Reality Lags Perception

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Davos's picture
Davos
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Reality Lags Perception

Reality Lags Perception

That isn't my line, I didn't coin it - though I wish I did. But I'd like the opertunity to expand on it.

I read it in Secretary Paul O'Neill's book, he was our 72nd Treasury Secretary and I would say he was the best Treasury Secretary we ever had.

Mr. Cheney fired him.

Thanks Dick!

Mr. O'Neill recommended massive tax hikes, massive spending cuts and an attempt to balance a deficit before it got to $500,000,000,000.00. As of March 2009 the CBO is forecasting a deficit of $1,850,000,000,000.00.

It got away. We went from 500 billion to close to 2 trillion in just a few years. Like Dr. Al Bartlett says, 'Most people do not understand exponential growth, yet the concept is of fundamental importance.'

Mr. O'Neill, like I and many other bloggers, believe that deficit's DO matter. We are now at a point where one week of bond auctions amount to half the budget deficit that Mr. Oneill advocating containment of.

You might want to pause a second to reflect on that statement.

In his book Paul O'Neill revealed that 'Reality lags perception' was actually a guiding principle of the past administrations. If your not familiar with a guiding principle I read a book 'Fast Company' on them, they are a jig that anyone in the organization can run data through to make a decision without a boss having to delay the yes/no process.

We are going to war for:

  • Perception #1 Weapons of Mass Destruction,
  • Perception #2 to democratize Iraq,
  • Perception #3 to fight terrorism.

I think terrorism is the most recent reason, I might have missed a few or lost track. There have been so many reasons that I can't keep up. Regardless of the perception de jour, the reality is that 5,000 of our soldiers have died and many more are still in harms way. Of course, I must be geographically challenged because I thought that the kin to the people who they let fly on 9.12.2001 (when everyone else was grounded) was in Pakistan or Afghanistan, not Iraq.

Personally, I'm a big boy, I can take the truth and I imagine everyone else can, I think we are in Iraq because if we weren't there would be a lot less oil on the market and the world's economy would be suffering even more.

...if we continue along the present course, the safety of American troops in the region, of our friends and allies like Israel and the moderate Arab states, and a significant portion of the world’s supply of oil will all be put at hazard.

Oil, to the State Department is a matter of National Security.

I would not dissagree with them on that.

But I digress, I'm not writing a political statement, I'm simply stressing that we go to war for a reason not reason's that change when proved false. The Gulf of Tonkin incident that was later proved false, it created a war where 58,000 soldiers died - however the reason for going to war didn't change like underwear changes.

....and that the Gulf of Tonkin incident may well have been fabricated as a means of drawing the U. S. into the Vietnam war. All these things have been rumored for years, but Bamford draws upon all sorts of official sources to nail them down.

Again, this is how reality lags perception. And, if the perception is changed each week then the reality can lag even further behind. My 17 year old daughter is great at this when it comes to progress reports and school work. Keep on her, keep the perception from becoming fluid and we get a 3.95 grade average and advanced placement courses, let her change the story and the D+'s appear on the reality report card.

Today I shun the TV, I don't have cable or for that matter even a digital converter box. I try to stay away from the mainstream media and focus on 25 of what I consider to be the best economic blogs.

Jim Rogers, one of the world's greatest investors can say in 15 words what took me 45 words: "Getting your investment advice from the government or TV [and] you are bound to go bankrupt."

Until I heard him say that, I have to admit, I felt a little bit alone in my views on where I get my financial information from. Many friends would question me about this. Blogs to them are like yellow journalism. When a successful author and billionaire endorse what I believed to be true it is very reassuring.

By the way, that link I found on Michael Covel'sl bog, it is part of his new movie "Broke, the New American Dream."

And, in case you missed it here is what I consider to be two better resons why I shun cable financial "reporting." I mean come on, when we have to go to a comedian for acurate financial data then who is the joke really on. Who is really the clown here?

Reality lags perception.

Another clip.

Today, when I visit the blogs I see two camps. Inflation and Deflation. Black and white, "A" or "B."

I myself see "C." We can and I think likely will have "hyper-inflation" as the result of a dollar collapse. I think it is underway right now. I'm talking a Zimbabwe style dollar collapse.

Austrian Economics taught us that if we increase (inflate) the money supply that the value of the money decreases and prices rise. To me this is the true meaning of inflation. I think the seashell story expounds on this.

Right now Camp A and Camp B seem mired in where the money is. If "we" destroy our dollar will it matter if the money leaves the banks or stays in the banks? 

No.

Which brings us to the reality of the situation: We can not sell enough bonds to service our debt. Bond sales are anemic. They can not sustain a weekly offloading of a quarter of a trillion dollars of debt! When Paul O'Neill was fired $230,000,000,000.00 was pretty close to half of the entire projected deficit. Now we are exceeding a $1,850,000,000,000.00 deficit. A 1.85 trillion dollar deficit, and we can't find enough foreign or domestic bond buyers to service that massive shortfall.

