There is an interesting story from CNBC.com that illustrates that a bond trader is concerned that the bond market will collapse. It is not the fear that the bond market will collapse that caught my eye, it is the fact that he thinks deflation will fuel the collapse. I do not see that happening, exactly, yet at least. Clearly housing is still seeing deflation and we are not at the bottom yet either.
Logic dictates that we should all be gearing up for inflation, now, but the data does not lie and I can pull the most aggressive data I want and it shows ultra low inflation rates which is scary, frankly. With the massive printing and monetization of debt that we have seen over the past 2 years we should see some inflationary pressure, somewhere, but nothing. Not only has the Fed’s balance sheet grown, but it is growing and so is the national debt, at a record breaking rate. Still, inflation is nonexistent which is puzzling to all economists and policy makers, even housing that is given the most generous tax breaks and, recently, a huge tax credit to buy is showing that prices are falling, not rising. This is a severe problem and it is going to get worse.
Deflation will continue to rip through the economy as the deleveraging continues which could be for another 3-4 years, but there are always caveats which I will go over. The primary reason there is no inflation, this isn’t rocket science unless you are an economist, but credit is contracting and people are saving more which means less money is in circulation. Bank balance sheets are enormous right now, but the irony is they are still largely insolvent and even if they could lend why would they with 10% unemployment and initial claims coming in at 470K a week? All of this means prices will drop lower across all categories, except for food which I admit has me perplexed as well.
The primary reason is the fact that everyone is deleveraging and paying down debt. We live in a society that was driven by consumption, but that consumption was not organic, i.e. actual income driven, it was credit driven. Once that credit is gone, and it is long gone, consumption ends as we once knew it. Sure, we will have hot products like the iPad, why, I do not know, but that is not for me to decide and even those products have a certain shelf life meaning their appeal will eventually wear off. Especially when we have initial claims, on a monthly basis, at 1.8M which is twice the population of Montana and the target market, 18-30, is experiencing a high rate of unemployment.
This lack of inflation is not lost on the Federal Reserve and believe me they are worried about it. Tomorrow you will not see any drastic change in their language or actions. They will likely get rid of paying interest on bank deposits, what’s the point if inflation is nil. In fact, I am willing to bet, this will not be in the announcement, that the Fed’s balance sheet will get even bigger and what should concern you is the amount of currency swaps that appear on their balance sheet. Those swaps are for Europe’s banks that “are just fine” so they can settle their trades in the relatively safe reserve currency, the USD. If that number keeps growing the problems in Europe are much larger than we are being told. Europe will also weigh heavily on tomorrow’s decision and that will be a reason that no major action will be taken as well.
It is clear that deflation or disinflation is here at the moment and I am sure it will get worse, but it will also be somewhat quick. As many of you know the U.S. has decided to not pass an official budget this year. This is the first time this has happened in almost 40 years and there is only one reason I can speculate this is not happening, the $1.6T estimated by the President was a little too conservative and the actual number is probably much higher. Why debate that before the midterm elections? It would also bring the U.S. front and center in the whole sovereign debt fiasco that Europe is going through at the moment. Frankly, our balance sheet is much, much worse than what we are so critical about over in Europe and we haven’t even instituted socialized medicine, yet.
Deflation is great for U.S. treasury debt as investors can capture greater real returns and the treasury pays out little interest, but this is not going to last long. Our deficits and our tinkering in China’s affairs is about to bite us in the rear end in a big way. First, we owe too much and can never, ever repay it, there is just no way out of it and we cannot “grow our way out” and the people suggesting that are loony tunes. Second, I suspect the RMB, Yuan, China’s currency, will eventually weaken, I am very sure of it, but it may also strengthen in the meantime which would be humorous only because China would then be running big trade deficits, not surpluses, and would not have to buy our debt. I wonder how well our $40B daily auctions would go then.
