Deflation Not Done -- Then ???

[jpatter666]

Re: Deflation Not Done -- Then ???

Good points!

Is FRED speculating, or is this a hint at an expectation?

Agreed -- does not compute for me. You'd think even TIPS would be better than treasuries if such a near-term call is possible.

And if we're looking at a possible POOM event by the end of the year, shouldn't we be thinking about the "Time to short treasuries" call? At least some options....

Am even more confused now.... :confused::confused::confused:

[FRED]

Re: Deflation Not Done -- Then ???

Agreed -- does not compute for me. You'd think even TIPS would be better than treasuries if such a near-term call is possible.

And if we're looking at a possible POOM event by the end of the year, shouldn't we be thinking about the "Time to short treasuries" call? At least some options....

Am even more confused now.... :confused::confused::confused:

We drafted "Time to short Treasuries" two years ago but have not published it. Timing is everything. Everyone who has shorted Treasuries over the past two years, no matter how much the bet appeared justified, got their asses handed to them. So far we have correctly not issued that call when many others have.

[jpatter666]

Re: Deflation Not Done -- Then ???

We drafted "Time to short Treasuries" two years ago but have not published it. Timing is everything. Everyone who has shorted Treasuries over the past two years, no matter how much the bet appeared justified, got their asses handed to them. So far we have correctly not issued that call when many others have.

Fair enough! OK, let me be clearer in my dilemma. I've a reasonable amount of commodities (gold, silver, ETFs). Own my house for all purposes free and clear (yeah, could have sold, but for varied reasons I'm keeping), very little debt.

I'm pretty much out of the market based on the S&P call (when and if this happens, I expect more of a *BANG* to start than a slow decline)

What I've got is waaaay too much cash. IF a currency event were to happen, would not treasuries get crushed just as hard as cash (perhaps even more?). This is what keeps me hesitant on treasuries. Seems like lots of risk to me for very little potential return.

Commodities would do well in a poom, but other than PMs, you'd *think* they'd decline in a crash. And I've got lots of PMs now, don't need to go all jtabeb.

The reason I'm nervous is that to hear you and EJ, we have a potential major event within the next six months and I'm still not sure how to position for it.

[touchring]

Re: Deflation Not Done -- Then ???

Am I the only one who thinks it's insane to hold 70% in US treasury bills if you think, even remotely, such an event is likely anytime within a few years, let alone a few months?

Why would you not rather hold 10-30% gold and the rest either in a basket of other hard currencies or a basket of other hard currency denominated bonds?

anything, other than dollars. i suppose.

[ST]

Re: Deflation Not Done -- Then ???

We drafted "Time to short Treasuries" two years ago but have not published it. Timing is everything. Everyone who has shorted Treasuries over the past two years, no matter how much the bet appeared justified, got their asses handed to them. So far we have correctly not issued that call when many others have.

Personally, I wasn't talking about the risk of treasury decline, but the risk in holding the bulk in dollar denominated assets when you feel a sudden stop for the USD may be front and center, when I made those comments below. Thanks in advance for any thoughts.

[goadam1]

Re: Deflation Not Done -- Then ???

anything, other than dollars. i suppose.

That leads you back to the same list one could draw up in 2007 (pre-itulip for me): brics, canadian energy, em debt, miners, multi-national corporations. All that stuff got hammered in 2008 but if you had stayed with them you just be somewhat down. The trade on that stuff is pretty crowded.

[danielmc999]

Re: Deflation Not Done -- Then ???

Table of Contents

• Low blow, MetalMan!
• What's wrong with a money/credit vantage point?
• Even Faber acknowledges the money/credit vantage point
• jtabeb - one needs to consider root cause versus effect
• Money/credit model in action - Zimbabwe, Argentina, Germany, Japan
• In this context, I note that debt is now declining
• Thinking about a bond market dislocation
• Bond market dislocation flashback - International monetary crisis of 1931
• Questions I pose for the future

Low blow, MetalMan!
Wasn't it you MM who had earlier said "tragedy of the commons" when another poster got a little hot headed? To more or less personally insult this guy seems like the same behavior you were frowning upon earlier.

What's wrong with a money/credit vantage point?
I personally do not see anything wrong with looking at the movement of prices from the vantage point of the value of money and credit. On some level it seems that most people generally agree on the definition whether or not they choose to admit it directly.

Even Faber acknowledges the money/credit vantage point
Marc Faber is a noted believer in near term price inflation across the board (equities, gold, and commodities), a *more* aggressive stance than EJ. Here is his most recent interview on Financialsense - good stuff.

