Why Home Prices Have Much Further To Fall [View article]
There is a widely held belief that booms and busts are inherent in capitalism. But those who think this way are at a loss to explain why free market activity would lead to strange clusters of error, in which many businesses see profits replaced with losses, all at the same time.
This misconception is then used to justify the failure of central banking and huge bailouts that we are told are necessary to "cure the excesses of capitalism". (Hint: they're not needed to restore capitalism, which we haven't had in the US for about 100 years; they're "needed" to temporarily sustain malinvestments fostered by central bank inflation.) So conventional reasoning about this runs along these lines: "The Fed hasn't eliminated the business cycle, but no force on earth could be expected to do so; it's inherent in capitalism. But at least they've improved the situation, by 'smoothing it out'."
There's a better explanation for all this that is little understood these days. Booms and busts are entirely a consequence of monetary inflation exercised through the bank lending system. There were booms and busts in the 19th century in the US, as well as in other times and on other continents. In the US, 19th century banks were emphatically not free market institutions; they were business entities that had long enjoyed special legal privileges that supported their inflationary activities, even prior to the formation of the banking cartel we know as the Federal Reserve System.
The special privileges were granted by state legislatures, were fiercely opposed by the Jacksonian democrats, and included bank holidays (arbitary suspension of contractural obligations of the banks), legal tender legislation (whereby bank notes were required to be accepted as payment for debts), and the legal treatment of demand deposits of gold coins as credit transactions instead of fiduciary transactions. Concerning this last, Jones would make a deposit of gold coins with a bank, which deposit Jones naturally assumed was available for his use on demand; while at the same time, the bank would lend Jones' deposit, via a check or bank notes, to a borrower who of course also assumed this money was immediately avilable for use when she chose to spend it. This practice is fraudulent, but it almost never is referenced in such terms because of long established and legally sanctioned banking practices. In other words, the fraud is sanctioned by government interention; it is not the outgrowth of free enterprise. A furniture warehouse that issues more than one receipt to patrons for use on demand of Smith's furniture is engaged in "fast business", not free enterprise based on private property rights.
My main point is that the fractional reserve landing of banks is inherently fraudulent and such fraud was propped up in the 19th century through special privileges granted to banks by state legislatures. Such fractional reserve lending, of course, expands the supply of credit and money. It is this expansion through bank lending that fosters artifical booms that lead inevitably to corrective reality-asserting busts.
The formation of the First Bank of the United States, thanks in large part to the influential lobbying of Alexander Hamilton (who was an enthusiastic backer of big government schemes throughout his career), was fervently favored by bankers. It won their fond support, because the central bank would play the role of credit expansion orchestrator, issuing regulations that would require the banks to expand credit at the same rate. This regulation-orchestration curtailed the restaining influence of the check clearing procedure on fractional reserve lending, thereby enabling far greater credit expansion; and with it, the hoped-for result of forestalling bank losses from the artifical boom.
The purpose of the Fed and its US Bank forerunner has been the imposition, through the force of law, of a banking cartel to accomodate and support bank inflationary credit expansion that could not exist in a free market.
The result of central banking in the US and everywhere else is quite obvious to anyone who cares to investigate: tremendous inflation, increasingly destructive and dangerous booms/busts, the evisceration of our capital foundations through malinvestments and other forms of inflation-induced capital consumption, and a crescendo of calls for more, more, more: bailouts, bank regulations, and money printing...without end.
Read Murray Rothbard's The Mystery of Banking available in pdf for free from mises.org, if this subject arouses your interest.
U.S. Economy Facing Japan-Like Deflation: What Investors Need To Know [View article]
To understand whether or not the US is sliding into deflation, the first step is to properly define deflation. Without a proper definition, based on good economics, it is impossible to understand what is happening or might happen.
Deflation is a contraction in the money supply. Defining it as "falling prices" necessarily leads to confusion, because prices can fall for a while based on rising demand for money-to-hold (falling velocity).
Thus, Japan hasn't had deflation, because its money supply has consistantly expanded. Consumer prices have fallen infrequently in Japan because rising productivity increases real output: more goods require more intense use of existing money to buy and sell those goods. More intense useage is the same thing as rising demand for money-to-hold (falling velocity), as people strive to increase their yen balances to accomodate buying more goods. Rising money demand sometimes is sufficient to more than offset slowly rising money (yen) supply. So at these times, prices fall slightly.
There is only one way that the United States or Japan can experience deflation: money supply contraction due to toppling financial dominoes that out run and overwhelm central bank attempts to qwell financial panic. We may well be facing deflation in our future, but we won't slide into it; it will necessarily occur due to a huge panic that causes a chain reaction of plunging asset prices.
What the future holds is uncertain, because the Fed and other central banks are staffed by devoted inflationist quacks. These people really believe that printing money is a panecea and they'll probably risk runaway inflation to try to head off a deflationary collapse.
That's not to say they'll succeed, only that they'll give it their best try. Whether or not they'll succeed depends entirely on their guesswork. If they guess that X money is necessary to qwell a rising panic, they'll forestall growing deflationary market pressures and we may roar into mass inflation. If they guess wrong, as they did in the Thirties, the financial house of cards-evolved through a century of central banking-will collapse. Then all investment prices will lose 90% or so.
There is no third alternative in my understanding.
In the meantime, the more they do whatever to "stimulate" the economy, the more they hollow it out via capital consumption. This makes our economic-financial system ever more fragile and prone to catastrophic failure.
