July 22nd, 2014
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Taking Stock as Economy Slides Toward Abyss

by Rick Ackerman on February 16, 2012 2:31 am GMT · 125 comments

[Erich Simon has contributed some appropriately grim essays in the past. In the commentary below, he surveys the economic landscape as America’s descent into bankruptcy picks up speed. There will be no escaping the ravages of Depression, he says, even for those who have piled up gold against events that may lie beyond imagining. RA]

Beginning in 1995, the Federal Reserve financed the arrival of financial Star Wars, leveraging fear over the Y2K computer bug. The spending spree that ensued bankrupted the last greatest nation on earth. To fuel it, global currencies were juggled, gold was suppressed (until 2004) and equity markets were pumped with hot air. The euro, a fallback currency, was invented in case of a dollar rout. With debt force-fed into economies of the East and West, the 30-year Treasury Bond was retired in 2001 to circumvent a possible collapse of auction demand.

The job of the Fed is to disburse “wealth”—i.e., scarce national resources denominated in indigenous currency. Currency gives physical form to the work, and resultant savings, to construct a national means of production. The Fed is charged with maintaining the status quo, a quality of life that has in fact been trending downward for both rich and poor since the supposedly mild recession of 1991. Not long thereafter, free markets gave way to manipulated markets, which today are giving way to de facto markets. Wealth was ripped out of the pockets of savers, retirees and everyone else. And then it was spent. Military contractors — along with the trinity of Wall Street Greed, Washington Corruption and Corporate Machiavellianism — were vastly enriched by The Great Campaign to realign global-resource scarcity and human draw.

This time, supposedly, it was going to be different. The rising tide of prosperity would encompass the whole world. In fact, the only thing that was different was the surreal “wealth effect” of inflated paper assets shortly before the world flared into ruin. The dot.com boom and global McMansioning were decidedly inflationary — the smokescreen that allowed the Masters of the Universe to build the banking system’s version of a perpetual motion machine. It was fueled by arcane and incestuous debt operations that enjoyed the endorsement of U.S. Treasury secretaries Robert Rubin and Hank Paulson, among others.  The supply of dollars mushroomed out-of-control between 1995 and 2002, but there was a long lag before the bank crash finally arrived in 2008. It lopped about 42% from the value of the U.S. dollar.

Seekers of Handouts

When the smoke cleared in 2008 there was little remaining of the U.S. economy besides seekers of handouts from The Government. The Obama Administration generously obliged, conjuring up $7.5 trillion in digital dollars to bail out all institutional comers except Lehman Brothers. Global production fled to the lowest-wage countries, inducing a Third World manufacturing frenzy and a subsequent collapse in product quality. Equity markets have continued to rise, goosed by negative real interest rates. The global complexion has taken on the pallor of death while clueless economists continue to “kick the can” down the road. The Fed has engineered a beguiling inflation amidst broader and more powerful currents of deflation.

It has also expropriated the wealth of America’s Middle Class for fiscal purposes, driving savers into penury in the process as they cope with inflation at the consumer level while receiving almost no return on their nest eggs. Once savers are tapped out, within 24 months they will have to liquidate. Blood will indeed run in the streets, but not until every last dollar of savings and disposable income have been stripped from private hands. Gold bugs will be similarly gutted, notwithstanding any fleeting blow-off in the price of bullion. Thereafter, risk will be repriced into the markets, the Fed having been forced, finally, to take a hands-off approach.

Before the greenback is ultimately carried off with the trash, it will find temporary value through relative advantage against other currencies and from rising interest rates. Meanwhile, it will serve as sovereign coupon to the military state, translator of our new state of rationing and barter. The dollar even now no longer reflects national endowment of scarce natural resources, collapsing or gone, but rather endowment by decree. When interest rates and remnant social-wealth-(re)distribution converge over the next 24 months, the 99% will be bankrupted. This is the real secular change happening now, a nation verging on the epiphany that there is little left to lose.

***

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{ 125 comments }

Bradley February 16, 2012 at 3:10 am

Great looking bike!
One question: what is the additional sprocket behind the down tube for? It looks like more than just a transfer point for the chain (for looks). Is this something that has been ridden by anyone known here, or is it a stock photo?

Rich February 16, 2012 at 3:37 am

Escher bike, economy and market…

j February 16, 2012 at 3:37 am

“Gold bugs will be similarly gutted, notwithstanding any fleeting blow-off in the price of bullion. Thereafter, risk will be repriced into the markets, the Fed having been forced, finally, to take a hands-off approach.”

I’d love to add my 2 cents but I’m too bust scratching my head trying to figure out what the H your saying….any chance of of dumbing the above down so I can respond …not to worry I’m not a Gold Bug just a US$ Bear……..

Rich February 16, 2012 at 3:38 am

Nice essay Erich.
Mahalo…

Rick Ackerman February 17, 2012 at 9:08 pm

Here is a follow-up from Erich that I am posting in his behalf:

There seems to be some confusion on the most important point (insight) I was imparting. It’s not that there will be simultaneous inflation/deflation. First, there is no such thing as inflation or deflation, they are two ways of saying- ‘broke’. BUT, in relation to the dollar and the longevity and trend change of the same, the terms ‘inflation’ and ‘deflation’ help illuminate the dollar’s future, as well as a wile plan by the Fed lost on today’s economists.
Every economist out there right now feels that the Fed is blindly addicted sans choice to this ‘kicking the can’ approach until something breaks, and probably that ’something’ will be the dollar as it goes worthless or nearly worthless. But that is not necessarily the case. The Fed is not necessarily so stupid or so desperate or so impotent. And such nonchalance flies in the face of the Fed’s own survival, no matter the circumstance.

With respect to the fate of the dollar, the Fed is continuing to print money (‘inflation’) while managing a tentative dollar panic and demise, but when the printing presses start ’smoking’, somewhere around the time that the Fed has monitored and approved the transition into ’social bankruptcy’ (aka ‘deflation’… into Nationalism, then probably into Dictatorship), at THAT point the Fed will put the brakes on money supply and explode interest rates higher. Nobody except insiders will be beneficiary of such a ruthless policy since all will be without investment capital; Gold Bugs will see their holdings rise on the paper tide, and then crash over the Deflation reef with prices dropping under $700 at least, no later than the first meaningful rate hike.

This is quite a brilliant strategy because it might realign the balance of rich and poor (albeit into a diminished environment and habitat) and further maintain and reinforce the dynastic system of our age-old, feudal landlord status quo. And it could very well work. When looking at Fed policy as a 24 month window (to complete the bankrupting of the United States) and transition into a de facto, completely segregated market environment (i.e. gold market, stock market, credit market, real estate market, etceteras without any correlations among them, individual markets by decree) then a picture emerges of a future that is no longer kicking the can into uncertainty, but rather clear and quantifiable chain of events. Monetary as well as social and global.

This was the point I was making, and the fact that equity markets are holding steady or rising is just one ‘lip service’ market inside a changing national face which at this stage is irrelevant, just a tool to transition events further out. The fact is, despite all of the Debt and money printing, the dollar is probably going to survive (and if it doesn’t then it will be the last investment category to fall). And in this way the administration will underwrite its own survival. The unfolding social collapse ushering riot and arson is simply the upcoming stage set of our budding militarism. Without a viable currency, as de facto coupon and remnant store-of-wealth according to our upcoming (military-corporate) Ration system… reflecting scarce natural resources that are no longer obtainable through the Capitalist format, then there could not be economic structure to the dawn of our USA Third World, Banana Republic, Military-embodied national character.

E.

Rich February 16, 2012 at 3:51 am

Big4 short Dollars, Dow, Forex, Metals, Nikkei and QQQ.
Long Euro, Food and Yen…

John Jay February 16, 2012 at 3:56 am

Good synopsis of the State of the Union.
No way out that I can see.
If they keep printing and maintain ZIRP.
Eventual collapse.
If they stop printing and normalize interest rates.
Instant collapse.
The timing will depend on the Euro/China/Japan dynamic.
Approval rating for Congress is down to 10%.
Everyone knows we’re screwed.

Beemer February 16, 2012 at 4:13 am

Rick,
Any hope for a blow off top for AAPL and the Naz today?

mario cavolo February 16, 2012 at 6:46 am

Oh yea Beemer, Rick’s gonna come right and tell you the magic answer on that one, eh? :) …let’s buy those call options and we’ll see you on that Caribbean island retiring in glory…

Robert February 16, 2012 at 4:14 am

Fascinating read.

Most assuredly destined to be proven wrong by the passage of time, but fascinating nonetheless…

“The Fed has engineered a beguiling inflation amidst broader and more powerful currents of deflation”

Wrong.

There can be no such thing as simultaneous “inflation” and “deflation” any more than you can simultaneously shower, and dry yourself off…

What you call “deflation” is actually economic contraction, and economies can contract REGARDLESS of how the central planners and money printers attempt to jigger the money supply and economic data.

If we were in a true deflation, then all the employed people out there would be loving it, because real incomes rise during deflationary periods. I know this will sound odd, but China is currently the most deflationary country on Earth. The standard of living there is sky-rocketing as the purchasing power of real income rises. The Chinese may be increasing their money supply, but this rate of increase is still outpaced by the growth rate of real economic productivity… therefore the purchasing power of real wealth creation is also outpacing the rise in the general price level…

Economies contract when people begin believing they have no reason to be productive (due to stagnant or declining real incomes), and therefore stop.

What we are facing today is not lack of willingness to be productive – What we are facing today is the open revolt of the productive against the non-productive. The message is clear: “We will not carry your water anymore”; and the non-productive don’t like it, so they are using compulsion and coercion (always the state’s favorite ploys) to try and force their position.

But just wait until the foundation beneath the US Treasury market begins cracking… The fact that no one believes this is possible is probably exactly why it is inevitable.

When the federal bills can no longer be paid, all the alphabet federal departments will begin folding, and Atlas will slowly stop shrugging…

Carol February 16, 2012 at 4:41 pm

Robert > “When the federal bills can no longer be paid, all the alphabet federal departments will begin folding, and Atlas will slowly stop shrugging…”

Robert you are such an optimist. No really if what you are saying were to actually materialize we could finally get uncle Sam off our collective backs. But I know no such thing can or will ever happen as long as uncle Benny has access to his magically printing press.

But here’s to hoping!

Mark Uzick February 16, 2012 at 5:48 pm

Robert: “But just wait until the foundation beneath the US Treasury market begins cracking… The fact that no one believes this is possible is probably exactly why it is inevitable.”

Hasn’t that pretty much already happened? Except for occasional panics causing the flight of assets from other sick financial systems, like the EC, for the wrongly perceived relative safety of US Treasuries, the federal government is dependent on the Federal Reserve for the sale of its bonds and for supporting low interest rates.

Robert: “When the federal bills can no longer be paid, all the alphabet federal departments will begin folding, and Atlas will slowly stop shrugging…”

The federal bills will be ‘paid’; it’s the federal employees and federal contractors who will refuse to work or provide goods and services for worthless dollars that will cause the departments to close.

When you say “Atlas will slowly stop shrugging”, do you mean that when the burden of these federal agencies is lifted that businessmen will stop their strike (the shrugging) and return to productive pursuits?

Robert February 16, 2012 at 6:53 pm

“When you say “Atlas will slowly stop shrugging”, do you mean that when the burden of these federal agencies is lifted that businessmen will stop their strike (the shrugging) and return to productive pursuits?”

That is exactly what I am saying….

Look, healthy human psychology requires us to maintain personal motivation (to “strive” if you will…)

If we are presented with the societal premise that the results of our efforts are not ours to enjoy, then the strife becomes for naught.

I’ll repeat again (and everyone MUST understand this point if you expect to thrive as you strive) :

ONLY the productive pay taxes, and there is NO SUCH THING as a productive government employee.

What the government pays to Peter, it must first take from Paul, and EVERYTHING that Peter pays back to the governement is NOTHING but a relative decrease on Paul’s general level of burden…

Paul is still the ONLY one paying anything… The fact that Peter surrenders back 30% of his output only makes him that much LESS of a parasite…

Mark Uzick February 16, 2012 at 9:38 pm

Robert: “That is exactly what I am saying….”

To me, that makes sense; but, in the context of your presentation, someone unfamiliar with the novel might have taken that to be a warning of catastrophe instead of an optimistic prediction of civilization rising from the ashes of statism run amok.

The doom and gloom is so thick around this forum that it’s easy to mistake silver linings for thunderbolts.

richard j February 16, 2012 at 10:10 pm

Robert; I quit my day job 10 years ago. I read Atlas Shrugged 33 years ago. I figured it would go more or less as she predicted, though Ayn Rand was a spiritually dead person.
Yes, agree, & liquidation for us, control for them, reminds me of a Gahan Wilson cartoon many years ago depicting a man with a gas mask surrounded by total desolation, saying…..I think I won!
I like your sense of humour,btw, have had some good belly laughs over the months.

mario cavolo February 17, 2012 at 12:12 am

Have to agree Robert, I know govt folks who have meetings and can’t think of anything else they do…cheers, Mario

Robert February 17, 2012 at 7:00 pm

“I read Atlas Shrugged 33 years ago. I figured it would go more or less as she predicted, though Ayn Rand was a spiritually dead person.”

Richard I agree completely.

