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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: kris b who wrote (75902)	12/17/2006 8:52:34 PM
From: NOW	Read Replies (1) \| Respond to of 110194

<am trying to understand how can FED reliquify households so they can prevent a recession or worse> Why is it in their interest to do this? A deflationary environment might be profitable for them as well, no?

To: kris b who wrote (75902)	12/17/2006 10:00:40 PM
From: russwinter	Read Replies (1) \| Respond to of 110194

1. Yes, think the consumer is the story, but it's two stories. There's been a big loot or shift in wealth. The top quintile (Bullies) now constitutes 40% (at least) of consumer spending, and they've held it together. But the Bullies can't fade at all to keep things going. Plus the defaults coming from the other 80% are going to create a credit and financial crisis. If the Fed starts printing money hard to prevent it, we will get an unmitigated inflationary bust, and generation long crisis. If they act somewhat responsibly we will get mostly a classic credit bust. 2. No acceleration possible 3. Only the Bully and Pig Man class can obtain much new money in the current order, and mostly through loots and speculation. Same process we've seen all year, but that's running it's course. I can't believe credit will be extended too much longer to many of the others. The key to that are the FCBs willingness to support a sinking ship. Actually the longer Bully/Pig Man wild man run continues, the worse for Brazil Americans. I think once the Pig Man Bubble fizzles, Brazil Americans will get some welcome and beneficial deflation on costs, as long as the Fed doesn't print. Once the maladjusted Bubble jobs are washed out, the economy can then rehire towards productive enterprises, based on balanced consumption, and actual economic signals, rather than distorted ones. If they print to bail out Bullies though, look out! That's what I fear. 4. It's not new money, but it's mobilized and used differently. That's the risk, financial assets get mobilized into a Flucht in die Sachwerte of sorts. 5. Don't think much of the receding housing and credit Bubble can be replaced. There will be a Depression. It will either be a cleansing (a decade), or a disasterous bailout attempt will be attempted that causes irreparable multi decade damage. 6. absolutely correct 7 Asset inflation can morph into other inflation as I explained in the previous post. 8. Probably the other way around. The Pig Man phony shuffle conomy bust will actually work to help the real economy get adjusted and eventually healthier, although painfully. Capital will get allocated more correctly.

To: kris b who wrote (75902)	12/17/2006 10:18:54 PM
From: basho	Read Replies (1) \| Respond to of 110194

Kris B, I think your concerns are entirely valid. The almost universally held assumption that the Fed's possession of the electronic printing press will always, should the authorities so choose, be sufficient to ensure inflation and certainly to avoid deflation is I fear a potentially fatal delusion. Any attempt use “unconventional measures” to force the rate of monetary growth beyond that required to prevent a deflationary meltdown is likely in my view to end in complete catastrophe. It could only occur through what Bernanke termed “helicopter drops” -- in other words through massive growth in base money rather than via credit -- and would in my view quickly threaten the destruction of the currency as well as the credit markets. It would in effect be an attempt to superimpose an old and rather basic financial system -- such as those operative in the countries which have experienced hyperinflation in the last 100 years -- on top of an immensely complex credit based one already suffering from terminal confusion and grossly excessive leverage. Or, in Bob Hoye’s memorable phrase: “To go to paper inflation would require them (the central banks) to chew through the entire credit market . . . ”. Should people and businesses -- not to mention foreign creditors -- become convinced that the authorities are determined to keep on expanding the amount of currency at all costs a flight from credit instruments cannot be far away. Nor indeed can a flight from fiat money itself. This is Mises ‘crackup boom’. Most, perhaps all, financial markets (supported as they tend to be by debt) would suffer severely at the same time as many daily necessities soared in price. As far as I can see, the only remaining step if faced with that dilemma would be for the US to impose all manner of draconian controls on foreign exchange flows and markets more generally. To move, in effect, towards autarky. Possible, of course, but an even bigger step than for the Fed to bid for the lot. No, I suspect the practical effectiveness of the fed's armoury probably depend on it never having to be actually used in extremis.

