Tuesday, May 19, 2009

Weimar Watch

The latest from John Hussman, who's nailed the economy and financial markets for years and has the performance record to prove it:

The bottom line is that the attempt to save bank bondholders from losses – to provide monetary compensation without economic production – is not sound economic policy but is instead a grand monetary experiment that has never been tried in the developed world except in Germany circa 1921. This policy can only have one of two effects: either it will crowd out over $1 trillion of gross domestic investment that would otherwise have occurred if the appropriate losses had been wiped off the ledger (instead of making bank bondholders whole), or it will result in a stunning and durable increase in the quantity of base money, which will ultimately be accompanied not by a year or two of 5-6% inflation, but most probably by a near-doubling of the U.S. price level over the next decade. As I've noted previously, the growth rate of government spending is better correlated with subsequent inflation than even growth in money supply itself, particularly at 4-year intervals. Regardless of near-term deflation pressures from a continued mortgage crisis, our present course is consistent with double digit inflation once any incipient recovery emerges.

Read the full post here. Don't forget the Fed's position on this.


Anonymous Anonymous said...

Yellen's categorical dismissal is amazing.

5/19/2009 10:15 AM  
Anonymous Anonymous said...

Chorus: In a hurry to offload their debt obligations, and in a hurry
to be private again.

Dow 14000 soon??

perhaps the financial crisis has been fixed according to various indicators such as libor and yield curves as written in more detail http://iamned.com/blog/ very compelling

5/19/2009 1:53 PM  
Anonymous Anonymous said...

dow 14000 soon according to experts


5/19/2009 1:53 PM  
Anonymous Thomas Daulton said...

I can't access the link from work, due to Internet filters, but iTulip.com has a recent post where, after giving guarded opinions about several abortive market rallies, they now assert that the recent uptick in various commodities is the starter's gun for years of crushing inflation.

Oil for example is almost double what it was at the market bottom only several months ago, even though it hasn't retaken the stratospheric heights of a year ago. Problem is, by now we have used up all our economic weapons and have nothing left to fight with.

I find iTulip's estimation of "what happens next" to be plausible and very frightening. They believe the Obama Administration will spend the rest of their 4 years muddling through exactly like is happening now -- showering astronomical bailouts of taxpayer monies on favored companies on a case-by-case, ad-hoc basis rather than fixing the broken system -- all the while touting an illusory "economic growth" which only exists because government economic statistics are intentionally falsified. Most people following these issues should know by now that, if we measured unemployment using the method we did during the Carter Administration, it would today be double the official statistic; inflation would be well over 150% of what is reported. So for the next three-and-a-half years, "Mr. Hope and Change" will rest on the laurels of an anemic 2% economic growth which, for the man on the street, is more than reversed by the additional hidden 6 percentage points of inflation which the government simply deletes from the books.

I agree with Anon above me that a Federal official labeling "ludicrous" the connection between printing money and inflation, is even worse than 'amazing', particularly given all the spectacularly bad market calls made by various Fed officials and CEOs in recent years. I have strong beliefs, but if I were in a position to be quoted about the economy, I'd not only be hesitant to be quoted -- I'd _ALSO_ be hedging all my policies and actions to prepare for the eventuality that my predictions might be dead wrong. I shoot off my mouth because I have nothing to lose by it; Yellen _OUGHT TO_ have something to lose by it, but as TCR has shown conclusively, she doesn't. Accountability is a thing of the past. Hence, Yellen, like me, can afford to shoot off her mouth. Who's going to call her on it later? Just a couple of obscure bloggers with no political influence.

Her brazen-ness is perhaps a reflection of Fed policy as a whole. They have learned the lesson of Wall Street: you can be dead wrong, and obviously wrong, but as long as you're very loud about it, people will trust you, consider you an expert, and think that your bloated salary is justified. Even after your predictions blow up in your face and others', you'll still be welcome on the five-to-six-figure lecture circuit. Where's the downside?

5/19/2009 2:01 PM  
Anonymous Billy "Boxcar" Soetoro said...

I think Hussman's explanation of the status quo is excellent. However, methinks his leap toward those two exclusive outcomes is specious.

Historical inflation has certainly correlated with government spending. But the key word is 'correlated.' Other key words in Hussman's article are "is consistent with" and "our present course."

Surely one of the greatest annoyances committed by the Fed in recent times - that is beyond their mere existence - is their commitment to gradualism in effecting rate policy. Certainly this has contributed to their poor performance in the run-up to rapid bubble formations and deflations. But this does not necessarily mean it will hold in the reverse, citations of the national accounts identity notwithstanding. (Oh, but I know, it's ontologically true!)

Surely as well the current policy of concomitant securities purchases and issuances by the Fed is nothing more than an accounting farce - a makeshift holding pattern that will have inflationary consequences if held long enough into the future. But the question of whether such policy can and will be reeled back gradually through the natural maturation of existing securities, new growth, new exports, and the opportunity for other regulatory measures such as raised capital requirements, such that inflation might be contained while minimizing the effect on real long-term growth, has not been answered. What matters first - if we believe the Fed matters at all - is whether the Fed is back in a position of pulling or pushing on the proverbial string. That game hasn't even started yet.

