Another Harbinger of Economic Weakness

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Another Harbinger of Economic Weakness

Yesterday Paul Kasriel (one of the few economists who actually has a clue) had an essay posted at Safehaven.com. He found that despite being used in several leading indicators, M2 money supply has lost its correlation with one measure of demand (final sales of domestic product) since 1990.

Kasriel went looking for a better indicator, and found that bank credit (excluding commercial and industrial loans) is still correlated to final sales. I asked him in an email what the major components of bank credit are, after excluding C&I loans. He responded:

'From 1947 through 2009, C and I loans averaged about 20 pct of total bank credit. In the past 10 years, that percentage is lower. What's left is securities, consumer loans, residential and commercial real estate loans, leases and "other loans." '

Interestingly (and I hope I'm not preëmpting his next column), Paul Kasriel did not comment on the current state of his proposed indicator. Although the old indicator M2 remains mildly positive, bank credit minus C&I loans is pointing hard down, in its worst showing since the deep recession of 1974 (red line in chart):

http://www.safehaven.com/article/18042/i-renounce-monetarism-with-apologies-to-mr-lippman-of-pendant-publishing

Put this together with some other straws in the wind -- for instance, an update from the Consumer Metrics Institute, which collects an innovative data series derived in real time from consumer discretionary purchases on the internet. Their latest post has gone into outright grizzly-bear doom-'n-gloom mode. Take a Valium (or four) and steel yourself for the ghastly news:

There probably hasn't been two separate recessions in three years, simply one that has evolved in significant ways. But if this really is a "double dip" recession, then our data indicates that the "Great Recession" of 2008 was merely the precursor, and not the main event. It is this current dip that we should be really concerned about; the current contraction in consumer demand is about structural changes in consumer behavior, whereas the "first dip" was about short term loss of consumer confidence.

http://www.consumerindexes.com/history.html

ARRGGHHH!! No wonder Treasury yields have been crashing -- yet a third piece of evidence. Look like 3rd quarter GDP may come in negative. The first 'flash report' will be issued in late October.

Prepare for a scary Halloween, haunted by zombie banks, with panicked policy makers huddling in their COG bunkers. Me, I'll be out trick-or-treating in my Charles Ponzi mask. Hot damn, I'm a millionaire!

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Re: Another Harbinger of Economic Weakness

And, after taking off costumes, (some) citizens vote the following week.  Interesting times we're in.

David

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Re: Another Harbinger of Economic Weakness

In the Great Depression 1.0,  people said that in the crash of 29 fools lost their money,  but in the slide of '32 everyone lost their money!

Those who do not learn from history are doomed to repeat it.

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Re: Another Harbinger of Economic Weakness

ECRI's Leading Indicator continues to hover below 10%:

Don't mean to be such a wet blanket. But when a diverse set of indicators sends a consistent message, it has to be taken seriously.

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Re: Another Harbinger of Economic Weakness

Is this really a shocker?  Deflation is a decline in the money supply.  We long ago substituted credit for money.  I respect Paul and have had some email exchanges with him over the years.  While he may be a "good: economist, at the end of the day he is still an economist saddled with a conventional education that draws him back towards the center. He is also "forced" to deal with the spurious data the govt. and financial industry "spin" out.  On the other hand, even his timid imitation of Chicken Little has relegated him to page 29 of the Woodchuck Gazette - anything more assertive might find him swirling the drain of his hot tub.

Of course bank credit is contracting. Home sales are less than half the peak and the consumer, while not yet hibernating, is getting very sleepy.  Banks are clinging to their "asset" valuations and off balance sheet fantasies for to do otherwise would reveal their true state of solvency - which is to say they aren't.  This means that the banks are extremely slow to complete foreclosures leaving loans in the delinquent category instead of the default category. 1 year is common and 2 years is not unheard of.  If they take the loan to the default category, the credit is officially subtracted, it gobbles up some of their inadequate loan loss reserves and is a hit to their capital ratios.  All of this means that in reality the credit contraction portrayed by the official data is really the rosiest of scenarios. 

What isn't being talked about are cash flows which may or may not be reflected in the velocity numbers,  The banks aren't getting paid - how much the servicers are absorbing or kicking the can down the road is another question.  Banks don't earn money by paying depositors - they earn it from the spread on the loans.  That and their ludicrous service fees which have become a much larger percentage of their earnings mostly because they are earning a lot less from their loans and their ludicrous theory of increasing fees (think tax increases to cover declining revenues) which in the end will drive customers away if not out of the banking system all together.  Lots of people these days operate without accounts - why do you think the govt has gone to offering prepaid debit cards instead of checks for refunds and other transfer payments?

Our version of the 1930 soup lines is called unemployment insurance.  Perhaps that should really be called welfare now since most are eligible for almost 2 years of govt checks.  40 million now receive food stamps.  This is on top of the myriad services and give-aways (food bank - etc.) coming from the private sector.  I question how much longer the broader base of employed will continue to politically support the continuation of govt money as the question of fairness rings in the ears of the people who did everything "right",  They didn't get mortgage modifications, an $8,000 check for buying a house or a $4,000 check for buying a clunker.

