Where is the CRASH!

[bart]

Re: Where is the CRASH!

Bart -

All kidding aside. That is a kind but disingenuous comment on your part. I have not got a clue about economic theory, nor it's many applications. I bob about with little more substance than a cork on the high seas, reading much of the economic commentary on these pages.

I understand a little more about geo-politics, and I think I have a little clarity on what's going to be happening in the energy markets, but that's only because a lot of people here don't have the foggiest idea how truly ugly the thing is which is already beginning to bust loose in that area.

Just to clarify the point - I have zero illusion of having much of any grasp of many of the economic workings - and that's regarding everything - from hedge funds to central banks, as they are discussed on these pages. It is my fervent wish that I do not mouth off on those topics and make an complete ass out of myself.

The third head on the Cerberus dog is going to have to be something of substance, or we'll just have to dispense with your and Finster's third head altogether. :rolleyes:

Jim has it right - I was "tweaking" you and being a bit silly too.

I'd say the third head would belong to EJ, but that puts both Finster and myself in more rarefied company than we belong... and actually even submitting someone for a third head would be more "political" than I like to be.

The real bottom line though is that, although you may think you know little, you know a great deal more than you both think you do or that the average person knows.

The whole area is a massive minefield and it has literally taken me years to get whatever handle on it that I do have... and you have the courage and intention to actually find out. That's much rarer than you probably think, and admitting that you don't know applies to me too.
And even better, you ask decent questions when you don't understand something and that allows folk that do have some understanding in the area to hold forth and wing it... like Finster and myself and others. We may not be right either but at least we have some facts and some real logic behind what we share... even with "spaghetti" charts or those weirdo FDI log charts from Finster. ;)

I wish I could point you at some posts of mine from 3-4 years ago on other boards but they've been deleted. You could see how little I actually knew or was reasonably certain of... but it would blow my carefully constructed persona too... :eek: ;)

It may sound too simple or even self serving, but the most important thing that I did to get out of the relative confusion I was in was to actually start with one stable and true basic and simple fact... and it was "inflation = more money than goods".
Literally everything else followed and flowed from there.

[Guest]

Re: Where is the CRASH!

You mean ... You mean ... Mish got it all wrong and we won't get a massive deflation (which the Fed would of course be powerless to stop) - so that our foreign creditors could collect even more from the US in debt repayments, due to our supposedly appreciating dollars ???

And there I was, thinking the FED's primary mission was to ensure foreign creditors would be faithfully paid back (over the next fifty - sixty years) in constant value US dollars? What happened to the mission?? What will become of our good reputation ???? :eek:

[touchring]

Re: Where is the CRASH!

And there I was, thinking the FED's primary mission was to ensure foreign creditors would be faithfully paid back (over the next fifty - sixty years) in constant value US dollars? What happened to the mission?? What will become of our good reputation ???? :eek:

A bankrupt does not have any reputation to talk about. I think Bernanke knows that the US is bankrupt. He is going to devalue the dollar to worthless so that the debt need not be paid.

Face the facts. Get out of your dollars assets ASAP.

[Guest]

Re: Where is the CRASH!

Yes Touchring - my comment was intended as sarcastic, but evidently the sarcasm was not broad enough to read clearly? (Sigh!).

[GRG55]

Re: Where is the CRASH!

A bankrupt does not have any reputation to talk about. I think Bernanke knows that the US is bankrupt. He is going to devalue the dollar to worthless so that the debt need not be paid.

Face the facts. Get out of your dollars assets ASAP.

You know folks, even EJ has very occasionally made reference to the possibility that the Fed may fail in its efforts to reflate. I recall him finishing one of his posts about Fed actions a while ago with words along the lines of "Let's hope it works".

The probability of Mish's debt-default led deflationary-recession (or worse?) may be low, but its not zero.

Just thinkin' about the growing consensus around the increasingly crowded (includes me) run-from-the-US$ trade, that's all...

[touchring]

Re: Where is the CRASH!

You know folks, even EJ has very occasionally made reference to the possibility that the Fed may fail in its efforts to reflate. I recall him finishing one of his posts about Fed actions a while ago with words along the lines of "Let's hope it works".

