I wrote this August 20, 2008. It never made post status, but what has transpired since, it becomes an interesting read October 26, 2008
Meanwhile, back at bear chat, the debate rages about inflation and deflation, gold and silver shortages and all kinds of wacko stuff. But, what is really happening? I think it is everything contrary to what the news says, that we are actually deflating, that the dollar is getting stronger because there is not only a shortage of them to continue the rest of the world on its merry way, but that they are going to get even shorter in supply. The US political scene is really getting messy and whomever wins the next election is going to prolong this agony any way they can, because government draws its power out of agony and not out of prosperity. Here in the US, they just get us to rubber stamp that what they are doing is agreed to because we voted for it. None of us would vote and I don't because I never agree to what they are doing.
The biggest shoes are about to drop, FNM and FRE. They will either languish for awhile or they will agree to something with the US in return for dropping all suits and prosecutions. Thirdly, the US will at least figure out that FNM and FRE weren't all at fault and were only doing what HUD and Congress told them to do and throw them a bone. The third case would allow them to begin to transact business like they should have all along and shut down the loose lending standards that have been increasingly applied since 1995.
For those on the inflation side, no one has shown me how the big spending consumers are going to get the money to keep the party going. Inflation going forward depends on money or credit to keep the bust going big time. In the 1970's, people went out and hoarded stuff to get a jump on the next price increase. This time they just aren't buying what is going up any more than they have to. Why is clear, they don't have the money or the capacity to ask the boss for more money this time.
The wacko gold bug bears think the dollar is going to nothing. I give them some credit in foresight, but I don't believe we are at that point nor do I believe they are going to be young men when it occurs, as in under 70. The US is still the economic powerhouse of the world and most of the rest of the world merely acts as suppliers to the US economic machine. Today I saw a comparison with Japan, the 1930's and with Argentina, and the comparison was the US was mostly like Argentina. There is a lot to the world besides adding up money flows, as they happen for more reasons than one side getting rich and the other going broke. In the case of the US, its debt is dollars and the financial assets of the world are dollars, mostly by choice. As I have written before, the exporting countries to the US have been exporting for a purpose, namely to acquire dollars. Their machinery over there is geared to produce goods in exchange for dollars and thus if the US fails to purchase the production, their business models fail.
The comparison to Japan is really deep. In todays society, savings and debt are bedroom cousins of each other. I am not sure what savings is, but to say that according to statistics, the corporations in the US made record profits in comparison to the GDP, the highest since 1929. Debt in the US is well over 300% of GDP, yet we owe foreigners an amount in the area of 50% of GDP. The other roughly 300% came from somewhere. Someone saves that money to create the loan and the more saved, the more debt accumulated.
If I had to make a guess right now, we are going to a short period of inflation talk followed by some bankruptcies, followed by a collapse in consumer spending. Consumer spending crashes won't be pleasant for the developing world or for parts of Europe. It is the US consumer floating China, not the relending of money to the US that is floating the US consumer. The consumer stops spending and expanding the economies of Asia as soon as the US consumer has no more credit. Then the money supply implodes in on itself, causing a scramble for market share in a variety of world commodity producers. Those that are liquid and poised to pick up some bargains in commodities will make a lot of money, while those caught speculating long are going to be crushed by the debt deflation.
Here is the problem with calling for deflation. The current mess created by the bailout of the financial system under the guise of floating bad funds under the auspices of the international banking community, we have the appearance of run away prices. The big point here is that the dollar recyclers are also commodity consumers on a grand scale for the first time and rather than lend the money back, they went shopping. Thus the prices for commodities everywhere are being pushed by demand from areas not seen since the 1970's. The 1970's commodity price spirals were also created by the third world being loaned money at that time to consume, together with a large war, the launching of social programs in the US and the removal of gold backing from the dollar. Throw in the maturing of the baby boom generation born between 1945 and the early 1960's and we have a huge demand for everything. People don't remember deflation because deflation is something avoided at all costs and the ones that saw it are dead. The people that saw the last gas crunch are the ones running the money now and they recall that very well. Thus, we have dead people that remember the deflation and a huge generation that remembers the inflation. Thus, we will eventually move to fight inflation, not even having a clue as to what deflation is.
But, it is deflation that will win. Everyone scoffs at it and I am a contrarian and I believe it will happen. They won't lower prices until their warehouses are so piled with crap that their bankers are calling the loans if they don't liquidate. People don't know how to make money and they understand losing it even less. Once they start holding out for their money, they are going to find that debt is consuming money so fast that yesterdays rock bottom price is a sellers bonanza today. In many cases selling is going to mean bankruptcy and not selling is going to mean bankruptcy. We are already seeing this in the financial circles, as you can't sell your CDO's at this price so wait. Wait and you keep taking lower prices, as word gets out this stuff is mainly toxic. The car business is more than just gasoline, as the sales apparently started to dive last July, not after the price run up in gasoline. It is just that the automakers are all trying to sell what brung them, not what they can't make presently. We won't see that demand return when the price of gasoline falls because people just won't have the money this time around. It is one thing to wait around for a deal, but it is another to have your money or credit disappear in the meantime. There is going to be a lot of this.
The problem cannot be solved in the conventional sense that a normal recession happens. It can't be solved because it is a debt problem that must be wiped out in a liquidation. They don't wipe it out and either the economy drags into a long term down cycle or the deflation pressures are worse next time.
Wednesday, August 20, 2008
Monday, August 11, 2008
Now We Have Been Rescued-NOT!
I carry on a continual debate with other bears about whether we are in an inflationary environment or a deflationary one. It appears for the moment that we are hung between the two, but it is my contention we end up with deflation, at least until recovery starts anew. I will go into details what I mean later in this post.
The stock market bottomed again on July 15. I had been expecting a bottom because July always provides turns in markets or I should usually. In fact, if one would trade just 4 months, they would probably make more money than trying to force the markets for the entire year, the first months of quarters. Almost all the strong moves I have seen originated in January, April, July and October with April and July usually providing signals of direction. I won't go into details here because I don't have a load of statistics, merely observations. But, the point is that in bears, an up means a correction of a down move in July, in bulls an up means get on board, at least from what I have seen. A down in a bull means all hell is going to break loose and a big correction is ahead, ala 1987, 1997 and 1998 and to some extent 2000 to name a few. This correction looks like the ones we had in 2001 and 2002, where we had big falls into July, a strong rally for a month then a turn down. The true nature of the 2000-2002 bear was obscured by its aliabi, the 9/11 event, which was a smoke screen (A $30 billion event causes a recession and a $500 billion real loss is supposed to be a walk in the park? I will get to this later as well), but the bottom in July was taken out in August and we were headed strongly down when 9/11 hit. an
So I think this is a seasonal event that has appeared in the last 2 strong bear moves down and nothing but a bear correction. The bulls are rejoycing in some things, namely that the Fed won't have to raise interest rates because of the oil markets being in decline. There is too much reflection on the 1970's going on when in fact this is nothing like the 1970's. The 1970's were a period of strong worldwide demand colliding with a required change in the US money and strong generational demographics in the US coming into play. This one is a long and pure financial bubble, aka, 1914 to 1930. There is a world of difference.
The bulls are celebrating a strong reversal in the dollar as well. So they celebrate the fall in the dollar and then the rise in the dollar like both are Johnny on the spot to rescue them. There is the thought that the dollar is making oil go down and the thought that oil is making the dollar go up. I have to believe neither of them are true and that if anything, the dollar price in oil is a supporting feature of the dollar, not a depressing feature of it. The true culprit is liquidity and it might be liquidity in a lot of places.
Doug Noland, whose inflation outlook is much polar to mine, speculates that the pair trades on Wall Street are in a mess and that is what is causing the fall in commodities, the rally in the dollar and maybe the stock market rally as well. I give him an angle on this because I am still pretty naive to what the pair trades are at this time and I would venture Doug, being where he is has a clue. Truth be known, the banks could very well be running the markets against their customers to make some money of their own. What Wall Street and its financiers will do to their customers for money is as close to fraud and a violation of some kind of fudiciary duty as can be imagined, as they know where the players are most of the time. This means they know how much retail money is short in the stock market and can influence moves overnight by moving the market parameters and they know the pair trades, thus force the hands of the players to carry the trade in their favor. Plus they have all the free money anyone could imagine, as they only have to mark to market.
