Financial topics

[Higgenbotham]

Bailout 18 months too late to contain Eurozone problems according to Athens professor. Interview.

http://www.abc.net.au/lateline/content/ ... 276182.htm

[aedens]

So it comes that at the present day the laborer cannot buy his own product. In the market his product costs more than he has received in wage; it costs more by the amount of many profits, which are made possible by the existence of the right of property; and these profits under the most various names, such as profit, interest, rent, hire, tithe, edicts and so on. The lesson is indeed the value on everything. The Team made a decision on risk and Customer needs. We can see the weather and not the times? In my observation alone the issue is the seal in the forehead. The Consumer is King not us, not all Kings are wise. Inflation is a condition in supply chain and output cost's. Numerous conditions as we know. We all have been unbraided justly or unjusty and we learn.

[vincecate]

The more the Fed intervenes to try to reduce the "output gap", the larger the "inflation gap" will become, which will in turn increase the "output gap". I would project that by the time the US government figures this out U-6 unemployment will be 50% (it's already about 16%), the employment-population ratio will be at the lowest point since data tracking began and 110 million Americans will either be on food stamps (if food stamps still exist) or they will be starving.

One of the things that happens in hyperinflation is that central bankers see the ratio of money/prices going down and think they need to print more money. The problem is that as people get worried about the value of money dropping they don't hold onto it long, so the velocity of money is going up. But the central bankers see it as a problem of not enough money and turn up the printing presses.

It is kind of amazing, but time and again central bankers trying to help governments by printing money and buying up government debt think that hyperinflation is not a result of their actions. I don't even think they are lying, though that is a possibility. If the US gets hyperinflation I really think Bernanke will blame it on something else that happens around that time. Maybe Chinese selling their treasury bonds or Arabs no longer pricing oil in dollars and Bernanke will really believe the hyperinflation is not his fault. He will think that if he does not print things will be worse and it is the only thing he can do. I am sure of it.

Mish is another deflationist I follow (along with John) but he recently said, "Unfortunately, this means the imbalances will continue until the entire mess blows up in a currency and derivatives crisis of immense magnitude. I cannot tell you when that will happen, I can only tell you it will." I think a currency crisis of immense magnitude will turn out to be hyperinflation.

http://globaleconomicanalysis.blogspot. ... ettis.html

When John and Mish switch to predicting hyperinflation I figure we will be getting close.

http://pair.offshore.ai/38yearcycle/#hyperinflation

[Higgenbotham]

The more the Fed intervenes to try to reduce the "output gap", the larger the "inflation gap" will become, which will in turn increase the "output gap". I would project that by the time the US government figures this out U-6 unemployment will be 50% (it's already about 16%), the employment-population ratio will be at the lowest point since data tracking began and 110 million Americans will either be on food stamps (if food stamps still exist) or they will be starving.

One of the things that happens in hyperinflation is that central bankers see the ratio of money/prices going down and think they need to print more money. The problem is that as people get worried about the value of money dropping they don't hold onto it long, so the velocity of money is going up. But the central bankers see it as a problem of not enough money and turn up the printing presses.

The "inflation gap" describes the current condition of the economy. From 2008, the cost to do business should be down 30%, but it is up 10% as round numbers. The "inflation gap" is 40%.

The situation aedens describes is entrepreneurs are in fact holding onto their money and capex is being adjusted downward. I see it everywhere. Cash is being hoarded. Corporations are hoarding cash and the rich are hoarding cash.

The reason cash is being hoarded is it costs too much to invest it. The money people are aware of this. If you invest at a 60% premium to the realistic cost structure (that's 110 divided by 70) if the cost structure falls to reality you are out of business because a competitor can come in and underbid you.

This is what Bernanke (or any Central Banker) doesn't understand because he's never been in business. He thinks he can maintain the cost structure artificially and the entrepreneurs will pick up the slack. They won't. Entrepreneurs are by definition the smartest people on earth, not academics. They can't be fooled, they will not invest their cash in an artificially high cost structure environment and the more Bernanke tries to force them to, the worse the economy will stagnate. There doesn't have to be hyperinflation for that to happen; all that's needed is an "inflation gap" and low demand on the finished product end due to stagnant wages and unemployment (and underemployment).

