Financial topics

Investments, gold, currencies, surviving after a financial meltdown
John
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The Wall Street Journal becomes aware of deflation

Post by John »

-- The Wall Street Journal becomes aware of deflation

Mainstream financial reporters are generally so oblivious to what's
going on in the world that they almost always act like they've never
heard of the word "deflation."

In the past few years, there's been an explosive bubble in commodity
prices, thanks to surging demand in China's bubble economy. And yet,
the CPI (consumer price index) has increased only modestly in that
period. It never occurred to them to wonder why those commodity
increases didn't send the CPI to over 10%, as happened in the 1970s.

Now, with China's economic cooling, commodities demand on the margins
is crashing, and commodities prices are falling at the same time.

Image

Suddenly WSJ is dicovering deflation:
> Falling prices in commodity markets have helped ease inflation.

> Fed officials generally consider price stability to be an
> inflation rate between 1.5% and 2%. Their preferred measure of
> core inflation, which excludes food and energy, stands above 2%
> now, and is expected to remain above that mark as price increases
> from earlier this year advance through the product pipeline.

> The economic slowdown and declining commodity prices have eased
> the nation's consumer inflation rate, which surged to 5.6% over
> the summer. Annual inflation in the U.S. is likely to turn
> negative for at least several months next year, on declining
> energy and food prices.

> With the unemployment rate rising rapidly and capital markets in
> turmoil, "pretty much everything points toward deflation," said
> Paul Ashworth, chief U.S. economist at Capital Economics. "The
> only thing you can hope is that the prompt action of policy makers
> can maybe head this off first."

> The Japanese economy in the 1990s and the U.S. during the 1930s
> illustrate how deflation can choke a weak economy and spiral out
> of control. A sagging economy exerts downward pressure on prices
> because of weak demand for labor and goods. Broad-based declines
> -- particularly in a credit crisis, which can push asset prices
> down sharply -- can also force down wages, preventing consumers
> and, therefore, companies from paying their debts. Falling prices
> also encourage businesses and consumers to save rather than spend,
> because money would be worth more after prices decline. The
> restrained spending, in turn, hurts the economy even more.

> Federal Reserve Chairman Ben Bernanke, in a speech as a Fed
> governor in 2002, said deflation in the U.S. is "highly unlikely"
> but added, "I would be imprudent to rule out the possibility
> altogether." The reason, he said at the time, was the Fed "has
> sufficient policy instruments to ensure that any deflation that
> might occur would be both mild and brief."
> http://online.wsj.com/article/SB1224287 ... lenews_wsj
As usual, there's no historical sense of what's going on. They
mention the deflation of the 1930s without wondering whether the
inflation of the 1970s and the deflation of today are part of the
same cycle.

Mainstream economics has a flat view of time. In their standard
models, every decade is pretty much like every other decade. 50 year
olds in one decade are the same as 50 year olds in another decade.
Businesses created in one decade are identical to businesses created
in another decade.

That these assumptions are totally absurd. 50 year olds in the
1970s, who lived through the Great Depression, are going to have
completely different attitudes and behaviors towards money and
spending than 50 year olds today. And yet, as incredibly simple as
this observation is, mainstream macroeconomics is totally oblivious
to it.

What American companies are suffering from today is what I call the
"Crusty Old Bureaucracy Effect." I came upon that name several years
ago, when I read someone criticize a company has having a "crusty old
bureaucracy."

In fact, most major businesses were formed (or recreated) in the
1930s depression. They were young and productive for decades, but
today these companies have almost ground to a halt, as the
bureaucracy prevents change.

The result is that today's companies cannot produce products that
people actually want, and so demand for these products is falling,
and prices are falling as well.

Today we have two different forces affecting prices: the Crusty Old
Bureaucray Effect is lowering demand, while commodities prices affect
supply. When commodities prices were rising, these two forces worked
in opposit directions, keeping the CPI relatively stable. Today, the
two forces are working together, pushing prices down so much that
even the Wall Street Journal seems to have noticed.

