Posted on 02/05/2010 11:47:22 AM PST by blam
Market Collapse Day II: Equities And Commodities Now Falling Hard
Vince Veneziani
Feb. 5, 2010, 1:51 PM
The market continues to tank, with the Dow currently down 135 points to 9868. The NASDAQ is down 23 points to 2102 and the S&P 500 is down 17 points to 1046. It's a total bloodbath.
Commodities are down across the board (cattle, however, is up!).
Oil is down 3.9% to $70.31 a barrel.
Gold is down yet again. It's currently at $1050 an ounce, down $12. Silver is down 3.5% to $14.82 an ounce.
(Excerpt) Read more at businessinsider.com ...
If it is, it's earlier than I expected.
You want to do something for posterity? Tape episodes of the Food Network and some grocery store advertisements because people 20 years from now are not going to believe how plentiful food used to be.
No, this is just continuing down the path to depression.
I hope people have taken the last year to prepare.
I think 2010 is going to be a miserable year for a lot of industries and difficult for a lot of people, but the steep decline of commodity prices is actually the result of a STRENGTHENING of the U.S. dollar.
Being in cash (USD) is GOOD! (at least for the short term).
What will we play the tapes with?
Damn, that is not good, not good at all as we need that $100.00 oil for a recovery.
Damn.....
Wait, it is rallying as I type.
If Obama reads just the right words from his Teleprompter, everything will be fine. He’s giving more speeches than ever, and he’s working hard to find the exact right words to read.
It remains a deflation. But no, it isn't going to send US GDP lower again. US markets maybe, though our safer asset classes will benefit from flight to quality, as will the dollar.
Those who have been pretending it is all a great inflation, on the other hand, based on nothing but their ideological hatreds and smears of central banks, will be taken out and shot by the markets. Because it is a deflation and not an inflation.
Big end-of-day rally going on. Fed buying again?
This is the end
Beautiful friend
This is the end
My only friend, the end
Of our elaborate plans, the end
Of everything that stands, the end
No safety or surprise, the end
I’ll never look into your eyes...again
Can you picture what will be
So limitless and free
Desperately in need...of some...stranger’s hand
In a...desperate land
Lost in a Roman...wilderness of pain
And all the children are insane
All the children are insane
Waiting for the summer rain, yeah
There’s danger on the edge of town
Ride the King’s highway, baby
Weird scenes inside the gold mine
Ride the highway west, baby
Ride the snake, ride the snake
To the lake, the ancient lake, baby
The snake is long, seven miles
Ride the snake...he’s old, and his skin is cold
The west is the best
The west is the best
Get here, and we’ll do the rest
The blue bus is callin’ us
The blue bus is callin’ us
Driver, where you taken’ us
The killer awoke before dawn, he put his boots on
He took a face from the ancient gallery
And he walked on down the hall
He went into the room where his sister lived, and...then he
Paid a visit to his brother, and then he
He walked on down the hall, and
And he came to a door...and he looked inside
Father, yes son, I want to kill you
Mother...I want to...WAAAAAA
C’mon baby,-———— No “take a chance with us”
C’mon baby, take a chance with us
C’mon baby, take a chance with us
And meet me at the back of the blue bus
Doin’ a blue rock
On a blue bus
Doin’ a blue rock
C’mon, yeah
Kill, kill, kill, kill, kill, kill
Only if we want a recovery for the Arabs.
Or if you would like to see a recovery for the domestic oil and gas industry.
And with oil at $70.00 there is not that much incentive to take on new E&P projects in the US.
Therefore, we and the world will be sending more cash to OPEC.
I believe you can have some of both. If you have severe deflation in the sense that financial assets become worthless, while the government floods the market with cash and savers frantically try to buy concrete non-financial assets with what they can salvage from their financial holdings, you could find the prices of bonds and credit financed items such as real estate dropping while the prices of essentials such as commodities go up. An inflationary depression would be the worst of both worlds, but deflationary in the Austrian sense of credit rather than the conventional view of prices.
I am sure you do believe it, because doom mongering is one of those mental games of twister in which everything that connates "bad" must be blendable into the grand baddest of baddee bads and shrieked hysterically to the rooftops. But it remains a round square and a misunderstanding.
"If you have severe deflation in the sense that financial assets become worthless"
Worthless in what? Im kumquats? In other financial assets? In blueberry scones? No, worthless measured by money. That means, the exchange value of money increasing. Which is what a deflation is. When you can buy all of Exxon for a dollar, it will be hopeless to pretend that a dollar is worthless, too.
"while the government floods the market with cash"
First some facts. One, the government doesn't create cash. The Fed controls M1, banks control money more broadly considered. Two, the government is not flooding the market with cash. The Fed's sheet is about the same size as it was in October 2008. The Fed *did* pump in lots of high powered money in September and October of 2008. But then it was all over, and there hasn't been any money creation since then. Well, numerically zero for over six months, and about a 4% annual rate (below trend) after that.