The bulls speculation is that the price of oil is the entire problem, that the subprime losses didn't really happen and that what did happen is easily absorbable. This is all bullish nonsense and those that spout it really can't believe it. There is a lot of difference between a $500 billion loss in the bond market and a $500 billion loss in the stock market. For one, the bonds are expected to be there, while it is accepted that stocks are play money. In public institutions few are based on stock in their portfolio that depend on it for their net worth. Most is in trusts and the vulnerable are the pension trusts which have been swept under the rug for years anyhow. Bonds, on the other hand, come out of the net worth of highly leveraged financial institutions and not only have to be recognized, but greatly impair the capacity of these institutions to make more loans. Stocks might have a wealth effect and in some cases force corporations to pay more attention to their pension liabilities, but bonds make companies go to zero and destroy the capacity for further financial growth. I don't believe most of these losses are temporary, as the companies taking them are having to make bargain basement deals for more capital and would otherwise find a legal way around imaginary losses. They aren't taking these losses to get ahead of the curve in other words, but only out of necessity. There are more to come.
I believe this is the real game behind the dollar rally, the decline in the price of oil and the decline in business in general. I also believe it will lead to deflation. I will introduce what I call my theory of pressure just to coin a phrase. I think it applies in all systems where you can deal with excess for awhile, but you can't deal with shortage for very long at all and shortage includes a reduction in the former excess. Thus if we are getting 12 units when we need 10, whether it be oil or money, we can play with that for awhile. Once the market pretends we have 12 units when we need 10, in money, we have inflation expectations and an accomodation that we are going to continue to need 12 units, we are going to price like we have 12 units and so on. But, let the market drop to 11 units and one might realize after awhile that Old Joe didn't have as much inventory last time and we are using just in time inventory systems so we have better stock up a little. On the other side, demand is falling for oil in the US. What does that mean? Even though the price is up, the pressure to acquire more oil has dropped and in fact, the inventories can be reduced by a factor of maybe 20 times the drop in demand, because that is how many days of inventory are being held. This is probably fallacious because so much of the inventory is used to fill the system and not really in surplus (ie in pipelines and other places). Thus mere changes in pressure, even if pressure is still in excess or in sufficient are enough to produce a swing in the opposite direction.
There is a lot of talk about there being too many dollars in the world. Are there? The oil markets have created a pile in the Middle East and in Russia. The export markets have created a pile in east Asia and even in South America in places. But, is the pile growing fast enough? The typical inflation bear seems to think it is growing so fast that in a matter of days the dollar is going to zero. But, ask the banker in London who is borrowing against a rising or high TED spread if there are enough dollars? He will probably tell you differently.
The point being that outside of OPEC, the flow of dollars has changed dramatically. In OPEC, we have seen the run in oil prices maybe come to an end and demand begin to drop so the flow may change there as well. The stated US trade deficit isn't rising despite massive increases in oil prices and the bill for oil. This means there is $200 billion of international income missing from the exporters to the US. There are other problems as well, namely massive losses in bank capital.
Though we may have a stock market crash, my idea here is that we are more likely going to have a long grind down. Bulls point to factors that have no real bearing on what is going to happen going forward and look back at a time when credit was easier, cheaper and more widespread than we will have going forward. They point to a bottom in housing that seems to never come and is threatened by further financial impairment in the GSE's and other sources of home financing. Mostly they point to a fall in oil prices, which were caused to start by the solution to the credit mess sought by banks and now are falling most likely due to even tighter funds. They look back at the amazing growth in China and think it will carry us through, when in fact the Chinese have in total assets about 25% of the GDP of the US and if they have to spend those, they are out of business.
I don't believe the real impact of the credit crunch is upon us yet. Using the unwritten theory of pressure, what we are seeing right now is the impact of diminished pressure. The banks wrote a hot check to cover their SIV's then after awhile the Fed covered it then the different wealth funds around the world took the money out of circulation by injecting capital into the banks. Thus we had a sudden blow up in pressure that probably peaked in March and now we are seeing the pressure diminish into May and probably level out now. The point of the leveling out only has to do with the stock market, which is enjoying a temporary increase in pressure due to less money being needed to trade the oil market. But, the supply of pressure creating money is declining and the stock market will only last so long.
In this vein, I think we are moving to a bear in all markets and the action to the upside is only due to the idea that most traders have lived their entire lives in asset inflation times and are continually trying to buy the bottom. Robert Prechter, someone that many try to discredit, said in his books that once the supercycle top was reached, the previous bull action would have been so long that the market would be bought all the way down. I see here that people are speculating in housing, despite the fact that the financing for housing has been impaired not only on a national level, but an international level as well. They have no clue that 75% of the demand for housing is based on financing and much of the rest of it is based on the idea that prices will go up. We are going to get a time where neither prevail, neither easily available financing or the expectation the price will go up. Existing home sales are still well above 4 million, which used to be the speculative peak of home sales, which tells me there is plenty of speculating going on.
Look what is going on in China. Now we have a dollar reversal and maybe it is short term and maybe it isn't, due to the level of interest rates worldwide and the use of dollars for banking liquidity worldwide. Hot money going into China with its high growth and appreciating currency (appreciating while inflation rages over there as they have overpaid for everything) is likely to reverse and it won't find a wide exit. The Shanghai was off 5% last night, a level that constitutes a crash over 1 day (the list of 5% down days in US history is pretty short) and this in itself might be a signal the door isn't too wide. The entire world is on the short dollar trade and the banks may have all speculators where they want them, as bankers might just want to take delivery on all these dollars.
As of right now, bears are cheering in the commodity markets and crying in the stock markets. But, the cash flow that was generated by commodities was an important factor in supporting the economys of the world, as it created the pressure in dollar assets to keep the supply of dollars sufficient. Some say the oil market went up because of a weak dollar, but it is all possible that the oil markets kept the supply of dollars on the international markets up, mainly because so many Americans had to put the purchase of gasoline on their credit cards. I doubt the US consumer is alone in this matter. Now with the peak in oil demand, oil prices, the incoming pressure of dollars is weakened and thus the supply pressure of dollars has declined or even turned negative.
I have been posting that the market would rally for a month, retrace 5/8th roughly of the decline since May and roll over. A month would be August 15. This has been the pattern going into and coming out of July in the past 2 bear market moves. The lone bullish exception was 1996, which in fact was a sideways market that took off out of a sudden decline in July and reversal. Thus the sideways, which bulls consider down market, turned up in July. This wasn't a sideways market, but a steady sell down. In fact, this wasn't a classic turn off the bottom as we have seen in the past. Past turns have made a 1000 points in a week, well beyond the moves we have seen so far.
The stock market bottomed again on July 15. I had been expecting a bottom because July always provides turns in markets or I should usually. In fact, if one would trade just 4 months, they would probably make more money than trying to force the markets for the entire year, the first months of quarters. Almost all the strong moves I have seen originated in January, April, July and October with April and July usually providing signals of direction. I won't go into details here because I don't have a load of statistics, merely observations. But, the point is that in bears, an up means a correction of a down move in July, in bulls an up means get on board, at least from what I have seen. A down in a bull means all hell is going to break loose and a big correction is ahead, ala 1987, 1997 and 1998 and to some extent 2000 to name a few. This correction looks like the ones we had in 2001 and 2002, where we had big falls into July, a strong rally for a month then a turn down. The true nature of the 2000-2002 bear was obscured by its aliabi, the 9/11 event, which was a smoke screen (A $30 billion event causes a recession and a $500 billion real loss is supposed to be a walk in the park? I will get to this later as well), but the bottom in July was taken out in August and we were headed strongly down when 9/11 hit. an
So I think this is a seasonal event that has appeared in the last 2 strong bear moves down and nothing but a bear correction. The bulls are rejoycing in some things, namely that the Fed won't have to raise interest rates because of the oil markets being in decline. There is too much reflection on the 1970's going on when in fact this is nothing like the 1970's. The 1970's were a period of strong worldwide demand colliding with a required change in the US money and strong generational demographics in the US coming into play. This one is a long and pure financial bubble, aka, 1914 to 1930. There is a world of difference.