I also wonder if Congress will actually pass the much dreaded Currency Manipulator Bill they are threatening China with, I think that is Smoot-Hawley on steroids. If both these things happen, China lets the currency strengthen to get the U.S. off their back, right before they drop it to new lows, and Congress passes their tariff act, that is essentially what it is, what would that do? It would force Americans to pay much more for goods, that is inflationary, and it would force China to either not buy more U.S. debt because there is nothing to hedge against and in all likelihood China would end up being net sellers of treasuries because all of their bubbles would have popped and they would need to get liquid. All thanks to politicians who have no clue how capital works. That would lead to inflation in a big way because all that inflation we exported over the years would wind up right back home where it belongs. This, of course, is a worst case scenario.
What is more than likely to happen is the fact that the U.S. simply continues to spend and the bond market slowly begins to demand a higher risk premiums. Eventually it will end up like Greece where the U.S. cannot borrow at reasonable rates, but long before that the Fed will take matters into its own hands and begin to buy treasuries through quantitative easing programs, they did it once, they can do it again, right? Except this time it will be inflationary, but not from a money velocity point of view, from a dollar depreciation point of view. That is much worse because you actually do not have to increase money velocity to destroy the currency which will crush savers and the middle class.
The beauty of this is it doesn’t happen all at once, it happens over a period of months and the government will tell you this is a good thing. How you say? Oh, it is a perfect plan. Because we consume about 80% of what we produce domestically so we won’t see it right away, but what we will see is our exports increase dramatically, because the dollar is falling on the international markets. More people will become employed, sounds good right? Well, I am not done yet. As people become employed they spend more and prices rise and as prices rise wages will need to increase, but no one is buying our debt still, except the Fed. The money supply will have to keep growing to keep up with inflation so they print, monetize and send out more money to banks to get into circulation. Wages will increase at exponential rates, but it won’t mean anything.
You see, it is all fake, driven by the monetization of our debt and eventually the dollar will simply be worth nothing and no one will want to trade with us or at least do business in our currency which means production stops because you cannot exchange our currency for anything else, it is Zimbabwe. The printing of money is a dangerous thing and the economists who insist that what separates us from Greece is that we do have a printing press are right, but for the wrong reasons. It is much more dangerous that we have a printing press because we can do terrible things to ourselves and what I just laid out above it could happen. It might happen because there is historical precedence. There are 2 well documented cases, the Weimar Republic and Zimbabwe.
It happened, in both cases, quickly, very quickly and in Germany’s case they started out with deflation, much like what we have now. As the government repaid debt and tried to keep the economy going they printed money and they went from deflation to inflation in the blink of an eye. They were so efficient at printing money they eventually only printed money on one side of the paper, to speed up the process. They even used wood tokens so people could at least burn them for some value. It doesn’t take much to start down the path of inflationary cycles because neither the Germans or Zimbabwe wanted to be the poster child for hyperinflation, quite the contrary in fact, they, like Ben, think they can control events, capital. That is where they went wrong, capital has a mind of its own and once a path is determined it is tough to change course or stop it altogether. Some very smart men were in both countries and they failed at stopping the inflationary onslaught. I highly doubt our Fed can stop it since they admit they cannot see things coming anyhow.
As far as the folks who say these things cannot happen here, well, they can and they will. It is inevitable at some point and there is no way a deficit reduction committee can stop it or implement a plan to reduce our debt before it happens. There is no political will left in Washington to stop their spending ways. Especially with some 78M Baby Boomers about to receive the mother of all socialized benefits, how do you say no to the largest voting bloc in history? You don’t. I believe that the whole deflation/inflation debate is irrelevant as we will have both. Plus, investing for deflation is really no different than normal investing, some bonds and strong dividend paying stocks which should be your core holdings anyhow. Inflationary investing, well, that is a different story and while I prefer toilet paper and gold you may prefer tobacco and food, either way. The point is, it is coming and you will not see it happening until it is here.
