Are We at the Beginning of the Next Bull Market? Probably Not

“[It is] an ill wind that bloweth no man to good.”

-- John Heywood

I’ve heard a lot of discussion in recent months about the future of the dollar and the economy. Some people think this is just a typical downturn – that we’ll get through it and then everything will be just fine. Housing prices will rise again. The stock market will recover. The United States will prosper. Everything will be as it was. Similarly – and more recently – there has been a plethora of talk about whether the recent rally in the stock market is the beginning of a new, long-term bull market.

I hate to yet again be the harbinger of bad news, but this is not the beginning of a new bull market, and things are not going to be as they were.

Have a look at this chart comparing the stock market collapse of the 1930s to our current downward spiral, created by Mark Lundeen:

Mark has consistently painted a cogent argument that we are nowhere near the bottom. If you haven’t already, you would do well to read his articles going back a year or two. He predicted everything we’re going through in a humble and patient manner. Even if you’re determined this market is going to turn around and return to “normal,” I’d think twice before simply dismissing his research. In any case, no matter what your outlook is for the future of markets and the economy, the focus of this article is the current stock market rally. And the thing that should be jumping out at you, regarding the chart above, is the red plot – explicitly, the sheer number of false rallies the market endured from 1929 to 1932.

Before we go further, I want to remind you that I found my success in the financial world as a value investor. I believe wealth-creation is a long-term prospect, and if an investor wants to do well, he or she must find undervalued enterprises that create abundant free cash flow. But more than anything, that investor must enter the position at a discount to intrinsic value. So what is intrinsic value? It is a discounted measure of a firm’s ability to create wealth for its owners, over time. And in my world, wealth is measured explicitly by free cash – loosely derived from a company’s earnings.

The problem with the current economic environment is manifold. Sure, in terms of simple aggregate stock prices, global markets have been crushed, and on the surface -- to less scrutinizing eyes -- the whole thing probably seems like a giant orchard full of low-hanging fruit. It’s simple, right? You have earnings. You have price. If the price goes down, the company is worth more, intrinsically, because the price-to-earnings ratio has collapsed. Simple, right?

The question is rhetorical, and you’ve undoubtedly guessed that my answer is a resounding no. When the market took its first harrowing dive in 1929, reported earnings remained intact, driving price-to-earnings ratios much lower. To a novice value investor, this might have seemed like the opportunity of a lifetime. Of course, we know now that it was anything but the opportunity of a lifetime; over the ensuing few years, as conditions worsened, earnings reflected the true nature of the economic environment and melted accordingly. Stocks continued to fall accordingly, with very short-lived respites offered by the painful bear market traps I referred to in the chart above.

What caused these traps? The exact same mistakes would-be value investors always make after every downward move in a collapsing market driven by a faltering economy: stocks fall, but earnings do not follow immediately, and this makes everything look “cheap.” Unfortunately, earnings always lag the market, so when equities fall, the real economic conditions aren’t reflected by historical reporting.

Of course, in a prospering economy, this all becomes moot because earnings will continue to grow despite any market downturns. In October of 1987, for instance, the market shed 23% of its value in one day, but the economy was booming. Anyone picking up equities the day after the crash found some incredibly undervalued companies -- because earnings were increasing throughout the economy. But there is absolutely no comparison between the 1987 crash and its economy with either the 1929-1932 crash, or the 2007-2010 crash, and anyone foolish enough to even consider buying equities at this point needs to take a long, hard look at the economic conditions underpinning our current depression:

1. The housing and credit markets are terminal. To bring it into perspective, consumers drove 67% of the economy until a year or two ago, and they got the money from their houses and credit cards. That party, however, is over, and the spending has come to a halt. Is this fully reflected in company earnings? Absolutely not, and the worst is yet to come.

2. The depression of the 1930s was the worst economic catastrophe the U.S. has ever seen (yet), but even in the midst of that torturous environment, the nation was a net lender, and it had a huge manufacturing base. Today, the U.S. is the largest debtor nation on earth, with a relatively small manufacturing base. Whether you agree it was the best move or not – and I don’t – the United States essentially borrowed its way out of the Great Depression -- simply because it could. That, coupled with its powerful manufacturing sector of the time, allowed the country to muddle through some extremely painful years. In the current environment, however, the government’s debt-load is at record levels, and its ability to borrow is severely limited. If you believe that China and Japan are going to continue to lend to the United States at yields between zero and three percent, indefinitely, I would like to know why. Are they really so reliant on the U.S. consumer to buy their exports? And that leads inevitably to the question: what consumer? Please see my previous bullet point.