The bulls are celebrating a strong reversal in the dollar as well. So they celebrate the fall in the dollar and then the rise in the dollar like both are Johnny on the spot to rescue them. There is the thought that the dollar is making oil go down and the thought that oil is making the dollar go up. I have to believe neither of them are true and that if anything, the dollar price in oil is a supporting feature of the dollar, not a depressing feature of it. The true culprit is liquidity and it might be liquidity in a lot of places.
Doug Noland, whose inflation outlook is much polar to mine, speculates that the pair trades on Wall Street are in a mess and that is what is causing the fall in commodities, the rally in the dollar and maybe the stock market rally as well. I give him an angle on this because I am still pretty naive to what the pair trades are at this time and I would venture Doug, being where he is has a clue. Truth be known, the banks could very well be running the markets against their customers to make some money of their own. What Wall Street and its financiers will do to their customers for money is as close to fraud and a violation of some kind of fudiciary duty as can be imagined, as they know where the players are most of the time. This means they know how much retail money is short in the stock market and can influence moves overnight by moving the market parameters and they know the pair trades, thus force the hands of the players to carry the trade in their favor. Plus they have all the free money anyone could imagine, as they only have to mark to market.
The bulls speculation is that the price of oil is the entire problem, that the subprime losses didn't really happen and that what did happen is easily absorbable. This is all bullish nonsense and those that spout it really can't believe it. There is a lot of difference between a $500 billion loss in the bond market and a $500 billion loss in the stock market. For one, the bonds are expected to be there, while it is accepted that stocks are play money. In public institutions few are based on stock in their portfolio that depend on it for their net worth. Most is in trusts and the vulnerable are the pension trusts which have been swept under the rug for years anyhow. Bonds, on the other hand, come out of the net worth of highly leveraged financial institutions and not only have to be recognized, but greatly impair the capacity of these institutions to make more loans. Stocks might have a wealth effect and in some cases force corporations to pay more attention to their pension liabilities, but bonds make companies go to zero and destroy the capacity for further financial growth. I don't believe most of these losses are temporary, as the companies taking them are having to make bargain basement deals for more capital and would otherwise find a legal way around imaginary losses. They aren't taking these losses to get ahead of the curve in other words, but only out of necessity. There are more to come.
I believe this is the real game behind the dollar rally, the decline in the price of oil and the decline in business in general. I also believe it will lead to deflation. I will introduce what I call my theory of pressure just to coin a phrase. I think it applies in all systems where you can deal with excess for awhile, but you can't deal with shortage for very long at all and shortage includes a reduction in the former excess. Thus if we are getting 12 units when we need 10, whether it be oil or money, we can play with that for awhile. Once the market pretends we have 12 units when we need 10, in money, we have inflation expectations and an accomodation that we are going to continue to need 12 units, we are going to price like we have 12 units and so on. But, let the market drop to 11 units and one might realize after awhile that Old Joe didn't have as much inventory last time and we are using just in time inventory systems so we have better stock up a little. On the other side, demand is falling for oil in the US. What does that mean? Even though the price is up, the pressure to acquire more oil has dropped and in fact, the inventories can be reduced by a factor of maybe 20 times the drop in demand, because that is how many days of inventory are being held. This is probably fallacious because so much of the inventory is used to fill the system and not really in surplus (ie in pipelines and other places). Thus mere changes in pressure, even if pressure is still in excess or in sufficient are enough to produce a swing in the opposite direction.
There is a lot of talk about there being too many dollars in the world. Are there? The oil markets have created a pile in the Middle East and in Russia. The export markets have created a pile in east Asia and even in South America in places. But, is the pile growing fast enough? The typical inflation bear seems to think it is growing so fast that in a matter of days the dollar is going to zero. But, ask the banker in London who is borrowing against a rising or high TED spread if there are enough dollars? He will probably tell you differently.
The point being that outside of OPEC, the flow of dollars has changed dramatically. In OPEC, we have seen the run in oil prices maybe come to an end and demand begin to drop so the flow may change there as well. The stated US trade deficit isn't rising despite massive increases in oil prices and the bill for oil. This means there is $200 billion of international income missing from the exporters to the US. There are other problems as well, namely massive losses in bank capital.
Though we may have a stock market crash, my idea here is that we are more likely going to have a long grind down. Bulls point to factors that have no real bearing on what is going to happen going forward and look back at a time when credit was easier, cheaper and more widespread than we will have going forward. They point to a bottom in housing that seems to never come and is threatened by further financial impairment in the GSE's and other sources of home financing. Mostly they point to a fall in oil prices, which were caused to start by the solution to the credit mess sought by banks and now are falling most likely due to even tighter funds. They look back at the amazing growth in China and think it will carry us through, when in fact the Chinese have in total assets about 25% of the GDP of the US and if they have to spend those, they are out of business.
I don't believe the real impact of the credit crunch is upon us yet. Using the unwritten theory of pressure, what we are seeing right now is the impact of diminished pressure. The banks wrote a hot check to cover their SIV's then after awhile the Fed covered it then the different wealth funds around the world took the money out of circulation by injecting capital into the banks. Thus we had a sudden blow up in pressure that probably peaked in March and now we are seeing the pressure diminish into May and probably level out now. The point of the leveling out only has to do with the stock market, which is enjoying a temporary increase in pressure due to less money being needed to trade the oil market. But, the supply of pressure creating money is declining and the stock market will only last so long.
In this vein, I think we are moving to a bear in all markets and the action to the upside is only due to the idea that most traders have lived their entire lives in asset inflation times and are continually trying to buy the bottom. Robert Prechter, someone that many try to discredit, said in his books that once the supercycle top was reached, the previous bull action would have been so long that the market would be bought all the way down. I see here that people are speculating in housing, despite the fact that the financing for housing has been impaired not only on a national level, but an international level as well. They have no clue that 75% of the demand for housing is based on financing and much of the rest of it is based on the idea that prices will go up. We are going to get a time where neither prevail, neither easily available financing or the expectation the price will go up. Existing home sales are still well above 4 million, which used to be the speculative peak of home sales, which tells me there is plenty of speculating going on.
Look what is going on in China. Now we have a dollar reversal and maybe it is short term and maybe it isn't, due to the level of interest rates worldwide and the use of dollars for banking liquidity worldwide. Hot money going into China with its high growth and appreciating currency (appreciating while inflation rages over there as they have overpaid for everything) is likely to reverse and it won't find a wide exit. The Shanghai was off 5% last night, a level that constitutes a crash over 1 day (the list of 5% down days in US history is pretty short) and this in itself might be a signal the door isn't too wide. The entire world is on the short dollar trade and the banks may have all speculators where they want them, as bankers might just want to take delivery on all these dollars.
As of right now, bears are cheering in the commodity markets and crying in the stock markets. But, the cash flow that was generated by commodities was an important factor in supporting the economys of the world, as it created the pressure in dollar assets to keep the supply of dollars sufficient. Some say the oil market went up because of a weak dollar, but it is all possible that the oil markets kept the supply of dollars on the international markets up, mainly because so many Americans had to put the purchase of gasoline on their credit cards. I doubt the US consumer is alone in this matter. Now with the peak in oil demand, oil prices, the incoming pressure of dollars is weakened and thus the supply pressure of dollars has declined or even turned negative.
I have been posting that the market would rally for a month, retrace 5/8th roughly of the decline since May and roll over. A month would be August 15. This has been the pattern going into and coming out of July in the past 2 bear market moves. The lone bullish exception was 1996, which in fact was a sideways market that took off out of a sudden decline in July and reversal. Thus the sideways, which bulls consider down market, turned up in July. This wasn't a sideways market, but a steady sell down. In fact, this wasn't a classic turn off the bottom as we have seen in the past. Past turns have made a 1000 points in a week, well beyond the moves we have seen so far.
Thursday, July 24, 2008
When and how do we know this thing is over?