To: kris b who wrote (75902)	12/17/2006 10:27:51 PM
From: jimmg	Read Replies (3) \| Respond to of 110194

kris, here's my take on what the Fed's strategy is at this point. 1. They realize that the vast middle class is key to consumer spending and holding the economy together. 2. They feel the consumer spending benefits of the housing bubble is wearing off and they are trying to offset the impact of that through higher stock prices. They need higher stock prices in advance of actual weakening of consumer spending because they can't let psychology dip into retrenchment. They need continued high propensity to spend and take risk. 3. Getting money into the hands of the average consumer is done by raining money onto the economy via the stock market. It's the old "Tricklenomics" from the Reagan days. If you rain enough money down on the rich, the crumbs will fall to everyone below. Since they need quite a bit of crumbs to fall to offset the housing bubble, they need quite a large stock market ramp which we see today. 4. This becomes self-fulfilling after awhile. The stock market wealth is offsetting the housing bubble burst and everyone thinks we have a soft landing with stabilized housing and consumer spending. If we truly have a soft landing, the stock market can then can expand p/e's under the assumption that a profits recession will either not occur or be very minor. 5. This will all continue indefinitely in my opinion until the markets see concrete evidence that something is wrong. That could mean resurgent commodity prices causing inflation fears and a big bond market backup. It could also be corporate spreads widening and eventually shutting off the high yield spigot and consequently the lbo activity. Before we see corporate spreads widening we will need to see soft consumer spending and more companies starting to miss estimates such as Black & Decker last week. 6. The problem is that every sign of weakness triggers a bond rally and heightened stock market speculation. This is why I think the Fed needs to be boxed in by heightened inflationary concerns before we see the stock market seriously weaken. If the dollar holds up and commodity prices remain stable, this gives the Fed a free ride to facilitate money and credit growth. So, I guess I'm at the point where I'm most closely focused on commodity prices, the dollar and long term interest rates. Perceived economic weakness followed by lower interest rates, tight credit spreads, stable commodities and a slowly eroding dollar is a bullish combination for the stock market. The Fed wants a lower dollar. That much is clear. They just don't want a dollar panic. They want a long, slow continual slide lower. Unfortunately, the Fed is getting what it wants so far. I think it all blows up eventually but it's very difficult to estimate how and when. I remember last spring it was surging commodity prices that got Bernanke to start mumbling into Maria's ear. I think that's what it's going to take to derail this apparent goldilocks economy.

To: kris b who wrote (75902)	12/18/2006 5:11:25 AM
From: Mike Johnston	Read Replies (2) \| Respond to of 110194

Kris, Can you tell me why do you insist that hyperinflation in the US will be driven by wage growth and the Fed somehow reliquifying all households ? In healthy economies, ones with a sound currency and balanced sustainable growth, productivity driven wage growth can fuel certain amount of price inflation in certain sectors, but overall it doesn't. Rising incomes in such economies are driven by real growth and rising productivity. In sick, unbalanced, unstable and unsound economies, like the US today, high inflation is not initially driven by wage growth. Wage growth stemming from social discontent, higher government spending, increasing inflationary psychology and labor unrest can be a result of inflation. And such wage growth can then perpetuate inflation. In the US, hyperinflation will not be driven by wage growth, but by panicky people getting rid of money they already have, while there are not enough goods being produced domestically to satisfy that kind of demand and prices of foreign-made goods will soar sharply. There are trillions of dollars sitting in money funds, savings and bank deposits. There are additional trillions sitting in bonds and foreign public and government reserves. Will everybody just stare when this wealth evaporates or will some people take action to protect themselves ? Where was wage growth during hyperinflation in Bolivia, when the middle class there lost 90% of their purchasing power in 3 months ? Where was wage growth in Argentina, when worker's purchasing power dropped by 40% overnight ?

