1997 ?!

[c1ue]

Re: 1997 ?!

Finster, others,

My question has to do with the dollar depreciation situation.

It appears you have the belief that stocks will maintain relative growth vs. inflation while bonds will benefit from 'flight to safety' once the brown stuff hits the air circulator.

However, if there is a dollar collapse would not both (or actually ALL dollar denominated assets) fall equally?

In this case, I will exclude PMs and commodities as these will retain purchasing power value in the face of actual demand.

This has been my primary fear and the reason why I am pushing money into businesses abroad.

Weimar and Argentina are the examples I fear; while certainly I don't see 1000% inflation in the US, on the other hand a dollar index of 65 is entirely possible.

[jk]

Re: 1997 ?!

the theory is that the stock market's rise reflects the dollar's decline. that stocks are real assets, fractional ownership of a business and its assets, and that is part of why stocks are rising, and that is theory under which they are recommended. my concern is that rates are rising, the dollar's dropping, and the credit markets are nervous, and these are the circumstances for big sell-offs of ALL risk assets.

[Finster]

Re: 1997 ?!

Finster, others,

My question has to do with the dollar depreciation situation.

It appears you have the belief that stocks will maintain relative growth vs. inflation while bonds will benefit from 'flight to safety' once the brown stuff hits the air circulator.

However, if there is a dollar collapse would not both (or actually ALL dollar denominated assets) fall equally? ...

I don't think so. Bonds and stocks are close kin, but not identical twins. Strictly speaking, bonds are "dollar denominated" assets, while stocks aren't fundamentally "denominated" in anything. A bond promises you pay you X nomber of dollars in the future. Common stock does not.

As a result, if the value of stock stays the same and the dollar loses value, it takes more dollars to buy the same amount of stock. This creates the illusion of "growth". But really the stock is just acting as a hedge against inflation.

Now if enough people realize this and flee from dollars into stocks, stocks may actually get ahead of inflation. If the inflation then abates a little (or even if the markets anticpate same), they may lose this premium, while bonds gain because of the anticipation of lessened pressure on interest rates.

Even if this doesn't happen, inflation inflicts damage on the real economy. This can erode the future production from which stocks derive their value. So you have a number of crosscurrents all acting to urge prices in one direction or another. Sorting out which of them will predominate over some specified time frame is therefore a complicated proposition.

[grapejelly]

Re: 1997 ?!

and in the longer run, stocks discount inflation through lower PE ratios, making stocks a poor investment in rising inflation IN RELATION TO GOLD.

Stocks continue their mostly nominal gains as investors flee cash, but once people figure out that gains are mostly due to inflation, we should expect PE ratios to contract. Indeed, they are contracting over the years of this secular bear market since 2000. But because earnings have been so inflation-driven also, share prices haven't nominally fallen.

[Jim Nickerson]

Re: 1997 ?!

and in the longer run, stocks discount inflation through lower PE ratios, making stocks a poor investment in rising inflation IN RELATION TO GOLD.

Stocks continue their mostly nominal gains as investors flee cash, but once people figure out that gains are mostly due to inflation, we should expect PE ratios to contract. Indeed, they are contracting over the years of this secular bear market since 2000. But because earnings have been so inflation-driven also, share prices haven't nominally fallen.

To which "secular bear market" are you referring?

[Finster]

Re: 1997 ?!

To which "secular bear market" are you referring?

Pay attention, Jim! :eek:

He just got done saying "Stocks continue their mostly nominal gains...". In other words, it's the ongoing "secular bear market" in stocks. Stocks are NOT making new record highs in real terms, but remain well below their Y2K peaks. Thus, the bear market in stocks that began in March 2000 continues.

I could post charts showing this, but the one Bart has already posted above works fine. Just train your eyes on that bright green line, a good proxy for the real stock market.

[Jim Nickerson]

Re: 1997 ?!

Pay attention, Jim! :eek:

He just got done saying "Stocks continue their mostly nominal gains...". In other words, it's the ongoing "secular bear market" in stocks. Stocks are NOT making new record highs in real terms, but remain well below their Y2K peaks. Thus, the bear market in stocks that began in March 2000 continues.

