Not picking on you Nuke, you just happen to share a belief that is widely held. "Printing always works" and "timing is everything" are clearly conflicting and mutually exclusive terms yet many adhere to this type of hopium.

If presently our economy is so tenuous that printing can help ONLY IF the timing is right then I will stay away from investing as I certainly do not trust TPTB to get the timing right every time; they have clearly shown an inability to get it right ANY time prior.

Flappingeagle,

You make a great point. I am 100% with you, but my 100% encompasses more.

It is true that the game will go on, like you said, until it's not in their benefit to keep playing. However, as an engineer, I look at the market dispassionately as a system, in fact, as a non-linear system composed on many inputs and outputs with a variety of outcomes. The great mistake many economic and financial raconteurs make is that all of the inputs are logical, that it is a non-linear system and that all of the outputs will be consistent. They never are. What causes a crash in one system set of variables may actually cause a rise in another. Even time and histrionics are a sizable contributor to the systems outputs. Note I said outputs, not output. What you think may be good or bad depends on any one of many of the outputs and its combined results.

The players have many reasons to stop playing. The could stop because it's not in their interest or they could stop because they fear to play, or even because their actions make no perceptive change. In my view, there's a possibility that even when they stop playing (and we haven't defined the myriad of games that they could play) the market could even thrive and improve despite all the so called market raconteurs say will happen!

Don't you think it's rather odd that all of the folks in the "Hopiumites" side of the ledger can't allow themselves to describe circumstances where the market will "fail" (no definition of what failure is) and the "Depressionistas" like most in this blog cannot come to describe a set of circumstances where the market could continue to succeed (no definition of success yet)? That's because they aren't looking at this system dispassionately. They have prior biases (and I admit I have some myself) and amazingly you're classified immediately as one of them or one of the "others".

What I find really odd is that although a lot of people talk about the "big crash" coming or not coming, no one really has really studied and discussed what such a market "crash" will look like.

On that last point you're wrong; I've been talking about that and both discussing and analyzing it for five years, right here.

When this thing blows, you printing guys are going to be so blindsided you won't know what hit you. Japan stayed inflated by the rest of the world. Their internal debt is 200% of GDP higher than the US. Richard Koo proposed the Japan solution because it enabled the private sector to delever. How much deleveraging has the private sector done over the past 20 years if the Debt to GDP for the entire economy, including government is over 500%?

What happens if they devalue 10%? First of all, they lose 50% of GDP purchasing power of what is already there. No more money. They merely made a 1.75 litre into a half gallon by adding water. When people realize the whiskey has been watered, they will buy another brand. Then there would be a move away from the currency. At 4% interest, Japan has committed their entire future income to past spending. Think of that. I got poked here for bringing up what David Hume wrote in the 1700's. Modern man thinks he is smart and the guys in the 1700's were stupid. Modern man can't even do math.

There is one correllation, savings to debt. If savings went to pay debt, there wouldn't be any savings would there? What is savings if something that wasn't spent. When the government gets your savings, it is spent. Sometimes wisely, but most of the time it goes into the gutter, down the drain. We have heard for years what kind of high savings rate the Japanese had, but was it savings or a huge debt bubble? Well, Japan had a huge debt bubble in the 1990's and still has a huge debt bubble, because they have spent all future revenues to keep it inflated. Their government finances 50% of their spending. 17 years to watch this crap and what do Obama and Bernanke do? Monkey see, monkey do and the monkey seen has been eating poison bananas and the observers just think he is high.

The problem with the Japanese savings is it all went into junk bonds. Their government, our government, corporations sure to collapse, mortgage bonds, you name it. Someone mentioned the Japanese stock market was on a rocket ship. Yeah, it is 25% of its all time high 22 years ago. Go research the Nikkei. There are 225 stocks. I took a look at a few financials, wondering if it was a place to invest. The market there is higher than it is here.

The money printer idiology seems to forget that there isn't any such thing as a free lunch. If there was, the idea should prove universal and we can let the printing press do the work. No, we are talking about organized stealing, not just the government, but the banks as well. What can't go on forever won't. The only problem right now is all the women in town decided to be *****s at the same time and the price collapsed and there is a big party happening. (pardon the politically incorrect for you ladies, as this is merely an example). There is a big case of AID going around the party. We will find out soon who has it.

