The Deflationary Undertow Before The Inflationary Wave

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Posted on 16th February 2012 by Administrator in Economy |Politics |Social Issues

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Gonzalo adjusting his inflation outlook slightly.

 

Ride the wave, or drown. 

War between Israel and Iran now seems inevitable. Leon Panetta claimed that it would be this coming spring—and I see no reason to doubt him.

How an Israeli-Iranian war will play out—that is, whether it will draw in more geopolitical actors (such as the U.S.), or if it will be a series of limited attacks, counter-attacks, and then stalemate—is impossible to predict. War tends to take on a life of its own.

But we can predict how it will affect the global markets.

A very reasonable assumption is that oil supplies, especially to Europe, will be severely curtailed. Aside from the fact that one fifth of the world’s oil production passes through the Straight of Hormuz—ground zero of a war with Iran—the rest of the world and especially Europe depends on Iranian oil. As discussed in the SPG Scenario of this past June (“An Israeli-Iranian War?”), close to 10% of the eurozone’s oil comes from Iran—and the countries most particularly dependent on Iranian oil are precisely those most in trouble right now: The so-called PIIGS.

So oil prices will inevitably rise. And so—just like 1979, after the overthrow of the Shah of Iran and the subsequent Oil Shock—the world’s economies will experience another likely oil shock which will send up the price of oil, hurting the world economies rather badly—

—and driving up inflation.

Dollar inflation and euro inflation is in the offing, in the weeks and months following a war with Iran. The assets that will rise drastically in price will be precious metals, especially silver; agricultural commodities; and oil—obviously. The assets that will collapse in price will be sovereign bonds, corporate bonds, and equities, in that order. In the Scenario, I discussed which countries will hurt the most, so I won’t bother repeating what I wrote there.

However, notice I say that inflation will rise “in the weeks and month following a war with Iran”: A war with Iran which disrupts oil supplies will—inevitably—lead to an inflationary wave.

But before that inflationary wave hits—that is, in the days and hours following the beginning of the war—we will experience a deflationary undertow.

This deflationary undertow will present some interesting opportunities.

 

IT WAS THE BEST OF TIMES, IT WAS THE WORST OF TIMES

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Posted on 10th February 2012 by Administrator in Economy |Politics |Social Issues

Gonzalo with his take on the two big “settlements” yesterday.

A Tale of Two Settlements

So yesterday, there were two big settlements: Greece, and the Mortgage Mess.

Completely independent of each other, both settlements not only happened on the same day, they happen to highlight two issues which ought to be bugging us all like cockroaches crawling through our underwear.

Issue One is how in both cases, the Too Big To Fail banksters won—and they won big. Again. Insofar as the mortgage settlement goes, they got what amounted to a speeding ticket, while getting a Get-Out-of-Jail-Free card on the worst of the robo-signing and illegal foreclosures scandal. And insofar as the Greek situation goes, the banksters have gotten the IMF, the ECB and the EC to essentially put the Greek people’s collective nuts in a vise and squeeze until they scream “θείος!” (“Uncle!”)

Issue Two is the mainstream media’s spin on these two settlements: How the completely cheerleadery, near-sycophancy of the MSM serves to both obscure how big the banksters won in both settlements, and to give us all a false sense of security. From the MSM, we hear that Greece has been “bailed out” and the Mortgage Mess has been “fixed”, and that the banksters are “getting their comeuppance”—so we get the false sense that the world is right as rain, and everything can slowly go back to normal.

But the world is not right. We will not be going back to normal any time soon. The banksters are not getting righteous justice.

Rather, the two settlements go to show how crony-corrupt our particular epoch’s Global Capitalism really is: The banksters rape the people of two countries, and the mainstream media cheers.

Let’s go over each of the two settlements, and pick apart their implications.

 



 

ZIRP

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Posted on 1st February 2012 by Administrator in Economy |Politics |Social Issues

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Gonzalo is back. I personally think ZIRP is an evil policy that destroys the lives of senior citizens while further enriching criminal bankers. And that’s all I have to say about that.

