2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

[aaron]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

Sorry EJ,

I have to disagree. It is going to be a stock market boom with a rise in interest rates. People are already moving to liquid currency(T-Bills), next they will move to physical assets. Though stocks may not go as much as physical assets(Real Estate, Gold), it will still rip up shocking everyone. Inflation will just follow the FED Balance sheet expansion seen in past 4 years.

Why?

[Milton Kuo]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

Sorry EJ,

I have to disagree. It is going to be a stock market boom with a rise in interest rates. People are already moving to liquid currency(T-Bills), next they will move to physical assets. Though stocks may not go as much as physical assets(Real Estate, Gold), it will still rip up shocking everyone. Inflation will just follow the FED Balance sheet expansion seen in past 4 years.

From what I have read here on iTulip and elsewhere, high rates of inflation (but not hyperinflation) are like Kryptonite to stocks. That was certainly true in the 1970s in the U.S. and I don't see anything different now from then that would cause stocks to boom if we see high inflation.

QE has driven prices of stocks and real estate up, well beyond what I believe are reasonable values, so I think the absolute best situation we could get in a high inflation environment would be flat prices as the currency depreciates enough to render current equity and real estate prices reasonable.

[sishya]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

I think FED Balance sheet is going to increase further as Yellen takes hold. There will be more clamor for expanding QE.
But increasing QE need not translate to lower interest rates.

Now we are slowly seeing Long term rates go up since Mid 2013. But we don't see a corresponding rise in T-Bill rates. why ?
People are scared to commit money for long term. They expect inflation to rise. I think this will happen at the same time dollar loses against
other currencies like Euro, Yuan etc...In such an environment, higher interest rates will not be a kryptonite. we will just have lower dollar, higher corporate profitability, higher wages,
higher interest rates like any third world country that prints a lot of their deficits like USA does(unlike ECB, which mostly allows loans to be defaulted rather
than make them whole via QE).

[Mega]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

I think "They" print like Bastards.......frankly they got nothing left to do..........the game is up, the ship is sinking...
Mike

[Polish_Silver]

What is a "debt deflation"

EJ: It's a Fed chairman move that causes the banking and credit markets to collapse, followed by a failure to meet the exploding demand for money that occurs in a debt deflation.

[Polish_Silver]

What is a "debt deflation" ?

EJ: It's a Fed chairman move that causes the banking and credit markets to collapse, followed by a failure to meet the exploding demand for money that occurs in a debt deflation.

Is a debt deflation a severe economic contraction caused by high debt levels?


What is the "exploding demand for money" ? Is it high interest rates?

Bankruptcies? Foreclosures?

Shift from borrowing to saving? ---that sounds right.

[ProdigyofZen]

Re: What is a "debt deflation" ?

EJ: It's a Fed chairman move that causes the banking and credit markets to collapse, followed by a failure to meet the exploding demand for money that occurs in a debt deflation.

Is a debt deflation a severe economic contraction caused by high debt levels?


What is the "exploding demand for money" ? Is it high interest rates?

Bankruptcies? Foreclosures?

Shift from borrowing to saving? ---that sounds right.

As consumers/businesses etc begin to pay down their debt it contracts the money supply. Transactions demand for money explodes as investors must obtain cash to pay down debt, therefore they sell assets, which in turn decreases the "asset demand" for money. Stocks and bonds sell off as investors hoard cash or "go liquid" and then pay down debt creating debt deflation.

As EJ wrote in his book: An overindebted economy is like a poorly loaded ship with too mcuh weight above the deck and not enough ballast. A financial crisis is a rogue wave that hits the ship from one side. The ship must be quickly righted before it tips to the point where it begins to capsize. The Fed must pump water into the hull to increase the ballast and at the same time counter the excess debt weight from above deck. It does this by making hundreds of billions of dollars in no-questions-asked loans to banks and by taking debts and unmarketable securities off the balance sheets of banks and onto its own. At the same time, aggressive government lending and spending programs grow the money supply before a self-reinforcing debt-deflation process -- the capsizing of the economic ship-- develops as a result of banks not lending and households not borrowing.