Once inflation reveals itself, interest rates will reflect it. But, they won't just reflect the current inflation, but the idea this mess won't stop and it will be time to flee fixed income and anything representing various currencies into something else. When we see rates suddenly go from 2% to 10%, it will be like a kick in the groin from an elephant. Debt will still increase faster than GDP.

From a guy who has been right on this game for the 11 years I have been reading him, Doug Noland who denies the rumor he has turned bullish. Is the next decline a dip or a cliff? Maybe a flash crash that doesn't stop because the money plug has been pulled.

http://www.prudentbear.com/index.php/cre....

Karl Denninger on 2011-03-19 in follow up to the tsunami 8 days earlier.

http://market-ticker.org/akcs-www?post=1....

"Japan has been a net exporter (and thus net buyer of Treasuries and other sovereign and foreign debt) for quite some time. This is almost-certain to at least halt and these flows may reverse."

I am also an engineer and I fully understand and agree with your non-linear statement. I for one still uphold anther truism - it is exceeding difficult to control an unstable system with non-linear control. Sure, you can turn an inherently (and deliberately) unstable fighter plane into a stable one with non-linear control but that is accomplished via blindingly fast and precise math. Economics does not offer such conveniences

As essentially a statement of fact QEing means the economy is broken. Committing to ZIRP for years means it is expected that the economy will stay broken for years. Insolvency and extreme leverage WILL result in the plane crashing when all we have are slow imprecise non-linear monetary controls.

If finance was engineering, they would only teach engineering in college, not business. When the herd spooks, there won't be any time to get out. What we see now is insanity prevailing. The equations aren't fixed, but variable to what isn't fixed, which is the required rate of return and the risk premium. What else isn't fixed is the long term faith in dealing in fictional currencies. The masses will get rid of their governments and insist on a change. It will either be through the ballot box or through revolution.

Rvacha,

You're not picking on me because I'm neither a "Hopiumite" which I guess is a positive thinker that thinks any one (select whichever one you want: Money Printing, etc.) action will keep the markets from "crashing" or a "Depressionista" (like I believe most of the folks in this blog tend towards) who believe the market will "crash" at any one point in time. As an engineer, I cannot look at this market emotionally. IMHO a bridge has more personality and predictability than this market.

The markets will take off and they will crash. That's not the issue. They are a myriad of raconteurs that will tell you a myriad of reasons why and how they anticipated it. There's nothing but intellectual value in that. What is of value is to try to anticipate (note I did not say predict) as far back as possible when it actually changes one way or another or doesn't change at all and WHEN. Timing is everything. How many times has Denninger turned his DEFCON 1 on and off? Timing is not easy to understand, much less even predict.

This is a system, and it has inputs and outcomes that I know I will never know or fully understand. I look at the markets dispassionately and do not wish either a "crash" or a "rise". I have no ax to grind if it goes either way.

One think I was educated on as an engineer is to accept the wisdom that I don't and will never know all of the inputs influencing this system, but to accept the ones I see and learn from them as much as I can so I can design my portfolio accordingly. Yes, I make mistakes, a lot of them, specially when I listen and create an opinion based on a limited set of "facts". But I go forward because my goal is to win not by emotion, but by correctly anticipating or reacting to the market's outputs. Like Denninger says a lot, "it is what it is".....and I'll add "it is also what you can't see and understand".....

Let me give you a thought: IMHO, if the market collapses before the end of September, there's a very good chance (actually IMHO about 65%) that Obama will be re-elected. The odds drop to 35% almost linearly if it "crashes" on the day before the election.

Don't you find it odd that no one talks about what the crash will look like when it does "happen"? Why if we talk about the impending crash we can't seem to describe or even discuss how it will happen? How will you know it's here? Maybe it's already come and gone!

Look no farther than the ticker values KD has at the top of every page.

Quote:

If finance was engineering, they would only teach engineering in college, not business.

I happen to have been invited up to a Tokyo quant shop for a major US investment banker a few months ago. This very topic was brought up. It turns out that 96% of its employees were mathematicians, engineers and even included an anthropologist. Actually, they were looking at radiation probabilities to short real estate!

Both disciplines use the same base, they just solve different types of problems and have different terminologies.

There's lots of discussion on what a cash might look like. Gen has written on this as well. I think almost universally people consider what happened in 2008 to be a crash and that one wasn't even outwardly brutal. I think Greece hasn't crashed, it is still crashing. Austerity forced on governments, 10s of millions without jobs or a roof over their heads, monetary deflation, a huge number of failed banks and businesses, etc. - all quite quantifiable. We will know once it has begun but will not know when it will end.

