Skip to comments.We Asked David Kotok What His Biggest Economic Fear Was, And What Told Us Was Absolutely Terrifying
Posted on 09/17/2012 9:16:29 AM PDT by blam
We Asked David Kotok What His Biggest Economic Fear Was, And What Told Us Was Absolutely Terrifying
Sep. 17, 2012, 10:14 AM
The market is characterized by bulls who are in deep anguish: On the one hand, they think the market is super-stretched. On the other hand, they see the Fed and the ECB going to new heights of accommodation, and don't want to fight that trend.
So we're trying to discern something: What's the #1 threat to this market right now?
We asked David Kotok of Cumberland Advisors what worries him most.
In a phone call, he painted a very worrying scenario that combines geopolitical unrest, surging oil prices, overly-loose monetary policy, and a tax disaster.
Here's what he said:
"The scenario that worries me is a geopolitical shock that spikes oil, and does so now, such as to remind people of what happened in 1973/1974, with the Yom Kipur war, when oil went from $3 to $12. I admit to being old enough to remember it. It did so at the same time [former Fed Chair] Arthur Burns was in a very expansive Fed policy mode. In 1973-1974, what the Fed did through monetary policy was to fuel the inflation that occurred in the late 70s and became virulent."
"On the monetary policy side [today], the policy is geared to blunt the force of deflation. The position of the Fed is: We'll deal with inflation later. And that's fine... when there is no shock."
"AIn a shock, when policy is very stretched, it means the system has no resilience."
"It's like jumping on a trampoline of cement."
"My worry is, the Northern piece of Nigeria is embroiled in civil war with Islamic extremists."
"Nigeria is the most important oil producer in the world."
(Excerpt) Read more at businessinsider.com ...
I do, too. Gas lines as far as you could see down the road, and people fighting over places in line. Today, it would be like a zombie apocalypse..............
***oil went from $3 to $12***
I remember those days! Gs went from 30 cents a gallon to 45 cents and America went berserk!
***In 1973-1974, what the Fed did through monetary policy was to fuel the inflation that occurred in the late 70s and became virulent.” ****
I remember those days! WIN! (WHIP INFLATION NOW) buttons were being made, and the price of them went up, wage and price controls in place.
Then under Carter the interest rate hit 21%! The Unions a few years later blamed Reagan.
The only advantage of high interest rates is I got lots of high pay raises, even though I could not buy more with the inflated money, but I had bought a house a few years before at 7.9% interest. The high inflation rate helped me pay it back with inflated (worth less) dollars.
Then the crash when the Savings and Loans and banks went broke.
A few years back as I watched the price of homes skyrocket I told my wife that we were heading for a fall just like the 1980s. It happened the year I retired and I kissed my 401k good by.
So have we got Ben Arthur Burnsnanke running things now?
One of the costs that would drive the price of oil up would be the insurance costs for the maritime industry that transports the oil.
We have agreements with some allies to supply them with ‘X’ amount of oil/gas during certain circumstances regardless of our prices.
I’d love to have that Mercedes SL convertable you can see in the picture behind the red beetle.
Oh God!! Of all the carpola I have lived through those gas lines were the absolute worst. I was living in Miami at the time and my only saving grace was that I drove an MG and it went forever on a tank of gas. We used to cruise around at really odd hours looking for a gas station with a semi short line.
It would also ruin the economies of the EU and South Asia and Japan. The whole world would go into an economic disaster that would dwarf the Great Depression. Perhaps THAT is the target...............
***Oh God!! Of all the carpola I have lived through those gas lines were the absolute worst.****
It is interesting that in the middle of the US from New Mexico to Arkansas gas was plentiful at that time. Just higher in price. Then there was that d***ed 55 mile speed limit on all highways.
We used to think it was funny to watch the Californians get into fist fights over who was next in line at a gas station while we had plenty.
The only time gas got tight here was on 9-11. It went up almost 200 % on that day. It later dropped.
I posted this elsewhere but thought this might be a place for one of the many brilliant FReepers to weigh in.
So what Ive been trying to figure out in my pea brain is this:
What good does it do the Federal Reserve, a private corporation, to print money and thus make the money they have and trade in worth less?
What good does it do them to have 5 Trillion dollars worth of debt that is becoming worth less and more prone to default every day?
I could print money, you could print money but it isnt worth anything. You can print more stock but eventually it becomes worthless and your share holders lose confidence. In the long run making your stock worth less makes it worthless.
So what is in this for the Fed? What am I missing?
Inflated money makes debt disappear. There’s a LOT of debt.
I remember the oil crisis all too well. We could only buy gas on odd or even days, depending on the license plate. We had to drive from Houston to Dallas one weekend and had to carry 10 extra gallons of gas in the truck to assure we wouldn’t get stranded in between. That was a dangerous practice, but we had no alternative choice.
But they hold at least 5 Trillion in U.S. debt. It does not make sense for them to sell debt at one higher rate for dollars and take a return in dollars that are worth less.
Inflation is your friend when you are paying debt back not when you are loaning money.
...and wealth, and investments.
Those who have behaved responsibly get screwed.
A few years ago gas jumped to an astounding $4/gal around Atlanta. The lines were very long, and many stations ran out - expecting a one-week refill delay. I didn’t go to work one day for fear I couldn’t make the 40 mile drive back for want of gas.
$4 gas? can you believe it? that’s nuts...oh, wait...
That picture looks like the lineup outside a Mecum or barrett jackson auction today. :-)
I would go for the Mustang at the end of that line. :-)
My (flawed) understanding:
The Fed is the only business allowed to write a random number in their balance sheet. The guy in charge writes "$1,000,000,000,000" in the Assets column, and "-$1,000,000,000,000" in the Liabilities column. It all adds up to $0, you see. They then loan out that vast new asset, and charge interest on that loan. Oh, sure, the interest rate is something absolutely pathetic like 1% ... but one percent of one trillion dollars is a cool ten billion dollars. The trillion-dollar loan eventually gets repaid*, the trillion-dollar liability gets erased, the "$1,000,000,000,000" in the Assets column and "-$1,000,000,000,000" in the Liabilities column vanish into $0 sum, and the business enjoys its nifty new $10,000,000,000 profit. Not bad a few seconds of writing and a little interim bookkeeping.
(* - meh, at that kind of interest income for that size a loan, nobody cares if it's never paid back so long as the interest payments keep rolling in.)
I thought that was it, huge interest and it cost them nothing and no risk to get it.
Huge amounts of funny money all for nothing. Big rents on worthless assets for very little overhead.
Meanwhile, the money loaned keeps the people that allow it to stay in power and stay on the big tit. What a wonderful arrangement.
This is as good an explanation as any.
One thing not often considered:
There’s only a couple trillion dollars of physical currency. Those (be they paper or coin) at least are “bearer instruments”: if you have a dollar bill, you have $1 and don’t have to account for it per se.
The rest of our “currency” IS DEBT. The $1 in your savings account isn’t there and isn’t, per se, yours - it’s debt, all of which traces back to the Federal Reserve. You can’t have a “digital/virtual dollar” on its own in bearer terms like a physical paper/coin dollar, it must exist in terms of being owed to someone else, who owes someone else ... who owes the Federal Reserve; this is necessary to account for its existence, which can only exist as a chain of debts.
The Fed creates a QE dollar by writing $1 in Assets and -$1 in Liabilities.
The Fed gives the USA $1 by buying a Treasury bond.
The USA gives a construction company $1 by buying asphalt.
The construction company gives an employee $1 by buying work.
The worker gives Coke $1 by buying a soda.
Coke gives a manager $1 for services.
The manager gives the USA $1 for taxes.
The USA gives the Fed $1 for the bond loan.
The Fed returns the $1 to the Assets column.
The $1 in Assets and -$1 in Liabilities add up to $0.
The $1 vanishes.
The whole time, the “dollar” is just a chain of IOUs either built on or passed around.
