Meltdown

[BachQ]

Reminds me of when oil flirted with $50 a few months back.

  That's ancient history: oil is now below $34.44/bbl !

Gold @ $946

[Archaic Torso of Apollo]

Should I be buying Swiss francs? Or gold? What do you gurus think?

[BachQ]

Should I be buying Swiss francs? Or gold? What do you gurus think?

When crude oil broke through $80/bbl 15 months ago, I told friends and family that oil would be $200/bbl within a year.  Well, oil is now $36/bbl, and I'm predicting that oil will fall below $20/bbl this spring. 

When gold broke through $1,000/oz, I was similarly convinced that gold was heading toward $2,000 to $3,000/oz.  A few months ago, gold was around $700/oz.  I goofed.

Although my track record is far from stellar, I can tell you that all of the gurus are convinced that precious metals -- in particular gold -- are the optimal investment over the longterm. 

I would stay away from most fiat currencies since they're supported by house-of-cards financial institutions and home economies that are collapsing from debt and phony ponzi infrastructures.

[ezodisy]

Yeah sell the £ because it's finished and the Euro because it's flawed & doomed. I've heard that the Swiss Franc isn't what it used to be.

Ever consider investing in Russia?*

*lol!

[BachQ]

Yeah sell the ... Euro because it's flawed & doomed.

Doomed?  Yes.  ........... But flawed?   

London Times: Eurozone GDP plunges by record 1.5% in 4th qtr 2008, and is projected to contract by 2.3% in 2009.

[Archaic Torso of Apollo]

Yeah sell the £ because it's finished and the Euro because it's flawed & doomed. I've heard that the Swiss Franc isn't what it used to be.

Ever consider investing in Russia?*

*lol!

LOL indeed. Well, what goes down must come up.

I've actually been buying Euros because I've been scared by all these predictions of a dollar collapse. And I have a practical reason: I pay my rent in Euros. (2 years ago, I paid it in $$.)

[BachQ]

The Euro because it's flawed & doomed.

Failure to save East Europe will lead to worldwide meltdown (Telegraph 14 Feb 09): The unfolding debt drama in Russia, Ukraine, and the EU states of Eastern Europe has reached acute danger point. If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung. ..."A failure rate of 10pc would lead to the collapse of the Austrian financial sector," reported Der Standard in Vienna. Unfortunately, that is about to happen.

(Telegraph 11 Feb 09): Toxic Debt could push EU into Crisis

Telegraph 11 Feb 09: While no country was mentioned, the obvious candidates are Ireland, Luxembourg, Belgium, the Netherlands, Austria, Sweden, and Britain -- and non-EU member Switizerland -- which all have oversized banking sectors. ... The IMF says European and British banks have 75pc as much exposure to US toxic debt as American banks themselves ...

[Coopmv]

Failure to save East Europe will lead to worldwide meltdown (Telegraph 14 Feb 09): The unfolding debt drama in Russia, Ukraine, and the EU states of Eastern Europe has reached acute danger point. If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung. ..."A failure rate of 10pc would lead to the collapse of the Austrian financial sector," reported Der Standard in Vienna. Unfortunately, that is about to happen.

(Telegraph 11 Feb 09): Toxic Debt could push EU into Crisis

Telegraph 11 Feb 09: While no country was mentioned, the obvious candidates are Ireland, Luxembourg, Belgium, the Netherlands, Austria, Sweden, and Britain -- and non-EU member Switizerland -- which all have oversized banking sectors. ... The IMF says European and British banks have 75pc as much exposure to US toxic debt as American banks themselves ...

I hear you but the ECB headed by that idiot Jean-Claude Trichet still talks about inflation.  Deflation is now the biggest enemy for the global economy.  The higher the deflation rate, the higher the real interest rate since the latter is nominal rate less inflation rate.  When the inflation rate is negative, it does not matter what the nominal rate is, as is the case of the US fed funds rate, which is currently between 0 and 1%. 

