Disclaimer:
I do not edit or censure any Guest's post. The opinions expressed in this post are Dr. Lalani's alone, regardless of how much I might agree. Nothing herein is intended as financial advice or any kind of recommendation. So, without further mealy mouthed B.S....
The Kansas City Shuffle
“We are entering the second Great Depression. Prices will decline relentlessly for many years and unemployment will soar. Demand for commodities will wither and the Chindia Juggernaut will be stopped in its tracks…”
It is amazing that no less than 3 months back the whole world was worried about hyperinflation and the US dollar moving to parity with the Zimbabwe dollar and now...deflation and Kondrateriff Winter rules. The deflationist party is in full swing with the Fed perceived to be pushing on a string and the price of everything except credit coming down.
I think that given appropriate powers in place deflation is possible in the US. It would be healthy and purge some excesses from our system. But I think Mike Shedlock and others are dreaming if they think that we will have a protracted period of global money supply contraction. Credit standards and interest rates in the US are about as low as they can get. Not so elsewhere. Until recently it was considered a “loose lending standard” in India to give someone a loan for 50% of the property value. None of the exotic products that prevailed here have had widespread dissemination. 95% of Chinese cars are bought with full payment. 95%! Think of that. 70% of Indians and Chinese have never used a credit card and have savings over 20%. Interest rates and reserve requirements are quite high in both countries and have plenty of stimulatory potential.
Mish Continues to make the silly (to my mind) argument that is the equivalent of saying “Someday a person will die” i.e. the end is deflation. He may be right at some point but he will not be right on a global basis for a protracted period of time. Now Mish has a huge problem as he is about as deceptive as any one I know in using things to promote his point of view. When oil prices were rising he repeatedly said that rising prices are not a sign of inflation, and those that argue otherwise are stupid and do not know what inflation is. Now that prices are coming down, every post is about prices coming down - and that is supposed to be evidence of deflation.
Let us take a longer-term view. The US dollar has lost 99% of its purchasing power since 1930. Let us for argument's sake say that it gains 50% from here over 5 years before inflation sets in again. It would still have lost 98.5% of its purchasing power at its best moment. Look at what the Fed is currently doing. Look at what the U.S. Congress is doing. Another 150 billion package proposed. If that fails it will be 500 billion and then maybe a trillion. Normally issuing debt like this deflationary as the interest competes with spending, but not for the US government which spends like drunken sailors anyway.
This is the great Kansas City shuffle. Everyone and their brother is talking about deflation and the money drops are going to come in fast and furious. For a sentiment analysis I suggest you visit the www.theoildrum.com. A quarter ago everyone thought hyperinflation would be the end result and now everyone believes deflation cannot be helped.
Commodities:
Corn, Soybeans and wheat look like “bargains of the century” at these prices. Long dated futures (2011 plus) look like a sound place to start. Will write about oil in a separate article.
Stocks
We have great stocks trading at 3-5 times expected earnings. Sure many estimates will come down but many will not. Those are bargains of the century. If you think that we will stop eating or using coal over the next 10 years because of “Deflation” then by all means, buy the classic 10 yr treasury bond yielding 3.5%. The long bond has peaked and we will now see yields moving past 4.5% in 1 year, in my opinion. The unlimited supply from the US Treasury and limited demand from foreigners (as they have less to recycle as we cut back spending) will guarantee that. Remember the last deflation scare in 2001-2002? 10 yr yields went as low as 3.03% and then rocketed higher.
Back to stocks...We have Ebay trading at a 30% discount to it's price in 2000. Then, it made 9 cents a share, now it made 40 cents in a quarter. Then it had 1 billion in cash, now it has more than 4 billion. Ex cash it traded at 180 times earnings, now it trades at 5 times earnings. The long bond was at 6.5% and hence Ebay was trading at a 1200% premium (in terms of earnings yield), now it trades at a 75% discount. I am not recommending Ebay… but it serves to make a great example. All my life I have hated technology stocks because of their ridiculous valuations and now I may actually buy a few.
