By Bill Bonner
"One part slump…one part inflation…and one part who-knows-what. Of course, the feds are eager to put more inflation into the brew. If they had their druthers, the concoction would have more of a kick - with more exciting price increases and less depressing slump."
Read the rest
Showing posts with label Deflation. Show all posts
Showing posts with label Deflation. Show all posts
Friday, February 15, 2008
Sunday, February 10, 2008
Words from the (Investment) Wise
by Prieur du Plessis
The past week witnessed a turnaround in sentiment as renewed recession fears dominated investors' actions. Stock markets across the globe were subjected to selling pressure, while credit spreads scaled new highs. "What the market giveth [the previous week], it also taketh away [last week]," was Briefing.com's very apt description of events.
A particularly weak ISM Services report and the specter of bond insurer downgrades further reignited recession concerns, and reminded pundits of the words of Lily Tomlin, the American comedian: "Things are going to get a lot worse before they are going to get worse."
Randall Forsythe of Barron's offered the following commentary: "The Mardi Gras that's lasted four decades for the American consumer is drawing to an end, if it is not already over. After Fat Tuesday comes Ash Wednesday, which is observed today, and is the beginning of Lent, a 40-day period of fasting, self-examination and renewal for Christians, analogous to Ramadan for Muslims or Yom Kippur for Jews. Lower interest rates are a palliative, not a cure, for the economy's woes. Time is the only healer. Economists call that time a recession, and it can no longer be avoided."
Before highlighting some thought-provoking news items and quotes from market commentators, let's briefly review the financial markets' movements on the basis of economic statistics and a performance chart.
Read the rest
The past week witnessed a turnaround in sentiment as renewed recession fears dominated investors' actions. Stock markets across the globe were subjected to selling pressure, while credit spreads scaled new highs. "What the market giveth [the previous week], it also taketh away [last week]," was Briefing.com's very apt description of events.
A particularly weak ISM Services report and the specter of bond insurer downgrades further reignited recession concerns, and reminded pundits of the words of Lily Tomlin, the American comedian: "Things are going to get a lot worse before they are going to get worse."
Randall Forsythe of Barron's offered the following commentary: "The Mardi Gras that's lasted four decades for the American consumer is drawing to an end, if it is not already over. After Fat Tuesday comes Ash Wednesday, which is observed today, and is the beginning of Lent, a 40-day period of fasting, self-examination and renewal for Christians, analogous to Ramadan for Muslims or Yom Kippur for Jews. Lower interest rates are a palliative, not a cure, for the economy's woes. Time is the only healer. Economists call that time a recession, and it can no longer be avoided."
Before highlighting some thought-provoking news items and quotes from market commentators, let's briefly review the financial markets' movements on the basis of economic statistics and a performance chart.
Read the rest
Saturday, February 9, 2008
The Fed and The Sorcerer's New Apprentice
Uncle Sam Crying "Uncle!"
by Antal E. Fekete
Tertium datur
People tend to think in terms of black-and-white. Many of my correspondents think that either hyperinflation or deflation is in store for the dollar; tertium non datur (no third possibility given). I would say tertium datur. The third possibility is a hybrid of hyperinflation and deflation. I described this scenario in my previous article "Opening the Mint to Gold and Silver". It is possible, even probable, that we shall witness collapsing world trade and collapsing world employment together with competitive currency devaluations, as the three superpowers compete in trying to corner gold. The lure of gold is very strong. "There is no fever like gold fever" and, contrary to conventional wisdom, governments are especially susceptible.
A large part of the problem is that the Central Bank is helpless in the face of bond speculation. The Fed is no Sorcerer. It is the Sorcerer's Apprentice. It can pump unlimited amounts of "liquidity" into the system, but cannot make it flow uphill. As we shall see, new dollars flow to the bond market causing a lot of mischief there, instead of flowing to the commodity market as hoped by the Fed.
