Oracle 1990, vs Sunpower 2009, history repeating

[GRG55]

Re: Oracle 1990, vs Sunpower 2009, history repeating

I think the buying of long term treasuries could paper over the structural issues, through relatively high inflation. Krugman have been talking about how he would like 5 % CPI inflation for some years ,and I think it's inflation in the range above what people are used to, that's coming.

"paper over" is the operative phrase, I agree.

[GRG55]

Re: Oracle 1990, vs Sunpower 2009, history repeating

In 1998, when the panic was at these levels seen earlier in this Panic of 08-

8 dollar then, was like 35 now, so it's safe to assume, that with the new money being pumped in, oil will go up to around 90 just to match gold, I think it should go even higher, and probably to a new "baseline" level that is more than sufficient to drive a boom in alternative energy. What's the new level is hard to say, maybe it's 70 for the moment, and 35, and 140 dollar is on the outer extreme of the range, however with all the new money coming, that base level should move higher. If it was to move like in the seventies, oil should have no problem going to 700-1000 dollars over the next decade.

If it gets that bad then EJ's bull market in brass door knobs is a slam dunk...:eek:

[c1ue]

Re: Oracle 1990, vs Sunpower 2009, history repeating

The problem with the theory that QE will fix all is the fact that the US still spends more than it earns.

All this talk about inflation fixing all is nice, but the problem is that this assumes the nations that have been lending to the US will continue to do so.

I have repeatedly pointed out that this is not a good assumption.

For historical examples on how this type of thing backfires, harken back to the '70s oil shock. That oil shock could directly be attributed to the US going off the gold standard and the subsequent devaluation of the dollars being received by the Gulf.

The US then was a net creditor. The US now is a net debtor.

I guarantee if a similar scenario unwinds - be it energy, consumer goods, or whatever, the results will be much nastier this time around.

And I don't mean disco.

[touchring]

Re: Oracle 1990, vs Sunpower 2009, history repeating

The problem with the theory that QE will fix all is the fact that the US still spends more than it earns.

All this talk about inflation fixing all is nice, but the problem is that this assumes the nations that have been lending to the US will continue to do so.

I have repeatedly pointed out that this is not a good assumption.

For historical examples on how this type of thing backfires, harken back to the '70s oil shock. That oil shock could directly be attributed to the US going off the gold standard and the subsequent devaluation of the dollars being received by the Gulf.

The US then was a net creditor. The US now is a net debtor.

I guarantee if a similar scenario unwinds - be it energy, consumer goods, or whatever, the results will be much nastier this time around.

And I don't mean disco.

Thanks for sharing your views.

So buy gold and PWE? But what if a major bank collapses and bring about a deflation like lehman?

[nero3]

Re: Oracle 1990, vs Sunpower 2009, history repeating

The problem with the theory that QE will fix all is the fact that the US still spends more than it earns.

All this talk about inflation fixing all is nice, but the problem is that this assumes the nations that have been lending to the US will continue to do so.

I have repeatedly pointed out that this is not a good assumption.

For historical examples on how this type of thing backfires, harken back to the '70s oil shock. That oil shock could directly be attributed to the US going off the gold standard and the subsequent devaluation of the dollars being received by the Gulf.

The US then was a net creditor. The US now is a net debtor.

I guarantee if a similar scenario unwinds - be it energy, consumer goods, or whatever, the results will be much nastier this time around.

And I don't mean disco.

It will be very nasty, true, the the US loose the confidence in the dollar, and in treasuries ,then worse inflation in the seventies are coming, possibly even hyperinflation. I am thinking more it will be in the 5-20 % range, year on year. Probably more similar to Iceland than anything else.

[nero3]

Re: Oracle 1990, vs Sunpower 2009, history repeating

Please interpret for us dummies.

It's difficult to explain, but alternative energy, fertilizer, shipping, emerging markets, all follows the same pattern. What you are getting is a huge boom in alternative energy, as energy becomes scarce, simply because all the spreading of wealth because of the weak dollar, increase the global energy demand, especially as BRIC builds a middle class, and emerging economies develop towards service economies.

Think of this as 1988-1990 for these things, relative to the boom that was in US equities back then. Think of the 2007 crash in the sensex as the same as the 1987 crash in the dow.