This was my first post to this forum, made on 6-3-2008

http://tickerforum.org/akcs-www?post=469....

Fundamentally, I have the same question today I did then. Why is it different now? At the time I was told the math doesn't lie. My response was that sure, the math doesn't lie, but ending up with a negative number doesn't mean game over.

This was pre LEH, pre Bear, and we speculated on what effect they would have. And the nuclear images came out in force that it was all over. I didnt buy it then, and I dont buy it now. LEH and Bear did collapse. Wamu did collapse. here we are. The world did not collapse. You can still get a ninja loan for christs sakes.

With Japan having something like a 20+ year history of "teetering", why is it different now?

Quote:

There's lots of discussion on what a cash might look like. Gen has written on this as well. I think almost universally people consider what happened in 2008 to be a crash and that one wasn't even outwardly brutal. I think Greece hasn't crashed, it is still crashing. Austerity forced on governments, 10s of millions without jobs or a roof over their heads, monetary deflation, a huge number of failed banks and businesses, etc. - all quite quantifiable. We will know once it has begun but will not know when it will end.

rvacha, iceland HARD crashed. obviously they didnt go to canibalism or mad max.

Quote:

On that last point you're wrong; I've been talking about that and both discussing and analyzing it for five years, right here.

We'll agree to disagree. Remember, you are market commentary and not investment guidance. You clearly discuss the data, the tactical trading patterns, and some slected equities, market instruments, etc. and the macro economic logic, just fine, but you've rarely if ever talked about the post "crash" market characteristics other than some numbers.

What are the slope scenarios? What could cause it to turn up once it starts crashing? What can past "crashes" teach us as to the behavior of the market values? The list is endless......and the blog revenue, of course.

127001 - True, but they had 4 things in their favor - the rest of the world didn't crash with them, they eradicated debt, they have aluminum (i.e. a trade surplus), and they weren't in a CB fiat race to the bottom situation of any great size.

127: Iceland has 300,000 people. As of 2000, we had 57 cities with a higher population.

@ Nuke_engineer - you would appreciate this...

http://www.zerohedge.com/contributed/ins....
Inspiration from Admiral Stockdale

Originally published on Slope of Hope last month, I thought it was worth bringing over here to ZH....

If you're like most Americans, you hadn't heard of James Stockdale until he showed up for the 1992 Vice Presidential debates and made this famous line:

Who am I? Why am I here? (video can be seen here)

Afterwards, he became the butt of jokes and was basically portrayed as a dottering old man. He and Ross Perot captured nearly 20% of the vote, in spite of being a third party ticket, and the nation soon stopped talking about Admiral Stockdale.

0110-stockdaleI hadn't thought of him for years, but last night I happened to trip across an article about the man, and I was amazed. He suffered through unspeakable horrors as a prisoner of war and, in all that time, he showed strength, resolve, and character that I imagine 99.9999% of the population lack. The guy had brass balls, pure and simple, and he was awarded the Medal of Honor for his courage.

Read on:

Stockdale was held as a prisoner of war in the Hoa Lo prison for the next seven years. Locked in leg irons in a bath stall, he was routinely tortured and beaten. When told by his captors that he was to be paraded in public, Stockdale slit his scalp with a razor to purposely disfigure himself so that his captors could not use him as propaganda. When they covered his head with a hat, he beat himself with a stool until his face was swollen beyond recognition. When Stockdale was discovered with information that could implicate his friends' "black activities", he slit his wrists so they could not torture him into confession.

One can only imagine fellow VP-debate-participant Dan Quayle's behavior in such a circumstance. Once they mussed his hair, it would probably be all over. To continue:

Stockdale was part of a group of about eleven prisoners known as the "Alcatraz Gang": George Thomas Coker, George McKnight, Jeremiah Denton, Harry Jenkins, Sam Johnson, James Mulligan, Howard Rutledge, Robert Shumaker, Ronald Storz and Nels Tanner; which was separated from other captives and placed in solitary confinement for their leadership in resisting their captors. "Alcatraz" was a special facility in a courtyard behind the North Vietnamese Ministry of National Defense, located about one mile away from Hoa Lo Prison. In Alcatraz, each of the eleven men were kept in solitary confinement in cells measuring 3 feet by 9 feet with a light bulb which was kept on around the clock. The men were locked in leg irons each night

What amazed me the most is what Stockdale said in reflection:

"I never lost faith in the end of the story, I never doubted not only that I would get out, but also that I would prevail in the end and turn the experience into the defining event of my life, which, in retrospect, I would not trade."

