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XMFSinchiruna (27.72)

Act II, Take II: The Worst is Yet to Come

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74

September 02, 2009 – Comments (20)

Please begin by following this link to an article from TimesOnline, featuring fascinating quotes from the once-ridiculed, and later vindicated economist Ann Pettifor. I urge all Fools to take time out to consider her words, and approach them with the open-minded neutrality that her perspective deserves after so clearly predicting the global credit crisis years in advance of its full manifestation.

In her comments, she refers specifically to England's predicament, but every word of it is 100% applicable to our own situation on this side of the pond. 

Ms. Pettifor's predictive pedigree is peerless: her 2006 book The Coming First World Debt Crisis was received with ridicule at the time of its publishing, but no one's laughing now. Ms. Pettifor is trying to deliver a cautionary message once again, sharing her conviction that we've yet to see the worst of this crisis, but sadly she finds that despite having been 100% correct in her prior warnings her words are again falling on the deaf ears of eager market participants.

Logic demands that she be given a wide audience and that her words are considered very carefully. After all, we know what Einstein called it when people repeated the same approach while expecting different results. Investors ignored the likes of Ms. Pettifor and Peter Schiff in 2008 at their own expense, and yet now dismiss their warnings of a second phase of the crisis just as readily. I call it folly ... Einstein would have called it insanity.

In this respect I share her sentiments precisely: "I hate this role of being a gloomer and doomer, as I’m an optimist by nature. But I am very pessimistic now."

"She likens Alistair Darling, the Chancellor of the Exchequer, to a high-wire artist. “He thinks that if he can just keep his eyes closed he will get to the other side. Yet underneath him is this vast debt that has not been cleared off the banks’ balance sheets. Many of the banks are still insolvent and this has not been addressed.”"

"She is baffled that the Government has used billions of pounds of public money to rescue the banks without insisting on any change in behaviour."

These comments describe precisely what I've been trying to convey here, that all policy responses here on our side of the pond have likewise been nothing more than a band-aid on a wound that actually requires surgery. To continue the medical analogies, it's as if we've placed a tournaquet around the thigh of our economy's severed leg, and completely overlooked the fact that tournaquet's are temporary fixes designed to buy us some time. Meanwhile, the wound has gone gangrenous, but no one has bothered to look becase they're busy buying stocks. :) Well, some of us, even though our stomachs turn at the sight of the wound, are willing to look because the patient's health is priority one.

"She was baffled by a recent letter to the Queen — from other leading UK economists — after she reputedly asked why nobody had seen the crisis coming. With a voice bordering on incredulity, she reads out a passage where the letter-writers say “inflation remained low and created no warning sign of an economy that was overheating”." [Blasting the notion that inflation remained low, she then points to the explosion in asset values that far outweighed any moderation in the prices used to calculate official inflation figures.]

Peter Schiff, Jim Rogers, Niall Fergusson, Ann Pettifor ... these are the voices that I believe investors need to hear. Turn off the tv and look deep into the events of last year and consider for yourselves whether anything more than a hail-mary reflationary maelstrom has been heaped upon the fire that started it all. For those who see Krugman's nonsense or Kudlow's cheerleading as anything other than the useless distractions that I believe they are, I will remain concerned for your financial well-being, as you may very well remain concerned for mine. :)

I recognize the width of the philosophical rift that has grown between bulls and bears as this rally has worn on, and that each camp seems to view the other as suffering from some kind of tragic disconnect from reality. My hope is that we can bridge that gap with open-minded discussion and systematic weighing of the available evidence rather than through ridicule or stereotyping of our fellow CAPS members. We are all talented and capable investors ... we just happen to disagree on the gameboard we're playing on. Let's respect each others' perspectives and listen thoughtfully to what everyone has to say, and maybe we can come to some mutual understanding even if agreement is not in the cards. I'm okay with a philosophical rift; I just don't want to see a physical rift driven like a wedge down the middle of this community. After all, we're all on the same team. :)

If you still haven't clicked over to the TimesOnline article, please do so now, and then return to share your comments and perspectives.

20 Comments – Post Your Own

#1) On September 02, 2009 at 11:07 AM, IBDvalueinvestin (99.66) wrote:

TMF it can't get as bad as that says.

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#2) On September 02, 2009 at 11:19 AM, catoismymotor (42.18) wrote:

Just change the government agencies and the names involved in this article and it could be directly applied to our own situation. I believe she is right. We are in for a repeat of this mess without a major change as to how things work, possibly as early as 2012 when this current bubble explodes beyond a simple market correction.

Chris, has this article changed your current strategy with regard to precious metals?

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#3) On September 02, 2009 at 11:27 AM, whereaminow (21.66) wrote:

“The banks are not using the money productively, yet what we need is for the Government to spend more productively,” she says.

As correct as she is about the problems, she appears to be unaware of the Economic Calculation problem.  The government can not spend money productively.  It does not deal in profit/loss.  It receives no objective economic feedback on how it has employed its capital.  It's only feedback is political.  This weighted feedback is skewed by those who can keep, maintain, and expand government's power.  The most important of these groups is the banks.

So while Peter Schiff and the Austrian School completely understand why the government chose the path it did, Ms. Pettifor, despite her wisdom, is baffled.  I wouldn't be surprised if she dismissed the Austrian School and qualitative economic study.

David in Travel

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#4) On September 02, 2009 at 11:28 AM, XMFSinchiruna (27.72) wrote:

It could get ugle very fast

As GMX pointed out, insiders are selling en masse. What do they know?

The ECB sees systemic risk in the CDS market

The IMF is engaging in global quantitative easing with the basket of member currencies called SDRs.

The Democratic Party of Japan, which has stated its preference for requiring U.S. bonds be denominated in Yen rather than USD, has won the election in a landslide.

Our quarter-century penance is just beginning

What is the FED so afraid of revealing to the public?

Bernanke's happy conspiracy

Deficit projections keep growing, and growing, and growing ...

Anyone have the spare time to do some research on this troubling data table from Treasury? I think there's a monster lurking in this data.

China considering ban on export of rare earth metals ... very agressive move!

And in its most aggressive and under-reported move to date, China has warned foreign financial institutions that China's state-owned enterprises will be permitted to walk away from failed derivatives! This is an enormously significant development on both a financial and geopolitical level.

Our city and state governments are teetering on insolvency.

The dollar could just as well have Mickey Mouse's face in the front. It's funny money.

Who is going to bankroll our wanton spending practices?

Deutsche: Nearly half of all mortgages to be underwater by 2011

All the mortage refinancing activity has done nothing but buy a little time

Mobius: derivatives and stimulus to spark new crisis

It's official, China wants a new reserve currency

The FDIC is broke, and will need a b.b.b.b.b. bailout (that word is still hard for me to say out loud)

Gold is breaking out, and is trying to tell you something. Are you listening?

Any questions?

 

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#5) On September 02, 2009 at 11:32 AM, XMFSinchiruna (27.72) wrote:

catoismymotor

My thoughts on precious metals will be out later today. Nothing has changed ... still targeting $2,000 gold and $50 silver with a long-term approach, and viewing today's breakout above $965 as a strong indication that the next major move above $1,000 to stay has just begun.

Today is one of those key pivotal days in gold's trajectory.

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#6) On September 02, 2009 at 11:37 AM, GNUBEE (25.95) wrote:

Sinch, OK, Flame on......

Her suggestions would work, but then people would have to experience voluntary pain, and those in power would have to voluntarily give it up. Alas, the only pain that is allowed is that which we have no control over (yes I know sounds Yogi Berra-ish). The system will operate as is until it decays from within. I do not see any immediate danger as those in control have been able to re-write the rules in ways I could not speculate. They will keep the system running, because collapse means they lose control.

I think they will continue to be sucessful short term. long term, no one knows.

 If everyone inflates, the score of the game does not change, just has more zero's. The winners will be the ones who do it first.

And no Yogi Berra does not steal pick a nik baskuts, thats Yogi Bear

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#7) On September 02, 2009 at 11:44 AM, XMFSinchiruna (27.72) wrote:

GNUBEE

I'm more interested in her projection given her track record than her suggestions for how to avoid it. I don't share her optimism that a protracted depression can be avoided at this stage by any means, so why exacerbate the already unserviceable debt? Her suggestions for how to deal with the problem did little for me ... but her assessment of the situation is spot-on.

As a reminder, I was on the lawn of the U.S. Capitol with a bull-horn on the eve of the TARP vote, trying to convince Americans that the policy responses to the crisis were more dangerous than even the monstrous problems we faced at the time. My opinions on what could have averted a more prolonged depression than we previously faced are on record. I advocated letting the banks fail, and I still do. I believe history will show the folly of the strategy adopted, and all the credit being awarded to Bernanke for preventing a depression will morph into financial history's most epic damnation.

