Depession Markers you can't ignore, refute, or wish your way out of.

[Zebo]

You guys should know I don't post this doom and gloom with any glee but rather to educate and prepare you. The politicians are lying to you right now - just like they lied to you about houses going up forever, or always pointing to stock charts as proof of your steady retirement vehicle, or claiming putting your labor up against children in Vietnam is the way to go . The indicators are even worse than back then (and this post does not even address sociological and anthropological issues we have, e.g. deadbeats) and politicians and economists have not answered them, except to say, "lets dig an even deeper hole."


This is from an Investment News Letter
Enjoy: http://www.safehaven.com/article-12679.htm

February 23, 2009

Arguments Against the Depression Outlook
by Steve Saville




Below is an excerpt from a commentary originally posted at www.speculative-investor.com on 22nd February 2009.

Over the past two months we've explained why we think a great depression is on the cards. We are not 'doom-and-gloomers' who relish the prospect of an economic debacle; in fact, we very much hope that our depression prediction proves to be way off the mark. Our analysis of the economic situation is simply heading where logic takes it.

This is a case where we would like to be proven wrong and are diligently looking for reasons why we could be wrong. Unfortunately, at this stage we haven't come across a good counter-argument. The consensus seems to be that things won't get anywhere near as bad over the next few years as they were during the 1930s because, well, because they just can't. Our retort is that the economic situation is far more precarious today than it was during the months following the 1929 stock market crash, so why is it so hard to believe that another "great depression" lies in store? To support our view we cite the following:

1. The credit expansion of the past 10 years was much bigger than the credit expansion of the 1920s, leading to the situation where debt is a higher percentage of GDP than it was at the outset of the 1930s depression.

2. Due to the greater magnitude of the more recent credit expansion and much faster growth in the supply of money than occurred during the 1920s, there is a more troublesome mismatch between production and consumption today than there was at the outset of the 1930s depression. Another way of saying this is that more money was ploughed into ill-conceived 'bubble activities' during the past 10 years than during the 10 years leading up to the depression of the 1930s.

3. In misguided efforts to help rejuvenate their respective economies the governments of today are making the same mistakes that were made during the 1930s, only more rapidly and on a grander scale. For example, governments are: trying to prevent prices from falling to their natural levels, encouraging and propagating the further expansion of debt, propping up failed business ventures, increasing the burden that the government itself places on the economy, creating a more uncertain environment and thus reducing the incentive to invest for the long-term, and taking actions designed to reduce savings at a time when inadequate real savings is a big part of the problem.

4. There is about one quadrillion dollars of financial derivatives that have to be accounted for today that didn't exist during the 1930s. We don't think the derivatives issue is close to being the most important economic problem out there today, but it adds to the overall risk.

So, what are we missing? Why don't the above points suggest that another great depression is a high-probability outcome?

We suspect that those who believe a great depression to be almost out of the question will attempt to substantiate their optimistic view by noting that according to the official GDP number the US economy only shrank by 1% (around 4% annualised) during the final quarter of last year. Our first reaction to such an argument is that given the plunges in house prices, auto sales, employment and the PMI (Purchasing Management Index), as well as the virtual collapse of the banking industry, you would have to be very gullible to believe that the US economy only shrank by 1% last quarter. In any case, if we are currently at the equivalent of Q1-1930 then there should currently be MINIMAL evidence of depression in the official statistics. Note, for instance, that the US economy appeared to be doing so well during the first few months of 1930 that President Hoover declared the downturn to be over in April of that year. If anything, the surprise over the past couple of months has been the almost total ABSENCE of economic recovery signs. Our view has been that there would be an economic 'false dawn' during the first half of this year followed by a resumption of the deterioration, so the relentless weakness is a little disconcerting. It is also worth noting that GDP numbers will tend to understate changes in the overall economy. The reason, as discussed in previous commentaries, is that despite its name the GDP calculation yields an estimate of NET output, not gross output. Specifically, it fails to count the intermediate stages of production and thus weights consumption spending -- the most stable part of the economy -- at more than double its true weighting.

We suspect that those who believe a great depression to be a very remote possibility will also point to the inflationary policies of central banks, in which case they should explain exactly how counterfeiting money could make an economy stronger. In a recent article entitled "Printing Like Mad", Frank Shostak explains that creating money out of nothing can only make things worse. Where is the logical flaw in Shostak's argument?

 

[Atreus21]

It should be noted that a key difference between the economy of the 20's versus the present is that our present economy is far more diversified.

I remember reading that from a textbook. I don't know exactly the particulars. I'm not sure where our economy was focused in the 20's.

 

[StageLeft]

My guess on point 1 is that debt is integrated in our society and has been for decades more than it was then, so this is not necessarily a cause for alarm in and of itself.