I think we are in a watershed event that is going to lead to depression around the world, but even that situation will have an end. The Great Depression lasted 20 years, even though historians seem to gloss this fact over with nonsense about the New Deal and other socialist programs that basically were make work, survival programs and little else. But, even in that vein, one of the great bull markets in history occurred between 1932 and 1937, where gains were in the area of 400% on the Dow. What followed was a bear market that was also one of the worst. There was a difference then in the sense that they at least could debase the local currencies and leave gold for international settlement. That end of the game is over and the only thing left to do is move the currencies to zero as a solution. I doubt TPTB will allow that to occur, as it would mean everyone was bankrupt. Also, the impact of intentional deficit spending isn't new any more and won't have the impact it might have had then. the only solutions so far are to sustain prices and demand at unsustainable levels and massive resistance to let the situation finish adjusting and put the problems behind us, thus the heartburn might just turn into a heart attack.
The US is the demand for the world. Robert Rubin undertook this path in the late 90's in order to attempt to finish the Asian crisis and we forgot to stop it. Trade deficits exploded with the stock bubble, then florished with the housing bubble. It hasn't seemed to sink into the average Joe's head or the average analyst what impact this trade deficit going away is going to have on the rest of the world. This is demand fueled by credit from the US. It might be money loaned back by other countries, but the credit is made in the US and that system is reversing itself fast. I believe this mess has the capacity to balance the US trade deficit and there isn't 5 countries combined in the world that could replace the $600 billion or so in excessive demand that the US brought to the table and if there are, it is only due to the fact that the US is running deficits with them right now. This amount of credit would suck China dry in about 2 years. They won't be able to expand or maintain trade by shrinking the value of the medium of trade.
The idea of Peak Oil might turn out correct not because potential production has peaked, but because consumption has peaked. I think people now will be shocked to see how much less gasoline is used, how much less paper towel is used and so on and so on. Take away pricing pressure and you will soon see the shitcan the Arabs have put themselves into with all their financial commitments. India implodes and the financial backing in China disintegrates. Commodities collapse and the commodity exporting contries go with it.
It will be worldwide and the signs are already showing worldwide. One of signs of this will be oil and what is right now being viewed as a bullish development, the price coming down, is either a temporary respite or a sign that what I am illustrating is starting to occur. The price of oil in this area has been there too short a time to have caused much of the economic grief that has shown up on the scene and much lower prices would have to appear before there was any impact on the current conditions. Bullish or not, oil is a limiting factor on economic expansion due not to price but to supply.
If demand for oil is indeed falling and price follows, then at some price there will be a need to sell more oil, not less oil due to financial necessity. At what price does this occur? I am guessing under $70 and maybe under $55. Remember if you were there, that in 1980, we were never going to see oil at $13 again and yet we did on and off for the next 19 years. I think $55 is a much more substantial price than $13 was 25 years ago, due to the direction other assets are headed and the relative financial position of the exporters. It is also substantial in that instead of allowing consumers to keep there cash and pay down debt, it keeps the money in circulation and in bank accounts. The main reason oil prices are inflationary at this time is they keep the money coming, but the consumer can only send out so much before they are tapped.
I would guess the best way to tell that my prognosis is wrong is if the bull win enough rounds to keep this from occuring is that home prices quit falling and home starts tick up(this is probably a nonsense sentence, but I didn't know how else to write it and I hope you know what I mean in the form of demand). As long as these are inclusive of each other, this game is going to go on and it isn't a housing crisis to start, but a housing bubble. Without price increases, construction increases only prolong and make the problem worse. I think the other thing is that oil demand remains high. As long as the demand and price for oil are high, the bulls are still in the game, contrary to the news. The most bearish news right now is if oil keeps coming down. The bulls didn't need lower prices, they just needed a price where it would stop going up. I believe that if China isn't in full financial crisis by this time next year or apparently headed for it, depression will probably be avoided. I would watch to see how much it slips. A legitimate boom continuing in China probably precludes a depression, but I have to believe for the time being that China is booming toward over expansion that won't be profitable. There is a lot of money from around the world chasing Chinese assets that outsiders really cannot own. The return will be zero.
Now if you followed me closely, I might have made sense. But, if you got lost by your follow the press logic, you might be more confused than before I wrote this. I think most of us bears believe the US credit system has run its course and this will take down the world economy, but at the same time, we have our eyes on 2002. This time is different, as all the financial companies have impaired financial positions and there isn't any home equity left to leverage. The hedges are fully leveraged and before long there won't be a counter party to buy what they have to liquidate.
The US is the demand for the world. Robert Rubin undertook this path in the late 90's in order to attempt to finish the Asian crisis and we forgot to stop it. Trade deficits exploded with the stock bubble, then florished with the housing bubble. It hasn't seemed to sink into the average Joe's head or the average analyst what impact this trade deficit going away is going to have on the rest of the world. This is demand fueled by credit from the US. It might be money loaned back by other countries, but the credit is made in the US and that system is reversing itself fast. I believe this mess has the capacity to balance the US trade deficit and there isn't 5 countries combined in the world that could replace the $600 billion or so in excessive demand that the US brought to the table and if there are, it is only due to the fact that the US is running deficits with them right now. This amount of credit would suck China dry in about 2 years. They won't be able to expand or maintain trade by shrinking the value of the medium of trade.
The idea of Peak Oil might turn out correct not because potential production has peaked, but because consumption has peaked. I think people now will be shocked to see how much less gasoline is used, how much less paper towel is used and so on and so on. Take away pricing pressure and you will soon see the shitcan the Arabs have put themselves into with all their financial commitments. India implodes and the financial backing in China disintegrates. Commodities collapse and the commodity exporting contries go with it.
It will be worldwide and the signs are already showing worldwide. One of signs of this will be oil and what is right now being viewed as a bullish development, the price coming down, is either a temporary respite or a sign that what I am illustrating is starting to occur. The price of oil in this area has been there too short a time to have caused much of the economic grief that has shown up on the scene and much lower prices would have to appear before there was any impact on the current conditions. Bullish or not, oil is a limiting factor on economic expansion due not to price but to supply.
If demand for oil is indeed falling and price follows, then at some price there will be a need to sell more oil, not less oil due to financial necessity. At what price does this occur? I am guessing under $70 and maybe under $55. Remember if you were there, that in 1980, we were never going to see oil at $13 again and yet we did on and off for the next 19 years. I think $55 is a much more substantial price than $13 was 25 years ago, due to the direction other assets are headed and the relative financial position of the exporters. It is also substantial in that instead of allowing consumers to keep there cash and pay down debt, it keeps the money in circulation and in bank accounts. The main reason oil prices are inflationary at this time is they keep the money coming, but the consumer can only send out so much before they are tapped.
I would guess the best way to tell that my prognosis is wrong is if the bull win enough rounds to keep this from occuring is that home prices quit falling and home starts tick up(this is probably a nonsense sentence, but I didn't know how else to write it and I hope you know what I mean in the form of demand). As long as these are inclusive of each other, this game is going to go on and it isn't a housing crisis to start, but a housing bubble. Without price increases, construction increases only prolong and make the problem worse. I think the other thing is that oil demand remains high. As long as the demand and price for oil are high, the bulls are still in the game, contrary to the news. The most bearish news right now is if oil keeps coming down. The bulls didn't need lower prices, they just needed a price where it would stop going up. I believe that if China isn't in full financial crisis by this time next year or apparently headed for it, depression will probably be avoided. I would watch to see how much it slips. A legitimate boom continuing in China probably precludes a depression, but I have to believe for the time being that China is booming toward over expansion that won't be profitable. There is a lot of money from around the world chasing Chinese assets that outsiders really cannot own. The return will be zero.
Now if you followed me closely, I might have made sense. But, if you got lost by your follow the press logic, you might be more confused than before I wrote this. I think most of us bears believe the US credit system has run its course and this will take down the world economy, but at the same time, we have our eyes on 2002. This time is different, as all the financial companies have impaired financial positions and there isn't any home equity left to leverage. The hedges are fully leveraged and before long there won't be a counter party to buy what they have to liquidate.
Friday, July 18, 2008
Is the bubble done?