The probability of Mish's debt-default led deflationary-recession (or worse?) may be low, but its not zero.

Just thinkin' about the growing consensus around the increasingly crowded (includes me) run-from-the-US$ trade, that's all...

You have to look at China to know if the Fed efforts will fail. Much of American exports today is led by demand from China. China consumes half the metals mined today (copper, iron, aluminium, etc), and contributes significantly to economic growth in emerging and resource rich economies. High commodity prices is driving growth from Russia, to Australia to the Middle East.

With prosperity, these countries will import more iPODs, Boeing and Intel chips.

If China bubble bursts, China is going to sell its trillion dollar reserves to save its stock market and banking system, and with it commodities will plunge. Plunging commodity prices will hit commodity export markets, and the world growth engine will stall, and with that American exports to the emerging markets will also fall, along with the DJ.

When this happens, no amount of reinflating by America can make this external demand recover in the short term.

Also, a note that i'm not sure if the dollar is going to appreciate or depreciation if China uses its reserves to bail out its banking system, but i do know that any crisis is going to hit commodities hard, especially those related to building, like iron and copper.

[FRED]

Re: Where is the CRASH!

Sizing Up the Next Crash
Business Week

Laszlo Birinyi of Birinyi Associates believes 21st-century markets are prone to systemic failure and that 1990s structural reforms haven't worked

The Japanese market, for example, might eventually have declined because of bad loans, inflated real estate, or some other fundamental factor, but the "smoking gun," inflection point, or pin prick, was—we contend—the introduction of put warrants, which were a huge success in terms of activity and performance virtually coincident with that market's peak. The warrants, available only offshore, allowed investors to both hedge and take a negative view of that market, which they surely did.

An issue that could lead to another crash is that of derivatives and other instruments. We are admittedly negative about the subject in part because of our experience in 1994. At the end of 1993, our Wall Street Week picks included a put on the Hang Seng Index. The Hang Seng complied with our hopes and declined 30% that year but our put (in the form of a warrant; ETFs were unavailable) also declined 30%. more...

[Guest]

Re: Where is the CRASH!

You know folks, even EJ has very occasionally made reference to the possibility that the Fed may fail in its efforts to reflate. I recall him finishing one of his posts about Fed actions a while ago with words along the lines of "Let's hope it works".

The probability of Mish's debt-default led deflationary-recession (or worse?) may be low, but its not zero.

Just thinkin' about the growing consensus around the increasingly crowded (includes me) run-from-the-US$ trade, that's all...

____________

GRG55 -


I understand your point - about indulging overly complacent assumptions about inflation being the inevitable outcome for the US's debt predicament. As Finster has pointed out, massive debt constantly"wants to deflate".

There is potentially a trump card tilting the scales towards an inflationary outcome, and it may exert an impact larger than the domestic US economy. Any event or trend which exerts a global effect well beyond the US relegates the dynamics of US debt deflation to a secondary event, notwithstanding the size of the US economy.

I tried to discuss this a few months ago on these pages but my impression was there was little interest in the idea. The thesis noted that E.J's earlier posts on gold and inflation, dating back to the year 2000, made speciific mention of the fact that petroleum was one of the primary drivers of inflation back in the 1970's, so implicit in his comment was clear acknowledgment that petroleum prices can be either the subject of inflation, or the driver of inflation, or both.

That is, currency and credit abuse can translate into petroleum price rises, but also, petroleum prices have been shown historically to feed directly into inflation. There is therefore little substantive reason to believe that one of these directions for inflationary push (inflation flowing from oil price rises into producer and consumer costs) has summarily ceased to exist as a possibility in today's markets, where it quite manifestly existed in the 1970's.

This is a dynamic who's very real tell-tale can be spotted easily, like a glaring piece of evidence, in today's food price inflation, now soaring globally. I understand many here insist today's food price inflation finds it's source in currency inflation, yet we see a clear "smoking gun" in the emergence of ethanol production instead, and see a further "smoking gun" in the fact ethanol has emerged precisely as a panacea for "alternative fuels". Why is anyone messing with alternative fuels if petroleum is abundant?

