I said in the Thursday night premium report that we would see manufactured economic data as this bear market progressed, but I had no idea it would start so quickly. Does anyone really believe we created 117,000 jobs last month and that unemployment decreased? I suppose with the markets in free fall it probably wouldn't do to publish the true number, which was almost certainly negative. I suppose it was irrelevant though, it took the market less than 5 min. to figure out the numbers were a sham and sell off.
However, I think the decline is probably done at this point. In my last post I took a guess of 1200 to 1225 as a possible bottoming level. It looks like the government's pathetic attempt at deception drove the market down a little further to 1175. We should now see a violent, and very convincing, bear market rally.
On average the S&P will rally about 90 to 110 points in the first 8 to 15 days out of an intermediate cycle bottom. And those are the statistics for intermediate bottoms in a bull market. Bear market rallies are much more violent.This one could be exceptionally so as I expect the powers that be will try to manufacture another rally similar to what happened at the end of June. This time though there will be true demand behind the rally. If the Fed turbochargers the move we could see 125 to 150 point rally over the next 2 to 4 weeks.
I'm positive after that kind of rally our friend Beanie will return with more talk of Dow 36,000. However he will be wrong again. We are, and have been, in a secular bear market since March of 2000 and in a cyclical bear market since May. Until stocks reach insane levels of undervaluation they are going to remain in a secular bear market. It's possible that we may reach that bottom in the fall of 2012. That is when the next four year cycle low is due.
.
ReplyDeleteGary,
ReplyDeleteAny thoughts on the downgrade?
It may or may not raise interest rates. I doubt it though seeing as how money is fleeing into the bond market in preparation for a recession
ReplyDeleteMrMiyagi, do you think now is a good time to buy calls on SPY? Are you doing it?
ReplyDeleteEveryone knows the US is going to default on its debt. There's no surprise there. The gamble is trying to determine how rapidly we will debase the dollar.
ReplyDeleteEamonn,
ReplyDeleteI really don't know at this point.
I had some SPY puts this week but sold already (a bit early but a profit is a profit).
We'll have to see Monday I guess.
.
ReplyDeleteMrMiyagi, I agree with you, a profit is a profit. I got out early too on my puts, on Wednesday. The first rule is, don't lose capital. I dont mind not getting all of the move, just the body of it
ReplyDeleteI also had some LSV puts and LVS puts from a while ago and sold them both.
ReplyDeleteI am hoping for a short term SPX/DOW bounce though, just to reset things.
Make that SLV and LVS...
ReplyDeleteRight on with equities, the market "cracked" this week, no question. But, they will sail that boat out one more time and they will all sell it as sea worthy. Poor retail folks will believe this major drop is a buying opportunity and the big boys will sell right into it over the next 1-2 months.
ReplyDeleteLooks like October will again be the month of major turmoil, a "savage" bear market has begun, one fornthe books. Big OTM position once we get near the top of this next cycle.
As form gold, sure it's so stretched it can plunge, but it should be very short lived. The Fed is going to be back, downgrade will raise rates, not by much but they will need to be bid up to keep rates low for the economy. Euro is so oversold and the ECB will likely come out over the weekend with some positive sounding spin. We could see the dollar struggle again. In any event, the Gold bull is so mature and we've reached the quickening stage. IMO you need to be exposed to that market.
I'm staying long gold still, have added some Weekly puts to hedge against a sudden mean regression collapse. Bought GDJX, 10% of portfolio in the "Long" buy/hold accounts, couldn't resist these prices, but those are for non trading accounts.
S&P just downgraded the US to AA+.
ReplyDeleteIs that going to send Gold jumping come Monday?
Poly, would you explain how you use weekly puts to protect your gold long position? What percentage of your capital do you put into each? Thank you...
ReplyDeleteThat's what we're discussing Jason.
ReplyDeleteEamonn,
ReplyDeleteI'm off to bed and that's a long topic, many variables. Email me if you could and I will reply.
Cheers.
I would be very careful expecting a short-lived gold correction. There are just way too many people on the gold trade right now. I wouldn't be in the least surprised if gold has to suffer an intermediate degree correction before the next leg up can begin.
ReplyDeleteThose tend to last 4 to 6 weeks on average.
Placing a stop at the next daily cycle low is going to be critical in avoiding getting caught in a more serious correction than most people are expecting.
Folks, there is a reason the miners are diverging so badly. Ignore that at your peril.
"Folks, there is a reason the miners are diverging so badly. Ignore that at your peril."
ReplyDeleteTotaly agree with that comment! A couple warnings signs to follow with KISS...
1) anything that goes up too fast comes down faster..parabolic or semi-parabolic
2) Divergance is a bad sign
I always sell when I see these things...wouldn't be surprised to see gold sell off on a QE3 hint by the FED...doesn't make sense. Sure it does since when do markets have anything to do with logic. :)
Bankrupt US sold treasuries at negative interest rates...people are just lining up to give their money away to their bankrupt borrower.
In terms of the downgrade, there are certain pension and mutual fund requirements that I am not sure how they will be affected. I am reasonably sure that all pension funds have to hold investment grade, but there may be certain pension specific requirements to restrict to a higher standard. Fed knew about this prior of course, so the plan is in play...perhaps allow interest rates to rise, so Ben has the excuse to keep rates low...ummm more printing...who knows....
This is what the third time the market is trying to do the right thing and correct, but the CB's all seem to want to delay this!
Let's see next round of printing hmmmm...very dangerous...this time around oil cracked the market at 125$...last time say $150...this time what 100$...very dangerous because as soon as that breaking price falls below the marginal cost of oil, it is life changing time....producers don't produce at a loss, supply goes down, and then price goes up and makes the problem worse.
Only solution to not defaulting is killing Medicare and SS...no choice..if not welcome to
Central Banks Gone Wild.
Fun times ahead!
gary
ReplyDeleteeveryone and their mothers are talking of a relief rally next week, dont u think the big boys will pull the market down even more early next week?
I don't know who everyone is. The dumb money confidence level just fell threw the floor. Sentiment has reached levels as bad or worse than March 09.
ReplyDeleteThat being said another day or two won't matter. Trying to time a perfect bottom in this volatile environment is going to be pretty tough. But by the end of the month I expect the market will be back above the 200 DMA.
The trick is to have a relief rally without anyone knowing...up 2% sucker people in....fall 3%....up 4%...down 2%...have people buy tops and sell bottoms as much as possible....Nobody has conviction so they don't hold...without the market constantly reaffirming ones insecure position, traders-bulls and bears alike are going to get killed...for the most part...lots of good traders here!
ReplyDeleteGood week-end all...next week might be interesting...
Interestingly.. I haven't heard of many
ReplyDeleteexpecting or calling for a bounce. The most experienced guys are somehwat shell shocked and saying things like oversold markets are more dangerous than yadaydayda
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ReplyDeletePro traders got blind sided this time and lost a lot of money. They're coming back into the market but with a lot less capital so the cascade effect may impact the overall health of the market. The downgrade won't help. Regular Joe with his 401k is stuck just like in 2008. All confidence in the market will be lost. I never thought I would say that QE3 will have to be announced and announced fast...
ReplyDeleteGary's right. After falls like these in the DJIA and the PM's, there follows what I've termed "choppy waters".
ReplyDeleteIt's what Keys referred to, the see saw around a price, full of surges in each direction, terminating confidence, allowing over the next few days, 2 or 3 max, those who trade very short swings to earn boatloads of money.
Look at gold on a 5 minute chart. That's what we'll see during each day upcoming in the S&P.
The easy money's on the long side.
Aside: A vendor, a naive market chump, asked me yesterday what to do about his equities. I said, stick it out and wait for the bounce. He placed a safety stop, instead, in the morning. He was hit and lost as he said $40 thousand. He couldn't believe his stop got hit. That's the bottom. His stop was it. Of course, the market has already retraced from that low. And he's gone, and scared, and won't do a thing.
So, the market can now rise with nearly zero chump participation. The longs will make money hand over fist for the next few weeks.
This is a classic market move. It's 1987, 1929. But the worst part is that this is July 1929. The October 2011 drop will blow out everyone's accounts.
What I'm expecting is a September which will trade between today's S&P low and the high of this last Monday. If this happens, the market has set up for the biggest crash we alive will have ever seen, save the one day in 1987. The S&P will be a bear for years thereafter to come.
PM's? The 5 & 10 year parabolas roll along.
Truly, nothing's happening in the USD on a longer term perspective.
ReplyDelete74.5 is a solid number. The USD's gone nowhere over the past few years, up some, down some, and back at 74.5.
And the China people haven't lost faith either. They Yuan is 6.43, in the newer middle low range. They didn't abandon the buck.
I wait and watch for that day, when the RMB goes straight up, and China's factories slam shut.
I know, I know. But I can hope.
Slumdog, you say " the market has set up for the biggest crash we alive will have ever seen, save the one day in 1987".
ReplyDeleteCould you describe why this will happen?
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ReplyDeletePoly thinks independently concluding his own way, "one for the books".
ReplyDeleteI watch trading patterns. The '08 crash occurred on a classic reversal pattern and we're setting up to experience one.
For me to reach a final conclusion, I must wait until the last trading day of September. The pattern needs to be there. It's starting out with this nice long stretch. Next month will be the indecision month. And the following one will "explain" to those who suffer from indecision that they failed to honor what the market said to the longs which is "step aside".
Strangely, my 30 yr old CPA said to me that he wasn't concerned for himself but he was for his parent who has most of their wealth in a house, now having lost that appreciation, and in the equity market. That parent is dependent on the equity market holding in this range for them to have retirement income.
Surprise. Surprise!!
The right thing to happen is for all those equity holders to see their wealth evaporated. The system gets to "reset". Hence, my short term (as in not for the rest of my life) love of the PM's.
PS: You noted I called the turn in those? I don't follow anyone except my own pattern logics. Some just repeat and repeat. They're in the chart patterns over the past decades. One just needs to dig for them and think about them. That's why I like Gary's thinking so much. He's studied intensely the cycle patterns, and he calls them with relative ease.
Sitting at home, with charts in front of you, PRINTED OUT, you can see and compare and look. I don't buy into the statistical studies. I need to see the stuff, eyeball to line. Veronica has done well with the stat studies; I just don't trust as easily. I gotta see it.
I think we've seen all the crash we're going to see for awhile. The Fed is going to fight this the whole way down.
ReplyDeleteThe next crash phase shouldn't be until the fall of 2012. Until then I expect we will just see a normal grind it out bear market.
Slumdog, thanks for your posts.
ReplyDeleteGary,
ReplyDeleteWhat about this gold backwardation?
Spot gold 1661 and august futures 1648.80, any significance?
Anybody here understand the implications?
High 5
ReplyDeleteWasn't silver the same way before the may plunge?
Dang
ReplyDeleteBeanie gets top billing? Ain't he special. I can't wait for the rebuttal. Is he a subscriber?
