Saturday, June 28, 2008

More they inflate, the more it deflates

I keep wondering if my assessment is going to be wrong, but I am going to stick to it until it is clear that I am wrong. Otherwise I will go nuts trying to figure out what I think I understand. There is a lot of inflation screaming out there, but I suspect we are looking at the last hurrah with stocks and housing in decline and commercial real estate sure to follow as recession sets in. The world is being driven by a one time event, the emergence of China and India into the realm of rapidly developing countries. This is a big event because in the case of China, auto sales are almost as high as those in the US for a country that didn't have auto sales to speak of 10 years ago. I am really kind of amazed to watch this market, as oil goes higher and higher and demand keeps skying in these 2 countries, despite the fact the bill for oil is way out of reach of the typical income in these countries. Americans that make many times more money are to the point of having to park their autos and take the bus.

My spin on this matter is that the world has moved too far too fast for the commodities markets to supply and now that commodities are the only game in town, the huge piles of money on the asset side of the accounts is chasing what amounts to a marginal surplus, creating what appears to be a shortage. They are building massive developments in Asia and I don't believe they are going to be feasible for a long time. In fact, they are building massive developments here in Dallas and I don't believe they are going to be feasible. Dubai is absolutely amazing, phenominal and sure to be a white elephant. China depends on exports to the rest of the world to raise money and I highly doubt they can stand on their own should their export partners enter a sizable recession. The emerging poor are paying double for the materials they need.

My point is that demand worldwide has been fueled by Wall Street finance and this animal is on life support. The most recent spiral has more to do with the failure of Wall Street finance and the breaking of the dam of pent of money creating through formerly recycled dollars being replaced by bad checks covered by the Fed. I believe there was $400 billion or more dollars unleashed on the world to clear out the SIV's and other off balance sheet games that was flat the entities lending to themselves. The Fed is now covering these funds in a variety of innovative and fraudulent lending games that are supposed to be temporary. They succeed in mopping this money up and the commodity bubble collapses. So do the American banks, which don't have the liquidity to pay their debts.

The whole world is focusing on inflation and I am looking toward deflation. The average American home has lost 18% of its value, some $4 trillion. The SPX is down 300 points, another $2.7 trillion plus another $1.3 trillion in the other stocks. That is $8 trillion in the US alone and we aren't even into the commercial real estate market or the debt markets, where there are several trillion in bad debts not even mentioned. Sub-prime is the tip of the iceberg, as we are going to see huge problems in corporate debt and the balance sheets of US corporations, which have been allowed liberal accounting rules to keep their balance sheets solvent.

The lending capacity of the American financial system is collapsing in the midst of screams about inflation. The game is going to center around who owes and who is owed by the financial system. The people that owe don't have the ability to pay and the collateral held is diminishing in value every day. For inflation to continue, money creation has to continue and I don't believe the last couple of months is a good omen for what is about to transpire. I read the Credit Bubble bulletin and I have noticed Doug's figures surrounding M-2 are growing slower and slower every day. I have also noticed currency has grown, but that is the result of the system needing more cash to buy gasoline for those that don't have checking accounts or those that don't carry a card. The money market accounts have grown, but there is massive hazard surrounding these accounts and I am not educated to the point of knowing what these funds are going into since it appears that commercial paper has declined.

The worldwide problems have been caused by excessive dollars getting into the hands of those that need them to buy capital goods and expand infrastructure. I don't expect the flow of dollars to continue for long and in fact, I expect them to literally cease, as the customers at Wal Mart are out of credit and up to their neck in the cost of surviving. But, this isn't a commodity price crisis, but a long cycle financial crisis that could be terminal.

At some point American banks are going to have to mark to market. So are European banks, which seem to be coming cleaner than the American counterparts. Goldman Sachs, not a bank, but somewhat an equivalent, hasn't even started to recognize its losses, maybe enough to wipe them out. It is kind of like 20 guys going to a whorehouse and 19 of them coming down with something and the 20th not catching anything, though he was with all the women. There are fictions going on.

Everything is down. I cannot buy into the idea that there are any good sectors on Wall Street worth holding at this time. There are stocks I think are almost giveaways, like PFE that I cannot bring myself to touch. The stock market is one of the last liquid games out there, even if the prices are down and people and entities are going to have to start raising cash. They talk one minute on CNBC about brokers reducing leverage while in the next breath hyping the market. I don't know how we are going to get from point a to point b if the gas isn't in the tank, which is what leverage is, gas in the tank. We are about to go from borrowing to expand to borrowing to stay afloat to struggling to get out of debt to keep from sinking. This is how deflation goes and it is a mathematical phenomenon.

People single out the US for collapse, but I don't get how the US collapses and the rest don't fall with it? The game is uphill and losing the US would be like losing 33% of your horsepower on an uphill climb. Being the dollar has backed all the currencies in the world, the rest also go to zero if zero is the case. I sense we are about to see a lot of goods on the market and no buyers.

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