Up to now leading commodities have outperformed gold. That could change. A select few commodities might continue in the bull-mode for a time, although gold could easily beat them. Most other commodities might go into a bear-mode similar to that of the commodity markets of the 1930's. If that's what was in store, then most investors would be totally lost. They would be navigating without a compass. There would be endless debates whether the country is experiencing deflation of hyperinflation. Your motto in this hybrid scenario should be: "expect the unexpected".
Of course, the Fed will keep printing dollars like crazy. Few of them, if any, will go into commodities. Indeed, most of the newly created dollars will go into bond speculation. Why? Because commodity bulls are running into headwind and face grave risks. By contrast, bond bulls enjoy a pleasant tailwind. Bond speculation is virtually risk-free. Under our irredeemable dollar bond bulls have a built-in advantage. The Fed has to make periodic trips to the bond market in order to make its regular open-market purchases of bonds to augment the money supply. In order to win, all the bond speculator has to do is to stalk the Fed and forestall its bond purchases. This is the Achillean heel of Keynesianism: it makes bond speculation inherently asymmetric favoring the bulls, and that will ultimately derail the economy on the deflation-side of the track.
Friday, February 8, 2008
Looking Into a Gifted Horse's Mouth
Gift Card Sales Backfire
The whole idea of gift cards seems kind of silly. Why give someone a $50 gift card when it can only be used at one spot, while $50 in cash can be used anywhere? And if a person gives you a gift card back what's the point of it all?
Why not trade $50 bills and be done with it? Heck, why not save the effort and not exchange anything at all? I guess attitudes have not sufficiently evolved for that yet.
For whatever reason gift cards have become increasingly big business. People like them. Perhaps it's because they can buy whatever they want instead of having to go through the hassle of returning something too big, too small, too red, too blue, or too pink.
And Businesses like them too! Or at least they did.
Read the rest
The whole idea of gift cards seems kind of silly. Why give someone a $50 gift card when it can only be used at one spot, while $50 in cash can be used anywhere? And if a person gives you a gift card back what's the point of it all?
Why not trade $50 bills and be done with it? Heck, why not save the effort and not exchange anything at all? I guess attitudes have not sufficiently evolved for that yet.
For whatever reason gift cards have become increasingly big business. People like them. Perhaps it's because they can buy whatever they want instead of having to go through the hassle of returning something too big, too small, too red, too blue, or too pink.
And Businesses like them too! Or at least they did.
Read the rest
Thursday, February 7, 2008
Credit Crisis: Precursor of Great Inflation
The so-called "credit crisis" is gaining momentum. Investors increasingly question the solidity of the banking system, as evidenced by banks' tumbling stock prices and rising funding costs. With bank credit supply expected to tighten, the profit outlook for the corporate sector, which has benefited greatly from "easy credit" conditions, deteriorates, pushing firms' market valuations lower. In fact, peoples' optimism has given way to fears of job losses and recession on a global scale.
The obsession with a policy of lowering the interest rate is rooted in a deep-seated ideological aversion against the interest rate. It is a destructive ideology, in particular if the government is in charge of the money supply. Because then the government central bank will lower the interest rate to whatever is deemed appropriate from the viewpoint of the government, pressure groups, and vested interest. FULL ARTICLE
The obsession with a policy of lowering the interest rate is rooted in a deep-seated ideological aversion against the interest rate. It is a destructive ideology, in particular if the government is in charge of the money supply. Because then the government central bank will lower the interest rate to whatever is deemed appropriate from the viewpoint of the government, pressure groups, and vested interest. FULL ARTICLE
Wednesday, February 6, 2008
What if House Prices Fall by 30% Worldwide?
by Gary North
In the midst of local house-buying manias, the classic mark of the end is when buyers line up to buy a house and bid against each other. This is the best way to sell a house and the worst way to buy one.
Why do buyers do this? Because they have missed out again and again by offering less than the listed price. The buyers who offered the listed price bought the house.
[I did this in February, 2005 for my home. The other family thought that $90,000 for a 4-bedroom house was too much to pay. They were wrong.]
