patrick.net

The reason I have reservations is b/c it’s the… rough equivalent of saying our industrial revolution would have ended just 10 short years after it started?

Xactly. When the U.S. and W. Europe clearly slide into the post-RE recession (assuming we haven't already), BRIC has plenty of untapped domestic "pent-up demand" to keep the commodities party going for decades to come. Despite all the bad economic news, gold, oil, LNG, copper, all *still* trading near all-time highs, and I doubt this trend will reverse anytime soon.

RE: main topic: I second OO. "Inflation is not a single variable", as Peter P often says. Most of us here still expect falling nominal prices in housing to some extent, despite all the Fed's and Congress's increasingly desperate efforts to "save" housing. I suspect they will achieve some success in their efforts, mainly by trying to inflate everything else. As far as that "withdraw billions of dollars" goes, does this look like the Fed is aggressively contracting the money supply?

And, yes, the Fed cannot precisely target where the money goes, and they also cannot also force people and businesses to borrow (pushing on a string). However, they do have *some* control. It's also important to point out that Congress has far more power than the Fed acting alone. I have to wonder if Congress won't have some future remedy for this new "conundrum", though. Something like issuing us all $100K REIC credit cards --only good for spending on overpriced McMansions, pergraniteel upgrades and the like.

Let's not kid ourselves here: the gub'ment still has plenty of ammo left to prop up asset prices, debase the dollar and punish savers.

blah blah blah

this is turning into a Roubini-fest...

yawn

more interesting to me is the inflation in airfare in the past 2 months... i used to easily find cheap airfare as recently as christmas week...now fares range $400-500 on routes that are usually $200-300 or so...

and the planes appear to be full if i trust the airlines' web sites...

:(

"$100K REIC credit cards" ok that was good.

Why play around!? WTH, make it... 200K.

Silver and Platinum are going to go down by far more than many expect. Both are used in industry, and when that use drops…

I especially see a long-term drop in silver due to the replacement of film-based photography with digital photography. There's huge amounts of silver still in the ground in the US - Idaho's "silver valley" produced over a Billion ounces of silver and there's still a lot left up there and in the Owyhee mountains.

Platinum will still see its use increase due to its use in cat cons.

Not silver advice. ;)

HARM, DinOR, OO

Is the current boom in China truly an "industrial revolution" in the way that the industrial revolution occurred in Great Britian / US / Germany. In one way, yes: poor agricultural workers are leaving their traditional homes and ways of life to work in dark, satanic mills.

But in most other ways, no: 200 years ago the creation of power loom resulted in a huge productivity gain in the creation of cloth. Railroads replaced horse drawn transport. Etc. Etc. -- I'm not going to give a lecture on economic history.

China's advantages appear to be: breathtakingly cheap and nearly unlimited supply of labor (by developed world standards), a willingness to despoil their environment (environmentalism is a luxury enjoyed by rich nations), vendor financing to its customers (remember Lucent, anyone), Communist party control of the means of production (resulting in party members and those with connections succeeding spectacularly), and a willingness to jail or execute those who try to upset the status quo.

Oh, and there's been a privitization of eduction and heath care as well, from what I've read (that is, you don't get any if you can't pay for it).

A great place to make cheap products cheaply: absolutely. An industrial revolution: hardly.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aue8imip6T3Q&refer=home

Rates on $100 million of bonds sold by the Port Authority of New York and New Jersey, with bidding run by Goldman, soared to 20 percent yesterday from 4.3 percent a week ago, according to data compiled by Bloomberg.

The auction failures provide new indication of Wall Street's unwillingness to commit capital amid $133 billion in credit losses and asset writedowns.

``It's the beginning of the end for the auction-rate market,'' said Matt Fabian, a senior analyst with Concord, Massachusetts-based Municipal Market Advisors. ``Banks have stopped supporting the market.''

I believe this is what is called an 'oh shit moment.'

I expect gold to come back after a substantial drop, so I’m currently hoarding cash for a purchase when it drops.

If you expect a drop, you can use options to hedge your holdings. There are option on gold futures as well as index options on XAU.

Not investment advice. Options are risky and are not suitable for all investors.

BRIC has plenty of untapped domestic “pent-up demand” to keep the commodities party going for decades to come.

