NY Mag: Can This Market Be Saved

love the beard Noah! I think I saw you in the street the other day, and I said to myself that guy looks like urbandigs! But the beard threw me off.

lol, if it was in the upper east, your probably right! Thanks for the nice face hair compliment!!!

Noah - While I agree 2009 will be a down year for NYC and you will see some deals, all I can say is, "What a buying opportunity".

You will see a historic decline of the dollar in 2010. We are pumping records amounts of cash in to the economy to save the country and longer term this will have unprecedented effects on the USD. I would not be surprised to see short term strengthening (although EUR back to 1.30), come 2010, USD is in trouble and foreigners will start to buy up cheap america.

Mike - you raise great points. Many people I talk to and whom I consider way ahead of the curve in this crisis, discuss the dollar collapse as part of endgame, question is when will that be? Thats one reason for the gold trade.

Now we are seeing dollar strength from deflationary forces, reversal of short dollar trades, and balancing out from weakness overseas.

I think there will be a good buying opp, but when will it be? 2009? 2010? Thing is this time around, I see a L, not a V shaped recovery.

Noah-

Dollar bulls are going to get crushed as the rest of the world is printing faster (as a percent of their respective GDPs) than the US is printing as a percent of GDP.

A treasury bubble does not exit and all fiat currency is in a race to the bottom (i.e. zero). The rest of the world us just catching up to the dollar.

Cheers!

JT - interesting. Have to run out for appts, but when do you see the dollar reversing course and getting whacked? I agree its a race to debase!

JT's comment is correct: the only way to look at the various bailout packages is by country and region as a percentage of GDP. However, if the Euro zone for example is "printing" money (i.e. incurring more debt as a % of GDP), faster than Ben, why does that "crush" the dollar bulls? To say the USD is going to oblivion is the same activity as calling a singular top or a singular bottom for the Dow - the relationships between countries and regions are much more dynamic than 'up or down'. If the USD was on such a slippery slope, why then have the LatAm currency markets tracked the USD both up and down since, well, as far as I can recall? More central to the point, both Mexico and Brasil devalued when the USD rallied this past quarter. Are we now to believe that as the USD begins its inevitable descent into oblivion that these currencies are somehow going to magically decouple and go lateral / up? The kill-the-USD folks are probably a good time at a cocktail party or maybe a Columbia Philosophy Club meeting, but the truth is the world wants a strong / stable USD. A USD that erodes in value over time means exporters make less money and ultimately the global economy slows. Why in the hell do you think the Saudis put more money into C a week before it blew up? Do you really think they didn't know what would happen? They did that because the US is the strongest credit the world has and has ever known, bottom line, which is not coincidentally reflected in the value of the USD for both settlement purposes as well as pricing. If you don't believe me, watch CNN for five minutes and the miraculous awakening the Democrats have had now that the election is over with regards to the strength of the US economy vis-a-vis the rest of the world. The Germans just took on 20% of their GDP in one fell swoop, and thats just the beginning for Europe btw. Long winded, sorry, but I get tired of the linear currency argument. Just like a stock trade, currency strength and weakness are not mutually exclusive - there is a meaningful, intrinsic relationship between the two, and most importantly, there are cycles and game changers along the path. It's during times like these that I really do wonder if the problem isn't just too much inane TV shows and People Magazine?

http://www.pbs.org/moyers/journal/10242008/watch2.html

Couldn't resist: great Moyers' interview with James Galbraith. G focuses on some of the real problems: eastern Europe being one of them, which unfortunately will drag the Euro zone into it. Russia is scary and the end game may is very very unclear but for now, the country is quickly heading into political and economic collapse. Thailand also comes to mind as well. Watch the USD rally when political crises increase.

Fred - thanks for the comments!!! Gonna watch the interview

FRED/JT - thoughts on Mr. Practical?

http://www.minyanville.com/articles/C-citigroup-STOCKS-volatility-bailout-liquidity/index/a/20123

"When a government that can create its own money becomes insolvent, it is manifest in a a much lower currency. Ironically it is manifest in a higher currency in the first stages as debt is destroyed. But as government take on more and more assets financed by printed dollars it becomes weaker. We are seeing that struggle play out each day. When the dollar goes up due to deflationary pressures, stocks go down. When the government replaces debt with its own by printing currency and takes the risk as it did with the Citigroup
(C) bailout (a huge amount for one company), the amount of dollars printed to finance the bailout causes the dollar to drop and stocks to go up.

...total debasement of a currency will lead ultimately to a deflationary collapse. Study your history. A total debasement of currency creates no wealth and the stockholder is no better off, it just looks that way for awhile. But if all confidence is lost, the fiat currency system fails altogether.

The point is nothing really matters anymore besides currency, so watch them closely. Governments are systematically destroying stock markets and changing how they work. They are being replaced with socialism and determined pricing.

Risk is very high."