Yes I know Glenn Beck and everyone selling gold and half the known universe has been smearing Bernanke non-stop pretending that the Fed is creating new money hand over fist forever, but, well, they are all a pack of ignorant liars and fools. It flat isn't. We get the figures every week and there is no excuse for not knowing it. But they repeat the lie endlessly anyway, because it fits their ideology, no other reason.
Third, if people get way more cash than they want, then they will try to get rid of it by spending it and that will drive money prices higher, and the exchange value of money lower. But one, they aren't, and prices have moved the opposite way in the smash. And two, people in fact have demanded much higher quantities of money as a safer investment. Before the crisis it was normal (through time I mean) as an average for people to carry cash equivalents around 10% of their assets; now it is more like 15% and stably so.
In other words, the demand for money is emphatically not a constant and the value of anything depends on said demand as well as on the supply. Just knowing the supply went up no more tells you that the value of dollars will go down, than there being more Nike shoes in the world means their price must be falling. Last I checked, Nike was making shoes hand over fist and selling them for $80-100 a pair. Why? Demand.
A deflation is a period of increasing exchange value of money brought about by a *demand shock* that increases people's desired money balances, by large amounts. It is called a deflation because people strive to get out of debt-assets into more liquid cash assets, and the total volume of private debts outstanding and the total money value of all asset classes combined, usually falls in consequence. We say, there is a scramble to get *into cash*.
If in a scramble to get into cash, the quantity of cash in existence remains fixed, then the value of cash will not remain fixed. It will soar; demand up, supply unchanged, price up. Moreover, many forms of cash or near cash equivalent are, on their liability side, debts that people are scrambling to repay in a deflation, therefore the natural tendency is for the effective quantity of money to fall, as well. Banks pay down debt, let their loans run off into cash without renewal, corporations pay off maturing corporate paper without new issues, etc.
If nobody does anything about the quantity of money in such a demand spike, then the quantity of effective money declines, and the value of money soars, from both factors, though the demand one is much faster to act and by far the dominant force. Notice also please, that millions of men issuing "sell" orders for every sort of risk asset are issuing exactly that many "buy" orders for money, which is the opposite side of every such trade.
This is why the doctrinal solution to such a money-demand spike (a "financial panic", in the literature), is to expand the money supply violently, by as much as the market wants. Bagehot explained this in the 19th century, private bankers like Morgan knew it and practiced it, doctrinaire monetarism as in Milton Friedman demands the same policy response. The point is to accomodate the panic desire to get out of other assets and into cash. Someone takes the other side and issues cash, or something the market will accept as being as riskless as cash, and takes the longer dated assets that the market is clamouring to sell and get out of.
This moderates the spike in the exchange value of money that results from such a panic. It does not stop the desire or the process. People are still paying down debt and running up cash balances with every intention of holding them for security purposes. We say, the ratio of cash to assets increases; in older runs, the ratio of deposits to physical cash decreases as well. We say, quite inaccurately but in the terms of Irving Fisher, the "velocity" of money declines. We say, more accurately with modern monetarism, the demand for money balances increases.
"savers frantically try to buy concrete non-financial assets"
No, see, that is exactly what they were doing *in the bubble itself*, and that idea comprehensively blew apart in the smash. Oil was $147 a barrel. It fell by a factor of 4 and is still half its peaks. Houses were the main frantically bought concrete non financial asset - and they fell in price by a third to half.
Nor is any of this surprising. An ideological world was betting against the Fed (and the US actually) and expecting a grand inflation. But the Fed wasn't inflating. The Fed held M1 completely flat for 3 straight years from the spring of 2005 to the spring of 2008. I bet you did not know that. It is utterly normal for M1 to grow 6% a year; the economy does, on average. The Fed was riding the brake, hard. At the very moment the speculators you are talking about (and whose errors you are repeating) bid oil and houses to the moon - and promptly had their heads chopped off.
There was no grand inflation of new money to justify prices of $350,000 for the average 3 bedroom house or oil at $150 a barrel or gas at $4 a gallon. Such prices *destroyed demand*, because there was no monopoly money to pay for them. The banks did indeed create $2 trillion of new savings form money - CDs, money market funds - money substitutes - all of it M2 and MZM, not controlled by the Fed. But the stuff you can actual use to buy things - currency and checking accounts, that the Fed controls - did not grow at all because the Fed did not grow its own sheet.
Prices therefore crashed to earth. Which is to say, the exchange value of money increased. Which is to say, we had and have a *deflation*, and precisely *not* the inflation that all the speculators predicted and are still predicting. They are crying "turn those machines back on", hoping that house prices double again and make them all whole. But they aren't, and they aren't going to.
"the prices of bonds and credit financed items such as real estate dropping"
No, sorry, hopeless. The mortgage and the house are not the same item. If the value of the house goes up, the mortgages are all rock solid. If the value of the house goes down, then the mortgage is worth more than the house and the bank gets the house. We say, a leveraged asset is in a "call" position. It is precisely the exchange value of money *increasing*, not decreasing, that drove the value of the money-denominated mortgages *above* the value of the houses.
