Wednesday, July 8, 2009

Hyper Inflation in the Confusion Market

Here I was ready to not post and then a startling news story breaks and I had a thought I wanted to write about from earlier in the day! Tomorrow I will be prepping for a Friday fishing trip to the Quabbin Reservoir, so certainly no post.

Running Out the Clock Explained
I have harped on the banking/government/FED/Treasury unified theory of running out the clock. By my line of thought, hiding losses and providing "liquidity" are the two steps decided upon to try ans wait out some kind of material improvement. Today Calculated Risk had an extended excerpt from an interview given by Bryan Marsal, CEO of Lehman Brothers Holdings (he is overseeing the unwind) that explains this all far better than I can. Here is the game plan from an insider:
One of my partners said yesterday that we are going to call this phase the "extend and pretend" phase in our economy. Which is you extend someone's maturity - because they are going to default - and you pretend that business will come back or that leverage factor is going to come back.

Then we'll enter phase two, which he said is the request to extend or "amend".

Then "send". In other words send the keys.

That is the phases we are in right now. Everyone is trying to buy time, as opposed to dealing with the leverage, they are trying to buy time. Whether you are a banker or a company, they are all trying to buy time. I don't see the leverage coming back, and I don't see the consumption of good and services coming back.
Bryan Marsal, CEO of Lehman Brothers Holdings.

And there it is plain as day.

Now one might wonder why the entire banking sector, the government, and companies across the board think playing for time is going to work. Perhaps they know something we don't. I was thinking about this another way:

If debts are going to be rolled over into new never to be paid loans guaranteed by the government, then the losses may be able to be hidden for as long as no major "call in" occurs.
Sick and sad but that is what the deal is.

Goldman Sachs: The Story with no Ending
This evening there is a story so important, so world changing, and so believable that you should at least take a look before I kill off all the excitement (from Market Ticker):
**FLASH** Goldman Code Theft Bombshell
from DailyKos:
...GS, through access to the system as a result of their special gov't perks, was/is able to read the data on trades before it's committed, and place their own buys or sells accordingly in that brief moment, thus allowing them to essentially steal buttloads of money every day from the rest of the punters world.
Two things come out of this:
1. If true, this should be highly illegal, and would, in any sane country result in something like what happened to Arthur Andersen...
(2. ... is way off point....)

God help Goldman if this is true and the government goes after them. This would constitute massive unlawful activity. Indeed, the allegation is that Goldman alone was given this access!
God help our capital markets if this is true and is ignored by our government and regulatory agencies, or generates nothing more than a "handslap." Nobody in their right mind would ever trade on our markets again if this occurred and does not result in severe criminal and civil penalties.

I encourage the readers to check out Market Ticker and the links to Daily Kos (I know, a pretty crazy site, but this story is hot!) and get excited and scared all at once.

After you are done reading, and before you try and pull all of your accounts from everywhere in readiness for the financial market collapse, hey I said WAIT!!!

Still here? Ok.

Nothing at all is going to come of this story.

Now do not get me wrong, there is some real meat here and I personally have NO DOUBT Goldman Sachs has been front-running trades via complex networks and thereby "skimming" as much as 100 million a day from what is easily illegal activity.

And that is why there will be no story, no action against Goldman (at least in the open), and no market dislocation.

If this is true, it cannot be allowed to see daylight, and hence it will not. There is simply no way, no how.

Ok, now you can still get crazy, but keep it "contained".

Hyper Inflation in the Confusion Market
I am not one that sets his feet to an idea and refuses to move no matter what kind of information or argument is presented before him. I have been wrong so many times about so many things I have experience in changing my view, yes flip flopping, should I think I am wrong. There is nothing wrong with changing your mind as long as you have as solid line of reasoning behind it.

So here I was, thinking about the whole inflation/deflation debate that we have all been having. After careful consideration of the great Stoneleigh missive on deflation and the followup by Ilargi both of The Automatic Earth, I must say my inflation scenario was losing steam in my own mind. Add to this the daily data that Mish Shedlock provides and I was feeling like a deflation type of guy.

And then out of no where I became all confused again.

The culprit today was, strange1y enough, a Mish piece on deflation! As I was reading this article from today I was ticking off the deflation proofs presented and was again feeling the deflation groove. Mish covers all the usuals, but then this line hit me over the head:
Please keep in mind every country on the planet is following the same stupid Keynesian Handbook so on a relative basis the US is not as bad as appears at first glance. Don't expect a complete collapse of the dollar to happen anytime soon.

And thus came my confusion.

