POOM! (or soon to be POOM!!)

[jtabeb]

http://news.moneycentral.msn.com/pro...028&id=9139901

[jimmygu3]

Re: POOM! (or soon to be POOM!!)

http://news.moneycentral.msn.com/pro...028&id=9139901

It's always nice to have an excerpt:

White House to banks: Start lending now

October 29, 2008 1:58 AM ET


WASHINGTON (AP) - An impatient White House prodded banks and other financial companies Tuesday to quit hoarding billions of dollars flowing into their vaults from Washington and start making more loans. Wall Street soared nearly 900 points on bargain-hunting and hopes of a hefty interest rate cut by the Federal Reserve.

The stock market's amazing climb, with its second-largest point gain ever, was a welcome burst of good news for a nation suffering big job losses and seemingly tumbling into a painful recession.

Consumer pessimism reached record levels in October amid rising unemployment, plunging home prices and shrinking retirement and investment accounts. The Conference Board, a private research group, said consumer confidence fell to its lowest point since it began tracking consumer sentiment in 1967.

Hoping to thaw the credit freeze that has chilled the economy, the Bush administration sent banks an unmistakable message to put aside fears and open up loan windows for cash-starved businesses and consumers who have pulled back on spending.

"What we're trying to do is get banks to do what they are supposed to do, which is support the system that we have in America. And banks exist to lend money," White House press secretary Dana Perino said. While there are limits to Washington's power to affect banks' behavior, the White House decided it was time to use its bully pulpit.

"They (regulators) will be watching very closely, and they're working with the banks," Perino said.

Meanwhile, Treasury Department officials met with banking industry representatives to resolve a glitch in the rescue program that has temporarily prevented some 6,000 of the nation's 8,500 banks from applying for government support.

Treasury is buying preferred shares in banks as a way of injecting cash into the institutions. But about 6,000 of the nation's banks don't have publicly traded shares of stock and therefore are not set up in a way to meet Treasury's current qualifications.

Treasury officials at the meeting assured banking industry representatives that they are working to rework the application forms so that both banks with publicly traded stock and privately held institutions can qualify for the program. They said if the Nov. 14 deadline for applying for government support needs to be extended it will be.

[hayekvindicated]

Re: POOM! (or soon to be POOM!!)

It is getting pretty close to it. The Dollar has lost value against Sterling the last two days on rate cut hopes :eek:. You know the currency is not sound when it starts to lose value against the currency of a country which produces almost nothing.

But the Yen has been falling too - though that I expect has been due to BOJ intervention. I'll stick my neck out as an inflationist and say it out loud: there's never been a better time to buy Gold or commodities. I risk being criticised by the deflationists (many of whom are close friends) but I expect there will be no serious argument in a couple of years time.

Im on the inflation side and Im putting my money where my mouth is. Im going to buy physical gold tomorrow - three times more than I've got right now. This is the right time to do it.

[Adeptus]

Re: POOM! (or soon to be POOM!!)

HELP! Is this the time to buy Bullion???

Exploding Debt Dynamics, Part II: The Golden Supernova
http://www.taipanpublishinggroup.com...ly-102808.html

The above article by Taipan Publishing, would also seem to support that POOM is just around the corner and that Gold (physical) is about to explode.

Only one concern, I don't trust this publishing company much (mostly because every other email they send me sounds like an informercial on steroids - "Invest with us and gain 1349% in 1 month!!!!!!" - I'm not kidding).

That being said, the above article mostly in layman's terms sounds convincing to non-financial/ecomomist types such as myself (I'm an IT guy that's been reading itulip for 8 months and not understanding about 50% of what I read, but I think I get the key points - it's all going to hell!).

Would somebody mind reading this article (about 10 mins?) and commenting briefly on it's theories?

Mega's post today re: starting the printing presses...
http://www.itulip.com/forums/showthread.php?t=6168
...Also seems to align to what the Taipan article above talks about to justify a jump in physical gold.

