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Wednesday, February 29, 2012

Why We Should Still Be Worried about a Double-Dip Recession


February 27, 2012 RSS Feed Print
James Rickards is a hedge fund manager in New York City and the author of Currency Wars: The Making of the Next Global Crisisfrom Portfolio/Penguin. Follow him on Twitter: @JamesGRickards.
The late summer and fall of 2011 was filled with fears of a double-dip recession in the United States coming hard on the heels of the 2007-2009 recession, frequently referred to as the Great Recession. With improved economic news lately including lowerunemployment, lower initial claims, higher growth, and higher stock prices, this recession talk has died down. That's why Lakshman Achuthan, the highly respected head of the Economic Cycle Research Institute, caused a stir last week when he repeated his earlier claim that a recession later this year was almost inevitable despite the better news.
Achuthan makes the point that improved news on the employment front is a lagging indicator from the end of the last recession and doesn't reveal what's ahead. He adds that higher asset prices in stocks and housing are the expected result of Federal Reserve money printing and don't say much about fundamentals. To make his case for a new recession, he focuses more on year-over-year growth in GDP versus the more popular quarter-over-quarter data, and indicators like changes in industrial production and personal income and spending.
There's another way to view the economic data since 2007 that casts all recession analyses in a different light. The better analytic mode is to bring back a word mainstream economists have abandoned—depression. When you realize the world has been in a depression since 2007 and will remain so indefinitely based on current policies, talk of recession, double-dip, and economic cycles is seen differently.
Economists dislike the concept of depression because it has no well-defined statistical meaning unlike recessions that are conventionally dated using well-understood criteria. They also dismiss the word "depression" because it's, well, too depressing. Economists like to think of themselves as master manipulators of fiscal and monetary policy levers fully capable of avoiding depressions by providing the right amount of "stimulus" at just the right time. They tend to look at a single case—the Great Depression of 1929 to 1940—and a single cause—tight money in 1928, and conclude that easy money is the way to ban depressions from the business cycle.
The Great Depression featured a double-dip of its own. Within the start and end dates of the Great Depression, there were two recessions, 1929 to 1933, and 1937 to 1938. In the Keynesian-Monetarist telling, the first of these was caused by tight money, the second was caused by a misguided effort by Franklin Delano Roosevelt to balance the budget. Hence economists added fiscal deficits to their tool kit along with easy money as the all-purpose depression busters. Easy money and big deficits are said to cure all ills. President Obama and Fed Chairman Ben Bernanke are following this script to a "T".
While tight money in the United States almost certainly contributed to the Great Depression, there were other causes including war reparations owed by Germany and war debts owed by England and France. These massive unpayable debts combined with a mispriced return to a poorly constructed gold standard restricted global credit and trade and caused deflationary pressures. This world-in-debt condition closely resembles the world today where overleveraged financial systems in Europe, the United States, and China are all trying to deleverage at once.
Less studied than the causes of the Great Depression is the equally interesting subject of why it lasted so long. The best explanation for this is found not in monetary or fiscal policy but in what economists call regime uncertainty. As FDR skittered among price supports, gold confiscation, court packing, and other ad hoc remedies, business executives waited on the sidelines until some consistency and certainty in policy developed. This situation is also the same today. Will the Bush tax cuts expire or not? Will Obamacare be upheld in the courts or not? Will payroll tax cuts and unemployment benefits be extended? Is corporate tax reform coming? This list goes on with the same effect as in the 1930s. Business investment will remain dormant until some certainty returns and, on current form, that may be years away.
Recessions inside a depression are completely different phenomena than typical business and credit cycle recessions. They are the result of behavioral shifts in a larger wave of deflation and deleveraging. Velocity, or turnover, of money drops faster than the Fed can print. The Fed can try dollar devaluation and other gimmicks but the dominant mode of deflation prevails until debt is destroyed, assets are revalued, and business investment finds a hospitable climate. We now confront the toxic twins of deleveraging and regime uncertainty from the 1930s while the Fed applies the inflationary remedy of the 1970s. This standoff between printing and precaution can continue for decades.
With business investment on hold, regime uncertainty rampant, fiscal policy at the limit, and monetary policy impotent, the depression will simply grind on with below-trend growth at best and periodic decline at worst. Paul Simon put it best in his song "Allergies" when he sang, "We get better, but we never get well." That's what a depression is. Occasional growth notwithstanding, we simply never get well.

Wednesday, February 22, 2012

Hugh Hendry Interview - Hyperdeflation First...