To turn a blind eye to this glaring causality, and then go on to string the rise of ethanol, and consequent massive food inflation, by some circuitous rationale, all the way back to currency inflation seems an extraordinarily cumbersome, even clunky chain of reasoning.

It's in the context of these glaring current inflationary questions, that I note with curiosity that the "Petroleum price spikes do indeed feed inflation" part of E.J.'s posts from way back in year 2000 (as he was referencing the 1970's), seem to have been culled out entirely from present year 2007 discussions.

The widespread assumption I have read more than just a few times on these pages in 2007 is that if the US suffers a significant recession, demand falloff globally would cause petroleum prices to sag down badly (the $40 dollars a barrel thesis), and this downturn would be made particularly drastic by the removal of the "currency abuse / futures speculators" because these are still tacitly accepted as being what's really the determinant factor "inflating" petroleum prices today.

In sum, the argument suggesting the advent of ethanol, and the consequent notable food price inflation in recent years are primarily currency induced, because "all commodities are rising so it's obviously due to currency inflation", strikes me as not only an incomplete analysis, but one which leaves big questions unanswered.

E.J.'s own acknowledgement of the 1970's noted that a rising oil price can be a primary driver of inflation. Shouldn't we acknowledge this observation seems more valid in today's tight petroleum market than it was in the seventies tight market, which was politically driven instead of fundamentally driven as is today's?

The role of a petroleum price upward spiral, if it's fundamentally driven rather than politically driven (and there is a plenty of literature out there now, right up to the national security level on the topic) is a very large factor in estimating the probability of inflation over deflation, at least over the next ten years.

A runaway petroleum price, has been acknowledged by the chief editor here in commentary dating from year 2000 as a notable inflationary factor, which in that era was acknowledged to be politically driven. The cause is not the point however - mere occurrence of oil price rises is sufficient to spark inflation, or propagate inflation.

If fundamental causes of oil price inflation were carried further into discussions regarding inflation / deflation today, this would exert a big influence on the conclusions this community attempts to obtain. The fact growing scarcity is never discussed as a significant factor here is striking, as the "inflation / deflation" question is "the" main question of this community. The issue has not found it's way into common acceptance in discussions here. What is lost is a large insight - fundamental and critical tightness in the petroleum markets, with supply / demand equilibrium worsening for the next ten to twenty years, is an explosive driver of increasing inflation in the new century.

This single driver of inflation is potentially moving to front and center as we approach years 2010 - 2015. It does not require much reflection to note that this single fact could potentially have a significant bearing on the likelihood of massive deflation.

It really is, never discussed here seriously. Call it a "collective blind spot" in this community, in 2007.




Ref: http://www.cge.uevora.pt/aspo2005/ab...n_Franssen.pdf

[bart]

Re: Where is the CRASH!

____________
...

To turn a blind eye to this glaring causality, and then go on to string the rise of ethanol, and consequent massive food inflation, by some circuitous rationale, all the way back to currency inflation seems an extraordinarily cumbersome, even clunky chain of reasoning.

...

There is no all encompassing "holy grail" for explaining every single price behavior. It's a combination of fundamental items like supply & demand and monetary factors, and social items like geo-politics that are then all stirred and blended with that exotic thing called human emotion and reaction.

But to call the proven connection between inflation (note that I'm not saying just *currency* inflation) and prices cumbersome and clunky ignores too many actual facts, and how much simplicity is actually there.

Here's a recent chart of mine for example which very clearly shows the relationship between CPI(+lies) and M2 or M3. Do note that CPI is actually Consumer Price Index too, and does not take into account many assets that also inflate like stocks and bonds, etc.






Then we have just the very simple raw numbers, and since you used the 1970s:


1/1970 - 10/12/2007 growth

M3.........................21.1x
DJIA.......................22.1x
Gold.......................19.8x
Oil..........................24.8x
Dow Jones World.....17.1x (est.)
Average US home....11.3x
Avg. hourly earnings..5.6x
Sugar.......................3.3x
Corn.........................2.9x
Wheat.......................6.0x
Soybeans..................4.0x

CPI-U........................5.5x
CPI-U + lies...............9.7x



As you can plainly see, agricultural commodities have very clearly lagged.

