JasonC

Gold Price's Interest Rate Ransom

There is no dollar overprinting.

The Fed hasn't expanded its sheet at all since October of 2008. It made emergency loans to the banks in the smash itself, and since then all it has done it redeploy the same funds into long dated securities as banks repay those loans.

Total US credit growth, including government debt, is running at half normal rates. State governments are increasing at normal, the Fed isn't increasing at all, and all private sectors are contracting rapidly, led by banks and asset backed securities of all kinds (including mortgages running off into cash etc).

It remains a deflation.

The dollar gets stronger from here because Europe is going to have its own second round banking crisis, driven first by Greece but soon by Spain (where all the books are faked and real estate losses have not been taken yet) and eastern Europe (which is a basket case). The Euro may hit 1.25 again before all of that is over.

Unemployment has peaked in the US, and recovery is already underway in China and Australia. Growth will spread from Asia to the US, and Europe will be the weak looking part of the developed world. None of which is going to help the Euro.

The ECB tried to play the entire crisis as higher and mightier and more rigorous than the Fed, but all it has done is been slow to address their real problems. That made for a year of stall, it solved nothing.


On Dec 17 08:10 AM DeepValueLover wrote:

> Those who believe that the dollar is a "safe haven" are the same
> people who will be crying when the dollar collapses as a result of
> its overprinting.
>
> Ask yourself this:
>
> Why is the dollar temporarily "valuable"?
>
> What solid asset backs the dollar?
>
> Will huge dollar holders (Asian central banks) continue to purchase
> the paper at 1% - 3%?
>
> What if these central banks sell?
>
> Gold now....Gold forever!

Greece Concerns Are Misplaced

Default won't help them. They have a current year budget deficit of 12% of GDP. They have to borrow it or they have to slash spending by epic amounts with nothing to show for it and nothing to sell it to the people with, as something they get in return. They can't borrow a dime if they default.

The ECB's conditions are less draconian than the immediate consequences of lack of access to the credit markets.

No doubt Greece would prefer continued access to Germany's credit rating and checkbook for nothing, but wishes are not horses and beggars do not ride.

Greece slashes spending one way or the other. It can expell itself from world capitalism in a huff as well, or not - entirely up to its demagogues. But the free ride is over.

D.R. Horton: Did Anyone Actually Listen to the Call?

The tax benefits are not "bailouts", they simply reflect the fact that the company lost money instead of making lots as it previously believed. Taxes are paid on profits, companies running losses do not pay them. DHI and other builders owe less because they made a lot less than they thought, in the bubble. That isn't any "bailout", it is paying less *to* the UST because they made less.

"I have no idea how they have held on this long" - simple, they ran off inventory into cash. Building companies have inventory and they let it sell while not splashing out to refill the pipeline, whenever the market turns down. That (gradually) readjusts the supply from too-high levels, and it makes them cash flow positive even without any earnings. In the boom, they tend to run up inventory rather than cash, and show "earnings" but spend all of it on new houses. In the busts, they show "losses" but don't spend on new houses and instead let cash flow in to them, paying down boom time debts etc.

Anyone trying to evaluate deep cyclicals as though they always return the same amount on capital and it is always positive and they always reinvest a constant portion of it and generate free cash from the remainder, cannot possibly understand any deep cyclical stock. They aren't growth stocks, they don't work that way. People bring inappropriate expectations taken from growth-stock land to cyclicals and over-fixate on second and third derivatives of reported earnings - result bubble chasing, wrong at every turn of the cycle, and madness.

The right way to look at deep cyclicals is by tracking long averages, by watching cash flow, and by independently assessing the likely return on the investments actually being made, as they are made. You can't look at flow rates with tiny time-window denominators; it is meaningless. Instead treat everything as a stock, and look at balance sheets not income statements.

U.S. Debt Hysteria Is Getting Ridiculous

Spots - flat wrong. The Fed hasn't been buying treasuries since October, and it owns no more today than it did the day Bear went bankrupt. The size of the Fed's total sheet is the same as it was last October. All of the buying of treasuries only rebuilt the position sold off earlier in 2008 as it moved from ownership of treasuries to direct loans to the banking system. The only net new position is the mortgage backeds, which have run up only as fast as loans to the banking system have been repaid. The Fed did expand the sheet one-off during the actual panic, but has been doing nothing but reposition from short loans to the money market into long term securities, since then.

Once again we see that any error is tolerated and any slipshod fallacy is indulged provided it alleges doom and criticizes present institutions. It is just ridiculous at this point, the title of the article is correct. There isn't anything a doom mongering hyperinflationist can allege that won't be lapped up eagerly by the endless legions of lemmings all betting on the exact same thing that cause the bubble of the "oughts" in the first place - the metaphysical faith that anything you can hit with a stick is worth infinity, while anything denominated in money and especially in dollars doesn't exist.