Can some of the senior Ituliper's comment on whether this is a great time to buy bullion? Or whether I, as a Canadian, should wait for a 5 to 10% jump, then dump most of it as Wave 5 desinflation/deflationary cycle crushed the Dow to 4,500 and puts further pressure on gold... and then buy back into bullion when inflation arrives in 2011 or 2012 as some other poster on here mentioned?

(I'm already 50% physical gold and 5% physical silver 25% cash and 10%Canadian T-bills and Money Market Funds)

I'm very confused about the timing of this POOM, and as you all know, timing is everything, any help would be much appreciated.

Adeptus,
PS. Replies in layman terms as possible would be appreciated.
PPS. Thanks to everyone on here for all your daily insights. I got out of the Stock market back in Q4 2007 and am pretty much at 0% to 5% gain as of today.

[friendly_jacek]

Re: POOM! (or soon to be POOM!!)

There is a huge difference between 1% in 2003 and now. In 2003, the economy was coming from recession already due to commercial credit expansion and baby boomers heavy spending. That rate cut (negative real rate) created a lot of inflation and $ devaluation.

Now, the economy is entering recession and frugality is the new thing in US. This is not Poom, barely an attempt to slow the chain reaction deflation that started in earnest. While things can improve for a few weeks or months, I will be raising cash agressively.

[jtabeb]

Re: POOM! (or soon to be POOM!!)

There is a huge difference between 1% in 2003 and now. In 2003, the economy was coming from recession already due to commercial credit expansion and baby boomers heavy spending. That rate cut (negative real rate) created a lot of inflation and $ devaluation.

Now, the economy is entering recession and frugality is the new thing in US. This is not Poom, barely an attempt to slow the chain reaction deflation that started in earnest. While things can improve for a few weeks or months, I will be raising cash agressively.

Suit yourself, I'm blowing my cash on a house in my hometown. Hope things work out for you.

[touchring]

Re: POOM! (or soon to be POOM!!)

The year is 2008, we're still 4 years from 2012.

[touchring]

Re: POOM! (or soon to be POOM!!)

There is a huge difference between 1% in 2003 and now. In 2003, the economy was coming from recession already due to commercial credit expansion and baby boomers heavy spending. That rate cut (negative real rate) created a lot of inflation and $ devaluation.

Now, the economy is entering recession and frugality is the new thing in US. This is not Poom, barely an attempt to slow the chain reaction deflation that started in earnest. While things can improve for a few weeks or months, I will be raising cash agressively.

I agree, China is using the sledgehammer to smash low end industries that consume imports and this will lead to a further drop in demand for commodities.

[jtabeb]

Re: POOM! (or soon to be POOM!!)

The year is 2008, we're still 4 years from 2012.

I'd rather be right and early, than wrong and never.

[touchring]

Re: POOM! (or soon to be POOM!!)

I'd rather be right and early, than wrong and never.

I hope you are right, but the recovery, even if it starts now, is a long way to go.

American bank reputation has been severely damaged and no interest rate or fiscal policy can create another poom in the short term.

[ASH]

Re: POOM! (or soon to be POOM!!)

HELP! Is this the time to buy Bullion???

(I'm already 50% physical gold and 5% physical silver 25% cash and 10%Canadian T-bills and Money Market Funds)

I'm very confused about the timing of this POOM, and as you all know, timing is everything, any help would be much appreciated.

Adeptus,
PS. Replies in layman terms as possible would be appreciated.
PPS. Thanks to everyone on here for all your daily insights. I got out of the Stock market back in Q4 2007 and am pretty much at 0% to 5% gain as of today.

Hi Adeptus. Keep in mind the distinction between Eric Janszen (the official iTulip line) and his myriad interpreters who also post to this site. EJ has advocated a modest holding of precious metals as insurance, but not a majority holding as an investment. Likewise, EJ has recommended against trying to time market motions during this "chaotic" period. (Essentially, he has recommended holding a modest amount of gold -- like 15% of your total wealth -- through the deflationary "ka" phase of his macro scenario, rather than trying to time the transition to inflation.) If someone like myself tells you "yeah -- I think now is a good time to buy more precious metals" or "no -- I think you should wait until early 2009 to buy", that's not advice from iTulip backed by EJ's record -- that's advice from some random dude you met on the internet.

