Financial topics

[jldavid47]

Dear Freddy,

> Now let's consider a worst case scenario: In this case we would
> see a severe double-dip that once again hurts earnings but with no
> more budget cuts available for corporations as they have already
> laid off everyone they can afford to and the bailouts are no
> longer possible given the mood of the country. So in this case we
> see earnings at $20 for the worst 12 months (I can actually
> imagine much worse but let's go with this) and a trough P/E of 6
> as investors lose all faith in a stock market that has lost them
> money for over 10 years and an economy that only seems to be able
> to grow debt and unemployment. This gives us an S&P 500 at a low
> of 120, about 10% of where we stand now.

This analysis is absolutely correct, and in fact it's a mathematical
certainty. S&P 500 = 120 is correct.

John

In Barron's roundtable this week, Marc Faber says "The S&P won't revisit the March 2009 low of 666 in nominal terms ever again."
I have a feeling he will be eating these words by the end of the year, if not much earlier.

[freddyv]

In Barron's roundtable this week, Marc Faber says "The S&P won't revisit the March 2009 low of 666 in nominal terms ever again."
I have a feeling he will be eating these words by the end of the year, if not much earlier.

From a technical perspective that would be pretty much unheard of. I will be absolutely amazed if the S&P doesn't at least revisit its 1995 level of 450 and I'll be surprised if it doesn't go significantly lower than that. 150 would be my guess. Now that may not happen for another 10 or 20 years but I would expect it much sooner, likely in the next 2-3 years.

There are a lot of "surprises" coming, according to Generational Dynamics. Things will happen that we can't even imagine now. So just add something like a financial collapse in China to all the current problems we have and throw in a major war and you've got the perfect scenario for our upcoming crisis era. My guess is that one of the real big surprises will have to do with the Internet. Perhaps there will be a tech "war of civilizations" that leads to a trade war that leads to nuclear war...who really knows but this Google-China issue shows how quickly something unthought of can heighten tensions very quickly.

Fred
http://www.acclaiminvesting.com/

[Carl L]

I know that John believes that inflation is impossible. I think that Faber is correct about 666 being the nominal S & P low. There is every reason to believe that we are entering an inflationary depression. Bernanke and the rest of the world's central banks will print however much money is necessary to avoid deflation. When the mass of people (the core principle of generational dynamics) catch on to the fact that all currencies are losing purchasing power, there will be a surge to buy as much as possible while the currency can still be traded for objects that are valued. With the stability of money having been eviscerated, it will be impossible to organize production and distribution on the scale needed for the world economy to function.

I have followed this website since its inception. John's analyses are always thought provoking. The high level of discussion on this GD Forum is an additional service.

Carl Lieberman

[Higgenbotham]

I know that John believes that inflation is impossible. I think that Faber is correct about 666 being the nominal S & P low. There is every reason to believe that we are entering an inflationary depression. Bernanke and the rest of the world's central banks will print however much money is necessary to avoid deflation. When the mass of people (the core principle of generational dynamics) catch on to the fact that all currencies are losing purchasing power, there will be a surge to buy as much as possible while the currency can still be traded for objects that are valued. With the stability of money having been eviscerated, it will be impossible to organize production and distribution on the scale needed for the world economy to function.

I have followed this website since its inception. John's analyses are always thought provoking. The high level of discussion on this GD Forum is an additional service.

Carl Lieberman

This really made me think. It seems like a point of no return has been reached. To where I'm not sure.

Starting with Faber, he also said he thinks the stock market can go down 20% starting about now. That was on Bloomberg too. If that were to happen, those of us on this forum might conclude that deflation has begun. That could be the wrong conclusion. Instead, it may be possible that stocks will retreat because monetary conditions have become so unstable that instability is winning out over inflation. In other words, all the liquidity that was pumped in since March was more important initially than the instability it generated, but the forces of instability are continuing to grow as effects of the liquidity wear off. Even though an inflationary backdrop may remain, the overall mix from about this point forward is not good for business or the stock market (just last week it was reported that monetary instability in South America is negatively impacting the bottom lines of US multinationals).

But I still tend to favor the deflation argument. Part of the reason goes back to something that was discussed here a few months back and that was the question of whether the Fed could act quickly enough to stop the deflation, since there is always a time delay between the bursting of the bubble and any Fed actions to counteract it. At that time, most here argued that the Fed could not act quickly enough. At some point, it seems probable that another and this time much more rapid bursting will occur and the Fed will not be able to act quickly enough to stop it. One thing that makes me believe this will happen is that nobody thinks it can (complacency). That includes all the learned panelists on the recent Barron's Roundtable and just about everybody else. At this point, I'm almost convinced it can't happen either. Anything that is out of the Fed's control could trigger that - a rogue nuke, pandemic outbreak, severe earthquake, or maybe more likely an old fashioned bond interest rate spike due to default fears, etc. My tendency still is to think that anything of that nature would cause deflationary panic and leave the Fed sitting on their hands with no solution. What if the Haiti earthquake had happened on the New Madrid or San Andreas fault lines? Curious if anyone else has thought of this.

