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Please Watch this Video and Tell me what you think

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  • Wed, Apr 10, 2019 - 06:49am

    #1
    RDenner

    RDenner

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    Please Watch this Video and Tell me what you think

Personally I found it to be one of the most eye opening economic speeches I’ve seen since watching the original Crash Course back in the day… It is a very in-depth explanation about why we are where we are economically speaking.. Revolves around the idea that the fed has created all this potential inflation, like to the tune of 1600% inflaiton based on 16X reserves at the US Fed and yet inflation is nearly flat. As it is around the world.. WHY?

His explanation I believe is dead on and is worth the 1 1/2 hours to watch. Recorded in 2016 before the election and befor the taper tantrums of the Trump administration and before the EU did more QE.. If what he says is correct, it portends a very fast and very messy end to the QE experiment, expecially in this era of closing foreign trading and the possiblity of trade wars.. Would love some feedback on this..

 

  • Mon, Apr 15, 2019 - 08:22pm

    #2

    dabenham

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    Koo Interview re balance sheet recession & QE trap

Thank you, RDenner, for starting this thread! Am very glad to have learned of Koo’s work and explanations. Seems we are well on our way to another “balance sheet recession” given all corporate borrowing and shedding of cash via stock buybacks! Concur, or?

Found this pithy version of Koos balance sheet recession explanation (~13 mins) from 2015 especially easy to digest.

“Escape from the balance sheet recession and the QE trap – an interview with Richard Koo”

 

  • Tue, Apr 16, 2019 - 11:49am   (Reply to #2)

    #3
    MKI

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    Well on our way to another “balance sheet recession”?

dabenham wrote:

Seems we are well on our way to another “balance sheet recession” given all corporate borrowing and shedding of cash via stock buybacks! Concur, or?

2015 talk  is great because it’s very basic. However, it doesn’t cover #2 below very well:

1. Balance sheet recession (BSR) as companies all are paying off debt from the prior boom…AND…

2. ROI is greater abroad so companies invest QE cash abroad & local jobs disappear, making growth only there. And institutions many cannot (by law) invest outside home country so they must flood existing assets at home…AND…

3. USA/Japan/EUR QE pile of money keeps growing and is just waiting for the slightest uptick in economic growth…the millsecond this happens companies will flood home and all inflation hell will break loose w/interest rates through the roof (think 1979). In the 2018 talk at 14 min Koo covers this: “You don’t want to be long USD at that point!”

At 20 min in the 2018 talk Koo talks about how #2 dominates now, not #1 like before. I don’t think Koo understood #2 very well in 2015 because Trump had not been elected yet and nobody believed it could happen (see his comments at 4:50 “No to TTP!” and how even HRC was anti-free trade when she got nominated). The world, but especially Asians, are scared to death their unfair trade is, as Koo says, “over”.

So in summary, I don’t ncessesarily concur another BSR is on the way anytime soon. Sure, it might if the FED gets frisky again. Remember, the FED must keep flooding the stock market & aseets to avoid the painful inflation that will happen if our companies return home with QE all at once. Basically, we are now just like Japan, only 20 years behind…and Japan has been doing this for 30 years now with no end in sight, and they haven’t even started to unwind! The USA might only be 10% into this artificial & controlled stock market / housing bubble. The USA might be forced to play this game until 2100, sitting between fire and ice. Or as I said before the FED could miscalculate and blow everything up tomorrow. Better have gold – real gold, at home – if that happens.

I was working for a multinational in 2014-15 and remember plotting oil and financials cackling with cooworkers how oil didn’t matter at all anymore (if it ever did). It was all FED, all the time. Koo puzzled me back then because he never spent much time on #2 or #3: what the hell happens when our QE chickens come home to roost (which they eventually must); that is, we have our next real expansion? In 2018 he is far more alerted (or maybe he’s just in Asia so probably can’t get away with lying to those guys who know what’s coming).

  • Wed, Apr 17, 2019 - 06:10am

    #4
    RDenner

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    Since you seem to have a

Since you seem to have a pretty good feel on this, what are your thoughts on the US Dollar as reserve currency and your thoughts on if that privilidged position is at risk any time soon if ever.

Many I speak with say that the US Dollar supremacy scheme will only end when the United States no longer has nuclear weapons. Meaning that it will take an act of war against us where we lose, before that privilidge is removed from us..

It is because of our privilidged spot at the top of the economic system, that we can continue to deficit spend on our infrastructure and ironically our military…

 

Would love your thoughts..

