The Hard Way or the Harder Way

[Jim Nickerson]

Re: The Hard Way or the Harder Way

jk,

I always appreciate your perspectives and your time to make more than brief comments.

Part of what we are all thinking about is what will happen and how to play it.

Today in Barron's which requires subscription, in Abelson's column, he comments on Stephanie Pompoy's (MacroMaven's chief maven) prophesies.

To paraphrase: Deflation in housing market will be worse than the dot-com bust, hitting the US consumer and the financial system with its record exposure to real estate. Current fear of inflation will succumb to fear of deflation with FOMC action to lower rates possibly by Christmas. She thinks these efforts--using Japan and dot-com bubbles as recent examples--will fail because consumers will resist taking on new debt even cheaper debt. A worsening US credit environment will "send liquidity in sharp retreat, taking all assets with it."

She thinks it is high-end consumers who drive discretionary spending, so she'd short Starbucks, go long Spam (Hormel), and long pawn brokers.

Financials involved with home building in any way will be hit. Banks still own 3 trillion Bonars (43% of total assets) and 1 trillion in mortgage backed securities, thus a 55% exposure to real estate. She supposed banks will have to rebuild their loan-loss reserves, now at 20 year lows. [I, JN, do not personally understand the implications of the last sentence.]

Suggestions (hers): short or underweight regional banks, credit card companies and subprime lenders.

She thinks the Feds will be forced to monetize Treasuries (print more money to buy them which is inflationary) while the rest of the world does not devalue their currencies competitively. If that happens the Bonar will start steadily to decline. Assuming that, US investors should seek hard-assets, and certain things--Treasuries, multinationals, and consumer staples may rally, but those rallies will disguise their devaluation in dollar terms.

Simplest answer to play the coming Bonar decline--according to Ms. Pompy: long commodities and short stocks; specifically long gold-index and short bank-stock index. Abelson said she said a lot more, but this is all he shared.

[jk]

Re: The Hard Way or the Harder Way

Today in Barron's which requires subscription, in Abelson's column, he comments on Stephanie Pompoy's (MacroMaven's chief maven) prophesies.

To paraphrase: Deflation in housing market will be worse than the dot-com bust, hitting the US consumer and the financial system with its record exposure to real estate. Current fear of inflation will succumb to fear of deflation with FOMC action to lower rates possibly by Christmas. She thinks these efforts--using Japan and dot-com bubbles as recent examples--will fail because consumers will resist taking on new debt even cheaper debt. A worsening US credit environment will "send liquidity in sharp retreat, taking all assets with it."

She thinks it is high-end consumers who drive discretionary spending, so she'd short Starbucks, go long Spam (Hormel), and long pawn brokers.

Financials involved with home building in any way will be hit. Banks still own 3 trillion Bonars (43% of total assets) and 1 trillion in mortgage backed securities, thus a 55% exposure to real estate. She supposed banks will have to rebuild their loan-loss reserves, now at 20 year lows. [I, JN, do not personally understand the implications of the last sentence.]

Suggestions (hers): short or underweight regional banks, credit card companies and subprime lenders.

She thinks the Feds will be forced to monetize Treasuries (print more money to buy them which is inflationary) while the rest of the world does not devalue their currencies competitively. If that happens the Bonar will start steadily to decline. Assuming that, US investors should seek hard-assets, and certain things--Treasuries, multinationals, and consumer staples may rally, but those rallies will disguise their devaluation in dollar terms.

Simplest answer to play the coming Bonar decline--according to Ms. Pompy: long commodities and short stocks; specifically long gold-index and short bank-stock index. Abelson said she said a lot more, but this is all he shared.

i also read abelson on pomboy this morning. it sounds like ms. pomboy would fit right in around here. her scenario sounds a lot like ka-poom.

[jk]

Re: The Hard Way or the Harder Way

speaking of stephanie pomboy- i did a search and came upon this short piece she published at minyanville.com 8/29/06



For those of us whose investment time horizon extends beyond one day, the present environment is -- in a word -- exasperating. Somehow, we just can’t seem to advance the debate. While there is some discussion about whether the housing bubble’s deflation will be orderly or not, the larger issues remain unexplored. Eventually, we console ourselves, the markets will be forced to acknowledge (as they did in 2001) that the bubble’s bust has derivative consequences (e.g., it’s not just homebuilders that are exposed). But will we still be sane and/or solvent when that happens? Only time will tell.

From a less self-interested standpoint: When it does become apparent to all that we are in deep you-know–what, how will the rest of the world respond? Will they, as they did last time ‘round, rush to our rescue, plugging our asset dike with their capital? Or are they about to pull the ripcord on US consumers and this whole vendor-financing gig once and for all?? This is, arguably, the most important question of all. If the rest of the world is willing to ‘go again,’ extending more credit to massively over-extended US consumers, then we just delay the inevitable reckoning another day. If not, the dollar will at last decline unanswered.