I have speculated for about 2 years that the oil rally would eventually end at a fibonacci number, $89 or $144 as it has appeared for the past couple of years. For one, I had an idea that the rally had fallen short in 2006 and that the low 80's figure was going to be the high. That was until the financial crisis left huge amounts of money unattached worldwide and the market ran past $89 to about $100. That too was a potential top, but once oil ran past $110, it was clear it was going to the $144 area, where for the time being it has stopped.
In such a market, the high of $147 or whatever it was interday was about as close to $144 as one could expect. The next move, if we do in fact go higher will be $233.
I have become attached to these fib numbers due to my knowledge of the movement of oil over time. For a long time it was $3 a barrel, even when $3 was a lot of money. In the 1970's, it moved first to $5, then to $8, then to $13 where it stayed for about 5 years. When the Iranian revolution broke out, oil then moved to $21 and then in a 2 price system to $28 and $34, with the Saudi's maintaining the lower price. When oil broke, it always settled in the $13 range before rallying back to $21 for about 2 decades, with some runs to $34 during times like the first Gulf War and early in the 2000's. Thus we saw moves to $5, $8, $13, $21 and $34, making 5 total moves. This time we saw moves to $21, $34, $55, $89 and $144 for 5 moves. Does this mean we are done? I think there is a real good chance we are, as there is coming something that few will understand, the fact that inflation causes deflation.
Here is what I believe and I will maybe change this, but for now I am going to stick to what I believe is happening. For one, the bust in the CDO market created a situation where $400 billion wasn't recycled to from one account to another and instead was funded by the banks writing what amounted to hot checks, leaving the money to circulate. Of course, the Fed had no alternative but to cover these checks, as word got out in the Fed funds market that maybe lending to XYZ bank might be a bad idea. Everyone knew about banks like Citi, which clearly had worldwide influence as was probably too big to fail, but much of this is still out there. There was the run on Northern Rock and the implosion of hedge funds, including some run by Bear Stearns, but this was lost money. The bank of England covered the funds drawn from NR with $100 billion. All this money was left to follow the only game left, commodities.
What has happened in the last year is quite interesting. For one thing, much of the $400 billion has been absorbed by deflation. I will elaborate here to the point that hopefully you can follow what I am talking about instead of reading the headline inflation numbers, primarily because inflation and deflation are lagging and not forward. First, much of this extra money went to buy oil because the demand for oil was burgeoning and it was something that would clearly store and play down the road. Second, much of this money ended up or was already in SWF (sovereign wealth funds) and much of this money went to recapitalize many of the weak financials. In this case, money kind of disappears. They say we have written off $400 billion worldwide, so that pretty much accounts for the $400 billion that didn't get recycled.
We are now seeing a pretty violent reaction on the oil price run up. The bulls think this is good news, but oil is a huge market. If this is indeed a speculator driven price hike, then it is clear that there are some huge speculators stuck in positions. There is only one way that speculators could have driven this market higher for this long and that is to roll their own contracts. In order to get out of the current months contracts, they would have had to have taken delivery or rolled sufficient enough long positions forward to entice the hedgers to move their short positions forward instead of making delivery at a loss, thus both moving their liabilities forward. Now that the shorts might have the upper hand here, it is quite possible they are going to force delivery of product the longs aren't prepared to take. I don't know where this oil may be hidden, but I woudn't be surprised to see it suddenly appear in inventory either here in the US or overseas. The point is that if speculators are indeed responsible for this bubble, then there is oil somewhere unaccounted for and if it is hidden by the longs, then it is financed and it and the borrowed money must be liquidated. This is a financial disaster awaiting the hedge funds and you can bet that OPEC itself has forward shorts in this market.
Amaranth supposedly lost $6 billion on their failed gas corner. To understand the size of their position, one must realize that gas declined about $8 from peak to bottom and that Amaranth probably paid around $10 for most of it on average. Realizing they got out at between $6 and $8 and that 1 trillion feet of gas sells for $1 billion a dollar then one might realize how huge their position was. Figuring they lost $3 per MCF, they had 2 trillion of the roughly 3 trillion in storage. I was wondering for some time how gas was staying as high as it was in light of how large the supplies in storage were. There just isn't a lot of places you can hide natural gas. This may not be true for oil, as I suspect there are storage facilities around the world that could hold a billion barrels or more and it not be inventoried. Imagine if there were 1 billion barrels of oil out there that suddenly needed to be liquidated? Even if the figure were 200 million barrels, we would be looking at the US supply of crude sitting out there somewhere. The large exporting countries have to have massive storage facilities for no other reason than to be able to manage production and demand over time. Countries like Indonesia where there used to be sizable exports could have large storage facilities that they could rent to allow the hiding of oil. The Japanese trader who ran the copper corner in the 1990's supposedly had copper in warehouses in LA and other areas that was bought on the LME.
In any case, the market could actually have been true rather than rigged as I suppose and there isn't a hidden surplus. I find that highly doubtful, having watched the oil market for decades. But, it has to be either a rolled contract game or an actual taken delivery and hidden game where continued pressure is put on the market by very sizable excess contracts being taken to delivery points over and over again. If a corner has enough long contracts over what could be provided to the market, they can always exercise a few deliveries and the shorts have to buy their way out of the rest of them. This gives the appearance of making a huge profit, which is really nothing more than postponement of a liquidation of long positions. All buyers have to become sellers in speculation and visa versa.
Where I part company with the bulls is I believe this to be highly deflationary. For one, the bulls think the consumer game will go back to normal while I believe that those that could still spend kept spending while those that couldn't used the rest of their credit just to survive this oil price run up. Thus, they won't be spending any time soon, if forever. Thus we have had a forced inflation in the short run out of this speculation which will cease and now the world will run without the credit inputs of high oil prices. You can consume for as long as you have room on your credit card, which could be as long as they keep raising the limit or the payments exceed income.
I am watching the money supply figures and they have weakened over the past 90 days. Not a decline in M-2, but a very weak growth, which in light of $160 billion in stimulous checks and the extra money that has been injected into some account by the credit used to buy gasoline is pretty sorry. Where would we stand without the stimulous checks? Bernanke was making light of this situation and the bulls seemed to take it as a signal of the bottom. I take it as the first true recognition that we are in recession and that we went into recession with Santa Claus gifts from Uncle Sam, huge booms in exports and 2% interest rates.
What I see now is maybe another huge short opportunity for the financials. There are again statements to the effect that the bottom is in on housing. It is going to be a damn flat bottom if that is the case. Suddenly Europe is slowing down and China is clearly going to be next, as it is paying massive premiums on everything it imports and its exports are losing traction with its customers economies on the slide. I sense the financials get a good month of reprive and then are back in the dumps again, just as we saw back in March. In fact, we really got to June before the financials started getting the truth out once more. First time it was C getting new capital, then it was Bear being bailed out along with MBIA and Ambac and now it is the implicit being made explicit in regard to FNMA and FHLMC paper. This won't in any way fix the problem.
I would watch the money supply figures going into the fall. I have to believe that we are going to see poor retail results as the stimulous money dries up and the price of oil dries up credit card spending. If inflation indeed turns to deflation, the entire world game is up.
In such a market, the high of $147 or whatever it was interday was about as close to $144 as one could expect. The next move, if we do in fact go higher will be $233.
I have become attached to these fib numbers due to my knowledge of the movement of oil over time. For a long time it was $3 a barrel, even when $3 was a lot of money. In the 1970's, it moved first to $5, then to $8, then to $13 where it stayed for about 5 years. When the Iranian revolution broke out, oil then moved to $21 and then in a 2 price system to $28 and $34, with the Saudi's maintaining the lower price. When oil broke, it always settled in the $13 range before rallying back to $21 for about 2 decades, with some runs to $34 during times like the first Gulf War and early in the 2000's. Thus we saw moves to $5, $8, $13, $21 and $34, making 5 total moves. This time we saw moves to $21, $34, $55, $89 and $144 for 5 moves. Does this mean we are done? I think there is a real good chance we are, as there is coming something that few will understand, the fact that inflation causes deflation.
