SOS Peter Schiff

Peter Schiff argues that the printing of money by government will cause high inflation. (of course the CPI so far did not show much of inflation, however he argue that the purchase power of US dollar has drop, which is equivalent to inflation)

True

If the money flow into the economy system, i.e. cash for clunker, housing subsidy, money to build briges, roads, schools, etc (the deflationist arguement is that the economy already over debt and over consume, hence, it is not sustainable for such subsidy and bad for the economy.

False

If the money stays in the banks reserve as a result of recapitalisation of banks by buying up their toxic assets, by bailing out banks, recapitalising banks with guaranatees. In short, government is printing a lot of money but it does not enter the economy system, bank reserve only increases.

Neither

When government intervent the economy, as usual putting good money into bad investment, it will increase the price of that particular sector, such as medical/insurance etc. Just imagine, government is borrowing money (taxpayers) putting into industry that is incapable to payback back the loan and interest. In short, unproductive use of resources, not only human capital, as well as capital expenditure

So, his arguement is both RIGHT in a way, and also WRONG in a way, and also NEITHER wrong nor right.

MyView

The problems with inflationists and deflationists are mainly they will used a few of the conditions to make their arguement, which supports their views. Hence, the best way to validate their views is that both are given a sum of money to invest or short, and the RESULTS will speak for themselves.

Of course in a real world, both will happen in a certain way, it is a matter of intensitivity. So, follow the conditions made by MISH in the last blog and review how many have come true and how many that really convert their convictions into money making.

SOS MISH

Micheal Shedlock says:

Definition of Deflation is the reduction in money supply AND credit in the economy that cause all prices to go down generally

Conditions for deflation:

1. treasury yields down


2. commodities down


3. stock market down


4. home prices down


5. consumer prices down


6. GDP down


7. credit market down


8. USD dollar up


9. Banks hoarding cash up


10. saving rates up


11. purchasing power of gold up


12. bond price down

SOS Precher's Take on 2010

Don’t:
• Generally speaking, don’t own stocks.
• Don’t own any but the most pristine bonds.
• Generally speaking, don’t invest in real estate.
• Generally speaking, don’t buy commodities.
…

Do:
• Fight the inertia that will keep you from taking action to prepare for the downturn. Start taking steps now.
• Involve your significant others in your decisions. Put your home or business partners in tune with your thinking before it’s too late.
• Talk to heavily invested parents or in-laws who may be planning to pass on their investments to you. See if you can get them to become safe and liquid.
• Think globally, not just domestically.
• Open accounts at two or three of the safest banks in the world.
• Invest in short-term money market instruments issued by the soundest governments.
• Own some physical gold, silver and platinum.
• Have some cash on hand.

...

• Plan how to take advantage of the next major uptrend. For example, go back to school during the decline and come out with extra skills just as the economy begins to recover. Apprentice in a job for low pay and learn enough to start your own business at the bottom so you can ride the next big up wave of prosperity. Investigate troubled businesses to buy at the bottom at deep discounts.
• Smile! because you will not be jumping out of the window; you’ll be preparing for the incredible opportunities listed in the next chapter.

MyView

The above is Robert Prechter's take. The major difference between the deflationist (Prechter/Mike Shedlock) and inflationist (Peter Schiff/Marc Faber) is the deflationist said that the wave of deleveraging in most sectors will over power the printing of money by the central bank, on the same score, the inflationist is thinking the opposite, the wave of printing money, from private debt to public debt, will overpower to any deleveraging by the private sector.

Prechter's showed that the by giving the example of Japan, where public debt debt increase significantly to replace the private debt, but the property price still drop about 87% from its peak in 1989! Although Japan GDP was positive but weak. Similarly Japan stock market is currently traded significantly below its peak in 1989. Japan's model had shown that no matter how much the government can create debt, it does not stop the deflation (and Japan's case is isolated, no impact to the world economy)

Peter Schiff argument is also valid that US government is printing so much money, unprecedented, that it will eventually cause the dollar to drop significantly, hence, may cause hyper inflation and destroy its economy.

I believe that

1. Japan still manage positive GDP after its crash in 1989 is due to its strong exports (world is growing), strong private savings and strong trade surplus.


2. On the other hand, US is following Japan's model, public sector is printing money, US will run out of bullet because it cannot export its way out of the problem, and on top of that, US is over geared and also over consumed.