3. In the 1930s, the United States dollar was tied to gold, thereby limiting the government’s ability to flood the market with printed currency. I have no doubt that Franklin Roosevelt and his henchmen would have loved to print money to battle collapsing prices caused by the same deleveraging forces we are seeing all around us today. Unfortunately they couldn’t – at least not the way the Fed is doing it now -- and the country was spared the runaway price-increases that would have certainly ensued if the government had been able to print money at will. Today, there is no gold standard. The U.S. government is running wild -- printing money like a child with carte blanche in a candy store -- and that money will have to be soaked up somehow when the deleveraging stops. How will the government do that? By selling Treasuries? To whom, and at what yields? Please see my previous bullet point.

When you compare our current situation to the Depression of the 1930s, the outlook is certainly grim. And yet, in terms of the stock market and its close relationship to corporate earnings, the prognosis is even worse; in the 1930s, the government’s ability to inflate the dollar was impaired, and so, at the very least, prices continued to fall – giving the consumer at least one thing to be happy about. Sure, corporate earnings fell, but at least money retained its value. In today’s economy, however, inflation is the name of the game, and runaway price-increases loom like the darkest storm on the horizon. At this point, it isn’t a matter of if, but rather when the nightmare begins; its inevitability is simply terrifying to those of us who refuse to bury our heads in the sand and trust the very government that created this hopeless fiasco in the first place.

I suppose some would argue that rising prices will be good for corporate earnings, and this will undoubtedly be so in nominal terms. But if the consumer is feeling the pain now, how is he going to feel when the prices of milk and eggs start moving up exponentially? The truth is, in nominal terms, the whole stock market might actually rise a little, but as a long-time value investor, I’m here to tell you that will not mean that wealth is being created for shareholders. If the consumer isn’t spending now, what is his budget going to look like in a hyperinflationary environment? No, in real terms, corporations are facing years of unprofitability -- thanks to the profligate and reckless actions by the United States federal government, among others -- and stock prices are going to reflect that, in real terms.

So when you’re thinking about “buying the dips,” or dollar-cost-averaging into equity markets, try to remember that we are in uncharted territory. The U.S. consumer-driven economy simply has no more fuel, and nothing will change that – at least not for many years. Likewise, the onset of inflationary price-increases is indisputable and inevitable; a country cannot wantonly commit itself to $12.8 trillion and simply print its way to its objective without suffering the enormous consequences of massive price-escalation. Further, this condition will hang in direct contrast with the economy of the 1930s, which was, to say the least, bad enough. I can only imagine how bad an inflationary depression is going to feel.

Ultimately, corporate earnings are headed for disaster, and that won’t be good for anyone. But it certainly doesn’t bode well for the prospects of true value investors.

If you want to know more about when I will be interested in equities again, see my article on the Dow-to-gold ratio.

Disclosures: Paco is long TBT, UGL, and DXO. He also holds U.S. dollars by necessity, pending the advent of private gold-backed currencies.

Comments

[Raymond Mic...:]

Playing devil's advocate, what if the wealth destruction that we've witnessed and will continue to witness dwarfs the amount of money that the Fed prints and circulates? Will we still see inflation? Moreover, if the consumer is dead, as you suggest (and I agree), yes, bread and milk may go up in price due to consumer demand, but pretty much everything else should see no increase in demand, thus tempering inflation. Further, if there is demand for non-necessities (at some future time), which causes them to rise in price, then doesn't that mean that some of the printed money has found its way into consumers pockets through job-creation or other means? In short, is inflation an absolute inevitability? Or are there scenarios, such as a massive consumer retrenching that leads to a deflationary spiral that outstrips the government's will to print money? I don't know, just speculating out loud.