The title LMAO
ReplyDeleteok here is a little story.
I was speaking with one of my brokers ( he is a FOMC member) this friday morning. I was trying to get a feel of what we were heading for and get his take on world economics.
He made the statement that we were downgraded. The way he said it, made it sound like it was a few days ago. I just said back to him ' O i missed that '. he said it was not a big deal and wont affect much, and just played it off.
So the other thing is QE3. I asked if Ben would be gearing up Q and/or some other tool. He said QE3 would not be off the table and would probably be the likely tool.
It was sort of the tone of him speaking, that i was supposed to be getting the messages.
Now the evening breaking news is about the downgrades.
sorry no tradeable info . just a little story
Gary, what's your view on gold for the next few months. I took a small put position in GLD today. Regards.
ReplyDelete5 Aug, 8:24 PM Treasury officials discover a $2T error in S&P's future deficit projections, throwing into limbo the agency's plan to downgrade the U.S. credit rating. S&P notified Treasury this afternoon of its intent to downgrade, and presented its report to the WH. Following 2 hours of analysis, government officials discovered the error, and notified S&P, who agreed it had made a mistake. -Market Currents, Seeking Alpha
ReplyDeleteI don't know if the downgrade came before or after this news broke.
ReplyDeleteThey knew in advamce about the downgrade which gave the US fed officials and WH time to come up with uh oh you all made a mistake and S+P admits the mistake. Hmmm sounds like more manipulation to me. Gary said there would be days like this.games smoke and mirrors.
ReplyDeletelol.... classic tittle
ReplyDeleteLet the blog wars begin :-)
"I'm positive after that kind of rally our friend Beanie will return with more talk of Dow 36,000. "
ReplyDeleteFreaking hi-sterical!
Dude deserves it.
Beanie, come out of your hole; come clean or defend your self.
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ReplyDeleteAs we twiddle our thumbs waiting for a DCL in Gold, I've been readgin Trader Vic's 2nd book: Princicples of Speclation and came across this:
ReplyDelete"Greenspan is by no means outspoken, but he understands and believes the premises of Austrian School economics. For proof, read his chapter on gold in Ayn Rand's book Capitalism: The Unknown Ideal. To allow a credit expansion and the ensuing inflation to take hold would be a fundamental moral compromise for him. I hope he has the courage to stay committed to low inflation. If he does, then we will not see high economic growth due to credit expansion in the next few years."
Wow....did not realize Greenspan believed in Austrian School...WTH happened to him later on?
More pertatently, if Greenspan could change his colors, will Ben change his and go from Helicopter to Austrian school??
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ReplyDeleteNj
ReplyDeleteOnly when a different set of hands are yanking his chain
Antal Fekete is Austrian School and this is what he says about gold backwardation:
ReplyDeletePermanent Gold Backwardation: The Crack Up Boom
http://www.goldstandardinstitute.net/2011/05/permanent-gold-backwardation-the-crack-up-boom/
Gary,
ReplyDeleteI am still giving the bulls the benefit of the doubt in the stock market. We have suffered some technical damage this week with a bout of panic selling. No doubt. Caution going forward is indeed warranted. We do NOT have a confirmed bear market, however. We need at least a -16% correction off the 52-week highs for confirmation. We did have a false DOW Theory sell signal and death cross last summer, if you recall. We have NOT had a euphoric bull market top with heavy distribution, signs of every bull market top since 1929. Selling pressure hit record lows in this bull market a few weeks ago. Is this time different? Anything is possible and I agree with you that there will be incredible amounts of manipulation at levitating the market and economy. Especially with an election year approaching. Just for clarification, the last bull market that contained multiple 10%+ corrections was from 1932 to 1937, a period often compared to our current economic climate. I want to see several panic buying days in the coming weeks to confirm that the recent selling was nothing other that a correction in an ongoing bull market. This is the 3rd year of the bull, the easy money has been made.
I've been holding a 100% position in inverse ETF's since June 2nd 2011. The ride has been extremely tough as I've seen huge gains, huge losses and huge gains again, all unrealized of course. I’m willing to give all the unrealized profits back, slip back into unrealized losses if need be, but I will ride this bear into it’s 4 year cycle low with my current positions. Anyone who buys BEARX or GRZZX can go to sleep and wake up in late 2012 rich!
ReplyDeleteI'm reminded of Gary's post: http://garyscommonsense.blogspot.com/2009/07/its-time-to-hold-on.html
I thought the bear market rally from 2009 was coming to an end and went 'Old Turkey' and will stay 'Old Turkey' because the three year cycle low is in and gold starts its D-Wave decline when The Bernank and the FOMC disappoints everyone and doesn't print. Gary's sitting in 100% cash and he's left himself an out when The Bernank doesn't print and the D-Wave begins.
We're crashing at the moment and if you haven't do so it is time to go to the $, $ denominated bonds if you're conservative and short or buy puts on everything that isn't nailed down. Everyone including Gary thinks a bounce above the 200 DMA is just around the other corner which means it isn't.
The only thing around the corner is a global economic collapse.
Book it!
No we did not have a Dow theory sell signal last summer. And that's what prevented me from calling a bear market at the time.
ReplyDeleteThis however is a confirmed bear market. You have now held on for a 16% loss when you didn't have to. You're going to get your chance to exit in the next couple weeks and shrink that loss considerably. I wouldn't make the mistake of missing that opportunity.
By the way we had 9 90% down volume days days in the last couple of weeks. If that doesn't qualify as panic I don't know what does.
ReplyDeleteKen,
ReplyDeleteAlmost no one is looking for a bounce other than smart money traders.
Sentiment has absolutely dropped through the floor. Dumb money traders are expecting the end of the world. The only reason that it looks like everyone is expecting a bounce is because you're on a blog filled with extremely experienced investors that understand what is unfolding, and what to expect.
Gary,
ReplyDeleteThere was a DOW Theory Sell signal issued last summer issued by Hulbert's top-rated Dow Theory market timing investment letter. It was, however, quickly reversed. There are different interpretations of Dow Theory as well all know. I only follow the most successful letter. Sorry to the many Richard Russell followers, but his market-timing is lowly rated.
We have had a 14.8% correction in the SPX so far this year. Not 16%.
I agree about the numerous 90% down days. The bullish camp needs to see those negated with several panic buying days as I mentioned. Caution is warranted and the next several weeks are critical IMO.
According to the parameters set out by the founders of Dow theory, we did get a confirmed Dow theory sell signal this week.
ReplyDeleteGary,
ReplyDeleteYes, the top-rated Dow Theory letter also issued a new DOW Theory Sell signal last week. Thus, the bulls need to see panic buying in the coming days/weeks.
I hear you Gary but just as you mentioned in your July '09 post and again in a comment just above bear markets are brutal to both bears and bulls alike. Weak hand shorts covered in the fake rally at the end of QE2 and trapped longs are looking for a bounce to get out. I agree that not selling longs here and now is prudent but this bear will drag longs so far underwater they'll capitulate and dump them in a panic. We almost saw that when the SPX hit 1162 yesterday. Had that number not held we would have been down 100+ S&P points at the close. That's the number to watch next week.
ReplyDeleteWe'll re-test Friday's intraday lows and if they don't hold it'll really be time to panic. Either way I don't care as I'm un-hedged and will remain un-hedged on any violent counter trend rally. The only thing that gets me to cover and book losses is a new 52 week high on a close above 1371. I'm developing strong hand status with each drawdown or weak counter tern bounce that fails. We'll see what happens but know this I value your opinion and your service tremendously. What if you're wrong about The Bernake and he doesn't panic and the d-wave starts in gold? You already have the divergence in miners all we need to see is the Euro crack 1.40 and the $ rip higher confirming the three year cycle low is in fact in?
Take a look at this: http://www.oftwominds.com/blogaug11/dont-bet-on-Fed-8-11.html and let me know what you think. Is the Bernake going to put the Fed at risk of Congress abolishment and loss of control of the money supply of the worlds most productive economy and the worlds reserve currency? What say you?
I'm discussing gold extensively in the weekend report.
ReplyDeletetorreo,
ReplyDeleteBear market rallies are always the most violent. Panic buying isn't a sign that the bull market is intact. It's a sign of a bear market rally.
Here is another CHS oldie but goodie titled: "When "Buy on the Dips" Becomes a Pampers Moment" which dates back to November 10th 2007:
ReplyDeletehttp://www.oftwominds.com/blognov07/buy-on-dips.html
I really like the John Kenneth Galbraith's classic book The Great Crash 1929:
"A common feature of all these earlier troubles was that having happened, they were over. The worst was reasonably recognizable as such.
The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to insure that as few as possible escaped the common misfortune.
The fortunate speculator who had funds to answer the first margin call presently got another and equally urgent one, and if he met that, there would be still another. In the end, all the money he had was extracted from him and lost. The man with the smart money, who was safely out of the market when the first crash came, naturally went back in to pick up bargains...
The bargains then suffered a ruinous fall. Even the man who waited out all of October and all of November, who saw the volume of trading return to normal and saw Wall Street become as placid as a produce market, and who then bought common stocks, would see their value drop to a third or a fourth of the purchase price in the next twenty-four months. The Coolidge bull market was a remarkable phenomenon. The ruthlessness of its liquidation was, in its own way, equally remarkable..."
Don't think IT can't happen again?
IT is!
Ken,
ReplyDeleteI think you are hoping for another crash like in 2008. The odds of that happening are almost inconsequential at this point.
In the fall of 08 the daily cycle topped in four days. That's why the market crashed it had 35 days in the down phase. This daily cycle topped for all practical purposes on day 24. It's now late in the daily cycle and due for a bottom. The likelihood of the continued crash this late in the cycle is slim. Not to mention that any further downside would just trigger an even more violent upside. With volatility like that you are going to be able to time the bottom and by the time you recognize that the correction is over the market will already be 50 to 70 points higher.
Gary,
ReplyDeleteI don't have confirmation of a bear market yet. I want to see -16%+ prints on the DJI and the SPX. The bulls need panic buying and new 52-week highs. Caution is warranted on both sides. Let's see what happens in the coming days/weeks.
In case everyone is wondering what "IT" is the Bernake explained what "IT" was and how "IT" could be avoided in the following speach:
ReplyDeletehttp://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm
The S&P downgraded US Debt was priced into the market by Friday's close. The reason for the downgrade was for the Bernake and the FOMC who's thinking about launching QE3. If they launch QE3 we'll go from AA to A and so on and so on until the Federal government is borrowing 30 year money at 16.5%. Is the Bernake going down that road Gary?
I think the Bernake is having his "Pampers Moment" this weekend!
Ken, sounds to me like your trying to convince yourself with that 'junk' from 1930. Fact is there will be a violent rally soon and if they continue to print your not going to get the mega crash your waiting for. shorting is a mugs game, its easier to make money on the long side which also offers more and better risk reward set-ups. I learnt that the hard way.
ReplyDeleteGary, will the weekend report be out today or tomorrow?
