Forecast

Real Estate. We are in the midst of an inflationary depression. On one side we have the ravages of debt. On the other, an uneasy coalition between the printing press and the psychology of a people.

The government will continue printing dollars to support the economy. Debt which pushed up asset values will now cause them to deflate as people pay down their debts instead of buying. The over-leveraged will continue to experience pain and their defaults will further damp asset values. The government prints dollars under different names but its key effort is to replace the personal spending that is now devoted to saving.

The rise of gold is unremarkable. Against copper, gold has risen about 40% since the beginning of 2007. Against oil, gold has risen 60%. Against stocks, of course gold is up 120%.

I'm not sure exactly how much gold has risen against "real estate," but with housing prices roughly down about 30% nationally, and gold up around 100%, we can all guess the relevant math.


Of course we are looking at values versus their peak, but that is exactly the point. The point in the past which we pick for measurement is arbitrary; we can only make decisions in the present. We are looking for the point at which we collectively hit our debt maxima, and we are guessing the point at which the government will target for suitable valuation.

Of course, this assumes that the government has any agency in the matter, which it does, but only indirectly.

My biggest mistake in the past 2 years has been trusting in the efficacy of printing dollar bills. It turns out this is an extremely blunt instrument. The government can no more guarantee asset values.

Our collective debt will hold down "real estate." But "real estate" values hold a reflexive power over broad swathes of the economy. The government will thus target a price level based on real estate values.

In this process, the government will anchor the values of all other goods. Tangible, fungible goods will attain a steady state value. Tangible but subjective/discernible goods, another. Subjective paper goods will suffer against common paper but against gold most of all. Gold, the most subjective of goods.

Regardless, under the best of scenarios, we will see "real estate" values depreciate by the scale of each buyer's dreams... assuming these dreams are rooted and leveraged in paper.

"This is the most facile portrait of what caused this crisis" ...and other thoughts on the inauguration of Barack Obama

Alan Greenspan is responsible for this crisis. He will be remembered for his tragic combination of ideological stubbornness and hubris. These were compounded by his age. Old age triggered a calcification in his thinking and myopia in his vision which rendered him out of touch and imperceptive to paradigmatic shifts in the world economy. In short, he was a victim of his own success and ego.

While the Federal Reserve's Fed Funds Target Rate played a large role in fomenting this crisis, it is not the whole story. The impact of China's rise, as transmitted through both the Wal-Mart effect on inflation and by China's massive interventions in the currency market, kept interest rate on long term U.S. government debt supernaturally low. This caused the stewards of our economy to fall asleep at their posts and the citizens of our country to become complacent.

Money was made too easy. She slept around, inflating the egos of people and the asset prices of things. Inevitably, we all got the clap.

Equally important is the human story. We, as humans, have a instinctive desire to avoid pain which has been encrypted and inculcated in us over the immense epoch of our genetic history. Often we construe falsehood with pain, when really we should embrace the opposite.

We see ourselves as rational creatures, and avoiding pain appears eminently rational. But this is fallacious. Avoiding pain is actually an emotional decision. Enduring pain in the pursuit of truth and some teleological utopos is truly rational. The ability to endure pain is characteristic of that higher order of thinking which separates us from all other creatures who possess no filter on their actions. Creatures who move before thought stalls in their brain with impulse as quick as synaptic transmission.

We, as a culture, failed in our fiduciary responsibility to ourselves. We allowed ourselves to be deluded. We delayed the tough decisions. We lived like children.

Alan Greenspan failed in his fiduciary responsibility to our nation. He let his desire to be liked, cherished and remembered overwhelm his thinking. This was not a conscious, pseudo-rational decision... its was an emotional one. But nothing is more insidious than the desire for popularity, as it corrupts truth, and posits the ends for the means.

The economy hasn't gotten laid in a long while, and he is frustrated. He lost his game when he slept with some hussy and got the clap. It is time for him to take his medicine.

The (un)Thinkable is happening. Panic now. Thankfully we have the Bernanke Experimental Economics Playbook

Vol. 1: "Soft Landings..."

Dr. Ben Bernanke, in a speech on November 21, 2002 laid out a playbook of options for the Federal Reserve to run should it ever lose control of monetary policy in the face of massive deflation. Intended primarily as a thought experiment, this graph shows the Fed losing control as we speak. Witness the (relative) stability of the federal funds rate until the bankruptcy of Lehman Brothers and the reverse take-under of A.I.G.. Up until today, the effective federal funds rate has never approached its zero limit... never-ever.

We are truly balancing on the edge of economic science and there is no chart for where we are going. This is a Ph.d level, alchemy lab improvisation called "Quantitative Easing." The Federal Reserve is synthesizing a powerful medicine, but they don't know if they're missing an ingredient, and they have no idea what size dose to give. To much and the patient will OD chasing the inflation dragon. To little and he'll go into cardiac arrest.














Click here to understand what I'm talking about.

And here to read "The Unthinkable Has Happened" by Tracy Alloway, Ftalphaville.ft.com

And here to read "Obama Can Be a Roosevelt, Not a Carter" by David Blake, Ft.com

The Fear Gauge

Today was the most fearful day in the markets that probably anyone living can recall. Gold surged 11%. Banks essentially stopped loaning money to each other. At one point banks were so scared that they were willing to invest in 3 month U.S. government debt (which they can use as collateral in case of disaster) for 0.03%, essentially for free. This was the lowest rate anyone has seen since the Second World War. The Vix, a measure of the amount of volatility traders expect over the next thirty days, reached its highest point since the crisis began last July. Since its inception it has only been this high twice, once during Russia's default on its debt in 1998 which caused the largest hedge fund collapse up until that time, and once during 2002. At its current level the Vix indicates that the S&P 500 will move up or down by 10.4% over the next 30 days. My personal feeling is that this is either the end of things as we know it or the worst its gonna get, staring into the precipice wise. Since I've been expecting Armageddon for since 2006 the fact that it hasn't happened yet is encouraging. Also despite the extreme stress in almost all markets, the Japanese yen which has typically surged during times of crisis has remained steady over the past 2 days. Finally, for the past 14 months it has been profitable to bet on volatility declining every time the Vix has broken 30 on an intra-day basis. I believe it is extremely unlikely that the Vix will break 40. That said, I have no idea what other policy initiatives the central banks of the world will pull out of their pockets. They can't just make bad loans good, and despite the massive injections of liquidity into the markets, there is no way that temporary liquidity can solve credit problems. Oh and by the way, the Federal Reserve has run out of money and has asked the Treasury to begin borrowing money on its behalf so that it can continue to function