Here is what I believe and I will maybe change this, but for now I am going to stick to what I believe is happening. For one, the bust in the CDO market created a situation where $400 billion wasn't recycled to from one account to another and instead was funded by the banks writing what amounted to hot checks, leaving the money to circulate. Of course, the Fed had no alternative but to cover these checks, as word got out in the Fed funds market that maybe lending to XYZ bank might be a bad idea. Everyone knew about banks like Citi, which clearly had worldwide influence as was probably too big to fail, but much of this is still out there. There was the run on Northern Rock and the implosion of hedge funds, including some run by Bear Stearns, but this was lost money. The bank of England covered the funds drawn from NR with $100 billion. All this money was left to follow the only game left, commodities.
What has happened in the last year is quite interesting. For one thing, much of the $400 billion has been absorbed by deflation. I will elaborate here to the point that hopefully you can follow what I am talking about instead of reading the headline inflation numbers, primarily because inflation and deflation are lagging and not forward. First, much of this extra money went to buy oil because the demand for oil was burgeoning and it was something that would clearly store and play down the road. Second, much of this money ended up or was already in SWF (sovereign wealth funds) and much of this money went to recapitalize many of the weak financials. In this case, money kind of disappears. They say we have written off $400 billion worldwide, so that pretty much accounts for the $400 billion that didn't get recycled.
We are now seeing a pretty violent reaction on the oil price run up. The bulls think this is good news, but oil is a huge market. If this is indeed a speculator driven price hike, then it is clear that there are some huge speculators stuck in positions. There is only one way that speculators could have driven this market higher for this long and that is to roll their own contracts. In order to get out of the current months contracts, they would have had to have taken delivery or rolled sufficient enough long positions forward to entice the hedgers to move their short positions forward instead of making delivery at a loss, thus both moving their liabilities forward. Now that the shorts might have the upper hand here, it is quite possible they are going to force delivery of product the longs aren't prepared to take. I don't know where this oil may be hidden, but I woudn't be surprised to see it suddenly appear in inventory either here in the US or overseas. The point is that if speculators are indeed responsible for this bubble, then there is oil somewhere unaccounted for and if it is hidden by the longs, then it is financed and it and the borrowed money must be liquidated. This is a financial disaster awaiting the hedge funds and you can bet that OPEC itself has forward shorts in this market.
Amaranth supposedly lost $6 billion on their failed gas corner. To understand the size of their position, one must realize that gas declined about $8 from peak to bottom and that Amaranth probably paid around $10 for most of it on average. Realizing they got out at between $6 and $8 and that 1 trillion feet of gas sells for $1 billion a dollar then one might realize how huge their position was. Figuring they lost $3 per MCF, they had 2 trillion of the roughly 3 trillion in storage. I was wondering for some time how gas was staying as high as it was in light of how large the supplies in storage were. There just isn't a lot of places you can hide natural gas. This may not be true for oil, as I suspect there are storage facilities around the world that could hold a billion barrels or more and it not be inventoried. Imagine if there were 1 billion barrels of oil out there that suddenly needed to be liquidated? Even if the figure were 200 million barrels, we would be looking at the US supply of crude sitting out there somewhere. The large exporting countries have to have massive storage facilities for no other reason than to be able to manage production and demand over time. Countries like Indonesia where there used to be sizable exports could have large storage facilities that they could rent to allow the hiding of oil. The Japanese trader who ran the copper corner in the 1990's supposedly had copper in warehouses in LA and other areas that was bought on the LME.
In any case, the market could actually have been true rather than rigged as I suppose and there isn't a hidden surplus. I find that highly doubtful, having watched the oil market for decades. But, it has to be either a rolled contract game or an actual taken delivery and hidden game where continued pressure is put on the market by very sizable excess contracts being taken to delivery points over and over again. If a corner has enough long contracts over what could be provided to the market, they can always exercise a few deliveries and the shorts have to buy their way out of the rest of them. This gives the appearance of making a huge profit, which is really nothing more than postponement of a liquidation of long positions. All buyers have to become sellers in speculation and visa versa.
Where I part company with the bulls is I believe this to be highly deflationary. For one, the bulls think the consumer game will go back to normal while I believe that those that could still spend kept spending while those that couldn't used the rest of their credit just to survive this oil price run up. Thus, they won't be spending any time soon, if forever. Thus we have had a forced inflation in the short run out of this speculation which will cease and now the world will run without the credit inputs of high oil prices. You can consume for as long as you have room on your credit card, which could be as long as they keep raising the limit or the payments exceed income.
I am watching the money supply figures and they have weakened over the past 90 days. Not a decline in M-2, but a very weak growth, which in light of $160 billion in stimulous checks and the extra money that has been injected into some account by the credit used to buy gasoline is pretty sorry. Where would we stand without the stimulous checks? Bernanke was making light of this situation and the bulls seemed to take it as a signal of the bottom. I take it as the first true recognition that we are in recession and that we went into recession with Santa Claus gifts from Uncle Sam, huge booms in exports and 2% interest rates.
What I see now is maybe another huge short opportunity for the financials. There are again statements to the effect that the bottom is in on housing. It is going to be a damn flat bottom if that is the case. Suddenly Europe is slowing down and China is clearly going to be next, as it is paying massive premiums on everything it imports and its exports are losing traction with its customers economies on the slide. I sense the financials get a good month of reprive and then are back in the dumps again, just as we saw back in March. In fact, we really got to June before the financials started getting the truth out once more. First time it was C getting new capital, then it was Bear being bailed out along with MBIA and Ambac and now it is the implicit being made explicit in regard to FNMA and FHLMC paper. This won't in any way fix the problem.
I would watch the money supply figures going into the fall. I have to believe that we are going to see poor retail results as the stimulous money dries up and the price of oil dries up credit card spending. If inflation indeed turns to deflation, the entire world game is up.
Monday, July 7, 2008
Where is the money going to come from?
Lehman came out today with a statement that FNM and FRE need a total of $75 billion in cash infusion to get through their current mess. I wonder how much Freddie and Fannie think Lehman needs. It isn't a matter of who has the $75 billion, but who is going to need Fannie and Freddie to produce more lending besides the Congress of the US? This isn't a $75 billion investment. The investment has already been made and it was clearly insufficient.
I continue to be a deflationist in the teeth of what appears to be raging inflation. All the stuff that is going up isn't necessarily stuff that the US is going to jump off the bridge if it goes up. Between oil and gas, the US produces near 20 million BPD equivalent, now selling for $2.8 billion a day. How many countries in the world have a $1 trillion economy, much less in one category? We haven't even touched coal or hydropower or atomic, just oil and gas. Corn is going up? Also a big US crop, in fact the US is by far the largest corn producer in the world. In any case, in the scheme of things, consumption of these products aren't rising much if at all in the US, only in the emerging world.
One thing is clear. The US consumer in his entirety has run out of the capacity to borrow more money. This doesn't mean all consumers are tapped out, but the ones that add to their balances every month are. A guy that charges up his card and pays it off every month is a convenience debtor, not a debtor in reality. Then again, how much monetary growth over the past 15 years can be attributed to these pay as you go debtors? How much of the current money supply can be attributed to the $3o billion a month extra being spent on gasoline alone? Figure half the people put their gas purchases on a card, due primarily to the fact that most don't carry enough cash with them to fill up entirely, there is $15 billion on average that exists just because gasoline prices are higher for those that pay their balances monthly. Those that can't pay monthlyare on their way to becoming prior consumers, as are those that are trying to live within their means and the pump is replacing their other expenditures.
Remember, the CRB is hitting China a lot harder than it is the US. It is hitting Europe especially hard as well and the weak dollar has to be hitting their economy especially hard. How does China sell a weak US economy with a low US dollar more goods? REMEMBER China has to get dollars to buy oil?
You guys that read my stuff around the web can point to this as evidence I have called a high in the price of oil. It might get to $150, as is widely expected, but the fibonacci's are lining up with the recessions and the drop in demand and all other items, as the $400 billion hot check is mopped up and put back in the bank as capital infusions. China won't be repeating their expansion of the prior few years any time soon. Neither will Dubai once they realize that they paid top dollar one more time. This is all going on due to the flow of dollars in their direction, not because they have some kind of economic miracle going on. Think they are going to abandon the dollar and let the Europeans fleece them next? No, they are going to go with what brung them as I think Yogi Berra used to say (might as well be Yogi, as he said about everything else).
