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Prepare for the Collapse of the Dollar

Monday, January 30, 2012, 1:39 PM

Prepare for the Collapse of the Dollar

by Gregor Macdonald, contributing editor
Monday, January 30, 2012

Executive Summary

  • The decision whether to export its commodities will become increasingly strategic to the US
  • Understanding why Washington has decided to kill the dollar
  • What's driving the dollar now
  • What to expect from a coming secular decline of the dollar
  • Why the deflation risk is ending and grand quantitative easing (QE) is now underway

Part I: The Price of Growth

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: Prepare for the Collapse of the Dollar

The just-released GDP report, which wraps up the 2011 performance of the US economy, made for unhappy reading.

While the headline number was stronger in the fourth quarter, after adjusting for inflation, the reading for the entire year came in at 1.7%. As Business Insiders Joe Weisenthal put it, that is the "final, pathetic growth number for 2011."

Many writers over the past year, including me, have hammered away at the idea that the performance of the US economy in real terms was statistically indistinguishable from a flatline in the aggregate.

No one disputes that some sectors of the economy, like exports and shipping, are growing. At issue is whether the economy as a whole is operating for the majority and not just segments of the populace. (Again, in real terms.) At a growth rate of 1.7%, we can at least conclude that no meaningful headway can be made in employment. Since the 2008 crisis, the US has been building a multi-million sub-population of people who are unemployed long-term. Only monthly job growth that first utilizes all new workers coming into the labor force will be able to eventually cut into this labor pool. Hence the revelations from the Federal Reserve this week related to targeting inflation, maintaining a zero-interest rate policy through late 2014, and conducting further quantitative easing (QE).

Before we dissect this week’s Fed meeting, let’s take a look at the recent trend in exports.

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Off the Cuff: It's a Mad, Mad World

Friday, January 27, 2012, 12:00 AM

In this week's Off the Cuff with Mish & Chris podcast, Chris and Mish set their sights on:

  • The Fed
    • 0% interest rates through 2014 (at least!). There's not even a pretense left now about whom its policies are really directed at helping.
  • Europe

    • In the words of Shakespeare, the latest proposals are simply "sound and fury, signifying nothing." At this point, a deep and prolonged recession is a certainty.
  • Japan

    • Decades of can-kicking are coming to their limit. 2012 could well be the year Japan topples into crisis.

Recorded on Wednesday, this podcast features Chris and Mish tackling the parade of head-scratching news announced by various governments and central banks this week. It's almost as if these entities are competing with each other for the Darwin Award.

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More of the Same: Zero Interest Rates Extended

Wednesday, January 25, 2012, 6:59 PM

Finally, the Federal Reserve noted something correctly, namely that the economy is not in great shape, and even went so far as to note that things probably won't start improving until 2015 or later. In today's Federal Reserve announcement, the Fed dialed back its growth projections by 0.3% to the low to mid 2% range, and made these other observations and promises:

  • FED EXPECTS TO MAINTAIN `HIGHLY ACCOMMODATIVE' MONETARY POLICY 
  • FED SEES `EXCEPTIONALLY LOW' RATES THROUGH AT LEAST LATE 2014 
  • FED TO KEEP REINVESTING HOUSING DEBT INTO MORTGAGE SECURITIES 
  • FED SAYS INFLATION `SUBDUED' 
  • FED SAYS HOUSING `REMAINS DEPRESSED' 
  • FED REITERATES `SIGNIFICANT DOWNSIDE RISKS'

In short, we will be living with zero percent interest rates until 2015, unless they extend the range future at future meetings.

For those expecting deflation to be expressed in stock or commodity prices, today was something of a setback. Oil is well over $110 on the world stage, grains are running again, and gold is up handily on the year and certainly on the day.