So for those who might be tempted to think we've seen the worst, I would beg to differ.  IMO we've only just begun.  As increasing recognition of the true depth of the credit contraction occurs we will begin to see the full impact on everyday lives.  When you have a huge debt bubble contained within an even larger debt bubble, the inevitable result is a credit contraction, the likes of which has never been seen on this planet (or any other for that matter).  Few have any notion of the power of a debt contraction, since it has rarely occurred.  It is the definition of deflation in a modern society.  This one appears to me to be so large that Bernankes helicopter better be morphing into the Borg mother ship if he has a prayer of achieving inflation.

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Re: Another Harbinger of Economic Weakness
yobob1 wrote:

Deflation is a decline in the money supply.  We long ago substituted credit for money. 

Few have any notion of the power of a debt contraction, since it has rarely occurred.  It is the definition of deflation in a modern society.  This one appears to me to be so large that Bernankes helicopter better be morphing into the Borg mother ship if he has a prayer of achieving inflation.

To a point, I agree with you. Every asset bubble has been followed by a long period of economic stagnation. Call it Asset Reflux Disease. Laughing

However, I maintain that a fiat currency issuer is able to adjust the purchasing power of its scrip. The question is how.

As we are now seeing, QE programs don't work when banks fail to lend out excess reserves. However, there's a more direct inflation channel which doesn't involve lending at all.

In a 2007 IMF paper titled 'Central Bank Quasi-Fiscal Losses and High Inflation in Zimbabwe,' Sònia Muñoz documented the extent to which the Reserve Bank of Zimbabwe was simply printing and spending thin-air money. She estimated that the RBZ's loss from Quasi Fiscal Activities (QFAs) equaled a staggering 75% of GDP in 2006. Muñoz states that 'In Zimbabwe soaring inflation is due more to the RBZ's quasi-fiscal activity than to conventional government budget deficits.'

Unlike the Federal Reserve, the RBZ did not create new reserves by purchasing debt. It simply printed and distributed bales of banknotes (liabilities, from its perspective) without corresponding assets. For accounting purposes, the IMF created an asset category called 'Non-earning Assets' which amounted to 83.3 percent of RBZ's total assets in 2006.

Muñoz goes on to state, 'Central banks do not need to have capital or even positive net worth to function. The RBZ should be prepared to disclose its negative net worth to the public.'

http://www.imf.org/external/pubs/ft/wp/2007/wp0798.pdf

So there you have it -- QE programs, which are debt and lending based, may not function in the aftermath of a Bubble. If a central bank really wants to stop deflation, the answer is simply to spend scrip money without borrowing. Eventually this will drive the central bank's net worth into negative territory. But since scrip currency isn't redeemable, nothing happens except that it loses purchasing power.

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Re: Another Harbinger of Economic Weakness

Well done, Yobob. You write so well and argue your point effectively. However, given what Machinehead has emphasized; that the banks are involved in laundering tax dollars, through purchase of treasury bonds, how will bond purchasers react, both internationally and nationally, to the problems you have outlined in your thread? All your assumptions seem to be built on the bedrock of a strong currency that will be supported as a safe haven.

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Re: Another Harbinger of Economic Weakness
agitating prop wrote:

Well done, Yobob. You write so well and argue your point effectively. However, given what Machinehead has emphasized; that the banks are involved in laundering tax dollars, through purchase of treasury bonds, how will bond purchasers react, both internationally and nationally, to the problems you have outlined in your thread? All your assumptions seem to be built on the bedrock of a strong currency that will be supported as a safe haven.

Correction--fed is laundering future obligations, deficits through banks. 

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Re: Another Harbinger of Economic Weakness

Some longer-term perspective on ECRI's weekly leading indicator from Doug Short:

The question, of course, is whether the latest WLI decline is a leading indicator of a recession or a false negative. The published index has never dropped to the current level without the onset of a recession. The deepest decline without a near-term recession was in the Crash of 1987, when the index slipped to -6.8.

http://dshort.com/

Meanwhile, the Fed Funds rate is stuck at zero. Fiscal policy is neutralized because there is no political consensus for more deficit spending. 

To take a neo-Zimbabwean approach, the Fed would need to take an action I've long dreamed of: send out Federal Reserve gift cards [aka 'Bubble Cards'] to every household. 'Thin-air money' would be spent into existence, but there would be no corresponding debt added to the Fed's balance sheet. Instead, its equity would decline, and perhaps go negative. [The Fed could boost its equity by $300 billion, if it marked its gold holdings to market.] The dollar would fall, and prices would go up.

Such a policy would be disastrous, of course. I'm merely saying that a determined inflationist can make prices rise, by directly diluting the value of its scrip currency. By contrast, QE is a sterile exercise within the government and banking sectors, which fails to channel any new purchasing power to the peeps in the absence of lending expansion.