Just to show how serious the situation is, we can look at the bond market. Interest rates on the 10 year and 30 year US government bonds continue to fall. Rather than invest cash in a business, the money is being held in US government bonds as a "least worst" alternative to paying a 60% premium to realistic capex investment costs. Basically entrepreneurs would rather park their money in government bonds where they might lose half of it versus investing it in business expansion where they might lose even more than half of it (round numbers).

[aedens]

Government is pumping the economy and ending up in the banks and going nowhere. It is not increasing the money supply, it is not multiplying, it is not creating inflation other than what my Wife tells me. It is going to the balance sheets of the banks. John and Higgy can present the Inflation line with the debasement as I have read.
The premise as we know here is the balance sheet recession from Dr. Coo's work in the Keynasian mindset. We followed the logic to the souce from Alfred Marshall who was Keynes mentor. GD does show the branches on the tree if not the leaves I have seen also. Great work here on foot prints from the past.

And for the long hot summer it continues: http://www.faa.gov/news/updates/?newsId=64216

MULT_Max_630_378.png (12.96 KiB) Viewed 9855 times

[vincecate]

Yes, aedens and Higgie, for now people and companies are hording cash and the money multiplier is low. This is just the setup for hyperinflation, we do not yet have hyperinflation. When interest rates are 0% and inflation is low it is reasonable enough to put money under their mattress. But the reason interest rates are so low is that the Fed is propping up bond prices by printing money and buying bonds. As long as more and more people are putting money under their mattresses this can work without inflation for a couple years. But at some point people start buying real things, instead of just putting money under their mattress, and then prices really start to go up. Then huge numbers of people decide they are better off buying real things than keeping money under their mattress and not only stop putting more money under their mattress but start taking out what they had saved up. Then all hell breaks loose as both inflation and the money multiplier start going up.

This hording of cash and low money multiplier is like the tide going out before a tsunami hits. It should not make you happy and comfortable.

[Higgenbotham]

Somebody asked me this question today.

"One of the things I'm trying to get to make sense, as I've mentioned to you before, is the disconnect between market action and the dangers of the impending debt default as preached by all the talking heads. Everyone sees the danger and no one is running for the exits??? Interest rates are low? Stocks are high?"

This is a very good question.

Here is my answer.

I copied this out of an old history book years ago because I thought there might come a time when it would be useful to reference. I'm pretty sure this is the time.

"On the morning of August 24, 1857, the financial community of New York was horrified by the announcement of president Charles Stetson that his city branch of the Ohio Life Insurance & Trust Company had suspended payments. Men quickly learned that the house, which did a heavy business in western investments, had liabilities of from five to seven millions - and that its assets had been largely embezzled by the cashier. The economic situation had been uneasy. A panic now struck, sudden and devastating as a tornado. Stocks fell to incredible levels; commodity prices sank; bankruptcy followed bankruptcy."

"During the spring and summer of 1857, talk of an imminent financial crash had spread throughout the country. Bankers and tradesmen discussed it; the press was full of it. "A Coming Crash" - such was the title of an editorial in the New York Tribune of June 25. The London Economist echoed the dark prognostications of the New York Shipping List.

Yet to most Americans, confident in their resources and energy and encouraged by favorable crop reports, the blow that fell in August was stunning. Till the middle of the month the stock market remained fairly vigorous. At home, hopes of peace in Kansas remained high; abroad, the only serious trouble was the Sepoy revolt. On August 11, one of the oldest flour and grain houses of New York, NH Wolfe & Co., failed. Then came the Ohio Life & Trust crash, and alarm became universal."

Does it make sense now?

I recommended this book to John about 6 years ago and he got a copy. The name of the book is The Emergence of Lincoln. I thought the chapter on the Panic of 1857 captured the essence of generational panic, what it feels like, and why it occurs better than any text I have ever read.

[John]

Dear Higgie,

> The reason cash is being hoarded is it costs too much to invest
> it.

I actually don't think that this is it at all. And with all due
respect, Higgie, you may not realize this because you're smart enough
not to be in debt.

People and corporations are hoarding cash, in my opinion, because
they're afraid they're going to be caught short. If you decide to
invest money in something, and then you lose your job or you lose
demand for your product, then you know that you won't be able to
borrow any money to make a credit card or mortgage payment, or to meet
payroll.

