Sitting around waiting for the next explosion
November 24, 2009
Here at the Revo we don’t pander to you with a bunch mindlessly optimistic happy talk. These are dangerous times and it is better to face them with eyes wide open. The global economy is in tatters because of the bursting of an asset bubble. In this case it was real estate. Asset bubbles happen when, for whatever dumb ass reason, way, way too much money is invested in assets that, frankly, just ain’t worth it.
Why do people bid up the value of assets? Greed mostly. They want to buy low and sell high. They believe they can buy questionable assets and that they will be able to sell it later to some other sap. In other words, they are buying not because they believe the assets are worth the price, but rather because they believe that they will be able to sell them to someone else for an even better price. They sure as hell aren’t buying the assets to use. In fact, people will bid up the price of anything if they think they can sell it for more in the future. Witness tulip mania in Denmark. We can laugh at the foolish Danes but then again ten years ago we bid AOL up to the point it was able to “purchase” Time Warner. More recently we bid up our home values with money borrowed from the Chinese and used the equity to buy boats, Caribbean vacations and cocaine. Under the circumstances, we shouldn’t hack on the Danes too much.
So what is the next big speculative asset bubble to burst? Here is a clue: it is going to be a big one. When interest rates are bouncing around 1% and the value of the dollar is sinking like a rock, the effective interest rate is actually less than zero. You can borrow money, sit on it and pay it back later with deflated dollars and keep the difference. This is called forward interest arbitrage and make no mistake, there is some arbitraging going on right now.
Of course these folks aren’t going to just sit on the money they borrow, they are going to put it to work by investing it. Traders are borrowing at negative 20% rates and investing the funds on a highly leveraged basis on a mass of risky global assets like oil, energy and commodities. All this liquidity pouring into these assets is driving prices up, up, UP. Everybody doing this is raking in the dough; early investors in bubbles always do, but they are just riding a gigantic bubble financed by a large negative cost of borrowing. When it pays to borrow money and short the dollar you do it man! You gotta ride the wave right into the cliffs baby.
Of course reckless U.S. policy is driving all of this. Easy money, low interest rates, loose monetary policy and government pressure on banks to loan money are all at the core of this situation.
Alas, all good things must come to an end; some spectacularly so. Eventually the dollar will stop decreasing in value. It has to. It can’t fall to zero. When it does, the price of money will no longer be negative and the risk of borrowing will increase. This will cause investors to attempt to realize gains and cover their short positions on the dollar. Furthermore, the Obama debt machine will eventually create enough risk for the Chinese and other foreign investors that they will demand higher interest rates to cover it. Driving up of interest rates will further increase the risk of investments causing yet more investors to exit. More and more will run to U.S. treasuries and the cascade will have begun. Then the asset bubble goes “pop!” When that big sucker bursts, we will all be within its blast radius.
So what to do? Well, in the meantime invest and make some money. Your goal is to employ the “greater fool theory” and get out before the bubble bursts. For now easy money and excessive global liquidity will continue to push asset prices up. Until it doesn’t anymore and all hell, once again, breaks loose.
Locke n Load :
Date: November 24, 2009
I probably shouldn’t be surpised but RD, you did a fine job of putting that in laymans terms. I spent the better part of 12 years as a commodity broker investing/speculating in everything, including currencies. I spent countless hours trying to explain market gyrations, macro economics, and Friedman to customers, the press, etc. but to no avail. The concept of ‘carry trades’ was beyond foreign to almost everyone. I imagine you recently read the Roubini article? He can be a bit of a crank and is FAR too enamored of his own education but he’s right in this case. The dollar carry trade we are witnessing will end VERY badly. However, it will not unfold like the housing bubble did. This will be far more abrupt and crippling. All of you may have read the recent odd Fed comments regarding the overnight rate (meaning fed rate)and the possible aggressive hikes. I think I’ve seen 3 references so far but the gyst is this: the Fed is warning all followers that when they see the dollar fall below an (un)specified point they will try and defend it. What IS that point? Hard to tell. Chances are it wont have so much to do with a particular techincal support level as an external trigger such as significant debt sales issues. By that I mean the buyers of our short term debt drying up. In normal times the avg loan term on the aggregate of our debt is a few years. It stands at about 49 weeks right now. We are selling a LOT of short term debt right now trying to buy back our expensive debt (refinance it) but this wont last forever. When the buyers balk we will be in a bind. We wont be able to inflate our currency and we wont be able to finance the bills. This is, frankly, armageddon for the dollar and everyone will call the Fed’s bluff. We’ll probably hear a LOT of talk about ‘fiscal responsibility’ out of the Dems and the Fed as this point nears and they try and allay the fears of our international buyers but in the end it wont matter. The rubber will have met the road. The Fed really has no options left. This is a Soros dream trade and you can bet your (worthless)bottom dollar he’s playing it for all he’s worth.
R.D. Walker :
Date: November 25, 2009
Lock n Load: I did read Roubini and he is right. It is brutally obvious and the savior administration in Washington isn’t doing a thing to stop the inflation of this asset bubble. On the contrary, their policies are contributing to the carry trade mania. It is going to be ugly when this one pops.
Do you ever feel like some character Stephan King book who can see future disasters that no one else can? I can see this one happening in my mind like it has already occurred. I can see the chaos. I can see the billions in invested funds vanishing. I can see the loan defaults. I can see the government trying to prop up banks and currency with a crippled dollar. I can see the political class blaming greedy Wall Street types as if they are shocked that the species exists. I can see the calls for more government regulation of every aspect of the economy. It is like I am watching a documentary of some fucking disaster that has already occurred.
