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Strike up the band, boys, happy days are here again! Recently released short-term economic data, including unemployment claims, non-farm payrolls, home sales, and business spending, which had been so unambiguously horrific in February and March, are now just garden-variety awful. With the Wicked Witch of Depression now apparently crushed under the house of Obamanomics, the Munchkins of Wall Street have sounded the all clear, pushing the Dow Jones up 25% from its lows. But the premature conclusion of their Lollipop Guild economists, that the crash of 2008/2009 is now a fading memory, is just as delusional as their failure to see it coming in the first place.
Once again, the facts do not support the euphoria. Over the past few months, the government has literally blasted the economy with trillions of new dollars conjured from the ether. The fact that this "stimulus" has blown some air back into our deflating consumer-based bubble economy, and given a boost to an oversold stock market, is hardly evidence that the problems have been solved. It is simply an illusion, and not a very good one at that. By throwing money at the problem, all the government is creating is inflation. Although this can often look like growth, it is no more capable of creating wealth than a hall of mirrors is capable of creating people.
We are currently suffering from an overdose of past stimulus. A larger dose now will only worsen the condition. The Greenspan/Bush stimulus of 2001 prevented a much needed recession and bought us seven years of artificial growth. The multi-trillion dollar tab for that episode of federally-engineered economic bullet-dodging came due in 2008. The 2001 stimulus had kicked off a debt-fueled consumption binge that resulted in economic weakness, not strength. So now, even though the recent stimulus administered a much larger dose, we will likely experience a much smaller bounce. One can only speculate as to how much time this stimulus will buy and what it will cost when the bill arrives.
My guess is that, at most, the Bernanke/Obama stimulus will buy two years before the hangover sets in. However, since this dose is so massive, the comedown will be equally horrific. My fear is that when the drug wears off, we will reach for that monetary syringe one last time. At that point, the dosage may be lethal, and the economy will die of hyperinflation.
As always, the bulls fail to understand that investors can lose wealth even as nominal stock prices rise. As a corollary, the bearish case is not discredited by rising stock prices. While there are some bears that mistakenly cling to the idea that deflation will cause the dollar to rise, those of us in the inflation camp understand that the opposite will occur.
In the meantime, stocks are not rising because the long-term fundamentals of our economy are improving. If anything, the rise in global stock prices is due to investors realizing that cash is even riskier then stocks. The massive inflation that is the source of the stimulus is essentially punishment for those holding cash. To preserve purchasing power, investors must seek alternative stores of value, such as common stock.
It is important to point out that despite an impressive rally, U.S. stocks have substantially underperformed foreign stocks. In the past two months, while the Dow Jones has risen 30%, the Hang Seng and the German DAX have risen by over 50% in U.S. dollars. Commodity prices are also rising, with oil hitting a five-month high. And gold is shining as well, with the HUI index of gold stocks up 30% during the past two months, and 2/3 of those gains occurring in the past month. If this rally really were about improving economic fundamentals, gold stocks would not be among the leaders. Further, during those two months, the U.S. dollar index fell by 7%, with commodity-sensitive currencies such as the Australian and New Zealand dollars surging 20%.
To me, the relative strength of foreign stocks and currencies indicates that perhaps the global economy is not as impaired as many have feared. It has been my view all along that after the initial shock wears off, the world will be better off - once it no longer subsidizes the American economy. The shrinking U.S. current account deficit is evidence of this trend in action. Renewed strength in foreign stocks and weakness in the dollar may indicate that not only is the world decoupling from the U.S., but benefitting as a result.
So let the Munchkins dance for now. But remember, the Witch is not dead, only temporarily stunned by an avalanche of fake money.
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Monaco's a bit too pricey...
;-)
Malta? Greece? I think I'd choose somewhere in the Mediterranean.
On May 15 03:21 AM Dr. Kris wrote:
> I'm not sure if this country is on the verge of Armageddon, but if
> you were to pull up roots and relocate someplace else, where would
> it be?
>
> Monaco's a bit too pricey...
On May 15 03:21 AM Dr. Kris wrote:
> I'm not sure if this country is on the verge of Armageddon, but if
> you were to pull up roots and relocate someplace else, where would
> it be?
>
> Monaco's a bit too pricey...
www.planbeconomics.com.../
On May 15 02:44 PM heyjoe wrote:
> Brazil?
On May 15 03:21 AM Dr. Kris wrote:
> I'm not sure if this country is on the verge of Armageddon, but if
> you were to pull up roots and relocate someplace else, where would
> it be?
>
> Monaco's a bit too pricey...
On May 10 04:11 PM Ricard wrote:
> I went ahead and wrote out a thought-piece after thinking about this
> article in more detail:
>
> seekingalpha.com/insta...
>
>
> On May 10 06:21 AM Ricard wrote:
The fall of GM, which blew 110b dollars over a twenty-year period and never once flinched, parallels the inability of the Gov't to regulate and prevent bubbles from bursting. Politicians can't solve problems -- but rather promise expensive deals in their election platforms. The high wages, benefits, and pensions for worker unions are a primary reason for outsourcing, which fuels foreign economies. Certainly, the Gov't knows what is happening, but the only solution is monetary policy (money printing).
I truly envision a shift to the East, another fiat currency for the oil standard, which will require hedging with gold, foreign stocks based on foreign currency, and inflation-protected US treasuries. Most of the current and future problems relate to dollar devaluation and inflation.