While this week’s headline TIC stats suggest no cause for alarm, these aren’t exactly stable flows. We long since lost the stickiest of all capital flows—direct investment. Today, the bulk of our capital inflows come courtesy of foreign speculators stretching for yield (with private sector purchases of non-government paper accounting for 70% of the inflows over the past year) rather than policymakers trying to keep the US flush. One need look no further than China, our chief vendor financier, for proof. The chart above suggests they’re not exactly tripping over themselves to send bucks back to Hank Paulsen & the gang.

The conspicuous gap between the dollars China is taking in and those it is sending back to us, as we all know by now, reflects its purchase of stuff. From investments in infrastructure to spending on welfare programs to filling their SPR, China is using its bucks to buy economic independence rather than US paper. Can you imagine?!

The key, though, is that China is not unique. Developing economies have always had a propensity to spend rather than ‘recycle’ their dollars, holding only 32% of their allocated reserves in dollars versus 74% in the industrial world. And, importantly, dollars are now flowing from industrial to developing nations in record fashion. This would be bad for the dollar (and good for commodities) in normal times, but is bound to be particularly so today. After all, we are in the middle of a Cold War for Resources.

Which brings us to the other potentially-pivotal difference between today and post-bubble 2001. In the formation of the legendary global imbalances over the last 5 years, the world has been flooded with dollars. The result is that, unlike 2001, the world is now desperately SHORT on resources and massively LONG the dollars required to purchase them. Essentially, we have stocked the rest of the world the dollar ammunition it needs to fight the war for resources. Might the U.S., like Stonewall Jackson, inadvertently be done in by its own dollar troops? The idea that a commodity boom could be sustained, much less accelerate, at a time when the US economy is slowing is not one that’s bound to be widely embraced. But given the surplus of dollars … and lack of compelling paper opportunities… it may be a mistake to rule it out.

Of course, dollar bulls will argue that the point is moot. Ya know, the great Petro-dollar recycling story. According to them, the fact that roughly $300 bln a year is being transferred from the hands of our friends (like Japan, Europe, UK, etc) to our enemies (Venezuela, Russia, etc) is actually good news!? Call me crazy. But for folks like Putin and Chavez, buying U.S. financial assets would seem to rank pretty low on the list of things ‘To Do’ with forex reserves. The chart below confirms our suspicions. In fact, one gets the distinct impression that Russia has a cutoff of, say, $10 bln it will ‘recycle’ each year, regardless of how much forex reserves might swell.



To be sure, these dollars will eventually find their way back to the U.S. But, by the time they do they’ll have been man-handled so much they’ll scarcely be recognizable, much less desirable.

In this regard, the current market discourse misses the point. While talking heads engage in a lively debate as to whether the housing bubble deflation will be orderly or dis (orderly), they all share a smug confidence that the answer simply determines how frantically the rest of the world rushes to our rescue. With the cold war for resources underway and the world well-munitioned with the dollars required to fight it, this may prove a rather dangerous assumption.


and this from 9/14
"Looking through the retail sales report the thing that really stands out is the increase in 'grocery stores.' Of the $560 mln increase in Non Auto retail, the food component has accounted for $296 mln (with grocery stores =$200 mln of that). Over the last three months, food has accounted for 33% of the increase in total retail sales and 53% of the increase in NonAuto retail sales."

and in a barron's interview way back in 2/05

the dollar which has heretofore acted as a uniter -- bringing global economies together in the common purpose of debasing their currencies so as to maintain their export audience with the U.S. consumer -- will now become a divider.
As one country after another concludes the destructive consequences aren't worth the reward, it's no longer guaranteed that when we have a weaker dollar, the rest of the world is going to rush to try and weaken their currencies in response; therefore the global-liquidity floodgates will be thrown open, and money will flow like mad. We've now pushed the rest of the world to the point where they've had enough.
So my sense is that, contrary to the conventional wisdom that this sort of global liquidity will continue to flow and a weaker dollar will ensure that this high-beta game keeps going, we will experience the opposite. I think the reflation trade is over, and it's going to be much harder to make money in the year ahead.
Q: But you have been a huge fan of gold. Why own it now if you think the reflation trade is over?
A: Most people view the two as inextricably linked. However, I'm not most people.
I think the reflation trade is over insofar as the rest of the world is no longer going to follow us down the path of the currency debasement. So the global-liquidity spigots will begin to close. However, here in the U.S., we clearly have an agenda to weaken the dollar. Therefore, as someone who resides in the U.S. and earns a living in dollars, I think having gold is a vital hedge against what we are clearly trying to do politically...namely, inflate away our debt.
Q: And are there any fundamental reasons to expect the dollar to continue to go lower?
A: Circling back to my earlier comments on the economy, I believe that we will reach a point where the Fed actually ends up having to reverse course [jk- remember the fed was still tightening when this was written] -- as evidence mounts to suggest that this levered economy simply "can't handle the truth" when it comes to higher rates.
As foreign central banks make fewer appearances at our Treasury auctions, and rates begin to rise, the Fed might soon find itself forced to assume the role of buyer of last resort. Then there's the very real possibility that the retreat of global liquidity precipitates a financial crisis. This, as ever, would surely find the Fed rushing in to mitigate the pain. Any or all of these would further undermine the dollar's already-limited virtues and enhance the appeal of gold. If you believe, as I do, that the dollar is headed lower, $500 gold is really a no-brainer. [jk- "$500" target shows what a difference 18 mos. makes]

[PeterM]

Re: The Hard Way or the Harder Way

Thanks for referring to Pomboy. Found the MacroMaven site and there are some nice charts there. The 'free' stories appear very well researched and eloquently argumented. I think they see the Ka a little worse than only disflation due to a reduction in the willingness to lend. What I don’t yet understand yet is why they think the other currencies will not devalue and why the Chinese economy will hum along.