We can't pay our bills!

One word, and one word only comes to my mind: Insolvent.

Nate Martin http://economicedge.blogspot.com/ has recently compiled a series of excellent readings about this weeks bond sales. After reading his articles which pointed out that foreigners were becoming net sellers I was on Barry Ritholtz's "The Big Picture" blog, another top blog in my Google RSS Reader. Barry had posted a piece by David R. Kotok, here is some of it:

1. Fed policy is on hold at Quantitative Easing (QE), which means short-term interest rates near zero and plenty of liquidity in the financial system. The Fed has said it will continue this posture for a period of time. Markets do not expect any change until well in to 2010 at the earliest.

2. The much-feared Obama healthcare initiative seems to be stalled. Markets are relieved, because this initiative, as it was presented, amounted to a huge transfer payment that would be funded by future tax increases. The tax hikes would come on top of those already discounted by markets. Lifting the double tax whammy has given stocks a boost.

3. Foreigners are buying US Treasury securities again, and that has quieted the fearmongers who have been crying that the US will be abandoned and the dollar will face a crisis. That may still occur, but the day of reckoning for our fiscal profligacy seems to be postponed. Markets like dodging this bullet.

I agree completely with point 2. Jim Puplava of the Financial Sense News Hour with John Loeffler has explained in detail that a 1.6 trillion dollar health care plan with no means of funding will not have a positive effect on our economy. While I'm sure that initially point 1 will keep rates down I'm less certain that Quantitative Easing is optional. I totally disagree with point 3. So I emailed David seeking clarification. He differs with Nate's view, but wasn't specific as to why.

Nate was quite specific and offered facts or substance to the tune of $15,600,000,000.00:

Another Piece of the Money Trail…
As I’ve been mentioning in my reports on the flow of Treasury International Capital (TIC Flows), foreigners have been net sellers of our debt. This last report, released July 16th, shows a net outflow of foreign private capital of $82.2 billion and the outflow of foreign official flows were $15.6 billion.

[TIC Whitepaper on page]

Call me names, call me a fear monger - but the bottom line is I stand behind Nate's question: If the primary dealers are buying then where is the money coming from? It is a most valid question. If "we" have to counterfeit money to service our debt I have to be very honest - that frightens me. A lot! Maybe, just maybe I'd feel a little bit better if we didn't have falling revenues or if hiring was taking place where I was assured that revenues would pick up. But that isn't the case, and a good part of the bond sales are for the Regan era debt. In other words foreigners who bought bonds then - now have instruments which have matured - and we have to borrow money from them or print it to pay them. We do not have the money to pay them back. Instead we have a deficit that is many times larger.

Printing money inflates the money supply, it causes prices to increase.

I continued reading David's piece and I saw something that stood out. To me it had PERCEPTION written all over it:

At the end of next week, Peter Demirali and John Mousseau will join us at another sweet spot, in the village of Grand Lake Stream, Maine at Leen’s Lodge for the annual Shadow Fed fishing retreat (nicknamed Camp Kotok by Becky Quick). CNBC will be broadcasting live on Friday, August 7, starting very early in the morning and running for much of the day. We are 34 attendees, plus Steve Liesman, Matt Greco (a Squawk Box producer), and the CNBC crew. The attendees are by invitation only and have traveled from as far east as Abu Dhabi to as far west as Vancouver and Newport Beach and from as far south as Dallas. We have booked the entire camp and will be testing its capacity.

Like Jim Rogers said: "Getting your investment advice from the government or TV you are bound to go bankrupt." Like Mr. O'Neill said: "Reality (insolvency) lags perception (good market news)."

Take care, D. "Davos" Sherman Okst AKA a Fear Monger

JAG's picture
JAG
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Re: Reality Lags Perception

Great work Davos!

I share your fears and you make a very good argument for a dollar collapse.

Its amazing how productive one can be when they remove the idiot box (TV) from their personal space. 

Now, I'm going to expect work like this from you on a regular basis.

Thanks.

SagerXX's picture
SagerXX
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Re: Reality Lags Perception

 Will comment on this (massive, yugely annotated) post (that obviously involved a lot of hard work & thought) when I have half a mo' to read it thoughtfully.  

Viva -- Sager

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LogansRun
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Re: Reality Lags Perception

Excellent post Davos!  IMO, people that poo poo investment/economic blogs are in real trouble!  You've done an outstanding job of validating you opinion and I will say, I agree with everything.  You can't trust the gov't, the media and you MUST trust yourself.

Best!

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johnbryson
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Re: Reality Lags Perception

Hi Davos,

I completely agree that inflation and even hyper inflation is on its way. However, the question for me is the timing. With commercial real estate looking like it will cause more banking troubles, I wonder whether we will not have another round of deflation before inflation starts to pick up. Also, wouldn’t it take time before dollars from bond sales etc, to make it into the real economy?

