Here Comes Da Zirp!
How likely are we to see a zero percent interest policy? Pretty likely:
"Federal Reserve Chairman Ben S. Bernanke signaled he's ready to cut interest rates to the lowest level on record should the central bank's actions fail to stem the deepening economic slump.
Policy makers said yesterday that ``downside risks to growth remain'' even after their half-point reduction in the main rate to 1 percent. The Fed dropped a reference in its statement to threats from inflation, projecting "levels consistent with price stability'' in coming quarters...
Bernanke is drawing on an academic career studying the failed efforts to prevent the Great Depression, and yesterday's shift indicates he's prepared to revisit his 2003 commitment as a governor to lower rates to zero percent if necessary. Should lending fail to revive by December, the central bank will probably cut by another half point, said former Fed Governor Lyle Gramley...
Reflecting a crisis that has reverberated throughout the global economy, the Fed's Open Market Committee yesterday said that international rate cuts should contribute by loosening credit markets. The FOMC also said slowing economies abroad will threaten the record boom in American exports, which have kept the U.S. from a deeper slump...
In a new step to increase the availability of dollars in emerging markets, the Fed yesterday agreed to provide $120 billion to four counterparts. Brazil, Mexico, South Korea and Singapore get $30 billion each by signing the so-called currency swap lines. The U.S. already has unlimited agreements with the European Central Bank and Bank of England."
Inflation from 2002-07, Deflation from 2008-09, hyper inflation from 2010-???
I could see Gold going to $3,000, by way of $300 first.
>
* With apologies to Flip Wilson
Source:
Fed Signals Door 'Open' for Cutting Rates to Lowest on Record
Scott Lanman and Craig Torres
Bloomberg, Oct. 30 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=adtjOhAF5mEk&
The Big Picture is moving! The new post here
Thursday, October 30, 2008 | 07:05 AM | Permalink
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I have not owned gold or gold shares since the late 70's. I agree with your reasoning Barry, and I wish I didn't.
As discussed a little last night the federal debt jumped by 800 billion since September 1. This is in reality an unbelievable number. Enormous. And if Bernanke is serious about how much he's willing to spend, it is just the beginning.
Barry, if you have the time over the weekend, for those of us who are investors and not day traders, could you put up what you can find about which countries are most likely to be fiscally responsible now and over the next 5 years? If it is Germany, or Switzerland, or some other....I think that is where I'd like to concentrate my investments over the next few years.
This massive debt increase will only end badly...we all feel that in our gut..
Posted by: Bruce in Tennessee | Oct 30, 2008 7:18:37 AM
I jump on Bruce's bandwagon.
How can those of us that are fiscally responsible prepare for potential hyperinflation?
Posted by: Jay Weinstein | Oct 30, 2008 7:28:26 AM
The Fed is now acting as lender of last resort for overseas borrowers who can't get dollar based loans from US banks? Thats nice, I'm kind of surprised they're chartered to do that.
Posted by: JC | Oct 30, 2008 7:28:47 AM
The Fed is now acting as lender of last resort for overseas borrowers who can't get dollar based loans from US banks? Thats nice, I'm kind of surprised they're chartered to do that.
Posted by: JC | Oct 30, 2008 7:29:33 AM
Barry
This is your first reference to coming economic conditions that squares with what I have been basing my investments on for some time.
Those who have talked about the prospects of inflation as a serious problem fail to understand at least two things:
1) reinflating the (world) economy is the intent of policy: it is NOT an unhappy and unintended consequence of policy. In the choice between deflation and inflation, everyone will choose inflation. The only way out of the housing and other asset deflation is a rather robust asset inflation.
2) Winners and losers. The problem that has not been addressed (and will be a political monster for years to come) is the disastrous impacts on certain groups from a sequence of crushing deflation followed by raging inflation. Debt holders will be crushed -- debtors enriched (in the next six months, borrow and buy). The elderly will be crushed. First they loose their retirement account value, then their fixed income is inflated away.
Important in all this is the timing. Scale is less uncertain. Forget past history. Massive global deflation followed (soon?) by massive global inflation is a new game.
Posted by: Mac E. Avelli | Oct 30, 2008 7:40:32 AM
Mac:
Yes, your points are well taken. Especially your remark about timing. For years everyone has been preached to about not being a market timer...and these policies will in my opinion, make those of us who hope to hang on to the value of our money, just that...market timers...and we'd better be right...or we'll join the elderly as you so rightly posit....
Posted by: Bruce in Tennessee | Oct 30, 2008 7:48:22 AM
I held gold stocks from 2002 to 2005 (got out too early) and thought gold was pricey as recently as 2007. I think it is going to drop further along with other commodities, for about a year. I agree with BR's musing that it will go up later, along with some sort of inflation. Hyper? I'm not sure about that. A lot depends on how much (or too much) money is being created right now.
