Debt Deflation Bear Market: First Bounce - Eric Janszen

[llanlad2]

Re: Debt Deflation Bear Market: First Bounce - Eric Janszen

Debt Deflation Bear Market: First Bounce

In a recession, a recovery in personal consumption, incomes, and retail sales signals the start of recovery. The virtuous cycle of credit growth--and its corollary, debt growth—combine with rising incomes as the rate of unemployment growth slows. Credit expansion leads the economy out of the cycle, followed by incomes. That is what many stock market participants think they are seeing now, as previous experience has trained them to see. But they are wrong.

Another way of determining if earnings are going up or down is just to ask the bosses.



And the direction of the S and P. (good forward indicator)



They also expect to lay off another 6% of their workforce. No recovery here.

For detailed info from the CFO survey you can download directly from http://www.cfosurveyeurope.org/

[The Outback Oracle]

Re: Debt Deflation Bear Market: First Bounce - Eric Janszen

i agree that there is no earth shaking message in that graph. you'll note that there are no depressions over the interval of the graph - until today. i think all it's showing is that current conditions are unlike previous post-war periods. as you point out, in general pce/s&p500 will get almost all its volatility from the stock market. the red line is high when stocks were low. in the period covered that correlates with and tends to lag high inflation- stocks dropped because of fed tightening. current conditions look different.

Thanks JK. I worry that I am a bit dense and that i must have missed something important.

[gwynedd1]

Re: Debt Deflation Bear Market: First Bounce - Eric Janszen

I am not one of those who believes that the government will involuntarily lose control of the dollar at least for now. Looking at Japan's mortgages in the 2 percentile range we may have another cycle to go, or at least it possible. Now that they are buying long term treasuries they can still prop up housing. The other thing I look for is government loan guarantees to give banks the risk free interest bearing loaning they seek. It will not be a monetary collapse but a political one that take down the dollar IMHO. They do have control of the supply if they so choose.
What is near its end is the consumer based money supply growth which was driven by consumer selection of good and services. That will fade into centralized planning and bank financed projects with government loan guarantees. We are a dead free market economy at this point. We are just a notch up from a Soviet system with a choice of a few colors.

[rjwjr]

Re: Debt Deflation Bear Market: First Bounce - Eric Janszen

I am not one of those who believes that the government will involuntarily lose control of the dollar at least for now. Looking at Japan's mortgages in the 2 percentile range we may have another cycle to go, or at least it possible. Now that they are buying long term treasuries they can still prop up housing. The other thing I look for is government loan guarantees to give banks the risk free interest bearing loaning they seek. It will not be a monetary collapse but a political one that take down the dollar IMHO. They do have control of the supply if they so choose.
What is near its end is the consumer based money supply growth which was driven by consumer selection of good and services. That will fade into centralized planning and bank financed projects with government loan guarantees. We are a dead free market economy at this point. We are just a notch up from a Soviet system with a choice of a few colors.

gwynedd1,

I hear what you're saying about banks and the "risk free interest bearing loaning they seek", but they still need borrowers...and as you say later in the post, "What is near its end is the consumer based money supply growth". If consumers aren't the ones doing the borrowing, who will it be? I think all borrowers are tapped out. That leaves the Federal gov't to pick up the slack, but I read EJ's point to be that gov't spending doesn't kick-start a recovery, it only sustains the economy for so long as they apply stimulus...which they can't do forever. So, we are left with war, which we know worked to end the Great Depression, or ????? There is no precedent for a solution so no one knows what will work. At least that's how I read the situation and the article, and that's why this is a dead cat bounce, not a sustainable rally.

[vanvaley1]

Re: Debt Deflation Bear Market: First Bounce - Eric Janszen

Where does the article say that the U.S. and Japan are apples and oranges? We have written dozens of articles over 10 years that state precisely the opposite, summarized below.

Japan's starting point (1990) advantages over the USA (2009) in a debt deflation

• Large pool of national savings, high savings rate
• Median net worth > $100,000
• Median household debt < 10% of net worth
• Government a net creditor
• Economy 80% productive (profits-based), 20% financial (capital gains and interest based)
• Expanding global economy creating high demand for Japanese exports

Japan's starting point disadvantages over the USA in a debt deflation

• Stagnant population with little immigration and low birth rates
• Oldest median age of any developed country, producing an internal demand deficit

U.S. starting point (2009) disadvantages over the Japan (1990) in a debt deflation

• Gross external debt 95% of GDP
• Median net worth < $50,000
• Median household debt 40% of net worth
• Economy 50% productive (profits-based), 50% financial (capital gains and interest based)
• Global depression, shrinking external demand

Japan today after 19 years of debt deflation

• Gross public debt up from 49% of GDP in 1990 to 195% of GDP
• Diminished pool of savings, low savings rate
• High personal debt levels

Moral of the story: deflating debt against the incomes of households and businesses while moving private debt to public account does not work.