The Perniciousness of ZIRP

Suppose that I promised to give you free chocolate for the next three years: How much chocolate would you eat today?

Mmm . . . money . . .
—er, I mean: Mmm, chocolate . . .

 

A pound? Half a pound? A few ounces? Or would you not eat any chocolate at all, once I made the announcement? After all, you’re going to have free chocolate for the next three years—seems silly to gorge on chocolate today, when you can have as much as you’d like tomorrow, or next week, or whenever you want over the next three years.

So free chocolate for the next three years? Great! . . . uh, only not right now, thanks very much: I’m kinda full.

But then what if I said to you, “Chocolate is free now—but I’m definitely going to raise the price in the near term. In a month, chocolate might be free—or then again, it might cost $1,000 an ounce. So get some while you can, because tomorrow, you never know!”

Well, obviously, to such an uncertain outlook, you’d go out and buy some chocolate now—because tomorrow, it might well be unaffordable.

In fact, it seems quite obvious that if you don’t know when I’m going to raise the price of chocolate, you’ll probably wind up buying—and eating—more chocolate than if it was free. A paradox? Sure—but true.

In point of fact, if the chocolate is free, you might not eat any chocolate at all. Every time you make the decision as to what to eat, you might well find yourself repeating the same mantra: “Chocolate is free—I can have it any time I want. So I won’t have any now.”

This is the problem Ben Bernanke and the Federal Reserve currently have—and it’s their own stupid fault: They have promised to maintain interest rates at effectively 0% until at least the end of 2014—they have in fact announced this zero interest-rate policy (ZIRP) as the hallmark of their strategy to reignite the economy—

—but then they’re surprised when businesses aren’t borrowing more. They’re surprised when lending is in fact contracting. They’re surprised when the American economy doesn’t start borrowing—and thus growing—like crazy.

So the American economy obviously doesn’t benefit from ZIRP. In fact, it stagnates because of ZIRP.

 

GONZALO’S BACK

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Posted on 27th December 2011 by Administrator in Economy |Politics |Social Issues

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It’s been awhile since we got an article from our old friend Gonzalo Lira. This is a good one. He sums up the MF Global implications quite well. The big boys, like JP Morgan, will always win out over the ordinary investor. Those in power will always screw you in order to protect the criminal Wall Street banks. They look down upon the serfs from their penthouse castles in NYC. You cannot trust any financial institution. Some day you will wake up from a good nights sleep to find out that your politician “leaders” in Washington, in collusion with their Wall Stree masters, have absconded with the money in your brokerage, IRA, or 401k plan. They will do it for the good of the country. Trust them.

A Run On The Global Banking System—How Close Are We?

Nine weeks after its bankruptcy, the general public still hasn’t quite realized the implications of the MF Global scandal.

Once he looks down, then he’ll begin to fall.
My own sense is, this is the first tremor of the earthquake that’s coming to the global financial system. And how the central banks and financial regulators treated the “Systemically Important Financial Institutions” that had exposure to MF Global—to the detriment of the ordinary, blameless customer who got royally ripped off in its bankruptcy—is both the template of how the next financial crisis will be handled, and an accelerator that will make the next crisis happen that much sooner.

So first off, what happened with MF Global?

Simple: It went bankrupt—because it made bad bets on European sovereign debt, by way of leveraging positions 100-to-1. Yeah, I know: Stupid. Anyway, they went bankrupt—which in and of itself is no big deal. It’s not as if it’s the first time in history that a brokerage firm has gone bust. But to me, the big deal in this case was the way the bankruptcy was handled.

Now there are several extremely serious aspects to the MF Global case: Specifically, how their customers were shut out of their brokerage accounts for over a week following the bankruptcy, which made it impossible for those customers to sell out of their positions, and thus caused them to lose serious money; and of course how MF Global was more adept than Mandrake the Magician at making money disappear—about $1 billion, in fact, which still hasn’t turned up. These are quite serious issues which merit prolonged discussion, investigation, prosecution, and ultimately jailtime.

But for now, I want to discuss one narrow aspect of the MF Global bankruptcy: How authorities (mis)handled the bankruptcy—either willfully or out of incompetence—which allowed customer’s money to be stolen so as to make JPMorgan whole.

From this one issue, it seems clear to me that we can infer what will happen when the next financial crisis hits in the nearterm future.

Read more »

WAITING FOR LEHMAN

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Posted on 25th October 2011 by Administrator in Economy |Politics |Social Issues

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I think Gonzalo is putting too much faith in central bankers and politicians. They are not smart. They are trying to avoid a Lehman moment, but they will fail. The entire world financial system is a pile of sand. If one grain of sand falls on the wrong spot, the whole pile will collapse. It is unpredictable. No one knows when it will happen, but it will happen. The time to prepare is now, not then.

Waiting for Lehman

This is an adapted version of a post which appeared in my Strategic Planning Group. Adapted how? Well, the full argument is reprinted below—but the ugly money-grubbing stuff about what to do and what investment opportunities are good have been cut. After all, readers of the free version of my blog aren’t interested in such base dealings, right? GL

In Samuel Beckett’s play Waiting for Godot, the four main characters wait in vain—Godot never arrives.

In the financial markets, the same thing is happening now—we are all waiting for Lehman: That sudden bankruptcy-crisis-calamity which sets off a whole series of credit events, which in turn causes massive sell-offs, plunging markets, collapsing confidence, and ultimately—just like the bankruptcy of Lehman Brothers did back in 2008—shoves the entire global financial edifice right up to the very edge of the cliff.

To the edge—and perhaps this time over it.

We have good reason to be waiting for Lehman—our current situation is simple and stark: Sovereign nations and individual citizens are over-indebted—to the point where they cannot pay back what they owe. We all know that this overindebtedness at the sovereign and individual level is going to end, and end badly: Worse than 2008.

So along with everyone else, I’ve been waiting for Lehman—and fruitlessly trying to guess which will be the Lehman-like event this time around. Will it be the bankruptcy of Dexia? BofA? UniCredit or SocGen or one of the Spanish banks? Will it be a war in the Middle East? Bad producer index numbers from China? A fart by a day-trader in Uzbekistan?

When will Lehman arrive!?!?

But lately, my thinking has changed: Like the characters in Godot, I think that we’re waiting in vain. The Lehman-like event will never arrive because it won’t be allowed to arrive. So this miserable slog we are going through will continue—indefinitely. (Yeah, I know: Sucks to be us.)

My thinking is based on two assumptions: One, that the central banks and government financial authorities and regulators around the globe are absolutely terrified of a repeat of a Lehman-type bankruptcy or trigger event. And two, that those self-same central banksters and government drones will do absolutely anything to prevent another Lehman-like credit event from setting off another cascade of consequences.

And when I say “absolutely anything”, I’m not using hyperbole: Fuck principles, fuck the law, fuck legal constraints, fuck even basic long-term economic and fiscal health—or sanity. The clowns running the circus were so freaked out by the effects of the 2008 Lehman bankruptcy and the domino-effect that it triggered, that they will not let it happen again—ever. Come what may.

Hence, this endless Waiting for Lehman: This endless slog of ad hoc solutions and fiscal half-measures that brings us only tension and misery—and erodes our economy even further.

But this certainty that the bureaucrats in Washington and the eurocrats in Brussels and Frankfurt will do absolutely anything to avoid a Lehman-like event adds something key to the equation:

Predictability.

Since we know how the central banks and economic leadership will react—that is, if we start from the assumption that the political/economic leadership will do absolutely anything to prevent a major credit event from taking place—then we can predict what they will do in the three main areas of weakness:

  • Sovereign debt and the possibility of default.
  • Financial sector weakness and the possibility of insolvency.
  • Geopolitical crisis and the possibility of another Oil Shock.

What follows is a discussion of those three areas of weakness—and what the central banks and economic leadership will do about each of them.

Read more »

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