I started yesterday to formulate my thoughts based on what JK wrote. It got a little long.

i'd be very interested in ej's, and others', thoughts on this question, too.

Thanks jk, and the others to take the time to write a clear and comprehensible way. Ok, then here are my 2 cts. looking (mainly) from a EU perspective.

my own are that it will go to commodities. if you assume the answer to the inflation/deflation debate is inflation, then you have to assume a weaker dollar. [the alternative is global inflation of all currencies, in which case people all over the world will be looking for stores of value - commodities and especially pms.] so, given a weaker dollar you have americans looking for stores of value domestically, and also competing for global resources with their weaker dollars. sounds like commodities including, but not necessarily "especially," pms.

Assuming it will be Ka-disflation and then Boom-inflation (before deflation takes hold), I am not sure if the US will get away with unilateral currency devaluation. Also I don’t see the decoupling of world economies as Schiff sees it.

First the EU
I see many concurrencies between the US and EU. The regional differences in the EU are probably larger than within the US, but broadly I see hidden inflation, hidden unemployment, real estate bubbles, decreased manufacturing, money expansion, looming baby boomer cost problems, ineffective political processes, etc..
Take e.g. the inflation. The official inflation is now 2% in Holland, but probably this is as bogus as the US numbers. I see an utter disconnect between necessities and gadgets. Going to the shops everything feels distorted. Fresh produce doubled in price during the last years. Processed/imported food items increased less as margins decreased in the chain. What got cheaper is cheap imported Chinese clothing and especially gadgets like DVD players and laptops. A DVD player is now cheaper than a bag of potatoes, milk and some fruit, but how often do you buy a DVD player?
The general public ‘feels’ that everything is more expensive and blames it on the introduction of the Euro, and more recently on the cost of energy. The politicians however wave with inflation statistics that ‘prove’ low inflation.
I reckon that the price of everything that is limited in supply, is rising in a sea of 8% money expansion in the Euro zone. Incidentally this is double the money expansion as agreed in the Euro treaties (but nobody talks about it). The RE bubble in Holland and some other countries is flat the last 4 years and did not yet deflate due to decreasing interest rates, remortgage and heavily advertised lending. The liquidity just moved to the cheap markets (Southern EU, Ireland, Eastern EU) pushing RE out of reach for the local people there. Also gold got more expensive in Euro terms …. what more prove do you need for inflation.

The general public is however oblivious about financials and politicians are cheering the booming economy of 2% growth. During the last months consumer confidence is increasing, but the producer index appears to be stalling/dropping. Unemployment is still high in Germany and decreasing in Holland (but the statistics don't count the disabled workers).
The EU has expanded in size considerably last years which decreased the labor cost base of the Eu zone. Manufacturing is shifting East and laborers are allowed to move into the West resulting in pressure on wages. EU transit truck driving was mostly Dutch but is now mostly done by Eastern European drivers, tradesmen are setting up business in Holland, etc. I see a distribution of the wealth from the West to East, but I yet fail to see a net increase in total wealth over the EU zone. Politicians promoted all this by claiming ‘we in the West’ would do the smart innovative work and ‘they in the East’ (Far East) the production. But, unfortunately only a small fraction of the population has the capacities and/or the education to do this ‘smart’ work. Personally I see a lot of financial and political problems coming from the speedy integration of too many countries.

Part of the EU output is going to the US; if US demand drops I don’t see other customers who will pick up the slack. Also some business fundamentals appear shaky to me, as they are based on tariffs and politics. E.g. a growing business in Holland is assembly. Who would have thought? If you bring complete electronic devices to the EU you pay steep import duties, so …. import the chunks, screw it together and presto you have a EU product (with much lower total import duties). Also these products are exported as EU products. I don’t know the volumes, but I am pretty sure that the EU economy would take a hit if the US slows. Except probably for the production of real luxury goods.
With respect to EU bank actions, I think they will talk tough but in the end they will inflate and devalue too, to limit the difference between the bonar and the Euro.

Russia
I think Russia is a wild card, but based on what I have read and my visits there, I don’t see them picking up any demand destruction in the US. There is a very wealthy minority in some cities that will keep buying extravagant expensive stuff, but the majority of people outside Moscow is still poor. I think their currency will remain strong as long as the world thinks they have oil (which might be less than generally assumed), and as long as the power plays of Putin and others don’t disturb the perception of a working Russian market/economy too much. I assume that they will spend more on military capabilities or invest in defense industry over the coming years, but I consider it unlikely that they will buy the Chinese stuff that the US now imports.

