James Kunstler responds to Next Bubble Article in Harpers

[icm63]

Re: James Kunstler responds to Next Bubble Article in Harpers

Several Points

1) True they cant spend USA bonds in China, but China can issue there own bonds, and attract investment from SWF.
2) Forex $USD to $Yaun, will see $USD sink, maybe not as much as $0.10
3) The point is USA and $USD has been held up by the ARABS and China. Watch out when the dont any more.

Last Point if I had massive funds to Invest, that could great a BUBBLE, I would be looking for a 25 yr investment returns, appreciatingForex, and China ( subject to political protection etc) would be my starting point. ( And I wouldnt create any bubble, full stop)

[FRED]

Re: James Kunstler responds to Next Bubble Article in Harpers

He basically says that there won't be a next bubble because the U.S. has no money left to invest in anything else. Any comments?

http://www.lifeaftertheoilcrash.net/...erBubbles.html

If this has been posted before, please let me know and I will delete the thread. Thank you.

merry,

In case you missed it, the response to JHK's post, as promised, is here with some other stuff, too.

[icm63]

Re: James Kunstler responds to Next Bubble Article in Harpers

More on SWF


FROm MISH

http://www.howestreet.com/articles/i...rticle_id=5667

The Sovereign Wealth Fund Theory

The other day in response to a reader query about sovereign wealth funds, I made this statement: "Those dollars will eventually come home to buy US assets. A piece of Pfizer, Citigroup, Goldman Sachs, Exxon Mobile. How exactly does that cause "inflation"? "

Bonnie Writes:

I am curious how this would NOT cause inflation? New stock market bubble; expansion of P/E multiples; 401k becoming 801k; CNBC/FOX having a party, declaring victory for American capitalism; banks' balance sheets improve somewhat; US investors feel wealthier on their stock portfolios and begin spending; Wall Street is looking up and Manhattan condo market stabilizes. The Concoran Group runs a full-page add in New York Sun "We just saw proof that Manhattan real estate never goes down significantly for extended period of time"

Repatriation of huge amounts of foreign held dollars that will flow into US stocks will create a huge expansion of money and credit, i.e. a bubble, i.e. inflation, almost by definition.

What am I missing?

Bonnie,

Let's start with the "Manhattan real estate never goes down significantly for extended period of time" theory. Two years ago the same "proof" was offered about real estate in the US in general. Since then trillions of dollars of fake wealth have been wiped off the books, and Citigroup (C), Merrill Lynch (MER), Lehman Brothers (LEH), all needed capital to keep lending.

Did those capital infusions reignite lending? Look at point number two above under "Fed Fed Will Save The Day Actual Results" for your answer.

Did those capital infusions reignite the stock market? Pull up a chart of the stock market an take a look.

Is Citigroup lending after two bailouts?
Would it be lending if China Bought the whole freaking bank? (The deal would never be approved so we have to talk in theory).

The answers to the above questions are
1) no
2) no

If China bought all of Exxon Mobil (XOM) would that cause Citigroup or Bank of America (BAC) to want to lend?

No again. XOM is not in the housing business and Citigroup is too capital impaired.

Would it push XOM higher?
Perhaps initially but it would then settle back to market price quickly.

There is no reason for banks to lend and there would still be no reason for banks to regardless of what capital infusion pour in. We do not need any more strip malls, grocery stores, nail salons, pizza huts, houses or anything else.

And with jobs going into the toilet we actually need less of all of those.

This notion that sovereign wealth funds can bail out the US is potty. It falls flat for many reasons, but the biggest one is that it does not create any jobs.

[jk]

Re: James Kunstler responds to Next Bubble Article in Harpers

i'm with bonnie, not mish, on this one. the swf's purchasing equities liquifies assets heretofore frozen in tbonds held in foreign cb reserves. this increases velocity. whether this will sufficient to offset other forces remains to be seen, but the direct effect of swf's is clear.

[GRG55]

Re: James Kunstler responds to Next Bubble Article in Harpers

i'm with bonnie, not mish, on this one. the swf's purchasing equities liquifies assets heretofore frozen in tbonds held in foreign cb reserves. this increases velocity. whether this will sufficient to offset other forces remains to be seen, but the direct effect of swf's is clear.

No argument with the highlighted part jk. But your second point (sufficient to offset other forces) is crucial in the longer term.