Rand had human nature pinned from an “intellectually moral” standpoint, but it really is too bad that she publically had to be such a wet blanket about it…. But then again, consider the kneejerk reactions she fomented from many Americans simply because of the “Russian-like” accent in her voice, and/or the fact that she came from a Jewish family…

Remember, when Rand was alive and in the public view, the US was not exactly warm and cozy to women who did not talk like Dinah Shore, and look like Anita Bryant…

Part of me always thought it would be hilarious to find a long lost home movie of Rand partying hard with Ted Kennedy… Something that would show that she really did understand what it meant to have a good time in spite of the fact that the people around her were only slightly more morally advanced than a tribe of baboons…

:)

SD1 February 16, 2012 at 5:15 am

As soon as you said the “free markets gave away to manipulated markets in 1991,” you lost my attention. The markets have never been free, and you spend far too much time reading garbage on the internet that is designed to do nothing more than separate you from your money. Just my opinion.

Cam Fitzgerald February 16, 2012 at 5:42 am

“The Fed has engineered a beguiling inflation amidst broader and more powerful currents of deflation”.
————–
Terrific article Erich. I loved the above line and how you nailed a elusive yet obvious truth in so few words.

mava February 16, 2012 at 5:49 am

Robert, SD1, and J,

You guys said most of what I wanted to say. Deflationary Inflation? Waaaa…??

And, yes, I am a gold bug. How is it again, how those gold bugs will bee similarly gutted?

I don’t know about you, but if you own gold stocks mainly, you’re not a gold bug. You’re a speculator (nothing wrong with that, just not a gold bug) that just happen to be speculating on gold stock at this time. Gold stock holders will get gutted, I agree, gold bugs won’t.

A gold bug is someone who believes that the only purpose of government is to rob you blind. Consider if someone that believes this (as I do) will ever place his bets on anything that government might touch.

I also find interesting you view on the Fed:
“The job of the Fed is to disburse “wealth”—i.e., scarce national resources denominated in indigenous currency. Currency gives physical form to the work, and resultant savings, to construct a national means of production. The Fed is charged with maintaining the status quo, a quality of life that has in fact been trending downward for both rich and poor since the supposedly mild recession of 1991. ”

Like J said, I wish you’d simplify this, dumb it down, cause I have no idea what you are talking about.

I am very much in agreement with the author on the general sentiment. Yes, there is no way out when thieves are voting. Democracy has a fatal flaw. Only property owners should be able to vote.

Cam Fitzgerald February 16, 2012 at 6:34 am

Deflationary inflation. Why not call it that then. Stagflation maybe but that is not quite the right term either. Asset prices are falling though and real wealth has evaporated into the ether while the Fed has ginned up three rounds of inflation by stimulating commodity markets through indirect means.

You got taxed while your wealth withered.

With each new round the effect has weakened though and even I will admit that deflationary forces are again at the door. Witness the drops in demand from China as the housing bubble there deflates. This presents a very real risk of falling commodity prices as the artificial demand created by PBOC intervention and the blowing of a massive credit bubble wind down.

Now suddenly everybody gets why China has been building ghost cities and railways to nowhere. Doing so has inflated resource prices globally and created a sense that all was well with the word as mines stayed busy and ships traversed the seas filled with raw goods destined for a very busy market. China was holding us all aloft but obviously paying a price for it.

Now that is ending. Do not believe for a moment that the steep drop in the Baltic Dry is truly just indicating a surplus of ships. The excess capacity is in fact only camouflaging a bigger problem. Falling demand for resources, for coal, for ores for lumber. The bubble is bursting in China and with it are being exposed the bones and the vulnerabilities of their financial system. Billions upon billions of Yuan denominated debt may never be repaid.

I believe we are near to experiencing a deflation shock as the worlds most important economies all slip towards recession simultaneously while the worlds busiest big economy (China) shows the first cracks in declining real GDP growth. Given the suspected real rate of inflation there we even suspect the estimated 8.3% rate for 2012 as being far too generous.

This did not appear to be the case just a few short months ago as the printing presses whirled and we sat on the edge of our seats awaiting an inflationary blizzard. Now where did those fears go? Why has it not materialized?

It seems clear to me that as commodity-push efforts have failed to drive global growth that the alternative event coming will be a new energy crisis. That event is one that would impact all markets simultaneously while creating the necessary conditions of shortage to drive inflation. I am not saying it is a good idea, only that it is what will probably happen next.

I hear Iran is cutting Europe off, by the way. Is that the trigger? The odds of a new round of QE have increased significantly in the last months as Europe has enabled the EFSF and England engaged in a huge round of outright monetization. What China does next is material.

The ball is back in the Feds court.

mario cavolo February 16, 2012 at 1:40 pm

Mava, at risk of an uproar, for the first time ever, a friend politely suggested to me that “universal suffrage” was a bad idea and I asked him what the hell universal suffrage was?….He said well, it means that a podunk idiot with no education and knowledge has the equal voting influence and weight as an intelligent, educated person who is “qualified” to offer a vote on the people who will have the incredibly important responsibility of running our society’s affairs, and so I think that’s unreasonable. Being I don’t stick my nose in politics, I swear I had never such the topic cross my mind before in my entire life, and his point sure as hell made sense. Cheers, Mario

Onioro February 16, 2012 at 4:01 pm

Asset deflation with simultaneous monetary inflation should hide a depression for a little while. As the CPI continues to rise look into the future for crushing taxes on nominal gains, no one and no asset shall be spared, even GOLD. While those in government will say everything is fine and recovery is just around the corner, our New Greatest Depression should be a bit of an open secret for everyone else. There are no examples in history of a purely symbolic currency ever uncontrollably rising in value in perpetuity, it has always done the opposite.

-Onoiro

mario cavolo February 16, 2012 at 4:15 pm

Equally Cam, we are DONE, you are clueless and life goes on…be well.

eric February 16, 2012 at 4:15 pm

yeah mario cavolo is at it again. sure, china is in the better position long run, but lets be clear to the people not in china, these ghost cities, while sitting empty,because of the lack of quality standard, will fall apart by the time they get occupied. most young people without their parents support ,can not buy a home on their own. Im not hating,i like it in china but stop telling everyone fairy tales. its the middle kingdom, not the magic kingdom. it has its good and its bad. its highs and its lows. respect to you and all other expats who have stuck it out,not many can hang . however, i find it very disturbing that these structures are built and left empty-roads are always good but empty apartments need repairs. whats that western word “depreciation?”

Robert February 16, 2012 at 5:02 pm

“The ball is back in the Feds court”

And what, pray tell, do you think the Fed will do, Cam…?

Robert February 16, 2012 at 5:22 pm

“for the first time ever, a friend politely suggested to me that “universal suffrage” was a bad idea and I asked him what the hell universal suffrage was?….He said well, it means that a podunk idiot with no education and knowledge has the equal voting influence and weight as an intelligent, educated person who is “qualified” to offer a vote on the people who will have the incredibly important responsibility of running our society’s affairs, and so I think that’s unreasonable.”

-Mario,

What your friend was describing is EXACTLY why the American Constitution was drawn up the way it was… and it is why the united States of America (note the lower case “u” ) was formed as a REPUBLIC, and not not as the mob-rule democracy that so many “elite” and educated thinkers today assume it should be.

The will of the majority may not overrule the will of the minority.

Democracy is a flawed concept (just as Communism is)- the idea that the majority (or, the “99%” if we use today’s popular terms) has a collective right to demand anything from the minority just because they outnumber them, is preposterous. Taking such logic to its logical end is to suppose that on the day that Federal employees comprise 51% of the US workforce, that the federal budget will be balanced; because the 51% can vote to have the 49% submit 100% of their income to pay the taxes necessary to fund the operations of the 51%, and on that day, we shall have peace… it’s assinine.

The TRUTH, unspoken almost everywhere, is that all Federal employees pay NO TAXES. What federal employees do is surrender back a portion of the taxes that are paid by the private sector to provide 100% (minus whatever percentage the Fed gins up) of the Federal employee’s gross income.

I like the way your friend thinks regarding this topic.

You see, what we all REALLY have the right to is fairness in our human interactions and affairs.

You (whether singularly or in aggregate) do not have the RIGHT to demand anything from me that I am not willing to provide, and any attempt to pass laws to compel me to provide for you is morally inferior…

Laws never grant freedom – some laws PRESERVE freedom, but most laws REMOVE freedom.

And majorities, always and forever, seem to be driven by the logic that they get to pass the laws that allow them to fleece the minority.

Well, the middle class is devolving into the voting minority, and the majority comprised of the rich and poor, using an unintended and paradoxical collusion, are seemingly planning to fleece this minority- exactly as democracy would dictate they should.

&&&&&&

Take heart, Robert, because there’s a monetary/fiscal Catch-22 that will save taxpayers from having to bear the crushing burden of providing to public employees the absurdly generous retirement benefits they’ve been promised. The fact is, the money simply isn’t there — not even 5% of it — nor will it every be, at least not in real terms. The Guvvamint could not simply print the money because ginning up such vast sums as would be required — $900 million, for instance, just to handle Flint, Michigan’s unfunded pension and healthcare liabilities — would be tantamount to hyperinflating the currency. (And just let Them try to index to inflation the benefits of public-sector workers alone. The riots would make the street violence in Greece look like Carnivale.)

The bad news is that, for the same reasons, none of us stands to receive Social Security or Medicare benefits that even remotely compare to what recipients are now getting. RA

C.C. February 16, 2012 at 6:08 pm

“Only property owners should be able to vote.”

Within that one simple sentence lies a Grand Canyon’s worth of wisdom regarding human nature, followers vs. rulers, the scourge of Government and how all they all intertwine, react and ultimately determine man’s freedom.

We should talk more openly and frequently about this important aspect of human interaction and existence – in the end, it distills down to Liberty – who has it and those who wish to take it.

Robert February 16, 2012 at 8:34 pm

“Deflationary inflation. Why not call it that then.”

What…? Why..?

I, for one, would feel a great deal more comfortable if we called it “Inflationary deflation”

Or wait, perhaps that is the same concept…?

Are we talking about the same thing here?

I’m talking about rising prices and falling incomes, but I think you are talking about declining money supplies and rising prices…

oh, hold on…. no, wait…..

{Sigh}…. Just forget it.

:)

mario cavolo February 17, 2012 at 12:28 am

Eric, I’ll always agree there,s good and there,s bad… I know the frustrations and struggles of economic uncertainty. I find myself fighting against patently false and exaggerated rhetorical, negative representations about many items…..meanwhile you sure are right about apt build quality, something to twatch for more closely than back in the states… Cheers, Mario

Cam Fitzgerald February 17, 2012 at 7:51 am

“And what, pray tell, do you think the Fed will do, Cam…?”
—————————
More Bond buying, perhaps another QE. What do you think?

Cam Fitzgerald February 18, 2012 at 1:22 am

Eric on February 16, 2012 at 4:15 pm
“Yeah mario cavolo is at it again”.
————————————–
I was just thinking about that. Mario is in China. Bet he uses Baidu instead of Google. The poor guy is info deprived due to the suppression of sites and actually has no idea what is going on over there…..well except in the fast food restaurants.

mario cavolo February 16, 2012 at 7:00 am

“China has been building ghost cities and railways to nowhere….”

This kind of statement about China by people such as yourself who don’t anymore than what they read in the media is SUCH an outrageous, incorrect exaggeration it deserves to be called out and expunged from every possible source on the planet so as not to mislead human beings who read. Would anyone ever have said the same thing about the post WWII American interstate road and rail system that got built all across the country? Don’t think so…

Reality, for example: after 5-10 ten years of steady, high growth and investment into national infrastructure, the economic cycle will slow down.

You can be sure that amongst China’s 10+ 2nd tier cities, we will never in our lifetimes see real estate prices any lower than the current 5-8000rmb psqm range, when just 5 years ago they were in the 2-3000rmb…that’s the heartland society of the country below the water line of the iceberg.

Cheers, Mario

Cam Fitzgerald February 16, 2012 at 7:25 am

People such as myself? You mean people who read analysis and facts instead of tea leaves? Like I said to you before, a bubble is a bubble is a bubble. They vary little from one part of the world to the next and differ little in structure and form whether the subject is tulips or houses.

Look at any of the historical charts for yourself and compare them to what we see in China today before becoming one of those blinded by denial.

I follow the media in China, not just what is published here Mario. There are big cracks showing. You may not like what I have written but if you genuinely want to take someone to task then I suggest you debate the remarks of some of China’s own thinkers and economists who are questioning growth levels, GDP, state issued statistics and even the reliability of energy usage and the quantities of iron ore on hand.

I hear that electrical consumption for steel production is running at only 40% capacity while ore is piling up on the shoreline of many docks to the point of excess…….must be the Chinese New Year festivities, right?

mario cavolo February 16, 2012 at 9:27 am

Good grief Cam, digging the hole deeper…you’re generalizing the slowdown in one area to be an all-encompassing indicator and its not, you’re completely discounted the ability of a govt with a couple trillion in their bank to FLIP A SWITCH anytime they like and , a govt that is building out their country’s infrastructure on slave labor wages while they can, as the U.S. did. You look at a few failed real estate developments as a leading indicator of a real estate bubble burst?…Hmm, how does that compare to TRILLIONS of mortgage free home equity across 100 million homes owned by the heartland masses of the society? Why do we read ridiculous GHOST TOWN rhetoric, a whopping SIX real estate development towns, OHH MY!!! but not the story of trillions of mortgage free home equity across the hearland of China, because they WANT to keep it quiet and they’re laughing at the stupid Westerners. There are people like my mother-in-law, who had NOTHING and now has higher debt free assets than the average unemployed middle class American family? How does that compare to the middle class in America where the middle class is up to their eyeballs in mortgage debt and beyond? Its the exact opposite by trillions, you CAN”T comprehend it because you don’t know what its like to live side by side with millions of middle class people who eat out every night in packed restaurants $2 per person, who have NO debt and NO mortgages; let their homes go back down in value by 30% after doubling the past five years, oh yea, that will really ruin the economy, eh? I’m not even talking about the bubbly wealthy sector…

Its simple, you DON”T live here. When’s the last time you attended one of the monthly, off the record to the press, closed door United States Consulate citizen briefings here in Shanghai? I didn’t think so, and if you want to discount that level of on the ground eyeballs reality, feel free.

