Six Questions for Eric Janszen on the Economic Collapse

[FRED]

Re: Six Questions for Eric Janszen on the Economic Collapse

Fred, I'm having a hard time reconciling your post here with some others in recent days (from you and EJ), but perhaps I am just being dense.

EJ puts forth gold as an insurance play, and has a relatively small allocation (~15% if I recall correctly). EJ's comments on this make sense to me.

By saying that "you" remain long gold here seems to imply that you (whichever personality this is posting today) would not view gold as insurance, but rather as an alternative investment to equities, the euro, yen, franc, etc. It would also seem to imply that a greater allocation in gold would be called for, assuming iTulip still feels that equities are a bad play at the moment.

Currency depreciation is one of several tools that the Fed can use to fight deflation. With the Fed funds rate at 1.5%, huge public and external debt, no assets to inflate, how are we going to get out of this one? Dollar depreciation is starting to look like the only tool left on the Fed's menu except for outright debt monetization.

I don't want to beat a dead horse here, and I know that there are several similar threads going on right now, but if you're a dollar bear, euro bear, swissie bear, yen bear, don't feel equities are the place to be, and LONG gold, I can't imagine where the other 85% of "your" portfolio might be allocated given this outlook.

Short term treasuries ala Treasury Direct.

Please note I'm not asking for the sake of looking for guidance of portfolio allocation. I'm just trying to put all the pieces together and better understand the differences in iTulip's short-term and long-term economic outlook.

Thanks.

J

Gold allocation depends on:
- Risk tolerance
- Age
- Employment
- What else is in your portfolio
- Etc., etc.

There can be no one size fits all allocation of any asset class.

[drumminj]

Re: Six Questions for Eric Janszen on the Economic Collapse

Currency depreciation is one of several tools that the Fed can use to fight deflation. With the Fed funds rate at 1.5%, huge public and external debt, no assets to inflate, how are we going to get out of this one? Dollar depreciation is starting to look like the only tool left on the Fed's menu except for outright debt monetization.

Understood.

Short term treasuries ala Treasury Direct.

Here's where you lose me. If one is a long-term dollar bear, why would one want to be holding US dollar-denominated assets with a US dollar revenue stream? I can certainly understand why short-term versus longer-term due to the fact that rates will have to rise as inflation takes hold. However, why US Treasuries at all if you're a dollar bear? If one expects the $US to depreciate, it must be measured against some other currency or asset. Wouldn't one rather be significantly invested in such currencies or assets?

Or are US treasuries put forth as the likeliest "safe" place to sit on the sidelines and wait and see what currencies are likely to be depreciated the least and which assets are likely to hold their value (or appreciate) in real terms?

Again, I'm not looking for anyone to tell me where to put my money. I'm just trying to reconcile what appears to me to be an inconsistency.

[Jim Nickerson]

Re: Six Questions for Eric Janszen on the Economic Collapse

drumminj,

Personally it sort of pisses me off when I ask someone here a question and one or two who I don't ask pop in with answers.

What follows is not any attempt to answer your question, but are possibly some relevant considerations that exist at the moment.


From du Plessis's site highlighting remarks in a Jeremy Grantham report http://www.investmentpostcards.com:80/

“At under 1,000 on the S&P 500, US stocks are very reasonable buys for brave value managers willing to be early. The same applies to EAFE and emerging equities at October 10 prices, but even more so. History warns, though, that new lows are more likely than not.

“Fixed income has wide areas of very attractive, aberrant pricing.

“The dollar and the yen look okay for now, but the pound does not.

“Don’t worry at all about inflation. We can all save up our worries there for a couple of years from now and then really worry!

“Commodities may have big rallies, but the fundamentals of the next 18 months should wear them down to new two-year lows.

“As for us in asset allocation, we have made our choice: hesitant and careful buying at these prices and lower. Good luck with your decisions.”

Click here for the full report on Grantham’s views on the fallout from the financial crisis and what investment opportunities he sees. (Grantham will be publishing a second part to this report, entitled “Silver Linings” in two weeks’ time. This article will also be posted on Investment Postcards.)

Source: Jeremy Grantham, GMO, October 2008.

and here is another opinion about the recent strength in the US$

US Dollar: A Nice Move, But A Long Way To Go

The US Dollar index is now up 16.5% since it bottomed earlier this year, which is a significant rally for a currency that many had begun to jokingly call the US Peso. The Dollar is currently in a very nice short-term uptrend, trading 5.5% above its 50-day moving average and 11% above its 200-day. However, it's important to remember that the currency has a long, long way to go to get back to levels seen in the earlier part of this decade. As shown in the chart below, we need about 5 times the rally we've seen over the past couple of months to get back to 2000 levels. But the Dollar has historically had very long bull and bear market cycles, and once it gets going in one direction, it usually stays on track for quite some time.


From Bespoke 10/21/08 8:57AM

http://bespokeinvest.typepad.com/bespoke/

The underlined remarks are something the system or I did unintendingly. It does not represent emphasis.

