Monday, August 30, 2010
Sunday, August 29, 2010
Check out Ostrich Investors 2
read zeal may be correct for reasons entirely beyond the scope of his analysis. forget the retail investor. remember japan.. apply zeal logic to japan and see what happens. i have not changed my opinion that dow hits 60,000+ by 2030. maybe well before due to inflation. but first ongoing deflation, unless the fed panics and buys anything that moves!! that will be the black swan! the timing will be based on technical factors. left to its own devices, markets and global economy could disintegrate. feds job is to not let that happen in conjunction with other central banks. does that imply a weak dollar or a strong dollar. of course, the bond market is central. watch it very closely. it argued for deflation until friday!!!! something significant may be happening in the coming weeks to prevent a spiraling decline.
Wednesday, August 25, 2010
Sunday, August 22, 2010
Financial Myth #1 Money on the sidelines
Myth #1: There is need for outside money in order for stocks to rise.
False: Not necessary. Counter example:
Mr. Jones owns A shares. Closed Tuesday at $10. Mr. Smith owns B shares. Closed Tuesday at $10. Wednesday is a beautiful day. Everyone is optimistic. Or maybe important positive financial news. Mr. Jones would like to purchase B shares. Mr. Smith would like to purchase A shares. The exchange takes place at $11/share. Thus each investor is 10% wealthier and the market is up 10%...No new money came into the market! Just new confidence and optimism.
Now expand the example to include other kinds of assets and additional players.
Same scenario can unfold. All the players exchange assets at higher prices. Bonds Up, gold Up, real estate Up. No new money came in to the game.....
Conversely if the weather and news Wednesday morning is negative. The shares
exchange hands at $9. Markets declined 10% and every body feels much poorer. No money was taken out of the market. (uninformed people of course ask. Where did the money go??).
Similar analysis applies to the real estate markets: ten people. each one buys a
house and sells a house to a neighbor. all at higher prices from the previous sale. no new money. everybody is richer and happier...
Now add people with cash in the bank. Include people with any and all other classes of assets. they decide to buy stocks. A seller for each buyer. The seller uses the proceeds of his sale to either buy a different asset class or puts the money in the bank. In any event, eventually someone puts the money in the bank or buys Treasury securities which are viewed as the equivalent to money. Treasuries can be borrowed collateralized or quickly sold quickly....
Bottom line: positive or negative psychology determine price not necessarily cash on the sidelines!
False: Not necessary. Counter example:
Mr. Jones owns A shares. Closed Tuesday at $10. Mr. Smith owns B shares. Closed Tuesday at $10. Wednesday is a beautiful day. Everyone is optimistic. Or maybe important positive financial news. Mr. Jones would like to purchase B shares. Mr. Smith would like to purchase A shares. The exchange takes place at $11/share. Thus each investor is 10% wealthier and the market is up 10%...No new money came into the market! Just new confidence and optimism.
Now expand the example to include other kinds of assets and additional players.
Same scenario can unfold. All the players exchange assets at higher prices. Bonds Up, gold Up, real estate Up. No new money came in to the game.....
Conversely if the weather and news Wednesday morning is negative. The shares
exchange hands at $9. Markets declined 10% and every body feels much poorer. No money was taken out of the market. (uninformed people of course ask. Where did the money go??).
Similar analysis applies to the real estate markets: ten people. each one buys a
house and sells a house to a neighbor. all at higher prices from the previous sale. no new money. everybody is richer and happier...
Now add people with cash in the bank. Include people with any and all other classes of assets. they decide to buy stocks. A seller for each buyer. The seller uses the proceeds of his sale to either buy a different asset class or puts the money in the bank. In any event, eventually someone puts the money in the bank or buys Treasury securities which are viewed as the equivalent to money. Treasuries can be borrowed collateralized or quickly sold quickly....
Bottom line: positive or negative psychology determine price not necessarily cash on the sidelines!
How to create Inflation
Now let's go to Myth #2: Quantitative easing is the same as Printing
Money.... and is a guaranteed path to Inflation
False!
The Federal Reserve Bank (Fed) has a responsibility to regulate bank reserves.
When member banks that are in compliance need funds they can obtain them from the Fed either by selling very short term maturity securities or borrowing at the Fed window at the discount rate. Conversely, the Fed can reduce bank liquidity by selling securities into the market place.
