I just listened to Mish Shedlock and another guy debate inflation/deflation on Jim Pulovas website. Mish and I have a lot of the same ideas about deflation, but I do believe there is more to the story than either of us knows. As I listened to this moron, who probably has more degrees and been overpaid more dollars than Bernanke could print, I realized there is a world of ignorance. Asset inflation is inflation and asset deflation is deflation. Both are end game results of inflation.
As most people that come to this site understand, I am in the minority, a deflationist. As I have pondered this idea, my sense of how it gets started and what happens grows. Deflation is always preceeded by a massive inflation of debt. There really can't be any printing of money as anything but debt or the value of money collapses in a short period of time. Thus the supply of debt itself is a prime determinant of money. But, it is also only the new supply of debt that can actually inflate, as the rest of the debt is actually a deflationary phenomenon. This is a hard idea to grasp, but technically the money that has already been created is followed by the urgency of the debtor to get it back to pay it back and not to spend it again. Along with this urgency is the interest due everyone, which is money in excess of what was created in the credit system. Thus someone is generally in default and someone isn't going to get paid. As long as the system continues to inflate at a reasonable rate and debt can be liquidated on a broad scale, it continues.
Something happens in the long credit cycle that few understand, especially those educated guys like Mish debated who say it has never happened before. that something has happened over and over again throughout history. John Law used paper money to inflate. The Bank of England used paper money to inflate with its value based on gold backing, but not based on gold 100%. Banking has never been based on having money to pay depositors, which is the missing link in most people's arguments today about inflation. I hope to describe the credit crisis and how this need to deliver liquid funds between banks themselves is the primary funding problem.
Well, by default the US dollar became the world reserve currency. In some fashion it is paper gold. Plus it is something that is created by banks alone, as it is bank paper and not government paper. The Fed is a bank as well, meaning it needs to possess good assets in place of its paper, which is what the dollar is, Federal reserve bank paper.
Lost on the side of inflation is the absolute need to liquidate in this game. Not only are assets outside of banks needing to be liquidated, but those inside banks as well. I doubt many are understanding that the Fed is merely liquidating assets or loans that have already been made so banks can have some liquidity between each other. In any case, the Fed is buying what amounts to real property in the sense that whomever sold it to them no longer has it.
The point is that what is being liquidated is needed to pay debt, not to reload and spend more. Thus the government borrows money and issues debt and the money is put into accounts and the bonds bought with the funds from the Fed, who in turn buys them back from the banks so they can cover the checks coming in from other banks. Banks don't lend this money because they owe it and they realize it won't be that easy to get back in this climate.
The real reason we deflate is the boom and inflation of the recent past. Not only were prices pushed up with inflation, so was capacity. The capacity remains, but those that were the big spenders are left with deflated credit lines and sizable debts. In many countries, there were housing bubbles which drove demand. Now these bubbles are deflating with little to stop the deflation, as with most capacity, the capacity of housing has been significantly overbuilt. Housing is not only a sizable source of employment in most times, but also has provided a sizable amount of credit to the system in the form of collateral. As the problem is currently compounding itself, there will be a net shrinkage of everything relating to housing, most importantly the capital position of those that have financed it.
In the end, the most important determinant of deflation is the fact that so many things were looked at as money, whether it be the balance of ones brokerage account, the bonds that are no longer solvent owned by many or the equity in ones house. Also, the widespread supply of credit allowed those with collateral to feel as if they possessed money whether they had need for the cash at the time or not.
What vew understand is that the Fed rarely ever puts money in the system it doesn't need. I believe it is trying to expand lending, which is the only determinant of what is referred to as the velocity of money. I don't buy the idea that money just slows down, but instead lending slows down. Most lending is done to immediately go out and buy something, which means that money immediately changes hands. Lending creates pressure on the system. Buying instruments that represent lending that has already taken place does little or nothing. Banks don't have money in the sense they could pay off their depositors, so what is being put out amounts to zero.
All said, we are in a system of insolvency and insolvent systems are no longer creditworthy. An insolvent borrower could more readily borrow money than an insolvent lender can make a loan. The entire system is insolvent and the asset values that backed it are falling. The just pretend method that the current authorities have adopted is not going to make an insolvent outfit solvent. It might allow them to fudge their earnings or losses, but it won't make dead men walk, which is what the real desire is. Zombie banks won't make many real loans. Without money available directly for what the private sector individuals desire, deflation will be the norm.
Friday, September 25, 2009
Sunday, September 13, 2009
When does it all collapse
The United States has gone to pot. Most people my age don't realize the US has gone to pot. Recently I was at a school reunion, being my 35th year out of high school. One of the guys I played golf with was a local business man. Another was a guy that is a wheeler dealer who made a lot of money out of real estate in Florida. The wheeler dealer agreed with me, though he was a liberal. His brother is more down my line and spoke to me about this mess that is brewing in the US. The business guy, who is buying more stores in a currently growing area of the Metroplex refused to believe the government wasn't going to fix this stuff.
There are only 2 type people that believe we are going to get out of this mess by spending and lending more money, morons and those that haven't studied it. Most of the experts we hear on television and are pushed forward by the Nobel Prize in economics committee propose that we spend even more, which means they are either paid liars or miseducated. Being the central bankers of the world have dictated economic education for the past 100 years, it isn't surprising that many could be miseducated in finance, economics and money in general.
Worst yet is that economics in general is nothing more than an extention of politics. The constitution of the United States set the political tone, but the Constitution no longer prevails. I have seen copies where the preamble of the Constitution had a word changed from ensure domestic to insure. One mean to help bring about and the other means to sell insurance. That is what socialism is and the economics of the day are structured to bring about the end of the original intent of the document with its guarantees of private property and limits on government in favor of a rule of necessity and constant war and bankruptcy.
Thus it is the political persuasion of intelligencia that dictates the mainstream and not fact. Because I tended toward the conservative side of politics, I happen to be able to see what has occurred that has precipitated this crisis. This leaning along with a degree in finance which led me to a sound conclusion that assets were massively overvalued clued me into the idea that something was amiss.
Austrian economics is a free market economics. The counter economics of Keynes and the Chicago school are government and banking manipulation economics and when problems like this arise, they blame the free market and the lack of regulation. This is a failure of the capacity to see that it wasn't the market, but the presense of government and quasi government organizations like the Federal Reserve, state chartered fractional reserve banking and international banking organizations that actually provided the platform for this disaster. Thus, the solution is to give over more power to these organizations that pushed the world to the brink of collapse to push us closer to the edge. The fix is the problem.
Hopefully the American population has had enough and the stomach to go through the long term solution. But, we have a problem in that the culprits of the creation of this mess are those that hold the power in US government, along with the bulk of the media. Instead of free markets, most banks of size are socialist organizations, the Federal Reserve being an idea of Marx and J.P. Morgan. Though Morgan was a capitalist, his idea of the Federal Reserve was straight from Marx. Also, Morgan was engaged in fractional reserve banking, which was the source of the problems faced in 1907 and in the 1890's.