Apr 20 05:12 AM

[socrateazz:]

Your article is very insightful. I agree. I further believe with the current government policies the future probably will be much worse than the great depression. The reason I see is the balance of trade. Once the value of the dollar starts to fall significantly a snow ball effect will be felt. The average American is into using and trading wealth. There are becoming fewer wealth creators in the US. The brilliant ( truely idiotic) enviornmental (wealth distribution) Laws (cons) will only accelerate the problem. Those in charge will continue to take credit for what they are not responsible and blame on others for which they really should be responsible. Reality is in the propaganda: At least until blame can be properly redirected to those not really responsible for the result!

Apr 20 05:36 AM

[Ricard:]

"What caused these traps? The exact same mistakes would-be value investors always make after every downward move in a collapsing market driven by a faltering economy: stocks fall, but earnings do not follow immediately, and this makes everything look “cheap.” Unfortunately, earnings always lag the market, so when equities fall, the real economic conditions aren’t reflected by historical reporting."

I agree with most of the article, except this quote. Earnings already began to fall in late 2007, which was the highest peak of the Dow, ever. Had one sold everything and held cash (Jeremy Grantham), then one would have done quite well through this morass.

Earnings this quarter may look good, but c'mon...people are only focused on the financials, and the word 'alchemy' comes to mind immediately when dealing with that industry. Most other companies are not doing as well as they were one or two years ago...a trend that began in 2007...!

Apr 20 06:28 AM

[ArkansasAngie:]

Forbes reported that earnings for the S&P 500 are down 84.7% YoY.

I'm wondering whether we aren't in a race against time.

Companies have been operating under a growth business model. Companies made investments and took on debt based on growth.

The question becomes how long can companies survive without earnings and market growth. In order for them to survive, companies will need somebody to loan them the money

Borrowing money and then having to pay it back keeps me from borrowing money for my little company.

Gee... if I only had a non-recourse loan I'd do my part in spending it and hoping for the best too.

Apr 20 07:54 AM

[User 353732:]

To slightly misquote T.S Eliot: " This is the way the age ends; the age ends; not with a bang but with a whimper" Age , but not the world. The world does not end and neither does humanity and human action.
High inflation and high unemploymet are not a destination but an avenue( maybe a very painful and dangerous one or maybe just a painful and humilating one) to something else, another age in the long procession of ages. We do not know what this next age looks like but we know that people will consume, produce, save, invest, transact,trade, create, destroy, organize and disrupt, civilize and brutalize i.e will do what people have done always. Nations and spheres of influence and empires will rise and fall, as they have always done.
1. So how do we in the USA survive the transition? surely only a very small minority can be passive investors( or fund managers or investment advisors) in hard and financial assets , which have no value unless someone , somewhere, is using these resources to create value. The vast majority will have to engage in active work and almost everyone( over 95%) who can work will have to dispense with the notion of"retirement"( a concept peculiar to our age). For some, being frugal and starting a small business, some new endeavor , may be the way to survive and position themselves for whatever the next age may bring. Others( eg in finance, retailing, real estate, media and fashion, state and municipal government, law, accounting and consulting) will have to retrain themselves mentally and physically and turn to opportunities in food and agriculture, energy and utilities, water, metals and minerals, manufacturing, transporatation and logistics,repair and maintenance, essential public services, military services, healthcare and education. Indeed 65 to 70 % of Americans will pretty much keeping today what they do now.
It is the purely "professional" classes who, I think, will experience the greatest difficulties and anxities about status, identity and money.The typing, tapping and talking classes who only know how to manipulate symbolic logic in comfortable surroundings will fare the worst(except for the very best, who will do better than ever). The combination of mental and physical skills will provide many more options than just the mental skills that characterize so many professionals today(especially the Salarymen/Salarywomen).
2. What about after the transition( lasting 6 to 10 years, maybe) to the next age? Well that depends on whether you are an optimist or a pessimist and are still around, of course.
For the optimist, prepared for whatever comes next and willing to shed nostalgia(the past will not reurn either for America or the World) , I speculate there will be more,even better, but different oppoprtunities for entrpreneurship, innovation and investment, and happiness in the next age. We can only dimly see these now but in a few years there ought to be much greater clarity. Humanity has endured,survived, and thrived after far worse calamities than several years of high inflation, high unemployment, and multiple, simulataneous, low level shhoting and economic wars, thanks to the optimists.
If you are pessimist ,this comment will have no appeal for you. One hopes, you will find good things to do working for or with an optimist, who will have seen and siezed the next opportunity, years before you acknowledged their existence.

