after its creators left fiscal policy in national capitals. As the Greek talks dragged on this past week, bonds dropped across Europe on investors’ concern that Portugal and Spain will also struggle to cut their deficits.
Contagion Risk
The extra yield that investors demand to hold Portuguese debt over German bunds surged to 298 basis points on April 28, the most since at least 1997. The Greek premium touched 827 points. The spread on Spain climbed to the highest since March 2009. Standard & Poor’s followed its decision to cut Greece’s credit rating to junk on April 27 was followed by downgrades on Portugal and Spain.
“After the immediate relief, however, the focus will be squarely on implementation risk in Greece and I believe Portugal, and probably Spain, will need to put on the table a stronger fiscal effort to avoid coming under renewed pressure in the coming weeks and months,” said Marco Annunziata, chief economist at UniCredit Group in London.

[c1ue]

Re: The Next Crash - Part I: How the First Bounce of the Debt Deflation Bear Market ends - Eric Jans

Greece accepted an unprecedented bailout from the European Union and International Monetary Fund valued at more than 100 billion euros ($133 billion) to prevent default, agreeing to budget cuts that unions called “savage.”
The measures are worth 30 billion euros, or 13 percent of gross domestic product, and include wage cuts and a three-year freeze on pensions, Finance Minister George Papaconstantinou said in Athens today. Greece’s main sales tax rate will rise to 23 percent from 21 percent. The exact bailout amount will be announced later, he said. Euro-region finance ministers meet at 4 p.m. in Brussels. Germany will provide 28 percent of the euro region’s contribution.

So 100 billion euro bailout - coincidentally a big portion of the German/French bank exposure - in return for a 13% government spending cut.

Items to follow:

1) How will the bailout occur? A check to the Greek government or perhaps buying out of French/German bank debt owed by the Greek government?
2) Will the previous riots escalate? And will Papandreou's government survive?

[metalman]

Re: The Next Crash - Part I: How the First Bounce of the Debt Deflation Bear Market ends - Eric Jans

So 100 billion euro bailout - coincidentally a big portion of the German/French bank exposure - in return for a 13% government spending cut.

Items to follow:

1) How will the bailout occur? A check to the Greek government or perhaps buying out of French/German bank debt owed by the Greek government?
2) Will the previous riots escalate? And will Papandreou's government survive?

[hayekvindicated]

Re: The Next Crash - Part I: How the First Bounce of the Debt Deflation Bear Market ends - Eric Jans

he said genius if he did both... got out in dec 2007/mar2000 and back in mar 2009. did faber advise his clients to get out of the market dec. 2007 & before in mar 2000? nah.... he's still down 20% or 40%... respectively.

What do you know? Do you subscribe to his newsletter? Other than regularly prattling "we told you to buy gold in 2001", what else do you say? I would have bet the ranch that the first assault in response to my criticism would come from you. Well, I had hoped we would get responses of a higher quality than this. Everyone who has criticised EJ on this site gets attacked by you first. Unfortunately, the attacks are never of good quality.

Faber was on record in late 2007 saying that stocks were in a bubble. He went heavily into cash around Jan/Feb 2008 (when emerging markets topped out) - he said he was 80 percent in cash around that time. AND, he saw that October 2008 was the bottom for emerging markets. And he went on record asking his clients to buy stocks. So there.

india is not an oligarchy ala argentina/greece/etc ... imf worked there for that reason?

What do you know about India? Not only do the RICH not pay any taxes in India, nobody does. Is India facing a crisis of Greek proportions?

not one mention in the story re the cause... fiscal crisis... the rich don't pay taxes.

That's not the only cause. Greece has a ridiculously bloated public sector in which public sector employees get paid 14 months wages for (allegedly) doing 12 months work and where the retirement age is 53. That's what I call a friggin joke. Have you ever crossed the Atlantic by the way? Your responses indicate an ignorance that is quite shocking.

really? "most assessments of the asian crisis suggest devaluations' were a disaster & were caused by taking the imf's advice & not imposing currency controls. china & taiwan ignored the imf & came thru with flying colors.