The main thing against this becoming 1930's is not necessarily a contraction in GDP but at least the social safeguards in place should soften the blow for a lot of people, limiting breadlines and all that. Also, it's politically acceptable to take some from the rich to give to the poor, now more than it was then.

It is bad, though. There have been perma bulls--there still are--who've chastised the doom and gloomers all the way from the 14k down to where we are now, and continuing to fall. They've constantly said it won't be that bad, it will turn around soon, etc., and they surely have exhausted all their credibility.

I have no idea how bad it will get. I am sure it will get worse, and unlike 15 months ago the prospects for a major economic cataclysm are surely much higher than they were then. I know a lot of people still don't get it. I know people who are behind on their car payments and yet still find the money to bring their kids to expensive play parks. Some people are incapable of learning, though, like an old dog. I don't know what help there can be for them.

 

[Nemesis 1]

The smart guess that everthing that is going on right now.Economicly speaking . Says one of 2 things.

The people running the system are either Corrupt. Or They are not qualified for there positions. Either way they must be brought to justice.

I don't think they are stupid people. That leaves us with they are corrupt and have hidden agenda . That would also point to the fact that everthing since at least jimmy carter has been munipulated. More likely it started with JFK ass.

Either way they have destroyed the dollar. We just haven't been told the good news yet.

Alot of rich still transferring their wealth still. But soon that will be complete.

 

[TheSlamma]

Originally posted by: Zebo
You guys should know I don't post this doom and gloom with any glee but rather to educate and prepare you. The politicians are lying to you right now

So is this a free public service announcement?

 

[Craig234]

Originally posted by: Zebo
The politicians are lying to you right now - just like they lied to you about houses going up forever...

Please post the quotes from the politicians who said housing prices would go up forever?

 

[nullzero]

Originally posted by: Atreus21
It should be noted that a key difference between the economy of the 20's versus the present is that our present economy is far more diversified.

I remember reading that from a textbook. I don't know exactly the particulars. I'm not sure where our economy was focused in the 20's.

Far more diversified you say... You mean a U.S. economy based mainly on FIRE (Finance, Insurance, and Real Estate) I think we are pretty screwed here. Notice how all +90% of the government bailouts and assistance is to try to prop up companies and assets in the FIRE.

This is a good read on the FIRE based economy with good charts showing the system http://www.itulip.com/forums/showthread.php?t=891

 

[dullard]

My posts from another thread (updated slightly for new numbers that just came out): I figured that my list is just more markers to add to your list.

Originally posted by: dullard
As it is, the economy is no where near depression levels. But, there are many signs that are quite similar to the depression. If anything that is significantly negative happens, it may easily spiral us from recession to depression.
...
The great depression had a few important factors. There was a stock market boom that ended. The stock values fell 52% from their peaks, had a dead cat bounce, then fell again. There was a real estate boom (prices 4x higher) in the mid 1920s that ended (the construction boom ended in 1928, one year before the start of the great depression). There was deflation that regularly set prices down between 0.59% and 2.05% in almost every month. Finally, consumer spending dropped 10% even though business spending and government spending were actually UP in the early 1930s. About 1.5 years into the depression unemployment rose from 3.2% to 8.7%

What do we have today? The S&P fell 52% from it?s peak, had a bounce, and is falling again. There was a real estate boom that ended (average prices are already down 26% and still falling). New home construction is down 79.5% so far in this real estate bust. While deflation isn?t a certainty yet, the CPI did just fall 1.92% in November (the 2nd largest monthly drop ever), down 1.01% in October (which was the largest drop since the depression until November hit), down 1.03% in December and it fell in September and August. Consumer spending has decreased and if you include ONLY the ending of easy home refinance cash, then consumer spending must fall at least 7%. If anything else bad happens, the consumer will easily reach the 10% drop in spending only seen in the great depression. About a year into this mess and the unemployment rate went from 4.7% to 7.6%.

The major facts seem quite similar. Aside from the unemployment rate only going up to 7.6% instead of 8.7%, the stats are nearly identical for the start of the great depression to what we have now.
...
How about some more similarities:

[*]1930 and 2008: Democrats have gains in congress during what was thought to be a recession
[*]1930 and 2008: Bank failures skyrocket
[*]1929 and 2008: Automobile sales off by 1/3rd

 

[alchemize]

Here's a shocker - the website wants you to buy gold!

 

[Fern]

I'm not a student of the 'Grest Depression' etc. Perhaps someone who is/was can comment on my question/thoughts below.

My (vague) understanding is that much of it was precipitated by a stock market collapse. At that time there were no uniform accounting rules, and no SEC to enforce them (the SEC arose out of the aftermath of the collapse).

Because of bogus company financials, easy credit and excess demand generated by speculation the worth of the market was vastly overstated. I.e., if you added up the value of all outstanding stock it by far exceed the (real) values of all the companies in aggregate. (Be aware that a company can issue it's stock for $10 per share, but later the market pushed it up to $100 on speculaytion. The company never got that increased amount as the stock was sold back and forth between third party investers. Also, the worth of the company itself never increased 10 fold.)

I think of it something like that great tulip bulb speculation thingy.

OTOH, today, while I think the stock market has been somewhat overvalue (price is inexcess of historical P/E ratio) it's still nowhere near as bad as that in 1929.

Then we have housing which many think is the biggest cause in all this today. But unlike the stocks of companies back in 1930, houses have intrinsic value and I don't see how they become completely worthless in value like the stock of a bankrupt company.

In addition to recent 'easy credit' for homes and excess demand it generated, I personally think a big cause of this banking mess is the 'mark-to-market' rules resulting from Enron. The MBE's (mortgage backed securities) could be valued based on their expected cash-flow then discounted for PV (present value), instead they must be valued on current market prices (even if you have no interest in selling them currently). This puts an awful burden on the holders of the MBE's because they must write-down the value of this asset (the MBE) on their Balance Sheet and take a 'paper/noncash' loss on their Profit & Loss Statement. As regards banks, this means their lending ability is severely reduced (i.e., no credit for us/market).

So because no market exists for them, these MBE's are valued at pennies on the dollar, yet the homes (and therefore the derivitives/MBE's) are NOT really worth pennies on the dollar. Try to build a similar home and see what it costs in material, labor, and raw land. So, there is real value there and I think much more than reflected in the MBE's.

While there will never be demand for bankrupt stocks like those in 1929, there will be demand for these homes. People need a place to live, and those in smaller/older/less desirable homes will want to move up when possible. etc.

I guess to summerize, I think there is a significant differnece between then and now - that being worthless stock != currently depressed homes.

(BTW: The stupid mark-to-market rules should have been the first thing changed; it would have created trillions in value instantly without requiring federal $'s)

Fern

 

[Ozoned]

Originally posted by: Fern


(BTW: The stupid mark-tomarket rules should have been the first thing changed; it woudl created trillions in value instantly without requiring federal $'s)

Fern

Fern hits nail on head. We WILL change the rule if we need to to avoid a depression. Timing is everything. 2 years from now, WHO will be owning most of the foreclosed homes?

 

[dullard]

Originally posted by: Fern
I'm not a student of the 'Grest Depression' etc. Perhaps someone who is/was can comment on my question/thoughts below.

I'd also like to see your comments on my post above.

My (vague) understanding is that much of it was precipitated by a stock market collapse...OTOH, today, while I think the stock market has been somewhat overvalue (price is inexcess of historical P/E ratio) it's still nowhere near as bad as that in 1929.

If you think that, then look at the actual data.

Then we have housing which many think is the biggest cause in all this today. But unlike the stocks of companies back in 1930, houses have intrinsic value and I don't see how they become completely worthless in value like the stock of a bankrupt company.

Like I said in my post above, the great depression started after a big housing crash. We just are in the midst of a big housing crash.

I personally think a big cause of this banking mess is the 'mark-to-market' rules resulting from Enron...As regards banks, this means their lending ability is severely reduced (i.e., no credit for us/market)...So, there is real value there and I think much more than reflected in the MBE's.

That is a red herring. Mark-to-market accelerated the mess, but it didn't have any cause in the mess. Yes, the houses have real value. But an investor who holds a $500k mortgage on a house now selling for $400k does not hold paper of real value. That investor is worse than having pennies on the dollar. He/she is holding something worth negative $100k. The securities aren't selling at pennies on the dollar because there is no market. Nope, there is a market, it is just that they actually are worth pennies on the dollar. Even without mark-to-market, banks have nothing but a steaming pile of crap and wouldn't be able to loan anyways. The mark-to-market arguement was just denial by the banks of the real extent of their problems.

 

[nullzero]

(BTW: The stupid mark-tomarket rules should have been the first thing changed; it woudl created trillions in value instantly without requiring federal $'s)

Ok change the rules then we can tax these crooks on how much they claim their assets are worth just like I get taxed for gains in stocks or anything else. All these banks deserve to fail, Let them all fail then we can start over with a clean slate.

 

[Fern]

Originally posted by: dullard

Originally posted by: Fern
I'm not a student of the 'Grest Depression' etc. Perhaps someone who is/was can comment on my question/thoughts below.

I'd also like to see your comments on my post above.
OK, but it may be a little while

My (vague) understanding is that much of it was precipitated by a stock market collapse...OTOH, today, while I think the stock market has been somewhat overvalue (price is inexcess of historical P/E ratio) it's still nowhere near as bad as that in 1929.

If you think that, then look at the actual data.
I can't seem to find the comparable market value/GDP ratio for 1929. Was it higher than 1.9 as seen in your chart?

Then we have housing which many think is the biggest cause in all this today. But unlike the stocks of companies back in 1930, houses have intrinsic value and I don't see how they become completely worthless in value like the stock of a bankrupt company.

Like I said in my post above, the great depression started after a big housing crash. We just are in the midst of a big housing crash.
I am/was unaware of any housing crash in '29 (Glad I pointed out that I'm no student of the Great Depression

I personally think a big cause of this banking mess is the 'mark-to-market' rules resulting from Enron...As regards banks, this means their lending ability is severely reduced (i.e., no credit for us/market)...So, there is real value there and I think much more than reflected in the MBE's.

That is a red herring. Mark-to-market accelerated the mess, but it didn't have any cause in the mess. Yes, the houses have real value. But an investor who holds a $500k mortgage on a house now selling for $400k does not hold paper of real value. That investor is worse than having pennies on the dollar. He/she is holding something worth negative $100k. The securities aren't selling at pennies on the dollar because there is no market. Nope, there is a market, it is just that they actually are worth pennies on the dollar. Even without mark-to-market, banks have nothing but a steaming pile of crap and wouldn't be able to loan anyways. The mark-to-market arguement was just denial by the banks of the real extent of their problems.

I can't agree with that (underlined portion). Whereas the paper was once valued at $500K, since the house has fallen to $400K the paper should be worth that (you can swap the paper for the house). My math says 400/500 or .80 on the dollar, far more than the measly few cents we see them valued at now.

I don't see that paper as quite so worthless for another reason: I'm reading that only about 9% of all mortgages are in default. Therefore, that mortgage backed security should be producing a cash flow equal to about 90% of that expected (all things being equal). That's a helluva lot of cash flow.
[/b]

See bolded

Fern

 

[Cuda1447]

I don't know if we will hit a depression or not, but here's the million dollar question. If we do, what do we, as individuals, safeguard ourselves to be sure we make it through ok? Pull money out of banks? Stock pile money? Stock pile food? Assets? Any specific industries that we should consider being capable of working in if need be? What do you do with real estate? If you are considering buying (and can afford) how would a depression effect that? Any other things I can't think of?

 

[StageLeft]

Originally posted by: Cuda1447
I don't know if we will hit a depression or not, but here's the million dollar question. If we do, what do we, as individuals, safeguard ourselves to be sure we make it through ok? Pull money out of banks? Stock pile money? Stock pile food? Assets? Any specific industries that we should consider being capable of working in if need be? What do you do with real estate? If you are considering buying (and can afford) how would a depression effect that? Any other things I can't think of?

It's a hard call. The safest bet is to stockpile a lot of food, since it has a real value and you will really use it at some point in the future, but beyond that the debate of inflation vs deflation still exists and is at the epicenter of any preventative measure, really. If the dollar does start to severely inflate, you'll want to be locked into a house with a fixed mortgage if at all possible.

 

[dahunan]

This Economy was built on dumb citizens and consumerism--- people who have no money whatsoever in the bank yet they were spending and spending and .....

After these same dummies are hit hard in the next year... it will take a long time for consumerism to regain popularity...

^^ I could be wrong

 

[Cuda1447]

Originally posted by: Skoorb

Originally posted by: Cuda1447
I don't know if we will hit a depression or not, but here's the million dollar question. If we do, what do we, as individuals, safeguard ourselves to be sure we make it through ok? Pull money out of banks? Stock pile money? Stock pile food? Assets? Any specific industries that we should consider being capable of working in if need be? What do you do with real estate? If you are considering buying (and can afford) how would a depression effect that? Any other things I can't think of?

It's a hard call. The safest bet is to stockpile a lot of food, since it has a real value and you will really use it at some point in the future, but beyond that the debate of inflation vs deflation still exists and is at the epicenter of any preventative measure, really. If the dollar does start to severely inflate, you'll want to be locked into a house with a fixed mortgage if at all possible.

And if it deflates? Assuming I plan to stay in my house through the depression, how will that be affected? Also, excuse my ignorance, but assuming the company I get my mortgage loan through goes belly up, what happens to my mortgage?

