Sunday, March 29, 2009

Predictions: The Good, the Bad, and the Ugly

March 16, 2008 stands in history as the all-time low for the U.S. Dollar Index. Two weeks later, one year ago today, I started the Ca$h Bull.

I started it amid fears that the dollar was facing imminent collapse, and in danger of being replaced as the world reserve currency by the Euro, or even the Yuan. This blog was begun on the premise that the value of currency should be viewed by its purchasing power of goods and services in its native economy rather than as a contest against other currencies on the global market—and that cash, especially the dollar, would emerge strongly as the world-wide credit bubble resolves in a recessionary economic contraction.

Some anniversary facts and statistics: with all the posts (not including this one) cut and pasted into a word file with a 12 point font, the document is 104 pages long. Sadly, neither “The Ca$h Bull” nor “The Cash Bull” flags this site on a Google search. But “the Cash-Inventory Equivalency” comes up on the first page, and “The Desire Coefficient” comes up #1.

So I’d like to thank those who patronize this blog, especially you East.Bay.Miser, your responses do make a difference. Today I’m going to start allowing anonymous posting to make it easier for people to comment. I’m also modifying the tags system to be in line with its proper use, rather than as keywords which I originally thought. The new tags should be up in a day or two.

Though I try to focus on financial analysis here and avoid making predictions, sometimes they slip out. So, for fun, here is a rundown of how I did—divided into the good, the bad, and the ugly.

The Good:

3/29/09: “I am heavily invested in the U.S. dollar, and contrary to many opinions, I think now is a good buying opportunity for it.” (Truth be told I started working on the theory posts of this blog, up to "The Value of Money," a couple weeks beforehand.)
4/5/08: “So long as base money continues to hold about even, the fallout from the credit bubble will be deflationary as asset prices correct to their fundamentals.” Even with base money doubling we are still seeing a deflationary trend. This sentiment has been repeated many times so will be mentioned just this once here.
4/28/08: “Though they will almost certainly print some money, it will not be enough to stave off a deflationary recession.” They have and it hasn't.
5/14/08: “Americans have been lent more than they will be able to pay back, which will result in widespread defaults and foreclosures.” A straightforward statement now but very much denied back in the day.
6/28/08: “The last time we saw rates this low (2% overnight rate), we saw the rise of the housing bubble. Now, we see an economy holding on by its fingertips as this behemoth slides into a recession.”
8/5/08: “Prices are already dropping in the asset classes (i.e. stocks and houses) and I predict will continue to fall throughout the general economy under supply and demand forces as we progress further into the current economic downturn.” Today we see clear evidence of this downturn in commodities, retail, and manufacturing. Declining prices haven’t quite matched declining demand as of yet, but both are deflationary.
8/6/08: “Despite the stated intention of the legislation [The HOPE for Homeowners Act] to keep house prices unaffordable, my guess is the correction will continue unabated.”
8/7/08: Regarding rate drops by the ECB: “I think I am not alone in believing we can anticipate rate drops in coming meetings.”
8/9/08: “There will come a day where banks are unwilling to lend, and borrowers cannot or will not take on more debt regardless of how favorable are the terms.”
9/15/08: Regarding the fall of Lehman: “For the first time credit default swaps are being triggered, and soon the whole patency of the default swap market (in other words, bond insurance) will be tested.” Enter AIG bailouts the very next day.
11/10/08: “Bailing out AIG is a more civil way of handing money to banks straight up.” Common knowledge now that AIG was forced to disclose how it used the bailout money.
12/4/08: “Today is a stepping stone that will likely conclude in a worldwide zero-interest-rate policy (ZIRP).” The U.S. and U.K. are there, and the ECB not far behind.
12/16/08: Regarding ZIRP: “It is hoped that lending money for free will increase credit, lending, and general economic activity. We haven't seen that with the prior interest rate drops, and we won't see it with this one either.”
1/26/09: “future indicators show no end to budget cuts and profit downgrades.” There have been quite a few in the last couple months and more expected.
1/28/09: “Expect quantitative easing soon.” No shocker, but still a two-month heads up.
2/10/09: About Geithner and acquiring toxic assets from banks: “The fact he is calling for the use of private capital in all of this, for this ‘bad bank,’ which obviously isn't going to happen unless it is fully guaranteed, strikes me as almost a delay tactic.” This was a smirky remark but now the plan is for private acquisitions of toxic assets to be 90-95% government guaranteed.

