POOM-KA, the reverse iTulip theory

[GRG55]

Re: POOM-KA, the reverse iTulip theory

I'm with you here Cow. I've been calling it Ka....ka....Poom.

The root problems that caused last year's run at deflation haven't been solved. Most of the $60T in CDSs are still floating around. Citi, BofA and even Wells aren't profitable by any historical evaluation, and the housing market still has a bunch of adjustables due to kick in. Commercial Real Estate is still a shoe to drop.

On top of this, the Fed has taken their foot off of the quantitative easing accelerator and the current political mood isn't bailout/printing favorable.

I think we have another deflationary "Ka" to drop too. When it hits, the political winds will shift, the Fed will hit the accelerator even harder than it did last time, and Poom will follow.

At the risk of igniting another semantics debate over "deflation vs disinflation vs inflation vs _____'flation [fill in your favoured prefix], it seems many of us are expecting another "deflation scare", especially given US money supply expansion seems to be on pause at the moment.

But given iTulip's specialty is calling the big, macro turns, and given that neither of the past two "deflation scares" [2001/02 and 2008] turned into the self-sustaining cycle that iTulip prefers to define as deflation, I don't see why any of us should expect there will be an iTulip defined deflation this time either.

...With the US dollar now being used as a funding currency for carry trade speculation, I'd expect a swing down in the stock market to lead to another strengthening of the $US as leverage is unwound ( a repeat of the action last year)...

The market has interesting ways of fooling everyone. It would not surprise me to see that the US Dollar does not behave the same way it did last year, when the inevitable stock market decline finally occurs. The sentiment against the US Dollar is pretty extreme at the moment, with "everyone" over on one side of the boat. The conventional contrarian wisdom is that one should be making tracks across the deck to the other railing and go long the US Dollar. But perhaps this time [or some time very soon?] the normal relationship between center of gravity and center of bouyancy is disrupted and instead of a self-righting moment for the US$, we get a capsize instead?

[MarkL]

Re: POOM-KA, the reverse iTulip theory

My only question is, "if it is ka-ka-poom or some variation on that theme, does gold look out 6 months to the inevitable POOM and just continue higher"?? I sort of assumed gold would be the flight to safety play when the market crashed the last fall. That is obviously not what happened. If we have another deflation scare ( ka-ka ) my guess is that this time we will not see the forced liquidation and margin call selling in gold and gold shares that we saw last fall. This time the inevitable POOM will be so obvious that gold will be the only real flight to safety play ( the only lifeboat ) and will be recognized as such. It is going to be a very interesting next 6 months.
Good luck to all of us.

Great, and for me, personally relevant question Swannmex. Another way to look at Gold might be as having strong opposing forces on both sides of the fence, with the result being significant swings as the safety/deflationary forces fight it out in the short term.

A lot of people have gotten caught up in this rally... and a lot of other people will shortly be unable to afford their ARM or commercial property. If the market and the mortgages take a hit, some will certainly be forced out of lots of things including Gold, so I'm not sure I agree with you that forced liquidation won't occur.

[jtabeb]

Re: POOM-KA, the reverse iTulip theory

At the risk of sounding silly, I'd go for ka-poo-ka-POOM.
Currently we seem to be approaching the end of the poo phase. A rehersal for the big POOM that lies on the other side of the next leg down.

With the US dollar now being used as a funding currency for carry trade speculation, I'd expect a swing down in the stock market to lead to another strengthening of the $US as leverage is unwound ( a repeat of the action last year).

If we then make a new stock market low early next year there will probably be enough panic to justify dramatic monetarization, and POOM will be on.

Obviously it is possible that new lows in the stockmarket would be accompanied by a further weakening in the dollar, but it seems more likely to me that another leg down means another "flight to safety", another round of deleveraging.

Russian example says declining currency is simultaneous with declining stock market. That's what I expect in our case too.

[blazespinnaker]

Re: POOM-KA, the reverse iTulip theory

I think ka-poom makes perfect sense if everyone behaves in predictable, linear fashion and there are no exogenous events.

Let's face it, though, people are not going to behave predictably and many things can occur. Solar energy breakthroughs, robotics, AI, genetic engineering, swine flu epidemics, wars (pretty easy to come by), terrorist strikes, and more.

[cjppjc]

Re: POOM-KA, the reverse iTulip theory

A lot of people have gotten caught up in this rally... and a lot of other people will shortly be unable to afford their ARM or commercial property. If the market and the mortgages take a hit, some will certainly be forced out of lots of things including Gold, so I'm not sure I agree with you that forced liquidation won't occur.

This has been true for along time.





Every January is higher or so close it doesn't matter, than the previous January.