[The Outback Oracle]

Re: Six Questions for Eric Janszen on the Economic Collapse

Fred "Dollar depreciation is starting to look like the only tool left on the Fed's menu except for outright debt monetization."

Given tne nature of his speech today, I think the Chinese are having a wee whisper in Paulson's ear about such thoughts.

Next solution?

[drumminj]

Re: Six Questions for Eric Janszen on the Economic Collapse

drumminj,

Personally it sort of pisses me off when I ask someone here a question and one or two who I don't ask pop in with answers.

What follows is not any attempt to answer your question, but are possibly some relevant considerations that exist at the moment.

Jim, I really don't care who answers. I directed my question and FRED since it's a question regarding things FRED and EJ have said that appear contradictory. If anyone else can shed insight, I'm certainly happy to hear it.

The information you included is interesting. Always good to know what moves other people are making, assuming one can get a good feeling for what their qualifications and motivations are.

Am I the only one who feels there's an inherent contradiction in someone who's a long-term dollar bear suggesting being in US Treasurys right now, especially given the fact iTulip looks for long-term investments rather than short-term trades?

BTW - Any chance I could fly you to Austin to meet my ex-girlfriend? She always considered me such a pessimist, but after meeting you (given your outlook on the future of the country and politics) I think she might find me to be quite the optimist!

[phirang]

Re: Six Questions for Eric Janszen on the Economic Collapse

Understood.



Here's where you lose me. If one is a long-term dollar bear, why would one want to be holding US dollar-denominated assets with a US dollar revenue stream? I can certainly understand why short-term versus longer-term due to the fact that rates will have to rise as inflation takes hold. However, why US Treasuries at all if you're a dollar bear? If one expects the $US to depreciate, it must be measured against some other currency or asset. Wouldn't one rather be significantly invested in such currencies or assets?

Or are US treasuries put forth as the likeliest "safe" place to sit on the sidelines and wait and see what currencies are likely to be depreciated the least and which assets are likely to hold their value (or appreciate) in real terms?

Again, I'm not looking for anyone to tell me where to put my money. I'm just trying to reconcile what appears to me to be an inconsistency.

Buying short-term treasuries now is idiotic: keep the money in some crappy bank under the limit and get your 3.x%.

It's only a matter of time before yields improve on t-bills, and then you're totally hosed if you bought now.

[BobH]

Re: Six Questions for Eric Janszen on the Economic Collapse

A declining US $ is NOT a deflationary environment...

Thank you for the response and thanks to the other two who also responded.

In re-reading EJ's statement the word that I now see is 'relative'. So he is stating that with the future dollar decline, 'relative' to commodities, this will cause inflation in food and energy. Sorry I was just slow in the uptake on that one! but of course, that causes me to ask this.

In a deflationary world, what would cause the dollar to fall faster 'relative' to commodities? As it seems that if it didn't fall faster there most likely wouldn't be any inflationary problems.

What am I not seeing here? Thanks

[Jim Nickerson]

Re: Six Questions for Eric Janszen on the Economic Collapse

Jim, I really don't care who answers. I directed my question and FRED since it's a question regarding things FRED and EJ have said that appear contradictory. If anyone else can shed insight, I'm certainly happy to hear it.

The information you included is interesting. Always good to know what moves other people are making, assuming one can get a good feeling for what their qualifications and motivations are.

Am I the only one who feels there's an inherent contradiction in someone who's a long-term dollar bear suggesting being in US Treasurys right now, especially given the fact iTulip looks for long-term investments rather than short-term trades?

BTW - Any chance I could fly you to Austin to meet my ex-girlfriend? She always considered me such a pessimist, but after meeting you (given your outlook on the future of the country and politics) I think she might find me to be quite the optimist!

That is important. Grantham is a repected pundit, though I don't know his motivations just as I don't generally know those of most people whose opinions I read. At least you can determine his name, assess his age, know where he works, so his comment is not put forth in total anonymity. As far as the Bespoke comment, I have no idea as to who made it. One can check out a long term chart on the $USD and decide for oneself.

I don't consider myself a pessimist, but rather I try to be realistic. The politics in this country is in deep, deep, deep shit. If you are in Texas, have you seen any of the TV ads by Cronyn? Listening to the couple I have, you'd think the pissant is newly seeking to be a senator and has not been sitting on his ass in Washington for the past six years--it makes me want to throw up firstly, and, secondly, there ought to be a law against politicians lying--that would certainly cut down on noise pollution.

[we_are_toast]

Re: Six Questions for Eric Janszen on the Economic Collapse

Thank you for the response and thanks to the other two who also responded.

In re-reading EJ's statement the word that I now see is 'relative'. So he is stating that with the future dollar decline, 'relative' to commodities, this will cause inflation in food and energy. Sorry I was just slow in the uptake on that one! but of course, that causes me to ask this.

In a deflationary world, what would cause the dollar to fall faster 'relative' to commodities? As it seems that if it didn't fall faster there most likely wouldn't be any inflationary problems.

What am I not seeing here? Thanks

Does this mean that watching the dollar index is pretty much a waste of time? Can we assume gold is representative of the commodities that the dollar will fall against? Is there a basket of commodities where an index can be built such that when that index starts turning up it would indicate we are entering Poom?