We have heard rumors of recessions and estimates of recessions, but we haven't had a broken financial system recession like this one that is coming since the 1930's. The inflation that happened in the 1970's along with the bad recessions weren't because the financials were broken, but because the demand for capital credit was so high that interest rates had to shift with inflation. What are our capital interest rates today? Even before the Fed loosened, capital rates had trouble running above 5% on risk free money and 6% or so on top credit lines. This is market, not rigged money. What will it be when there is no demand to build box retailers and speculate on stock in China and India or buy GOOG or 10 houses to rent and become a millionaire in 3 years?
The problems are multifold. America needs a pay hike and they can't get a pay hike because the jobs are going overseas if Americans get a pay hike. So, we have fat cats that get their money out of small cats that are going into debt to line the pockets of the fat cats who went long the ABX then short the ABX and now pretty much have no ABX to fleece the small cats who are out of credit and if they aren't subprime, can't sell their small home any more to someone that is so they can move closer to the fat cats. So one group pays off their debts and pulls in their horns because they can't keep spending money like drunken sailors and keep their penthouses in Manhattan on Central Park. The other group can't borrow any more and loses their job at Walmart because they can't spend and borrow any more at Walmart. The autoworker who has been building SUV's loses his job because they don't need that many people to build the mopeds that the poor guy who had a subprime auto loan on an SUV is now driving due to the fact the repo guy got the SUV he can't afford to put gas in any more and can't sell.
I have understood for years that we couldn't have a real bear market without some kind of credit mess. At one time, I supposed that the bear market would cause the credit problems, but instead I have come to understand that it is the expansion of credit that causes the bull market and the credit problems that result and with the credit game over so is the bull market. The 1970's, even though inflationary and a bear market, really were a bull market after the inflation really started and as it subsided, took off and carried the bull to amazing heights. The problem was the necessary switch in money, as was the switch in the 1930's. What is going to be the switch this time that saves the market from deflation?
One think I am beginning to notice is the restaurants are starting to look bare and the DFW area is a better economy than most. The shine is off Starbucks. It will soon be off the cellphone game, the PC game and the AAPL game. We are about to see a decline in the number of Visa cards for the first time in history and a lot of people are going to be forced to cash. I think the fact that we are seeing some growth in cash outstanding from the Fed is evidence that folding money is being carried for the purpose of buying gasoline in ever greater dollar quantities as many don't have credit any more. The price of gas will decline, but with the decline won't go the availability of credit. If anything, it will cause a drop in cash balances.
I think we are about to see an amazing decline in credit availability. Kudlow for once had some guys that were hitting the nail on the head. Joe Bataglia (sp) and another guy who don't agree too often were right on the money while Kudlow, Dennis and some other guy were in just pretend the price is higher a few years from now and all will be okay, as there won't be any write downs. The point is that the banks have to have capital to expand the money supply and I doubt many want to go to jail for covering up insolvency for long. Come clean now and they are all standing under the same mess, a subprime game that is no ones fault because the rating agencies said the risks were good. The world is standing still while it runs in place faster and faster.
I continue to be a deflationist in the teeth of what appears to be raging inflation. All the stuff that is going up isn't necessarily stuff that the US is going to jump off the bridge if it goes up. Between oil and gas, the US produces near 20 million BPD equivalent, now selling for $2.8 billion a day. How many countries in the world have a $1 trillion economy, much less in one category? We haven't even touched coal or hydropower or atomic, just oil and gas. Corn is going up? Also a big US crop, in fact the US is by far the largest corn producer in the world. In any case, in the scheme of things, consumption of these products aren't rising much if at all in the US, only in the emerging world.
One thing is clear. The US consumer in his entirety has run out of the capacity to borrow more money. This doesn't mean all consumers are tapped out, but the ones that add to their balances every month are. A guy that charges up his card and pays it off every month is a convenience debtor, not a debtor in reality. Then again, how much monetary growth over the past 15 years can be attributed to these pay as you go debtors? How much of the current money supply can be attributed to the $3o billion a month extra being spent on gasoline alone? Figure half the people put their gas purchases on a card, due primarily to the fact that most don't carry enough cash with them to fill up entirely, there is $15 billion on average that exists just because gasoline prices are higher for those that pay their balances monthly. Those that can't pay monthlyare on their way to becoming prior consumers, as are those that are trying to live within their means and the pump is replacing their other expenditures.
Remember, the CRB is hitting China a lot harder than it is the US. It is hitting Europe especially hard as well and the weak dollar has to be hitting their economy especially hard. How does China sell a weak US economy with a low US dollar more goods? REMEMBER China has to get dollars to buy oil?
You guys that read my stuff around the web can point to this as evidence I have called a high in the price of oil. It might get to $150, as is widely expected, but the fibonacci's are lining up with the recessions and the drop in demand and all other items, as the $400 billion hot check is mopped up and put back in the bank as capital infusions. China won't be repeating their expansion of the prior few years any time soon. Neither will Dubai once they realize that they paid top dollar one more time. This is all going on due to the flow of dollars in their direction, not because they have some kind of economic miracle going on. Think they are going to abandon the dollar and let the Europeans fleece them next? No, they are going to go with what brung them as I think Yogi Berra used to say (might as well be Yogi, as he said about everything else).
We have heard rumors of recessions and estimates of recessions, but we haven't had a broken financial system recession like this one that is coming since the 1930's. The inflation that happened in the 1970's along with the bad recessions weren't because the financials were broken, but because the demand for capital credit was so high that interest rates had to shift with inflation. What are our capital interest rates today? Even before the Fed loosened, capital rates had trouble running above 5% on risk free money and 6% or so on top credit lines. This is market, not rigged money. What will it be when there is no demand to build box retailers and speculate on stock in China and India or buy GOOG or 10 houses to rent and become a millionaire in 3 years?
The problems are multifold. America needs a pay hike and they can't get a pay hike because the jobs are going overseas if Americans get a pay hike. So, we have fat cats that get their money out of small cats that are going into debt to line the pockets of the fat cats who went long the ABX then short the ABX and now pretty much have no ABX to fleece the small cats who are out of credit and if they aren't subprime, can't sell their small home any more to someone that is so they can move closer to the fat cats. So one group pays off their debts and pulls in their horns because they can't keep spending money like drunken sailors and keep their penthouses in Manhattan on Central Park. The other group can't borrow any more and loses their job at Walmart because they can't spend and borrow any more at Walmart. The autoworker who has been building SUV's loses his job because they don't need that many people to build the mopeds that the poor guy who had a subprime auto loan on an SUV is now driving due to the fact the repo guy got the SUV he can't afford to put gas in any more and can't sell.
I have understood for years that we couldn't have a real bear market without some kind of credit mess. At one time, I supposed that the bear market would cause the credit problems, but instead I have come to understand that it is the expansion of credit that causes the bull market and the credit problems that result and with the credit game over so is the bull market. The 1970's, even though inflationary and a bear market, really were a bull market after the inflation really started and as it subsided, took off and carried the bull to amazing heights. The problem was the necessary switch in money, as was the switch in the 1930's. What is going to be the switch this time that saves the market from deflation?
One think I am beginning to notice is the restaurants are starting to look bare and the DFW area is a better economy than most. The shine is off Starbucks. It will soon be off the cellphone game, the PC game and the AAPL game. We are about to see a decline in the number of Visa cards for the first time in history and a lot of people are going to be forced to cash. I think the fact that we are seeing some growth in cash outstanding from the Fed is evidence that folding money is being carried for the purpose of buying gasoline in ever greater dollar quantities as many don't have credit any more. The price of gas will decline, but with the decline won't go the availability of credit. If anything, it will cause a drop in cash balances.
I think we are about to see an amazing decline in credit availability. Kudlow for once had some guys that were hitting the nail on the head. Joe Bataglia (sp) and another guy who don't agree too often were right on the money while Kudlow, Dennis and some other guy were in just pretend the price is higher a few years from now and all will be okay, as there won't be any write downs. The point is that the banks have to have capital to expand the money supply and I doubt many want to go to jail for covering up insolvency for long. Come clean now and they are all standing under the same mess, a subprime game that is no ones fault because the rating agencies said the risks were good. The world is standing still while it runs in place faster and faster.
