Saturday 15th March 2008. Depression :-(
On the first hour of the Financial Sense broadcast today, Frank Barbera says we are at the "fork in the road" that could lead to economic collapse in the USA and a much lower US Dollar. Not certain but possible. The Fed will likely cut interest rates next week by upto a full 1% point and that may actually aggravate the problem by causing the US$ to fall and commodity prices to rise even more, dampening consumer demand. He mentions what I have mentioned before: that we are seeing rising prices but not rising wages and this is a major and bad difference between now and the stagflationary 1970s. Surely this points to an imminent inflationary depression then? It's the ultimate inflationary-deflationary squeeze. Rising costs, falling revenues, falling "real terms" asset values. A credit crunch leading to less business investment, at the same time as collapsing "real terms" house prices, a distressed consumer, falling corporate profits, collapsing "real terms" stock market, higher unemployment, falling tax revenues, bankrupt municipalities, bankrupt social security and Medicare, feeding into the above. For that read poverty. That is the reverse of the "wealth effect" that was caused by the excessively low interest rates and rising housing prices over recent years that allowed excessive debt and cash out refinancing based on increasing perception of home values. It was only perception, a sick delusion and it is about to be undone, in my humble opinion. Gary Dorsch also mentions a similar aggravating confluence of factors in his interview straight afterwards.
On the other hand if I was really a contrarian, I might say that since the financial catastrophe is being exposed on the ordinary daily news headlines, maybe it's almost over and we will get a giant bounce in the markets. That is the kind of thing that Clif Droke might say as a fascinating to read contrarian market technician. However, just because the approaching 10km meteorite heading for earth is on the news constantly doesn't mean that is won't hit us. I think this is more the kind of situation that we face. At any rate, there is still also a heap of denial about the seriousness of the credit and derivative problems and people are not being told that it will wipe out the value of their homes, pension funds and other assets. They are not being warned that their bank could be closed one day and their life savings swallowed up into a big black hole of Wall Street corruption. The bank run on Northern Rock and now the run on Bear Stearns yesterday have been considered to be the exceptions. They are not yet the norm. So maybe it is not yet time for contrarians to rush back into the markets. Just a thought.
We also have the confluence of several 'round numbers' and long held forecasts. Steve Saville's wonderful US Dollar graph posted on the web years ago (in 2003) showed the US$ and the Swiss Franc reaching parity sometime around 2007 and at the same time the US Dollar Index bottoming at 70. I think that Jim Sinclair and others had US Dollar Index targets of 72, at least as a stop point on the way further down towards Jim's ultimate target of 52. Well, this weekend we have the Swiss Franc virtually at parity with the US Dollar (it's actually closed above it - it's $1.0020 to the CHF) and the US Dollar Index has been under 72 most of the week (now 71.65 on Kitco). Then we have US$1000+ gold, US$100+ oil, the US Dollar breaking below 100 Japanese Yen, 1000 Swiss Franc gold (1000.05 CHF!), AU$1000+ gold in Australia, almost 100,000 Yen gold (just come off its peak a little), almost CAD$1000 Canadian Dollar gold, almost £500 gold (496+) in Sterling and possibly some others that I have missed. What an excellent mine of information is to be found on the Kitco front page!
My call here is for a hyperinflationary/hyperdeflationary depression to emerge over the next few years in the USA and likely in most of the Western world or even further afield. New definitions for inflation and deflation will have to be sought because all existing definitions don't really help much with this strange situation. Just think of a massive and lasting fall in the standard of living and that's all that matters. The rest is just technical waffle.
Bonds: One facinating symptom of the credit crunch is that everyone and his dog is trying to raise cash and lots of money (billions and billions as the late great Carl Sagan would have said) is flowing into US Treasury bonds and notes. So much that there seems to be a revived bull market in US Treasuries at the moment. Jim Puplava mentions that the yield onthe 2 Year Note is a measly 1.45% while the yield on the 10 Year Note is a stingy 3.1% even as headline (probably grossly understated) CPI inflation is over 4%. That looks like a good way to have your money eaten away slowly but surely, although the assumption must be that your money is "safe" with the US Treasury and total loss is not possible.
Would it not then be grimly ironic if the USA was to default on its Sovereign debt at some time in the not too distant future?