 

[StageLeft]

Originally posted by: Cuda1447

Originally posted by: Skoorb

Originally posted by: Cuda1447
I don't know if we will hit a depression or not, but here's the million dollar question. If we do, what do we, as individuals, safeguard ourselves to be sure we make it through ok? Pull money out of banks? Stock pile money? Stock pile food? Assets? Any specific industries that we should consider being capable of working in if need be? What do you do with real estate? If you are considering buying (and can afford) how would a depression effect that? Any other things I can't think of?

It's a hard call. The safest bet is to stockpile a lot of food, since it has a real value and you will really use it at some point in the future, but beyond that the debate of inflation vs deflation still exists and is at the epicenter of any preventative measure, really. If the dollar does start to severely inflate, you'll want to be locked into a house with a fixed mortgage if at all possible.

And if it deflates? Assuming I plan to stay in my house through the depression, how will that be affected? Also, excuse my ignorance, but assuming the company I get my mortgage loan through goes belly up, what happens to my mortgage?

They sell it to others, so you will never lose that mortgage.

If it deflates, you want to be in things that either keep or grow your money, so a savings account or metal box with cash is the lowest level of those, beyond that get into some treasury bonds that are NOT inflation adjusted; thus even if, for example, deflation came in at 10%, they are still paying you back positive interest on your money.

 

[nullzero]

Originally posted by: Cuda1447
I don't know if we will hit a depression or not, but here's the million dollar question. If we do, what do we, as individuals, safeguard ourselves to be sure we make it through ok? Pull money out of banks? Stock pile money? Stock pile food? Assets? Any specific industries that we should consider being capable of working in if need be? What do you do with real estate? If you are considering buying (and can afford) how would a depression effect that? Any other things I can't think of?

Well lets look at what is doing good;

These charts speak for themselves

S&P 500 vs GLD (gold etf)

http://finance.yahoo.com/q/bc?...=on&z=m&q=l&c=&c=^GSPC

S&P 500 vs CAB (Cabela's big outdoor chain store that sells guns and ammo)

http://finance.yahoo.com/q/bc?...=on&z=m&q=l&c=&c=^GSPC

S&P 500 vs RGR (Gun manufacturer)

http://finance.yahoo.com/q/bc?...m&l=on&z=m&q=l&c=^GSPC

S&P 500 vs SWHC (Smith and Wesson a gun manufacturer)

http://finance.yahoo.com/q/bc?...=on&z=m&q=l&c=&c=^GSPC

S&P 500 vs GDX (gold miner etf)

http://finance.yahoo.com/q/bc?...=on&z=m&q=l&c=&c=^GSPC

There you have it gold, guns, and ammo are out performing the market by a 20% to 40% over the last 3 months. As for where to stuff your money... I would buy some land that has water rights and is fertile; if you can obtain for a great deal. If we do go into a massive depression it could possibly be the best investment since you can farm on it and provide food for yourself and others.

I would also agree with others and start stocking some food on hand for at least 6 months out. If you and a significant other lost all income you could still feed your family for a couple months. If you are unemployed it could be time to pick up new trade skills and master things that could be useful to barter with if we go into a prolonged massive downturn.

 

[Craig234]

Originally posted by: dahunan
This Economy was built on dumb citizens and consumerism--- people who have no money whatsoever in the bank yet they were spending and spending and .....

After these same dummies are hit hard in the next year... it will take a long time for consumerism to regain popularity...

^^ I could be wrong

I think it's helpful to view the economy as the people at the very top being the 'farmers', and the mass public as being the animals for slaughter.

In the 'normal' economic model, people spend a certain amount of their income and resources - perhaps often more than they should - on consumerism.

That 'feeds' the top - the people who own the businesses that profit from the consumerism, the transfer of wealth.

Much the same as the casino slowly bleeds its customers, the wealth always gradually going up, however many exceptions there are who 'wing big' against the casino - the farmers gradually increase their proportion of the wealth they own. Pay out 5% more in wages, get back that plus 10% in profits from the consumerism.

This can actualy work fairly well, if done as described above and the wealthy can't just keep increasing their share, and simply enjoy the much larger share they have.

But that isn't good enough. How do you get the public to spend far more than they can afford, so you can bleed them even further, leaving them with less and you with more?

Well, some of the basic tools for even the first scenario are things that stimulate spending - television with commercials, publications iwth ads, we're the most marketed nation in the world, inundated with advertising that gets people to be stimulated to 'acquire'. Funny enough, even long ago, these issues were noted, such as Galbraith (see my sig) discussing the changes in the modern American economy:

...profoundly challenged the nation's traditional direction and purpose. "The Affluent Society"--as he famously dubbed it in 1958--was delivering a cornucopia of privately-produced material goods and services, but was leaving the public sector starved for good schools, good roads, good parks, good medical care. In this Affluent Society, he warned openly, Americans were now being manipulated by advertising (especially through the new technology of television) to embrace a mindless and endless process of unneeded consumption that did far more to enrich and stabilize the profits of large corporations than it did to increase the real well-being of Americans themselves...

America was, he warned ominously, fast becoming a place where "the production of the frivolous is viewed with pride, while creation of the significant, the lasting, and the civilizing is looked on with regret." As you know, this concern with what he deemed the crucial "social imbalance" of modern economies--and the role of modern economic theory in defending that imbalance as an inviolable matter of free "consumer choice"--became the basis for his fame, and the explanation why he has sold more than seven million copies of his books, making him the best-selling economist of the modern age (with the sole exception of Karl Marx in the old Communist countries, where presumably a percentage of Marx's sales involved something other than consumer choice).

But those are already in place - so how to get people to spend far more and put themselves at risk of loss, in order to spend and enrich the rich further?

By giving them a supply of fantasy money.

But how? The greatest wealth of the public lies in their homes. So, if the paper value of those homes is inflated in a bubble - the people are 'wealthier' on paper, and can spend far more. It's not as if the money has to be 'real'; you aren't going to have the public all 'cash out' of their homes they way they might a stock bubble when it bursts. People can borrow real money for real debt against the paper bubble increases in their homes.

Thus can you get the public to spend far more and enrich the rich - and when the bubble bursts the rich keep the money they got, and the public is left holding the bag - with big debt, with tax debt to 'bail out' the system, and so on. Perhaps that leads to new opportunities to use the acquired cash from the bubble, to buy up the newly burst cheap assets for low prices, and further increase the share of the wealth owned.

In that sense, the housing bubble was the farmers 'fattening the calves' for increased yields. It felt fine to the calves to get fed nicely, but it had a price.

It's not that I'd say there are people pulling puppet strings to cause this bubble, but it is remarkably how nicely it fits what they would do if they could.

And you know the top financial people are well aware of these issues and who they benefit as they influence the nation's government policies.

One of the worst things is how hard it is to avoid these problems - the financial firms who 'sit out' the reckless behavior are competitively disadvantaged, missing big profits.

Thus the lack of rules lets the worst force the rest to follow in a race to the bottom. Even the most responsible homebuyer was affected by the inflated housing prices.

 

[Red Dawn]

Originally posted by: Zebo
You guys should know I don't post this doom and gloom with any glee but rather to educate and prepare you. The politicians are lying to you right now - just like they lied to you about houses going up forever, or always pointing to stock charts as proof of your steady retirement vehicle, or claiming putting your labor up against children in Vietnam is the way to go . The indicators are even worse than back then (and this post does not even address sociological and anthropological issues we have, e.g. deadbeats) and politicians and economists have not answered them, except to say, "lets dig an even deeper hole."


This is from an Investment News Letter
Enjoy: http://www.safehaven.com/article-12679.htm

February 23, 2009

Arguments Against the Depression Outlook
by Steve Saville




Below is an excerpt from a commentary originally posted at www.speculative-investor.com on 22nd February 2009.

Over the past two months we've explained why we think a great depression is on the cards. We are not 'doom-and-gloomers' who relish the prospect of an economic debacle; in fact, we very much hope that our depression prediction proves to be way off the mark. Our analysis of the economic situation is simply heading where logic takes it.

This is a case where we would like to be proven wrong and are diligently looking for reasons why we could be wrong. Unfortunately, at this stage we haven't come across a good counter-argument. The consensus seems to be that things won't get anywhere near as bad over the next few years as they were during the 1930s because, well, because they just can't. Our retort is that the economic situation is far more precarious today than it was during the months following the 1929 stock market crash, so why is it so hard to believe that another "great depression" lies in store? To support our view we cite the following:

1. The credit expansion of the past 10 years was much bigger than the credit expansion of the 1920s, leading to the situation where debt is a higher percentage of GDP than it was at the outset of the 1930s depression.

2. Due to the greater magnitude of the more recent credit expansion and much faster growth in the supply of money than occurred during the 1920s, there is a more troublesome mismatch between production and consumption today than there was at the outset of the 1930s depression. Another way of saying this is that more money was ploughed into ill-conceived 'bubble activities' during the past 10 years than during the 10 years leading up to the depression of the 1930s.

3. In misguided efforts to help rejuvenate their respective economies the governments of today are making the same mistakes that were made during the 1930s, only more rapidly and on a grander scale. For example, governments are: trying to prevent prices from falling to their natural levels, encouraging and propagating the further expansion of debt, propping up failed business ventures, increasing the burden that the government itself places on the economy, creating a more uncertain environment and thus reducing the incentive to invest for the long-term, and taking actions designed to reduce savings at a time when inadequate real savings is a big part of the problem.