Mort Zuckerman was just on Power Lunch, clearly he was the smartest man on the show, but nevertheless his comments regarding the Audit the Fed Bill makes me wonder, is he retarded? He runs newspapers for a living so clearly, well you would think anyhow, he can read, but he obviously has never read the Audit the Fed Bill because he puts up the same paper defense as every other opponent to the bill does. He claims it will take away the ‘independence’ of the Fed and make it a political entity.
Is he serious? The Fed has lobbyists which mean it already is political and when we are talking about auditing what the Fed is taking in for collateral, how they are arriving at interest rate decisions and basically removing the veil of secrecy it is not taking away their independence. Especially since the audits are 6 MONTHS AFTER the fact. I am sorry, 6 months after a decision is made does not mean Congress will have any impact on any decision Uncle Ben makes, period end of story.
Mr. Zuckerman also claims it will weaken the dollar, excuse me? Clearly the man is retarded because the dollar only strengthened last year because we were going to blow up. We were only going to blow up because the Fed screwed up so badly, end of story Mr. Zuckerman. Uncle Ben is going to print the USD out of existence because that is his plan, read my other posts, I know what he is trying to do and believe me he has Obama’s blessing to do it. However, like everything else Uncle Ben has tried to do he will fail and kill the USD.
Finally, Mr. Zuckerman, I guess you did not have history in your remedial classes in school, so let me fill you in on a few events. We had a chaotic system before hand, mostly with bank failures, but even those ‘panics,’ as they were called, were few and far between, i.e. the panic of 1907. The Fed was supposed to end those problems with the banking system, right? Let me answer that for you, yes it was. Well, need I remind you of the little thing called the Great Depression? We had massive bank failures and the Depression itself was caused by the Fed, just like the problems we have now.
In fact, since the Fed was created we have had more serious problems at an ever increasing rate than at any other time in our history, period. If you knew anything, Mr. Zuckerman, you would know that was 100% true. I admit that we need a lender of last resort, but that can easily be accomplished by the Treasury department, but having a simple solution or, more to the point, a public, open solution, is not in the banks best interests. So, Mr. Zuckerman, you clearly are on the side of the elites, not the peoples which is ironic since you peddle your product to the masses. Do us all a favor, stay behind a desk and keep your uninformed opinions to your freaking self you moron.
Unemployment tomorrow is going to be horrible, how do I know? Goldman upped its estimate from 200K to 250K and we know they got that direct line to treasury and those ‘advanced’ reports. Remember this happened in August as well and guess what, the numbers came in plus or minus 5% of Goldman’s estimates. I mean seriously, can you make it less obvious?
I did mean to post this earlier, so I am sorry, but if you followed my bearish tone then you would already own TIPS and 2 year treasuries and while you would not have done as well as equities you would have been up some 3.4% and 2%, respectively, in the recent months. That’s not too bad for bonds, but I even trimmed my exposure there just because things do not seem right. I did increase my exposure to PCY because it has been stable, it’s outside of the dollar, which will have a nice rally in the near-term, and I love emerging market debt. Outside of that when the dust settles I plan on jumping into the BRIC heavy and other foreign investments trying to leave anything exposed to US credit markets behind.
Of course, I will own some US stocks, but it will not be the largest holdings I have by any stretch of the imagination. As you all know this rally is done and rational thinking is about to bring us, in a very abrupt and radical way, back down to Earth. We have not had economic data that merited this type of rally to begin with, but what do I know. Anyhow, a couple of things made me chuckle, apparently Cramer, with his canny ability to pick losers, told everyone to buy CIT and Citi, CIT is dead and Citi is headed back to the $2 area.
The other vindication is the fact that David Rosenberg confirmed exactly what I have been saying all along about unemployment. During a credit collapse unemployment is a leading indicator, not a lagging indicator. I was beginning to think I was nuts, kidding of course, but hearing all the idiots on CNBC makes one nuts after awhile when you hear 550K a week job losses are a lagging indicator when the problem is defaults on loans and credit products, duh. I am still waiting to see the young idiot who debated Trim Tabs Charles Biderman last month claiming his economic indicators are “on fire” and GDP will be up”4 or 5% in the 3rd and 4Q09 and then some.” Based on the data from yesterday and the ISM today, car sales data, unemployment and pick any other horrendous data point you want I certainly don’t see 4 or 5% GDP growth any time in the near future, but that asshat did. Yeah, our educational system is fine when we are turning out clowns like that.