Cheers,

John

Davos's picture
Davos
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Re: Reality Lags Perception

Hello John:

I'm a minority on this point - I don't think the dollars will need to leave the banks holding pattern. My take is once the Fed monitises the continued shortfalls between bonds sold and bonds auctioned the dollar will de-value.

I do think there are a million variables. Like you said 3.5+ trillion in CRE and the additional 1.5 trillion in Alt-A's and Option Arms. Both of those I imagine could lead investors to move out of equities and into "securities" if/(when) the market takes another October 2008 punch.

But my intent of the loooonnnnnng piece was just to provoke thought on 2 things:

  • I think there could be a C outcome as mentioned here and above
  • The media and BEA and BLS really skew perception

Again, this is just my take, I'm no financial planner, wizzard, have no crystal ball, I'm just a blogger that reads a LOT!

Take care

Nichoman's picture
Nichoman
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Re: Reality Lags Perception

 @Davos,

We share similar thoughts (I posted part of Nathan's views a few days ago).

My sense is we are in a type of "Gov't Debt Bubble" that will burst (possibly fairly soon).

BTW...in some ways...my concern is were still naive...if not too optimistic to what can/will happen.

 

Nichoman

 

SagerXX's picture
SagerXX
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Re: Reality Lags Perception

 (finally read Davos' whole post)

Hunh.  I hadn't thought of how Healthcare For All going down the tubes (as it most surely is IMO) would make the markets feel all perky.   

Reality lags perception.  I suppose -- being a guy who went short the Dow just before it had that l'il dip that took it down near 8000 (and is still short the Dow 1000 upticks later) -- I can take some comfort from thinking that when Reality catches up, I'll be in the right place (and'll just have to wait longer to see upside if the Dow does a swan dive).  

And I guess since my reality these days is trying to cheese my way over thin ice for another 6-12 months before I'm able to make the next couple of large changes necessary IMO to thrive in the coming years, I can mostly ignore the fact that this market upswing doesn't materially affect my prep (inasmuch as my ongoing annoyance/disbelief at every "The Dow was up another 123 points today!" market report on the radio doesn't make me wanna drive my car off the road).  The amount of money I have in the market is pretty miniscule, and I see my next prep stage as being 95% about relationships and building more of same (with like-minded peeps who are Busy Doing The Right Things to be ready).  

Having thereby consoled myself, I must say Davos' summary lays out in neat detail:

1.  That the rank and file still don't get it; 

2.  TPTB know this and exploit it the way a Zamboni exploits ice;

3.  Because of 1 & 2, we will at some future point see another big honkin' downleg and the rank and file will take another pimpslap (followed by another round of bailout-ish activity, and further looting/destruction [of pension funds etc.]).

Which'll keep me scrambling down my prep road.  

We Happy Few are trying to make what use we can of the lag between reality & perception (I hope).  

Deft as they have thus far proven themselves, TPTB at some point will either stop juggling or will drop a few balls.  At which point perception will adhere to reality in a really unpleasant way.   I'd like to be out of the way when that happens.  

Thanks again, Davos.  Quite the worthy opus!

Viva -- Sager

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Cloudfire
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Dear Mr. Monger . . .

 

Dear Mr. Monger;

Great post!  I am similarly positioned . . . Though I can't say that I am sufficiently nimble in mentally juggling mega-numbers to make the inflation/deflation call based on sheer rationality, my gut (admittedly unscientific, but frighteningly accurate) just keeps telling me that it'll be inflation in the long run.  At any rate, it makes much more sense to me to own things that will have real value, regardless of the perceived value of those paper things.  It's tempting to hold cash, "hoping" to make a killing in the event of deflation . . . but that strategy assumes that the dollar, as an institution, can weather the storm . . . No, I'd rather own things with real, lasting, and indisputable value, thank you very much . . . .

Sincerely,

Mrs. I. Lee Skeptical

 

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DrKrbyLuv
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Re: Reality Lags Perception

Davos,

I feel like I know you because you help bring me the news every morning.  I'm glad that you stopped back here (forum) with a progressive and finely written article.  I try to avoid saying anything too controversial in the front room where you and CM provide the meat of this mission.

Anyways, you're here, so I want make one comment and then ask a question.

Comment - the private Federal Reserve holds a monopoly that allows them to "control and issue" virtually every penny in our economy.  It comes down to 5 banks on Wall Street that control the NY Fed.  Consolidation and contraction (monopoly) serves the international cartel.

The big "6" corporate conglomerates control almost 96% of our TV, cable, music industry, movies, radio stations, Internet service and international news services like Reuters, Bloomberg, etc.

Question - do you think that this crisis is an accident, or incompetence, or the result of random greed?  Do you suspect that the lies and coming bankruptcy happened without somebody pushing the buttons?

Larry

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