Guest Post From Llano Llama

Was posted in the comments by Llano Llama and I agree so much with it that I thought I would make it its own post. Thanks

There are so many angles on this.

I think Prechter is making the better case because he is taking into consideration more of reality. Unfortunately, to explain things clearly, laying out the arguments and counter-arguments requires multiple book length treatise that few would ever read. Our ability to process complexity is limited so we prefer simple answers and simple models. But alas, the economic world is not a simple linear predictable beast. It is a non-linear, non-equilibrium, path dependent, complex interaction of systems and sub-systems.

If anyone asks, I push the path dependent idea first. People seem to understand that we will get a different result if we raise taxes in 2011 rather than leave them at current rates. If they are more economically inclined, they will understand that Europe moving to a tighter monetary union and sharing the pain is very different than breaking up the EU/EMU.

If they are still listening, I try to lay out some cases where the expected simplistic story didn't occur. For example, in 2008 we heard that oil going over $140/bbl was a sign of runaway inflation or Peak Oil. And yet a few months later oil traded to the $30s. Similarly, you will hear that "A central bank in a country with debt denominated in their own currency can force as much inflation as they want." And yet Japan has gone about 20 years in some form of economic stagnation. Apparently, there are more forces at work than mentioned in the simplistic story.

At that point the discussion is either about human nature, the limits of Capitalism, or "should I buy gold?"

The Must Watch Videos of the Year - Peter Schiff and Bob Prechter

There has been no bigger debate over the last two years than that over deflation and inflation. Perhaps the biggest deflationist Bob Prechter debates one of the biggest hyperinflationist Peter Schiff in the two videos below. They both believe the same thing, a complete collapse is coming in the next few years. They couldn't be more different in how that collapse will occur. Schiff believes we are heading towards a hyperinflation and Prechter believes deflation will come with a vengence and that banks will fail and people will lose deposits etc. (hyperinflation comes on the back end)

Unfortunately they both are just throwing out scenarios. There is little to go off of to conduct fundamental analysis. Collapse is coming, that can be fundamentally analyzed, how it occurs can't because it is based on social mood and political decisions. For my two cents, I think Prechter will be proven right but not to the extent that he is predicting. Deflation will lead to inflation. Dow will never get to 1,000 like Prechter is predicting. Hyperinflation is a political event and Dow well above 1,000 will cause collapse to jump start massive inflation.

I really think one of the more important things to listen to in 2010.

Part 1



Part 2

Money Printing?? - Hasn't Happened

Maybe I am being naive but I think I figured out the technical way the Fed worked before almost anyone on Wall St. (Hoisington had it figured out) The knowledge and my efforts have cost me dearly as the perceived truth is much more powerful than actual truth. (i.e. David Teppers comments become gospel though completely 100% wrong in how the whole thing actually works) In other words it is a puzzle I wish I never would have solved. Sunday on 60 minutes Bernanke said the Fed wasn't printing money after saying in 2009 and 2002 he could. Now all of a sudden several Wall St firms analysts are echoing him. No one thinks!!! If the Fed says it must be gospel so when Bernank said he was printing money everyone assumed he was without actually looking. I have about determined Wall St. never thinks. It is 100% about gaming others, not fundamentals.

Below are a few excerpts by Morgan Stanleys David Greenlaw. (who also had it figured out earlier than most) The entire thing I can be found here. It is the best description I have read explaining a very complicated topic.

QE2 departs from the textbook. The issue is confusing because all of us who took a basic undergraduate Money & Banking class learned that a central bank's open market purchase of securities was effectively the same thing as printing money.[My comment - no one actually challenges the textbook. No one challenges perceived truth!!!] But the experience of the last few years has taught us that this logic is not always correct. In fact, Fed officials have been reluctant to adopt the QE terminology because the impact of asset purchases is all about rates - not quantities.

and

Fed will respond to inflation as needed. Interestingly, the market moves that we are seeing in currencies, commodities, inflation expectations, etc., appear to reflect a belief that the Fed has been printing money - or will do so at some point down the road as the money multiplier normalizes. Bernanke tried to address this point in the 60 Minutes interview. He indicated that the Fed could raise rates in "15 minutes" if necessary and that he is "100%" certain of the Fed's ability to respond to an inflation threat. Of course, it remains to be seen whether the Fed will follow through on this pledge - and it remains to be seen what the FOMC will consider to be a legitimate inflation threat. But the market moves that appeared to coincide with the reintroduction of Fed asset purchases reflect speculation - as opposed to a fundamental supply/demand shift - because there hasn't been any money creation to date. Ultimately, the success or failure of the Fed's asset purchase policy will depend on an interest rate transmission mechanism, not a quantity channel.