In fact, I think a parallel can be drawn: People hoard money for the
same reason that they hoard candles or canned food or bottles of
water; they're afraid that they won't have any when they need it.

John

[Higgenbotham]

> The reason cash is being hoarded is it costs too much to invest
> it.

I actually don't think that this is it at all.

I did a search for "why are corporations hoarding cash" and this was the first article that came up on the list.

http://abcnews.go.com/Business/hoarding ... 559&page=2

As long as the economic outlook remains cloudy, employers will continue to hold on to their reserves, predicts Rene Stulz, a finance professor at Ohio State University and an expert in cash reserves.

"It makes sense to put cash [...] in hiring people if you can make money. It doesn't make sense to take the cash and hire people if you're going to make losses," he said.

I've taken words such as uncertain and cloudy (or phrases such as "unusually uncertain") to be code words for deflation but it may have as much or more to do with immediate concerns about the regulatory environment. Certainly, worries about being able to make a debt payment go hand in hand with deflation and the resulting loss of invested capital.

http://timesfreepress.com/news/2011/jul ... ding-cash/

That is creating uncertainty about what the economy is going to be like just a few months down the road. That uncertainty makes it riskier than usual for companies to hire new workers or otherwise expand. What happens if they do so and then Congress hits them with higher taxes? They may not be able to afford to keep the workers they’ve hired. And what happens when countless ObamaCare regulations roll out over the next few years, and companies learn bit by bit just how much those regulations are going to cost them? That’s discouraging investment, too.

It’s no wonder companies are reluctant to hire. As commentator Michael Barone, of the American Enterprise Institute, put it, “It’s hard to avoid the conclusion that the threat of tax increases and increased regulatory burdens have produced something in the nature of a hiring strike.”

This falls more into the category of the cost structure being too high and likely to go even higher. That's from the standpoint of cash flow and increasing cash flow burdens and is inflationary. My thought is those burdens will not be possible to maintain and that's another good reason to hoard cash. But that doesn't have anything to do with deflation of the value of invested capital.

Having covered all that, here's the view that I think is spot on but it's stated in more practical terms than the terms I used.

http://seekingalpha.com/article/228507- ... powder-dry

So we have this huge bifurcation of both the manufacturing sector and the financial sector. One part of each is piling up cash while the other part is just trying to keep its nose above water.

It is my bet that the companies that are building up their cash hoards are just waiting for the opportunity to sweep in and acquire firm after extremely weak firm. It is my guess that these companies are waiting for the right time to pick up their exposed brothers and sisters for a song.

They see the opportunity to participate in a complete re-structuring of the economic framework in the United States. The move depends upon two things. First, it depends upon the realization on the part of the weaker companies that they have little or no future without being acquired. Second, it depends upon some of the uncertainty surrounding the economic policy and regulatory philosophy that the federal government is going to finally decide upon.

The debt issuing and cash hoarding that is going on in both the banking sector and the manufacturing sector is not in preparation for hiring more people and buying more equipment. The corporations issuing debt and hoarding cash are preparing to build themselves by acquiring the assets and intellectual property of those companies that are not going to be able to make it on their own into the future.

This is another way of saying they know they can get it cheaper later than they can get it now, so there's no reason to invest now.

[Higgenbotham]

Interesting that Zero Hedge posted an article on Apple's cash hoard tonight. One of the comments echos the likely scenario. I would add that many of these 163 companies that go bankrupt probably won't be acquired as suggested but will be liquidated in fire sales at auction.

Apple Has More Cash Than 38.9% Of The Companies In The S&P Combined (And $413 Billion Less Debt)
Submitted by Tyler Durden on 07/23/2011 19:44 -0400

One last quick comparable chart indicating the unique position of Apple in the stock market: with $76.2 billion in Cash, Short and Long-Term Investments, AAPL has more money in the bank than 38.9% of all S&P 500 (ex financials) companies, combined, or 163 companies in total.

by HungrySeagull
on Sat, 07/23/2011 - 20:25
#1485856

So we know where the Market will stand. When the great wave rolls through, Apple and others who are debt free will be lighthouses while the rest drown.

We can look forward to future money making moves by Apple to scoop up the carcasses of the dead companies where it suits em.