Fed lowers expectations, stands pat... for now.

Good FED perspective. So if QE3 is not in the works and FED is worried about inflation, then doesn't make sense that US TReasury yields falling like a rock. If anything, DEFLATION is what the market is telling us...Gold, Stocks Down, Bonds are up....even with another Downgrade upon us as Supercommittee can't get act together....if inflation upon us Gold would have decoupled and treasury yields would rise like Italy's.

Hi John,
It's important to remember that shrinking asset prices is not the same as deflation (though they occasionally go together). Only a contraction in the money supply will cause deflation, and what we've seen is massive expansion in the money supply. Gold will fully decouple when investors lose confidence in the markets and the dollar bubble bursts. In the meantime it is still up 20 percent in the past year. It's the long term trend that we're looking for.

In Aftershock v.2, you implied that the trigger for the US sovereign debt collapse would be the coming inflation. Would the turmoil in Europe be more likely now? There is definitely "changing investor psychology" going on there that might ignite a backlash against all sovereign debts.

Your team doesn't see "rare earth metals" (REMX) or silver decoupling as well? What other assets classes do you see decoupling in the event the dollar crashes along with the Euro? Would the agriculture ETF MOO be a smart move?

Hi Aftershock team,

This maybe an offtopic but I would still like to ask. In your book you mention that one chapter had to be removed. Is there a way to access that censored chapter via your web site or get it by email?

Thanks,
Tim

The missing chapter is on the Amazon web site for the 2nd edition of Aftershock. Look for the small "bonus chapter" PDF. It is worth the read.
As for rare earths and noble metals, only gold has the perception of wealth and safety and will skyrocket. The rest will be based on their worth in a greatly diminished manufacturing economy.

@ John Pombrio: I bought it on Google
and see nothing on Amazon. :(

http://www.amazon.com/Aftershock-Protect-Yourself-Financial-Meltdown/dp/0470918144/ref=sr_1_1?s=books&ie=UTF8&qid=1322689543&sr=1-1
Tim, it's there. Here is the link. Look under the IN STOCK and Formats boxes and you will see MORE TO EXPLORE :Bonus chapter . If you still cannot find it, do CNTRL-F and type in Bonus and the link will be highlighted.

John, that's right! Thank you ":)

Hi all,

Thanks John for pointing out that the bonus chapter is available on the Amazon page.

Also, John is correct that most precious metals other than gold will lose value due to decreased industrial demand. The one exception though is silver, which in spite of its industrial use should behave more like an investment metal in the very long term. Because of its hybrid status and its reputation as the "poor man's gold," expect it to take an extra year or two to decouple.

The issue with an agricultural ETF invested in commodities is that those commodities will take a big hit, especially when demand from China decreases. That being said, there is some potential with ETFs like that if timed correctly on the tail end of the dollar crash. The key here is active management. Like anything, there's risk involved.

John, we'd still look at dollar inflation as the major factor for collapse; in particular when CPI reaches 10 percent (latest reports put it at just below 4 percent). There will be plenty of factors that damage the economy between now and then, but that will likely be when things turn really chaotic. For various reasons, however unsound, there are still plenty of buyers for US bonds.

After today's announcement that the FED will print money for an even lower interest rate for the EU, do you see this accelerating inflation of the US Dollar and hastening the pop of the US dollar bubble?

If so, Does this change your prediction to an earlier timeframe than 2014? Thanks, Rich

Rich,

Yesterday’s move by the central banks was to prime the European banks for the coming recession. Not much was really accomplished. Just more hot (and falsely comforting) air from the central banks. The following is from today’s WSJ:

"The central banks' action itself was fairly NARROW. It changed the terms on U.S. dollar swap lines first launched in late 2007 as the U.S. mortgage crisis spread around the globe.

Under the program, the Fed lends dollars to other central banks" ... "The action Wednesday made these emergency Fed loans cheaper, lowering their cost by [JUST] half a percentage point.

When the Fed launched the swap lines, it saw them as critical to its efforts to tame the financial storm sweeping the globe."