Perhaps JT would agree that Sr. Practical is talking from a silo and fails to remind the reader that ALL countries are printing money to keep the pond full so to speak. So, the first issue is can we really isolate one central bank versus another and speak faithfully about the long term impact? It's a hard case to make, which forces us to look at the bailout cost as a % of each subject country's GDP. Through that lens some interesting observations become clearer: (1) the EU is going to have a hard time raising rates when the US begins to do so (hello Dr. Inflation), coupled by the fact that Europe has effectively stopped creating labor (both via natural methods but also in terms of declining productivity and increasing consumption), (2) China's export driven economy will turn inward and she will get there but there will be a decade or so of rockiness, before China re-emerges with a vibrant, stable middle class consumer, and (3) (my personal little theory) The Americas' Century will emerge as the best capitalized, most diversified and politically stable region on the planet. If you take the combined GDPs of Mexico, Brasil, Canada and the US (let's throw Chile, Argentina and Colombia in as well) you have about $19.5 trillion (37% of the world's GDP). That dwarfs Chindia and suprasses the EU by $4 trillion or so (depending on whose calculations you believe). Looking deeper into the EU, there is no one country that stands out as having averted this thing and in fact, Spain, Italy, the UK and possibly Germany are teetering on the brink of significant medium term recessions (at least Spain and Italy are screwed for the next five to ten years). The UK may end up the creek as well. Back to the Americas, Mexico, Brasil and Canada have all essentially avoided this crisis and more importantly have stable, well capitalized banking systems and robust middle market consumer economies. There will effects felt by the US slowing down, but the fact is they are in great shape from a fundamental perspective. Second, the Americas region has more natural resources combined than any other regional block or individual country. Lastly, you have to look at country debt in the context of regional economic power because that's the true nature of any economy. The US economy does not stop at the Rio Grande - it's fluid. My point is that even if the US ends up with a real bailout cost of 10% of GDP (which is probably 3x to 5x the true out of pocket cost), you have to look at the cost from a regional perspective. When this is all said and done, the much touted reserves held by China, Russia and India will have been spent in large part. I personally feel that the real driver of currencies is war and trade. During times of peace, the latter tends to rule. But during war time, all bets are off and the safe haven currencies rise to the top, fast. Geographic isolation has many benefits. I would not want to live in Poland or Turkey today.

I have to admit that I almost did not recognize you in the picture Noah due to your gotee. No offense, but I think you lok much better without it.

Fred - interesting. Im going to try to put together a visual of world economies printing vs their gdp so I can see it better.

Donald - ha..its a beard, its winter, so a few more months; unless wifey shaves it while I sleep

Noah, I'd love to see such a visual. I'm skeptical of the claims that we are on the low end of the totem pole in terms of printing/expanding monetary supply. As you have pointed out, printing isn't the entire story behind monetary infusions. Even if the dollar is perceived as stronger than another currency, primarily due to fear, that doesn't necessarily mean that intrinsically it is worth 25% more today than it was a couple of months ago.

If you add it all up it seems like we're close to committing 6 trillion? That's a heap of change, and it doesn't appear to be the end.

I posted earlier this year about the fear of hyperinflation.... not sure how to protect myself against that with a large cash position and a couple of debt free properties.

but I bought a substantial sum of Yen in february of this year as a hedge against the dollar. not sure if i want to increase that hedge right now as I am fearful of the Japanese goverment artificially devaluing the yen to support their exporters...

sigh so many decisions!!

Anon - why not just build a position in commodities? they may be sideways for a little while but some are pretty good buys right now, FCX namely and at some point the USO will make a lot of sense. there was a good article in seeking alpha the other day on integrated oils being the best positioned for alternative fuels (check out petrobras for one).

commodities are exposed to deflationary forces, industrial production slowdown cycles, and flaws of management, overcapacity, and overinvestment

It's funny, I've read so much commentary about how the dollar is going to collapse (much of it on gold-related blogs), meanwhile gold is still well below where it was when Cramer made his swirly-eyed pronouncement that we should all buy it.

I think most people have a fundamental misunderstanding of economics and truly believe that the government is just running the presses and pushing currency into circulation.

You'd think that with all of the recent announcements regarding $800 billion here, $7 trillion there, gold would be screaming through the roof.

Any theories from all the gold-hoarding unibombers as to why it's not?

Deleveraging! Adjusted Monetary Base shows printing, as money supply y-o-y is up 33%.

Im not a gold bug, Ill sell if there is a reason to sell, but geez, we are going from 30/40:1 to 10/12:1, and everything is being sold outside of treasuries. Even paper gold assets to raise cash. Stocks are down 40%, oil down 60%, commodities wrecked, and gold is flat over 12 months. Its all relative.

I think the move will happen when deleveraging is over and those that bought for crisis are OUT. I say its 2009's trade.

Noah, you were probably the most honest participant in this little roundtable at NY mag. Too bad you couldn't have given more of your perspective. A few at the table were just not credible at all.

The other comments here are interesting. It seems to me that the bottom line reason an extremely painful 2-3 years is looming is total true debt is no longer manageable by anyone, the gov, the corporation, the banks, and many individuals. NY real estate will come down dramatically I think. Probably 30-40% in time.

And I hate to say it but these bailouts are just going to delay the inevitable collapse by maybe a six months or a year at most (and printing money, though seemingly helpful to begin with, in the long run has to add to the problem). The deflation spiral (with paradoxical little unsustainable rallies and upticks) seems unstoppable to me.

The total debt gov and business acknowledges, plus unfunded debt, off the books debt, toxic derivatives of all types, etc. is estimated to be anywhere from $100 trillion (which is conservative) to several quadrillion.

A good conservative summary of a very reputable estimate of its magnitude is by the head of the Fed Reserve Bk of Dallas:
http://www.dallasfed.org/news/speeches/fisher/2008/fs080528.cfm
His estimate is on the order of $100 trillion.

Also check if interested:
http://www.federalreserve.gov/releases/h41/Current/
It appears the gov owes close to $1 quadrillion on US issued treasury securities, which we know are just IOU's not backed by anything but faith and productive output of the country if adequate.

Just seems the system is too big a house of cards to sustain by accounting gimmicks and one time budget maneuvers any more. Throw in job and home losses, reduced spending, retail businesses failing and so forth; and it seems like we just might really see a monster depression over the next few years. Wish someone could convince me otherwise.

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