All Forum Posts by: Anthony Halstead

For those wishing more doom and gloom:

http://usawatchdog.com/hyperinflationary-depression-2012-2014-mainstream-media-keeps-putting-lipstick-on-pig-economy/

or maybe some would call it reality. I prefer to see both sides of an issue. I like real estate for the leverage, growth, income etc. But I also realize that what worked last 50 years may not work for the next 10 years. If I can plan to mitigate for the "fat tail" or "black swan" events then I can do much better than others when those events come and avoid the regression to zero.

I am not a gloomer, I just think that some things are inevitable unless something happens (was that a Yogi Berra?) and would like to be somewhat prepared if they occur.

Tony

Gene, yes, I also view gold as an insurance policy against worse case. In that situation, I guess gold is the mirror in my strategy (comparing to Rich's strategy) where a low probability (ie it does not happen here...) event with high realized effects needs to be planned for.

Inflation, and hyperinflation, are transfers of wealth from those with money to those with debt. As the govt goes more and more into debt as the only solution to pay the ever increasing interest/debt payments and rising yearly budgets, they will have to issue more and more debt to cover the expenditures. Look at the 15trillion debt, I guess about 6-7 trillion of that has been created to pay for interest expense. We (they) have created debt to pay the interest on existing debt... is that sustainable?

Unless there is a dramatic shift in spending and the economy really starts to go forward the spending will keep going and most likely increase via stimulus/bailout/etc. And now we are entering the time of baby-boomer exodus from the workforce/stockmarket/housing market etc, which means less demand for stocks, houses, etc and more saving. I guess this might mean more spending (of savings? but pretty sad picture there as much wealth was lost during recent housing and stock bubble deflations) but not looking for that to sustain growth.

So printing of money will continue, and at some point a loss of confidence is predicted. Thus hyperinflation, no matter what you wish to define it as...

I guess behinds the scenes we are already there in the beginning stages with buyers of US t-bills drying up (except the fed) and other countries diversifying from the dollar to gold, yen, local currency for payments. It is really not too hard to see if you take a big picture view and stop using the last 6 months/6 years/your learning or short life time of experience to project into the future. It will most likely be different...

Tony

One of the key points of the interview is that the ISDA is responsible for determining if the "credit event" is a default or not. Thus far they have determined that a 50% haircut on debt is not a default, and JS is proposing that a 70% haircut on debt will also not be declared a default.

His reasoning is thusly because the ISDA is comprised mainly of the 5 largest US banks, who "own" 97% of the exposure to the Greek debt. Thus if the Greek default is declared a default, the 5 largest US banks need to pay up for the debt insurance (they sold insurance on the debt, payable if the event is classified a default by the ISDA) to the counterparties who bought the insurance. However, if they magically by some means declare that it is only a "credit event" or some other such nonsense, instead of a default, they do not need to pay the insurance and the counterparties end up loosing 50-70% of their investment...

Kinda nice when you are making the rules and in charge of definitions as well...

So scenario as presented by JS: 5 largest banks meet (in the guise of ISDA) and declare it to be a credit event or restructuring, not a default. Everyone claps hands and cheers, the world is getting better, Greece did not default! 5 largest US banks thus avoid bankruptcy from this event. Other companies go bankrupt because their debt is not insured.

(and 5 largest US banks continue to pay out large bonuses, book large "profits" and influence US monetary and political policy)

further reading... who owns the fed? It could not be the 5 largest US banks... could it?

Tony

Interesting interview:

http://www.youtube.com/watch?v=9802NwSSS6U&feature=player_embedded#!

Worth watching to understand how the game is rigged by large entities...

Jim (who has much experience and has been correct more often than not) is basically saying we are approaching a 1-2 year run-up in equities and after that a down period worse than 2008.

Interesting to see what happens.

Let me know if any of you watch the interview and actually understand the point, I would like to see what you think.

Tony

Jeff, I agree with your assessment, and also that it is not that easy... I still think that things denominated in debt (or backed by debt) will drop, while those things which people need to buy will rise in real price.

