patrick.net

I am mixed about the drop in the dollar. I work in manufacturing (my god, he actually MAKES things?) and I am saddled with major student debt so inflation may make my life a bit easier. On the other hand, since salaries tend to move up slower than commodities it means I'm going to be paying more for everything else in life for a while to come.

Manufacturing will initially take a hard hit as the economy contracts. As things stabilize I anticipate domestic manufacturing will be able to recoup some work from offshore competitors. However, American management needs to get over themselves before anything serious gets going.

Patrick,

It is true that a 1% decline in the dollar would equate to a loss of $100 billion in value on our total debt if converted to foreign currency. Of this Japan and China would have about $10 billion.

Of course, the dollar has been declining for six years vs the Euro (after rising by the same pace during the preceding six years). So why would Japan and China suddenly get excited now?

But the real point is that there are more variables to consider. For example, foreigners hold only a small portion of our total federal debt. About 75% is owed to US citizens and US governmental agencies. Also, one must consider what the next best alternative is for Japan and China. I can assure you that they need our market to sell their goods more than we need to buy those goods. And we benefit from their really cheap financing (measured in Euros they are actually losing money by lending to us, and they have been for about six years).

And in any case the US government is having no trouble selling its bonds.

Zephyr :

Interesting points, as always. I am not as pissed off as others are about the US$ decline. As long as Indian and Chinese currencies appreciate, I will swallow the decline of US$. Because outsourcing becomes less attractive.

Unfortunately, the Indian and Chinese governments may not play along. They won't like the depreciating USD either. They along with other central banks MAY try to devalue their own currency to at lest partially offset the slide in US$. That can lead to global inflationary spiral.

As SP mentioned the slide did not start today. Still happened today is not at all insignificant as you say. IMO, it's exactly the opposite.

Today's event have the possibility to become one major event. We sent out a signal today. In a big way. Some economist/journalists are arguing it was bold. I think it's signaling a complete surrender. Everyone will have their interpretation.

I am very fascinated by the game theory aspects of such moves. Hence today was anything but insignificant.

SP,

Hindsight is 20/20. Still looking back it is now obvious why the commodity bull has been running so strong. The same question that you are asking - a real store of value - people found in commodities. Gold soaring above 70 and oil going over 80 becomes a headline news. But the uptrend started long ago. I don't know why but it coincides with certain rate cuts that happened a few years ago. Must be a random coincidence.

Housing must have been a good store of value for those rare folks who purchased using a serviceable loan with low fixed rate mortgage.

Fiat currency of another government is fundamentally no different. There is no reason to believe that other central bankers are better than ours.

So the real question to me is, are we late to that party. Given that housing is toast, does the commodity bull have any more room to run ? I have a significant portion of my portfolio in commodities already. I am hedging it now with covered calls.

I am betting that pure growth stocks - in US - will do better going forward. Especially those who earn significant revenue from exports. Many technology stocks fit that bill. I am long on QQQQ.

NOT ANY SORT OF FINANCIAL / INVESTMENT ADVICE

stuckinba: i like your thinking... I still believe the usa has an edge on efficiency, technology, legality, and a system that rewards entrepenuers and risk takers, better than anywhere else in the world... As the crash deepens in housing, all will seem doom and gloom, but behind the scenes and ureported the seeds of the rebirth of the american economy will be planted. Heck, we burned down and blew up almost all of japan, and they roared back a few decades later, am I really to believe a housing bubble and some currency issues will stop the USA long term? I think not.

Even so, it is far better to “earn” whatever I can in US Pesos, cover my living expenses and transfer all surplus to some other real store of value. When I need to actually consume something, I can:
1. buy it using non-USD savings
2. borrow long-term in USD debt and pay it back in steadily devalued USD
3. convert just enough into USD to buy whatever

This is exactly what I have been doing ever since Bush was elected. I recommended this back in 2003 when I first started posting to this blog. I see no reason to change this strategy.

BTW, anyone still wants to praise Bernanke ? Do it now before he announces another rate cut ;-)

We won't know how Bernanke is doing for at least another six months. If he can keep us out of a recession without sparking off inflation, then he is a genius in my book.

Jimbo said:
This is exactly what I have been doing ever since Bush was elected. I recommended this back in 2003 when I first started posting to this blog.

What do you convert your USD to?

@zephyr and others, thanks again for putting up with my ranting. If I seemed livid, it was because I felt that today's slide (0.5% in 21 minutes) was not insignificant - and I had not been smart enough to diversify out of USD sufficiently because I did not believe the Fed was going to abandon the dollar so wantonly.