"the prices of essentials such as commodities go up"
Hardly. Gasoline is much more essential than anything else you could name in this respect, and it doesn't cost $4 a gallon anymore. It costs $2.50. The prices of all industrial commodities are way below their mid 2008 peak levels. They fell hard, just like houses - more even. The only commodity that didn't fall hard, is precisely one with nothing essential about it, gold - and it rose because of its "moneyness", not its nature as a commodity. The exchange value of everything perceived as a safe cash like asset soared, relative to everything else. Not as essentials, but as the opposite - as horded goods for future safety.
It is a deflation. But men whose entire view of the world depends on a slander of the Fed and a prediction of hyperinflation just around the corner (forever), cannot admit that they are not living in an inflationary world. To them, central bank controlled currency equals cannot maintain value equals must inflate recklessly equals hyperinflation inevitable.
They've been singing that sad song since *1973*. It has a slight color of accuracy through about 1979, when Volcker took over at the Fed. It has had *none* since then. But to them, it is only a dream deferred. They will never, ever admit they are wrong, and have been continually for 3 straight decades. Every wiggle on the graph of progress they will herald as vindication - just as every layoff makes doctrinaire Marxists predict the immediate and final demise of capitalism. But it is all a crock, they don't know any economics.
It's a deflation. Simple, and the diagnosis is entirely clear and unambiguous in every respect, looking at every past deflation ever know. But apparently, this is fantastically hard for some people to admit.
I expand, in case this point is too shocking to believe it. The Fed extended very large loans to the US banking system in September and October of 2008. It also extending large dollar loans to overseas central banks, especially in Europe, to enable them to support the dollar accounts in their own banks. The amount involved was on the order of $1 trillion.
Essentially all of that has been repaid since then. The total repayments to the Fed on all its various crisis measures comes to $1.1 trillion. When people repay cash to the Fed, if the Fed does nothing that cash is *extinguished*, it disappears. Since cash is the debt of the Fed, repayment of a debt to the Fed puts the asset back on the sheet of its issuer, and that eliminates that asset and liability both.
The Fed has been buying large amounts of treasuries and mortgage securities for the last year, especially since April of 2008 or so (when most of its sheet was still emergency support to the banks, in various forms). But the Fed has been doing this as repayments flowed back to it, from the banks. This has merely maintained the money supply, not expanded it. It prevented the huge repayment stream from the banks back to the Fed, from collapsing the narrow money supply, by buying others stuff (long dated securities), as the direct bank loans were repaid to it.
If the Fed had not done so, the rate of contraction of the money supply would have been approximately 50% per year. Over the great depression's worst early period, 1929 to 1933, the average rate of decline in the money supply was 13% per year. In the peak of the 30s panic, with 5000 banks failing in a period of a few months and ending in a "bank holiday" that completely shut down the entire banking system, the rate of decline in the effective money supply briefly hit 30% per year. We would have been 2-4 times those peak rates, had the Fed not acted to maintain the money supply, as the gusher of repayments came flooding back to it, all last year.
The total Fed sheet today is 6% larger than the October 2008 sheet, which was 15 months ago. That is a 4.8% average annual rate. The average for the economy and past M1 is around 6%, sometimes 7% in expansions. There has been no great inflation in any Fed actions since the smash itself. They meet the panic demand, they maintain support to the banks until those were liquid enough to repay, and it has maintain the money supply in the face of those repayments, with narrow money growth at slightly below average trend rates.
Total debt outstanding has also been growing less than normal. It is normal for that figure to rise about 7% a year - the average since WW II is 7.5% actually. In the last year, it was only 2.3%. Yes including the treasury and the large deficits. The corporate paper market has been cut in half and the asset backed money market has disappeared. Banks are running off loans rather than making them, and consumers are also contracting their own balance sheets by paying down, rather than incurring new, debt.
Thus, the supposed great inflation everyone is screaming about on every news outlet, with CNN showing shots of printing pressed over every story about the Fed or banking, is actually M1 growing slower than normal, but still the fastest of the money measures, and broader total debt growing only 1/3rd of normal trend rates. It has taken an active, smart, aggressive monetary policy on the part of the Fed just to hold the price level stable in this environment. If they had done less, the general price level (and wages) would have collapsed as e.g. prices for houses and industrial commodities actually did. Which would have made the load of all existing debst crushing. Which would have led not to gains to lenders but to large defaults etc.
We know all of this, we know what a deflation is and we know how to fight its worst effects. We have done so, successfully, but it remains a deflation. People worried about inflation in this environment are exactly as ignorant as those who feared inflation in 1932. (Yes, they were there).
That looks like a dramatic increase to me. If I'm misinformed, please let me know.
You also state that M1 has been growing slowly, to which I agree. As I'm sure you know, the velocity of money is the link between the monetary aggregates and price rises. I agree that the velocity is down, and absent Fed intervention, we would have had dramatic price deflation along with credit deflation. Where we probably differ is on the risks associated with future events. When velocity picks up, the Fed will have to drain credit from the economy to limit inflation. I doubt that this will be done successfully.
A second issue is the quality of the balance sheet. Do you believe the Fed has paid fair value for the assets it has so hurriedly acquired? If so, no problem. If not, we (taxpayer) will hold the bag.
Your thoughts?
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