Posted by: Quiddity | Oct 30, 2008 7:48:33 AM
While I generally agree with your statement: "Inflation from 2002-07, Deflation from 2008-09, hyper inflation from 2010-???"
However the risk to that forecast is policy. Given we are about to have an election in which Obama is likely to win, how is policy likely to change? Paul Volcker is part of the Obama braintrust and if Volcker had his way there won't be any inflation under his watch.
See my discussion at: http://humblestudentofthemarkets.blogspot.com/2008/10/barbell-portfolio-for-fork-in-road.html
Posted by: Cam Hui | Oct 30, 2008 7:57:30 AM
Forget past history. Massive global deflation followed (soon?) by massive global inflation is a new game.
Posted by: Mac E. Avelli | Oct 30, 2008 7:40:32 AM
I'll second this one with a single caveat: "There are some old lessons that will be, vitally, necessary."
as well, as he said, timing is key, but it isn't anything to get cute about. Most people have their 'houses' adrift in the dunes, luckily, cornerstones, and keystones, are still available. You don't have a mason to understand plumb, nor square.
Just remember the old Carpenter's rule: "Measure twice, cut once."
And, to the extent that it's feasible, those whom you do 'business' with is more important, than ever..
Posted by: Mark E Hoffer | Oct 30, 2008 8:00:02 AM
One other thought before I go to the salt mine...I have posted before about an article I read in the Economist years ago about the investment cycle and how equities were very closely aligned with rises and falls in liquidity, worldwide liquidity that is.
Well Barry's bud, Paul Kedrosky, has a chart that typifies this relationship this morning on his blog site. The relationship is amazing.
http://paul.kedrosky.com/
Liquity, Then and Now.
Posted by: Bruce in Tennessee | Oct 30, 2008 8:08:49 AM
Mark
This may be a condition in which, as you say, "it isn't anything to get cute about" and the issue is who you do business with. I disagree.
My opposition in my investment plan has been my wife. She has thought me quite mad for more than 3 years now. In 2006 I insisted we sell our house and become renters. In 2007 I retired and paid a huge tax and penalty tax to withdraw my retirement accounts and get control of the assets. I have used the money to short the stock and market and over the past 4 months to begin buying real estate.
Timing is, for me, of the essence. When should I be fully invested in real assets? How much of what kind of debt should I acquire and how should it be structured?
Except for my reluctant wife, I want no partners. No one I know, especially at my age, is willing to bet the farm and also willing to wait for returns.
Posted by: Mac E. Avelli | Oct 30, 2008 8:22:04 AM
The way I see the immediate future is a Fed that is completely out of ammo with very few options left.
Now the hand-wringing really begins. I'll be damned if I would let Paulson or Bernanke slip from center-view. They committed to the solutions taken and must be made to stay with them. Don't let them pass this mess off on some other smuck and blame him/her for its outcome.
Nearly all the bozookas and missiles have now left their silos. So, now we wait.
I respect Paul Volcker very much; but, the fact is.... there isn't going to be any tools let to do very much with after this Administratrion leaves Office. Right or wrong, our response to the problem is out there. Our wad has been spent.
Time will tell if we were right or wrong in our response. It just feels to me like we are repeating the mistakes of the past but on a massively greater scale.
Posted by: BG | Oct 30, 2008 8:25:53 AM
"hyper inflation from 2010-???"
It certainly looks that way to me. Years from now they'll say it was all 'baked in' by 2009.
Having borrowed against the future, worldwide, governments will decide they just don't really want to pay all that stuff back. So they won't.
Posted by: wally | Oct 30, 2008 8:31:05 AM
Bruce, Mac, Mark et al.
Excellent comments & thoughts. Quite a bit above my financial IQ but I am trying to catch up. Thanks for taking the time.
Cheers.
Posted by: Douglas Watts | Oct 30, 2008 8:33:01 AM
Bernanke's playbook for a deflationary environment c. 2002: http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm
As Bill Gross said yesterday on CNBC, buy what the government's buying (or will continue to buy).
Posted by: Matthew | Oct 30, 2008 8:42:01 AM
Mac,
I hear ya, though, to attempt to clarify what I was referring to, here goes:
"as well, as he said, timing is key, but it isn't anything too(ed.) get cute about. Most people have their 'houses' adrift in the dunes, luckily, cornerstones, and keystones, are still available."
I was agreeing that 'timing' is key, but, given that most have their 'houses'--Financial Portfolios--adrift in the dunes--substantially subject to the vagaries of the 'Marketplace'--they shouldn't get too cute-- U$D 0.95 is close enough to U$D 1 to accomplish "cornerstones, and keystones, are still available."--towit: Hard assets that aid in sustaining, and, as well, by that fact, are readily tradeable.
and, with this: "And, to the extent that it's feasible, those whom you do 'business' with is more important, than ever.."