The Bad:

4/30/08: “Today, the Fed eases the overnight rate to 2%, hopefully ending a striking series of sudden decreases throughout the past 8 months.” Oops. Not.
5/10/08: “I think the dollar will correct against foreign currencies eventually, but slowly” While the dollar is correcting against foreign currencies, slow isn’t the right word for it, unless you are willing to accept wild fluctuations around a downward trend line as meaning “slowly.”
9/7/08: “Clearly, banks have no reason to fear making unwise loans because they can anticipate a taxpayer bailout every time.” Not every time. In fact not enough times that they seem worried about it now.
9/15/08: “Not that I'm expecting $1.50 gasoline prices again…” I saw it once for around $1.90 in San Francisco, which is getting pretty close.
9/25/08: “This uptick on the base money supply is worrisome and if not a random artifact of the financial turmoil and indicative of a trend it could spell concerns for the value of the dollar.” If any Internet site reported on this shift in base money before me, I’d love to see the link. This files under “bad” because the dollar has continued to strengthen anyway.
10/1/08: “When all is said an done, the DJIA will be trading close to the 6000 range, and real estate will fall on the order of 50% from peak, assuming there is not a hyperinflationary event.” I’ve already called this as wrong because things are going to get worse.
10/9/08: On the drop in the DJIA after the TARP passed: “This is a deep spike downward, but I anticipate there will be some recovery before proceeding with its steady downward course… there is plenty of steam left in this bust.” Eh… there wasn’t that much recovery, but the downward trendline since then has been steady.
12/6/08: “I see a plan starting to unfold… Congress agrees to pass the unspent $350B of TARP bailout money, if the Bush adminstration agrees to give some of it to automakers.” I must have put on my tinfoil hat that day. Automakers got their share of the first round of TARP money and, except for a $20B outlay to Bank of America, Obama got the full second half of it.

The Ugly:

9/11/08: Here’s what I predicted the bailout would be: “The federal government will buy troubled mortgages from banks, I imagine at near face value, floating Treasury Bonds as needed to pay for them—such that the Treasury Department holds the mortgage stinkers, bought for with bonds that will be paid off by the taxpayer over time. Banks now have the opportunity to become re-capitalized from recent losses and dump toxic mortgage securities all at once.” As it turned out, bailouts went every which way BUT that. Worse, I had this on “Selected Posts” for months. Even on 9/17/08 I made the comment: “My earlier prediction that the conservatorship of Fannie Mae and Freddie Mac was sufficient to cover the bailout fell squarely on its rear end less than a week later. You win some, you lose some.”
9/16/08: Regarding AIG: “Personally I cannot get excited about the downfall of an insurance company; they are the embodiment of the risk aversion seemingly inherent to American culture.” Oh, how much I had still to learn.
10/13/08: “The whole idea of ‘free market’ in the financial industry is such a laughable notion by now that I don't find nationalization of the banks particularly troubling.” Mid-October was too early to make such a call, and with nationalization now looming under Geithner, I do find it troubling.
3/10/09: “Get dollars now and sell your stock while you still can.” Though in the long run I think you’ll be better off, this was a terrible statement to make right at the beginning of a bear run. It’s from a post written in the heat of the moment that probably never should have been uploaded and I have a good mind to delete it. I’ll be more careful from now on.


10/30/08: “I have a suspicion this [foreign banks] is where all the newly minted currency since September is going [to pay off loans to U.S. banks].” An interesting, if slightly paranoid, idea. Fed data shows clearly that the newly minted money is now sitting in U.S. Bank reserves. But might the Fed have given it to foreign banks first, in exchange for foreign currency, to pay off their carry debt to U.S. banks?

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