I expect vacation homes, second homes, boats, cars, etc to drop in price (as most are doing) while food, gas, rent, healthcare, education, taxes rise in price.

Thus cost rise while wealth (profits, wages, gains) drop for most people who do not get on the right side of this in time.

Still not sure exactly how it will play out, but I guess an inflationary deflation depression is what I see. Still.

Tony

Any more on the "mirroring strategy"?

Tony

Some history on defaults, plus stats that the US is going to exceed or already has.

The US will go down in history is as one of the most indebted nations ever:

"Morgan Stanley reported in 2009 that there’s “no historical precedent” for an economy that exceeds a 250% debt-to-GDP ratio without experiencing some sort of financial crisis or high inflation. Our total debt now exceeds GDP by roughly 400%.

Investment legend Marc Faber reports that once a country’s payments on debt exceed 30% of tax revenue, the currency is “done for.” On our current path, analyst Michael Murphy projects we’ll hit that figure by October."

http://www.zerohedge.com/news/thousand-pictures-worth-one-word-worthless

The DJIA as priced in gold is back at 6500, and as gold rises and the Dow drops, in real terms the dow is loosing money.

Somewhere in there is inflation if you want to figure out how to quantify it. I think the main reason that the issue is so cloudy is that we are still pricing in dollars, while dollars are being printed like crazy. One part of me says that the debt will cause massive deflation (not enough dollars to pay the monstrous debt) but...

We live in interesting times.

Tony

J Scott-

Well, here is one way they are going to pay down the debt, or more correctly put, decrease the rate at which it is increasing...

"By Corey Boles and Janet Hook

WASHINGTON -(Dow Jones)- Lawmakers are considering changing how the Consumer Price Index is calculated, a move that could save perhaps $220 billion and represent significant progress in the ongoing federal debt ceiling and deficit reduction talks.

According to congressional aides familiar with the discussions, the proposal would shift how the Consumer Price Index is calculated to reflect how people tend to change spending patterns when prices increase. For example, consumers tend to drive less when gas prices increase dramatically.

Such a move is widely seen by economists as resulting in a slower rise in inflation. That would impact an array of federal programs that are linked to CPI including the Social Security program and income tax brackets set by the federal government.

The proposal could lower federal spending by around $220 billion over the next decade, based on calculations by last year's White House deficit commission, which recommended the change as part of its final report."

So in effect they are going to lower the "official" inflation number to allow them to pay out less to everyone whose salary, pension, welfare, etc (seniors, disalbled, military, etc) is tied to inflation. They are going to change the numbers to "show" lower inflation. This will "save" money by not paying out what is due. If they do this a few times pretty soon they can say we have deflation, thus requring more money printing and allowing cuts in benefits for those programs.

I do not like how the govt plays with official statistics... and then these stats are quoted as correct. They have been playing with CPI since the 80's.

But I still think that the political will, and public support, will not allow them to "balance" the budget, much less pay down the debt. Not in the short term, nor in the next 10-20 years. Looking at the proposal you gave (not sure it is yours, I think it is not) I do not ever see that happening. I give it zero chance.

I think the debt ceiling will keep getting raised, they will keep playing with numbers and stats to keep the ball rolling a bit longer, and just try to stay afloat until the economy recovers and revenues increase.

That is what Bernanke is preaching, just a bit more time, just a bit more money.

We will see how it turns out, I am not hoping for the worst, but I am also realistic.

Tony.

J Scott-

"If we also got rid of the major corporate tax loopholes (with regards to how option are taxed, etc), we'd get not just the rest of the way there, but we'd have a surplus by 2020."

J, I would argue that one reason companies are running is because of the taxes here. They cannot compete on a worldwide market if they are taxed at US tax rates (without deductions, etc) and have US labor costs. Compare them to India or China for example, or Vietnam or Indonesia... Forcing these companies to pay taxes will create lots of offshore entities... And perhaps since they are the ones "writing" the tax code (via their billions of dollars spent on lobbiests) they will write the new one even more favorable for them and worse for the average American? Dunno, but seems that they always win, they have such influence with the govt compared to average citizens.