There are better iTulip regulars to look at the link you posted, but I'm curious, so I'll give it a read, and comment on it later. Just remember: random dude on the internet. Not best qualified to offer opinion. Not EJ.

[jtabeb]

Re: POOM! (or soon to be POOM!!)

no interest rate or fiscal policy can create another poom in the short term.

That is where you and I will just have to disagree.

[ASH]

Re: POOM! (or soon to be POOM!!)

The above article by Taipan Publishing, would also seem to support that POOM is just around the corner and that Gold (physical) is about to explode.

From the article:

We have seen the dollar (and the yen) skyrocket due to their roles as “funding currencies”, and the great unwinding that ensued.

I buy this as part of the explanation for the timing of the dollar's recent strengthening.

We have seen the dollar further benefit from the knee-jerk comfort of U.S. treasuries, still the deepest and most liquid “go-to” market in the world for safety in a time of panic.

It's not entirely a knee-jerk reaction if the market in US treasuries is indeed the deepest and most liquid. I'm not a currency expert, but it seems to me that the weakness of the US dollar running up to this crisis was a result of widespread knowledge about the problems of the dollar (lower yield, large current account deficit, impending housing-led recession, etc.), whereas the strength of other currencies was the result of widespread ignorance about their similar impending problems. I think the onset of the crisis has brought previously ignored problems with competing currencies to the fore, and reminded some traders of the dollar's few virtues.

Depending upon how this crisis evolves, it is not obvious to me, a priori, that the dollar's recent strengthening will prove temporary. As long as the crisis persists, I think that currencies tied to large economies are likely to be the only game in town, which basically means a shoot-out between the US dollar, Euro and Yen. Recent concerted action of the ECB notwithstanding, I cannot dismiss concerns about centrifugal forces within the EU (partly evinced by rising spreads in Euro-denominated sovereign bonds between different member states, for instance). I gather that European growth is going into the toilet as well. Then there's the fact of the European bailout itself -- unlike earlier, when the ECB kept interest rates high in defense of price stability, European and American stimulus policies are starting to look very similar. As for the yen... I realize that it is strengthening, but I don't like their debt/GDP ratio, or their demographic prospects. For that matter, although they are fantastic savers, and ran a strong current account surplus, I think the export activity behind the accumulation of those savings and the surplus is threatened by the current crisis. In short, just because the US dollar has problems -- and has been lifted by the crisis -- doesn't in and of itself mean it will go right back down. The world after the crisis is different than the world before the crisis, which means the factors that set the exchange rate of the dollar before the crisis will also be different.

That said, the outflows information that iTulip recently published is an empirical fact, which trumps theoretical arguments. I am going with the iTulip thesis for now, because it is backed by data. However, I think it is a mistake to believe that the dollar must fall again. In fact, the thing I find most cockeyed about internet economic speculation is the certainty with which various pundits flog their particular predictions.

We have seen gold, gold stocks, and hard assets of all kinds get dumped over the side via the biggest avalanche of forced asset sales – involuntary asset sales – the world has ever known.

I don't regard this point as proven at all. Forced sales might play a role, but I haven't seen hard data that establishes the size of that role. It could just as easily be a bunch of traders jumping out of anti-dollar positions. Gold, commodities, and hard assets are absolutely not buy-and-hold investments -- I would think they are largely held by investors who trade actively. You would only have to be marginally more sophisticated than I to predict what tight dollar credit would do to the value of the dollar in conjunction with massive leveraged positions financed by dollar-denominated loans (as opposed to clucking to yourself after the fact, after someone explained it to you, as I have done). Thus, I think it likely that most of the action in hard asset prices simply results from investors trading out of anti-dollar positions, in line with recent events.

We have seen the world go white-knuckled with fear over the deflationary aspects of the credit collapse – without yet considering the supernova-style policy response that is sure to follow (and may now be in effect).