Apr 20 08:10 AM

[pslater:]

Excellent article Paco. Like you, I fear future inflation and currency devaluations. While some will argue whether this will happen at all, history shows that EVERY significant bout of inflation and currency devaluation in history has started with the same policies our government is following at present.

As always, place your bets.

Free cash flow strikes me as an excellent criteria upon which to base these bets. However, if you use dividends as a proxy for free cash flow, it becomes clear that free cash flow is being destroyed as fast as household balance sheets.

Apr 20 08:12 AM

[Tony Daltorio:]

Great article as always, Paco. With the huge debts built up and the lack of a manufacturing base to grow our way of these problems, what awaits the US is a dollar that loses much of its value and much higher inflation.

And for the deflationists who think the Fed is running out of ammo, to use a baseball analogy - we're still in the top of the first inning when it comes to the amount of money the Fed is going to "create".

Apr 20 09:06 AM

[doubleguns:]

In the 30's when the dollar was pegged to gold the govt confiscated the gold from the citizens. Once they had the gold they promptly revalued it higher(devalued the dollar). Wealth creation for the govt. We cant do that either today since our dollar is not pegged to gold.

Another significant difference between now and then that enabled the govt to survive. Foreign entities were making a run on americas gold back then and this confiscated gold was used to survive the run. Today the run will be selling treasuries which the treasury will have to print dollars like crazy to keep up with redemptions or put a moratorium on redemptions. In either event the dollar will plunge and inflation will surge.

Apr 20 09:39 AM

[mrmillergd:]

Great article. You can't go from a retail, consumer-driven economy to something else overnight. Where would growth come from? The major problem we have now is that no one has an answer.

Apr 20 10:18 AM

[toobad41:]

At last someone has made an effort to understand this current market. However, I don't believe we are headed towards a depression as Lundeen seems to indicate. If I recall the "Great Depression" had no input from the government. There was no Federal insurance on savings and people made runs on banks. Banks could not cover and closed their doors. We have checks today that were not in effect back then. I am anxious to see the "BEV" curve after the next 80 weeks or so. It should be interesting to say the least... Maybe WWIII will have started by then and take us out of this mess.

Apr 20 01:20 PM

[Jasper M:]

toobad, I am simply aMAZed you would say
"If I recall the "Great Depression" had no input from the government."
Pretty much everything after the first three years of the Great Depression was a Product of government input - price controls, for one thing (started under Hoover, and expanded exponentially by Roosevelt), interference in labor markets, regulation. Confiscation.
That depression was made Great by government's failure to accept the verdict of the marketplaces re prices. The Same thing is happening now, with the price of bad debt.

Apr 20 02:46 PM

[toobad41:]

Let put the record straight. The Great Depression started on October 29, 1929 (Republican Hoover in power). February, 1930 Treasury Sec. Andrew Mellon announces that the Fed will standby as the market works itself out. This philosophy continued through 1931. By 1932 over 10,000 banks failed and 80% of the markets value is lost. Hoover did little to late and FDR won the election and took over in 1933. By 1934 the markets began to recover. So my message is that the Republican Pro-business senario failed badly. I am not saying the FDR dream plans worked. I am saying doing nothing would have been a terrible thing to do. I am pro-business but somethings in a larger scale cannot work themselves out. This is the senario we are in today. This is bigger than anything we can imagine. I hope Mark Lundeen is wrong; I truly do.

Apr 20 04:09 PM

[bebido:]

Paco, another great article. Keep up the good work!

Apr 20 04:19 PM

[Whippet:]

Toobad41- Unfortunately, we don't have a track record of what no government intervention would have looked like in the 1930s, and never will. To claim FDR's policies had ANY positive impact on recovery is to say that correlation implies causation. Any scientist, economist, or 9th grade student could tell you this is bogus logic. Just try to tease the economic recovery out from the New Deal and the onset of World War 2- it cannot be done. The hyper-Keynesian schlock we're being served by the messiah and his disciples follows the same fallacy. The only track record we know works in this country is capitalism, low or no income taxes, a hard currency, and a lean federal government financed by excise taxes and tariffs. This system has warts, but brought us from a country of pioneers, farmers and tradesmen in 1776 to an economic superpower in 1913. We can thank the Fed, Wilson, et. al. for everything since.