I have taken new positions in Mosaic, Agrium, Pennwest Energy Trust and Provident Energy trusts.
Currencies:
The Australian dollar looks hammered. On a purchasing power parity as well as on fundamentals it looks a lot better than the US dollar. It has lost 35% (against the USD) in 3 months, which is extremely unusual for a currency with moderately good fundamentals. Many believe that with prices for commodities down that Australia exports will collapse. I doubt that that will happen over any protracted period of time. Also the amount received by Australian exporters in Australian dollars at current exchange rates is likely to be higher than 3 months ago.
In summary we are seeing massive de-leveraging, as evidenced by currencies moving 10% in a day and 87% of stocks simultaneously hitting new lows. I am quite bullish on stocks and if not for the coming implications of peak oil I would have been over-the-freaking-top bullish on stocks.
Dr. Saif K. Lalani, PhD.
“We are entering the second Great Depression. Prices will decline relentlessly for many years and unemployment will soar. Demand for commodities will wither and the Chindia Juggernaut will be stopped in its tracks…”
It is amazing that no less than 3 months back the whole world was worried about hyperinflation and the US dollar moving to parity with the Zimbabwe dollar and now...deflation and Kondrateriff Winter rules. The deflationist party is in full swing with the Fed perceived to be pushing on a string and the price of everything except credit coming down.
I think that given appropriate powers in place deflation is possible in the US. It would be healthy and purge some excesses from our system. But I think Mike Shedlock and others are dreaming if they think that we will have a protracted period of global money supply contraction. Credit standards and interest rates in the US are about as low as they can get. Not so elsewhere. Until recently it was considered a “loose lending standard” in India to give someone a loan for 50% of the property value. None of the exotic products that prevailed here have had widespread dissemination. 95% of Chinese cars are bought with full payment. 95%! Think of that. 70% of Indians and Chinese have never used a credit card and have savings over 20%. Interest rates and reserve requirements are quite high in both countries and have plenty of stimulatory potential.
Mish Continues to make the silly (to my mind) argument that is the equivalent of saying “Someday a person will die” i.e. the end is deflation. He may be right at some point but he will not be right on a global basis for a protracted period of time. Now Mish has a huge problem as he is about as deceptive as any one I know in using things to promote his point of view. When oil prices were rising he repeatedly said that rising prices are not a sign of inflation, and those that argue otherwise are stupid and do not know what inflation is. Now that prices are coming down, every post is about prices coming down - and that is supposed to be evidence of deflation.
Let us take a longer-term view. The US dollar has lost 99% of its purchasing power since 1930. Let us for argument's sake say that it gains 50% from here over 5 years before inflation sets in again. It would still have lost 98.5% of its purchasing power at its best moment. Look at what the Fed is currently doing. Look at what the U.S. Congress is doing. Another 150 billion package proposed. If that fails it will be 500 billion and then maybe a trillion. Normally issuing debt like this deflationary as the interest competes with spending, but not for the US government which spends like drunken sailors anyway.
This is the great Kansas City shuffle. Everyone and their brother is talking about deflation and the money drops are going to come in fast and furious. For a sentiment analysis I suggest you visit the www.theoildrum.com. A quarter ago everyone thought hyperinflation would be the end result and now everyone believes deflation cannot be helped.
Commodities:
Corn, Soybeans and wheat look like “bargains of the century” at these prices. Long dated futures (2011 plus) look like a sound place to start. Will write about oil in a separate article.
Stocks
We have great stocks trading at 3-5 times expected earnings. Sure many estimates will come down but many will not. Those are bargains of the century. If you think that we will stop eating or using coal over the next 10 years because of “Deflation” then by all means, buy the classic 10 yr treasury bond yielding 3.5%. The long bond has peaked and we will now see yields moving past 4.5% in 1 year, in my opinion. The unlimited supply from the US Treasury and limited demand from foreigners (as they have less to recycle as we cut back spending) will guarantee that. Remember the last deflation scare in 2001-2002? 10 yr yields went as low as 3.03% and then rocketed higher.