Every night when I watch the line out the door to go into Pizza Huts all across China seven nights a week, the McDonalds, Pizza Hut, KFC and local Chinese restaurants, which are basically PACKED with families, even at 3pm, I think of those big cracks you’re talking about…

Yes corporate level business is slowing down, yes its tough, its a struggle and that varies from sector to sector. But that is FAR from anything like bursting bubbles. Historically, what comparison?…we have never seen anything like we’re seeing now in China, there is NO comparison to anything in the past when a country mushrooms into a fullblown global power over the course of 20 years…

Cheers, Mario

John Jay February 16, 2012 at 3:13 pm

Mario,
I have always argued that China’s “Ghost Cities” and “Trains to Nowhere” are a much better use of surplus capital than buying US Treasury paper. In a severe economic crisis there is somewhere for them to house the poor. The same goes for any stockpiles China has of copper, nickel, etc. “Ghost Cities” in China look livable. US “Ghost Cities” look like Detroit. One is an asset, one is a liability.

Cam Fitzgerald February 16, 2012 at 3:58 pm

Mario, the Chinese Premier himself has acknowledged there are serious challenges and problems. The governments own statistics tell us that property prices have dropped in 57 of 75 tier one and two cities and UBS -AG has given offered some worrisome analysis of the situation regarding growth. I did not ever say China was in recession now did I? You might just be taking all of this a little too personally and I cannot understand why you would bother as it is not your responsibiltiy to defend government policy. In any case you are offering mere anecdotes of a Pizza Hut lifestyle while suggesting that just because I do not live there I can not know better than you what is taking place. With regard to your comments I think it is you who do not understand the workings of credit excess and clearly China has engaged in such to the extent that they are now seeing an economic slowdown as a result of a price correction in real estate. Surely you are not suggesting that when GDP growth drops from an estimated 13.5% annual rate four years ago to the 2012 estimate of 8.3% that is a reasonable slowing? Nor do you have to dig deep to find confirmation of the impacts of this sharp deceleration. Simply understanding that a reduction in building as a result of a housing correction should be enough to warn you that activity will drop, unemployment rise, loans stop performing and that demand for all kinds of inputs will fall. Therefore commodity prices themselves will be affected. This is not rocket science when we already know that China has been consuming up to half of all the mined resources globally for the past few years and that they have had what may be the biggest building project ever taking place in their back yard. As to the trillions in reserves, well I think that excuse has been a little overworked by too many people. How many times do you think China can spend those reserves before they are gone? Every issue confronted by China is countered by a China bull claiming the deepness of their pockets as insurance against warts and hemeroids. In any case, much of this money is tied up abroad in bonds and Treasuries. Freeing it all up suddenly to solve problems at home would wreak havoc on the value of the Yuan while devastating the manufacturing trades. So that is not going to happen Mario. Try to get past it. In the meantime, I will stick with some good analyst opinions of what is transpiring over there and I will perhaps even give greater weight to remarks from China’s leaders from now on. You are far too biased for me to read anymore.

mario cavolo February 16, 2012 at 9:41 am

Nice write Erich…..

“…a quality of life that has in fact been trending downward for both rich and poor since the supposedly mild recession of 1991….”

The truthful, genuine statement in your article that says it all, John Jay made the point well a few days earlier too. Inflation/declining currency purchasing power will continue over time, that’s the steam relief valve for their elitist banking games, far more so than any kind of doomsday collapse.

This is why American’s need and in fact are going back to the Asian lifestyle of living on budgets, sharing homes, no cars…but for America, that is a backward road that will be so so painful, its very upsetting to think about it, the place my Italian family went to for a better life, and now the place I left for a better life in APAC region for the future. Keeping in mind that APAC actually includes Australia and India, Melbourne may be our “China exit strategy” rather than back to the states…

No matter, if you’ve got $2 million when the sh^%$t hits the fan, you’ll still have half a million or so, but if you’re already broke, big big trouble for society….

Cheers, Mario

Chris T. February 16, 2012 at 10:11 am

Robert, you write:

“There can be no such thing as simultaneous “inflation” and “deflation” any more than you can simultaneously shower, and dry yourself off…”

Not sure if I agree with some of Erich’s points, but that notion of his is not wrong. It is not impossible.
Rather than me stating it badly here, see this article:
http://www.professorfekete.com/articles%5CAEFCanWeHaveInflationAndDeflation.pdf
well stated there!

“If we were in a true deflation, then all the employed people out there would be loving it, because real incomes rise during deflationary periods.”

The second part of that, real incomes rising, is certainly true.
BUT:
It is precisely real income’s converse, the cost of labor, that is the problem, it goes up too.
They have only one way to cope:
lay-offs.
That is why in deflationary times, unemployment rises.
Best example:
The “depression” of 1929-1932/33.
Workers refuse to adjust their wage demand down, which they could have and still maintained their real income/standard of living, and thus the employers had to lay off.
Therefore, your first part is wrong, because those “loving” it, won’t be employed for long.

What DOES make people better off in deflationary times, if they adjust their future income down, is the savings they have accumulated. These go up in real terms.
For the US as a whole, deflationary times will be terrible, because precisely that, savings is missing.
Wasn’t in the very early 1930’s, where most had substantial savings, and actual data shows increases in consumption of superior goods, a decrease in consumption of inferior goods, an increase in charitable giving, and so forth.
Hardly the behavior of a population in destitution.
Even at its worst, 75% of the country still had jobs and income.

As to Erich’s gold-bug comment:
Have to echo J, I don’t get it.
When that statement is read alongside of:
“…the 99% will be bankrupted”.
Precisely those that are gold-bugs won’t be, because they will have put away a nice amount of this unencumbered asset, which will be there after all of what you outline, and then resume the role it has had for 1000s of years.
Some others too of course, land, esp. productive land, but the portability of gold is probably its advantage there.
Unless you believe that THEY will take everything with outright confiscation, in which case nothing of course is safe, it would be like the Ukraine in 1930.
If one believes in such a scenario, then no prepping, survivalizing, etc will help, but I doubt it will go quite that far.
In any case, even after many decades of the USSR, disappeared assets popped up once it went, same goes for assets, including PMs buried across Eastgermany in 1945. Some of it was recovered after the Wall fell.
(by gold-bug I don’t mean the person who is hoping to trade out of his gold into fiat paper at some blow-off level, but one who is using it to protect wealth in the post fiat-du-jour world. Even if you didn’t convert a double-eagle into a whole Berlin city block in August of 1923, where it was worth about 85 trillion RM, that Double Eagle went very far in Berlin in 1924, your 8/1923 RM’s were worth less than kindling or toilet paper…)

Robert February 16, 2012 at 5:48 pm

Chris, you said:

“The “depression” of 1929-1932/33.
Workers refused to adjust their wage demand down, which they could have and still maintained their real income/standard of living, and thus the employers had to lay off.
Therefore, your first part is wrong, because those “loving” it, won’t be employed for long.”

And yet:

“Wasn’t in the very early 1930’s, where most had substantial savings, and actual data shows increases in consumption of superior goods, a decrease in consumption of inferior goods, an increase in charitable giving, and so forth.
Hardly the behavior of a population in destitution.
Even at its worst, 75% of the country still had jobs and income.”

Your two countervaling statements demonstrate my point.

During the 1930’s, those who accurately understood that employment was more important than their salary level, managed to weather the storm best… and some even managed to build a better standard of living on a lower nominal (but higher real) income level…

So will it be today.

I agree with you that savings are an important personal buffer that many Americans today do not have, but consider for a moment that a lack of savings makes people more inclined (and willing) to work for less money…

Why are there less teenagers working in fast food joints? The fast food joints are not shutting down…?

it’s because the fast food companies have a larger pool of older, and willing workers to pull from. Bad for the young, but good for the burger joints

Therefore, the lack of savings in the US is a buffer that will naturally work to counteract unemployment. They may never fully balance out, but they will exert force upon each other.

I fully agree that many people will be pissed that they are suffering a reduced standard of living as they flip burgers for less pay, while being pressured to pay more in higher prices; but the end result will be a better level setting of global wage levels, which is EXACTLY what these global events over the past 4 years has actually been all about…

One day, in my lifetime I am convinced, we will see the day when a welder in Shanghai earns just about the same real income as a welder in Seattle, and regional labor rate variances will be driven by pure supply/demand characteristics (ie: a plumber in a town with 50,000 people, (20,000 of whom are plumbers), will earn less real income than a plumber in a town of 50,000, (20 of whom are plumbers)…

I think you and I agree more than you might realize.

Robert February 16, 2012 at 6:02 pm

Oh, and regarding Fekete’s article…

His points run along similar lines to the ones I laid out in the following commentary:

http://www.rickackerman.com/2010/08/it-doesn%E2%80%99t-have-to-be-%E2%80%98inflation-vs-deflation%E2%80%99/

Only the vocabulary is different, and if you will indulge me a little self-aggrandizement, I chose DELIBERATELY not to use the term inflation and deflation in my article due to the ambigous nature of their common definitions…

I admire Fekete for his analytical skill, and I respect his wisdom as superior to mine on all topics economic…

mario cavolo February 17, 2012 at 12:35 am

Kudos Robert for “countervaling”. Sweet word, haven’t seen it in print for ages…:) M

Beemer February 16, 2012 at 3:14 pm

Mario,
I was just curious to know his thoughts. Lighten up you arrogant pr**ck.

mario cavolo February 16, 2012 at 4:18 pm

Hey, it was friendly jesting you arrogant p**ck… :)

Chris Mc February 16, 2012 at 3:25 pm

If it gets as bad as all that, and I think it will, then my big disagreement with the author’s view of outcome is the R word. Armed, violent and bloody Revolution.
Dust off the guillotines, because they will be put to good use. Industrial woodchippers will work just as nicely. Revolutions take years to foment, but we got a nice start a long time ago on the one coming.

Robert February 16, 2012 at 8:38 pm

Yeah, and it would be too bad if it had to come to that, because the people could apply their energy toward compelling their state governements to call a Constitutional Convention long before the point of open revolt…

j February 16, 2012 at 5:38 pm

lol!…Beemer raising the question about Apple is no different than these forums imo, we all come away with more questions than answers….a sign of these very difficult times that have no signs of changing anytime soon.

Thankfully charts don’t talk so we listen with our eyes

O.T. $HUI… haaaanging in there Mr Rick

Chris T. February 16, 2012 at 6:01 pm

AAPL:

waiting in line the other day, heard a lady tell her friend (both in their early 40s):
you know I finally replaced my cell with an iPhone two weeks ago. I knew what you could do with it before that, but never thought I needed all that. But it’s so great, I don’t know how I could’ve lived without one now.

Those others that are a decade or two younger are even more addicted to their Apple products.
People would just about part with anything else before they part with their connectivity, almost to the point of starvation, so it’s probably too early to bet agains AAPL as the paragon of that life-style choice.
Choice is perhaps not the right word, it ought to be addiction, and you know how addicts feed their habit above all else….

Mario cavolo February 17, 2012 at 4:03 am

Hey chris, I was also a holdout, got an iPhone only a year ago, thought it was great, except for the screen size, gave it to my wife and picked the htc sensecw bigger screen…don’t find much difference between apple os n android…both pretty damn smooth n slick!

C.C. February 16, 2012 at 6:34 pm

AAPL:

There is a trend in place right now. That trend is the fascination of twiddling and diddling over ‘apps’ and ‘communicating’ with others. Human beings – are by nature and for the most part, a communicable species. Therefore, it stands to reason why venues (Facebook, Twitter, et al.), and hardware/software companies that underpin the social-networking revolution would stand to $gain.

I see something different on the horizon however – a ‘counterculture’ of sorts, brought about in part by the realities of hard economics. Yes, you can still twiddle & diddle your phone/apps., while you contemplate what we’re making & exporting, under a tent…

Yet Another Steve February 16, 2012 at 6:52 pm

It’s true that the upcoming generation of 20-somethings is more focused on their social networking and internet gadgets than us Boomers. McJobs and temporary work, no thought to the impending disasters. Not good for them. We Boomers will wring everything we can out of the Federal trough, some paid for by us, that we can. I’m starting on SS in 9 months, early. Do I trust the Feds..hell, no. Do I think any of you folks or anyone out there really has a rat’s ass idea of what is really going to happen and when? Hell no again but GLTA.

The web keeps those mployed who would otherwise be starving and homeless.

YAS

Too

Paul February 16, 2012 at 6:53 pm

According to Warren Buffett “gold is worth nothing” and gold bugs will be gutted … and he would be right if we were so stupid as to trade our physical metal for worthless US fiat dollars … because according to Buffett it really doesn’t matter how much fiat money you collect for your gold ($1750, $3500, $12,500 or $25,000 fiat dollars) from his standpoint any fiat paper you collect for your gold is going to be worthless.

We at this site are not going to stupidly “take a small amount of fiat paper” for our physical gold just because Buffett says it is worthless … but we do need a fair way to calculate what gold should sell for in fiat currency terms … so we can avoid being ripped off by those who imply it is worthless … surprisingly the calculation is rather simple … to do it I make the assumption that the government will be willing to trade their gold at Fort Knox for our Bernanke fiat paper … of course the gold at Fort Knox (if there is any) won’t be sold to us … but I use this assumption to provide a handle for calculating what gold “should be worth” in US fiat paper.

