Financial topics

[John]

Somebody posted something in another thread a couple of weeks ago
saying that Japan's nuclear disaster is much worse than they're
telling us. There's news breaking that confirms it - reactor #1 is
melting down. Highly radioactive water is leaking into the ocean.

[OLD1953]

Those reactors are not acting as one would expect, even after such a disaster. I'm tending to think the "modified for plutonium production" people are correct.

This is turning into the Japanese dust bowl.

The market has gone insane, IMHO. The reaction to a stronger dollar, stocks fell. Reaction to low inflation, stocks fall. Good news for the USA is bad news for the stock market. WHERE do these people think they'll trade their stocks if the US goes bankrupt? Going from the evidence of the last ten years, if we had 100% unemployment, the dollar went to zero and we had total failures in every imaginable way, the market would recover to DOW 100,000 within six months.

http://www.bloomberg.com/news/2011-05-1 ... mbles.html

http://www.thestreet.com/story/11118306 ... ay-13.html

When we reach the point that any news is bad for stocks, then I suppose the market has nowhere to go but down.

[vincecate]

The market has gone insane, IMHO. The reaction to a stronger dollar, stocks fell. Reaction to low inflation, stocks fall. Good news for the USA is bad news for the stock market. WHERE do these people think they'll trade their stocks if the US goes bankrupt? Going from the evidence of the last ten years, if we had 100% unemployment, the dollar went to zero and we had total failures in every imaginable way, the market would recover to DOW 100,000 within six months.

Try to think of the S&P500 as a currency backed by stocks and having some real value. If the value of the dollar goes up then the S&P500 currency is worth less dollars. If the value of the dollar goes down then the S&P500 is worth more dollars. You can think of gold or oil as currencies and they behave this same way most of the time. If the dollar goes to zero (my hyperinflation prediction) the market will go to over Dow 100,000. I don't think it is insane, it seems very reasonable really.

I don't think "low inflation" is the right way to describe what we now have. Every month this year the inflation rate has gone up. We are now over 3% inflation and Nixon imposed price controls at 4% inflation. This 3% measure has all kinds of tricks to keep the number down, so we probably have a higher real rate of inflation now than when Nixon put in price controls to fight inflation (bad idea).

http://inflationdata.com/inflation/Infl ... lation.asp

[Higgenbotham]

First, what is the source of the corporate profits? Or why did they rebound from zero in the fourth quarter of 2008 to $800 billion per year for the S&P 500?

My answer is bailouts. Bailouts are the source of most of the profits. I think without the bailouts the S&P 500 would have still rebounded to profitability but to a much lower level. Looking at the numbers pretty much proves that.

Putting my trader hat back on, here's what I have noticed. It used to be months ago that the dollar would bottom, move up a couple percent, then the S&P would top and roll over. But that didn't happen recently. The S&P topped and rolled over first, the dollar continued lower, then the dollar rebounded.

Let's say we examine the typical tech company's books to see what we are buying when we buy that stock. Tech companies have a lot of cash on the books. They pay a lot of salaries to workers with critical skills and those are the salaries that are going up. They sell product on balance to people who don't have critical skills and those are the salaries that are going down or disappearing. They have few hard assets on their books. I have yet to see a tech company that is holding gold or silver on their balance sheet. They don't carry much inventory with the just in time systems. There's no benefit that this tech company receives from the later stages of inflation.

So what I'm saying is this - this is no longer an industrial economy exclusively. And that's what I think the recent behavior of the dollar versus stocks is now telling us - that the limits of dollar debasement may have been reached for the time being as far as benefiting any asset class that the Fed cares to manipulate.

Getting back to the initial point about using bailouts to boost corporate earnings, from here on out it gets much much tougher. Obviously, borrowing the money and putting it on the backs of the citizenry was an effective way to steal the money and siphon it into the corporate balance sheets to give a temporary earnings boost. But now that the borrowing capacity of the US is stretched to the limit, using inflation won't work so well due to the way our economy is structured.

It would be my contention that without more government largess in some form corporate earnings are toast. And if corporate earnings are toast, the stock market is toast. It would be my further contention that with more government largess corporate earnings are toast anyway. So the stock market is toast anyway, at least for the time being, whether the dollar goes up or down. Contrary to popular belief, I would expect that on any QE3 announcement in the next 24 months the stock market will tank.

