Re: Financial topics
Posted: Fri Feb 19, 2010 10:14 am
http://www.zerohedge.com/sites/default/ ... nction.pdf
FYI
If you do not know early and late you are prey.
FYI
If you do not know early and late you are prey.
Generational theory, international history and current events
https://www.gdxforum.com/forum/
Yes, Higgenbotham. These are things we agree upon. The shadow inventory, paying first-time buyers with rebates, keeping long term interest rates low (Fed buying treasuries), and Freddie/Fannie continuing to write bad loans with Geithner saying they are fully backed by the government are all ways of propping up the market and preventing it from reaching the price that would determined by a supply-demand equilibrium.Higgenbotham wrote:A headline from yesterday morning (not this morning as I previously indicated) that pertains to our discussion of last night. While the investment community and ratings agencies do not frame the issues in the way we do here, they've begin to sniff out the "disparity" using the same theme of mortgage backed securities and how those values relate to employment and the housing glut. Also, note the use of the word illusion, which indicates that the "disparity" was previously hidden but now has been discovered by the market. Therefore, a panic is probably not too far off in the future.
http://www.housingwatch.com/2010/02/17/ ... webmaildl4
Heartened by the recent rise in home prices? Don't get too comfortable. Standard & Poor's, the credit-rating agency that tells investors what mortgage-backed securities are worth, reports that the increase was just an illusion. It predicts the nation is about to see a deluge of new foreclosures that will drive real estate values back down.
Blame the "shadow inventory" – nearly 1.8 million homes that are on the road to foreclosure but for all kinds of reasons haven't gotten there yet.
Many homeowners have fallen behind on their mortgages or stopped paying, but foreclosure has not yet arrived. Mortgage servicers, the folks who send you the bills and file for foreclosure when you can't pay them, are overwhelmed. Courts, too, are backed up. Mortgage modifications and foreclosure moratoriums have put off the day of reckoning for borrowers, but not forever. And unemployment is sabotaging more homeowners every day.
Out of more than $1.6 trillion in existing mortgages that were packaged into mortgage-backed securities by Wall Street, some $425 billion worth are extremely late on their payments, and therefore likely to go into foreclosure. Only a fraction of borrowers who fall seriously behind are able to catch up, with the help of a loan modification. And even then the majority end up falling behind again. That amount of bad mortgage debt has been spiking up every month, slowing down just a little thanks to the government's Home Affordable Modification Program, but still continuing to rise.
As I said, I find inflation to be very mysterious.Indyboy wrote: > John, without any comment on the rest of your passage (my limited
> understanding of inflation being a little different than yours, I
> can write that separately) I am not sure of this statement. It
> seems to me that you are saying that 1970's were a period of high
> business growth which fueled shortage of labor and hence,
> wage-inflation. If so then 70's would be inflationary+growth where
> I believe that most people think of 70s as being
> inflationary+recessionary. Actually, post oil-shock, when the
> inflation really kicked in the unemployment rate was actually
> quite high. Briefly, I look upon prices as being the demand-supply
> equilibrium between available money (monetary-base + money created
> by our fractional reserve system) and the goods it is chasing. So
> inflation can happen if the same the same amount of money is
> chasing fewer amount of goods and in the 70's less oil was a big
> factor.
Higgie already answered this, but I'll add to his answer. In the caseIndyboy wrote: > My original question was not regarding this. My precise question
> was that if Fed goes on a buying spree and pumps cash into the
> economy in the trillions, then how do things blow up ? Zimbabwe
> style inflation or 1930's type deflation ? Some people here say
> both and I am asking, if they really understand it, to explain how
> the macro-economic variables are going to evolve. And does there
> exist the right amount of money pumping that causes neither
> inflation or deflation. I am still thinking about it, but I was
> wondering if anyone else had thought it through. QE by the
+ trillions was not happening in the 1930's, so even if things were
> to blow up, it is quite possible that the exact route will be
> different.