The topic of this thread is about the timing of the POOM, and if you want to try trading the POOM, then as you said -- timing is key. To discuss whether POOM happens -- and when -- we need to be specific about what POOM is. A lot of us use POOM as shorthand for inflation, but there are many possible inflationary mechanisms:

• repatriation of dollars held by foreigners
• creation of new dollars by government policy
• weakening of the dollar against other currencies for foreign exchange
• classical wage-price spiral

Based upon what EJ has written, I believe that he is predicting dollar repatriation. If I understand correctly, EJ says that all the dollars required for POOM are already out there, and so POOM will happen when they come home. This means POOM happens when foreigners are scrambling to rid themselves of dollars in net, which is the opposite of what has happened recently. Watching the outflows data would therefore be the way to gauge when POOM might occur. (And, a reconsideration of the factors which affect demand for the US dollar versus other currencies would help you assess the likelihood of POOM occuring at all.) According to the capital inflow/outflow data published by iTulip, inflows were falling and outflows were growing, prior to the crisis events of the summer. The question is whether this trend will resume, or whether the calculation of the desireability of dollars has changed post-crisis.

The creation of new dollars by government policy is the mechanism most of us fixate upon. The word "printing" is used somewhat sloppily as short-hand for this type of activity. Yes, the government can directly create paper money by physically printing it, but the portion of the money supply represented by physical paper is quite small. I think the most important mechanism by which the government (or rather the Fed) creates money is through the purchase of treasury bonds from banks. As I understand it, if the bank sells a bond it owns to the Federal Reserve, the Federal Reserve pays for the bond by creating a reserve deposit for the bank ex nihilo. The reserve deposit can then be used as the fractional basis for credit creation by the bank, which increases the money supply if the bank chooses to lend against those reserves. Conversely, if the Federal Reserve sells a treasury bond to a bank, paid for out of the bank's reserve deposits with the Fed, then the money supply contracts because that reserve deposit is no longer available as a basis for credit issued by the bank.

Here's where we need to be a little sophisticated. Not every government measure taken during this crisis necessarily increases the money supply, and the impact is not necessarily felt immediately. For instance, phirang was kind enough to direct my attention to this article by Professor James Hamilton, which describes how the Federal Reserve uses the purchase of treasuries to "sterilize" the loans it has made to bail-out troubled banks, so that the money supply is not increased by these loans. On the other hand, the way the Federal Reserve targets the federal funds rate -- the interest rate charged by banks when they lend their reserve deposits at the Fed to each other -- is to buy and sell treasuries, as this affects the supply of such reserves. Thus, when the Fed "lowers interest rates" it is doing so by purchasing more treasuries from banks to increase the total supply of reserve deposits, and hence increase the money supply... assuming that banks lend against their reserve deposits.

In the passage above, I have underlined the phrase "assuming that banks lend against their reserve deposits." This is because the extent to which a change in the reserve deposit at the Fed affects inflation depends upon what the banks do with those reserve deposits. In most circumstances, a bank will lend as much as it can against its reserve deposits (as limited by reserve fraction requirements), because it can earn interest income from loans against its reserves. However, when loans are being defaulted upon, and assets on the banks' balance sheets are vaporizing, they have a motive not to lend to the full extent of their reserves. Thus, the Fed could increase reserve deposits as a matter of policy without producing much immediate short-term inflation. Also, the Fed's actions could simply replace reserves that had to be expended covering losses from bad loans or failed assets; if done accurately, this would be a neutral activity. If the Fed overshoots on creating reserves, then later when banks are less afraid to lend, we might indeed get a spike in inflation as the result of all the banks lending to the full extent of the reserve fraction requirements at once. You need to understand this if you are trying to time POOM, and think it will result from low interest rates. Also, you need to understand that the Fed does have policy tools to reduce the money supply, if it is so inclined, so the money supply need not necessarily increase in the end. Some of the arguments on iTulip have to do with how adept the Federal Reserve will be at using these tools, and whether it will choose to do so to prevent a significant inflation. I personally believe that the Federal Reserve will handle things in such a way that we do indeed get significant inflation from this, but I am not prepared to argue that this is a certainty.

