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B4 the Bell Fryday May 14, 2004


Guest yobob1

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Guest yobob1

:) Welcome to the best balanced thread in the universe. :)

 

Busy at work, so daytime posting is restricted. Those of you in the back saying "Thank God!" can leave now. :lol:

 

I wonder how much Rumsfeld's little morale booster trip to Iraq for lunch cost us? If Clinton were still in office I suspect Rumsfeld's plane might have had a real bad landing by this point in time. Ah the good old days.

 

Doc said that in an inflationary bear market stocks and bonds go down together, which obviously should be true. And there can be little question on both a pure monetary basis and a current price basis that we have inflation, at least for the moment. That's the perception which is all that's necessary. There are three things however that must change to assure that inflation is indeed the outcome. Incomes must begin to rise at least as fast as prices and debt must expand at a pace faster than previous rates of increase.

 

I have serious doubts that incomes will rise at all and indeed the pressures for falling incomes seem to increase daily. Many of the airlines for example need wage concessions to avoid bankruptcy. Auto workers signed onto contracts with little wage increase over the next three years as well as giving the companies much more latitude in plant closure's and lay-offs. Sleddogs daily posting of job losses, many of which are relatively good paying and benefit rich manufacturing and local government jobs, also point to falling incomes. Yes they might find another job, but very likely at lower wages and a good chance of being without much of a benefit package.

 

Secondly, debt levels are already at historic levels by any metric. With key rates rising, it would appear to me that increasing debt levels from here would be a Herculean task. Personally I think the odds of the Feed raising the fed funds rate are very close to zero for the foreseeable future. Yes everyone and their brother is out jawboning rate increases to as much as 3 or 3.5%. That would absolutely wipe out the financial markets, so it ain't gonna happen anytime soon. Oh they might bump a quarter point just to show the world they haven't thrown out their WHIP buttons, but they really don't mean it. They know what the real score is and they're still terrified of deflation, and rightly so.

 

The other little thing that is a heavy lid on inflation is spare capacity. At the reported 76.5% +/- utilization rate they're about 5% shy of what would normally be considered the tipping point towards inflation. I also happen to believe that utilization is over-reported based on what I see around here and from other reading. Just so you know, around here is Boise, Idaho which is neither a "severly depressed" nor "booming" economy. I would say our economy around here is a pretty good measure of the aggregate. The only thing keeping our econmy from going TU is construction. Even a small contraction in that would send us reeling.

 

And in reality that's where this whole mess is. Any small contractions at any number of points will take this puppy down fast and hard. We're all living on the edge of a very sharp knife. The global economy is severely over-leveraged but in order to just maintain the status quo that leverage must continually expand at a rate fast enough to keep pace with the ever expanding number of "bets" gone bad. To get a "revival", that leverage must expand much quicker than the pace of failures. The problem is, the loose money policies required for such an expansion soon runs out of credit worthy entities and in order to maintain the growth credit quality requirements must constantly be degraded to ensure sufficient volume. You can see it in the spreads in emerging market, junk bonds, munis, asset backs and corporates. You can also see it particularly in home lending where currently you no longer have to prove income, bad credit is no hurdle, and income allocation ratios have been thrown out the window. I'm not even sure if you need to prove you're breathing anymore. Your dog is instantly qualified for a $500,000 mortgage.

 

What happens, is there was a very good reason for risk to be approptiately priced, why it took 20% down for a conventional mortgage and your PITI couldn't consume more than about 30% of income, why people with bad credit couldn't load up a truck full of furniture and not make payments for 2 years. Why? Because these people, countries, cities, junk corporations have proven time and time again that a high percentage of them will never repay those loans, which is exactly what will happen in good times or bad. In addition with the pressures on the labor market in the US, the number of previously credit worthy people who fall from grace is rapidly rising as they took on too much debt based on an income, or incomes in most households these days, that no longer exists.