Back to stocks...We have Ebay trading at a 30% discount to it's price in 2000. Then, it made 9 cents a share, now it made 40 cents in a quarter. Then it had 1 billion in cash, now it has more than 4 billion. Ex cash it traded at 180 times earnings, now it trades at 5 times earnings. The long bond was at 6.5% and hence Ebay was trading at a 1200% premium (in terms of earnings yield), now it trades at a 75% discount. I am not recommending Ebay… but it serves to make a great example. All my life I have hated technology stocks because of their ridiculous valuations and now I may actually buy a few.
I have taken new positions in Mosaic, Agrium, Pennwest Energy Trust and Provident Energy trusts.
Currencies:
The Australian dollar looks hammered. On a purchasing power parity as well as on fundamentals it looks a lot better than the US dollar. It has lost 35% (against the USD) in 3 months, which is extremely unusual for a currency with moderately good fundamentals. Many believe that with prices for commodities down that Australia exports will collapse. I doubt that that will happen over any protracted period of time. Also the amount received by Australian exporters in Australian dollars at current exchange rates is likely to be higher than 3 months ago.
In summary we are seeing massive de-leveraging, as evidenced by currencies moving 10% in a day and 87% of stocks simultaneously hitting new lows. I am quite bullish on stocks and if not for the coming implications of peak oil I would have been over-the-freaking-top bullish on stocks.
Dr. Saif K. Lalani, PhD.
4 comments:
Guns and Butter.
"The Bailout's New Financial Oligarchy" with economist and financial historian, Dr. Michael Hudson, discussing the largest financial theft in American history - the evolving giveaway to Wall Street crooks. We talk about the class war leading to depopulation, de-industrialization, poverty, and sharply increasing default and debt. The bailout offers no help to the economy. The only way to resolve the crisis is to write down the debt, and this is not being done. We discuss the IMF/World Bank, the end of foreign investment, Enron-style accounting, and the false cover story promulgated through media deception. The bailout is a gangland operation to pay the pals of Paulson.
"The price of everything except credit is coming down." Hmm, finally something to invest in for the long term! :) I've exhausted the cash, Treasuries and gold angle. I wonder if anyone was thinking this way just before the Great Depression -- wonder if they thought it could get as bad as it did. Hmmm ... Anyway, I'm glad Mish has been brought into the conversation cause, so far, he's been right on everything. He's a believer in Austrian Ecomomics, which nobody teaches, and his way of thinking, including his lots & lots of anecdotes versus "the big numbers," can irritate some. Hopefully, Jim Rogers, who is a BIG commodities (oil) bull, will be brought into the conversation too. I follow him as much as possible, though he only seems to appear on Bloomberg. Finally, I think we can all agree, that 6 months ago, we should have seen that there was a LOTLOTLOT more speculation going on than anyone wanted to believe. The Oil Drum certainly fought against that idea -- it was all oil supply and demand to them. They were mostly wrong. Everyone's learning ...
Maybe there was speculation. .maybe there was not..we did not see inventory builds associated with the price being out of whack with reality.
Second got to CFTC and see number of small traders trading oil at its peak...less than 200..compare that with number of stock traders. Sure the large guys an run prices up but mass involvement is required for a true bubble.
When oil prices ame down from 78 to 49 the whole world said that prices at 78 were not justified...maybe with the benefit of hindsight we will say that $70 oil was not justified either.
I agree with Mish on the Austrian School..unfortunetly he keeps twisting events to suit his outlook. Second no austrian school ever said supply and demand do not matter. That makes commodities sucha good investment. Perhaps most people dont think of this but it would be good to have an investment go up 40% in a time of 15% inflation but it would be fantasti to get 40% returns when the price of everything else is FALLING!
LAstly he ignores the global story of credit which is in its infancy.
There is a great new book out by Jeff Wilson called The Manhattan Project of 2009. (Energy Independence Now)
He has a web site that explains the book way better than I could even attempt to!
www.themanhattanprojectof2009.com
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