Barron's: Where do you find yourself outside the existing belief system today?
Hendry: In 2009, I made a YouTube video of the empty skyscrapers in Wuhan, China. Goldman Sachs and others articulate a very reasonable and compelling argument of being invested in China. With the evidence of my own eyes, I concluded that China had a very robust system of creating gross-domestic-product growth, but forsaking the creation of wealth.

When America was having its China moment in the 19th century, it occurred against the backdrop of a gold standard, a hard-money regime, with a public sector that was minuscule versus the overall size of the economy. As an entrepreneur, if your project failed to generate a sustainable level of cash flow, you failed.

If you talk about a hard landing in China, you talk about GDP growth of 5%, not minus 5% or minus 15%. The Chinese government prints money. It can build superfast railways and overbuild airports, because the rest of the economy can subsidize it. China's swollen public sector is directing asset allocation, rather than pursuing profit maximization. They see [their system] as a success. But it creates a bubble, which can prove quite damaging.

Barron's: You've already had a hard landing—in the Chinese stock market.
Hendry: I should add something else that is contentious—U.S. quantitative easing [that eventually sent more money flowing to China], promoted because America had two sharp recessions and pursued orthodox policies, and had very little to show in the creation of jobs.

The policy was very successful. China now has inflation. Minimum wages have grown 20% annually for the past three years. This has encouraged the Chinese to tighten monetary policy. When you have bubbles and you tighten, bad things happen. China's stock and property markets are weak, a side-effect of quantitative easing. We may now have the pricking of the Chinese bubble. A year or two down the line, it could have enormous repercussions for the global economy.

Barron's: How does one play it?
Hendry: The world is very fearful of hyperinflation. Pension schemes have a preponderance of real assets, from forestry to gold to TIPS [Treasury inflation-protected securities], because they are very fearful. The road to hyperinflation is via hyperdeflation. That is why it's proving so difficult for hedge funds to make money. How does the rational mind that anticipates hyperinflation own 10-year government Treasuries yielding less than 2%? It can't. That's why people are struggling. To lay the seeds of hyperinflation, you need really, really bad things to happen. I thought the U.S. housing market having a massive crash would be hyperdeflationary. But then my Chinese friends pumped $1 trillion of credit into their $5 trillion economy, and created a global recovery, which has just come to an end. I'm speculating that hyperdeflation happens before hyperinflation. What's the worst that could happen? But the sum of all my fears would be China having a real hard landing of minus 5% or minus 10% GDP growth. If we had that—and Europe—the Fed would be printing $20 trillion, and I would have gold at $5,000. You can have a modest amount of gold, but you can't have all your assets in real assets, in case we get that hyperdeflation event.

Barron's: So how do you make money?
Hendry: Would you believe that the AIG strategy of selling too much credit protection in risky assets like mortgage-backed securities is alive and booming today in Japan? It doesn't concern mortgages. It is credit-default swaps on individual Japanese corporations.

Barron's: Do you seriously believe Japanese corporations are going to fail?
Hendry: Clearly, they can and do go bust. I'm buying the CDS on investment-grade Japanese corporations because of the overpricing anomaly. Japan had a bust 20 years ago, and yet today the banking stocks, relative to [Japanese bourse] Topix, are making fresh lows.

If I'm a Japanese bank and I lend money to a new business, I get 1% on 10-year paper. Then the bank gets a call from me, and I'm willing to pay 50 basis points for five-year protection on this same company. So suddenly, the yield has gone from 1% to 1½%. Compare that to five-year Japanese government bonds, yielding 30 basis points. The bank thinks: This is a great trade! Japanese steel companies are investment-grade and won't go bankrupt. So, the bank gets this huge yen yield, and thinks it is not taking any risk. You'd better believe it will sell way too much of that good thing.

One of my partners told me about Japanese steel: Here is a country with no energy, no iron ore or coal, yet it's the largest exporter of steel in the world, exports half its output. To put that in context, China manufactures 700 million tons of steel and exports perhaps 30 million. Japan produces 110 million tons and exports 40 million. As long as Asia is strong, they are fine. But if Asia hiccups or reverses, plant-utilization rates go from very high to very, very low very quickly.

Then we discovered that Warren Buffett owned shares of South Korea's Posco [5490.S. Korea], and that Korea was the biggest importer of Japanese steel, but Posco and Hyundai [5380.S. Korea] are building huge, integrated steel plants. They have a surplus of steel capacity and—guess what?—they're exporting to Japan, because the yen is so strong.

Initially, I wanted to buy a three-year, out-of-the-money put on Nippon Steel. My broker said, "I've been in a 20-year bear market; my boss will kill me." Then I thought, being long credit protection is being long volatility. I redialed his credit counterpart. I said: "I'm thinking of purchasing up to a billion yen of five-year credit-default swaps in Nippon Steel." The first thing he said was, "Would you consider 10 billion?" So one part of the bank is banned from selling volatility, and the other part is having a party. I bought reams of the stuff.

