Deflation v Inflation – Comprehending What Will Come
QUESTION: Martin,
While I clearly understand your reasoning for deflation in the US allied to a very strong dollar; does the opposite apply to those countries, like the UK and European economies where their currencies are likely going into freefall?
Keep up the brilliant work. Is the movie coming to the UK?
AB
ANSWER: Yes. Britain abandoned the Gold Standard first during the Great Depression and its economy end the deflation and was the first to recover. This was one of the very arguing point of George Warren to devalue the dollar to Roosevelt to reinflate the economy. Germany has imposed deflation on everyone really tearing the European economy apart because they do not understand why they even went into hyperinflation.
The rise in the dollar in the US as other other economies were defaulting pushed the USA into a deflationary depression. This then set in motion protectionism as they failed to understand the mechanism unfolding.
It is important to understand the mechanism. The collapse in currencies that will force the dollar up will then turn the US economy down hard and unemployment may indeed truly reach 25% since it is now 12% on a good day.
This was our old forecast for unemployment from 2010. Nothing has changed. Once you realize that this is not some PERSONAL OPINION of what I would like to see happen or what I “think” will happen, then there is hope that you will grasp the way to zig and zag if you at least comprehend your opponent.
The decline in other currencies is NECESSARY to relieve the economic pressure. The negative side today that did not exist during the Great Depression is the crisis in pensions. This is why I warn we are in the collapsing trend of socialism. All the unfunded promises will evaporate. Government will not print money to cover them, they will prefer war to eliminate obligations. Just look at Ukraine. The people rose up and now the new western installed government tells the people that reform will come AFTER they win the war. Government NEVER go into hyperinflation when they have an established economy. That unfolds in revolutionary governments as was the case in Germany, Russia, France, and even the USA. In with the new government that defaults on the obligations of the previous. There is absolutely no case of an established government with a police force and a bond market deliberately moving into hyperinflation. That would be intentional suicide. Just open you eyes to the policies of Germany and the IMF.
12298 is Closing Support for the Euro
The Weekly Bearish Reversal lies at 12298. A closing below that today should signal a new low next week. Keep in mind 12150 is the key Yearly Support. We need a closing below that to signal the Euro will move into meltdown sending capital into the dollar that could make the blast upward in the Dow to the first barrier of resistance.
Central Bank Watching – Refusing to go gentle into that good night
While the world has been watching Draghi and are surprised at the dissent, at the same time the street tends to try to create hard fast rules to follow the Fed rather than the markets and economy. The thinking process seems to try to fashion fixed rules to approach the Taylor Rule. This is kind-of like a dog chasing its own tail. The Taylor Rule is supposed to indicate setting Fed policy based on inflation and an estimate of future growth trend. Again, it would be nice to be able to create a deterministic rule. The problem is it really does not work that way.
The Central Bank of Canada attended a conference in Toronto. They took ten seats. The institutions knew who they were and would ask me question what central banks were doing and then look at their faces after my response. They were as cold as ice. I went up to my friend there and said gee I hope I was not too hard on them. They said it was the best speech they had heard. They then commented they wished they could tell these dumb people they do not look at half the nonsense the market thinks they do,
There is no common agreement on which variable to use in the Fed. This is very much flying-by-the-seat-of-their-pants. The Fed is watching with open mouths the Eurozone approaching melt-down, money leaving Emerging Markets (A) because of poor growth or (B) because of geopolitical risks, Japan’s desperate attempt at QE for twenty-five years going down in flames and the dollar rising as US policy makers insist on looking at purely domestic issues, Any you really think you can qualify the Fed’s actions based upon the mythical Taylor Rule alone?
The Euro bounced on the ECB press conference where the anticipated QE appears to have been delayed, Meanwhile, we are watching peripheral debt suffering as a result and a higher Euro will devastate the budgets even more. Indeed, a rise in the Euro will ensure there may be bankruptcy in the wind. We are seeing German Bunds holding in as Italian BTP’s trade wide. As a trader it just feels like all Central Banks are in search of a descent excuse rather than a remedy! At this point, it appears everyone is flying blind. Do not go gentle into that good night, the disconnect between fiscal and monetary policy is our doom and it will burn and rave at close of day; Rage, rage against the dying of the light.
The Euro bounced on the ECB press conference where the anticipated QE appears to have been delayed, Meanwhile, we are watching peripheral debt suffering as a result and a higher Euro will devastate the budgets even more. Indeed, a rise in the Euro will ensure there may be bankruptcy in the wind. We are seeing German Bunds holding in as Italian BTP’s trade wide. As a trader it just feels like all Central Banks are in search of a descent excuse rather than a remedy! At this point, it appears everyone is flying blind. Do not go gentle into that good night, the disconnect between fiscal and monetary policy is our doom and it will burn and rave at close of day; Rage, rage against the dying of the light.
Energy – Igniting the Old Texas-New York Arbitrage?
We will be publishing an institutional quality report on Energy. There are large shifts in the energy complex not only due to advanced drilling technologies, but also renewables. When we put out that forecast that oil would rise from $10 to $100 back in 1997, people were shocked. We even had a request to construct a model for the Department of Energy. Goldman Sachs’ Alan Cohen stopped that project despite the fact that that request was submitted to the court on October 3rd, 2000.
The significance of that forecast was that the rise in prices would shift the energy sector dramatically breathing life into alternative energy sources. In Amsterdam, the taxis were Tesla electric cars. There is a significant market shift with different production reservoirs
and demand trends of the key commodities. There is a dramatic impact of competing
technologies such as renewables.
and demand trends of the key commodities. There is a dramatic impact of competing
technologies such as renewables.
A number of emails have come in asking if energy is being manipulated lower to inflict pain on Russia. No – this is a trend that the US did not even anticipate. True, this trend will only intensify the political risk to supply and also fuel the Cycle of War. At the same time, it is boosting the Chinese economy, which is far more dependent upon imported energy than the USA at this time. The collapse in energy will impact the Middle East and Russia, benefit China, and ignite the old Texas – New York arbitrage where the boom time in NYC were the hard time in Texas and the boom times in Texas marked the decline in NYC. This may be extending to China.
Euro – More to it than Just Watching the Printing Machine
Why the bounce in the Euro? There is resistance appearing within the Governing Council that is far larger than previously believed. There is no majority within the 6 member Executive Board raising some hope that massive flooding of euros may subside. Lautenschläger, Mersch and Coeure are opposing Draghi’s plans to blow-out the money supply. Other council members including Weidmann are also opposed but in the end a “clear majority” supported Draghi’s course.
Former Goldman Sachs’ Draghi is really clueless. Europe cannot be saved with just flooding the economy with money. There has to be reform and a drastic lowering of taxes. Flooding the system with money means little if at the same time you are extracting a large portion of that new money with higher taxes. This is a net sum game and we cannot look at just the printing machine.
Confidence in Economy Turning Down Outside USA
The UK POLLING REPORT latest poll conducted yesterday in Britain for the sun and the times. Not so much a poll about voting intentions rather a poll about voters perception of the state of the economy. Findings:
Sun = 25% of people expected the economy to get better in the year ahead, down
from 39% in march. 32% expect it to get worse , up from 23%
from 39% in march. 32% expect it to get worse , up from 23%
Times = 40% of people expect the economy to get better the next year down
from 50%. 22% think it is getting worse up from 13%
from 50%. 22% think it is getting worse up from 13%
Confidence outside the USA is turning down already. This tends to make sense since non-US economies peaked in 2007 and are in a 13 year decline into 2020.
The Euro – Clinging to Life?
The Euro bounce into mid December has resistance at 123-124 followed by 128-129. The critical number at year end will be 12150. A year-end closing beneath this level will be long-term bearish. However, support will lie at the 118-120 level next year. A closing above 121.50 will suggest that the euro is not ready to collapse at this time and we may need to wait until 2016. The key resistance will stand at the 135-137 level for 2015. The critical support lies at 116. Once this area is broken, then the Euro will collapse to retest the par level against the dollar. We can see that we have a convergence of support this year at the 122.70 area from a technical perspective. This lends more significance to the 121.50 level for the year-end closing.