Take a look at the image that was included in the article (link below). Notice the main graph there "Fed feeds dollers to central banks." It looks like it’s ramping up just like before 2008.


http://si.wsj.net/public/resources/images/P1-BD621_CENTRA_G_20111130190306.jpg

Rich,
This will definitely speed up inflation – any time a currency is made more readily available it will lose value. But it doesn't change our long term forecast for the simple reason that we were already expecting this. This is just another confirmation of what we've been predicting all along.

Great book and good information to mash up with information from other books I have read. I do have a question on the future China economy though. Peter Schiff's Crashproof and your book both predict a future crash / burst because of the Fed policy and continued and expanding debt. However, your team predicts China's economy will crash hard but Peter predicts due to an internal rising middle / consumer class within China that they will transition to internally self sufficient economy.

Can you shed light on the differences because both make compelling arguments?

China is on the road to a complete drop in their economic growth. It began in 2008 with the huge decrease in their exports and was made much worse by the Chinese economists printing vast amounts of money. They used it to let the local Chinese government hacks sell land and build unneeded apartments and infrastructures using criminally loose lending standards. The inflation has already hit hard with the CPI over 10% at times. When the government tried to rein in the lending, it just went underground or was replaced by corporate loans with usurious rates that a loan shark would love. No, they are heading towards the "Great Fall of China" and the middle class will be devastated once exports go even lower than they already are.

You recommend gold heavily in your book due to the expected dollar bubble pop and associated currency inflation. What are your views on the companies that mine gold as an alternative to physical gold itself ?

With the developments in Europe, predictions about recession or at least much slower growth in the next few years all over the globe, the problems of the Euro, are you still holding to the time frames in Aftershock regarding when high inflation will kick in and the dollar bubble begin to pop?

David,
China looks like it has built up a consumer class, but in reality it is still a very export-based economy, and very dependent on the US. This is why China has invested so much in the dollar, keeping its value artificially high and depressing their own currency. When the dollar bubble bursts, we'll see that internal demand in China is not enough to protect them from the crash.

Gordon,
We bring up gold mining stocks on pages 207-09 in Aftershock 2nd Edition. In summary, there are potential advantages in gold mining stocks, especially in the long term, but there are some risks. Mining stocks may be hit by the stock market crash in the short term. Then there are issues with the particular companies: Are they purely in gold mining or do they get much of their revenue from other resources? Is the company well-managed and honest? Do the research and make sure you know what you're getting into.

Martin,
RIght now we're looking at about an 18 month to 2 year time frame for the dollar bubble burst. Recent developments have only been part of what we had counted on in the first place. Obviously many things could happen between now and then, but we will use this blog to keep everyone updated as things progress.

You mentioned the euro should remain strong against the dollar for several years, but what about recent news regarding the possible breakup of the eurozone- there has even been mention of a "neuro" for the stronger northern european economies? how would this affect the US situation?
what about countries who's currency is based on the US $, such as Belize, though on a scale of 2x or 3x- will they be hit even harder?
If someone was in a position to do so, would they fare the storm better relocating to a less developed country, such as the Philippines, at least until it blows over? I'm wondering if they would benefit by cashing in their gold there when it comes time before the gold bubble burst?

Interesting paper by the St. Louis Fed on the failure of the Fed to keep the inflation rate under 2% which is its goal for the next 2 years.
http://research.stlouisfed.org/publications/es/article/9036
The paper outlines options that the FOMC can do to slow inflation while still maintaining a zero interest rate policy:
1. Outright sales of securities or temporarily reverse repurchase agreements.
2. Increase the rate it pays on banks excess reserves.
3. Issuing term deposits at competitive interest rates.

Jeffrey,
It's not so much an issue of the euro remaining strong against the dollar in the short term. There will be plenty of volatility and foreign exchange rates will be difficult to predict. In the long term, we expect the euro to survive and hold up better than the dollar.

If the Eurozone were to break up, it would only make the debt crises around Europe that much worse, likely leading to defaults and a collapse of the European banking system. Since the US's banking system is very closely intertwined with Europe's, it would have very negative consequences for us as well.

What we might see happen is that one country, possibly Greece, might exit the euro. The subsequent devaluation of their own currency, and the fact that their debt would remain in euros, would create an unattractive enough situation that we'd be unlikely to see other countries follow suit.

