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interesting article.

it fits with a deflationary spiral, the complete cliff dive of demand.   it fits with a 200billion dollar a week treasury schedule as the money has to come from somewhere, it fits with increased demand for us dollars as debt servicing continues to absorb all available funds, it drives a huge coffin nail into anything green.  it puts a "special" hurting on russia and venuezla.   

Personally - 20 is a stretch, but I can see 30-40 barrel again given current conditions.  by current conditions I mean consumer led depression looming.  -- for historical perspective, oil touched 16 dollars a barrel in 1999. 

http://www.bloomberg.com/apps/news?pid=20601072&sid=auTu3RI8WC1A

July 16 (Bloomberg) -- Crude oil will collapse to $20 a barrel this year as the recession takes a deeper toll on fuel demand, according to academic and former U.S. government adviser Philip Verleger.

A crude surplus of 100 million barrels will accumulate by the end of the year, straining global storage capacity and sending prices to a seven-year low, said Verleger, who correctly predicted in 2007 that prices were set to exceed $100. Supply is outpacing demand by about 1 million barrels a day, he said.

"The economic situation is not getting better," Verleger, 64, a professor at the University of Calgary and head of consultant PKVerleger LLC, said in a telephone interview yesterday. "Global refinery runs are going to be much lower in the fall. If the recession continues and it's a warm winter, it's going to be devastating."

Crude oil last traded at $20 a barrel in February 2002. Futures were at $61.18 today in New York, having recovered 89 percent from a four-year low reached last December. The Organization of Petroleum Exporting Countries is implementing record supply cuts announced last year in response to plunging consumption.

"OPEC don't realize the magnitude of the cuts they need to make," which would total about a further 2 million barrels a day, Verleger added. "Storage is going to become tight. It's not clear if there's going to be enough storage available."

China, Inflation

Oil will average $63.91 in the fourth quarter, according to the median of analyst forecasts compiled by Bloomberg. Crude for December delivery traded at $65.61 today in New York. Prices have rebounded on expectations of a demand recovery, led by China and other developing economies, and concern expansionary monetary policy would stoke inflation and weaken the dollar.

At the other end of the spectrum from Verleger, Goldman Sachs Group Inc. predicted in a report yesterday oil will rally to $85 a barrel by the end of the year, and recommended that clients buy futures contracts for delivery in December 2011.

"China is in a real desperate situation," said Verleger, who publishes the Petroleum Economics Monthly. "We're in a situation where U.S. consumers aren't consuming and Chinese manufacturers get hurt. Economists are looking for growth in all the wrong places."

Forward contracts for oil have been higher than prices for immediate delivery this year, a situation known as contango, creating incentives to buy crude now and store it. That may end as growing stockpiles make storage more expensive.

"Prices would be much lower today, but for the very large incentive to build inventories," Verleger said. "You need forward buyers, which we had when people were fearing inflation, but as concerns turn toward deflation" that will no longer be the case.

Very interesting.............

Most investors, both individuals and funds, seem to be betting on higher oil prices and higher commodity prices in general right now.  Look at the stock price increases recently in oil explorers, oil service companies, precious metals & mining stocks.  Part of that is the fear of dollar devaluation.  Things got a bit peaky a little while back, then we had a correction.  I expected that one.  Now we're back up without any real fundamental reason other than fear, and I think, protection going forward for an expected declining dollar.  However, this is a hard one to call.  I absolutely believe in commodities for the long-term, but short-term, I'm not sure what to expect right now.  When enough people expect something and take steps based on their expectations, it moves the market, regardless of the underlying fundamentals.  Case in point:  All the "green shoots" hoopla.  Um, what has actually improved.  By every measure, economic activity is declining.  Ah, but it's declining at a slower rate.  This is what's being touted as a turnaround.  Yippee!  We can all go back to spending & borrowing like there's no tomorrow!

Another noteworthy item:  The dollar fell (and stayed) below 78 on the USD index today, what some considered a long-term resistance level.  Some authors attribute this to investors pulling out of the "safe haven" dollar and investing in commodities and other currencies.  I'd be willing to bet (and bet my own money!) some of the big boys like GS & JPM are borrowing dollars on the cheap & investing in higher yielding currencies.  Of course, we're not privy to that information though.  People used to do that with the Japanese yen, but now they're doing it with the US dollar.  When your currency is being used to fund carry trades, it's not exactly a sign of confidence in it holding its value going forward. 

By the time "Government" Sachs is talking about a recommendation, it's too late.  They're the worst pump & dump advice out there.  I'd follow their advice to buy oil futures for a certain date on the same day I make an investment based on Jim Cramer's recommendations.  If oil drops into the $30's (which I do not expect), and I have some spare cash, I'm a buyer.  My gut feel is we'll get another correction, but I'm not sure if I  would be comfortable trying to time it or estimate its depth on the way down.

Oil is used a throttle on the economy. In other words the price is fixed by people well above our pay grade. Does anyone still belive the sky high prices we saw last summer where a coincidence? They where slamming on the brakes hard to bring about the crash we saw in the fall. Once the train wreck was complete they eased up again. Anyone who tries to invest in it is gambling. No other way to describe it. Personaly I'd say as long as the economy is lousy the price of oil will remain more or less stable or fall. It all depends on where we are being driven.  

What a fun ride!  [shocked]

Thanks for the interesting read...

I make an investment based on Jim Cramer's recommendations.

[toilet]

Good points waggin, while I do see where you are coming from, I disagree in the final conclusion you drew.  More than likely, we both have some right and some wrong, but I dont mind talking the points through to see if we cannot get some clarity. 

Quote from: waggin
Most investors, both individuals and funds, seem to be betting on higher oil prices and higher commodity prices in general right now.  Look at the stock price increases recently in oil explorers, oil service companies, precious metals & mining stocks.  Part of that is the fear of dollar devaluation.  Things got a bit peaky a little while back, then we had a correction.  I expected that one.  Now we're back up without any real fundamental reason other than fear, and I think, protection going forward for an expected declining dollar. 

Yes, it seems many are betting that commodity prices will rise; however that belief has no fundamental or technical merit to warrant it.  All of it is fear of dollar devaluation / and or fear of inflation - both of which describe the same thing. 

Quote
However, this is a hard one to call.  I absolutely believe in commodities for the long-term, but short-term, I'm not sure what to expect right now.  When enough people expect something and take steps based on their expectations, it moves the market, regardless of the underlying fundamentals.  Case in point:  All the "green shoots" hoopla.  Um, what has actually improved.  By every measure, economic activity is declining.  Ah, but it's declining at a slower rate.  This is what's being touted as a turnaround.  Yippee!  We can all go back to spending & borrowing like there's no tomorrow!

The recent runup is not exactly without explanation.  The runs from June and July have not been organic, they have been on very low volume and a high percentage directly from just a few large primary dealer brokers.  The high frequency automated trading platforms from goldman sachs have been in the news for weeks.  And news out the last week has centered on nasdaq printing orders to select few prior to execution - in order to compete with DirectEdge exchange (which is owned by goldman).  Consider this, some select few get to see the market orders before they go through.  There are no retail investors anymore.  What you see is manipulation. 

A note about this type of manipulation - it never works. 
In 2003, British Petroleum cornered the propane market by buying the front month supply from the market and then escalated prices to try to force more money.  Aside from being caught by the SEC and getting tarred and feathered and paying huge fines and such - the strategy itself did not work.  They actually lost money on the strategy, and heres why.  As you go into the situation where you are the market, you become the only buyer at the escalted prices.  Manipulating prices higher means nothing if you have no one to sell to at the inflated price.  Eventually, money (just like water) will seek its way back to level and price determination ina market will be established. 

Goldman et all can run this market as far as they wish, and in the end all it will accomplish is their computers selling to their computers.  It is funded by the treasury and federal reserve via their various lending programs.  Which again is the same sham. 

Last week saw a bid to cover under 2 on the 5 year, this means there were not enough bidders to take the auction and the primary dealers were forced to buy up the rest.  By artificially keeping the yield low (quantitive easing) they are only ensuring that the market does not participate.  They may end up owning the entire treasury market and succeed in keeping yields low - however in doing so they lose all buyers.  There is no free lunch. 

Quote
Another noteworthy item:  The dollar fell (and stayed) below 78 on the USD index today, what some considered a long-term resistance level.  Some authors attribute this to investors pulling out of the "safe haven" dollar and investing in commodities and other currencies.  I'd be willing to bet (and bet my own money!) some of the big boys like GS & JPM are borrowing dollars on the cheap & investing in higher yielding currencies.  Of course, we're not privy to that information though.  People used to do that with the Japanese yen, but now they're doing it with the US dollar.  When your currency is being used to fund carry trades, it's not exactly a sign of confidence in it holding its value going forward.