When member banks need currency (cash) they can obtain them by exchanging their reserve deposits at the Fed for cash-currency. That is how paper money enters the economy. PERIOD.
The US Treasury does not print money. It is illegal. The Treasury must borrow money to pay its obligations like any other player in the economy. Of course, by definition their credit is good.
Now let's examine quantitative easing. The Fed purchase of longer maturity Treasury paper or Treasury guaranteed paper...Is that process always inflationary?? Is it printing money?
No!
When the Fed buys T Bonds, the seller can do several things with the proceeds. He can buy other T-Bond equivalents or he can use the proceeds to make loans to the private sector. There is currently no evidence that private sector loan demand exceeds the capacity of Banks to make loans. Thus there is no reason to believe that Fed QE is necessarily inflationary. Furthermore, the holder of Treasury securities can always borrow against them or sell them. Thus the Fed through QE at best raises the prices of the Treasury securities (effectively lowering interest rates). However, there is no evidence that further lowering of interest rates will increase loan demand. Lenders are afraid to lend and borrowers are deleveraging. Not increasing their debts. As long as loan creation to the private sector is stagnating or declining, there will be no increase in aggregate demand for goods and services in the economy. No inflationary expectation.
Suppose the Fed bought the entire Gov't debt (not owned by various government agencies like the SSA)?
The sellers of those Gov't securities would have to do something with the money. If it is left in non interest bearing accounts, it will have no impact on the economy. Thus the sellers will have to go out and buy something or lend the money to somebody. But everybody is looking to deleverage, to pay down their loans...Next step, the US Gov't decides to increase the deficit (fiscal policy) . Problem: Congress at this stage, > will not let the Government increase the deficit (fiscal > irresponsibility). Incidentally, if the increase in the US Gov't deficit is less than the decrease in private borrowing, there would be no reason to believe that US deficits are inflationary. Indeed, for example, if private sector borrowing decreases by $3 trillion and Gov't deficit increase by $1.5 trillion, there is a net $1.5 trillion deleveraging > in the economy. Total demand as represented by "new" purchasing power declines by $1.5 trillion. Not inflationary. If on top of that, the US government manages to transfer money to the public and the public uses that money not to buy goods and services but instead pays back debt, then the transfers are also not inflationary.
In the extreme, the Fed purchases the entire annual deficit (about $1.3 trillion). The government replaces the private sector as the consumer of last resort. If private spending declines by $1.3 trillion, there is no demand inflation. Furthermore, if global productivity continues to increase, more goods and services
can be produced at lower and lower cost by fewer and fewer workers... hmmm.......
Where is the inflation???????
Eventually, the game may have to be restarted. The rules will change and the government actually will print money (weimar republic, banana republics, Israel in the 80's, Zimbabwe). The government could deposit the newly minted money and deposit $10M into everybody's checking account. All debtors can easily repay their loans with almost worthless money and lenders get destroyed. Everybody owns their house debt free.... The government owes no more money (the debt is repaid with worthless old dollars) ... and there is a total financial reorganization....
What will hard assets be worth? Well for a short period of time, it will be back to a barter economy. All real estate, capital assets and commodities including sardines, water and gold (with no special standing) will be subject to supply and demand in a barter economy. Owners of all hard assets (as evidenced by shares of
companies, deeds, warehouse receipts for commodities) will be in good shape. Shares in companies whose only assets are bonds, notes IOUs, etc. will be wiped out. The above presumes that there will not be uncontrollable social unrest or revolution.
Do not forget that there are more borrowers than lenders. Democracy can play funny games... demagogues can take advantage and point fingers at various minority elements in the society. Only time will tell.
What does Myth #1 teach us? Given confidence in the future, lenders will make loans, borrowers will borrow money to make purchases at higher prices...that is called inflation.
Conversely, pessimism can lead to devastating spiraling deflation. Eventually these long term leveraging cycles must come to an end. Debt creation can only grow so high. Even trees do not grow to the sky. Servicing of debt eventually becomes impossible.
Ancient geniuses understood the long term multi-generational cycles and created the 50 year Jubilee concept that placed a lid on expectations, concentration of wealth and debt creation...The world is in the process of relearning that lesson....
Money.... and is a guaranteed path to Inflation
False!
The Federal Reserve Bank (Fed) has a responsibility to regulate bank reserves.
When member banks that are in compliance need funds they can obtain them from the Fed either by selling very short term maturity securities or borrowing at the Fed window at the discount rate. Conversely, the Fed can reduce bank liquidity by selling securities into the market place.