It's crap, the same crap that gave us $147 oil and $1 million 3 bedroom houses 20 years old. It is an inflationary brainstorm but the much maligned authorities are simply not living up to the doom mongers' script.

The reason the bubble burst last year is the Fed held M1 completely flat for 3 years. That is all it took to make all the blown inflation-monger bubbles collapse of their own absurdity. The same will happen this time around. How many times do these idiots have to lose $10 trillion before they wake up to the fact that prices of real assets you can hit with a stick, can and do go down?

Dr. Copper Spots a Monster Crash

Believing that inflation is on the horizon is not inflation actually on the horizon. It is a lot of people speculating recklessly on the thesis that is clearly false.

The charts showing all that build are not prices, they are stockpiles. The equilibrium price for anything is where the market for willing sellers and buyers clears - not where stockpiles build up continually. Lots of speculators are piling up every commodity they can think of, but nobody is buying it off of them to actually use it. Because demand is punk at these levels of economic activity, and at the nonsense fake prices the speculator's extra buying creates.

All the speculators have the same inflationary brainstorm that anything they can hit with a stick is worth infinity and anything printed on paper is worth zero. This was horribly false for houses and it is just as horribly false for copper or oil. Giant buildups in stockpiled copper, oil, all industrial commodities, do not signal inflation "on the horizon", they just signal that speculators are using low rates to bet on another inflation that isn't happening.

You might think losing $12 trillion in a year would teach these genuises that prices go down as well as up. But you'd be wrong.

It isn't a thought, it is an ideology and a fantasy, and only bankruptcy can cure it.

Oil: Ready to Break Higher?

Stocks are building continually and there is no demand.

This is just another inflationary brainstorm, there is no demand to meet it, and it will be another round trip. Everyone expecting higher prices for everything is ignoring the huge excess capacity and punk demand everywhere.

Fed Sends Gold Higher, But What Is It Good For?

Yes it is absurd, because (1) dollar currency rather than monetary base is only $900 billion not $1.7 trillion - you could redeem every dollar in existence for gold below $3000 an ounce (2) the Fed owns 85 cents of US treasuries, 84 cents of mortgages, 15 cents of agencies, and 35 cents of other assets (loans to the banking system, foreign exchange, swap lines to foreign central banks etc), on top of the 40 cents of gold - for every physical dollar.

Halve those figures if you like to cover all the core deposits rather than the physical currency, it remains true that all of the liabilities are over-backed by valuable assets. You have to pretend every other asset on the sheet is worthless and only the gold worth anything to support the idiotic $6300 figure.

If you think $750 billion each of treasuries and mortgages aren't worth anything, go ahead and short them; it is a saner bet that expecting gold to go to $6300.

And the Fed owns the same position in treasuries today that it did the day Bear went broke. It merely rebuilt the position this year that it sold off in 2008 as it moved its sheet to direct loans to the banking system. Remember those silly stories of last August about the Fed "running out of treasuries"? - lol The only new position is $750 billion of mortgage backeds. In case everyone just forgot, Fannie and Freddie are in receivorship and foreign holders are selling off their agencies; the Fed and GNMA have replace them as buyers.

Everyone expecting inflation because narrow money is $1 trillion higher is ignoring the fact that total assets are $12 trillion lower. Why the former is considered more inflationary than the latter is deflationary is one of those magical mysteries of monetarist fanatics.

No the Fed isn't going to monetize another trillion or three to fund the treasury. It hasn't taken a single action since the start of the crisis to accomodate the US treasury, which doesn't need the accomodating (because its credit is rock solid). All of its actions have been in support of the banking system and private credit markets, which is case everybody just forgot, are the ones who required it. It wasn't treasuries that went begging at 15% offered yields this time last year.

Ideology is no substitute for objectivity in finance...

U.S. Treasuries in a Bubble, Not Commodities

Problem - the premise is false. The Fed isn't pumping out money. The Fed's balance sheet is the same size as it was last October. All that happened in the meantime is the emergency short term loans to the banking system etc were repaid, and the Fed parked the proceeds in treasuries and agency mortgage backeds.

Everyone in the world is predicting the same US inflation and dollar collapse that was the bubble in the first place. It didn't happen 2005 to 2008 because the Fed held M1 completely constant over that span. It isn't going to happen this time either because the Fed hasn't moved its sheet size in a year.

The treasury auctions are 4 times oversubscribed in bills at zero and 2.5 times oversubscribed for the 10 years with actual yield.

Foreign investors did stop buying agencies over the last year but continue to buy treasuries hand over fist. China, Hong Kong, Japan, the UK, everybody else in smaller amounts. They may talk about the dollar being old hat but it continues to be the place they are parking their net new reserves. Foreign investors have also been buying the US stock market since April, at a $15 billion a month clip.

And the reason is clear - they are not willing to see their current account surpluses disappear, by actually pushing the US to trade balance. So the net capital inflow ot the US has slowed but it remains an inflow.