_J Scott:

"... Is that unreasonable to ask of someone (or the country)? "

Really? Ask away. How many votes will you get? You will not get elected with that for a campaign. Thus it will not happen. That is why Bryan and others are predicting high inflation, the government cannot meet its obligations, today or in the future, in fact ever. As this becomes more and more apparant to everyone, the US bond market will start to resemble that of Greece. Yes, laugh now, but I had this same discussion several years ago about Greece. People said it could never collapse, that it was part of Euro, that countries dont collapse in modern world, that ... It is pretty simple to understand. At some point the will to pay back or pay off the debt is gone, the coersion required to extort that amount of money via taxes or inflation (the hidden tax) is too great and the population rebels. The financial situation in the US is similar.

However, I do not see it happening this week, and for the following reasons: The US is still one of the most productive countries in the world, we produce a large amount of the world's food, we can pull out of Iraq, Afghanistan, etc and save money, we can do several things to save money while also printing to inflate, we are still (somehow) the world's reserve currency (so when Europe's S hits the F people will flock to "safety"). So it will be a while, and we could even start to recover economically in the next 10 years before it happens which may push it out even further. So we are no Greece in terms of productivity and potential, and that is what is keeping us going.

I do not see the dollar folding in the short term, but in the long term all that matters is the long term, and I am betting on significant devaluation of the dollar for the next 10 years or so at a minimum.

Bryan-

"All of the arguments about buying gold and the other nonsense will not help one bit if there is HYPERinflation."

I guess I have planned my business portfolio for inflation, but I am hedging hyperinflation in my personal portfolio with some gold and silver. I have thought that in a hyperinflationary scenario (see Wiemar, Zimbabwe) gold and silver may be neccessary. In Zimbabwe they used gold and US dollars when local script collapsed, what would we use here if the dollar devalued massively?

That is my thinking on gold and silver, it is for that extreme outlier event, and my position size reflects my calculation of its risk.

For your thoughts (well articulated) about using RE and fixed long term debt to cancel/benefit from inflation, I agree with you and have a similar plan.

What do you see the chances of deflation, stagflation, inflation, hyperinflation? And from that, where do you see oil, food, RE (both commercial and residential), unemployment, US dollar going in the next 1-2 and 5-10 years? Just curious how you see things going and how this affects your risk planning and decision making.

Tony

From Wikipedia:

"Bankruptcy or insolvency is a legal status of a person or an organisation that cannot repay the debts it owes to its creditors."

also:

"As of May 6, 2011, the Total Public Debt Outstanding of the United States of America was $14.32 trillion and was approximately 98% of calendar year 2010's annual gross domestic product (GDP) of $14.66 trillion.[2][3][4] Using 2010 figures, the total debt (96.3% of GDP) ranked 12th highest against other nations."

This is including Portugal, Ireland, Italy, Greece, Spain, etc.

also:

"The U.S. government is committed under current law to mandatory payments for programs such as Medicare, Medicaid and Social Security. The GAO projects that payouts for these programs will significantly exceed tax revenues over the next 75 years. The Medicare Part A (hospital insurance) payouts already exceed program tax revenues and Social Security payouts exceeded payroll taxes in fiscal 2010. These deficits require funding from other tax sources or borrowing.[16]

The present value of these deficits or unfunded obligations is an estimated $45.8 trillion. This is the amount that would have to be set aside during 2009 such that the principal and interest would pay for the unfunded commitments through 2084."

So if they had set aside 45.8 trillion in 2009 the money plus interest would fund the programs, but now we are running deficits each year, and the funding obligations are getting larger, plus we do not have the interest helping us (remember time value of money growing for you) so the yearly requirement is going to increase over time.

Basically, we have so much debt that if the entire GDP for a year was used to pay the debt it would just pay it off (not after this year) and future obligations cannot be met.

And this is with interest rates at historic lows (artificial lows). As soon as / if interest rates increase (like in Greece) then the world will realize that the US is bankrupt.

Short answer, the US cannot pay it's current and future bills, and there is no forseable way to pay them short of massive inflation.

t-bills, caveat emptor... and maybe same for holding cash.

Tony