Fatal mistakes were made by the Federal Reserve and government sponsored enterprises like Fannie Mae, Sallie Mae and Freddie Mac. The result was a John Law type fiasco that destroyed Ameican production in favor of American credit and set the country up in a debt bubble that has no solution other than painful deflation. But, being those that have bankrupted the system and themselves in the process hold titles of nobility and the governmental power itself hostage, there is no solution presented other than to bail them out. Being there isn't enough money in the world to reflate a debt bubble, more debt to create more money is going to lead to economic and financial collapse of those entities that attempt such solution.
Currently I am watching the Japan solution applied to the United States. For several years I heard these Wall Street types point fingers at Japan knowing they were going to not have any other solution than what Japan was using. The US banks are just as entrenched in the political power structure as the Japanese banks and Federal Reserve money created off US government debt does nothing more than bankrupt the country while sliding down the black hole of compound deflation. The system is bankrupt from the top down.
Being the system is bankrupt from the top down, the unwinding is going to eventually occur from the top down. This means the government itself is going to suffer a debt crisis. I don't know when this is coming, but I do believe that the US treasury market is going to be the next step down the road of collapse and to save itself, the government is going to have to abandon the saving of the too big to fail system. With this, the entire world will fall into a depression of epic proportions.
It is hard to envision saving this mess without at least a semi socialist solution. What I would propose is a plan to reorganize the debt system while putting together a plan to feed and house the population on a temporary basis. The Fed should be abolished and fractional reserve banking outlawed and replaced with a dual system. If the government has a position in the economy, it might be to serve as the holder of the bank deposits, while all lending at interest is done out of a pure capital at risk with no fractional reserve leverage allowed. The fact is that there isn't any such thing as supportable compound interest money, which is what fractional reserve banking eventually leads to and there isn't a such thing as a government guarantee of deposits.
There are only 2 type people that believe we are going to get out of this mess by spending and lending more money, morons and those that haven't studied it. Most of the experts we hear on television and are pushed forward by the Nobel Prize in economics committee propose that we spend even more, which means they are either paid liars or miseducated. Being the central bankers of the world have dictated economic education for the past 100 years, it isn't surprising that many could be miseducated in finance, economics and money in general.
Worst yet is that economics in general is nothing more than an extention of politics. The constitution of the United States set the political tone, but the Constitution no longer prevails. I have seen copies where the preamble of the Constitution had a word changed from ensure domestic to insure. One mean to help bring about and the other means to sell insurance. That is what socialism is and the economics of the day are structured to bring about the end of the original intent of the document with its guarantees of private property and limits on government in favor of a rule of necessity and constant war and bankruptcy.
Thus it is the political persuasion of intelligencia that dictates the mainstream and not fact. Because I tended toward the conservative side of politics, I happen to be able to see what has occurred that has precipitated this crisis. This leaning along with a degree in finance which led me to a sound conclusion that assets were massively overvalued clued me into the idea that something was amiss.
Austrian economics is a free market economics. The counter economics of Keynes and the Chicago school are government and banking manipulation economics and when problems like this arise, they blame the free market and the lack of regulation. This is a failure of the capacity to see that it wasn't the market, but the presense of government and quasi government organizations like the Federal Reserve, state chartered fractional reserve banking and international banking organizations that actually provided the platform for this disaster. Thus, the solution is to give over more power to these organizations that pushed the world to the brink of collapse to push us closer to the edge. The fix is the problem.
Hopefully the American population has had enough and the stomach to go through the long term solution. But, we have a problem in that the culprits of the creation of this mess are those that hold the power in US government, along with the bulk of the media. Instead of free markets, most banks of size are socialist organizations, the Federal Reserve being an idea of Marx and J.P. Morgan. Though Morgan was a capitalist, his idea of the Federal Reserve was straight from Marx. Also, Morgan was engaged in fractional reserve banking, which was the source of the problems faced in 1907 and in the 1890's.
Fatal mistakes were made by the Federal Reserve and government sponsored enterprises like Fannie Mae, Sallie Mae and Freddie Mac. The result was a John Law type fiasco that destroyed Ameican production in favor of American credit and set the country up in a debt bubble that has no solution other than painful deflation. But, being those that have bankrupted the system and themselves in the process hold titles of nobility and the governmental power itself hostage, there is no solution presented other than to bail them out. Being there isn't enough money in the world to reflate a debt bubble, more debt to create more money is going to lead to economic and financial collapse of those entities that attempt such solution.
Currently I am watching the Japan solution applied to the United States. For several years I heard these Wall Street types point fingers at Japan knowing they were going to not have any other solution than what Japan was using. The US banks are just as entrenched in the political power structure as the Japanese banks and Federal Reserve money created off US government debt does nothing more than bankrupt the country while sliding down the black hole of compound deflation. The system is bankrupt from the top down.
Being the system is bankrupt from the top down, the unwinding is going to eventually occur from the top down. This means the government itself is going to suffer a debt crisis. I don't know when this is coming, but I do believe that the US treasury market is going to be the next step down the road of collapse and to save itself, the government is going to have to abandon the saving of the too big to fail system. With this, the entire world will fall into a depression of epic proportions.
It is hard to envision saving this mess without at least a semi socialist solution. What I would propose is a plan to reorganize the debt system while putting together a plan to feed and house the population on a temporary basis. The Fed should be abolished and fractional reserve banking outlawed and replaced with a dual system. If the government has a position in the economy, it might be to serve as the holder of the bank deposits, while all lending at interest is done out of a pure capital at risk with no fractional reserve leverage allowed. The fact is that there isn't any such thing as supportable compound interest money, which is what fractional reserve banking eventually leads to and there isn't a such thing as a government guarantee of deposits.
Sunday, August 9, 2009
The savings paradox.
Michael Pettis has some interesting stuff in his site this week about savings rates, trade and deflation. I am in the early stages of the article, but it occurs to me that I need to write something here on the subject rather than lose it in his comments section. I believe the entire game to be a credit phenonmenon, including the idea of savings, which is nothing more than debt recycled from one account to another and has absolutely nothing to do with substance. i believe in the case of international trade, it actually relates to the credit excess in one country to the detriment of another. I also believe that due to the inconvertiblilty of currencies like the Chinese that savings is done by the central bank and thus there is a curtain drawn between trade and the Chinese currency. Thus all dollars drawn in for investment and trade are impounded to the extent that they aren't needed to buy minerals or other raw materials. The domestic economy has its own market separate from the international accounts. In this matter, a domestic economy could have no debt at all or piles of it, backed on the other side of the equation by savings.
Michael brings up the idea of the Obama administration encouraging savings, which is bordering on absurd. The entire Obama plan is no different than the Bush plan except more obscene on the consumption side. The only consumption he seems to not care for is energy and seems to be leaning toward endowing corporate USA and Wall Street the right to consume energy at the expense of the common every day man. This protest will be for another posting, as it is one of the greatest fascist programs of all time.
Back to savings. If someone can tell me how savings in this world economy can correspond to something besides debt, I would like to learn. This idea is kind of like the money going into the stock market, when anyone with a brain can figure out that money only changes accounts from idiots to smart people. Even if I take $100 and stick it in a matress, it is nothing more than the representation of something owed by the Federal reserve and that something is actually a paradox as it is generally a note in the amount of what I have plus interest due and represents a mathematically impossible equation other than someone taking a haircut. Investing in stocks is nothing more than an exchange of assets and has nothing to do with savings, a real pitfall for those that fool with that market and have no financial training other than what their brokerage companies can give. Speculation is no exchange or investing at all, but instead informed gambling at best.