I can't speak to Brazil, but Russia is a petro-power (which puts it in a different class). India is reliant almost entirely on the economies of the West, and you'll have difficulty finding anyone who says otherwise. As for China - besides the US and Europe, they trade with their Asian neighbors - but recent reports suggest that most of that trading is actually a big supply chain that ends in the West. Don't expect China to do well in the coming years - they're one recession away from street riots.

Despite all the bad economic news, gold, oil, LNG, copper, all *still* trading near all-time highs

Yeah, and stocks are still pretty high too. Proves only that there's tons of optimism still left in the market, not actual future demand.

“Inflation is not a single variable”, as Peter P often says.

Yeah, it is a constant: 2.00%. :-P

If you expect a drop, you can use options to hedge your holdings. There are option on gold futures as well as index options on XAU.

I tried to learn about options, and they made my head hurt. Thanks for the (non)advice, though.

Options are risky and are not suitable for all investors.

Indeed - that certainly includes me. You gotta watch those things like a hawk.

Instead, I'm also buying short ETFs, which are eminently more understandable, though their fees make them unsuitable for a longterm hold, they're a great way to bet the other way, as far as my non-expert mind can tell.

But mostly cash for the next few months.

Let’s not kid ourselves here: the gub’ment still has plenty of ammo left to prop up asset prices, debase the dollar and punish savers.

Out of curiousity, what "ammo" do they have now that they didn't have in the 30s? Do they have any "ammo" that Japan lacked? Honest question - I don't see any, but that doesn't mean it isn't there.

(And yes, I'm aware that in both cases, rates were foolishly raised going into their respective crisis. That one difference is a pretty thin reed to hang hopes on, isn't it?)

You gotta watch those things like a hawk.

Not necessarily. If you sell naked options, you will lose hair though.

Instead of buying short ETFs, have you consider selling ETFs short instead?

Not investment advice

Out of curiousity, what “ammo” do they have now that they didn’t have in the 30s? Do they have any “ammo” that Japan lacked?

Ruthlessness?

Ed S,

Thanks for the input. Perhaps my choice of terms wasn't ideal? I think there are dangers in assuming any event in the West will play out similar to what takes place in China. If we fail to become their "buyer of last resort" I have confidence they'll work on whatever comes next.

I no longer am "long China" but I don't have any desire in seeing them in some sort of death spiral?

more interesting to me is the inflation in airfare in the past 2 months… i used to easily find cheap airfare as recently as christmas week…now fares range $400-500 on routes that are usually $200-300 or so…

I imagine this is the pass-through effect of oil prices making it to the airline industry, which of course is highly sensitive to jet fuel prices. So who says inflation is "contained?" Oh yeah, that would be the dynamic duo of Bernanke and Paulson.

and the planes appear to be full if i trust the airlines’ web sites…

The airlines have been implementing severe cost-reduction strategies, like cutting back on the number of flights to fill each flight more. The other lame example is United charging $25 for every extra check-in bag beyond one bag.

I am NOT bullish on oil. The coming recession will knock down oil prices.

The SoCal January DQ numbers are out, and there's more ugliness:

http://www.dqnews.com/RRSCA0208.shtm

For entertainment, check out Marshall Prentice's spin this time:

"We don't know how much of this downturn is driven by market fundamentals, and how much is due to turmoil in the lending industry. The market has been sending mixed signals since August, and it's virtually impossible to see trends and make predictions. Our sense is that quite a bit of activity is on hold, we just don't know how long it can be kept on hold," said Marshall Prentice, DataQuick president.

That's right, LOTS and LOTS of PENT UP DEMAND. We just can't keep holding off that demand much longer - it's ready to bust out!

netdance,

in the 1930s, USD is a gold-backed currency. Their hands were tied.

Debasing the USD is the path of least resistance for a government and a nation deeply in debt. Technically, we will NEVER be able to get out of debt if USD retains its purchasing power. So let's not have any fantasy about USD retaining its buying power if we just shore up our dollars in the bank earning almost no risk 3% (so far) Fed rate. It ain't gonna happen.

Japan lacked ammo because it doesn't have a world reserve currency. It is also a saver nation with prudent consumers. The culture is similar to China, which has a problem stimulating internal consumption despite the huge base of savings. Asians like the count their wealth instead of spending it.