SP

i got something wrong on the TIPS, i think. I said:

"inflation - you get your 3% (or whatever the going rate is) on top of inflation
deflation - you only get 3%, but your money got more valuable on top of that so who cares"

in the deflationary case, i think you can actually you can go to a 0% return if the CPI justifies it (goes quite negative), but you will never lose your principal.

yes, TIPS are not where you want to be long term. but when the economy feels on the verge of something big giving way, and you don't know whether it will end up being inflationary or deflationary or both, you can do a lot worse than parking in TIPS.

If he can keep us out of a recession without sparking off inflation, then he is a genius in my book.

That's already happened. There never was any inflation and now there will be no recession.

SP,

Very few people diversified early out of USD, and I am not one of them. OO is a rare gem. He has been saying this consistently for last 2 years on this blog. I will buy him sushi and sake when I meet him in person. Because of his posts I started looking for USD hedges.

I don't recollect Jimbo's advice but he seems to have done same. There was another who first mentioned MERKX on this board and I thank him too. Forgot his handle.

But I believe that for holding your down payment in USD is not a bad option. You are still purchasing a house in USD. If one purchases a house for a lesser nominal price, then the USD devaluation hasn't affected adversely. Of course having moved out to Euro 5 years ago would be even better.

What do you convert your USD to?

Mostly foreign equities. Back in 2001 it was kind of hard to do and I had to search long and hard to find closed end funds and ADRs. Now it is much easier with ETFs. I also have a smidgen of gold and silver. About a year ago I bought a fair amount of US Blue Chips, all of which are either major oil companies or do most of their business overseas.

I actually keep my "next down payment" fund in CA Muni bonds, but I am starting to regret that choice.

Stuck,

I'm done praising Bernanke for a while ;(

This is from Calculated Risk comments. One of the better ones.

Bernanke was beaten by his parents at a young age. This is his passive-aggressive way of getting back at them.
fjr | 09.18.07 - 4:19 pm | #

>certainly what I do with mine. My 25+ year average annual compound rate of return >on invested equity has been about 26% after tax. I have been very happy with that.

Zephyr,

That's off the scale!! Are you telling me this is all from regular investing and re-investing, no IPO windfalls included or anything like that?

Yeah, this was way back in thread 58. Hard to believe we are all the way up to 515.

I guess that was only 2005 though, not 2003 like I had remembered... sorry :-D

azrob, I hope you don't believe that I think that you are a troll. I don't agree with you much, but you are here to contribute to the discussion, not just stir up sh*t.

You don't constantly flame bait just to see if you can get a response. There are a couple of people that are doing that on every thread, which I get tired of pretty quickly.

@ Dennis,

I could buy a 700 round spam can of Brown Bear 7.62x39 3 years ago. Last month at a gun show, I bought one for $160 ($170 with taxes). Today I went to my local gun dealer for another spam can and he told me that bullet prices are going up again. I was told that another spam can would be 15%-20% higher than what I paid at the gun show!

Go and get your bullets before getting priced out forever :)

I may be upgrading to an AK variant with a 75/100 rd drum from my 10 rd Yugo SKS. I then plan to flip it in 2 years and keep all the appreciation tax free. They after all are not making any new guns and prices can only go up.

Lowering the rate of return for investors is certainly not a way to prop up housing prices dependent on non guaranteed jumbo financing. That pool has just been dried up a little further. Oh well, it is still a great time to be a debtor.

The Pigmen of Wall Street:

http://www.stockmania.com/2007_09_19_archive.html

I'm disappointed. But as I look around the new landscape and take stock, I'm not entirely sure it looks much different, other than I'd hoped they'd 'rip the bandage'. Now I guess we watch them peel it off.

ING rates yesterday:

4.50% savings
5.15% 12 mo cd

ING rates today:

4.30% savings
4.90% 12 mo cd

http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/09/19/BUH1S8PSN.DTL

Bay Area foreclosure activity skyrockets

It looks like we just left the inflation part of the cycle and entered the recession part. Ben says so. So it is good that we do not have large mortgage debt in this case. I forgot what my high school teacher said to do next, but I think he said have lots of cash.

I've never really been a huge fan but I've caught myself watching Glen Beck the last few nights as he's had Peter Schiff as his guest. Glen gives him plenty of free reign and it's nice to be able to hear Peter fully develop his concepts. While it's worth watching I fear Peter (like myself) is much better at identifying problems and disturbing trends than forming solutions.

(In spite of all the negative news, AFAIK the "bear funds" haven't done as well as you'd think)

Does anyone here (and I KNOW Peter has fans @ Patrick) have his performance numbers? I'd be curious to see them?

Interestingly, Emigrantdirect.com has held their savings account rate at 5.05% APY while thy have lowered there flexible term CD to 4.55% APY.

back to the Fed cut - after I've digested the news overnight, there seems to be another explanation. It's possible that the Fed sees a recession as a done deal already, and this cut is to mitigate the damage down the road. As we all know, the change in the Fed rate will not show for at least 6 months, with full effect not apparent for up to 18 months.

