Financial topics

[John]

> I am new to the site and find the points of view here very
> interesting and scary at the same time.

> You mentioned in a previous post that odds of a generational panic
> event are about 25% for each week going forward. Hasn't this panic
> already happened, the DOW has fallen from a high of 14000+ to
> around 8000, I would call that a major panic. Comparing it with
> the 29 crash, there might be some retracement and then a further
> decline to say 3000 but in 29 that last decline took over a year.
> If we expect this crisis to follow that pattern, then wouldn't it
> be a slow bleeding death that could span several years (10 to 15
> if you just scale the time frames)?

See the following article for a discussion of the timeline
differences between 1929 and today:

** There's never before been a day like this on Wall Street.
** http://www.generationaldynamics.com/cgi ... 11#e081011


John

[Gordo]

The government can default because it can't pay its debts.
And it can't pay its debts by creating more debts. And that's why
your suggestion fails.

Perhaps in some fantasy world where US Government debt is not denominated in dollars.
Until then, default is simply not possible. Depreciation of the currency is inevitable, of course. But this should be no surprise to you, as its what Roosevelt did in the 30's.

Furthermore, we could generate $10 trillion in additional debt and still be below Japan's level of debt to GDP.

And just to clarify - I do not expect imminent hyperinflation. We are obviously in a deflationary period now, I don't know how anyone could dispute that. The deliberate depreciation of the currency will come later, just as it did during the great depression, although even those efforts won't necessarily cause an immediate increase in money supply or consumer prices.

Also - and this is very important - Ben Bernanke has stated that he will basically do WHATEVER IT TAKES to avoid deflation. I'm not sure what exactly this will entail, but I can guarantee his response will not be the same as that during the '29-'32 period. Anyone who has not yet read it, MUST read Bernanke's 2002 speech on this subject:
Deflation: Making Sure "It" Doesn't Happen Here

He has obviously thought a lot about this. Not just recently, but years ago before most were thinking about it. He is always described as some kind of "depression buff" or someone who has studied the period rigorously. All of these things should give us clues.

[John]

Dear Gordo,

It's exasperating to read what you've written, since I've explained
many times why what you're describing has not worked and can't work.

I'm quite familiar with Bernanke's economic views, and I've written
about how incoherent they are many, many times. Here are just four
out of dozens of articles:

** Ben S. Bernanke: The man without agony
** http://www.generationaldynamics.com/cgi ... 29bernanke

** Bernanke's historic experiment takes center stage
** http://www.generationaldynamics.com/cgi ... 27#e070827

** Ben Bernanke's Great Historic Experiment
** http://www.generationaldynamics.com/cgi ... 18#e070818

** WSJ's page one story on Bernanke's Princeton 'Bubble Laboratory' is almost incoherent
** http://www.generationaldynamics.com/cgi ... 18#e080518

Perhaps Bernanke has been thinking about this since he was a boy sitting on
his grandmother's knee, but his thoughts have been wrong, and he's
been proven wrong many times in the last few years.

Now you're suggesting that the Fed expand credit to $10 trillion
dollars. What I'm telling you is that this is impossible.

I'm not saying that it's bad policy (though it is). I'm not saying
that politicians would veto it (that wouldn't stop it from
happening). What I'm saying is that it's impossible.

The only way you could expand credit to $10 trillion dollars is by
offering subprime loans -- subprime mortgage loans, subprime credit
card loans, subprime auto loans.

And the problem is that the Boomers and Gen-Xers who were willing to
accept such loans only two years ago would not be willing to do so
today. They've already lost their homes, lost their jobs, lost their
lives, because they did what you're suggesting.

Another way the Fed might try to expand credit is by offering to loan
unlimited amounts of money to banks, using near-worthless
mortgage-backed securities as collateral. Oh wait. That's what
they've been doing, and it hasn't done any good.

