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Thread: weekend commentary - the 'Pinnochio Effect'

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    Default weekend commentary - the 'Pinnochio Effect'

    "Friday, June 30, 2006


    “If you fake the funk, your nose will grow.” — Bootsy Collins, The Pinocchio Theory

    Today, we see the Pinocchio effect in play in it's full glory. The Wizards tried to slip in some more benign language, I suppose to test the waters? Understandable, given that they feel they want to control the situation. They sure don't need Toto pulling back the curtain. Instead they were hit upside the head with a two by four.

    Just about every crack up boom trade from gold to gasoline is soaring, and the USD is being pounded. This is not just a Risklove play now, but has all the hallmarks of a true crack up boom, where all kinds of players get involved in a classic flucht in die sachwerte (flight into real goods). In that scenario, participants worldwide just get weary of monetary authorities (Wizards), "faking the funk". The risk now is a true panic, and then a full blown crack up boom is underway. This is the moment of truth for the Wizards, it's time to quit faking the funk. I'm now seriously wondering if an intra meeting hike might occur? It sure seems necessary. Mark my words, if this keeps up much longer, you will hear talk of it.

    For investors, this is a difficult moment. If a crack up boom, flucht in die sachwerte panic really gets underway and out of control you can't just sit on Treasury bills and US Dollars, you'll be wiped out. Crack up boom trades themselves are also extremely high risk, so folks have to guess right. One can already see clear evidence that the Wizards are pulling liquidity, and that trades including commodities and foreign currency are very popular. One would expect them to be popular, given the Pinocchio monetary policies that have been employed. Which is exactly why the Wizards need to get their heads out of their asses."(snip)

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    Default Re: weekend commentary - the 'Pinnochio Effect'

    During his confirmation hearing, I was very distressed to hear the new Treasury Secretary basically indicate that he wasn't going to help defend the dollar. Far be it from me to tell a Goldman Sach wizard that with all the imports in manufactured goods, a declining dollar will be very inflationary, compared to the Nixon devaluation in the early 1970's when most goods, services and imports were relatively low and all typical things people needed were made in dollars here and priced in dollars and were relatively constant in internal dollar terms.

    Learn to shop at Walmart. It will be the only place you can afford to go to. Maybe the dollars stores as an alternative.

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    Default Re: weekend commentary - the 'Pinnochio Effect'

    A declining dollar would also prompt America to "do it it's self" and start creating product and services within it's own borders peopled by it's own citizens. After all, a falling dollar means nothing to people who earn dollars and spend dollars. Only when one has to translate dollars into Yen (or what have you) to pay for product built by people who earn in Yen does it matter.

    Walmart and the dollar stores who are so dependent on a strong dollar will be the expensive places!

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    Default Re: weekend commentary - the 'Pinnochio Effect'

    ^^^ agreed that most of the 'affordable' items in every product segment i.e. cars from Korea, clothing from Vietnam, appliances from China etc. are actually priced in their own currencies ... thus if the US dollar's exchange rate value tumbles by 1/2 the price of all of these imported items will double for US customers. However, the problem will still remain that US industries will still not be able to afford / willing to invest in 'replacement' domestic production ... both because few foreigners will be willing to loan them the money to do so, and because US 'costs of production' will still include the comparatively high costs of DOL/OSHA compliance, EPA compliance, comp/unemployment/SSI/employee benefits, taxes etc.

    Ultimately this will translate into US consumers having to pay twice as much for such items no matter where in the world they are produced - including domestic production. But a declining US dollar exchange rate will also mean that imported COMMODITIES will become much more expensive in US dollar terms - which if the same 50% devaluation is followed will mean $6 per gallon gasoline, a doubling of gas/oil/electric bills etc.

    Bottom line is likely to be that the standard of living for all Americans is going to decline significantly when the US dollar starts falling rapidly.

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    Default Re: weekend commentary - the 'Pinnochio Effect'

    A declining dollar, where americans can't afford Hondas and Sony's could revive domestic manufacturing. Might take ten years and in the interim there would be economic dislocation.
    Economic dislocation is another term for recession or adjustment? I'm fairly convinced the wizards are out of magic. It would be better to stay in your wizard castle where the peasants can't see you, then be out front when the peasants realize your policies have caused their trauma, and that you have no magic. In the movies the peasants get out their torches when they know you don't have any magic left.

