Guest Post: The Path To Hyperinflation
by Zero Hedge - May 30th, 2010 9:50 am
Courtesy of Tyler Durden
Submitted by Jordan Roy-Byrne of Wall St Cheat Sheet
As we’ve discussed recently, persistent deflationary forces do not augur for a repeat of Japan circa 1990s or the US in the 1930s. Instead, because of the inability of governments to finance their current and future debt burden (there is a dearth of domestic savings and global capital), deflationary forces will ultimately lead to severe inflation or hyperinflation. In today’s missive, we explain how this will happen but in various stages.
In the first stage, the economy enters a recession after a large credit bubble. The recession and end of the credit bubble lead to deflation. As a result, the US Dollar and US Treasuries outperform. Think 2008.
Policy makers (a term for interventionist bureaucrats) then provide stimulus via monetary easing and deficit spending. Gold (NYSE: GLD) and gold stocks (NYSE: GDX) outperform with silver not far behind. Think late 2008 to early 2009.
The economy gets a bump from the stimulus and economically sensitive markets such as commodities and stocks outperform. Think 2009.
This brings us to where we are now. The market is starting to sense that Europe’s debt burden is too high as its economies struggle to recover under the weight of excessive debt. The market is beginning to sense a rising probability of default. Precious metals are soaring against the Euro, the Pound and the Swiss Franc.
Meanwhile, with money moving back into US Treasuries, the US will have the ability to attempt another stimulus and announce further quantitative easing. Europe is currently ahead of the US on its track to currency depreciation, rising inflation expectations, and rising CPI/PPI. The US still has time before the market begins to worry about its debt burden.
The next stage is the transition from the initial outbreak of price inflation to severe inflation. Inflation accelerates due to a loss of confidence in governments and currencies. A failed economic recovery leads the market to realize that the debt burden is too large and will ultimately be defaulted upon or inflated away. At this juncture, all commodities begin to perform well again. It may take anywhere from six to 18 months for this stage to be evident.
Finally, inflation is exacerbated as supply shortages emerge. Tight credit restricts new production and consumers begin to hoard. During such a period, precious metals and commodities will continue…
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DiggAnother Fin. Reg. Failure
by Zero Hedge - May 30th, 2010 9:44 am
Courtesy of Bruce Krasting
The following graph is derived from data in Fannie Mae’s most recent monthly report. It compares the default rate experienced by Fannie on its book of conforming loans to the default rate on “enhanced” loans. The enhanced default rate is 4Xs higher than the regular default rate. Enhanced loans have performed very poorly over time.
When a Fannie loan goes bust there are many economic losers including:
-The borrower will likely lose the property and suffer a variety of losses.
-The lender (Fannie) will lose money.
-The taxpayers pay for all of the losses at Fannie.
-The process of foreclosure causes RE comps to fall and results in devaluation of values in communities, towns, cities, states and ultimately the whole country.
-As RE values decline so does the tax base of municipalities. This adds pressure on state and local government’s finances. The response is to cut expenses. Very often these cuts come from school budgets. Exactly the worst place for cuts to come from if a country was trying to stay competitive in a global world.
The collateral damage of defaults is much larger than the loss incurred by the lender. It cuts across society and the economy. Our country desperately needs policies that reduce the cycle of default. Until the default rates return to the historical mean there can be little hope of a sustained economic recovery. Our private financial institutions will continue to be suspect. The process of the FDIC closing banks every Friday will not stop. The public lenders, Fannie, Freddie and FHA will continue to run up big losses. It will go on for years. The collateral damage will cripple towns, cities and states. As RE values decline individual wealth will go down and with it will go consumption.
For me the most remarkable thing about this is that the Fin. Reg. proposals do not even mention the mortgage insurance (MI) industry. The proposed new rules take a shot at re-regulating the banks, it provides some protection to consumers from predatory lending, it sort of addresses concerns regarding derivatives. But it does not touch the MI providers. How could that be possible?
There are (at least) two reasons for the carve out of MI in the Fin. Reg.
…
Radio Zero: Nuke Baby Nuke! (The Exciting Sequel to Drill Baby Drill!)
by Zero Hedge - May 30th, 2010 1:00 am
Courtesy of Marla Singer
C’mon you wimp. The Russians nuke these things all the time. Here is your big chance to show up Putin. Run with it, baby. No one will every call you a pussy again. What is the use of being commander and chief if you can’t set off a nuke now and again? We’ll just watch from a confortable distance. To wit:
Connection details: http://radio.cl.zerohedge.com
Or just connect direct: http://72.13.86.66:8000/listen.pls
Implications On GoM And Global Drilling Following The Biggest Oil Spill In History; Presenting The Short Candidates: DO, PDE And NE
by Zero Hedge - May 29th, 2010 10:57 pm
Courtesy of Tyler Durden
With concerns about implications on GoM drilling post the Macondo spill dominating the investing world, as every day millions of gallons of fresh oil spill into the Gulf of Mexico, we present reports by Bank of America and JPM which disclose possible consequences from regulatory intervention, as well as all the rigs and operators in the GoM likely to be impaired by either surging insurance premiums, or something much worse, now that US offshore drilling policy is in greater flux than even ongoing financial reform. With today’s adverse BP developments, Tuesday will likely see another bloodbath within the offshore drilling space, where RIG CDS have blown out more than in 2007 when the company was rumored to be a take private candidate more often than Radioshack is today (speaking of, in breaking news, today the market did not leak a new rumor about some idiot LBOing RSH ). The attached reports should provide a sufficient perspective on which managers and which operators are most likely to suffer the wrath of a skittish market.
BofA report:
JPM report:
On The 2% Target Inflation Rate
by Zero Hedge - May 29th, 2010 10:26 pm
Courtesy of Tyler Durden
Over the past week, numerous people have inquired about the utility and practicality of the 2% “target” inflation rate held sacred to central banks the world over. Why 2%? And, more importantly, why not more… much more. Will the Fed ever get to targeting hyperinflation as a monetary policy goal, and if we ever get to that ludicrous position, can this be implemented in practice? Are the days of 2% target rates over? This is not just some theoretical whimsical musing – these questions are predicated by a recent IMF report which hypothesized that a 4% inflation rate “might prove superior to the traditional 2% target rate in helping to minimize the impact of future economic shocks.” Furthermore, the higher the target rate, the greater the stimulus flexibility, as ZIRP would then become a perpetual component of capital markets, and recurring fiscal stimuli would be the norm as opposed to the outlier. We present a TD Securities report by Eric Lascelles which answers all questions about “why 2%”, and what will happen when 2 becomes 4, then 8, then 16, etc, until the second coming of Rudolf von Havenstein is finally confirmed.
| Attachment | Size |
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| Inflation Rate TD.pdf | 141.82 KB |
TECHNICAL PERSPECTIVE: WHERE’S THE VOLUME?
by Chart School - May 29th, 2010 9:35 pm
TECHNICAL PERSPECTIVE: WHERE’S THE VOLUME?
Courtesy of The Pragmatic Capitalist
By Decision Point:
FROM A SUBSCRIBER: Hi Carl. I’ve never written but have followed you for many years (since AOL) and have learned more about reading the market from you than any other source. You have such a clear and common sense view that it is really refreshing. I love the new daily blogs and am so glad Erin is learning the ropes. I would write her directly, but don’t see her email address anywhere. I rarely disagree with what is said, but in this case I am very suspicious of a bullish interpretation of today’s (May 27) rally, mostly due to the low volume. It seems more like a bear market, short covering rally to me. Was wondering what you think of the volume issue. Thanks for any comments.
Thanks for the compliment!
I try not to engage in discussions in order to reconcile differences of opinion about the
After several days of sloppy, downward-sliding price action, on Thursday the market finally had the first day of what could be a full rebound from very oversold conditions. Sloppy action in oversold conditions signals a very dangerous situation, one from which a crash can result, and on Thursday we breathed our first conditional sigh of relief.
While we have emphasized the danger involved “buying into weakness” with oversold markets, we have believed that the odds favor an end to the correction because we are technically in a long-term bull
It is true that volume was pathetic, but volume has been unimpressive throughout this bull market, and for Thursday there is also the issue of the upcoming Memorial Day weekend. People are leaving town early.
We can also see a clear descending wedge pattern, a bullish pattern which has a high reliability for resolving to the upside.
Most important is our philosophy that price is primary, breadth and volume are secondary. Not that we don’t look at breadth and volume, but they need to be subjectively interpreted based upon the bull or bear bias of the market. As a result, none of our mechanical timing…
The surprising truth about what motivates us
by ilene - May 29th, 2010 9:22 pm
H/tip Barry Ritholtz at The Big Picture
RSA Animate – Drive: The surprising truth about what motivates us
This lively RSA Animate, adapted from Dan Pink’s talk at the RSA, illustrates the hidden truths behind what really motivates us at home and in the workplace. (www.theRSA.org)
Barry: "Oh, and it essentially guts traditional economic thinking — at least when it comes to issues such as “incentives work” (only sometimes, for some tasks) and that we are profit maximizers (not really)."
John Taylor On The Dollar, Growth And Immigration
by Zero Hedge - May 29th, 2010 8:53 pm
Courtesy of Tyler Durden
The Dollar, Growth, and Immigration
May 27, 2010
By John R. Taylor, Jr.
Chief Investment Officer
Although those of us who invest in the currency market have to pay careful attention to the daily price twitches resulting from economic releases and political speeches, the foreign exchange value of individual currencies actually moves glacially with wide emotional swings around the central value. The emotion has often run against the dollar. Before the start of the euro, the Deutsche mark was the market favorite. Two societal attributes probably contributed to this consistent bias. First, the Bundesbank and the German government preached and usually followed a more conservative monetary and fiscal strategy than the Fed and the US government did, which resulted in marginally tighter liquidity on average in Germany. The two governments’ different leanings could partly be explained by the historical accident of the ruinous hyperinflation that Germany suffered in 1923, terrifying modern Germans, but more critical was the fact that the US population was younger and growing faster than the German one. Because the tendency to consume is higher in the early years of adulthood and trails off dramatically as retirement age approaches, Americans bought more and saved less than the Germans. Furthermore, the US had to spend more on its infrastructure and social services than Germany, just to handle the higher level of household formation. Looking over the past 40 years, it seems that countries with growing populations and with faster growing economies tend to have weaker currencies than those with a more stable population and slower growing economies.