In any case, housing in China costs about the same as in the US, yet according to what I have read by Andy Xie in Caijing, Chinese incomes are about 1/7th US. I am guessing that the Chinese consumption of housing is roughly 40% of US so the relative cost of housing is about 280% US. They aren't buying this out of their pockets, but are being financed in some fashion. My best guess is the same debt segregation of lending to the industrial so the flow can support the real estate markets that was probably part of the Japan bubble. In some fashion it is all debt.
Depressions last because there is no plan on how to give the haircut on debt and redistribute economic power. As long as there isn't a depression on the horizon it appears that all are left to fend for themselves, but once a crisis is threatened it is unheard of that the owners of Citicorp, Goldman Sachs, Bank of America, UBS, etc. should be replaced and the underlying equity be wiped out and replaced out of the current stock of money. I know the pain that pensioners would go through, but careful examination will reveal that much of this side of the equation has already been looted by Wall Street academic and actuarial formulas that just aren't true over the long term of economic cycles.
There is only one way the Japanese economy fell into the hole it fell into and that was an excess of debt. We heard for years that the Japanese savings rate was 20% to 25% of GDP. Well, what did that mean but the debt rate was also increasing at an amazing rate. Back in the 1980's, I recall the trade deficit with Japan was in the $100 billion range. I don't know about the rest of the world because Japan had to import all its raw materials or at least a very high percentage, but lets say they were even with the rest of the world. In this event, if their GDP was $1.5 trillion, then they were saving about $300 billion, $200 billion domestically. This implies that their debt level against their economy was increasing about 13% annually and their debt level was doubling less than every 6 years against GDP.
The US/China situation is also figured backwards. The situation wasn't fueled by a high China savings rate, but by a run away credit phenonomenon in the US that originated out of the activities of Government sponsored enterprises, namely FNMA, FHLMC and Sallie Mae. Collateralized were home equity and the future value of labor. It was only natural that this excess flowed beyond the US borders given the desperation with which developing countries needed developed world currencies. But, it wasn't the lending back of the money which made this bubble possible. It was only natural that the money was either used to acquire property, minerals or debt from the nation of origin. Had the US government not run deficits, had the GSE's and Wall Street finance not loosened lending standards, the lending back of money would have mattered very little and the trade would have never happened.
If I saved $1000 and loaned it to company A, of course company A would owe me back my savings plus the rent on the money commonly called interest. If Company A then wrote a check to B for $1000 and B saved the money by lending it to Company C, then the same process would occur. There would be $1000 in money in the system and $2000 in savings and debt. If A or C spent that money and cannot get it back, the debt cannot be collected and the savings really doesn't exist. Only the $1000 exists.
Once the gold standard was done away with, money was replaced with debt. The cash in my pocket is backed by the debt on reserve at the Fed, which is payable only in the notes I possess in my pocket along with the other notes in circulation. Interest is due on these notes, so the Fed is always pulling money out of the economy independent of the other activities they employ to keep the system inflated. In any case, this would be the only money that we have independent of the Fed and the sovereign debt. The money created by banking takes on a property sort of like the example in the prior paragraph, in that most of the assets backing the money at any given time are uncollectable. The difference between the bank money and the savings example is that the bank has created the money without any prior savings, instead acting as surety or guarantor of the credit they have extended. When it becomes apparent that the bank can no longer act as surety, the system no longer trusts them and they become like Citicorp and if they are large enough, they create a credit crunch all by themselves. Banks wouldn't lend to each other meant banks wouldn't lend to Citicorp, who had an amazing interbank liability that couldn't be paid. The black hole is still present, it has merely moved from Citicorp to the government which will at some point have no other alternative than to tax the economy and relocate the black hole where it has been all the time, the banking system.
Savings, debt and collateral all serve to create each other. Only in this manner can the Japanese situation be explained. The Japanese answer to the problem was more debt, which in general would be inflationary, but in this case or in the case of maximum payable principal and interest is deflationary. This is what a depression really is, maximum payable principal and interest and the longer the effort to support the money supply goes on, the worse it gets. Irving Fisher was wrong, though his thesis of swelling dollars over the short term was correct. He forgot that the dollars spent a lot of years shrinking. When the result of several business cycles and government solutions to recessions piles up to debt in the amount of several times GDP, then too much has been borrowed out of the future to go on and continue to consider the debt legitimate and the money real in any sense. Like all psychological pain, it is created and made worse by the continued avoidance. No one wants to lose their status quo except the debtors.
Michael brings up the idea of the Obama administration encouraging savings, which is bordering on absurd. The entire Obama plan is no different than the Bush plan except more obscene on the consumption side. The only consumption he seems to not care for is energy and seems to be leaning toward endowing corporate USA and Wall Street the right to consume energy at the expense of the common every day man. This protest will be for another posting, as it is one of the greatest fascist programs of all time.
Back to savings. If someone can tell me how savings in this world economy can correspond to something besides debt, I would like to learn. This idea is kind of like the money going into the stock market, when anyone with a brain can figure out that money only changes accounts from idiots to smart people. Even if I take $100 and stick it in a matress, it is nothing more than the representation of something owed by the Federal reserve and that something is actually a paradox as it is generally a note in the amount of what I have plus interest due and represents a mathematically impossible equation other than someone taking a haircut. Investing in stocks is nothing more than an exchange of assets and has nothing to do with savings, a real pitfall for those that fool with that market and have no financial training other than what their brokerage companies can give. Speculation is no exchange or investing at all, but instead informed gambling at best.
In any case, housing in China costs about the same as in the US, yet according to what I have read by Andy Xie in Caijing, Chinese incomes are about 1/7th US. I am guessing that the Chinese consumption of housing is roughly 40% of US so the relative cost of housing is about 280% US. They aren't buying this out of their pockets, but are being financed in some fashion. My best guess is the same debt segregation of lending to the industrial so the flow can support the real estate markets that was probably part of the Japan bubble. In some fashion it is all debt.
Depressions last because there is no plan on how to give the haircut on debt and redistribute economic power. As long as there isn't a depression on the horizon it appears that all are left to fend for themselves, but once a crisis is threatened it is unheard of that the owners of Citicorp, Goldman Sachs, Bank of America, UBS, etc. should be replaced and the underlying equity be wiped out and replaced out of the current stock of money. I know the pain that pensioners would go through, but careful examination will reveal that much of this side of the equation has already been looted by Wall Street academic and actuarial formulas that just aren't true over the long term of economic cycles.
There is only one way the Japanese economy fell into the hole it fell into and that was an excess of debt. We heard for years that the Japanese savings rate was 20% to 25% of GDP. Well, what did that mean but the debt rate was also increasing at an amazing rate. Back in the 1980's, I recall the trade deficit with Japan was in the $100 billion range. I don't know about the rest of the world because Japan had to import all its raw materials or at least a very high percentage, but lets say they were even with the rest of the world. In this event, if their GDP was $1.5 trillion, then they were saving about $300 billion, $200 billion domestically. This implies that their debt level against their economy was increasing about 13% annually and their debt level was doubling less than every 6 years against GDP.
