Gekko vs. Denninger. Wow. Can These Two Guys Fight?

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Gekko vs. Denninger. Wow. Can These Two Guys Fight?

Gordon Gekko and Karl Denninger get into it over gold investment and deflation/inflation. Worth a read of the two op-eds. 

Gekko fires a shot across the bow at Karl for hating gold as an investment and for calling for monetary deflation. Karl responds with all 16 guns blasting in heated retort. 

 

I'm not going to post the entire exchange but here are some snippets. One thing's for sure. The blogosphere sure doesn't march in lockstep. 

 

Mr. Denninger and Gold or Why the Dollar-Deflationists Are Wrong

Those who know Mr. Denninger know that he, well, for lack of a better word, hates Gold. It only goes to show the level of disinformation and ignorance prevalent in our society when even smart people like Karl fail to get it. From what I hear anybody even mentioning the word Gold runs the risk of being permanently banned from one of his "forums". In a recent commentary entitled "Ten Things for 2010" he was at it again bashing Gold. Here is what he had to say:

 

We're not looking at hyperinflation folks, in my view - we're looking at a deflationary collapse…If you fear hyperinflation do not look to Gold, instead buy a small (5% of your total portfolio) position in far out of the money LEAP CALLS on the major indices, spread across them.  Why?  Because (1) the tax structure on gold is unfavorable, (2) gold has never performed well on a contemporary basis .vs. inflation and (3) you can't eat it.  If you try to get around the tax man structure you're going to get creamed; governments can and WILL prevent that from working.  My recommendation thus is to buy insurance against a hyperinflationary event using instruments that do not try to evade the formal financial structure, are levered (to get around the tax hit) and are defined risk (so as to avoid losing your ass if you're wrong.)

Really Karl? LEAP Calls? In a  hyperinflation? That’s a good way to lose 5% your portfolio. I’m assuming you know what hyperinflation is - in a hyperinflation the currency becomes worthless, as in toilet-paper. Why would anyone want to get paid their "winnings" in a worthless currency, assuming there are stock indices and counterparties left who can pay off these worthless winnings when countries collapse? 

http://gordongekkosblog.blogspot.com/

 

Listen To The Hucksters, Lose Your Ass

 

Especially those who don't sign their real names:

Those who know Mr. Denninger know that he, well, for lack of a better word, hates Gold.

Bah.  One cannot hate an inanimate object.

It only goes to show the level of disinformation and ignorance prevalent in our society when even smart people like Karl fail to get it. From what I hear anybody even mentioning the word Gold runs the risk of being permanently banned from one of his "forums".

"From what I hear" is what someone says when they're incapable of actually bothering to read the simple topic headers on a forum.  Specifically, I got tired (fast) of the incessant and mentally-deficient spamming of my forum with goldbug crap and thus have deemed it off-topic everywhere except in.... surprise.... the metals forum.

That's right, I have a specific place for all such discussions where they're perfectly welcome - even if I believe the people running their particular beliefs are wrong (or worse.)

Really Karl? LEAP Calls? In a hyperinflation? That’s a good way to lose 5% your portfolio. I’m assuming you know what hyperinflation is - in a hyperinflation the currency becomes worthless, as in toilet-paper. Why would anyone want to get paid their "winnings" in a worthless currency, assuming there are stock indices and counterparties left who can pay off these worthless winnings when countries collapse?

Worthless currency eh?  Hmmm... all I have to do is be able to obtain a return that exceeds the devaluation of the currency in question, assuming it does in fact devaluate.

http://market-ticker.denninger.net/

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Re: Gekko vs. Denninger. Wow. Can These Two Guys Fight?

I may be a bit bias, lol, but I think Karl wiped the floor with Gordy. The recent surge of arrogance in the gold-bug camp can really only play out one way...capitulation on an equal scale.

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Re: Gekko vs. Denninger. Wow. Can These Two Guys Fight?
JAG wrote:

I may be a bit bias, lol, but I think Karl wiped the floor with Gordy.

I have to agree.  It is very counterintuitive to believe in deflation when the currency is fiat but it is a strange world that we live in.

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Re: Gekko vs. Denninger. Wow. Can These Two Guys Fight?
goes211 wrote:
JAG wrote:

I may be a bit bias, lol, but I think Karl wiped the floor with Gordy.