A Day to Take Note Of

Very very interesting day today. I thought so during the day today and was reading some commentators tonight who thought so as well. The first prints of the day I covered some shorts and towards the end of the day I put half of it back on. Yes, that was a bad short term trade but the reversal today was amazing in ALMOST ALL asset classes. In technical terms hammers in the NASDAQ, S&P, gold, silver, copper, VIX etc.

Tomorrow will tell you alot. If we don't follow through to the downside it is ignorable but if we start selling off confirming today's price action it could get really interesting.

Today's news of course was the president became Republican showing there really isn't much difference between two parties. Republicans won today, Democrats won today, and America got screwed. You have to cut spending on the other side of it and the bond market noticed that didn't happen. Maybe that is when this all finally blows to bits, when the bond market sells off hard causing interest rates to spike. Typically bonds and stocks move inversely. That hasn't really happened this year. Bonds went way down looking like the economy was going to crunch while stocks continued to climb. However, when the game is up, both can go down. Look at Spain. Bonds go way down and stocks go down with it. There is some differences since Spain can't print its own money.

Anyway, today was a day to take notice of. Very interesting and tomorrow will tell you alot.

More of the Same

Strong day on Wall St. I wasn't surprised that we were up (was expecting it yesterday with the start of a new month and Europe being sold hard the last few days), but as usual I was surprised how fercious the up move was. Because it was so strong it puts the odds that the market has higher to go. First watch 1227ish and than 1250. That is if the market doesn't reverse tomorrow, which could still happen. The reason we were up so strong is very suspect. Many are credited the "strong" China number last night which doesn't make alot of sense because the futures yawned at the number and the Chinese markets finshed flat. It started with Europe and unlike when Europe sells off hard and the U.S. markets shrug it off, when Europe surges it gives an excuse for the U.S. to surge. So up up and away we went. ADP employment numbers were strong but annouced layoffs were the highest they have been in 8 months. There was also a rumor that the U.S. would bail out Europe which was quickly denied.

I think the market continues to rest on Europe first and China second. If the problem spreads to where Spain has to be bailed out - game is up. The question is which game. Will Germany buckle and allow the ECB to start its own version of QE or will haircuts be taken on debt, losses taken, and we revert back to some sort of capitalism? More and more thoughts on some sort of QE in Europe.

Tomorrow the ECB meets and it is likely the bears only hope for the remaining of this year. The market seems to be indicating that it is expecting some form of signal that the ECB will loosen up buy more government debt. It is entirely unclear that will indeed happen. If it doesnt and the Euro starts heading down again, than todays rally should reverse tomorrow somewhat. Not really expecting it will but we will see. Someone was out there today buying European debt today and it almost had to be the ECB.

Gotten a few comments that I havent been blogging as much lately, and I haven't. I have been really busy but it is getting really old talking about the same thing over and over again. This is bad but it doesn't matter because the government will print more money. The last couple of weeks the market should have been down really strong with Europe falling apart but it wasn't. Probably bullish in the near term. The market won't start going down strong until something happens outside of Bernankes control. That will come from politicias, the populace, or an oustide nation (i.e. China). Like I said - if tomorrow the market doesn't reverse, the odds are strong that the market heads higher between now and year end.

David Einhorn on Consuelo WealthTrack

David Einhorn was on Conseulo WealthTrack. Very good interview as one would suspect from Einhorn. I encourage reading or listening to the entire thing. Below are some highlights.

On what has changed (this is my big thing, the market can go up every day until it doesn't but absolutely nothing has changed fundamentally that caused this whole mess. It is worse)

CONSUELO MACK: Has anything changed? Are any of the watch dogs doing their job better?

DAVID EINHORN: Well, the truth actually is, what we’ve seen is, even in the bigger financial crisis, the same watch dogs have just repeated the same behavior, just in a much bigger way. So what we’ve seen, the same kind of sort of forbearance towards Allied Capital has been granted to the big banks, the big investment banks, and so forth.

and

CONSUELO MACK: So even with what we’ve seen, with the banks being more prescribed in what they are able to do, I mean, using much less leverage, being more scrutinized, you don’t think that that’s enough?

DAVID EINHORN: It’s just not enough. If you look at the big banks, they’ve gone from maybe 25 or 30 times leverage to 15 or 16 times leverage, or something like that. That’s still a lot of leverage. And it doesn’t count the derivatives books. And you have these huge notional derivatives books that, they’re just sort of tail risks that are sort of out there, and nobody really knows what’s in them, and nobody knows what risk they pose, and you certainly know that if any of the big four or five books that have the massive derivatives books was going to be on the cusp of failing; you would need to bail them out, the same way, in the future, that you would in the past. Notwithstanding whatever the new rules supposedly say.
on gold

CONUSLEO MACK: Now, one of the things you just mentioned is inflation. And we are seeing inflation in hard assets. And one of the hard assets that you own at Greenlight Capital is gold. It’s your largest position. So what does gold represent to you, in your portfolio?

