Not Just Thye but ALL the Usual Suspects are here

[Finster]

Re: Not Just Thye but ALL the Usual Suspects are here

Well with oil, gold and silver retracing and stocks also having a "jeffolie" day there is a wiff of deflation in the air.

I still find it hard to believe that the Fed won't react to a downturn by turning on the liquidity tap to full.

Best investment seems to be paying down debt and cash and cash eqivalents

China's attempts to cool off their economy must be working.

Indeed, just because we're getting a whiff of deflation now doesn't mean we're in it for the long haul. I totally agree on minimizing and ideally eliminating debt, and holding some cash and short term high quality credit. And because of that likely return of the liquidity flush, definitely think a generous portion of gold and other hard commodities is very a good policy.

[jk]

Re: Not Just Thye but ALL the Usual Suspects are here

Indeed, just because we're getting a whiff of deflation now doesn't mean we're in it for the long haul. I totally agree on minimizing and ideally eliminating debt, and holding some cash and short term high quality credit. And because of that likely return of the liquidity flush, definitely think a generous portion of gold and other hard commodities is very a good policy.

if we get a deflation scare equity shorts and puts should do well. the question in my mind is what happens to the dollar vis a vis other currencies.

[Jim Nickerson]

Re: Not Just Thye but ALL the Usual Suspects are here

Indeed, just because we're getting a whiff of deflation now doesn't mean we're in it for the long haul. I totally agree on minimizing and ideally eliminating debt, and holding some cash and short term high quality credit. And because of that likely return of the liquidity flush, definitely think a generous portion of gold and other hard commodities is very a good policy.

From http://www.safehaven.com/article-5844.htm

The commodities markets are figuring out that inflation is nowhere to be seen and that deflation is here. Crude oil, natural gas, unleaded gas, gold, silver, platinum....they're all joining in the deflation conga line. Inflation is getting priced right out of the equation. Interest rates are dropping, too.
That ol' yield curve inversion was right again, dad gummit.
Homebuilders are quaking in their boots as right before your very eyes, ordinary folks have figured out that if they wait 'til next year, prices will be lower. Soon they will figure out that prices will be a LOT lower. The speculators have run kicking and screaming from the housing market (step one) and the general consensus is already that the "housing boom is over." Lower interest rates aren't helping at all.
You should probably get accustomed to the following, coming-soon-to-the-business-section-of-your-local-newspaper phraseology: Oversupply, excess inventory, "hard landing," foreclosures, "upside-down" mortgages, contract cancellations, "fire-sales," bankruptcies, foreclosures, bank failures, credit crunch, credit contraction, bank crisis, Fannie Mae crisis, liquidity crisis, real estate deflation, asset deflation, price deflation, foreclosures, meltdown. Real estate values will fall from peak values somewhere in the range of 50% to 90%, depending on area, location, property type, "intrinsic value" and scarcity.

Moyer could not possibly be correct, or could he?

Also an interesting tale of woe by Nystrom about his uncle and real estate in Japan from the early '90's http://www.safehaven.com/article-5846.htm

[Jim Nickerson]

Re: Not Just Thye but ALL the Usual Suspects are here

if we get a deflation scare equity shorts and puts should do well. the question in my mind is what happens to the dollar vis a vis other currencies.

If my mind is right, and if there is validity to the FDI http://users.zoominternet.net/~fwuthering/FFF/Inflation, it seems to me the dollar will strengthen, but I do not know if I am interpreting this correctly. Even if I am correct, I am not sure this says what it will do against other currencies.

It might offer some insight if Finster can and were willing to put us up a chart of the FDI and the US$ index, so that past historical relationships could be visualized.

[bart]

Re: Not Just Thye but ALL the Usual Suspects are here

If my mind is right, and if there is validity to the FDI http://users.zoominternet.net/~fwuthering/FFF/Inflation, it seems to me the dollar will strengthen, but I do not know if I am interpreting this correctly. Even if I am correct, I am not sure this says what it will do against other currencies.

I'm leaning more than a little towards a short term strengthening, especially considering the recent ~$2 billion permanent repo injection:

[Jim Nickerson]

Re: Not Just Thye but ALL the Usual Suspects are here

I'm leaning more than a little towards a short term strengthening, especially considering the recent ~$2 billion permanent repo injection:

Thanks, Bart.

