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data suggests global weimarization

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    Data Suggests Global "Weimarization"
    Thursday October 26, 2006

    GBO= Global Blow Off and The Fed, as we reported yesterday, didn't budge in their rate quandary - at least for now. As a result, the US dollar is down some this morning - and as the dollar goes down, the effective price of gold goes up - nearly $5 for a while this morning.


    This is all indicative of the confusion caused by the most complex financial markets in history. Complexification, as we've called it, results in some very strange things. Last week, I explained how the bundling of nonperforming loans actually drove up the stock market (by securitization of bad debt into asset-backed securities [ABS's]). This week, we can consider the incredibly complex pressures on the dollar. And a phenomena that I'll just call Global Weimarization, named after the most explosive inflation in recorded history. A few to ponder:


    Global Hidden Hyperinflation is here. The dollar should be going down because of the continuously bloating federal spending - wars aren't free. By itself, this would argue for a declining dollar because we're just printing up more paper, but how much isn't clear since the Fed knew this was all coming and hid their M-3 broad monetary measure back in March of this year. Suckers and fools is what they must figure us for. But you know that inflation is running like a forest fire globally, right? Global inflation is immense - mind boggling. In the UK, for example, the rate of inflation is an annualized 14.1%! And Interfax reports today the money supply of Russia is up an amazing 28.2% (measured by the Russian equivalent of M-2) by 28.2% year to date!

    Other data points supportive of the "Global Weimarization" mere include Israel, where inflation has cooled off (!) to 12% a year, and China where inflation is percolating along at 16.8% year on year (YoY) on their equivalent of M-2.

    Of course, one way for the dollar to hold its own would be for the Fed to pay foreigners more money to hold our paper, but they couldn't do that at yesterday's meeting because of the pending elections. Thus, in December, don't be surprised at a Fed rate hike - which will lead to more pain in the housing industry - because the Fed needs others to buy our paper and a rate hike is an effective discount increase. As Mark Brandly writes for theLudwig von Mises Institute, the days of 12¢ hamburgers and $600 cars is just a dream when the printing presses are turned on globally.

    Oil is showing some of the effects of the slightly weaker dollar this morning. But, remember that on a utility value basis, oil is worth about the same now as always. It's needed for fuel, plastics, and the rest. But when the dollar drops in purchasing power, the price we pay for oil seems to go up because of the reduced wallop of the underlying dollars. It takes more "weak paper" to buy the same goods.

    And now - this interesting little revelation for you: There's a case to be made that if the dollar drops, at least initially, the stock market could be propelled upward. The reason? There was once a time when stocks were valued based on their ability to produce earnings and dividends (e.g. free cash) to owners. But lately, ownership of stocks has changed fundamentally. Stocks in some ways act like real estate insofar as you're not buying a dividend stream, you're buying a "property" and with that you're buying "market position" and "niche." Further, a stock - even a declining one - has securitization value - so you can roll more layers of debt into play.

    Just as domestic inflation in moderation can drive up the price of an asset like an apartment building, so too can inflation (masquerading as the declining value of the dollar) drive up the price of stocks because they are now more valued as assets than free cash flow generators. As long as the future looks secure, there are probably more curious distortions ahead - thanks to derivatives and the whole process of complexification.

    To paraphrase the old Rod Stewart song, "Every picture tells a story" we offer our Global Index (usually for Peoplenomics subscribers only) as evidence that we're now in something that looks suspiciously (to me) like a Global Blow Off:

    If all of this is too complex for you, consider this: In the Weimar experience, the price of everyday goods and services went up. In the present GBO, fueled by derivatives and debt-piled-on debt, the financial markets where layers of paper feed more layers of paper, we might see a hyperinflation scenario where the bulk of inflation is contained within financial market, debt instruments, and the like.

    Oh, by the way, if you or the folks managing your money get this wrong, your life savings could disappear. Stuff happens though, right? I think the von Mises folks call this the "Crackup boom."
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