The math is very simple … using data from the World Bank in 2011 it states there’s a total of 10 trillion US dollars in the world … and … with 25,000 tons of gold (800 million ounces) in the world … we just simply divide 10 trillion by 800 million … the answer I get is one ounce of gold is worth $12,500 US fiat dollars … therefore anyone buying gold now for $1750 fiat US dollars per ounce is getting a bargain.

Some may take issue with such a simple calculation that greatly under-estimates gold’s “true fiat value” … first because the US only owns 8,000 tons of gold and not all the gold in the world (25,000 tons) … and secondly because it assumes no other currency like Yen, Rupee, Yuan, Euro’s, etc. can be used to buy gold … so this means gold’s “true fair value” should be much higher … but at least the conservative estimate above gives us a target for gold in “fiat US dollar terms” that at least clearly shows that one will be ripped off by listening to Buffett and selling your one ounce gold coin at the current price of $1750 fiat US dollars.

And in fact the above calculation is even way more conservative then you think because it does not account for what happened this recent December 2012 when Bernanke “illegally” loaned a trillion new US dollars to the “European banks” (which by the use of fractional reserve banking can now be leveraged to an additional 10 trillion dollars) … what this means is Bernanke has in effect doubled the world’s US dollar fiat money supply to 20 trillion dollars … and plugging this number in my simple equation makes an ounce of gold conservatively worth $25,000 US fiat dollars.

Bernanke by now doubling the money supply will simply make everything twice as expensive … a $4 dollar pack of hamburger meat will soon cost $8 dollars … $100 dollar oil will soon cost $200 dollars … etc., etc. … this inflation in prices caused by Bernanke’s recent doubling of the US money supply will show up as the new money slowly filters into the system … and it will cause a depression as people cut back on their spending in order to buy the bare essentials … thus what Bernanke is giving us is an “inflationary-depression” where the fiat US dollar is worth half as much and the fiat price of everything doubles ( forcing gold from $1750 to $3500).

However … $3500 US fiat dollars does not represent gold’s “true fiat worth” as calculated above … calculation shows gold was worth $12,500 fiat US dollars back in 2011 and is now worth (with Bernanke’s recent doubling of the money supply) $25,000 fiat US dollars per ounce.

Conclusion … buying gold for anything under $10,000 fiat dollars per ounce will still allow an investor to conservatively more then double his fiat holdings (and that’s if paper fiat is what a gold bug really wants in exchange for his physical gold). Buffett may have lots of fiat but he will own no “real money” when the game ends.

Gold and other commodities should be bought before Buffett and the majority of the public catches on … which will likely be when price inflation ratches up significantly toward year end.

Robert February 16, 2012 at 8:44 pm

Look, Warren Buffet is a very successful speculator, but I agree with Doug Casey that Buffet is an idiot savant who does not understand economics, or the immutable natural laws that harmoniously interact to construct our very existence.

Buffet has made his points about Gold well known, as have Roubini, Summers, and Krugman…

History (and nature) will prove them wrong.

Mark Uzick February 16, 2012 at 10:08 pm

Your calculations amount to nonsense; all the fiat in the world is not even worth a grain of gold or anything else for that matter.

The value of gold can only be measured in terms of things that have real value, like silver or potatoes.

Speaking of potatoes: Fiat money’s purchasing power is the ultimate bubble – based on mystical faith in the magical power of the state. As the state’s abuse of this faith becomes ever more outrageous, fiat money’s ultimate bubble is degenerating into the ultimate hot potato.

steve4 February 17, 2012 at 1:12 am

$12,500 for gold…… how much for silver? One might begin to wonder why such an effort to suppress silver

Cam Fitzgerald February 17, 2012 at 8:11 am

“Your calculations amount to nonsense; all the fiat in the world is not even worth a grain of gold or anything else for that matter. The value of gold can only be measured in terms of things that have real value, like silver or potatoes”. ~~ Mark Uzik

But Mark, if that is true then can you answer this one small question?…….why did Ben Bernanke and the Fed bother with easing policies such as the recent bond buying instead of just going out and buying up all the worlds Gold?

If gold is so special why does the Fed not want it all? They certainly printed up enough USD to buy all the worlds supply several times over. Weird that they bought debt instruments instead. How very strange.

See the reason I am asking this is because my “fiat” is good and it buys precious metals every day of the week. It buys gas and groceries too. The gold dealers who sell me metal must all therefore be a bunch of idiots. Not only that, all people who sell gold for paper are complete idiots (according to the gold bugs).

Sarcasm aside, paper currencies hold value because they are the accepted form of trade. Why would that ever end? The Gold-huggers need to understand that it is those with the power to make law and those with the ability to tax who really set the rules.

That is why there will never be a gold standard and why we will never have the Ron Paul’s of the world as president.

Gold is a speculative investment only. That will end.

Mark Uzick February 17, 2012 at 1:29 pm

Cam, you know very well that any attempt by the Fed to buy all the gold would drive up the price to infinity long before even a fraction of all the gold was bought.

As to fiat’s purchasing power, I’ve already explained that it represents a bubble as temporary as any Ponsi scheme, as has been shown repeatedly throughout the history of fiat money. Like the stock of a fraudulent company with cooked books, fiat money has market value until people begin to realize that there is nothing behind it except crooks who will print as much of it as they can unload on suckers.

Robert February 17, 2012 at 6:22 pm

Cam wrote:

“can you answer this one small question?…….why did Ben Bernanke and the Fed bother with easing policies such as the recent bond buying instead of just going out and buying up all the worlds Gold?”

- Simple: All the world’s Gold is not for sale at current prices… There is a reason the Gold market is so illiquid, Cam; think about it…. Why does Gold demand (and trade volume) INCREASE when the price climbs?

“If gold is so special why does the Fed not want it all? They certainly printed up enough USD to buy all the worlds supply several times over. Weird that they bought debt instruments instead. How very strange.”

Again, they haven’t printed anywhere NEAR enough to buy the world’s supply several times over. Your assumption is flawed.

When you consider the amount of fiat liquidity in the world to the number of Gold ounces, and then calculate the number of 100 ounce COMEX contracts that would be required to settle this many transactions (not to mention the LBMA and Hong Kong Global exchange contracts); you will see that the price of Gold (and silver) is expressly a function of their thinly traded market conditions at present.

The Bullion Banks and other “insiders” in the Gold market only strive to maintain ONE simple balancing act: They work to keep the market trade volume balanced with the a very lean stock to flow ratio, so that the ONLY supply of metal that influences delivery prices is that of new out of the ground production.

If production stopped, or if people began focusing more liquidity into the Gold market, the stock to flow ratio would have to be ramped up FANTASTICALLY to meet the demand.

The only thing that is necessary to take these markets higher is increased liquidity, and the Gold necessary to couteract this liquidity would not be met by the supply side at current prices. Get it?

Your logic dictates that if Gold is over priced at present, then somewhere out there is an undiscovered glut of Gold that is or will be for sale for less US dollars… I suppose perhaps this Gold is in a cave somewhere being protected by a tribe of Sasquatch…?

I’m not going to wait for you to be right about an unproven (and unverifiable) possibility.

“The Gold-huggers need to understand that it is those with the power to make law and those with the ability to tax who really set the rules.”

- So, you deny that there has ever been an open popular revolt (or even outright Revolution) in the history of mankind? Are you serious?

The true FACT is that the rules are “set” by those who are willing to live by (or adhere to) the intellectual or cultural prejudices of others…

When this willingness collapses, things change very rapidly; and sometimes chaotically or even downright violently.

Cam Fitzgerald February 17, 2012 at 7:22 pm

“Again, they haven’t printed anywhere NEAR enough to buy the world’s supply several times over. Your assumption is flawed”. ~~ Robert
————-
Actually I think your logic is flawed. You see they did not even buy 10% of all the gold. Not 5% either. Nor did the Bank of England. Well how about that European stability Fund then? When it was implemented with “printed” money why did the ECB buy bank debt and Greek bonds instead of gold, Hmm?

The gold camp is made up of so many tail-chasers with all their distorted logic and rationalizations for why things should work this way or that way. Most of it is nonsense.

Where is the inflation Robert? Where is the hyperinflation? For that matter, where is the depression and why is the world not ending so you can benefit handsomely from your little pile of metal?

I am guessing that like most metals guys this little drama is playing out in your head and nowhere else. Most of the theorizing and speculation about all the end of the world scenarios never materialize. It is, as I said, just tail chasing and fear pandering. Thankfully, most normal people ignore all the bleatings and just carry on with their lives like before.

We have been here before by the way. The gold bubble of the seventies was far more intense than this one. I would call this current event muted, even dull, if anything. But then, we had an energy crisis back then and people really did believe their worlds were coming to an end.

The barrel price of oil went from below 10 bucks to a hundred. How is that for a reality check. There was shortages everywhere, bankers hitchhiked, fuel stations ran dry……

But all the crying and the handwringing only led to better days ahead and all the folks hiding in their bunkers with metals stashes while awaiting Armageddon suddenly looked very, very foolish.

I get a real laugh when I hear you guys speculate on how much gold is worth. It’s the new math. Only the gold huggers get it. You should probably realize though that long before you might get to enjoy all that dough the government would want its share anyway. Especially if it became as valuable as you think. You would be taxed on windfall profits.

Meanwhile, most of you are showing just how cynical you really are by predicting an upsurge in price, a parabolic move and an eventual blow off top.

That is code, you see. It is a frank admission on your parts that Gold really is a speculative bet. It is not an investment then is it? Not any more than a house was an investment before the bubble there burst. Bre-ex anyone?

And what do you people think is going to happen right after a blow off top? I can tell you if you are curious. We will go back to buying groceries and gas with paper currency just like we always did and a few of you will have lost your shirts following a price collapse in precious metals.

But go ahead. Paint yourselves in a corner if you like.

Robert February 17, 2012 at 9:18 pm

” I think your logic is flawed. ”

-That statement took balls – I’ll grant you that.

“Where is the inflation Robert? Where is the hyperinflation? For that matter, where is the depression and why is the world not ending so you can benefit handsomely from your little pile of metal?”

Hahahahaha … You may have no idea why I am laughing, but it has more to do with the past (year 2002 to be precise) than it does the future.

There does not have to be a Depression, nor an economic contraction, nor even a hyper inflation, for Gold to continue rising in price from here… There only has to be further currency debasement by Central Banks, which there will be… You said it yourself elsewhere in this thread. The Fed will soon have no choice but to buy more bonds (a point I agree with you on fully, BTW)

Oh, and for the record, I’ve never claimed Gold was an investment. Gold is an ASSET…. I assume you know the difference…?

Cam Fitzgerald February 17, 2012 at 10:16 pm

I know the difference between an obsession with an golden icon and investing for income but I will bet that biblical reference flies right over your head.

Robert February 20, 2012 at 7:35 pm

“I know the difference between an obsession with an golden icon and investing for income but I will bet that biblical reference flies right over your head.”

-Hardly.

Watch this short 2 minute video, and listen to the lyrics in the soundtrack:

http://vimeo.com/23864881

Indeed, we all WILL never be the same, as we continue to slowly and steadily realize that the salvation for our species lies with nothing but with the universal spirit that lives within all of us… The NAME of this spirit is simply another irrelevent tangential distraction.

Again, your assumption that I worship at the alter of the golden idol is flawed… I simply understand the quality of money. If that condemns me to eternal damnation, then I guess I’m taking some pretty risky chances, aren’t I?

C.C. February 16, 2012 at 7:18 pm

Warren Buffet is proving – almost by the day, that age and wisdom do not always share the same quarters.

Onoiro February 16, 2012 at 8:15 pm

“Railroads are much more energy-efficient than trucks because they use much less fuel. An average Burlington Northern train hauls as much freight as 280 trucks. Rails are also favored by some shippers because they can carry things that can’t travel on highways, like hazardous chemicals.” -msnbc

Warren Buffet didn’t buy the second largest railroad in America because he believes in her recovery, think about it.

Paul February 16, 2012 at 7:19 pm

I also see some are questioning how we can have inflation and depression at the same time … well in the coming economic slowdown … the public will find they are holding fiat dollars worth half its current value as the prices paid for “everything real” doubles in fiat paper terms … it is only then that the public will come to realize they are not living through a Great Depression like their parents and grandparents lived through (where the money supply was kept depressed as prices fell) making cash king … but this time around … it’s different … they will find themselves in an “inflationary-depression” where a constantly expanding money supply continually loses value at the same time the prices of all goods, services and commodities rise in terms of the “debased currency” … and in such an environment gold (not cash) will be king.

Onoiro February 16, 2012 at 8:54 pm

Asset deflation hidden by monetary inflation. Nominal gains on assets that would otherwise be used to head off a rising CPI will be heavily taxed. Simply put, there are no financial experts who know how to plan for the barrel of a gun.

j February 16, 2012 at 8:19 pm

Ol’Buffy

Funny how he nor those that interview him regarding gold never put facts in his face!

Lets see, $1mill invested with Buffy Jan 2000 in his Berky fund at $56gs per unit today would be worth $2.1 Mill…..$1mill invested in Gold over the same time frame from $285 to $1725 results in a portfolio worth $6.1 mill….hmmm….any questions???

Paul February 16, 2012 at 9:09 pm

Buffett at one time bought a lots and lots of silver … I believe at only $6 or $7 US fiat dollars per ounce … but he was likely forced by his bankster buddies to unload it all at little or no profit probably because it might have encouraged the public to buy … this suggests that Buffett could be in the banksters pocket and therefore anything he says about precious metals should be taken with a grain of salt.