We think this is about to change. Stability is now passé and the optimal currency of the future will have high relative growth in output and in population. Demographics are the key to the future median value of currencies, and the winners will include countries like Brazil, Australia, Canada, and the United States as GDP = population growth plus productivity. Among the losers will be Japan and the Eurozone countries. The fast growing countries with birthrates above the levels necessary for replacement combined with societies open enough to allow immigrants to assimilate with the native population will be the big winners. The population of the US should rise by about 33% over the next forty years, and those young workers, both native-born children and new arrivals, will help pay the retirement costs of the aging ones.…
Search No More: Google’s a Value Stock
by ilene - May 29th, 2010 8:50 pm
Search No More: Google’s a Value Stock
[H/t to John at Wall St. Sector Selector]
Courtesy of Ockham Research
Google’s (GOOG) stock has been punished thus far in calendar 2010 falling more than 20% from its 52-week high. Some of that can be blamed on the recent correction, but with the broad market indexes just about even for the year there is obviously something more. Much of the pessimism towards the internet search giant is related to its pull back from the lucrative Chinese market after a throw down over censorship, and Google’s pain has been Baidu‘s (BIDU) gain as their shares have grown nearly 80% already this year. Some of this shift in valuation is certainly warranted, especially for Baidu, however we think that the reaction has created an opportunity to pick up shares of the global leader in search advertising.
A recent info-graphic provided through Barry Ritholtz’s blog shows the degree to which “googling” has gone global (all statistics are as of February 2010). In the US, Google claims an impressive 72% percent of search market share despite established competition. However, to the south Google’s market share is stronger with Mexico and all of South America hovering around 90%. Google has all but squeezed out the competition in such European countries as the Netherlands, Belgium, Latvia, Lituania, Hungary, Romania, and Poland all with greater than 95% share. Interestingly, as of the time of the report, Google only claimed 26% of Chinese searches, but 81% from India.
A recent report out of Google claims the company generated $54 billion in US economic activity in 2009, apparently this tabulation accounts for revenues generated through ads placed by on Google search results (as opposed to being Google’s own revenue). The report laid out the value proposition for using their platform, “We conservatively estimate that for every $1 a business spends on AdWords, they receive an average of $8 in profit through Google Search and AdWords.” It would seem to me profit is the wrong term to use in this case, but you get the idea; the platform works.
Clearly, internet search advertising is dominated by Google, and we have seen spending return as the economy has rebounded. We believe this trend will continue as keyword targeted advertising has become a key medium for small business ad campaigns, and economic recoveries are a time when many small businesses get…
Gold Daily Chart: The Handle Forms, a Reader’s Questions, and Felix Zulauf on Gold
by Chart School - May 29th, 2010 7:25 pm
Gold Daily Chart: The Handle Forms, a Reader’s Questions, and Felix Zulauf on Gold
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Courtesy of JESSE’S CAFÉ AMÉRICAIN
With regard to the cup and handle formation on the gold chart, a reader from Italy asks, ‘Are you so sure?’
The short answer is ‘never.’
All charting is based on probabilities. Only fools are certain of what will happen next, and the market soon separates them from their money. In fact, ‘knowing what will happen next’ is the greatest single indicator of failure in trading that I have seen. All charts, all data, are selectively twisted and formed to support the outcome that one believes in. And when the like-minded collect, groupthink soon follows.
At the feast of ego, all leave hungry.
Right now this formation is indicative, a ‘potential’ thing that will be confirmed IF gold can break out higher. I would put the probability at about 65%, so it is a decent wager, but not more than that.
The greatest negative is the possibility of a market meltdown in which everything is sold, at least temporarily.
This same reader from Italy suggests that gold is a Ponzi scheme. That is hardly probable since a Ponzi scheme requires a person, or small group of people, to concentrate and promote it. In the case of gold it is quite the opposite case, that the shorts hold concentrated power. I think he meant to suggest that it was a bubble, and was being a bit provocative. Although you could make the case that it is an ‘anti-Ponzi’ phenomenon, to the except that a fiat currency that was based in a debt Ponzi scheme is collapsing.
Well, is gold in a bubble? Gold is the ‘mirror’ of fiat currencies. Are governments and central banks doing a good job of protecting and maintaining the value of their currencies. Is spending well in balance with taxation? Gold is the barometer of profligacy and corruption. This is why corrupt statists fear and despise it.
Here is an interesting interview with Felix Zulauf on the global currency crisis and the gold bull market which is worth listening to carefully.
If people look back to the last great credit collapse worldwide which was the 1930′s, and sees what happened to currencies and gold, they will obtain some knowledge that could very useful to them now. Stubborn ignorance can rationalize amost anything, and there is a peculiar tendency among people to resist…
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