Latin America
I read somewhere (can’t find the link) that some LATAM economies are heavily dependent on money being sent home from (undocumented) workers in the US. If the US reduces consumption, building activity, restaurant visits, etc., I would expect less work and income for these people, and hence less spending power of their relatives abroad.
The Mexican economy might have an extra problem now their wealth proving Cantarell oil-field is starting its decline. That should reduce the possibilities for further governmental economic ‘stimulation’ by pet projects and social expenditures. State lending will of course be the preferred option, but that would devalue the peso against the bonar. Competative devaluation race between bonars and pesars?
Brazil, Argentine, Venezuela etc. have money, economy doing good now, but I don’t see a customer base for buying the Chinese products that are now produced for the US. The have cheap labor available locally.

The strong point in these economies is that, as region, they are less dependent on oil imports, have minerals, and may-be most important water and agricultural crops (food).
This might be a region where I would expect that liquidity would flow too. The only problem I see (from the point of money masters) is the communist tendencies of some governments. But that probably something that money can be ‘solve’.


Another aspect that I think is often not addressed when people talk about other countries picking up the US demand, is the logistical part of China export and US import. When I think about the US infrastructure and distribution system (including all the way up to WallMarts everywhere), I don't think that LATAM or Russia has the infrastructure to get cheap Chinese products to the people. That kind of retail infrastructure is not in place outside the capital cities.


Canada
Good place to be, but not very relevant with respect to customer demand.

Australia
Good place, but some debt bubble problems. No oil, but plenty coal, agriculture. But again not relevant with respect to customer demand.

Middle East
Lot of money, but in a few hands.

Africa
Too poor to act as customers. No logistical / retail system.

Japan
Some demand may come from Japan as economy finally appears to be on the rise (pent up demand?) and there are 128 milllion consumers. Japan already trades a lot with China and the retail infrastructure is in place. My concern with Japan is the demographics and public debt at 150% of GDP. In 2004 the population started to decrease, so I would expect less need for more or bigger housing (no asset inflating housing booms anymore). Also people are very aware of the need to save for their retirements, as there will be less people to take care of them. It is estimated that the population will drop 50% over the next 70 years.
Also don’t forget that Japan still holds 750 Billion US treasuries and 80 Billion Agencies (this is more than double of what China has). What will happen with this 'paper wealth' if the bonar drops? How resilient will the spending power be?
BTW I always wonder why we single out China as our vendor-lender partner??


So what is left?
In my perception, the only customer base that could replace the US is the exporting Far East itself (China, India, Indonesia, etc.). By sheer numbers 1% demand increase of 2.5 billion people is as much as 10% demand decrease in 250 million people.
I see however several caveats:
- the preceding numbers only work when salaries, salary structure, taxation, etc. are somewhere equivalent… which is not. Vast numbers are still very poor.
- Is the Chinese production or rather overproduction capacity geared to stuff that the Chinese want/need. If not how fast can they retool their production capacity. E.g. IMO the Chinese market/infrastructure/demand is not yet ready for widespread use of 2 meter home cinema sets. Their desires might just be a little more limited.
I think you should look more to the Chinese as other countries that went through an industrial transition. What are the first needs and wants? I would first expect a desire for better food (more meat, especially poultry) and transportation (mopeds). Both involve the use of limited commodities. I will address this point later.
- As the inflow of bonars decreases and the bonar reserve decreases due to devaluation, how long will the reserves last to keep buying the required input? Of will they start to print money too?
- Can their banking system absorb the shock? As I understand there is a lot of bad debt in the system.
- As the rate of economic expansion decreases, how will China cope with their disappointed citizens that not yet benefited from the boom? Increased internal tension, followed by a need for a publicly acceptable external enemy?
- If they can’t export, will they build more public infrastructure or will rhetoric and defense spending increase?
Too many questions, and I don’t know much about China. Would love to hear your input.

alternatives 1 - if we assume low, low rates, then housing can be pumped up to a degree, softening the housing decline, but can it become a repeat bubble? it is hard to see speculators jumping right back in after their recent scare. but perhaps i am crediting people with too much rationality. i'm thinking of the people in the anecdote related at safehaven, in a link supplied by jim nickerson: these were ordinary folks, with not a lot of income, who had leveraged themselves into 5 properties around the san diego area, with a total mortgage debt of $3.6million. i think the psychology isn't right, though. a bubble has to build to a widespread belief in the inevitability of ever rising prices. there have been too many newspaper articles about the housing bubble popping: it would take years for that to reverse.

.

I would agree completely from my EU (somewhat more frugal perspective), but the US consumer did surprise me so far in the desire to take on debt.

alternatives 2 - stocks? this seems somewhat more plausible for a repeat performance. a lot depends on what happens in the stock market between now and then. there is apparently some noise being made even now about the dow approaching its old high. if the stock market isn't hit too badly between now and when the pumps get turned on, then i could see equities moving up a lot. it's been several years since people were swearing "never again" about the stock market. it seems more likely, however, that stocks will be hit hard BEFORE the pumps are turned on. their decline will be one of the triggers that elicit the inflationary response. in that scenario, in which the stock market will be hit hard AGAIN before the inflation, it's hard to see the public wave of enthusiasm settling on stocks.

