Great Depression II (2000-201?)

Discussion in 'Economics' started by andrasnm, Mar 26, 2004.

  1. People who are too self-absorbed to notice - this is it! Your grand-father has lived through it so you shall.

    I have an old friend who has lived through the depression I as well as the WWII in Europe. He 79 and a self-employed plumer and metal sculptor. He is poor (get's social security) and still has to work for a living. He told me this; he - as poor as he is, he still HAS EVRYTHING. A VCR, TV, 2 phones, car etc etc. This is the same for the general US. When the multi's start squeezing us we just don't buy any more goods.

    The official BS of percentage of application for unemployment benefits is a statistical lie. The jobs are not created and there are exported to the lowest bidder meanwhile bleeding off the domestic tax base plus the US Treasury.
    The US is saturated and consumer confidence is bad (no matter the sad/pathetic economist trying to say otherwise)

    It is a vicious circle and if you are employed or a small business you have a true reason to be paranoid - you are next!
    The next big one hitting the US may come next year surely will put us over the brink and by than the dollar will likely be worth 30-40% less.

    The giant snake started to eat it's own tail... It is only matter of time when it chokes.

    When the dust settles we shall have a new world order albeit a little different as the neo-con politico's predict..
    Futures traders however can profit from knowing what is coming.

    Short the dollar, gold is a buy, so is crude oil, eventually bonds will come around and rates will go up, and up....most hard assets are a buy.
    When things will unfold as I suspect the stock market will sell off. As we surely have negative growth after the generous tax giveaway wares off we shall have some political ramifications i.e. change in US social policies.
    As inflation and hard asset inflation pressures will elevate the treasury bond yields so will corporate bankrupcies elevate the corporate bond yields.
    This undoubtedly means the end of the real estate bubble in California. Rates are everything to construction and real estate market.

    My futures trend predictor so far has worked well. Knowing the macro economics and picking on trends early can make you wealthy enough not to care about my predictions.
  2. ptunic


    I agree for the most part, at least as far as being a major risk-- I can't predict it will happen but it is on my mind..

    I disagree slightly on the jobs issue, I don't think it is quite that bad.

    However I see the record debt (not so much government but private sector) as the largest risk. If the debt bubble pops that is going to be far more significant than the NASDAQ crash was, at least 3x more economic damage. And I agree with you, assets like gold will probably do well, shorting stocks will do well, real estate prices might be wild on the upside and/or downside, etc.

    The Fed will probably produce moderate inflation. They learned their Volkner lesson so probably won't see 10% + but maybe we will see it creep up from 1% to 6% initially. The reason they will inflate a little is that reduces the pain of the debt bubble collapse (if it happens).

    The Greenspan position is that due to our now massive depth of modern derivative markets, the risk is pretty much spread out over enough investors that it isn't a problem now, other than GSOs. I think that does partially help but still, that can only compensate for so much.

    What would be the final trigger for something like this? I think it would have to be 2 major things at once, such as:
    - moderate increases in inflation due to oil costs and health care costs skyrocketing for example (even more than now)
    - combined with China and/or Japan sharply reducing their purchases of US T-Bonds, such as if China floats their currency and doesn't want to intervene as much (definately a stretch though since they countries have been net buyers for years/decades?).

    The chain of events here would be:
    - inflation increases from 1% to 4% due to oil + health care / less foreign demand for US assets / whatever
    - US Bond yields increase significiantly since they track inflation
    - mortgage refinancing and new purchases come to a standstill-- the housing sector demand demand slows sharply
    - this in turn pushes lots of people in ARMs into bankrupcy as they can't make the higher monthly payements
    - the higher bankrupcy risk increases the mortgage-backed security spread, increase mortage rates further

    Now the interesting (but truly horrible) part begins:
    - We enter into debt trap dynamic mode-- we see a cycle of higher interest rates, inflation, causing more bankrupcy, causing more inflation as the Fed tries to reduce the burden of consumer debt, which in turn increase interest rates.. etc. etc. It is a self-feedback cycle that is hard to stop.

    The pain only stops when the Fed increases interest rates a *ton* by decreasing money supply sharply. This bankrupts tons of more people leading to a massive recession or minor depression depending on if there are other policy errors, but at least gets inflation under control which is neccessary to have any chance of economic growth in the future.

    Hopefully this scenario won't unfold :)

  3. Now where is Trend Fader with all of this "Doom & Gloom"???
    He'd love this thread!

  4. Clearly ET is in need of new forum: DOOMSAYERS. (alternate title: Harrytrader theory)

    How many threads there have been here with a doom and gloom scenario I can't count.

    The themes are all the same. There is a great financial house of cards, the Fed is the man behind the curtain speaking through the Wizard, currency will be worth much less, hard assets are the way to go.... etc.
  5. maxpi


    It would not hurt to be prepared for it to some extent if one can afford to do so.