Yes, it does look this way.  In fact Art Cashin wrote today in his letter:

"There is speculation among brokers that a "dollar carry trade" may be evolving. For
decades, arbitrageurs would borrow money in Tokyo at zero percent and short the
yen. They would then take the "free money" and buy commodities, crude, high
yielding bonds and even stocks. With U.S. rates held at zero for months, traders
wonder if an American version of the "carry trade" is beginning to evolve.
Whatever the source, there is no denying the influence of dollar movements across
asset classes. It is clearest against oil and commodities but quite evident versus stocks. "


I agree with what he is saying, and with what you are saying as well.  However, Japan has been doing this for nearly two decades.  Where is their inflation?  By your reasoning - it should be rampant.  Here is the facts as I see it.  Alot of "monetary theory" focuses far too much on monetary base, and not enough on credit contraction/expansion.  If a country - say Japan or the US - lowers rates below other parts of the world and creates the arbitrage opportunity - the net affect may indeed be a reduced currency value.  However that does not necessarily indicate inflation will take hold as the primary fundamental driver for our economies is credit.  Credit and debt are the same thing, for me to borrow at almost zero, it also means I cannot make loans less than that (and turn a profit at least).  If money is offered at zero, no one BUT the central bank will loan money.  This in turn causes credit to contract massively.  As credit contracts and no one is seeding the real economy craters.  Savings increase, purchases are put off, new jobs are not created, etc.  Without velocity of money (consumer spending!) there can be no inflation.   

When I say inflation/deflation - I am not necessarily talking about prices, especially food prices as in the coming 12-24 months as I expect them to fluctuate wildly for different reasons. 

Quote
By the time "Government" Sachs is talking about a recommendation, it's too late.  They're the worst pump & dump advice out there.  I'd follow their advice to buy oil futures for a certain date on the same day I make an investment based on Jim Cramer's recommendations.  If oil drops into the $30's (which I do not expect), and I have some spare cash, I'm a buyer.  My gut feel is we'll get another correction, but I'm not sure if I  would be comfortable trying to time it or estimate its depth on the way down.

Agree never to follow GS or Cramer.   I try to do my own research and thinking. 

As another example of this, consider the above, when US carry trade is being published in the UBS Wealth Management Research newsletter - its about played out as well.

Quote from: ScottA on August 03, 2009, 07:32:28 PM
Oil is used a throttle on the economy. In other words the price is fixed by people well above our pay grade. Does anyone still belive the sky high prices we saw last summer where a coincidence? They where slamming on the brakes hard to bring about the crash we saw in the fall. Once the train wreck was complete they eased up again. Anyone who tries to invest in it is gambling. No other way to describe it. Personaly I'd say as long as the economy is lousy the price of oil will remain more or less stable or fall. It all depends on where we are being driven.  

It never fails to amuse me to learn that the same government that is so incompetent, it couldn't possibly run a national health insurance program, is also an evil genius that can manipulate the international oil market to bring down the world economy.

Who said it was the government?

Quote from: ScottA on August 04, 2009, 10:50:55 PM
Who said it was the government?

Then who was it?  The Trilateral Commission?  The Illuminatti? The Jonas Brothers?

Quote from: Pox Eclipse on August 05, 2009, 07:22:25 AM

Quote from: ScottA on August 04, 2009, 10:50:55 PM
Who said it was the government?

Then who was it?  The Trilateral Commission?  The Illuminatti? The Jonas Brothers?

It was the Duke Brothers! ::)

Again

read "Confessions of an Economic Hit man" if you want to know how the 'system' operates

Exactly, it was the Duke boys and Uncle Jessie!  :P

Quote from: ScottA on August 05, 2009, 11:49:05 AM
Exactly, it was the Duke boys and Uncle Jessie!  :P

I was thinking of Randolph and Mortimer (http://www.thechicagoschooloftrading.com/Resources/Images/Duke%20brothers.bmp), myself!

 w*  -----back though the looking glass and down the conspiracy rabbit hole again.

Quote from: rwanders on August 05, 2009, 06:08:14 PM
w*  -----back though the looking glass and down the conspiracy rabbit hole again.

:D

Life must be very dull for those who don't believe in conspiracies.

 :)  Fortunately, we have the conspiracy theorists to keep us amused watching them build their mental  Rube Goldberg devices.

That is why we are so advanced.... Just can't slow those wheels down. :)

Quote from: Pox Eclipse on August 05, 2009, 07:22:25 AM

Quote from: ScottA on August 04, 2009, 10:50:55 PM
Who said it was the government?

Then who was it?  The Trilateral Commission?  The Illuminatti? The Jonas Brothers?

Don't be silly; the Jonas brothers have nothing to do with manipulation of markets.  However, from a supply & demand perspective, the sheer volume of cosmetics and hair care products used by them and other boy bands would be a factor in overall demand for oil.

I don't need a conspiricy theory to explain the obvious.

The markets are obviously manipulated.
911 was obviously an inside job.
America is obviously a Facist controlled country.

Anyone who has ever bothered to read a little history can see it even without the need for a grand theory to explain it.

Tell it like it is, Scott! 

I agree, Scott.  

I knew we did 9/11 as soon as my sister told me about it on the phone before I had seen the scripted news lies by the talking heads..  

I'm a pilot and most pilots who have worked with ATC (IFR-Commercial) know that with the safeguards that were already in place pre-9/11, it could not happen without being assisted  by insiders.

The military industrial complex Eisenhower warned about is firmly in place.

I heard from my sister's neighbor's third cousin, twice removed that the whole conspiracy was masterminded by Homer Scraggs, the Grand Potentate of the Peoria, Illinois Masonic Lodge but, all intelligent and informed persons know it was really controlled by Adolf Hitler from his secret lair in the basement of the Sistine Chapel where is has been hidden by the Knights of Columbus ever since he was flown out of Berlin by Amela Erhart who had been captured by the Japanese and traded to the Nazis for their secret plans to rule the world by flooding the market with cheap automobiles from Toyota. Only the assassination of FDR by agents of the Trilateral Commission in league with the International Bank Conspiracy led by the Rothschilds delayed their diabolical plot. They struck again on 9/11 when their agent, cleverly disguised as the 104th floor janitor at the WTC, successfully smuggled in 10,000 cherry bombs, blowing up the building while Steven Spielberg, a secret agent of the Elders of Zion, bamboozled the world by projecting a special effects film of planes striking the towers and taking control of all cable and network cameras. No thinking person could ever doubt this!   :o :o

That's funny rwanders ::)

What happened to the 20 dollar oil ???

The only problem I have with the 911 theory is why use four planes?
If it was a conspiricy wouldn't one be enough to get the aginda though?

Wow... amazing you heard all of that stuff clear up there in Alaska, RW.  Ain't the innernet wunnerful.

This thread sure got a bit off topic eh? Anyway, some interesting news out this afternoon. The FOMC meeting minutes came out a little while ago.

http://www.federalreserve.gov/newsevents/press/monetary/20090812a.htm

QuoteAs previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October.

No new expansion of QE or monetary expansion, and a slowdown with planned END in October.  
This is exactly the sort of thing that would kill
1) stock market
2) gold
3) oil

and set the dollar and bond markets on a rampjob.  Speaking of dollar, early look is that it likes the news.

-edited to remove chart as it is was a realtime view instead of context view. 

Edit:  (Removed real-time chart.)

Wonder if the "Stealth QE" will be stopped as well.  Thought it was very interesting that a recent 7-year treasury auction was not allowed to fail.  The primary dealers purchased the treasuries, then a couple of days later the Fed purchased them from the primary dealers.  Doesn't seem very transparent, let alone ethical.  Now if all is peachy, and there's nothing to hide, why was this little shell game necessary?  Since we're depending on foreign nations to finance us, and they're proving less willing to do so at the existing low rates, won't the Fed have to continue to monetize the debt?  With our astronomical national debt, we have no choice but to monetize.  Anybody seen IOUSA yet?  I haven't, but I really want to.

http://www.chrismartenson.com/blog/fed-buys-last-weeks-treasury-auction/23880

Dollar recovery?  Not so fast IMO.  Unless you call a deceased feline bounce a recovery.  We had a spike earlier in the day, but we're slowly dribbling back down toward the low point of the day, and we're still down overall for the day/week/YTD.  The long term trend is down, and nothing I see on the horizon is going to change that.  The 2008/2009 strength was because the USD was perceived as the least worst.  Note that since the announcement earlier, there was no drop in gold or oil; both are up slightly. 

All else being equal, I'd place more confidence in precious metals and oil going forward.  Since I don't have the access to information or the ability to manipulate much of anything (I'm so jealous of those darned Jonas Brothers!), I'm not going to try to call the daily or even monthly fluctuations, but I will and am putting my money where my mouth is for the long term.

A smarter man would just leave this alone.  Alas, I guess I am not one. 

I do understand your position waggin, and I respect you greatly for posting it.  Let's revisit this thread in 2 months and see where it stands. 

