Financial topics

[Higgenbotham]

PS Higgie, I am glad you are not still shorting silver. It is up 2% this morning.

Just shorted silver again on this morning's runup.

[vincecate]

PS Higgie, I am glad you are not still shorting silver. It is up 2% this morning.

Just shorted silver again on this morning's runup.

Hum. Now it is up 3%. I feel much better about my 2013 silver calls than your silver short.

Can you answer my "where do I go wrong in my hyperinflation thesis" post? What is your current thinking?

[jdcpapa]

Now I'm in US dollars and this is my virtual life. Being in t-bills risky? You bet your life it is!

I have a question for anyone in dollars or t-bills. If my hyperinflation thesis is wrong, where do you think I went wrong? For example:
1) This time is different and the 40% deficit and 80% debt to GDP rule will not apply because the dollar is the reserve currency (mind you there is no force of nature keeping it the reserve currency).
2) The world can never stop buying Treasuries (though note foreigners dumped $17 billion last month)
3) Unlike all previous central banks, the Fed won't print money just because the government needs money. The Fed will force the rest of government to balance the budget even when lots of Treasuries are coming due and spending has been nearly double taxes (you really think Bernanke will stop printing? If interest rates go up the interest payments on the debt could be more than the total taxes.)
4) I should ignore the 100 hyperinflation cases and just compare the US to Japan (really?)
5) The deflation in the last generational crisis had nothing to do with unwinding the Fed's $2.50 in paper money for every $1.00 worth of gold and the hyperinflation in the previous two generational crisis (civil war and revolutionary war) were flukes and we should assume generational crisis have deflation (if gold had not been made illegal the unwinding would have meant Fed bankruptcy and paper money becoming worthless, which is hyperinflation. With basically 3 crisis out of 3 having or nearly having hyperinflation, why don't we think US crisis and hyperinflation go together?).


http://pair.offshore.ai/38yearcycle/#hyperinflation
http://www.treasury.gov/resource-center ... ts/mfh.txt
http://howfiatdies.blogspot.com/2010/11 ... ndard.html

One more question, interest rates have been going down since they hit 20% around 1980. As they have gone down the value of bonds has been going up. But interest rates are now near 0%. They can not go down any further. It seems reasonable that at some point interest rates will start going up. If they start going up then the value of bonds will be dropping. Does anyone believe in a "permanently high plateau" for bonds? The Fed has put trillions into bonds and you don't think they made a bubble? Who will want to hold bonds when the value is dropping?

PS Higgie, I am glad you are not still shorting silver. It is up 2% this morning.

I am not sure you are wrong. Although we can look back at history for examples that seem to repeat; the creative twist taken may play out a little differently.

For example: Productivity is disregarded in the US. Jobs are now outsourced, at a much lower wage rate, to other countries. This creates unemployment in the US among other problems. But isolating that issue: In the US, a large portion of our population is unemployed (and growing) and as such is experiencing a dramatic downward shift in the standard of living. Soon we will wake up to this realization and productivity and competitition will continue, but our overall standard of living will decline.

Look at the construction industry as an example. Wages have been set back approximately 30 years. Is that not a devaluation of the dollar from their perspective? They provide the same services. They once owned a 3-2 and now live with their relative or worse. An entire industry has arguable dropped off of the middle class roles.

Is that not the ultimate effect of hyperinflation?

IMHO, When the US$ ceases to be the world reserve currency then traditional hyperinflation is a probabilty. Until then, if the world controls the value and sets a backstop; then hyperinflation implodes (deflation). The world has a vested interest in the outcome ie the powers that be. This needs to be factored into the calculation.

Short term interest rates have averaged 4-5% for over 60 years. The blip during the Carter administration is a mid-point with regard to the bond issue. Interestingly, inflation and short term rates on average have mirrored each other.

Well, speaking of productivity..........Rdrunr?

Y'all have a good day!