Apr 20 04:36 PM

[JohnAl:]

"Let put the record straight. The Great Depression started on October 29, 1929 (Republican Hoover in power). February, 1930 Treasury Sec. Andrew Mellon announces that the Fed will standby as the market works itself out. This philosophy continued through 1931. By 1932 over 10,000 banks failed and 80% of the markets value is lost. Hoover did little to late and FDR won the election and took over in 1933. By 1934 the markets began to recover. "

toobad41, you really need to reread your history. Looking at this as a Democrat vs Republican issue is missing reality entirely. Hoover wasn't the free marketer that he's made out to be by history teachers in the gubmint schools, he was a classic economic interventionist. In an attempt to spend the country out of the depression Hoover increased federal spending and the deficit so dramatically that FDR railed against it in the 1932 campaign. He also pressured business to prop up wage rates and it was he, not FDR, who started the depression era public works programs.

The Hoover/FDR to Bush/Obama parallels are astounding. Just as Bush was no free marketer, neither was Hoover. And just as FDR turned out to be Hoover on steroids, so it appears that Obama is Bush on steroids.

The Hoover/FDR interventionism stifled the recovery and kept the country in depression for a decade and a half. Let's just hope America comes to it's senses and we don't suffer the same fate in today's Bush/Obama depression.

Apr 20 08:05 PM

[nmelendez:]

The problem with all this is there is no final objective. Back during Kennedy, we decided to put a man on the moon...AND WE DID!!! The whole country pulled together towards that one objective. We are now lost because we are unable to distinguish the tree from the forest. We need an objective, something to aim for. If we don't get one we will just keep ambulating around like zombies. Me, my project is to pay off all my debt in 3 years. All except my house.
I am using the Dow/Gold ratio as a tool. So far it's working. I am also putting 20,000 yearly into 30 year treasuries, God knows the Fed needs our help.


On Apr 20 10:18 AM mrmillergd wrote:

> Great article. You can't go from a retail, consumer-driven economy
> to something else overnight. Where would growth come from? The
> major problem we have now is that no one has an answer.

Apr 20 08:55 PM

[Moon Kil Woong:]

Increased earnings are driven by cost savings just as bank profits are being generated by accounting games and cutting lending. The stock market is not the whole market. The general market is still contracting and it seems like no one in Washington seems to care.

Save the banks. Save the brokers. Save wall street. No wonder no one is left worrying about job losses and the unemployed except the fact they want them to borrow even more.

Paco is right that the economy is no better than a year ago but everyone will work their darndest to make sure the market doesn't reflect that fact. If there is to be capitulation at this rate it will be another year and a few trillion more down the drain trying to prop the market up with taxpayer $.

Apr 20 10:16 PM

[Valley Boy:]

You are exactly right. When President Harding tackled the
Post World War One Depression of 1920-1921, he allowed
in the various labor-management negotiations that wages, along with the other prices in the economy, to fall to their natural market
levels. He also cut the work week to 40 hours; we can thank him for weekends! This did not sit well with his Secretary of Commerce, Herbert Hoover. Hoover thought this was anathema to his humanitarian beliefs; remember, he was in charge of humanitarian efforts in World War One.
After Hoover became president and the stock market crashed,
he did everything he could to convince the managements to prop
up labor rates. This was one of the factors in deepening the
1930-1933 economic decline; richer wages equalled less work
available.