End of the Nuclear Renaissance, the Future of Natural Gas, and the Case for MLPs [View article]
To Searcher:
I'm all for the First Law of Thermodynamics. Whenever I hear someone utter those sacred three words, I stand and cheer!
I'm contemptuous of myths based on allegations of "monopoly capitalism", such as 150 mpg carburators that GM and Ford supposedly suppressed. Capitalism doesn't yield monopolies, which are the consequence--always and everywhere--of mercantilism--state grants of coercive privilege to politically influential cronies.
But neither point is relevant to the issue of whether or not rogue Italian inventors have achieved a technological breakthrough in energy production that--according to press reports--is not claimed to be costless, but substantially cheaper than alternatives; and that at least one major utility thinks is real--according to a press release by the Mad Italians--based on its having entered into a contract for power production from this source that you've decided violates natural law.
As for my rude comment about "snotty academics", I ought to be congratulated for my remarkable polemical restraint. Most academcis are not only snotty; they are promoters of proven falsehoods, blatent misconceptions, and above all else, officially sanctioned myths that they dare not challenge. These myths are state-supported dogma riddled with contradictions, that academics teach despite massive and incontrovertible evidence to the contrary. This mythology runs the gamut of ideas: economics, history (including recent major historical events in the War on Terror), medical doctrine, climateology!, and so forth.
Any grownup who hasn't grasped that state supported "research" and "education" necessarily suppress intelligent inquiry is not intelligent, or is at least not intellectually conscious.
Academics today are not passionate intellectuals in pursuit of truth, who respect logical coherance and good evidence. Most of them do not even grasp that objective truth--and objective reality--exist! They are pseudo-intellectual shills, who make careers from justifying and defending official doctrine about a host of subjects.
Start Looking at the Short Side of Things [View article]
Michael, I think you're right about the general outlook; right about China, the banks, home builders and reckless consumer spending. When money printing slows down, as it has in the USA for a few months, and as appears imminent in China, bad investmests that flourished during the easy money boom begin to languish. Profit margins squeeze and revenues disappoint.
I am short a couple banks and some index stuff. I got interested in the banks for the reasons you mentioned, plus my understanding that while medium to large banks are political favorites, small to mid-sized banks tend to be sitting ducks. Its not that they are badly managed or run by stupid people. Rather, if the ecnomy is seriously deteriorating, past loan and security investments will drag them down, while future lending opportunities--except to he US government--will be meager.
The fly in my ointment is the Fed. When stocks start to go down in a serious way, the Fed will pump money like crazy. The new money flows to the banking system first; at this point the new money could force down yields on some loan securities--and some loans--which could then lift bank shares as the new money flows back into stocks. So shorting the financials has pretty good prospects for a while, but there are dangers ahead.
Om the flip side of this thinking, printing more money may temporarily and artificially boost a lot of banks later, but only at the cost of bleeding the rest of the economy. The economy gets bled, because the money inflation bids scarce real goods and work into white elephant ventures, like banking (in today's impossible circumstances) and home building (in overbuilt and under-saved America) and foreign military adventures. These scarce real goods are not a condition of nature, of course; they don't rain down on us from the heavens, like the rain and sunshine. Clearly, they have to be produced, through someone's intelligence and effort, using precious wealth that had been accumulated through someone's past work and saving. So the more the Fed "rescues us" (read: politially connected banks), and the more the Federal government "creates jobs" (at the cost of silently impoverishing businesses and workers), the more small banks are undermined.
Too bad there is no index fund for community and small regional banks.
For the last six months, the monetary base (bank reserves plus currency) have gone sideways, not up. Here's a link to the St Louis Fed's monetary base from 2008: forward.http://bit.ly/Ao7NN4
Some conclusions are obvious from the expansion of the monetary base since 08.
First, we can expect rising inflation in years to come--not an original insight, but a reliable one.
Second, the explosion in the base since 08 makes it plausible that prices today might well be heating up. This conjecture becomes more likely when one considers the very large increase in various measures of money supply since 2008. The one I prefer has grown by 60% over 4 years.
Third, if prices are heating up persistently, as I'm guessing, inflationary expctations are awakening. If so, this would explain why bond yields are escaping Fed control. It would also add impetus to rising prices.
Fourth, we can expect rising supplies of money, even though banks can't embark on another huge lending boom. The boom days featured rapid and continuing growth of real estate lending--something that's not going to happen again anytime soon. There's nothing I can see on the horizen that could replace real estate lending and provide the means to another vast bank credit expansion. However, future money growth could come from "leakage" from Fed printing money to buy assets, both of banks and of non-banks such as GM, AIG, GE that can't deploy the new money into excess reserves.
So we can have struggling banks AND rising money supply, which is what we've had for 4 years. It seems likely that Bernanke and his colleagues will resort to more money future pumping--to "fix" the stock market when it begins to fall; to "fix" rising bond yields; and so forth. The question is mainly one of timing.
Of course, it's no secret that when they attempt to depress bond yields, it doesn't work for long. If they "sterilize", selling 30 days assets to buy long term assets, they invert the yield curve which hammers the banks--already staggering from the Greenspan debacle. If they toss out "sterilization" and just print money to buy bonds, money supply grows and prices/inflationary expectations go up. So bond yields STILL go up, because the bond market is enormous.
So perhaps the next Big Thing will be a vicious long running bear market in bonds.
A Return To The Gold Standard Could Destroy The Modern Economy [View article]
Sorry, but this article is deeply flawed.