The host asked him how he would respond to the argument "well, isn't private economic contraction leading to a decline in private debt, which removes that money from the system?" Faber's response was that money printing, government purchases and government guarantees would more than offset the decline in private debt.

His response was not inconsistent with the definition. What he was saying, and what I think is *the* counter-argument, is that the decline in debt will be "outrun" by other forces, or that other forces will somehow drive continued debt growth. Other people may have other definitions, but I am just trying to validate the view that the [money+credit] view does not seem inconsistent.

jtabeb - one needs to consider root cause versus effect
I had read jtabeb's response. I wholeheartedly believe this approach can add value. However I would contend that it holds off the notion of cause versus effect. Of disease versus symptoms. I would contend that when [debt+money] drops, hard, prices tend to fall, all else equal.

Money/credit model in action - Zimbabwe, Argentina, Germany, Japan
In light of jtabeb's response I would also note the following.

• Zimbabwe did *not* have a pre-existing debt bubble to nearly the extent that we do. They also did not have a stock market bubble. As this graph shows, they had 5-11% current account deficits persistently. Contrast that to the US who, while bad, has been running 4-6% deficits in the worst of times (graph). 35-50% of Zimbabwe's GDP was spent by the government (graph), which as we know tends to be more inelastic than average. In the US, government spending has been 20% of GDP (graph). Zimbabwe printed away those tremendous deficits, with the remainder accumulating as external debt. As such, money was forced to grow at a rapid clip, asset prices did not have downward valuation pressure, debt was much smaller relative to the expansion of the money base, and spending was awfully inflexible due to its reliance on the public sector (a lot of military). When Real GDP eventually collapsed (graph), external creditors all more or less simultaneously pulled their external debts, and Zimbabwe funded the difference. Money up, debts not down nearly enough to offset, large external dependence that is pulled, poom. This fits the model.
• Argentina similarly can be explained from a money/debt vantage point, as EJ has noted in depth. The US has way, way more debt than Argentina ever did (see table). When the economy collapsed and the external funding sources pulled, initially credit went down more than money went up and the stock market collapsed. Because there was a continued proverbial "hole at the bottom of the boat" in the form of deficits that could only be funded through printing, money continued going up while the mark to market value of that debt had already been peeled away, and the external funding sources continued to pull. Poom.
• Weimar Germany can be explained from a money/debt vantage point. I would note first off the 2 phases of the German inflation - (1) war time ; (2) post-war. War time inflation was horrific. As one can see in this chart, in a mere 1.5 years from 6/1914 to 12/1915, currency in circulation and loans were up 130% and 260%, respectively. Tremendous deficits. Money and debt were both up a remarkable sum. The Germany government created loan banks to fund war expenditures. This immediately translated into violent inflation (see graph). Money up, debt up. It would have been much worse had Germans not had as much mistaken faith in their currency as they did, perhaps out of the expectation they'd win the war. When they lost, any external creditors that existed pulled, while German citizens realized all that wartime money printing was for naught, in the face of *continued* growth in money and debt. Poom.
• Japan can also be explained from a money/debt vantage point. The wrinkle with Japan IMHO was two-fold. (1) They had a stock and debt bubble preceding their economic collapse. (2) They ran persistent *surpluses* through the collapse period. They did not have external dependence, their external debt was relatively low, and the debt unwound itself. They printed, increasing money, but the unwind of debt in the face of no external event creating a pull on the currency would imply deflation, unlike the prior cases. And that is what we saw.

Is it unreasonable to say that a [money+debt] vantage point is invalid? EJ? Fred?

The reason I set this up is to have a vantage point from which people on both sides can better discuss with one another, instead of resorting to ad hominem attacks.

I fully acknowledge that the US is very much less similar to Japan, and more similar to Germany, Zimbabwe and Argentina from the vantage point of "external dependence". I hope the above has made this clear.


In this context, I note that debt is now declining
I bring up this vantage point also because we are now seeing debt going down in a way that we have not seen in a *very* long time, off a level of debt that has no parallel in human history, especially when you factor in (1) the weak economic "FIRE" composition of our economy; (2) entitlements; (3) derivatives; (4) insurance/guarantees.