 

 

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Re: Another Harbinger of Economic Weakness

Meanwhile, the Continuous Commodity Index closed at a post-2008 high this week:

Commodity prices are only a small sector of the economy. But their rise suggests the possibility of stagflation rather than deflation.

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Re: Another Harbinger of Economic Weakness

MH wrote:

To take a neo-Zimbabwean approach, the Fed would need to take an action I've long dreamed of: send out Federal Reserve gift cards [aka 'Bubble Cards'] to every household. 'Thin-air money' would be spent into existence, but there would be no corresponding debt added to the Fed's balance sheet. Instead, its equity would decline, and perhaps go negative. [The Fed could boost its equity by $300 billion, if it marked its gold holdings to market.] The dollar would fall, and prices would go up.

There's another way, like the one you propose, but circuitous enough that it is being tried first.

Step 1:  Have mortgage bonkers issue guaranteed-to-fail mortgages to vast rafts of future deadbeats

Step 2:  Watch whole thing, predictably, swirl the drain

Step 3: Have the Fed buy all these mortgages for 100 cents on the dollar

Step 4: On the other side of the playpen, have the fedgov step in and modify the deadbeat mortgages downwards to "help homeowners" and "preserve american's right to own a home."

Step 5: The Federal Reserve accepts lower payments on its pool of MBS paper but then doesn't write it down to reflect the vastly lower value

End result:  More Fed money out there in people's pockets, no hit to the old balance sheet, and nobody except a few cranky bloggers have any clue about what's going on.

However, I think this program has about run its course and it's not helping, or at least not helping fast enough.  

I truly believe that a determined government can always create positive inflation due to this thing called a printing press, or its electronic equivalent.  Oops.  Wait, that wasn't me that said that.    That was some other dude at Jackson Hole in 2002.  I'll see if I can dig up his name from somewhere.

At any rate, I tend to take such pronouncements seriously as trial balloons are not free and rarely wasted.

 

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Re: Another Harbinger of Economic Weakness
cmartenson wrote:

 and nobody except a few cranky bloggers have any clue about what's going on.

HEY - I resemble that!

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Re: Another Harbinger of Economic Weakness

Statistically...an "r" (correlation coefficient) of .55 simply is not impressive.   A value less than .5 still lies in the range of chance.    This is weak at best.

In 35 years of analysis... 

Values generally of .7 or greater...tend to find real world significance.

Values of .9 or greater...show very strong relationships (first order).

More info...try

Correlation Coefficient 

2 cents.

Nichoman   

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Re: Another Harbinger of Economic Weakness

yobob1

You should post more often.  You help bring clarity to the confused.

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Re: Another Harbinger of Economic Weakness
Nichoman wrote:

Statistically...an "r" (correlation coefficient) of .55 simply is not impressive.   A value less than .5 still lies in the range of chance.    This is weak at best.

I'm not impressed by any value of "r" without knowing the significance of that value.

http://en.wikipedia.org/wiki/Spearman's_rank_correlation_coefficient

Long ago I knew of a correlation whose value was much less than 0.1 but was highly significant, alas my aging brain can no longer locate where that information been stored.

 

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Re: Another Harbinger of Economic Weakness
Nichoman wrote:

Statistically...an "r" (correlation coefficient) of .55 simply is not impressive.   A value less than .5 still lies in the range of chance.    This is weak at best.

In 35 years of analysis... 

Values generally of .7 or greater...tend to find real world significance.

Values of .9 or greater...show very strong relationships (first order).

More info...try

Correlation Coefficient 

2 cents.

 

Nichoman   

You're probably referring to Kasriel's assertion that 'in the second sub-period, 1990 - 2010, the correlation between percentage changes in real bank credit and real final sales decreases to 0.55, the sign on the correlation is "correct" and a 0.55 correlation is nothing to sneeze at.'

Economic data is 'noisy,' with plenty of spurious volatility. So it's rare to achieve high levels of the correlation coefficient, and difficult to prove statistical significance.

But if the bar is set too high, we can hardly infer anything from market-based time series. To use a Chinese idiom, we might as well be ducks listening to thunder, in blank-eyed incomprehension. You pay your money, and you take your chance.

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Re: Another Harbinger of Economic Weakness
agitating prop wrote:

Well done, Yobob. You write so well and argue your point effectively. However, given what Machinehead has emphasized; that the banks are involved in laundering tax dollars, through purchase of treasury bonds, how will bond purchasers react, both internationally and nationally, to the problems you have outlined in your thread? All your assumptions seem to be built on the bedrock of a strong currency that will be supported as a safe haven.

 

Eventually all fiat fails - that is a given truism until proven incorrect.  We are an all fiat planet for the first time, so in a very real sense we are in uncharted waters.  The fact that no currency is redeemable says there is no "strong" currency on a stand alone basis. That pretty much leaves us in a position of discussing the merits and flaws of various brands of toilet paper.  How that toilet paper fairs within a given issuer's border and outside the border can easily be different.  From a purely selfish and practical standpoint, I'm not terribly concerned with the performance of the dollar (within bounds) on a comparison basis with the other little yapping fiats.  I'm more concerned with the performance of the dollar (at least on an intermediate basis) where I live. 