8 weeks comes out to roughly October 14th or so.  for reference sake, as of 8/18: 
spx = 989
dow = 9217
usdx = 79.008
gold = 939
silver = 14.82
oil/nymex crude = 69.91

Quote from: muldoon on August 18, 2009, 10:26:33 PM
A smarter man would just leave this alone.  Alas, I guess I am not one.  

I do understand your position waggin, and I respect you greatly for posting it.  Let's revisit this thread in 2 months and see where it stands.  

8 weeks comes out to roughly October 14th or so.  for reference sake, as of 8/18:  
spx = 989
dow = 9217
usdx = 79.008
gold = 939
silver = 14.82
oil/nymex crude = 69.91

Sounds like a plan, but let's reference silver to $13.97, August 18th's closing price & a pretty good approximation of its average for the day.  I don't see where it hit $14.82 yesterday.  

Hey, if we all agreed, it wouldn't be much of a discussion.  Several of the authors I like to follow have opposing views, and I value all the information.  I enjoy looking at your viewpoint, respect & consider your reasoned analysis, and am not offended in the least that we see things differently.  There are so many variables out there that can affect what happens, it's natural that some of us will read the tea leaves differently.  (or toasted cheese sandwich or spilled wine)

I like looking at economic issues over a longer term.  If we can keep this topic fresh in our minds, we can add to it as time passes.  Feel free to broaden the topic if you think it's related.

Edit 10/1/09:
Lately, I've read several articles that reference how it's possible to have both inflation & deflation together, and this one does a great job of explaining the concept.
http://www.financialsense.com/fsu/editorials/2009/0921.html

This article led me to the one above:
http://www.kitco.com/ind/schoon/oct012009.html

In summary, you see deflation; I see inflation, and we're both right. 

I look forward top picking this back up in a couple of weeks and hope it will be an ongoing thread with some more folks getting interested and contributing.

We agreed to revisit on Oct 14th, but I am calling it in early.  The 14th is the middle of the week, and since I started my new job I don't have as much time to expound my thoughts as I used to and since I want to do this justice I am going to take the opportunity I have now.  I also have the house to myself this evening as my wife and children or off at a birthday party for a while.  I have been considering these positions and the situation in general quite deeply lately.  To be honest, I have near obsessed over the most minute scraps of detail for years on this, it's not a new development. 

First off, I'll come out and say that I also can see the case for both.  I have for some time, however I believed the case for deflation to strongly overcome the case for inflation.   Quite specifically, I picture the inflation/hyperinflation case the equivalent of driving a vehicle into a brick wall at 500 miles per hour and I did not believe it was actually a real possibility that it would intentionally be done.   I have changed my mind in the past few weeks.  Reversing a 3 year position can be tough, so bear with me as I still struggle to get the details of my thoughts out on this. 

I stated a year ago - just after the bailouts that I believed the case for hard crash was very low at that point, but that the case for lengthy depression was very high because of the destruction of private party credit.  That collapse of private credit is the key to the deflationary picture as in a credit=money economy the removal of credit is the same as the removal of dollars.  You can see this in many ways, businesses no longer borrowing because there is no demand because consumers are tapped out.  The ones who need money are a huge risk and cannot get credit, the ones who could afford it dont want it because it is a bad time to grow or expand business as everything slows.  It is the very definition of deflationary spiral. 

The government has stepped in, and they are providing some levels of money into the system.  It has been revealed recently that during the second quarter, the fed purchased more than 50% of the treasuries debt.  It has also been revealed that for the year 2009 to date, the fed has purchased 105% of all mortgage backed securities sold in the US.  Every house sold in the united states was done so because the government purchased the paper.  (and then they purchased some more on top of that - hello fraud?).  The point highlighting the very fact that private credit is dead dead dead. 

As companies slow they lay off and go bankrupt.  This increase the number of people not working which snowballs as they then default on debt which impacts more.  As these increasing number of people fight for fewer and fewer dollars in circulation the values on items decrease.  Go on craigslist and look at boats or 4wheelers or whatever to see that everything in this nation is on sale.  That is deflation and exactly why I have very firmly held a cash is king, debt is dumb take for whoever were to ask me for years. 

As that very thing has exactly played out - some may wonder, why on earth would I change my tune now?  Because the government has put these dollars into the economy and they have done nothing to help the average local economies.  They want to increase the bailouts, increase the stimulus,  do anything at all to get more people in debt - cash for clunkers?  FHA loan standards reduced to allow for 50% debt to income ratios - (they think its a good idea to make a home loan where your house payment is 50% of your monthly check, before taxes/insurance).  The 4billion to the post office to cover their pensions, and a nonstop endless stream of backdoor bailouts being done now.  They KNOW they cannot do another big bailout bill, everything is slipped in one provision at a time now. 

But the rest of the world is very aware of whats going on.  Those bailouts were not financed by debt, they were financed by the fed - via direct monetization of debt.  It's no secret they do not want an audit, and it's no secret that any such audit would lead to a crash and very higher interests rates exactly as they threaten it would.  They are insolvent, just as insolvent as every bank in this nation is.  Their collateral is trash, with vast hundreds of billions in marked assets having a market value of zero if they were to sell.  They have no reserves to lend against.  They are lending with nothing to back it up, and that is in effect the helicopter ben talked about all those years ago. 

There is a direct run on the dollar right this moment, as other countries dump dollar denominated assets looking for safety.  When I re-read this thread I was surprised to see me quoting above back in August that some were concerned a dollar-carry-trade was starting.  Seems like a year ago because we have a huge carry trade going now and it's as well known and plainly obvious as anything in the fx market.  I cant believe so much has been lost in such a short period of time. 

Here's what happens in a currency crash.  Other countries begin selling your bonds and shunning your dollars.  They trade in currencies that are not ours which reduces demand for dollars.  All those trillions of dollars in the world then come back to the us.  Thats where inflation comes from.  Those dollars coming home to roost.  Those trillions of debt coming right back home and flooding our country.  It may look like china buying oil fields for billions, or japan selling bonds in italy, or any number of things we see in the news everyday. 

The dollar depreciation is *intentional*!  The reason they wish to pursue this path is because a strong dollar means goods cost less.  The weaker our dollar is the more it will offset the causes of deflation.  As houses deflate in value, they are hoping that the lost value of the dollar will keep the prices high, high enough to make us solvent again.  I have heard (from a reputable source, I am not a rumor monger unless I think it is valid)  that there are those in the treasury that wish to see the dollar hit a DX in the sub 50 range.  Thats another 50% loss from here.  Think 7 dollar gasoline.  On top of a crushing economy.   That cuts everyone in the US effectively 50% in how much our dollar buys, and increases every other country by roughly 100%. 

There are those that believe a hyperinflationary hit will leave us all millionaires, but I don't see that.  I cannot see any job in the united states paying 1,000 to someone for something they can get in china for 50.  Our costs may go up 50 to 100% a year, but our income will not.  What will occur is that our standard of living decreases.  One thing I have also learned through significant research is that a currency collapse is not a long slow gradual process.  It is quick, like if you were in Argentina in 2001, you literally woke up one day to the currency was dropped 3to1, meaning for every dollar you used to have now you had 30 cents.  Ohh and oil and everything you import into your country just went up 3to1 the other way (9to1 to you).  Overnight. 

I don't know what the future holds, it looks bumpy as hell. 

I see the case for huge inflation on all imported goods (20-100% a year).  45% likelihood

I strongly doubt the case for hyperinflation (1000% plus per month).  5% likelihood -how to get the $ into wages is my question. 

I see the case for continued deflation (decade long depression ala Japan 90s US in 30s) 50% likelihood

I see no case for return to "normal" (life as we knew it in 2005)  0% likelihood

Sorry for the long post, and lack of good news within it.  I'm just putting my thoughts on paper.  Let's all hope I'm all wrong. 

Always appreciate reading this analysis.

Muldoon, thanks for the well-reasoned and documented thesis. The concept of inflationary and deflationary forces at work simultaneously sounds to me like about what happened in Japan after their real estate bubble burst in the '90's or so, and was characterized as "stagflation". I think it's the fallout from the exercise of gov't power used to shield their political friends from the rightful economic consequences of bad business decisions at the expense of the little guy with no clout. I also think we're seeing it replayed here and now, and see no reason to think the outcome will be any better. You are correct that such a situation results in a lower standard of living, particularly for those with large debt loads; that IIRC, was/is the case in Japan.

Take care and good luck with the new job!

H.

I think you nailed it muldoon. Did you notice how all the bailouts, clunker programs etc all seem to end up helping the banks in the end? More stealth bailouts. It's been slow to hit here but the economy in OK is falling fast now. The so called recovery I keep hearing about in the news is a ghost.

Alcohol is one of the very few "drugs" that withdrawal from it can actually kill a person.  Even heroin withdrawal won't kill you.  If used in moderation, quitting drinking cold-turkey has no effect whatsoever.  We (our economy) have not been using credit in moderation.

