The US economy glides like a box of rocks. Don't stand under it - Eric Janszen

[we_are_toast]

Re: The US economy glides like a box of rocks. Don't stand under it - Eric Janszen

I have a couple of questions about the capital flow chart.

Isn't the rush to Tbills by foreign money a capital inflow?

How could capital inflows decline so much with so much money going into Tbills?

Where were the foreign capital investments in the U.S. and what are the signs that it is leaving?

If capital inflow is declining, and capital outflow is increasing, where is all the capital going and shouldn't this have caused a mass dumping of dollars to get to whatever foreign assets the capital is acquiring?

Can the data reflected in the Feds charts be trusted?

[Sapiens]

Re: The US economy glides like a box of rocks. Don't stand under it - Eric Janszen

Add it all up and what do you get? Sorry to say, a deep recession that goes on for years as we've warn you about since March 2006 when we re-opened.

Our advice remains unchanged. If you run a business, the name of the game is: survive your competition. Cut, cut, cut spending. Renegotiate every contract you can to reduce fixed costs. Talk to your employees about accepting pay cuts to avoid layoffs. Cut your own salary, too. Scout out cheaper facilities then call your landlord and renegotiate your rent or move. Remember, in a recession like this one, recovery is not just around the corner. Everything is negotiable.

If you are an employee, if you can't afford a pay cut then you haven't cut expenses enough at home. Round up the family and tell them you are all going to find ways to cut spending, even if it doesn't appear to be necessary yet. Build up your rainy day fund for the real possibility that one income or both family incomes may go away for a year or more. This article How to Cut Expenses and Live More Frugally offers decent advice.

I fully expect this downturn to last for years, but if we all make sound decisions we will all be stronger than ever when we come out the other side.

Bravo! Bravo! Bravo! Fantastic analysis and very sage advise! Great job EJ.

[brendan]

Re: The US economy glides like a box of rocks. Don't stand under it - Eric Janszen

Seiver also had some parting advice for the U.S. Treasury: It should refinance a chunk of its short-term debt as possible with 30-year T-Bonds. "What a deal the market is giving the Treasury," Seiver argued: "It can lock up money for 30 years at 3.1%, even though the inflationary consequences of its actions will in large part be responsible for why that 3.1% will be an incredibly bad deal for investors who buy the bonds."

I hope the Treasury follows this advice, ASAP.

[CanuckinTX]

Re: The US economy glides like a box of rocks. Don't stand under it - Eric Janszen

Now, the guy who said that this is the most likely thing to happen has 15% gold as insurance against the occurence, but not a larger position as a speculative trade. What does that tell you?

I'm also betting that EJ's 15% allocation in PM is a lot higher in $ terms than most people's total portfolio! So what I'm saying is he probably has a lot of wealth that he just wants to protect and doesn't need to take on a large speculative position.

FWIW, I'm about 30% PM's myself, 50% cash and the rest spread between stuff like short S&P, SRS, short US$ fund.

[c1ue]

Re: The US economy glides like a box of rocks. Don't stand under it - Eric Janszen

There are opposing forces at work . . . .

The value of houses can go down because more are forced to sell their homes. On the other hand, the value of the money owed diminishes with inflation.

Also, in a raging inflation RE may be seen as something "real" . . . as opposed to holding fiat, the value of which is plummeting. This latter factor would be especially true in a hyperinflation.

Raja,

The point is - if you have cash, our present times are an opportunity. If you tie yourself down now to an investment which has opposing forces, you're giving up opportunity.

Certainly a house is more than an investment, but it is always important to distinguish one from the other. At some juncture you are sacrificing either your investment or your non-investment housing pleasure.

As for hyperinflation - it would be interesting to see what happens with property taxes in such a scenario.

I could be wrong, but I don't believe any nation with percentage property taxes has ever gone through hyperinflation?

Because if it did, then everything paid for via said taxes (in the US, mostly schools) is going to get screwed bad. Or those with houses are going to get taxed really badly. Either way, not a good situation.

[icm63]

Re: The US economy glides like a box of rocks. Don't stand under it - Eric Janszen

Three things missed...well maybe not focused upon, rather than missed".


1) USA interest rates will rise, this will accelerate the misery, supply of bills, will over come demand (demand from the world, USA itself, china, japan, etc). Rates will rise. Dont believe me, see rates on the Jumbo already. :eek:

2) Gold has two head winds, liquidations by funds to cover margin calls, and the fear of deflation (yes I know you dont see this but the fear is enough and if (1) above happens with any gusto well thats the end of any inflation/gold hopes).

3) Ed, your previous article on "Zero rate hell", (yes this is my favorite), with USA having its Agentina moment...I guess all bets are off if that happens ! Maybe this is (1) above, but the horror movie version.

[Andreuccio]

Re: The US economy glides like a box of rocks. Don't stand under it - Eric Janszen

There are opposing forces at work . . . .

The value of houses can go down because more are forced to sell their homes. On the other hand, the value of the money owed diminishes with inflation.