To: kris b who wrote (75902)	12/18/2006 7:22:53 AM
From: GST	Read Replies (1) \| Respond to of 110194

Excellent questions: Now put them in global context. <1. Who is the engine of the US economy (according to the latest stats households/consumers account for 90% of the economy if you include housing)? If it is not the consumer who else has the buying power of the same magnitude/size?> Demand growth will slide in the US and grow outside the US. <2. If it is a consumer, does the consumer have the financial means/borrowing power to accelerate the consumption of goods and services from here or not?> Asia is a largely cash economy -- we are at the dawn of their days as consumers. <3. If it doesn't how can consumer obtain new/money-buying power? > American buying power in global terms has peaked. <4. Liquidating assets like bonds; stocks doesn’t constitute new money.> America is socialism for the rich. Washington will look after its rich patrons. <5. New money/buying power is higher wages and/or new borrowings (where is the new asset bubble that HOUSEHOLDS can monetize to fuel their consumption. It should be at least the size of the receding housing bubble, otherwise there is not net addition of funds to the Ponzi unit)> The next generation now coming out of good universities who have something to offer in a 'knowledge economy' are making money -- lots and lots of it. Less skilled workers will 'enjoy' a standard of living that keeps foodbanks in business for decades to come. We are becoming a global society of rich and poor, and Americans will see a rising tide of poor here and a rising tide of rich elsewhere -- education will increasingly make the difference. Some institutions of higher learning will be embarrassed to admit the true cost of admission and will use back door methods like foundation contributions from rich families and entrance lotteries for the best and the brightest who don't have the money to pay half a million in tuition -- this will keep people from asking too many questions. Joe 6 pack as he is known here will never see his consumption grow again. He is done. He will be lucky to survive the transition to global consumption amidst American debt. The US is in Beijing now begging China to help the US devalue the dollar and light a fire under Chinese consumers -- and the indeed the fire has been lit. Now it is a matter of fueling the fire and that is what Wizards do best. With all due respect, anybody who sits around watching the US Fed and thinking primarily in terms of US consumers is going to be blindsided by new global patterns and trends and global actors. You wouldn't talk about the oil industry in purely domestic terms, but you would presume to do so for the most global of all commodities -- the US dollar.

To: kris b who wrote (75902)	12/18/2006 3:37:51 PM
From: russwinter	Read Replies (1) \| Respond to of 110194

Part of the puzzle as to why retail has not collapsed. Pig Men (especially) and Bullies have their only little private party going, selling stock. Remember, these are not "households", nor is it really "savings", that's the big fallacy. 77% of all stock is held by the top quintile. But this is the top 1% getting all the loot, monetizing stock in a huge ramp in part using borrowed money.Look at the numbers, you've witnessed the biggest financial ramp and loot in history. from John Mauldin's column this weekend: "So where," I asked Phillipa, "is all the strength in retail sales coming from?" The short answer is, because we are partying like it's 1999. Bullish analysts would correctly point out that incomes are rising. Disposable income was up 6% in the third quarter, partly from rising incomes and partly from reduced tax payments. The third quarter was the first time in two years that income growth exceeded spending growth. But income growth does not come close to explaining how we can see huge drops in Mortgage Equity Withdrawals, yet no apparent effect on sales. So where are we getting the cash? From savings. Phillipa writes: "Our tax contacts in states prone to heavy exercise of stock options report a big upsurge this year. Individuals have been sellers of stocks forever, but the levels in the Q3 Flow of Funds report are at record highs. The first 3Qs of 2006 average $770B at an annualized rate ; in 2000 it was $630B, and no other year comes even close. It's currently 11% of DPI; previous peak was 9% in 2000. "(Net financial investments, basically savings less borrowing, has been positive since 1952 when the series started. In the 1950s it was about 5% of DPI rose to its peak of 11% in 1982, went negative in 1999 and now is -9.7% of DPI. This is another way of saying the savings rate is negative, but the levels are stunning to us.) "In Q3 households sold $166B in treasuries, $139B in corporate bonds, and $757B in stocks, totaling about $1.1 trillion, and net purchases of financial assets was an unusually low $250B.