C1ue has been the most emphatic (of several folks with the same view) that just because the SWF have a lot of money is no guarantee they will invest it intelligently.

So far I have been willing to give them the benefit of the doubt but can't help but notice that, so far, they have been rather consistently investing in things that most iTulipers wouldn't touch (Citi, UBS, AMD are notable). The Abu Dhabi fund Taqa has been recycling petrodollars into...wait for it...more petroleum (natural gas in Canada) :eek:. Notwithstanding the fact that I am personally bullish on North American nat gas, I have to wonder why a country swimming in petroleum feels the need to have a whole lot more of the stuff :confused:. Lack of options? Lack of imagination?

[jk]

Re: James Kunstler responds to Next Bubble Article in Harpers

No argument with the highlighted part jk. But your second point (sufficient to offset other forces) is crucial in the longer term.

C1ue has been the most emphatic (of several folks with the same view) that just because the SWF have a lot of money is no guarantee they will invest it intelligently.

So far I have been willing to give them the benefit of the doubt but can't help but notice that, so far, they have been rather consistently investing in things that most iTulipers wouldn't touch (Citi, UBS, AMD are notable). The Abu Dhabi fund Taqa has been recycling petrodollars into...wait for it...more petroleum (natural gas in Canada) :eek:. Notwithstanding the fact that I am personally bullish on North American nat gas, I have to wonder why a country swimming in petroleum feels the need to have a whole lot more of the stuff :confused:. Lack of options? Lack of imagination?

given the transport problems with natural gas, and given the fact that they were investing in something of concrete value which they felt they could truly understand, the abu dhabi investment makes sense. i think the citi, ubs, etc investments buy political influence as well as an interest in the business - a "dividend" not available to us mortals.

[EJ]

Re: James Kunstler responds to Next Bubble Article in Harpers

given the transport problems with natural gas, and given the fact that they were investing in something of concrete value which they felt they could truly understand, the abu dhabi investment makes sense. i think the citi, ubs, etc investments buy political influence as well as an interest in the business - a "dividend" not available to us mortals.

This is a very important point. Further concentration of wealth in the hands of governments, whether government is buying out of the treasury account, lending short term out of the central bank account, or purchasing out of the Federal budget,will distort markets. As more of this occurs in response to deteriorating private sector economic performance as the US economy deteriorates, political relationships will become more important than market and economic forces in shaping investment decisions.

We all know that governments are terrible at allocating investment capital, although they are needed to enforce the "rules of the road" so markets can function. The tech and housing bubbles could have been avoided if the SEC had been able to enforce securities law and the housing bubble if the Fed and other regulatory bodies had enforced lending laws and properly regulated credit derivatives.

The paradox is that the inevitable response to the failure of governments to fulfill their legitimate role to enforce the rules of the road in markets is to increase their less constructive role of making direct investment into industries better served by private source of funding. To the extent that Sovereign Weath Funds (SWVs) invest in US infrastructure projects that are the traditional realm of government, I'm in favor. In fact, I see Private Public Partnerships (PPPs), while imperfect, as having the potential to improve on the capital-inefficient and tending toward wasteful and corrupt pure government management of infrastructure projects, such as we suffered here recently in The Big Dig. PPPs have the potential to offer the benefits of private corporate oversight, with the rigors of public company project management in terms of transparency and needing to meet obligations to shareholders, while also providing a level of funding that only governments can offer.

SWFs investing in properly structured PPPs is not ideal – the ideal solution was to not have the credit bubble and economic crash in the first place. But here we are with a lot of debt, an economy going into a prolonged recession, our productive capacity weakened by decades of dependence on the FIRE sector, and there they are will all their "surplus savings" denominated in dollars to put to work and a limited number of places in which to get a return on a level of risk that is lower than a government guaranteed PPP investment.

[bill]

Re: James Kunstler responds to Next Bubble Article in Harpers

To the extent that Sovereign Weath Funds (SWVs) invest in US infrastructure projects that are the traditional realm of government, I'm in favor. In fact, I see Private Public Partnerships (PPPs), while imperfect, as having the potential to improve on the capital-inefficient and tending toward wasteful and corrupt pure government management of infrastructure projects, such as we suffered here recently in The Big Dig. PPPs have the potential to offer the benefits of private corporate oversight, with the rigors of public company project management in terms of transparency and needing to meet obligations to shareholders, while also providing a level of funding that only governments can offer.