On Apr 20 08:05 PM JohnAl wrote:

> "Let put the record straight. The Great Depression started on October
> 29, 1929 (Republican Hoover in power). February, 1930 Treasury Sec.
> Andrew Mellon announces that the Fed will standby as the market works
> itself out. This philosophy continued through 1931. By 1932 over
> 10,000 banks failed and 80% of the markets value is lost. Hoover
> did little to late and FDR won the election and took over in 1933.
> By 1934 the markets began to recover. "
>
> toobad41, you really need to reread your history. Looking at this
> as a Democrat vs Republican issue is missing reality entirely. Hoover
> wasn't the free marketer that he's made out to be by history teachers
> in the gubmint schools, he was a classic economic interventionist.
> In an attempt to spend the country out of the depression Hoover increased
> federal spending and the deficit so dramatically that FDR railed
> against it in the 1932 campaign. He also pressured business to prop
> up wage rates and it was he, not FDR, who started the depression
> era public works programs.
>
> The Hoover/FDR to Bush/Obama parallels are astounding. Just as Bush
> was no free marketer, neither was Hoover. And just as FDR turned
> out to be Hoover on steroids, so it appears that Obama is Bush on
> steroids.
>
> The Hoover/FDR interventionism stifled the recovery and kept the
> country in depression for a decade and a half. Let's just hope America
> comes to it's senses and we don't suffer the same fate in today's
> Bush/Obama depression.

Apr 20 11:37 PM

[Paco Ahlgren:]

I appreciate your cynicism, but history remains intact: the level of dollar devaluation today is exponentially higher than the dollar-gold-price reset of the 1930s. That's why I used the word "limited" in my analysis.



On Apr 20 05:52 PM Freya wrote:

> Your Article: Statement #3, 1st paragraph,
> "In the 1930s, the United States dollar was tied to gold, thereby
> limiting the Government's ability to flood the market with printed
> currency.", 2nd paragraph, ..." in the 1930s, the government's ability
> to inflate the dollar was impaired..."
>
> In the 1930s, the Government devalued the USD by changing the valuation
> of Gold against the dollar by about 69%. Gold was fixed at $20.67,
> then overnight, it was fixed at $35.00.
>
> If that occurred today, the present USD value of 87 would drop to
> around 51.
>
> What part of history are you trying to change?
>

Apr 21 09:28 AM

[Paco Ahlgren:]

On the contrary, the government caused the Great Depression. They were immensely involved in the prolonged pain. But you are correct: they could not save banks, and so banks failed, and if anything, that helped the situation. Today, the government is printing trillions of dollars to save everything from banks to auto manufacturers. On the surface, and to those whose perception is limited to the here-and-now, I'm sure it all sounds great. But the U.S. government has given itself carte blanche with our currency, and the end result is that the devastation is going to be deeper and longer that the Great Depression.

The nation should have been grateful that the government was unable to intervene more in the 1930s. We're about to find out how punishing such intervention will be in the long run. The dollar is going to suffer massively, and the ripple-effect is going to be incalculable.


On Apr 20 01:20 PM toobad41 wrote:

> At last someone has made an effort to understand this current market.
> However, I don't believe we are headed towards a depression as Lundeen
> seems to indicate. If I recall the "Great Depression" had no input
> from the government. There was no Federal insurance on savings and
> people made runs on banks. Banks could not cover and closed their
> doors. We have checks today that were not in effect back then.
> I am anxious to see the "BEV" curve after the next 80 weeks or so.
> It should be interesting to say the least... Maybe WWIII will have
> started by then and take us out of this mess.

Apr 21 09:33 AM

[Nik Kondrat...:]

Paco,

The chart is hauntingly clear and the article brilliant. I would quibble with your assertion that the US lent its way out of the GD I. Our emergence from the 1930s economy was not mono-causal, and certainly not because we started lending more. Yes that was part of it. But, more importantly, stimulus from the WPA, NIRA, a move toward "free trade" and away from Hooverite protectionism with the passage of the Reciprocal Trade Agreement Act, abandonment of the gold standard, tooling for war and an eventual market for war material under the Lend-Lease Act of 1941.

What's interesting is that today, our problems are vastly more complex and our levers less powerful to effect change.

Great article, please keep up the fantastic analysis.

Nik

Apr 21 07:11 PM

[bartpr:]

your comparison has major flaws. first, the adminsitration did nothing to stop the depression until fdr came in in 1933. his new deal produced three years of 10%plus growth. in the current situation the
administration acted immediately with their multi pronged stimulus
program. perhaps the market has seen this as a positive. i have only an opinion.

you have ignored the fact that the nasdaq composite has broken
upside of its last lower high in jan. of 1653. and got into the 1670
area.

in the rallys of the 1929-32 period the upside of each rally failed to
reach the former upside, resulting in a pattern of lower lows for
each rally.