DAVID EINHORN: To me, gold represents money. And there’s different types of money. Some people think gold is a commodity, and they want to think about jewelry demand, and how many weddings there are in India, and so forth. And how much is coming out of the ground. I think of gold as money. And you can have dollars, or you can have Yen, or you can Euros, or you can have Pounds, or you can have gold. And there’s other currencies in other countries, but those are the sort of the major currencies as I see it, and I think that the merit of gold is, given our current monetary policy and our fiscal policy, as well as the problems in the other major currencies, gold is the money, I think, of choice, that we would like to have a meaningful amount of our assets denominated in.

and

CONSUELO MACK: For individual investors, who don’t have the kind of flexibility that you do to trade and, nor the sophistication, I mean, how should we view gold, as individuals? I mean, should it be in all of our portfolios? And should we, too, view it as a substitute for paper currency?

DAVID EINHORN: I think so. I think it makes sense as a diversifier, and to have this sort of money, particularly because this is the kind of money that Chairman Bernanke can’t print more of.

On owning banks

CONSUELO MACK: So as an investor listening to you, would you touch a bank with a ten foot pole? At this point, would you invest in one of the major money center banks?

DAVID EINHORN: No. We wouldn’t invest in the major money center banks.

QE Explained - Cartoon Style

Below is a video that has been featured on many blogs and has gone viral (over 1.3 million hits). It was so good decided to post it here also. Don't endorse all of what is said but it isn't to far off.

Catch Up

Wow it has been a long time. I have been traveling some and been busy with other things. It also gets tiring writing about the same story. If you look at the headlines over the last two years, little has changed. Why the market decides to care now or care 6 months ago and not care a month ago is beyond me. We have been here 3 or 4 times over the last two years. Are we on the precipice of this thing falling apart or does the governments still have some wiggle room to keep this going? Europe is again falling apart, U.S. muni bonds are blowing out like they haven't been since 2008, an anti move against the ponzi perpetrator - the Fed - is growing in momentum, obvious spending cuts going into next year, China pulling back- are we done or is this another false break and there is yet another move up? If we are done going up why now versus last August? Logic need not apply.

The chart below was on zero hedge. It is the most amazing chart you will ever see. It shows domestic equity outflows. It has been 28 weeks in a row with domestic mutual equity fund outflows. All time record. That is over 80 billion dollars. Somehow the market goes up. Who is buying? I don't know. The government? Investment banks? I don't know.



There are three really interesting things going on right now. China seems to be slowing, Europe is cracking, and U.S. muni bonds have sold off hard. All three are very dangerous going forward. I just don't know if there is another push higher or not. Europe is more dangerous than Wall St. gives it credit for. The bickering among European leaders is what will topple the Euro.

The NY fed manufacturing index was horrid. Worst drop since 2001 I think. Components that make up the number were also really bad. Tomorrow is Philly Fed. I think that number has more importance than normal. Will be interesting if it diverges or confirms NY.

QE Impact on Japan's Stock Market in 2001

I had been wondering about this. From David Rosenburg:

Let’s learn from the Japanese lesson with its QE experiment. The day the Bank of Japan launched the program on March 19, 2001, the Nikkei surged 7.5%, from 12,190 to 13,103. It went on to make a fresh high on May 7, at 14,529 (just under two months after the announcement) — rallying another 11%. Fully three-quarters of the post-QE rally to the May highs occurred in the first four days. And that is all she wrote.

Three months later, as it became painfully obvious that the real economy was not responding well to the shock therapy, the Nikkei index slid 16% to just over 12,000. Moreover, the day before 9/11 it had already tumbled all the way down to 10,500 (down 27% from the nearby post-announcement high and 14% lower than the day of the announcement itself!).

That is a huge move higher in a short amount of time on the QE announcement. My follow up question would be how much the QE was telegraphed. In otherwords did the market know QE was coming for sure like it was in the U.S. How much was the rally priced in here and how much do we still have to go?

Ron Paul Is About to Totally Revolutionize the House Monetary Policy Panel

From CNBC

Odds are you haven’t heard of the monetary policy subcommittee. Officially known as the House Subcommittee for Domestic Monetary Policy and Technology, it’s a subdivision of the House Financial Services Committee that has mostly occupied itself with pressing questions of issuing commemorative coins and whether or not to eliminate the penny.

That’s about to change. Ron Paul, the Republican Congressman from Texas, is the ranking member of the monetary policy subcommittee, and when the next Congress takes over he’ll likely be the chairman of the subcommittee.

And Congressman Paul has some big plans.

“I will approach that committee like no one has ever approached it because we’re living in times like no one has ever seen,” Paul said in an interview with NetNet Thursday.

Paul said his first priority will be to open up the books of the Federal Reserve to the American people.

Time will tell how much power he will really have and how much he can really do. I have a feeling at some point this will be a big 2011 story.