Economic activity from nothing, using only “debt dollars”.
Render unto Caesar. All “debt dollars” are Caesar’s; it all exists because the USA borrowed from the Federal Reserve, and in turned loaned it to others who (one way or another) owe back to the USA and in turn to the Federal Reserve.
The real problem, however, comes when the total “debt dollars” owed exceeds (by a lot) the “debt dollars” accountable.
(thinking out loud here, trying to understand it myself...)
The Fed creates a QE dollar by writing $1 in Assets and -$1 in Liabilities.
The Fed gives the USA $1 by buying a Treasury bond.
The USA gives Solyndra $1 to develop solar power.
Solyndra folds. No taxes paid.
The USA still owes the Federal Reserve $1.
With GDP growth stalled and federal tax revenue never exceeding an already maxed-out 20% of GDP, that $1 is still owed.
The Fed injects (via QEn) another $1 to ‘stimulate the economy’.
The USA pays off the prior $1 owed.
The USA still owes the Fed $1, just with a new due date.
Velocity of money becomes a non-trivial factor: a dollar injected into the economy must now move thru the economy, attached to real value exchanged, in time to return as tax revenue and pay off bond payments come due.
But if there is insufficient value & velocity within the economy to move the “debt dollars” from new loan to prior payment fast enough, more “debt dollars” must be created (i.e.: borrowed) & circulated to at least make the interest payments.
Inflation kicks in as the relative value of dollars decrease so that more “debt dollars” can get thru the system to make bond interest payments.
As the imbalance tilts farther & faster, inflation becomes hyperinflation: the imbalance feeds on itself to the point that you have to pay for a meal before you eat it because it will cost more by dessert because the value of a dollar decreases so fast.
Physical cash becomes pointless; only computers can keep up (unless you want large-orders-of-magnitude numbers on currency with short-term expiration dates; where have we seen that before?).
The Federal Reserve can’t issue “debt dollars” fast enough for the government to make interest payments in return (”here’s a billion dollar loan...oh, BTW, you owe us a billion dollars interest from that prior loan, due, uh, right now”).
All for want of $1.
Except we’re talking a lot more than $1.
Some 86% of our money is “debt dollars”. I’d say “hang on to your real dollars” but you won’t be able to hold onto it for long.
Render unto Caesar. Once you don’t have his money, he can’t demand it of you.
50lb bags of bread flour are $16 at Costco...hint...
Apparently $4 gas is only a problem in the media when a Republican is in office.
I guess the media will be praising Obama for solving the housing crisis once inflation kicks in and no one's underwater on their mortgage anymore.
You'd think some enterprising gas station would do home delivery of gas under those circumstances. Seems silly to have to waste gas driving around and looking for a station and then waiting some more in line to get gas.
That's been Paul Krugman's open advice to Obama. Inflate the debt away. Sounds to me like that kind of policy should be considered an act of war by our debtors.
It’s a Triumph TR6.
Unless they tacked on a hefty convenience fee, why would station owners waste their own gas driving around delivering gas when they had cars lined up around the block right at the station and they were already selling all that they had?
There are at least 10 cars in that picture...I’d love to own now.
They would definitely charge a delivery fee. They’d also want to cart around their cigarettes and candy bars and sell those. It’s possible they could reach more customers by selling a smaller amount of gas per customer door-to-door, instead of letting everyone fill up to the max at the station. Then with a broader customer base they have a bigger base to sell the snacks and goodies to. Just take orders over the phone just like a pizza place.
You just saved me a post!! (I was only gonna ask Santa for 3!!)
so Costco tomorrow it is....
The wheels look Mercedes, and there is chrome trim along the top where the side window meets it.
Are you sure it is a Triumph?
It looks like a Merc to me.
Look at the tail lights and rear bumper. The wheels may not be stock but it’s a TR6. That era marked the beginning of the whole Superfly, ersatz Rolls Royce grille thing, maybe some poor fool tarted up their Triumph and though it looked better, lol.
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