You don't want the Japanese-style deflation either. Wage income and passive income dropped faster than housing price, because jobs disappeared faster, and banking interest went negative. Savers are CHARGED money if they leave their savings with the bank, it happened in Hong Kong as well. Yes, housing price went for a long dive, but your wealth also shrinks along with everything else, because equity market tanked, Japanese Treasury yielded 0.2%, birth rate went sharply down and there was no money to be made by anyone.

"tons of optimism still left in the market" Wow! Really?

Wouldn't be anyone "I" know. Things have shifted. I think the whole "bears-bulls" thing is now outdated altogether. (Whether you just have a 401K at work) or are in the primary mkt. most of us have at best been "cau...tiously optimistic" (yet ready to pull the plug at a moment's notice!)

We were even cau...tiously optimistic when our pockets were being lined! Great. We had 40% returns last year! Does this mean you're bullish? Oh HELL... no.

How many of you still know people out there touting DOW 30K!?

I'm stilling trying to wrap my head around that chart. I think I misinterpreted the linked article, comments and charts the first time around. Let me try again.

The big drop in SOMA, matched by a nearly as big increase in TAF, all happened in the Dec-Jan 2007-2008 timeframe. That means that the big20 primary dealers returned their borrowings to the Fed, and then the Fed promptly lent it out again through the other teller window. Whether the TAF money went to the big20 or then directly to smaller banks is hard to say, and I suspect there is no data available because of the anonymity offered by TAF. It *may* have been that primary dealers were very happy to return the money and let the Fed assume the risk more directly.

Going back to August, there is a noticeable drop in the SOMA balance around the time of the credit crunch, indicating that big20 banks were returning money, whether from reserves or from called-back credit to others. But I don't see any Fed action *causing* the August crunch, except of course for the previous excessive sloppiness under Greenspan finally catching up with us as a whole.

DinOR, would be interested in your take on this interpretation. Am I getting closer?

DinOR,

Didn't mean it to sound like an attack; it wasn't meant to be. I don't know what's going to happen to China or BRI(c) -- I'm at the far end of the information food chain (i.e. msm and blogs).

It's just that there's so much apparent wonderment about China that I think that we need to be a bit skeptical. There's so much of it: China's going to build cars! China launched a rocket! China is building a tall building!

Without a doubt, parts of China are entering the 20th century. But most of what they are doing and accomplishing has been done before -- they just do it cheaply (see earlier post for reasons). A place to make money: you bet. An unstoppable world power ready to overwhelm? I don't know (and will probably be dead by the time that question is answered).

Well, China is a misanthropist's nightmare.

It is understandable that China is a huge market because it has literally over one billion of willing consumers.

I am not a believer of larger markets. I prefer niche markets. China is already attracting too much competitions.

I don't think the chart indicated that the FED is voluntarily reducing the monetary base. The FED's intention cannot be clearer, inflate.

It was merely an indication that FED's policy of sprinkling money around got stuck in the pipeline, because for some reasons the banks didn't want it. Don't worry, FED will go back and re-hash another mechanism to get everybody take the money.

Ed S,

I hope you're around... well around long enough to see all the things you WANT yo see! :)

No I didn't take it as a confrontation at all. Like you, we've been told since we were kids that China will have this great awakening and it will be wonderful (or horrifying) to witness! (Personally.. I'll take wonderful)

Hey and don't sell the blogs short. Yesterday when Hank spoke he took great pains to articulate that "Project Lifedone" (I mean LifeLINE damn'it) would *not be extended to "investors and speculators". Well where in the hell did he get the idea that was a priority to anyone?

revengeofaone-

I noticed the same trend. UAL cranked up their ticket price the day after Elmer FED went into action, to which I responed by not purchasing the ticket I had planned and instead waited a week for a frequent flier freebie. I also cancelled my annual trip "home" for the holidays and didn't attend an auction in Vegas for the first time in 4 years.

Cable rates also went up here, and unfortunately for Comcast my Tivo died about 2 weeks later. Had an absolutely precious conversation with some teleprompted customer care representative wanting to know if I was moving. Can't handle commercials anymore, and since Tivo recently decided against the lifetime plan, hello Netflix. Couldn't be happier catching up on House MD with a 4x discount. NFLX anyone?

Just doing my part to keep that inflation theory under check.

justme,

No, no your explanation is better than anything I could provide! I think OO has it right w/ "re-hash mechanism" for further definition as well.

