Tag Archives: depression

Slouching Toward Austerity

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Charles Hughes Smith at “Of Two Minds” blog describes the politics of resentment succinctly and ends:

“Now that the “housing never goes down” fantasy has imploded, the dwindling remains of the once-great middle class are slouching dejectedly through the ruins of the political center (which cannot hold because there is no center, only a State/Plutocracy Elite and a rabble of State dependents defending their fiefdoms), filled with bitter resentments at this undeserved plight–for isn’t this the Greatest Empire the World Has Ever Known?–beset by anxieties about the rough beasts (let us call them austerity, restraint, humility, responsibility, patience, sacrifice and thrift) whose hour has come round at last.”

Eric Janszen On The Bubble In Economic Fallacies

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Eric Janszen at iTulip on how the masses never connect an excess of past circuses with a deficit of current bread:

“Ten years from now, when the full impact of the U.S. asset bubbles of 1998 to 2008 are fully felt, the dot com era, when money flowed like oil from a geyser, before the wars and financial crisis, will be remembered as the good old days, the high water mark for American power and influence. Not one in a million Americans will connect the antecedents to financial crisis and excessive government borrowing to the inflation that we will experience in the future. Not our readers, of course. Continue reading →

Buckle Up For The Deflationary Ride

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From Rick Ackerman:

We all need to get on board with paying down debt like any responsible citizen debtor would do. We owe big-time and this is but a taste of how it may cost us:

  • Major employment reductions amongst those working in the public service
  • Health care services that are rationed. Fewer nurses, health practitioners and support staff Continue reading →

Roubini: Significant Risks Of Gold Correction

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Downside risks to gold, writes Nouriel Roubini at The Globe and Mail:

“But, since gold has no intrinsic value, there are significant risks of a downward correction. Eventually, central banks will need to exit quantitative easing and zero-interest rates, putting downward pressure on risky assets, including commodities. Or the global recovery may turn out to be fragile and anemic, leading to a rise in bearish sentiment on commodities – and in bullishness about the U.S. dollar.

Another downside risk is that the dollar-funded carry trade may unravel, crashing the global asset bubble that it, with the wave of monetary liquidity, has caused. And since the carry trade and the wave of liquidity are causing a global asset bubble, some of gold’s recent rise is also bubble-driven, with herding behaviour and “momentum trading” by investors pushing gold higher and higher. But all bubbles eventually burst. The bigger the bubble, the greater the collapse.

Gold’s rise is only partially justified by fundamentals. And it is not clear why investors should stock up on gold if the global economy dips into recession again and concerns about a near depression and rampant deflation rise sharply. If you truly fear a global economic meltdown, you should stock up on guns, canned food and other commodities that you can actually use in your log cabin.”

David Tice On King World News: Trouble Ahead….

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David Tice on Eric King’s King World News, December 23, 2009

  • This is not another inventory recession; this is unprecedented
  • There’s trouble all over the globe – Europe, China, Japan..
  • Hunker down, cut back expenditures, get out of stocks, own gold
  • Look for deflation followed by competitive currency devaluation, then inflation.

Shadow Stats’ Williams Says Hunker Down For Depression

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John Williams of Shadow Stats says the gig is up:

“Atlhough the hyperinflation is going to be limited largely to the U.S., the economic downturn will affect things globally. I can’t tell you how things will go with a hyperinflationary Great Depression, which is where I see things going.

It’s the type of thing that will tend to lead to significant political change. People tend to vote their pocketbooks. You could have the rise of a third party. You could even have rioting in the streets. I’m not formally predicting that — anyone can run these different scenarios. For the individual, what you need to do, from an investment standpoint, look to preserve your wealth and assets. Don’t worry about the day-to-day fluctuations in the markets. What I’m talking about here is over the long haul…

[Gold is] going to be highly volatile, as will the dollar, over the near term, but longer term, physical gold I would look at as a primary hedge for preserving the purchasing power of your wealth and assets. Maybe some physical silver. Get some assets outside the U.S. dollar. I might even look to move some assets physically outside the United States. The key here is to look at a longer range survival package, battening down the hatches, and preserving your wealth and assets during a very difficult time. Once you’re through that, you’ll have some extraordinary investment opportunities, and I can’t tell you what it’s going to be like on the other side of this crisis.”