Can the dollar dropping relative to commodities theory be declared as the currency theory of general relativity? If Bernanke and Paulson print money at a fast enough rate, will time slow down and dollars become shorter?

[Guest]

Re: Six Questions for Eric Janszen on the Economic Collapse

BobH -

"In a deflationary world" - From what little of macro economics has been pounded into my head from reading here the past two years, iTulip finally got me to GROK that in any economy where the unit of commerce was fiat, where a speculative bubble pops, you have two options. One: the country has a large pool of internal savings for the public debt to draw on as asset values collapse. Two: the country does not have any savings, but rather the opposite, has only large debts.

In the example one with the large internal savings disinflation is possible and can be long lasting. In example two with only piles of internal debt disinflation is highly unlikely, verging upon impossible. Only inflation is the likely net outcome there. In neither case can the currency appreciate in the strict deflationary sense vs. assets because the currency is fiat. When the currency is linked to gold one might have deflation due to collapsing asset values, but not otherwise.

Now we have lots of people starting to refer to the international "deflation", but there are no currencies anywhere in the world linked to gold. Gold is soaring against all currencies other than the USD, which it could not do in a real deflation. It is very weak right now vs. the USD, and the USD appears very "strong". This creates the illusion that gold and the USD are both "strong" in the same way, because there is "deflation". All currencies are weakening sharply against the USD, and they are also weakening against gold.

So my objection to the use of the term "global deflation" is that while there is a very strong current in effect that is very similar to classic "deflation, assets in fact are weakening against these two forms of money for very different reasons. Once people begin to recognize that gold and the USD are strong for profoundly different reasons, you won't see "deflation" talk around any more. So referring to "deflation" internationally even today, is incorrect.

Gold today while really being a form of money, is in a very unnatural state to be moving in tandem with a fiat paper money like the USD while soaring against all other fiat money. The fiat money (USD) is of course seeing brisk expansion of aggregate quantity. The fact it's moving in tandem with gold is the aberration - because normally any un-gold-backed fiat money would be most certainly inversely correlated to gold in that environment, and gold would then be soaring vs. ALL currencies, confirming 100% inflation as the backdrop. So as gold is indeed rising against all fiat money other than USD, one should recognize actually that what is occurring in the world is really a broadening in-flation.

Asset values are collapsing, paper derivative values are collapsing, and all the paper currencies (including the tempoarily aberrant USD) are collapsing against gold. The current dive in the gold price is STILL just noise in the overall trend. So I would suggest that there is some "disinflation" internationally relative to gold, but what is happening in all assets relative to the USD is a very strange hot-house flower indeed. It has a "much shorter lifespan" than the gold and the deflationary signals it emits are false.

Thank you for the response and thanks to the other two who also responded. In re-reading EJ's statement the word that I now see is 'relative'. So he is stating that with the future dollar decline, 'relative' to commodities, this will cause inflation in food and energy. Sorry I was just slow in the uptake on that one! but of course, that causes me to ask this. In a deflationary world, what would cause the dollar to fall faster 'relative' to commodities? As it seems that if it didn't fall faster there most likely wouldn't be any inflationary problems. What am I not seeing here? Thanks

[friendly_jacek]

Re: Six Questions for Eric Janszen on the Economic Collapse

once all these margin calls have cleared (the deleveraging) there will be a ton of money on the sidelines in short term treasurys. Where's it gonna go?

Into tangibles.

When I studied the IMF reports lately, I learned that the deleveraging is supposed to last at least till the end of the decade. Did you know that hedge funds were leveraged 70x in 2007 and deleveraged to "only" 40x in 2008?

It's too bad I'm learning this now (the data was available for a while).

[Guest]

Re: Six Questions for Eric Janszen on the Economic Collapse

FJ - That is likely the answer to the question many have been asking here, "how long does the USD strength persist". If deleveraging implies a continuing bid for USD, we already know this event will last "multiple years", no?

When I studied the IMF reports lately, I learned that the deleveraging is supposed to last at least till the end of the decade. Did you know that hedge funds were leveraged 70x in 2007 and deleveraged to "only" 40x in 2008?

It's too bad I'm learning this now (the data was available for a while).

[phirang]

Re: Six Questions for Eric Janszen on the Economic Collapse

Oh, crap, gold is fked now!!!

Quick, can someone else pretend they understand what is going on?!

[Guest]

Re: Six Questions for Eric Janszen on the Economic Collapse

Phirang - with your comments about a "global deflation where everything collapses against a fiat US dollar", I really do wonder whether you understand the relationship between deflation and fiat money. Do you?

Oh, crap, gold is fked now!!! Quick, can someone else pretend they understand what is going on?!

[phirang]

Re: Six Questions for Eric Janszen on the Economic Collapse

Phirang - with your comments about a "global deflation where everything collapses against a fiat US dollar", I really do wonder whether you understand the relationship between deflation and fiat money. Do you?

Have you heard of this "reserve currency" thing?