The Sarcasm Report v.15

Yen May Extend Gain as Commodities Drop Fuels Carry-Trade Exit
March 20 (Bloomberg) -- The yen and Swiss franc may extend gains against major currencies as declines in gold and oil feed speculation investors are exiting purchases of commodities that were financed with cheap loans from Japan and Switzerland.

Investors, worried what excessive cheap loans (housing bubble) would do to our financial system, embraced cheap loans in an effort to protect themselves. Is that what I'm seeing? Further, in this era of excess stuff, buying more stuff was also embraced. That's probably me just being a bit extra (short-term) deflationary/paranoid these days though. Nevermind.

``There's massive deleveraging going on, forcing some of the fund community to cover the losses by unwinding trades in other markets,'' said Michael Malpede, a senior currency analyst in Chicago at Man Global Research. ``They are unwinding some of the one-way trades,'' including bets on euro-dollar. ``It triggered a domino effect.''

Toilet paper is/was a one-way trade for me. Then again, I'm fairly sure I didn't finance the purchase using a Japanese loan nor did I ever expect to resell the paper for fiat paper. If memory serves, that is.

The Fed on March 18 said ``inflation has been elevated, and some indicators of inflation expectations have risen.''

The comment helped ``to change things around in respect to commodity markets,'' said Hans-Guenter Redeker, global head of currency strategy in London at BNP Paribas SA, in an interview on Bloomberg radio. ``So we did see a lot of trends that had been in place over the past six to seven weeks being destroyed'' yesterday.

I would rank parabolic trends at the top of the list when it comes to trends most easily destroyed. Will the trends arise from the ashes (yet again for a variety of long-term reasons) like a Phoenix though? Maybe! Let's just say I'm still not willing to bury US Dollars in my backyard in hopes I'll be digging them back up in 20+ years thinking how well I did to hoard them. I may be crazy short-term, but I don't think I'm actually insane long-term. Time will tell though!

The Fed has cut rates 2 percentage points this year to restore confidence to financial markets and avert a recession. Banks are reeling from $195 billion in assets writedowns and credit losses since the start of 2007, according to Bloomberg data.

Nothing restores confidence like a good old-fashioned intermeeting rate cut panic!

Deflation

It is hitting with a vengeance today as seen in the interest rate spread between treasuries (non-inflation protected yields are falling substantially), their inflation protected counterparts (real yields are rising substantially), and the implosion at Bear Stearns.

My short-term deflationary mood (as seen in the upper left corner of my blog and in my most recent post about the possibility of a commodity crash) is kicking in it seems. I'm still stagflationary long-term. I expect I'll be mostly alone in the coming months though. It is what happens after this (probable) recession that concerns me most. The 1970s saw many recessions that temporarily eased inflation short-term.

Once again, as a saver I hope I'm wrong about future inflation (and real yields). It will be far easier to protect myself (even in inflation protected treasuries) if inflation stays tame (and real yields stay positive) over my lifetime.

No Reason to Lose Money!

Whew! Finally, a voice of reason!

Treasury Yields Hint Market Losing Faith In Fed On Inflation
"I can't see a reason to buy an investment with a negative rate of return," said Tom di Galoma, head of U.S. Treasury trading at Jefferies (NYSE:JEF) & Co.

US Stocks: Keeping up with inflation this year? Nope.
Chinese Stocks: Keeping up with inflation this year? Nope.
European Stocks: Keeping up with inflation this year? Nope.
Treasury Bills: Keeping up with inflation this year? Nope.
Real Estate: Keeping up with inflation this year? Nope.
Commodities: Keeping up with inflation this year? Yes, but possible bubble.
Toilet Paper: Keeping up with inflation this year? Yes! (at Costco anyway)

Behold the inflation tapeworm. It appears to be eating much more than it is giving back, as is the case with parasites in general. Perhaps Tom has a cunning plan to protect ourselves from it that I am missing.

For the record, Tom di Galoma began his career in 1985. For what it is worth, we fell off the gold standard in the 1970s. Hey, I'm just saying that it may or may not be affecting his eyesight. That's all. If you can't buy an investment that keeps up with inflation and you can't sit in cash because it can't keep up with inflation, that only leaves you with a paradox. Right?