[BachQ]

I hear you but the ECB headed by that idiot Jean-Claude Trichet still talks about inflation.  Deflation is now the biggest enemy for the global economy.  The higher the deflation rate, the higher the real interest rate since the latter is nominal rate less inflation rate.  

Correct ... deflation will give rise to high real interest rates (even when the nominal interest rates are approaching zero), such that the resulting high real interest rates will worsen the recession, which will in turn cause more deflation, leading toward a deflationary spiral.  Given this liquidity trap, even a nominal ZIRP (zero nominal interest rate policy) may be too high in real terms. 

Historically, a currency devaluation could achieve the desired stimulus by boosting exports and raising the price of imports (leading to inflation to counter the deflation).  But the primary causes of the current deflation are (1) the popping of asset bubbles coupled with both (2) the pervasive reduction in the supply of credit and (3) deleveraging (and the unwillingness of consumers to take on more debt).  I don't have any numbers handy, but it seems obvious that the supply of credit has dwindled by double digits. With banks becoming effectively insolvent and wary of defaulting borrowers (lowering the availability of credit), and with asset bubbles bursting and consumers becoming unemployed (lowering the demand for credit and increasing the default rate for current debt), this deflationary vortex of illiquidity will spiral toward a depression.

Given this framework, and with all other things being equal, it seems clear that nominal interest rates should be reduced to near zero.  As such, at first blush, it seems that Trichet will have no choice but to lower rates at the next ECB meeting.

With that said, Trichet may be correct in predicting inflation, at least with respect to commodities prices.  It's conceivable that commodity prices will be bottoming soon, and that we are headed toward another round of significant commodities price inflation.  I personally believe that we will see more deflation in commodities prices, but only through this spring/summer, after which time scarcities of industrial commodities will push prices higher.  For example, we may be headed toward a major oil price spike this summer.  These commodities shortages will lead to higher prices.

So, the question is whether Trichet is careless for being behind the curve, or is insightfully ingenious for being ahead of the curve?  Perhaps both apply!

When the inflation rate is negative, it does not matter what the nominal rate is, as is the case of the US fed funds rate, which is currently between 0 and 1%. 

I'm not sure I follow.  True, when the nominal rates are already near zero, the nominal rate "doesn't matter" amid deflation.  But when the nominal rates are far above zero, the rates do matter, of course.

[BachQ]

Massive desert solar 'colonies' hope to solve energy crisis ( Arizona Star 12 Feb 09): Imagine large-scale solar-power plants being built across the Sonoran Desert, along with power lines up to 300 feet high, to export the sun's power to the rest of the West.  That's the ambition of an idea the Western Governors Association and the federal government are studying -- to make Arizona a solar energy "colony" for 11 other states, two Canadian provinces and Baja California.

[Coopmv]

I'm not sure I follow.  True, when the nominal rates are already near zero, the nominal rate "doesn't matter" amid deflation.  But when the nominal rates are far above zero, the rates do matter, of course.

The nominal rate is the fed funds rate in this case, which is very close to zero right now.  However, the real interest rate is much higher due to deflation.

[BachQ]

The nominal rate is the fed funds rate in this case, which is very close to zero right now.  However, the real interest rate is much higher due to deflation.

I think the only way to measure an accurate "rate of deflation" is to consider and give effect to the magnitude of credit contraction (this assumes a broader definition of money supply than is conventional).  A simple measure of disinflation (i.e., dropping CPI) is only a small part of the deflation equation.

I hear you but the ECB headed by that idiot Jean-Claude Trichet still talks about inflation.  Deflation is now the biggest enemy for the global economy.  The higher the deflation rate, the higher the real interest rate since the latter is nominal rate less inflation rate.  When the inflation rate is negative, it does not matter what the nominal rate is, as is the case of the US fed funds rate, which is currently between 0 and 1%. 