To summarize, the Detroit Syndrome is defined by a long-term chronicity of exposure to:
1. a long-standing trade deficit
2. unfounded expensive wars
3. unwarranted Gov't-backed sector growth
4. unbalanced Gov't budget
5. monetary policy (printing money)
6. no currency standard (e.g., gold)
When you add corporate and individual debt to the above, the result is failing economy. Hence, the Detroit Syndrome results in a failed economy. Detroit's economy happened to be hinged inextricably to the auto industry.
On May 11 08:52 AM Editrice wrote:
> ebworthen advises us to save, pay down debt, downsize, and hunker
> down. Is this Mr. Schiff's advice as well?
Where we will take the hit, is this allows struggling companies, bad for the economy to survive longer, and not move into something more globally competitive, or something that caters more to local demand.(Depending on your industry). funny money makes funny business stay around longer. But the positives of that, is even bad business's employ real people, who feed real families and would suffer real heartache if the governement who created the problem did nothing. Peter, your rich. Try advocating the government do nothing when you stare into the face of hungry 4 year old. Go ahead, tell him to starve. sorry, we already spend too much on social programs. We need time to fix them. IN the meantime, have a crumb.
Exactly. I haven't seen diddly that amounts to real improvement.
"Try advocating the government do nothing when you stare into the face of hungry 4 year old."
The government is creating one million hungry kids with their actions. But by all means, keep voting for them and telling everyone "more government" will solve the problems more government created. Nice.
I do agree that our governement helps create dependence, but you cant damn the children because the adults are brain damaged and delusional(fake money can solve problems). Have to find a middle ground in the mean time. I love Ron Paul, but hes too extreme for a transition. I would have loved to see him try though, as painful as it would have been.
On May 10 01:25 PM Whitslack wrote:
> I love this metaphor!
>
> "Although [inflation] can often look like growth, it is no more capable
> of creating wealth than a hall of mirrors is capable of creating
> people."
One error in your response. Bernanke has not taken unconventional steps to "DEFLATE" asset bubbles. He has taken unconventional steps to RE-INFLATE asset bubbles and therein lies the rub. There will be a very high price to pay.
Each subsequent market deflation is much more horrific than the previous one and thus requires a much larger dose of the re-inflation drug than the previous one. This is what Hayek decrobes as having "A Tiger by the tail." The cure is the disease and more cure only makes the disease worse until finally the party is unsustainable and even the U.S. Treasury and Federal Reserve with their infinite wisdom and money creation abilities will not be able to sustain the booms.
On May 10 06:21 AM Ricard wrote:
> This is a rather interesting article from Mr. Schiff.
>
> Something I've noted is that he apparently has the reputation of
> getting the macro picture spot on, but unfortunately being unable
> to transform that into portfolio gains. I'd suspect it may have to
> do with market-timing, evidenced by his bold prediction here of a
> 2-year stimulus rally.
>
> Running with this theme (which may very well be correct, and may
> actually give Cetin an A+ in weathering this downturn), it's entirely
> probable that the economy may 'fully recover' from this stimulus
> package as it did from the last one in 2002. Bernanke, like Greenspan
> before him, has taken unconventional actions in trying to deflate
> asset bubbles, and like his predecessor, may have to be held responsible
> for any unpredictable consequences. If this thesis hold true, then
> perhaps, like last time, the bubble will not pop - the landing will
> not only be soft, it will be as if the markets landed on a trampoline,
> propelling them to even higher dizzying heights, until at some point
> the subsequent fall destroys the trampoline, and the markets along
> with it. Maybe during the next 'crisis', the fed will be forced to
> adjust reserve ratios, i.e., the nuclear option.
>
> So, to summarize my rather complicated comment - maybe Schiff has
> a point - markets artificially recover, do not experience the much-needed
> recession and readjusting, and the bubble never pops. My contribution
> to this thesis is that perhaps we are setting the stage for an even
> larger and longer artificial boom.
>
> Anyway, thanks again Mr. Schiff for another interesting read.
So what is a minnow to do? One tack is to invest in things that people will always need, for example, food, green energy, water purification, etc.
The counter argument is chilling: "the market can remain irrational longer than you can remain solvent." That also applies to governments - most of them.
For the individual, rationality also requires understanding the irrationality of others. My evolutionary history did not prepare me very well for that task. Basically, I have the cognitive equipment to be a hunter-gatherer and to have an inordinate interest in the rear ends of females. At age 84, that is not of much use.
On Jun 17 02:52 PM austrian63 wrote:
> Ricard,
>
> One error in your response. Bernanke has not taken unconventional
> steps to "DEFLATE" asset bubbles. He has taken unconventional steps
> to RE-INFLATE asset bubbles and therein lies the rub. There will
> be a very high price to pay.
>
> Each subsequent market deflation is much more horrific than the previous
> one and thus requires a much larger dose of the re-inflation drug
> than the previous one. This is what Hayek decrobes as having "A
> Tiger by the tail." The cure is the disease and more cure only makes
> the disease worse until finally the party is unsustainable and even
> the U.S. Treasury and Federal Reserve with their infinite wisdom
> and money creation abilities will not be able to sustain the booms.
>
You are describing a very unstable system. It seems to be the case that mathematical stability is achievable through mathematical controls, not through political bullcrap - which has been our typical tool.
The macroeconomic controls over government investments and expenditures, monetary policy, and tax infrastructure would be better controlled by a carefully designed computer algorithm than by the fed, the treasury department, and the congress.
Why is that not done? Well, people who possess power, however poorly they exercise it, seldom voluntarily give it up. People who have risen to their levels of incompetence usually remain in denial.
What I have said about myself also applies to the movers and shakers of this world: they have the cognitive equipment of hunter-gatherers and an inordinate interest in the rear ends of females.