SWFs investing in properly structured PPPs is not ideal – the ideal solution was to not have the credit bubble and economic crash in the first place. But here we are with a lot of debt, an economy going into a prolonged recession, our productive capacity weakened by decades of dependence on the FIRE sector, and there they are will all their "surplus savings" denominated in dollars to put to work and a limited number of places in which to get a return on a level of risk that is lower than a government guaranteed PPP investment.

Yes indeed the financing vehicle of choice, PPP.
http://www.fhwa.dot.gov/ppp/legis_model.htm

moving along and part of new funding program for US.
http://www.construction.com/event/Be...mit/agenda.asp

Breakout Session I: Public-Private Partnerships (“PPP”) and Alternative Financing of Infrastructure Projects
Private financing of public infrastructure—particularly in fast growing transportation, energy and environmental sectors—is to some a necessary evil, to others an innovative solution and to most, a subject that needs to be better understood. The approach may be familiar in some global markets, but in others, such as the U.S., where public taxes and centralized trust funds have traditionally been the financing backbone, the paradigm is changing fast. Shifting economics are affecting the government’s ability to commit funding on a long-term basis, yet population changes and climatic impacts are making the need for capital improvement and expansion of facilities greater than ever. How will a private-sector, market-driven approach affect infrastructure finance and construction? What are the the debate shaping up in the U.S. and elsewhere? What and where are the successful strategies now in use and what lessons are being learned for the future? Government and private experts in Public-Private Partnerships (PPP) will discuss the strategies, risks and rewards of this approach.

[GRG55]

Re: James Kunstler responds to Next Bubble Article in Harpers

This is a very important point. Further concentration of wealth in the hands of governments, whether government is buying out of the treasury account, lending short term out of the central bank account, or purchasing out of the Federal budget,will distort markets. As more of this occurs in response to deteriorating private sector economic performance as the US economy deteriorates, political relationships will become more important than market and economic forces in shaping investment decisions.

We all know that governments are terrible at allocating investment capital, although they are needed to enforce the "rules of the road" so markets can function. The tech and housing bubbles could have been avoided if the SEC had been able to enforce securities law and the housing bubble if the Fed and other regulatory bodies had enforced lending laws and properly regulated credit derivatives.

The paradox is that the inevitable response to the failure of governments to fulfill their legitimate role to enforce the rules of the road in markets is to increase their less constructive role of making direct investment into industries better served by private source of funding. To the extent that Sovereign Weath Funds (SWVs) invest in US infrastructure projects that are the traditional realm of government, I'm in favor. In fact, I see Private Public Partnerships (PPPs), while imperfect, as having the potential to improve on the capital-inefficient and tending toward wasteful and corrupt pure government management of infrastructure projects, such as we suffered here recently in The Big Dig. PPPs have the potential to offer the benefits of private corporate oversight, with the rigors of public company project management in terms of transparency and needing to meet obligations to shareholders, while also providing a level of funding that only governments can offer.

SWFs investing in properly structured PPPs is not ideal – the ideal solution was to not have the credit bubble and economic crash in the first place. But here we are with a lot of debt, an economy going into a prolonged recession, our productive capacity weakened by decades of dependence on the FIRE sector, and there they are will all their "surplus savings" denominated in dollars to put to work and a limited number of places in which to get a return on a level of risk that is lower than a government guaranteed PPP investment.

It's interesting, and ironic, that in the home of the SWFs (at least the Middle East SWFs) there has been a determined shift by many governments to open up infrastructure funding to private capital.

Regional power generation and water desalination have been particular favourites where this has occurred. Governments still guarantee the returns from the projects, in the form of secure buyer of the project output (e.g. all power is sold on long term contract to the government electricity company) or 100% government backstopping of the financing scheme (this is a favourite to promote growth in the emerging Islamic finance industry and local Islamic banks).

One of the effects is that true private sector project funding is crowded out - local private capital has no great motivation to invest in anything with potential risk and no government guarantee, when the frenzied infrastructure sector has, so far, been able to soak up so much of the available capital. I say this from personal experience, raising equity for petroleum projects. The first question was invariably "What sort of government guarantee do you have?", next comment (upon being their being told there is no government behind what we do) was usually "Isn't oil and gas something the government should do?". 'nuff said.