Now I know some will jump all over me and say, but the price of imports will skyrocket and we'll all be broke trying to buy underwear at Wal-Mart or fill up our tanks.  Under different circumstances, I wouldn't disagree.  Given that we have substantially less spending power post credit withdrawal and we have no "real" savings, you have to remember to ask, who is going to pay the price?  The answer is far fewer. 

Then what happens to the exporters who over the last couple of decades have become super dependent on our consumption? As a WAG, I'd say we may not have to wait too much longer to find out even without a currency exchange induced sales slump, but it's safe to assume, it ain't gonna be real pleasant in Exportistan either.

IMO the reserve status of the dollar isn't at risk for the time being.  The only real contender that has the volume and liquidity currently required was the Zero.  Sadly the very serious flaws of the entire Euro scheme were recently revealed when the blanket was pulled off the PIIGS.  They might have made it if they could have finished enslaving the entire continent under one central government with direct taxing and spending authority, but alas they didn't.

I read a line somewhere the other day that made me chuckle - and I'm paraphrasing since i don't have a pornographic memory.  "The only bubble seems to be in the talk of the bond bubble."  I don't have a crystal ball, but I long ago predicted that rates on US bonds would hit historic lows suggesting something like 3% on the 30 year. Machinehead may recall that.  The demographics of this country, and most others, suggest that there will be a move in money from higher risk to lower risk.  Having spasmodic equity markets only hastens and reinforces that move.  That is clearly being shown in the flow data as the small investors are dumping equities and buying bonds.  How equity overweight are the pensions and institutions?

IMO the "laundering" of tax dollars is simply masking the true extent of the ongoing debt failure.  That money can't really be spent to any great degree as it would immediately reveal the rampant insolvency of the banking system - I suspect that over time it will be "spent" as loss reserves - primarily it is assumed your grand children will be paying off your mortgage debt via taxes that you defaulted on.

In sum, "strong" is a relative term, not an absolute term when it come to currencies.  The apparent liquidity being created is not spendable other than is short term govt spending which means that 90% of it is wasted on "services" that have no direct impact as economic value - I count all govt spending as an "expense" to an economy not an add to GDP.  Currency valuations are more a function of relative price / speculative trading (rampant in all markets) of over 4 trillion dollars per day.  Everyone knows the price of everything; few know the value of anything. 

 

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Re: Another Harbinger of Economic Weakness

Laughing  Sadly the Asset Reflux has collapsed the esophagus and we're left feeding through a tiny tube.

If I'm reading you correctly what you are referring to is willy nilly physical printing of money.  To do it legally would of course require some very serious legislative changes.  That certainly doesn't mean it couldn't happen here, but I view it as unlikely for the time being.  I have a hard time seeing the secretary of the Navy pulling up to the dock with billions of dollars in cash to take delivery of a new aircraft carrier.  Or for that matter any govt employee showing up at Staples with a box of cash to buy some new pencils.  As dysfunctional as we are as a country, we are not Weimar Germany or Zimbabwe - at least not yet. Besides, we still have blank checks - we can't be broke. Smile

 

machinehead wrote:

To a point, I agree with you. Every asset bubble has been followed by a long period of economic stagnation. Call it Asset Reflux Disease. Laughing

However, I maintain that a fiat currency issuer is able to adjust the purchasing power of its scrip. The question is how.

As we are now seeing, QE programs don't work when banks fail to lend out excess reserves. However, there's a more direct inflation channel which doesn't involve lending at all.

In a 2007 IMF paper titled 'Central Bank Quasi-Fiscal Losses and High Inflation in Zimbabwe,' Sònia Muñoz documented the extent to which the Reserve Bank of Zimbabwe was simply printing and spending thin-air money. She estimated that the RBZ's loss from Quasi Fiscal Activities (QFAs) equaled a staggering 75% of GDP in 2006. Muñoz states that 'In Zimbabwe soaring inflation is due more to the RBZ's quasi-fiscal activity than to conventional government budget deficits.'

Unlike the Federal Reserve, the RBZ did not create new reserves by purchasing debt. It simply printed and distributed bales of banknotes (liabilities, from its perspective) without corresponding assets. For accounting purposes, the IMF created an asset category called 'Non-earning Assets' which amounted to 83.3 percent of RBZ's total assets in 2006.

Muñoz goes on to state, 'Central banks do not need to have capital or even positive net worth to function. The RBZ should be prepared to disclose its negative net worth to the public.'

http://www.imf.org/external/pubs/ft/wp/2007/wp0798.pdf

So there you have it -- QE programs, which are debt and lending based, may not function in the aftermath of a Bubble. If a central bank really wants to stop deflation, the answer is simply to spend scrip money without borrowing. Eventually this will drive the central bank's net worth into negative territory. But since scrip currency isn't redeemable, nothing happens except that it loses purchasing power.