[graph 1- Total, Private and Public Debt / GDP, Q2 2009]
[graph 2 - Sequential Change, Total and Private Debt, Q2 2009]

It is for this reason that I must respectfully disagree with Dr. Faber. The facts are the facts. He said public debt growth is offsetting private debt contraction. Not true. Total debt declined for the 1st time in Q2 2009. Private sector debt has now declined for 3 Q's in a row, and the pace continues to accelerate. Moreover this is unprecedented dating back to 1952.

Money is up, but private debt unwind is accelerating, and public debt is struggling to keep up.

Thinking about a bond market dislocation
On a going forward basis, if we have some sort of a bond market dislocation that prompts long term Treasury rates to jolt upwards, the public debt route will become prohibitively expensive, and the Fed will be forced to ask himself this question: "if I don't print, this will collapse. However it is my printing that has caused this bond market dislocation, and the more I print in the future, the more I am likely to see an asymmetric, "cost" in the form of a disorderly run on dollars." In the meantime, this event would *really* hasten the debt unwind.

Bond market dislocation flashback - International monetary crisis of 1931
I would not discount this possibility. In fact we saw nearly the same situation in late 1931, which is arguably what turned their bad recession into the Great Depression. Austria went down, then Germany went down, then Britain defaulted. People then got worried about the United States, even though the US was the creditor nation at the time. We had a record breaking pulling of gold from the US which prompted us to raise rates not once but twice in the same month (see graph). I am not saying we are the same country that we were back then, but this sort of dynamic can happen, and boy do we have a lot of weak countries who could get this domino process started.


Questions I pose for the future
The question I pose to you, then, is this.

1. Do you not think that as fiscal and monetary policy peaks in Q3 2009, in the absence of new programs and a bond dislocation, that the unwind of private debt will *not* be greater than the sum total of public debt growth and new money printing?
2. If we do see an array of new programs unleashed (say, if the S&P falls to 700), do you not think we are at very high risk of a currency dislocation?
3. If we do see a currency dislocation that raises long term Treasury rates to, say, 9%, what do you think is the probability, realistically speaking, that Bernanke continues to go whole hog with printing?
4. If we do see a currency dislocation with higher long term Treasury rates, and we do not see Bernanke decide to print his way out of the problem, do you really see private debt declining at a rate slower than the whatever happens to public debt, money printing, and a move out of our currency?

I will be up front. In the event of such a bond market dislocation, the cost/benefit of new Bernanke printing seems low. We are playing a game of financial chicken right now, to some degree. Up to the point that we can get away with it, the cost/benefit is great. After a dislocation, it seems not so great. I don't see a logical reason why Bernanke would take us off the deep end though I acknowledge full well he has the ability to. If he does not I do not see how this model does not imply deflation.

I'd love to hear the counter-argument.

[Finster]

Re: Deflation Not Done -- Then ???

4 years versus 4 mths. Back then in 1930, there wasn't a China that could continue buying up raw materials to keep the CPI high.

finster, will you pls have a word with our friend here. he seems to be stuck on the notion that the quantity of commodities matters more than the quantity of irredeemable dollars.

Ha! Indeed, the idea that Chinese demand, sua sponte, is behind the scorching inflation that's been showing up in commodity prices is one of the biggest canards ever floated by the Washington-Wall Street economics crowd. The idea that somehow the Chinese just woke up after all these years and decided they'd like some of the finer things in life is patently vacuous. The Chinese - or anybody else for that matter - can hold their breath until they turn blue, stomp their feet, and 'demand' commodities all they want, and it won't do a damn thing to commodity prices.

For 'demand' to affect prices, it has to be backed up by more than desire. There has to be money behind it. And if you're talking about prices in US dollars, that means US dollars. Where did the Chinese get all these US dollars? Pull one out of your wallet ... it says right on them where they come from. That's where to look for the explanation for this price inflation.

[goadam1]

Re: Deflation Not Done -- Then ???

Fair enough! OK, let me be clearer in my dilemma. I've a reasonable amount of commodities (gold, silver, ETFs). Own my house for all purposes free and clear (yeah, could have sold, but for varied reasons I'm keeping), very little debt.

I'm pretty much out of the market based on the S&P call (when and if this happens, I expect more of a *BANG* to start than a slow decline)

What I've got is waaaay too much cash. IF a currency event were to happen, would not treasuries get crushed just as hard as cash (perhaps even more?). This is what keeps me hesitant on treasuries. Seems like lots of risk to me for very little potential return.

Commodities would do well in a poom, but other than PMs, you'd *think* they'd decline in a crash. And I've got lots of PMs now, don't need to go all jtabeb.