[richard5za]

I have a question for anyone in dollars or t-bills. If my hyperinflation thesis is wrong, where do you think I went wrong? For example:

Vince,
I am 90% in cash; I put the 5% I sold recently back into gold and miners yesterday, but allow me give a personal view.
Its not a case of you going wrong: I think the final outcome will be different from many predictions; this sort of thing usually catches people by surprise.
Secondly, its certainly possible that hyper-inflation may be the final result in the USA. Its also possible that in certain circumstances there will be high inflation without hyperinflation, and in other circumstances deflation is a genuine possibility.
I am in cash, mostly because that is the most flexible place to be right now. Both high inflation and deflation have historically (for the last 111 years on my data) produced low PE ratios in stocks. On the grounds that price stability is unlikely (i.e. low positive inflation) I am seeing a stock market that drops by at least half, in fact my calcs suggest a Dow that bottoms under 4800. So I don't want to be in stocks (i.e. general equities and excluding specialised stocks such as gold miners)
On the other hand if I see inflation coming I will jump into inflation hedges: Top quality real estate, best quality and rare antiques, precious metals depending upon circumstances, etc. But I'm not going to jump into inflation hedges before I'm confident that inflation is a reality. And I don't want to be spooked by early inflation beacuse that may not be the final direction.
I made quite a lot of money in the 1970's out of inflation; whatever the result on the inflation and deflation scenarios, if you make the right call you can make very good money. e.g. On deflation stay in cash until the market bottoms and buy stocks that are going to increase multi-fold, etc.
Richard

[John]

This was another "first Friday of the month" where I watched the CNBC
commentators in stunned reaction to the bad jobs report.

I've been going through a job change myself, which has barely left me
time to breathe. However, I do have some free time this morning, and
I want to comment on some of the things that have been posted with
respect to engineers.

I have to change jobs because the project that I've been working on
(real-time air traffic flow monitoring and rerouting software for the
FAA) is moving to N.J., and I don't want to move from Cambridge.

I approached the job search with enormous apprehension. In the
early 2000s, after the Nasdaq crash, there was a period of several
years when I couldn't even get a recruiter to return a phone
call. I was lucky that I actually survived that period.

In my 2008 job search, things were better, but there was still
a lot of nonsense. A typical job description would provide a list
of software tools, with specific version numbers, and require
that applicant have experience with those specific versions.
A typical application questionnaire would ask how many years
of experience you had with each specific tool.

It was as if you're applying for a construction job, and you're asked
for how many years of experience you've had with a flat blade
screwdriver version 2.9, a phillips head screwdriver version 8.4, a
claw hammer version 7.4, and a ball pein hammer version 9.6A.

It took me a year to get a new job in 2008, so I was very apprehensive
about what would happen this time.

I was shocked and surprised that things have changed dramatically. My
resume is for a Principal or Senior Software Engineer who has had
decades of experience with every major kind of software project, every
major platform and programming language. And I got dozens of
inquiries from recruiters, several quick interviews, and a good job
offer from a company developing financial/trading software.

I got some inquiries from recruiters listing the same kinds
of specific tools/version numbers as before, but I didn't even
try to answer those questions. I just said, "I've used all these
tools or similar ones in the past, but I don't remember the version
numbers. I'm looking for a senior position where I take responsibility
for a system, irrespective of the tools being used."

That turned some people off, but the surprise is that this was exactly
the kind of answer that some people were looking for. They had gotten
burned because they had asked for experience with a certain kind of
screwdriver, but the person they hired didn't know how to handle
unexpected problems, like the screw refuses to go all the way into the
wood. The people they hired were baffled.

The other big surprise was that no one asked for references. In 2008,
every recruiter demanded that I provide the names of three references
whom they could call to verify that I had done what I claimed. Much
to my surprise, not a single recruiter asked for references. I
assume, once again, that people got burned because basically every
reference is going to give a positive reading.

Instead, I was subjected to technical grillings, asking me to
write sample code and give mini-presentations on projects I'd
worked on in the past. The interviewers had enough technical
skills to evaluate me to judge whether I knew what I was doing.

I believe it was Higgie who said that the country is moving
back to "engineering," and people who can get things done. What
I'm saying is that I've already seen a dramatic change, in just
the last three years.

This is good for me, but this means that people without the kind
of experience that I've had are going to find it very difficult
to find a job.

Which brings us back to today's disastrous jobs report. This
is very ominous and continues a trend that's far from over.
People will increasingly have to accept lower salaries, which
will push the deflation trend enormously. A lot of people
won't be able to get jobs at all.

At this writing, the DJIA is down 200 points. Analysts are talking
about a recession, which is very bad news for stocks, since it will
mean that earnings will be lower than the bloated predictions, which
means that even the fraudulent P/E ratios based on operating earnings
will be rising, forcing a selloff. It looks like September/October is
going to be very bad.

Here's one more general note. I keep debating with myself whether
QE2 was a good idea or not.

I agree with those who say that QE2 did nothing to create jobs
permanently. I also agree with those on the other side who say
that things would have been much worse without QE2.