Agree again, however some questions:
-How relevant is J6P for the stock market (was it 80% program trading now)?
-Where does J6P get the money from to put in the stock market. Will he get margin again to leverage himself?
-What will happen to the willingness to lend (provide margin) and the willingness to take debt/risk?
I can image the stock market going up (in numbers, but falling in gold terms). But is the stock market the real economy, or is it a financial mirage of proprietary bank trading, taking hedge funds and pension funds taking to the cleaner. Legalized rigged robbing.

Alternative 2b- foreign stocks. this seems more plausible. if the dollar is weak but we don't have global runaway inflation, then other economies may be growing in a relatively healthy way. [could they really? with a sick economy in the u.s.? let's assume so.] also, the declining dollar will translate into rising foreign equity prices from the american viewpoint. it's hard to see a broad interest in foreign stocks, americans are in general too insular, but foreign stocks will have a following. american demand for e.g. asian stocks will add to the currency effect and push up those stocks even in terms of their base currencies. so there will be substantial bull market in foreign stocks. the strength of this move will depend on how fast the dollar declines- if the dollar drops too quickly it won't work.

Looks better than US stocks to me. But for me not EU, Russia, not ME, … what then?
May-be Canadian, Australian, Brasil in with emphasis on PM, energy (longer term), and food.

the recent commodity moves are most likely a precursor to the big commodity wave to come. looking at multidecade charts the recent peaks are not all that high. for all that some commentators have labelled gold's move, for example, as "a bubble," it never got close to widespread public ownership and enthusiasm.
i think commodities have completed stage 1 of a 3 stage move. their ownership to date has been restricted to enthusiasts and speculators. the great majority of day-to-day market participants never touched them.

the slowdown or recession which we are now entering, along with the pullback in commodity prices, marks the shift to stage 2. stage 2 will be the institutionalization of the commodities markets. commodities will be legitimized as mainstream investments. ownership will broaden significantly, but will not reach the man in the street. thus the rise should be relatively orderly.

another slowdown or recession, accompanied by another pullback in prices, will mark the shift to stage 3. in stage 3 there will be a wave of new mutual fund offerings, helping the public get on board. fraudulant junior mining companies will be floated on smaller exchanges around the world. the price of gold will again be announced every half hour on the radio business reports. the newsweeklies will run articles on the commodities markets [but not a cover, yet].

the last part of stage 3 will be a wild acceleration for precious metals in particular. that's because, to quote richard russell, gold is unique because it is moved first by greed, but then by fear.

these processes will take many many years to play out. i just took a look at ej's ka-poom chart, which puts a peak in 2014. whenever it happens, we get the magazine covers, the last peak and drop for commodities, the re-incarnation of paul volcker [if we're lucky], and the worst recession since the 1930's. time to buy bonds.

that recession, with its pullback in prices, may well mark the clear end of lace w:st="on">u.s.lace> global hegemony, and a shift to a different global system.

Yep, I pretty much agree with that. But I don’t know about the timing … Who does??
BTW the bottom chart on page 14 on MacroMaven http://www.macromavens.com/reports/F...rap.8.4.06.pdf
gives some perspective on how low the CRB still is compared to stocks.
Sorry, extracted the chart with SnagIt but could not figure out how to copy the chart into this mail. .



But I see some major potential wrenches that may influence the process and the outcome.
1. War. I try to be positive and non-conspiracy but I get the chills of the things that happened last years, the rhetoric of some governments and the lack of reaction of the masses. I really wonder if we will not have war before 2014. May be I read too much history but if the last 5 years rhyme with historic events such as the Reichsbrand, Gladio, Tonkin, etc. we are on the wrong track.

2. Peak-oil and the realization that even IF peak-oil is not yet here, the demand increase from China just does not match with any potential supply. May be recession will give us some reprieve due to temporary demand destruction. Unfortunately that may just be enough to kill recently started alternative energy projects instead of increasing efforts to find alternatives. I was involved in a large multi-year study for bio-fuel opportunities etc. and looked at all alternatives. I far as I know there just are NO short/medium term feasible alternatives out there to mitigate the demand/supply gap.

3. Internal unrest, when people in the West realize they have to abandon their their energy intensive way of life. And upheaval in China etc. when the people there realize they will never get an opportunity to live a life they dreamed of, and as portrayed in all those shows on the television.
A drop in cheap fly-tourism, which will leave touristic areas like Egypt Red Sea and Turkey with high unemployment. There just is nothing there besides sand, sea and concrete. More desperate Islamic people?
I don’t know what the parallel in the US would be.


Of course for some (especially the well prepared) life will go on. And the hardship might even bring back some virtues neglected in our individualistic, commercial society.

that's my science fiction story. i feel a little dumb, or limited, for not being able to think of other alternatives: stocks, real estate, bonds, commodities. and? and this is just the replay-of-the-'70s model. not too creative. other ideas?

In the 70s I was still at school, happily ignorant of any economics. My science fiction book would agree on commodities, but more than only PM. I would agree on gold for hedging against the devaluation of most currencies, and as transportable wealth in crises. But unfortunately you cannot eat or drink gold.