4. There is about one quadrillion dollars of financial derivatives that have to be accounted for today that didn't exist during the 1930s. We don't think the derivatives issue is close to being the most important economic problem out there today, but it adds to the overall risk.

So, what are we missing? Why don't the above points suggest that another great depression is a high-probability outcome?

We suspect that those who believe a great depression to be almost out of the question will attempt to substantiate their optimistic view by noting that according to the official GDP number the US economy only shrank by 1% (around 4% annualised) during the final quarter of last year. Our first reaction to such an argument is that given the plunges in house prices, auto sales, employment and the PMI (Purchasing Management Index), as well as the virtual collapse of the banking industry, you would have to be very gullible to believe that the US economy only shrank by 1% last quarter. In any case, if we are currently at the equivalent of Q1-1930 then there should currently be MINIMAL evidence of depression in the official statistics. Note, for instance, that the US economy appeared to be doing so well during the first few months of 1930 that President Hoover declared the downturn to be over in April of that year. If anything, the surprise over the past couple of months has been the almost total ABSENCE of economic recovery signs. Our view has been that there would be an economic 'false dawn' during the first half of this year followed by a resumption of the deterioration, so the relentless weakness is a little disconcerting. It is also worth noting that GDP numbers will tend to understate changes in the overall economy. The reason, as discussed in previous commentaries, is that despite its name the GDP calculation yields an estimate of NET output, not gross output. Specifically, it fails to count the intermediate stages of production and thus weights consumption spending -- the most stable part of the economy -- at more than double its true weighting.

We suspect that those who believe a great depression to be a very remote possibility will also point to the inflationary policies of central banks, in which case they should explain exactly how counterfeiting money could make an economy stronger. In a recent article entitled "Printing Like Mad", Frank Shostak explains that creating money out of nothing can only make things worse. Where is the logical flaw in Shostak's argument?

Cool all we need is a Pandemic and another World War and the End of Dayers will be rocking with their cocks out:roll:

 

[Zebo]

Originally posted by: nullzero

Originally posted by: Cuda1447
I don't know if we will hit a depression or not, but here's the million dollar question. If we do, what do we, as individuals, safeguard ourselves to be sure we make it through ok? Pull money out of banks? Stock pile money? Stock pile food? Assets? Any specific industries that we should consider being capable of working in if need be? What do you do with real estate? If you are considering buying (and can afford) how would a depression effect that? Any other things I can't think of?

Well lets look at what is doing good;

These charts speak for themselves

S&P 500 vs GLD (gold etf)

http://finance.yahoo.com/q/bc?...=on&z=m&q=l&c=&c=^GSPC

S&P 500 vs CAB (Cabela's big outdoor chain store that sells guns and ammo)

http://finance.yahoo.com/q/bc?...=on&z=m&q=l&c=&c=^GSPC

S&P 500 vs RGR (Gun manufacturer)

http://finance.yahoo.com/q/bc?...m&l=on&z=m&q=l&c=^GSPC

S&P 500 vs SWHC (Smith and Wesson a gun manufacturer)

http://finance.yahoo.com/q/bc?...=on&z=m&q=l&c=&c=^GSPC

S&P 500 vs GDX (gold miner etf)

http://finance.yahoo.com/q/bc?...=on&z=m&q=l&c=&c=^GSPC

There you have it gold, guns, and ammo are out performing the market by a 20% to 40% over the last 3 months. As for where to stuff your money... I would buy some land that has water rights and is fertile; if you can obtain for a great deal. If we do go into a massive depression it could possibly be the best investment since you can farm on it and provide food for yourself and others.

I would also agree with others and start stocking some food on hand for at least 6 months out. If you and a significant other lost all income you could still feed your family for a couple months. If you are unemployed it could be time to pick up new trade skills and master things that could be useful to barter with if we go into a prolonged massive downturn.

I don't really invest in other peoples fortunes..

I've built 13 houses since 2003 and was happy to sell my last one at a $75,000 loss. Why buy or even hold property as it plummets??? AltA's and Commercial is yet to come.

I sleep with metals as a hedge if they start printing money - but basically, right now, cash in KING with DEFLATION happening. Shorting is for professionals so I won't do that either other than index funds may be a good idea until America stops deleveraging, then the world is your oyster with all that CASH.

 

[BoberFett]

Zebo

Mark my words, this deflation is temporary and natural since we're coming out of the bubble. We've got fewer dollars (due to tight credit) chasing the same amount of goods so prices naturally decline. As companies fail and unemployment increases, along with massive government infusion of cash into the system we'll see more money chasing fewer goods. This deflationary blip will be replaced with inflation: 70s style.