Because Buffett can’t play the precious metals market it does not mean he can’t make money by Bernanke’s inflation tactics … buying railroads is a good move if the oil price jumps to $200 fiat US dollars per barrel as the trucking industry shuts down.

bc February 16, 2012 at 9:40 pm

What happens in these debt/deflation crises is; credit dries up, and, equally important, moves toward ever shorter duration. As noted above, first the 30 year bond vanishes, then the 10, 5, and so on. In the end game, duration collapses to zero, and we have an all cash and carry economy. No credit and zero duration become one and the same. Industrial economies cannot function in this environment, so the real delivery of goods and services crashes to near zero. Cities in particular are not viable, so the people leave the cities. Somewhere along this glide path to utter ruin political forces act to (finally) produce structural changes overturning the status quo power structure. This is not necessarily a good thing. Usually guns are involved.

gary leibowitz February 16, 2012 at 10:24 pm

Another off topic comment.

13085, Rick’s long standing bullish call for the Dow is right around the corner. Great Call! Despite his personal opinion on the market he followed the tape.

Rick Ackerman February 16, 2012 at 10:53 pm

Hey, Gary, thanks for noticing. I try to practice what I preach — i.e., no matter what you think, the market may have other ideas.

For the record, I remain bullish till Dow 13085, at least, but I still hate everything about this market.

Cam Fitzgerald February 17, 2012 at 8:19 am

I hate this market too. Have to agree that was another great call Rick. I did think you were going to be wrong on that one so this is a pleasant surprise.

Paul February 16, 2012 at 10:30 pm

Rick … did I just see Royal Gold take out 4 hidden pivots? …

If so … this must be the gold bugs clear and powerful answer to Buffett’s words dooming gold.

Buffett would have made a fortune if he stuck to his silver position and now he seems destined to another “big lost opportunity” poo pooing gold.

bc February 17, 2012 at 12:48 am

If you want more of the casino chips we call dollars, I still recommend you look at VXX and TVIX. These are breaking their long term trend, and will hedge you against what I believe is an imminent price collapse in the markets.

BDTR February 17, 2012 at 1:14 am

Maybe it shouldn’t be astonishing to read this Randian anti-govt-employee stereotyping from intelligent people experienced enough to know better, but it is.

Robert, I happen to have known a career reconstructive surgeon named Paul who spent his career at Walter Reed. He could have been a very rich private practitioner, but dedicated his skills as a public servant for less compensation than your average private nurse.

No doubt that he worked his parasitic skills to the extreme of a stroke that took him at 59. I can’t help but think of the likely many named Peter that he healed.

Really, folks. The dogma’s myopic as all hell.

Robert February 17, 2012 at 4:20 am

BDTR-

There is no Dogma. What I stated is a financial fact validated (and obviated) by the application of 5th grade mathematics…

Could your friend have chosen private practice, and accepted a similar level of compensation for his efforts, had he chosen…?

Your friend was a very generous soul who did not understand (or may have understood but chose to ignore) that his personal worth to society was in no way enhanced by his altruistic sacrifice of personal gain…

He did not have to forego the private sector in order to help more ailing people (I’m not suggesting that doing boob jobs in Beverly Hills is more noble simply because there is more money in it- quite the opposite, in fact); but I’d be willing to bet that his generosity was proselytized and leveraged 100 fold by administrative public servant do-gooders riding his coat-tails all the way to their very own comfortable government pension.

Hey, to each their own…

I am not criticizing the choices people make when they are given circumstances that hold a personal appeal (for whatever reasons); just as yesterday I could not castigate the millions of sub-prime borrowers who willingly took loans that put them way in over their heads… The lenders offered the rabbits a carrot- so why is anyone surprised that the rabbits jumped for it?

Consider for a moment what your friend would have done if there were no such government hospital as Walter Reed… would he have foregone medicine? I can’t imagine so.

I appreciate the candor in your comment. Please consider that I wouldn’t come across as such a heartless SOB (or invest all this time typing) if I really didn’t give a $hit.

Jeff Lane February 17, 2012 at 1:55 am

Mario I tire at your accusations that anyone who believes in china’s ghosttowns are “uninformed”. First off, most of the reports I see and read are on the ground investigations. By people who manage $Bil funds and what to know the truth. What do you call entire cities and malls sitting with only a guy hired to sweep the unused streets ? I suppose you don’t even believe it’s run by communist ? Just the fact that the Politburo is making all the economic decisions should give you pause. Please tell me why the shipping rates have collapsed. Why the collapse of the countries that previously were net purchasers of chinese goods won’t cut them off at the knees ? Just like US tax revenues overide all the bogus economic reports here, so does the fall of electrical use in china…….China will fall like all the rest.

TM February 17, 2012 at 5:57 am

It’s not even a question of “if or when” China will fall. It’s already started, as this excerpt from The Slog attests:

But it’s the Chinese enigma that too many people are ignoring. Asian shipping shares aren’t doing well at the moment, and most of the indices measuring economic futures are at or near the red-flashing-light point. The equation here is remarkably simple: China exports to the West, West’s ability to consume spirals down the loo, China hits the ground hurting. China stops ordering raw materials, Australia goes into a rapid and deep recession, and the Sydney property bubble bursts. China cuts imports and tries to focus on the home market to take up the slack. Western exports fall further, and depression becomes slump.

Yesterday’s revelations about Chinese loans to local government pools winners have added another dimension to Beijing’s problems. I was surprised the piece here didn’t get more hits – the scandal does, after all, involve a likely Beijing write-off of a sum totaling nearly three times the size of the US bank bailout of 2008. It doesn’t have any of the potential for contagion, but let’s get real here: we have a stop-start gerontocracy in China grappling to control private property inflation, chronic housing shortages, huge wealth imbalances, overspent infrastructure budgets, and most of its trade customers going bankrupt. The likelihood that China will soon shrink as an outlet for Western consumer goods has now become a near-certainty, but the coverage given to this development was minimal. Anyway, you read it here first.

http://hat4uk.wordpress.com/2012/02/13/you-thought-chinese-bankers-were-different-think-again/

Cam Fitzgerald February 17, 2012 at 8:28 am

Thanks Jeff and TM for adding your comments here. I am also puzzled why Mario takes any criticism of China as a personal affront. He defends as though he were responsible for what is now taking place and is coming across as shrill while trying to shut down the debate altogether. This is an important conversation though and we have legitimate cause for concern so the topic needs more discussion, not less. Anyway, it is good to know others are taking the developments seriously. I believe this is but the beginning of a very rough patch that is coming. As I alluded to earlier, without intervention we may be facing a deflation shock and that would be just the beginning of our new troubles.

Mario cavolo February 17, 2012 at 4:51 pm

Question and answer…

I call them a few failed real estate developments…. which are not by any stretch or measure an indicator of the broader core trends across china,s various economic sectors including real estate .

Mario cavolo February 17, 2012 at 4:59 pm

This kind of statement is exactly why I take it personal

“its – the scandal does, after all, involve a likely Beijing write-off of a sum totaling nearly three times the size of the US bank bailout of 2008.”

3 times the size of the 2008 u.s. Bailout?….really!? Wow! I read this crap and I’m speechless, absolutely unequivocally speechless!

mava February 17, 2012 at 6:31 am

Robert,

Doug Casey really said that? I am of the same opinion and it turns out we agree on one more thing. Wow.

My reasons for saying that is that I have seen too much corruption, and since I am not a baby anymore, I perfectly understand without being shown that Buffet is just a myth.

Give me a father who is in the highest levels of government and I will show you that making money on “wise forecasts” is as easy as pissing off my two fingers.

In my opinion, you’ve got to be a fool to believe in Buffet’s story. It’s no different than to believe that a mafia boss is just “lucky”.

Another point on which we agree was that I called an ounce of gold to worth about US$ 65.000, and Casey has a very much similar estimate. (I calculated that years ago, and my very next move was to buy gold).

Mark Uzick,

Actually, worthless or not, you have to account for the fact that currently, all money buy all goods. Dollar and any and all currencies being ultimately worthless means only that the purchasing power of one of their unit will fall significantly, until people just stop bothering with them, but right up until that day, all currencies will still buy all goods.

***

On the outright confiscation question as it pertains to the ability of gold bugs to survive in comfort, I must note that if your gold is available for confiscation, then again, how is it that you’re a gold bug? You’re a patriot then, nothing more. Just a party whore. You are suffering from the hands of the people to whom you will willfully surrender the fruit of your suffering. That is not a gold bug.

Cam Fitzgerald February 17, 2012 at 8:31 am

Pretty good comments Mava. Especially the last paragraph. Brilliant. Cheers!

Mark Uzick February 17, 2012 at 1:41 pm

mava, that’s not difficult to account for at all; it’s really too obvious – see my response to Cam above.

Robert February 17, 2012 at 6:42 pm

Gold confiscation… give me a break.

How could the US government facilitate such a confiscation, and how would they collect suffience ounces from US citizens to impact market prices when US citizens are predominantly NOT owners of Gold….?

OH! Maybe the US government will send the Gold confiscators to India and China and go to door to door confiscating all of THEIR Gold, right…?

Of course they won’t… They’ll just find that cave of Sasquatches out there and take THEIR Gold….

Or maybe, the Annunaki will return to Earth, and the US Government will be waiting to confiscate all the Gold that the Annunaki took away after they genetically created humans in Sumeria 20,000 years ago to mine Gold for them to take back to Osiris, or whereever the hell they came from…. :)

Flights of fancy can take all forms, but market conditions simply are what they are….

The PM markets are highly illiquid and yet they deal in very scarce resources – this does not portend lower prices over longer time horizons… I’m sorry if this does not line up with all the preconceived notions all you “bubble” blowers out there wish to cling to.

mava February 17, 2012 at 6:45 am

BTDR,

A public servant? Try an oppressor. I don’t need his service, and yet, he is a part of a violent machine that insist on my buying his so-called “service”.

And the compensation amount makes absolutely no difference in this case. Why? Would you say that Jews burning in ovens would be glad to know that Hitler could make more money in a private enterprise?

Evil is evil, for money or for free, and government is evil.

Cam Fitzgerald February 17, 2012 at 8:19 pm

“The PM markets are highly illiquid and yet they deal in very scarce resources – this does not portend lower prices over longer time horizons…” ~~ Robert
——————–
Really Robert? Maybe you forgot about the bond bubble. Ever wonder what will happen to gold when interest rates begin to rise? How far off in the future do you think that might be? 2014 perhaps as the Fed will keep rates low until then…..assuming the Fed can keep the bond market compliant until then.

You probably noticed already how cooperative bond players have been where Greece, Italy, Portugal et all are concerned. Look at how rates shot up over there and wonder. You know it is coming here eventually too.

In the meantime, should real estate recover then gold is pretty much over as a speculative bet. Why would anyone hold metal when they can have the opportunity of asset appreciation and rents?

I seriously doubt gold will ever see its really big day in the sun as some of you suiggest but will instead eventually just fizzle out and fade back to the woodwork. It is not going to be worth 10,000 dollars that’s for sure.

As to gold markets being illiquid, well I though gold was intended to be a currency by the gold huggers. Now you tell me it is illiquid. Makes perfect sense to me. Even you are getting it now.

Robert February 17, 2012 at 9:50 pm

Good grief Cam…

The level of liquidity in the Gold market is a matter of FACT, not a matter of currency.

Why isn’t the Fed buying Gold instead of Bonds? I don’t know- maybe you should ask the Fed.

Could it be perhaps because the Fed is not interested in “joining” all us crazy gold nuts who think real assets are superior to printed paper for wealth preservation…?

In your never ending attempt to denigrate the foolish self righteousness of all us stupid, deluded Gold freaks (at least one of whom has generated, and fully enjoyed, the benefits of 500% plus in REALIZED capital gains over the past 10 years), you simultaneously fail to recognize your own glaring self-righteousness in declaring that we will all be wiped out when the “bubble” pops… Boo hoo for all the poor souls who will think that the secret to getting rich is simply doing the same thing that everyone else is doing to get rich….

I have posted the following response to you so many times that I grow bored with it, but I will type it out again anyway:

Your crystal ball is no clearer than anyone elses…

Cam Fitzgerald February 17, 2012 at 10:10 pm

“Your crystal ball is no clearer than anyone elses…”
—————————
Of course it is Robert. I can see the outcomes, you can’t. That is why I am supremely confident most of you goldhuggers will eventually lose your shirts as you hold on right back down to the bottom.

Happy trails!

Robert February 18, 2012 at 12:33 am

If you can see all outcomes, then why the following comment to Rick made above in the same thread:

“I hate this market too. Have to agree that was another great call Rick. I did think you were going to be wrong on that one so this is a pleasant surprise.”

….. ?

How could you be wrong? I mean, You’re absolutley right: It is so plainly obvious that because the dollar price of Gold and commodities collapsed in 1980 when the Fed raised rates that it is all but GUARANTEED that the same thing will happen again.

I mean, yeah, there’s that whole little thing about rising rates bankrupting the US Treasury, who would have to issue new higher yielding bonds today to pay the interest on the high yield bonds it issued yesterday; compounded by the persistent nag that the Bond market has shifted into the uber bubble phase where no one seems to think they can lose by betting on the full faith and credit of Global Police State, inc.

But yeah, of course things will be just like 1980, because when Volcker raised rates, NONE of the money that flooded out of commodities flooded into Bonds… did it? (sarcasm, in case you were wondering)

Now do you see the difference? in 1980, the money that left Gold and commodities went INTO Bonds.

This time, if interest rates start rising, the money is going to LEAVE bonds more aggressively; since rising rates are going to FORCE the Treasury to flood the world with supply just in order to make its interest payments on the ever-mounting Federal debt…

in 1980 , the US was the world’s largest creditor- we had the collateral to back-stop Volcker’s plan.

This time, we are the world’s largest debtor.

As the rate of new debt accumulation goes parabolic, the value of the currency approaches zero… always has, always will.