ReplyDeleteIt will be out as soon as my proof reader finishes.
ReplyDeleteTorreo,
ReplyDeleteJust curious why you keep moving your target? First it was a 10% correction. Now it's been moved down to a 16% correction.
Instead of riding this all the way down by continuously adjusting your parameters you could have just gotten out in May when I said the bear market has begun and avoided all of this.
This is how people ride bear markets all the way to the bottom.
I don't think anybody, other than the talking heads on TV, believes that we are not in a recession at this point. The average decline of the stock market during a recession is 33%.
However we are also in a secular bear market. I think we can expect average declines more in the 40 to 50% range, which has been borne out by the last two bear markets.
Gary, is that (the dog ate my homework) Toby?
ReplyDeleteGary,
ReplyDeleteHow many languages does Toby proof read in?
Speaking of a pampers moment, this is a great laugh about E-trade.
ReplyDeletehttp://www.youtube.com/watch?v=W4hfdaC7eL4
Gary,
ReplyDeleteI'm not moving my target. In modern history, no bull market has contained more than one 10%+ correction. We now have two. The 1930's bull market had more than one 10%+ correction and remained a bull. A confirmed bear market has minimal prints of -16% to -20%, depending on your source. I follow the -16% on both the SPX and DJI for bear market confirmation. Do I have a red flag, absolutely. Am I going to play "zero or hero" and call this market a bear with only one signal (Dow Theory Sell), no way. From a positional standpoint, I am still mostly on the sidelines. I obviously do not have a buy signal at this time. Again, let's see what happens over the coming days/weeks.
Looks like Gary watched my video.
ReplyDeleteI am going to tee this up again for Gary or anyone else --
ReplyDeleteIs the dollar index (USDX) a reliable indicator, particularly as it pertains to forecasting PMs, when it is a relative measure against other fiat currencies, particularly the euro (over 50% of the basket of currencies)?
Conceptually, dollar down, gold up makes sense but given the crisis in Europe (and Japan, the second most heavily-weighted currency in the index), doesn't the dollar index TODAY just reflect who is devaluing their currency faster/more?
How about a dollar index that tracks the dollar against a basket of commodities?
Weekend Report is up.
ReplyDeleteNot yet on Twitter.
Good investing
Le Fou
Just got my tweet. Thanks
ReplyDeleteLe Fou
Hi Gary,
ReplyDeleteDo you see much chance of gold stocks moving up with the bounce in the markets, even with a correction in gold?
MarkF: I’m also contemplating a large position in miners. Miners got dragged into panic selling along with the market and are due for a bounce. Notice also the positive divergence between RSI and price in $HUI, which seems to characterize the last few short-term bottoms. And the kicker is that if a correction in gold never arrives or arrives late (e.g. runaway move), you’d be in for the ride as it unwinds the divergence with gold from the last few months. It’s also possible that miners will put in a higher low than current levels when gold finally dips down, just like they did last cycle.
ReplyDeleteGary,
ReplyDeleteYou being underwhelmed by TA, I thought you would appreciate this little story:
"Many don’t put much stock in technical analysis. I understand that. A former institutional client of mine once said: “At the bottom of the ocean are many sunken vessels, and in each one there is a chart room filled with charts.”"
--from this article by Rick Santelli:
http://www.cnbc.com/id/44036727
Beanie, on Twitter, said that the bottom was in on SPY on Friday, but it looks to me like he was buying SPY on the way down.
ReplyDeleteHere's Beanie's Twitter:
http://twitter.com/bettertrading
Anybody here subscribe to Jim Stack. I used to read him some time back. He has an excellent track record in anticipating recessions.
ReplyDeleteWould be nice to know what he is thinking at this point in time.
This just in , if this rescue plan put forth on Friday to save Italy doesn't happen all the markets--will tank big time come Monday..things could get very ugly very fast..From zeo Hedge
ReplyDeleteIt Just Went From Bad To Far, Far Worse As Germany Says Italy Is Too Big For EFSF To Save, Refuses To Carry Euro Bailout Burden
Submitted by Tyler Durden on 08/06/2011 12:20 -0400
Bank of Japan Central Banks China European Central Bank Germany Italy Japan Monetization Quantitative Easing Reuters
Remember when we said (yesterday) that Germany will soon balk over the fact that it is pledging its entire economy to bail out an insolvent Europe? Well, that moment has come.
Dow Jones just hitting the tape referencing Spiegel
German Govt: Italy Too Big For EFSF To Save - Spiegel
German Govt: Doubts Whether Tripling EFSF Would Help It Save Italy
German Govt: Italy Must Make Savings, Reforms To Exit Crisis - Spiegel
Italy Debt Guarantee Could Raise Doubts Over Germany's Finances - Spiegel
German Govt: EFSF Should Only Help Small, Mid-Size Countries - Spiegel
As a reminder, yesterday's stopgap announcement by the ECB to expand its SMP purchases of secondary market Italian and Spanish bonds was merely as a precursor to full EFSF monetization until its comes fully online in September (or sooner) in a vastly expanded format (between €1.5 and €3.5 trillion).
If Germany is now against this, which appears to be the case, it pretty much means, well, game over.
Add the uncerainty over the unwind of the Europe rescue "gamechanger" as one of the more naive CNBC anchors said yesterday, and Monday is now guaranteed to be a bloodbath.
As for those saying China will gladly step in and fund a $5 trillion EFSF shortfall, they may want to read the following article from Reuters:
Italian Economy Minister Giulio Tremonti said on Thursday that Asian investors are reluctant to buy Italian bonds because it sees they are not being bought by the European Central Bank.
Speaking at a news conference, Tremonti also said it would be desirable for the central bank to follow the lead of the Japanese and Swiss central banks in taking expansionary steps to tackly the euro zone's crisis.
"I note that the Bank of Japan today launched quantitative easing and the Swiss cen bank cut rates to zero, we are waiting for decisions if possible, but desirable (from the ECB)," Tremonti said.
When you talk to Asia they say: "We don't understand what Europe is," he continued. "The second point is that they say 'if your central bank doesn't buy your bonds, why should we buy them"?
I find it strange that Gary didn't mention anything about the S&P downgrade.
ReplyDeleteOy...from my recollection you've been saying the same since late 2009/early 2010.
ReplyDeleteWe've been through this before back in May 2010 where SPX lost 170 pts in 2 weeks and ultimately 210 pts total when correction was done (3 months later).
Back in May 2010, ALL bears declared the START of bear market. Six months later, they all got ran over.
However, this US downgrade is kind of the wildcard. Nobody knows what will happen because it has never happened here before. But note that a downgrade could eventually be upgraded, like some countries (France, etc).
Still, for now, I stick to my secular bull market call that will take the Dow to 36,000 this decade. Tech innovation is still alive and well. Besides, the average bull market lasts 4 years and we're only in the second year. I believe this bull market still has about 6 years, towards the end of Obama's second term.
Sandy - yes, I subscribe to Jim Stack. He has a much longer time frame than most reading this blog, and is more cautious. But he does have a near-perfect record of calling bull and bear markets.
ReplyDeleteHe put out a special bulletin to subscribers on Thursday ningt (reconfirmed Friday) and said:
Throughout all that the markets throw at us, above all - we strive to stay objective. That can be difficult when traders are losing their senses. Here are the facts that we know about recent market action:
• If we are in a full-fledged bear market, it’s unlike any bear market of the past 50 years in that there were no precursory warnings from leadership, breadth or bellwether indexes and stocks. However, that’s not to say it might not still be a bear market.
• The kind of selling we’ve seen in the past couple weeks typically does not come at the start of a bear market. Instead, it’s characteristic of the kind of panic selling often seen at or near the end of a market correction or bear market. No guarantees, but here are some supporting statistics:
- Breadth today was 20:1 negative, however the volume ratio [volume in declining stocks compared to volume in advancing stocks] was over 90:1. In other words, 98.9% of volume was in declining stocks!
- On today’s close, our short-term Pressure Factor hit an extraordinary oversold -169 [normally, -80 is an “extreme” oversold reading]. There were only six occasions in the past 60 years when the Pressure Factor has dropped below -160. Here are those initial dates: June 9, 1953; October 19, 1987 (after Black Monday); October 27, 1997; February 27, 2007; December 1, 2008; and June 4, 2010 (last summer). None of those instances saw the S&P even 1% lower one week later. Only one instance saw the market negative one month later - last summer which marked the correction bottom. And interestingly –perhaps coincidentally– 5 of the 6 saw the market up over 19% twelve months later. Such oversold extremes typically do not market the beginning of a bear market.
- Even before today’s drop, the S&P 500 had declined for 7 consecutive days as of Tuesday’s close. That’s happened 53 times in 82 years. And not one instance [even in 1929-32] saw the market 4% lower a week later.
.
More:
ReplyDeleteThose are the facts. And literally none of them indicate that this decline is going to snowball into a freefall or market crash over the next week. Again, there are no guarantees, but it’s important to keep a perspective that this decline from the recent high has only given back the profits of 2011. We still remain substantially ahead of year ago levels.
Now let’s talk about our concerns...
• Although historical odds may be against a bear market (based on the absence of warning flags), we cannot rule it out. You should never fight the tape (or trend). Even without negative divergences, we saw “Distribution” start to appear today in our Negative Leadership Composite for the first time since the market bottom. That doesn’t necessarily mean a bear market, but if it continues increasing we will move toward a more defensive allocation.
• Even though valuations are not as dangerous as they were in 2000 or 2007, and many of the stocks and funds in our portfolio are more conservative, we cannot rely on that alone for our portfolio defense if the market fails to stabilize or leadership and breadth deteriorate.
• Personally, I don’t like making allocation decisions in the midst of an emotional trading frenzy. Tomorrow’s unemployment report, if worse than expected (and it’s not expected to be great) might trigger more lemming-like selling on the open. But even so, the current oversold extremes suggest we should see a short-term bottom and rally in the coming days. And that would provide valuable time to further analyze and reassess our allocation and position. We’re not trying to remain bullish... we’re simply trying to stay objective.
------
I quote this not to break his copyright, but to urge people to consider subscribing. He's speaking at the Money Show in San Francisco next week, and I think there's a webcast
Beanie,
ReplyDeleteI believe you will be right about DOW 36,000. But not in this decade. Maybe next decade.
Meantime, I think the DOW will 8000 (possibly even 6000) before it hits 15000. Maybe you don't care, you will just use DOW 8000 as a buying opp. You can do that if your horizon is very long term. But are you okay with your existing investments taking a 30 or 40 percent haircut, maybe 50 percent?
Farm Girl,I don't know who this Jimmy Stack is, but I do agree with his take.
ReplyDeleteThis selloff happened for a reason, some folks were privy to the fact the the S&P would downgrade the USA, which it did Friday night.
Overall, corporate earnings have been really good.