The private sector can only save if the government dis-saves? What on earth is government "dis-saving"?
Government gets what it takes by...taking. It produces nothing of value, in nearly all instances; and whatever it does is funded by stealing wealth that has been earned by private firms and individuals.
What the government commandeers from individuals and firms it virtually never saves. Why? Because the purpose of the taking is to feed its vast army of supporters, clients and workers. These people take the stolen wealth and, for the most part, consume it on living necessities and luxuries. The small part of the stolen wealth that is plowed by the state into physical infrastructure and weaponry is malinvested, wasted, gone forever. It is wasted because these are imperial projects that no one would voluntarily fund with her own wealth.
So the idea of government "dis-saving" as contrasted with "saving" makes no sense. Whatever the government takes is consumed and thereby permanently lost to the possibility of being saved by its rightful owners.
So again, when government spends, it takes from private sources. Most of this taking comes from funds that would otherwise be saved, since people first reduce their saving and then their living expenses. So it is entirely reasonable to characterize government spending as..."dis-saving".
Therefore, it follows that government spending ("dis-saving") REDUCES private saving, which is the source of capital formation, the development of the division of labor and economic progress. To promote government activity, therefore, is to sabotage what remains of our economic well being.
Your idea that economic progress would disintegrate if people were allowed by the governments of the world to evolve a free market money is well-meant but non-sensical. Governments didn't invent money, after all; they captured it. They control money for the same reasons that they assert control over other aspects of lives: to impose the vision that political operators have for our lives, without our consent. Of course, no one lives on air and these oeprators want to live affluent lives as they devote themselves to running ours. So they feather their own nests with wealth stolen by the state, and they give away loot to their allies and ravenous mobs of supporters, allegedly because they are "compassionate".
But this is not compassion, because moral virtues require that the actor be free to choose. It isn't compassion to rob Peter to pay Paul. No, they award loot to their clients, whatever they tell themselves or others, because they need to buy support to entrench and maintain their personal power.
You would have us believe that this nefarious process leads to our mutual betterment. That's sad, because it is so misguided. If anyone wants to learn more about the nature of money in free markets, I suggest you read Murray Rothbard's The Mystery of Banking and Henry Hazlitt's Economics in One Lesson--both classics downloadable for free from Mises.org.
Forget Lehman, Watching For Another Credit-Anstalt Moment [View article]
I don't get why most analysts believe that "fiscal austerity" sabotages economic growth. The "austerity" is reduced government spending, which makes available more consumer and capital goods for private use.
Private activity is always more productive than government activity. This is true, even though private production is often partially misdirected into malinvestments by central bank inflating. Compare the partial wreckage of the housing boom with the total waste and destruction of the wars in Iraq-Afghanistan-Vietn... and etc. Contrast capital lost in the internet bubble with the devastating waste of domestic spending--all devoted to funding the salaries of workers who produce little to nothing of value.
Government spending enables Peter to live by the work of Paul. It also makes Paul's efforts far less productive by funding regulatory agencies with armies of enforcers and auditors, processors and paper shufflers. Everyone of these government employees is unwittingly engaged in reducing productivity, stifling competition and ramping up costs for smaller producers.
If only the EU and the US could "suffer" 100 times today's "austerity", private producers would create 500 times more wealth.
The EU Debt Crisis and How to Profit From It [View article]
Thanks for the good article.
Two minor points of dissent:
First, the primary pressure for a Greek bailout is the certainty that northern European banks will fail in the event that Greeks fail to pay. This logic also applies to other PIGs.
Second, the Fed is never out of ammunition, because its Big Gun is money printing.
I only wish the Fed were down to its last bullets, and that it would use them on itself. Metaphorically.
In Defense of Incivility Towards 'Banksters' [View article]
The idea that financial entrepreneurs and managers are largely corrupt is incoherent. Financial executives are individuals who work in a system that has been corrupted and rigged as a consequence of our political culture. The term "banksters" suggests these men and women are gangland thugs, which is an irresponsible and vicious accusation.
The solution is not to smear and denigrate financial entrepreneurs, but to get rid of Mussolini state capitalism and replace it with free markets.
Titan International: Good Time to Bet the Farm [View article]
Two of your assumptions about this business are unreliable, at least based on my observations.
First is the idea that tractors and combines "wear out" after 5 years of use. Most tractors and combines I see (I live in farming country) are more than 5 years. Almost no one buys new equipment, because of high cost. This has been ongoing for as long as I've paid attention--perhaps trhe last 40 years. Meanwhile, grain prices have fallen as the dollar has rallied, and other costs--fertilizer, parts, diesel--have remained high. Operators have got to make do, so they repair and rebuild themselves, in their own on-farm shops. On the rare occassions when grain prices blast into new high terrritory, some farmers will buy some new equipment. These observations are in the northern Great Plains--perhaps this calculus doesn't apply in the Midwest where farming has higher margins.
Second, as long as community banks are under pressure, the credit extended to most farmrs will be restricted. Farm banks will do okay after grain prices rise, so credit will expand then. In the meanwhile, it seems to me this is a waiting game. The longer the wait, the more the stock price is likely to fall to more atractive levels.
Global Warming Will Push Gold Higher [View article]
Geez, you should run for political office. Sorry, but you think like a herd animal.
Good luck with your devotion to anthropological global warming, and making investment bets based on your analysis.