 

There are those around here that say, yeah but the government can just borrow enough to keep the ball rolling. First off, the government wastes about 90% of what it spends, and most importantly, we're already running a near trillion dollar deficit when one takes into account the Social Insecurity surplus and the off budget items. In order to replace the stimulus from re-fi and tax rebates/cuts that has now passed, I think would require another annual near trillion dollars of borrowing by the government. Remember, we can't just maintain a status quo we must constantly expand at a sufficiently high rate. Now what do you think would happen to rates if the US government tried to borrow an additional trillion dollars a year? What do you think would happen to the economy assuming rates rose to adjust for the additional borrowing. Unlike Japan we cannot finance this from our savings - we have none. Japan had the luxury of a culture steeped in the tradition of saving. We instead must borrow the savings and profits of the rest of the planet and since we're already borrowing about 80%+ of those, I don't know where it would be coming from. Maybe those UFOs in Mexico are from another planet willing to invest in the US government? Catch 22 once again.

 

We don't even need to get into the geopolitics of the moment or the likelihood of an impending contentious election. Those only add to the problems.

 

About 9 months ago, I stated on these boards that I thought we had about 15-18 months before the POR was hit. A few months back I stated that the lagging data would begin to confirm about the "edge of summer". Well we're here and April's retail sales reports (first downer in seven months) is beginning to reveal the truth, even though all of these reports are heavily massaged. My observations lead me to believe that May is shaping up to be worse than April overall. In fact unless something changes pretty quickly my time-frame could be shortened, but for now I'll stick with my roughly year end prognosis. Could I be wrong? Sure. Early on in my career I had several solid misses as well as many solid hits. What threw me at first was the lack of belief at just how far the fed and the government were willing to distort the economy. I knew they would throw a lot of weight into forestalling the decline (which only makes the fall later on worse) but I underestimated their resolve. They of course have only made the true underlying bubble, debt, far worse than it would have been had they simply taken the lumps early on. Now they have ensured the worst possible outcome and they have nearly reached the end of the rope. The fed is out of ammo, which is why they're jawboning constantly, and the government's ability to borrow going forward may well be constrained by rising rates. Increasing supply when the product on the shelf is going begging usually is not a smart move.

 

Oh, almost forgot, stocks will be up or down today. Actually I have my guess, but I won't publish it due to contrarian reasoning. :lol:

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I have no idea whether inflation is sustainable or not, but with the printing presses running all the time, I suspect that it is. As the Japanese have shown, if the public doesn't care, worthless debt can be propped indefinitely, with minimal deflation. So who knows.

 

The important thing, as yobob pointed out, is that the players now perceive that inflation is here. The bond market is normally two years behind the curve in terms of cathcing up with reality. Even if deflation were to arrive today, the bond market will continue to react as if inflation were here for two more years. Deflation hasn't arrived yet, so add an indefinite period to that.

 

Stock investors are even slower and stupider than bong investors. The stock market is usually six months to a year behind the bond market. Therefore, regardless of the facts on the ground, the stock market will behave as if in an inflationary environment for at least two and a half to three years.

 

Precious metals are in a cyclical bear within a secular bull. 2005 will be a roaring bull for gold and gold stocks. The worst is over on the downside, but there's lots of churning and basebuilding ahead, not without some additional pain. I'd buy the dips near the long term cmap projections in the Golden Stool.

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I'm reposting something Butterfield8 put on late on the last thread. Looks like someone may have been reviewing yesterday's discussion of peak oil on B4 the Bell:

 

A Crude Shock

By PAUL KRUGMAN

Published: May 14, 2004

 

... if there is a major supply disruption, the world will have to get by with less oil, and the only way that can happen in the short run is if there is a world economic slowdown. An oil-driven recession does not look at all far-fetched.