The US/China situation is also figured backwards. The situation wasn't fueled by a high China savings rate, but by a run away credit phenonomenon in the US that originated out of the activities of Government sponsored enterprises, namely FNMA, FHLMC and Sallie Mae. Collateralized were home equity and the future value of labor. It was only natural that this excess flowed beyond the US borders given the desperation with which developing countries needed developed world currencies. But, it wasn't the lending back of the money which made this bubble possible. It was only natural that the money was either used to acquire property, minerals or debt from the nation of origin. Had the US government not run deficits, had the GSE's and Wall Street finance not loosened lending standards, the lending back of money would have mattered very little and the trade would have never happened.
If I saved $1000 and loaned it to company A, of course company A would owe me back my savings plus the rent on the money commonly called interest. If Company A then wrote a check to B for $1000 and B saved the money by lending it to Company C, then the same process would occur. There would be $1000 in money in the system and $2000 in savings and debt. If A or C spent that money and cannot get it back, the debt cannot be collected and the savings really doesn't exist. Only the $1000 exists.
Once the gold standard was done away with, money was replaced with debt. The cash in my pocket is backed by the debt on reserve at the Fed, which is payable only in the notes I possess in my pocket along with the other notes in circulation. Interest is due on these notes, so the Fed is always pulling money out of the economy independent of the other activities they employ to keep the system inflated. In any case, this would be the only money that we have independent of the Fed and the sovereign debt. The money created by banking takes on a property sort of like the example in the prior paragraph, in that most of the assets backing the money at any given time are uncollectable. The difference between the bank money and the savings example is that the bank has created the money without any prior savings, instead acting as surety or guarantor of the credit they have extended. When it becomes apparent that the bank can no longer act as surety, the system no longer trusts them and they become like Citicorp and if they are large enough, they create a credit crunch all by themselves. Banks wouldn't lend to each other meant banks wouldn't lend to Citicorp, who had an amazing interbank liability that couldn't be paid. The black hole is still present, it has merely moved from Citicorp to the government which will at some point have no other alternative than to tax the economy and relocate the black hole where it has been all the time, the banking system.
Savings, debt and collateral all serve to create each other. Only in this manner can the Japanese situation be explained. The Japanese answer to the problem was more debt, which in general would be inflationary, but in this case or in the case of maximum payable principal and interest is deflationary. This is what a depression really is, maximum payable principal and interest and the longer the effort to support the money supply goes on, the worse it gets. Irving Fisher was wrong, though his thesis of swelling dollars over the short term was correct. He forgot that the dollars spent a lot of years shrinking. When the result of several business cycles and government solutions to recessions piles up to debt in the amount of several times GDP, then too much has been borrowed out of the future to go on and continue to consider the debt legitimate and the money real in any sense. Like all psychological pain, it is created and made worse by the continued avoidance. No one wants to lose their status quo except the debtors.
Wednesday, August 5, 2009
What green shoots?
The surface news seems to propel the stock market daily while the economy is propped from all angles. But, the news is bullish only if you consider pyric victories positive. Seems the oil markets take every report that is less bad than the prior to mean the surplus that is spilling out into the streets will soon disappear and boost prices ever higher. Some say this is a weak dollar, but the markets haven't been cleared for some time, regardless. The same is occurring in the copper markets, a product that is clearly cornered and stockpiled in massive quantities in China. Much is riding on these two commodities alone, most likely including the future profits of Goldman Sachs and many hedge funds. Should these markets crater, it is quite possible that the too big to fail that are involved, along with the independent producers of oil and the mining companies around the world would need a bailout.
The recent improvement in unemployment claims is being spun as a sign the recession is over, while in fact a recession that supposedly began in December 2007 showed no losses of employment of this size prior to 2009. Thus the economy is still declining at a pace that exceeds any during the first year of the recession, yet the recession is over? Nothing I have seen can be farther from the truth.
I believe the news is being made up as we go along. I recently read Murray Rothbards chapter in the book A New History of Leviathan that the Fed expanded holdings by a factor of 6 between 1929 and 1932 and the inflation did no good. We are told this didn't occur in the modern press as Bernanke does the same thing today. The budget of the US expanded 40% while the receipts of the government collapsed by 50%, making the gap between receipts and expenditures 60%. Still no inflation of prices and no recovery. Nothing could be more similar than the response between 1929 and 1932 and today than what Rothbard wrote here.
The solution in the US is to create an even bigger consumer debt bubble, while the banking industry is under pressure to preserve capital. I recently had my credit lines cut, though I had maintained a perfect record and paid all balances in full. Thank God I don't need the credit at this time. What are they doing for people that are really cashed out?
Then we have the home sales. Home sales never left the bubble stage from what I can deduce from past sales figures I have seen. The speculators have never left the market while the government is recreating a new subprime market with government subsidies and guarantees. In the meantime, the economy collapses while all this is going on. The recent rising new home construction figures were below anything prior to this recession for the past 50 years, yet you would think the financial side of the mortgage market was fixed and new homes were selling like hotcakes with legitimate lending. Nothing could be farther from the truth nor can what is being done at this time be sustained without government props. There is no private housing market in the US today, nor is one likely to appear any time soon.
In the meantime, mid sized banks in the growth areas of the country are now beginning to collapse. Colonial Bank of Montgomery, Alabama, an entity I had done business with in the past is open only because the regulators need the money to close it. The same is evidently true of Guaranty Bank, a former division of Temple Inland, another entity my family dealt with in the 1990's. There is another I am not familiar with, a bank that starts with C, I believe in Florida. I believe much of this is prime mortgage related lending along with failed housing projects. My dealing with Colonial was in the conforming mortgage market. These 3 failures alone will wipe out the FDIC.
The problems with the FDIC are why they had to construct the TARP fund. I believe Citi alone is a $400 billion hole and it is a lot easier to hope than to pay. This wasn't the first time Citi was broke. Much of what was missing has been covered up by government guaranteed financing for companies from Goldman Sachs to General Electric and everything inbetween.
Those playing in the mortgage business need to take a haircut and they can't. From what I understand, most of the foreclosed properties are being withheld from the market for 2 purposes. One to keep the weak market from being glutted and the other to keep the effects of the suspension of mark to market intact. Should the properties be sold, the losses would have to be recognized and there would be more banks to bail out, not to mention other financial entities. Those hoping for massive gains from holding housing in the next few years are going to be disappointed. In fact, I wouldn't be surprised to see a rent war break out if the highly likely weak recovery transpires. So much of the next economic wave depends on a resumption of real estate construction and I find it highly unlikely for anything near the bubble trend to ever return, nor anything close to the old peaks prior to the bubble. The same holds true for the commercial side of the game as well, as I expect retail real estate to be a disaster along with much of the other commercial property as well. I have attempted to last through a real estate bust and witnessed an entire metropolitan area of real estate related investment and construction businesses go broke. In the 1980's, the 2 largest home builders in the US, both based in Houston, imploded. Despite the size of this bust, I have yet to hear of a large builder going bust. My guess is that either the bubble was so big that even at reduced prices there was profit in the inventory or they are being carried as well under the label,too big for their creditors to let fail. Nothing here measures up to me. The bust will take longer to work out than even the least optimistic of analysts because the bubble was so much larger than prior bubbles and the market is growing so much slower than it was in 1980 or 1990.