It just seems to me the whole selloff is manufactured. Who created the Congress debt ceiling debacle? The same ones who are now praising the USA downgrade. I don't think bull markets end with political influence. It does end, however, with Fed policies. And fed policy is currently conducive for economic expansion.
Farm Girl,
ReplyDeleteThanks for posting that.
(Did you buy stocks on Friday.)
pimacanyon,
ReplyDeleteI don't see Dow going to 8000. In fact, I don't see it going below 11,000 . So I'm invested based on my take.
Again, however, the credit downgrade is unprecedented. Since it has never happened here before, nobody knows what the outcome will be. Maybe it's a nonevent. Maybe it's disastrous. We have to see.
Corporate earnings just doesn't say the Dow is worth 8000.
But USA downgrade, who knows.
Just because we don't know doesn't mean we position ourselves for a crash to 8000. It just means we have to be cautious and not get overly confident in the bull case, until we see what the full consequences of the downgrade are.
Farm Girl,
ReplyDeleteThanks. If I remember correct, Jim Stack has almost a 100 % track record of forecasting recessions.
I used to subscribe to him, but did not renew once I subscribed to Gary:)
This comment has been removed by the author.
ReplyDeleteThanks Ver,
ReplyDeleteI guess the big wild card is just how big a correction in gold might be coming. As Gary has reminded us, gold stocks follow gold price 90% of the time. With the ridiculously wide divergence we are seeing between the price of gold and the miners, that divergence would be magnified in the event of a significant correction in gold. I realize I just answered the question I had for Gary. It might be worth a short term trade though. I doubt Gary would agree. By the way, I thought a few years ago that holding gold is far more profitable than buying miners and a lot less nerve wracking, but I still hold onto the hope that we will beak out of this divergence in a big way. Too bad the stock markets are breaking down at just the time when miners need a boost.
"towards the end of Obama's second term."
ReplyDeleteSecond term? Yikes!
Good read about history of silver parabola
ReplyDeletehttp://thetsitrader.blogspot.com/2011/08/silver-parabolic-bounces-and-sp-500.html
The last time gold went up 6 weeks in a row was fall 2007. In the past 4 years the most consecutive weeks gold has been positive is 5.
Last week was week 5. Odds do not favor a week 6, though it could happen, of course.
pimaCanyon,
ReplyDeleteIs there still a Rose Canyon lake up in a Mount Lemmon?
We used to catch trout up there.
Somebody should make bumper stickers. " I'm mad as hell"
ReplyDeleteStill true today....
http://www.dailymotion.com/video/x5ohp8_network-howard-beale-mad-as-hell_shortfilms
That was pretty funny SF!!
ReplyDeleteAdorable Toby!
ReplyDeleteThanks for sharing this waking up moment with us!
Great report, it clarifies everything!
Thanks FarmGirl for sharing those stats, very interesting indeed
ReplyDeleteJReality,
ReplyDeleteIt should be pretty obvious now that there will probably never be another Republican president. For two reasons:
1)All the ginormous mess that was created by the last Republican president.
2)Potential for alternative energy to replace fossil fuels. Just you know, once alternative energy goes mainstream, the GOP will likely be a powerless party.
It seems the party is now set on making it difficult for Obama to do anything, despite the fact that the majority of Americans love him (look at how much money he can raise for his presidential run(s)). The debt ceiling debacle and S&P downgrade appear to be machinations of the GOP, to bring down the president and smack down the democratic party before the 2012 elections.
If Obama gets a second term, alternative energy gets a step closer to becoming mainstream. When you consider that First Solar's solar panels are reaching grid parity in 2012, and fully electric vehicles like the Nissan Leaf now only costs $30,000 (it costs about $20,000 to fill up gasoline when we drive our fossil cars for 10 years), you can see how close alternative energy is going mainstream.
MarkF,
ReplyDeleteThe assumption is that miners will magnify gold's move, but I think we may get thrown a curve ball. The market's obviously been sniffing out the intermediate decline in stocks (and perhaps the onset of the bear?) for weeks if not months and the miners just got thrown out with the bath water.
During the last gold correction from 6/22-7/1, the miners didn't deviate too far from gold's % loss, and ended up making higher lows and leading gold out of daily cycle low.
I agree that gold is stretched and due for a correction, but what's unclear is whether it'll be on the shallow side like Poly thinks, or on the deeper side like Gary thinks, or something in between where we chop around and consolidate while sentiment wears out and moving averages catch up.
At the current levels and with even sharper panic selling behind them, miners may be a nice way to bag a short-term bounce and then play it as it goes after that, ideally for a break out to catch up with gold, rather than trying to time an entry to gold.
DP,
ReplyDeleteYep. Although I have not been there. We always drive right by that turnoff on our way to hiking trails at Summerhaven or up past the Ski Area. We were just up there last weekend. Amazing how it can be so cool up there when it's 100+ down here.
Sounds like you lived here once, eh?
Sold my B of A puts yesterday for a 300% profit, not bad for 2 months.
ReplyDeleteProbably got out too early but didn't want to get greedy.
Still holding my puts on C and WFC (January '12, FYI).
Up almost 200% on C puts, WFC I'm up barely anything.
Things will get worse before they get better for the banks, especially with the S&P downgrade of the US debt, but I believe that Bernanke will backstop the banks with more bailouts/QE.
Gary, any specific input regarding the S&P downgrade we need to take to heart? It's a fairly significant event IMO, and it's got me thinking that I should go out and pick up some more gold bullion.
Beanie,
ReplyDeleteEven though the markets may react short term to the debt downgrade IMHO it's a non-event. Ho-hum, like they are telling us all something we didn't already know? Really, how stoopit to they think we are anyway? How can the US ever default on its bonds when it has a printing press? Doesn't make sense to me, and my guess is the markets will just shrug it off.
Now the fact that the money you get from cashing in your bonds will be worth a lot less in 10 years when the bond comes due--that fact is true. But it's always been true and has not been a secret! What HAS changed is how rapidly the currency is being devalued. But again, it didn't take the S&P rating agency to alert everyone to this! Investors have eyes and ears and brains. The rating agency is a dinosaur, they obviously didn't know their butts from a hole in the ground back in 2004 - 2007 when they gave AAA ratings to junk mortgages, and now we are supposed to stand up and take notice?
That there's all this hoopla about the downgrade is laughable. This is all very old news, so what is the big deal.
Beanie,
ReplyDeleteYou wrote "When you consider that First Solar's solar panels are reaching grid parity in 2012, and fully electric vehicles like the Nissan Leaf now only costs $30,000 (it costs about $20,000 to fill up gasoline when we drive our fossil cars for 10 years), you can see how close alternative energy is going mainstream."
But let's do a real apples to apples comparison here. Say it does take 20 grand to pay for the gasoline to drive a car for 10 years. What's missing here is how much will you spend on electricity to drive the Nissan electric car for 10 years? Probably less than what you'll pay for gasoline, but actually I have no idea. I know that electricity is not free. Unless the Nissan is built out of solar panels and keeps itself going solely on those, there will be costs for the recharges. What are those costs estimated to be?
(I am all for alternative energies, by the way. But I want to sell that idea based on their own merits, not by hiding parts of the cost picture.)
Beanie,
ReplyDeleteHave some more KoolAid.
Amazing where gold's at relative to everything else:
ReplyDelete$INDU:$GOLD ratio tapped (and broke) the March 2009 lows. Looks like it's set for a bounce, but a parabolic move in gold and/or bear decline in stocks will push us to new lows.
$GOLD:$HUI is at new highs which on one hand scream for a reversion to the mean event, but on the other hand could be signaling a parabolic move in gold and/or miners getting punished.
Once the Reps get all their sleazebags what know how to make the economy work regulated into the Tea Party, they will regain the white house and repeal obama care if it is the last thing they do.
ReplyDeleteObama's budget is 3x Bushs' worst. Bush buried everything into the military a la Reagan. Bush wasn't stupid. He knew that after he did his worst as far as burying the country in debt, that the Dems were destined to top that three times over the first chance they got.
Obama may get a second term simply because the Reps/Tea don’t have a candidate. Any superstar R/T must be waiting for 2016, so they don’t have to run against an incumbent.
If Obama gets a second term he will be busy vetoing the obama care repeal especially if the Reps gain the Senate majority.
Oh how wrong you are Beanie. in the summer of 2010 I was telling people not to short the market because I didn't think the bull was finished.
ReplyDeleteNever once did I ever tell people to short the market. On the contrary I told people that the market wouldn't top until the dollar put in its three year cycle low.
There is a possibility that that low came in May. I started warning people in April to get their money out of the stock market. Anybody that listened to me has avoided this entire mess. Anybody that listened to you just got slaughtered ...again.
What Jim Stack, and most analysts fail to recognize is that this is not a normal market. This is a market that has been supported by quantitative easing. There is no fundamental driver behind this market and never has been.
ReplyDeleteWe saw last year that once quantitative easing was removed the fundamentals quickly dragged the market back down. The same thing has happened this year. As soon as QE ended the tide immediately went out.
It is a big mistake to expect this market to act similar to any other cyclical bull or bear market in history.
seriously, no one in the world believes the US credit rating is AAA. Everyone knows that the US is going to have to default on its debt, either honestly, or by debasing the currency.
ReplyDeleteThe token downgrade by S&P is meaningless and should have absolutely no effect on the markets. This was priced in, months, if not years ago.
LOL @ Gary & Beanie debate
ReplyDeletepimaCanyon --
ReplyDeleteYes, I lived in the area in the first half of 90's.
Mount Lemmon is one of the most beautiful places I ever seen.
BTW, when we were fishing trout in Rose Canyon Lake, we heard couple of bears screaming the other side of the lake. Fishermen were just staying calmly briefly looking at that side.
On the other occasion, we were driving in the trail, when car in front of us stopped suddenly and people was pointing at smth.
It was a huge bear chewing grass. My wife and friends jumpped out of the car pointing at him, and only after we fully estimated the real danger of doing that.
I know that there was some bad accident with human life loss, which caused bears evacuated from the area.
Some of the accidents included mountain lions.
If Obama does get a second term, he will probably be down to appointing Beanie as Treasure Secretary by 2015.
ReplyDeleteLOL @ dipshit
ReplyDeleteGary,
ReplyDeleteI'm not worried about our downgrade. That's small potatoes. I'm more worried that Germany is balking on its pledge to bail out the insolvent countries in Europe.
The stopgap announcement by the ECB to expand its SMP purchases of Italian and Spanish bonds was the even that turned our market around on Friday.
Now, if Germany is reneging on this deal, it's pretty much game over.
See Zero hedge: http://preview.tinyurl.com/3p7cqjp
Le Fou
DP,
ReplyDeleteI lived in Tucson for 36 years until I could no longer stand the hellish heat. Rose Canyon was one of my favorite places to go fish and hang out to escape the 110 degree summers. Mount Lemmon truly is beautiful. I've since learned after moving to the Keweenaw Peninsula where I was born, to a log cabin in the woods, that I needed the changing seasons, slower pace, low population density, and less crime Michigan's Upper Peninsula provides. Tucson's beautiful but it grew hectic and crime ridden with a million people living there now. Traffic is insane. The Keweenaw is one of the most beautiful places I've ever lived, and I lived all over the U.S.