Yet, guess who continues to astonish me? Mr. Doom and Gloom himself Marc Faber who said things are bad, but said in March that we will have a major rally before a selloff happens again. Hmm, guess what seems to be happening? As evidence of his holinesses rightness I have included recent videos confirming it below, enjoy.
According to Harry Schultz and many tin foil hat wearers on the internet there will be a currency collapse and embassies should stock up on local currencies to last at least a year. This led to rumors of bank holidays and runs on the banks and other far out there rumors. Are these just paranoid people trying to conjure up publicity or is there any truth behind these strange stories.
I have to say that it is possible that some of these stories hold water, scary right? As you may know the Fed has had a huge currency swap program that has corresponded with the sudden strength and weakness of the USD which is quickly unwinding and may lead to new lows in the USD. That could lead to new lows in the USD and potentially start a currency crisis and, as I have said many times before, the Fed is unwilling to defend the dollar. However, it is unlikely that that alone will cause a complete collapse of the currency. It would take the foreign buyers of our debt to sit out of a few auctions, we would call these treasury auctions ‘failed’ auctions, along with new lows in the USD to trigger a collapse on our currency. I would say this has a probability of 65% of actually happening, it is there, but not a certainty.
What I think is more realistic is an actual bank run in the near future, I know here comes the tin foil hat. I want you to really think about what I am about to say, because it is all true. The FDIC is basically broke, really, it is. By my estimations it has just 4-6 billion in cash left and that is assuming it has not had to make good on any of the loss-share agreements in place. We are at our limit as far as the amount of debt the US is allowed to issue, hence the pending vote to raise the debt ceiling to $13 trillion dollars, which I have signed a petition against, in the effort of giving full disclosure.
So, if we have another few institutions go belly up over the next few weeks, which we will, and the new bailout for medium to smaller banks is not approved by treasury and the debt ceiling is not raised the FDIC will be officially insolvent. I put forth the idea that the only reason banks did not go under last year is because we knew the FDIC was there to guarantee our deposits. Now if the FDIC was suddenly incapable of providing that guarantee, would Americans really keep their money in the bank? No way. That would lead to a bank run like we have never seen before.
Thanks to our wonderful fractional reserve banking system all banks would then be in trouble when depositors pulled money from institutions. We should also face the fact that we should not even have the FDIC as it encourages banks to assume more risk and it encourages depositors to ignore how much risk their banks take, just my personal belief, but if you think about it there is validity to that thought. I do believe this is a very real possibility in the near future unless the debt ceiling is raised or the TARP bailout is designed for small institutions, which I am against.
If this bank run happens, which is possible, but unlikely, then it will be a much bigger problem than you think. It will force all cash loans to be called in. If you recall your history this was the cause of the 1929 stock market crash and the very beginning of the Great Depression. However, unlike 1929 the leverage we have today is much larger than back then which means the losses will be much, much worse. I contend it will make last year look like good times. Leverage is not our friend and leverage is the reason why we saw everything decline, including gold which usually goes up during times of trouble, but when you have hedge funds buying on 30 times leverage then they sell everything including gold.
A bank run is possible this year and I think a much bigger threat than a currency collapse. Actually, I think we are in a double edged sword situation because raising the debt ceiling will not help the dollar either which could lead to a currency collapse down the road, but nevertheless the banking system is still the biggest problem America faces in the near-term. This is not some conspiracy theory nonsense, but real life issues that are coming to fruition and that have to be dealt with. The only reason the Fed is pulling any of the stimulus is because we are so close to the debt ceiling. Of course, you have not heard about reaching the debt ceiling because the media is too busy talking about other nonsense issues.