Now here's the important part......when asked about who died during captivity, he replied:

"Oh, that's easy, the optimists. Oh, they were the ones who said, 'We're going to be out by Christmas.' And Christmas would come, and Christmas would go. Then they'd say, 'We're going to be out by Easter.' And Easter would come, and Easter would go. And then Thanksgiving, and then it would be Christmas again. And they died of a broken heart."

And then, finally, the most important part of all, which you might want to read ten times to yourself:

"This is a very important lesson. You must never confuse faith that you will prevail in the end—which you can never afford to lose—with the discipline to confront the most brutal facts of your current reality, whatever they might be."

I hope the departed Admiral will forgive me for using his words as an inspiration for traders - - or anyone undergoing a challenge - - but these are some of the most inspiring words I've ever read.

Thank you, Admiral Stockdale, for everything you did. I promise that those old jokes tossed around in the 1990s about you are no longer funny anymore. You were a great man.

Oh, and just to add icing to the cake. His full name, honest to God, was James Bond Stockdale.

What a bad-ass.

Tesla,

Thanks for thinking of me. My family and I had dinner with the Stockdales several times. He was certainly quite a man. A fellow prisoner, Mike Christian, (who unfortunately did not adjust to life back home as successfully) was a neighbor of ours in Virginia Beach and my third cousin were all together in prison in North Vietnam at one point or another.

It was fascinating to sit in a table listening to those three talk. Most fascinating was that sometimes they talked more about the dead than they did of the living, yet always kept their tenacity and will in reserve.

Of all your surprising revelations, Nuke, that last is the most breath-taking. I have known Admiral Stockdale's bona fides. I'd give a LOT to have had a conversation with him!

I think it was the mathematicians that almost blow up the entire world finance 5 years ago. The finance people have known for nearly 2 decades the valuations didn't make any sense. The quants have turned finance into a casino. Nassim Taleb, a quant himself, properly pointed out in his Black Swan book that the entire game is based on something that is totally wrong. He says the bell curve is a faulty measure for risk. Instead of eliminating risk, it incorporates risk. The current remedies, where some of these idiots are making money again is nothing but a refueling of the bomb that went off in 08. This bomb is now many times more powerful and will blow much higher. Debt is part of the perception of wealth that enables this game to go on. In reality, it is prime evidence the system is bankrupt and the players can't pay. The CDS's on Japan are trading higher than the yield on the bonds.

There is a perception that all these countries can fix their problems if they only run trade surpluses. The debt is the prime part of the equation that makes this an impossibility, namely because the interest on increasing debt is an exponential function that makes it progressively more difficult to sustain the economy and pay the debt. Acting-man.com linked a really interesting scenario of leaving the Euro. It is worth reading, as it points out that in general the country that defaults recovers in a couple of years, because their debt is reduced significantly. They don't mention the holders of the debt. There hasn't been a big bomb go off in awhile, but the links between banks blew over something as simple as LEH. The other dominos are much weaker than they were.

Mannfm11,

Really appreciate your posts....just curious as to what you see as a possible near-term triggers for rates to "suddenly go from 2% to 10%" and what would people fleeing from fixed-income and currencies (including USD?), flee into (that hasn't already been been bid up, such as housing, oil, PMs?)

Wow, barely remember Admiral Stockdale when he ran with Perot. Thank you guys for this information. What an amazing American!!

Yep. Stockdale was the real deal.

Even if they avoid a worsening of the nuclear problem which seems uncertain at best, this seems to be a major inflection point/game changer with the 6 D’s you mention.

The question seems to be how long before Japan will default on its debt. If it becomes more of a foreign borrower it would seem to necessarily have to redeem some US treasuries leading to both a stronger yen and stronger USD as interest rates on both currencies increase. At some point in the near future if we’re not there already QE will run into the brick wall of commodity price increases.
(originally posted 3/21/11)

http://www.nakedcapitalism.com/2011/03/s....

Japan three problem ‘Ds’ – depression, deflation and demography – have now been joined by two new ‘Ds” – disaster and destruction. The toxic combination is exposing another ‘D’ problem for Japan – debt.

Yep....

The thing is most of it is internal (nearly all) so there are options but they still suck. And if rates start to go up the government will be in deep ****.