[Higgenbotham]

The following is an excerpt from an e-mail I wrote to John in March 2008 before this forum was brought online. I keep coming back to the 1340s collapse because there isn't any modern precedent for what we are seeing.

> Given the events of yesterday, today I'm looking some more into
> attempts by the Florentine government to prevent the bankruptcy
> of their private banking firms during the financial crisis of the
> 1340s. The excerpt below is from a book that covers the history
> and sources of government debt financing. In the 1300s, the
> primary sources of government debt financing were the investment
> banks. The investment banks of that era were primarily involved
> in agricultural trade; we could perhaps think of them as being a
> hybrid of a Cargill and a Bear Stearns. As the book points out,
> the political structures at that time precluded the public debt
> markets that we have in advanced democracies today. When Edward
> III started the Hundred Years War in 1337, the Bardi and Peruzzi
> (Florentine banks) provided about half of the loans for this
> effort, only to have Edward go bankrupt, and by 1343 both the
> Bardi and Peruzzi were also bankrupt. Now comes the interesting
> part given yesterday's events. According to this source, the
> Florentine government intervened to keep the Bardi solvent, but
> the scheme failed and the Bardi collapsed three years later in
> 1346.

> http://books.google.com/books?id=53ZBMP ... #PPA110,M1_

An idea I hadn't thought of until now: We are reading about sovereign debt downgrades and default fears. At the same time, we know governments have been propping up the banks. In this link, it says that the news of Edward's default traveled rapidly to Florence and there was a run on the banks. It seems very plausible that the same thing could happen if Dubai, Greece, Ireland, Portugal, or any of a number of other countries default or even if there are fears of a default.

Given what has transpired in the past 2 years, I am going to take another look at this. If anyone has any insights on this topic, please post them. Thanks.

[jwfid]

Hi everyone,

Since I first became aware of our predicament, I have completely underestimated the lengths that government, the central banks, and the financial industry were prepared to go through to avoid a second Great Depression. In addition to all of the stimulus and quantitative easing, there has even been rumours of the federal reserve purchasing S&P 500 futures, and possibly even equities themselves. Other rumours exist that additional federal reserve purchases of Treasuries that far exceeded the amount they publicly stated they would purchase to keep auctions from failing. Who know's what else they have already or will do?

I know, I probably read Zero Hedge too much. Two years ago I would have dismissed every one of these points as totally crazy.

Florentine government intervened to keep the Bardi solvent, but
> the scheme failed and the Bardi collapsed three years later in
> 1346.

Higgy,

I don't think we can draw many parallels between the collapse of 1929-1933, or any other generational financial collapse to ours. The financial situation today is completely different in many ways. One item in your quote that I notice right away was interesting fact that the Florentine government intervened.

Without governement intervention we would have already had our collapse in 2001 or 2002. I was reading on Steve Keene's blog that he believes that the collapse should have occurred in 1987. Although I'm not sure that's what would have happened because it is not consistent with generational theory.

I hope this helps. I value and read your posts thoroughly. I just think we need to be careful about comparing our collapse with others that occurred in the past.

John,

Keep up the good work. I really like your new format. I look forward to viewing your site every day. Thanks.


Joe

[freddyv]

I know that John believes that inflation is impossible. I think that Faber is correct about 666 being the nominal S & P low. There is every reason to believe that we are entering an inflationary depression. Bernanke and the rest of the world's central banks will print however much money is necessary to avoid deflation. When the mass of people (the core principle of generational dynamics) catch on to the fact that all currencies are losing purchasing power, there will be a surge to buy as much as possible while the currency can still be traded for objects that are valued. With the stability of money having been eviscerated, it will be impossible to organize production and distribution on the scale needed for the world economy to function.
Carl Lieberman

I disagree on several counts:

1. History is replete with very smart people like Marc Faber making statements that in hindsight look very foolish. These people are often too close to the problem and have no perspective on what is really happening.

2. Despite tons of money being "printed", given away to cronies and spent as stimulus there is little sign of inflation but signs everywhere of deflation. The fact that the stock markets and housing markets are significantly below the highs of 2-3 years ago after all of this stimulus and the supposed recovery is a prime, real example of deflation as is the contraction of credit throughout our economy. Deals are everywhere whether you're buying a car, a house, renting an apartment or office or flying to Hawaii (as low as $280 RT directly from the Hawaiian Airlines website).

