Karl Denninger

Does Disaster Loom from Dollar Funded Carry Trades?

Brad: Don't be so sure about "The Amero".

Those who are sure that the dollar will swirl the bowl and flush are counting on Bernanke, at the end of the day, inserting the gun in his own mouth and pulling the trigger.

He might shoot himself, but I argue that if he does it will be by accident, not intent. If there is a collapse in our currency it will almost certainly come with violent "regime change"; the least of your problems will be your investments.

As I am known to say: "If you think you will need gold or silver you will need lead and tubular steel more."

Does Disaster Loom from Dollar Funded Carry Trades?

On Nov 09 02:08 PM Michael Clark wrote:

> Karl: If this carry trade is so dangerous to America, why are we
> not raising interest rates now? (Is it because we're putting the
> mortgage re-bubble ahead of the possibility of a commodities super
> ascent?)

The Banks are insolvent. The attempt being made is to allow them to cash-flow defaulted debt without anyone being the wiser. "Extend and pretend" writ large. This requires huge spreads, ergo, zero rates.

> Which is more dangerous to America: lower housing prices; or a spike
> super-inflation of commodity prices? (Lower housing prices will actually,
> eventually, save the housing market. A secondary bubble will not
> save the housing market: it will just make a second housing collapse
> inevitable.)

The super-inflation in commodities and a trashed currency. Bernanke and the rest of the bankers don't care. They need to be ring-fenced, broken up, and the pieces that are insolvent jettisoned.

But that means no more billion-dollar bonuses and no more obscene acts performed by Congresspeople in exchange for "campaign contributions."

Painful Unemployment Report

It is not a lagging indicator for loan defaults - and never has been.

All modern economies are credit-based. That is why the chart I presented on Employment Trends has a near-perfect correlation with the END of recessions when it turns up, and also provides a nice leading indicator that typically warns 6-12 months before a recession is "officially" declared.

For consumers to consume they must have income. Can't get around this - defaults and thus economic slowdown take a few months to start to ripple through the economy once employment starts to slack, but when it turns up the removal of the downward pressure on loan (credit) performance correlates almost exactly with the resumption of positive economic activity.

We have NOT turned the corner.

Cautious Outlook from Productivity and Costs

Gee, looks like I was vindicated (employment report this morning), eh?

Might want to rethink your thesis.....

Skeptical About Buffett's Big Bet

Any time a board takes 15 minutes to say "yes" to being bought out you paid too much.

Really, it's not much more simple than that. This is true of any negotiation - when it's that easy, you blew it.

GDP Is 'Better'

Ad-hominen attacks always come out when the people on the other side of the debate are unable to argue with the mathematics.

Goldman Dissembling: Dark Pools et al

One other point folks - volume is NOT liquidity.

If I pass the same 100 shares between myself and someone else 1,000 times, there is NOT 100,000 shares of "liquidity", or depth of market, out there. There is in fact the ILLUSION of such liquidity, which can (and does!) dupe other participants into THINKING they can place an order for some significant fraction of that alleged liquidity and get a decent fill.

This is in fact false, as they will discover if they try to execute against it!

Mathematical Realities Will Trump the Dollar

I will simply comment that a significant number of comment-posters in this thread **invented** statements in their mind that were not made.

It's rather amusing, really..... but not surprising.

Now I get to see, having made this comment, how many people who have commented can go back and figure out what the above paragraph means.

PPI: An Economic Frost Warning

Mark:

Going "long equities" as a means to avoid a currency collapse is idiotic. The net return on such a strategy is negative; this is trivially discerned by looking at the input costs to the companies in any index, some of which are imports. In a currency collapse this prevents their EPS from keeping up and you lose in purchasing power (nominal numbers don't count, only purchasing power does.)

You want to be long "things" that have to be imported and won't collapse. Those "things" have to have utility value. Thus, commodities like oil.

Several times I have been asked what my strategy would be if I believed in this scenario (I don't.) I said over two years ago (and repeatedly since) that if you believe this as a thesis the best plays available are levered defined-risk plays on commodities, and if you want to, on equities. Specifically, LEAP CALL options. You HAVE TO HAVE leverage to keep ahead of the devaluation on equities or you WILL lose. This is not true on commodities since the FX reserves of the producers (in the case of oil) will be devalued too and they will thus withdraw supply to boost price in an attempt to get back their already-held FX value.

Nonetheless I don't believe that this will be the outcome - not by intent and not be necessity. If it happens it will be due to accident, not design or pre-ordained reality.

The risk of an accident is high but as with bets on the end of the world most of the time a bet on such an outcome turns out poorly.

PPI: An Economic Frost Warning

The error in believing that currency devaluation "will save us" (as many people have) is that historically capital ALWAYS flees faster than you can devalue. Japan is just the latest in a long line of nations that have learned this the hard way.

The dollar-based carry is an example (the borrowed funds are NOT invested here!) along with the fact that capital in general simply won't come here when it is faced with a 30% annualized devaluation rate on repatriation. It will either go somewhere else or leave - fast - because earning enough to be worth it to counteract that is damn near impossible.