Sincerely,

John

John
Posts: 11485
Joined: Sat Sep 20, 2008 12:10 pm
Location: Cambridge, MA USA
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Re: Financial topics

Post by John »

From a web site reader, referring to a previous response:
http://generationaldynamics.com/forum/v ... p=507#p507
> Appreciate that you took your time to respond to my question.
> However, I don't believe you answered the question.

> Your response referenced a previous comment you had made which is
> a "macro" view of the economy and general market direction.

> My question was more specific and was an attempt to understand
> how "market makers" of options handle the unwinding of those
> options (OPEX) especially in the current situation where a lot of
> puts were bought in anticipation of a market decline and those
> puts are now "in the money".

> It appears, the market answered my question. The market went up.
He's right that I didn't answer the question, but that's because I
don't know enough about the detailed specifics of options trading to
provide useful information.

If anyone else can provide additional information, please do so.

Sincerely,

John

John
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Joined: Sat Sep 20, 2008 12:10 pm
Location: Cambridge, MA USA
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Earnings estimates fall again

Post by John »

-- Earnings estimates fall again

CNBC Earnings Central posted several earnings summaries this week.
The latest was as follows:
> Earnings Central Stats

> As of Friday, October 17th:

> 82 companies in the S&P 500 have reported earnings for
> third-quarter 2008, 59% of the companies have beaten expectations,
> 15% were in-line, and 27% missed.

> The blended earnings growth rate for the S&P 500 for Q3 2008,
> combining actual numbers for companies that have reported, and
> estimates for companies yet to report, stands at -9.1%.

> On April 1st, the estimated growth rate for Q3 was 17.3%, and by
> July 1st, the estimated growth rate had fallen to 12.6%. (Data
> provided by Thomson Reuters)
> http://www.cnbc.com/id/15839135/site/14081545/
Here is the table of earnings growth estimates over time:


Date 3Q Earnings growth estimate as of that date
------- -------------------------------------------
Mar 3: 25.0%
Apr 1: 17.3% Start of previous (2nd) quarter
Jul 1: 12.6% Start of quarter
Sep 5: 0.8%
Sep 12: -1.6%
Sep 19: -0.3%
Sep 26: -1.7% End of quarter
Oct 3: -4.8%
Oct 10: -7.8%
Oct 15: -9.8% Wednesday
Oct 16: -10.3% Thursday
Oct 17: -9.1% Friday


Sincerely,

John

malleni
Posts: 150
Joined: Sun Sep 21, 2008 3:34 pm

Re: The Wall Street Journal becomes aware of deflation

Post by malleni »

John wrote: ...

Today we have two different forces affecting prices: the Crusty Old
Bureaucray Effect is lowering demand, while commodities prices affect
supply. When commodities prices were rising, these two forces worked
in opposit directions, keeping the CPI relatively stable. Today, the
two forces are working together, pushing prices down so much that
even the Wall Street Journal seems to have noticed.

Sincerely,

John
John and perhaps even the other forum members,

Thanks for this article.
I have a question and it would be interesting to get information from USA about it.
It looks that similar diagrams can be made for EU (Austria), but still something looks not exactly clear as you described regarding "falling prices".
At least here.
(perhaps in US is situation different and it would be good to compare)

Namely, 6 months ago the gas prices was double so high as today (140 against 70 $ roughly today)
But, on the gas stations this nice reduction of prices - is NOT to see. The reduction is about 20-25% (at highest!)

In the food stores - the food prices are in the BEST case - the same. In many cases - food is more expensive as 6 months ago!
It looks that this good effect for customers (at least A-EU) - is almost NOT visible (besides this insufficient reduction of gas price - now about 1.15€/liter for 95 Euro)

How it is in USA regarding these articles?

It would be good to get first informations from US since things looks happened first there and couple months later here.