Also, in a raging inflation RE may be seen as something "real" . . . as opposed to holding fiat, the value of which is plummeting. This latter factor would be especially true in a hyperinflation.

Also, unless he sells, he owns the house, and if the value of the house deflates, he loses that amount, whether he's got the house leveraged or not. The question is what to do with the equity he currently has. If one is certain there will be strong inflation, and that gold, for example, will therefore rise in price, having the equity in gold rather than in the house would be a way to maintain the value of the equity. Later, you could sell whatever portion of the gold you needed to to pay off the debt, and you would be left with the remainder of the gold as a profit.

Two big risks with that play, though. First, since you're playing with your house equity, if things don't go as planned you could lose your home. Maybe not the smartest bet in uncertain times like these. Second, there are lots of ways you could lose even if inflation did play out as expected. Some examples we've talked about here before: the government might confiscate it, or they might tax profits on it at some absurdly high rate. If you hold physical, it could also be stolen.

[rj1]

Re: The US economy glides like a box of rocks. Don't stand under it - Eric Janszen

I have a couple of questions about the capital flow chart.

Isn't the rush to Tbills by foreign money a capital inflow?

How could capital inflows decline so much with so much money going into Tbills?

Where were the foreign capital investments in the U.S. and what are the signs that it is leaving?

If capital inflow is declining, and capital outflow is increasing, where is all the capital going and shouldn't this have caused a mass dumping of dollars to get to whatever foreign assets the capital is acquiring?

Can the data reflected in the Feds charts be trusted?

This is a question I have too. If foreign money is flowing out, what foreign money is that? The governments or institutions/individuals? And that would also mean that the approaching 0% treasury rate is being done mostly with American money. I can see foreign money pulling itself out of the stock market and returning home, that would make sense in this business environment. But as far as the American money leaving the country, well, where would it go?

[raja]

Re: The US economy glides like a box of rocks. Don't stand under it - Eric Janszen

Raja,

The point is - if you have cash, our present times are an opportunity. If you tie yourself down now to an investment which has opposing forces, you're giving up opportunity.

What do you see as the opportunities?

[mercerbear]

Re: The US economy glides like a box of rocks. Don't stand under it - Eric Janszen

This is a question I have too. If foreign money is flowing out, what foreign money is that? The governments or institutions/individuals? And that would also mean that the approaching 0% treasury rate is being done mostly with American money. I can see foreign money pulling itself out of the stock market and returning home, that would make sense in this business environment. But as far as the American money leaving the country, well, where would it go?

Yes, two of the charts above seem to contradict each other. The first chart shows the the dollar index strengthening to 85 while the second shows net capital outflows. How is it possible for the dollar to appreciate while capital is fleeing the dollar?

Falling treasury yields (rising prices) would also support dollar strengthening and capital inflows, would they not?

What are we missing here?

[LargoWinch]

Re: The US economy glides like a box of rocks. Don't stand under it - Eric Janszen

I believe that EJ warned us a few months ago that we have about 6 months to a year to protect our wealth against inflation.

This information when coupled with some of EJ's latest posts, seems to point to stagflation. Furthermore, EJ indicated the inflation part will be hard to time due to the ongoing severe recession (in my view, this should be the critical research element for all iTulipers).

Hence, in this environment, asset allocation is critical since some asset are falling in $nominal terms (RE, cars, art, Tbills and bonds etc.) despite inflation, while some are rising rapidly because of inflation (gold, commodities etc.).

The real returns between asset classes will be significant for years to come. One word of advice: now is not the time to cancel your iTulip subscription...

[Adeptus]

What will happen to RE in POOM/severe inflation scenario?

On real estate, during the potential upcoming inflationary cycle...

C1ue said: As the debt 'value' goes down due to inflation, so too does the value of the real property.

This is something I've been wondering about that I haven't quite understood yet. When you say that the value of real estate goes down during an inflationary period, you mean in real dollar *value* terms, but not in actual dollar numbers, right? The actual number of (more and more worthless) dollars that one pays would in fact likely increase, right?

In short, I'm unclear as to what happens to real estate prices during POOM. Do they go further down, because people are hoarding money to survive (i.e. buy gas, food, heating energy, etc?) and because credit will be even tighter, with interest rates rising, and therefore have less money to "invest" in real estate?

Or will at some point during severe inflation (just prior to hyperinflation??), people realize that the dollars they are holding will become more and more worthless and so with stocks in continuing decline, and cash losing value daily, the only 'safe' bet will become real estate again? I.e. Buy a small farm, so you can be sure to feed your family?

Has anyone studied what happened to real estate prices in other Western countries that experienced severe inflation or hyperinflation? (i.e. Brazil, Argentina, Russia?, etc). What does history tell us may happen?

How do itulipers see the turning point in real estate values during the inflationary/hyperinflationary period? Will there be one? What will be the triggers?

C1ue said: As for hyperinflation - it would be interesting to see what happens with property taxes in such a scenario.