At this point, I either begin publicly sharing my opinion regarding your levels of extreme normalcy bias and cognitive dissonance, or I shrug my shoulders and say “Whatever, Cam”…

{shrug} Whatever, Cam.

Cam Fitzgerald February 18, 2012 at 1:06 am

Guess you know it all Robert. You sure behave as though you do. I am guessing your market calls are perfect too. I will have to check the “ramblings”. So why do any of us even bother with the WSJ or Barron’s or Ricks or Zero Hedge etcetera. We can just read the arrogance and insults of Robert each day and glean your constant stream of market genius. We will all be rich. What’s your next big call coach?

That was sarcasm too in case you did not get it.

Robert February 18, 2012 at 5:52 am

Actually, I don’t behave as if i know it all… I only think, and write as if I do…

The fact that my thinking does not align with yours only sets the stage for one of us to be right, and one to be wrong, and only the passage of time will serve as the ultimate arbitor in this exchange…

Enjoy the wait.

Cam Fitzgerald February 18, 2012 at 6:38 am

The only thing that does not align with me, Robert is your general lack of civility and the sneering disrespect you show for comments that differ from your own. Both you and Mario have been on a real ego trip lately and you could stand to use a chill pill and stop going on the attack whenever someone voices an opinion that differs from your own.

Robert February 18, 2012 at 6:41 pm

AHA!

The crux of our disconnect…

For me, this discussion is all about circumstances, and the ability to identify historical fractals that could/would repeat in the future given those circumstances…

My points of argument would have been the same regardless of whom I was engaging in the discussion.

For you, it was all about “Cam versus Robert (and/or Cam versus Mario)”

This exchange (for me) is not, and never was, about anything personal. I do not attack the person, but I do expose the argument when it can not be completely reduced to a rational empiracal basis. I’m sorry if my nature in this regard offends you, but it is what it is…

Despite all the craziness in the world, people do EVERYTHING they do for a reason. Understand the reasons, and you will be able to better formulate the outcomes.

You and I are in full agreement pretty much on the shape of things to come right up until the point of potential US Treasury insolvency. I say such insolvency is possible (in fact, if we do go into another global economic contraction I think it is not only possible, but likely), so I focus on the probablities that present themselves under such a scenario.

You say such USTreasury insolvency is impossible, and therefore US Dollars would be King during any “deflationary” collapse.

I, however, understand (and try to help you and others understand) that this is NOT the 1930’s all over again… in any future US Dollar liquidity/solvency crunch, the US Dollar has NOTHING it can be re-priced against, except EVERYTHING currently priced in US Dollars.

When a currency is a claim on “faith and credit” then a decline in faith and credit must yield a decline in the value of said currency.

Any pricing measures of the currency against other faith based currencies is arbitrary… If all currencies are backed by faith, then a decline in the general level of faith means a decline in ALL currencies… follow me?

I try to elucidate the fact that if the USTreasury goes bankrupt (in concept), then it will have NO assets that can be re-priced (in any currency) to clear the default… save ONE (with the US’s other option being to go to war against the rest of the world- something Germany thought it could also accomplish, but look how well THAT turned out.)

If the US Treasury had a big ole tub of crude oil on its balance sheet, then it would have two assets; but it doesn’t… On the asset side of the balance sheet, the the US Treasury has faith based paper (which rises and falls in value along with general levels of global faith), and it has Gold.

On the liability side, it has debt to the Fed (the Treasury’s largest creditor), debt to China (2nd largest, and shrinking), and debt to everyone else…

If faith keeps declining, then the day will come that the global currency war will ratchet all the way down to Gold versus the US Dollar. Under such a scenario, You have to think about which one the WORLD would choose, and not which one YOU would choose.

Because you think a particular scenario is impossible, you therefore apply no rational thought to it. Now, I’m sorry if you take this personally, but this is a prototypical example of the same kind of cognitive dissonance that convinced nearly every person in Spain that Christopher Columbus should have been denied by Ferdinand and Isabella, and tried and burned at the stake as a heretic and murderer for wanting to willingly lead his crews to their ultimate deaths.

In these arguments/exchanges, simply think of me as Columbus… I simply dare to assume that “Beyond here, there be NO dragons…”

If you are right in your assumptions that the US Dollar will retain supremacy, then there can only be more wars ahead of us (climaxing with China)

If I am right, then global society can/will find the economic and currency balance it is looking for… a balance based on faith in each other, and not faith in war-mongering governments. Something will have to serve as the anchor, pivot point, and numeraire of this new economic balance…

Indeed, perhaps it can/will be a new global faith in a centralized currency issuing government that anchors this new global balance; but if the Euro is any example from which we can draw any lessons or inferences, then I personally think it might be a little pollyanna to assume that the world citizenry is ready for this kind of fiat based centralization… And I think it would be the pinnacle of hypocrisy and contradiction for the US (supposedly the bastion of fredom and personal liberty) to try and FORCE the world down this path militarily…

You choose to look at things tactically (ie: what’s next)

I choose to look at things strategically (ie: what is to come as a result of what’s next)

Tactically, I think what’s next is rising (and possibly drastically rising) global trade liquidity in the Precious Metals markets. I respect your right to disagree with me on that, and I am completely open minded to the fact that I may turn out wrong…

Nothing personal

mario cavolo February 19, 2012 at 6:53 am

we would do that Cam if someone such as yourself presented FACTS which supported their views on subjects of which they are not particularly qualified to voice their different “views”

My statements on China are typically not “views” they are deeply grounded in reality, and if I did not KNOW that, I would not print and publish the words in the first place…that’s not arrogance or ego trip, its intelligence and my attempt at helping other people such as yourself, who once again, do not live here for twelve years and not privy to the real on the ground goings on, to understand. When its not appreciated, yes I take it very personally and for that I offer no apology to anyone foolish enough to follow only what they READ wherever it may have come from.

Erich February 17, 2012 at 8:29 pm

It’s not that there will be simultaneous inflation/deflation. First, there is no such thing as inflation or deflation, they are two ways of saying- ‘broke’. But in relation to the dollar and the longevity and trend change of the same, the terms ‘inflation’ and ‘deflation’ help illuminate the dollar’s future, as well as a wile plan by the Fed lost on today’s economists.

Every economist out there right now feels that the Fed is blindly addicted sans choice to this ‘kicking the can’ approach until something breaks, like the dollar going worthless or nearly worthless. But that is not necessarily the case. The Fed is not necessarily so stupid or so desperate or so impotent. And such nonchalance flies in the face of the Fed’s own survival, no matter the national circumstance.

With respect to the fate of the dollar, the Fed is continuing to print money (‘inflation’) while managing a tentative dollar panic and crash, but when the printing presses start ’smoking’, somewhere around the time that the Fed has monitored and approved the transition into ’social bankruptcy’ (aka ‘deflation’… into Nationalism, then probably into Dictatorship), at THAT point the Fed will put the brakes on money supply and explode interest rates higher. Nobody except insiders will be beneficiary of such a ruthless course since all will be without investment capital; Gold Bugs will see their holdings rise on the paper tide, and then crash over the Deflation reef with prices dropping under $700 at least, no later than the first meaningful rate hike.

This is quite a brilliant strategy because it might realign the balance of rich and poor (albeit into a diminished environment and habitat) and further maintain and reinforce the dynastic system of our age-old, feudal landlord status quo. And it could very well work. When looking at Fed policy as a 24 month window (to complete the bankrupting of the United States) and transition into a de facto, completely segregated market environment (i.e. gold market, stock market, credit market, real estate market, etceteras without any correlations among them, that is, individual markets by decree) then a picture emerges of a future that is no longer kicking the can into uncertainty, but rather clear and quantifiable chain of events. Monetary as well as social and global.

This was the point I was making, and the fact that equity markets are holding steady or rising is just one ‘lip service’ market inside a changing national face which at this stage is irrelevant, just a tool to transition events further out. The fact is, despite all of the Debt and money printing, the dollar is probably going to survive (and if it doesn’t then it will be the last investment category to fall). And in this way the administration will underwrite its own survival. The unfolding social collapse ushering riot and arson is simply the upcoming stage set of our budding militarism. Without a viable currency, as de facto coupon and remnant store-of-wealth according to our upcoming (military-corporate) Ration system… reflecting scarce natural resources that are no longer obtainable through the Capitalist format, then there could not be economic structure to the dawning of our USA Third World, Banana Republic, Military-embodied national character.

Robert February 17, 2012 at 10:04 pm

Ummm… Everyone will be “broke”….

Kinda like the Kalihari Bushmen are “broke”, right?

Are not all forms of wealth and social status a fallacious human invention…?

Are the Global banks REALLY trying to teach the planet that everyone is merely a Kalihari Bushman at heart?

Or, are they actually just blindly spinning their wheels, pulling monetary levers, and pushing flashing interest rate buttons, in a wild attempt to make it appear that they are actually doing ANYTHING about restoring human faith in the native value of fair and honest commerce….?

You tell me.

Robert February 17, 2012 at 10:22 pm

I must say this again for emphasis…

Fair and honest commerce, not credit creation or expansion, is the foundation of ALL healthy human economies…

If things are not fair, no amount of issued credit will disguise the imbalances in personal sentiment that result…

mario cavolo February 19, 2012 at 6:57 am

sweet heavens…as an entrepreneur I am fighting tooth and nail to make it because of the lack of fair and honest commerce which has emerged across the economies…in my experience, true on every continent, eh? …Asia/China…U.S….Europe…makes no difference…there’s little healthy about what we see across the global financial system…the only saving grace truly good news at this time from a broad macro global perspective is the new rise of the middle classes across the emerging countries…

Chris T. February 18, 2012 at 12:07 am

Robert:
Robert, agree to some extent, but my comment, while not stated explicitly, is focussing on the margin, which is where prices, and PAIN from unemployment is made.

Certainly it is hard to imagine that everyone will “lose their jobs”

Certainly the mechanics of the whole thing we seem to agree on.

The rest of the depression comment really is just a little homage to Howard Katz, who so rightly pointed out that what we are being taught is a depression, is really only one for the elite, but not the masses, whereas the socalled good times, are actually depressions for the masses, but just not for the elite.

Case in point of the early 1930s vs. the post 1970 period onward:
In the first instance, the elite was clearly suffering the reverse of the stealthy inflation-tax transfer, hence they got us to believe the notion of depression, yet all the while real stats show people wer e not acting that way.
Unlike in the post 1970s world, or better post 1981 world, we are taught, as per the DOW;s curve, things have been great primarily, when in fact only the elite gained, but the rest of us have been in a depression (hihgest ave. real wage peaked about 3 -4 decades ago)

“But what about the pictorial evidence?”
That’s the comment about the margin and real increasing labor costs, but already on the mend when Hoover was voted out (who did his best too to keep a recovery from happening). Then came in FDR, and just like the W and Barry-O tandem, kept the same misguided policies, just on steroids, and then you really did have a backsliding…

Robert February 18, 2012 at 12:37 am

T”he rest of the depression comment really is just a little homage to Howard Katz, who so rightly pointed out that what we are being taught is a depression, is really only one for the elite, but not the masses, whereas the socalled good times, are actually depressions for the masses, but just not for the elite.”

- I was a subscriber to the One-Handed Economist for years… I miss ole Howie, :(

mava February 19, 2012 at 8:50 am

Same here. May his soul be blessed. Learned a lot from Howard. Miss him a lot.

roger erickson February 18, 2012 at 3:42 am

Here’s one of the most relevant comments seen all year on fiscal and trade policy.
[comment at:
http://bilbo.economicoutlook.net/blog/?p=18218&utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+economicoutlook%2FFYvo+%28billy+blog%29 ]

Adam (ak) says:
Friday, February 17, 2012 at 7:26
“It is from this point of view that the fight for foreign markets may be viewed. ”

This is the best counter-intuitive explanation of the Chinese mercantilism. The Chinese capitalists do not withdraw the profits as monetary savings on a large scale, they mostly reinvest them and this creates a positive feedback (“acceleration”) – until they reach productive capacities which can satisfy the whole global demand for some commodities. Rising profits not only “finance” investment but also stimulate business confidence and induce credit-financed productive investment.”I” is the parameter which has been maximised in China for the last 30 years up to the point of full utilisation of the productive capacities (which is another limitation not shown in the equations mentioned above). At the previous stage of development production in China was constrained mostly by the productive capital not by demand because they had access to “almost infinite” global demand. Exports were therefore “benefits” and imports were “costs”. Would an alternative path to rapid development based on domestic consumption exist in a country with so high Sw ratio? Not in the current world infested with neoconservatives armed with nukes I am afraid. Also – the Chinese had tried replacing private investment by government investment prior to the reforms but this did not work. Of course when global demand is satisfied by Chinese manufacturing (it may decrease as a result of the global austerity crisis) they will switch to increasing (G-T) or they will reach a plateau in growth like Japan however we are quite far away from that state. Yet Chinese have already overtaken the US as the largest manufacturer. They only need to change the composition of their manufacturing – from pencils, plastic boxes and clothing to computers, iPods, solar panels and space technology – and beyond.

Their persistence may be rewarded.

What about the following book?
“Michal Kalecki” by Julio Lopez G. and Michael Assous, Palgrave 2010
It contains a summary of all the relevant theories developed by Kalecki.

mava February 18, 2012 at 7:29 pm

Erich,

OK, so you really meant “inflation, then deflation”? That’s fine, I don’t have a problem with that. I mis-express myself all day long too. Of course deflation can follow inflation. Cool.

As to your argument that the Treasury will just raise rates to engineer the deflation, I think you could glance at Robert’s comments to Cam.F.

There are many arguments on why such is not possible, but Robert brings one that is no worse than others.