I could post charts showing this, but the one Bart has already posted above works fine. Just train your eyes on that bright green line, a good proxy for the real stock market.

Fiinster, I really knew that, but I have been arriving at the conclusion that the real markets seem to move on perceptions of a world that does not read iTlulip. It seems the "truth," as we apparently know it, is certainly not what moves the markets.

[jk]

Re: 1997 ?!

Fiinster, I really knew that, but I have been arriving at the conclusion that the real markets seem to move on perceptions of a world that does not read iTlulip. It seems the "truth," as we apparently know it, is certainly not what moves the markets.

jim, i'm sure you've heard the line about how the market is a voting machine in the short term, but a weighing machine in the long term. we're focused on the weighing. in the meantime however, we live with the short term emotions and the knowledge of keyne's observation that in the long run we're all dead.

[bart]

Re: 1997 ?!

Finster, I really knew that, but I have been arriving at the conclusion that the real markets seem to move on perceptions of a world that does not read iTulip. It seems the "truth," as we apparently know it, is certainly not what moves the markets.

Ah yes, grasshopper... but it does and has moved markets.




All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.
-- Arthur Schopenhauer (1788-1860)

I think between step 1 and step 2.


There are also stocks that will do exceedingly well even in the "ka" stage much like there were during the Great Depression.
We also have a great deal more "background manipulation and control" going on than in any prior period for which I have detailed data (back into the '80s).

Cracks are indeed beginning to show enough so that it can no longer be ignored or swept under the rug by the Fed or the various investment houses and banks, and the "expectation control" folk are out in full force. Simply look at how much Bernanke and the Fed are talking about their inflation concerns and trying to manage sentiment.

It's quite similar to housing - EJ and I and others called the peak in mid 2005 and were disagreed with and ridiculed for over a year, and only recently was Lereah of the NAR canned. That was almost two years total. Only in the last 6-8 months or so have folk really begun to see that all is not rosy and only in the last couple of months have public cracks in the derivatives game started to show publicly... in other words - "Patience Luke". ;)

Do also be aware that "ka" may only occur in a portion of the world or even just the US. There are no guarantees, and underestimating the abilities of all the key players to pull it out once again like they did during the Asian crisis, LTCM, the S&L crisis, the Mexican crisis, etc. is part of what's is shown in the overall ka-poom theory... regardless of whether the dollar takes a big hit or not.

One "interesting" data point - last week's H8 money report from the Fed had a new lines on it called "Securitized real estate loans". The balance, under the section called "Large Domestically Chartered Banks", is blank in all prior weeks that I've searched and this week its $1.211 trillion... as if by magic. In plain English, there's *lots* of stuff going on behind the scenes to avoid something like LTCM.



And then we have relative behavior during Weimar, which also illustrates relative values over a significant time period.











More on my Weimar charts page



I don't think we'll see **anywhere** near the same amount of hyperinflation in the US, so the Argentinian scenario is much closer to what I expect will happen... and do note that gold "only" roughly preserved purchasing power during both Weimar and Argentina.

[Finster]

Re: 1997 ?!

Fiinster, I really knew that, but I have been arriving at the conclusion that the real markets seem to move on perceptions of a world that does not read iTlulip. It seems the "truth," as we apparently know it, is certainly not what moves the markets.

But where's the disconnect? Are you saying that the nominal stock averages should be going down, just because stocks are really in a secular bear market?

Not at all. It's actually quite rational. Stocks are down from their peak. The dollar is down more. Consquently, it still takes more dollars to buy the same stock, and the nominal averages are up.

No armchair argument can overcome the fact that our investment menu is limited. All investments might go down over some period of time, looked at purely in terms of purchasing power. That doesn't mean we can sit it out. There is no such thing as being invested in nothing. If you are "parked" in cash, that is merely the asset in which you are invested.

If stocks go down, but go down less than cash, then you are still better off being in stocks.

The markets aren't ignoring this fact; they're validating it.

[c1ue]

Re: 1997 ?!

I don't think we'll see **anywhere** near the same amount of hyperinflation in the US, so the Argentinian scenario is much closer to what I expect will happen... and do note that gold "only" roughly preserved purchasing power during both Weimar and Argentina

I agree with this assessment, both parts.

