Deflation and Debt Destruction

Good Morning Folks!

This will be my last post of the year. I hope everyone has fun celebrating tonight. Be safe and have a Happy New Year! I am sure many of you are glad 2008 is over from an investment standpoint! Lets hope 2009 isn't as painful.

The markets are up mildly this morning. Jobless claims for the shortened holiday week were still close to 500,000. A startlingly bad number but what else is new right?

I want to highlight an excellent interview around deflation that I caught on the Market Oracle last night. This is one of those interviews that sends chills down your spine and keeps you up at night. The interview is between the famed economist Martin Weiss and his currency expert Jack Crooks.

I will put up the charts from the interview followed by a few comments and highlights from the interview. In my opinion, these two have it 100% totally right. This has been my thesis for about 2 years. The deflation we are seeing is breathtaking and getting worse, and the Fed is powerless to stop it.

Here are the charts followed by a few comments below:

First of all we have seen a massive destruction in wealth that totals $7.7 trillion:

Mortgage debt is completely collapsing as the the number of new mortgages in total dollars is being dwarfed by the number of mortgage dollars that are defaulting:

The Fed and the TARP are powerless to overcome this massive loss of wealth:

My Take:

I want to highlight a few critical exchanges in this interview. I love how they put the economic stimulus in perspective. Ben Bernanke and Bubblevision are constantly touting that this isn't Japan or the Depression all over again because we are flooding the system with money. As you can see by this exchange, this is flat out wrong and it will not work:

"Jack: But many people believe the 1930s Depression was caused by the failure of the federal government to fight the decline. This time, they say, the government is doing precisely the opposite.

Martin: In reality, America's First Great Depression wasn't caused by what the government failed to do to stop it. Rather, it was largely caused by all the wild things the government did do to create the superboom in the Roaring '20s that preceded it. They dished out money to banks like candy. They let banks loan money to brokers without restraint. And they encouraged brokers to hand it off to stock market speculators with 10% margin.

But if you want to see what happens when a government intervenes aggressively after a bust, just look at Japan since 1990. Japan lowered interest rates to zero, just like the Fed is doing today. Japan bailed out banks, brokerage firms and insurance companies, much like the Fed is doing here. Japan embarked on massive public works projects, much like President-elect Obama is proposing now.

But it did not end the deflation. And it did not prevent their stock market from making brand-new lows this year."

This is an absolute perfect answer as to why this is a bunch of bullshit.

Critical Point #2!

Here is another highlighted exchange about how the $ 8.5 trillion dollars in bailouts promised by the government is a bunch of smoke and mirrors:

"Jack: Still, most people think the government can just print more money at will. They're now talking about a total bill of $8.5 trillion. Your numbers don't seem to account for that.

Martin: Because those bigger numbers are almost entirely guarantees and swaps — not net new money added to the economy. Plus, please bear in mind one more thing: The wealth destruction we've been discussing today does not include the losses by financial institutions, corporations and governments."

100% right again. These are guarantees and do nothing to help the economy.

Bottom Line:

I would advise everyone to read this article in full. Their advice on getting through this debacle? Raise cash. Dollars will become much more valuable as this debt destruction continues. Your dollars will allow you to buy more and more as deflation destroys the value of all assets. Look at how much more gas you can get now versus a year ago with a dollar!

I could have written 5 pages on this because its the best piece of research I have seen to date. Things are going to get real tough, and this interview really helped put things in perspective. This is all falling apart at a much faster pace than I anticipated folks.

2009 looks pretty hopless in my view. We continue to party on for now in the markets. Up 1% as I speak. Play the tape!

Have a great holiday and safe New Years Eve!