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Deflation’s Chinese Water Torture


Falling long-term yieldsThe tedious price action that ended Wall Street’s week paradoxically left denizens of the Rick’s Picks chat room as keyed up as I’ve seen them in a long while. Opinion seemed evenly divided on the question of whether stocks are about to blast off into hyperspace, or tumble into a deflationary abyss as deep and destructive as the 1930s Depression. I cast my vote resolutely with the latter, although I would have to concede that a blowoff spike sending the Dow Industrials above 20,000 is at least theoretically possible. For where else is an investor, or a dot-com company with a mountain of idle capital, to turn with yields on 40-year bonds heading toward 2% or lower, and returns on shorter-term paper at zero and sinking? This poses quite a problem for the leviathans of the investment world — pension funds and insurance companies in particular, since they are on the hook to pay out sums in the future that will overwhelm today’s meager returns.

Epic Malinvestment

Still worse is that the monetary stimulus the central banks have applied to jump-start the economies of the world is not working, not even a little. And yet, the charlatans who run the banking system, unwilling to acknowledge the devastation they have  wreaked on savers, apparently still believe that pushing interest rates even deeper into negative territory will eventually float everyone’s boat. This epic delusion flouts not just common sense, but reality. For any fool can see that the radical policies pursued by the central banks have created a magnet for malinvestment on an epic scale, feeding a speculative mania that can only end in disaster.

The pension problem, which my colleague Mish Shedlock has written about at length, perfectly reflects the lose/lose outcome of a deflationary bust. For in the end, every penny of every debt must be paid — if not by the borrower, then by the lender. This elemental idea was most forcefully stated by C.V. Myers in his prescient 1976 book, The Coming Deflation.  Where pensions are concerned, liabilities have piled up so high that no one, least of all the twenty- and thirty-somethings now paying into the Social Security system, expects retirement promises to be kept. It is quite clear even now that would-be beneficiaries under the age of 55 are all going to get stiffed.

As for Stocks…

In these all-too-interesting times, is there a case to be made that stocks will continue to muddle sideways indefinitely? This seems unlikely, given that traders are so wildly divergent in their views right now. Then again, if Mr. Market’s greatest delight lies in causing bulls and bears alike to suffer as much pain as possible, a do-nothing market would be as effective in achieving that result as the Chinese water torture. Whatever happens, we should have no illusions about escaping the quadrillion-dollar black hole of deflation that the banksters and ‘Government’ have colluded to create in the name of ‘stimulus’.

Please do not ask trading questions!

  • Cam Fitzgerald April 18, 2016, 3:35 pm

    As for Stocks…

    I don’t know for sure Rick but now is no time to get complacent. With the VIX currently priced right down at the bottom of a nearly perfect smiling arc (weekly chart) and the indices implying we are at the top of the range it just seems probable something is going to break soon.

    But after this many years of waiting almost nobody will even hear it now. What’s that? Stocks might fall, you say? C,mon man, are you still telling us that same old story?

    And that’s when it happens. When nobody will listen anymore and nobody even seems to care. Because who can honestly say they have the energy to keep being on the ready for the Mother of short opportunities when so many false signals have already come and gone.

    Earnings season is not over yet. I think we are near to that mythical correction. Very near actually and when it comes precious metals will be going down along with almost everything else.

    But then again, I have been humiliated by the market so many times on this score I hardly want to keep track anymore.

    So lets fugetaboutit and relax. Everything will be A-OK.


    Cam, Rick’s Picks subscribers have used Hidden Pivot targets when attempting to short The Mother of All Tops perhaps a dozen times over the course of the bull market. I’d guess they’ve made money on about 80% of these trades. We do it for sport — and because we can. Join me in the chat room sometime if you don’t believe that nailing swing highs and lows in the E-Mini S&Ps is as easy as shooting fish in a barrel. RA

  • roger erickson April 18, 2016, 7:42 am

    This argument, in various forms, has been going on for at least 500 years (probably 5000).

    There are multiple popular forms, and they all miss the point.

    1) myth #1: we can’t repay growing debt to one another
    (uh .. BS. How have we ALWAYS paid one another to keep doing more & more? Growth. Simpletons only recognized that we need more “currency.” But currency comes from more people and/or capabilities, which generates more REAL growth, which is denominated with more, created currency. Short answer, we need to pay each other enough to consume all of our increases in production. That’s not so difficult. The hard part is getting distributed people to just stop & think. Solution: fiscal expansion first, monetary policy as a coincidental issue)

    2) myth #2: We can’t afford to pay one another.
    (uh, more BS. How has human evolution occurred the last million years? Nothing’s stopped us yet. A few accountant idiot savants fixated on static thinking may put up a brave front, but aren’t gonna stand in the way for long. Solution? Grasp that people with FINANCIAL savings want to preserve the current buying power of their hoarded currency. Yet that conflicts with the need to denominate the expanding options available to their own children & grandchildren. You have to make a choice, your current fiat currency, or your grandchildren’s options? So far in evolution, the increasing real value of grandkids options always swamp the imagined instantaneous value of static currency. You just have to make a choice. That choice will be made anyway, after you die.)

    3) Our inter-personal debts are putting our grandchildren into debt to one another?
    (Uh … this is comical for several reasons. First, the components of all organized systems are ALWAYS in debt to one another. Luckily, the return-on-coordination is the only return that outpaces the cost-of-coordination. That’s just an observable fact. Second, people alive in any decade are never in aggregate debt to the past or present. They always need to consume what they produce, regardless of what their parents or grandparents did. Financial debts always denominate the real transactions we make. In the end, all currencies are fiat currencies, since all currency ever does is denominate the organized activities of a population at any given time.)

    The common sense form is so unpopular that it’s been suppressed all these years. How do we get our whole populace to explore their expanding options? Education. An ounce of cheap prevention is now worth tons of expensive repair.
    (start with the one by John Adams)

    Traveling Entrepreneur Task: How does an entrepreneurial nomad optimize the path traversing an escalating smorgasbord, when every table from which he takes a dish spawns at least one additional table ahead, with equal or greater numbers of completely different offerings? What’s the optimal path through continually scaling options [personal & aggregate]?
    Hint: Success = positioning for optimally expanding options, NOT briefly hoarding extra assets within a local dead end.




    Roger, you usually have sensible things to say in this forum, but I’m not buying any of this. It almost sounds like something Krugman wrote. RA

  • John Jay April 17, 2016, 11:40 pm

    I think it is becoming perfectly clear that a Debt Based economy demands ever more debt, at ever lower interest rates.
    That is the only way to avoid systemic implosion.

    Now, everyone is forced to play Kick the Can!

    A Hyundai dealer out here has TV ads offering new low end Hyundais for lease as low as $65 a month!
    I am sure the fine print is pure usury, but still!

    In the housing market, we are headed Back to the Future with NINJA loans at 125% LTV.
    Because as was proven once before, if anyone can borrow $500,000………………
    House will cost……………….
    See how that works!

    And, as Obama is in the process of telling the Students owing one trillion dollars in Student Loan Debt, “You don’t owe that!”

    And the Poway School District that borrowed a couple of hundred million dollars while promising to pay back a billion dollars 30 years from now is going to do the predictable thing!

    And the KSA is threatening to dump a couple of trillion dollars in US paper if the redacted pages on 9/11 are released?
    The question is, To Who?

    Because if they “Dumped” that paper, the Boys in Chicago, London etc. will put their hands in their pockets real fast, and the tape will show “No Bid”.
    Nothing like a Whale in Trouble to get the sharks into a feeding frenzy.

    Through the looking glass and down the rabbit hole we all must go!

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