Of course there is always concern for the matter of competence and performance, and so goes the entire history of the Fed's uncanny ability to always find new ways to justify its own existence. But to insist that the Fed's actions as perceived today all but guarantee some gross historical remission toward monetary disaster, is still highly questionable. It is as questionable as the "investment" component of the NIM identity itself. If there is anything we've learned from this crisis, it's that the demand for money does not necessarily follow supply. I realize there is a real distinction to be made between short and long run, but the nature of any long-term credit extension, micro or macro, only begs every other question of timing and real underlying production during the interval. It turns out that, whether or not the Fed's attempt to stop panic is truly effective or not, personal savings has risen and the trade deficit has begun to move downward.

As for the matter of one or more creditors commiserating on the delinquency or unjust dispensation of another group of creditors, or warning that another shock is inevitable, it should be noted, though it rarely is, that no member of the creditor class hedged with the appropriate government securities, including those seeking to trade corporate debentures, will be victimized beyond what can be described in incremental terms. If any individual investor in 2009 wants to make pronouncements on future macroeconomic phenomena apart from what is represented in their own private mix of puts and calls, it might first be acknowledged that there is more uncertainty due to private leverage in today's "global" economy than any current public models are capable of predicting, and particularly more than the Fed could ever be responsible for with a $4 Trillion balance sheet. There is no moral excuse, for example, for rampant origination fraud in low interest rates or dilution remedies, any more than there is an excuse for burglary in dinner party invitations or property insurance.

And, ultimately no investor should not need to wait on the Fed's permission to bet against it, if that is truly the strategy we believe will work for us or our clients.

5/19/2009 3:54 PM  
Anonymous KAIMU said...


We hear a lot about comparisons to the 1929 crash and the FDR stimulus of the 1930s. Also OBAMA is compared to FDR. To be honest none of that is a fair comparison. There may be small parts that rhyme, but most does not.

During the 1929 stock market crash, regarded by many as the worst on record, the US GOVERNMENT based on US TREASURY numbers then was in a surplus of about $740milUSD. That surplus carried on into 1930. Back then that was a lot! Now days millions are small ... TRILLIONS are a lot!

Only during FDRs job work programs did the deficits appear in substantial numbers growing to a zenith during 1937 to $2.37BIL USD deficit from a surplus in 1929. So spending was rampant. Based on tax revenues(receipts) and withdrawals(outlays) during the 1930s FDR was spending at a rate of 2.4 times receipts. In other words for every $1 the US TREASURY took in $2.40 was spent by FDR.

Based on the current US TREASURY DAILY STATEMENT, dated Friday, May 15, 2009 the total the OBAMA regime has spent(outlays) so far during FY2009(started in Oct)is $7.588TRIL USD. With a "T"! Total FTD tax revenues(receipts)for FY 2009 is $1.294TRIL USD. That means that OBAMA is spending at a rate of 5.86 times receipts(nearly 6 times). In other words while FDR maxed out at $2.40USD spent for every $1 in revenues, OBAMA is now spending way more than double FDRs rate and OBAMA has not even started the Stimulus! So OBAMA spends $5.86USD for every $1USD of tax revenues.

The idea that OBAMA can announce a $3.6TRIL FY 2010 Budget while he is spending double that right now on FY2009 is as ridiculous as Yellen's comments about inflation. If "spending" is not part of a budget then the budget is a joke.


5/19/2009 4:57 PM  
Anonymous Goldhorder said...

And thank god i've been betting against them since the nasdaq bubble popped...and i am going to keep betting against them...anybody who invests in us stocks is foolish. Wall street has proven itself as a den of thieves. No amount of money printing is going to change that anytime soon. Lol. With any fiat currency the only thing that matters is public confidence. Americans haven't seen the light yet...but the charade won't last much longer.

5/19/2009 6:00 PM  
Anonymous Anonymous said...

What exactly is the accountability process for someone like Yellen? Is there one?

5/19/2009 8:35 PM  
Anonymous Anonymous said...

Billy S, good post.

5/19/2009 8:53 PM  
Anonymous Ed said...

Good point about FDR. He and his Congresses were surprisingly fiscally responsible -spending was cut in some areas even in 1933 and I think they ran a few surpluses before the war. The focus was more on what we would call "structural reform", which we are promised but haven't seen. There isn't anything like the legislation creating the SEC that has surfaced yet.

Ugh. Time to buy more anti-inflation hedges.

5/19/2009 11:02 PM  
Anonymous KAIMU said...


Ed ... the US GOVERNMENT had Budget surpluses in 1929 and 1930. From 1931 to 1946 there were no surpluses as FDR spent on job works programs and WW2. In 1947 the US GOVERNMENT had a surplus of $4.018BIL USD(after WW2). During WW2 the peak outlays were in 1945 at $92.712BIL USD. After WW2 the spending was cut more than half due to military budget cuts.