A strategy that appears particularly appropriate given the current environment, if you expect the dollar to COLLAPSE, is to short equities and go long a basket of commodities. If the dollar DOES collapse equities will also collapse while at the same time commodities (especially oil!) will skyrocket. If you're wrong and the economy recovers you get a push, as both commodities AND equities should rally; ergo, your hedge against being wrong prevents a big loss. I do not believe that "they" will let the /DX go to 40, and if it "gets away" from them like this, I don't believe being long commodities (and/or short equities) will matter - you will need guns and lead as fully 1/3rd of America will be destitute: jobless, homeless and hungry. That's how revolutions happen and over two years ago I sent a letter to all 535 members of Congress detailing exactly how this could happen and asking them to consider setting aside $200 billion (cash, not "credit") for this eventuality - to house, feed and clothe up to 100 million Americans for a year. Of course they didn't, so there is no safety net to protect against this possibility.

BTW Mark you really ought to stop misrepresenting what I have written - repeatedly so. As I have repeatedly pointed out I was long off the 666 bottom and dumped those positions in the high 800s on valuation; the last couple of months have been nothing other than scalps and very short-term daytrades. As we have gone over 1,000 on the SPX I have been slowly picking up longer-term short positions, again, on valuation, although my exposure is both levered and light (concentrated more in PUTs where having the timing wrong will result in forfeiting what I stick in, but limits exposure, while providing a ridiculously outsized return if the timing is right.) Again, if you want my short-term outlook GET A GOLD STAR on the forum and you can see it - daily. Continually misrepresenting what I have written and said in that venue, WHEN YOU HAVEN'T SEEN IT, is dishonest in the extreme.

If/when you see the dollar reverse the impact in the equity markets will be severe; the short-dollar trade is severely unbalanced at present, and this points strongly to extreme danger. We're also VERY overbought on the internals at present - in fact, more so on my indicators than at any time since November of 1999. The worse news is that my proprietary signals are at extremes well beyond 1999, and I don't believe for a second that the earnings and economic outlook will improve enough to bring them back into balance. To the contrary.

Of course in November of 1999 we had another 3 months or so of stupid before it all blew up, so one cannot rule out more idiocy sequentially before the inevitable comes. If and when it does it is unlikely to prove good, clean entry points, and the "what has worked" meme of buying the dips is going to get you destroyed, just as it did last fall. The people who tried to buy the bounces on the way down last fall had their portfolios shredded, and that was with internal and valuation numbers FAR less over-extended than they are now.

Banks and Delinquent Borrowers: The Chickens Are Coming Home to Roost

I'm sorry that reading is troublesome for you.

Predict (accurately) the value of Treasuries over THE LONG TERM and you're just fine with that pronouncement.

Of course that's a wee problem, as has been repeatedly discovered.

On Oct 14 08:34 AM Andrew Butter wrote:

> Yes it can.
>
> The value of a housing is a function of after tax household income
> divided by a function of the 30-Year Treasury yield.
>
> That's basic math
>
> Don't believe me?
>
> That algorithm gives a 98.9% R-Squared going back to 1915

Banks and Delinquent Borrowers: The Chickens Are Coming Home to Roost

Housing, in the long term, cannot rise faster than after-tax household income.

C'mon guys, this is basic math. Two exponential (compound) functions, where one has a larger exponent than the other, will ALWAYS run away from each other.

Sixth grade math folks. You passed, right?

This stuff is NOT hard to figure out.

Liquidity: Toward a Proper Mechanism

What those who pray at the Keynesian Altar have missed is that velocity cannot be maintained when debt-carrying capacity is exhausted.

The problem with the monetarist principle MV = PQ is that "V" cannot be maintained when maintaining "P" and "Q" requires more debt issuance and there is no more credit capacity in the economy. The attempt to do so forces them to dramatically increase "M" (which Bernanke has done) but "V" has not responded nor has P or Q, because in a credit-based monetary system (all modern systems are) increasing base money is ineffective due to the multiplier factor.

This lesson was learned the hard way in the 1930s and everyone who learned it is now either dead or senile. We will thus get to learn it again.

Alcoa Kicks Off Earnings: Some Numbers That Don't Add Up

Uh, that's a roughly 6% volume decline. I wouldn't call that insignificant, given that its a sequential decline.

I do agree on the debt issue, although they're trying in that regard.

On Oct 09 01:26 AM ryanclarke wrote:

> Good and careful scrutiny of the numbers. With revenue up about 9%
> from last quarter and aluminum prices up 18% from last quarter ....
> shipments should be about the same ... which they were ... not alot
> difference of shipments of ... 1,230,000 metric tons shipped this
> quarter, 1,288,000 last quarter. What's of greater concern to me
> is following AA debt levels and the ability to service that debt
> level long term.

OTC Derivatives Reform: The Parade of Mendacity Continues

They are Andrew, they are.....


On Oct 07 12:31 PM Andrew Butter wrote:

> This is a fantastic analysis, it's a shame perhaps it wasn't a lot
> shorter and simpler in which case more people would read it.
>
> The point if I understand is that "banks" have been and are trading
> insolvent which is normally considered criminal almost everywhere
> and (a) they have not been brought to task (b) they are still doing
> it,
>
> The fundamental argument that prompted me to even take an interest
> in all this (over a year ago) was that as a valuation specialist,
> I could see that the method of valuation had been and is being fudged
> to allow banks to trade insolvent.
>
> I find your article most disturbing, it suggests to me that my fears
> in March 2008 were worse than my worst nightmare.
>
> I think the issue of derivatives is a separate issue.