All of these problems in the real estate market not only threaten the solvency of the financial system, but they do something few understand at this time, deprive the system of future loan collateral. This is going to be the real impact of this bubble going forward, the inability to tap home equity by the masses for a long time to come for things like retirement income, consumer spending, stock market investment and debt retirement along with all other major forms of spending. Also gone is a major portion of the move up housing market. We have only seen the tip of the iceberg here.
There is much more to the housing market that is beyond fix. For one, the market is saturated. Second, high interest rates penned up demand in the 1980's and much inflation wasn't passed on. As rates fell, FNMA developed more and more programs of qualification and the securitization of the mortgage market, demand erupted for housing against a fixed supply. As time passed, housing wasn't built for occupation, but for speculation. When I entered the real estate business in the late 1970's, much the same thing was going on, except Volker and inflation caught up with the cashflow market and put a damper on the bubble market. Underlying demand from the boomer generation was such that a collapse in the price of housing didn't transpire then. What did go on was people were paying extra over and above rents to get ahead of inflation as home owners or reap appreciation as speculative investors. The investor games didn't go on for long unless the borrowers were real pros with pockets deep enough to stay in the game.
What followed this bubble up is no longer present. There isn't a pent up demand from excessively high interest rates or a fast growing home buying age public. Thus there is an owner occupied percentage in the US that is likely higher than can be sustained along with interest rates that can only go up from here, unless there is no recovery. Then prices of homes will continue to sink.
The last green shoot comes from China. The Chinese recovery is more a flood of money pushed into the streets along with doctored statistics. I have read some things about the Chinese real estate market, which has to be 4 or 5 times the size of the normal US market, but only for a temporary period of time. The real business in China is building, not manufacturing and I am reading of entire cities of empty buildings. Thus, once this surplus is exposed, once the speculative bubble bursts and once the truth about the Chinese economy comes to the surface, the whole game washes out. It appears that the Chinese housing game has about 5 to 10 years left then the dance stops. I don't mean it slows down, but just flat stops. They have enough housing under construction right now for about 70 million people and enough capacity to build about 50 million worth of housing annually. There are only about 300 million people left to move from the rural areas, thus 6 years minus what is already sitting around vacant and the game is done. I don't even bring up the fact that the Chinese population is set to start expiring at a massive rate in a few years as the 1 child policy begins to take its toll. This is not good news for the mining industry and for those that believe in peak oil as already being reached. It is good news for the rest of us, save the fact that the economic impact on the world is going to be great.
So you have it. Green shoots is one of the biggest fairy tales in economic history. I think we had a muddle through economy a few years ago. This time, we are likely to see a just lay there economy. The effect of this on economic growth and corporate profits is going to be devastating. Stocks and retirement funds are going to shrink to next to nothing and life as we know it is going to change. It would be very beneficial to all if I am wrong here, but I don't believe that is going to be the case. I look for the Dow to possibly touch 10,000, maybe even a little higher, then the bear to come out again, stronger than he was the first time. The government will forget about saving the banks this time and start working to save itself.
The recent improvement in unemployment claims is being spun as a sign the recession is over, while in fact a recession that supposedly began in December 2007 showed no losses of employment of this size prior to 2009. Thus the economy is still declining at a pace that exceeds any during the first year of the recession, yet the recession is over? Nothing I have seen can be farther from the truth.
I believe the news is being made up as we go along. I recently read Murray Rothbards chapter in the book A New History of Leviathan that the Fed expanded holdings by a factor of 6 between 1929 and 1932 and the inflation did no good. We are told this didn't occur in the modern press as Bernanke does the same thing today. The budget of the US expanded 40% while the receipts of the government collapsed by 50%, making the gap between receipts and expenditures 60%. Still no inflation of prices and no recovery. Nothing could be more similar than the response between 1929 and 1932 and today than what Rothbard wrote here.
The solution in the US is to create an even bigger consumer debt bubble, while the banking industry is under pressure to preserve capital. I recently had my credit lines cut, though I had maintained a perfect record and paid all balances in full. Thank God I don't need the credit at this time. What are they doing for people that are really cashed out?
Then we have the home sales. Home sales never left the bubble stage from what I can deduce from past sales figures I have seen. The speculators have never left the market while the government is recreating a new subprime market with government subsidies and guarantees. In the meantime, the economy collapses while all this is going on. The recent rising new home construction figures were below anything prior to this recession for the past 50 years, yet you would think the financial side of the mortgage market was fixed and new homes were selling like hotcakes with legitimate lending. Nothing could be farther from the truth nor can what is being done at this time be sustained without government props. There is no private housing market in the US today, nor is one likely to appear any time soon.
In the meantime, mid sized banks in the growth areas of the country are now beginning to collapse. Colonial Bank of Montgomery, Alabama, an entity I had done business with in the past is open only because the regulators need the money to close it. The same is evidently true of Guaranty Bank, a former division of Temple Inland, another entity my family dealt with in the 1990's. There is another I am not familiar with, a bank that starts with C, I believe in Florida. I believe much of this is prime mortgage related lending along with failed housing projects. My dealing with Colonial was in the conforming mortgage market. These 3 failures alone will wipe out the FDIC.
The problems with the FDIC are why they had to construct the TARP fund. I believe Citi alone is a $400 billion hole and it is a lot easier to hope than to pay. This wasn't the first time Citi was broke. Much of what was missing has been covered up by government guaranteed financing for companies from Goldman Sachs to General Electric and everything inbetween.
Those playing in the mortgage business need to take a haircut and they can't. From what I understand, most of the foreclosed properties are being withheld from the market for 2 purposes. One to keep the weak market from being glutted and the other to keep the effects of the suspension of mark to market intact. Should the properties be sold, the losses would have to be recognized and there would be more banks to bail out, not to mention other financial entities. Those hoping for massive gains from holding housing in the next few years are going to be disappointed. In fact, I wouldn't be surprised to see a rent war break out if the highly likely weak recovery transpires. So much of the next economic wave depends on a resumption of real estate construction and I find it highly unlikely for anything near the bubble trend to ever return, nor anything close to the old peaks prior to the bubble. The same holds true for the commercial side of the game as well, as I expect retail real estate to be a disaster along with much of the other commercial property as well. I have attempted to last through a real estate bust and witnessed an entire metropolitan area of real estate related investment and construction businesses go broke. In the 1980's, the 2 largest home builders in the US, both based in Houston, imploded. Despite the size of this bust, I have yet to hear of a large builder going bust. My guess is that either the bubble was so big that even at reduced prices there was profit in the inventory or they are being carried as well under the label,too big for their creditors to let fail. Nothing here measures up to me. The bust will take longer to work out than even the least optimistic of analysts because the bubble was so much larger than prior bubbles and the market is growing so much slower than it was in 1980 or 1990.
All of these problems in the real estate market not only threaten the solvency of the financial system, but they do something few understand at this time, deprive the system of future loan collateral. This is going to be the real impact of this bubble going forward, the inability to tap home equity by the masses for a long time to come for things like retirement income, consumer spending, stock market investment and debt retirement along with all other major forms of spending. Also gone is a major portion of the move up housing market. We have only seen the tip of the iceberg here.
