Saturday, August 8, 2009

Fleckenstein and Faber

I will have a quick take on the article below with my usual "The Bottom Line" section at the end of this post.

Let me preface this by saying this is probably the best article I have read around inflation vs. deflation. It was written my one of my favorite market commentators Bill Fleckenstein. He does a wonderful job in this piece highlighting some brilliant insight on the inflation/deflation debate from famed economist Marc Faber.

I rarely highlight a whole article, but this one is a must read from beginning to end IMO:

"Last week's 26-year high in the price of sugar must have stuck in the craw of the deflationist camp, those who fear a bout of falling prices. And that's as good a segue as any to the inflation-vs.-deflation debate.

I've spilled plenty of ink on this important topic (for example, read "What's next: Inflation or deflation?"), and this week I'd like to turn to a friend of mine, Marc Faber, for his assessment.

Marc's most recent Gloom, Boom & Doom Report contains an excellent discussion of inflation vs. deflation, and he makes the connection between the policies we're pursuing -- massive stimulus to create inflation, due to the fear of deflation -- and the funding crisis that I have warned about that will arrive as the U.S. has trouble financing its increasing debt. (Read "Why creating jobs is so hard.")

I decided to quote liberally from Marc's report. But I encourage folks to read it in its entirety. (Here's the Gloom, Boom & Doom Web site; a subscription is required.)

For newer readers who continue to ask me to elaborate on this subject, hopefully Marc's commentary will bring them up to speed:

"Deflation can be avoided through debt and money printing. This isn't to say that I support such policies, or that I find deflation to be "bad" and inflation to be "good." (Price stability is the most desirable condition.) But the point is that if a government is really determined to inflate its problems away, it can be done. Those people who believe in deflation have, however, some strong arguments. Their principal contention is that the economy is so weak (output gap) that the private sector's contraction cannot be offset by government spending and money printing."

In fact, the massive money printing and the rest of the stimulus are why gross domestic product has held up as well as it has. More from Marc:

"The deflationist argues that, because we have a weak economy, we shall have deflation; an argument with which I would tend to agree in the very short term."

For newer readers who continue to ask me to elaborate on this subject, hopefully Marc's commentary will bring them up to speed:

"Deflation can be avoided through debt and money printing. This isn't to say that I support such policies, or that I find deflation to be "bad" and inflation to be "good." (Price stability is the most desirable condition.) But the point is that if a government is really determined to inflate its problems away, it can be done. Those people who believe in deflation have, however, some strong arguments. Their principal contention is that the economy is so weak (output gap) that the private sector's contraction cannot be offset by government spending and money printing."

In fact, the massive money printing and the rest of the stimulus are why gross domestic product has held up as well as it has. More from Marc:
"The deflationist argues that, because we have a weak economy, we shall have deflation; an argument with which I would tend to agree in the very short term'

A true deflationist will also argue that because of deflation, economic conditions will worsen and, therefore, long-term U.S. government bond yields will decline. . . . But what happens to fiscal deficits and monetary policies under a scenario of a further decline in economic activity and a further collapse in asset prices? The answer is very simple. Deficits will increase further and more money will be printed. And the longer weakness in the economy prevails under the deflationary scenario, the more fiscal deficits will pile up and the more easy monetary policies will be pursued.

So, whereas near-term deflation is a distinct possibility, in the longer term inflation is more likely because of several factors. When the economy recovers (and the recovery is likely to be fragile), the Fed will be very reluctant to increase short-term rates. Another reason for the Fed's reluctance in this respect will be the size of the government debt, given that higher interest rates would increase the interest burden. Therefore, I can't imagine any scenario under which the Fed wouldn't keep interest rates at an artificially low level, as it also did post-2001. That such a monetary policy, combined with the growing fiscal deficits discussed above, is more likely to lead to inflation rather than deflation should be clear."

And here, in Marc's words, is what the funding crisis could look like:

"For the reasons I explained above, inflation will pick up. With or without Fed tightening, interest rates will shoot up because of a loss of confidence by foreign U.S. dollar debt holders and the dollar tanks. Government debt payments and health care expenditure will soar. Instead of contracting, fiscal deficits will increase and force the Fed to continue monetizing the debt at a time when it should be tightening. . . .

A vicious cycle of higher and higher inflation rates and a weaker and weaker dollar will follow amid economic weakness, because personal incomes will be squeezed by inflation. Eventually, hyperinflation will follow. So, in the debate about inflation and deflation, both camps could be right but at different times."

Marc is far more certain than I am that hyperinflation lies ahead. For me, it's way too early to have to make that determination, and it's not at all clear to me that that is our ultimate destination.

However, I am more certain than he is that the maximum deflationary pressures have passed. The policies of the Fed and other central banks are why I continue to advocate that folks own the currency with no central bank to screw it up: gold.

GEe, who knew?

Lastly, in the slap-on-the-wrist department, General Electric (GE, news, msgs) announced Aug. 4 that it had agreed to pay a $50 million fine to settle an accounting fraud complaint brought by the Securities and Exchange Commission. That followed news of the day before that Bank of America (BAC, news, msgs) had agreed to pay $33 million to settle a similar charge, regarding false statements that it made on the Merrill Lynch deal.

