Hiding a Recession

[lehighguy]

To a certain extent we can say the market sees it and is reacting.

USD to Euro:
http://finance.yahoo.com/q/bc?s=USDEUR=X&t=5y

Oil:
http://futures.tradingcharts.com/chart/CO/W

Gold:
http://finance.yahoo.com/q/bc?s=GLD&t=5y

Current reductions in the long rates are, IMO, driven by the intenese fear out in the marketplace. When you don't know what to do with your money you throw it in treasuries. And boy do these mortgage buying wiz kids not know what the hell is going on.

When OPEC is thinking about accepting euros as payment, china is thinking about shifting to partial euro currency reserves, and Warren Buffet is publicaly declaring his lack of confidence in the dollar and buying brazilian real then at least some market actors are catching on.

[The once and future king]

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toafk,

Not all prices increase, obviously. Technological progress and increasing productivity acts to offset the effects of monetary inflation on prices. That's what I'm saying; monetary inflation is "hidden" in lots of different places; some price inflation, but exported inflation to foreign reserves, increasing productivity, and temporal delay all act to mask the negative effects on consumers. Couple that with totally bogus CPI numbers . . .

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what are your thoughts about my market discussion above?

Barron

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The market found ways to create inflation, or more accurately create debt. This was the primary purpose of the CDO and its ilk. All the money being imported via the Carry trade needed a "home" and the vehicles derived via the (new) markets/products in mortgage debt gave it one.

As for bonds/yields, well arnt these in price action relative to metrics? If there is divergence between the inflation metric and the "real" rate of inflation how would bonds etc react to this divergence?

I would have said that for along time, inflation was destroying yield at least in the UK. In that any money invested in a bond when interest rates were historically low
(average rate of interest in the UK over the last century was 8%. At the moment they are "high" at 5.75%)would have performed piss poor against the option of investing the money in Equities or the housing market.

You might have had the same purchasing power a year later had you invested in a bond for one year, had you wanted to buy from the basket of stuff, infact your purchasing power may have increased. If you wanted to use the money to buy another asset class, chances are your purchasing power had declined massively.

In terms of opportunity cost,it is massively expensive had you invested in a simple interest baring bond linked in some way to the basket of stuff inflation metric, which I will call the BS metric for short. Given the huge returns on other investments available at the time, e.g buy house, wait six months yay 20% return.

Given also that interest rates where also bound to go up at some time surely not that great a time to be in bonds.

That said I acknowledge how complex the bond market is at least in speculative terms. Judging yield/maturity and the price action on face value etc so much of the above may be completely erroneous.

[Splendour]

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I've been wondering for a while if the final frontier of government economic management would not be to simply fudge away recessions via statistical hocus pocus. After all, the government is the organization that gathers and reports the statistics. How hard could it be? Manipulation of the CPI has become more intense for the past twenty-odd years, to the point where I find the number to be completely ridiculous. Until recently I thought it was being under-reported to the tune of maybe 50%. Now I believe it may be much worse. Consumer price inflation is probably hovering near double digits, as anyone who has been shopping for the past four or five years can attest to.

Intermission: My wife is watching a youtube video where some [censored] just said that lewrockwell.com is "totally in bed with the islamofascists." Ahahahahaha! And now back to our OP.

What is the significance of a 10% CPI? Well, the CPI is used to "deflate" GDP, which we are told was nearly 4% last quarter. Uh, what? How is this absurd number arrived at? Well, they only deflated the nominal GDP by 0.8%. That's right. You read that right. In calculating GDP last quarter, the government assumed price inflation was 0.8%. That's the lowest since the Eisenhower administration.

So let me get this straight. "Consumer confidence" is in the toilet. 92% of people say they are spending less on the holidays than last year. Oil is $100/barrel, Gold is almost $850/ounce, the dollar is at an all time low versus yak turds and every other currency in the world, the Fed just cut rates (twice) and is printing money (it's a figure of speech, Barron) like there's no tomorrow, and price inflation is supposed to be at its lowest point in 50 years?