Another possible government policy leading to inflation is to create money to directly pay government debts by having the Federal Reserve purchase bonds directly from the government (as opposed to buying from commercial banks). This is more of a nuclear option -- the last resort. This is what we will resort to when the government is well and truly insolvent, and cannot pay its bills out of tax revenue and bond sales to the public. Although this is much more serious than just about any other inflationary mechanism, it is not where we are today. The government would not need to do this so long as it is able to borrow by selling bonds to the public. Although the recent bailouts have added significantly to the public debt, and tax revenue is likely to fall during the recession, we are not yet at the end of our rope (at least by the measures of debt:GDP ratio and the interest rate the government has to offer on its bonds). Personally, I think that this is the mechanism of the next crisis -- the predictable outcome of the demographic entitlement spending crisis. However, the extent to which the market may anticipate this crisis is unclear. Also, it seems possible that a disorderly drop in the dollar's foreign exchange value resulting from the dollar repatriation that EJ expects might necessitate monetization. My personal view, however, is that this is tomorrow's POOM.

The last two items in the list -- weakening of the dollar for foreign exchange and a wage-price spiral -- are less about money supply than how domestic price rises might be experienced. If foreign demand for dollars drops, then our import costs rise. To the extent that we enjoy lower prices on traded goods because of access to imported commodities and cheaper foreign labor, we should expect the prices of traded goods to rise. On the other hand, lower foreign demand for dollars implies less access to credit from foreign sources, so I see some potential for reduced demand on our side of the equation if domestic credit creation doesn't pick up the slack. I think we'd be looking at higher prices for traded goods, but lower prices for assets that were formerly financed. As for a wage-price spiral... I doubt such will occur, but the issue seems somewhat complicated. With the decline of organized labor and the rise of outsourcing, the pricing power of domestic labor is basically shot, and that would tend to prevent a wage-price spiral from taking off. On the other hand, if the dollar is weak for foreign exchange, then outsourcing may cease to be so easy, and we could see a resurgence of the unions in the long run. Right now, with the labor market so weak, the idea of a wage-price spiral seems pretty silly. The only context in which I can imagine one developing is as part of a "next bubble" dependent upon local labor (such as a massive infrastructure build-out).

We know that the first three points above are temporary phenomena bound to end... and the fourth is a market mindset bound to change.

I don't think it's proven that his point #2 (knee-jerk flight to dollar) is temporary, that his point #3 (gold prices primarily a function of forced sales) is in fact correct, or that the policy response in #4 must be drammatically inflationary. I think the outflows data published by iTulip makes #2 likely to be temporary, and I personally think #4 is likely to prove inflationary.

... I also don't think you should position yourself "all in" based upon any particular investment thesis, unless you can afford to lose all your money. Most importantly, resist the temptation to assign too much certainty to anyone's predictions of the future.

[bart]

Re: POOM! (or soon to be POOM!!)

Here's where we need to be a little sophisticated. Not every government measure taken during this crisis necessarily increases the money supply, and the impact is not necessarily felt immediately. For instance, phirang was kind enough to direct my attention to this article by Professor James Hamilton, which describes how the Federal Reserve uses the purchase of treasuries to "sterilize" the loans it has made to bail-out troubled banks, so that the money supply is not increased by these loans.

I urge caution on Professor Hamilton's take. What he fails to include is that one of the components of M3 - repurchase agreements (liabilities of depository institutions, in denominations of $100,000 or more, on U.S. government and federal agency securities) is quite similar in definition and practice to the various new Fed facilities like the TAF.

[GRG55]

Re: POOM! (or soon to be POOM!!)

I agree, China is using the sledgehammer to smash low end industries that consume imports and this will lead to a further drop in demand for commodities.

What are they going to replace these low end industries with?

Some sort of low-commodity-consumption industry...like "Financial Engineering" perhaps?