[Guest]

Re: Oracle 1990, vs Sunpower 2009, history repeating

Spot on Nero3. I think you are the only person I've read on this site that firmly grasps this notion. We may be traversing a severely traumatized global financial economy - but the combination of a secularly weakening USD, with the geological unfolding events both converge to one point, that is, these two factors both massively affect hydrocarbons - and that convergence of two very large trends will make McKillop's below described scenario a very large component of the next decade. Can you say: $200 oil? Anyone want to deny this is in our near future? What that spells, at least initially, is more global boom. Meanwhile, the vast majority of iTulipers are mired in a view of the world going forwards as a sort of John Steinbeck inspired Great Depression II. Not according to McKillops subtle thinking on resource economics (BTW I understand this was EJ's major in University). Have you read Andrew McKillop? He's right up your alley with these ideas:

You have described the core thesis very well.

McKillop writes:

Petro Keynesian Growth

Real facts are always lacking in the discourse of the Cheap Oil fraternity. One easily-checked economic fact they will surely economize on is the following: the US economy attained it highest-ever postwar growth of real GDP, achieving what today would be the completely impossible all-year rate of 7.5%, which is about 3 times the US economy’s average annual growth rate through the 1990s when oil prices were low, in the Reagan re-election year of 1984. In 1984, in dollars of 2004 corrected for inflation and purchasing power parity, the oil price for light, low sulphur crudes was around USD 58 – USD 68/barrel. Lower quality, heavier and higher sulphur crudes typically sold at around USD 50 to 55/bbl in 2004 dollars, at that time.

This type of simple economic fact has almost ‘samizdat’ status, being close to unmentionable in the popular, and specialized media, exactly like Peak Oil until very recently. Today’s epochal and vast economic growth of India and China, for example, takes place in a framework of steadily rising oil prices – and also causes oil prices to rise. Very simply, the “oil tax” levied on the OECD countries, and increasingly on China, India and other oil-dependent industrialising and urbanizing nations, is recycled into the global economy. Rising oil prices create new and solvent demand in former, or continuing lower income societies and nations, for example exporters of non-oil mineral and agricultural commodities, for which prices are buoyed by higher energy prices. These ‘players’ have a high propensity to consume and therefore, in very classical Keynesian terms, this serves to increase world economic growth. My term for this process – which also generates more liquidity through increased demand for US dollars to settle oil purchases - is Petro Keynesian Growth.

Article here: http://www.financialsense.com/editor...2008/1117.html

It's difficult to explain, but alternative energy, fertilizer, shipping, emerging markets, all follows the same pattern. What you are getting is a huge boom in alternative energy, as energy becomes scarce, simply because all the spreading of wealth because of the weak dollar, increase the global energy demand, especially as BRIC builds a middle class, and emerging economies develop towards service economies.

Think of this as 1988-1990 for these things, relative to the boom that was in US equities back then. Think of the 2007 crash in the sensex as the same as the 1987 crash in the dow.

[Guest]

Re: Oracle 1990, vs Sunpower 2009, history repeating

More on this inflation vs. resources theme complexity from McKillop.

He firmly grasps the fiat currency unit and debt derived underpinnings of oil price changes, but he places this understanding solidly within a broader understanding of what have been, and will to a much greater extent become the primary underpinnings of the petroleum price (anyone insisting the fiat currency unit is the sole significant component in the oil price IMO is misleading us).

This guy is subtle - some conclusions may seem quite counter-intuitive. Some of his ideas may read like old hat and are well explored at iTulip - but one or two others are not.

QUOTE:

Concerning inflation, the usual add-on rationale for why higher priced oil is so bad for the economy, those ‘experts’ usually quoted by the media will carefully avoid to mention (or perhaps do not know) that well before the first Oil Shock, in the early 1970s, inflation rates were three or four times higher than official CPI figures in most OECD countries, today. Yet in the early 1970s oil prices were under USD 9-per-barrel in today's inflation adjusted dollars.

What happened in the early 1970s, notably ‘the abandon of Bretton Woods’ or fixed exchange rates and gold-US dollar pegging, was due to huge and unmanageable US debt with the rest of the world, in part, ironically, caused by the ‘Bretton Woods system’ of fixed US dollar-gold exchange, at around USD 38/Troy ounce of gold. Today’s gold price, in late 2004, is about USD 450/Troy ounce, and in 2008 gold briefly attained USD 1000/ounce.