The Downgrade, while short term will cause some to freak - is meaningless. A credit rating agency does nothing in regards to whether the US can pay it's "debt" or not. Gary - I have to continue to disagree with your statement in the comments above that "everyone knows the US will default"
ReplyDeleteThat is operationally impossible. We are not Greece.
I wrote and article - back when everyone was worried about default - to really help folks understand the truth of the way the monetary system works:
http://seekingalpha.com/article/282117-debt-ceiling-debacle-strategy-do-nothing
We will have some serious headwinds moving forward as the private sector continues to pinch pennies, and the GOP keeps trying to force austerity here. (And I usually vote Republican!)
The answer to this mess - strengthen the private sector. Tax less - and not just for the rich - but the middle class. Eliminate the employment tax so people who dish out paychecks don't have additional costs...... and SPEND MORE. Yes - we actually CAN afford to do that. Spend not just so Wall Street gets rich - but so the middle class gets the money.
The problem remains that both parties, and most investors - are both right and wrong. Until that realization takes place - you can expect a long and muddled period, AKA Japan. Another collapse? Or the End of America?
Nope.
You conveniently left out the second half of my statement, "either honestly, or by debasing the currency."
ReplyDeleteDebasing the currency is the same thing as defaulting. Creditors get paid but with dollars that are worth much less than when the debt was originated.
We have already debased the dollar 40% against a basket of the eight major currencies over the last 10 years.
We are already defaulting on our debt.
Two sides of that argument - debasing the currency is not the total disaster everyone makes it out to be.
ReplyDeleteA currency has value only when the productivity of the country behind it has value.
Read the article I linked - it explains that. I would argue the value of the dollar is dropping more due to the fact the rest of the world is now more productive, cause US productivity to not be as needed in the world scene, and thus less valuable.
The flip side is - as the currency goes lower to find it equilibrium point, every bit it drops means that US productivity is that much more affordable to the rest of the world.
Again - read the article.
Also - answer this question - do you prefer the US Government turns a constant profit and runs surplusses from here until the debt is paid off?
Think through your answer as it will reveal much about your understanding of the economy.
LOL spend more?
ReplyDeleteIsn't too much debt and too much spending what got us into this problem in the first place?
How can a grown up possibly say that we need more spending and more debt to fix a problem of too much spending and too much debt?
It's exactly this kind of thinking that has put us into the position we are at today. What we don't need is more mumbo-jumbo nonsense.
We need real solutions. Unfortunately the real solution is the same one that has worked every single time in the history of mankind. Allow the deleveraging process to run its course, cleanses the system, and start over.
Yes that means two or three years of severe pain. But history is crystal clear, every country that has taken their medicine and allowed the cleansing process to work emerged out the other side after 2 or three years and grew at tremendous rates.
The simple fact is there will never be another period in history where it will be as easy as it is now to let the cleansing process run its course. The longer we postpone this the worse it will become.
We've already turned what could have been just a severe recession in 2000-2002 into an inevitable depression.
The longer we try to avoid facing reality the more severe the depression is going to become.
My vote is to bite the bullet now and get it over with. Otherwise this will probably lead to world war III.
Modern Monetary theory = "hey we figured out a brand new way to f**k everything up"
ReplyDelete"debasing the currency is not the total disaster everyone makes it out to be."
ReplyDeleteYou really need to read some history books. Not one single time in history has this ever worked. Not once.
Please show me the history book that is evidence of the entire world collectively not being tied down to an asset backed currency?
ReplyDeleteNever happened, therefore, your argument is fundamentally flawed if you want to use history, as you are basing the facts of today on something that has never before taken place.
Flawed logic
"Modern Monetary theory = "hey we figured out a brand new way to f**k everything up""
ReplyDeleteHAHAHA - yeah - that is a good defense..... please - enlighten us as to why that is the case.
This should be good.
And I notice you conveniently avoided the answer to this question:
ReplyDelete"do you prefer the US Government turns a constant profit and runs surplusses from here until the debt is paid off?"
Again - think through the monetary system. We are not a household.
Hell Scandinvian did it in the early ninties. They suffered terrible pain for three years then emerged out the other end with incredible growth rates.
ReplyDeleteYou can put your trust in magic and nonsense. I'm going to trust common sense and history. We'll see who ends up being right.
The government can't turn a profit as it produces nothing. Government is a parasite on society. A necessary parasite to some extent, but one that needs to be kept as small as possible or it risks draining capital out of the economy. Capital that is needed for investment and expansion.
ReplyDeleteLike I said modern monetary theory = the reason we are in this mess in the first place.
How about a friendly little $5k wager?
ReplyDeleteWe'll both put it up into an escrow account to go to charity.
We can put the rules of the gamble in writing.
I say we don't collapse - you say we will - but you have to define what that is and put a date on it as well. No open ended timelines.
And - you are still avoiding that question. Just saying - we'll see who is right and calling my challenge question "magic" leaves much to be desired from your position.
Please - humor me. Do you prefer the US Government turn a profit from here until the time the debt is completely gone?
Makes one think yeah?
Dying to hear your answer.
Sure they can - they run deficits to they not?
ReplyDeleteThey "spend" more than they tax
Are you saying you prefer they tax more than they spend?
"HAHAHA - yeah - that is a good defense..... please - enlighten us as to why that is the case."
ReplyDeleteBecause all of the theories in the world don't change the laws of economics. The simple fact is it's not possible to produce prosperity by printing money. It doesn't matter if everyone in the world is printing or not. (They all are and you can see what it has gotten us. One bubble after another and one catastrophe after another.)
If you think MMT is the reason we are in this mess - you certainly don't understand their stance.......
ReplyDeleteNow we are getting somewhere - and what "laws of economics" are you referring to?
ReplyDeleteYou want to tie the currency to an asset like gold that has a limited supply?
Read the article - the final conclusion is not good. We have tried asset backed currencies for centuries and they too have constantly failed...... people don't see that though.
Printing money is neither good nor bad..... it just is. Money moving through the economy sucking up demand is what can hurt the economy. More dollars chasing full capacity output - but we have had that argument before.
The government needs to spend more to create jobs - not just buy financial assets. Buying bonds does nothing for the economy - but spending money to build roads actually does make America more valuable. Spending is not the issue - inefficient spending is the problem. Bailing out crook filled banks does nothing to help the real economy. Bailing out main street - yes we can afford that.
Tim the "spend more" arguement works if deficit spending leads to a lower debt/GDP ratio (has a positive GDP multiplier). That way the USD is not debased as Gary mentions. Deficit spending has worked previously(post great depression) but currently the spending has been failure (given debt/GDP is growing). Further deficit spending will most likely lead to dollar debasement.
ReplyDeleteI'm not really sure what you mean by collapse?
ReplyDeleteI know that if we continue down the path we are going at some point the bond market is going to break.
A country cannot devalue its currency indefinitely without consequences. We are already suffering commodity inflation, and have been for the last 11 years, to a great extent because the Federal Reserve is debasing the currency.
If we continue down this path we too will have our Greek moment where the bond market revolts and interest rates spike.
History suggests that they usually come out of the blue. Everything is going along fine and then one day for what ever reason the system breaks.
We had a taste of that in the fall of 2008.
As I explained in my article - you can NOT have a limited money supply. As an economy grows and new ideas and businesses come to fruition, and as new consumers come online - the money supply NEEDS to grow. Tying the supply to gold is absurd.
ReplyDeleteThe debt ceiling is basically a self imposed gold standard.
I agree that printing money does nothing to create prosperity, but unfortunately that is all they are trying to do. They need to spend those dollars on productivity. Creating it alone does nothing.It also does nothing to kill the economy either. The potential is there...... but the demand to create the potential is not.
Less taxes, and more spending on jobs - it's the fix for America.
I have never suggested going back on the gold standard. A gold standard has never prevented a determined government from debasing its currency.
ReplyDeleteThe problem is human nature. Historically we create a debt bubble on average about every 80 years, and they always end in a depression that cleanses the system so that we can start over.
If we could change human nature we could break this cycle. Going back on a gold standard would change nothing.
"If we continue down this path we too will have our Greek moment where the bond market revolts and interest rates spike."
ReplyDeleteNo Gary - I'll wager on that one as well. We are not Greece. Greece is like California. Revenue constrained.
Being on the gold standard - yes we can have a greek moment. On the gold standard, if you don't have enough gold and want to keep spending - you have to borrow it. That is not the case in America and most Sovereign nations today.
Jeff - the problem is NOT deficit spending - the problem is spending it on the wrong things. Buying bonds to bail out banks who then don't turn around and lend out their windfall does nothing for the American economy.
Spending on job creation would get us out of this mess.
Again - read my article and you will see this idea of "America" being in "debt" that they won't be able to pay is silly. It starts about half way down in regards to a story of me making vials of sand the new currency.
It will be an eye opener for you to the way things actually ARE. Once people understand the system in which we operate - then can then begin to get their brain around the solutions that are needed to fix the mess we are in. Government surpluses are no bueno. America has run a deficit and been in debt most of its 200+ years. The 6 times we have run long term surpluses was followed by depressions and severe recessions.
The government, who by force determines what the currency is, should keep the private sectors demand for that currency flowing as needed. Bubbles occur when they over do it, and collapses occur when inefficient spending takes place. Again - that is the source. Spending is not bad - deficits are not bad. But when the spending is spent on crooked wall street, then that is where the root of the problem is.
Simply spending money on jobs is not the answer. This was tried during the depression and failed miserably.
ReplyDeleteAll you end up doing is taking money out of one person's pocket and putting it in the pocket of a ditch digger.
The ditch digger produced nothing but a hole in the ground. In the process the solvent person was weakened because you stole money from him to give to the ditch digger.
We don't need infrastructure jobs. Those are not self-sustaining productive jobs. Once a highway or bridge is built that job goes away. And in the process you just weakened the US taxpayer.
We need real sustainable industries. The personal computer and Internet were real sustainable industries that created millions and millions of jobs worldwide.
Plastics and electronics were real sustainable industries that created millions and millions of jobs in the 50s and 60s.
I don't know where the jobs will ultimately come from, my guess is the biotech industry, but until they do we have no hope of extracting ourselves from this mess. All we can do is continue to make the mess bigger and the end game more catastrophic as we print more and more money and go deeper and deeper into debt.
Tim and Jeanene,
ReplyDeleteYou come on this blog to persuade people to adopt MMT as an economic theory. Why don't you just post a link and invite over to YOUR BLOG to learn about MMT, and anyone who want to learn about it can go there.
It's pointless to come on GARY'S BLOG to debate your theory, because we're all here to hear what Gary has to say.