However, as I heard somewhere (but can't remember where) and am certainly paraphrasing:

"Everyone makes money in up markets, but the great investors avoid being killed in the down ones."

[bart]

Re: 1997 ?!

I agree with this assessment, both parts.

However, as I heard somewhere (but can't remember where) and am certainly paraphrasing:

"Everyone makes money in up markets, but the great investors avoid being killed in the down ones."

This one is a goody too... ;)

Don’t gamble! Take all your savings and buy some good stock and hold it ‘till it goes up, then sell it. If it don’t go up, don’t buy it.
-- Will Rogers

[friendly_jacek]

Re: 1997 ?!

1987? 1999? 1929? no - 1997!

avoiding a serious recession and avoiding more than a "correction" in equities depends on the economy becoming somewhat less dependent on consumption and somewhat more successful in exporting, while [especially asian] other economies pick up the pace of their own consumption. can this handoff be made without severe disruption in the interim?

i think the answer depends on your definition of "severe."

were the events of 1997-98 -- the "asian contagion," the russian default and the ltcm episode -- "severe"? they certainly seemed severe at the time, and the fed thought the global financial structure could topple if ltcm wasn't "handled" carefully.

but in retrospect the equity sell-off in 1998 was just "the pause that refreshes" for the 1990's bull market. the dji dropped from just over 9000 to just under 8000, about 11%. the s&p dropped from about 1200 to about 1000, about 17%. i.e. we had "a correction" of over 10% and under 20%. the nasdaq dropped harder, about 25% from 2000 to 1500. but of course the naz went on to star in the last act.

commentators have been comparing our current circumstances to 1987 and 1999. stock market analysts are driven, i have noticed, to find historical parallels. and in detail: is it the "spring of '87" or the "summer of 1999"? or, god forbid, the summer of 1929? we look to the past for guidance and stuggle to find the right historical epoch as a repository for our fears and hopes.

i'd like to nominate 1997, but upside-down, inside-out and in slow motion.

if you recall, the 1997 "asian contagion" started with a speculative attack against the over-valued thai baht.

[from a paper on the thai crisis @ http://www.columbia.edu/cu/thai/html...cial97_98.html ]
Thailand had had persistent current account deficit ranging from -5.08 to -8.10 % of GDP [from 1990-96] lowest among the other nations for most of the time in the sample [of asian countries]. This negative sum largely came from the country’s balance of trade deficit. The value of its imports had widely exceeded its export value.

does this high current account deficit arising from a high trade deficit remind you of the recent multi-year experience of another country you know?

from the paper on thailand:
"This high volume of imports could be expected as the country had had a high GDP growth rate [5.52 to 8.94% in the years 1990-96]."

that sure doesn't fit.

from the paper on thailand:
"However, the number could look better if Thai people had been more prudent in spending and could be more competitive exporters. During the boom period, the economy was in a bubble. Thai people had had an expectation of a long run economic growth of their country; thus, their consumption had become quite excessive especially in imported commodities and luxuries."

thais had been the recipients of a lot of foreign credit, much of which had been invested in real estate- commercial buildings, luxury condos, golf courses and the like. i.e. the credit was invested in things that didn't generate foreign income. that's starting to sound familiar again, isn't it? we've got the real estate boom, the consumption boom and, in addition, a black hole for money in the form of the war[s] in the middle east.

but the baht was pegged to the dollar, and the foreign debt was denominated in dollars. speculators saw that the baht was overvalued and began selling it. eventually, thailand was forced to devalue.

of course, the u.s. isn't thailand. as owner of the world's reserve currency, the u.s. gets to take on its debt in u.s. dollars. thailand couldn't print dollars to pay back its debts. we can. big difference.

and russia defaulted around the same time because oil was so cheap. oil is no longer cheap. another big difference.

and ltcm could threaten the world's financial system because it had huge leverage supporting huge positions which, although usually uncorrelated, became correlated in a crisis. no difference. there's now huge leverage supporting huge positions, and just about everything still gets correlated in a crisis. so big similarity.