I have to agree.  It is very counterintuitive to believe in deflation when the currency is fiat but it is a strange world that we live in.

So, say we get a terrible blast of deflation, how will the govt. respond? Deflation of that type, very likely means upwards of 30% unemployment. Really think about this. How will the govt respond?  This is where the deflationist argument collapses.

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Re: Gekko vs. Denninger. Wow. Can These Two Guys Fight?
agitating prop wrote:
goes211 wrote:

It is very counterintuitive to believe in deflation when the currency is fiat but it is a strange world that we live in.

So, say we get a terrible blast of deflation, how will the govt. respond? Deflation of that type, very likely means upwards of 30% unemployment. Really think about this. How will the govt respond?  This is where the deflationist argument collapses.

The government will respond by trying to spend its way to prosperity.  The question is can it and what will happen if it tries?

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Re: Gekko vs. Denninger. Wow. Can These Two Guys Fight?
agitating prop wrote:

So, say we get a terrible blast of deflation, how will the govt. respond? Deflation of that type, very likely means upwards of 30% unemployment. Really think about this. How will the govt respond?  This is where the deflationist argument collapses.

If we get a terrible blast of deflation, it means the government is powerless to do anything to stop it. It means that QE, which has never worked before, didn't work this time either. This is where the inflation argument deflates. 

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Re: Gekko vs. Denninger. Wow. Can These Two Guys Fight?
goes211 wrote:
agitating prop wrote:
goes211 wrote:

It is very counterintuitive to believe in deflation when the currency is fiat but it is a strange world that we live in.

So, say we get a terrible blast of deflation, how will the govt. respond? Deflation of that type, very likely means upwards of 30% unemployment. Really think about this. How will the govt respond?  This is where the deflationist argument collapses.

The government will respond by trying to spend its way to prosperity.  The question is can it and what will happen if it tries?

It can print it's own money to fund stimulus projects that create jobs. It would be lovely if they reindustrialized the U.S  through new alternative energy infrastructure, but Obomba signed some "balanced budget" bill that looks like it was created to funnel money directly to the military and defence contracters. I took one look at that bill and could clearly see, the military industrial complex is going to get a huge shot in the arm, and the currency will be degraded even further, as a consequence.

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Re: Gekko vs. Denninger. Wow. Can These Two Guys Fight?

So, say we get a terrible blast of deflation, how will the govt. respond? Deflation of that type, very likely means upwards of 30% unemployment. Really think about this. How will the govt respond?  This is where the deflationist argument collapses.

I agree. Deflation may come with some down drafts only to be followed by more stimulus by the digital method. They have already proven they will stimulate. I really think Marc Faber's ideas make sense IMHO. He seems to elude to the world will be easier than ever to inflate with the aid of the digital age.

If we get a terrible blast of deflation, it means the government is powerless to do anything to stop it. It means that QE, which has never worked before, didn't work this time either. This is where the inflation argument deflates.

Are you sure the Govt aka printing press would be powerless? On May 25th they asked for 200 billion more stmulus. They can always argue we have the right fix it just takes more time & more stimulus can't they? Maybe I am missing something?

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Re: Gekko vs. Denninger. Wow. Can These Two Guys Fight?
JAG wrote:
agitating prop wrote:

So, say we get a terrible blast of deflation, how will the govt. respond? Deflation of that type, very likely means upwards of 30% unemployment. Really think about this. How will the govt respond?  This is where the deflationist argument collapses.

If we get a terrible blast of deflation, it means the government is powerless to do anything to stop it. It means that QE, which has never worked before, didn't work this time either. This is where the inflation argument deflates. 

Again, this is where the deflation argument collapses like a poorly cooked souffle, tears itself apart, like a retread on a road of historical perspective. Govts will never allow deflation, if they have other alternatives. It doesn't matter how self defeating for a nation inflation proves to be.  If a govt inflates, the consequences are not experienced as immediately, and they are always thinking in terms of political cycles. Inlfation is more stealthy. Govts can institute all kinds of policy to inject vast amounts of capital directly into the system.

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Re: Gekko vs. Denninger. Wow. Can These Two Guys Fight?