BTW, the appropriate solution depends on the goal the central bank wants to achieve.  If the goal is to artificially stimulate the economy amid a depression, then lowering interest rates to zero seems appropriate.  However, artificially low interest rates are what got us into this mess to begin with (e.g., housing bubble; excessive debt; Internet bubble; etc.).  And doing so will reinflate the bubbles and could make matters worse over the longterm.

If the goal is to uproot this house-of-cards at the source, then we need to hit "reset," and purge the economy of all its excesses, including eliminating toxic debt and asset bubbles.  This would be a political impossibility, however, because the short-term pain would be perceived to be too great. 

[Coopmv]

This cannot be good news, as the Japanese economy, the second largest in the world, is shrinking at over 12% annual rate.

http://biz.yahoo.com/ap/090216/as_japan_economy.html

[BachQ]

This cannot be good news, as the Japanese economy, the second largest in the world, is shrinking at over 12% annual rate.

http://biz.yahoo.com/ap/090216/as_japan_economy.html

Indeed, it's not a good sign when the world's 4th largest exporting powerhouse experiences a record 35% monthly plunge in exports (for December 2008).  Per your article, Japan's exports plunged a record 13.9% in the fourth quarter from the previous three months.  We'll see if 1st quarter 2009 is any better/worse.

Meanwhile, Ireland "could default on debt" (London Times -- 14 Feb 09): "FEARS are mounting that Ireland could default on its soaring national debt pile, amid continuing worries about its troubled banking sector.  The cost of buying insurance against Irish government bonds rose to record highs on Friday, having almost tripled in a week. Debt-market investors now rank Ireland as the most troubled economy in Europe. ...One possible solution would see Germany buy billions of euros of Irish government debt through a fund set up by the European Central Bank." [/b]   (Germany to the rescue!  )

Looks like the UK's projected deficit (as a percentage of GDP) is just a tad below the US's:




http://www.economist.com/research/articlesBySubject/PrinterFriendly.cfm?subjectid=478046&story_id=13110366

[Coopmv]

Debt Is Hobbling Europe Inc.

Read on ...

http://www.businessweek.com/magazine/content/09_08/b4120028076400.htm?chan=magazine+channel_news

[ezodisy]

anyone interested in chart formations should check out Oscar's Weekend Webinar. If historical patterns over the past 18 months mean anything there should be a big sell-off soon, probably this week.

http://www.youtube.com/watch?v=8_1rSbcO1GQ&feature=channel_page

Oscar rules

[Coopmv]

Looks like the UK's projected deficit (as a percentage of GDP) is just a tad below the US's:

Much of the prosperity in the UK has resulted from its soaring financial markets.  The use of masssive borrowing to leverage speculative investment returns was just a page from the same Wall Street playbook.  Little wonder both countries are now paying the same humongous price for rescuing the disintegrating economies.

[ezodisy]

there's a worthwhile four-part Faber interview posted on Financial Truth. Audio quality isn't very good but it's an excellent chance to hear him talk freely for 40 minutes

[BachQ]

More on Eastern Europe:

I hear you but the ECB headed by that idiot Jean-Claude Trichet still talks about inflation.  Deflation is now the biggest enemy for the global economy.  The higher the deflation rate, the higher the real interest rate since the latter is nominal rate less inflation rate.  When the inflation rate is negative, it does not matter what the nominal rate is, as is the case of the US fed funds rate, which is currently between 0 and 1%. 

FT Alphaville:Forex failure continues in Poland

Australia.to: Eastern Europe is about to Blow

UK Telegraph:Eastern European currencies crumble as fears of debt crisis grow

[BachQ]

AP:Las Vegas has Edged-out Detroit to become America's Emptiest City

CNN:"The economic meltdown is continuing to batter the casino industry, with the two largest U.S. markets -- Las Vegas and Atlantic City, N.J. -- posting sharp declines in gambling revenue. On the Las Vegas Strip, the overall take fell 23% to $474 million in December, according to the Nevada Gaming Control Board."

BBC:Trump casino files for Chapter 11