[EJ]

Re: Not Just Thye but ALL the Usual Suspects are here

China Forecast

From Stratfor Q3 2006 Forecast: June 2006

For the past two years, Stratfor has been warning of a massive Financial crisis emerging in China. During the second quarter of 2006, the rest of the world finally has taken notice. And international notice is critical: The Chinese have been able to manage their financial crisis partly because the rest of the world believed there was not a critical threat to China's economy. Now that it is generally understood that there is a clear financial crisis in China, the flow of foreign direct investment and the ability to surge exports shifts. As a result, the Chinese government will have to take rapid steps.

In our view, there are no options that can be rapid, effective and painless. China will be making choices now, all of which have consequences. Our expectation was that the crisis would not hit until late 2006 or early 2007. It may well be upon us now. The Chinese will work to push off the crisis, and use their foreign exchange reserves to buy time. But they will do so at the cost of more intense pain. The longer they put off the rather brutal financial steps that must be taken -- reduced financing at higher rates, bankruptcies, unemployment -- the worse it will be. But the crisis is now hardwired into the system.

The only choices the Chinese government has is who will pay the price and when will the crisis hit in earnest -- and its ability to make even those choices is contracting continually.

As China moves into open economic crisis and shifts its economic and political behavior, it will begin moving in tandem with Russia. Russia has already shifted its behavior, asserting itself in its "near abroad" and challenging the United States in the Middle East. Russia has moved with caution because it understood that, by itself, it lacked the weight to move against the United States. However, if China changes its behavior, alignment between China and Russia becomes logical. There are tensions between the two countries, of course, but the tension they have with the United States will be substantially greater.

These trends increase the pressure on the United States to terminate the Iraq campaign and curtail the jihadist war. However, the campaign in Afghanistan remains a fundamental unsolved issue for the United States. The coming quarter will see the most serious fighting since the fall of the Taliban government, as Taliban forces, recovered and rearmed, launch a summer campaign against insuffcient U.S. and allied forces.

http://www.stratfor.com/reports/

Next week, iTulip members will be able to get a subscription to Stratfor through iTulip at discount. Look for an announcement next week.

[Finster]

Re: Not Just Thye but ALL the Usual Suspects are here

If my mind is right, and if there is validity to the FDI http://users.zoominternet.net/~fwuthering/FFF/Inflation, it seems to me the dollar will strengthen, but I do not know if I am interpreting this correctly. Even if I am correct, I am not sure this says what it will do against other currencies.

It might offer some insight if Finster can and were willing to put us up a chart of the FDI and the US$ index, so that past historical relationships could be visualized.

There is naturally some correlation between the USDX and the FDI, simply because they both measure the market value of the US dollar. But there are some important differences too, since they measure it against different things. The USDX measures it against other currencies, the FDI against real things. Another way to look at it is that the USDX measures the relative value of the USD, the FDI the absolute value of the USD.

The differences can be very important. One case in point was highlighted by 2005, particularly in reference to gold prices. Analysts frequently observe that when the USD declines, the gold price rises. In 2005, however, their usual measure of the USD - the USDX index - rose, yet gold prices rose too. So many were flummoxed by the apparent contradiction of the rising price of gold when it 'should' have declined because of the rising dollar.

The FDI eliminates this paradox. It shows that in 2005, the dollar did not rise, but fell. The USDX rose because as noted, it merely measures the dollar against other currencies. But those currencies as a whole fell even faster than the dollar, making it only appear that the dollar rose. An analyst following the FDI instead of the USDX would not have been mystified, but would have fully expected the dollar price of gold to rise.

I don't have a chart of the USDX, but bart has a chart that includes the FDI and the USDX, along with some other dollar-related measures. Perhaps he will post it.

[bart]

Re: Not Just Thye but ALL the Usual Suspects are here

I don't have a chart of the USDX, but bart has a chart that includes the FDI and the USDX, along with some other dollar-related measures. Perhaps he will post it.

With a setup like that... fer shure:

[Finster]

Re: Not Just Thye but ALL the Usual Suspects are here

With a setup like that... fer shure:

A chart for every occasion!