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Re: Another Harbinger of Economic Weakness

You can't fall if you're already laying on the floor. They had to get some altitude for the next leg of the crash. Smile IMO this recent episode of commodity "love" is mostly excess liquidity chasing momentum - in many ways to me it is even more speculative in nature than the 2008 fiasco (My God!. Oil is' going to a million dollars a barrel by year end!!!! - oops our bad, we meant to say thirty dollars)

To me stagflation requires some income growth to provide the purchasing power to support higher prices. Spendable incomes look to be declining - any increases in "income" are being gobbled up by increasing shared benefit costs and tax increases as municipalities and states scramble to cover the growing gap. There is scant evidence of any real ability to raise prices without offsetting volume declines.  As people run out of the govt. "welfare" checks, the current purchasing power looks set to decline further which should add some momentum to the downward spiral currently being slowed, but not stopped, by all of the past interventions.

Besides I never liked the coined "stagflation" term.  It implies stagnant incomes with rising prices and that can't persist for very long unless the gap is covered by debt.  Given debt is shrinking, I'd say the possibility is low.

 

machinehead wrote:

Meanwhile, the Continuous Commodity Index closed at a post-2008 high this week:

Commodity prices are only a small sector of the economy. But their rise suggests the possibility of stagflation rather than deflation.

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Re: Another Harbinger of Economic Weakness

'Il Dottore di Doom' prognosticates to the Journo of Gloom -- and it ain't pretty:

“The US has run out of bullets,” said Nouriel Roubini, professor at New York University, and one of a caste of luminaries with grim forecasts at the annual Ambrosetti conference on Lake Como.

“More quantitative easing (bond purchases) by the Federal Reserve is not going to make any difference. Treasury yields are already down to 2.5pc yet credit spreads are widening again. Monetary policy can boost liquidity but it can’t deal with solvency problems,” he told Europe’s policy elite.

Dr Roubini said the US growth rate was likely to fall below 1pc in the second half of the year, despite the biggest stimulus in history: a cut in interest rates from 5pc to zero, a budget deficit of 10pc of GDP, and $3 trillion to shore up the financial system. The anaemic pace compares with rates of 4pc-6pc at this stage of recovery in normal post-war recoveries.

“We have reached stall speed. Any shock at this point can tip you back into recession. With interbank spreads rising, you can get a vicious circle like 2008-2009,” he said, describing a self-feeding process as the real economy and the credit system hurt each other. “There is a 40pc chance of double-dip recession in the US, and worse in Japan. Even if it is not technically a recession it will feel like it,” he added.

Dr Roubini said average public debt in the rich countries would rise to 120pc of GDP by 2015 in the rich countries, leaving no scope for a further fiscal stimulus. If they push their luck, they too risk the sort of bond crises seen in Southern Europe this year.

In the US, the fiscal boost has faded, switching to tightening over coming months The lift from the inventory cycle is finished. Capex spending by companies has held up well, but this slowed sharply in July. Housing is already in a double dip. The last support for the US economy is consumption, barely growing at 1pc.

“All we did was kick the can down the road and stole demand from the future,” he said.

http://www.telegraph.co.uk/finance/economics/7981334/No-defence-left-against-double-dip-recession-says-Nouriel-Roubini.html

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Re: Another Harbinger of Economic Weakness
yobob1 wrote:

Then what happens to the exporters who over the last couple of decades have become super dependent on our consumption? As a WAG, I'd say we may not have to wait too much longer to find out even without a currency exchange induced sales slump, but it's safe to assume, it ain't gonna be real pleasant in Exportistan either.

IMO the reserve status of the dollar isn't at risk for the time being.  

I read a line somewhere the other day that made me chuckle - and I'm paraphrasing since i don't have a pornographic memory.  "The only bubble seems to be in the talk of the bond bubble."  I don't have a crystal ball, but I long ago predicted that rates on US bonds would hit historic lows suggesting something like 3% on the 30 year. Machinehead may recall that.  

Exportistan -- LOL! We've got two Exportistans as neighbors -- Canada and Mexico -- our No. 1 and No. 3 trade partners respectively. Of the two, Mexico probably faces the music first, as it is (or soon will be) a net energy importer instead of exporter. They'd better buy some solar ovens to cook tortillas, while the exports earnings are still available.

Agreed about the dollar's reserve status -- official buyers don't just dump their holdings cannonball style, as a panicked individual might do. At most, they simply stop accumulating new dollar reserves. But one shouldn't underestimate the effect of such marginal changes. Not much will happen for awhile -- then one of those chaotic step-function changes will burst out overnight in a herd-panic, as some new Soros breaks the Bank of China or some such. Markets don't adjust linearly -- they ain't rational (contrary to what's still taught in flat-earth 'Econ 001' -- reduced from '101' owing to the ZIRP).