This is how Generational Dynamics works. There have been massive
generational changes in attitude and behavior, and those changes make
what you suggest LITERALLY IMPOSSIBLE. It literally cannot be done,
because of generational changes that have already occurred.

The fact that you're getting a $300,000 credit line from credit cards
means that you live in a totally different world from the rest of us.
I believe that many people today would be shocked that you would
consider borrowing that much money on speculation, even at teaser
rates.

If, after all these years, you still want to believe anybody but me,
then believe Mort Zuckerman, whose bitter, angry statement yesterday
was quoted in my latest web log entry.

** Market selloff resumes savagely, as markets collapse around the world
** http://www.generationaldynamics.com/cgi ... 16#e081016

Sincerely,

John

[Gordo]

Now you're suggesting that the Fed expand credit to $10 trillion
dollars. What I'm telling you is that this is impossible.

Impossible?
Keep an eye on this chart:
http://research.stlouisfed.org/fred2/se ... NS?cid=124

How can it be impossible when Japan just did it (in terms of debt to GDP) over the course of the last 15 years? This did nothing to help them avoid deflation, of course.

[Gordo]

I believe that many people today would be shocked that you would
consider borrowing that much money on speculation, even at teaser
rates.

John - you are quite possibly the only person I know that would call an FDIC insured CD "speculation". Hahah. If I lose this money, it means the world has gone to hell in a handbasket (no less than a complete government collapse) in which case - would it REALLY have made any difference if I had or had not borrowed the money in the first place? If the government collapses, I can guarantee you that the last thing people will need to worry about is paying off their credit card debt!

[John]

Dear Gordo,

You're shifting the ground. You said that the government could
create an unlimited amount of money by offering credit through banks.
I said they couldn't.

This is not offering credit through banks. This is banks coming to
get loans, using their near-worthless assets as collateral, so that
they can lend money to each other and corporations. This is what all
the bailouts have been attempting to do.

Huge masses of people are furious at bankers. It's funny. I
remember in the 50s that my mother and a lot of other people thought
that a banker was the devil incarnate. Things are coming full
circle.

And huge numbers of people are furious at the $700 billion bailout. A
lot of Gen-Xers are really furious because they hate Boomers anyway,
and see the bailout as part of the Great Boomer Plot. This is an
example of what I mean about changes in generational behavior. The
Gen-Xers created the structured finance vehicles because of their
contempt and hatred for Boomer values, and now they blame the Boomers
because it backfired on them.

There isn't a snowflake's chance in hell that a $10 trillion bailout
would ever be attempted, but if it were, the newly aroused Millennials
and Gen-Xers -- the same ones who are voting for Obama because of his
hatred for Boomers -- will never agree to even one more bailout.
That's what I mean by nihilistic Gen-Xers. They'd rather destroy
themselves then bail out the Boomers (and themselves).

So, yes -- Impossible!

Libor is down slightly today, and everyone is rejoicing. Let's see
what happens next.

Can the Fed purchase $10 trillion (nominal value) of near-worthless
securities and save the world? So far, they're only authorized for a
few hundred billion. Let's see how it works out.

Sincerely,

John

[John]

Dear Gordo,

John - you are quite possibly the only person I know that would
call an FDIC insured CD "speculation". Hahah. If I lose this
money, it means the world has gone to hell in a handbasket (no
less than a complete government collapse) in which case - would it
REALLY have made any difference if I had or had not borrowed the
money in the first place? If the government collapses, I can
guarantee you that the last thing people will need to worry about
is paying off their credit card debt!

If there's a big string of bank failures - as there certainly will be
-- then the government will perform some sort of triage. You're
probably right -- that you'll get your money back with interest on
the CD and be able to repay the credit cards, but in these extremely
turbulent times, you are taking a non-trivial risk. There are
definitely scenarios -- prior to total governmental collapse -- where
you'll lose some or all of the money in the CD, and you'll still owe
the total amount on the credit cards. Or, less onerous, you may have
to wait a long time to get your money out, and in the meantime your
teaser rate expires.