 

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#8) On September 02, 2009 at 11:46 AM, SnapDave (56.91) wrote:

I don’t know about rates in the UK, but here we had ridiculously low rates go up a little which, along with stupid time bomb mortgages, helped prick the bubble. So I don’t buy this stuff about a need for low rates or any of her other morally hazardous solutions. If anything rates need to adequately price risk. The risk of home values being stagnant or even declining never entered the equation before. But she is absolutely right that we still have a problem.

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#9) On September 02, 2009 at 11:49 AM, XMFSinchiruna (27.72) wrote:

SnapDave

I agree with you about rates. Any effort to create unnatural market conditions is a recipe for failure IMO.

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#10) On September 02, 2009 at 11:54 AM, outoffocus (22.80) wrote:

PERMABEAR! DOW 20000!!! Just kidding.

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#11) On September 02, 2009 at 12:02 PM, GNUBEE (25.95) wrote:

Agreed, there is a great chasm below us. But will we fall in, or merely wobble around a bit is the question.

And at this point any fall will kill us, so what if we fall an extra 10 feet before impact? Gives me more time before lights out no?

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#12) On September 02, 2009 at 3:17 PM, EggplantWizard (99.49) wrote:

Some of her concerns about the banking sector aren't as relevant in the US, since across the pond, banks generally had 60-70x leverage instead of 20-35x. UK / European financials are far worse off than US financials (greater amounts of negative equity).

That said, fundamentals still look pretty gloomy in most sectors, especially the financial sector. I think it's quite possible that we won't have much of a correction, but rather a stagnation of equity prices while inflation bring the real value "up" to match the nominal price.

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#13) On September 02, 2009 at 4:42 PM, ReadEmAnWeep (52.61) wrote:

+

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#14) On September 02, 2009 at 4:55 PM, XMFSinchiruna (27.72) wrote:

Man, was this ever timely?

http://www.fool.com/investing/general/2009/09/02/the-next-monster-move-in-gold.aspx

:)

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#15) On September 02, 2009 at 5:15 PM, jesusfreakinco (28.80) wrote:

Chris,

You are beginning to look like a market timer!  Nice article indeed.  We'll see how gold reacts in the next couple of days, but I believe this dog has room to run.

My juniors performed very nicely today with NXG and TRE leading the pack :-)

JFC

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#16) On September 02, 2009 at 8:34 PM, kamuirei (< 20) wrote:

Wonderful post.  The general consensus among those I care to listen to is that the US market is in deep deep trouble.  How do we feel about the global economy?

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#17) On September 03, 2009 at 10:13 AM, hhasia (66.76) wrote:

A view from across the Pacific.

Asia has had a rope leash tied to the foot of the bear. When the western bulls would charge at that bear he would feign falling down.  Now it is quite clear that the bear is standing on all fours. They in Asia are about to let go of the rope holding him back. To insure protection from the ravages of his enleashing the planned hording of materials is topped out and futures contracts with COMEX need not be honored.  When all is said and done the bear owners will feast on the carnage.

HHASIA

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#18) On September 03, 2009 at 1:51 PM, jesusfreakinco (28.80) wrote:

Comex (or as I like to referring them affectionately as Crimex):

Take this chart and shove it where the sun doesn't shine:

Silver: up 5.3% today

http://www.kitco.com/charts/livesilver.html#ny

Gold: up 1.67%

http://www.kitco.com/charts/livegoldnewyork.html

 

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#19) On September 08, 2009 at 3:55 AM, lucas1985 (< 20) wrote:

" I wouldn't be surprised if she dismissed the Austrian School and qualitative economic study."

She tries to do science, not astrology. She used the post-Keynesian framework to asses the buildup of debt and correctly predicted the current crisis. You won't like ker commie answers to the crisis. She's even fond of the idea of outlawing interest.

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#20) On September 09, 2009 at 4:05 AM, jester112358 (28.70) wrote:

Seems like we are heading for an inevitable debt default by the US.  But we better learn to make our own stuff before we do that because you only get to default once and then the bond vigilantes just won't trust you again with their capital for some reason!  In the meantime we'll keep running up the big US credit card until they pull our credit line.

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