Your pornographic memory isn't that bad -- I do recall your improbable rants about the 30-year hitting 3%. Now that it's almost there, though, I'd recommend that you declare victory, go home, and go short! Tongue out

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Re: Another Harbinger of Economic Weakness
yobob1 wrote:

To me stagflation requires some income growth to provide the purchasing power to support higher prices. Spendable incomes look to be declining - 

Besides I never liked the coined "stagflation" term.  It implies stagnant incomes with rising prices and that can't persist for very long unless the gap is covered by debt.  Given debt is shrinking, I'd say the possibility is low.

It's an interesting point. During the inflationary 1970s, nominal GDP growth after 1971 never fell below 8%, even during the severe recession of 1974-75 (dark brown line in the graph below -- mislabeled as 'real GDP,' but it's nominal GDP before inflation adjustment). So commodity prices kept rocking even as the economy cratered. Late 1973, grains: whoosh! Rest of the decade: gold, silver -- whoosh!

By contrast, nominal GDP growth in the current report -- from 2Q 09 to 2Q 10, during an alleged recovery -- was only 3.9%. That's a level which corresponded to deep recession in the past. It's why everything feels so damned depressed -- there's no top-line growth, no comforting mild-inflation illusion to put a Botox-induced smooth glow on our economy's ragged crows-foot visage. It's low and slow, obscene and mean, and a mess to look at.

For commodity prices to nevertheless climb in such an unpromising environment suggests considerable relative strength to me. The paths of the economy and prices can diverge from each other. Rising prices are the mechanism by which falling living standards are enforced (as you've alluded to).

Buddy, can you spare a C-note for a cup of coffee? Cry

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Re: Another Harbinger of Economic Weakness

people can poop on your r value if they want to - lol.  however, when i look at graphically depicted data my brain kind of cooks its own view of r (assuming i know where the data came from).  graphs generally have 2 or 3 pieces of data on them but there is a lot of factual data available that if examined carefully does not bode well for the future.  now i may be missing something here and there but i keep having 2 questions:

1) when i watch cnbc (or any other biz media) i rarely see any of this data presented and it seems odd to me as there are really big things going on.

2) commodity prices in general do keep trending up.  the media people claim this is a result of the markets "seeing" the end of the recession and green shoots and all that.

i do not believe it.  it is adding up to permanent recession to me.  the new normal is recession.  when you mix in higher energy prices in the future it gets scary.  now i may well be slow in the economic gig (i am a senior engineer) but i have been studying it for years and continue to do so.  i learn something every time i get on this site.  stagflation does not seem likely for the reasons specified by a previous post on this thread (yobob1), inflation may happen due to excessive liquidity in the system but average people are not seeing any of the excess liquidity as far as i can tell so how can there be inflation ?  credit is really tight.  incomes are stagnate.  housing sucks.  corporations are sitting on some money as they cut big time and have not resumed expansion as they do not see any reason to.  the political situation is unstable as the dems are going to experience a blood letting at the polls in november and the repubs will take control of one or both houses of congress.  with obama in the white house this will led to fed gov grid lock - repubs pushing to hold the line on spending and trying to institute cuts (spending and taxes) and obama with the veto and the repubs without enough votes to override.  and, the people trying to service previous debt with no money, no jobs, and not a lot of hope.

it all looks pretty bleak so back to the 2 questions...

 

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A Harbinger of More Super Postings

What a great thread!  Thanks Machinehead and yobob1 for furthering my education.  May the  great-info/posts ratio stay pinned on maximum!

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Re: Another Harbinger of Economic Weakness
machinehead wrote:

For commodity prices to nevertheless climb in such an unpromising environment suggests considerable relative strength to me. The paths of the economy and prices can diverge from each other. Rising prices are the mechanism by which falling living standards are enforced (as you've alluded to).

Buddy, can you spare a C-note for a cup of coffee? Cry

Sure its possible for commodity prices to climb even in a depression.  However for me to believe its any show of "strength", I'd have to see an obvious supply problem.  Secondly I wouldn't expect it to spread like the black death across all commodities simultaneously.  Its pretty well established that there's a glut of oil on the market and warehouse levels for all the base metals are mostly near 5 year highs.  I know we had wheat in storage that surpassed "normal" levels and I'd guess we have plenty of corn (can you spare a cup of ethanol?).  I know the talk of town is Russia's wheat export ban ( a move they will come to regret - establishing them as an unreliable supplier) and that would normally pressure the other grains to some degree.

Its been my experience that when it comes to the ag commodities, they will spend all Spring and Summer telling us how lousy the crops are here or there, the speculators take the ball and run with it and then the crop comes in "larger than expected".  Once in  while their dire predictions are warranted, most of the time they're not.  It helps living in farm and ranch country where talking directly to the farmers is a real possibility.  Obviously you can't judge the production of a continent based on one county, buy again my experience is most of your local farmers are pretty well informed about other areas of the country.  I think there's an underground farmer network. Smile

So where's the market information away from price that demands higher prices?  The global economy has been floundering now for two plus years which would typically indicate lower demand.  In addition the climb in price from 2006 until the lemmings sailed off the cliff in 2008 sent a signal to increase prodcution (see corn in response to ethanol, demand), so we should have actually been in the position of seeing increasing supply (see oil) and falling demand for most commodities - that's hardly a recipe for "strength".