What can you do gentle Revo reader? Beats the hell out of me. Brace yourselves I guess.
MadBrad :
Date: November 25, 2009
Is it reasonable to believe that the September 15th 2008 electronic run on the banks was a coordinated event?
http://www.capitalismgonewild.com/2009/02/electronic-run-on-banks-550-billion.html
R.D. Walker :
Date: November 25, 2009
Brad: It isn’t outside the realm of possibility but, as you know, I tend to disbelieve most nefarious conspiracy theories. I just don’t believe they can be secretly coordinated. These fuckwits can’t find their asses with both hands let alone pull off evil genius plots.
RUDE JUDE :
Date: November 25, 2009
So, what does one do now? Is there any hope for the middle class DINKs (Double Income No Kids)? With NO debt and a moderate amount in mutual funds, IRAs, ROTHs, etc. and some saved up cash. My Grandparents who lived the depression hid their cash all over their house. We were still finding it long after they departed. But then again, that was when the dollar still had some meaning to it. We are SCREWED!!
MadBrad :
Date: November 25, 2009
Yes and I admit that it is hard for me to get my head around the kind of numbers involved but an array of financial institutions don’t have to be knowingly acting as co-conspirators to create what is apparantly an unprecedented event. I believe it was an act of War by a stateless entity and I believe that all the effects that act of War have amazingly coincided with the political and financial goals of Mr. George Soros. It fits his M.O. and he has a history of manipulating political and financial institutions to his image and personal gain.
RUDE JUDE :
Date: November 25, 2009
That BASTARD!!!
MadBrad :
Date: November 25, 2009
RJ, we are only screwed if we play by the rules written for us by other people. The goal of any investment is to provide security. My primitive mind does not accept numbers written on paper as anything more than something to read. I DO understand the things I need to physically survive each day. I’ve never bought Gold but I’ve sacrificed a lot to buy fully and semi-jacketed Lead.
My never thought I would live this long, so I never learned to value those things most people put their faith in. If I can’t eat it, drink it, shoot it, wear it, sleep on it, in it or with it I tend to consider it as a secondary item at best. When I die my goal is to have an empty wallet and empty testicles.
MadBrad :
Date: November 25, 2009
Oh yeah, before I check out I’m going to invest in a copy of the Summa Theologica. By the time I’ve finished it I should be able to make bigger investments that will offer returns that are Armageddon-Proof. It’s wealth I can actually take with me into the hereafter.
Marie :
Date: November 25, 2009
This post is an example of what I love about the Real Revo. This blog is really an intellectual blog without being all pompous and arrogant. History, economics, religion, whatever! You guys have brass balls. Love ya~!
R.D. Walker :
Date: November 25, 2009
Thanks Marie, we aim to please. We don’t aim too high though.
MadBrad :
Date: November 25, 2009
Yes Marie, thank you very much. As time progresses we will see more with each day how everything is connected. What I like about the Revo is that we actually have people who specialize or are highly educated in a variety of all the different subjects we attempt to tackle here. Regardless of how technical or conceptual the discussion gets it always boils down to basic common sense, we hope.
I hope you and everyone here has a VERY happy Thanksgiving.
RUDE JUDE :
Date: November 25, 2009
Brad: you are right. We are screwed only if we play by the rules of others. Thank you for putting that perspective on it for me. As for common sense; well, I always thought that some, and I’m saying some as to not diss every college grad, lost their common sense IN college. More than likely from the liberals who run them. I hate the fact that one of my neices goes to Indiana University. She usually has to “discuss” their thinking with them after classes. It frustrates her to no end. Common sense? what the hell is that?
I hope all the REVOs have a safe and blessed Thanksgiving!!
R.D. Walker :
Date: November 25, 2009
RJ: Squirreling your money away ain’t going to do it this time. When that cash isn’t worth the paper it is written on, it is just taking up space.
I hate to say this, but Brad is probably right: buy stuff now. And take on long term fixed rate debt. You will have the stuff that you won’t be able to afford later and you will be able to pay off your debt later with the play money we used to call the dollar.
RUDE JUDE :
Date: November 25, 2009
Yeah, I suppose you’re both right. It’s just been so ingrained in my being from my upbringing. Monopoly money is coming to a wallet near you!
Thanks for the help guys!
Jim :
Date: November 27, 2009
“well, I always thought that some, and I’m saying some as to not diss every college grad, lost their common sense IN college.”
Very true. I’ll admit that I spent four years having Keynesian economic nonsense drilled into my head. Then I spent the next eight years unlearning bad economic theory in favor of what works in the real world.
I also agree with what Brad has written. You’ll likely be better of making use of what remaining purchasing power the US dollar still has by purchasing ‘stuff’. Now granted, purchasing ‘stuff’ is tricky, takes a great deal of research, and will test how comfortable one is with ‘risk’ but from all indications the USD and US treasuries are dead investments walking.
Here are some ideas with this in mind:
*Gold/Silver/Platinum/Palladium – may face a pull back in the next 6 months but still vastly undervalued. One of the safer investments you’ll find.
*Collectibles (automobiles, art, etc) – Tricky and do your homework first but if done wisely can be a solid long-term investment.
*Blue-chip dividend-paying stocks anywhere in the world.
*Wine/Single Malt Whisky – Seriously, you have a homogenous product that can be bought/sold in the same manner as shares. There are already a number of wine investment funds. Plus, if all else fails, you can drown your sorrows.