[Guest]

Re: Where is the CRASH!

Bart -

Clearly M2 and M3 do indicate a tight linkage to CRB. However my whole point is that this linkage is accepted in this community tacitly to preclude any other significant factors upon the oil price. You are referring to a verifiable past phenomenon, yet the linked article was referring to an increasingly probable future phenomenon.

The M3 = CRB phenomenon you chart was at least initially, US central bank led - this alternate event, being geological / global-demographic in scale, in principle could dwarf the effects of US led M3 abuses in potential inflationary destructive power. You only have to decide if it will occur. Seems EJ already examined that issue this summer, and concurred based upon the quality of reports on it available, that it will occur.

It is entirely true that the majority of price run up in the past five years has occurred due to exploding currency and credit volumes. But what acceptance of this thesis does is to satiate any curiosity as to whether this bonfire is about to not only catch a ferocious backdraft from emerging fundamentals in energy, but that by being engrossed with the M3 = CRB linkage we will be utterly bewildered when the fundamental story regarding supply / demand in petroleum engulfs all the already sickly fiat currency factors - starting .. right about now, or real soon.

When this mechanism gets into gear, unlike the M3 driven surge we've witnessed for seven years or so, it promises to be driven by resource depletion factors that are then theoretically outside of governments ablities to steer or control. What keeps us from retreating into severe alarm about present energy price spirals is the tacit assumption these remain within society's grasp to control, if we could only persuade governments to rein in monetary aggregates.

If the inflationary events get bad enough, we retain the sense that we'll come to our senses and simply rein in runaway monetary aggregates. We are reassured from a deeper societal alarm, by feeling industrial society retains the driver's seat in the present predicament, as present soaring oil prices are merely an inflationary manifestation.

Hence taking your charts linkage (M3 = CRB) as gospel of "all the actual, potential, or significant drivers" of near future inflation, risks leaving readers (and I observe this with utmost respect for the superb panorama of real events which Barts charts reveal) in a state of innocence of potentially even larger factors emerging.

The linked article, and it's many corroborating news stories now scattered far and wide across the world's news outlets and now also heavily ranked in government commissioned studies the world over, don't merely suggest the above description is possible, they confirm it's occurring.

It may be vestigial, or hidden in the near term price action because exploding M3 for the past few years masks it. But all these reports and news articles from within the energy industry are talking about geology. It is a world far away from M3, and when a geologic commodity enters into decline, it is a world much less affected by what M3 does than many other aspects of the economy.

When petroleum liquids production hits a ceiling, and smacks into a 6.5 billion people world where just one 1.3 billion person country (China) is growing fuel consumption 13% annually, M3 action upon the petroleum price must probably take a back seat to supply / demand disequilibria.

Meanwhile we refer to the observed historical causality of the rising oil price due to inflating monetary aggregates and ignore the flatly stated admonitions (IEA, Saudi Aramco former chief geologist, dozens of entire Government commissioned reports) within these many now published warnings, of a permanently out of whack supply / demand imbalance, which these same studies admonish us is careening towards the global economy.

This should absolutely not be polemical on these pages now as E.J. has fully acknowledged it this summer in an article dedicated to that topic. The topic was raised, was well covered in that short summary, and promptly dried up and blew away, never to have it's large inflationary implications discussed again since on these pages.

Supply / demand disequilibrium may greatly intensify - soon - and usurp the present prime inflating effect upon energy prices by monetary aggregates, and replace that cause, or more likely - ADD TO IT (which is certainly worse) - with a fundamental supply / demand driven motive force that will not only embark upon a permanent cycle of increasing prices, but - most critical distinction - will have shifted the cause from something human controlled, to an environmental or immutable cause we can no longer control and which risks massively disrupting the industrial growth paradigm of the last 200 years.

