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Monday, October 12, 2009

What part of the cycle are we in?

Items of Interest:

Zero Hedge:
Goldman Increases Ten Year Deficit Estimate To $10.5 From $9 Trillion, Sees Output Gap At 10% -- A comprehensive analysis by Goldman Sachs of the long-term US economic forecast discloses some rather unexpected pessimistic observations.

Last week the US Treasury closed the books on fiscal year (FY) 2009, a year that will go down as a gamechanger in modern US budget history. According to estimates by the Congressional Budget Office (CBO), the Treasury will report next week that the FY 2009 deficit was just over $1.4 trillion (trn). This is more than triple the FY 2008 shortfall and, at 9.9% of GDP, by far the largest relative to the size of the economy since World War II. Both revenues and outlays reached extremes not seen in more than 50 years (15% and 25% of GDP, respectively)...
The Big Picture:
Getting Better ?

U.S. states suffer "unbelievable" revenue shortages -- The U.S. economy may be creeping toward recovery after the worst slowdown since the Great Depression, but many states see no end in sight to their diving tax revenues.

Tax revenues used to pay teachers and fuel police cars continue to trail even the most pessimistic expectations, despite the cash from the economic stimulus plan pouring into state coffers...
Kevin Depew / Minyanville.com:
Five Things: The Credit Cycle Begins Again -- So how will this cycle end? Exactly like the last one: in tears, perhaps even worse if the cycle of risk-seeking behavior doesn't penetrate the consumer, as I believe it won't. While that could be wrong -- we'll see -- the bottom line is this cycle will continue to play out over a period of time. Because the consumer will be less of a participant this time, the duration of this credit bull market may be shorter than some credit market watchers expect. But the end result will, again, be exactly the same...
Mr. Practical:
The Credit Cycle Is Not Over
Nick Paumgarten / New Yorker Magazine:
The Secret Cycle -- Is the financier Martin Armstrong a con man, a crank, or a genius?

[...] I was told, time and again, that some of the biggest investors out there view even the wackier cycle theories with respect, and factor cycles into their allocations. This may say less about the viability of cycle theory than it does about the chimerical folly of market divination—which may be why such investors are loath to discuss it. “You don’t talk to people about it, because they don’t understand," one trader told me. “It’s not something you can share openly with colleagues. It’s not accepted.”

“I’ve studied cycles for years,” Dimitri Chalvatsiotis, a London-based trader at a global hedge fund, told me. “It’s part of the methodology. It’s an overlay that defines the way I look at the world. These cycles govern the planet. That’s where you start. Some people believe news drives markets. I don’t.”

“The way I think about cycles in general is that they provide a great approach to offsetting human biases,” Laeeth Isharc, a hedge-fund manager in London and previously a trader at the giant investment firms D. E. Shaw and Citadel, said. “We tend to think that the future will be like the last few years, only more so. Cycles are a good way of reminding oneself that there is mean reversion.” ...
David Goldman / Asia Times / Inner Workings:
Gold Arithmetic: Why the Gold Price Has No Ceiling -- What’s the price of the last ticket on last train out of Paris on the night the Germans march in? Whoever is carrying the most cash will get it, and that will be the price. Robert Merton, the great finance theorist, showed that in a multi-time-period model, investors hedge against the prospective change in the investment opportunity set. If sufficient hedges are not available the price of such hedges can be arbitrarily high. As I have tried to show in several recent articles, most recently this Sept. 15 essay at Asia Times, gold is a hedge against the collapse of America’s central role in world affairs.

What is the correct price? Central banks alone own about 4.8 million tons of gold. The world produces about 2,200 tons. Suppose that central banks wished to increase their gold holdings by 1 percent. That’s 48,000 tons or so, or more than 20 times annual mining production. What’s the price elasicity on that sort of thing? How badly do you need that ticket out of Paris?
Gold a hedge and no more - yet

Safe Haven:
Gold and Saving -- It is very likely that two ultra-long-term trends reversed direction over the past two years, the first being the expansion of private-sector credit in the US and the second being the contraction of the US savings rate. The trend reversals are, of course, inter-related, in that the new trends towards less debt and more savings are being driven by economic hardship in the present and the revelation that the economic future will not be as rosy as previously thought....

Calculated Risk

MishTalk - Mike Shedlock

Paul Krugman - NY Times

The Big Picture - Barry Ritholtz

naked capitalism - Yves Smith

Pragmatic Capitalism

Washington's Blog

Safe Haven

Paper Economy

The Daily Reckoning - Australia