 

[LegendKiller]

Originally posted by: dullard

Originally posted by: Fern
I'm not a student of the 'Grest Depression' etc. Perhaps someone who is/was can comment on my question/thoughts below.

I'd also like to see your comments on my post above.

My (vague) understanding is that much of it was precipitated by a stock market collapse...OTOH, today, while I think the stock market has been somewhat overvalue (price is inexcess of historical P/E ratio) it's still nowhere near as bad as that in 1929.

If you think that, then look at the actual data.

Then we have housing which many think is the biggest cause in all this today. But unlike the stocks of companies back in 1930, houses have intrinsic value and I don't see how they become completely worthless in value like the stock of a bankrupt company.

Like I said in my post above, the great depression started after a big housing crash. We just are in the midst of a big housing crash.

I personally think a big cause of this banking mess is the 'mark-to-market' rules resulting from Enron...As regards banks, this means their lending ability is severely reduced (i.e., no credit for us/market)...So, there is real value there and I think much more than reflected in the MBE's.

That is a red herring. Mark-to-market accelerated the mess, but it didn't have any cause in the mess. Yes, the houses have real value. But an investor who holds a $500k mortgage on a house now selling for $400k does not hold paper of real value. That investor is worse than having pennies on the dollar. He/she is holding something worth negative $100k. The securities aren't selling at pennies on the dollar because there is no market. Nope, there is a market, it is just that they actually are worth pennies on the dollar. Even without mark-to-market, banks have nothing but a steaming pile of crap and wouldn't be able to loan anyways. The mark-to-market arguement was just denial by the banks of the real extent of their problems.

IT IS MBS, not MBE!!!

Dullard, the MBS bond is not worth -100, that's a silly statement. It is worth $400K. Since there is most likely enhancement on the bond, it's probably actually worth $420.

You saying it is worth -100 is like saying that a new car you just drove off the lot that you bought for 100 and is now worth 66, is actually worth -34. What? Where did you get your math education?

Second, the bonds aren't worth pennies on the dollar because the market values them at pennies on the dollar because the houses are worth pennies on the dollar. The houses are worth, for the most part, near par value when it takes into account defaults. Keep in mind that even if 20% of houses foreclose, if the house is worth 50% of the mortgage value, only 10% of the bond gets written down. That's not even including the excess interest generated by the mortgages.

The math roughly works like this. Right now, since the securitization market is completely irrational, a 10-year MBS bond is pricing at 8%. It priced at 4% before. That's 4% premium per year, thus the older bonds are discounted at 4% per year to make them equivalent. Thus, 4x10% = 40%. Because the discount rate is now 8%, which is 4% greater than the original 4%, you get a 40% discount to par. Thus, the bond is only "worth" 60% of par.

Now, that doesn't mean that you won't realize 100% of the value of the bond, it just means that the market is demanding a premium for interest

The problem with Mark to Market (which wasn't a response to Enron BTW), is that during irrational markets it causes successive waves of repricing. If you have a bond that was worth $100, then you had to write it down to $80, you may be forced to sell in order to raise your Capital % to obey document covenants. Thus, since the forced sale occurs, you now cause the market to be flooded with more bonds, dropping the price down to $70. This happens again, and again, and again, until it is down to 10% because the bond market is a BUYERS MARKET. They get a hugely good deal, you get fucked.

M2M accounting only works when the market is rational and is pricing efficiently. The biggest problem with M2M is that just because something is priced, by the market, at $60, doesn't mean you would sell it at $60, nor does it mean you should be required to put up more capital to cushion the value.

Going back to the car analogy, it would be like you driving the car off the road and the bank immediately demanding you put more money down on your loan because your car is suddenly worth less because the market is discounting it because it isn't "new". That's a bullcrap reason for putting more money into the loan.


--------------------------
As far as the fearmongers saying that there is 1/4 of a "quadrillion" in derivatives. The vast majority of those are interest rate derivatives. They do not pay out at Nominal value (which is what that boogeyman balance is based on).

For example. If I have a $2bn bond and I want to hedge interest rate risk, I take out a $2bn swap. Now, any given month I may net out .5%/12 interest. That's what? A payment to the swap counterparty of 833,333. Not much money.

Now, let's say that that swap counterparty "layed off" the interest rate risk of my swap with him with another swap. Then, let's say 10 more parties did the same thing. All of us are trading that same $833,333. Yet, we have $24bn of swaps outstanding. Not a big deal.

Sure, swap counterparty risk exists, but even with a default, only the 833,333 is at risk for an unswapped person.

--------------------------------

As far as comparing the S&P 500 to anything like gold or ammo, get real. The pricing of the stock market right now is irrational. The pricing of gold right now is irrational. They have an inverse relationship, so what?