In my (slightly pessimistic) fictional book I see much higher energy prices, impacting the way we live (how to commute to and A/C a 3000ft McMansion in exurbia?) but also a huge impact on the price and sorts of food we eat.
I expect a sharp rise in the cost of food production (fertilizer production cost is 70% energy, running the tractors, transporting it to processing plants, getting the water, etc. all requires energy). The increased fertilizer cost will IMO lead to lower application rates and decreased average acreage production. Furthermore the biofuel demand might decrease acreage now allocated for food. The import of food (and feed raw materials) will get more expensive.
And don't forget the energy cost in food processing (e.g. evaporation in corn syrup production, spray drying of soy isolate, ring drying of starch, etc.). Note that this also cuts into the whole structure of food industry that is now optimized on few plants, lot of drying, no inventory and long transport. Where possible membrane technology will replace heat based concentration.
IMO this will also result in other products on the shelves. No 2000 mile Cesar Salad anymore. No fresh crab legs in Vegas casino's.

Furthermore this will be happen against a backdrop of increased international demand for better food (more animal protein) and energy from the Chinese.


Such things are long term scenarios but thinking about it may help to register developments. In the mean time don't forget to enjoy.
It will be interesting years ahead.

[Jim Nickerson]

Re: The Hard Way or the Harder Way

Peter,

No need to ask what you did this weekend. Nice of you to put down your broad, thoughtful perceptions.

When I think about all these problems and possbile answers, I conclude the final answers will be forced upon people.

At some point part of the answer to the world's problem has to be a reduction in the number of people on earth--whether by wars, plague, flu--something has to reduce the number of people utilizing the supply of stuff--needed stuff:food, water, air.

Food needs to be grown near where people are and those who grow their own stuff may be the long-term survivors.

I inquired as to subscription rates at Macromavens.com. 25K bonars a year, or just 10K for a 6-month trial. So much for that.

[FRED]

Re: The Hard Way or the Harder Way

Posted for John Serrapere by Fred...

Rome, Spain, and Holland Empires experienced economic woes after their coins became global currencies and they quit producing/exporting goods. All of their economies were dominated by financial sector speculation (GDPs). Britain to a lesser degree experienced same from 1880-1921. Production was left to their subject nations/colonies because they could do it cheaply, which lowered inflation and fostered financial speculation (funding military conquests and expanding trade rooted in foreign centers of production) much like the USA and Britain today.

Their empires ran great trade deficits and ran up huge debts and these imbalances were sustained in some cases for 50 or more years. Their low savings rates guaranteed debtors with huge burdens while the high savers (producers) had low debts and high production, which enabled them to exchange “hedgehog coins” for their own appreciating currencies. The producers later went own to rein over their masters after they developed their own economies that were balanced in export-import exchange.

[Jim Nickerson]

Re: The Hard Way or the Harder Way

The more the merrier, and the bleaker the future.

U.S. population to top 300 million this month

http://news.yahoo.com/s/nm/20061002/..._population_dc

Whether the 300 millionth U.S. person is added by immigration or by being born in the United States, the expected absolute number of Americans prompted a report by the non-profit Center for Environment and Population.
The report's author, Victoria Markham, noted that the United States is the only industrialized nation with significant population growth. The vast majority of the world's population rise -- about 98 percent -- is in poor countries, she said.
"In combination with our very high rates of natural resource consumption and the associated pollution, that results in America having the highest per capita environmental impact in the world," Markham said in a telephone interview.

NUMBERS DON'T TELL THE WHOLE STORY
Sheer numbers of human beings don't necessarily have the heaviest impact on the environment; instead, environmental impact is a calculation that involves population, affluence and technology, the report said.
In the areas of land-use, water, biodiversity, forests, fisheries and aquatic resources, Americans are consuming more than they did in the past. The report found:
-- Each American occupies 20 percent more developed land -- housing, schools, shopping and roads -- than 20 years ago.
-- Each American uses three times as much water as the world average; over half the original wetlands in the United States have been lost, mainly due to urban and suburban development and agriculture.
-- Half the continental United States can no longer support its original vegetation; nearly 1,000 plant and animal species are listed by the U.S. government as endangered or threatened, with 85 percent of those due to habitat loss or alteration.
-- The United States consumes nearly 25 percent of the world's energy, though it has only 5 percent of the world's population, and has the highest per capita oil consumption worldwide.
-- Each American produces about 5 pounds (2.3 kilogram) of trash a day, up from about 3 pounds (1.4 kilogram) in 1960; the current rate is about five times that in developing countries

and this is the kicker

After U.S. population hit 200 million in 1967, Paul Erlich gained notoriety with a book called "The Population Bomb," which predicted mass starvation due to population growth.
No such dire warnings accompany the center's report, Markham said. "We aren't saying there's too many of us," Markham said. "We were trying to step back and take a look at the broad picture and at the population trends and the scientific data."

To me the emphasized sentences [my emphasis] demonstrate behavior of an idiot.