There is much more to the housing market that is beyond fix. For one, the market is saturated. Second, high interest rates penned up demand in the 1980's and much inflation wasn't passed on. As rates fell, FNMA developed more and more programs of qualification and the securitization of the mortgage market, demand erupted for housing against a fixed supply. As time passed, housing wasn't built for occupation, but for speculation. When I entered the real estate business in the late 1970's, much the same thing was going on, except Volker and inflation caught up with the cashflow market and put a damper on the bubble market. Underlying demand from the boomer generation was such that a collapse in the price of housing didn't transpire then. What did go on was people were paying extra over and above rents to get ahead of inflation as home owners or reap appreciation as speculative investors. The investor games didn't go on for long unless the borrowers were real pros with pockets deep enough to stay in the game.
What followed this bubble up is no longer present. There isn't a pent up demand from excessively high interest rates or a fast growing home buying age public. Thus there is an owner occupied percentage in the US that is likely higher than can be sustained along with interest rates that can only go up from here, unless there is no recovery. Then prices of homes will continue to sink.
The last green shoot comes from China. The Chinese recovery is more a flood of money pushed into the streets along with doctored statistics. I have read some things about the Chinese real estate market, which has to be 4 or 5 times the size of the normal US market, but only for a temporary period of time. The real business in China is building, not manufacturing and I am reading of entire cities of empty buildings. Thus, once this surplus is exposed, once the speculative bubble bursts and once the truth about the Chinese economy comes to the surface, the whole game washes out. It appears that the Chinese housing game has about 5 to 10 years left then the dance stops. I don't mean it slows down, but just flat stops. They have enough housing under construction right now for about 70 million people and enough capacity to build about 50 million worth of housing annually. There are only about 300 million people left to move from the rural areas, thus 6 years minus what is already sitting around vacant and the game is done. I don't even bring up the fact that the Chinese population is set to start expiring at a massive rate in a few years as the 1 child policy begins to take its toll. This is not good news for the mining industry and for those that believe in peak oil as already being reached. It is good news for the rest of us, save the fact that the economic impact on the world is going to be great.
So you have it. Green shoots is one of the biggest fairy tales in economic history. I think we had a muddle through economy a few years ago. This time, we are likely to see a just lay there economy. The effect of this on economic growth and corporate profits is going to be devastating. Stocks and retirement funds are going to shrink to next to nothing and life as we know it is going to change. It would be very beneficial to all if I am wrong here, but I don't believe that is going to be the case. I look for the Dow to possibly touch 10,000, maybe even a little higher, then the bear to come out again, stronger than he was the first time. The government will forget about saving the banks this time and start working to save itself.
Monday, July 27, 2009
Housing data is misleading
This is a copy of something I wrote on Calculated Risks page. I thought it at least covered an area that was too important to lose in a comment post, so I have put it here for save keeping. Those who don't go to Calculated Risks page, you are missing some of the most important information about the economy and the housing bubble. I am going to add a little more to the bottom of the page because I didn't finish my thought.
Risk, you have a great page and I have used it for at least 2 years for reference of data you have accumulated. I have been around housing in some capacity most of my working life, having been both a Realtor and a mortgage broker. I have also been though a housing bust, the 1980's Texas bust being one of the worst seen in the USA for a long time prior to the current mess. In any case, your data doesn't support what the recent data is showing.
The big deal is that home sales really never exceeded 4 million prior to this bubble on an existing basis. I do know from your data and other data I have mined from the government that new home sales were at a record of 819K until somewhere around 1997 from which we didn't see sales that low again until 2008. I believe your chart on the story above says more than you are mining out of it. I will elaborate after I mention the obvious.
You are using a ratio of existing sales to new sales to I believe net out distressed sales. The last time housing really went bust was the early 1980's interest rate shock. It is also the only time new home sales were at a bottom compared to this recent action, dropping to 401K. Existing home sales in that recession/ bust were well below 3 million. You might note that existing home sales have remained above the prior record, despite the worst economy in a long time. This doesn't support the idea that home prices or building are falling because of a bust, but because of a collapse in market fundementals. There has been speculation all the way down. The population argument doesn't hold water because the real game is how many new households are needing houses and the boom generation was providing as many as ever. Thus the 4 million/800K of 1978 was a peak. There was also a speculative bubble going on in 78 to support such a sales figure. The bust that followed dropped sales to 50% on both accounts. Thus our totals here should be more in the 3.5 million range, not the over 5 million range we have seen as a bottom.
The other matter is the new home sales figures and how they stayed so high for so long during the 1997 to 2007 period. Your chart "comparing peaks and troughs for starts, new home sales and residential investment shows the truth. Though you can say a bottom might be in because new home sales are bouncing, remember that not all markets were glutted. They were building roughy 50K in units here in the DFW area before 2007 and scaled back early. I think DFW could probably consume 25,000 units this year, which would maybe by itself make up the change in construction last month. Other areas aren't coming back.
If you look at that chart, don't only look at the peak, but look at the duration of the climb and the size of the top. A big top means a big bottom and we are going to see something that is totally unexpected. Remember, prior overconstruction was always corrected every few years and only the 1972 era and 1978 era peaks lasted over a very short period of time, 2 and 3 years respectively and followed by plunges. it was the plunge that created the following peak and the 2 peaks played themselves out in the 1980's where we only saw a more moderate peak.
This is evidence that the supply of housing is so large that it will take years to work off the excess. Also, the high existing home sales figures tell me the speculators haven't quit speculating. I don't care to listen to NAR statistics as they have been lying for years and using bubble statistics to hide the fact that the bubble hasn't left. This is the true nature of the problem as I see it.
Thus we are going to see one of two things happen. Either we are going to see a rebound and another speculative bubble (the government has an interest in encouraging and recreating a bubble and would do nothing to stop it, including making FHA a subprime financing outfit) or we are going to see this rebound fizzle to lower prices and lower sales. We spent 5 years above the 5% GDP point in housing, which equated to all the time in the 30 plus years prior. We also spent 11 years in record annual sales territory, peaks that had only lasted 2 years prior. Thus, we are looking at a lot of years of surplus housing construction to wipe out.
If this does become a new bubble, I expect it to either bankrupt the US government or force them to drop FNM and FRE and let the market take the losses. If it doesn't, it will force the knife catchers to liquidate or join the groups of foreclosed. In any case, the economy won't be the way it was for a long time.
Risk, you have a great page and I have used it for at least 2 years for reference of data you have accumulated. I have been around housing in some capacity most of my working life, having been both a Realtor and a mortgage broker. I have also been though a housing bust, the 1980's Texas bust being one of the worst seen in the USA for a long time prior to the current mess. In any case, your data doesn't support what the recent data is showing.
The big deal is that home sales really never exceeded 4 million prior to this bubble on an existing basis. I do know from your data and other data I have mined from the government that new home sales were at a record of 819K until somewhere around 1997 from which we didn't see sales that low again until 2008. I believe your chart on the story above says more than you are mining out of it. I will elaborate after I mention the obvious.