I'm persuaded we're headed for a natural and unfortunate cooling period starting maybe in the next couple decades. I don't know the science well, only having read three books on it--all written for laymen not scientists. I do know from what I've read that the risks are entirely aligned with an ice age, which will devastate northern lattitude farm production when it finally arrives.
I wouldn't want the burden of trying to persuade you of this--or any other idea.
Why Buffett Is Not Wrong Regarding Gold [View article]
Paulo, I like your insightful articles. I've learned a lot from reading you. But you are wrong about gold in this article, because, I suspect, you don't understand the rationale for gold ownership at this time in history.
Gold is a natural, market driven monetary alternative. Prior to the rise of big powerful states, that outlawed gold as money, the yellow metal was, of course, money. The market made it so, because of its unique physical characteristics and great scarcity that made it useful in indirect exchange.
Now we have arrived at an interesting historical junction. Fiat currencies around the world are in advanced stages of destruction, due to astonishing rates of monetary inflation in the world's reserve currency. This induces other central banks to more or less keep in step, which doesn't upset them much given their ideological outlook. Prices are still comparatively tame, but there will be terrible consequences from recent rampant inflation, with rampant inflating stetching well into the future. The only answers that central bankers and politicans have for our economic disintegration--that's what's in progress--is more destructive inflating, as though they really could create wealth by rapidly depreciating the paper currency and looting other people's money.
If the above is true, then people will eventually realize that they must have a reliable monetary alternative to the fiat currencies. That's because, obviously, fiat currencies are run by people determined to depreciate their value. As you know, this causes huge inflationary booms that destroy capital, spread poverty, and risk an unpredictable and uncontrolled monetary deflation--featuring cascading defaults-- if the bottom falls out in a recession.
As events unfold in this ugly parade, people will turn to gold to protect their savings from the inevitable destruction of fiat currencies.
The 300% plus increase in US bank reserves over about 3 years isn't a one time anomoly. It's objective evidence that the tail of the central bank can no longer wag the dog of the periously distorted financial system and an economy brought to its knees by predatory politics. The situation has been building and accelerating over the past century.
So the case for gold isn't derived from its status as an inflation hedge. It's not and there is no such thing. The case for gold is that some relibale form of money must rise to replace the destruction of fiat currencies and welfare states, which are nearing the end of their hegemony.
Residential real estate can be a smart investment or a lousy investment. It depends entirely on rental income versus price, obviously, and location.
In most areas, price is still too high. Personally, I would not look at a house unless the gross rental income was in excess of 12% of the prurchase price. I won't buy anything unless the annual rental income was about 15% of the price.
We'll see 15% gross rental caps in all sorts of areas during the next recession, I think. So I think Shaun Connel and Wall Street Debunker both make valid points.
The obvious reason real estate prices have stopped descending is because of politics. Political intervention enables banks to extend and pretend, so the foreclosure tsnami doesn't happen. Who knows, but I'd guess banks will delay foreclosures due to costs and accounting losses in every way they can think of. So house prices have to get forced lower--relative to rents--by events the Federal government and Fed cannot control.
What events? Americans growing poorer: rising inflation that forces mortgage rates much higher, living expenses that reduce disposable income, and rising taxes.
Rising inflation is a likelihood, because we've had 4 years of rampant money growth with plenty more ahead. So mortgage rates climb and rents climb. Meanwhile, localities will struggle to impose higher property taxes, restrained by angry voters struggling to survive. Home ownership is 66% or so and even a drop to 50% would still present a powerful lobbying interest in opposition to punitive (meaning more punitive) rates of property taxation.
So my 50 cents boils down to choosing some community that can muddle through disturbing disintegrating times ahead, buying rentals at smart prices and worrying a lot about renter malfeasance. This last implies making buys in some areas where renters have an opportunity to earn decent money, buying houses that appeal to income earners, and where house prices make a residential rental investment bet attractive.
The risks are real; there are no simple for sure trends. Except most people and perhaps all of us are headed for harder times.
Fed Policies: Dr. Bernanke's Monster [View article]
Eric, your article is interesting and insightful on many important points, including that stocks may be well over valued based on long term trailing earnings, and that the fed's monetary policies have created a monster.
There is one shortcoming that you could readily remedy, which is your analysis lacks unifying coherence. The question of why banks are struggling with over-valued assets and risk aversion is not addressed in a fundamental and comprehensive way.
Why does the economy require repeated massive infusions of new money to postpone another recession and crisis? Or in other words, what exactly is it that causes recessions? Animal spirits? Sun spot cycles? "Weak aggregate demand"?
None of these notions can explain coherently the nature of the business cycle recession, which is that following a boom featuring rising prices and lengthening of the structure of production, a recession inevitably ensues. The recession is characterized by a cluster of errors entirely alien to the market process. Instead of some small number of failing enterprises connected to entreprenuerial error, suddenly a very large number of such failures occur throughout the economy ALL AT THE SAME TIME.
Why?
Conventional economics has no good answers. The explanation lies in the theory of the business cycle explained by von Mises and von Hayek and their Austrian School followers.
Grasp the nature of the misallocation of scarce goods inherent in Federal Reserve inflating, under any and all circumstances, and one can understand why QE1 was futile and destructive--destined to ensure far greater difficulties in the future than the immediate failures it was intended to prevent.
Why The Market Is Not Necessarily Cheap [View article]
Thanks for your excellent article, one of the most insightful I've read in a long time.