My own favorite argument have been “Why not already?” (This is the summarized form). Basically, a theory such as yours, need to be tried against the following as a critical test: How is the Treasury going to pay the higher interest?

I don’t know about you, but those who tried this before say ultimately, that the Treasury will print the new additional claims on wealth to pay for higher interest.

If this is your answer, then take a note that this means that the Treasury is going to engineer deflation by creating an inflation. There is an obvious problem with that, similar to “going down by going up”, “emptying it by filling it up” and “inserting by withdrawing”.

If you think of this, but somehow still insist that this is possible then your theory becomes easily challenged by asking: So if you can do it, and live for free, print money while prices fall, while not producing, then why don’t you do it already? Why wait for some global event? Let’s declare the permanent paradise on earth already, now, today! To that, you will have no answer, because the only answer to that is a demonstration.

mava February 18, 2012 at 7:48 pm

Cam F,

The problem that I see with your view that it will be better to have money invested in some other instruments than gold is the following:

1. Real estate is out of question, because:

a. Landlord will not be allowed to demand what he needs to match gold real “profits”.
b. Tenants will not be able to pay what Landlord would need.

Personally, I see mass property fires as a result of this disconnect, after which, rent control will be universal in US. You probably would disagree with such a notion, stating that such an attack on property rights is unthinkable in US, and I will ask you “Was fascist healthcare something that was thinkable in US?”

2. By assuming that the government can both create money and increase real rate of interest, you create a paradox, I believe. Both things can not exist at the same time. I’d like to hear your view on how that is possible.
If I am mistaken, and you do not assume that said paradox, then here is the reason of why there will be no movement into financial instruments out of gold even if nominal interest rates increase:

- Gold as an instrument will receive real rate, which at all times is a positive value, while any paper instrument during nominal rate increase receives a nominal interest rate which has to be less than an inflation rate, because otherwise, the mechanism does not have a feedback loop. Thus, an interest on any paper instrument remains negative interest rate, official government statistics testifying of miracles opposing this simple equation non-withstanding.

Now, what I am getting down to is this: I am acting on simple knowledge of this (above). The masses do not know this simple thing, because they are simply not willing to live and survive. They are in the cow mood. Some day, they will begin questioning themselves regarding this simple arithmetic, and on that day, the Fed and the Treasury are finished.

I am simply preempting the crowds in their next move, and this is all that is required to stay filthy rich.

Yes, I know there is money to be made even on a negative real interest rates. But this number is only possible with OPM (other people’s money), which is what fund managers and banks do. This is not real profit, but an accounting fraud. This has no application for the masses.

Robert February 19, 2012 at 6:40 pm

You mean the day won’t come when we all won’t be getting rich by hypothecating and re-hypothecating all our neighbor’s savings accounts and betting it all against the rising price of Silver like JPMorgan is doing…?

Boooooo! I was already filing my LC with LegalZoom…. :)

Regarding Interest Rates…. Spot on, Mava.

My Jedi Mind powers tell me some interesting discussion should arise next week regarding that topic… right Rick?

Cam Fitzgerald February 19, 2012 at 8:44 pm

“My statements on China are typically not “views” they are deeply grounded in reality, and if I did not KNOW that, I would not print and publish the words in the first place…that’s not arrogance or ego trip, its intelligence and my attempt at helping other people such as yourself, who once again, do not live here for twelve years and not privy to the real on the ground goings on, to understand” ~~ Mario Cavalo
————————
Intelligence is it? You might have noticed there were four other people besides myself who objected to your portrayals of China and the insults you leveled when objections were raised. I guess they are all Podunk idiots too. Right, smart guy?

I got a real laugh for you asking that I present you with facts about issues on the ground. You want facts pal? A quick google search that any eight year old might do reveals hundreds of articles from virtually every major news site discussing current problems with the Chinese economy. I can hardly do them all justice but if you want to keep up your childish front I am happy to reprint some of the better ones here so that you might start eating your words.

Otherwise, don’t waste my time.

Meanwhile, after a very lazy search that took no more than a minute I came across the following article. It is written by someone in China who actually has his “feet on the ground”. The story is one discussing the outcomes of the housing burst and how one family was impacted. You will find it revealing.

http://www.chinalawblog.com/2011/12/the_impacts_of_chinas_real_estate_crash_a_hard_rain_is_gonna_fall.html

I am curious to know how you will spin this one. You do realize Mario that the Chinese government does not need you to make excuses on their behalf. They have already openly acknowledged that a serious problem exists while you on the other hand would have us believe everything is dandy.

I have said this before but it is worth repeating. I do not trust your judgement where China and its economy is concerned. I do not believe you are a reliable writer or a good source of information.

Neither do four other people who read this site last week.

mario cavolo February 20, 2012 at 12:30 pm

When did I EVER say everything is dandy? This is why we can’t communicate, because you use exaggerated, generalized statements like this…you also suffer from a psychological phenomenon known as “exception” thinking, where as I follow “the rule” thinking. You keep citing exceptions to the rule…such as one family, or this little Ghost town or two…I keep telling you about the macro picture which is the real story and contains the broad set of facts upon which to judge, not just a few sprinkled ones in an article…..

Meanwhile this week on Thursday, I who do not know anything credible about China besides fast food restaurants , will enjoy the $150/plate 20 guest VIP Luncheon event I have arranged with former CNN Senior Correspondent for HK and Beijing, former U.S. Consul General Kenneth Jarrett and the CEO of Shui On, the largest and most famous real estate developer in China…feel free to check my blog for the event link….oh maybe, I’ll cancel the VIP room at the Kerry Hotel and take them all to Pizza Hut instead…:) Mario

Cam Fitzgerald February 20, 2012 at 11:27 pm

Here is the Macro picture Mario:

Chinese auto production is falling. Is a 28% decline enough to get your attention Mario? Maybe your survey of Wendy’s restaurants will come up with a better number. Hunh?
http://www.caam.org.cn/AutomotivesStatistics/20120217/1605068493.html

Non manufacturing PMI is in sharp decline falling from 56 to 52.9 during the month of January alone. Bet that means nothing either, eh?
http://news.xinhuanet.com/english/china/2012-02/03/c_131389358.htm

Housing prices are falling across all provinces. -Note that 70 of 70 cities saw sales declines in January (official) while 49 saw outright price declines. This is what a bursting property bubble looks like, Mario. But then you might be like David Lereah back in 06 telling everyone that we are in store for a soft landing. Sorry bud. There are no soft landings following housing bubble bursts.
http://www.bloomberg.com/news/2012-02-19/china-s-january-housing-prices-post-worst-performance-in-a-year-on-curbs.html

Chinese Economists are now predicting GDP to decline to 7% with the Premier expected to make announcement –You will note that GDP growth rates have fallen continuously from a high of 13.5% to this years 8.3% in just four years. Dropping to 7% is considered serious. There is certainly growth but the trajectory is definitively down and not in a good way as it confirms a falling trend.
http://www.bloomberg.com/news/2012-02-17/china-stocks-fall-on-jump-in-money-rates-slowing-economic-growth-concern.html

Electrical and power consumption is declining too according to the China Electricity Council. For anyone still reading, that is a branch of the Chinese government. It is not the world according to Mario.
http://www.china.org.cn/business/2012-02/07/content_24576241.htm

China’s export growth slowing. Cracks appearing. See the chart attached. What more do I need to add?
http://soberlook.com/2012/02/chinas-excess-exports-turn-negative.html

Steel and iron ore prices falling on declining China demand:
http://seekingalpha.com/article/367961-basic-materials-continue-free-fall

Baltic Index sharply lower as commodity imports shrink. (and everyone thinks it is just because of too many ships). Meanwhile, most ship builders are in China and demand for new boats is in decline. So shipbuilding is about to go into decline too. Bet you aw that coming, didn’t you?
http://seekingalpha.com/article/341301-expecting-a-bust-in-the-shipbuilding-industry.

And then this…..Chinese Premier Wen Jiabao has said the country cannot grow in isolation. Well, I will be damned. Just how weird is that? You mean to say that Chinese success also depends on the health of foreign economies? Like the US and Europe too? Will wonders never cease. But it is good to know that even the Chinese leadership has acknowledged that some trading partners are important and thus by default, the Chinese economy will suffer if they also slow.
http://www.bbc.co.uk/news/business-14909855

So Mario, do you think Europe and the US are in a growth mode or are they slowing? Be careful answering, I have read your previous commentary.

I can spend all day at this. Now start coming up with real facts Mario or stay home. Like I keep saying, you are not a trusted source of information. Just a guy who bullshits and blusters his way through the day on blog sites like this and tries to bully out anyone who disagrees with reams of his worthless words.

mario cavolo February 20, 2012 at 1:58 pm

Hello All, as Cam wishes to foolishinly challenge the inside understandings of China which people such as myself possess, I just read the article he wrote plus 3 additional major publication articles on the same subject of new home property development speculation and recent price slashings…

1. This has little to do with the rest of the Chinese economy. For example, after years of explosive growth, steel demand is weakened by 15%…as would be expected to happen.

2. EXISTING home prices have hardly budged and they won’t.

3. Why are we talking about poor mr. & mrs. li who have lost money on their new apt development when the developer slashed prices, but is this not more than balanced by the 100 MILLION home owners across China who now possess an estimated 10 PLUS TRILLION USD of home equity in their homes which have gone up in price from $30/sq to $90/sq ft? Is $90/sq ft an outrageously high price that will drop substantially, hardly.

4. I have said all along that the damage when it comes will be limited to exactly this area of a few real estate developers who overleveraged and overbuilt…as a percentage of the home ownership inventory, and as a percentage of total home ownership inventory including existing homes, this is not across pricing of the entire market as it was in the United States.

The dynamics here which impact the real estate market are very very different

5. I easily stick with my view as the media loves to report the extreme stories, while deleting the rest of the story. My friend bought at a new development one hour outside of Shanghai, 2 months later the developer facing soft sales dropped pricing by 20%.

6. Meanwhile, prices in Shanghai of existing homes have not budged. And why should they?…people don’t have mortgages on their homes, they are not under pressure to sell them even if they do go down in price by 30% after having tripled over the past five years.

7. In our mr. & mrs. li example,…who FORCED them to buy a new home at that price which they could not afford???? That’s THEIR problem, their choice!!! They could have much more easily RENTED the same quality apt for $400 per month!!!! That’s at half of rent costs in the U.S. . In that example, the idea that the woman refused to marry him because he didn’t have a home is completely IRRELEVANT. That is a cultural tradition which existed when the circumstances supported that ability of that social cultural tradition to exist, namely when home prices were dirt cheap. That status no exists ladies, get over it. Love your man, be a good wife and rent like real folks have to do all over the world. And if not, let the man throw you out on your ass anyway.

8. So again, yes, these dozen real estate developers will get hurt and buyers of their properties will get hurt. That is NOT the broad swath of homeowners across China’s real estate market, it is just one part of the broader market. That doesn’t mean it is not painful, it means that the media, as usualy, the vast majority of articles, only print one part of the story to grab readers.

Where is my article on the TRILLIONS of mortgage free homeownership equity in China?…its on MY blog, because it ain’t sexy, and it aint negative on China, which is what the media needs it to be for readership.

I could go on with many more points, will stop here…

Cheers all, Mario

Cam Fitzgerald February 20, 2012 at 11:49 pm

“3. Why are we talking about poor mr. & mrs. li who have lost money on their new apt development when the developer slashed prices, but is this not more than balanced by the 100 MILLION home owners across China who now possess an estimated 10 PLUS TRILLION USD of home equity in their homes which have gone up in price from $30/sq to $90/sq ft? Is $90/sq ft an outrageously high price that will drop substantially, hardly”. ~~~~ Mario Cavalo
———————-

Vapour. Just hot air Mario. You really are full of yourself. Ask any American who saw their equity evaporate following the Credit Crisis how rich they feel today. Take note that one need not go underwater to have lost wealth. I am puzzled how you simply this topic without consideration for real loss.

As you know, if someone in China has a 30% equity stake from a down payment but prices decline 40% they have lost ALL their money and only the debt survives.

That is right. That was real money they lost Mario. Money that their families worked hard for and saved. In some ways it is worse than the US experience where people put zero down and lost a house. Don’t forget that those NINJA loans were given to folks with no assets so the effective loss for them is zero. They can walk and save face if there was no pride to be lost in the first place.

In China, it is shaping up to be everything for some. Total loss.

Overall, I would say I am very disappointed with your lack of insight and perspective of the market you claim to know so much about.

mario cavolo February 20, 2012 at 2:49 pm

Two NORMAL reports from http://www.capitalvue.com …Highlights:

1. Over leveraged property developers are slashing their prices around 20%…TRUE AND that’s NOT a widespread representation of the China real estate market. That’s a report on an individual company’s problem affecting a small percentage of the population as home buyers.

2. Those price drops come on the heels of five years worth of property price INCREASES! So the vast majority of people who had ALREADY BOUGHT are IN the money, not underwater. This is NOT a case of the masses piling on at the top of pricing, which is typical western psychology. Oh but that’s good news so who wants to read about that?

3. “It was reported that new properties in second-tier cities, including Hangzhou, Tianjin, Nanjing and Chengdu were offered at discounts of between five and 20 percent.”

That’s a real estate market CRASH? The CRASH has arrived?

4. “According to the NBS, a total of 48 cities posted month-on-month drops in home prices, with prices unchanged in the remaining 22 cities.”

That’a a real estate market CRASH?

5. “First-tier cities which implemented the most restrictive policies led the declines in home prices, with home prices in these cities falling 0.2 percent from December. ……The 40 cities which rolled out purchase restrictions recorded monthly home price declines of 0.17 percent, while home prices in cities with no such limitations fell 0.12 percent…The prices of existing homes in Beijing, Shanghai, Guangzhou, and Shenzhen all fell month-on-month, with Beijing posting the greatest drop of 0.9 percent, followed by Shenzhen’s 0.8 percent decline..”

Oh DEAR!! That’s a real estate market CRASH?

6. “The average transaction price recorded by Evergrande Real Estate (3333.HK) in January was 5,936 yuan per square meter, down from the 2011 average of 6,590 yuan.”

Oh DEAR!! A 10% reduction after prices have already risen from a dirt cheap 2000rmb/psqm (USD $30/sq ft) to a reasonable 6590/psqm (USD $100/sq ft)….Oh the pain, the wailing and knashing of teeth of the poor Chinese homeowners!!! That would be the same Chinese homeowners who have at least on average 60-80% equity in their homes…

This is the first time someone ever felt the need to misguidedly call me out on my well-balanced China views as with “I do not believe you are a reliable writer or a good source of information.”

The above forces are CAUSED by policy decisions which have not yet been reversed. For example, imagine if you in Kansas, were told, hey you’re not a resident of Los Angeles so you can’t buy a home there unless you have gainful employment there in LA? In America, that would be regarded as very unreasonable. Or if you were told you can’t get more than one mortgage no matter what..? Same story….

The problem IS that real estate developers are overleveraged on loans coming due and they are slashing prices…yes that is a problem in the sector. It is yet to be seen if that problem will somehow trickle down further into the rest of the normal, broad real estate market including existing homes, which have VERY little mortgage debt on them. And so I deeply doubt it.

IF and only IF the real estate developers slashing their prices trickles further broadly across the Chinese real estate sector, then can any person living in China or not, or any news agency anywhere in the world can clearly and accurately state that a real estate collapse of prices has occurred as which occured in the U.S.

I’ve enjoyed clarifying the matter…including the expansion of my fairly reasonable knowledge and understanding of China’s dynamics beyond fast food restaurants…and thanks to Rick always for creating the forum venue for such important matters…

Cheers, Mario

Cam Fitzgerald February 21, 2012 at 1:00 am

Seventy of seventy cities that are monitored by Chinese authorities report declining numbers of property sales in January. Some of these declines are double digit. Forty nine of seventy cities report falling prices.

That is how corrections begin, Mario, not how they end.

Let me ask you, did the US housing bubble burst begin at the end or did it begin at the beginning? You fail to understand the basic mechanics of a correction or why the kinds of changes I have pointed out are quite significant.

These changes may seem small in magnitude but they have made up for it in volume. Try to appreciate that housing price changes work on a multi year basis and that once a new trend is established (like this one going down) it tends to flow along the same direction until equilibrium is reached.

That is another way of saying prices will revert to the mean. This is a correction Mario. GDP will continue to fall for more than just a few quarters.

China is not special. It is not different. The same rules of economics apply there as apply elsewhere. It is you who is lost in a bubble of egoism, arrogance and denial.

Cam Fitzgerald February 21, 2012 at 1:12 am

“Over leveraged property developers are slashing their prices around 20%” ~~ Mario Cavalo
———————
Sounds like excess supply to me. Sorry Mario. Price slashing does not happen in an economy that is rapidly expanding. You cite credit problems of individual companies as the problem but that goes right to the heart of excess supply too.

Let me do this in little words for you.

There R 2 many housies in china 4 sale.

mava February 20, 2012 at 6:48 pm

Mario, you obviously feel offended. It’s OK if someone challenges you. It’s not ok to overreact.

So, you’re dinning with some people from the government. So, you’re evil. OK. But, honestly, Mario, this doesn’t mean that you know what you’re talking about.

If you are talking with evil government people, then you know what they know, and what is it they know???? That’s right, nothing. Sure, they can bestow a large part of nation’s savings on you, but that’s just because they are thieves, not because they understand economy.

So, I am not discounting your opinion here at all. Just this one particular argument.

Cam Fitzgerald February 20, 2012 at 11:57 pm

Try to be more generous with your criticism. Mario earned it.

TM February 21, 2012 at 6:15 am

mava’s comment floored me. It’s a truism I learned growing up Chinese and being surrounded by Chinese business people and their government backers — they are inherently evil and nothing about them can be trusted. Human life does not have the same value over there, so don’t make the mistake of thinking they’re just like you, because that will be your last one.

mario cavolo February 26, 2012 at 9:33 am

Yes Mava, no apologies, I AM deeply offended and I don’t appreciate hearing extreme comments, ESPECIALLY BY PEOPLE WHO HAVEN’T LIVED HERE!!!

TM, get a life you anti-Chinese racist piece of sh*&^%t.

Robert February 20, 2012 at 7:08 pm

Cam Wrote:

“why do any of us even bother with the WSJ or Barron’s or Ricks or Zero Hedge etcetera. We can just read the arrogance and insults of Robert each day and glean your constant stream of market genius. We will all be rich. What’s your next big call coach?”

I can’t believe I missed the opportunity to respond to this…. :)

Well Cam, I’ve already laid out Forecast number one from Robert the Market Genius’s Book of Arrogance and Insults (a FANTASTIC title, BTW… I could probably sell a million copies if I could just expend the following 4 or 5 viewpoints into something long enough to call a book:

1) Increasing liquidity and trade volumes in the Physical PM markets- The paper futures market exchanges will try to counter this trend using margin fluctuation (just as they are doing now); but eventually, high margins will draw the buyers out of the futures and into the spot market… the futures exchanges will have to either lower margins (as CME did in Silver last week) to draw volume back and compete again, or prices will go into backwardation and stay there (just as Fekete has laid out).

As interest rates face sustained downward pressure, the real cost of owning real assets declines. No brainer to me, but you call it bubble economics. Again, I just say “whatever”…

2) Real estate: Commercial? forget about it- there is a glut of comercial vacancy out there. Agricultural? Only if you understand the farming business. As mentioned in Tom Cafferty’s article; buying productive land that is not producing will generate no real income.

For me, it is RESIDENTIAL real estate, but only in specific markets (do your research). Right now in Phoenix, Albequerque, Austin, Salt Lake City, and other mid-sized, modern western US cities anywhere outside of California, a 2000sqft 4-bedroom single family home can be had for about $150K cash, and rented for $1500/month…. that’s a 12% annualized gross rate of return- this probably reduces to about 8%, which is still not too shabby, after you factor out property taxes, maintenance and management costs.

However, I must point out that Gold has also been averaging about 8% YoY for the past 10 years, and it is a little more “invisible” to the tax man than a rental house… right?

3) Unemployment: bet on (real) US unemployment levels in the 15-20% range (8-10% reported) for at least the next 5-10 years, but don’t expect sky-rocketting increases in the general unemployment level. Because so many Americans have no real savings, they will take WHATEVER work they can get, in exchange for WHATEVER the hiring person (or company) is willing to pay. Bad for standards of living, but as I stated, this will assert downward pressure on the unemployment rate.

4) The rise of “anti-corporatism” – Expect to see smaller, higher quality, better craftsmanship, boutique businesses begin to pop up and steadily erode the influence of the corporate mass-producers. New home starts will face the same pressures they have faced for 4 years now, but what houses DO get contracted for construction will be custom builds using smaller, leaner, and more creative General Contractors.

Expect to see sandwich shops that produce tastier and healthier alternatives to Subway for the same price, and expect to see hambuger businesses that provide a FAR superior alternative to MacDonalds (5 Guys is a relatively new chain that is charging forward in this effort, although they REALLY have to work on their pricing model if they want to see sustained long term success- if their food stays as expensive as it is now, I foresee them having a “Krispy Kreme” style moment of clarity sometime in the next 5 years)

Expect to see increasing deposit growth in credit unions, and in non-brick and mortar banks (like Everbank and ING) as more people pull their savings and capital from the huge banks which are currently (and will continue to be) the Remoras swimming around on the Whale Shark of government.

Speaking of government- I can’t say whether it will grow, shrink, or stay the same size in nominal terms, but I do fully expect government’s RELEVANCE to erode going forward.

As Rick rightly points out above, one day Social Security and Medicare will fold, and the political cronyism will be laid bare for all to gaze upon; and, if we are really lucky, no one will care…. No government exists without the consent of the governed. As the general level of consent erodes, so will gov’t’s relevance.

So, there you have it in Reader’s Digest format: Robert’s arrogant forcast of what the next 5-10 years holds… A little lite on the insults, but I’m sure there will be future opportunities for me there as well…

If I turn out wrong on any (or all) of these trends, then one day you will be able to write a commentary on RicksPicks about how the arrogance of self-minded people like me was the root cause of the commodities bubble; and since I will be destitute and homeless (pushing my shopping cart full of Gold around looking for anyone that will trade a Maple for a cigarette or a can of beer), I will be too poor to have access to the Internet, and will therefore not be able to see, or post a response, to your final gloating about how right you were as you enjoy your pallets of paper cash…

:)

Cameron Fitzgerald February 21, 2012 at 9:14 pm

I got to hand it to you Robert. You have some good ideas. Maybe you should write a book. There is always room for guys who think outside the box. That seems to be what the market wants.

Cam Fitzgerald February 20, 2012 at 11:55 pm

Frustrating. I just wrote a post answering Mario and it vanished after hitting send. If you have it Rick, please put it up as it contained a few good links disproving Mario’s “sunny view”.

mava February 21, 2012 at 4:13 am

I know, Cam F.

It is very frustrating. Usually, it is because I haven’t yet entered email address. All gone, poof!

Sometimes, hitting “back” button helps to recover, but far from always.

It’s not Rick though. It’s the code of the page written poorly. It should do “validation” while caching the submission, and return the visitor back to “add your email” page, not just clear everything out.

Such is life.

Cam Fitzgerald February 21, 2012 at 8:11 am

Thanks Mava. You might be exactly right that I never entered my e-mail correctly. Who knows, it might just be the will of the Gods so I will let it rest for tonight. Mario has gone quite crazy without extra help anyway. Tomorrow is another day.

Cam Fitzgerald February 21, 2012 at 10:00 pm

Well, I will be damned. It did show up. Seems my post was stuck in moderation for the weekend. (See above for a few links that challenge your view Mario.) There is plenty more on credit, banking issues, domestic consumption, rail traffic, imports of raw materials etcetera, etcetera. Enough to fill a book. Maybe someone will write a comprehensive report on the state of the Chinese economy as things have changed rather rapidly in just the past few months. Perhaps this is why there is so much denial. It does take time for new information to accepted and internalized. Most people are still operating on last years information so a lag has developed that will leave them at a disadvantage where investments are concerned. I have little doubt meanwhile that China is headed for a serious housing correction and it is one that will play out for several years to come. One thing we should have all learned by now is that where real estate is concerned the time lines can be quite long. These assets are not like stocks that can rise of fall 5% or more each day. Now one other thing we should know by now is that if such a large economy as China is decelerating due to a housing correction that the impacts on almost all hard commodities could eventually be quite sharp. Many of the hards are being consumed by China at an unprecedented rate. In some cases this is up to 50% of global production. A slowdown for construction of homes (not even considering all other forms of capital intensive investment) means that demand will fall sharply. Even another round of QE stimulus and the usual speculation is unlikely to refloat commodities if demand itself falls as some predict. Many people object to this idea. They cannot imagine that an economy can slide hard from a bubble burst when it is posting such high levels of growth. They are wrong of course for what they are saying is that it is different there (in China). Well, it was different in the US too yet the excess of credit was devastating. The worlds largest economy was just as susceptible as the smallest. Little varies anywhere in bubble dynamics and China is not special either in that regard. Why would China be especially immune? This is a view I am challenging. That country has engaged in one of the worlds biggest stimulus and credit programs and it was on par with the spending that took place in the US. What difference does it make that it was earned money that was used versus borrowed? The outcome is the same. Falling prices, falling demand, a surplus of homes and buildings of all sorts, under utilized capacity and little room for new expansion to keep the party going. Here I will seriously question whether the stimulus experiment can even be replicated twice. What this means is that China will have to experience its first ever modern economic correction. It has not happened before under the existing model and so there is no precedent there for what is coming. Few are prepared. Fewer still believe it possible. Is it any wonder that denial exists amongst most of the population? Now, as we seem to have arrived at that moment in time when the largest economic expansion in history is suddenly slowing we do need to rethink our own investment objectives and consider how the world might look in 5 years time. This is a valid exercise if you believe that China’s bubble is bursting and that the high inflation rates there will ultimately lead to a steep reduction in lending, lead to rising interest rates, falling home prices and an economy that has been weakened by exactly the measures it took to stimulate and expand. There must be an irony here that the medicine makes you sick for surely that is what we are seeing. My bets on China are to take a wait and see approach. This is still very much an expanding economy despite all the problems and I do not know of anyone who believes they are anywhere near to seeing recession. On the contrary I would be frankly very surprised to see GDP growth fall below 6% per annum before this is over. There will be trauma though and I would not touch construction, heavy equipment, real estate, malls or banks in the interim. The better opportunities in China seem to revolve around a rapidly expanding consumer economy and fortunately there are a lot of choices in that area. Indeed, the government has made it a priority to raise GDP internally with less emphasis on exports to keep growth levels maintained. I can see no reason they will not succeed. In the meantime, Mario, lets not deny what is obvious. It does not pay to lie to ourselves. There is no money in it. I would encourage you to keep an open mind and not paint yourself in to a corner where the problem areas of China are concerned. What is underway now will surely be one of the biggest challenges the country and the government has faced since the days of Tienanmen.

Cam Fitzgerald February 21, 2012 at 10:07 pm

And PS: Thanks again Erich for the article that seems to have heated up Ricks site the past few days. Looking forward to the next.

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