My guess is that at the first sign of a major bank run we will have a bank holiday to sort out the problem. This would involve a recapitalization of the FDIC and probably some emergency action taken to restore faith in the banking system. However, no matter what they do, it is merely postponing the inevitable because we are a debtor nation who has to borrow trillions every year and we have a declining tax base. We will never be able to dig ourselves out of this hole because we do not have the political strength to do so nor do we have the assets either. Keep liquid, keep money around the house, buy physical gold and silver, I really like silver, and do your own homework, but I think you will find even I am soft peddling the news to you.
ha
This is according to Marc Faber who authors the Gloom, Doom and Boom Report who has, for some time before it happened, was warning of financial collapse. Now, Mr. Faber is a bit of an odd character, a very smart man, but definitely not your average guy and he makes me look like a ray of sunshine. However, one must give credit where credit is due and he was one of the guys who warned of the disastrous monetary policies in the recent past.
Mr. Faber is now saying that what has happened over the recent past is merely a warm up to what will happen in the near future. He cites the fact, correctly so I might add, that nothing has changed and the very same failed leaders who failed us to begin with are still in power and making the “changes” to save the system. Of course, no real changes are being made and the same problems that got us here are still there and, if anything, the problems are now 10 times worse because the government will now be tapped out and unable to bailout the banks when they fail again, and they will.
Case and point, the FDIC is officially broke and actually went to the banks that they are supposed to guarantee for funding. They later said that they were not serious about being bailed out by the private sector, yeah right, but frankly if the debt ceiling is not raised then the FDIC will be unable to borrow against its line of credit at the treasury department. This is a very serious problem and I am torn about this situation. On one hand, I have had enough of the debt because we will never be able to pay it back and are, whether we admit it or not, bankrupt. On the other hand, what’s another trillion dollars? Not only that, we cannot let the people suffer anymore than they have already.
If you think I am full of it about the debt ceiling or the FDIC being virtually bankrupt, go do your own homework, but trust me ignorance is bliss sometimes. Simple mathematics dictates that we cannot print our way out of our problems and government spending is counterproductive as it has to be repaid eventually. If what many are saying is true, i.e. David Rosenberg and company, then many of the jobs last, millions of them, are never coming back and that means we will not regain that tax revenue. One of the only tools we have officially not used yet, but certainly a tool we will ‘officially’ use in the near future, is extremely dangerous for a country that has trade deficits and that is the devaluation of its currency.
As I stated yesterday, currency devaluation has short-term benefits, higher equity prices and profits for multinational companies. However, longer term devaluation of the currency is tough to reverse and leads to higher prices for everyday products like food and energy. Not to mention that if we lose control over the rate of devaluation, which we will, then we will certainly not be the reserve currency any longer. I do not know how big of a deal that will really be, nobody really knows, but I do know it is not good. I do know that those countries that devalued its currency in the past, either intentionally or not, have never regained their official world strength again, look at the UK as a modern example or the Roman Empire as a older example.
Even if we do not devalue our currency the market will if we do not get our deficit under control. Over the past 20 years we have never managed to get our deficits under control even when we had budget surpluses, so I do not have my hopes set real high that our elected officials will get spending under control. I also know that the Fed will certainly not get monetary policy correct since they missed the most obvious credit bubble in the history of credit bubbles. Perhaps this is a master plan of some sort, who knows, but I do know the Mr. Faber is a smart man who made many good calls while our supposed experts missed the extremely obvious.
It is important to note that Mr. Faber’s calls are 5 to 10 years out and not imminent. In fact, even my most dire predictions are not right around the corner and even I realize that the actions taken by the Fed have staved off the major problems for a couple of years. However, what Mr. Faber and I do know is that since nothing has changed and therefore we are doomed to repeat the same fate again, but only worse with the chances of a total collapse being even greater than ever. So go ahead Congress, pass healthcare, hell give us all a billion dollars, what does it matter since we will not pay any of our creditors back anyhow.
Be the First to Comment 
Subscribe to Annuity IQ's Feed