Earnings yields on stocks are high compared to interest rates on treasuries. But treasuries yield nil because we're in an economy that is poor, and that may be contracting in real terms. True, GDP is growing slowly, but this is not an accurate reflection of economic reality. GDP growth may simply reflect higher pricesXsales plus more government spending.
But the more government spending grows, the more it depletes our capital base. For gvoernment spending always takes scarce goods away from private productive use and awards it to mostly useless or destructive "public works" that benefit no one. An obvious example is the bridge to nowhere or the latest War of the Month.
If our capital base is being eroded by all the spending/inflating, then real earnings are bound to contract in the years ahead. By real earnings, I mean adjusted for replacement cost of depreciating assets rather than book cost, and adjusting again for taxation on exaggerated earnings.
Meanwhile, the central banks are determined to lead us to the Promised Land of rapidly depreciating money. So sooner or later, I assume they'll get what they wish for, in the form of rampant price inflation.
We all know what that portends for stock price-to-earnings ratios.
Why Home Prices Have Much Further To Fall [View article]
This misconception is then used to justify the failure of central banking and huge bailouts that we are told are necessary to "cure the excesses of capitalism". (Hint: they're not needed to restore capitalism, which we haven't had in the US for about 100 years; they're "needed" to temporarily sustain malinvestments fostered by central bank inflation.) So conventional reasoning about this runs along these lines: "The Fed hasn't eliminated the business cycle, but no force on earth could be expected to do so; it's inherent in capitalism. But at least they've improved the situation, by 'smoothing it out'."
There's a better explanation for all this that is little understood these days. Booms and busts are entirely a consequence of monetary inflation exercised through the bank lending system. There were booms and busts in the 19th century in the US, as well as in other times and on other continents. In the US, 19th century banks were emphatically not free market institutions; they were business entities that had long enjoyed special legal privileges that supported their inflationary activities, even prior to the formation of the banking cartel we know as the Federal Reserve System.
The special privileges were granted by state legislatures, were fiercely opposed by the Jacksonian democrats, and included bank holidays (arbitary suspension of contractural obligations of the banks), legal tender legislation (whereby bank notes were required to be accepted as payment for debts), and the legal treatment of demand deposits of gold coins as credit transactions instead of fiduciary transactions. Concerning this last, Jones would make a deposit of gold coins with a bank, which deposit Jones naturally assumed was available for his use on demand; while at the same time, the bank would lend Jones' deposit, via a check or bank notes, to a borrower who of course also assumed this money was immediately avilable for use when she chose to spend it. This practice is fraudulent, but it almost never is referenced in such terms because of long established and legally sanctioned banking practices. In other words, the fraud is sanctioned by government interention; it is not the outgrowth of free enterprise. A furniture warehouse that issues more than one receipt to patrons for use on demand of Smith's furniture is engaged in "fast business", not free enterprise based on private property rights.
My main point is that the fractional reserve landing of banks is inherently fraudulent and such fraud was propped up in the 19th century through special privileges granted to banks by state legislatures. Such fractional reserve lending, of course, expands the supply of credit and money. It is this expansion through bank lending that fosters artifical booms that lead inevitably to corrective reality-asserting busts.
The formation of the First Bank of the United States, thanks in large part to the influential lobbying of Alexander Hamilton (who was an enthusiastic backer of big government schemes throughout his career), was fervently favored by bankers. It won their fond support, because the central bank would play the role of credit expansion orchestrator, issuing regulations that would require the banks to expand credit at the same rate. This regulation-orchestration curtailed the restaining influence of the check clearing procedure on fractional reserve lending, thereby enabling far greater credit expansion; and with it, the hoped-for result of forestalling bank losses from the artifical boom.
The purpose of the Fed and its US Bank forerunner has been the imposition, through the force of law, of a banking cartel to accomodate and support bank inflationary credit expansion that could not exist in a free market.
The result of central banking in the US and everywhere else is quite obvious to anyone who cares to investigate: tremendous inflation, increasingly destructive and dangerous booms/busts, the evisceration of our capital foundations through malinvestments and other forms of inflation-induced capital consumption, and a crescendo of calls for more, more, more: bailouts, bank regulations, and money printing...without end.
Read Murray Rothbard's The Mystery of Banking available in pdf for free from mises.org, if this subject arouses your interest.
U.S. Economy Facing Japan-Like Deflation: What Investors Need To Know [View article]
Deflation is a contraction in the money supply. Defining it as "falling prices" necessarily leads to confusion, because prices can fall for a while based on rising demand for money-to-hold (falling velocity).
Thus, Japan hasn't had deflation, because its money supply has consistantly expanded. Consumer prices have fallen infrequently in Japan because rising productivity increases real output: more goods require more intense use of existing money to buy and sell those goods. More intense useage is the same thing as rising demand for money-to-hold (falling velocity), as people strive to increase their yen balances to accomodate buying more goods. Rising money demand sometimes is sufficient to more than offset slowly rising money (yen) supply. So at these times, prices fall slightly.
There is only one way that the United States or Japan can experience deflation: money supply contraction due to toppling financial dominoes that out run and overwhelm central bank attempts to qwell financial panic. We may well be facing deflation in our future, but we won't slide into it; it will necessarily occur due to a huge panic that causes a chain reaction of plunging asset prices.
What the future holds is uncertain, because the Fed and other central banks are staffed by devoted inflationist quacks. These people really believe that printing money is a panecea and they'll probably risk runaway inflation to try to head off a deflationary collapse.