Remember the CEO's of Shell and Mobil stating the entire sphere of "alt energy" will not amount to more than "a few percent" of global energy needs even by 2020? If that is not an eye opener, I do not know what is. If supply demand shifts into long term imbalance as Goldman Sachs state, the only component of this mess to offer adjustment at the time of this economic - demographic impact are A) price, and B) demand destruction.

"Price" in this case could easily mean "$250 a barrel" - which according to the 1970's model spells massive inflation. (Please note, EJ acknowledged this scale of potential price explosion in the article posted on energy this summer!). How do we then spell inflationary consequences ?

"Demand destruction" in the absence of significant "alt energy" spells a consequent "partial de-industrialisation". Sounds real corny. Mad Max world. LOL! How thoroughly unpleasant a prospect however, were even a fraction of that to be in any part plausible!

In the face of these possibilities, one could observe the world's fond but vaguely articulated hopes for "alt energy" appear to be the opiate presently smoked while sleepwalking towards problems which make today's fiat inflation of energy costs enviable in comparison.

This is the big insight to obtain in 2007. To merely ascertain that until now M3 = CRB have been the sole verifiable linkage effectively shuts our ears to the message the URL I posted, as well as now hundreds of other sober and highly reputable articles are trying very plainly to present.

Soaring oil prices due to inflating M3 is an enviable problem to have, according to their admonition. One simple fact we can readily ascertain, is that beyond < M3 = CRB > this community seems singularly devoid of commentary on the many excellent articles by petroleum industry analysts who explore this theme.

Seems due to lack of sufficient wide discussion of the above in this community, we continue to envision as entirely possible a world engulfed in deflation, where the massively inflationary potential of oil running full tilt towards it's demise at zero future production growth appears to be some kind of logical fallacy.

Meanwhile the world, taken at the widest demographic scale, appears faced with the largest industrialisation in 150 years, yet petroleum prices deprived of monetary inflation are supposed to retire, meek as a mouse, and confer a global deflationary environment upon us blissfully similar to that of the 1980's.

My prior post was concerning the various possible underpinnings of inflation. Obviously if oil prices are a factor of inflation, suggesting that oil prices are a cause of inflation will appear to be a mere tautology. My suggestion is that "tautology" may soon be stood right on it's ear and appear in an entirely different light, but because it appears now to be a tautology, few people will be out looking for the clear outliers of the event ..

Respectfully ...

[Rajiv]

Re: Where is the CRASH!

When this mechanism gets into gear, unlike the M3 driven surge we've witnessed for seven years or so, it promises to be driven by resource depletion factors that are then theoretically outside of governments abilities to steer or control. What keeps us from retreating into severe alarm about present energy price spirals is the tacit assumption these remain within society's grasp to control, if we could only persuade governments to rein in monetary aggregates.

If the inflationary events get bad enough, we retain the sense that we'll come to our senses and simply rein in runaway monetary aggregates. We are reassured from a deeper societal alarm, by feeling industrial society retains the driver's seat in the present predicament, as present soaring oil prices are merely an inflationary manifestation.
.

Lukester, it is not just oil -- many other resource constraints are coming into play. See WE ARE IN A BAD FIX

This is a planet in denial. While the existential question gets a red hot "apocalypse now" for an answer, our stock markets seem to have regained paradise lost.

We are witnessing nothing less than history's first confluence of unsustainable "peaks."

Perhaps, we are incapable of piecing them all, for when crude oil reached an all-time intra-day high of $84.10 per barrel on Sept 20, its entitlement to a front pager screamer was conceded to the tale of a few thousand empty -- or emptying -- American homes.

It was like the Butterfly Effect, with a twist. The flapping rooftops of confiscated homes were now whipping up an economic tsunami worldwide.
.
.
.
The Peak Crises and its plural

Peak Oil:
.
.
Peak Urbanization:
.
.
Peak Grain:
.
.
Peak Water:
.
.
Peak Fish:
.
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The full circle

What began as sub-prime woes in the US housing sector may ripple into something we cannot yet imagine. Will there be a severe global recession, or worse? If wars are yet contained, bidding wars will yet emerge over wheat, water, fish, medicines and oil. What will the future hold in this ecology of crises?