My Comment

In response to a reader, I added my comment (Dec 28):

This is the way I see it.

1. There is asset price deflation going on (house prices falling), since the prices reflected unrealistic future projections of housing growth driven by derivatives built on the mortgages.
Now that those projections have been called into question, the derivatives have been repriced as junk, and the underlying securities, the homes, have to return to a more appropriate price leve.

2. This means that all artifical economic activity associated with the housing bubble also has to decline. So there´s economic contraction. That has taken down the commodity markets with it (except for gold, which is up as a hedge against the dollar and as a speculative play right now)

3. I don´t pay too much attention to individual figures coming out on the economy that seem to indicate an improvement in things, because

a. Many of the numbers are inaccurate or deliberately misleading.
b. Economics is not a mathematical science.  It´s an art. Static numbers cannot tell you about the social mood, political factors and gestalt that  drive the market.

Now, market prices are bit more reflective of those things because they´re dynamic, so the prices of commodities and stocks can be  good indicators. But there again, which prices -the price of gold, the price of money in the US, the price of commercial borrowing?

c. There´s also market manipulation..very severe manipulation. So again, the market indicators have relevance but its upto individual analysis how to tease out the relationships.

4. That said, and despite the fact that we have a credit contraction going on (a decline in the monetary base) that doesn´t mean that at some point the money pumped into the banks won´t find ways of entering the economy….if it hasn´t already, in some disguised fashion. (I realize the word ´money´ is being used in different ways here, as it is through out the debate, which is the reason for so much confusion..but that´s a long story..)

5. It´s highly probable that as the slowdown shows its true face, governments everywhere are going to be simultaneously devaluing..leading to local inflation.

6. Searching for hard assets, funds are again going to drive prices of certain essentials upward..leading eventually to commodity prices soaring even while there is a general economic contraction

Thus you could have simultaneously a high level of inflation – perhaps not hyperinflation, I would guess around 15%’20% – as well as a depression

China Bubble, China Trouble

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Dominique Strauss-Kahn, the IMF’s Managing Director ended a 6-day trip in Asia by telling Chinese authorities to continue with their stimulus program.

“The main goal is to help with public demand, weak private demand. And the reason why we have to continue with stimulus is because a self-sustaining private demand is not yet visible,” he said.”

He also called for

1) Asian countries to rebalance their economies by becoming less export oriented and fostering internal demand

2) for the renminbi to strengthen to raise household purchasing power and labor’s share of income

Strauss-Kahn said he anticipated Asian growth of nearly 6% for next year (double the forecast for the global economy) and called for Asian leadership in the global financial crisis.

What does this mean?

Let’s start with Eclectica Fund Manager, Hugh Hendry, cited in “Outside the Box” (JohnMauldin@InvestorsInsight.com). Hendry writes:

“Now, if we repeat the Japanese experience then it is possible that nominal US GDP will rise from $14trn today to perhaps just $16trn in ten years time….. The Chinese are building capacity to meet a world where US nominal GDP is $25trn in ten years time. I fear they could be in for a nasty shock.”

That is, the IMF is banking on the remninbi strengthening so that domestic household expenditure can pick up the slack from weakening US consumer demand because there’s huge overcapacity in China.

Serendipitously, just as Strauss-Kahn and the Chinese premier Hu Jintao agreed that domestic demand has to be stimulated, along comes this Bloomberg report that quotes China International Capital Corp. as predicting that Chinese steel demand will rise 12% rather than the 5% predicted by the World Steel Association.

Now, where will the steel go? To a boom in housing construction and auto manufacture.

I blogged earlier that Jim Chanos, the dark prince of short-selling, has declared China a bubble set to burst, on the strength of these mysterious auto purchases that seem to be entirely production driven. One one hand, the government is using its dollars to manufacture cars, demand be damned. But the government has also committed to stimulate demand by social spending (on education and health) that’s intended eventually to make the Chinese loosen up…. and spend on those big-ticket items, like cars and houses.

