David Braunstein

Inflation vs. Deflation: Pick Your Poison

I can't see inflation without getting the newly printed money to the people. In your island example, the reason you had inflation was that both pirates got the money. I wouldn't have changed a thing if there was tons of money on the island, but no one found it. The Fed expands the money supply by buying treasury securities in the open market with newly printed money. Big deal! I could also expand the money supply by pledging my treasruy to the bank for a loan. Inflation can only occur when the newly created money either by printing or expansion of debt gets into the consumers wallets. This can be done by creating new jobs, increasing pay of existing jobs, and giving government subsidies. But most likely the new money will find its way into the hands of corrupt politicans, obscene top management salaries and bonuses, and of course into the few lucky soles who work at Goldman Sachs. Money that only goes to a few privileged individuals instead of the masses equals deflation may friends.

Consider These Conditions When Using the Unemployment Rate as 'Any Kind' of Indicator

Very nice article. Good insights. I agree, too many people beleive that unemployment is a lagging indicator and dismiss it.

Global Trade: Bottoming but Not Rebounding

Again, a great article. My guess is that the market leaders are alone far ahead of the pack. I suspect inflation expectations are ahead of the facts, too. Money on the sidelines has likely come back into the stock and commodities markets for lack of other business opportunities. This reallocation of cash put temporary upward pressure on prices from extreemly depressed levels. The fuel behind these market moves will likely soon run out.

The reason that bankers are not lending is that there are no more real bankers. Banks started syndicating loans after the bank failures of the 1980's and followed syndication with securitization. All real bankers have left the industry during the early 1990's to be replaced with fancy salemen, relationship types. The underwriting of loans was transfered to the securitization syndicate where the analysts knew nothing about the local economy nor the intergrity of the person applying for the loan. Loans were also dependent on loan score software that proved to be easily gamed. Since there are no more real bankers, they do not know how to make loans that stay on their bank's balance sheets. No wonder there is a political upsurge of bring back the securitization market. We saved the banks, but we did not bring back bankers. Instead, we saved a bunch of aggressive salesman jobs wishing for a return to the good ole days.

After securitization comes back, we will likely see a modest uptick in inflation and economic activity. Unfortunately, the seeds of the next sub-prime meltdown are already being planted. Those that do not learn from histroy are doomed to repeat it!

Commodity Bulls' Seven Fat Cows Will Be Followed by Seven Skinny Ones

Dear Dr. O,

Tort reform is a mixed bag. I live in Texas where they passed tort reform a few years ago. My wife contracted meningicoccal septicimia and miraculously survived with only losing a few finger tips and the bottom of her feet. Unforturnately, because of misjudgement by one of the attending physiicians, she was taken off of anitbiotics and off of isolation too soon. She contracted psuedomonus septsis and again almost died. She lost both of her legs above the knee and had amputation of all of her fingers. I went to an attorney who told me that if I lived in any state except Texas that my wife's case would be a slam dunk multi-million dollar victory. Texas tort reform limits teaching hospitals to $100,000 in actual damages and no punitive damages. I think tort reform of that magnitude creates an enviroment where doctors, nurses and administrators can and do become careless.

I liked your comments to Cam Hui's excellent article.




On Jun 16 08:06 AM Dr. O wrote:

> >>Commodity inflation would inevitably be followed by a deflationary
> collapse caused by massive demand destruction.>>&g... inflation
> would inevitably be followed by a deflationary collapse caused by
> massive demand destruction.>>> massive demand destruction.>\<<lt;<lt;&...
>
> Already happened: oil from $15 to $150 in ten years, followed by
> the 2008-2009 economic and financial collapse.

Cap-and-Trade Bill Moves Through Congress: Time to Sell Electric Utilities?

Yes, and it may also justify selling oil producers and oil service companies. I work for an oil producer and we calculated that from the Obama tax disincentives our taxes would rise about 50% even before Cap and Trade. The oil industry will not have any credits as they have a much smaller lobby group than the utilities. Also, with world wide weak energy demand, I believe the current prices are just too high.

Economic Ramifications of Skyrocketing Long-Term Unemployment

Great article! I believe that the Obama Administration will add many new government jobs directly and indirectly, but they will likely be lower paying jobs than before the economic crisis. We need retooling benefits to help those with long-term unemployment get trained for the new jobs primarily in "green" technology. Those "unforgivable" debts need to have the laws changed and soon. Loans need to be made to individuals based upon moral character that they will be paid back. If a person finds him/her self to become insolvent, then the loan needs to be restructured or forgiven by an impartial judge. A broad brush sweep that says judges can't renegotiate mortgages and student loans creates vastly unjust results as your article alludes. These is hope if our government can stand up to special interest groups and those profiting unjustly have to payback the debt they morally owe society.

Fundamentals Don't Support Oil at $55-60 a Barrel

You are dead right and you are about to make a fortune. My target is below $30 per barrel. If you look at a monthly technical chart, you will see that the recent run-up in price is simply part of a bearish flag marking the half-way point down. When large sell orders came in from $145, a broker had to buy them at $30-$40 and then resell them at $50-$60. It's about over and the next leg down will shock everyone. Technically, the target is $20 per barrel. I would like to join you, but I'm too old to take on that much risk. Options can wipe you out even if you're right on price, but wrong on timing. Good luck!!

Geithner's Doomed Bailout Plan

Although detail are to be forthcoming, I expect the "legacy assets" will be pooled into securities and sold to investors via a prospectus cheat sheet. In order for this plan to succeed, the Government must guarantee a minimum return to investors. For example, they could give investors a minimum guarantee of 85% of the purchase price of the pool. Investors then take 6% of their own equity and borrow the rest with a government backed loan to purchase the pool.