 

http://www.nytimes.com/2004/05/14/opinion/14KRUG.html?hp

 

Again deficit spending is the way to go in California:

 

Deal-Cutting Schwarzenegger Opts to Put Off the Pain

By Peter Nicholas

Times Staff Writer

 

May 14, 2004

 

Under his revised budget, the gap between what the state spends and what it takes in may persist in future years. In fact, the deficit may be tougher to eliminate down the road because of some of the spending commitments Schwarzenegger is making now.

 

http://www.latimes.com/news/local/la-me-an...-home-headlines

 

 

Great rant yobob1. Like I said yesterday, the first reaction to the oil shock will be deficit spending and monetary inflation. Will it work? Of course not, but that does not mean that they won't try.

 

Upcoming economic conditions will deteriorate fast because ther are two shocks ongoing now: First the shock of Japan's withdrawal from the Treasury market starting in April, and second the oil shock starting in May.

 

 

 

 

Tanks yobob1.

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Uncle Al, the Pied Piper of Fiat:

 

http://news.yahoo.com/news?tmpl=story&u=/a..._ge/greenspan_3

 

"Greenspan's First Passion Was Music

 

A young Greenspan toured the country for years with a dance band in hopes of becoming another Benny Goodman. But doubts about his abilities put him on a wildly different career path, one that led to chairmanship of the Federal Reserve (news - web sites). It's a position that wields enormous power over the $11 trillion U.S. economy."

 

Sigh... If only they'd been more talented, Hitler could have been a painter and Greenspan could have been a saxophonist. Maybe the world would have been spared some pain.

 

Or not. ;)

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The economy in the US is probably already in the process of slowing due to the drying up of morgage refi and high food and energy costs. Incomes are clearly not growing and there is a fair amount of capacity slack - the slack may well be in useless capacity , I mean if there is slack in capacity to produce pink jockey shorts , does this really count?

I would suggest the banning of the casual use of the word " inflation". As with a lot of public debate these days a lot of words are bandied about without defining them carefully ( evildoers, freedom,productivity come to mind as well) . the issue with "inflation" is who is asking ? and why do they care?

If we are concerned about how happy the average consumer is - then my guess is higher gas, food and healthcare costs = unhapiness. Lower wages , lower house prices, lower stock prices = unhappiness.

if we are concerned about the large creditors ( eg BOJ, Bank of China), then , i would guess - their ultimate use of dollars is for commodities , so again high energy, food, raw material costs = unhappiness.

Nobody except economists/ FED care about core CPI the way it is constructed.

Cost push inflation caused by supply constraints in energy and food relative to growing demand in Asia will be hard to supress with Fed rate increases - therefore they won't do it for this reason.

I am struggling with whether treasuries will go up or down from here. My sense is there may well be a flight to safety as all other assets collapse. Generalised inflation may not occur as wages stay depressed, but prices of a lot of things will nevertheless be going up.

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Testing Lows

 

And Patience

 

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Another great post Yobob

Thanks for your time and efforts publishing your thoughts.

 

On another note;

I have had a religious experience trying to withdraw CASH from the bank that is mine. A friend suggested I open up a line of credit and watch the problem disappear. My distaste for the banks has hit all time highs.

 

Ask yourselves what would happen if a crisis were to develop in Als hedge fund. The sooner I remove my reserves from fractional reserve banking the better.

 

Marias ringing of the bell coudnt have come at a better time.

Going to be another day to remember.

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Liquidity appears to be drying up quite quickly;

 

Earlier this wek China was only able to sell 65% of their bill auction

 

European high-yield bonds had their worst week since February as companies were forced to scale back or cancel offerings.

 

According to WSJ Russia's corporate bond market is a bid wanted situation. (i.e. there is no bid-ask spread because the bid is 0)

 

I would add that when MO fell down the stairs this week the stock was trading very wide ($0.75-1.25 bid ask spread) for hours. Maybe cueball needs to have a conversation with the specialist.lol If I see this happen to one or two other big liquid stocks I'm getting the hell out of dodge

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