And lastly, I have three reasons to suspect that commodities may be in a bubble.

1. We appear to be heading into a recession (possibly even globally).
2. Commodities are all the rage these days on the TV.
3. Commodities are parabolic, again. Parabolas are not sustainable (unless we hyperinflate).

That doesn't mean there wouldn't be another parabola after they crash (if indeed they do crash, which is not a given). I'm still stagflationary long-term and see little reason to change my mind.

The Sarcasm Report v.14

China's Retail Sales Grow at Fastest Pace Since 1999 (Update5)

March 12 (Bloomberg) -- China's retail sales climbed 20.2 percent, matching the fastest pace in at least nine years, a sign that consumer spending may sustain the world's fastest- growing major economy as export demand weakens.

Wow. How are they getting people to spend so much?

To foster domestic consumption, China is raising welfare payments and subsidizing farmers' purchases of televisions and refrigerators. Urban disposable incomes climbed to 13,786 yuan ($1,900) last year, while rural earnings rose 15.4 percent to 4,140 yuan.

Farmers do need their televisions. No doubt about it.

``The underlying story is that because food prices are rising rural income growth is the strongest it's been for years,'' said Cavey. ``Urban incomes also are very strong and with real interest rates very negative people don't want to leave money in the bank.''

Incomes are strong, as long as you don't compare them to food prices (about one third of the typical Chinese budget), oil prices, and/or bank interest rates. Seriously strong, once you strip those things out and subsidize TV purchases.

``Real'' interest rates are returns after inflation. The key one-year deposit rate is 4.14 percent, less than half the rate of inflation.

More than 4% in the hole? I must be an optimist. I'm thinking I-Bonds are still a great deal at 1.2% over inflation, because they are tax deferred, AND because the government no longer wants us to buy them (by reducing the maximum amount one can purchase each year). I'm also thinking a 1.6% real yield on the 20-Year TIPS isn't all that bad of a deal these days (it was 1.8% two months ago and 2.2% a year ago). See? Optimist!

That's what I love about America. The Chinese are given subsidies to help buy TVs. In contrast, we are given subsidies (tax rebate checks) to buy entire TVs (maybe even two small ones per person!) or anything else we might desire. We also have the option to buy even more expensive gasoline. It is our choice in the land of the free. Woohoo!

Something For Nothing

The Repercussions of $4 Gas
In many cases, the extra gas expenses will outstrip the free money consumers will get through the stimulus checks the government will send out this spring.

Expenses will outstrip the free money?

As a stagflationist, that has got to be one of the funniest things I've read in a long, long time.

I have an easy solution to this problem. Since the money is free and can be printed in infinite quantities, why not just give us more of it and drop it out of helicopters if need be? Surely that would allow us to pay for the gasoline.

Deeply sarcastic gallows humor, that's what I'm talking about.

My First Sarcasm Report Revisited

August 31, 2007
The Sarcasm Report
Since gold is a particular precious metal but stocks are actually a collection, wouldn't it make more sense to say the following? Gold (a particular precious metal) is simply following Jones Soda (a particular stock) higher because of the Bush bailout.

Nevermind. I know the answer to that already. Jones Soda actually went down today. That doesn't work.

...

By the way, I did say I was a stagflationist. Right? I get all giddy inside when so many things get propped up by our sound fiscal policies. I just know everything's going to be just fine if everything is propped up simultaneously. Heck, how can we lose?

Anyone want to guess what Jones Soda did today?

March 11, 2008
Jones Soda Fizzles
Shares dropped $1.66, or 38.3%, to $2.68 in afternoon trading. Shares have dropped 84.4% over the past 12 months.

I'm still a stagflationist but I'm also having a strange feeling of deja vu. Go figure.