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.
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.
Tuesday, May 13, 2008
What is going on?
I have been busy with other things, but I sense that the government statistics coming out have been cooked. The Fed keeps funding more and more liquidity toward entities that are illiquid and the market takes it as new money. No, it is cashing bad checks already written. The latest thing seems to be the retail statistics, which I believe to be down significantly instead of being as reported. For one, auto sales reveal more about what is going on than about any other item in the news. We are now down to normal, after being in a bubble for a decade. Next we will fall to depression levels and at some point we are going to see trouble in the retail commercial real estate sector.
I am getting a conflict and I just posted something about it on the Prudent Bear board. I saw where imported goods were up in price 6.8% for everything and 15% if you include metals and energy. What does Wal-Mart sell that isn't imported? I am having a hard time with this one because I doubt when you exclude food and candy that 10% of what they sell is domestic. 3% adjusted by fictional US CPI numbers would be a significant decline. Also, I just calculated the US oil bill to have increased by $21 billion a month roughly, using 14 million barrels a day and a $50 increase, which isn't that exaggerated. Why isn't our trade deficit worse? It isn't that big an increase in sales to overseas, as it is clearly a decline in imports other than oil and minerals. Someone ate a $21 billion slice taken by one product, oil. Maybe we are looking at 12 million barrels and $18 billion or maybe 12 million barrels and $40 a barrel times 30 for $14.4 billion, but there is a magical $15 to $20 billion missing a month which in retail means $500 billion a year once it is marked up or maybe 5% to 8% of all sales. The figures are a lie. In any event, the financial picture of the American consumer isn't that pretty at all.
Getting back to the consumer, it really amazes me that we have reached the point that either we attempt to spend our way to prosperity or we go broke trying. In any event, we are broke if we don't and broke if we do and the rest of the world goes down the drain with us. Why is a good question?
Lets take oil demand. If speculators are really running this market, they had better be hoarding their profit in the good they are trading. There is no way this is going on other than them taking delivery and running a corner on the surplus supply of oil by holding enough contracts to take delivery on the surplus. There is a problem if this is financed, as oil is a very inelastic good on the short run and just a minor surplus could cause the price to collapse. 5% of 80 million barrels a day is 4 million barrels a day, which is $400 million a day or $12 billion a month. It wouldn't take long for a corner to collapse, as it would run out of where to put this much oil together with the fact that it would take a huge position to squeeze the market. To carry such a position they would have to have enough cash to threaten delivery.
What I am saying is a 5% surplus in oil would cause the market to collapse in time. The US constitutes probably 30% of the consumer goods demand in the world. We are reaching a point where the US could temporarily collapse, which in a matter of weeks would cause the price of everything to collapse because the rest of the world doesn't have the interest, much less the income to consume this amount of goods. It would provide a domino effect in layoffs world wide that would cause a deflationary spiral beyond comprehension. I don't think we can avoid it.
Next is this banking mess. I have noticed the M-2 figures for the past 4 weeks and 3 of the 4 weeks have shown significant declines. We are in trouble here, as the Fed loans to the banks are for checks already written, not for lending purposes. The US credit machine is broken, which means the credit machine for the world is broken. When is China going to line up to buy more CDO's full of subprime mortgages? If there is no real subprime market to even approach the one we saw the past few years, how are consumers going to get cash out of their homes? It is the subprime demand that created the appreciation that allowed for cash out refinances and for cash producing sales. There is a lot more here, as this financing was piling up in accounts of corporations and speculators. Throw an extra trillion in free cash out there and see how sweet it gets. It won't ever be this sweet again for people my age. How is a consumer dependent economy going to get across the next street without the free money of the past? It won't and the boom in Asia will go down with it.
There are 2 camps out there and the first has to either be morons or lucky, the short or no recession camp. The really brilliant people are calling for a big mess. I am talking about Volker, Buffet, Soros and even Greenie. How can we not have a mess when the financial machine has lost its wheels? Maybe the government checks give us a bump, but the more likely thing is we just let it pass.
There is something besides normal inflation here. Inflation works when the money produced actually creates an additional demand, but when it only allows for the purchase of something at a higher price, the reason for financing goes out the window. I think that is what occurred in the late 1970's, and when this occurs, something is done to stop it. I think it will stop itself, as the wherewithal to pay isn't going up with the prices and credit this time.
I am getting a conflict and I just posted something about it on the Prudent Bear board. I saw where imported goods were up in price 6.8% for everything and 15% if you include metals and energy. What does Wal-Mart sell that isn't imported? I am having a hard time with this one because I doubt when you exclude food and candy that 10% of what they sell is domestic. 3% adjusted by fictional US CPI numbers would be a significant decline. Also, I just calculated the US oil bill to have increased by $21 billion a month roughly, using 14 million barrels a day and a $50 increase, which isn't that exaggerated. Why isn't our trade deficit worse? It isn't that big an increase in sales to overseas, as it is clearly a decline in imports other than oil and minerals. Someone ate a $21 billion slice taken by one product, oil. Maybe we are looking at 12 million barrels and $18 billion or maybe 12 million barrels and $40 a barrel times 30 for $14.4 billion, but there is a magical $15 to $20 billion missing a month which in retail means $500 billion a year once it is marked up or maybe 5% to 8% of all sales. The figures are a lie. In any event, the financial picture of the American consumer isn't that pretty at all.
Getting back to the consumer, it really amazes me that we have reached the point that either we attempt to spend our way to prosperity or we go broke trying. In any event, we are broke if we don't and broke if we do and the rest of the world goes down the drain with us. Why is a good question?
Lets take oil demand. If speculators are really running this market, they had better be hoarding their profit in the good they are trading. There is no way this is going on other than them taking delivery and running a corner on the surplus supply of oil by holding enough contracts to take delivery on the surplus. There is a problem if this is financed, as oil is a very inelastic good on the short run and just a minor surplus could cause the price to collapse. 5% of 80 million barrels a day is 4 million barrels a day, which is $400 million a day or $12 billion a month. It wouldn't take long for a corner to collapse, as it would run out of where to put this much oil together with the fact that it would take a huge position to squeeze the market. To carry such a position they would have to have enough cash to threaten delivery.
What I am saying is a 5% surplus in oil would cause the market to collapse in time. The US constitutes probably 30% of the consumer goods demand in the world. We are reaching a point where the US could temporarily collapse, which in a matter of weeks would cause the price of everything to collapse because the rest of the world doesn't have the interest, much less the income to consume this amount of goods. It would provide a domino effect in layoffs world wide that would cause a deflationary spiral beyond comprehension. I don't think we can avoid it.
Next is this banking mess. I have noticed the M-2 figures for the past 4 weeks and 3 of the 4 weeks have shown significant declines. We are in trouble here, as the Fed loans to the banks are for checks already written, not for lending purposes. The US credit machine is broken, which means the credit machine for the world is broken. When is China going to line up to buy more CDO's full of subprime mortgages? If there is no real subprime market to even approach the one we saw the past few years, how are consumers going to get cash out of their homes? It is the subprime demand that created the appreciation that allowed for cash out refinances and for cash producing sales. There is a lot more here, as this financing was piling up in accounts of corporations and speculators. Throw an extra trillion in free cash out there and see how sweet it gets. It won't ever be this sweet again for people my age. How is a consumer dependent economy going to get across the next street without the free money of the past? It won't and the boom in Asia will go down with it.
There are 2 camps out there and the first has to either be morons or lucky, the short or no recession camp. The really brilliant people are calling for a big mess. I am talking about Volker, Buffet, Soros and even Greenie. How can we not have a mess when the financial machine has lost its wheels? Maybe the government checks give us a bump, but the more likely thing is we just let it pass.
There is something besides normal inflation here. Inflation works when the money produced actually creates an additional demand, but when it only allows for the purchase of something at a higher price, the reason for financing goes out the window. I think that is what occurred in the late 1970's, and when this occurs, something is done to stop it. I think it will stop itself, as the wherewithal to pay isn't going up with the prices and credit this time.
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