What's not to like. The banks will lend because they are taking no risk. Investors will buy the "legacy assets" because their only risk is making 2% over 10% before leverage. The deal will likely be sold as some type of closed or dutch auction. That way these troubled assets are sold for the highest price. The price sold will likely be more than the bank's written down value. The banks win because then they not only get the bad stuff off their books, but they also get a write-up in capital from the sale.

The government wins as it does not have to put up much capital initally. It will address problems in the future as they happen. Some of these loans are in excess of 20 years. There will not likely be an active secondary market and if there is one, it will be razor thin. Investors will have to hold their pool to maturity to prove up a loss to the government as the Fed's are not likely to pay up for a loss in the secondary market.

More problematic will the covenents on the loans defining default to the banks. When and how does the bank collect on the bad loan? Does the bank also have to wait until the security is completely worthless (in some cases more than 20 years) to get the government guarantee?

Eventually the tax payer takes the hit, but it will likely be our children who suffer. Also there is a moral delima. The government is using leverage to get us out of the same situation that too much leverage put us in. The government is talking about 10 times leverage. Is that a good thing?

U.S. Government Recreating Leverage, Offering New Trading Windows

How does a trillion dollar securitization of consumer loans help anything? Isn't that what got us into this mess to begin with? Insured AAA junk. Now it's gonna be government insured AAA junk. My guess is that one or two trillion is not going to be enough stimulous to jump start this stock market, even for trading rallies. Unless of course the government will offer another couple of trillion for margin accounts and new carry trades!

The Real Crisis: Collapsing Capital Accumulation Process

firstproman, I disagree that we are sowing the seeds of the next bubble excess. Those days are over for many years because everyone is overleveraged now: homeowners, businesses, hedgefunds, nations, municipalities. The era of low interest rates produced over pricing and stock and asset bubbles. The next ten years will be marked by delevering and no amount of government intervenion is likely to change that. The government has two choices: (1) do nothing and let our capital system restructure the system through bankruptcies and foreclosures, or (2) pump more money into the system by printing it. Of course there is a third choice which is a mixture of (1) and (2). Since printing money hurts older americans and those who are unemployed and underemployed, that option hurts the most people as inflation cuts them to the bone. Therefore, a mixture is most likely. There will be no inflation or deflation if the governemt gets it right. Some asset prices will deflate; some will inflate. There will be winners and losers. Stock prices are likely to remain stable after reaching an equalibrium which is somewhere between 600 and 700 on the S&P 500 Index. From there it will rise, but most likely by only 5% to 6% annually for many years to come. Long-term interest rates will peak at 3% for the same number of years. Capitalism will coexist with socialism.


On Feb 09 04:28 PM firstproman wrote:

> Thank you for the fair response Rakesh. I agree with this briefer
> assertion. Left leaning thinkers have commonly argued that “state
> capitalism” is the natural next step in development of economies
> post “private capitalism”. In the west we are too often completely
> blind to this school of thinkers.
> Talking about our markets:
> I agree with your article that the current market collapse (equities,
> commodities, real estate) is largely due to the leverage excesses
> caused by Greenspan’s monetary expansion i.e. the last boom. I differ
> with you on what will happen next. I believe we are currently witnesses
> the birth of the Bernanke expansion and eventual bubble. A major
> question for investors is “which asset class or classes will experience
> exaggerated price increases?” even if only “nominal dollar” price
> increases.
> The market is infatuated with “booms”. We have so much cash (private
> capital) sitting on the sidelines waiting for the next drunken “price
> party” that the next “recovery” will become a self fulfilling prophesy.
> The Obamaniks will ensure this happens.
> Talking about world development in general:
> Most of the world is now trying to consume more i.e. improve living
> standards (development). At Davos even Putin, after condemning the
> U.S. for the current global economic reversal rejected a return to
> completely controlled economies OR protectionism (yes, yes, yes,
> self serving) . The current contraction may indeed get worse before
> it gets better but our central banks and governments are already
> sowing the seeds for the next boom and eventual bust cycle. I’ll
> be very surprised if nominal prices of one or more of the “hard”
> asset classes (equities, commodities) aren’t surging higher before
> 2010 ends!

Financial Bailout Remains a Work-in-Progress, Chaos-in-Motion

How can anyone expect anything good to come out of a stimulus package that no one has read, not even the President. How can we imagine that if our lawmakers do not even read the stimulus bill that they could possible look at it critically? Yes, I beleive they have good intentions, but "the road to hell is paved with good intentions." Rakesh, imbedded in your comments is the real solution to our economic problems. Hard work, good intentions and rigorous analysis.

Emerging Markets: Beware of the 'Head-in-the-Sand' Strategy

Wonderfully written! I enjoy your posts. After you make your fortune shorting stocks, please give us your prescription for the current crisis. The world needs the likes of you to help us all.

Waiting for Financials' Other Shoe to Drop

You are right on! I'm avoiding financials too, and most retailers except liquor and beverages. The Fed is injecting massive liquidity into the system, but it's pushing on a string. No one want to make loans in this environment. Remember, housing and construction got us out of the tech bubble. With those pillars broken, I expect to see new lows in the markets below the 1999-2000 lows before we see the bottom. My guess is that we may see new highs in about 10 to 12 years. Oil prices will trade between $80-$120 during that time. The problem will be deflation, not inflation as the rest of the world lowers their interest rates while ours stays steady. The USD should rebound to 1.15 to the Euro over that time period. Many banks will likely fail. Unemployment could reach 7%. But in the end, the U.S. economy will eventually strenghen and recover. This is not Armagedden, but it will feel like it for quite a while.

Tracking Crack Spreads

Good article, but I don't see anything on the chart that suggests you can buy the refiners when the two margins tip over 5%. Is there any logical explaination for this?