  • Wed, Apr 17, 2019 - 08:19am   (Reply to #2)

    #5

    dabenham

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    BSR, ROI Abroad & Resolution of Trade War(s)

MKI
Agree that Koo’s 2015 interview did not cover your #2 – the impact of greater ROI abroad for corps greatly inhibiting economic recovery at the central bankers’ homeland – whereas his 2018 talk does. Perhaps a balance sheet recession (BSR) should be reframed as an accelerant on #2’s negative impact on the homeland’s economy.

The debt load for US corps has exceeded $6.3T as of late 2018, according to S&P Global. Once one removes the top 25 cash rich US corps (Apple, MSFT, my former employer Cisco, Google, etc), the remainder have a cash-to-debt ratio of 12%. It was roughly 14% in 2008. That is the basis for saying we seem well on our way to another BSR. But to your point, since the Fed hasn’t kept the QT/rate increases going (that’s “frisky,” correct?), BSR hasn’t happened yet.

Coming back around to your #2, we don’t yet know what will become of POTUS’ trade deal with China and what impact that will have on view of ROI abroad vs home for US corps. If it is more like the USMCA nothing-burger (beyond dairy farmer’s potential upside), then wouldn’t an “attractive ROI abroad” still dominate? If it instead has some serious changes, chances are it will drive up CPI. If so, wouldn’t that pressure the FED to get at least a tad more “frisky” and here comes (another) BSR?

  • Wed, Apr 17, 2019 - 09:43am   (Reply to #4)

    #6

    dabenham

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    Nukes & USD's Reserve Currency Status

RDenner
Not sure if you wanted others’ 2 cents, but here I go anyway …

Our having nuclear bombs, or more generically, our military might and its geographic scope, has indeed stopped smaller efforts/chatter (eg, Libya, Iraq, etc) around moving to another reserve/oil currency.   Further, if we use our military might to force Venezuelan oil to be purchased in USD, then this will bolster the its reserve status in the short term.  But against China’s eventual rise, our nuclear bombs are not relevant (note 1), IMHO.

As long as China’s continues a monetary policy that is easier than our FED’s, this reduces the Yuan’s attractiveness and accounts for why it is still one of the smallest in reserve today.  But if China is playing the long game (eg, Silk Road+SouthAmerica and Russia partnership) better than the USA, which is now also actively trying to reduce its imports, then I cannot think of how we’ll stop that eventual transition.  It may take a long while to happen, but still inevitable.

Perhaps we can get out of our protectionist/nationalistic trend and successfully steer things toward a collection of currencies (eg, SDR), or to a crypto, instead of the Yuan when the timing makes sense … just pondering what might be plausible.

Feedback?  Your predictions?

Note 1:  One wildcard exception = If the powers that be in USA can manufacture enough consent to use our military might / nukes pro-actively on China.  The fact that we are so repeatably gullible might make this wildcard’s threat more effective than I am presently including in my calculations.

 

 

  • Wed, Apr 17, 2019 - 10:56am   (Reply to #2)

    #7

    Chris Martenson

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    US Corp debt load over $9 trillion

dabenham wrote:

The debt load for US corps has exceeded $6.3T as of late 2018, according to S&P Global. Once one removes the top 25 cash rich US corps (Apple, MSFT, my former employer Cisco, Google, etc), the remainder have a cash-to-debt ratio of 12%. It was roughly 14% in 2008. That is the basis for saying we seem well on our way to another BSR.

From CNBC in Nov 2018 we get this much larger estimate of US corporate debt loads:

Total corporate debt has swelled from nearly $4.9 trillion in 2007 as the Great Recession was just starting to break out to nearly $9.1 trillion halfway through 2018, quietly surging 86 percent, according to Securities Industry and Financial Markets Association data.

(Source – CNBC)

So instead of any balance sheet reduction, the US corp machine has seen fit to swap equity for debt.  This has been a profound leveraging, the exact opposite of a deleveraging.

When, not if but when, the next crisis comes, all of that leverage will really bite.  That’s what the central banks are so afraid of.

Consider:

 

  • 14% of companies are zombies (meaning last three years of op inc did not even cover the interest costs)
  • Pensions in as bad or worse shape and than before the GFC and now exposed 60% to equities
  • Median households without any emergency funds, let alone investments.
  • Fiscal deficits already at the top end of the historical range before any recession hits.

In other words, the central banks have plenty of reasons to fear any sort of a downturn.

Unfortunately, they are a fact of life, and all of their market jamming and jawboning aside, there’s not a lot they can do about that except forestall to make the eventual crash that much worse.