I hardly ever find myself at odds with Mr. Shedlock, but this line was a head scratcher for me.

Now we have entered into a period where as long as relative money magic is applied, all will be well? If this is so, then cannot every country simply print up some amount of money (relative to their monetary bases), use this new money to retire debt (debt deflation), and then all can go on as if this whole episode never happened? As long as each country stays withing relative limits, is there something wrong with it?

Say the US goes 5 trillion, China 2 trillion, Japan 1 trillion, and so on, could not enough money be "printed" to offset the debt deflationary cycle? As long as some parameters are kept fixed, then no currency should have issues as they are all doing the same thing, yes?

I admit I am confused by all this. A currency is measured, of course, against other currencies for the most part. It is also measured against goods and services. But if all money is funny money, will all money be just as good as it is today?

I am sure Mish has a well thought out process about that line, and to be fair it was two tiny sentences in a long article, but I have been stuck on it all day.

And thus I am still on the fence on the whole deflation/inflation thing. With the entire world printing money it is hard to imagine it will not come down to roost somewhere. While deflation says people will just save it, and banks will not lend it, and it will just be used as a set aside for losses the money is being put out there. Eventually it will replace the bad debt. Then it will enter the money system at some point.

I liked it better when I was not so confused!

Have a good night.

18 comments:

getyourselfconnected said...

Ok, I am just about packed up for the Quabbin fishing trip tomorrow. 3:30am wake up call! Fun on a day off!

Tons of news out there, leave any relevant articles or ideas in the comments and I will check them tomorrow evening, if anyone is still around.

GawainsGhost said...

Good God, what a day! It's 8:00 PM, and I just got home. Repo week, you know, and we got slammed with eleven new assignments. And they're all over the county.

I probably drove over 100 miles today. And that's not even the worst part. It was 107 degrees! Any of you guys want to try standing in an un-airconditioned repossessed home with no electricity and no water in that kind of heat? All day long?

I'm exhausted, and I'm drinking a Heineken to replenish lost body fluids.

Anyway, I hope you enjoy your fishing trip, GYC. I haven't been fishing in a while, but my friends and I used to take a chartered boat out onto the Gulf and catch red snapper. That's my favorite fish. I love it, spiced with blackened seasoning salt and broiled.

Here is probably the best article I've read on the current crisis.

http://www.opednews.com/articles/How-the-Economy-Was-Lost-by-Paul-Craig-Roberts-090223-753.html

getyourselfconnected said...

Gawains,
thanks for stopping in after a tough day. I will be "all in" the fishing groove tomorrow. Thanks for the article. A beer will actully dehydrate you, but I have found that I really do not care about semantics ya know!

Thanks for your comments all week. I felt like everyone was gone but you! When does the new car arrive?

Lisa said...

Hey, GYSC! I've been kayaking on the Hudson all week (lovely break in the rains!), but I've been watching the administration continue to destroy the country. This has been a much needed break for me. Going to Boston tomorrow for the weekend. Hope you have a great fishing trip! Miss you guys :)

getyourselfconnected said...

Lisa,
If you are in boston I would enjoy very much picking your brain over dinner.
If you like steakhouses we have Ruth's Chris (the best, not sure I can get a spot) and Mortons (the same). I am open for anything (luch, aquarium, etc) if you have a spare hour.

getyourselfconnected said...

Lisa PS,
I will be out of any contact tomorrow so use my personal email if you have any ideas and I will check it tomorrow evening.

GawainsGhost said...

The new car won't be in for a few months. I'm still waiting to find out the delivery date, but I suspect it will be in late August or September. I can wait. As long as it gets here before mid-October.

I'm flying my brother in from Maine, and a bunch of friends of mine from all over the country are all going to converge in Dallas to watch the Cowboys play the Falcons in the new stadium. It's going to be a game and one hell of a party. And I'm going in style.

When I go to Cowboys games, I always wear a tailored silver suit, blue silk tie and a grey fedora. Hundreds of people ask me to pose for pictures. The cameraman for NFL Films once asked me to pose by the bronze of Tom Landry, and I made the highlights of the replay on NFL Network! That was at the Indianapolis game in 06.

So it's a lot of fun.

getyourselfconnected said...

Gawains,
heres to a Patriots vs Cowboys superbowl, now that would be some game!!!!!!

Anonymous said...

Wells Fargo Bank Sues Itself
http://tinyurl.com/mjrvnn

Alrighty then.
LOL
Kevin

getyourselfconnected said...