One of my concerns/impressions about what's happening in this whole mess is the derivatives.  I've mentioned this before in a different context, but I think it applies here more than I thought previously.  Various articles have mentioned that there is likely $600-$1,000 trillion (yup, a quadrillion!?) of derivatives out there, all of it unregulated and virtually undocumented.  It boggles my mind that I could sit down with one of my neighbors and basically write a derivatives contract on a napkin that if one of our other neighbor's houses burns down, then the person that wrote the contract with me would have to pay me say $200,000.  If 9 other people wanted to bet that it wouldn't burn down, I could write derivatives to collect $2 million if it burned down.  I don't even have to have the money to pay my side of the contract if the house doesn't burn down.  It doesn't matter a bit if I have no interest in my neighbor's house or am not a party to their insurance policy.  Alan Greenspan, the former Fed-head, thought derivatives actually reduced risk and improved stability!!  Sure, no regulations, no margin requirements, no exchange for trading, no reporting requirements, and virtually no documentation.  If world GDP is running around $60 trillion annually, that's only 10% or less of the notional value of the derivatives out there.  One of the reasons we can't look to fundamentals for anything any more is that big money is being used to preserve and hide the status quo.  Does anyone else think that the allowed use of high frequency trading (HFT)/flash trading and front running is just an attempt to allow the big firms to unfairly skim money on just about every trade made in order to rebuild their balance sheets?  Who would bet against that these players are a party to discussions on interest rate policy and stimulus in advance of policy changes, or maybe even have a say in policy?  I highly suspect that why we're seeing the bailout money going where it's going is to try to plug all the holes where someone like AIG, GS, or JPM might have to actually pay on a leveraged derivative bet.  Think of how much was spent to prop up AIG, a party to massive amounts of derivatives.  As soon as one party defaults on one of these, I think it will expose the entire rotten, stinking core.  What we're seeing is an attempt to keep it hidden.  As Deep Throat said regarding Watergate, "Follow the money."  It's interesting how little is being said about the attempt to get the Fed audited.  Almost as if those in power (and I don't mean the politicians) don't want that to happen.  Hmmm...  How long is it going to take before the first big derivative default, and what will the cascade of intertwined derivative collapses look like?  This, I suspect, is why so little of what we're seeing right now makes any sense.

I typed a reply to this thread yesterday, but then deleted it instead of posting it.  I guess I am going to retype it today and maybe submit. 

I don't think I still agree with the post I made made just two weeks ago.  Funny as it sounds - I don't I don't think there is a printing press, I don't think there ever was one.  The only printing press is derived from velocity of money and credit expansion through lending.  There is no free lunch. 

Not sure the best way to word this, as I don't want to sound overly alarming.  I'll just say I expect fireworks next week and leave it at that.  I cant take the time to explain this right now but hope to this weekend when I get out of the city.   

I never got the time to explain any further, but we did get some fireworks.  CIT has declared bankruptcy today, dow lost a few hundred, SnP500 is sitting back on 1036, the dollar rocket shot up a bit into the mid 76 range. 

Why?

Here's what I think.  The fed is a bank.  (yes thats a loaded statement).  But it is a bank.  They have creditors and depositors and loan recipients.  They have a balance sheet, they have assets and liabilities.  They are limited in what they can do --much more than some on this forum would believe. 

I believe that they do not print money out of thin air as many claim.  What they do is print debt out of thin air; and debt must always be repaid.  Debt must have a worthy borrower - someone with viable collateral, someone with a means to repay, and they must be willing to assume more debt. 

If you consider the fed as a bank, you can look at their balance sheet at any time, it comes out every Thursday.  Called the H4.1. 
http://www.federalreserve.gov/RELEASES/H41/

If you go back to say last fall, you'll see a line item in section 1 - liabilities for Treasury Supplemental financing.  It started out around 200billion, and grew to 550 billion in December for the currency swaps.  Then it began shrinking, and the more it shrank, the more the market crashed.  It stopped shrinking in late Feb at 199billion.  The market stabilized, and we went from there.  About a month ago the treasury announced the drawdown of this account.  They are depositors at the fed, and over the last 6 weeks, it has come fro 199billion(where it was in Feb - Sept), to about 29billion to the tune of roughly 35 billion a week. 

Now, if you are a bank, you have capital requirements.  If the amount of dollars decreases on the amount of funds you have deposited - it reduces the amount of funds you have to lend.  And that is EXACTLY what has been occuring the last two weeks.  The Monday before last the Fed attempted a reverse repo - to withdraw funds from primary dealers.  It was a complete zero, with zero bids.  They attempted to withdraw 60billion and were unable to withdraw any.  On the following Thursdsay, wathing the slosh report we saw that 55billion in rollover funding to the banks was not rolled.  Those funds were called in and not replenished. 

Here is a link to the slosh report:  http://www.gmtfo.com/reporeader/OMOps.aspx

Think about this, and picture that money flows like water.  If the fed puts money into the system - markets rise, loans get made, there is money to do things.  If the fed withdraws money, not only is there not easy money but banks must then sell assets to meet other obligations.  These forced selling causes downdays. 

--
I know, they have printed a trillion right.  Maybe not.  If you look at the fed as a bank.  And you consider the Fed's charts from St. Luis site for non-borrowed reserves:   
(http://research.stlouisfed.org/fred2/data/BOGNONBR_Max_630_378.png)

It will tell the whole story.  Everyone knows the banks are not loaning money into the real world.  There is no free money for any of the real people.  The banks have these dollars on deposit at the federal reserve drawing interest as non-borrowed reserves. 

Wait, the banks have the stimulous money on deposit at their bank.  The fed.  The fed has increased their liabilities (people depositing money to them) by 1 trillion since the stimulous.  Thats your QE.  They are doing what a bank is supposed to, taking deposited funds and lending or purchasing assets.  It's not printing anything. 

--
So, to accept this theory, you have to believe the fed is not all powerful.  It does not set rates, it does not have the ability top create money, it has limited choices in what it can and cannot do legally.  It has some leeway in what laws it can ignore, but it cannot ignore everything. 

If that is the case, and if the fed is draining the swamp, the slosh if you were - then there is no other course for there to be a liquidity drain with it.  As money gets tight, and credit gets tight, the only way to meet obligations is to sell assets.   I still think the dollar has legs.  It may fall apart in the future, but for the short term I would not bet against it.  The case for this is simple supply demand, if the dollars in the slosh are being removed then there are not enough dollars in the system.  Thus dollar are needed and the value of them increases.  As the dollar increases, the value goes up - which causes things to drop in price - things like the stock market.  That can create a negative feedback loop.  This can be fueled by the number of people betting against the dollar, and the carrytrade unwind that a reversal would force.  Potentially a violent condition that puts the dollar up, DX80,SPX>900 in 2 weeks not out of the question. 

We'll see if this idea pans out, it worked to explain last week.  Who knows whats coming up.  However, this is my basic premise for what is going on right now. 

Muldoon, thanks for the post.  I always look forward to reading them and always find them very thought-provoking.

I believe that they do not print money out of thin air as many claim.  What they do is print debt out of thin air; and debt must always be repaid.  Debt must have a worthy borrower - someone with viable collateral, someone with a means to repay, and they must be willing to assume more debt.

I agree. Currency is Federal Reserve Notes, literally notes, interest bearing notes that we trade as a medium of exchange. The worthy borrower is lately the government, is it not, or from where did the trillion needed for the stimulus all of a sudden appear? The collateral, of course, is the govt's ability to levy taxes and confiscate property, by force if necessary, to make good the loan. So when the funds borrowed are spent into circulation, is not the money supply increased in effect even if the funds/notes are simultaneously an asset and a liability? What will happen when, as, and if the stimulus funds are eventually loaned to non-govt, non-bank borrowers and they hit the everyday sector of the economy most of us operate in every day? Is this what the Fed is trying to regulate with this slosh draining effort?

So, to accept this theory, you have to believe the fed is not all powerful.  It does not set rates, it does not have the ability top create money, it has limited choices in what it can and cannot do legally.  It has some leeway in what laws it can ignore, but it cannot ignore everything.

Isn't it certain that the FMOC sets the discount rate, and through open market operations, at least profoundly affects interbank and market rates, if not specifically dictating them?  The Fed, and by extension the FMOC, is absolutely constrained by laws/regulations, particularly with respect to setting reserve requirements, as far as their activities intended to regulate interest rates and consequently expansion/contraction of the money supply are concerned, but regulate them they do, even if it's indirectly, it appears to me. 