Here is a refrain from the book of Hosea (4:3):

Because of this the land mourns,
and all who live in it waste away;
the beasts of the field and the birds of the air
and the fish of the sea are dying.

[bart]

Re: Where is the CRASH!

Hey Lukester,

Wasn't it you that just a few posts ago was pleading some kind of newbie case? ;)

Your points are all well taken in my opinion, and just because I don't come right out with peak oil data and talk about oildrum.com points like Ghawar, Cantarell and the North Sea having peaked, and my own forecast of $250-$350+ oil within this hard asset cycle doesn't mean I'm ignoring or under valuing them. Peak oil is real in my opinion, as long as its defined as running out of "cheap" oil.

My basic point on that last post was to show the very clear historical connection between money supply and inflation. It's by far the biggest effect on prices, and is not a "circuitous rationale". About 75-80% of the Dow move over the last 100+ years has been inflation.

I agree that the huge oil spike in the '70s was primarily geo-political and that the one that we're in and what's ahead is both geo-political and supply based. It's very likely too that, just like the '70s, the profligate money creation of central banks and "the system" will not be seen as the primary source of high prices but it will be blamed on "the usual suspects" like greedy oil companies and eeeevil Mid Easterners and probably even China & Russia.

I should *tweak* you a bit though. The actual evidence of peak oil beginning to have an effect is right there in my last post. Oil is far ahead of any of the other elements and is actually well ahead of M3 growth... and that has only happened within the last 1-2 years... "strangely" enough right around the time that the three major fields I named above were peaking. :p ;)

Overall, fundamentals always do eventually show their full effects in markets but they are far from the only element that can massively affect prices. When oil and gold do really take off, it will also be easily explained by the FIRE economy, KaPoom theory and my own hard vs. soft asset cycle charting work ("the one cycle to rule them all" :eek: ;) )... as well as plain old inflation.

[Guest]

Re: Where is the CRASH!

Great posts, Rajiv and Bart -

I will now consider myself officially "tweaked" and shut up.

Just one perplexed question in closing - Bart wrote << my own forecast of $250-$350+ oil within this hard asset cycle >>

Under what circumstances do we imagine we'll even have another commodity up-cycle beyond this one, if certain commodities are critically dwindling today?

Can anyone imgaine another "petroleum boom" in 2035 or 2050? How then will the world see another "hard asset cycle" if the hydrocarbons are not there to fuel yet another traditional industrial boom in 30 years? Oops! The old model of predictable industrial cycles just broke down!

If it's a failure of the imagination to disbelieve that "technology" will inevitably "invent" our new global prime energy sources, perhaps it's an equal or greater failure of the imagination to not have a clue what those alternative globally scalable sources of power can possibly be? Sounds like some really bright guy needs to come up with a really bright idea really quick here?

Does anyone really have a clue what we are going to do for an encore? Remember, according to the measured opinions of the CEO's of BP and Mobil, everything encompassed in the term "alternate energy" is bunk - that means of course, all of these energy sources are absolutely viable on small scales, but according to these two CEO's (and others!) opinions, "alt energy" (means non-hydrocarbon energy) in aggregate is not even remotely scalable to replace petroleum as the primary driver of the existing global economy.

Has anyone made any really serious suggestions as to what's going to miraculously appear to save our butts by 2030? In this context it seems to me any reference to a "next commodity up-cycle" would sound curiously innocent of what may await us.

[bill]

Re: Where is the CRASH!

Does anyone really have a clue what we are going to do for an encore? Has anyone made any really serious suggestions as to what's going to miraculously appear to save our butts by 2030? In this context it seems to me any reference to a "next commodity up-cycle" would sound curiously innocent of what may await us.

[Rajiv]

Re: Where is the CRASH!

If it's a failure of the imagination to disbelieve that "technology" will inevitably "invent" our new global prime energy sources, perhaps it's an equal or greater failure of the imagination to not have a clue what those alternative globally scalable sources of power can possibly be? Sounds like some really bright guy needs to come up with a really bright idea really quick here?

Then I will have to live up to my avatar's reputation and put on his hat wouldn't I?