Blackstone Revisited

November 12, 2007
Blackstone vs. Romancing the Stone
One hell of a morning has turned into a bitch of a day! - Jack Colton, Romancing the Stone, 1984

March 10, 2008
UPDATE 5-Blackstone earnings fall 86pct in tough market
On a basis of generally accepted accounting principles, Blackstone posted a net loss of $170 million, compared with net income of $1.18 billion a year earlier.

Blackstone is down 32% since I heckled it in November and it is down ~60% since going public. It is almost like this firm which specializes in taking companies private suddenly felt the need to go public (financial hypocrites?) and cash out at the top. Yeah, almost exactly like that. Go figure.

March 23, 2007
The logic and timing of taking Blackstone public
Make no mistake: Many other elements are at work here, including greed, ego, opportunism and hypocrisy almost too rich to be true.

Indeed.

Investors in general fear that if Blackstone is sticking its toe into treacherous public markets, then we must be at the top of the market.

Way to go investors in general! I guess that brings me to a point. The herd is not always wrong. Sometimes the stench is so foul that most everyone can agree it stinks. I'm really starting to think some contrarian investors are seriously underestimating the herd. In my opinion, the herd thinks the economy stinks. I happen to agree with the herd. If I am right and the herd is right, heaven help the "catch the falling knife" optimistic bottom fishers.

I am going to argue one more point. What if the herd is wrong but wrong in the wrong direction? What if the herd simply isn't pessimistic enough? What if the herd thinks this is just one more typical recession and we'll be back to smelling the roses and living the good life once we're through it? I've argued recently that I was too optmistic. I've been running a site called Illusion of Prosperity and I was clearly not bearish enough. Had I been more bearish I would have done even better with my investments in the last three years.

I bring this up because I think the herd has somewhat moved to the sidelines. I'm not so sure the sidelines is a great place to be. I'm not sure earning 1.3% on short-term treasury bills offers great wealth protection. What if things don't improve? How can 1.3% offset $108 oil and rear view mirror looking 4.3% inflation? Just a theory. Perhaps a deflationary crash is coming. What if it doesn't though? What if we get an inflationary spiral instead? If so, the optimistic contrarians will be right that the herd was wrong. Unfortunately, the optimistic contrarians will be even MORE wrong.

The Death of Real Yields Continues

This is probably one of my better calls since starting this blog (not that I try to predict much here, since my crystal ball is rather hazy).

1. Predict bad economy.
2. Predict government response to bad economy.
3. Predict flight to safety.
4. Mention 1970s and the growing difficulty of making money off of money.
5. Repeat.

Here's the post that started the topic back in October (although I've been predicting the death of real yields in private since 2004, when I first turned stagflationary). The link to Stefan Karlsson is worth a reread in my opinion. I continue to be in agreement with his conclusion and it does not bode well for the future.

The Death of Real Yields
In conclusion, the explanation of the low yield on U.S. government securities is neither expectations of low inflation or falling global time preferences ("global savings glut"), but money-pumping by the Fed and other central banks and speculation in continued high levels of money-pumping.

I'm of the belief that there is SO much money floating around out there that it simply can't earn a good inflation adjusted return any longer. That's my bearish position in a nutshell.

For a while, money was flowing into everything. It was like a GUNS and BUTTER and STOCKS and BONDS and HOUSING and COMMODITIES monetary orgy. Great time to be a bull. Just buy something, anything. It didn't really matter what! Times are a changin' though (and the change isn't helping the real yield situation one bit). One by one, the investments above (in uppercase) are being taken out back behind the woodshed and old-yellered.

In any event, I don't see real yields rising much unless the economy strengthens substantially. I'm certainly not predicting that. I see plenty of long-term problems. Should the economy continue to deteriorate (seems much more likely), then the death of real yields will more than likely continue.

Of course, one might argue that the stimulus package might change all that long-term. Let me see. It will allow us to borrow money from ourselves (by increasing our national debt). We'll then use that money to either buy stuff we didn't really need in the first place or buy oil at an even higher price. *deeply sarcastic eye roll* Why the higher price? Probably has something to do with printing fresh money and handing it to foreigners as payment in full. Just a hunch!

Source Data:
U.S. Treasury - Daily Treasury Yield Curve Rates