If that is the case, and if the fed is draining the swamp, the slosh if you were - then there is no other course for there to be a liquidity drain with it.  As money gets tight, and credit gets tight, the only way to meet obligations is to sell assets.   I still think the dollar has legs.  It may fall apart in the future, but for the short term I would not bet against it.  The case for this is simple supply demand, if the dollars in the slosh are being removed then there are not enough dollars in the system.  Thus dollar are needed and the value of them increases.  As the dollar increases, the value goes up - which causes things to drop in price - things like the stock market.  That can create a negative feedback loop.  This can be fueled by the number of people betting against the dollar, and the carrytrade unwind that a reversal would force.  Potentially a violent condition that puts the dollar up, DX80,SPX>900 in 2 weeks not out of the question.

Yes, if Fed policy results in contraction of the money supply, fewer dollars chasing the goods and services in the economy mean lower prices and lower velocity, avoiding inflation but very likely at least postponing if not scuttling return to normal levels of commerce, or recovery from the crash. It's going to be a difficult if not impossible task to walk the fine line that finances stimulus, the war, and all the other huge expenses we are currently shouldering, yet allows recovery without currency debasement, and when all the debt owed to foreign creditors is thrown into the mix, intentional devaluation seems likely at some point in time. 

Time and only time will tell..........

Harry,

great comments.  I'll give a shot at my thinking on your questions.  Going to go out of order as I want to build up to something. 

Quote
Isn't it certain that the FMOC sets the discount rate, and through open market operations, at least profoundly affects interbank and market rates, if not specifically dictating them?  The Fed, and by extension the FMOC, is absolutely constrained by laws/regulations, particularly with respect to setting reserve requirements, as far as their activities intended to regulate interest rates and consequently expansion/contraction of the money supply are concerned, but regulate them they do, even if it's indirectly, it appears to me.

Well, I think they are constrained more than it may appear.  Consider this, something I hear quite a bit that never made sense are things like "the market had alot of sellers today", or "heavy buying" and the like.  Surely in every transaction there are buyers and sellers yes?  You cannot sell without a buyer correct?  The market defines the price, the market being the collective aggregate of supply/demand and greed/fear essentially. 

Well the same is true for the fed rates as well.  For them to lend, they must have a borrowor.  For them to borrow, there must be a lender.  Debt and credit are the same thing in the sense that buying and selling are the same thing - different sides of the same transaction.  For the fed to sell treasuries they must go to market and get an offer.  The market defines that rate.  The other side of the equation is the rate at which it can loan at. 

Walk through an example with me.  Go to the fed reserve chart from the st luis site,  http://research.stlouisfed.org/fred2/

In the search bar, enter wtb3ms  - this is the dataset that represents the 13week Treasury Bill.
http://research.stlouisfed.org/fred2/series/WTB3MS

Now, just under it, click where it says Customize with FRED graph.  add dfedtar - that is the fed funds target. 

The chart it draws shows the two datasets going back to the 1950s or so, with fed funds starting in the early 80s. 
I clciked on edit chart, and changed the dates to start in 2000. 

Note this:
(http://research.stlouisfed.org/fred2/graph/fredgraph.png?bgcolor=%23B3CDE7&chart_type=line&drp=0&graph_bgcolor=%23FFFFFF&height=378&mode=fred&preserve_ratio=checked&recession_bars=On&txtcolor=%23000000&width=630&id=WTB3MS,DFEDTAR&transformation=lin,lin&scale=Left,Left&range=Custom,Custom&cosd=2000-01-08,2000-09-27&coed=2009-10-30,2008-12-15&line_color=%230000FF,%23FF0000&vintage_date=2009-11-04,2009-11-04&line_style=Solid,Solid&mark_type=NONE,NONE&mma=0,0)

The blue line is the 13 week treasury bill.  Note that it LEADS the curve by which the red line follows. 
As the rate on the ^IRX cools, the rate at which the fed loans out shrinks as well. 

Instead of saying, during boomtimes the fed increases rates to slow things down and during slowdowns the fed decreases rate to spur spending; dont give them soo much credit and consider looking at it this way. 

during boomtimes the desire to purchase low yeilding treasureies goes down, thus the rate at which they sell for must increase.  As things cool in the economy the safety of treasuries is appealing versus the risk of losing money in equities.  As they are in more demand they can pay less and less yield.  The fed funds target is an adjustment by the fed to stay inline with the market. 

As the fed is a bank, if they borrow low, they can afford to lend low. 
If they must borrow high, they cannot lend low. 

You cannot have a situation where the federal reserve is collecting money by paying 3% interest on short term loans and lending it out at 0%.  And to note, we have not had that situation yet. 

-------

Quote
So when the funds borrowed are spent into circulation, is not the money supply increased in effect even if the funds/notes are simultaneously an asset and a liability? What will happen when, as, and if the stimulus funds are eventually loaned to non-govt, non-bank borrowers and they hit the everyday sector of the economy most of us operate in every day? Is this what the Fed is trying to regulate with this slosh draining effort?

You made mention of interbank just above.  That is highly relevant in my opinion.  Interbank lending used to be the mecahnism where banks borrowed overnight to meet obligations.  This allowed them to have more of the funds lent out (making more profit) and still be able to clear the checks of their customers at night.  But no many are borrowing right now, there are no developers rolling out condos, no new home depots being built, no company in the US is thinking about growing operations and borrowing money to do so; everything is scaling back.  The internbank rates are still high compared to what they were.  The alternative is to leave the funds on deposit with the fed and get paid interest.  Why lend to consumers at risk of default when the fed has guarenteed return for your deposits?  Thus you see the nearly 1 trillion on deposit with the fed I noted in my last picture.  The premise of your question is what will be the net affect of those funds hitting the streets and my perspective is that those funds are not hitting the streets at all.  For QE, the fed did what every bank does - it took those funds on deposit and lent or bought assets with it. 

Quote
t's going to be a difficult if not impossible task to walk the fine line that finances stimulus, the war, and all the other huge expenses we are currently shouldering, yet allows recovery without currency debasement, and when all the debt owed to foreign creditors is thrown into the mix, intentional devaluation seems likely at some point in time.

While I am still a very vocal critic of the fed and the treasury, and the congress that is implicit on these things, it is not a job I would want to do ever.  Your right it's a fine line to balance.  While I think there are those that do indeed wish to see currency debasement as a way out, I just also point out that the United States is not unique in this situation.  England wishes to get out of their mess, Japan as well, nearly every country in Europe maintans higher debt to gdp than us even now.  What this year has been in many ways is a race to the bottom; as a cordinated effort from around the globe has tried many of the same strategies.  The USD is based on relative strength to other currencies, would the USdollar still crater if england or Ireland or Germany crashed first?  Also, I would point out that Japan has been on the road of QE for two decades and still have functioning currency.  I just do not see it as a given.  I think there are more factors in the works that would work against that than work towards it. 


I also always enjoy these discussions guys.  I agree time will tell. 

Seems the gold & silver thread is trending toward some of the points in this thread.
http://countryplans.com/smf/index.php?topic=7934.msg101470#msg101470
(Hope I linked that properly.)   ???

Since it was easier to post a quick'ish response there, I did so.  Lots of things I want to keep discussing though in this thread.  Please keep this one going; I really enjoy reading it even if I'm not contributing currently.

Briefly, on the subject of oil only, I would not be surprised to see a correction soon.  There are some huge imbalances in market fundamentals across the board, not just oil, with some massive artificial influences.  My gut feel is an oil correction will be sharp and short-lived.  I'm not sure if I'd want to try to time it vs. just holding through it (assuming holding some oil-related investments currently.)

I posted about the IRX a few times above and what I see the relationships involved are.  Should be noted that the yields on the tbill absolutely collapsed today.  I believe something somewhere has materially changed and not been released yet.  this is not a normal move. 

the daily chart and a weekl;y chart showing the historical context.   yahoo says the range was 0.00 - 0.02, with another chart shoing 0.005% .  it's lower than these charts indicate. 

(http://www.loopy.org/irx-day-nov19-09.JPG)

(http://www.loopy.org/irx-week-nov19-09.JPG)

Lots going on right now, and I think it's all related.  How?  Wish I knew in more detail.  I also think there is going to be something ugly that comes out soon.  What are the odds that 1. Gov't Sachs is involved, and 2. It's going to cost us?  Sure wish I could tie all the nonsense together to give me a sensible plan for investing/surviving financially.  I still like energy in general, but am a little worried about another weird event bringing everything down in the short run.  Wonder what exactly is going to ooze out, and I wonder if it's going to be something that either: 1. accelerates the dollar decline, or 2. gives it a temporary lift.  Again, I'm betting on long-term continued DXY decline and won't try to time being in/out of that bet.  I'm a little nervous about what might happen to send people scurrying in to a short covering dollar rally though.  When pretty much everyone is thinking the same thing, I get worried.  If it's what I've been thinking all along, the contrarian in me gets even more worried.  Seems everyone thinks the USD is printed with H1N1 ink now. 