However, from the point of view of generational theory, things
are going to get much worse anyway. So the question for me is
this: Would it have been better to have no QE, so that the
inevitable crash would be more painful, but the worst would
be over more quickly? Or was it a good idea to have QE to
give institutions several additional years to prepare for
the inevitable crash, by hoarding cash and creating a stable
work force, but prolonging the agony?

As I said, I've debated this with myself many times, and I
still have no idea what the answer is.

I just saw another piece of data this morning: The euro producer price
index is up 6.1%. The dynamics of the euro are very different from
those of the dollar, and there may indeed be euro hyperinflation.
A breakup of the euro zone is a sure thing.

John

[vincecate]

I just saw another piece of data this morning: The euro producer price
index is up 6.1%. The dynamics of the euro are very different from
those of the dollar, and there may indeed be euro hyperinflation.
A breakup of the euro zone is a sure thing.

The normal hyperinflation situation is the government needs money because taxes don't come close to what they are spending and people are dumping their bonds and the central bank helps out by making money and buying government bonds. The ECB is not under one government and has rules that it is not to buy less than top rated bonds, so it might be able to avoid the normal hyperinflation situation. On the other hand, if people think the Euro Zone is breaking up they may dump the currency because of that. But either way the Euro is not your generic/standard/typical hyperinflation situation.

The US, Japan, and England are looking like typical hyperinflation setups (though the US as the reserve currency is not exactly typical either).

[Higgenbotham]

I have a question for anyone in dollars or t-bills. If my hyperinflation thesis is wrong, where do you think I went wrong? For example:

Its not a case of you going wrong: I think the final outcome will be different from many predictions; this sort of thing usually catches people by surprise...
I am in cash, mostly because that is the most flexible place to be right now...
On the other hand if I see inflation coming I will jump into inflation hedges: Top quality real estate, best quality and rare antiques, precious metals depending upon circumstances, etc. But I'm not going to jump into inflation hedges before I'm confident that inflation is a reality. And I don't want to be spooked by early inflation beacuse that may not be the final direction.
Richard

I think this is a good general answer. In my view, the anticipation phase lasted from 2001 to 2011. This is where astute investors anticipated monetary problems and got into metals as a safe haven. This phase is now over and the possibilities are obvious to everyone. But they are only possibilities. The reality is unfolding but metals are priced for a hyperinflation outcome even though there's no evidence. Almost every real time leading indicator I am reading says the US has been in deflation since about late April. Like I said, if silver were to get hammered to $16 on the existing data, I'd be a buyer. Here, I'm a cautious seller.

[jdcpapa]

I have a question for anyone in dollars or t-bills. If my hyperinflation thesis is wrong, where do you think I went wrong? For example:

Its not a case of you going wrong: I think the final outcome will be different from many predictions; this sort of thing usually catches people by surprise...
I am in cash, mostly because that is the most flexible place to be right now...
On the other hand if I see inflation coming I will jump into inflation hedges: Top quality real estate, best quality and rare antiques, precious metals depending upon circumstances, etc. But I'm not going to jump into inflation hedges before I'm confident that inflation is a reality. And I don't want to be spooked by early inflation beacuse that may not be the final direction.
Richard

I think this is a good general answer. In my view, the anticipation phase lasted from 2001 to 2011. This is where astute investors anticipated monetary problems and got into metals as a safe haven. This phase is now over and the possibilities are obvious to everyone. But they are only possibilities. The reality is unfolding but metals are priced for a hyperinflation outcome even though there's no evidence. Almost every real time leading indicator I am reading says the US has been in deflation since about late April. Like I said, if silver were to get hammered to $16 on the existing data, I'd be a buyer. Here, I'm a cautious seller.

I agree 100%. Well put. Thanks.

[richard5za]

Analysts are talking
about a recession, which is very bad news for stocks, since it will
mean that earnings will be lower than the bloated predictions,

Dear John,
PE ratios are correlated much more to inflation / deflation than they are to economic growth or decline.
There is some very intereting analysis on this which I will try to find time to post.
The main driver of the share prices is the ratio not the increase / decrease of earnings
More important, very glad you landed a good job.
Best regards
Richard

[John]

Dear Richard,

> PE ratios are correlated much more to inflation / deflation than
> they are to economic growth or decline.

Is that really true? As I recall, U.S. inflation was sky high in the
1970s, while P/E ratios plummeted.

John