Hey Kevin,
I am recovering after a long fishing trip today. Did ok catch wise, the Bald Eagles were out in force as well. Beautiful birds.

walkerxdotcom said...

I was hit by the same thought as you. It is quite the head scratcher. Except for the fact it is not free money that is being printed. It is money we the tax payers will have to pay back.

Also most of this printed money is going into big pockets, not my pockets, yet I who get no benefit, retain all the burden of that debt. The only way the inflation scenario could work is if the bailouts bailed me and the rest of the middle class out of all our debt. If that happened then our money could once again chase products, causing their value to rise, causing demand to rise, causing production to rise, thereby causing inflation to overcome deflation which could lead to a reversal of the unemployment problem.

The only problem is this does not appear to be the true underlying goal. The true underlying goal appears to be big financial takes care of itself and eachother and the rest of us and our children can pay for it although we recieved no benefit.

Even if my better scenario actually could come to pass, and we the people were bailed out, we would not really be bailed out. If we were in a system where the treasuries of all the countries printed more and bailed us out then it could possibly work, for all money would devalue at the same pace, as is true with our past. (todays dollar is worth a nickle comapared to 1930's).

But We are not in a system where the treasuries can print and bailout.

We are in a system where we borrow the bailout money from the Central banks. Therefor in our current system even if we did bail out ourselves, it would not be a true fix because our taxes would have to be raised by extreme amounts to pay back the central banks to keep this party going.

The only true fix is to take our punishment, suffer through the correction that needs to take place, stop borrowing (enslaving ourselves to the central banks), and Abolish the Federal Reserve.
http://www.petitiononline.com/fed/petition.html

Five presidents predicted all of this mess. Here is where I wrote about it, if you are interested.
http://walkermarketview.blogspot.com/2009/04/red-pill.html

It is at walkerx.com

getyourselfconnected said...

Thanks for the input Walker!
I would agree that the panic to avoid even a small recession (in early 2000-2001) has brought us here. At some poi nt you have to take a hit, get off the florr, and continue on. Instead our way of doing things is too hold on tight and try to wait for the bell.

Anonymous said...

GYSC

We have a lot of Bald Eagles here as well and yes they are magnificent birds. My SIL and grandson have been doing a lot of fishing out here and catching nice trout and bass. They went last weekend and one of his dogs got a mouthful of porcupine quills.
They are going to use my 10' John-boat and go this weekend. I haven't used that boat in over 10 years but I've had it for 36 now and just haven't been able to bring myself to getting rid of it.
I'll probably have that thing until the day I die. I just don't see myself ever using it again but one never knows does one?

Kevin

getyourselfconnected said...

John boats are bullet proof if you get a good one, if no damage no reason to replace. Love fishing but can be hard to find the time, out here in Mass the only good fishing is pretty far from where I am, so it becomes an all day commitment.
Take care

Anonymous said...

GYSC

If I was still fishing and using one of those I would want a 12' one.

I went out frogging one night with three of my drunk buddies and that was a big mistake. We had two vehicals so we parked one about 10 miles downstream and then took the other one back upstream. I had an electric trolling motor but no battery so we took the battery out of the upstream vehical to run the motor and launched that boat which was way overloaded. We got about 4 miles downstream and dumped that sucker, about drowned, froze our butts off, walked 6 miles soaking wet in the middle of the figging night without any flashlights, got pulled over by the cops when we hit town because the leads on the trolling motor were draging the ground, the only thing that went good that night is we didn't go to jail but we were pretty sober by then.
And they call those the good old days. LOL

I don't drink anymore and I don't fish or frog either.
By choice.
Kevin

getyourselfconnected said...

I dont drink anymore, but I dont drink any less!

I remember we (as kids about 12-14) used to do dares where the guy with the guts (stupidity) to walk out to the edge of the river in winter time while it was partially frozen the furthest was the top dog. Of course one winter night 1 guy cracks the ice and goes in. By perhpas divine intervention we were able to get him out, but we were all wet head to toe with a mile walk to home in 10 degree weather. We all had to use shears to cut the frozen clothing from our bodies. Thats my cold water story. To this day I hate the cold after that terrible night.

Anonymous said...

Obama Says Economic Stimulus Plan Worked as Intended
http://tinyurl.com/n7avcu

Translation: Let the beatings continue.

Kevin

The said...

I saw this over at The Mess That Greenspan Made this morning, and thought I'd pass it along. It's only one of the best commercials I've ever seen, certainly the best special effects. How did they do that?

http://www.youtube.com/watch?v=XQcVllWpwGs