Apr 22 08:42 AM

[flowerguy:]

Folks,

This is world war III.

It is being fought, not with bullets but with currencies against the global foe of all developed nations... DEBT.

The USA is just the leading debtor with 26% of the world economy and the world reserve currency.

For example, no matter what side of the argument you are on...can someone please explain how a government and it's soverign currency can survive intact with a debt load of over 5 times it's GDP and it's currency not backed by any hard assets? (The USA owes close to 75 trillion in debt and unfunded liabilities).

Every developed nation is a debtor!!

I appears to me that everyone and I mean everyone who is knowledgeable at all is holding their collective breath and hoping the USA pulls this off...but at the same time trying to both support the the USA's efforts to minimize direct damage and everything they can do "QUIETLY" to cushion themselves from the expected failure.

The banks and governments say whatever they want with relative impunity
The government reports whatever statistics they want (and quietly revises them later)
The Financial markets/houses and models are ALL based on historical patterns and valuations and are trying to get the cash on the sidelines into the market to generate a self fullfilling prophecy (growth and direction) and commisions.

The people go to work everyday hoping they still have a job while trying to save a bit more than they spend.

What I find truely bizarre is that the only solution I can see is the devaluation of every currency so they all remain the same relative to each other...or global inflation and the creation of a new global currency tied to a basket of commodities or currencies that the G20 trading nations "trust"

Either way the value of everything we hold near and dear is heading for a "Great haircut".

Apr 22 01:01 PM

[Paco Ahlgren:]

Relative to other currencies. Respectfully, read my articles more carefully.


On Apr 22 04:30 AM Freya wrote:

> Lets see, in the last decade the USD was as high as 120 and as low
> as 71. That's 10 years.
>
> Now at 86 and change.
>
> Its UP over 20% in the last 8 months, which means it is only down
> around 29% over the last decade.
>
> What is Limited is what has occurred over the last 10 years. It is
> a Magnitude lower than what occurred in the 1930's overnight, that
> was exponential.
>
> Now if you mean to say that in the Future, because of all compost
> being used to fertilize the field, the USD's devaluation will be
> exponential, then I totally agree with your assessment.
>

Apr 22 07:03 PM

[Paco Ahlgren:]

You've predicated your argument on a "strong" dollar, relative to the yen and the yuan, but you aren't listening: if the dollar is strengthening against a basket of currencies, but all currencies are falling relative to goods and services, then you don't really have any strength at all. Every major country on earth is printing unprecedented amounts of currency, and prices ARE going to rise -- dramatically.

You take your 25%, and wave your flag high and proud. And I'll be the first to admit you'll probably squeeze even more juice out of that rotten grapefruit, in nominal terms. Of course, if all major currencies are collapsing -- and they will -- you better get a good calculator, because your real rate of return isn't going to be all that impressive to those of us who have transcended the sheer myopia of "currency relativity." I don't share your fascination with yen and yuan; I'm far more interested in eggs and milk.

Of course, I also ignore Keynes and CNBC. But I'm an Austrian, that's just how I roll.



On Apr 24 06:12 AM Freya wrote:

> 1. the worst is yet to come but the markets are already expecting
> More than the Worst. Even Roubini no longer hawks the need for more
> than additional $1.8 Trillion which is a far cry from the $3.6 Trillion
> a few months ago.
>
> 2. Neither Japan nor China will stop buying US Debt. Japan wants
> a stronger dollar to make its goods more competitive, their interest
> levels are even lower than ours. They will buy and buy and buy.
>
>
> China wants to devalue its currency to compete globably. It is going
> on a Internal/international spending spree using its USD Reserves.
> It is in their best interest that the dollar either appreciates or
> maintains its strenght until they are done.
>
> 3. forget "3", it was flawed from the get go.
>
> The New Bull Market has started, you have already missed 25% of it,
> after you have missed 40% maybe you will acknowledge its existence.
> Thats the DOW, on the S&P maybe a little less, a few days ago
> the DJTA was within a couple of percent of a 50% Bear Rally off its
> lows.
>
> "Respectfully" Freya.
>
>
>

Apr 24 10:17 AM

[Al-USA:]

Excellent article Mr. Ahlgren and thanks for the link on Mark Lundeen: I spent a few hours reading his material and it is quite an eye opener...