[John]

I transcribed the following interview because it relates predictions of inflation
to the "Economics of the Maginot Line," which is a generational concept:

David "Danny" Blanchflower,
former Monetary Policy Committee,
Interviewed by Tom Keene on bbtv, 12:04 pm, 5/13/2011

We saw some inflation numbers today. Those numbers have jumped
up a little bit, but we should say they're not in the 7% levels,
they're not in terrible levels right now.

But they've been driven by a jump in the oil price. Energy is
the main contributor, and the question down the road is, is there
going to be another hike in oil? Assuming that there isn't, then
these effects will drop out. The Fed is quite right to say that
these are transitory, and down the road the worry still is: deflation.

[Are you kidding me?]

I know. We look around the world and those transitory effects
-- you look at the UK and the transitory effects there -- if you just
take them out, strip the transitory effects out, you basically
have inflation around .7, with the real risk to go lower.

And if we see weeks like last week, when the oil price drops quickly,
there is still a danger. It's not central projection/prediction?, but
it's a danger.

[How can economists be so divided on this issue?]

They're right to worry that it could matter, but at this moment
it doesn't appear to. The reason why it might matter is if it
gets entrenched into expectations of inflation. Bernanke said
this week that it hasn't to this point. If it does, the Fed
would have to act. If wage rises, started to go up, they would
have to act. But to this moment, wages are the dog that
hasn't barked. There is no evidence here of wage growth.
Inflation expectations appear to be broadly anchored to the
target, so you shouldn't act.

The problem to this point is we have a long history going back into
the '70s, and the difficulty is to argue the position that I've
argued. The worry is that people look back, they have one data point,
they have one data point from the past, and they think that it's going
to repeat again. Paul De Grauwe, whom you've talked about many times,
calls it "the economics of the Maginot line." That's for the last
great crisis, not for this one.

[vincecate]

I transcribed the following interview because it relates predictions of inflation to the "Economics of the Maginot Line," which is a generational concept:

The predictions of deflation seem based on when money was gold and even more of a "fighting the last war" type problem. Unless you still use gold as money, in which case even the hyperinflationist will agree that we will have deflation in terms of gold.

[Higgenbotham]

As I've said (not sure everyone agrees) the big bubble this time was in real estate and this chart shows a max of 830 and the min so far just came in at 104 ounces of gold to buy the median house, a fall of 87%.

http://www.sharelynx.com/chartstemp/USHLSPOG.php

Similarly, stocks have fallen about 80% in gold terms.

Stocks were the big bubble in the 1920s and from 1929 to 1932, stocks fell 89% in terms of gold and dollars, so we could be near the end as far as the real estate bubble deflating in terms of gold.

Going back a few weeks, I was laying out the possibility of a stock market crash or an upcrash in gold and silver, which can both serve to move the ratios down. It doesn't seem that the investment community at large really understands what has just happened. Real estate has had a monstrous historic crash relative to gold. There's never been anything like it in all of history, so far as I am aware.

Anyone who expects real estate prices to fall further should be very cautious about gold, as the number of ounces of gold to buy the median house has limited downside from here on a historical basis.

As far as the inflation versus deflation question, I'm watching the bond market and noting that US government bond interest rates have turned substantially lower since February 9. I'm also watching silver prices relative to the crash cycles that projected either a stock market crash low on April 27 or a silver upcrash high on April 27 (mentioned that day and previous). It was my projection (not mentioned) that silver would need to make a higher high around May 10 to indicate more future upside months and years out; if not, the April 27 high could be the final generational blowout. We saw a weak recovery into May 10, which doesn't bode well.

As far as how to play this, my strategy will change to continuing to short stocks while also carefully and slowly buying select real estate for income and maybe appreciation down the line if there is more inflation, even though I'm not expecting any inflation for at least 3 years. It's never good to go "all in" on any analysis, though, no matter how sure you are. Meaning I will not move to an "all in" deflationary stance for very long no matter how sure I am.

In that regard, I can remember talking to a guy around 1998 or so who had put his entire life savings of $175,000 into Hecla Mining. He had already doubled or tripled his money twice by making 2 previous "all in" bets. He had been out to visit the company and was absolutely sure he was going to strike for a third time. It sounded real good to me, as I had just purchased a few select gold mining shares myself. I ran down the list with him and he told me which ones were dogs in his opinion and why Hecla was better. Over the next few years, I watched Hecla Mining stock fall from about $5 to a fraction of a dollar. At the same time, two of my mining stocks went bankrupt and I lost tens of thousands of dollars.