Interesting you mention this. Here in BC, Canada our government has elected to freeze property taxes as one of the counter measures to deal with the financial crisis. Of course it's all spin and in fact totally counter-helpful, in the sense that they actually froze property taxes at the PEAK of property value. Given, we're likely looking at a property value decline for at least all of 2009+, in theory property taxes should be decreasing... but thanks to our government they are now frozen at peak value. I just hope that if hyperinflation ever comes around that they leave it frozen.

RAJA: in a raging inflation RE may be seen as something "real" . . . as opposed to holding fiat, the value of which is plummeting. This latter factor would be especially true in a hyperinflation.

This is in line with my thoughts, however, real estate is typically very slow to turn (in either direction), so I have a feeling that if we ever wonder into hyperinflation territory, prices on the street will lag behind the economic reality and so if one times it right, if the prices are low enough (to buy RE with 100% cash, and not worried about mortgage paperwork or interest rates), there could be a phenomenal opportunity to acquire long-term valuable real estate.
Thoughts?

PRESENT CIRCUMSTANCE: My personal circumstance here in Western Canada, is that I managed to sell my house at near peak value (we've had 8+ month of a downward turn now), am currently renting, and am currently 60% PMs and the rest cash/GICs.

FUTURE: My thoughts are to sell my PMs at near peak value (1, 2, 3 years from now?), and buy (lots) of real estate at bargain basement prices. In particular triplex/quadplex revenue generating real estate and/or a small farm just in case 'SHTF' scenario. If hyperinflation scenario becomes a possibility, then I'm aware that revenue generating real estate will in fact not produce any substancial income as rent increases here are fairly restricted (once per year, max of 2% + CPI interest rate).

Thanks,
Adeptus

[Jim Nickerson]

Re: What will happen to RE in POOM/severe inflation scenario?

FUTURE: My thoughts are to sell my PMs at near peak value (1, 2, 3 years from now?), and buy (lots) of real estate at bargain basement prices. In particular triplex/quadplex revenue generating real estate and/or a small farm just in case 'SHTF' scenario. If hyperinflation scenario becomes a possibility, then I'm aware that revenue generating real estate will in fact not produce any substancial income as rent increases here are fairly restricted (once per year, max of 2% + CPI interest rate).

Thanks,
Adeptus

Someone said in effect the reason we have economists is to make astrologers look credible; nevertheless, below is how "gold analysts" see gold prices. Hopefully gold analysts are worse predictors than economists, assuming one is bullish on gold.

http://bespokeinvest.typepad.com/bes...estimates.html
Consensus Gold Estimates 12/12/08 9:24AM

Yesterday we highlighted consensus analyst estimates for the price of crude oil. Below we provide the consensus price target for gold through 2012. These target prices are based on the median of 21 gold analysts surveyed by Bloomberg. As shown, analysts currently aren't expecting a big rally or a big decline in gold over the next few years. By mid-year 2009, analysts are expecting gold to be at $825/ounce, which is less than $10 from its current price of $816. At the end of 2011, analysts expect gold to be down to $790, and then down to $762 by the end of 2012.

[jk]

Re: The US economy glides like a box of rocks. Don't stand under it - Eric Janszen

the problem with real estate is that it is [virtually] always purchased with leverage- i.e. a mortgage, so that the availability and cost of financing must be built into any price estimates. in the inflation of the 1970's, real estate was a good hedge, since interest rates lagged inflation. now, however, given that we are in the midst of deleveraging an historic real estate bubble, i think that financing problems [lack of availability and stringency of requirements] will restrain real estate prices, not to mention the enormous overhang of inventory and foreclosures and abandonments by under-water current "owners." you might want to buy a property at some point in the next few years if you love it and plan to use it long-term, or if it can generate sufficient income to more than cover your cost of carry. but don't plan to flip it.

[FRED]

Re: The US economy glides like a box of rocks. Don't stand under it - Eric Janszen

the problem with real estate is that it is [virtually] always purchased with leverage- i.e. a mortgage, so that the availability and cost of financing must be built into any price estimates. in the inflation of the 1970's, real estate was a good hedge, since interest rates lagged inflation. now, however, given that we are in the midst of deleveraging an historic real estate bubble, i think that financing problems [lack of availability and stingency of requirements] will restrain real estate prices, not to mention the enormous overhang of inventory and foreclosures and abandonments by under-water current "owners." you might want to buy a property at some point in the next few years if you love it and plan to use it long-term, or if it can generate sufficient income to more than cover your cost of carry. but don't plan to flip it.

Given the mortgage credit bubble that produced massive real estate inflation in the RE sub-sector of the FIRE Economy and the collapse of that sector, there will be no real estate market to invest in for a least ten years. Forget it. It's a dead asset class for price appreciation. That said, in a few years the rental market may come back as prices of both houses and mortgages may make renting economical again. Not anything you'd get rich off of but without asset price inflation producing capital gains, any positive cash flow will be the New Rich for the foreseeable future. Back to the future for real estate!