I hope you do well with it, and I admire your guts.

But I stand by what I said earlier -- a lot of people would be
shocked at what you're doing, and you really are in a different class
from the rest of us.

Sincerely,

John

[John]

From a web site reader:

> My "friend" asked me a question the other day that I was not sure
> how to answer, would you please take a moment to give your input.
> I know your are very busy, I want to tell you how much I
> appreciate your work.

> My friend said he has two hundred thousand, quick, easy access.
> assuming he will not need this money to survive, where will be
> the best opporunities on the back side of this crises? he is 40
> miles north of miss gulf coast (prime real estate?). real estate,
> stocks, housing?? I am just not sure what the world will look like
> on the other side. if you were in his shoes, where would you be
> thinking the best opporunities to be? I hope you do not think
> harshly of my friend for thinking of profit after so much
> sufffering of his neighbors. he will surely suffer also, I think
> no common man will escape the pain.

I would never think harshly of someone attempting to make money
honestly. The people I get mad at are the crooks, the sleazy
politicians (which means all of them, Democrats and Republicans
alike) and the people who destroy themselves.

This is a good question. With volatility at record levels, right now
is an extremely dangerous time to invest in anything.

John Kenneth Galbraith says that by November, 1929, investors "saw the
volume of trading return to normal and saw Wall Street become as
placid as a produce market."

It might be worthwhile to start planning now for investing at that
time.

My expectation is that once the violent volatility ends, it will be a
long-term bear market, continuing with relatively little volatility.
However, as Gordo often points out, there may well be relief rallies
that last several months, so the terrain will still be very
dangerous for those who do short trading.

Thus, the way to plan for the post-crash period is to look at
previous long-term bear markets. Thus, you can look at 1929-1933,
1966-1982, and 2000-2003, and use those as models to make plans.

Since the level of poverty will be great, the "iPhone market" will be
bad news -- and by that I'm referring to all the high-tech gadgets
that are more cute than functional, and all the things that go with
them, such as designer lunches and designer clothing.

For an amusing angle on this, see this article:

** Depression-era chic: in fashions, what's old is new again.
** http://www.generationaldynamics.com/cgi ... 01#e080801

I would expect the best investment opportunities would be geared
towards satifying the survival needs of people in extreme poverty.
For example, Pat ("The Grey Badger") recommends Family Dollar Stores.

Another important area will be things related to defense.
We may well be in a major war before long, so talking about
investment opportunities may be moot, but if they exist, defense
oriented stuff should be a good bet.

But keep in mind that ALL stocks will be falling (because it will be
a bear market). That means that even a GOOD stock may lose money,
though perhaps it will lose less money than others.

There'll also be a return to basics. Entrepreneurs will have a hard
time getting those $50 million venture capital injections. The Bill
Gates model -- developing something in your basement, and building a
business on a cash basis -- may have a good chance of succeeding.

Those are my ideas. Maybe others will have ideas as well.

Sincerely,

John

[isaac]

Dear Isaac,

> OK then what does happen wehn the US defaults. Something must
> happens. And can the US really default if they can just print
> money any time they want too. I guess if they print money then
> that would be the first category since no one will take the second
> category anymore. They don't really need 7000 Million hundred
> dollar bills. They just need seven million $100,000 bills. I bet
> they could print those in jiffy. They probably wouldn't be worth
> the paper they were printed on.

They can't do that because it would be a violation of US law, even if
the government were in default.

Sincerely,

John

I would have thought that buying banks violated the constitution let alone the law. Are we sure the law really matters in this sort of circumstance?

[Witchiepoo]

I hope you do well with it, and I admire your guts.

But I stand by what I said earlier -- a lot of people would be
shocked at what you're doing, and you really are in a different class
from the rest of us.

Sincerely,

John

???

Could you please explain what this means, and what Gordo is "doing"?

Just curious.