Thank you

Kind regards
malleni

mannfm11
Posts: 246
Joined: Thu Oct 09, 2008 11:14 pm
Location: DFW Texas
Contact:

Re: Financial topics

Post by mannfm11 »

I think the idea of deflation is tough for the average person to grasp because they always look at the exception and they look back. If you looked back long enough, you would find oil at 1/3 the price in 1998 here in the US it was in 1981, yet no one was talking about deflation. Even today, soybeans are lower than times in the 1970's. Some guy said the green revolution happened since then. I was just reading something about the green revolution, which happened in the 1950's and 1960's, not the 1990's as seems to be thought. We had the last bubble, commodities this year, but speculation and the corners haven't stopped yet. The whole world knows the bottom is in the stock market and there is no evidence other than looking at past price and guessing it is low. I don't believe prices fell much for staples in Japan, but prices for something fell over there. They keep saving money at capital rates of 1.5% or a little higher on their treasuries. Their real estate collapsed and their successful industry seems to be priced at a little over 20% of what it was at the end of 1989. This, despite massive monetary inflation in the US over the same time.

Now the talk is PE's and John keeps harping on this subject. There appears to have been a lot of assumptions made that the Fed is throwing money out into the streets and that this stuff will be fixed. There are assmptions made that China, Russia and the Arabs have more money than they could ever spend. There are assumptions made that everything keeps going up. But, there are falling home prices, very low home construction, declining sales, an auto industry that is imploding, yet they don't even admit to a recession. How long do you think a recession has been going on in the US? They haven't admitted to a down quarter yet. They talk about 3% growth around the world and I wonder how that is going to happen?

The whole world is in a bubble. The talk is it is the US, but it is the whole world. Europe was so bubble bound it almost didn't recover in the 1990's, only to have it pop again. The whole China game is nothing more than another dotbomb bubble, the country being silicon valley in a microcosm. The whole game depends on being able to sell goods to poor credit Americans. How much marginal utility or sales do you think are going away with subprime borrowing?

The bulls are faced with a big problem. That problem is what you bring up, higher prices, which indicate tighter supplies on commodities. There are a million predictions of more growth worldwide and no extra oil in the short run. There are tens of trillion in debt and equity riding on this growth happening. Each failure to grow more destroys more money.

If you look at what the Fed is doing? It is replacing money that is needed to keep the system liquid. This isn't free money, it is loaned into the system and owed back to the Fed. At some point the Fed will have to collect or collapse. When they collect, the game is over.

Gordo
Posts: 122
Joined: Mon Sep 22, 2008 11:18 am

Re: The Wall Street Journal becomes aware of deflation

Post by Gordo »

malleni wrote:I have a question and it would be interesting to get information from USA about it.
It looks that similar diagrams can be made for EU (Austria), but still something looks not exactly clear as you described regarding "falling prices".
At least here.
(perhaps in US is situation different and it would be good to compare)

Namely, 6 months ago the gas prices was double so high as today (140 against 70 $ roughly today)
But, on the gas stations this nice reduction of prices - is NOT to see. The reduction is about 20-25% (at highest!)

In the food stores - the food prices are in the BEST case - the same. In many cases - food is more expensive as 6 months ago!
It looks that this good effect for customers (at least A-EU) - is almost NOT visible (besides this insufficient reduction of gas price - now about 1.15€/liter for 95 Euro)

How it is in USA regarding these articles?
Its not much different in the US. Gasoline peaked around $4/gallon and has been SLOWLY creeping down. Currently its around $2.85/gallon (about 30% drop). I have not noticed any real decline in food prices at all, in fact produce is at all time record levels. I continue to be amazed at produce prices like a SINGLE apple or SINGLE tomato selling for almost $1. Overall, there has been no deflation yet, however it is very typical for markets to be slow to react, and food/fuel are NOT discretionary items like jewelry and electronics.

Gordo
Posts: 122
Joined: Mon Sep 22, 2008 11:18 am

Re: Financial topics

Post by Gordo »

John wrote: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.
No, I did not. I can understand now why your reaction was: "impossible".
If you re-read Benanke's speech on deflation, he maps out what he will attempt to do, and shoving money down bank's throats is only the tip of the iceberg - and probably the least effective road to inflation.