Tim Geithner is testifying to the House Financial Services Committee.  Warning: You'll need hip waders for this one. 
http://video.nytimes.com/video/2009/10/29/business/1247465420175/geithner-testimony-to-house-cnbc.html
Yup, let's close that barn door after all the horses have escaped.  Oops, still a few in there.  Let's allow them to escape.  Ok, now we'll figure out how to have this never happen again.  When exactly will this be implemented?  Why do we continue to do the exact opposite?  I guess it's, "Do as I say, not as I do."  Here he is is basically getting tarred & feathered by Congressman Kevin Brady.
http://www.youtube.com/watch?v=ty_-Mf6QhpU&feature=player_embedded
Congressman Peter DeFazio of Oregon also skewered him.
http://blogs.wsj.com/economics/2009/11/19/qa-oregon-democrat-defazio-calls-for-geithners-resignation/

Ron Paul  [cool] & Alan Grayson  [cool] are also getting popular support for HR1207 (Audit the Fed, basically and up to around 311 co-sponsors), and now have enough support to get it passed.  Unfortunately, Mel Watt from NC is fighting hard to neuter the bill all the while claiming he's making the Fed more transparent with his amendment.
http://libertymaven.com/2009/11/19/house-committee-debates-gutting-ron-pauls-hr1207-alan-grayson/8074/ 
Care to guess where Watt receives most of his contributions?  In order: Wachovia Corp, American Bankers Assoc, Bank of America, American Express.  Hmmm.  There's a man motivated by reform of the financial sector.   d*

T-bill yields actually went negative today for the short term securities.  Interestingly, if you look at the recent auctions for the longer term ones, the % of purchases by indirect buyers is increasing.  More stealth QE, I'm guessing.  Primary dealers fall in to the indirect category, and stealth QE is accomplished by the primary dealers buing the bonds at auction, then turning around and selling them to the Fed.  Otherwise these auctions would fail, or if they were allowed to work openly, buyers would be demanding higher yields.  The fed is trying to encourage longer term purchases, but nobody wants to buy 30-year bonds at around 4% yield.  Yield spread is increasing on ST vs. LT securities.  Basically, fewer & fewer people trust the USD in the long term, but need a place to park cash in the short term.  What's next, and as a result, which direction will that cash stampede?

I have quite a few thoughts on this, not sure I want to get into right now tho. 

In short a few things, the Paul/Grayson amendement passed today around 4pm.  This completely removed the amendment Watts was trying to put in place.  41 AYES to 22 NOs, Watt, Kanjorski, Watt, Maloney, Frank... that's all I caught.  You can bet if Barney Frank likes it it's not good for us.  So, the Watt attempt at neutering 1207 was derailed.

For the bigger picture, there just are not too many reasons for the big T move today.  It's fear, there just no other reason in the world to lockup capital for 1 basis point.  The 6 month traded at 0.11% yield. Thats worse than any time last year from what I can see, it breaks records going back to 1958.  This is a HUGE fear move.  Something somewhere is on fire and risk appetite just went off a cliff. 

I also talked about the attempt at reverse repo earlier in this thread - where the fed tried to remove funds from the banks and failed.  That was when the treasury supplemental was being pulled last month.  Also out today that I think has a big factor in this is this feed from the wires:
*TREASURY TO AUCTION WARRANTS OF JPMORGAN, CAPITAL ONE, TCF
*TREASURY: DEUTSCHE BANK TO BE AUCTION AGENT, BOOK MANAGER
*TREASURY SAYS PROCEEDS OF AUCTION SALE RETURNED TO GOVT
*TREASURY SAYS AUCTIONS TO BE `REGISTERED PUBLIC OFFERINGS'
*TREASURY `MODIFIED DUTCH' AUCTIONS TO BE HELD IN NEXT MONTH

-- wait, treasury is selling the assets they took off the banks.  now the banks are unable to take them back?  They are going dutch auction with a non-american bank.  Those banks are dead, this is a cash crunch.

Waggin, I know your anti-dollar, and many opn this forum are as well.  But you need to consider the case here.  If there is a crunch for dollars, the value of those dollars goes up.  look at the DX from last fall through March, I'll save you the trouble, it went from 72 to 88 in 2 months. 

I dont know whats going to happen, but it looks to me like we bought some time and now the cards are lining up to resume where we left off in March.  deflationary crash is not off the table here. 

If I had to guess, a big bank is crashing soon.  maybe citi is on the block for fdic friday.  That would look like this. 

Quote from: muldoon on November 19, 2009, 08:22:35 PM

Waggin, I know your anti-dollar, and many opn this forum are as well.  But you need to consider the case here.  If there is a crunch for dollars, the value of those dollars goes up.  look at the DX from last fall through March, I'll save you the trouble, it went from 72 to 88 in 2 months. 

I dont know whats going to happen, but it looks to me like we bought some time and now the cards are lining up to resume where we left off in March.  deflationary crash is not off the table here. 

That's exactly what I am considering and was referring to as a possibility here:

Quote from: waggin on November 19, 2009, 06:01:08 PM
...I also think there is going to be something ugly that comes out soon...I still like energy in general, but am a little worried about another weird event bringing everything down in the short run.  Wonder what exactly is going to ooze out, and I wonder if it's going to be something that either: 1. accelerates the dollar decline, or 2. gives it a temporary lift.  Again, I'm betting on long-term continued DXY decline and won't try to time being in/out of that bet.  I'm a little nervous about what might happen to send people scurrying in to a short covering dollar rally though.  When pretty much everyone is thinking the same thing, I get worried.  If it's what I've been thinking all along, the contrarian in me gets even more worried.  Seems everyone thinks the USD is printed with H1N1 ink now. 

What especially worries me is the part about some event or even the possibility of an event causing a dollar short covering ralley.  Likely commodities and PM's would suffer.  Maybe only commodities and not PM's, even though it sure looks like they're due for a correction.  I was bullish on those areas back in August and am still bullish IN THE LONG TERM.  However, I'm nervous in the short term, because it's become a little crowded in this sentiment.  Like the story about the shoeshine boy giving Joe Kennedy advice in 1929 and his alleged decision to sell everything based on it, too many people piling on makes me worry about the possibility of sentiment swinging the other way.  That is a distinct possibility, and it will be an ugly swing if it happens.  Betting contrarian has served me very well this year and in the past.  Now that I'm not so contrarian, it's feeling a little claustrophobic.

Quote from: muldoon on November 19, 2009, 08:22:35 PM

I also talked about the attempt at reverse repo earlier in this thread - where the fed tried to remove funds from the banks and failed.  That was when the treasury supplemental was being pulled last month.  Also out today that I think has a big factor in this is this feed from the wires:
*TREASURY TO AUCTION WARRANTS OF JPMORGAN, CAPITAL ONE, TCF
*TREASURY: DEUTSCHE BANK TO BE AUCTION AGENT, BOOK MANAGER
*TREASURY SAYS PROCEEDS OF AUCTION SALE RETURNED TO GOVT
*TREASURY SAYS AUCTIONS TO BE `REGISTERED PUBLIC OFFERINGS'
*TREASURY `MODIFIED DUTCH' AUCTIONS TO BE HELD IN NEXT MONTH

-- wait, treasury is selling the assets they took off the banks.  now the banks are unable to take them back?  They are going dutch auction with a non-american bank.  Those banks are dead, this is a cash crunch.
 

I dont know whats going to happen, but it looks to me like we bought some time and now the cards are lining up to resume where we left off in March.  deflationary crash is not off the table here. 

If I had to guess, a big bank is crashing soon.  maybe citi is on the block for fdic friday.  That would look like this. 

That part (to me, anyway) is very significant.  Gee, mark to make-believe didn't accurately value the toxic paper the banks pawned off on us (taxpayers) as collateral?  Shocking!  Seems they got their cash for trash, and now they don't want the trash back?  Again, shocking!  Of course they can't afford to buy it back; there's still no market for it.  Part 2 of that is that their balance sheets won't allow it; they can't afford to buy anything right now.  What, the stress tests weren't real?  Say it isn't so!  What are the odds that the auctions will go off just swimmingly to "undisclosed purchasers?"  Nope, can't tell you who that, I mean they is/are. *cough* *cough* Federal Reserve *cough *cough*  If HR 1207 ever does see the light of day, squaring it with this is going to be mighty interesting.  I'm encouraged that it passed, but the overall bill isn't a done deal yet.  Even if it does pass, there are lots of other laws being ignored right now in the interest of "saving us" from whatever big, scary thing they feel the need to scare us with currently.  In other words, will HR 1207 ever be implemented effectively?  Lots of powerful folks will have lots of opportunities to throw roadblocks in front of it, I suspect. [frus]

I think I need to go build a shed/cabin to take my mind off of this.  Maybe that will cheer me up  ;D

this popped 30 minutes ago .. http://www.nni.nikkei.co.jp/e/fr/tnks/Nni20091120D20JF945.htm

ramifications of this wont be in US media for a few days if it makes it ever, but this is a game changer.  especially for an equity market priced at a 130 PE.  The inflation expections just got slaughtered.  also, I only was looking at the IRX earlier today, but the carnage really went all the way up into the 6 month and even the 2 year treasury bonds.  ie - bond market saying safety for two years is desirable...   