I was not referring to 'business partners', but, as I was alluding to, above, Tradesmen, and Merchants(as opposed to Retailers).
And, as you allude to, any Farmer knows that his Gains are seldom measured in 'Dollars', but are scored by Seasons.
Posted by: Mark E Hoffer | Oct 30, 2008 8:56:52 AM
he's got only 1% more to cut. then comes the helicopter 'strategy'!
it should fit well with obama's wealth redistribution program.
Posted by: baychev | Oct 30, 2008 9:04:01 AM
I don't think you can predict which countries will be fiscally responsible in the future.
I think we all would have said that a Republican Congress and President would be very fiscally responsible. We couldn't have been more wrong.
Posted by: Concerned American | Oct 30, 2008 9:08:02 AM
BR, you are too quick to rush to the hyper inflation with this statement.
"Inflation from 2002-07, Deflation from 2008-09, hyper inflation from 2010-???"
we should be able to recover from this contraction going forward into 2010 but it won't be hyperinflation. The potential money supply expansion will be limited by the number of participating banks that are left with the overhead of the toxic mortgages that are still left in the overall economic system regardless if it is a bank that owns them or the US government.
What I see as the next bring contraction about 5 years from now will be the next leveraged market to implode and the Fed not having any tolls to resolve it. Bonds. Highly leveraged and the high number of baby boomers who have most of their 401ks heavy in them nearing retirement.
The exodus from treasuries will result in high interest rates and there is not much that the Fed can do to stop it other than chasing rates up. Hopefully Volker is still around to help advise on it
Posted by: andrzej | Oct 30, 2008 9:12:22 AM
poster "Bernanke is drawing on an academic career studying the failed efforts to prevent the Great Depression"
one needs to wonder was he hired to continue policy of call / rake or start a new policy of do no evil?
one needs to wonder where commodity "human" fits in the formula?
Posted by: Greg0658 | Oct 30, 2008 9:13:55 AM
Beliefs take a long time to die. One is that Bernanke can save the economy. That is now dead. The next is that central banks control inflation. That too will pass with the repudiation of Modern Finance.
Does anyone even know how hyper-inflation is created? I mean that seriously. And, please don't say printing money. Because we've been listening to that pablum for years and those talking heads have been completely wrong.
Posted by: bdg123 | Oct 30, 2008 9:45:33 AM
ZIP-- tough to do here in US , if so, how do MMF's survive on the expense side , would be dicey I think
Posted by: Jaym | Oct 30, 2008 10:04:03 AM
"I could see Gold going to $3,000, by way of $300 first." - Bang on.
Posted by: Toro | Oct 30, 2008 10:10:05 AM
Does anyone even know how hyper-inflation is created? I mean that seriously. And, please don't say printing money. Because we've been listening to that pablum for years and those talking heads have been completely wrong.
Posted by: bdg123 | Oct 30, 2008 9:45:33 AM
bdg,
it happens when the 'suckers' wise-up to the con..
confidence in the fiduciary media gets puked out, and its 'value' goes down the drain with it..
could happen with a single U$D, as an extreme ex., in 'circulation', or a 1,000 quadrillion..same difference, really.
Posted by: Mark E Hoffer | Oct 30, 2008 10:24:02 AM
Posted by: Mac E. Avelli | Oct 30, 2008 7:40:32 AM
I see the world the same way you do.
Short term deflation followed by inflation/hyper-inflation.
I just want to understand the whys and what I can do to protect myself. An increase in the national debt of $880 billion in two months is freightening. This doesn't include the leveraging the FED has done with their balance sheet. As citizens we are on the hook for the debt and the FED leveraging.
Why would Bernanke et al do such a thing as create huge amounts of inflation almost seemingly on purpose. Government in general do not survive a hyper-inflation. Bernanke must think he can keep things under control and hyper inflation won't happen. He's now dealing with a bad situation the best way he knows and will deal with the outcome later, hopefully in a controlled manner.
2) How is one to stay solvent in such an environment. Here's a few investment proposals I see. Of course timing is the key question.
-Buy hard assets such as gold, silver, platinum, oil and other commodities. I'm slowly increasing my holdings now
-Short US government bonds in the near future. I read that Bernanke has said he would control long term interest rates so that complicates shorting bonds. I don't know how he can do that, but I think this must be part of his plan. What the Chinese/Japanese is far more important than what Bernanke does for long term bonds IMHO. The real question is when to do this.
-I've started looking around on how to legally move money out of the US. But like others when, how and where is the question.
.
Posted by: blue bellied yankee | Oct 30, 2008 10:30:09 AM