Then the panic escalates. Those offering the listed price get left behind. They wait too long. "Too long" means more than one day after the house comes on the market. They hesitate. He who hesitates is lost in a seller's market.
Read the rest
Tuesday, February 5, 2008
Commodity Conundrum
by David Petch
The following article was presented on Saturday, December 15th, 2007 for the benefit of subscribers.
Inflationary cycles are always manifested towards the end with rises in commodity prices that become equivalent to a black hole where money gravitates. Increasing the supply of money is the very definition of inflation, with rising prices being a symptom. Interest rate cycles tend to last 20-30 years starting from a decline to a base, followed by peak. Central banks use interest rates as the brakes of an economy and is the primary tool used under fiat currencies. Central Banks could stop printing money, but that would lead to a deflationary collapse, which is not a desirable outcome...so inflation it is. After interest rates rise to cool things on a Cycle Degree, periods of declining interest rates occur which will often see a decline in prices. Money is still being printed in the background, so the general overall theme is inflation, albeit maybe 1-2% instead of 15-20% near the end of the cycle. As economies begin growing with lower interest rates a credit economy emerges where companies and people essentially leverage their ability to purchase goods and pay it back later (a totally different concept than "Pay if Forward").
Towards the end of the credit cycle, inflation begins to grow due to expansion of the money supply and credit (due in part to the fractional reserve system used by banks). Rising interest rates eventually makes borrowing expensive, thereby quashing demand for things and causes scaling back in consumption sectors of the economy. During this phase, there is an increase in the amount of money circling the globe to try and find somewhere to park into something "tangible". Gold and silver and are often viewed as "tangible" items once the economy shifts from a credit economy to a "necessity economy" (paying only for the essentials such as heat, food, fuel for transportation etc.).
Supply and demand dynamics generally see commodity prices rise during the terminal portions of inflation cycles and decline during subsequent periods of disinflation. Once disinflation kicks in, commodity prices historically decline to near or below operational costs, which cause many companies to collapse. Once demand begins to outstrip supply, commodity prices begin to turn around.
Read the Rest
The following article was presented on Saturday, December 15th, 2007 for the benefit of subscribers.
Inflationary cycles are always manifested towards the end with rises in commodity prices that become equivalent to a black hole where money gravitates. Increasing the supply of money is the very definition of inflation, with rising prices being a symptom. Interest rate cycles tend to last 20-30 years starting from a decline to a base, followed by peak. Central banks use interest rates as the brakes of an economy and is the primary tool used under fiat currencies. Central Banks could stop printing money, but that would lead to a deflationary collapse, which is not a desirable outcome...so inflation it is. After interest rates rise to cool things on a Cycle Degree, periods of declining interest rates occur which will often see a decline in prices. Money is still being printed in the background, so the general overall theme is inflation, albeit maybe 1-2% instead of 15-20% near the end of the cycle. As economies begin growing with lower interest rates a credit economy emerges where companies and people essentially leverage their ability to purchase goods and pay it back later (a totally different concept than "Pay if Forward").
Towards the end of the credit cycle, inflation begins to grow due to expansion of the money supply and credit (due in part to the fractional reserve system used by banks). Rising interest rates eventually makes borrowing expensive, thereby quashing demand for things and causes scaling back in consumption sectors of the economy. During this phase, there is an increase in the amount of money circling the globe to try and find somewhere to park into something "tangible". Gold and silver and are often viewed as "tangible" items once the economy shifts from a credit economy to a "necessity economy" (paying only for the essentials such as heat, food, fuel for transportation etc.).
Supply and demand dynamics generally see commodity prices rise during the terminal portions of inflation cycles and decline during subsequent periods of disinflation. Once disinflation kicks in, commodity prices historically decline to near or below operational costs, which cause many companies to collapse. Once demand begins to outstrip supply, commodity prices begin to turn around.
Read the Rest
Monday, February 4, 2008
The Big Credit Squeeze
WASHINGTON (MarketWatch) - Banks are putting a stranglehold on credit, the Federal Reserve reported Monday.