Couple with Obama saying yesterday, doubledip recession possible... after visiting Asia at that.  his hands are tied on this and he knows it.  read that and try to couple it with everything they have stated to date, it's out of left field. 
http://www.reuters.com/article/marketsNews/idUSN188108620091118
http://news.yahoo.com/s/ap/20091118/ap_on_re_as/as_obama_economy

Anyway, the news out of Japan. 

Quote
Friday, November 20, 2009
Govt Declares Japan Has Slipped Into Deflation

TOKYO (Kyodo)-- Japan has slipped into deflation, Deputy Prime Minister Naoto Kan said Friday, adding to concerns about a solid recovery for the world's second-largest economy.

This is the first time in more than three years the government has assessed that Japan is in deflation.

Kan, also state minister for economic and fiscal policy, said the government believes that Japan is in ''a deflationary situation'' and the role to be played by monetary policies is very important.

Kan said the government will tell the Bank of Japan about its understanding of the current economic situation, hoping to work closely with it to avoid jeopardizing some recent tentative improvements in economic activity.

At a separate news conference, Finance Minister Hirohisa Fujii said he is deeply concerned about deflation in Japan, but there is no magic prescription for the challenge from a fiscal front as public spending will not help raise prices.

''We are aware of the serious risk,'' Fujii said, when asked about his interpretation of mounting deflationary pressures in Japan. ''The current situation is not what it should be.''

Fujii said addressing deflation is ''a very important point'' in running the economy. But he said that fiscal policies in principle lack the capacity to fix the economy.

''Public (spending) has propping-up effects,'' he said. ''But when it comes to improving the economy, in the words of (economist John Maynard) Keynes, it has to come from the private sector.''

The latest economic outlook released Thursday by the Organization for Economic Cooperation and Development also warned that deflationary pressures continue unabated in Japan and called on the central bank to deal with them appropriately, such as maintaining interest rates at their current low levels.

OECD Secretary General Angel Gurria, speaking at a news conference in Tokyo for the release, said, ''The pace of recovery will not be strong enough to reduce the unemployment rate below 5.5 percent or to stop the decline in prices, even in 2011.''

So, we did eventually find out what that move was about a few weeks ago.  It was not a big bank defaulting as I speculated, but a big entity did indeed "blowup". 

Dubai defaulted on its' debt over thanksgiving.  They claimed 150billion lost, but many seem to think the damage is far far more.  There have been some doozy statements made, such as the government is not responsible for the debt, to no creditors may claim assets that were provided as collateral.  While they are stating this "as nice as possible" the result is the same and massive.  There are plenty of news articles on this, but I think this article is quite appropriate - a personal perspective on it.  http://www.rickackerman.com/wp-content/uploads/2009/12/Dubai-Wipeout.htm

Last Friday, North Korea also hard crashed.  something I had not heard about until Monday morning when I was at work.  Googleing North Korea devaluation will get you plenty of links http://news.google.com/news?hl=en&source=hp&q=north%20korea%20devaluation&um=1&ie=UTF-8&sa=N&tab=wn   -- the gist of it being a 100:1 devalue.  If bread was 3 dollar, now its 300.  Their is a very short period of time to convert old dollars into new dollars, and their is a cap on the amount that can be converted.  The cap is around 150k won, or roughly 60 US dollars.  Not a single person in that country has more than 60 dollars anymore. 

Debt piling up in Greece is again looking dire, with Moodys and Fitch knocking their ratings down in the BBB area.  Theres CDS swap rates is something like 200 basis points, nearly twice as bad as California.  It seems the world is expecting them to follow the Dubai plan and acting accordingly. 

Here is a list from CMA, who I consider a decent ratings agency.  consider these spread values as odds in a casino, the higher the spread, the more likely you are to default.  It works like a champ in spotting the weakness and seeing who the vultures are about to carve out and devour.  aka death financing, as an exmaple, if you cannot pay your bills now, borrowing at 30% on a credit card isnt going to help you.  It's a clear tell-tale sign. 
http://www.cmavision.com/market-data
1- Venezuela
2- Ukraine
3- Argentina
4- Pakistan
5- Dubai
6- Latvia
7- Iceland
8- Lithuania
9- California
10- Romania


Ukraine is in just as bad of shape in terms of paying their bills.  A huge concern given the amount of natural gas coming from Russia into Europe via Ukraine pipelines.  If they stop paying Russia will the gas still flow?  Seems to be giving people the jitters.

Japan is in trouble as well, they just re-announced QE efforts and yesterday released they are injecting billions into their economy.  They want the yen/usd cross back because the carry trade unwind is killing them.  They are openly stating they want the US dollar to appreciate so the yen will fall and make their exports cheaper.  They are pursuing this. 

Meanwhile, US dollar is surging, it crossed 76 on the usdx index this morning.  US debt is seeing 4times over subscription.  That means even though we are selling record debt at record low interest rates, there are four times as many buyers bidding than we are selling.  Interest yields went NEGATIVE over the past two weeks. 

As we saw last year, it only takes one big domino to kick off a crises; Dubia may have been big enough all by itself.  I dont really know.  There is no transparency and all the accounting is fraudulent so it is near impossible to get a real idea of who is at risk or not. 

I do know that last year we were the first to cut rates and kick off zirp.  The next affect of that was 140 oil, and while UK and everyone else was screaming about inflation we held steady and killed our dollar.  At the height of the crises, it reversed.  He had already done the depreciation and the rest of the world was forced to follow suite at a time the US dollar was the most in demand thing on the planet. 

I remember that course of events because I can see the possibility of it playing out again.  We have monetized some debt, however it is nothing compared to the defaults and devaluations coming to much of the rest of the world.  We are now tightening policy (crushing the rest of world) which forces them to where we were back in March again.  Very nasty cycles. 

Just my thoughts.

two charts.

12 month usdx, broke the trendline hard and looks like a candidate for reversal to me.
(http://www.loopy.org/dollar12-8-09-year.png)

and today, note the huge spike of volatility after the close.  I dont know the story on what happened, but the move is just violent and strong..  this is the FX market, look at those candles.   
(http://www.loopy.org/dollar12-8-09-close.jpeg)

Flight to "perceived" safety of the US Dollar v-2.0.
 
Sentiment is pushing the USD up again.  Dollar index bumped up again today & is around 76.5 now.  Will it hit 80?  Higher?  In the race to the bottom (currency devaluation,) are other countries catching up to us?  Despite my long-term belief that the dollar is toast and investing in tangible things will be best, I am playing this current correction/reversal, sentiment change...whatever is appropriate to call it.  Over the last two weeks, I actually sold some commodities-related stock.  Interestingly, PM's & oil-related equities have taken a big hit, but agriculture has held fairly steady.  PM's have taken a huge hit and may not be done yet.  76.5 or even 80, even 90 on the dollar index won't mean $20 oil though.  Since the dollar index is the dollar's value RELATIVE to a defined set of other currencies, in this current environment the dollar going up only means that it's falling relatively slower than other currencies.  When you start comparing the dollar to tangible things, it doesn't look so hot.  That said, in the short term it's going to be nice to have, as some bargains will probably be found as we have more de-leveraging and flight to liquidity.

Note that only the short-term treasuries are seeing zero or negative yields.  Yield spread is increasing for the longer term treasuries.  The yield spread between 2 year and 30 year hit a 2-year high of 374 bps.
http://www.reuters.com/article/idUSN1114881020091211

That means longer term auctions have increasingly higher rates.  Translation: buyers are anticipating future inflation/dollar devaluation and want a higher premium to hold for a longer term.  Today's discussion about raising the national debt ceiling by another $1.8 trillion is a done deal IMO, and as tax revenues continue to decline, will have to be paid for with more treasury auctions.  If you had money to spare, would you lend to this "borrower?"
http://www.usdebtclock.org/index.html

The shorter term auctions are in demand and oversubscribed, but fewer & fewer buyers are bidding on the longer term ones...that is, if you don't count the Fed.

waggin, glad you made it back to this thread. 

Lots happening right now it seems.  By my count we have had 6 debt disasters in the past 2 weeks. 

Dubai - asked for halt on payments, government said we are not responsible, creditors said no to debt deferrmtn.  The payment is due this coming Monday, we'll find out if they default or not then. 

N Korea, hard crash devaluation.  Not much news out of the country, but it can only be a disaster.

Ukraine, they are underwater, and have no funding -  and no honest chance of getting funding either.  The IMF canceled their existing loan and now they are begging to borrow 2billion to pay bills, salaries and keep the gas pipelines on from gazprom.

Japan, going to inject 10trillion yen into the economy to fight deflation, drive yen lower in the two decade race to the bottom.