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Determining the Housing Bottom for Your Local Market

Monday, January 23, 2012, 9:47 AM

Determining the Housing Bottom for Your Local Market

by Charles Hugh Smith, contributing editor
Monday, January 23, 2012

Executive Summary

  • Why we may need to revisit how we determine "fair market value"
  • Local factors to consider
  • The importance of sentiment, and how to use it to your advantage
  • The emerging two-tier pricing structure for most markets
  • Five tools that will enable you to estimate how near (or far off) prices in your local area are from a bottom

Part I: Searching for the Bottom in Home Prices

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: Determining the Housing Bottom for Your Local Market

In Part I, we examined how the policies of the federal housing agencies and Federal Reserve have fundamentally socialized the US mortgage markets and are propping up housing sales and valuations via zero-interest rate policy (ZIRP), housing subsidies, and various loan guarantees.

Along with the structural factors outlined in my December series, Headwinds for Housing, this is the backdrop for our individual assessments of is this the bottom in my local real estate market?

Why This Time May Indeed Be Different

Before we look at some tools that will help us make that assessment, I want to stipulate that this overview is aimed at small-time investors, not institutional players, and that it may first strike experienced real estate investors as too basic. However, we must be alert to the possibility that this real estate market, so dependent on Central State intervention, ownership and policy, is qualitatively different from previous eras. And so the lessons of previous markets could be misleading, akin to “fighting the last war.” Thus we would be wise to start with the most basic tools as a foundation for further investigation.

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The China Syndrome: A Hard Landing Coming Soon?

Friday, January 20, 2012, 9:53 AM

As captivating as the drama is in Europe, and it is quite worthy of all our attention, there are more and more signs from China that its own economic troubles are mounting.

The chief concern for those in the West regards the flow, or rather recycling, of China’s reserve monies gained through their trade surplus. Those funds constitute a crucial factor that has allowed the western OECD countries to continue borrowing well beyond their means. The mechanism was simple enough: Chinese manufacturers would export their goods and receive various currencies in return. Dollars, euros, and yen would be then be exchanged for local yuan, and the People’s Bank of China would have to do something with all those foreign currencies. 

Over the past decade, what the People’s Bank of China chose to do was to use those currencies to buy foreign debt, an act which prevented the yuan from rising in value in relation to all the currencies in question. Thus the cycle could repeat and repeat again, as a low yuan encouraged higher exports and therefore higher domestic employment. Everyone was happy.

Western consumers got cheap goods. China got to keep busy. The only downside was that the West could not really afford all those goods and bought most of them on credit, resulting in debts which China now holds.

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Off the Cuff: The Sick Men of Europe

Thursday, January 19, 2012, 2:08 AM

In this week's Off the Cuff with Mish & Chris podcast, Chris and Mish get things back in gear to talk about:

  • Europe
    • Just went from 'worse' to 'worser.' To the tune of one trillion euros.
  • Derivative Risk

    • Why we should be extremely concerned by the $100+ trillion in outstanding derivative contracts
  • Market Exuberance

    • How can markets justify powering higher given such dire risks to the global economy?

It's a new year, but Europe's problems haven't changed. In fact, they're getting larger and more urgent. Greece is already in default, though no one is willing to call it that yet, and Portugal is almost certainly next. And while this should be of extreme concern to our European readers, it has a very good potential to trigger a cascading failure that could cause global markets to seize. So everyone has a stake in how this unfolds.

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Why We Must Embrace Simplicity Now

Tuesday, January 17, 2012, 12:28 PM

Why We Must Embrace Simplicity Now

by Gregor Macdonald, contributing editor
Tuesday, January 17, 2012

Executive Summary

  • What current gold demand is telling us about economic growth expectations
  • The dangerous conclusion from the famous Simon-Ehrlich wager
  • Simpler energy sources are becoming cost-competitive with complex ones
  • Why we will move towards greater simplicity, willingly or not 
  • Why many of our leaders are blind to this trend and will spend the next decade futilely fighting it. Will you?

