Financial topics

[Higgenbotham]

Dear Higgie,

The statement, "In the absence of any serious competitors to the
dollar, he advocated international control of U.S. monetary policy,"
does not surprise me in the least, although it's interesting to see
it stated this way.

All major currencies (except the yen) are in a deflationary spiral,
but the dollar is unique in that it's the international reserve
currency, and because the hundreds of trillions of dollars of credit
derivatives were almost all written in dollars. This means that the
dollar CANNOT become hyperinflationary, and even if it could, it
would be politically impossible to allow it.

This is why the US Government CAN default on its bonds. It's clear
that those bonds will never be paid anyway, and it's quite possible
that China will forgive American debt, in the same way that America
forgave Germany's debt in 1932.

For the US dollar to become an international currency is actually the
most rational solution to this situation. It's probably a disaster
for the US, but it's quite possible that the rest of the world will
decide that it's best for the world. "Give the UN control of the
dollar, and we'll forgive all your debts."

There's no way to be sure that this scenario will unfold, of course,
but this is a scenario that makes a lot of sense.

Sincerely,

John

The Russians have been thinking about the international currency situation for some time. You may remember the article I sent you a few years ago from one of the Russian newspapers that covered an interview with Andrei Illarionov (back when he was still in Moscow) about Putin's plans to try to elevate the rouble to international status. Around that time, there was also news that the Russians were trying to establish oil trading in roubles in Moscow and were building an oil pipeline to China. I figured that eventually they were going to try to put leverage of some kind on the US. We have apparently arrived at that point.

But I had originally thought that China would initiate the idea of getting Bernanke under control, and maybe they have. Besides US government debt, China owns a lot of US agency debt and I think they worked a deal last year to have the US put government guarantees behind that.

So none of this surprises me either. What I believe is happening is that reality is biting down and the US is going to have to become fiscally responsible now rather than later. Whether determined from inside the country or from outside, it was bound to happen.

It is possible that the rest of the world wants to go ahead and put us through bankruptcy now but I don't think the time has come for that. What probably needs to happen is to let the tsunami roll through and see what the fallout is. If we can meet our bond payments for a time, so much the better, and there are trillions and trillions of potentially bad debt to work out of the system before we get to the question of US bond default. I think what is happening here at the moment is that Russia and others want to preserve the value of their remaining reserves, which are still mostly in dollars, and want to prevent us from raising default risk by willy-nilly increasing the amount of bonds outstanding according to Bernanke's helicopter drop experiment, which is on the verge of either taking off or being, well, dropped. I substantially agree with you on the deflation issue (not to the tune of 100% but more like 90%) but in my view what is important right now is what the market thinks and what the world thinks about that. A lot of people really believe that Bernanke can create inflation and they are positioned accordingly. What happens if/when they find out that he really can't because he is just an economist who didn't understand the realities of international power relationships?

[Rafaelloello]

Is anybody as amused about P/E ratios as am I? If you don't break out into a belly laugh about how expensive stocks are right now, try to hold back a guffaw when you see the "estimates" of where they will be in 12 months:

http://online.wsj.com/mdc/public/page/2 ... dc_h_usshl

Now depending what date you click on the above link, the values will of course change. But, for example, today 1/29/2008, the current P/E ratio of the Nasdaq Composite is 33.77 ttm, 12 months ago it was 27.3 ttm. The market has determined a higher P/E ratio is "correct"? That means the future outlook is much better now than twelve months ago, according to the market. Am I missing something? Now hold on and try to make sense of this. According to the same page, the estimate of the *forward* twelve months is half what is now, 15.91. I ask myself, how is the P/E going to halve itself in twelve months? Well the rising P/E over the last year means that future earnings are bound to be plentiful, in fact one scenario would be that the stock price stays flat while the earnings merely double. That makes sense doesn't it? Oh wait a minute, what if the earnings stay flat... then the stock price would have to go down by half. Wait a minute, what if the earnings go *down*? That can't happen can it? Doesn't that mean that the stock prices would have to go down my more than 50% for the estimates to be accurate?

Laughable. How can people not see what's coming?

[John]

> Is anybody as amused about P/E ratios as am I? If you don't break
> out into a belly laugh about how expensive stocks are right now,
> try to hold back a guffaw when you see the "estimates" of where
> they will be in 12 months:

I haven't seen this page before. This is really fascinating, and
you're right - it's hard to believe that analysts could be so
incredibly stupid. They must be forecasting astronomical earnings
growth in the next year.

And I didn't realize that the Nasdaq P/E was at 33. What a bizarre
world this is.

Sincerely,

John

[mannfm11]

Interesting data about earnings forecasts. I am not shocked about the PE on the Nasdaq as the name of the game is bulling a new group of stocks. The group that was worth in sum $4 trillion in 2000 is now worth about 1/4 that and has most of the Nasdaq earnings. MSFT was 60 at its peak. INTC was around $70. Together they tally about $30. ORCL was a high flyer, WCOM went totally broke. CSCO is less than 20% of its peak. Most of these stocks are trading at pretty low PE's. This means there is a very high amount of value given to stocks that aren't making any money.