Please leave,
Le Fou
You seem to think that the problem is that the the banks won't lend money. The problem is that the economy is so overleveraged no one wants to borrow money.
ReplyDeleteConsider also that we are almost certainly heading back into another recession. What bank would want to lend money at the absurdly low interest rates to someone that will almost certainly not be able to pay it back. We did that in 2005 and 2006 and look what it got us.
You seem to think that the global economy operates in some kind of fairytale land.
The global economy operates on people and businesses working to improve their position in life. That usually doesn't include making irrational decisions.
A debt bubble Gary? Maybe in the private sector. The US government can't have a debt bubble. Stop and think for a minute.
ReplyDeleteBonds go to pay for nothing in the current system. Congress still thinks it does - but operationally - it does not. Bonds are just a way to actually damped inflation because it sucks currency out of the system.
Think about this - imagine the massive inflation is the government paid off all debt tomorrow. $14 trillion dollars would be back in the system overnight and have no where to go. It could stay in cash - or have to find a new home in other assets. Can you say massive asset bubble?
This is what QEII and the fed balance sheet explosion was supposed to do. Banks - who took currency and deposited it with the Treasury by buying bonds, were forced out of those 3-4% paying assets and were given cash which now pays .25%. The hope is they will lend it out at higher rates, or invest elsewhere. We know they didn't lend it out - instead it went into stocks and commodities. oops.
As far as debt - for those that don't read the article.... I could take over the government and make vials of Sand the new currency. If I tax your property in sand vials - you have to get your hand on my sand in order to pay or risk losing your property. The only way to get the sand into the economy is if I run a deficit and spend more sand than I take back in taxes. If you have nothing to spend sand on, I can offer you to place the sand on deposit back with me.... thus creating and IOU to you. I leak the sand back into the economy in the form of interest payments.
Am I truly in danger by being in debt to you?
Nope.
Tim for me spending on "right things" means deficit spending that lowers debt/GDP ratio. How do you define it? And how do we ensure that any government spending is done wisely?
ReplyDeleteSince the US is no longer under a gold standard and issues it own unbacked currency, they can always print money to pay its debts. So the issue is what effect will this printing have on inflation and how will the exchange rate (dollar debasement). Sorry but deficits do matter.
Time for me to go watch a movie. You can continue to live in fantasyland if you want.
ReplyDeleteI unfortunately have to live in the real world and make decisions based not on fantasy and theory but on cold hard facts.
I think it was Bernard Baruch that said "It's never different this time"
And it never has been.
"All you end up doing is taking money out of one person's pocket and putting it in the pocket of a ditch digger.
ReplyDeleteThe ditch digger produced nothing but a hole in the ground. In the process the solvent person was weakened because you stole money from him to give to the ditch digger."
False - that does not need to be funded from taxes on the federal level. State level, yes. But federal level, no. We can lower the taxes for those who are productive and lets say run a grocery store. Farmers and clerks all work hard to produce food. Lower their taxes. Then - spend money to pay the ditch diggers.
We can all complain how unfair this is - which it is, but don't stop the story there. Where will these ditch diggers buy food? Probably at the grocery store, where the farmers and clerks work. Imagine if those ditch diggers are just not working and getting no money. They suffer from a human standpoint, and the farmers produce less food as demand is not there, and the grocery store may not need as many clerks.
What is fair - make those people go to school to increase the knowledge edge of America. Or pay them to create roads. The coutnry will benefit from less traffic and more driving options. Quicker routes. Road may not be sustainable long term for jobs, but it places paychecks in peoples hand who create more value to America, who also now have paychecks to spend at businesses run by those who actually are productive.
When the private sector is running on their own - the the government needs to spend much less - if not at all, as the private sector will be self sustaining for awhile. IF inflation gets too high - increase taxes as that takes money supply out of the private sector and makes it less able to create velocity of funds - thus dampening demand.
Pretty simple imo.
The problem is that the U.S. Governments are now about 43% of GDP, making the economy collectivist in nature.
ReplyDeleteThe cure is decentralizing decision making from elites and DC out to the individuals of the country. The monetary system needs to be created by the peoples preference for money, the free market.
The government should have as little to do with designing and implementing a monetary system as humanly possible. Let the free market determine what capital is and isn't, it is supposed to be a capitalist system after all.
MMT is just the same old game of let the experts run everything, the same experts that destroyed the productive efforts of millions of hard working people who each have more common sense in their pinky finger than all the phdoubled's in the country do.
Totally agree Gary -
ReplyDeletebanks won't lend AND people can't and won't borrow.
Too much debt - ON THE PRIVATE SECTOR LEVEL.
To talk about America defaulting though is a huge swing and a miss.
It comes back to figuring out ways to allow those individuals who are buried in debt to have a way to pay that debt.... and they do that through jobs. People need jobs - bottom line, and less taxes.
Le Fou - buzz off dude- if you don't want to read about my MMT posts - then wait till Im done. If Gary wants me to stop - then he will ask me and I will oblige.
Tim,
ReplyDeleteIs your conclusion this weekend higher or lower gold prices in the short/long term? Why about equities?
Thanks.
And if the state is broke who pays the ditch digger? If the state is broke who pays for education?
ReplyDeleteLike I said we tried this in the 30's and it failed miserably. Unemployment stayed above 14% all the way to WWII.
Like I said Modern Monetary theory = a different name for the same ole policies that have already proven not to work.
What fantasy land is that Gary? Every time I get you in a corner with arguments you can't seem to overcome - you respond that way like that is the end of the matter, yet logically - you can't counter what I just said. Please -enlighten me again on reality of the monetary system. I gave you my example - which you think is fantasy land - but the bottom line - it;s the current reality of the system in which we live...... are you saying it is not?
ReplyDeleteThe only fantasyland here is the one you keep retreating to by taking the stand of "just watch"
Again - refute my example of the monetary system and show me where I err in how its NOT reality at this time?
"And if the state is broke who pays the ditch digger? If the state is broke who pays for education?"
ReplyDeleteWhat state? the 50 states can be broke - the Federal level state can not be. Please explain how the US government can be "broke"?
I assume you mean like your neighbor who loses their job and can't afford to pay their bills?
If so - you are wrong.
Are you saying massive inflation?
We've had that debate before. Another year just went by - still waiting for that hyper inflation to hit.
Are you referring to higher commodity prices? More to do with emerging middle classes growing and putting strains on resources. That will balance out medium term. Plus a lot of speculation of the market thinking massive inflation is right around the corner as America collapses - which it won't.
RJ - no idea on the prices of where things are going. Gold is in a strong bull market - not willing to fight that. Stocks are actually very attractively priced based on cash flows from bonds one can get:
http://seekingalpha.com/article/255201-the-case-for-a-higher-dow
Short term, the retail investor will over react to things they do not understand. I am buying stocks aggressively down here.
Hey JIM
ReplyDeleteno disrespect intended but all you did was predict the Head and Shoulders pattern that everybody else has been calling since the market double bottomed on the neckline back in June.
I leave with this from my article. Hopefully it helps some understand the fantasy land we are all living in... and realize most of "reality" that people sell is actually the real fantasy land:
ReplyDelete"Pretend with me that we get to a point in America where no one works, ever. Everyone gets $100,000 per year from the government, which spends the money by creating it, and sets tax rates at 0%. In order to get food and clothing and housing, etc., we need to rely on foreigners to provide it for us. We can buy houses, but only if foreigners are willing to come here and work to build us our homes. They have to bring their own lumber and tools though, because we can't work cutting down trees or designing tools. We just spend. And enjoy the fruits of everyone else's labor. The foreigners work tirelessly so we can live well, and in return receive a bunch of paper with pictures of dead white men on them.
"The $100,000 per person that the government creates is pure deficit spending, which becomes debt because it is not offset by taxes at all. Assuming there are 300 million Americans, the debt would increase by $30 trillion every year. Not sustainable for sure. But why? Is it because the U.S. government is "running out of money" since they cannot collect enough in taxes to pay for it? Hardly.
"The reason it is not sustainable is because the world will not work for dollars they cannot use to buy something with. It is the same reason why you would not come to work for me if I promised to pay you in grains of sand. The sand is useless to you at the grocery store.
"If every American does not work, then they are not producing anything on which the world could spend the dollars on. Currently, American workers are producing trillions of dollars every year worth of quality goods and services. Therefore, foreigners don't mind accepting them because they can be used to buy up the labor and creativity and production of American workers. The more we lose that, the less foreigners will want our dollars. The drop in the value of the dollar over the past decade has less to do with federal debt levels as most fearmongers will have you believe, and more to do with the rest of the world becoming more productive themselves. As the value of the dollar stays low though, American productivity will become more valuable in the world, and the cycle will continue to ebb and flow. These are long term, generational cycles mind you, but they are there."
I've already suggested you read history. It has never worked. You seem to think that somehow this time will be different. It's never different.
ReplyDeleteThe US will not default honestly but we will default because we will and are monetizing debt.
Let me ask you a simple question.
Would you lend $100 to a country knowing that in 10 years when you get your principal back that $100 will buy half of what it would when you loaned the money to begin with?
In 2000 $100 would buy roughly 100 gallons of gas. Now in 2011 that same $100 will buy about 29 gallons of gas. if you factor in let's say an average 4% interest rate over the period your return is somewhere in the neighborhood of $140 to $150 over 10 years. Even with interest you still can only buy about 43 gallons of gas.
That equation is basically the same for every commodity across the board.
Now do you understand how we are defaulting on our debt?
Holders of US debt are getting screwed, pure and simple.
Tim I agree with some of what you say but you avoid discussing the effect that "poor" deficit spending has on the US exchange rate. I think this should be heart of conversation should be the effect of deficit spending on exchange rate (dollar debasement).
ReplyDeleteBecause I believe most people realize that the US unlike a me or you can always print more unbacked USD to pay off any of its debt.
C'mon now Gary. You can't have a fair debate if you don't debate honestly (nobody not even Warren Buffett calls the market perfectly all the time but you seem to be an exception (like Prechter)), and resort to history revisions. It seemed just about every other week you talk about the resumption of the equities secular bear market (although you may or may not have specifically say to short stocks at will, but mainly because you were into precious metals) any time the market falls a little. I've made numerous comments to your posts along the way against the plunge and resumption of secular bear. Look, I don't visit your blog every day, but every time I come here I almost always see reference about the secular bear market ready to beat the bulls down.
ReplyDeleteI've always admitted I did not see the housing fraud of 2008 that crashed the market. You will never see me revise my words.
However, I've called the april 2009 low and have been and stayed bullish to date even amid several corrections along the way where many said we would plunge again. I've thought that 2008 was just temporary bump in the road on our way to Dow 36,000 and I still stick by that. This is why I invested even in 2008.
So far, every dip since 2008 have been great buys, and indeed many stocks are way above their 2008 levels. Some are even above the 2007 levels! That means my calls to buy stocks dating back to 2008 were correct, and still are.