Greece has an inpending emergency.  but the bigger story is that many of the euro countries are in the same boat.  The PIIGS countries, Portugal, Ireland, Italy, Greece, Spain have all hit the wall in terms of capital outlays, declining revenues, loss of credit, and massive deficits in relation to GDP.  As none of them control their own currency - they cannot devalue.  They need Germany and the rest of the EU to print them out.  And given Germanies history, it is pretty much not politically possible for them to follow that course.  I dont know if Greece will default, or if they get "helped" by IMF or world bank - not that I can think of any country in the history of time that actually benefitted from getting aid from the IMF.  They are insolvent, getting loans only prolongs it.  Much like California here in the US, they can borrow money but only get further and further into the hole by interest that they cannot pay off in the first place. 

--
Thats 6 symptoms of the same problem.  debt saturation, above the ability to service the debt.  Thats the rub with fractional lending, no matter how big the numbers get the requirement to always increase finally hits a wall and crashes down. 

--
I do not think we are seeing the dollar move this week due to flight to safety quite yet.  I base that on the de-couple in equities.  Yes, PM and oil moved but the stocks did not.  Considering money moves like water it is clear to me that money was not leaving other asset classes to go to dollars.  What I see occuring is that the value of the dollar versus other currencies is simply increasing on the market.  We dont peg currency, this is just the visual representation of the euro getting hammered in my opinion.

The problem it can create is that if it continues - it can create that situation.  Alot of the world is short dollar still, and the paramters for a short squeeze are there.  As people get margin called out they must sell driving the price higher.  If the price gets any higher than that - then you get into the situation where the carry trade that has developed over the past 6 months starts to unwind.  Then it's panic, equities tank, cats sleeping with dogs and the like. 

--
great thoughts on the treasury market.  short term is oversubbd 4 to one and the long term is a disaster.  Yesterday they had a tail just to close the 30.  I do not think it is specifically fear of inflation over the 30 year term as much as I think it is what a bond market would do if it expected deflation.  Drive everything short term for safety, not so much that they are expecting inflation and need a higher yield, but because the cost of money increases when it's in demand.  I think it is a normal market reaction, but I think it should be alot stronger.  If my thesis holds true, eventually the demand continues to roll into shortest duration, from 30 to 10, from 10 to 5, to 1 to 13 week.  Eventually the FRNs are the highest demanded (replay if 1930s usa). 

I know many doubt this scenario, but ask your grandparents - was the general problem during the great depression too many unwanted dollars floating around? 

Again, just my thoughts as we go through these quite interesting times. 

Dubai:  Wonder how much deeper the derivative oblications go than just the published info by country & institution?
N. Korea:  $60 per person?  Not a happy place?  Does Kim Jong Il care?
Ukraine:  Wonder if there are any nukes (or material) there?
Greece:  Talking to China about a trade/financing agreement?  Now that would upset the EU apple cart.
Germany:  Seems to be holding the reins for the EU, but lots of dissension & grumbling.
Japan:  Look how well QE worked for them, huh?  Some differences, some parallels for us, but definitely no lessons learned by us.
California:  Sorry we can't pay you, but here's an IOU.  Ok, what are the Chinese holding again?

A few references I've read have posited the theory that a deflationary collapse is followed by hyperinflation.  If so, in some respects talking about part of it is only touching on part of the whole.  Is that our plight?  I'll go with maybe on that one.  How far are we going to collapse?  I think what we're seeing on the surface is the attempt by Ben Bernanke, a "scholar" on the great depression trying to print fast enough to stave off the deflationary collapse.  We're still collapsing though.  Is this intentional?  That would explain a lot if it were. 

Debt is being destroyed faster than money is printed, but the allocation of that printed money has lots of unintended (intended?) consequences.  This, I think, makes defining terms like "money supply" and "inflation/deflation" subject to some interpretation and discussions about it challenging.  I try to limit my references to inflation/deflation to the money supply in discussion, because I believe that is the correct use.  Even with that, what M# is representative?  Even getting past that, looking at our debt level and the amount that will have to be rolled over (not including new deficit spending) this year suggests that even if we don't have "inflation" of the money supply yet, the fundamentals point to no other alternative going forward. 

Will we see hyperinflation?  Not sure.  Several posts ago, you (Muldoon) mentioned your gut calls on percentages of likely scenarios.  I still lean toward the attempted, controlled dollar devaluation theory to basically devalue the dollar.  This has the practical effect of defaulting on our debt obligations without actually defaulting in the true sense.  This will result in the things we need being more expensive and the things we don't being cheaper.  Like you said before, there are lots of deals to be found on Craigslist for boats, motorcycles, etc.  How much has your car/house/health insurance premium dropped lately though?  Paying less for a loaf of bread, gallon of milk, or a dozen eggs these days?

Through ignorance, selfishness, and downright corruption, our political structure is controlled by those who have a far different idea of what a desirable outcome is than you or I might.  Politics doesn't necessarily lend itself to a rational consensus either, even if enough legislators wanted to do the right thing.  At this point, it's just theater though, and on the topic of what we're talking about here, we truly have a one-party system.  Basically, I think we're already in the process of the most fascinating train wreck of our lifetimes. 

"Ponzi-financing":
http://www.drschoon.com/articles/2010ReadyOrNotHereItComes.pdf

This section is especially relevant (regardless of your views on PM's):
From its central bank induced lows in the 1990s, the price of gold has almost
quintupled. Today, gold seems expensive. In the future, today's price will seem
like a bargain.

We are now approaching the final stage of the collapse of the bankers' house of
cards; when debt levels are so high they can no longer be serviced, crushing those
still trapped by credit's promissory lure.

Hyman Minsky, the late American economist, made a seminal contribution to the
study of debt in his financial instability hypothesis. In the early stages of capitalist
systems, interest and principal can be serviced out of the debtor's cash flow. In
the final stage of "mature capitalist systems", they cannot.

Capitalism's final stage is what Minsky calls "ponzi-financing", when debt
payments can only be made by additional borrowing. This is what the US, the UK
and Japan are doing today, having to borrow against tomorrow in order to pay
yesterday's bills.

For 50 years, not one Dollar of new debt created by the US government to fund
the activities it does not wish to tax for has been repaid. The debt has simply been
"re-financed" with new debt being sold to retire the existing debt.
The Privateer, Late November 09, issue 6430100, www.the-privateer.com

At some point, the end finally arrives. Ponzi-financing cannot service debt
forever. Investing in unhedged paper assets is the bet that it can. Gold is the bet
that it cannot.

The important message is the debt issue.  For some, the mention of gold may distract, but I didn't want to remove it and change D.R. Schoon's intended message.  I really like the term, Ponzi-financing.  I think it sums up our predicament, and I think we're running out of new "greater fools."  I don't think anyone can make a rational argument that there is a way to grow/save/stimulate our way out of our national debt; the only path is default, and I think the attempt will be to make it a semi-orderly devaluation of the dollar.  IMO, the yield spread between the 2yr & 30yr Treasuries is a symptom of this.

agree with you 1000% that the underlying issue is ponzi financing.  also known as fraud.  it destroys the confidence necessary for a fractional reserve lending system to work.  it is thus exacerbated by the exponential growth requirement.  in any given closed system (limited by resources), you cannot have exponential growth forever.  At some point it is mandatory by logic that you hit the wall.  Debt saturation is the point at which it falls, and fraud and ponzi is the mechanism by which the can is kicked down the road.  extend and pretend, let the next administration deal with it, etc.  I have been keeping a journal this year, "letters to my grandchildren" is what I named it.  Just my thoughts on this mess and the mechanics that have taken us here.  This is not a new occurance - I have found the same event occuring 6 or 7 times going back some 900 years.  No new thing under the sun. 

I dont mean to sound like I am completely negative on gold, hell I have a wedding ring made out of it.  I just question how any commodoty can go up relative to lack of money to purchase it.  In the doomsday scenario people use to describe gold being needed, the idea of trading 1100 dollar gold for a box of 223 ammo sounds insane to me.  I also have not in any way written off the dollar long term. 

In the news today add Ireland:
http://www.irishtimes.com/newspaper/breaking/2009/1213/breaking24.htm
"The leader of the country's largest public sector union has said that the Government is facing "a potentially explosive situation" following the introduction of pay cuts in the Budget for staff on the State's payroll."

Add Germany - which in my opinion holds all the keys to where euro will go.  They are the most fiscally responsible of the lot, and have some horrible history with debt monetiation and hyperinflation.  Would they even be politically willing to go down that road again to bail out the rest of the EU?  That remains to be seen. 
http://www.bloomberg.com/apps/news?pid=20601085&sid=aR1FLc0g5Wuk

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currencies are valued in relation to each other.  if every country in europe fails.  and every country in latin america fails, and chunks of the middle east fails, where does that leave the dollar?  it leaves it as king of the word - warts and all.  Still just thinking outloud.