Part I: Returning to Simplicity (Whether We Want To or Not)

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: Why We Must Embrace Simplicity Now

The English thinker Thomas Malthus argued in his famous essay on the principle of population that there was no longer sufficient land to feed the world’s rapidly growing population, threatening poverty and famine. But an agro-industrial revolution soon transformed the economies of Europe and North America, and his fears proved unfounded. More recently, conventional wisdom held that market forces would always come to the rescue. Until ten years ago, this hope was largely fulfilled. During most of the 20th century, resource prices—of food, water, energy, steel, for example—declined, despite strong growth in the world’s population and even stronger growth in GDP. Prices fell because of a combination of new low-cost sources of supply and technological innovation. But in the past ten years, demand from emerging markets, particularly in Asia, has erased all the price declines of the previous century.

- Resource Revolution, from McKinsey and Company

It’s taken ten years of relentless inflation in food and energy, with myriad data showing declines in the quality and availability of many natural resources, for it to appear that the global consultancy McKinsey finally “gets it!”

I take this as a potential sign that Kahneman’s Availability Heuristic is about to undergo a sea change with regards to the prospects of technology-driven progress. Two hundred years of history exert a powerful force over people’s outlook, but a solid ten-year reversal of those trends just might be enough to induce some folks to begin reconsidering their previously-unshakable confidence in previous trends.

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Downgrading an Entire Continent

Saturday, January 14, 2012, 5:34 PM

Well, nobody should really care what the rating agencies say or do anymore, because they have proved themselves to be utterly useless time and again at anything more than stating the obvious long after it has already been revealed. Such as downgrading Lehman bonds to junk status after the bankruptcy filing.

Still, in a bold aftermarket move on Friday, S&P downgraded the credit ratings of nine Eurozone countries, including stripping France and Austria of their coveted AAA ratings.

It is noteworthy that the action came on a Friday, after the market close, which gives the behind-the-scenes fixers as much time as possible to soothe markets before they open again on Monday.

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Are You Prepared for $200 Oil?

Wednesday, January 11, 2012, 10:06 AM

Are You Prepared for $200 Oil?

Wednesday, January 11, 2012

Executive Summary

  • Higher oil prices caused by an Iran conflict could very well be the trigger for the next major economic downturn
  • Where oil prices will likely go, and how quickly, if a conflict erupts in the Persian Gulf 
  • The prudent steps you should take now, in advance of a potential conflict
  • How the financial markets will react, and likely safe havens
  • Why a war with Iran will be much messier than the Iraq war

Part I: Iran: Oh, No; Not Again

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: Are You Prepared for $200 Oil?

In Part I, we connected a few dots and made the point that Iran remains the last unconquered oil province within the last great deposit fields left on the planet. Perhaps it is coincidence that Iran now finds itself in the crosshairs, but that is unlikely. Instead, the oil treasures of the Middle East remain the last great prize, and Iran is unlucky enough to be standing in the way.

Once one understands where we are in the Peak Oil story, all of these maneuvers make sense and conform to a brutal but coherent logic: If oil supplies are dwindling as fast as the data suggests, then controlling the last, best supplies will be considered essential by every interested party.

While such speculation is interesting to engage in, there's really nothing you or I can do to alter these events. Instead, our job is to prepare as best we can.

The larger set of world events is grinding inexorably towards a lower standard of living, with the squabbling at present really being over who eats the first sets of losses. However, the next leg of the downturn will be precipitated by some event, and a war with Iran that spikes oil prices would be a perfect catalyst.

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Off the Cuff: The Knives Come Out

Wednesday, January 4, 2012, 8:39 PM

In this week's Off the Cuff with Mish & Chris podcast, Chris and Mish kick the new year off discussing:

  • Europe
    • The backstabbing begins among Eurozone members.
  • Oil
    • The risk of even higher prices just got a lot worse.
  • The Aftermath

    • What are the most probable economic outcomes at this stage?

The new year is already off to a rocky start, with protectionist squabbling in Europe and growing threats of an oil embargo with Iran. Those hoping 2012 will usher in any kind of economic recovery had better start hedging their bets.

» Read more