Two alternative approaches:

1. Debt restructuring

• Requires creditors to cooperate with debtors to lower debt principle across a wide range of types of debt, from mortgages to student loans to credit card debt

2. Inflation

• For net debtors, an eventual "market-based solution" is that foreign creditors devalue the currency and cost-push inflation sends prices up throughout the economy, and debt is paid down via inflated cash flows

Ka-Poom Theory posits that because #1 has never occurred in a modern economy that #2 is more likely in the U.S. after the Japanese approach of deflating debt against wages and moving debt from private to public account is tried and fails.

Thanks. Just as a matter of curiousity...would the economy turn around quicker with 'debt restructuring' than inflation? And...aren't the insolvent banks really getting debt restructuring?

[ThePythonicCow]

Re: Debt Deflation Bear Market: First Bounce - Eric Janszen

... and that's why this is a dead cat bounce, not a sustainable rally.

Marty Chenard, over at StockTiming.com, describes an unusual and scary buying pattern in the stock market bounce of the last week or two. Beware. I have already faded the short term speculative long positions that I took in mid-March.

The other technical analysts I enjoy reading the most, such as Captain Hook at treasurechestsinfo.com, Sy Harding at streetsmartreport.com and Steven Hochberg at ElliottWave.com, are less scary, at least by my reading of them, in the time frame of a few weeks or months.

Two of the afore named four analysts are rather gloomy longer term; the other two comment less on that scale.

(As usual, I prefer to remain vague about content from other paying sites.)

[Guest]

Re: Debt Deflation Bear Market: First Bounce - Eric Janszen

Pythonic - thought you might be interested in this. Barton Bggs thinks we've seen important lows in the markets. FWIW here's the interview.

I'm also getting this read from a guy I follow - Robert McHugh of Mainline Investors. He thinks we've already past the confirmation of a "complex multimonth rally", although he is intensely bearish for the sequel to that. Biggs is more cautious, suggesting a short sharp rally has yet to play out. Of course EJ does not buy any of this but then EJ does not have anything remotely resembling a trader about him (to the credit of his sober "sit tight and do little or nothing" investing style).

Here's Biggs (the guy has a pretty decent resume of market calls?).

[media]http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vlD.9oFxWj9I.asf[/media]

OK sorry - I just realised Bigg's call is stale news. This was from earlier in March and may well have already largely played out.

[ThePythonicCow]

Re: Debt Deflation Bear Market: First Bounce - Eric Janszen

Biggs is more cautious, suggesting a short sharp rally has yet to play out. ...

OK sorry - I just realised Bigg's call is stale news.

Now you tell me :rolleyes:.

Of course EJ does not buy any of this but then EJ does not have anything remotely resembling a trader about him

Yup.

[Rajiv]

Re: Debt Deflation Bear Market: First Bounce - Eric Janszen

Debt deflation at first withdraws household purchasing power from credit. Later households experience a decline purchasing power from loss of wage income as layoffs increase and savings are consumed in debt repayment. Government, by pouring vast sums of government money into the economy in an attempt to restart the virtuous credit cycle can produce a small “bounce” in the decline in aggregate demand that shows up as consumer spending, but cannot restart the wheel as it can during a recession. Debt levels continue to fall, and soon consumer expenditures as well.

Well to highlight this fact, there is ---- Hidden homeless emerge as U.S. economy worsens

Emergency shelters brimming with homeless people in California's capital are quietly turning away more than 200 women and children a night in a sign of the deteriorating U.S. economy.

The displaced individuals on waiting lists at St. John's Shelter and other facilities often turn instead to relatives or friends for temporary living quarters, perhaps moving into a spare room, garage or trailer. The less fortunate might sleep in their cars or a vacant storage unit.

They are the hidden homeless. And their ranks appear to be growing as rising joblessness and mortgage foreclosures take their toll in Sacramento and other U.S. cities, experts say.
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"I think there's a slight trickle of people who've been at risk of homelessness who are winding up in tent cities or knocking on shelter doors," said Michael Stoops, director of the National Coalition for the Homeless in Washington. "I expect a tremendous increase in homelessness over the next couple of years."

Stoops, who has worked with the homeless for 35 years, said the newly dispossessed often retain some income and seek initially to downsize or find cheaper accommodations.

WORST NIGHTMARE

"Their worst nightmare would be winding up on the streets, in a tent city or a shelter," he said. "That's the last stage. They will do everything they can before that happens to them."