Remember the US financial system is a credit-money system where 90% of all the money supply is created by banks through issuance of debt. If the private sector isn't lending new money into existence then the public sector must, else the money supply shrinks and a deflationary spiral takes hold.

https://courses.byui.edu/econ_151/pr.../Lesson_10.htm


Section 03: Demand for Money

Given our explanations of the functions of money, it will not be surprising that there are two different types of demand for money. The first is called the transactions demand and the second is called the asset demand.
Transactions Demand

On a daily basis people need money on hand for the things that they routinely buy. You have to get a haircut or stop by the store on the way home from work to pick up some milk. You have transactions that you need to conduct, and therefore you have a demand for money. The transactions demand for money is using money as a medium of exchange. Notice in the graph below that the Transactions Demand for Money (DMT) is denoted as a vertical line when graphed against the interest rate. The demand for money as a medium of exchange is independent of the interest rate, because when you are on your way home from work and need to pick up milk, the interest rate does not affect how much milk you buy.
Asset Demand

Some people hold money as a financial asset just like stocks and bonds. Holding money as a liquid asset is using money as a store of value. Consider a person who has a portfolio of investments. Perhaps he owns some stocks, bonds, jewelry, artwork, a home, a savings account at his credit union, and has $5,000 in a fireproof box hidden in his basement. In an emergency, the cash is the most liquid asset that the person has, and is far more spendable than a painting or a piece of jewelry that might take weeks to turn into cash. The liquidity of cash is the advantage of holding cash. The disadvantage of holding money as an asset is that there is very little or no return on this asset.

The cost of holding money as an asset is the foregone interest rate and there is an inverse relationship between the interest rate and the asset demand for money. This inverse relationship is illustrated in the graph below as a downward sloping asset demand for money (DMA). The total demand of money (DM) is just the sum of the transactions demand and the asset demand, and has the same downward slope as the asset demand.

[aaron]

Re: What is a "debt deflation" ?

Nice summary!

[LazyBoy]

Re: What is a "debt deflation" ?

https://courses.byui.edu/econ_151/pr.../Lesson_10.htm

Thank you!

[sishya]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

I think "They" print like Bastards.......frankly they got nothing left to do..........the game is up, the ship is sinking...
Mike

YES, they wil continue doing the "Printing" by making debts whole ie swap debts with Dollar reserves. Primarily being done by dollar block countries - USA, UK and Japan.
In such a circumstance, why would anyone be short stocks or even out of stock market.

NOTE : I don't invest in stocks other than my 401K through my employer. If I have cash, I buy Gold and Real Estate, in that order.

[oboy]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

Martin Armstrong's prediction of Dow 32k by late 2015 is predicated on just that.Where else will the trillions go?

[dcarrigg]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

You can't let it go into easy-to-enter markets. Then the plebs could make a buck off it. Better to complicate things. But in the end, the question may be whether all those numbers mean a damn thing at all. It's only a paper moon, after all.

What trillions?

[jk]

Re: 2013 Review and 2014 Forecast - Part I: The Last Bubble - Eric Janszen

You can't let it go into easy-to-enter markets. Then the plebs could make a buck off it. Better to complicate things. But in the end, the question may be whether all those numbers mean a damn thing at all. It's only a paper moon, after all.

What trillions?

"it wouldn't be make believe if you believed in me."
it's like tinker bell. if enough people clap, tinker bell lives.
same thing with money.

[Slimprofits]

Re: What is a "debt deflation"

CI: This may be more than a correction, then? I mean, really? A 56% decline?

EJ: In mid-2011 I projected what I called the Extended Asset Price Inflation Case. That's the green line. The Real DJIA was to climb from 83 at the time to just over 100 by the end of 2013. Early in 2014 it begins to price-in a mid-gap recession later in the year. The first chart was published April 2011 as the watermark indicates. The update was generated from the same excel file. The DJIA data are from the Dow Jones & Co. and the inflation adjustments updated using the latest data from the Real DJIA web site that we've been using since 2006.

CI: So the crash you forecast in mid-2011 for early 2014 is happening? Wish you'd reminded me of this chart sooner!

EJ: That would appear to be the case. However, a crash of the full extent of 56% shown spells complete disaster for the U.S. economy. I seriously doubt that the Yellen Fed will stand by, or at least I hope they understand the danger. The correction is a delayed reaction to the beginning of the end of the Fed's bond price fixing operation, which ending I have warned for years was to produce chaos in the bond market as market participants thrashed around trying to figure out what the market price of a long bond is without the Fed's interference in the market. By the way, a member asked me about this in December in the Ask EJ section here, which is why the update has a Dec. 30, 2013 watermark on it.

CI: So why not short it? If you got the timing right.

EJ: I've found over the past 15 years that it pays to wait for the second break after the initial correction in a crash process, if that indeed what this is.

Interesting.

[EJ]

Re: What is a "debt deflation"

Interesting.

For the perfectionistic, it's worth noting that the S&P500 today flirted with but did not yet exceeded what may be the 1850 3rd reflation peak, and that tonight the NIKKEI is teetering, which is significant as this is an Asia-centric versus US-centric crisis, for a change.