The next bubble: cash.

This is deflation, a contraction of money and credit. Hardy anybody argues about that anymore. So what happens next? Will Obama and the bailout maniacs inflate a new bubble in green energy in their new, green deal? Maybe, but it would only be a limited bubble, not the worldwide craze in any and all non-dollar assets that we saw the last time around.

Don’t assume that any new bubbles at all will form for a long, long time. The mood has shifted from risk to hoarding. Now that people have been burned by everything from dot-coms to gold miners and are scared to death of losing their jobs, they are going to hang onto the one thing that still works: Washington Wallpaper, the little notes that promise, “I owe you nothing but more of these IOUs.

Deflation will rage, until it doesn’t. We are still early in this phase, since among the public there is still a healthy fear of the dollar and paper money in general. But over the next year, as commodities and foreign currencies slide still lower and consumer prices stay solidly and noticeably negative, people will forget about the deficit and the $100 trillion in debt at just the wrong time.

This is the rule of maximum pain for the maximum number. The dollar is not yet ready to fail because it is too feared and despised. But when people let their guard down and sell for $450 the Krugerrands that they are paying $900 for today, take all that they have, because then the real fun will begin.

Just as the public will get too complacent about holding I-owe-you-nothings (Doug Casey’s phrase), Congress and Obama will get too complacent about printing them up, and the whole debt-based money system will come crashing down. I don’t pretend to know how it will play out (hyperinflation or just plain-old, “sorry, we can’t pay” default), but it will be visibly ugly, and I am glad I’ll only be watching it on TV. This won’t be pretty anywhere, but the US is not a civilized country anymore, and it has a most uncivil government.

Impatient Treasury shorts toasted.

The 30-year yield closed at 3.91% today, in a massive compression of the yield curve, a movement that has a lot of room left to run. Way back on August 8th (day 4 of this blog), I wrote the following in “That crazy, crazy bond market: a call for sub-3% long bonds”:

I predict that the dollar rally will strengthen the compression of Treasury yields at all ends of the curb, as the market perceives a lower currency risk. This is a sign of deflation: an increasing preference for cash. With the banking system on the verge of a collapse worse than the ’30s, people will have no choice but to buy Treasuries. These promises of an insolvent and unrepentant debtor are safer than cash in the bank (because its not really in the bank!).

This flight to safety will send short-term yields back under 1% (as they were in March), and traders will move out the yield curve to get ahead of the compression, driving long bonds to historic lows, likely well under 3%. …

So it may seem crazy, but it is entirely possible (and given the banking crisis, likely) that long Treasury yields will fall to 60 year records in the face of horrible fundamentals. But once they get there, I expect them to turn up and keep going, as the government starts to default by Fed printing.

To all those who feel that the US debt just DESERVES to be shorted, I say wait. It will get more deserving.

That post is worth another look, if only for the charts of the last top in Treasuries, the 1940s, when long yields hovered under 3% while inflation breached 10%.

There has been a lot of talk of a widening yield curve lately, and more than a couple of people have mentioned to me that they were thinking of shorting TLT or buying a short Treasury ETF. This actually furthered my conviction that despite the HUGE deficits that the US gov’t has started to run, that bonds were still a buy, or at least not yet a short, as no market tops out in room full of bears. Well, the premature shorts had another rough day, as we all were reminded again that this is a deflationary panic, and that Treasuries are the only things that go up in these little episodes.

Markets don’t have to make fundamental sense. They only sometimes do, in the sense that a stopped clock is right twice a day.

A global Dow for a global central bank?


The Global Dow is a 150-stock index of the most innovative, vibrant and influential corporations from around the world. Only leading blue-chip stocks are included in the index. Its components, like those of The Dow, are selected by editors of Dow Jones.

This is certainly a useful index that I will follow (it stands at 1444, from base of 1000 as of 1.1.2000), but the timing of its creation, a few months after Mr. Murdock acquired Dow Jones and with talk of a global central bank in the air, is suspicious. It is with moves like this that perceptions are slowly changed, so that when soveignty is lost, few notice or care.

That said, I suspect that it will be very difficult for bankers to succeed in such an effort, because rough times like these breed nationalism and heighten differences.


PS — I have been relocating and traveling these past two weeks, hence the lack of posts.

Among financial planners, the equity culture lives on.

Bloomberg columnist Jane Bryant Quinn reports that most financial planners still view stocks as the cornerstone of a retirement plan. An informal survey of planners showed overwhelming support for an equity allocation of 50-60%, although many have a new found respect for cash.

It still sounds as if most financial advisers are pretty worthless, just dishing up the same bad advice you could get from the New York Times:

Most of the planners are advising their clients to rebalance their portfolios, which effectively means putting money into stocks at current prices. They’re buying slowly, dollar-averaging into the market month by month. For taxable accounts, they’re also harvesting tax losses, to use against the capital gains that some mutual funds will be reporting, based on gains taken earlier this year. They also love municipal bonds.

Any adviser who had clients in more than a token amount of stocks by 2007 should be fired for incompetence. Same goes for those who still advise 50% or who like municipal bonds, which are an accident waiting to happen.

A good adviser doesn’t just deploy static formulas for asset allocation, but has the historical (100+ year) perspective required to identify periods of relative over- and under-valuation in various asset classes. Stocks were a time-bomb after about 1995. Commodities should have been avoided by early 2007. Real estate was on a crash course post-2004. Munis and corporates were also all risk an no reward after 2004.

This is pretty simple stuff, really. Just look at the relationships of various assets to one-another and to consumer prices, and don’t forget that metrics like PEs and yields can reflect overvaluations for so long that up begins to look like down.

As asset classes get way out of whack with historical averages, they should be sold or bought accordingly. People often forget that cash is an asset class, perhaps the most important one, and should be bought in spades when it is cheap and held until it is dear. It is still cheap.

The Depression Reader has assembled a compendium of essays and other media on this Greater Depression from writers with an Austrian perspective. While you won’t find many even here who understand the mechanics of deflation, you won’t find so many smart, honest economic writers anywhere else:

There is No Such Thing as a Free House

Someone once remarked that the best indicator of a recession is the number of times “Mises” “Hayek” or “Austrian” appear in the newspapers. During the boom, no one wants to listen to the lessons of the Austrian economists. No one wants to hear that we need to live within our means – that the Federal Reserve does not have the power to print us into prosperity by artificially creating credit. So while the writers of were warning against the housing bubble and the inflationary nature of the Fed, the mainstream was touting the economic wisdom of Bernanke and Greenspan. When this recession hit, it seems everyone except the Austrians was caught off guard. Commentators, bureaucrats, and politicians began panicking, “Something must be done! This is Something…therefore it must be done!”

Instead of looking to the mainstream for answers to this crisis, why not look to those who saw it coming?

For those new to Austrian economics, this reader will offer an introduction to this unique school of thought. It is unlike any other school of economics you have likely come across. Instead of focusing on unrealistic mathematical models, the writers here build their thinking on human action and observations of how the economy actually runs.

What’s important is not necessarily the specific political opposition to this bailout, but rather educating people about the dangers of nationalization, central banking, and government regulation. Only when people recognize the dangers of the government’s “socialism for the rich” will we be able to get back on the road to prosperity. Unfortunately, a correction is necessary. There is no such thing as a free house. The more the government intervenes, the longer and more painful it will be. But this crisis gives the country a chance to rethink its previous assumptions about the economy and the government’s role in it. Hopefully, this reader will be a first step for many into an exciting, growing branch of economic thought.

The Bailout

The Bubble

The Banks

The Fed

Short Selling

Ron Paul and Austrian Economics

We Told You So