  6. rgelite


    I'm not a conspiracy theorist (and by stating that, I'm not alleging that anyone on this thread is, either). So I'm not predicting here and I'm not being critical of any points of view I've read so far.

    I do find it interesting that "bankruptcy reform" is wending its way through Congress; it almost passed this session. From what I understand, it makes Chapter 7 tougher to declare if there is any possibility of repayment in the court's eyes over a 5 year period (rather than the existing law of allowing the declarer to decide where the "Uncle Point" of crushing debt in his or her life actually is). Consider that 5 years is a long time to someone who is in his or her 50's or 60's and is effectively wiped out, and who won't be able to contribute materially to a retirement account until after another 5 years has passed.

    And, if you slum on CNBC for any length of time (and even in local TV and radio markets for at least a year or two now), it's pretty astounding how many lending institutions are encouraging consumers to "trade their credit card debt for a second mortgage at low, low rates!!" (Their exclamation points, not mine.)

    As I said, I don't know what the future will bring. I just find it interesting the various ways the banks are now trying to protect themselves--in some attempts through the sheer stupidity of consumers (trading unsecured debt for one's home, the latter in many states wholly exempt from unsecured claims); and in another way by lobbying to change fundamental laws that have been in existence for 200+ years, particularly when current credit card (unsecured) defaults are less than 5% by last week's figures.

    I ask myself, who would want to lobby so hard to solve an issue that only affects less than 5% of their business and that has been at that level or lower for many decades? And who would want to make so attractive putting one's primary home at risk just to settle credit card debt? And I keep coming up with at least one answer (of several): Those who see further out than I do who have judged that the 5% is about to grow to previously unseen proportions very soon.
  7. ptunic


    Well a couple of caveats here :)

    First of all let me say I don't trade this way number one, just technical stuff so if I think the world is crashing and my indicators say go long US growth stocks I have to go against my instict unfortunetly :)

    Anyhow not all doomsayers are wrong all the time, nor all all doomsayers predicting doom all the time. I think there is some value in some doomsayers some of the time. I think there is some value in bulls some of the time. It depends on their reasons.

    In the case of a debt bubble, it has always ended in disaster in every case I have researched in world market history (I'm sure I missed some that didn't crash, but that's just based on the markets I've read). The reasons make since to me. I do hedge by saying due to widespread derivative markets this time *might* be different. If I had to bet I would say the derivative markets do help and will cushion the blows, but only to a degree. Again I'm not predicting doom and gloom, simply making a point about a major risk. There are plenty of other countries, such as New Zealand, where this particular risk is not present at this time so I'm not bearish across the board by any means. And I'm not bearish entirely on the US either, again it is just a risk that isn't usually present. Whether it is realized or not I for one cannot predict :)

    But I think there is value to being bearish some of the time for some people. One day after the NASDAQ hit 5000, I moved my 401k from 100% growth stocks to 100% cash, and kept it there for 2 years or so. I knew we were in a bubble and knew it would crash as every bubble ever has, and just got lucky on the timing (my timing exit was when I pre-ordered Irrational Exuberance and was thinking this it it-- the evidence is simply too much-- all the fundamental hedge fund analysts are reading this book too right this second and the market is toast! I have know way of knowing of whether the book really was the catalyst or not and I probably simply got lucky by using that as an exit signal).

    Some of my other predictions haven't come true-- I thought the housing market would crash within 2 years of the NASDAQ crash yet it is still powering ahead. Going thing I didn't short the housing sector :) I also thought interst rates would rise sharply by now and they haven't.

    What are things that could push the economy -- or stocks higher the next few years?

    - capture OBL
    - massive tech sector rebound
    - new technology-- say biotech-- becomes widespread
    - dividend + cap gains tax cut + demand lead recovery cause massive economic + financial boom


  8. uh ohhhhh...i guess now you are going to say that the IRS went after willie nelson because of farm aid!!!! i.e. he was saving too many family farms from foreclosure....sort of cut into their (the banks)business.
  9. rgelite


    Nope, bad guess on your part. I wasn't planning on saying that.

    What I did say was that it was one of several alternatives. It could be that in this era of productivity, the "thing" in banking is merely to squeeze the last few dollars out of that 5%. I don't know. I don't presume to see the future, nor read other people's minds, as others seem prone to try on ET. In fact, I stated explicitly at the outset that I wasn't a conspiracy theorist.

    I just found it interesting the banks' attempts to both shift debt from unsecured to secured (duh) and their vigorous attempt to make walking away from unsecured debt that much harder. It actually makes perfectly good business sense from their pov.

    I find interesting the vigor that they're pursuing it, as well as the number of fronts they're waging their campaign these days.
  10. thanks for introducing some insight into this thread. don't know the answer, but the questions deserve attention.
    #10     Mar 26, 2004