Mon 20 Oct 2008
Are the Dominoes Falling?
Posted by ray under Market Commentaries
Is the world heading for a deflation/depression? Have the probabilities increased or decreased? Tonight I’ll examine the benchmarks
In Words Are Capable of Precise Meanings, I mentioned the monthly closes that would increase the probabilities of a deflation/depression:
- Gold a monthly close below $640.00
- Crude a monthly close below $84.59
Both are basis the CSI Perpetual contract. Basis Dec, Crude’s benchmark close is below 81.00. Given that Dec Crude is trading below 74.00, there is a strong probability that October will close below 821.00. Gold is unlikely to close below $640.00 basis CSI’s Perpetual.
If Crude closes below 821 basis Dec, then the probability of a deflation/depression increases. There are other ominous signs on the interest rate front.
In the FT October 17 issue, I read that mortgage rates in the US had started to spike up. In the article “US mortgage rates spike on bailout”, the FT article said that homebuyers “face a leap of 50 bp”. If this trend continues, the US will see an exacerbation of the sub-prime problem.
The key will be the CPI numbers. So far the according to ShadowStats the ‘official fiddle’ continues and I would expect that to continue until after the elections. Once that is over, some authenticity will need to be reintroduced if the numbers are to have any credibility with Main Street USA. Should they start to spike up as expected, we can see the second wave of crisis hit home.
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I am travelling in Australia until October 27. My blogs will necessarily be briefer than normal.
October 20th, 2008 at 9:04 pm
Ray-san
My head hurts when you start with the fundamentals. The mass of information is boggling to my simple mind. Can you recomend a book on economics in the same vain as ’statistics without tears’?
I seem to have this inverted in my head, but are you saying that the deflation situation will lead to higher interest rates? That seems to be the indication from the t-bonds.
I will try to decipher the previous blog entries again.
You back in HKG around 15/16/17 Nov? We will be around and would love to catch Chrissy and newly mobile self if possible.
Regards
Stuart
October 21st, 2008 at 3:58 am
Hi Stuart
Long time no hear - are you back in Japan?
To answer your question:
It’s a sequential thingy - the second wave in the crisis will be brought about by inflation.
* The FED will be forced to raise rates or face hyperinflation.
* The US ecconomy already fragile, will be unable to face the battering of rising rates and inflation.
* The second round of sub-prime will then come around.
At best we can look can forward to stgaflation with recovery around 2015 +/- 2 years. At worst the FED attempts to prevent the crisis will lead to deflation.
Book Request:
No good simple book in the same class as Rowntree’s book.
Several readable but not simple books.
*A good place to start is ‘America’s Great Depression’ by Murray Rothbard.
* Anything by Rothbard is worth reading. I do not share his anarchist views.
* A good primer on Austrian economics: “A Primer on Modern Themes in Free Market Economics and Policy” (Paperback)
by John M. Cobin Ph.D
* Others - ‘Man, Economy and State’ is his magnamus opus akin to Ludwig Von Mises’ ‘Human Action’ - both readable but heavy going.
All available on Amazon
On Meeting:
I’ll be back in HK on Nov 2 - so will be around 15 to 17. Give me a call. Love to catch up.
October 21st, 2008 at 4:51 am
Stuart san
May catch up with you in HK, too.
October 30th, 2008 at 6:39 pm
Thanks Ray. Appreciated as always.
It now looks like gold will close 750ish,
and oil 70ish on the last trading day in Oct.
Does the one over, one under scenario ruin the symetry of the deflation/hyperinflation
possibilities?
Stuart
October 31st, 2008 at 5:41 am
Hi Stuart
Back in Singapore and continuous Internet.
I don’t undertstand the basis of the question,
The close for Crude below 81 basis Dec brings us one step closer to a deflation scenario. But so long as Gold can keep above US$640.00 on a monthly close basis, the recession only scenario is still a probability.
A Gold monthly close below US$640.00 will cause an increase in the probabilities of a deflation and reduce almost any chance of a recession only scenario.
There is no conflict between deflation and hyperinflation scenario. If I am right, the most probable scenario is hyperinflation will lead to deflation.
My process of thought for deflation goes like this: Next year, the inflation numbers will start to rise as the FED caused increases in the M3 take effect without a corresponding increase in productivity.
When this happens, the FED will have to raise rates to prevent hyperinflation on an already fragile US economy. This will cause another round of sub-prime crisis and problems in other credit areas (credit card etc).
Unfortunately, the FED will need to act promptly on the inflation issue if it is to have any chance of limiting the subsequent slow down to only a recession.
If it leaves the rate rise to a case of ‘too much, too late’, the rate increases will lead to a deflation.
BTW, if it does occur, the deflation will have been caused by FED ineptness in dealing with the crisis when it first arose.
It didn’t see it coming; it kept taking piecemeal action and stating the crisis was over and the actions it did take guaranteed the inflation/deflation threat we’ll (the world)see next year.