Thinking green tips, not green shoots. Going long cash, food, lead, lead delivery systems.

The media gets free FOIA searches and production. So why don't you send a request to the FDIC for all emails discussing the carry trade? Or maybe you have?

Markets moving without consumers and at the expense of a national currency.

Gen, that sounds very familiar but I can't quite place it. :)

Since to one degree or another we seem to be following in the footsteps of Japan would it be useful to outline how their consumer has fared over the last twenty years or so in order to get an idea how our consumers - that is we, us, you and I - might fare?

How has their standard of living fared, home values, unemployment rates?

I know their equity markets have ranged down-up-down all over the pace, but are well off historic highs - and hoem values cratered.

Apologies if this has been done and is searchable.

I suspect that while there are similarities that there are enough differences that our fate might be a tad more negative and dramatic - certainly from all the excellent likely outcomes that are posted here.

Thanks,

Pete

Their consumers started with tremendous personal savings.

Those have been dramatically cut down. Our fate will be MUCH more negative and dramatic, and it will come quicker too.

but... but... but...

Bloomberg says: "Stocks in U.S. Extend Second Weekly Gain on Disney, Abercrombie Earnings"

What? You mean it isn't all cartoons and fashionable clothes?

Gen, you're such a buzzkill. ;-)

i dont like the 'casino' reference. that implies that the market might go higher and might go lower, depending on how the dice roll, AND that the 'elite' are rolling dice
they aren't rolling dice, they are running mathematical formulas to produce outcomes
there's no chance their side will get caught with their pants down

Are we still increasing personal savings? I remember reading that we had a marked increase recently.

I expect that most can't save because every dollar available is getting spent just to pay the bills and take care of the family.

So the key question to me is:

What takes this trade down? What will stop this correlation? -- Gen, I know you said that raising short rates would do it. How about things outside the control of the Fed? I am thinking the Chinese drop the currency peg and then the USD goes straight to the toilet. CNBC heads talking about it now.

Next question is how long does this pattern hold? I am thinking the American people won't figure it out til it is over. So outside factors will probably end it.

Quote:

they aren't rolling dice, they are running mathematical formulas to produce outcomes
there's no chance their side will get caught with their pants down

Really? How'd that work out for Lehman and Bear?

This reminds me of the scene from "Hunt for Red October" when the capatain sent out a torpedo without the safty on and it came back and blew them up.

Seconds before the impact another officer said to the captain "You fool, you've just killed us all!"

Followed by:



Those would be my same words to Berstanke, Congress and the President.

The correlation can break for any one of a large number of reasons, and predicting what will start it is a fool's game.

However, that the feedback loop on the way down will be just as destructive as it was helpful on the way up is not in question.

This reminds me of watching a terminally ill person. Everyone knows the person doesn't have much time left, and yet the person keeps hanging on, thru good days and bad days. Then one day, the person dies. The death was not unexpected, yet it is still very sad when it comes.

Karl, has Ben really stopped buying Treasuries? I don't know how we can possibly cover these deficits without his QE.

October deficit $176 billion
For 13th month in a row, outlays trump receipts, adding to the federal government's red ink. Monthly interest: $22.8 billion.

NEW YORK (CNNMoney.com) -- October was another costly month for Uncle Sam. The Treasury Department reported on Thursday that federal coffers racked up a worse-than-expected deficit of $176.4 billion for the month.

It was the 13th straight month of a reported monthly deficit. Treasury said it was the largest October deficit on record.

October is the first month of the government's fiscal year, and at this reading, the Treasury is estimating that the annual deficit will hit $1.5 trillion. That would top the $1.42 trillion registered for 2009, which was the highest annual deficit since 1945.

Interest paid on the debt in October was $22.8 billion - or 7% of federal outlays for the month.

For the month, the Treasury took in $135.3 billion from various sources and spent $311.7 billion.

The administration has promised to deliver a deficit-reduction plan along with the president's proposed 2011 budget, which will be released early next year.