[Jim Nickerson]

Re: The Hard Way or the Harder Way

So infers James West today @

http://www.financialsense.com/fsu/ed...2006/1002.html

I find West's reports focusing on COT data offer a bit different perspective than most other things I read.

[Jim Nickerson]

Re: The Hard Way or the Harder Way

It seems a lot of individuals are expecting the dollar to weaken.

If one looks at the Japanese Yen in Q1 1990 it was about 160 to the US Bonar. It definitely strengthened as the Nikkei collapsed, in fact it doubled in value against the Bonar by first half of 1995.

http://bigcharts.marketwatch.com/int...asp?symb=C_JPY

How does one explain that? And were the US markets to relatively collapse from around where they are now--DJI and SPX at multiyear highs--why would the Bonar not increase in value, as the Yen did?

[jk]

Re: The Hard Way or the Harder Way

peterm, thanks for your long post. it's terrific. a few comments:

you ask how the u.s. could get away with a unilateral devaluation. as i understand pomboy's analysis, from the stuff i posted and some other stuff of hers i've since come across, the issue has to do with the fact that oil is priced in dollars. if china pushes up the dollar, it is also pushing up the cost of the oil it imports. that might be worthwhile for a huge u.s. market for its exports. as the u.s. economy slows and consumption is reduced, what is the incentive for china to keep supporting the dollar? they will lose more on the cost of oil imports than they gain in exports. the issue isn't unilateral devaluation initiated by the u.s., it's the withdrawal of support for the dollar by our vendor financiers.

i arrive at the same answer you do to the question of who can be the consumers if the u.s. is not: asians themselves. the transition, though, might be difficult, as you point out. i worry about a recession in the u.s. setting off a recession in china. china has a rickety banking system and still has an enormous "work"-force in the state operated enterprises. plus lots of redundant production capacity for everything from ball bearings to autos. thus the transition to chinese consumption might involve global recession/depression.

if the chinese indeed allow their currency to appreciate as the u.s. consumer market implodes, however, they will have increased buying power vis a vis global commodities. and they have a hoard of a trillion dollars or so to go shopping with. a military build-up can absorb some of their workforce and productive capacity. plus this supplies part of the answer to your question about how the chinese will be able to purchase oil: they will sell weapons and [e.g. nuclear?] technology. note that hugo chavez just went on a weapons shopping trip to russia and china.

as for foreign stocks, you mention canada, australia and brazil, but neglect to mention the asian markets- singapore, thailand, viet nam, china, japan, taiwan, korea. all those markets should do well.. eventually. the difficulty is predicting whether a global recession will hit them before they take true leadership away from the american markets.

[PeterM]

Re: The Hard Way or the Harder Way

peterm, thanks for your long post. it's terrific. a few comments:

you ask how the u.s. could get away with a unilateral devaluation. as i understand pomboy's analysis, from the stuff i posted and some other stuff of hers i've since come across, the issue has to do with the fact that oil is priced in dollars. if china pushes up the dollar, it is also pushing up the cost of the oil it imports. that might be worthwhile for a huge u.s. market for its exports. as the u.s. economy slows and consumption is reduced, what is the incentive for china to keep supporting the dollar? they will lose more on the cost of oil imports than they gain in exports. the issue isn't unilateral devaluation initiated by the u.s., it's the withdrawal of support for the dollar by our vendor financiers.

I have trouble to understand why the cost of oil import is pushed up if the dollar rises. I would expect the value of oil to be dependent on supply/demand, indirectly priced based on the mix of international currencies used by the buyers, and contracted in dollar terms.
Suppose China stops supporting the dollar and the value of the dollar is halved unilateraly. I then would expect the oil price in dollars to double as the suppliers still want the same value. But the price denominated in gold or other currencies would remain the same.
This would of course also halve the value of all paper 'assets' denominated of dollars. Which will hurt Japan first and then China.

I remember some similar debates about dollar-pricing of oil, but then related to a potential euro-priced oil bourse in Iran. Some said this would be dangerous for the dollar as there would be less demand for dollars.
Others claimed that it would not matter as anybody could make the contract in dollars, and the moment of the deal convert the payment into Euros and hedge the currency effects in the financial market. I tend to agree with the latter.

if the chinese indeed allow their currency to appreciate as the u.s. consumer market implodes, however, they will have increased buying power vis a vis global commodities. and they have a hoard of a trillion dollars or so to go shopping with. a military build-up can absorb some of their workforce and productive capacity. plus this supplies part of the answer to your question about how the chinese will be able to purchase oil: they will sell weapons and [e.g. nuclear?] technology. note that hugo chavez just went on a weapons shopping trip to russia and china. [/qoute]

If the Chinese appreciate their currency compared to the US the cost of their products for US consumers will increase, probably resulting in lower sales. The same if they appreciates compared to other currencies. In my book this might decrease rather than increase buying power viv a vis global commodidies.

For sure they have a lot of dollars, but the spending power of these dollars might be reduced in future.

Regarding military build-up. Yep, in history that is a well proven way to absorb workforce. And indeed, good point about exporting militar hardware and nuclear technology. I think China is leading now in the development of pebble-bed reactors. Which is yet another pointer to the independent knowledge development in a previously 'me too & copy' economy.