You're right. Pettis is an idiot. However, the problem is not thatIndyboy wrote: > A really good article in my opinion. To say that Chinese
> government is in a strong position to fight an asset bubble
> because of its huge assets is a mistake, because the assets are in
> USD.
> http://mpettis.com/2010/02/never-short- ... -reserves/
There is no investment strategy that will preserve capital over a long time horizon, just strategies that allow it to go extinct more slowly. Wealth never survives more than a few generations no matter how much it is or who manages it. A lot of people point to gold. Gold costs roughly 1% per year to insure and store, so by that route the value of a constant amount in storage is gone in 100 years. If the storage is paid out of the value of the original holding, it will last longer and decay at 1% per year instead and only 37% of the value will be left in 100 years. If one chooses self storage, it will likely be lost or stolen when the crisis it is meant to protect against comes to pass. After decades of experience and many superb market calls, Harry Browne came to the conclusion that a "permanent portfolio" of 25% stocks, bonds, cash, and gold with yearly rebalancing is the best way to maintain your capital.aedens wrote:http://www.zerohedge.com/sites/default/ ... nction.pdf
FYI
If you do not know early and late you are prey.
Yeah. They knew that back in 30 C.E. "Where moth and rust doth corrupt and thieves break in and steal." Not to mention the guy whose wealth was secure, but apparently his health wasn't. "You fool! This night will your soul be demanded of you." Oops... or as is said when many a fat cat or member of the Powers That Be has a heart attack, "They examined his heart and found nothing"?Higgenbotham wrote:There is no investment strategy that will preserve capital over a long time horizon, just strategies that allow it to go extinct more slowly. Wealth never survives more than a few generations no matter how much it is or who manages it. A lot of people point to gold. Gold costs roughly 1% per year to insure and store, so by that route the value of a constant amount in storage is gone in 100 years. If the storage is paid out of the value of the original holding, it will last longer and decay at 1% per year instead and only 37% of the value will be left in 100 years. If one chooses self storage, it will likely be lost or stolen when the crisis it is meant to protect against comes to pass. After decades of experience and many superb market calls, Harry Browne came to the conclusion that a "permanent portfolio" of 25% stocks, bonds, cash, and gold with yearly rebalancing is the best way to maintain your capital.aedens wrote:http://www.zerohedge.com/sites/default/ ... nction.pdf
FYI
If you do not know early and late you are prey.
==============================================================================Higgenbotham wrote:There is no investment strategy that will preserve capital over a long time horizon, just strategies that allow it to go extinct more slowly. Wealth never survives more than a few generations no matter how much it is or who manages it. A lot of people point to gold. Gold costs roughly 1% per year to insure and store, so by that route the value of a constant amount in storage is gone in 100 years. If the storage is paid out of the value of the original holding, it will last longer and decay at 1% per year instead and only 37% of the value will be left in 100 years. If one chooses self storage, it will likely be lost or stolen when the crisis it is meant to protect against comes to pass. After decades of experience and many superb market calls, Harry Browne came to the conclusion that a "permanent portfolio" of 25% stocks, bonds, cash, and gold with yearly rebalancing is the best way to maintain your capital.aedens wrote:http://www.zerohedge.com/sites/default/ ... nction.pdf
FYI
If you do not know early and late you are prey.
I think I've answered the question. If this response isn't specific or clear, it would be a good idea if people would quote a sentence or two and point out what is incorrect or unclear.indyboy wrote:My original question was not regarding this. My precise question was that if Fed goes on a buying spree and pumps cash into the economy in the trillions, then how do things blow up ? Zimbabwe style inflation or 1930's type deflation ? Some people here say both and I am asking, if they really understand it, to explain how the macro-economic variables are going to evolve. And does there exist the right amount of money pumping that causes neither inflation or deflation. I am still thinking about it, but I was wondering if anyone else had thought it through. QE by the trillions was not happening in the 1930's, so even if things were to blow up, it is quite possible that the exact route will be different.