The call to reduce the deficit as soon as the economy regains its footing has grown louder in recent weeks as the country's accumulated debt will once again pierce the congressionally imposed debt ceiling sometime by the end of the year. As a result, lawmakers will have to vote to increase it from its current level of $12.1 trillion.

In anticipation of that vote, a group of lawmakers have been pushing for a bipartisan commission to be created to make a lot of the hard choices lawmakers have thus far avoided: how to rein in spending on Medicare and Social Security; how high to raise taxes on everyone, not just those making $250,000 or more; and which government funded programs to cut in part or altogether.

The person charged with drafting President Obama's deficit-reduction plan is White House Budget Director Peter Orszag.

Orszag told CNN on Thursday that the current deficit, as bad as it is, "is actually, ironically, helping the economy. The tax relief and additional spending helps to bolster demand when the economy is very weak."

But, he noted, by 2011, 2012 or 2013, too large a deficit will harm the economy by crowding out private investment. "We need to get ahead of that problem," Orszag said.

How can I explain this to the average J6P like my parents and family?

A weaker dollar driving the stock market up will just not make sense to them....

There is no doubt the dollar and the stock market are inversely related, very tightly so. But I dont think it is because of the carry trade.

The carry trade means dollars leaving the country to be invested elsewhere, not good for local markets. The declining dollar means foreign investment pulled from the US as the exchange rate wipes out investment returns. And the dollars flooding other markets creates local booms which creates much better foreign equity markets to invest in for everyone, US or foreign.

How does all this not kill the US equity markets?

The Yen carry trade killed the Japanese stock market. Short term, the low interest rates and declining dollar means no place to put domestic investment income but the stock market but long term, does not the carry trade kill the US equities market?

Seriously, tell me why I am wrong.

You mean they think that the stock market should go up while they get poorer and lose their jobs?

Quote:

Are we still increasing personal savings? I remember reading that we had a marked increase recently.

"Savings" includes consumers attempting to pay down debt. The reality is there is no personal savings.

Credit induced bubbles can go boom. The bubble hits its pin, no one will lend any more to finance said boom, and those holding the assets can be bankrupted, and those who lent the money nurse large losses.

But is this bubble different? This one isnt financed by bank created credit, but freshly printed dollars. There isnt a credit bubble driving the dollar downwards, but monetary printing.

That means when this stops, we wont necessarily have a reversing of the carry trade, which sends the dollar to the moon, but permanently higher price levels vs the dollar.

The big risk with inflations such as this, are that you lose control of events, people refuse to hold dollars any more, and inflation zooms to the moon before you can put the policies in place to stop it.

As I have said before, the market is trying, whether it realises it or not, to correct the US trade imbalances with the rest of the world. That means either a weaker dollar, or much lower wages for US workers, or a bit of both. The Fed dont like the route which means lower wages, because we would just have too many contracts denominated in the dollar that would blow up. So instead it inflates.

I dont really see what other choice you have. Do you inflate by printing money, or do you let the drain of the fixed exchange rate with the Yuan suck the money out of the US?

Or do you risk a trade war, and demand that China floats its currency? Even if it agreed and complied, that is not without its risks.

Santelli made a good point that whatever goes to make up the confidence number was mostly taken before the jobs figures came out...

The question was asked how the Japanese consumer fared.

I keep hearing predictions our government can collapse.

How did the Japanese GOVERNMENT come out of their crisis?

If they came out fine with a safe retirement and retained power then maybe following the Japanese model makes sense to our government as far as personal survivability.

On the other hand Japanese tend to take their family and wade into the sea in shame after they have been scammed and lost everything. I'm not sure Americans will follow that particular Japanese model.

Ok, but how do you prepare for when it falls apart? Anything different from the 10 things You must do now? Or put it this way would you be buying Gold as this carry trade continues? My impression is that when it unwinds, we see cash as king again for a short time. The problem I see is that the US Gov cannot afford to anything that pushes rates up. They want the USD to fall to mitigate the Debt. Right now we are getting a free ride as long as China pegs to the USD. If they unpeg, then the USD falls immediately, right?