When did China face a balance of payments issue? It has always had healthy foreign exchange reserves. Read about the devaluation of the Rupee in 1991 and what happened after that. The Rupee was devalued by more than 60 percent against the Dollar. And it worked. Often devaluation is the only alternative. A country that is running out of foreign exchange reserves cannot support a currency at an artificially high level. How do you maintain a higher price for a currency than its fundamentals would support if you don't have large forex reserves? Actually, trying to maintain an artificially high rate of exchange is a surefire way of losing your forex reserves in a hurry.

ah, there we go. no... it's not the fact that the ruling elites in greece don't pay taxes... no it's those all powerful trade unions that are the problem. gimme a break.

You really sound like someone who has never been abroad - yeah I guess maybe Mexico is as far "abroad" as you've ever been. Come to Asia sometime. Tax evasion is RAMPANT in Asia. How many Asian countries today are facing the same crisis as Greece? do you think the Chinese rich pay their taxes honestly?

If you are going to go on the attack like a Rottweiler every time someone criticises EJ, come up with better arguments.

On a side note, we heard from EJ in 2008 that Russia was going to default - "you heard it here first". What happened there? At least Faber is humble and honest when he gets it wrong. Perhaps we need more of that here.

[aaron]

Re: The Next Crash - Part I: How the First Bounce of the Debt Deflation Bear Market ends - Eric Jans

hayekvindicated --> Since I joined this site, I am "up" overall. Gold has gone up. However, you are absolutely right. EJ made a very poor call. Metalman seems to forget that a lot of us joined AFTER the crash and EJ has not earned his American Idol status since then. Had I found this site 1 year earlier, I would think EJ walks on water too.

[hayekvindicated]

Re: The Next Crash - Part I: How the First Bounce of the Debt Deflation Bear Market ends - Eric Jans

hayekvindicated --> Since I joined this site, I am "up" overall. Gold has gone up. However, you are absolutely right. EJ made a very poor call. Metalman seems to forget that a lot of us joined AFTER the crash and EJ has not earned his American Idol status since then. Had I found this site 1 year earlier, I would think EJ walks on water too.

Aaron, is being "up" enough? If inflation in real terms is running at 9 percent and you make 7 percent year on year using the iTulip gold+UST strategy (which I've never followed), you are actually losing money every year (though at a lesser rate than those who chucked everything into the stock market back in 2000).

Perhaps EJ made so much money in the dot com boom that he can afford to lose 2 percent every year (if one uses shadowstats' measures of inflation rather than the CPI which indicates that inflation in the last decade was more like 9 percent). But if you are young and ambitious and want to beat inflation in real terms, 7 percent returns year on year don't cut it. You need to be making double digit returns on an average just to beat inflation and experience positive inflation adjusted returns. Anyone who is using this site for that purpose will not succeed in doing that. Perhaps a disclaimer to that effect is in order.

[aaron]

Re: The Next Crash - Part I: How the First Bounce of the Debt Deflation Bear Market ends - Eric Jans

Aaron, is being "up" enough? If inflation in real terms is running at 9 percent and you make 7 percent year on year using the iTulip gold+UST strategy (which I've never followed), you are actually losing money every year (though at a lesser rate than those who chucked everything into the stock market back in 2000).

Perhaps EJ made so much money in the dot com boom that he can afford to lose 2 percent every year (if one uses shadowstats' measures of inflation rather than the CPI which indicates that inflation in the last decade was more like 9 percent). But if you are young and ambitious and want to beat inflation in real terms, 7 percent returns year on year don't cut it. You need to be making double digit returns on an average just to beat inflation and experience positive inflation adjusted returns. Anyone who is using this site for that purpose will not succeed in doing that. Perhaps a disclaimer to that effect is in order.

I agree with you... but you forgot to put the big "YET" at the end of that. Since I joined the site, I have beat inflation. If high inflation does come like EJ predicts, then I fully expect to do very well. If it does not, well shit, I still have some cash to buy the deflated stuff.

His call for a market crash was wrong and cost me chunk of change in my lost bet (puts). EJ greatly underestimated the effectiveness of government intervention in the financial markets. If Faber says to get out now, then just buy some puts and enjoy your future gains.