To Jeffrey (cont.)

Countries like Belize (and any underdeveloped country) will be hit hard, but will likely break off ties with the dollar. The devaluation of the dollar will provide little help in paying off their own debts, and they'd likely prefer to inflate their own currency.

In spite of the long fall, the US is one of the best places to be, since there is a lot of real wealth here and the landing will be softer than in most places. Less developed countries, in contrast, will have infrastructures in much poorer shape.

It's always preferable to be invested in a bubble as it's inflating and out before it pops. As always, though, it has to be timed well. We'll be paying close attention over the years to watch for signs of the gold bubble burst. There's still a long way to go.

When's the next book coming? Will it have any advice on 401k vs. IRA?

Amazing how your book shows what is going on. WSJ had an article "Fed Policy Delivers a Tonic for Stocks" which mirrors the book's assertion that Fed risky monetary policies are (temporarily) good for the stock market. Here, the WSJ states that the Fed's "Twist program" which just ended buoyed up the US stock market. This follows the book stating that"monetary easing" did exactly the same thing. Always nice to have your writing backed up by an outside source.
Now that the "Let's do the Twist" is done, it's time to see how the market reacts. I expect another slide. What about you?

Steve,
The book is scheduled to be released this summer. And yes, it will include sections on 401Ks and IRAs.

Thanks for sharing, John!

Unemployment fell today to 8.5%

This is contradictory to the expectations of the book for unemployment to continue to rise to double digit levels.

Any comments from the Aftershock Team?

Chris, I too am looking for ways to dispute Aftershock. My son and I came up with a list of things that would prove that at least some parts of the book are failing their predictions. Housing prices and sales going to some normality for at least a year across the country for instance. One of the rules had to be "sustainable over time". There will always be temporary blips that look like "recovery is on the way!"
The real question is this unemployment rate true or going to last? The WSJ says that the jobs were in warehousing, transportation, retail, manufacturing, health care, and food services, most of these benefited by seasonal hiring. Unemployment and underemployment fell from 15.6% to 15.2% in November, not a great improvement.

Hi Chris,
First of all, let's be clear that we aren't predicting the steady worsening of the economy over the next few years. There will be plenty of volatility — upswings mixed with downswings — between now and the Aftershock. As an example, we actually think 2012 could be a very good year for stocks due to quantitative easing likely on the way. This will not stop the crash from coming (and will ultimately make it worse). So an upswing in employment is actually not contradictory to our predictions.

That being said, we also have to take unemployment numbers with a grain of salt. They can be misleading in a number of ways, such as by the exclusion of the underemployed and "discouraged unemployed." The thing to look for is an economy that is growing under its own steam, and we don't see that happening with this or any other short term upswing reported in recent years.

I have a question: Inflation is projected based on the QE actions, right? What about the increases in money done by other countries? Won't that offset allot of what the Fed did? Can you put a quantitative figure to that part of this issue?

Just wondering if you know why and what repercussions if any of this news?
Fed reports payment of $76.9 billion to government.
http://money.msn.com/business-news/article.aspx?feed=AP&date=20120110&id=14681064

Can you explain what the delay from QE to start of inflation is caused by? How do you quantize it? Thanks,
Reay

Steve,
The Fed is just passing the proceeds of their bond investments along to the government, which it has done for decades. It's business as usual and nothing to be concerned about.

Reay,
Inflation in other countries will be just that: inflation in other countries, meaning price increases for everyone. But a much bigger issue for the US is when foreign investors slow their purchases of dollar-based securities, which will have a much bigger impact here than elsewhere because of our dependence on foreign investment. This will have a devastating effect to the dollar's value in the world beyond the inflationary effect.

As for the delay of inflation, it is typically about 27 months. It takes a while after an increase in the money supply for prices to rise in the economy. We expect this delay to be longer this time around because people are very reluctant right now to raise prices and increase wages. For this reason, when it does occur, it can take off very quickly.

Can we visit that again... I have QE here, I get inflation... relative to other countries. If they use QE, they get inflation relative to the US dollar. While I agree we are much more sensitive to lack of investing here because we rely on foreign investors, that is only part of the equation. Isn't part of the inflation going to come from other countries relative to our currency, and won't that be reduced because their governments used QE to help their countries? Is there a way to put that in quantitative terms?