Maria Romero, 52, who held a series of low-paying jobs over the years before steady work became hard to find, said she lived out of her automobile for a year before reluctantly moving to St. John's Shelter in January.

[FRED]

Re: Debt Deflation Bear Market: First Bounce - Eric Janszen

Thanks. Just as a matter of curiousity...would the economy turn around quicker with 'debt restructuring' than inflation? And...aren't the insolvent banks really getting debt restructuring?

Inflation is a horrifically destructive process. Work-outs that include debt forgiveness -- reduction of principle amounts -- are far less destructive, but the government has done everything to prevent this, stepping in to ensure the stream of debt payments is maintained. The opposite is needed. What is needed is for the aggregate of debt payments across the economy that are consuming cash flows be reduced.

[Quincy K]

Re: Debt Deflation Bear Market: First Bounce - Eric Janszen

Inflation is a horrifically destructive process. Work-outs that include debt forgiveness -- reduction of principle amounts -- are far less destructive, but the government has done everything to prevent this, stepping in to ensure the stream of debt payments is maintained. The opposite is needed. What is needed is for the aggregate of debt payments across the economy that are consuming cash flows be reduced.

Debt foregiveness cannot be allowed as it destroys the integrity of the System. Once people get wind of it, many will elect to game the System.

If one is led to believe that credit worthiness will no longer be a factor in the game and unsecured credit lines are to become non-recourse, then there is no penalty to "cash out".

If this behavior where to occur on a wide scale(25+ percent of population)...the Bonar could hyperinflate. For many unfortunate Americans, this scenario(cash out) has already happened and will continue to happen as the debt deflation proliferates into other sectors of the economy.

[Chomsky]

Re: Debt Deflation Bear Market: First Bounce - Eric Janszen

Debt foregiveness cannot be allowed as it destroys the integrity of the System. Once people get wind of it, many will elect to game the System.

If one is led to believe that credit worthiness will no longer be a factor in the game and unsecured credit lines are to become non-recourse, then there is no penalty to "cash out".

If this behavior where to occur on a wide scale(25+ percent of population)...the Bonar could hyperinflate. For many unfortunate Americans, this scenario(cash out) has already happened and will continue to happen as the debt deflation proliferates into other sectors of the economy.

As if the "integrity of the System" isn't already utterly destroyed.

Forgive the debt, choke off credit only to those who are worthy, and adjust to the new lower-credit paradigm.

[cjppjc]

Re: Debt Deflation Bear Market: First Bounce - Eric Janszen

As if the "integrity of the System" isn't already utterly destroyed.

Forgive the debt, choke off credit only to those who are worthy, and adjust to the new lower-credit paradigm.

Yes, The integrity of the system. Even those who are not benefiting from the current system, and recognize the lack of integrity of the system, have a hard time conseptualizing any good that would result of major changes to the system. It appear things will have to get a lot worse for a lot longer, for the bigger questions to be debated honestly.

[Starving Steve]

Re: Debt Deflation Bear Market: First Bounce - Eric Janszen

As if the "integrity of the System" isn't already utterly destroyed.

Forgive the debt, choke off credit only to those who are worthy, and adjust to the new lower-credit paradigm.

The best thing that has happened in recent months is that banks have shut-off the credit supply. Why lend when risks are unknown and economic conditions are horrid? And even if a bank could lend, why would it lend when interest rates are ridiculously low and determined by economic planners in central banks? Why would a bank lend when interest rates for loans are no longer determined by common sense and the free market?

So let Bernanke and the other morons running the central banks around the world continue to drop money out of helicopters. Let them horse-around and keep interest rates near zero..... Now the entire world knows that central banking is a complete failure. The post-1971 ( post- Bretton Woods Agreement ) dollar standard for the world economy is nearing an end.

These days are horrid, and they may get worse yet. So enjoy. At least when this calamity is finished, we might be rid of fiat money, the dollar standard, and central banking forever.

[Quincy K]

Re: Debt Deflation Bear Market: First Bounce - Eric Janszen

As if the "integrity of the System" isn't already utterly destroyed.

Forgive the debt, choke off credit only to those who are worthy, and adjust to the new lower-credit paradigm.

I read about five months ago(I do not have the link) that statistically if the S&P hit 500 and the median house value dropped another 20 percent(already has) that 30 percent of all Americans would be theoretically BK(liabilities exceed assets). I would venture to say that a large percentage of these Americans would not be classified as "worthy". The majority of these people are a Chapter 7 waiting to happen and will have no access to private capital. Personally, I would never ever rent to someone whose liabilities(other than student loans) exceed assets under today's economic conditions.

You want close to 30 percent of all Americans cut off from bank credit?

That... is Armageddon.