Banks are raising their credit standards for mortgages, consumer loans and commercial real estate loans at a pace never seen in the 17-year history of the Fed's quarterly survey of senior bank loan officers, the Fed said.
Plain-vanilla business loans were also much harder to obtain, the Fed said.
Banks expect more delinquencies and charge offs for most types of loans to consumers and businesses, the survey said. Banks said they were tightening their lending standards in response to weaker economy, reduced tolerance of risk, and decreased liquidity in secondary markets.
The survey backs up the Federal Open Market Committee's comments last week that credit conditions had tightened considerably, a factor that led to the FOMC to slash interest rates by an unprecedented 125 basis points in two weeks.
Read The Rest
FMM Comment: Three things are happening here.
Banks are raising their credit standards for mortgages, consumer loans and commercial real estate loans at a pace never seen in the 17-year history of the Fed's quarterly survey of senior bank loan officers, the Fed said.
Plain-vanilla business loans were also much harder to obtain, the Fed said.
Banks expect more delinquencies and charge offs for most types of loans to consumers and businesses, the survey said. Banks said they were tightening their lending standards in response to weaker economy, reduced tolerance of risk, and decreased liquidity in secondary markets.
The survey backs up the Federal Open Market Committee's comments last week that credit conditions had tightened considerably, a factor that led to the FOMC to slash interest rates by an unprecedented 125 basis points in two weeks.
Read The Rest
FMM Comment: Three things are happening here.
- Banks are hoarding cash because Bank Reserves Go Negative
- People can't or don't want to borrow
- Banks can't or don't want to lend
Something the Fed can NOT do is force people to borrow. It can only sweeten the deal with low rates. So, if you are struggling to either inhale or exhale, you are suffocating, like the credit markets are doing now. It is just a matter of time, unless some "miracle" happens, before the credit market will turn blue in the face and collapse. And that, is called Deflation.
Sunday, February 3, 2008
Gold, the Euro and the US Dollar
By FX Insights Moderator,If you’ve spent even just a brief amount of time at FX Insights, surely you’ve noticed how close we watch and track the EUR/USD’s market correlated variables… and just to give the term a proper definition, my definition of what a market correlated variable is:
"A non-Forex factor that has direct connection to the EUR/USD and to the EUR/USD’s price fluctuations."
To put it another way, market correlated variables are factors happening outside of the Forex world, yet have major direct impact on whether the EUR/USD goes up, goes down, and to what degree these moves may occur.
Trading: Primarily, gold is traded on the NYMEX. For gold, there is a spot market, a futures market, and an options market. Gold is traded by everyone from the small potatoes retail investor all the way up the ladder to large banks, hedge funds, institutions, and further on up to the central banks of the world.
Major reasons why gold is purchased: Gold is purchased as a hedge against inflation. Gold is also purchased in “response” to a weakening currency, which in the case of the EUR/USD, gold is and would be purchased as the value of the dollar falls against the euro. Gold can be bought and gold can be shorted, just like a currency can in the spot FX market.
Gold and central banks: Although both the dollar and the euro are fiat currencies, the Fed and ECB have vast gold holdings within their reserves. One way the Fed and ECB control and manipulate the value of their respective currencies is by trading their vast gold reserves. The ECB is especially notorious for dumping many tonnes of their gold on the market at certain times of the year to “cool down” the value of the euro against the dollar. Gold is a powerful market manipulation tool at the hands of the central banks, and the market usually only learns of a central bank’s gold operations after the fact…
Key gold facts: The main reason why the commodity of gold is highly correlated to the EUR/USD is because gold is denominated in U.S. dollars. Gold and the USD share an inverse correlation… think of it this way, when gold is purchased, the USD is sold… the selling of any currency will naturally devalue that currency, so as gold is purchased and the price of gold rises, the value and “price” of the USD must fall because of the inverse correlation that exists between gold and dollar.