So you think they apply that $76b towards the $15T debt or just throw a nice bash at capital hill? lol

I was not trying to be so flip. How much have other coutries increased their money supply relative to normal during the last few years? Are those figures available, and could they all be put on a graph, calling 2007 or so 100%, and going from there? Should be interesting I think. If you decide to have a party, please invite me. Thanks,
Reay

Reay,
Inflation is an internal phenomenon, as measured by changes in domestic prices. The exchange rate is different, and it has to do with world demand for certain currencies as commodities. Inflation plays a nominal part in exchange rates, but is not the sole driver. The value of the dollar as a commodity is a function of investors buying and holding dollars and dollar-based securities.

Inflation in the US won't be slowed by other countries' money printing, but the dollar will still likely be more inflated than other currencies due to more unrestrained QE. But it will really fall in the exchange market because of lack of confidence in US assets.

For an example, look at the volatility of the euro in the past year. You can see that the euro's exchange value is not tracking internal prices (as inflation does) but rather is tied to perceptions about European bonds and other investments.

Money supply figures are generally published by central banks (for example, you can track the US money supply from the Federal Reserve website). Not sure about a site with recently updated money supply figures lined up in one place, though the Wikipedia entry for "money supply" has historical charts. Keep in mind also that much of the inflation we expect to see around the world will come from money that hasn't been printed yet, but will be when the markets slip too far and banks are on the verge of failure.

http://en.wikipedia.org/wiki/Money_supply%23Money_supplies_around_the_world

So, if I understand this, the real problem in FUTURE QE and Confidence in the US economy by other countries and individuals. Correct? It will be a little hard to predict that with any confidence won't it? Based on your book, I was looking at inflation as inevitible based on the original QE (1 and 2). Guess I misunderstood what was written. Thanks for setting up the Web site.

Make sure to read chapter 3 on Inflation in the 2nd edition of Aftershock. Any time a government greatly increases the money supply of a country, there has to be consequences, usually a large increase of inflation. This will happen in ALL countries that take this route (China is already in high inflation tho their “official” rate is low) but it is an issue that is internal and affects other countries mostly through trade. That is what the Aftershock team is predicting for the US after QE1 and QE2 (and 3 and 4…). Yes, there are other factors in play but the real issue will be too many dollars chasing too few goods here in the US (a supply and demand problem of the DOLLAR and not commodities like oil or corn). Inflation can and will be fought by the FED and slow lending by banks will keep it tamped down but ultimately inflation will occur. Not to worry about the exact way it will happen as we will see inflation play out in all its glory in a couple of years or so, heh.

Reay,
The Fed has already tripled the monetary base since 2008, so that alone will have great inflationary consequences. However, there is very good reason to believe that we haven't nearly seen the end of it — when the markets start to dip again, money printing is the least politically costly way to deal with it, and so politicians will tend to advocate for that. As always, the line of thinking is that, once the economy gets going under its own steam, the money can be pulled back out. What we see over time, though, is that when the economy becomes dependent on an ever-expanding money supply, there's never a good time to pull the money back out. (Unless, say, we greatly increased foreign funding of our deficit spending — but that's already another bubble.)

The same thing goes for other currencies around the world. If the markets can't stay afloat on their own and banks are on the verge of crumbling, monetary policy is the easiest short-term fix, and will be impossible for most governments to resist.

Aftershock is a terrific book for the basics of the coming consequences of multiple bubbles popping. It is geared toward individuals and businesses in the US. Its writing is simple enough to understand and avoids a lot of macroeconomics. It is also light on Europe and sticks to inflation rather than a possible confidence crisis on either US treasury bonds or a run on the dollar as "the" trigger point.
The book "ENDGAME:The end of the debt supercycle..." by John Mauldin is a much more sophisticated, information dense, and balanced book that comes up with the same predictions as Aftershock. Its the book to read AFTER you understand Aftershock. I now prefer it to Aftershock as it has a much broader view and a lot of detailed analysis in it making it is much harder to understand on the first reading. It explains things going on in Europe that Aftershock just touched on. Highly recommended.