Tim,
ReplyDeleteThanks for the healthy debate. I for one as a middle class American living in the highest cost of living area in the country (westchester, ny - ok, "one" of the highest) need lower taxes.
The student loan deduction was phase out for us years ago. We get no child credits anymore. We actually are now starting to get into the AMT bracket, and I hate it. All the while we have 3 kids. Also, there is the flex spending account at work but it maxes out at $5k per family. For us it should be $5k per child at a minimum.
I can assure you that any additional money we took in would be spent in the economy so I agree with that point.
We are huge spenders (but still pay off CC each month) and I always joke with my wife that we're propping the economy up as we do so.
Without middle class, USA is f-ed.
T&J,
ReplyDeleteThough your arguments come off as ridiculous I try to stay open minded just to make sure that I am not making a mistake in my thoughts on the direction of the economy. In that sense I welcome your posts. That said, you don't seem to be following too much logic.
Money itself is not wealth. Value or wealth, is something that increases or can increase your standard of living. This could be a washing machine or car or air conditioner. Something that makes your life better. In the world of real things, these things could be manufactured by machines, also representing wealth, as they make work easier and increase leisure time.
Money just facilitates the trade of these things and is (was) supposed to facilitate a store of wealth.. potential for making your life better. On it's own it is not wealth.. it had to be earned by creating and selling things that are wealth.
So how can the government increase the wealth of a nation by debasing and creating more currency? Issuing bonds will decrease money supply, sure, but not when the Fed is the only one buying. And don't try to tell me that that isn't printing money - we all know it is. I would welcome a logical attempt at explaining why it is not.
The government cannot create wealth - it taxes people.. taking money the people earned while creating things of value to each other. The government can try to manage the economy by targeting spending, but that rarely works, and is a net loss to the real economy.
Hyperinflation is not so much to do with the volume of money. The government is broke when people lose faith in it's currency.
T&J,
ReplyDeleteYou're back!
My opinion regarding MMT: It could work IF the clowns running the country had a clue about what MMT is AND if they were willing to take the long view for a change and implement policy that would be good for the country over the long term, 10 years from now, 20 years from now. So what do you think are the chances of those two things happening? Pretty much zero I would say. So MMT is relegated to academia, a great theory, but it will never get beyond the theory stage because it depends on the idiots in Washington first of all, understanding it and second, implementing correct policy.
Beyond that, there is a flaw in MMT in my opinion. You say that we are now in a world where all currencies float against each other and are not backed by hard assets like gold. That is true. So what is to prevent them all going to zero together?
Gold bugs love the line "All fiat currencies [in the past] have gone to zero." As if to imply that all fiat currencies currently in existence will do the same.
And why not? As good as the Central Banksters have become at debasing their own currencies, we are now in a RACE to the bottom, whose currency can go to zero first!
I believe this is a real possibility and I believe that the growing perception that this is a real possibility is what is fueling the rapid rise in the price of gold and silver. Which do you want, Eurotrash or US Dollars? Investors are saying, "Neither! Give me gold!"
Beanie,
ReplyDeleteAll I have said is that we are in a secular bear market and have been since 2000. Not once did I call a cyclical bear market until recently.
It wasn't until April that I started suggesting everyone get out of the market because it was due for another cyclical bear market.
I clearly explained that the reason this was so was because the next three year cycle low for stocks was due in 2012. In secular bear markets a four year cycle low always corresponds with a recession and a bear market in stocks. Those on average last about a year and a half to two years.
That time line demanded that we see a top in this cyclical bull market sometime this summer. The fact that the dollar is due for a three-year cycle low during the same period was also a very big determining factor in calling a new bear market.
I have explained this to you many times, why do you insist on ignoring it?
I want you folks to know that the debt debate, basically the idea that debt was gonna plunge America, has been with us since the founding of America. It's nothing new. The arguments are the same today as they were 100 years ago. Permabears have repeated that debt mantra about forever now. Nothing original. Just about every year, America is supposed to be at the brink of falling off the proverbial cliff. I guess that's how permabears stay permabears for decades and decades. They have a dream to cling onto, while the Dow has gone from 500 to 1000 to 11,000 . It doesn't matter if many bull markets were missed, the permabears love clinging on to a dream that one day they may be right. This is how folks like Prechter can stay in business forever.
ReplyDeleteOne more thing to add....
ReplyDeleteI hear that they are thinking of eliminating the housing deduction.
We are completely screwed if they do this. I can assure you my wife would quit her job as it wouldn't be cost effective anymore. It's already pretty close with the cost of a nanny and pre school.
The government has to find a way to lighten the load on the middle class or at least have a scale for cost of living.
Beanie,
ReplyDeleteThe irony is that this debt debate--we have to get this national debt under control--came up in the early 30's which resulted in fiscal and monetary tightening at a time when the opposite was needed. The result: the country was plunged even more deeply into depression that did not let up until the whole world was dragged into war.
History repeats, eh?
"Printing money is neither good nor bad"
ReplyDelete==
The only reason printing money "worked", so far, is because it was backed by an increasing input of energy (wood/coal/hydro/oil/nuclear, which produced increased work/goods).
We are now entering an era in which energy input has plateaued and soon will be decreasing. In this kind of a reality, the assumptions and mathematics that supported debt based finance will no longer be operative.
Wow....I pop in here now and again to get Gary's two cents on Gold.
ReplyDeleteI trade currencies only.........
I've not seen this chat as HEATED ever!! and need to pop in to say...
ANYONE READING HERE SHOULD JUST THANK THEIR LUCKY STARS THEY ARE EVEN PRIVY TO GARY'S POSTS - LET ALONE GIVEN THE MEANS TO ARGUE THEM.
SHAME ON ANYONE HERE NOT COMING WITH THE UTMOST RESPECT.
buttkissathon
ReplyDeletepimcanyon,
ReplyDeleteElectricity to charge an electric car costs more than 1/10 of gasoline. So take $2000 out of $20,000 still a saving of $18,000 in a 10 year period. With solar panels, even cheaper.
PC
ReplyDeleteFDR took office in earlt 33, immediately took US off the gold standard and spent like a drunken sailor. The reason the depression didn't end was probably because the Progressives thought they knew how to micro manage the economy better than the people knew how to manage their own lives.
What got the world in this mess is psychopathic control freaks who think they have all the answers.
Sorry, I meant less than 1/10.
ReplyDeleteSolar panels on every roof and fully electrified cars will bring awesome prosperity to America. So many benefits, it's almost like getting free energy. And you know what free energy means to a nation? Huge huge corporate and consumer prosperity.
Solar panels and full electric cars are already cost competitive with their incumbent competitors. But when you have large scale adoption, economies of scale drives cost down to the ground.
This is so big. So revolutionary it will change America. Enough to pay our debts many times over.
Alternative energies is what Americans want. That's why they voted Obama and gave him and continue to give him tons of money for his presidential run(s). To the tune of almost $1 billion I think. Unheard of in any presidency.
"Would you lend $100 to a country knowing that in 10 years when you get your principal back that $100 will buy half of what it would when you loaned the money to begin with?"
ReplyDeleteFirst of all - people don't "lend" the government anything. You make it sound like we need foreigners to fund us - that is just not true.
And one should lose money over time if they are not willing to take risks to better the productivity of America. In the same way that people who stick money in a mattress should lose money. In order to keep up with cost of living - you need to either work and help America become more valuable, or invest in those who can. For those that want to invest "risk free" you can expect to lose to inflation - potentially.
"In 2000 $100 would buy roughly 100 gallons of gas. Now in 2011 that same $100 will buy about 29 gallons of gas."
Please don't go there again - we already covered this.
Real compensation has more than covered the "loss of purchasing power" when you factor in benefits and other types of pay (pension, retirement matching)
http://www.econbrowser.com/archives/2005/12/real_compensation.gif
Solar panels are obsolete. They have a new type of panel that is as thick as a couple of roof shingles. The new type of panel can be broken, they even drilled holes in them to demostrate that they still worked. Solar panels are large, klunky, and expensive.
ReplyDeleteHigh5,
ReplyDeleteYou wrote "What got the world in this mess is psychopathic control freaks who think they have all the answers."
I could not agree with you more!
But wasn't is Hoover's policies of cutting spending that deepened the Depression?
Jeff: "Tim I agree with some of what you say but you avoid discussing the effect that "poor" deficit spending has on the US exchange rate."
ReplyDeleteI don't avoid anything. I referenced bad spending many times and said it's not good. The reason is that it is just spending that does nothing to build the value of America. The reason the dollar is dropping is that the rest of the world is producing more and more - thus the world needs less dollars to buy the productivity of America - as they can instead get what they need from the rest of the world. America needs to innovate, and create jobs that keep it at the forefront of the world, so they produce products the world needs more of, thus requiring the world to get their hands on more dollars. The core of the problem is NOT money printing, it is the loss of jobs and innovation that is stripping the heart out of the country. As the world continues to catch up - you will see less need for dollar demand. But again - printing the reason? Hardly.
High5,
ReplyDeleteFrom 1933 to 1937, the United States economy expanded more than 40 percent, even surpassing its 1929 high. But the recovery was still not durable enough to survive Roosevelt’s spending cuts and new Social Security tax. In 1938, the economy shrank 3.4 percent, and unemployment spiked.
Speaking of solar, where is Bob Loves Hawaii? Haven`t seen him here it seems for ages.
ReplyDeleteHigh 5,
ReplyDeleteThat's the policy mistake I'm referring to.
High5,
ReplyDeleteOne difference is that the spending FDR completed increased GDP >1x the level of spending. So over time the debt as a percentage of GDP decreased. The current spending (in fact since 90s has been increased GDP less than 1x).
Spending to grow GDP can work if it is spent well. The problem is that most of the government spending these days seems to be misallocated to corporate interest and rich tax breaks represented by their lobby groups.
That said debt reduction can also work. Look at Iceland they defaulted on the bank debt, did not bail out banks and after some hard medicine (and a very deep recession) are now a growing economy.
And we're about to do it again. Raise taxes and cut spending. With 16 percent real unemployment now, what number will we likely end up with after spending cuts and tax hikes? 20 percent? 25? Great Depression II here we come.
ReplyDeleteBeanie,
ReplyDeleteThe problem is that debt to expenditures has now reached levels that historically have led to crisis.
As Reinhart & Rogoff point out in "This time is different" typically what happens is you get a BANG moment.
Everything is going along fine and dandy and then all of a sudden BANG you are in a crisis. That happened in 2008. It happened to Greece last year and it's now happening to Italy.
If we don't change course it will happen to the US.
Just because we are the United States of America doesn't exempt us from the laws of nature.
Movax - You are creating a strawman argument - bringing up things that I never argued against as a way to disprove my arguments. You lost me. I actually would agree with most of what you say, but not all of it. Rather than start down that line though - you can read my thoughts on all of that here:
ReplyDeletehttp://seekingalpha.com/instablog/475264-tim-ayles/134563-debunking-myths-of-us-collapse
T&J,
ReplyDeleteIsn't real compensation having gone up due more to workers in 3rd world countries being willing to work for pennies an hour under horrible working conditions than to increases in US worker productivity?