You are using a ratio of existing sales to new sales to I believe net out distressed sales. The last time housing really went bust was the early 1980's interest rate shock. It is also the only time new home sales were at a bottom compared to this recent action, dropping to 401K. Existing home sales in that recession/ bust were well below 3 million. You might note that existing home sales have remained above the prior record, despite the worst economy in a long time. This doesn't support the idea that home prices or building are falling because of a bust, but because of a collapse in market fundementals. There has been speculation all the way down. The population argument doesn't hold water because the real game is how many new households are needing houses and the boom generation was providing as many as ever. Thus the 4 million/800K of 1978 was a peak. There was also a speculative bubble going on in 78 to support such a sales figure. The bust that followed dropped sales to 50% on both accounts. Thus our totals here should be more in the 3.5 million range, not the over 5 million range we have seen as a bottom.
The other matter is the new home sales figures and how they stayed so high for so long during the 1997 to 2007 period. Your chart "comparing peaks and troughs for starts, new home sales and residential investment shows the truth. Though you can say a bottom might be in because new home sales are bouncing, remember that not all markets were glutted. They were building roughy 50K in units here in the DFW area before 2007 and scaled back early. I think DFW could probably consume 25,000 units this year, which would maybe by itself make up the change in construction last month. Other areas aren't coming back.
If you look at that chart, don't only look at the peak, but look at the duration of the climb and the size of the top. A big top means a big bottom and we are going to see something that is totally unexpected. Remember, prior overconstruction was always corrected every few years and only the 1972 era and 1978 era peaks lasted over a very short period of time, 2 and 3 years respectively and followed by plunges. it was the plunge that created the following peak and the 2 peaks played themselves out in the 1980's where we only saw a more moderate peak.
This is evidence that the supply of housing is so large that it will take years to work off the excess. Also, the high existing home sales figures tell me the speculators haven't quit speculating. I don't care to listen to NAR statistics as they have been lying for years and using bubble statistics to hide the fact that the bubble hasn't left. This is the true nature of the problem as I see it.
Thus we are going to see one of two things happen. Either we are going to see a rebound and another speculative bubble (the government has an interest in encouraging and recreating a bubble and would do nothing to stop it, including making FHA a subprime financing outfit) or we are going to see this rebound fizzle to lower prices and lower sales. We spent 5 years above the 5% GDP point in housing, which equated to all the time in the 30 plus years prior. We also spent 11 years in record annual sales territory, peaks that had only lasted 2 years prior. Thus, we are looking at a lot of years of surplus housing construction to wipe out.
If this does become a new bubble, I expect it to either bankrupt the US government or force them to drop FNM and FRE and let the market take the losses. If it doesn't, it will force the knife catchers to liquidate or join the groups of foreclosed. In any case, the economy won't be the way it was for a long time.
Sunday, June 28, 2009
The Water Gets Muddier
The bulls have been running now for over 3 months. The best question is, running where? Bernanke speaks of green shoots, but the unemployment claims continue to exceed 600,000 a week, a number that is roughly 1/2 of 1% of the US labor force. If 2% of the US labor force is losing their job on a monthly basis, then the idea that consumer spending is holding up is a long shot, despite the numbers. Also failing to support this idea is the fact that Japanese and Chinese exports are down between 20% and 40%. Being these 2 countries are the source of much of the US consumer goods, it would stand to reason that US consumer spending is down significantly. The same is true of an Asian economic rebound.
The story is the great rally in stocks around the world. The truth is the US market, save the speculative Nasdaq, is either flat or down for the year. The Chinese market, which began to rally earlier is not even to the 50% point, down from the top more severely than the US market. Commodities have rallied, but again this is an inflation play of massive speculation and not due to real supply and demand problems. In fact, oil is piling up in surplus around the world, being hoarded in tankers and OPEC is holding down production to boot. I believe any short term US demand rebound is due mainly to filling gas tanks to avoid the run up in prices. All the while Goldman Sachs promises record bonuses. Wonder who is behind the movement in price and who is going to be the next bailout by the government due to systematic risk?
I don't believe many understand where we are in the economic cycle. We are at a history changing juncture. The phenomenon of fractional reserve banking creates 2 problems, an imbalance of have money and have not monies and a mathematical problem of uncollectable capital. By that, I mean the money to make up the capital reserves on the balance sheets does not exist. This is why we have losses as far as the eye can see in the financial markets and why I don't believe the bailouts are over. They are over only because they might not be politically feasible. It is also why I believe Goldman will be the next systematic event, in that they won't have anyone to pass the bag to this time. For whatever reason and I suspect fraud, AIG took it last time. Their customers can only be fleeced so many times before they cease to be customers.
Much is made of the purchase of bonds and mortgage backs by the Fed and how this is printing money. It is no more printing money than using your Visa. Plus, where is all the money the Fed has printed in the past? My contention is it no longer exists in the banking system, which has been barren for years of socalled reserves, but instead has been withdrawn and put in hiding in third world countries for years. In the meantime the banks have been without money to pay each other and thus we have the credit crunch that won't let up. The banking system is giving up its best assets in this series of transactions while getting assets in return that don't pay any interest. Money don't exist in banks only in bank accounts.
There are a few things different between this time and the 1970's. One is we are not following up the collapse of Bretton Woods with 30 years of currency adjustments in a mere 5 years or so. Second, we are at the end of a worldwide spending spree, something that was just beginning in the 1970's. The oldest boomers in 1970 were not even 25 while the youngest were still in grade school. That generation created a wave whereever it progressed and it was progressing to adulthood in the 1970's wher it was going to need cars, furniture, homes, capital goods for jobs and social services. It didn't hurt that the world bank had loaned hundreds of billions for emerging markets to spend as well. Remember the financial crisis then was the banks going broke on loans to these countries going into default.
Today we have an overpaid generation X and a busted boomer generation. The boomers are now in panic and not about to continue to spend as they had in the past. The generation Xers are about to see their gravytrains derailed and their credit cards maxed out. Where is the demand to push prices higher going to come from? I highly doubt it will be China, where the socalled savings rate has very little to do with the population and a lot to do with the confiscatory corporate and financial system. Absent demand, the capital goods business in China goes into a shell.
There is a lot of mud in the water. All I write is as speculative as what we are seeing in the stock market. Until people as a whole start getting free money or new, financially irresponsible people begin to get more credit cards than the other financially irresponsible people are losing I find it hard to see where the money makes the cycle. The speculator needs someone to take the bag from him whether he is dealing in stocks, commodities or manufacturing inventory. In the meantime, 600,000 people a week are applying for unemployment in the US, exports that create jobs and income are remaining depressed overseas and massive bets are being placed against the trend on green shoots.
The story is the great rally in stocks around the world. The truth is the US market, save the speculative Nasdaq, is either flat or down for the year. The Chinese market, which began to rally earlier is not even to the 50% point, down from the top more severely than the US market. Commodities have rallied, but again this is an inflation play of massive speculation and not due to real supply and demand problems. In fact, oil is piling up in surplus around the world, being hoarded in tankers and OPEC is holding down production to boot. I believe any short term US demand rebound is due mainly to filling gas tanks to avoid the run up in prices. All the while Goldman Sachs promises record bonuses. Wonder who is behind the movement in price and who is going to be the next bailout by the government due to systematic risk?