It’s my understanding that in 2001 gold began making a very strong resurgence which has ultimately led to this commodity making all-time highs in the $940’s…
This past week the USD/CHF went to post-World War II lows while gold was making all-time highs. Going back to 2001, look at the EUR’s climb to dominance over the USD… looking at the big picture, the EUR/USD has moved up in tandem with gold, while the USD Index has moved against gold and the EUR/USD…
Other key facts about gold and the USD: As we mentioned earlier, gold is denominated in U.S. dollars. So lets think about it… if the dollar is strong, you could buy more gold, literally getting more bang for your buck… a weak dollar buys less gold… here we have yet another reason why the weak dollar will only keep upward momentum going for gold – as long as the USD stays weak, the market stays bearish on the USD, gold naturally has to stay strong and has to rise, which then naturally correlates into the EUR staying bullish against the USD.
Gold and inflation: Back in the late 1970’s and early 1980’s U.S. inflation was absolutely out of control, and this runaway inflation issue took gold up to almost the $900 level, which must have been a staggering price back in those days… the Fed had to raise interest rates several hundred basis points very rapidly to slow inflation and this eventual mega rise in interest rates caused gold to loose half of it’s value and by 1983 gold was in the $400’s.
So as you can see, inflation is another key factor in the value of gold… when inflation rises, gold rises, but when a central bank steps in with interest-rate-raising tactics to slow inflation, gold will fall in value accordingly… and following this natural progression… higher rates = less inflation = weaker gold. Higher rates = a stronger dollar and a stronger dollar = weaker gold…
In many ways inflation is reflected in the price of gold which is then reflected in the price of the EUR/USD as more times than not gold leads the EUR/USD…
Practical exercise: I’d like to pause and take you through a practical exercise… this is how I think things through and how I attempt to forecast the market and formulate a predictive view of the EUR/USD… this is the kind of stuff that goes on in my head, so I’m going to do my best to communicate it as simply and clearly as possible…
First, I always start with interest rates… interest rates, as you’ve heard me say a katrillion times are paramount in the spot FX market…
For now I see the Fed in a rate cut cycle and the ECB in a rate hold cycle, at least through the spring of this year… I think the Fed can cut rates another 50bps or more before it’s all said and done. So going forward starting with interest rate cuts, here’s how I think it through:
1. Fed rates stay at 3.00% and possibly get cut further
2. Low rates and rate cuts weaken and devalue the USD
3. The weak USD correlates into higher gold prices
4. Higher gold prices correlate into the EUR/USD continuing to make bullish gains
5. Rate cuts and weak USD lead to rising U.S. inflation
6. Rising inflation leads to buying of gold, driving gold prices higher, driving EUR/USD higher
7. Rising inflation causes the consumer to slow spending, which further weakens the USD
So, that’s my logical way of thinking through what’s happening within the market under current conditions. The Fed seems reluctant to combat inflation and hell-bent on trying to stimulate growth and appease global markets with heavy rate cuts, so I believe this will naturally lead to more gold gains which should keep the euro supported against the dollar, at least until the Eurozone fundamentals really start turning south and the ECB begins following the Fed with rate cuts of their own, at which time we should see some rapid declines in the value of the EUR vs. the USD.
Gold and recessions: Currently, the hot debate is whether or not the U.S. is in a full-blown recession, the start of a recession, or a few negative GDP reports away from a recession… I’m not a college-degreed economist, so I can’t give you the textbook answer… personally, I look at two key things to help me determine a U.S. recession situation, and those two factors are gold and the employment situation (which then trickles down to the death of the consumer).