I believe there is constant lying on CNBC every day about stocks because there is a lot to unload. The problem is that the middle class doesn't have but a spits worth of money to even touch what needs to be unloaded. The current wall street climate isn't any different than the combines run by Joseph Kennedy and friends back in the late 1920's, as they restrict flow and throw stocks back and forth between themselves. There is no money on the sidelines. I find it very interesting that they are forecasting a doubling of earnings. They are going to be damn lucky if there are any earnings at all in a year. The dividends are even worse, as BaC cut theirs to a penny a quarter from something like 14 cents and PFE went to 64 cents annually from $1.28. The bankruptcy of Pfizer is going to be a major shock in a few years, but by the reaction of their recent moves, I beiieve it is highly likely.

The currency discussion is also interesting. John, you might note that book, the bubble that broke the world. In it all the interenational mess went on, but what was present then that isn't today was gold. It was the movement of gold that destroyed those systems. It is that, which people imagine is still in force today. I do believe the US is going to have to finance itself internally, but growth in Asia is dependent on an increase in American debt. The problem with the current system is that debts are assets. Savings is debt also and when one was saving gold and silver, it wasn't necessarily debt. But, then again, we were never on a real gold standard when it came to banks, only a gold conversion standard. I think the Richard Koo video you linked has a lot of validity and this is going to be easier to finance than we think. But, it is also going to cut back. Nature is going to solve this for us and the idea the world inflates while there is surplus in everything and collapsing demand is just flat nonsense.

[John]

Dear Higgie,

> The Russians have been thinking about the international currency
> situation for some time. You may remember the article I sent you a
> few years ago from one of the Russian newspapers that covered an
> interview with Andrei Illarionov (back when he was still in
> Moscow) about Putin's plans to try to elevate the rouble to
> international status. Around that time, there was also news that
> the Russians were trying to establish oil trading in roubles in
> Moscow and were building an oil pipeline to China. I figured that
> eventually they were going to try to put leverage of some kind on
> the US. We have apparently arrived at that point.

I guess I didn't realize the significance of that article when you
sent it to me. But it fits right in with Putin's plans, following
Russia's humiliation and near economic collapse in the 1990s.

In 2004, I followed the step by step nationalization of Russia's
major oil firm, Yukos.

** Vladimir Putin's party wins Russian Parliamentary election by a landslide
** http://www.generationaldynamics.com/cgi ... 04#e071204

My eyes were really opened by what kind of person Putin is -- namely,
he's ruthless, he'll take anything he can get, he'll use his KGB
experience to make sure that he has deniability, he'll kill and jail
his political enemies at will, and so forth. And he's become a
national hero to the Russians for restoring Russia's dignity.

In that context, it's not surprising that Putin was thinking about
some worldwide "monetary coup." Having taken control of all the oil
companies in Russia, he was emboldened by the skyrocketing price of
oil, and the torrents of money that were pouring into Russia.

Unfortunately, Putin spent all that money on high-rise buildings and
such, and now Russia is once again facing humiliation and economic
disaster, as the price of oil has crashed.

Putin is thus doing what all politicians do -- blaming anyone but
himself for the disaster. As usual, America is an easy target. And
the gullible President Obama is playing right into his hands by
joining the blame America chorus.

Sincerely,

John

[freddyv]

My eyes were really opened by what kind of person Putin is -- namely,
he's ruthless, he'll take anything he can get, he'll use his KGB
experience to make sure that he has deniability, he'll kill and jail
his political enemies at will, and so forth. And he's become a
national hero to the Russians for restoring Russia's dignity.

In that context, it's not surprising that Putin was thinking about
some worldwide "monetary coup." Having taken control of all the oil
companies in Russia, he was emboldened by the skyrocketing price of
oil, and the torrents of money that were pouring into Russia.

Unfortunately, Putin spent all that money on high-rise buildings and
such, and now Russia is once again facing humiliation and economic
disaster, as the price of oil has crashed.

Putin is thus doing what all politicians do -- blaming anyone but
himself for the disaster. As usual, America is an easy target. And
the gullible President Obama is playing right into his hands by
joining the blame America chorus.

John

This is all eerily reminiscent of Hitler and the buildup to WWII.

We see tensions being ratcheted up on a daily basis but getting nowhere because of appeasement, which will eventually fail to appease.

As we will unfortunately see, people will be eating less and they tend to get kind of testy when there's not not enough food to go around. Few ever blame themselves for their shortfalls if there are other people left on earth to blame.

The future does not look bright and even my prediction for a bear market rally is falling apart quickly.