But there’s an irony in thinking about China’s demand as affecting the commodity market. The irony, says Hendry, is that China is the commodity market.

“Huge demand and numerous small players are a perfect setup for price increases by the Big Three miners, which often cite high spot prices as the reason for jagging up contract prices. But the spot market is relatively small, and mines can easily manipulate spot prices by reducing supply. On the other hand, numerous Chinese steel mills simultaneously want to buy ore to sustain production so their governments can report higher GDP rates, even if higher GDP is money-losing. China’s steel industry is structured to hurt China’s best interests.

The Chinese government is very much wedded to it’s 8% growth target and will do whatever it takes to come close to that target – including flooding the domestic banks with a wall of cheap money to lend as economic stimulus. However, preventing a downturn with easy money is a dangerous way to reflate the economy.

As profitability for the businesses that serve the real economy remain weak, there has been of shift of investment in the first half of 2009 disproportionately into property, stock and commodity markets rather than private sector capital formation. This shift in the medium term threatens to undermine China’s financial stability. Thus, China is experiencing a relatively weak real economy and red hot asset markets.

The Chinese imports that revived the bulk carrier market this year were mostly for speculative inventories. Bank loans were so cheap and easy to get that many commodity distributors used financing for speculation……

Even more foreboding is a looming real estate bubble. The real estate sector in China is especially critical to the bulk carrier market because approximately 50% of Chinese demand for steel is generated by the construction industry. Most Western shipping forecasts are based on unlimited future need in China for new construction. The reality is quite different. China’s urban living space is 28 square meters per person, quite high by international standard. China’s urbanization is about 50%. It could rise to 70-75%. Afterwards the rural population would decline on its own due to its high average age.

So China’s urban population may rise by another 300 million people. If we assume they all can afford property (a laughable notion at today’s price), Chinese cities may need an additional 8.4 billion square meters. China’s work-in-progress is over 2 billion square meters. There is enough land out there for another 2. The construction industry has production capacity of about 1.5 billion square meters per annum. Absolute oversupply, i.e., there are not enough people for all the buildings, could happen quite soon.

…..The nationwide average price [of housing] is about three months of salary per square meter, probably the highest in the world! Consequently, a lot of properties can’t be rented out at all. Those that can bring in 3% yield, barely compensating for depreciation……

Some argue that China’s property is always like this: appreciation is the return. This is not true. The property market dropped dramatically from 1995-2001 during a strong dollar period. Property prices could drop like Japan has experienced in the past two decades, which would destroy the banking system.

Buffett Bets Big On US Economy

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Warren Buffett’s Berkshire Hathaway fund has pumped $34 billion into Burlington Northern Santa Fe Corporation, the USA’s second largest railroad.

“Berkshire’s $34 billion investment in BNSF is a huge bet on that company, CEO Matt Rose and his team, and the railroad industry,” Buffett said in a statement.

“Most important of all, however, it’s an all-in wager on the economic future of the United States. I love these bets,” he said.”

More at AP.

Mid-East, Europe, Africa Securitizations Will Deteriorate More, Says Moody’s

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From the Global Arab Network:

“The performance of many asset classes in the Europe, Middle East and Africa (EMEA) securitisation sector will continue to deteriorate throughout the rest of the year and into 2011, says Moody’s Investors Service in a new Special Report. The report examines the prospects of recovery for international securitisation in several asset classes and geographies: EMEA Auto ABS, UK Credit Card ABS, UK Non-Conforming RMBS, Spanish ABS and RMBS, Asia Pacific ABS and Global Derivatives. The rating agency expects performance volatility and uncertainty to decline in the coming months, although it cautions that a drop is predicated on achieving some level of economic moderation if not slight improvement, combined with the seasoning of securitised loan portfolios.

Moody’s says that although GDP growth is expected to turn positive in many countries in EMEA later this year or in early 2010, employment and home prices will continue to deteriorate well into 2010, which will lead to securitised loan losses remaining at elevated levels throughout 2011 and 2012.”