The rapid rise in gold prices and the rapid decline in new job creations, the loss of construction and manufacturing jobs, the rise in new and continuing jobless claims and the almost 100bps rise in the unemployment rate signal a real recession… and I think these signals were obvious many months ago when gold really started taking off…
But here’s where it gets a little weird with gold and recessions – believe it or not, history has shown us that when the U.S. is in a full-blown, established, and recognized recession, the price of gold has stabilized and or declined! So this means if all the world’s economists put their heads together and officially declare that the U.S. is in a recession, we could see the price of gold level off or drop, which could push the value of the USD up against the EUR…doesn’t make much sense that the USD could strengthen during a recession, but it’s certainly possible…
Gold and trading the EUR/USD: Here’s where we get practical when it comes to using gold as an indicator to trade the EUR/USD…
Quite simply, I am watching the spot gold market just as much as I’m watching the EUR/USD price action… moves in the price of gold more often than not will lead moves in the EUR/USD… gold is a tremendous leading indicator… if I’m trading the market intraday, I’m watching every little uptick and downtick with gold… I watch the NY spot gold market like a hawk…
If you’re one of our many tech traders trying to wean off the techs and learn how the EUR/USD really moves and why it really moves, you’d be well served watching the spot gold market as a key indicator… do yourself a favor and compare a 1-week gold chart to a 1-week EUR/USD chart, pick any week really, and you’ll see what I’m talking about…
There’s really no way I can glamorize the gold-EUR/USD correlation… it’s fairly simple and fairly cut and dry… it’s not a magic bullet indicator, and as I always say, there’s no such thing as “always” in the FX market, but gold is a highly probable and fairly consistent market correlated variable.
If you don’t track it or use it as a trading indicator, I encourage you to begin doing so… it’s only going to enhance your trading and give you more wins vs. losses as it will paint a clearer picture of market direction.
When the spot gold market is volatile you can expect the EUR/USD to be volatile… when gold decides to find its next top and correct, you can likely expect the EUR/USD to correct with it… the overall euro fundamentals do not warrant the value of the EUR/USD to be north of 1.4200, however, because of market correlated variables like gold being on such a bullish run, the euro naturally has to come up with it…
Again, of all the market correlated variables like oil, bonds, and equities, I believe the tightest overall correlation exists between gold and the EUR/USD.
Lastly, based on past experiences, I know there’s somebody or several somebodies out there who’ve read this and are thinking, “So if gold goes up, what does the EUR/USD do?” If you’re not sure, find me in the chat and ask, I can always use the amusement…
Saturday, February 2, 2008
What Will You Do With Your Gold?
by Gary North
This assumes you have bought some gold.
A lot of my readers have read my recommendation – "Buy some gold" – for six years. They still haven't bought any. They apparently think it's good enough to have read a few reports on the importance of buying gold. "Now I don't actually have to buy any." It's like an overweight person reading a diet book while munching on Fritos and bean dip.
There is an astounding amount of misinformation on gold available on the Web. This shows the tremendous impact of the Web. Back in 1995, this misinformation was far more limited in its scope.
Here is the main piece of information: "Gold! Gold! I'll be rich – rich, I tell you! Hahahahaha."
No, you won't. Here's why.
Thursday, January 31, 2008
Stagflation dilemma haunts euro
But other analysts say European growth worries are premature
LONDON (MarketWatch) -- When it comes to the threat of stagflation, the European Central Bank has appeared much more worried about the inflation portion of that dreaded compound word than signs of a stagnating economy.
But some foreign exchange analysts say Thursday's muted reaction by foreign-exchange and fixed-income markets to another round of troubling euro zone inflation data increased the likelihood that policymakers may soon pay more heed to signs of slowing European growth.
Stagflation describes a period of low or negative growth and high price inflation. Signs of the latter have been evident for a while, and more evidence emerged Thursday.
LONDON (MarketWatch) -- When it comes to the threat of stagflation, the European Central Bank has appeared much more worried about the inflation portion of that dreaded compound word than signs of a stagnating economy.
But some foreign exchange analysts say Thursday's muted reaction by foreign-exchange and fixed-income markets to another round of troubling euro zone inflation data increased the likelihood that policymakers may soon pay more heed to signs of slowing European growth.
Stagflation describes a period of low or negative growth and high price inflation. Signs of the latter have been evident for a while, and more evidence emerged Thursday.
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