All the economic data available as of today sends mixed messages about the direction of the economy, but it may well be true that the Fed thinks otherwise. For instance, as we've discussed, nearly every single national housing downturn has coincided with a broad recession.

All in all, it makes me wonder if the stock market is correct in being so cheerful about the Fed rate cut. Perhaps it should be thinking, "boy, what does the Fed know that I don't know. Maybe things are worse than we all thought?"

skibum,

That's why I was having difficulty understanding so many of Zephyr's points. This isn't your garden variety rate cut. Conventional wisdom may not be much of a guide. What the St. "should" be asking (not counting MISH etc.) is WHY are we so frantically cutting rates!? That's what prompted my question about Peter Schiff's performance numbers.

I own a fund run by a "bear among bears" (Steve Lehman) and while I've kept the position it really hasn't panned out all that well. What's the answer here? I'm open!

"I find it very interesting that people can think that lowering the cost of a fundamental element of their cost of living is bad for them."

Because, Zepher, not everyone is a goddamm debtor. Lowering the cost of that "fundamental element" only allows Joe Howmuchamonth to run up asset prices and actually increase costs to savers. It also lowers the rate of return savers can get.

I would like to see house prices fall to point that I can buy what I want without having to join the bandwagon of fools who do not mind enslaving themselves to a 50 year mortgage if the payments are right. I would hate to see the current idiocy of low/no down payments, bailouts, and rate cuts cause houses to be affordable only for dual income couples who devote the major share of that dual income to house payments over a very long period. That is the trend if we have a growing part of the population that thinks large debt is a "fundamental element" of the cost of living.

Zephyr Says:
I find it very interesting that people can think that lowering the cost of a fundamental element of their cost of living is bad for them.

Ah, yes, I forgot to respond to this until headset brought it up.

When asset prices drop like a rock, then we can talk about really lowering the cost of living, and you won't find us complaining about that. An irresponsible rate-cut that prevents a slide in asset prices, while simultaneously debasing the currency to which I entrust my savings is nothing to cheer about.

I am sure you know this, so what is really interesting is that so many of your posts seem to put rather thin positive spins on this.

SP

@Headset,

Hate the debt,

not the debtor

o.k? :)

In conventional terms and under "normal" circumstances the points Zephyr makes are usually true. I don't have any problem with that.

What I question is whether these are conventional times or if there is ANYTHING normal about them? Sure we've done plenty of rate reductions over the years to thwart off recessions ( just not when we're at or near full employement and at an already reasonable cost of money!)

The comments I've heard this morning from the REIC on CNBC is that they are *not satisfied! Angelo wants ANOTHER 50 bps. and Schumer wants a TEN % raise in Fannie/Freddie lending capacity! Diana Olick?

"It's never enough, is it?" No Diana, it's not, nor IS there enough.

Since StuckInBA is sharing the love, thought I would give some back. His crystal ball was spot on in calling the end of $50 a barrel oil on this blog.
Regarding Zephyr, keep in mind that in previous threads he has stated that the fed funds rate was above its "natural" setting and needed to come down. That's why he is so calm and the rest of us are running around like madmen. He is also doubling his investments every 3 years (hey, if I was doing that, I wouldn't be worried either...) My WellsFargo puts finally went negative yesterday.
The CA city chart is up on DataQuick. Check out your favorite burg.
Mill Valley up 2.44%
Novato up 16.97%

Somebody predicted here that DOW was going to 12000 by the end of this month. Now, it looks like it is going to 14000.

@DinOR,

The Fed was trying to wean the junkie (US economy) off the junk (easy credit). It found out this summer that the withdrawl was too harsh, man. So the Fed gave a little fix yesterday to ease the pain. Now they're realizing when you give that fix, the junkie's just going to beg for more. It's called enabling.

DinOR,

Its the mindset I hate, not any person. It is bad enough that we think of a 30 year mortgage as "standard", without adding any more callousness about incurring new forms of long term debt. Higher car and house prices enabled by debt are not my idea of a good thing.

Jimbo,

I'm sorry about that, I'm 1/8-1/4 troll :-/

"Coming down" cold turkey is a real bummer man!

You're right, you're exactly right! This is the role BB has been forced into. Junkie Nursemaid! Where's the bathroom again?

@Headset,

I sure HOPE there is a major revolt against the "30 to Life" program. I see so many couples older than my wife and I signing up for massive mortgages and they're older than we are! We fully intend to have this modest place paid off by the time Mrs. DinOR leaves the workforce over the next 3-5 years. The sooner, the better.