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    Default Re: weekend commentary - the 'Pinnochio Effect'

    A declining dollar, where americans can't afford Hondas and Sony's could revive domestic manufacturing.
    Well, maybe, but the pricing will never be at the same levels we're paying today in US dollar terms. Thus if the price of a Honda Civic winds up increasing from US$20k to US$40k it's possible that US auto companies may introduce a competitive model which they can sell for US$30k. Where Sony and the electronics industry are concerned, I doubt that even a doubling of the price of imports could be equalled by US production - simply because the manufacturing base has been 'out of business' for 20+ years, because no sane investors are going to pony up billions to re-establish production facilities when the profitability is still going to be severely limited by US labor laws, environmental laws, taxes etc. More likely the 'world market' will shift and those billion dollar investors will turn to even cheaper offshore sources with even less restrictive labor and environmental laws, with even cheaper 'slave' labor etc. in order to further reduce costs of production so the US$ denominated price can undersell Japan.

    I tend to agree with you that, once the consequences of a falling US dollar really start to come home to roost, there are going to be a huge number of 'villagers carrying torches' here in America. The last time this happened in any serious way was during the 1930's. However, unlike the 1930's where the US gov't was able to 'borrow from the future' in order to provide benefits and 'make-work' for the torch bearers, this time the US has already borrowed itself to the hilt. Thus we may be in for lots of things which haven't been seen in many years i.e. MacArthur vs the Bonus marchers.

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    Default Re: weekend commentary - the 'Pinnochio Effect'

    Quote Originally Posted by Melonie
    I tend to agree with you that, once the consequences of a falling US dollar really start to come home to roost, there are going to be a huge number of 'villagers carrying torches' here in America. The last time this happened in any serious way was during the 1930's. However, unlike the 1930's where the US gov't was able to 'borrow from the future' in order to provide benefits and 'make-work' for the torch bearers, this time the US has already borrowed itself to the hilt. Thus we may be in for lots of things which haven't been seen in many years i.e. MacArthur vs the Bonus marchers.

    Don't you know? That is why Roosevelt started WW II!

    (Oops, my bad - wrong thread)

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    Default Re: weekend commentary - the 'Pinnochio Effect'

    ^^^ careful, Deo, you're treading close to the edge. Besides, don't you know that only Republican presidents start wars to divert public attention (or so prints the NY Times anyhow) ! Be that as it may ...

    If you really want to scare yourself about the accuracy of 'official figures', it would appear that there has been a minor accounting error in regard to America's current account deficit. No big deal, only 2.7 TRILLION dollars worth !!!!! Of course, what's a couple of trillion dollars between friends, right ?



    "(snip)The global financial system seems to have a black hole at its centre. Over the last two decades, US residents have sold a total of about $5,500bn worth of IOUs to foreigners, yet the officially recorded net investment position of the US has deteriorated only by a little more than half of this amount ($2,800bn). The US capital market seems to have acted like a black hole for investors from the rest of world in which $2,700bn vanished from sight - or at least from the official statistics.
    How can $2,700bn disappear?

    It is often argued that the US can simply make large capital gains on its gross positions because its assets are denominated in foreign currency and its liabilities in dollars. However, the available data indicate that over the last two decades this factor has netted the US at most $300bn-$400bn. This still leaves a loss of well over $2,000bn to be explained."(snip)

    I assume that this is referring to the so called 'dark matter' theory, which attempts to explain how all of this money that supposedly winds up vanishing in some sort of worldwide accountant's 'black hole' is really a payoff for exported US 'intellectual property', US 'intangible assets' etc.



    Personally, I subscribe to the 'tin foil hat' / Occam's Razor theory that all of this money is secretly winding up in somebody's pocket, probably by accounting games which don't require a doctorate in astrophysics ! In other words, IMHO this theoretical worldwide accountant's 'black hole' might be better described as a 'roach motel' in regard to the actual profits from offshore operations of US companies versus the officially reported profits !!!
    ~
    Last edited by Melonie; 07-01-2006 at 08:16 PM.

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