To put this whole FIAT thing into perspective at the height of WW2 the US GOVERNMENT spent $92.712BIL USD mainly in two theatres of War in Europe and Asia. The US MILITARY budget for FY2009 is around $633BIL USD if you count supplemental and off budget. We were in WW2 "officially" for six years from 1939 to 1945. If you total military dead with civilian dead then total number of people who died during WW2 was around 61million people. So the entire US MILITARY outlay for 2009 is 680% higher than the entire US GOVERNMENT FY1945 outlays that included the cost of WW2.

So spending, whether on WAR or PEACE, in this modern era is the very definition of INFLATION.

Lets dig deeper into the years from 1789 to 1849, that 60 years. If you add up all the spending during that 60 year period it totals to $1.090BIL USD. We spend more than that on one day of Medicare.

From 1850 to 1900(50 years)total US GOVERNMENT spending was $15.453BIL USD(around $8.3mil was spent on the US Civil War by both the North and South). We now spend more that the entire cost of the US Civil War in one day on food stamps!

So war has gotten a lot more expensive and seems to be lasting a lot longer. WELFARE, which is nothing more than just US government PROMISES has replaced the bulk of government spending than warfare did in the years from 1789 to 1900. WELFARE is the "bribes" that keeps the American public from rioting. Would this Nation be any different from China if there were no unemployment, social security, medicare, FDIC? In fact all major US Banks would be in line with Lehmans if it were not for the US TAXPYER, but tax revenues in America have been collapsing at an alarming rate. As I have pointed out OBAMA is spending at a rate more than double what FDR was, nearly 6 times over total receipts. FDR only spent 2.4 times receipts. Thats total FTD, which includes "all" forms of taxation, not just payroll, but estate, excise all combined.

Why bother with US INCOME TAX at all if spending is this far gone. Who is it we are really fooling? What lunatic out there really believes the USA will pay off its debts and unfunded liabilities.

The last US PRESDIENT to precide over this Nation with ZERO National Debt was Andrew Jackson, back in 1835. Ever since then America had been accumulating huge debts. The US National Debt now stands at $11.3TRIL USD. According to Dallas Fed governor Fisher, the total unfunded liabilities(owed to future retirees) for Social Security, Medicare and Medicaid is at $101.2 TRIL USD ... Current US EXTERNAL DEBT(owed to foreigners) now stands at $13.642TRIL USD. Our elected leaders can renege on the unfunded liabilities which would mean whatever you paid into SS/MED was for nothing. Universal Healthcare will be used to renege on this debt. We cannot renege on the other DEBT totaling nearly $25TRIL USD. Our government never pays the principal on this DEBT, only the minimum due, like some spendy credit card addict!

Why do we need the US FED and why do we need US INCOME TAXES? Someone explain that to me ... Timmy? Ben?

The US EMPIRE is based on DEBT piled upon MORE DEBT!

5/20/2009 1:00 AM  
Anonymous Anonymous said...

Why would anyone want credit to GDP to expand beyond the levels that capsized their systems? What purpose is served by such unstable levels of credit? Better to maintain private debt to GDP within a range that promotes long term stability.

Let CPI prices gradually fall so that consumers can buy the extra goods made available by increased productivity. Don't force consumers to borrow unrepayable sums to buy the widgets.

A new bull market? No more Financial Crisis? Does Buy & Hold Work?
as written in more detail http://iamned.com/blog/ very compelling

5/20/2009 12:07 PM  
Anonymous Anonymous said...

http://www.screencast.com/apps/news?pid=20601087&sid=ajgUp7xQIn6c&refer=homeMaybe we should stop talking about recession and crisis and keep buying stocks and make money

5/20/2009 12:07 PM  
Anonymous wfta said...

I stumbled onto Mr. Hussman’s website a couple months ago and have concluded that he is among the most well thought commentators on the economy that I have read.
I had initially wanted to give TARP a chance, because I feared that if we let several of the megabanks fail FDIC style, new healthy entities could not be organized quickly enough to allow Main Street to get the credit it needs to operate day-to-day. I assumed at that time that the Treasury Secretary and the Fed Chairman were acting out of the same fear.
Whether that fear is valid or not, I am now convince that our government is serving the management, shareholders and especially the bondholders of large financial companies and not the interest of U.S. taxpayers.

5/20/2009 4:04 PM  
Anonymous Anonymous said...

Hussman is one of the few market pundits worth reading IMO.

5/20/2009 4:24 PM  
Anonymous Bill in SoCal said...

No Anonymous,
DOW 36000 according to the experts.

5/20/2009 8:19 PM  
Anonymous Anonymous said...

They weren't kidding about toxic assets.

"The Environmental Protection Agency has found sulfur and other materials in a small sampling of Chinese-made drywall, which some officials and residents blame for sickening fumes and corroding metal in homes in several states."

The material in the drywall is not only making people sick, but corroding pipes and electrical wire. They said on Nightline that removing the drywall might not be enough, the pipes and all wiring might need to be replaced too.

So this is what the cheap crap from China gave us.

5/21/2009 1:19 AM  

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