[qoute]As for foreign stocks, you mention canada, australia and brazil, but neglect to mention the asian markets- singapore, thailand, viet nam, china, japan, taiwan, korea. all those markets should do well.. eventually. the difficulty is predicting whether a global recession will hit them before they take true leadership away from the american markets.

I mentioned Japan and China, not the others. It was long enough already and I don't know too much about the others.
Singapore with only 4 million people is not very relevant in the demand picture. They don't have any resources expect human labour. Don't know much about the companies on the stock exchange there.

Thailand, Vietnam ,Taiwan and Korea appear interesting to me, and I certainly expect them to be part of the next world economy. Appears a good place to invest to me, but not yet. I too wonder if they will be hit by a potential rippling globl recession IF US demand would slow.
From what I read, I expect less impact than on China as their economies are probably more diversified, with more developed internal markets.

[jk]

Re: The Hard Way or the Harder Way

I have trouble to understand why the cost of oil import is pushed up if the dollar rises. I would expect the value of oil to be dependent on supply/demand, indirectly priced based on the mix of international currencies used by the buyers, and contracted in dollar terms.
Suppose China stops supporting the dollar and the value of the dollar is halved unilateraly. I then would expect the oil price in dollars to double as the suppliers still want the same value. But the price denominated in gold or other currencies would remain the same.
This would of course also halve the value of all paper 'assets' denominated of dollars. Which will hurt Japan first and then China.

if the dollar depreciates then, yes, the price of oil will rise in dollars. but the depreciating dollar will be a symptom of a weakened u.s. economy, with lower demand for oil. thus global demand should drop and the global price of oil with it. for americans the price will rise, for everyone else it will fall.

for the chinese, to support the dollar is to support u.s. demand, and thus support the cost of oil. this is worth it for a huge u.s. export market. otherwise, it's not worth it. also the pool of dollars brought into china by chinese exports will shrink. for the chinese to support the dollar in the face of lower u.s. demand, they would have to buy dollars from others on the open market, and add to their dollar hoard without having the offsetting benefit of exports. why not, instead, spend the dollars on global commodities, as long as anyone is willing to accept them? watching the dollar slide lower, china and japan are going to develop a might itch to spend the dollars they have, putting further pressure on the dollar's value.

[PeterM]

Re: The Hard Way or the Harder Way

if the dollar depreciates then, yes, the price of oil will rise in dollars. but the depreciating dollar will be a symptom of a weakened u.s. economy, with lower demand for oil. thus global demand should drop and the global price of oil with it. for americans the price will rise, for everyone else it will fall.

for the chinese, to support the dollar is to support u.s. demand, and thus support the cost of oil. this is worth it for a huge u.s. export market. otherwise, it's not worth it. also the pool of dollars brought into china by chinese exports will shrink. for the chinese to support the dollar in the face of lower u.s. demand, they would have to buy dollars from others on the open market, and add to their dollar hoard without having the offsetting benefit of exports. why not, instead, spend the dollars on global commodities, as long as anyone is willing to accept them? watching the dollar slide lower, china and japan are going to develop a might itch to spend the dollars they have, putting further pressure on the dollar's value.

With this I agree completely. I might have misread your reference to Pomboy. I read it as a statement from Pomboy that it was a 'pricing in dollars' issue.

[Jim Nickerson]

Re: The Hard Way or the Harder Way

It seems a lot of individuals are expecting the dollar to weaken.

If one looks at the Japanese Yen in Q1 1990 it was about 160 to the US Bonar. It definitely strengthened as the Nikkei collapsed, in fact it doubled in value against the Bonar by first half of 1995.

http://bigcharts.marketwatch.com/int...asp?symb=C_JPY

(I just noted, url above doesn't give you the chart I want, you have to select "time frame" > "All Data" > Draw Chart)

How does one explain that? And were the US markets to relatively collapse from around where they are now--DJI and SPX at multiyear highs--why would the Bonar not increase in value, as the Yen did?

I posted this a day or so ago, and it hasn't evoked any response, and I would appreciate someone's thoughts, if anyone has a thought. Below is a link to the US Bonar since 2000. Since 01/2004 the Bonar seems to have put in a reverse head and shoulders, and the RSI and MACD both appear positive to me. With all the debt we have it seems improbable that the Bonar is strengthening, but it seems to be.

Current Bonar chart.
http://stockcharts.com/h-sc/ui?s=$US...016&a=80445168

[bart]

Re: The Hard Way or the Harder Way

I posted this a day or so ago, and it hasn't evoked any response, and I would appreciate someone's thoughts, if anyone has a thought. Below is a link to the US Bonar since 2000. Since 01/2004 the Bonar seems to have put in a reverse head and shoulders, and the RSI and MACD both appear positive to me. With all the debt we have it seems improbable that the Bonar is strengthening, but it seems to be.

Current Bonar chart.
http://stockcharts.com/h-sc/ui?s=$US...016&a=80445168

I'll see that chart and raise you this one to chew on: ;)




Here's a key chart in my book on the dollar - its how many dollars all major central banks are holding as a percent of their overall reserves: