Economic Commentary

[quote author="Nude" date=1253163577][quote author="BondTrader" date=1253162286]Equities continued to rise as today?s economic data supported yesterday?s comment by Fed Chairman Bernanke that ?the recession is very likely over.? The S&P500; gained 1.5%, and was led by financials (REITs) and the energy sector.



CPI data showed that headline consumer prices were slightly stronger than expected, rising by 0.4% M/M, with the annual inflation rate rising to -1.5% Y/Y, and that core consumer prices were in line with consensus, up 0.1% M/M, with the annual rate of core inflation easing to 1.4% Y/Y. The overall report <strong>suggests that the deflation threat is now behind us, and that core prices will remain contained for some time, allowing the Fed considerable room to maintain the current accommodative monetary policy </strong>for the time being.



On balance, the Industrial Production and Capacity Utilization report suggested an improvement in the pace of economic activity and was consistent with the surge in the ISM production sub-component. Capacity utilization, however, continues to sit near the all-time low of 68.1% reached in June and speaks to the large amount of slack that still exists in the economy.



<strong>Oil jumped above $72</strong> on bullishness as Department of Energy data showed that crude supply fell to its lowest level since January.</blockquote>


Excuse me BT, but isn't that the recipe for stagflation?</blockquote>


Yep, it sure looks like we are heading down that road. We all knew unemployment rate will stay high for another 1-2yrs to say the least. At the same time inflation is creeping up given a collasping dollar and high commodities prices. As I mentioned several times, forget about government stats and keep in mind inflation aint just about price levels, it's purchasing power, the dollar we earned IS losing value quickly, simply because of the restless printing job from the Fed, the more they print, the lower the dollar will go. China has been secretly unloading anywhere from $50-100bn US dollar per months the last 6 month while buying gold and other hard assets, and the talking heads on CNBC are all SURPRISED why dollar gone down so much.

Also that's what you got for having too many government controlled Zombies (C, AIG, BAC, FNM, FRE, GM....) putting a big dragging on the whole economy in the next decade, or 2.
 
Excellent lunch time reading from David Rosenberg (Ex Merrill Chief Economist)





MR. MARKET IS ON STEROIDS



Not much more to say. The S&P 500 is now up more than 60% from the lows, which is truly amazing and kudos to those who called it. But the question is whether the fundamentals will ever catch up to this level of valuation ? usually after a 60% rally, we are fully entrenched in the next business cycle. Never before have we seen the stock market rise so much off a low over such a short time period, and usually at this state, the economy has already created over one million new jobs ? during this extremely flashy move, the U.S. has shed 2.5 million jobs (as may as were lost in the entire 2001 recession).





It is acknowledged by all the pundits that the recession is over, even though we can see that only industrial production and maybe with the help of the government, real sales, but employment and real income are still falling from where we sit. So dating the end of the recession as the NBER did in late 2001 is one thing just because industrial activity troughs, but it took several quarters for income and employment to bottom back then, so we had a listless recovery in 2002 and a stock market that did not really embark on a sustainable rally until mid-2003. A recession coming to an end is one thing, but sustainable market rallies require solid recoveries. The stock market right now believes that we are going to see that V-shaped recovery, but we remain skeptical since post-credit bubble collapses typically see consumer spending, which is over 70% of GDP right now, sputter even as other line items, such as government spending, kick into gear.





In any event, it?s not even worthwhile debating the economic outlook at this juncture. It?s about how much good news is already being discounted in the equity market, and believe it or not, there is more good news being priced in today than there was bad news being discounted back at the March lows. This is an overbought and overpriced equity market and we remain of the view that there is too much risk and too much growth being discounted to be a full participant.





It is not apparent today, to be sure, but it will be ? if not by the fourth quarter, then certainly by the first quarter of next year ? that there is not going to be normal recovery following what was an abnormal credit-induced recession. We say that knowing how forgiving Mr. Market is today over any adverse data points, and how giddily it is responding to positive news. We have preferred to express any pro-cyclical views in the fixed-income market where corporate bonds provide better income than a 2% dividend yield, better downside protection if there is a relapse, and a more reasonable assessment of the economic climate that lies ahead.





By the time the U.S. stock market rallied 60% off the October 2002 lows, we were into July 2005. We were into the third year of the expansion. Go back to the onset of the prior bull market in October 1990 ? by the time we were up 60%, it was January 1994! It took almost a year to accomplish this feat coming off the 1982 lows too and back then, we had lower interest rates, lower inflation, lower tax rates, lower regulation and an eight-year uninterrupted economic expansion to sink out teeth into. So we are witnessing something truly without precedent ? a 60% surge off a low in six months. This didn?t even happen in the 1930s!





The counter-argument, of course, is that the market this time around is coming off massively oversold lows. Not true. The market was far more oversold and the internals were much more compelling at the 1982 and 1990 troughs. The multiples on price-to-earnings and price-to-book, not to mention dividend yields, were much more attractive at the other lows.







No doubt we had a financial scare at the March trough, but valuation at the time was priced for -2.5% real GDP growth and $50 EPS, which is hardly Armageddon even if a bad outcome. And while it is true that the S&P 500 slid 60% from peak-to-trough, we have news for you ? so did corporate earnings.







In any event, this is the same market that lost its marbles in 2007, hitting fresh all time highs by October of that year with visions of new definitions of global liquidity, and at the time it was pricing in 5.5% real economic growth for the coming year. Instead, we had zero growth on average. Mr. Market is a discounting barometer to be sure, but he is not always right.



To reiterate, while acknowledging the obvious, which is that there is more momentum in the economy and the markets over the short-term than we had thought would be the case. However, our overall fundamental views and our outlook for 2010 have not changed at all and neither has our investment philosophy. If the S&P 500 was hovering closer to 800 or 850 right now, we could see the case for equities, but the market has simply moved too fast and is way ahead of the fundamentals, even if they do turn positive. Understanding that equities are a long duration asset, we have found over the years that investors have shortened their time horizons, and while it has become fashionable to price the market on an earnings stream three years out, the error term around any profit projection that far out is extremely wide. All we know is that as far as the coming year is concerned there is currently more room for disappointment than there is for upside surprises.





There is too much growth priced into the market and equities remain highly risky. Then again, this is a market that is ?all in? on the V-shaped recovery view and it will likely take some shockingly weak data points to shake this conviction. By and large, the data are coming in above consensus estimates and there could well be enough of a spillover into 4Q to prevent a complete relapse, thought 2010 remains a wild card. We also cannot underestimate the extent to which the government, having invoked multiple stimulus measures, from becoming even more aggressive. We are hearing rumblings that not only will the $8,000 first-time homebuyer tax credit be extended beyond the November 30 expiry date, but that the cap will be raised significantly. Damn the torpedoes, full steam ahead ? there?s a mid-term election to fight in 2010.





Sentiment is clearly bullish, which normally would indicate an overbought market, but as we said earlier, these are far from normal markets. According to the latest Investors Intelligence poll, bulls command a 47.8% share of the respondents and bears are at 24.4%. Only 27.8% are in the ?correction? camp, which is startling considering (i) how extended this rally is, and (ii) the time of year we are in.







We noted yesterday that the Nikkei posted six 20%+ rallies since its bubble burst in 1990 and no fewer than four 50%+ rallies. Indeed, you can count 423,000 rally points from all the up-days since the secular bear market began in 1990 and yet the index is down 74% since that time. So actually there is nothing in this flashy move off the lows in the S&P 500 that is inconsistent with a pattern of a bear market rally ? this is not the onset of a whole new sustainable bull market, in our view. These are rallies than can only be rented ? not owned, and are purely technically-motivated and momentum-driven. They are not premised on improved fundamentals, despite economic data that are skewed to the upside by rampant government intervention. Just remember ? nobody ever built more bridges or paved more river beds to skew the economic data than the LDP did in Japan for much of the 1990s.
 
<a href="http://www.stockhouse.com/Community-News/2009/Sept/17/The-myth-of-the-jobless-recovery">The myth of the jobless recovery</a>



There is no real economic growth without job creation



Like all good parrots, the talking heads in the North American media can be counted upon to regurgitate buzzwords over and over again ? even when they don't have the faintest idea what those words mean. The latest example of mindless droning from these pseudo-reporters is that the U.S. economy is headed for a ?jobless recovery?.



As with all oxymorons, no intelligent person would/should be foolish enough to add these buzz-words to his/her lexicon. By definition, an ?economic recovery? means a net increase in economic activity, which also dictates positive wealth generation. When an economy is producing wealth, this must also result in job-creation.



We can invent scenarios where such job creation is delayed. For example, an economy with a large, but mostly automated manufacturing sector could see a surge in demand (and production) as economic conditions improve. Over the short term, it is certainly possible that such an economy could sell most of its production abroad. Thus, an economy generating a significant increase in net wealth could temporarily produce little new employment in the domestic economy.



However, this must only be a temporary situation. Though the ?trickle down? theory of right-wing capitalists has been thoroughly discredited as a model for economic growth, there is a kernel of truth buried within this propaganda. When an economy produces significant amounts of wealth, even if that wealth creation is focused primarily in the hands of the wealthiest members of society, these people spend some of that money ? creating wealth and employment opportunities for the ?little people? further down the economic ladder.



The ?trickle down? theory fails as an economic model for the same reason the phrase ?jobless recovery? fails the test of rationality. When only the wealthiest people in a society have disposable income (people with enough wealth that they don't need employment income to keep spending), it is mathematically impossible to have a robust economy.



The reason for this revolves around an economic concept known as the ?marginal propensity to consume?. While this sounds complicated, like most jargon, it is actually quite a simple and obvious notion when explained in ordinary English. Basically, the lower a person's level of wealth/income the more they spend out of each new dollar they receive.



Thus poor people have a marginal propensity to consume of ?1? (or 100%), because due to their minimal wealth, they are forced to spend their money as fast as they receive it ? just to survive. Conversely, at most, a billionaire might have a marginal propensity to consume of 0.1 (or 10%) - and likely far less ? since these people have so much wealth (and consumer goods) already, that there is little need or motivation to spend any more each time their wealth increases by another dollar.



Plutarch, the Greek philosopher, uttered this famous quotation over 2,000 years ago: ?An imbalance between rich and poor is the oldest and most fatal ailment of all Republics?. The reason this is true is based upon our marginal propensities to consume. When wealth is evenly dispersed in a society, this means that a high percentage of that wealth is in the hands of people with a high marginal propensity to consume.



These people spend a high percentage of each dollar they take in. And then the person receiving that dollar spends a high percentage of that dollar, and so on and so on...



Conversely, in a society where wealth is highly concentrated in a tiny percentage of the population (like the United States, today), only a small fraction of each new dollar of wealth that is produced gets spent. This small ?multiplier effect? dictates weak economic activity ? since instead of being spent and re-spent, money collects in large pools of ?idle wealth?, which produces no economic benefit for a society.



Nowhere are these economic principles truer than in a consumer economy like the United States. With the exodus of manufacturing, the U.S. economy now produces little wealth. Therefore, for well over a decade this economy has become totally dependent on ultra-high levels of consumption to sustain the economy. In fact, for over two years, the U.S. as a whole had a negative savings rate ? meaning a marginal propensity to consume of greater than 100%.



As we have seen (and as any child could predict), this was totally unsustainable. However, what makes this brief period of insanity truly frightening is that with an extremely heavy concentration of wealth, during the time when the economy had a negative savings-rate, the wealthy were still socking-away billions of dollars per year ? meaning those at the bottom were spending much more than 100% of their incomes.



This brings us back (finally) to the mythical ?jobless recovery?. Apart from the phony ?economic growth? of the U.S. tech-bubble, followed by the even more-fraudulent housing bubble (where illusory ?wealth? produced temporary jobs), all that Americans have experienced for roughly twenty years are ?jobless recoveries?.



However, as I have illustrated with fundamental principles of economics (which are based upon both mathematical and logical certainty), you cannot have a healthy economy (i.e. a real ?recovery?) without the masses having significant spending power ? since at no time in human history has the spending of the wealthy been enough to produce a healthy economy (this was old news 2,000 years ago).



Therefore, if the masses don't have jobs, then the only way they can spend money is to borrow money. Here, at last, we expose the truth of the ?jobless recovery?: in previous years, Americans were able to create the (temporary) illusion of economic health through excessive borrowing ? and then spending those borrowed dollars virtually as fast as they borrowed.



Essentially, saying ?jobless recovery? became a sort of self-fulfilling prophecy, where like Pavlov's Dogs, Americans would automatically begin spending again (with borrowed dollars) as soon as they were told the economy had recovered.



There have been no ?jobless recoveries? in the past ? not in the United States, or anywhere else in the world. All that happened in previous ?jobless recoveries? is that Americans mortgaged their futures (and the futures of their children) through dramatically increasing their debt levels, and then recklessly spending those borrowed dollars on mostly pointless consumption.



As stated before, this is completely unsustainable ? and now, today, that binge is over. Americans have maxed-out their credit. The days of borrowing-and-spending are over. As a result, the only thing which can pull the U.S. economy out of what appears to be a terminal, downward spiral is real economic growth ? and the jobs which always accompany such growth.



When the talking heads (and the propagandists who put those words in their mouths) say the words ?jobless recovery?, what they are really saying is ?no recovery at all?. While in past years, the magic of credit cards could conceal that false propaganda, that magic is a thing of the past.



Today, the absurdity of the ?jobless recovery? is about to be exposed in the U.S. once and for all ? with sufficient clarity that even the mindless, media talking-heads will be able to see the inherent falsehood in this myth.



Read more Stockhouse articles by Jeff Neilson
 
I know fundamentals hardly matter in today's market, but still want to put things in perspective after 6mos rally;



? The trailing price-earnings ratio on operating EPS is 26.5x. At the October

2007 highs, it was 18.8x. In addition, when the S&P 500 is trading north of a

26x P/E multiple on trailing operating earnings, history shows that at these

high valuation levels, the market declines in the coming year 60% of the time.



? The trailing price-earnings ratio on reported EPS is 184.2x. At the October

2007 highs, it was 23.4x. In fact, just prior to the October 1987 crash, the

P/E ratio was 20.3x (not intended to scare anyone).



? The price-to-dividend ratio is 53x, where it was at the 2007 highs. Again, the

market is trading as it if were at a peak for the cycle, not any longer near a

trough. Once again, and we don?t intend to sound alarmist, the price-todividend

ratio just prior to the 1987 crash was 12x, and at the time, the S&P

500 was viewed in many circles to be at an extended extreme.
 
? It?s quite the active week ahead. We have the G20 meeting on September 24-

25 in Pittsburgh where investors will be watching for any clues over how global

bank regulation in the future is going to look (executive pay curbs, de-linking

commercial and investment banking, more stringent capital adequacy rules,

lower acceptable leverage ratios). We also have the FOMC meeting on

September 22-23 and the question is the extent to which the Fed sounds an

optimistic chord in the press statement and whether there will be a reference to

more mortgage purchases or whether the emphasis will be on exit strategies

from the unprecedented credit easing moves that have taken place.



? It is a very light week on the data front but what?s coming out has the ?housing label?

all over it: July FHFA home prices on Tuesday; August existing home sales on

Thursday; and new home sales on Friday (along with the final University of

Michigan sentiment data for September and August durable goods orders).

That Lennar stated that its 3Q loss doubled on sustained revenue losses (-42%

YoY) is one sign, at least, that not every slice of the real estate sector is

performing as well as everyone seems to think ? only the low-end, really, which

is on life-support from the slate of government assistance programs.



? September?s light-vehicle sales rate will fall to 8.8 million units, consumer auto site Edmunds.com said.

That would be the lowest rate in nearly 28 years, tying the worst demand on record.
 
?FDIC could seek bailout from banks - Yahoo! Finance , FDIC can either get money from the member banks or tap its 100bn line of credit with Treasury (Oh, just tap into the Treasury, everyone else has lately, right?)



?Weekly US Railroad Carloading Decline Accelerates, Hits 1993 Levels - The latest data out of the Association of American Railroads has been released. While a month ago the weekly YoY decline hit a very troublesome -17.1%, the last weekly decline added another almost 3% to the deterioration, and is now down -19.8% for Week 36. Cumulative traffic decline is flat at -18.4%. Including intermodal traffic or ton-miles in the calculation does nothing to improve the conclusion. Not a single "carload originated" category has improved, and in fact even the relatively stable ones from the prior update have slumped.



Market still looks very toppy and this buy on the dip mentally won?t go away easily.
 
Over the last 5 years, the major stock market indexes have all plunged while Mrs. Nude and I vacation in SoCal. The only exception was the year we got married, 2006. I'm not claiming a causal relationship, just a coincidence.



This year we will be in California for only a few days as we bop to Albuquerque and back, specifically Sept. 30th, Oct. 1st, 7th, 8th, 9th. Invest accordingly ;)
 
Mish is really bearish.



<a href="http://globaleconomicanalysis.blogspot.com/2009/09/buy-dip-mentality-fully-entrenched.html">"Buy The Dip" Mentality Fully Entrenched</a>



Anyone following the markets knows there is a huge underlying bid.



Among individual investors as well as fund managers ?Buy the Dip? Mentality Prevails.



Claymore's Schwager believes the high levels of cash on the sidelines coupled with increased risk-taking will result in buy-the-dip behavior and provide a downside buffer. The ?buy the dip? mentality was evident last week after investors surfaced following sharp losses on the prior Friday (8/14) and then again last Monday. As mentioned in recent weeks, there were large levels of cash on the sidelines.



According to the Investment Company Institute (ICI) there was $3.6 trillion sitting in money market mutual funds during the week ended August 19. While cash levels are down from the $3.9 trillion reached in mid-January, the current level remains 1.5 times higher than the 10-year average.



This, coupled with anecdotal evidence that large institutional investors remain underweight in equities, seems to be fostering a fear-of-missing-the-rally mentality. From a portfolio manager?s perspective, the second worst thing to actually losing money is underperforming your benchmark. Being underweight stocks and overweight cash would generally hold back performance in an environment of rapidly rising stock prices.



Sideline Cash Myth



Anyone advising clients to "buy the dip" based on sideline cash shows a fundamental lack of knowledge about how markets work.



For every buyer of securities there is a seller except at IPO time, secondary offerings, ect. Thus, it is virtually impossible for money to come into the market in normal day-to-day trading transactions.



For example: If one firm invests $100,000 in equities, then another firm will be selling $100,000 million in securities. The end result of the transaction is "sideline cash" moves from firm A to firm B.



Furthermore, because of monetary printing, one should expect the amount of "sideline cash" to rise over time. Sideline cash is higher than it was 10 years ago and will be higher 10 years from now barring a huge number of IPOs or secondary offerings that would suck up some of that sideline cash or a period of heavy monetary draining by the Fed.



Why Is The Market Going Up?



The market is going up because sentiment has changed. Buyers have become more aggressive, in relation to sellers. Sellers want more for their shares. There is a near panic "have to get in" attitude among retail investors.



Finally, rather than looking at sideline cash numbers in aggregate, one should look at Mutual Fund (MuFu) cash levels instead.



Please consider Rally in 6th Inning or Top of the 12th?



The opinion that the market can and will continue to rise is becoming ever more widespread, and ironically the bulls ALL say the same thing, namely "everybody else is bearish".



Mutual fund (MuFu) managers are not bearish, that much is certain. At 4.2%, the the MuFu cash-to-assets ratio is one of the lowest in history, in fact lower than at the 2000 top, and only a hair above the 2007 low. Those stats (from a friend) are from July. Given the continued rally, MuFu cash on hand has probably decreased even more in August.



The Dow's dividend yield is now at the level of the the 1968 top and the September 1929 top. Good luck with that!



Unlike sideline cash numbers in aggregate, MuFu cash levels might be considered a measure of sentiment, and if anything, those cash levels would suggest most fund managers are already "all in".



Investors Optimistic



Today the Financial Times is reporting Investors optimistic on rally.



Investors became increasingly willing in the third quarter to bet that the current rally driven by rising appetite for risky assets has further to go.



Research by Barclays Capital, drawing on opinions from hedge funds, asset managers and traders from institutions across Europe, Asia and the US, showed that more than half of the 820 respondents felt the rally seen in the third quarter was sustainable.



This was in marked contrast to the wealth manager?s last investor sentiment survey published in June ? when the majority of investors interviewed believed the then-powerful rally from March lows was a short-term correction.



Now, only 19 per cent believe they are still witnessing a bear market rally and are expecting a significant downward correction in the coming months.



?Recent data have surprised to the upside and more and more bears who were previously sitting on the sidelines have capitulated and are joining in.?



Insiders Sell Hand Over Fist



Meanwhile, as retail investors and fund managers chase a rally running on extreme sentiment, Corporate insiders continue to increase the pace of their selling.



The bravest face you can put on corporate-insider behavior right now is to point out that they're often early -- anticipating market moves by as much as 12 months in advance.



But otherwise the message from the insiders is rather sobering: They are selling a whole lot more of their companies' stock than they are buying. The net difference is even larger than it was two months ago, when I noted that insiders were already selling at a greater pace than at any time since the top of the bull market in the fall of 2007. [See Insiders Are Selling - July 28, 2009]



Consider the latest data from the Vickers Weekly Insider Report, published by Argus Research. For the week ended last Friday, according to Vickers, insiders sold 6.31 shares for every one than they bought. The comparable ratio two months ago was 4.16-to-1, and at the March lows the ratio was 0.34-to-1.



As Vickers editor David Coleman puts it in the latest issue of his newsletter: "Given the dramatic decline in our sell/buy ratios over a relatively short period of time and the robust rally we have seen in the broad market averages, we expect the overall markets to trade flat to downward in the intermediate term -- and with increasing volatility. Overall insider sentiment is bearish by nearly all metrics we track."



As Hulbert mentioned, insiders are not always right. Moreover one should not use insiders buys and sells as a timing device but rather a gauge of sentiment, and that sentiment is as extreme as it gets.



Thus, suggestions to "Buy the Dip" based on sideline cash not only shows a lack of understanding about how markets work, they also show a lack of understanding about how extreme sentiment is among retail investors and fund managers, even as insiders (who likely know much more about business fundamentals) are selling hand over fist.



Risk is not high, it is extreme.



Mike "Mish" Shedlock

http://globaleconomicanalysis.blogspot.com
 
Mish and CR answer <a href="http://globaleconomicanalysis.blogspot.com/2009/09/when-will-fed-start-hiking.html">when will the Fed start hiking</a> and break all the Gold Bugs hearts.
 
[quote author="BondTrader" date=1253666725]



... this buy on the dip mentally won?t go away easily.</blockquote>


Agreed, but what is the cash position of the funds presently?
 
[quote author="no_vaseline" date=1253681666]Mish and CR answer <a href="http://globaleconomicanalysis.blogspot.com/2009/09/when-will-fed-start-hiking.html">when will the Fed start hiking</a> and break all the Gold Bugs hearts.</blockquote>


Why do gold bugs care when the fed will start hiking?
 
[quote author="awgee" date=1253685993][quote author="no_vaseline" date=1253681666]Mish and CR answer <a href="http://globaleconomicanalysis.blogspot.com/2009/09/when-will-fed-start-hiking.html">when will the Fed start hiking</a> and break all the Gold Bugs hearts.</blockquote>


Why do gold bugs care when the fed will start hiking?</blockquote>


Because higher rates tend lower inflationary expectations, and may serve to buoy the dollar.
 
<a href="http://www.latimes.com/classified/realestate/news/la-fi-harney20-2009sep20,0,2560658.story">Homeowners who 'strategically default' on loans a growing problem</a>
 
[quote author="CapitalismWorks" date=1253686596][quote author="awgee" date=1253685993][quote author="no_vaseline" date=1253681666]Mish and CR answer <a href="http://globaleconomicanalysis.blogspot.com/2009/09/when-will-fed-start-hiking.html">when will the Fed start hiking</a> and break all the Gold Bugs hearts.</blockquote>


Why do gold bugs care when the fed will start hiking?</blockquote>


Because higher rates tend lower inflationary expectations, and may serve to buoy the dollar.</blockquote>


That makes sense. Are there any gold bugs who have expressed concern? And if so, which gold bugs?
 
[quote author="awgee" date=1253696108]That makes sense. Are there any gold bugs who have expressed concern? And if so, which gold bugs?</blockquote>


No. Most of them are for abolishing the Fed and other such nonesense and won't be trifled with anything like, oh I dunno, history...
 
[quote author="no_vaseline" date=1253699672][quote author="awgee" date=1253696108]That makes sense. Are there any gold bugs who have expressed concern? And if so, which gold bugs?</blockquote>


No. Most of them are for abolishing the Fed and other such nonesense and won't be trifled with anything like, oh I dunno, history...</blockquote>


[quote author="no_vaseline" date=1253681666]Mish and CR answer <a href="http://globaleconomicanalysis.blogspot.com/2009/09/when-will-fed-start-hiking.html">when will the Fed start hiking</a> and break all the Gold Bugs hearts.</blockquote>


I see. So, actually, you have no facts to support your suppositions and once again are making up nonsense because you have no supportable position.
 
<a href="http://www.nakedcapitalism.com/2009/09/the-origin-of-the-u-s-dollar-as-legal-tender-and-its-link-to-depression.html"> The origin of the U.S. dollar as legal tender and its link to Depression </a>
 
[quote author="awgee" date=1253709596][quote author="no_vaseline" date=1253699672][quote author="awgee" date=1253696108]That makes sense. Are there any gold bugs who have expressed concern? And if so, which gold bugs?</blockquote>


No. Most of them are for abolishing the Fed and other such nonesense and won't be trifled with anything like, oh I dunno, history...</blockquote>


[quote author="no_vaseline" date=1253681666]Mish and CR answer <a href="http://globaleconomicanalysis.blogspot.com/2009/09/when-will-fed-start-hiking.html">when will the Fed start hiking</a> and break all the Gold Bugs hearts.</blockquote>


I see. So, actually, you have no facts to support your suppositions and once again are making up nonsense because you have no supportable position.</blockquote>


Did I miss a post or something? Why are you two arguing like the Hatfields and the McCoys? Can't there be deflation in consumer spending leading to a drop in prices AND inflation relative to the basket of currencies?
 
[quote author="Nude" date=1253711177][quote author="awgee" date=1253709596][quote author="no_vaseline" date=1253699672][quote author="awgee" date=1253696108]That makes sense. Are there any gold bugs who have expressed concern? And if so, which gold bugs?</blockquote>


No. Most of them are for abolishing the Fed and other such nonesense and won't be trifled with anything like, oh I dunno, history...</blockquote>


[quote author="no_vaseline" date=1253681666]Mish and CR answer <a href="http://globaleconomicanalysis.blogspot.com/2009/09/when-will-fed-start-hiking.html">when will the Fed start hiking</a> and break all the Gold Bugs hearts.</blockquote>


I see. So, actually, you have no facts to support your suppositions and once again are making up nonsense because you have no supportable position.</blockquote>


Did I miss a post or something? Why are you two arguing like the Hatfields and the McCoys? Can't there be deflation in consumer spending leading to a drop in prices AND inflation relative to the basket of currencies?</blockquote>




Price deflation can and has been occuring in some things and price inflation in others. This is exactly what I have been saying for a few years now. And also that is the problem with referring to price increases and decreases as deflation and inflation.

Price decreases will occur in assets, all the stuff you own.

Price increases will occur in consumables, all the stuff you need to live.
 
[quote author="awgee" date=1253709596][quote author="no_vaseline" date=1253699672][quote author="awgee" date=1253696108]That makes sense. Are there any gold bugs who have expressed concern? And if so, which gold bugs?</blockquote>


No. Most of them are for abolishing the Fed and other such nonesense and won't be trifled with anything like, oh I dunno, history...</blockquote>


[quote author="no_vaseline" date=1253681666]Mish and CR answer <a href="http://globaleconomicanalysis.blogspot.com/2009/09/when-will-fed-start-hiking.html">when will the Fed start hiking</a> and break all the Gold Bugs hearts.</blockquote>


I see. So, actually, you have no facts to support your suppositions and once again are making up nonsense because you have no supportable position.</blockquote>


I could make the same accusation of you. Neither of us a have a crystal ball, and both of us are postulating what will happen next.



Your argument seems to be that inflation (or hyperinflation) is a foregone conclusion because 1) the Fed was irresponsible and printed all that money and 2) it will be unwilling or unable reigning in that liquidity using the tools it has at it's disposal (the Federal Funds rate, Reserve Requirements, or Open Market Operations).



My arguement is that inflation is contained because 1) the money the Fed printed got used to backstop "Zombie" banks and essentially is pouring money down a black hole and isn't available to lend and 2) the Fed can use the tools to fight inflation as they did in 1980-1983 and 3) gold is only surging because the dollar is getting pounded via the carry trade (nearly the same problem as 1981-83) and 4) the Gold Bugs are gonna get kneecapped for their trouble when the Fed reverses course.



Just because it happened 30 years ago doesn't mean it can't happen again.



<img src="http://www.bullnotbull.com/images/graphics/gold-1980-2.gif" alt="" />



<a href="http://www.bullnotbull.com/archive/gold1980.html">http://www.bullnotbull.com/archive/gold1980.html</a>



1979-01-01 10.07

1979-02-01 10.06

1979-03-01 10.09

1979-04-01 10.01

1979-05-01 10.24

1979-06-01 10.29

1979-07-01 10.47

1979-08-01 10.94

1979-09-01 11.43

1979-10-01 13.77

1979-11-01 13.18

1979-12-01 13.78

1980-01-01 13.82

1980-02-01 14.13

1980-03-01 17.19

1980-04-01 17.61

1980-05-01 10.98

1980-06-01 9.47

1980-07-01 9.03

1980-08-01 9.61

1980-09-01 10.87

1980-10-01 12.81

1980-11-01 15.85

1980-12-01 18.90

1981-01-01 19.08

1981-02-01 15.93

1981-03-01 14.70

1981-04-01 15.72

1981-05-01 18.52

1981-06-01 19.10

1981-07-01 19.04

1981-08-01 17.82

1981-09-01 15.87

1981-10-01 15.08

1981-11-01 13.31

1981-12-01 12.37

1982-01-01 13.22

1982-02-01 14.78

1982-03-01 14.68

1982-04-01 14.94

1982-05-01 14.45

1982-06-01 14.15

1982-07-01 12.59

1982-08-01 10.12

1982-09-01 10.31

1982-10-01 9.71

1982-11-01 9.20

1982-12-01 8.95

1983-01-01 8.68

1983-02-01 8.51

1983-03-01 8.77

1983-04-01 8.80

1983-05-01 8.63

1983-06-01 8.98

1983-07-01 9.37

1983-08-01 9.56

1983-09-01 9.45

1983-10-01 9.48

1983-11-01 9.34

1983-12-01 9.47



<a href="http://www.forecasts.org/data/data/FEDFUNDS.htm">http://www.forecasts.org/data/data/FEDFUNDS.htm</a>



And here's a chart of the US$ against seven other currencies:



DEM JPY GBP FRF CAD CHF ITL AUD

1979 1.8329 219.140 0.47218 4.2544 1.1714 1.6627 830.86 0.89464

1980 1.8177 226.741 0.43029 4.2256 1.1692 1.6757 856.45 0.87824

1981 2.2600 220.536 0.49764 5.4346 1.1989 1.9642 1136.76 0.87021

1982 2.4266 249.077 0.57245 6.5721 1.2337 2.0303 1352.51 0.98586

1983 2.5533 237.512 0.65973 7.6213 1.2324 2.0991 1518.85 1.11001



Unlike Skippy, I like it when somebody challenges me. Now it's my turn to challenge Awgee.



- Is this enough evidence of what happens to currency exchange rates/gold prices when the Fed elects to use its toolbox? If no, what other evidence do you want (be specific, I'll gladly get it)?



- What's stopping 1979-1983 from happening again?
 
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