After all, the claims cannot grow 2x faster than the underlying wealth creation of the economy forever.  
But that’s exactly the model they have been pursuing with blind zeal.

When, not if but when, Japan’s experiment ends, it will be really ugly for all concerned.  It will turn out that placing more and more debt upon a shrinking and ageing popualtion wa nt the correct answer for anybody – except the banking system (for a while).

At any rate, great conversation, I am learning a lot.

  • Wed, Apr 17, 2019 - 10:59am   (Reply to #4)

    #8

    Chris Martenson

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    One way the dollar ends quickly

RDenner wrote:

Many I speak with say that the US Dollar supremacy scheme will only end when the United States no longer has nuclear weapons. Meaning that it will take an act of war against us where we lose, before that privilidge is removed from us..

For my money, the dollar supremacy scheme ends rather suddenly when the first US aircraft carrier is sunk by a swarm of comparatively cheap hypersonic antiship missiles.

The projection of power is the essential component, not the ability to end all life on the planet.  That’s a thing, to be sure, and will limit what any other countries can do in terms of invading the US, but force projection is the means of maintaining US sway over the world.

Can’t project what you can’t ship.

  • Wed, Apr 17, 2019 - 11:37am

    #9
    MKI

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    BSR & USD as RC (reserve currency)

DR: Hey, I do not have a good feel for any of this stuff. I’m completely lost. Why I can’t let Koo go…

I am probably wrong about thinking this, but why is the USD as RC a “privilage” anymore in the era of fiat? Everyone prints whatever fiat they want; nothing is backed but by a national economy. Case-in-point: Japan…they’ve built more debt/GDP than the USA without having 1. RC, 2. a single nuke, or 3. natural resources! WTF? All they have (like the Germans) is a very, very productive economy run by smart, hardworking people. All their money? BS fiat, like ours. In fact, the only reason I can see that Venezuela or Greece (or even the USSR) get into trouble is they stop working. The only privilage I see the US having these days is their jobs stolen by Japanese, German, and Chinese workers where we lose our skills, our families, and our health. Some deal! I’ll take 1950 and half GDP again, please.

 

DA: I see your point on the BSR. Companies are all leveraged up again and it must come down, thus BSR.

The problem I have? Japanese firms have already cut their debt but are not borrowing money again. And they don’t even have a Trump with nukes/RC who can tweet anytime he wants that he will enforce fair trade. If that happens the US booms and all will have to borrow to play. It’s what happened in Japan in their bubble, right, when Tokyo was worth more than CA? Where is the debt line?

Look, I have zero idea why we even got this far. But what stops Trump from pulling another TARP X2 to goose the economy at a slight hint of recession? Use imagination: bridges to nowhere. Another war. Nationalizing whatever & hiring everyone. To my simple mind we haven’t even started to play Koo’s game yet. Why not CPI 10%-20%, a war or two, and the FED buying everything still for sale? I’m sure 1,000 new companies with zero debt will spring into existence to get in on the free money and thus service the leveraged (read: zombie) ones. The US plays the tune now, and the corporate world must dance.

Look, I’m sure I’m wrong here. I am just waiting for somebody, anybody, to tell me how our post-2008 BSR even gets started with our massive trade deficit, Trump tweeting, and activist FED. To my feeble mind we are already 5 years late. Why not 25?

  • Sat, Apr 20, 2019 - 08:58am

    #10
    MKI

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    One Last Link: Predictions & Humility

DRenner: I still can’t stop thinking about your Koo video (and wife & kids are sick of my rambling so I’m dumping here) with one last link:

Mauldin: Just like I am predicting that much of the US deficit will end up on the balance sheet of the Federal Reserve, I said the same thing would happen to the Japanese. I also said it would devalue their currency. I actually put real personal money on the prediction. I bought a 10-year yen put option. That trade has not worked out so well. I don’t even want to open the envelopes from J.P. Morgan containing that information.

But I learned a lesson and I had a great deal of company. Many hedge fund managers and other investors made the same bet. In essence, we said that Japan is going to print money and the same thing will happen to it that happened to every other country in the same situation: The currency will lose value.

Instead, it brought one of the most surprising macroeconomic outcomes that I could imagine. Talk about thinking the unthinkable back in 2008.

I’m sure sane people will be proven correct “in the long run”. However, as Keynes says, in the long run we are all dead!

https://www.mauldineconomics.com/frontlinethoughts/the-rules-will-change-but-thats-probably-ok#avoiding

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