The Govt can't walk the razors edge perfect of inflation vs deflation. That is why I plan to short these down drafts only to turn around & go back long knowing the end result (in the end) will be inflation.

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Re: Gekko vs. Denninger. Wow. Can These Two Guys Fight?

The fractional reserve banking system (watch a youtube video.."money is debt" and/or google how it works if you don't have a complete understanding of the system) must always move forward otherwise it's vulnerable to a mighty collapse in the other direction.  QE'ing tries to keep the system moving forward.  It's never worked in any modern economy.  The counter deflationary forces are tremendous......many past residential real estate losses have yet to be recognized by the banks & the housing market still has another 20-30% to drop per most unbiased analysts, CRE losses have yet to really get rolling but are surely coming, unemployment continues to get worse with no clear evidence of improvement, wages are going down, businesses are not wanting to get loans, state & local governments are going bankrupted all across the U.S., credit card defaults are rising, availability of credit is decreasing, etc., etc.  There is not any more mark-to-market for the banks.  What that means is that if they were forced to mark their assets to true value they would be forced to come up with huge amounts of money to keep adequate reserve requirements.  Banks are also becoming more cautious with their lending in a desire to keep their reserve requirements up. 

When the fractional reserve banking system moves in the natural forward direction the money supply grows in an exponential fashion.  However when the system starts backing up it collapses in a reverse fashion (do a mathematical example if it's hard to see how this works.....it's scary stuff....first read about it in a book "The Negative Multiplier"), negative multiplier effect as termed by some people.  This process can occur at lightning speed through the entire banking system literally overnight, and the money supply contracts dramatically.  If we had a sound currency, then cash is king because all other assets get crushed in a mighty deflationary collapse.  As we all know the soundness of our currency is at question because of our massive government debt.

With the increasing deflationary forces I take in from the news everyday, I'm starting to suspect the Fed is actually undershooting how much money it needs to print (and actually put into the economy...printing is one thing, but injecting into the economy is another) to head off the deflationary forces.  What happens if the PIGS start defaulting (deflationary)?  There are 10's of trillions of USD denominated debt held outside of the U.S.  What if that debt is defaulted on before the U.S. goes down?

If there would be a big deflationary collapse / market collopase prior to any type of massive stimulus, I believe the USD would greatly strengthen.  Who in the hell would have any cash to buy up all of the crazy cheap assets?  Dollars would be quite scarce. 

I have to believe that ultimately we are headed for fiat currency hyperinflation, and not just in the U.S, but it might be a ways off.  Geitner/Bernanke are playing a very delicate game & one false move and they will cut their balls off with a deflationary death spiral.  Would they engineer some type of crash in order to garner politcal support for a massive stimulus 2.0?  A lot of the banks reserves are now in treasuries.  If there's a big market crash, the value of the treasuries will go up.

Personally, I'm holding about 70% gold & 30% in TLT (20+ year treasury etf).  I'm leaning towards the deflationary forces above.  If the market crashes, TLT will do will & I won't lose my ass, and I expect the worst gold would do is go down maybe 20% & most likely it would go up because of the fear factor.  I would have plenty of cash to reload into my gold positions, oil, & agriculture.  If there is hyperinflation, TLT gets killed, but gold will do decently.  If I knew more about options, I might go that route for TLT. 

I believe the entire world, including China, is in for a big slowdown.   I used to be a big China fan, but over the past few weeks I've changed my mind.  Who are they going to export to?  The U.S. is done.  Europe is done.  As China slows down with the rest, Japan's export economy which has barely kept them afloat for 20 years will start to disappear.  Australia has a huge real estate bubble looking for pin, and with China slowing down, there great natural resource economy comes to a grinding halt quckly.  Even Canada will have problems because they are in the midst of a housing bubble & if China slows down, their economy will take a big hit.  I think Germany has the best potential for coming out the best.

I think the standard of living needs to go down worldwide.  We've enjoyed an "unnatural" elevation in our living standard that mainly came from China's great credit card that was given to the U.S.  These excesses trickled down to many other countries.  Ironically, In the end I think it will probably be China who gets screwed.

Anyway, I don't have any type of financial/economic background.  I'm a novice at all of this.   Anything glaring wrong with my opinion?  I need someone smarter than me to help think through all of this.

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