The first major rise in oil prices through 1973-74 only served to ‘detonate’ already existing economic, fiscal and monetary pressures, and starkly reveal the weaknesses inherent in the postwar, OECD-centric, cheap oil-based economy.

Extending this to about 2.5 Billion Chinese and Indians, as we can demonstrate in under 1 minute with a piece of paper and pencil, is completely and totally impossible – due to resource and environment constraints and limits. Taking the average ‘demographic rate of oil demand’ in the OECD countries, about 14.3 barrels/capita in 2007, the complete impossibility of this being extended to a hypothetical ‘liberal economic developed world’, needing around 60 Billion barrels/year, leaps from the page.

In the short-term future (by about 2010-2015), and after the deflation shock following the collapse in 2007-2008 of the current oil-fired model of so-called Universal Prosperity, based on trading mostly-virtual debt-linked financial instruments, there is a rather large prospect of hyper-inflation following, like day follows night. A world currency crisis of unmanageably large proportions is becoming a real world possibility, at the 2010-2015 horizon.

It is very easy to claim that high oil prices (and/or high food prices) cause inflation, but this superbly ignores the monetary causes of inflation. The introduction of the Euro, for example, generated real but not officially admitted monetary inflation rates of 15%/year and more in 2002-04, in several Eurozone countries. The current overvaluation of the Yen and Euro (simply because there are no other ‘reserve moneys’ other than the USD, EUR and JPY) can easily reverse, leading to a surprising, non-rational, but real appreciation of the US dollar.

[nero3]

Re: Oracle 1990, vs Sunpower 2009, history repeating

Spot on Nero3. I think you are the only person I've read on this site that firmly grasps this notion. We may be traversing a severely traumatized global financial economy - but the combination of a secularly weakening USD, with the geological unfolding events both converge to one point, that is, these two factors both massively affect hydrocarbons - and that convergence of two very large trends will make McKillop's below described scenario a very large component of the next decade. Can you say: $200 oil? Anyone want to deny this is in our near future? What that spells, at least initially, is more global boom. Meanwhile, the vast majority of iTulipers are mired in a view of the world going forwards as a sort of John Steinbeck inspired Great Depression II. Not according to McKillops subtle thinking on resource economics (BTW I understand this was EJ's major in University). Have you read Andrew McKillop? He's right up your alley with these ideas:


Article here: http://www.financialsense.com/editor...2008/1117.html

Thanks for the link.

You know Germany. Had the US, been shrewd and "Asian" in their thinking they should have pump primed their economy through pumping out paper dollar to buy German government bonds from 1932 and through the depression. That would had pushed German interest rates and inflation down. It would have given Germany a boom similar to the boom of the US from 1989 to now, the US could had kept their machines going, like Japan from 89. The US treasury market is like the German bond market, that never was (because the US dumped it), between 1932-1949.

Of course, now US interest rates will head up, and inflation will head up, as the US is effectively bankrupt, and foreigners are loosing ability and will to prop up the US. I think US inflation will get even worse than in the seventies. The quantity of the US debt, is in my mind, not deflationary, because it's effectively the result of foreigners pump priming their economies, through propping up the bond market of a bankrupt nation, the US. If you are bankrupt, the level of debt, 100 %, 300 % or 500 %, of GDP does not really matter, in a sense, for the borrower, the more the better, as none is going to be paid back anyway, the level of possible inflation probably increase, not decrease with the debt load.

[gobears]

Re: Oracle 1990, vs Sunpower 2009, history repeating

I don't think so. I think the buying of treasuries, will create rising house prices, rising inflation, weaker dollar, further boom in emerging economies, further carry trades, boom in agricultural commodities, etc. It's like what the US did to finance WW2 (buy treasuries, mixed with wage and price controls), just in the 2009 world of modern computerized finance. I think what is gone is the asset price inflation disconnected from CPI inflation. I think the US will suffer a lot of stagnation, in the general market, but some thing will stand out. I think the emerging market's will have more of a "clean boom", with out the stagnation the general US stock market will suffer.

I think this quote along with followup quotes by Nero3, Lukester and others deserves further examination and thinking. The key point that is missed in many analyses is the shift of economic power from the G7, to the G20. The world of the 20th century basically split the world's resources & power between Western Europe, the USA and Japan. After WWII, it took Europe & Japan some time to catch up again, but they were already starting from a much higher base and just "regaining" what was already theirs. As the process was gradual and happened in an era of cheap energy / commodities, it was easy to accomodate.