nobody outside thailand cared all that much about the fate of the baht, at least at first. the baht's problems were contained to thailand, it was thought. [like the problems in the credit system are "contained" to a sliver of subprime - right.] the baht represented a little problem on the financial system's "periphery."

central banks all around the world care about the fate of the u.s. dollar: the dollar is at the center of the financial system. they all know that a dollar crisis will be contained only to the immediate planet.

so how about 1997-98 inside-out, upside-down and in slo-mo? i don't think it's coming, i think it's here.

we already have a dollar crisis, but it's playing out in slow motion and no one wants to talk about it too loudly for fear of frightening the flock. overwhelming foreign debt caused a quick devaluation of the baht. overwhelming foreign debt is causing a slow devaluation of the u.s. dollar.

russia was pressured by cheap oil killing its income stream. the u.s. is pressured by expensive oil killing it on the expense side of the ledger.

ltcm was hit by its leveraged bets suddenly becoming correlated as they all went south together. this is what is in the process of playing out in the credit markets right now. but slowly, slowly.

so how about a 1998 sized crisis? a consumer banana severe enough to drop markets and scare a lot of people and bust a lot of bonds. but as with ltcm, there will be a rescue. we already see pieces of it in various state funds to help exploited subprime liar buyers, and we'll see more, and on a bigger scale from the feds. and somehow, when the derivatives explode, the fed will remember its role as lender of last resort, and it will liquify the markets. there will be casualties, sure. but then, after the sell-off, the correction, comes the exciting 3rd stage of the bull market, propelled on a tide of liquidity that, compared to today, will be as a tsunami to a ripple. ka-poom indeed.

The unfolding events and the recent injection of liquidity by many CBs confirm this scenario. Well done! This does feel 1998-like, buy on dips, sell on tops! Not good for permabulls or permabears.

[friendly_jacek]

Re: 1997 ?!

I read the following recent blurb from SpeculativeInvestor (who sounds like permabear these days, BTW:

"Much worse than the LTCM crisis?

We've read commentary to the effect that the current crisis is much worse than the crisis of 1998 because in the earlier episode the source of the problem was identifiable as one large hedge fund (LTCM), whereas the major problems are now so spread-out that it will be impossible for the Fed to target any corrective actions in an effective way. In other words, the thinking is that the Fed's actions were successful in 1998 because it could pinpoint the primary source of the problems, whereas in the current situation there is no readily identifiable primary source that can be targeted by the Fed.

There is some truth to such commentary, but it must be remembered that the LTCM blow-up did not CAUSE the 1998 crisis. The 1998 crisis actually began during 1997 as an Asian debt/currency crisis and subsequently spread to almost all emerging markets. It led to a debt default by Russia, the dramatic widening of credit spreads throughout the world, and, eventually, to the collapse of a hedge fund that had made highly-leveraged bets predicated upon interest-rate spreads returning to normal levels. That is, the LTCM blow-up was a late-stage ramification of the crisis; it wasn't the cause of the crisis.

Further to the above, the current crisis may not be as different to the 1998 episode as many people are claiming. The numbers are now much bigger, but big numbers don't pose a problem for the central banks. The only thing that really scares the average central banker is the risk that a critical mass of people will 'cotton on' to the fact that continually creating more money to 'solve' the economic/financial problems that arise from time to time will ultimately destroy the currency."

This agrees with the jk hypothesis.

Additional thoughts I had on this that as the 1997-98 crisis was triggered by emerging markets, emerging markets equities suffered profoundly and the US equities were pulled down only temporalily and recovered smartly for a few more years.

If we extend this analogy it would mean that the US equities with US only exposure and/or banking will go down significantly, yet the global and especially emerging markets will move on.

The action in Chinese equities during the July-August sell off would indeed confirm it. FXI is up 30+% since the intraday low on 8/16/07. The China bull is on fire.

[jk]

Re: 1997 ?!

The unfolding events and the recent injection of liquidity by many CBs confirm this scenario. Well done! This does feel 1998-like, buy on dips, sell on tops! Not good for permabulls or permabears.

in 1998 the fed was able to put the recession off for 2 more years.
if we go into a recession 2007q4, as ej predicts, then this scenario ceases to apply.