3. On top of the above, the world, US, Europe and China had initiated a world wide printing of money (for China is ok because it has the sufficient surplus, strong savings, trade surplus and trying to maintain its currency at competitive level), so these world printing of money had flush the world with fiat money, and the other side of the equation is DEBT. If the money not used productively, i.e. buying toxic assets, going into unproductive sectors, doing bailouts, stimulating economy resulting resources not allocated productively, will significantly WEAKENING THE ECONOMY.
   


4. So the actions by most countries will weaken their own economy, as a result causing weak earnings, unproductive allocation of resources, incapability of repaying the DEBT.

In conclusion, the zero rate, stimulus, bailout will temporarily defer the D Day, it also inflate the future greater CRASH. The irrespossible actions taken now have not solve the OVERCAPCITY, OVERCONSUMED, OVERGEARED, and DERIVATIVES problems, it only shift the ULTIMATE CRASH to future date. The right question is not above whether the next ULTIMATE CRASH is coming, it is whether WHEN will it HAPPEN.

SOS Mutual Fund Cash Level is Low

Claus Vogt said that low cash level of mutual fund post greater risk for share market, based on pass market trend. He also said that the secular bear market started since 2000, which coincide with the view of Robert Prechter (Elliote Wave). Prechter confirmed this by comparing Dow Jones against gold and against CRB (commodities), and it has been dropping since 2000. Hence, we are deluded that in absolute terms we make money, in real terms, it actually shrink, i.e. you can buy less gold and commodities now against in 2000.

MyView

Well, human lives in a deluded world after all.

SOS Roubini

Roubini's view in Financial Times 1 Nov 2009

Why global risky assets prices goes up?

It is arising from the combine effects of

• zero Fed fund rates
• quantitative easing
• massive purchase of long term debt instrument

that encourages

• carry trade (of USD) on highly leverage global asset bubble

Why will this carry trade unravel?

1. US dollar cannot fall to zero, when it stabilises, many has to cover their shorts
2. Fed USD1.8 trillion purchase plan is over by next spring
3. If US grow in suprise growth in 3Q + 4Q of 09, market may start to expect Fed tightening
4. Fear of double dip and geopolitical risk

What should we do?

• Keep in save assets such as cash/treasuries

because, 2010 will be very volatile of the risky asset bubble due to the liquidity


MyView

Roubini's view of weak recovery mainly due to

• consumption growth slower than the GDP due to over leveraging
• investment spending or capex growth will be slower than GDP growth due to over supply
• credit growth is negative, or at best, very weak due to collapse of shadow financial system e.g. non-bank mortgage lenders
  
• fiscal stimulus drag (when discontinued)

Robert Prechter's view

• USD will unravel, all other asset class will fall
• deleveraging will overwhelm the stimulus plan
• debt problems only postpone but not resolved
  

Depending on when the "money printing stops" and the unravel of the US dollar carry trade, markets will be volatile. When the music stops, the second wave of tsunami will come back with a vengence (this is certain, but the timing is difficult to predict as it is subject to the government quantitative easing policy, zero fund rates policy + massive purchase of LT debt instrument.

SOS Peek-a-boo

Peek-a-boo

USD Total Debt = USD43 trillion (300% of GDP)

UK Total Debt = 829 billion Sterling

Eurozone Public Debt (84% of GDP by 2010)

Greece Public Debt (120% of GDP), German 78%, France 76%

Singapore Public Debt (92% of GDP)

Japan Public Debt (172% of GDP)



World USD dollar in circulation in the world 5 years ago = USD1 trillion, now is USD7 trillion



Ancient Chinese once said, truth is sustainable, lie is mutable.



Don't forget, every dollar printed on the other side of the balance sheet is a DEBT. If the money printed not gone to the productive activities that generate enough to pay back the debt, the DEBT will become Non Performing. If printing money can resolve the over leverage problem whenever economy in recession, isn't it simple for the government to do is to print more money, and all the existing debt is resolved. What is the long term consequences? Just look at Japan.



Another problem is the DERIVATIVES, what has been done about it?



MyView



DEBTS + DERIVATIVES = DEPRESSION



GOVERNMENT INTERVENTION + ECONOMY = FACISM

SOS 01012010

Dear readers (if any),

Have a purposeful life! Why only think about your eternal life when you are old, sow the seed early!

Time is precious, so, give a good thought about the spiritual path we take.

The Dao once said,

Man follows the earth

Earth follows the heavens

Heavens follows the Dao

The Dao follows the natural..............

www.falundafa.org