As for the much vaunted "carry trade", US investors owned less in foreign assets at the end of last year than nearly ever, really. Their foreign stocks got slammed; Americans don't buy foreign government bonds. Meanwhile the supposedly stupid US treasury positions all the foreigners have piled up earned plus 13% in that smash year. Foreign ownership of US assets went down because of the stock market decline, but only by $1 trillion, while US holdings abroad dropped $2.5 trillion - because we own their stock and they own our bonds.

As of the end of 2008, US investors had only a 5% position in foreign stocks and only 3% in foreign bond assets, and 80% of the latter are dollar denominated. The total US investor position in the BRICs is less than 0.5% of US household assets. Some carry trade. Nor can this change much net in the short run, because the net flow of capital remains inward at a $400 billion a year rate.

People talk their ideology but their actual trading positions are saying something quite different. Risk aversion is off the charts after last year's smash, and secular deleveraging continues.

Bond Expert Tuesday Outlook: Meeting the Treasury

The threat in the near term remains deflation and there is no reason for the Fed to tighten yet. The economy could not take it, it would be a 1938 style mistake and Bernanke is not going to make that one, he knows the history too well.

Longer term the trade on the board is to go short the 2 to 10 year spread. It won't stay this wide forever. Likely the short end moves upward as the economy recovers, along with an overall upward shift of the curve. Possibly the long end breaks downward on significant additional weakness, though I would put the chances of the first at 3-4 times those of the second. But here is what won't happen - 2s staying under 1% while 10s go to 5%...

Today in Commodities: Dollar Up, Again

Hey, someone noticed that the dollar went up! No fair! No one on the planet is supposed to be able to notice when that happens! Everyone screaming in chorus that it is toilet paper is supposed to make it so, and make everyone's overcrowded commodity bets pay off at infinite, wipe away all debts, and make every doom monger whole.

Monday FX View: The Dollar Stands Still

Um, the dollar just went vertical, up 1% against the Euro in less than an hour, and not one news organization, website, or commentator has a story covering it.

Is anyone watching the actual markets, or does everyone just make things up to fit their political world-view or trading book and just hope it turns out to be true?

Why Everyone Is Wrong About the Inflation/Deflation Debate

The no-risk trade is so crowded it is clearly doomed.

Gold is up because it is perceived as a safe haven.
Treasuries are bid at tiny yields because --- same.
Commodities - same.
Cash yielding zero - same.

All of it is Pavlovian investing in reaction to last year's pain. As usual with rear view mirror anything, it is precisely wrong, 180 degrees.

There is no inflation and there is no prospect of any.

The dollar is about where it was a year ago. Everyone talks about its decline over 9 months and not the huge spike it had in the 2 right before that, in the crisis peak. In case everyone just forgot, the entire world being short dollars (for debt, to fund real anything, etc) and unable to cover *was* the bubble.

It will be a long slow recovery, with GDP growth positive but below peaks in both GDP for a while and asset values for longer. Unemployment will decline only slowly. Deleveraging is a long slow slog and not over quickly. But there will be no inflation to speak of during it.

Everyone thinking they have to play the next shift in the exchange value of money to get ahead is exactly focused on the wrong issue. Where can capital earn reasonable returns with moderate safety in the present environment? Anywhere it can, it will be paid handsomely because credit is ridiculously cheap and will stay so. Anyone willing to take the slightest risk will be paid. Except those betting the house (again...) on outlier monetary movements --- which is approximately the entire financial pundit class, plus every populist fad-chaser on the planet.

Think stable income producers. Think credit, utilities, preferreds. Add modest leverage at near-zero cost, and carry. Don't pay any attention to all the heavy breathing scare mongers peddling their ridiculous washboard fantasies of hyperinflation or great depression reruns -- they are a total crock, start to finish.

10 More Reasons Why the Recession Will Last Forever

What an idiotic article.

Wanna bet this recession ends like every other?

No it is not different this time, it never is. What goes around comes around, it is a cycle. Grow up.

BofA and Stating the Obvious About Bank Profits

The real story in the B of A report is they remain cash flow positive as they have throughout. They added another $2.1 billion to their loss reserves, matching the loss to the common pretty much. There was also the $1.8 billion item from writing *up* the value of debt issued by Merrill because its credit improved.

Trust me, they won't go bankrupt through an improving credit rating.

They tick over around break even until the credit loss rate turns, then they pop upward. The net cost of the entire crisis will be a dilution a bit under half, from being forced to issue lots of stock at lousy prices to maintain capital at the bottom. In return they will have Merrill and be a $2.5 trillion bank in the next up cycle.

Everyone reacting to it as some disaster is smoking something, it was a non-event report...

BofA and Stating the Obvious About Bank Profits

The Fed isn't going to lose anything buying agencies MBS securities. It is going to make somewhat more profit than it makes in treasuries.