I also beleive that these damned ETF's are causing market distortions and have only served to increase the gambling.  Commodity markets in terms of daily dollar trading values are pretty small and it doesn't take a whole lot of money to push them around.  I fully expect that there are going to be plenty of burnt fingers once again.

 My local coffee shop charges a buck for a bottomless cup of coffee, so I ain't coughing up a C-note for you sit in some fancy coffee shop. Laughing

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Re: Another Harbinger of Economic Weakness
yobob1 wrote:
machinehead wrote:

For commodity prices to nevertheless climb in such an unpromising environment suggests considerable relative strength to me. The paths of the economy and prices can diverge from each other. Rising prices are the mechanism by which falling living standards are enforced (as you've alluded to).

Buddy, can you spare a C-note for a cup of coffee? Cry

Sure its possible for commodity prices to climb even in a depression.  However for me to believe its any show of "strength", I'd have to see an obvious supply problem.  Secondly I wouldn't expect it to spread like the black death across all commodities simultaneously.  Its pretty well established that there's a glut of oil on the market and warehouse levels for all the base metals are mostly near 5 year highs.  I know we had wheat in storage that surpassed "normal" levels and I'd guess we have plenty of corn (can you spare a cup of ethanol?).  I know the talk of town is Russia's wheat export ban ( a move they will come to regret - establishing them as an unreliable supplier) and that would normally pressure the other grains to some degree.

Its been my experience that when it comes to the ag commodities, they will spend all Spring and Summer telling us how lousy the crops are here or there, the speculators take the ball and run with it and then the crop comes in "larger than expected".  Once in  while their dire predictions are warranted, most of the time they're not.  It helps living in farm and ranch country where talking directly to the farmers is a real possibility.  Obviously you can't judge the production of a continent based on one county, buy again my experience is most of your local farmers are pretty well informed about other areas of the country.  I think there's an underground farmer network. Smile

So where's the market information away from price that demands higher prices?  The global economy has been floundering now for two plus years which would typically indicate lower demand.  In addition the climb in price from 2006 until the lemmings sailed off the cliff in 2008 sent a signal to increase prodcution (see corn in response to ethanol, demand), so we should have actually been in the position of seeing increasing supply (see oil) and falling demand for most commodities - that's hardly a recipe for "strength".

I also beleive that these damned ETF's are causing market distortions and have only served to increase the gambling.  Commodity markets in terms of daily dollar trading values are pretty small and it doesn't take a whole lot of money to push them around.  I fully expect that there are going to be plenty of burnt fingers once again.

 My local coffee shop charges a buck for a bottomless cup of coffee, so I ain't coughing up a C-note for you sit in some fancy coffee shop. Laughing

Currencies are generally valued relative to one another. They are all experiencing a somewhat synchronized weakening and that is reflected in rising commodity prices. The fact that there doesn't appear to be a problem with supply, outside of wheat,  further illuminates this reality. I think what govts have to do is allow gold to seek it's true level.  If there is to be a bubble, let it be in the price of gold, not  food.

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Re: Another Harbinger of Economic Weakness
agitating prop wrote:

Currencies are generally valued relative to one another. They are all experiencing a somewhat synchronized weakening and that is reflected in rising commodity prices. The fact that there doesn't appear to be a problem with supply, outside of wheat,  further illuminates this reality. I think what govts have to do is allow gold to seek it's true level.  If there is to be a bubble, let it be in the price of gold, not  food.

Like the cacophony of languages, the cacophony of currencies interferes with seeing the global picture.

We need a global CPI (Consumer Price Index). With rare exceptions (Japan being the only one that comes to mind), prices are rising and currencies are depreciating. In the high-growth developing world, prices are generally rising faster than in the becalmed OECD rich countries. 

Fiat currencies impose a veil of illusion. Tamper with the measuring unit, and you can make prices rise and fall, shimmy and shimmer. But mostly, they rise. And though the business cycle leaves its rhythmic imprint like the tides, it doesn't change the longer-term rising of the cost-of-living sea level.

Gold is particularly useful as a signaling device, because it's universally accepted as money, and always has been.

 

One golden Happy Meal feeds a family for a year. One golden french fry buys a dozen steak dinners.

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Re: Another Harbinger of Economic Weakness

Thanks for fleshing out the point I was trying to make and for the  pic of gilded happy meal, MHead, or should I call you "The Man with the Golden Bun"?Wink

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Re: Another Harbinger of Economic Weakness
machinehead wrote:

Fiat currencies impose a veil of illusion. Tamper with the measuring unit, and you can make prices rise and fall, shimmy and shimmer. But mostly, they rise. And though the business cycle leaves its rhythmic imprint like the tides, it doesn't change the longer-term rising of the cost-of-living sea level.

How about "the man with the golden brain" . . .  mh, such great writing - i am always blown away . . . 