3. The world has yet to really begin to deleverage. All of the unfunded liabilities in the US are a prime example as are the crazy valuations on stocks. The P/E ratio of the NASDAQ 100 is 90 and a best case scenario with the S&P 500 offers a FORWARD P/E ratio of 20 with an actual P/E of 122.

http://www.bullandbearwise.com/NASDAQ100RealPE.asp
http://www2.standardandpoors.com/spf/xl ... EPSEST.XLS

4. A look at the real world shows that there are empty buildings everywhere.

5. Consumers still have way too much debt and are underemployed.

6. Demographics.


Last but not least I am in the prime demographic for earners in this country and I am a business owner and a successful one, yet I can't imagine anything happening that would make me start spending like the good old days. The past ten years have taught me some life lessons and I imagine that is true of most baby boomers, most of whom are a bit closer to retirement than I.

Fred
http://www.acclaiminvesting.com/

[Carl L]

Fred,

Years ago, when I was a student traveling in Europe, I came upon prior currencies. The "old franc", 1000 of which were replaced by the "new franc". How could such a thing ever have happened? In Ben Bernanke's famous 2002 National Economists Club speech where he earned the moniker "Helicopter Ben", he laid out the Fed's path to arrest deflation. He said, "I am confident that the Fed would take whatever means necessary to prevent significant deflation in the United States and, moreover, that the U.S. central bank, in cooperation with other parts of the government as needed, has sufficient policy instruments to ensure that any deflation that might occur would be both mild and brief." All of his actions to date lead me to take him at his word. John just believes that the scale of the credit implosion is orders of magnitude larger than the monetary tools at the fed's disposal. Well, we're about to find out. Long before the "new dollar" replaces 1000 of the "old dollar", we will all be spending our dollars on anything that we believe will have some lasting value. In the end, there will be a huge diminution of economic activity (a depression), but not before the currency has been destroyed. In the thirties, the U.S. was a creditor nation. FDR devalued the dollar by 40% against gold but it was more in the U.S. interest to suffer a deflationary depression than to inflate like the hugely indebted Weimar Republic. Today the U.S. is the largest debtor nation on the planet. It seems to be more in our interest to destroy the value of our un-payable debts than to increase their burden through deflation.

I subscribe to the GD analysis that this will be a tumultuous fourth turning. I think that John's most recent blog on the Brown victory is spot on at the end, "Who will be the new candidate who will lead the nation through this realignment? Who will be the new Abraham Lincoln or the new Franklin Roosevelt? It might be a Boomer or a Gen-Xer, but it will probably be a surprise to a lot of people."

[OLD1953]

Couple of points here, first, there's no indication I've seen that the Fed is willing to endlessly inflate the dollar. That's rhetoric, and vs the fact that they've pulled money out of the economy several times in the last couple of decades. The money shock that came after Y2K was over is a good example.

Secondly, if we were going to see flight from the dollar and dollar worthlessness, we'd have seen it in 2007 or 2008, not after several trillion has vanished from the ken of man.

It's worth pointing out that hyperinflations are very rapid. I can't recall one that took more than a year or so before a new currency was issued. The German inflation was done in about eight months, IIRC, the old money was dead, long live the new money.

[freddyv]

I am a huge fan of Richard Russell and more so these days because of his age and experience and the fact that he seems willing to accept reality while knowing (because of his experience) that some things are inevitable. I am also a fan of Bill Gross and yesterday Richard Russell was discussing the much talked-about Barron's Roundtable and this comment stood out:

(Bill) Gross again -- The jobs situation leads to what drives the economic consumption. Without jobs, consumers can't spend. Remarkably, consumption has stayed above 70% of GDP amid the recession, but consumers can't continue to spend unless the government continues to write the checks.
...
Russell Comments -- Bill Gross manages the world's largest bond fund. Gross is a leader of the PIMCO crowd, one of the smartest groups around. Gross has a great grasp of the Fed, the money markets, and he knows the value of income. Reading between the lines, I gather that Gross sees hard times ahead. Gross believes painful sacrifices will be needed, in the face of a possible economic downturn.

That consumer spending has remained above 70% is shocking to me and shows that while the public seems to know that something is going on, the real substantive change that Generational Dynamics calls for has not really taken hold. How can we have 10% unemployment and 17% underemployment and so many businesses gone without having a drop in consumer spending?

John, I am interested in your opinion and comments based on your GD perspective.

Fred
http://www.acclaiminvesting.com/