Gordo
Posts: 122
Joined: Mon Sep 22, 2008 11:18 am

Re: Financial topics

Post by Gordo »

mannfm11 wrote:As far as Gordo's strategy? I venture he is getting money on credit cards and buying CD's. I think he should read the fine print, as you can't get but 20% of the limit in cash and even the ones that charge zero interest only do so on purchases and they charge something like 5% for any cash drawn. It might be 3%, but I can tell you it isn't a gift. The same is true of transferred balances, which come with 2 caveats, one that it costs you 3% up front and the other is that if you use the card for purchases, your payments come out of the transfers first, meaning they charge you on the purchases. I don't know of any CD's paying enough to overcome these factoring charges.
I have no reason to try to convince anyone else to do what I do, but with all due respect, you haven't done your homework. I posted links already to where you can find all the details you need to make my strategy work. Every card has different terms, you obviously have to pick the cards that have the terms that will be profitable to you. Thankfully, the dedicated few have done most of this work for you, in the links I provided you will find detailed worksheets of every profitable deal out there and exactly what the terms/fees are. And there is no 20% limit on cash, because these are ALWAYS considered balance transfers, not cash advances, even when the money is going directly into your bank account (again if you do the research yourself, you can easily verify anything I'm saying).

There are plenty of cards with no fees or low capped fees, its not hard to find them. As for getting $300k credit lines, its not as hard as you might think. Like I said, I've been "working" this for years. Imagine signing up for 100 credit cards over 5 years, first you can make thousands of dollars just in the sign up bonuses alone, and really there is absolutely no downside to having 100 credit cards (not sure why the general public balks at the idea). You will have to close some to open new ones depending on the rules at the issuing bank, that's quite alright, and you only need to do this if they tell you to. At the same time you are applying for lots of new cards every 3 months, you should start asking for credit line increases on every active card you hold, every 3 months. In a couple of years, you too will have at least 300k in credit lines. Then you sign up for another new card with a sweet 0% offer, after it arrives, you call up the credit card company, and you tell them you want to consolidate your credit lines, at that point you can move credit lines from all those cards you've accumulated over the years onto this new card, all of the sudden you can take out 20-50k at a time, multiply that by 5 or 6 credit card companies, multiply by 2 if you have a spouse, and you can see how easy it can be to hit 300k+. That's a basic overview, if you really want details, just do the research yourself.

Gordo
Posts: 122
Joined: Mon Sep 22, 2008 11:18 am

Re: Financial topics

Post by Gordo »

I'm not sure I really noted this before, but I like to look at a lot of different points of view. That's the main reason I keep coming back to this generational dynamics website, and I appreciate all of the work that John does, and I cherish our little exchanges. I don't dismiss anyone out of hand.

Anyway, I've posted John Hussman's commentary before, he is a very successful, conservative, fund manager with remarkably low volatility and never a losing year since his fund was started back in 2000 (yes, I know its not a very long track record). Anyway, as a little counter-balance to the doom and gloom, I think his commentary is worth reading, even if you think he is totally wrong. He publishes his thoughts every Monday before the market opens, here is his latest from today:
Why Warren Buffett is Right (and Why Nobody Cares)

JimZ
Posts: 34
Joined: Sat Oct 11, 2008 9:04 am

Re: Financial topics

Post by JimZ »

Gordo,
OK, so if you apply for hundreds of credit cards I am trying to understand (1) what impact that would have on your credit rating, and (2) at what point will credit card companies STOP giving you cards (i.e. when they see you have 80 cards already).
I haven't applied for a credit card in a long time, and I know they have been lax, but I am finding it difficult to believe there are that many banks willing to lend after looking at a credit report that lists more cards than "Carter has pills". In fairness, I will disclose I haven't done any research on this (mainly because I don't use credit cards).
God bless you for the cast iron stomach you must have to do something like this. I cant' imagine taking that kind of risk in an environment like this (especially since I have a wife, kids and a house).

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