I was on a conf. call yesterday and it should have been called "Whatever happened to M3?" A lot of it was over "my" head. The PM DID say though that (in spite of OO's cruel, cruel words) that it "might" be time to actually re-visit Japan? He pointed out that 60% of the Nikei is trading below BOOK value!

Then again Bill O'Neil would say things trade where they're at for a reason?

Couldn’t be happier catching up on House MD with a 4x discount. NFLX anyone?

House is one of my favorite TV show characters. What is better than a misanthropist MD? :)

Amazon.com Unbox is pretty cool too. I get my Stargate Atlantis there.

I actually increased my organic buying at Whole Foods, because the grocery price has been going up so much that buying organic makes more sense financially, at least for now.

I love tomatoes on vine, they used to be $2.99 a pound and sometimes you can get it for $1.49 on sale at Safeway. These days are over. Now they are stubbornly $3.99 or higher, which makes Whole Foods' organic tomatoes on vine at $4.99 look very attractive. Same story for some other vegetables, milk and eggs. The gap is closing between the conventionally grown and organic food.

in the 1930s, USD is a gold-backed currency. Their hands were tied.

No, they weren't: FDR confiscated all the private gold, then changed the redemption rate from $20 to $35 overnight.

That's a devaluation of the currency that our current gov't can only dream of.

So no, that didn't work then, and it's not likely to work now. It's been tried.

But that is the second most common answer I get when I ask the question, after the "raised rates into the crisis" answer.

Japan lacked ammo because it doesn’t have a world reserve currency.

But Britain had the reserve currency before us, and that didn't work out very well for them, did it? It was lost in a matter of months.

Sorry, I don't find either explanation for why "it's different this time" to be very compelling.

“tons of optimism still left in the market” Wow! Really?

Buffet offers the monolines a buyout of the only profitable part of their business, and the market roars upward. If that isn't optimism, then it's insanity. Especially given the other announcements of the day.

I stand by my claim of (unwarrented) optimism. Just because it isn't insane optimism, doesn't mean it isn't there at all. How else to explain GOOG's share price? or any tech's share price?

netdance,

you are talking about FDR. Don't forget we need to go from Hoover to FDR, and if FDR was put in place of Hoover, and we confiscated gold way earlier, would the Great Depression still happen?

I am not saying that we won't see the depression again, but history doesn't simply repeat itself, it rhymes with a slightly different tone.

Britain came out of the Great Depression way faster than other countries, you can look up this on wiki, precisely because they debased their currency more aggressively. It was the first western country to recover.

If that isn’t optimism, then it’s insanity.

Unfounded optimism IS insanity.

@netdance,

What OO said.

I don't recall ever saying, "the government's efforts to inflate our way out of our massive solvency crisis will be 100% successful, and the banks and speculators will all live happily ever after as the price of everything continues its rise skyward unabated."

What I have said for about the past 3 years is, inflation is the path of least resistance to our short-term obsessed government. It is also the *least unpalatable* option for a general populace with the attention span of a gnat and little-to-no understanding of what's happening to them.

It's not different this time, but that won't stop the government from pulling out all the stops and enacted stupid and desperate measures to try to prevent the Great Debt Unwinding.

Also note that Japan's ZIRP and "zombie loan" policies, while they did not prevent housing from falling precipitously in real terms, also did not completely fail to accomplish their primary objectives. They vastly slowed the rate of decline (16+ years) and prevented a full-blown Depression.

When inflation is the path of least resistance, all roads lead to inflation.

They vastly slowed the rate of decline (16+ years) and prevented a full-blown Depression.

IF I were a realtor, I would prefer a sharp housing price decline followed by a stable and gradual recovery.

A long and slow decline will kill the real estate industry. This is NOT what we want, of course.

What "we" (responsible saver-renter-taxpayers) and peon Realt-turds want is irrelevant. It's what the banksters and PTB wants that matters. If they feel a sharp abrupt drop in RE prices will crash the economy and trigger a massive credit/derivatives unwinding (not to mention political instability), then they'll do anything they can to prevent that. This is what appears to be happening now.

The ONLY important question: how do we profit from it. Buying ultra short ETFs is insufficient. We need more leverage. Ideas?

It will be completely tragic if we have to go through 16+ years of depression like Japan does.

One can only live so long, and for most people here on this blog, we are at the prime of our lifetime. I would rather the government trash the USD once for all, default on all debts, hit the bottom and be done with it.