Axel Merk has said, every time there is a stock market drop and move into cash in the USA, when the market recovers some of that cash leaves the USD and the market does not recover that loss. The net result is the USD going lower over time. So what realistic scenario is there anymore that would drive the USD higher for anything beyond the short term? I know a big War could do this.

I think the USD goes down until we find away to become a productive country again. That means we sell more than we buy or at least start moving in that direction in a big way. Right now the reasons for holding the USD keep falling away. What things do people overseas need to buy from us anymore?

So my thought is that the general trend of USD lower continues with big variation for years to go.

"The correlation can break for any one of a large number of reasons, and predicting what will start it is a fool's game.

However, that the feedback loop on the way down will be just as destructive as it was helpful on the way up is not in question."

Conf numbers may fluctuate up (and down ?) within the next few weeks. In the longer run what counts is what KD wrote:

Quote:

Their consumers started with tremendous personal savings.

Those have been dramatically cut down. Our fate will be MUCH more negative and dramatic, and it will come quicker too.

I just wonder how long it will take . My guess is only after BHO elected to 2nd term.

Isn't there a difference between asset inflation (bubbles) and price inflation? We have no price inflation to speak of but assets and commodities are going through the roof.

The Fed has to inflate asset prices to fund its operations. It is their "you're our only hope Obewan." If we get to the point where asset prices deflate even with the dollar carry trade (ie, the value of a dollar and the market go in the same direction - down) they/we are screwed.

Reminds me a little of consumers and credit cards in the late 1970s and 1980s. In the face of price inflation the credit card was the consumer's friend. Charge it now and pay back with cheaper dollars tomorrow. Seems like that is what is being done with assets now. Inflate prices (even if not justified by fundamentals) so the Feds collateral and that of its primary dealers looks good and the leverage looks better.

More and more people in the MSM are picking up on this. Gen quoted from the WSJ and I noticed that Liz Ann Sonders mentioned this in her monthly snapshot. However, she tried to draw a distinction between asset inflation (good) and price inflation. (bad) Asset inflation (commodities, emerging market equities and even domestic equities) can only lead to a bubble if it is not realistic and based on sound fundamentals. According to seekingalpha.com the SnP500 is still trading at 120+ times trailing 12 months earnings. Forward earnings look better, but what if they are wrong?

Like Gen, I wonder what will happen when the music stops. What happens when all these dollar shorts have to be unwound? What happens when the Fed starts its reverse repo operations and leverage goes back to 100:1? What happens if we get a spike in the dollar or it just levels off?

We are in uncharted waters but the Fed printed themselves into a corner. Consumers won't spend, but big institutional players don't mind borrowing at negative interest rates and buy gold, oil and stocks. What have they got to lose? By keeping rates low they are perpetuating this and now find themselves in a position where they cannot stop. If they do stop the risks are a very deep recession, bank failures, higher unemployment and things like "financial collapse." So they are in this market for the foreseeable future with no way to extricate themselves except the faint hope that "somehow" the markets will come back into balance and the economy can function without Fed life-support.

Problem is, the longer they do this the less likely it is this will happen without dire consequences which no one has the political will to face. So they all run around Washington talking about "reform" and "too big to fail" when all that is a sideshow. The real issue is how do we return to a truly free market.

My guess is that we cannot and will not because our leaders lack the fortitude and wisdom and vision to take the bitter pill now. The end result will be some sort of hybrid economic system and a government less and less connected to reality.

Ultimately the result will be the loss of individual freedom, more government secrecy and control of markets by a small handful of oligarchs which will close out opportunities for small businesses.

There is no way to ease out of the "dollar carry trade." There is no way for the Fed to slowly withdraw its support of the markets. Any action in those directions will have immediate and dire consequences. Those consequences will have a long term positive effect as it will allow the markets to truly correct, but as I said, no one has the vision or will to take that step. (Nor has anyone articulated a plan that makes good sense. So we will continue to treat symptoms but suffer long term from the disease.)