My point is, that some people (iron81 comes to mind, bless his heart) have previously stated on these boards that they buy into the idea that Fed control of the money supply has led to a "smoothing out" of the business cycle, as evidenced by the last twenty years. I say, no. The last twenty years are evidence of ever better manipulation of economic data and hiding of the business cycle.

In fact, here is my claim:

The last recession has never ended. The US economy has been contracting for some 7 years, give or take a couple of quarters, and this has been hidden by truly heroic inflation of the money supply, running at something like 15% per year, which has itself been hidden by, among other things, massive manipulation of government economic statistics.

Flame on.

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I think you may be right. But the real questions is who is doing the hiding and why they are doing it and is it beneficial and who is it beneficial for?

It doesn't look like its just government but business too. At the first whisper of anything you can trigger a market panic and the number of people that would benefit would probably be a lot less than it would hurt.

It seems like over the past 3 or 4 years I keep hearing that Christmas sales are falling, but if that was the case then what was all the mortgage equity borrowing that so many people indulged in all about? Did they only make major purchases and pay off consumer debt? I doubt it. Its not the nature of the majority of people to be that frugal.

[DcifrThs]

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To a certain extent we can say the market sees it and is reacting.

USD to Euro:
http://finance.yahoo.com/q/bc?s=USDEUR=X&t=5y

Oil:
http://futures.tradingcharts.com/chart/CO/W

Gold:
http://finance.yahoo.com/q/bc?s=GLD&t=5y

Current reductions in the long rates are, IMO, driven by the intenese fear out in the marketplace. When you don't know what to do with your money you throw it in treasuries. And boy do these mortgage buying wiz kids not know what the hell is going on.

When OPEC is thinking about accepting euros as payment, china is thinking about shifting to partial euro currency reserves, and Warren Buffet is publicaly declaring his lack of confidence in the dollar and buying brazilian real then at least some market actors are catching on.

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please refer to my specific discussion as before june 2007. i stated that numerous times because the market action now has many different aspects to it and is fundamentally driven by money market issues in both fear, high volatility in many markets, and "legitimate" recession expectations combined with fed cutting.

so can you please rethink your reply as it relates to the years 2001-2006 (or more accurately 1998-june 2007). why didn't markets react when this info was public?

what does that imply?

Barron

[lehighguy]

Take those graphs and find 5 year versions. All of these trends have been prevelent for the 2001-2008 time period.

[The once and future king]

DcifrThs

You havnt answered my question. Tips might have compensated you enough to cover purchasing power in relation to the basket of stuff (consumer goods), but I cant see how over the period in question it would have compensated you for the loss of purchasing power against a basket of assets.

[DcifrThs]

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toafk,

Not all prices increase, obviously. Technological progress and increasing productivity acts to offset the effects of monetary inflation on prices. That's what I'm saying; monetary inflation is "hidden" in lots of different places; some price inflation, but exported inflation to foreign reserves, increasing productivity, and temporal delay all act to mask the negative effects on consumers. Couple that with totally bogus CPI numbers . . .

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what are your thoughts about my market discussion above?

Barron

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The market found ways to create inflation, or more accurately create debt. This was the primary purpose of the CDO and its ilk. All the money being imported via the Carry trade needed a "home" and the vehicles derived via the (new) markets/products in mortgage debt gave it one.

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do you have facts and figures here? on the face of it, this sounds like uninformed speculation.

here is how i have come to understand what has happened and the way markets have been:

the carry trade (or at least a vast majority of it) is invested in liquid securities trying to take advantage of yield differentials. i think overall CDO investments can be illiquid and hard to value. there are more liquid versions of them like MBSs but i don't think they were the destination for the money taken from the carry trade. in fact, judging from TIC reports and just looking at the price action of the market when the carry trade went through periods of unwinding (feb 27th 2007), the equity markets seem to be the biggest home for the carry trade as MBS values didn't change much on that day but equities did a TON and the yen revalued by a lot reflecting that.

in fact, i'd be willing to bet that the vast majority of carry trade money didn't go to mortgage related products at all.

now in terms of your statement that "the primary purpose of CDOs is... to create debt" i don't really know what you mean.