That's not to say they'll succeed, only that they'll give it their best try. Whether or not they'll succeed depends entirely on their guesswork. If they guess that X money is necessary to qwell a rising panic, they'll forestall growing deflationary market pressures and we may roar into mass inflation. If they guess wrong, as they did in the Thirties, the financial house of cards-evolved through a century of central banking-will collapse. Then all investment prices will lose 90% or so.
There is no third alternative in my understanding.
In the meantime, the more they do whatever to "stimulate" the economy, the more they hollow it out via capital consumption. This makes our economic-financial system ever more fragile and prone to catastrophic failure.
End of the Nuclear Renaissance, the Future of Natural Gas, and the Case for MLPs [View article]
I'm all for the First Law of Thermodynamics. Whenever I hear someone utter those sacred three words, I stand and cheer!
I'm contemptuous of myths based on allegations of "monopoly capitalism", such as 150 mpg carburators that GM and Ford supposedly suppressed. Capitalism doesn't yield monopolies, which are the consequence--always and everywhere--of mercantilism--state grants of coercive privilege to politically influential cronies.
But neither point is relevant to the issue of whether or not rogue Italian inventors have achieved a technological breakthrough in energy production that--according to press reports--is not claimed to be costless, but substantially cheaper than alternatives; and that at least one major utility thinks is real--according to a press release by the Mad Italians--based on its having entered into a contract for power production from this source that you've decided violates natural law.
As for my rude comment about "snotty academics", I ought to be congratulated for my remarkable polemical restraint. Most academcis are not only snotty; they are promoters of proven falsehoods, blatent misconceptions, and above all else, officially sanctioned myths that they dare not challenge. These myths are state-supported dogma riddled with contradictions, that academics teach despite massive and incontrovertible evidence to the contrary. This mythology runs the gamut of ideas: economics, history (including recent major historical events in the War on Terror), medical doctrine, climateology!, and so forth.
Any grownup who hasn't grasped that state supported "research" and "education" necessarily suppress intelligent inquiry is not intelligent, or is at least not intellectually conscious.
Academics today are not passionate intellectuals in pursuit of truth, who respect logical coherance and good evidence. Most of them do not even grasp that objective truth--and objective reality--exist! They are pseudo-intellectual shills, who make careers from justifying and defending official doctrine about a host of subjects.
They are a priesthood.
Start Looking at the Short Side of Things [View article]
I am short a couple banks and some index stuff. I got interested in the banks for the reasons you mentioned, plus my understanding that while medium to large banks are political favorites, small to mid-sized banks tend to be sitting ducks. Its not that they are badly managed or run by stupid people. Rather, if the ecnomy is seriously deteriorating, past loan and security investments will drag them down, while future lending opportunities--except to he US government--will be meager.
The fly in my ointment is the Fed. When stocks start to go down in a serious way, the Fed will pump money like crazy. The new money flows to the banking system first; at this point the new money could force down yields on some loan securities--and some loans--which could then lift bank shares as the new money flows back into stocks. So shorting the financials has pretty good prospects for a while, but there are dangers ahead.
Om the flip side of this thinking, printing more money may temporarily and artificially boost a lot of banks later, but only at the cost of bleeding the rest of the economy. The economy gets bled, because the money inflation bids scarce real goods and work into white elephant ventures, like banking (in today's impossible circumstances) and home building (in overbuilt and under-saved America) and foreign military adventures. These scarce real goods are not a condition of nature, of course; they don't rain down on us from the heavens, like the rain and sunshine. Clearly, they have to be produced, through someone's intelligence and effort, using precious wealth that had been accumulated through someone's past work and saving. So the more the Fed "rescues us" (read: politially connected banks), and the more the Federal government "creates jobs" (at the cost of silently impoverishing businesses and workers), the more small banks are undermined.
Too bad there is no index fund for community and small regional banks.
The Fed In A Tightening Box [View article]
forward.http://bit.ly/Ao7NN4
Some conclusions are obvious from the expansion of the monetary base since 08.
First, we can expect rising inflation in years to come--not an original insight, but a reliable one.
Second, the explosion in the base since 08 makes it plausible that prices today might well be heating up. This conjecture becomes more likely when one considers the very large increase in various measures of money supply since 2008. The one I prefer has grown by 60% over 4 years.
Third, if prices are heating up persistently, as I'm guessing, inflationary expctations are awakening. If so, this would explain why bond yields are escaping Fed control. It would also add impetus to rising prices.
Fourth, we can expect rising supplies of money, even though banks can't embark on another huge lending boom. The boom days featured rapid and continuing growth of real estate lending--something that's not going to happen again anytime soon. There's nothing I can see on the horizen that could replace real estate lending and provide the means to another vast bank credit expansion. However, future money growth could come from "leakage" from Fed printing money to buy assets, both of banks and of non-banks such as GM, AIG, GE that can't deploy the new money into excess reserves.
So we can have struggling banks AND rising money supply, which is what we've had for 4 years. It seems likely that Bernanke and his colleagues will resort to more money future pumping--to "fix" the stock market when it begins to fall; to "fix" rising bond yields; and so forth. The question is mainly one of timing.
Of course, it's no secret that when they attempt to depress bond yields, it doesn't work for long. If they "sterilize", selling 30 days assets to buy long term assets, they invert the yield curve which hammers the banks--already staggering from the Greenspan debacle. If they toss out "sterilization" and just print money to buy bonds, money supply grows and prices/inflationary expectations go up. So bond yields STILL go up, because the bond market is enormous.
