'KA' for Dummies??

[WDCRob]

Never quite know what's worth posting since I'm at the bottom of the bell-shaped knowledge curve here, but this was very helpful to me in understanding a few of the ideas in Ka-Poom.

Do I have it right that this is describing part of the FIRE economy contraction that will eventually lead to a 'real economy' inflation as described in EJ's theory?

http://theroxylandr.wordpress.com/20...nterest-rates/

The whole system works only because the market is very liquid, prices are quoted several times per day and margin calls are calculated and met promptly. When the default expectations are low this whole $43 trillion market could be traded with only $200 billion of liquidity and remain properly capitalized. You can think about CDS as of flying butterflies, they are very light and pretty.

Let think what happens when the recession comes. From Spring of 2000 to Spring of 2003 the junk bond market lost 35% of price (check SHIAX chart). If the CDS market will ever lose 35% of its value it will amount into $15 trillion of capitalization required to maintain its liquidity.

I’m sorry, but there is no $15 trillion in that system to float the CDS market! We probably can collect that much if we sell 90% of the stock market, or crush all commodities to historic lows, whatever it requires. My gosh, there is only $4+ trillion of treasury bonds out there. Even if we sell all the treasuries we still need $11 trillion more for that margin call! Wait a minute, did it happen before?

Yes it did. In 1931 the treasury market unexpectedly collapsed (it happened during very short time) from the yield 2% up to 6%, the 7-year maximum. Of course it was a buying opportunity of a lifetime, because rates went back to 2% in 1934 and then below 1% in 1940s.

This spike happened not because of any inflation expectations, it was a deflationary environment. Not because of any worry about Treasury solvency - they had all the money to service the debt, and the debt was quite small. It happened because it was a severe credit crunch and there was not enough money in the system to buy treasuries at that fantastic discount. Nobody had any damn money!

I think that when the CDS market will finally start to move (it will take time, it’s a huge market) it will drain trillions and trillions of liquidity, like a giant sponge. It will require a huge sell-off in all the markets to fill the margin calls, the stocks, bonds, commodities - they all will have to go down big time, just to fill the gap.

[jacobdcoates]

Re: 'KA' for Dummies??

I am still trying to wrap my somewhat addeled brain around the "KA", but if stocks and commodities have to sell of to meet the margin call for cds, isn't that deflationary for the real economy. What I mean more precisely is commodities make up a large portion of a products cost, so if prices fall for commodities then wouldn't the price of the finished product fall. If the stock market collapses then would that have a very negative effect on consumer demand especially from the upper middle to upper class, since they have the most invested in stocks and bonds. I think I am just getting myself more confused, or maybe I do have the right idea and were headed for a deflationary depression. If I have messed something up please correct me.

[touchring]

Re: 'KA' for Dummies??

:eek:

How credible is this analysis? If it really happens, i will want to dump my gold and silver first thing!!

[c1ue]

Re: 'KA' for Dummies??

Jacob,

The subprime/Alt-A/MBS/CDS/SIV issue absolutely is going to suck in all available liquidity - in the sense of liquidity formerly available from banks.

Companies which generated positive cash and retained it - as opposed to used it to buy back stock or worse, borrowed money to play stupid stock games - will be fine.

Anyone and anything dependent on any way with loaned money will suffer.

Thus gold and silver would sell off in a market crash event, but the thing to keep in mind is that the 'crash' doesn't necessarily mean a marketwide reprise of the Y2K Nasdaq...in fact the market could very much stay at roughly similar levels to now, but would in purchasing power terms be much lower should inflation rise to truly Weimar-esque levels.

Should this latter scenario occur and in addition there is a severe recession in the US, then we'll truly know if gold is indeed an inflation hedge; at present it is still highly correlated with oil.

[EJ]

Re: 'KA' for Dummies??

Never quite know what's worth posting since I'm at the bottom of the bell-shaped knowledge curve here, but this was very helpful to me in understanding a few of the ideas in Ka-Poom.

Do I have it right that this is describing part of the FIRE economy contraction that will eventually lead to a 'real economy' inflation as described in EJ's theory?

http://theroxylandr.wordpress.com/20...nterest-rates/

Recall what happened in 1933 to make the recovery of the treasury market possible? Gold was recalled and re-priced, resulting in an inflation of the money supply. The writer forgets that the US dollar is no longer on the gold standard. Recommend Ka-Poom Theory is a Rhyme not a Repeat of History to learn more. Bernake continues to do exactly what he said he'd do.

[jacobdcoates]

Re: 'KA' for Dummies??

C1ue,

Doesn't lack of liquidity at banks, mean lack of liquidity in general, given that our economy is so heavily dependent on credit from banks/financial institutions to conduct everyday transactions. The Fed could print money 24/7/365. If no one borrows it, either the government or private entities, it never gets into the production economy to fuel inflation. If the government borrowed the money to payoff current loans due, then maybe I could see hyper-inflation going off like a rocket, but wouldn't the yield on t-bill's let you know before the ball really got rolling and the jig would be up so to say. that my understanding anyway? I have to admit I am not anywhere near a trained economist.

I think even positive cash flow companies will be hit very sorely, unless they make low cost everyday items(such as soap), any product that requires credit to purchase, which is a lot of products, since we of course are have a negative savings rate overall, we would see marked drops in demand, till people, I'm gonna say it, Save:eek: the money to buy it.


Using debt as money, it seems to me is not as unrestricted as a pure fiat based money system, that some would like it to be. Nor as elastic as some might have hope.

I do know this though auto sales should be way down for Nov, I talk to a lot of auto dealer all over the country, You would not believe how many times I ask for a specific person in the finance dept, only to be told "They no longer work here.". One lady told me she had just gotten her notice, strangely she seemed quite upbeat about the fact. I have to admit I was at a loss for words, and fumbled through the rest of the conversation.

In my own uneducated opinion were are headed for a classic debt-deflation, so long as the Fed Fund rate stays above the rate on 10 yr t-bills on the way down. Bernake is an academic and yes while he has studied the great depression for half of his life. The problem with that is the information paradox problem. Having to much information about it and wanting to make sure that we are in fact headed on the same path before he commits policy decisions to the course of action need to prevent it, which would seem to ensure that it does.

[c1ue]

Re: 'KA' for Dummies??

Doesn't lack of liquidity at banks, mean lack of liquidity in general, given that our economy is so heavily dependent on credit from banks/financial institutions to conduct everyday transactions.

Jacob,

Keep in mind that although there are plenty of individual and corporate nouveau riche who are highly dependent on loans, there are also significant numbers of individuals and companies who do have real money and real income streams.

These income streams also tend to be more diversified: both abroad and also in low hierarchy of needs areas.

Thus while cash flow positive rich companies will see stock prices fall and probably some demand loss, these companies will survive and gain relative market share.

When the ugliness ends, these companies will then be positioned to really rake in profits.

As for hyper-inflation - I personally think it is possible but not probable. The key is what the rest of world (ROW) wants from the US.

If ROW wants status quo, then everything will muddle down but still more or less continue.

If in the course of muddling down, that the historically normal nationalistic/jingoistic tendencies come out, then anything is possible because there will be desires in ROW completely different than what is there now.

I say this because while life in the US sucks for those not making $100K+ a year, it is still nowhere near bad enough for the revolutionaries to really make headway.

[jacobdcoates]

Re: 'KA' for Dummies??

I tend to agree very much c1ue, life does suck for those not making 100k. AS for revolutionaries in the US a highly unlikely event, but I'm not willing to say impossible. It depends on how badly things get, although I envision more of a generalized fraying of society.