--Fred

[Higgenbotham]

But it fits right in with Putin's plans, following
Russia's humiliation and near economic collapse in the 1990s.
...
In that context, it's not surprising that Putin was thinking about
some worldwide "monetary coup." Having taken control of all the oil
companies in Russia, he was emboldened by the skyrocketing price of
oil, and the torrents of money that were pouring into Russia.

Unfortunately, Putin spent all that money on high-rise buildings and
such, and now Russia is once again facing humiliation and economic
disaster, as the price of oil has crashed.

One thing I had found so striking about the Illarionov article was the fact that Putin didn't accept that Russia couldn't achieve international currency status without going through a lengthy process. Putin's and Hu's speeches at Davos indicate that the timing of the financial crisis was not what they expected. Basically, both needed more time.

As things stand now, with the dollar as the world reserve currency and US government debt acting as Russian and Chinese (and other) central bank reserves, the Russians and Chinese can't afford to see their reserves dwindle through debasement nor can we afford to lose world reserve currency status. So from that standpoint, we are all in the same boat in some ways, but perhaps not in others as of now and that is cause for concern.

Russia still has a strong reserve position, particularly on a per capita basis, but reserves are dwindling and I am not sure if these numbers reflect all of the $150 billion they blew supporting the rouble:

http://www.cbr.ru/eng/statistics/credit ... s_08_e.htm

http://www.cbr.ru/eng/statistics/credit ... s_09_e.htm

In my estimation Putin is unable to make the case he and his advisors made without help and agreement from China. It's really Russia and China that are in the same boat now and Putin is making his statements in typical enigmatic fashion. I'm still evaluating Hu's speech (and China's actions) and I think that's really the more important one.

So far, the US has been financing their borrowing by auctioning debt in the market. People are watching the cover ratios but I don't know enough about that to know how well that has been going. As stated, maybe it will go fine and the Fed has simply temporarily withdrawn from the idea of buying treasuries because they don't need to yet.

On a related note, I read somewhere this morning that default insurance on US government bonds has risen from about 0.1% to about 0.6% recently as the US has increased borrowing. You may want to check that out; I think the story was on Bloomberg News.

[John]

Dear Higgie,

> In my estimation Putin is unable to make the case he and his
> advisors made without help and agreement from China. It's really
> Russia and China that are in the same boat now and Putin is making
> his statements in typical enigmatic fashion. I'm still evaluating
> Hu's speech (and China's actions) and I think that's really the
> more important one.

I don't entirely agree that Russia and China are in the same boat.

In Russia, I expect Putin to continue as leader (whether President or
Prime Minister), and to lead Russia into the World War. This is
partially a consequence of the fact that the Communist government
collapsed in 1991, and was replaced by the current constitutional
government. I have no reason to believe that the current government
will collapse in a world war.

But Beijing's Chinese Communist Party (CCP) government is extremely
fragile. I expect the government to collapse entirely, and some
Mao-like dictator to gain control.

Maybe this is a distinction without a difference, but from a
strategic point of view it's probably to our advantage since our
enemy (the Chinese) will be embroiled in a civil war, while our ally
(the Russians) will be able to fight the Chinese and the Muslims.

Sincerely,

John

[Higgenbotham]

Dear Higgie,

> In my estimation Putin is unable to make the case he and his
> advisors made without help and agreement from China. It's really
> Russia and China that are in the same boat now and Putin is making
> his statements in typical enigmatic fashion. I'm still evaluating
> Hu's speech (and China's actions) and I think that's really the
> more important one.

I don't entirely agree that Russia and China are in the same boat.

In Russia, I expect Putin to continue as leader (whether President or
Prime Minister), and to lead Russia into the World War. This is
partially a consequence of the fact that the Communist government
collapsed in 1991, and was replaced by the current constitutional
government. I have no reason to believe that the current government
will collapse in a world war.

But Beijing's Chinese Communist Party (CCP) government is extremely
fragile. I expect the government to collapse entirely, and some
Mao-like dictator to gain control.

Maybe this is a distinction without a difference, but from a
strategic point of view it's probably to our advantage since our
enemy (the Chinese) will be embroiled in a civil war, while our ally
(the Russians) will be able to fight the Chinese and the Muslims.

Sincerely,

John

This article from January 13, 2009 covers this subject:

Although Chinese authorities have been able to quickly disband the recent protests, there is concern that a single national-level event, if mishandled by authorities, could lead to a serious political crisis.

http://www.washingtonpost.com/wp-dyn/co ... 03014.html

I didn't realize things had deteriorated to the point where a national-level event could be on the horizon. Another more recent article on the same subject:

http://www.guardian.co.uk/world/2009/ja ... baleconomy

[StilesBC]

Q4 earnings estimates from Thompson Reuters down again to -35.2%. Ouch.

I sense new lows and accelerating crisis through Feb and Mar. Positioned accordingly. 25% out of the money put options. 75% US Dollars.