The reason I'm nervous is that to hear you and EJ, we have a potential major event within the next six months and I'm still not sure how to position for it.

Are you me?

[jpatter666]

Re: Deflation Not Done -- Then ???

Are you me?

Ha...my head is spinning so much, could be!

At various panic-stricken times, I think I'm going jtabeb.
In my more contrarian moments, I channel Lukester or perhaps icm63. :rolleyes:
In rare moments of financial lucidity I feel all Finster-ish.
There are times where I feel quite well-rounded, almost Pythonic. Moo...

But most times these days, I'm bloody well frustrated and confused. Sigh.

[charliebrown]

Re: Deflation Not Done -- Then ???

agreed, i'm nervous too.
75% cash; t-bills, money market, 3mo CD's etc
5% tips/igrade corp bonds.
5% stocks; 1% dom/4% intl.
15% natural resources/gold/silver

I would like to increase gold/silver, but I would really like a pull back. I am dollar cost averaging into CEF, regardless of the price. If we get a pull back I'm going to purchase a big block. Will do likewise if see a big pullback in oil.

If the USD does tank, the purchasesing power of my cash will greatly decrease, even though t-bills may maintain nominal prices. Since so much is imported into this country, if usd tanks will this mean big price run-ups in imported goods?

I bought some STPZ yesterday, pimco 1-5 yr tips. looking for more inflation hedges, but this trade just "smells" crowded to me.

I see a lot of buzz hear about S&P 600 etc, and people wonder how it can be. Well it can easily be. The P in P/E is very subjective. The P "price" is how much are you willing to pay for a companies long term earnings. If investors fear the end is near, then future earnings look dim, and stocks get dumped. I computed ttm S&P P/E yesterday. (I don't have 100% confidence in my data source for ttm p/e) but it came out to be around 24. The average bottoming of ttm P/E in a recession is around 10. That is average, and this average was derived only over the post war recessions. So if we do go to P/E 10, then we are looking at S&P 450.

[metalman]

Re: Deflation Not Done -- Then ???

hey, that gives me an idea...

[metalman]

Re: Deflation Not Done -- Then ???

read this...

and this...

[Mashuri]

Re: Deflation Not Done -- Then ???

invasion of the mishtards.

Very educational. Perhaps someone is a little too emotionally attached to an idea?

[jpatter666]

Re: Deflation Not Done -- Then ???

agreed, i'm nervous too.
75% cash; t-bills, money market, 3mo CD's etc
5% tips/igrade corp bonds.
5% stocks; 1% dom/4% intl.
15% natural resources/gold/silver

I would like to increase gold/silver, but I would really like a pull back. I am dollar cost averaging into CEF, regardless of the price. If we get a pull back I'm going to purchase a big block. Will do likewise if see a big pullback in oil.

If the USD does tank, the purchasesing power of my cash will greatly decrease, even though t-bills may maintain nominal prices. Since so much is imported into this country, if usd tanks will this mean big price run-ups in imported goods?

I bought some STPZ yesterday, pimco 1-5 yr tips. looking for more inflation hedges, but this trade just "smells" crowded to me.

I see a lot of buzz hear about S&P 600 etc, and people wonder how it can be. Well it can easily be. The P in P/E is very subjective. The P "price" is how much are you willing to pay for a companies long term earnings. If investors fear the end is near, then future earnings look dim, and stocks get dumped. I computed ttm S&P P/E yesterday. (I don't have 100% confidence in my data source for ttm p/e) but it came out to be around 24. The average bottoming of ttm P/E in a recession is around 10. That is average, and this average was derived only over the post war recessions. So if we do go to P/E 10, then we are looking at S&P 450.

I've been adding physical gold, would like to add physical silver, but waiting for a pullback for that.

I've puts on FXI and SPY (I set those up soon after the EJ calls because as stated before I think the starting event might be a BOOM type -- for example EJ's sovereign defaults or liquidity crisis). I've taken a bit of a bath on those so far, but they were close enough to where even a small pullback will put them in the black.

I'm mulling following them up with serious out-of-the-money puts for March 2010. You can get those really cheap now and they could pay in spades if the 600 call comes to pass.

I'm also mulling GLD/SLV calls (yeah, I know about them -- most of my *real* PM holdings are GTU/CEF/GoldMoney/physical) but those would be more for a cash play than real PM holdings.

Same theory with GDX -- not really holding for PM value as much as a PM panic. I'd expect it to drop in a crash and hopefully pick up some then.