Nobody knows what markets are going to do. I have spent years reading esoteric fundamental information that few understand, calculating cycles that nobody in the world so far as I know has discovered and mostly fail to produce results, and developing short term trading skills which mainly serve to get me out of jams and save my ass from ruin before I make a few lucky hits. Few survive in this game.

In 2006, I had an account with a large retail brokerage when that silver debacle hit. I had also sold out at the top of that one. I called the desk and asked the manager of the desk how many accounts they lost in just that one debacle. I was expecting him to say a dozen. He said we must have lost about 50. Just on that one desk. The brokerage had at least 25 desks. I then asked him if anyone else had gotten out at the top. He said no, you were the only one.

Don't EVER believe ANYTHING you read on the Internet saying speculation is easy because it's not. Saying speculation is easy is an industry designed to sell worthless crap. In the Internet Age, it proliferates. There's no reason for a successful speculator to ever want to sell anything.

I'll say it one more time - nobody knows what markets are going to do. Nobody on earth. Not Jimmy Rogers, not George Soros, not Warren Buffett, not Bill Gross, not Goldman Sachs. Nobody.

[OLD1953]

Amen to that. Especially in times when they act contrary to common sense almost exclusively.

Now, as far as the IMF bailing out anyone goes, this may slow that down, as it looks like they may have to pick a new chief executive.

http://hosted.ap.org/dynamic/stories/I/ ... TE=DEFAULT

Don't that snap yer garters!

[John]

Amen to that. Especially in times when they act contrary to common sense almost exclusively.

Now, as far as the IMF bailing out anyone goes, this may slow that down, as it looks like they may have to pick a new chief executive.

http://hosted.ap.org/dynamic/stories/I/ ... TE=DEFAULT

Don't that snap yer garters!

Boy, that changed fast. When I went to bed he was only being questioned, not
charged with anything.

Those socialist politicians really know how to have fun, don't they?

John

[OLD1953]

It's a bad advertisment for the IMF, that's certain. And it certainly happened at the wrong time.

Another bit of bad news for food crops, the growing emergence of weeds resistant to glycophosphate (Roundup).

http://www.rodaleinstitute.org/20090625/nf1

http://www.monsanto.com/newsviews/Pages ... ation.aspx

It's getting difficult to find any scientifically oriented articles about any technical subject that touches on a political matter, and GM seeds most certainly do that. So a couple of points - 1. These weeds did NOT acquire resistance from the food plants that were modified for resistance to Roundup, they use two different mechanisms to defeat the chemical, one that produces so much plant hormone that Roundup can't cope, another that simply pulls Roundup off into the leaves and keeps it away from the growing tip (and biologists would LOVE to understand that trick) so the plant loses leaves but keep growing. The modification used by Monsanto for their RoundupReady seeds is entirely different. 2. This isn't some mutant "devil plant", it's just as expected a development as the appearance of antibiotic resistant bacteria. The problem could have been put off for decades by using dual chemicals, such as Balan first, then Roundup, then Balan after the crops were harvested, but farmers live on a pretty thin margin anyhow, and they'll take a future problem over present outlays every time, without fail.

I was going to make a long post about why you need a farm program managed by a government, but it really just boils down to this: to provide a secure and stable food supply, and allow for bad harvest years, farmers need to plan/plant for 20% production in excess of that which is expected to be consumed in a given country in a given year. It's quite rare for more than 20% of crops to fail, and carryover from previous years will be sufficient to keep everyone eating until the crops get better in that once in a 100 years chance when you combine spring floods with drought. That's obvious logic, and obviously necessary - but of course, the kicker is that NO FARMER CAN MAKE A PROFIT IF FOOD IS ALWAYS IN SURPLUS! Therefore, food security demands that people pay for that 20% they aren't eating, and you can't do that without some kind of government program, either by price controls on food, or by government payouts to farmers or whatever you please. But if you think food security counts for anything, then you support some kind of farmer handout. If you figure letting them starve is a solution, guess what, you'll get a different government (re Egypt, Tunisia, Libya, etc.) that will ensure food security. Eventually, and maybe after a lot of people die, but it's simpler to just have the farm program in the first place.