To get to the Weimar scenario, there are two levels of protection on the dollar that would have to be removed. The first is its use as world reserve currency and the second is the bond market. Having the world reserve currency incurs advantages that a country does not want to lose. Therefore, as a practical matter, the Fed will not want to do anything to jeopardize world reserve currency status. Since I wrote the previous responses, this concept was recently covered in a Congressional hearing where Bernanke stated that the bond market is in such a condition that further monetization and government deficits are too risky and will likely drive interest rates higher. Although the Fed can push enough electronic money out to get to the Weimar scenario, they would lose more by doing that than could possibly be gained. As far as thresholds, I would guess that somewhere around $1 trillion of additional monetization would cause the rest of the world to abandon the dollar. This is just a guess. Nobody knows. More of this was covered in the paragraph below from a previous response.Higgenbotham wrote:Let's take some version of the first case you gave. Say the Fed opened a bank account for every person in the United States and wired $1 million into it. It seems obvious that we would get inflation. My argument is that we would not except in a very abstract impractical sense. What would happen instead is that everyone (well, maybe not everyone) would hold onto their goods and refuse to sell them for dollars. The real economy would collapse and a barter economy would develop. Black market money like old silver coins or foreign currency would spring up and be used for exchange instead. In terms of dollars, there would be inflation but once the Fed destroyed confidence by creating this extreme amount of money, it would not have any practical use or value.
Higgenbotham wrote:As a practical matter the Fed has to keep the outright creation of money at a low enough level to prevent the abandonment of the dollar as world reserve currency. That's probably the first threshhold. That level is determined by foreign countries who currently hold dollars as reserves and use dollars in trade. The BRIC countries have already said "enough is enough" and have made plans to abandon the dollar if further debasement occurs. There is debate on whether the BRIC countries can really make good on that threat or not. They probably can't immediately, but they can make our lives pretty miserable in the meantime. If the Fed wanted to push to the point that the dollar is abandoned as world reserve currency and the Fed pursued this strategy domestically, I think they can create inflation once they push enough electronic money into the system to destroy the bond market. Once the bond market is destroyed, then we could end up like Weimar.
The reason the scenarios are opposite is because we are talking about different levels of response from the Fed. The collapse scenario would involve the highest amount of money printing. The hyperinflation scenario would involve a high amount of money printing over time, some to trigger the rejection of the dollar as world reserve currency, followed by more later to destroy the bond market. The deflation scenario involves a smaller amount of support. Those 3 distinctions were discussed some more in these paragraphs from a previous response.indyboy wrote:Higgenbotham - In the same writeup you seem to be outlining two completely opposite scenarios. In the first paragraph, you mention a hyperinflation scenario (Weimar-republic scenario) as a result of the Fed minting money. In the second paragraph, you mention of asset prices crashing in spite of the Fed printing money.
Higgenbotham wrote:The reference to Weimar is to show the steps that would be necessary to theoretically get to approximately that, however unlikely they are. First, the Fed would have to create a situation where the rest of the world rejects the dollar for international trade, but the dollar still stays in use domestically. I think that's possible to do. After doing that, the Fed would then need to push enough electronic money into the system to destroy the bond market. Only after doing those 2 things could we get to the Weimar scenario.
The first part of that paragraph describes what would happen if the Fed were to obviously push a huge excess of electronic money into the system. In my opinion, the market would instantly reject it, and the world economy would collapse. So that's a separate thing from the Weimar scenario and much more devastating. We could talk more about how that scenario could develop, but it would probably start with a foreign government obtaining intelligence in advance that this is going to happen, then selling their bonds to be first out the door, converting the proceeds to some other currency or to gold, then stopping all shipments of goods to the US unless alternative non dollar payment arrangements are made.
The second paragraph where I described the Fed MBS purchases gets to your point about moving the right amount of money into the system. This is in my opinion what the Fed is trying to do; however, this "disparity" I am talking about refers to the fact that the Fed is unable to target all aspects of the economy equally. While they may be able to hold security prices constant with the right amount of money, they are unable to hold, for example, the underlying wage structure constant which ultimately supports the prices of the securities. As a result, the market waits with baited breath for every weekly unemployment claims report and monthly employment report and dissects the numbers looking for signs of improvement.