So perhaps the next Big Thing will be a vicious long running bear market in bonds.
A Return To The Gold Standard Could Destroy The Modern Economy [View article]
The private sector can only save if the government dis-saves? What on earth is government "dis-saving"?
Government gets what it takes by...taking. It produces nothing of value, in nearly all instances; and whatever it does is funded by stealing wealth that has been earned by private firms and individuals.
What the government commandeers from individuals and firms it virtually never saves. Why? Because the purpose of the taking is to feed its vast army of supporters, clients and workers. These people take the stolen wealth and, for the most part, consume it on living necessities and luxuries. The small part of the stolen wealth that is plowed by the state into physical infrastructure and weaponry is malinvested, wasted, gone forever. It is wasted because these are imperial projects that no one would voluntarily fund with her own wealth.
So the idea of government "dis-saving" as contrasted with "saving" makes no sense. Whatever the government takes is consumed and thereby permanently lost to the possibility of being saved by its rightful owners.
So again, when government spends, it takes from private sources. Most of this taking comes from funds that would otherwise be saved, since people first reduce their saving and then their living expenses. So it is entirely reasonable to characterize government spending as..."dis-saving".
Therefore, it follows that government spending ("dis-saving") REDUCES private saving, which is the source of capital formation, the development of the division of labor and economic progress. To promote government activity, therefore, is to sabotage what remains of our economic well being.
Your idea that economic progress would disintegrate if people were allowed by the governments of the world to evolve a free market money is well-meant but non-sensical. Governments didn't invent money, after all; they captured it. They control money for the same reasons that they assert control over other aspects of lives: to impose the vision that political operators have for our lives, without our consent. Of course, no one lives on air and these oeprators want to live affluent lives as they devote themselves to running ours. So they feather their own nests with wealth stolen by the state, and they give away loot to their allies and ravenous mobs of supporters, allegedly because they are "compassionate".
But this is not compassion, because moral virtues require that the actor be free to choose. It isn't compassion to rob Peter to pay Paul. No, they award loot to their clients, whatever they tell themselves or others, because they need to buy support to entrench and maintain their personal power.
You would have us believe that this nefarious process leads to our mutual betterment. That's sad, because it is so misguided. If anyone wants to learn more about the nature of money in free markets, I suggest you read Murray Rothbard's The Mystery of Banking and Henry Hazlitt's Economics in One Lesson--both classics downloadable for free from Mises.org.
Forget Lehman, Watching For Another Credit-Anstalt Moment [View article]
Private activity is always more productive than government activity. This is true, even though private production is often partially misdirected into malinvestments by central bank inflating. Compare the partial wreckage of the housing boom with the total waste and destruction of the wars in Iraq-Afghanistan-Vietn... and etc. Contrast capital lost in the internet bubble with the devastating waste of domestic spending--all devoted to funding the salaries of workers who produce little to nothing of value.
Government spending enables Peter to live by the work of Paul. It also makes Paul's efforts far less productive by funding regulatory agencies with armies of enforcers and auditors, processors and paper shufflers. Everyone of these government employees is unwittingly engaged in reducing productivity, stifling competition and ramping up costs for smaller producers.
If only the EU and the US could "suffer" 100 times today's "austerity", private producers would create 500 times more wealth.
The EU Debt Crisis and How to Profit From It [View article]
Two minor points of dissent:
First, the primary pressure for a Greek bailout is the certainty that northern European banks will fail in the event that Greeks fail to pay. This logic also applies to other PIGs.
Second, the Fed is never out of ammunition, because its Big Gun is money printing.
I only wish the Fed were down to its last bullets, and that it would use them on itself. Metaphorically.
In Defense of Incivility Towards 'Banksters' [View article]
The solution is not to smear and denigrate financial entrepreneurs, but to get rid of Mussolini state capitalism and replace it with free markets.
Titan International: Good Time to Bet the Farm [View article]
First is the idea that tractors and combines "wear out" after 5 years of use. Most tractors and combines I see (I live in farming country) are more than 5 years. Almost no one buys new equipment, because of high cost. This has been ongoing for as long as I've paid attention--perhaps trhe last 40 years. Meanwhile, grain prices have fallen as the dollar has rallied, and other costs--fertilizer, parts, diesel--have remained high. Operators have got to make do, so they repair and rebuild themselves, in their own on-farm shops. On the rare occassions when grain prices blast into new high terrritory, some farmers will buy some new equipment. These observations are in the northern Great Plains--perhaps this calculus doesn't apply in the Midwest where farming has higher margins.
Second, as long as community banks are under pressure, the credit extended to most farmrs will be restricted. Farm banks will do okay after grain prices rise, so credit will expand then. In the meanwhile, it seems to me this is a waiting game. The longer the wait, the more the stock price is likely to fall to more atractive levels.
Global Warming Will Push Gold Higher [View article]
Good luck with your devotion to anthropological global warming, and making investment bets based on your analysis.
I'm persuaded we're headed for a natural and unfortunate cooling period starting maybe in the next couple decades. I don't know the science well, only having read three books on it--all written for laymen not scientists. I do know from what I've read that the risks are entirely aligned with an ice age, which will devastate northern lattitude farm production when it finally arrives.
I wouldn't want the burden of trying to persuade you of this--or any other idea.
Best of luck to you.
Why Buffett Is Not Wrong Regarding Gold [View article]
Gold is a natural, market driven monetary alternative. Prior to the rise of big powerful states, that outlawed gold as money, the yellow metal was, of course, money. The market made it so, because of its unique physical characteristics and great scarcity that made it useful in indirect exchange.