I agree with the end result of your analysis, although I will add that, when all is said and done, most "joe sixpack" Americans are just fed up with the lack of full employment, access to medical care, and a decent retirement so that, if the end result of your analysis comes to past and the once great capitalist American civilization descends into barbarism, I think most average Americans will resist capitalist barbarism and still opt for some form of civilization, with the above mentioned "rights", even if it means civilization under socialist democratic states. Just a thought.

May 02 02:28 PM

[Freya:]

If "all currencies collapse", what happens to the currencies of the Natural Resource rich nations which control the basic commodities. Will they be as weak as the others? Or the currencies of those nations which can produce more with less? Will they collapse as severely?

Keynes is DEAD, he can't refute. CNBC? Obama's Campaign Station.

The name of the Article is "Are we at the beginning of the next bull market? probably not."

Talk about what is actually happening in the Here and Now, not what you believe will happen at some point in the future based on views which might happen at some future point.

What is happening is reality, what might happen, "might".

Apr 24 02:40 PM

[Freya:]

1. the worst is yet to come but the markets are already expecting More than the Worst. Even Roubini no longer hawks the need for more than additional $1.8 Trillion which is a far cry from the $3.6 Trillion a few months ago.

2. Neither Japan nor China will stop buying US Debt. Japan wants a stronger dollar to make its goods more competitive, their interest levels are even lower than ours. They will buy and buy and buy.

China wants to devalue its currency to compete globably. It is going on a Internal/international spending spree using its USD Reserves. It is in their best interest that the dollar either appreciates or maintains its strenght until they are done.

3. forget "3", it was flawed from the get go.

The New Bull Market has started, you have already missed 25% of it, after you have missed 40% maybe you will acknowledge its existence. Thats the DOW, on the S&P maybe a little less, a few days ago the DJTA was within a couple of percent of a 50% Bear Rally off its lows.

"Respectfully" Freya.

Apr 24 06:12 AM

[Freya:]

EURO Basket: 16 countries in the European Union list the Euro as their official currency and 5 countries outside the Union. In addition, there are another 23 countries and territories which peg their currencies directly to the Euro.

The Euro Basket is part of the USD index. The Euro is currently around 1.3 to the USD down from 1.6 or so last year. The USD has appreciated around 19% against it and everything pegged to it.

Apr 23 10:52 AM

[Freya:]

The value of the USD Is a basket of currencies.

The moves between 120 and 71 were relative to other currencies within the basket. (Euro 57.6%, Yen 13.6%, Pound 11.9%, Canadian 9.1%, Sweden 4.2% and Swiss 3.6%). Will you also ignore all of the currencies pegged to the USD or those that use it as their De Facto currency.

Relative to what other Currencies?

Apr 23 03:15 AM

[Freya:]

Lets see, in the last decade the USD was as high as 120 and as low as 71. That's 10 years.

Now at 86 and change.

Its UP over 20% in the last 8 months, which means it is only down around 29% over the last decade.

What is Limited is what has occurred over the last 10 years. It is a Magnitude lower than what occurred in the 1930's overnight, that was exponential.

Now if you mean to say that in the Future, because of all compost being used to fertilize the field, the USD's devaluation will be exponential, then I totally agree with your assessment.

Apr 22 04:30 AM

[Freya:]

Your Article: Statement #3, 1st paragraph,
"In the 1930s, the United States dollar was tied to gold, thereby limiting the Government's ability to flood the market with printed currency.", 2nd paragraph, ..." in the 1930s, the government's ability to inflate the dollar was impaired..."

In the 1930s, the Government devalued the USD by changing the valuation of Gold against the dollar by about 69%. Gold was fixed at $20.67, then overnight, it was fixed at $35.00.

If that occurred today, the present USD value of 87 would drop to around 51.

What part of history are you trying to change?

Apr 20 05:52 PM