CDOs were created to diversify holdings of certain types and tranches of debt. specifically, banks could hold these high rated securities legally and earn a higher yield (since the market realized that CDOs backed by highly complicated to value debt obligations were more likely to default than their similarly rated corporate or more easily valued counterparts). CDOs were also created simply because liquidity or demand for yield and new products was there. investment banks and fin.service groups make TONS off of these things and as long as there are those willing to buy them, there are many more willing to structure them. this is where overall global liquidiy did find a home...but i don't think specifically as a result of the carry trade.

further, i don't think this relates well to the discussion i was trying to generate.

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As for bonds/yields, well arnt these in price action relative to metrics? If there is divergence between the inflation metric and the "real" rate of inflation how would bonds etc react to this divergence?

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if the divergence is positive, demand for TIPS would increase and demand for non-inflation linked bonds would decrease pushing up the break even inflation rate (BEI). vice versa if the divergence was negative.

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I would have said that for along time, inflation was destroying yield at least in the UK. In that any money invested in a bond when interest rates were historically low
(average rate of interest in the UK over the last century was 8%. At the moment they are "high" at 5.75%)would have performed piss poor against the option of investing the money in Equities or the housing market.

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but then the equity returns would have similarly been eaten away.

the fact that bond returns performed far worse than equities can be linked to more fundamental problems moreso than inflation (since equities don't perform well in highly inflationary environments either). specifically, bonds fell because growth was high and capacity was tight. this means mr. king pushed up rates to reign in that inflationary pressure.

equities on the other hand did great since corporate profit margins were increasing, export demand soared etc. as emerging markets and everything related to them soared (their demand soared etc.). this fed back into the bond underperformance since it increased growth and inflationary pressures in a tight capacity environment.

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You might have had the same purchasing power a year later had you invested in a bond for one year, had you wanted to buy from the basket of stuff, infact your purchasing power may have increased.

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can you rephrase. i don't really know what you're saying here.

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If you wanted to use the money to buy another asset class, chances are your purchasing power had declined massively.

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well, that relates to what i said above.

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In terms of opportunity cost,it is massively expensive had you invested in a simple interest baring bond linked in some way to the basket of stuff inflation metric, which I will call the BS metric for short. Given the huge returns on other investments available at the time, e.g buy house, wait six months yay 20% return.

Given also that interest rates where also bound to go up at some time surely not that great a time to be in bonds.

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if you're talking long term, real yeilds are mean reverting so that is true...but again, i don't see how that relates to my points about markets responding to the info boro posted.

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That said I acknowledge how complex the bond market is at least in speculative terms. Judging yield/maturity and the price action on face value etc so much of the above may be completely erroneous.

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agree with you there.

Barron

[The once and future king]

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since equities don't perform well in highly inflationary environments either

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Oh really?

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now in terms of your statement that "the primary purpose of CDOs is... to create debt" i don't really know what you mean.

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By this I ment provide a means by which debt can be provided to those who wouldnt have received it before. You know those sub prime folks we have been hearing so much about.

[DcifrThs]

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DcifrThs

You havnt answered my question. Tips might have compensated you enough to cover purchasing power in relation to the basket of stuff (consumer goods), but I cant see how over the period in question it would have compensated you for the loss of purchasing power against a basket of assets.

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i gotcha. i misunderstood what you were saying and concentrated much more on the market action.

TIPS don't cover the "basket of assets" as you know and pointed out so they wouldn't have covered your exposure to, say, milk.

if you consume the basket of goods though, you'd be covered, at least in some way. the market though would still react to the inflation expectations vs. historical realized infaltion.

Barron

[DcifrThs]

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Take those graphs and find 5 year versions. All of these trends have been prevelent for the 2001-2008 time period.

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oil has not. gold has not.

please paste the graphs that show gold prices anywhere remotely close to where they've gone for the past year. same with oil.

the euro, however is a different story and i agree that trend has been prevalent...but for fundamental reasons.

Barron