I don't believe many understand where we are in the economic cycle. We are at a history changing juncture. The phenomenon of fractional reserve banking creates 2 problems, an imbalance of have money and have not monies and a mathematical problem of uncollectable capital. By that, I mean the money to make up the capital reserves on the balance sheets does not exist. This is why we have losses as far as the eye can see in the financial markets and why I don't believe the bailouts are over. They are over only because they might not be politically feasible. It is also why I believe Goldman will be the next systematic event, in that they won't have anyone to pass the bag to this time. For whatever reason and I suspect fraud, AIG took it last time. Their customers can only be fleeced so many times before they cease to be customers.
Much is made of the purchase of bonds and mortgage backs by the Fed and how this is printing money. It is no more printing money than using your Visa. Plus, where is all the money the Fed has printed in the past? My contention is it no longer exists in the banking system, which has been barren for years of socalled reserves, but instead has been withdrawn and put in hiding in third world countries for years. In the meantime the banks have been without money to pay each other and thus we have the credit crunch that won't let up. The banking system is giving up its best assets in this series of transactions while getting assets in return that don't pay any interest. Money don't exist in banks only in bank accounts.
There are a few things different between this time and the 1970's. One is we are not following up the collapse of Bretton Woods with 30 years of currency adjustments in a mere 5 years or so. Second, we are at the end of a worldwide spending spree, something that was just beginning in the 1970's. The oldest boomers in 1970 were not even 25 while the youngest were still in grade school. That generation created a wave whereever it progressed and it was progressing to adulthood in the 1970's wher it was going to need cars, furniture, homes, capital goods for jobs and social services. It didn't hurt that the world bank had loaned hundreds of billions for emerging markets to spend as well. Remember the financial crisis then was the banks going broke on loans to these countries going into default.
Today we have an overpaid generation X and a busted boomer generation. The boomers are now in panic and not about to continue to spend as they had in the past. The generation Xers are about to see their gravytrains derailed and their credit cards maxed out. Where is the demand to push prices higher going to come from? I highly doubt it will be China, where the socalled savings rate has very little to do with the population and a lot to do with the confiscatory corporate and financial system. Absent demand, the capital goods business in China goes into a shell.
There is a lot of mud in the water. All I write is as speculative as what we are seeing in the stock market. Until people as a whole start getting free money or new, financially irresponsible people begin to get more credit cards than the other financially irresponsible people are losing I find it hard to see where the money makes the cycle. The speculator needs someone to take the bag from him whether he is dealing in stocks, commodities or manufacturing inventory. In the meantime, 600,000 people a week are applying for unemployment in the US, exports that create jobs and income are remaining depressed overseas and massive bets are being placed against the trend on green shoots.
Thursday, May 28, 2009
The whole group of numbers are nonsense
Unemployment claims less than predicted? How many people on Friday decided to go do something else other than file unemployment? 1% of 630,000 is 6300, which is about where the number came in. They spin this like the figures peaked at 900,000, but from what I can remember the 650,000 range was pretty much the peak, so week after week we are having claims come in within 5% of the peak, with the better numbers I have seen come in on weeks surrounding hollidays. This next week will contain Memorial Day. I don't know how many of you have been to an unemployment office, but you have to be unemployed to have the time to go. I don't believe they are geared to process 5 days of business in 4 days.
The other news was the durable goods orders, up 1.9%. The decline in March was more than doubled to 2.1% from what I can't find without looking. Point here is that the increase was created in part off a decline that was over 1% more than stated for last month. Expectations were up .5%.
This whole matter, not just these figures, but the expectations for autos and other stuff is some of the biggest bullcrap I have seen in years. I saw yesterday where SPX earnings were actually worse than expected coming into the quarter, but the news has been about so many companies that have beaten expectations. They missed in the fall. Point is that Wall Street was trying to sell no recession in the fall, then the board that calls recessions said it started in December 2007, meaning in Wall Street statistical terms, they missed it. So since then they have been trying to sell recovery because statistically, the recession had been going on so long. But, up until it was called, Wall Street was trying to sell us on the idea we were going to miss it. Which end of this donkey does the truth come out of. It appears both ends are the rear.
My point is that I think Wall Street was right up to September, that indications were we could miss the recession. Of course, us bears would have no part of that idea because most of us were banking on this financial mess, though few of us had a clue how it was going to play out, being none of us had ever seen it. What we are looking at started September 7, not December 2007 or with the subprime crisis. This is when the unemployment claims went to the 600K mark and have stayed there. It is when the price of commodities collapsed. It is when the Treasury started crying. It is when the real depression started.
Bulls mine these figures because they have this golden fleece called consumer spending. They can't really figure out the difference between green shoots and green puke. The rest of us are at the mercy of Goldman Sachs officials appointed to government positions, where numbers can be spun. My feeling is the consumer isn't only not coming back, if that is what we are waiting for, then we might need to spot Santa Claus for evidence.
The bulls are trying to use an old horse to pull a large plow. I am reading Rothbards book, "The Mystery of Banking" and from what I can gather, their capacity to steal with credit has dried up to the point that they get the bill back now. Of course, everyone has to die except the big NY and London financial institutions, so they have the government give the bill to us, in order that they try the game again.
The other news was the durable goods orders, up 1.9%. The decline in March was more than doubled to 2.1% from what I can't find without looking. Point here is that the increase was created in part off a decline that was over 1% more than stated for last month. Expectations were up .5%.
This whole matter, not just these figures, but the expectations for autos and other stuff is some of the biggest bullcrap I have seen in years. I saw yesterday where SPX earnings were actually worse than expected coming into the quarter, but the news has been about so many companies that have beaten expectations. They missed in the fall. Point is that Wall Street was trying to sell no recession in the fall, then the board that calls recessions said it started in December 2007, meaning in Wall Street statistical terms, they missed it. So since then they have been trying to sell recovery because statistically, the recession had been going on so long. But, up until it was called, Wall Street was trying to sell us on the idea we were going to miss it. Which end of this donkey does the truth come out of. It appears both ends are the rear.
My point is that I think Wall Street was right up to September, that indications were we could miss the recession. Of course, us bears would have no part of that idea because most of us were banking on this financial mess, though few of us had a clue how it was going to play out, being none of us had ever seen it. What we are looking at started September 7, not December 2007 or with the subprime crisis. This is when the unemployment claims went to the 600K mark and have stayed there. It is when the price of commodities collapsed. It is when the Treasury started crying. It is when the real depression started.
Bulls mine these figures because they have this golden fleece called consumer spending. They can't really figure out the difference between green shoots and green puke. The rest of us are at the mercy of Goldman Sachs officials appointed to government positions, where numbers can be spun. My feeling is the consumer isn't only not coming back, if that is what we are waiting for, then we might need to spot Santa Claus for evidence.
The bulls are trying to use an old horse to pull a large plow. I am reading Rothbards book, "The Mystery of Banking" and from what I can gather, their capacity to steal with credit has dried up to the point that they get the bill back now. Of course, everyone has to die except the big NY and London financial institutions, so they have the government give the bill to us, in order that they try the game again.
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