When member banks need currency (cash) they can obtain them by exchanging their reserve deposits at the Fed for cash-currency. That is how paper money enters the economy. PERIOD.
The US Treasury does not print money. It is illegal. The Treasury must borrow money to pay its obligations like any other player in the economy. Of course, by definition their credit is good.
Now let's examine quantitative easing. The Fed purchase of longer maturity Treasury paper or Treasury guaranteed paper...Is that process always inflationary?? Is it printing money?
No!
When the Fed buys T Bonds, the seller can do several things with the proceeds. He can buy other T-Bond equivalents or he can use the proceeds to make loans to the private sector. There is currently no evidence that private sector loan demand exceeds the capacity of Banks to make loans. Thus there is no reason to believe that Fed QE is necessarily inflationary. Furthermore, the holder of Treasury securities can always borrow against them or sell them. Thus the Fed through QE at best raises the prices of the Treasury securities (effectively lowering interest rates). However, there is no evidence that further lowering of interest rates will increase loan demand. Lenders are afraid to lend and borrowers are deleveraging. Not increasing their debts. As long as loan creation to the private sector is stagnating or declining, there will be no increase in aggregate demand for goods and services in the economy. No inflationary expectation.
Suppose the Fed bought the entire Gov't debt (not owned by various government agencies like the SSA)?
The sellers of those Gov't securities would have to do something with the money. If it is left in non interest bearing accounts, it will have no impact on the economy. Thus the sellers will have to go out and buy something or lend the money to somebody. But everybody is looking to deleverage, to pay down their loans...Next step, the US Gov't decides to increase the deficit (fiscal policy) . Problem: Congress at this stage, > will not let the Government increase the deficit (fiscal > irresponsibility). Incidentally, if the increase in the US Gov't deficit is less than the decrease in private borrowing, there would be no reason to believe that US deficits are inflationary. Indeed, for example, if private sector borrowing decreases by $3 trillion and Gov't deficit increase by $1.5 trillion, there is a net $1.5 trillion deleveraging > in the economy. Total demand as represented by "new" purchasing power declines by $1.5 trillion. Not inflationary. If on top of that, the US government manages to transfer money to the public and the public uses that money not to buy goods and services but instead pays back debt, then the transfers are also not inflationary.
In the extreme, the Fed purchases the entire annual deficit (about $1.3 trillion). The government replaces the private sector as the consumer of last resort. If private spending declines by $1.3 trillion, there is no demand inflation. Furthermore, if global productivity continues to increase, more goods and services
can be produced at lower and lower cost by fewer and fewer workers... hmmm.......
Where is the inflation???????
Eventually, the game may have to be restarted. The rules will change and the government actually will print money (weimar republic, banana republics, Israel in the 80's, Zimbabwe). The government could deposit the newly minted money and deposit $10M into everybody's checking account. All debtors can easily repay their loans with almost worthless money and lenders get destroyed. Everybody owns their house debt free.... The government owes no more money (the debt is repaid with worthless old dollars) ... and there is a total financial reorganization....
What will hard assets be worth? Well for a short period of time, it will be back to a barter economy. All real estate, capital assets and commodities including sardines, water and gold (with no special standing) will be subject to supply and demand in a barter economy. Owners of all hard assets (as evidenced by shares of
companies, deeds, warehouse receipts for commodities) will be in good shape. Shares in companies whose only assets are bonds, notes IOUs, etc. will be wiped out. The above presumes that there will not be uncontrollable social unrest or revolution.
Do not forget that there are more borrowers than lenders. Democracy can play funny games... demagogues can take advantage and point fingers at various minority elements in the society. Only time will tell.
What does Myth #1 teach us? Given confidence in the future, lenders will make loans, borrowers will borrow money to make purchases at higher prices...that is called inflation.
Conversely, pessimism can lead to devastating spiraling deflation. Eventually these long term leveraging cycles must come to an end. Debt creation can only grow so high. Even trees do not grow to the sky. Servicing of debt eventually becomes impossible.
Ancient geniuses understood the long term multi-generational cycles and created the 50 year Jubilee concept that placed a lid on expectations, concentration of wealth and debt creation...The world is in the process of relearning that lesson....
Wednesday, August 18, 2010
Monday, August 16, 2010
Sunday, August 15, 2010
Monday, August 9, 2010
Sunday, August 8, 2010
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