Now we have arrived at an interesting historical junction. Fiat currencies around the world are in advanced stages of destruction, due to astonishing rates of monetary inflation in the world's reserve currency. This induces other central banks to more or less keep in step, which doesn't upset them much given their ideological outlook. Prices are still comparatively tame, but there will be terrible consequences from recent rampant inflation, with rampant inflating stetching well into the future. The only answers that central bankers and politicans have for our economic disintegration--that's what's in progress--is more destructive inflating, as though they really could create wealth by rapidly depreciating the paper currency and looting other people's money.
If the above is true, then people will eventually realize that they must have a reliable monetary alternative to the fiat currencies. That's because, obviously, fiat currencies are run by people determined to depreciate their value. As you know, this causes huge inflationary booms that destroy capital, spread poverty, and risk an unpredictable and uncontrolled monetary deflation--featuring cascading defaults-- if the bottom falls out in a recession.
As events unfold in this ugly parade, people will turn to gold to protect their savings from the inevitable destruction of fiat currencies.
The 300% plus increase in US bank reserves over about 3 years isn't a one time anomoly. It's objective evidence that the tail of the central bank can no longer wag the dog of the periously distorted financial system and an economy brought to its knees by predatory politics. The situation has been building and accelerating over the past century.
So the case for gold isn't derived from its status as an inflation hedge. It's not and there is no such thing. The case for gold is that some relibale form of money must rise to replace the destruction of fiat currencies and welfare states, which are nearing the end of their hegemony.
Housing Prices To Fall Even More? [View article]
In most areas, price is still too high. Personally, I would not look at a house unless the gross rental income was in excess of 12% of the prurchase price. I won't buy anything unless the annual rental income was about 15% of the price.
We'll see 15% gross rental caps in all sorts of areas during the next recession, I think. So I think Shaun Connel and Wall Street Debunker both make valid points.
The obvious reason real estate prices have stopped descending is because of politics. Political intervention enables banks to extend and pretend, so the foreclosure tsnami doesn't happen. Who knows, but I'd guess banks will delay foreclosures due to costs and accounting losses in every way they can think of. So house prices have to get forced lower--relative to rents--by events the Federal government and Fed cannot control.
What events? Americans growing poorer: rising inflation that forces mortgage rates much higher, living expenses that reduce disposable income, and rising taxes.
Rising inflation is a likelihood, because we've had 4 years of rampant money growth with plenty more ahead. So mortgage rates climb and rents climb. Meanwhile, localities will struggle to impose higher property taxes, restrained by angry voters struggling to survive. Home ownership is 66% or so and even a drop to 50% would still present a powerful lobbying interest in opposition to punitive (meaning more punitive) rates of property taxation.
So my 50 cents boils down to choosing some community that can muddle through disturbing disintegrating times ahead, buying rentals at smart prices and worrying a lot about renter malfeasance. This last implies making buys in some areas where renters have an opportunity to earn decent money, buying houses that appeal to income earners, and where house prices make a residential rental investment bet attractive.
The risks are real; there are no simple for sure trends. Except most people and perhaps all of us are headed for harder times.
Fed Policies: Dr. Bernanke's Monster [View article]
There is one shortcoming that you could readily remedy, which is your analysis lacks unifying coherence. The question of why banks are struggling with over-valued assets and risk aversion is not addressed in a fundamental and comprehensive way.
Why does the economy require repeated massive infusions of new money to postpone another recession and crisis? Or in other words, what exactly is it that causes recessions? Animal spirits? Sun spot cycles? "Weak aggregate demand"?
None of these notions can explain coherently the nature of the business cycle recession, which is that following a boom featuring rising prices and lengthening of the structure of production, a recession inevitably ensues. The recession is characterized by a cluster of errors entirely alien to the market process. Instead of some small number of failing enterprises connected to entreprenuerial error, suddenly a very large number of such failures occur throughout the economy ALL AT THE SAME TIME.
Why?
Conventional economics has no good answers. The explanation lies in the theory of the business cycle explained by von Mises and von Hayek and their Austrian School followers.
Grasp the nature of the misallocation of scarce goods inherent in Federal Reserve inflating, under any and all circumstances, and one can understand why QE1 was futile and destructive--destined to ensure far greater difficulties in the future than the immediate failures it was intended to prevent.
Why The Market Is Not Necessarily Cheap [View article]
Earnings yields on stocks are high compared to interest rates on treasuries. But treasuries yield nil because we're in an economy that is poor, and that may be contracting in real terms. True, GDP is growing slowly, but this is not an accurate reflection of economic reality. GDP growth may simply reflect higher pricesXsales plus more government spending.
But the more government spending grows, the more it depletes our capital base. For gvoernment spending always takes scarce goods away from private productive use and awards it to mostly useless or destructive "public works" that benefit no one. An obvious example is the bridge to nowhere or the latest War of the Month.
If our capital base is being eroded by all the spending/inflating, then real earnings are bound to contract in the years ahead. By real earnings, I mean adjusted for replacement cost of depreciating assets rather than book cost, and adjusting again for taxation on exaggerated earnings.
Meanwhile, the central banks are determined to lead us to the Promised Land of rapidly depreciating money. So sooner or later, I assume they'll get what they wish for, in the form of rampant price inflation.
We all know what that portends for stock price-to-earnings ratios.