In the case of the BRIC (and especially China), they are also now "reclaiming" what was their's, but you have to go back a few hundred years to when China had the dominant GDP on earth. If things revert to the norm of the past 3,000 years, China will once again have the dominant GDP on earth within the next 20 years, with the other BRIC underperforming China but still becoming siginficant competitors. This is all happening much more rapidly than in the past, due to the tremendous pace of learning and change enabled by the digital age. It is also happening in a climate of growing scarcity of resources / energy. However, the emergence of the BRIC will not be so easily absorbed by the US than the absorption of the other G7 after WWII. Afterall, the G7 were just reverting to the rough economic balance of pre-WWII (of course with some caveats, like a much weaker Britain, stronger US, etc...). In the case of the emergence of BRIC, the US economy (and G7), have to "accomodate" 2B+ "middle class aspriring citizens" who have to share the world's dwindling resources.

I think it is also important to point out, that the possibility for a country like China to rapidly modernize is greatly facilitated by the digital age, globalization, and "out-sourcing". China has tremendous structural and cultural potential just waiting to be unleashed. Much like Japan in the late 1800's to early 1900's, and again post-WWII. They are hard working, educated, and have shown a recent ability to adapt rapidly. They are making tremendous investments in infrastructure, education, and commerce. All that pent up potential is now being unleashed, and I believe they are just getting warmed up.

On the other hand, the G7 have "overshot" their trajectory. The financial shenanigans of the G7 in the past several years let them "paper over" the huge structural problems they have. Aging populations, under funded pensions, dwindling tax bases, increasing resource costs, etc... The G7 have continued to live on the trajectory set during their glory years, by living on credit whose low finance cost were built on incorrect assumptions (low energy costs, G7 dominance, etc...).

While the previous generation of BRIC workers were not well equipped to compete with G7 workers, the latest generation is getting very close to on-par. Our graduate electrical engineering courses at Berkeley used to be 10-20 years ahead of most foreign institutions (especially the BRIC). Now, due to the miracle of the internet, the course material between Berkeley, and say Tschinghua university in Beijing is not that different. In fact, you can download the lecture notes of many advanced courses from all over the US. The engineers we hire in Beijing now from the top universities, are almost on par with US engineers, but their "fully loaded" cost is 10x lower, and they work harder. While the US and other G7 still have a substantial advantage in high tech, the gap is closing, and the "lead-time" that innovators used to enjoy where they could earn outsized profits is evaporating, due to the tremendous pace of competitors in the digital age.

In summary, I believe we are at a disruptive point, where multiple bubbles are bursting simultaneously. The G7 economic dominance bubble is bursting, the G7 know-how bubble is bursting, and the cheap energy / resources bubble is bursting. The financial side of things is just the reckoning of the costs. Somehow, the financial world has to reconcile itself with the real world, as it always does eventually. The G7 will surely inflate its way out of debt until the debts are again in sustainable proportion to the true earnings power and asset valuations of the G7. The BRIC will become less dependent on US consumers (decoupling in slow motion). Things will overshoot and undershoot as the world adjusts, and its very hard to say where any particular market or currency will go short-term as the old directions & forces still have momentum and can cause wicked short-term counter-trends (witness oil prices).

However, when the reckoning is done, assuming we have not destroyed ourselves, the G7 "share of GDP" will be flattened to be more equal with the rest of the G20, and the rest of G20 will rise. The G7 will continue to "paper over" their structural problems with QE and other methods, which will help cushion the correction, but not really change the final outcome. Most importantly, it will be very hard to predict the year-to-year impact of QE (look at Japan's experience). Eventually, the world economy will find its new bearings. The world GDP will begin to grow again, and as it does, commodity prices will rise rapidly. Alt-e will help the G20 more efficiently share the world's dwindling resources. Investment in alt-e, gold, commodities, agriculture, BRIC, and very selective segments of G7 will win. I believe China's re-emergence may be fraught with turbulence until it really gets going again. Watch the Chinese domestic economy and Japan export economy for signs of a turn-around.

Also, this is not the 1930's or 1970's. Some financial lessons may be taken for sure. However, we are in the digital age, G20 is more important than G7, commodities are becoming more scarce, population pressures are greater, worldwide upward mobility is greatly increased (while it is decreased in the G7), we can innovate much more rapidly, etc... things just move too fast and are too multi-polar now to compare to those eras.