If the economy was doing so well, the Federal Reserve would not be announcing (last week) an extension of its zero interest rate policy until the end of 2014. If the economy was truly in a real recovery the Fed would be hiking interest rates instead of giving away money for virtually nothing. It is just not the U.S. that is doing badly, but the rest of the world is also tanking. Just look shipping traffic around the globe. Today’s guest writer, Brandon Smith from Alt-Market.com, does just that in a new post that takes an in-depth look at the Baltic Dry Index. This mainly measures international shipping and the news is not very good. Please enjoy the excellent post below. –Greg Hunter

http://usawatchdog.com/there-is-no-real-recovery-in-economy/

"Currency Wars" by James Rickards is a fascinating read. One of the many surprises in the book is the reason for QE and QE2 as well as low interest rates. The author proposes that QE was really about trying to devalue the dollar in order to boost US exports (which Richard Nixon tried to do in 1971 with terrible results). Mr. Rickards also notes that the Fed ALWAYS mentions low interest rates and inflation in the same statement. The reason? Simply a marketing ploy to increase spending.

"Currency Wars" also should get the "dare to be different" award for economics that the 1st edition of Aftershock had. In the book, Mr. Rickards shows a completely different view on economics that I have ever seen before. He uses complexity theory, fractals, behavioral psychology, and chaos theory to explain how come current economic theory can be so wrong so often. It shows that the more complex the economies, the more tendency they will have to fail, sometimes catastrophically. This is exactly the type of changes in economic views that the Aftershock authors are looking for.

if our new politicians create a balanced budget(ha ha) won't that delay the bubbles

Hello folks,

Alright I am in the boat but longing for shore. My pension is a locked down obligation of 15% of my gross income for the next seven years.

My best hope is to become one of those distressed business professionals the book mentioned. Where do I get the skills for this?

I have read this book, and thought it not well written. I am now reading Endgame by Mauldin, and find it much better written than Aftershock, and more logical, without all the constant repeatition. For all of you, I recommend reading Endgame, and skipping Aftershock. Endgame is more logical and much less repeatitive.

Speaking of well written and not repetitive. :)

Anyone here ever heard of Mike Dillard
and the Elevation Group?

Sorry. Some folks need the repition.

Dave,
While a balanced budget is definitely not in the cards, even if it it were possible, it would not delay the Aftershock. If anything, it might speed it up by deflating the bubbles sooner (though the landing might be softer).

Check this info out
http://www.dailyfinance.com/2012/02/13/3-economic-misconceptions-that-need-to-die/?ncid=webmail20

Ok just an FYI- went to purchase 1 9v battery and a pack of 2 #2032 (small disk type) everyday batteries.
Walked in with $12.00 cash, picked up the items, went to check out (I live in DE, no sales tax)and didn't have enough to purchase the above items. Total came to $13.68 !!
Inflation is here folks and it's only going to get worse.
As for Endgame- don't think they predicted what was to come and put it to PRINT before the bubbles started to deflate. 20/20- anyone can write a book on what happened in the past.

Hi Aftershock Team,
In your book, you said that you do not foresee the Eurozone falling apart.
However with all the recent updates, to name a few below...
1) Spain with mounting losses in property loans on their bank's books, high and rising unemployment. They seem to be next in line to ask for hand outs.
2) Political gridlock in Netherlands and elections with no clear winners expected.
3) Greece newly elected government expected to go against austerity measures.
4) France with Sarkosy being the latest casualty, with new president feared to be against austerity measures.
5) Germany seems to need a completely different set of monetary policy with inflation now a risk for them
My general feeling is that all the austerity measures imposed and the hardship experienced by the people of the countries could eventually force the Eurozone to break up after the "alternate" political parties come into power. Could you please let me have your view on this?

How do u see the British Pound holding up through the aftershock?

Do you not see the potential of the IMF stepping in and propping up the dollar with SDRs or in some other way. I was surprised not to find any reference to potential IMF and G20 interventions in your scenarios of how this will all play out. Why do you seem to think they will play no role in postponing or softening the aftershock?