Just one reader note - since the FDI is plotted here in reciprocal but the USDX is plotted raw, correlation between the FDI and USDX shows up as inverse correlation. For example, the general rising trend of the inverted FDI over the past three or four years corresponds to a falling FDI, consonant with the falling USDX.

[jk]

Re: Not Just Thye but ALL the Usual Suspects are here

quoting stratfor

In our view, there are no options that can be rapid, effective and painless. China will be making choices now, all of which have consequences. Our expectation was that the crisis would not hit until late 2006 or early 2007. It may well be upon us now. The Chinese will work to push off the crisis, and use their foreign exchange reserves to buy time. But they will do so at the cost of more intense pain. The longer they put off the rather brutal financial steps that must be taken -- reduced financing at higher rates, bankruptcies, unemployment -- the worse it will be. But the crisis is now hardwired into the system.

The only choices the Chinese government has is who will pay the price and when will the crisis hit in earnest -- and its ability to make even those choices is contracting continually.

let's see, let's make a substitution:

In our view, there are no options that can be rapid, effective and painless. The U.S. will be making choices now, all of which have consequences. Our expectation was that the crisis would not hit until late 2006 or early 2007. It may well be upon us now. The Americans will work to push off the crisis, and use their reserve currency status to buy time. But they will do so at the cost of more intense pain. The longer they put off the rather brutal financial steps that must be taken -- reduced financing at higher rates, bankruptcies, unemployment -- the worse it will be. But the crisis is now hardwired into the system.

The only choices the U.S. government has is who will pay the price and when will the crisis hit in earnest -- and its ability to make even those choices is contracting continually.


one size fits all?

[jk]

will china save us?

from paul van eeden's commentary:

Consumer spending accounts for 70% of the United States' gross domestic product, so if consumer spending takes a hit because real estate refinancings have dried up, the economy is going to struggle. Can China save the world?

Many investors in natural resource stocks base their investment outlook on the expanding Chinese economy and its demand for base metals. I have long maintained that China is just another bubble looking for a pin and that the Chinese economy is too closely tied to the US economy to withstand a slowdown in US consumer spending without getting dragged down.

Chart 2: Economic Growth in China


If you look at the above chart you will see that China's economic growth has been spectacular. Their economy has been growing at an average annual rate of almost 9% since 1996. Yet, notice that the rate of growth has been relatively stable - at least according to the data I got from the World Bank. But also notice how the export of goods and services has become larger and larger as a percentage of China's GDP. From 1996 to 1999 exports accounted for about 20% of China's economy. By 2004 (latest available data) exports accounted for 34% of GDP. I wonder who is buying all that stuff that China makes? Notice also that China's exports are growing at almost 30% per year, and have been for the past three years (2002, 2003 and 2004).

A simple calculation will tell you that if China's exports are growing at 30%, and exports account for 30% of GDP, then the growth in exports alone will increase GDP by 9%. But hold on, that's how much China's entire economy is growing! So where is the internal demand? Where is the Chinese consumption that will propel base metal prices? Either the World Bank's data is completely useless, or else China's economy is far more dependent on exports that what some people think.

Speaking of base metals, the IMF released a report this week saying that they think "...metal prices will decline progressively from current levels as new production capacity comes on stream," with copper projected to fall by 57% over the next few years. I think I'll stick to gold. Hopefully the gold price will keep trending down in the short term so I can buy some more.

[bart]

Re: will china save us?

A simple calculation will tell you that if China's exports are growing at 30%, and exports account for 30% of GDP, then the growth in exports alone will increase GDP by 9%. But hold on, that's how much China's entire economy is growing! So where is the internal demand? Where is the Chinese consumption that will propel base metal prices? Either the World Bank's data is completely useless, or else China's economy is far more dependent on exports that what some people think.

The data coming out of China is suspect, at the very least. Here's another chart based on World Bank data - trying to reconcile the two is not exactly simple or encouraging.

[jk]

Re: Not Just Thye but ALL the Usual Suspects are here

bart, does "trade in goods" include both imports and exports? [that might explain it]

[bart]

Re: Not Just Thye but ALL the Usual Suspects are here

bart, does "trade in goods" include both imports and exports? [that might explain it]

Yes it does - its not netted out... but I still can't think very well with most of the stats coming out of China. They don't seem terribly consistent.
I don't know if its the stats themselves or something I'm missing... or both.