Thanks a bunch to Lukester and Nero3. My thoughts are on the same lines, and I welcome the out of the box discussion.

[Guest]

Re: Oracle 1990, vs Sunpower 2009, history repeating

Lots of really lucid comments there Nero3. Welcome to the iTulip zoo and menagerie.

The quantity of the US debt, is in my mind, not deflationary, because it's effectively the result of foreigners pump priming their economies, through propping up the bond market of a bankrupt nation, the US.

[Sharky]

Re: Oracle 1990, vs Sunpower 2009, history repeating

You know Germany. Had the US, been shrewd and "Asian" in their thinking they should have pump primed their economy through pumping out paper dollar to buy German government bonds from 1932 and through the depression. That would had pushed German interest rates and inflation down. It would have given Germany a boom similar to the boom of the US from 1989 to now, the US could had kept their machines going, like Japan from 89. The US treasury market is like the German bond market, that never was (because the US dumped it), between 1932-1949.

That sounds vaguely similar to what the US did in the mid-1920s with the UK. The Fed artificially lowered interest rates, resulting in a massive flow of money, gold and wealth into the UK, in an attempt to prop up its failing economy. The plan worked, but in the process it nearly bankrupted the US and became the underlying cause of the Great Depression.

If the US had exported more wealth in the 1930s by printing dollars and sending them to Germany, it may well have saved Germany, but the resulting damage in the US would likely have been crippling. I suspect that China is on the verge of learning a similar lesson.

[flintlock]

Re: Oracle 1990, vs Sunpower 2009, history repeating

It's difficult to explain, but alternative energy, fertilizer, shipping, emerging markets, all follows the same pattern. What you are getting is a huge boom in alternative energy, as energy becomes scarce, simply because all the spreading of wealth because of the weak dollar, increase the global energy demand, especially as BRIC builds a middle class, and emerging economies develop towards service economies.

Think of this as 1988-1990 for these things, relative to the boom that was in US equities back then. Think of the 2007 crash in the sensex as the same as the 1987 crash in the dow.

Thank you for the reply.

[c1ue]

Re: Oracle 1990, vs Sunpower 2009, history repeating

So buy gold and PWE? But what if a major bank collapses and bring about a deflation like lehman?

I have said time and time again - gold may preserve your capital, but it won't increase it. I do hold gold - both physical and paper - but it is a base rather than the engine of my portfolio.

What I look for is where the growth will be. Clearly not in the US in general, but possibly in some parts. So far it is not clear what those parts might be.

What you are getting is a huge boom in alternative energy, as energy becomes scarce, simply because all the spreading of wealth because of the weak dollar, increase the global energy demand, especially as BRIC builds a middle class, and emerging economies develop towards service economies.

Certainly at some point in the future, energy from oil/natural gas will become scarce. But my view is that this point is decades away. The feedback mechanism is already working: the spendthrift ways of the 1st world and the inefficient ways of the 2nd world (Russia, Eastern Europe, other oil producing nations) are all winding down as general economic conditions worsen worldwide. The worsening of economic conditions is itself slowing the rise of the BRIC middle classes.

You know Germany. Had the US, been shrewd and "Asian" in their thinking they should have pump primed their economy through pumping out paper dollar to buy German government bonds from 1932 and through the depression. That would had pushed German interest rates and inflation down.

The US DID do what you postulated...starting in 1924. This was the basis behind the 'economic miracle' in Germany. However by 1932, the US had it own problems and could no longer afford to do so - neither the government nor the private sector.

[Glenn Black]

Re: Oracle 1990, vs Sunpower 2009, history repeating

Am I to understand your theory as follows:

Western, 1st world industry consumes huge amounts of energy per $GDP generated. As energy prices rise, the most impact therefore falls on the shoulders of the 1st world economies. They in turn, respond by alternative energy, energy efficiency improvements, etc. but these changes are expensive in capital as well as $/unit energy consumed.

In the 3rd world however, they produce using different techniques, usually with a significantly lower energy overhead, and sometimes wih a lower energy used per unit of product produced. As they have a lower energy/$GDP ratio, they are less affected directly, and secondly, become a better deal when compared to the 1st world markets, and therefore pick up an additional share of the world's market share (1st world loses market share, 3rd world gains it).

If that is not what you are trying to say, please explain more fully. I must have missed your point and linkages.