Barron's: We've barely discussed Europe.
Hendry: We are partly playing it through Japan. If events kick off again in Europe, the correlation across all [global] asset classes will go to one. So the steel CDS is 130 basis points, while to insure against default by the French government, I'd be paying the same amount. Which is riskier? A very leveraged steel company that can't tax you? Or a government that can? Our bearish bets are largely outside Europe. As for Greece, the end game will be the Greeks rejecting austerity. The euro is nothing but a gold standard lacking flexibility, and all the onus is on private citizens to take the pain. Eventually, a Greek politician will say, 'Vote for me, and I'll get us out of this system."
Eventually, there will come a time when a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and (correctly) declare all the "bail out" debt foisted on their country to be null and void. That person will be elected.

http://globaleconomicanalysis.blogspot.com/2012/02/hugh-hendry-of-eclectica-discusses.html

Wednesday, February 15, 2012

Zeitgeist Addendum - Modern Money Mechanics



http://www.ftense.com/2012/02/how-is-money-created-to-buy-flowers.html


Tuesday, February 14, 2012

Someone on Faux News Speaking Truth?

RP-BP is apolitical, maybe this guy is too, despite being broadcast by Faux News....

Monday, February 13, 2012

India Gets It



Lakshmi comes alive during the Hindu holiday of Deepavali (or Diwali). Each year, around the new moon in October or November, Hindu people celebrate this Goddess of Fortune and invite Her into their homes, attempting to secure Her favors for the year to come.



Friday, February 10, 2012

The Internet Vision 1969




"The gender stereotypes might be backward-looking (we’ll make up for it later in the day), but the technological vision is on the mark, right down to email, e-commerce and online banking. Of course, these weren’t the only people imagining an electronic, connected world during the 1960s.
In 1964, the futurist Arthur C. Clarke peered into the future and saw our connectedness coming. By 2000, he predicted, “We could be in instant contact with each other, wherever we may be,” and “it will be possible in that age … for a man to conduct his business from Tahiti or Bali just as well as he could from London.”
And then Marshall McLuhan understood the trend too. He saw electronic media turning our world into a social one, a world where services like Facebook and Twitter would make complete sense. You can watch the prescient Marshall McLuhan right here.  H/T Sasa"

Monday, February 6, 2012

Umberto Eco on Lists, Order

'The list is the origin of culture. It’s part of the history of art and literature. What does culture want? To make infinity comprehensible. It also wants to create order — not always, but often. And how, as a human being, does one face infinity? How does one attempt to grasp the incomprehensible? Through lists, through catalogs, through collections in museums and through encyclopedias and dictionaries. There is an allure to enumerating how many women Don Giovanni slept with: It was 2,063, at least according to Mozart’s librettist, Lorenzo da Ponte. We also have completely practical lists — the shopping list, the will, the menu — that are also cultural achievements in their own right.” ~ Umberto Eco


http://www.brainpickings.org/index.php/2011/12/22/umberto-eco-on-lists/


http://www.spiegel.de/international/zeitgeist/0,1518,659577,00.html



Friday, February 3, 2012

Ritte Van Vlaanderen


SANTA MONICA, California — Spencer Canon didn’t set out to start a bicycle company. He just wanted a kit that didn’t suck.
He found the jerseys and shorts road riders wear boring. Uninspired. So he designed his own, black with light blue and red and yellow stripes. The old-school Belgian vibe looked great, but it needed something.
It needed a story.
Canon found one in the life of Henri “Ritte” Van Lerberghe, who once won Belgium’s biggest race on a borrowed bicycle after downing a few pints at the pub. His improbable career underscored everything Canon thinks cycling should be: fun, free and a bit irreverent. He and his friends started wearing the kit on rides.
That’s when things got weird.
“We were riding as a fake Belgian team that doesn’t exist, but the kit looked so cool we actually got sponsors,” Canon said, laughing at the recollection. “It took a few months, but our fake team and our fake brand just exploded. I realized I could take a fake team and make it real.”
Ritte Van Vlaanderen Bicycles was born.
Above: One of Ritte's neighbors offers his opinion on the Ritte Muur, the company's latest model.


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The guys at Ritte (pronounced “Rit-uh”) had no experience in the bike biz when they launched the company in 2010, which may explain why they’ve done everything backward. They started with a jersey, which led to a team, which led to them building bikes, which they sold through a viral marketing campaign. In one particularly funny ad, the UCI announces it is banning the Ritte Bosberg from racing because it provides “an unfair aesthetic advantage.”