If the Chinese weren't willing to make all our stuff at pennies per hour worked, would we have the purchasing power we have today? I think not!
"So what is to prevent them all going to zero together?"
ReplyDeletePrison and the taking of your property by a gulag government that forces you to extinguish your taxes in the form of fiat dollars.
Try bartering with the IRS for your taxes...... or try forcing your grocery store owner to take some other currency...... they won't because they need dollars to extinguish their tax obligation..... It's a sick system - but it is reality.
Beanie,
ReplyDeleteIf solar is our savior, why is it not cost effective and why does the solar industry rely on government subsidies to be able to compete in the marketplace.
If you include the energy required to manufacture the solar panel, how much gain do we really get from a solar panel?
In other words, if it costs 10 units of energy to build a solar panel, and over its 20 year life span that solar panel produces 10.1 units of energy, then we're not there yet, are we?
T&J,
ReplyDeleteOR runaway inflation that results in complete abandonment of the currency and outright revolution.
Tim
ReplyDeleteIf there are two equivalent productive countries, one with debt/GDP of 30% and one with debt/GDP of 100% - I would find it hard to accept that the exchange rate would be the same. Something does not compute here.
So the appreciate of the partially gold backed swiss franc is a function of their increasing and productivity relative to the US?
PC
ReplyDeleteOh I must have the wrong impression of FDR. Here I thought he was a big government socialist/progressive. I stand corrected.
"And we're about to do it again. Raise taxes and cut spending. With 16 percent real unemployment now, what number will we likely end up with after spending cuts and tax hikes? 20 percent? 25? Great Depression II here we come."
ReplyDeleteThis is right on - this idea of reducing federal spending and raising taxes is gonna be brutal on the private sector.
The last thing EVERY American should want - is the government turning a "profit" by taking in more taxes than they spend.
TO THE PENNY!!!!- federal government deficits = private sector savings.
Therefore - government surpluses will take the savings of Americans and be excruciating on the middle class.
Paul Ryan is the most dangerous man in America - and again, I usually vote Republican. The GOP though is getting this terribly wrong. Dems problem is they want to spend recklessly on non- productive parts of the economy. As you said earlier - they are both right, and wrong at the same time. Not good that the clowns on both sides of the aisle don't have a clue as to what is going on, and therefore don't know how to fix it.
Gold will be a good bet, but I like productive businesses that sell things people have to buy - like food. Gun to the head - I'll take a dividend from JNJ or PG or KFT over most PM's any day.
T&J,
ReplyDeleteYou strongly implied - if you didn't say it outright - that the US needs more money printing, or that it is not going to hurt at the worst. I can't comprehend of how it can help anything, other than increasingly shorter and shorter term can-kicking.
I don't see how it can help at all when we know it is not wealth they are generating, just destroying everyones savings. It's forced socialism - which does not work in a property based system with obligations and debt. There are enough rich people that will realize this is what is happening to them, that they will dump their US dollars, in greater and greater numbers, for something of value, mostly gold, before it is too late.
High5,
ReplyDeleteYou wrote "Oh I must have the wrong impression of FDR. Here I thought he was a big government socialist/progressive. I stand corrected."
Are you being sarcastic, or serious here?
Either way, you're not addressing the fact that FDR's government cut spending and raised taxes, and that caused the economy to tank and unemployment to spike. Why would we expect a different result this time?
Jeff -
ReplyDeleteHigh debt/GDP countries is a sign of maturity in the economy there. Every country that gets near it's full ability will have that problem. There will be a point in time where China will have the same issue most likely. I am not too worried about debt/GCP though. Japan is at 250% - yet they still exist. They are dying a slow death though as they are aging quickly, not creating internal demand, and other countries have caught them in technology. They led for years, but now the world has caught up.
I again believe that the fear mongers will still be worried about the US debt level in 30 years when it is at $30 trillion and the GDP output of the country is at $28 trillion.
Assuming the worlds population keeps growing that is.
And this is why we keep making this mess bigger and bigger.
ReplyDeleteWe keep trying to avoid the pain. I have news for you we are going to have to take our medicine one way or another.
We can either do it willingly and control the process to some extent, or we can continue to delay the inevitable until the market forces us to face reality, the BANG moment.
Unfortunately humanity has a long history of being incapable of making hard decisions until it gets into a crisis.
haha beannie, i didn't know you knew beannie---
ReplyDeletewith bermonkee in charge, he's an idiot!---heck--his policies could end up--in a hyper inflation period---- in which case dow could reach a million---and a loaf of bread, could cost $5,000 dollars. a house would cost a trillion. LOL
zstock---
Movax: "I can't comprehend of how it can help anything, other than increasingly shorter and shorter term can-kicking."
ReplyDeleteAll money eventually has to get spend somewhere. That somewhere is usually productive businesses that create wealth out of nothing. A farmer takes a seek - which is free because it was given to him by God from a plant the farmer did nothing to create. The farmer works and turns that seed into corn, which goes to the store, where people buy it and eat.
If the government gave some lazy doofus $1 to buy corn, he eats for free (unfair!!!) but the farmer and grocery store get the Dollar.
The farmer now has an extra dollar to invest in another corn stalk if he wanted.
What is unfair is not that they are stealing from the farmer by printing, they are not. Taxes go to fund nothing. What is not fair is that the farmer had to work for his food and the doofus got to eat for free.
We should make him go to school or build a road so the farmer can get his crop to the store easier and at a cheaper cost. Pay the doofus to improve American - rather than get a free lunch.
So in the end - the printed dollar makes its way into the hands of productive businesses who are creating value for the country.
It is my first point in this blog piece:
http://seekingalpha.com/instablog/475264-tim-ayles/134563-debunking-myths-of-us-collapse
i didn't know you heard of beannie.
ReplyDeletebermonkee policies could lead to hyper inflation. if that happens, beannie will get his 36,000 DOW, and you and i will have to sell our houses for a trillion dollars, so we can go out and get a $5,000 dollar loaf of bread...LOL
The correct answer is to drastically reduce government spending, cut taxes, and allow the deleveraging process to run its course as quickly as possible.
ReplyDeleteYes this will be painful, extremely painful. But, it will be over and done with in two or three years.
If we continue down the path we are on we will lose another decade, and we will have crises after crises, and each successive recession will continue to get worse and worse.
My vote is to just bite the bullet and get it over with.
"We can either do it willingly and control the process to some extent, or we can continue to delay the inevitable until the market forces us to face reality, the BANG moment."
ReplyDeleteThose bond vigilantes?
They don't exist in American and sovereign currency issuers.
Any time you see the US CDS rise - the safest trade in America is to short them.
Greece and the other PIIGS? Yeah - the market can spank them. Vigilantes exist there.
America will not have a bond market collapse moment.
PC
ReplyDeleteOf course I'm being sarcastic. I won't waste our time debating whether or not FDR was responsible for one of the largest usurpations of the private sector, the largest centralization of power, the most expansive regulatory regime, high spending, high borrowing, periods this country has seen. Yet the high unemployment rate ran all the until WW11.
Now the feds are spporting an extra eleven perecent of the economy through deficit spending, creating temporary jobs at the cost of over 300k per year, and diminishing returns from there as far as the eye can see.
Of course unemployment will skyrocket when the government stops creating useless jobs. But it won't be because they give up on it, it will be due to the original reason. The economy is too big because of the phony money creation and needs to reset by clearing out all the malinvestments, like solar and ethanol from corn, so that investments can be made in promising ventures.
Seriously, debt will be over a quadrillion in 30 years.
ReplyDeleteActually they are stealing from the farmer. By printing money and giving it to someone the supply of money in the system increases thus devaluing the currency. So the price of everything the farmer has to purchase increases. This is called inflation.
ReplyDeleteNot to mention why in the world would be farmer work and toil to produce a product when apparently all he has to do is just wait by the mailbox for the government to mail him a dollar.
Some of these arguments are so illogical that I just can't imagine anyone dreaming them up.
Tim, do you live in the real world?
"The correct answer is to drastically reduce government spending, cut taxes,"
ReplyDeleteNope.
You can still run deficits and add to the debt that you are afraid of.
If the government spends $14 trillion and collects $12 trillion in taxes - the debt goes up by $2 trillion.
The private sector gets $14 trillion in income from the spending, and gives back $12 trillion in taxes for a net $2 trillion of money in the system to use and save and spend.
If the government cuts spending to $4 trillion and reduces taxes to $2 trillion.......
Same problem - $2 trillion more in debt.
Also - the private sectors now has only $4 trillion of income - but that is offset by only having to pay $2 trillion in taxes..... therefore - they still have $2 trillion to spend.
The only way to get out of the "supposed" dangerous debt - is to tax more than they spend.
If the government taxes $4 trillion ( which is less taxes!!) and spends only $2 trillion...... ooops....... huge sucking of $2 trillion out of the middle class pockets. They will be forced to go into debt to maintain the lifestyle they had for a short period...... or they will be forced to retrench.
Think Clinton surplus - this is EXACTLY what happened!
"Actually they are stealing from the farmer. By printing money and giving it to someone the supply of money in the system increases thus devaluing the currency. So the price of everything the farmer has to purchase increases. This is called inflation."
ReplyDeleteYou are totally wrong still Gary. So the costs of the farmer increase..... what does he do? He increases the cost of his corn. Tis why you and the farmer make more dollars per hour of labor today EVEN THOUGH the cost of corn and everything you buy has gone up for decades!
"Not to mention why in the world would be farmer work and toil to produce a product when apparently all he has to do is just wait by the mailbox for the government to mail him a dollar."
That is where capitalism comes in. Hopefully most people will want more than the basic life - and try to get ahead and have a nice house and new car and take a vacation. By working - they can get more of those dollars. By living off the government, usually you are relegated to a pittance of an existence, living in the ghetto, and eating bread and water. That is why the farmer would want to work. If the doofus gets paid more than the farmer - then sure - time for the farmer to stop working - and then the whole system collapses as we all starve to death.
TJ
ReplyDeleteI get that the US can deficit spend on programs and bid up price of commodities and innovate and build new technology than resell that final product and grow GDP much greater than the initial government spending. If the US did that, the economy would grow, there would be job hiring (debt/GDP would decrease) and US exchange would increase in part because of demand for our new products. This is the ideal solution. In fact Japan could do the same thing (and has oscillated between doing this and choosing austerity the last decade)
In reality (and correct me if the last few years have not occurred like so), the US deficit spends on poor projects/bailouts etc which increases the debt/GDP ratio, does not lead to job creation but rather currency debasement (or as you argue the depreciation is function of the inability of the US to sustain its lead in global innovation).
On our current path I see exchange rate depreciation (currency debasement) the outcome.
at 86d4life
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