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Re: Another Harbinger of Economic Weakness
machinehead wrote:
agitating prop wrote:

Currencies are generally valued relative to one another. They are all experiencing a somewhat synchronized weakening and that is reflected in rising commodity prices. The fact that there doesn't appear to be a problem with supply, outside of wheat,  further illuminates this reality. I think what govts have to do is allow gold to seek it's true level.  If there is to be a bubble, let it be in the price of gold, not  food.

Like the cacophony of languages, the cacophony of currencies interferes with seeing the global picture.

We need a global CPI (Consumer Price Index). With rare exceptions (Japan being the only one that comes to mind), prices are rising and currencies are depreciating. In the high-growth developing world, prices are generally rising faster than in the becalmed OECD rich countries. 

Fiat currencies impose a veil of illusion. Tamper with the measuring unit, and you can make prices rise and fall, shimmy and shimmer. But mostly, they rise. And though the business cycle leaves its rhythmic imprint like the tides, it doesn't change the longer-term rising of the cost-of-living sea level.

Gold is particularly useful as a signaling device, because it's universally accepted as money, and always has been.

 

If gold is a signaling device, then arguably gold is signaling deflation as it is taking fewer ounces to buy the same goods. Smile

The only thing that suggests a synchronized weakening of fiat is gold priced in fiat. Between 1980 and 2000 that was not the case - quite the opposite. In fact, using gold as signaling device, you would have concluded that period was inflationary in spite of the fact that most commodities priced in fiat were stable to declining over the longer term.

We don't price anything in ounces of gold.  Instead gold is priced in fiat, so you're always stuck with converting things back and forth using an ever shifting conversion factor.   That conversion factor is subject to all of the market forces (including manipulation and pure speculation), most of which seem to have no logical connection to any real fundamentals. I look at Japan.  In 1980 it took roughly 175,000 yen to buy an ounce of gold.  By 2000 it was (again very roughly) 25000 yen.  Today its a little over 100,000. What does that tell me?  Honestly, what does it tell me?  We know the ounce of gold hasn't changed. 

People go rabid with the mention of a one world currency, and yet what is gold?  I see no option of any one currency returning to a full redeemable status.  Can you imagine what might happen to money flows and the valuation of all other fiat were someone to do it? All of the known gold gives you something like 3/4 of an ounce of gold per person on the planet - and a substantial portion of that gold is tied up in artifacts, jewelry, etc. so even the prospect of a redeemable one world currency seems pretty unlikely.

At the end of the day gold is valuable because its rare and it takes "work" to extract and refine, plus being fungible and stable. 

Maybe we should just cut out the middle man and have a medium of exchange that represents your work - labor credits as it were.  Boy would that be a severe pay cut for the CEOs and quite the raise for the ditch diggers. Laughing

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Re: Another Harbinger of Economic Weakness
yobob1 wrote:

 

If gold is a signaling device, then arguably gold is signaling deflation as it is taking fewer ounces to buy the same goods. Smile

The only thing that suggests a synchronized weakening of fiat is gold priced in fiat. Between 1980 and 2000 that was not the case - quite the opposite. In fact, using gold as signaling device, you would have concluded that period was inflationary in spite of the fact that most commodities priced in fiat were stable to declining over the longer term.

We don't price anything in ounces of gold.  Instead gold is priced in fiat, so you're always stuck with converting things back and forth using an ever shifting conversion factor.   That conversion factor is subject to all of the market forces (including manipulation and pure speculation), most of which seem to have no logical connection to any real fundamentals. I look at Japan.  In 1980 it took roughly 175,000 yen to buy an ounce of gold.  By 2000 it was (again very roughly) 25000 yen.  Today its a little over 100,000. What does that tell me?  Honestly, what does it tell me?  We know the ounce of gold hasn't changed. 

People go rabid with the mention of a one world currency, and yet what is gold?  I see no option of any one currency returning to a full redeemable status.  Can you imagine what might happen to money flows and the valuation of all other fiat were someone to do it? All of the known gold gives you something like 3/4 of an ounce of gold per person on the planet - and a substantial portion of that gold is tied up in artifacts, jewelry, etc. so even the prospect of a redeemable one world currency seems pretty unlikely.

At the end of the day gold is valuable because its rare and it takes "work" to extract and refine, plus being fungible and stable. 

Maybe we should just cut out the middle man and have a medium of exchange that represents your work - labor credits as it were.  Boy would that be a severe pay cut for the CEOs and quite the raise for the ditch diggers. Laughing

Yobob, Commodity prices were relatively stable between 1980 and 2000, but assets and share prices were climbing significantly. Doesn't it make sense that gold responded to asset bubbles by increasing in value relative to the U.S. dollar?  This isn't a rhetorical device, I'm honestly curious.  Thanks for taking the time to respond in such detail and at such length. Btw, gold is $1257 per oz. U.S. this morning, nearing all time highs!

*I've heard a lot about gold being fungible lately and figure maybe Monsanto will develop a spray for that!Wink

 

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