Were these attempts to just sweep problems under the rug? Many of us have thought that GE has been monkeying with its numbers for a long time in an attempt to win at the game of beat the number.

The modest fines imposed by the SEC make it look as though GE and Bank of America had done nothing more than tell little white lies -- which hardly instills confidence that the agency is serious about its role as enforcer of financial integrity.

Regretfully, this is what I've come to expect from the government. (If I were surprised, I'd be outraged.) What those in command do is rescue the "establishment" rather than punish them for wrongdoing. How else can you interpret giving GE the functional equivalent of a parking ticket in light of the fact that, according to Bloomberg:

"The company broke accounting rules four times in 2002 and 2003 to increase earnings or avoid reporting negative financial results, the Securities and Exchange Commission said in a lawsuit in federal court in Connecticut today. 'GE bent the accounting rules beyond the breaking point,' SEC Enforcement Director Robert Khuzami said in a statement. 'Overly aggressive accounting can distort a company's true financial condition and mislead investors.'"

If this is what the paper tiger SEC decided to charge GE with, who knows what creativity really took place? I'm sure financial scoundrels everywhere are laughing all the way to the bank."

The Bottom Line:

Both inflation and deflation will have their time in the sun but in the end, it looks like all roads lead to inflation.

Faber sees it pretty much like I do. The Fed will get more and more desperate as this crisis deepens, and they will be forced to monetize the debt out of fear that the economy will collapse if they don't.

The Fed does not have the will to let things fail. Sadly, we no longer have any leaders at the Fed that have the character and strength to make the tough decisions.

The Fed/Treasury is filled with nothing but a bunch spineless hacks that will do anything in their power to protect the financial elites in this country.

Thomas Jefferson, John Adams, and George Washington must be rolling over in their graves right now.

Friday, August 7, 2009

The Deflationary Case

Hello All!

Since we discussed inflation yesterday, I thought today was a good time to lay out the deflationary case of how this crisis could possibly play out.

We got some data today that supported further deflation in the economy. The debt vs. GDP chart below(from 2006) was just updated data on Bloomberg today:

My Take:

As you can see above back in 2006, our debt as a % of GDP soared to 330% which dwarfed any other credit bubble including The Great Depression. Today, through masssive government spending, we have somehow found a way to outdue ourselves and blow this bubble even larger!

Bloomberg reported that Comstock has an update explaining that the credit bubble has now blown to a staggering 372% of debt vs. GDP:

"Aug. 7 (Bloomberg) -- The U.S. economy may be just as sluggish during the next 20 years as Japan’s economy was in the last 20, according to Comstock Partners, a money manager founded and run by Charles Minter.

Stimulus programs and a surging money supply aren’t likely to “solve a problem of excess debt generation that resulted from greed and living way beyond our means,” the firm wrote yesterday in an unsigned report on its Web site. “We could wind up with a lost couple of decades.”

The CHART OF THE DAY shows U.S. total debt and gross domestic product since 1952, along with the ratio between them, based on data compiled by Bloomberg. The ratio rose in the first quarter to 372 percent even as household borrowing dropped for a second straight quarter, an unprecedented streak.

Assuming that private borrowers pay down debt at the same pace as they did in Japan after its 1980s economic bubble burst, the savings rate will climb to about 10 percent in 2018, the report said. The estimate was made in a study by the Federal Reserve Bank of San Francisco that Comstock cited. It’s more than double the 4.6 percent rate for June."

Take Continued:

You can click on the link at the bottom of the chart for the updated version. Folks, you need to ask yourself this question:

How on earth is this sustainable? The only way we have been able to stave off the popping of this credit bubble is through massive government spending.

There is only one way that we can stave off a collapse at this point(for awhile at least): Printing aka: Monetization of the debt! The government is broke, and the world doesn't have the desire or money to continue and buy trillions of $$$ of treasuries year after year.

The feds are down to two choices the way I see it: 1) Monetize or 2)slash spending, raise taxes, and let this credit bubble burst.

The case for a deflationary collapse was supported by some new consumer spending data in June that was released today:

"WASHINGTON (MarketWatch) -U.S. consumers reduced their debt in June for the fifth consecutive month, the Federal Reserve reported Friday. Total seasonally adjusted consumer debt fell $10.29 billion, or at a 4.9% annual rate, in June to $2.502 trillion. Consumer credit fell in eight of the past nine months. Economists surveyed by MarketWatch expected consumer credit to decline by $4.5 billion. This is the longest string of declines in credit since 1991. In the subcategories, credit-card debt fell $5.04 billion, or 3.8%, to $1.59 trillion. This is the record 10th straight monthly drop in credit card debt. Non-revolving credit, such as auto loans, personal loans and student loans fell $5.04 billion or 3.8% to $1.59 trillion."

The Bottom Line:

As you can see, the consumer is collapsing as a result of being suffocated in debt. The savings rate has soared in the past year as consumers pay off their various debts. Bubblevision will tell you that this savings is actually bullish.

They explain this by saying its just a matter of time before this "cash on the sidelines" is thrown back into the market as the "new bull market" roars on. This is a crock of you know what.


Because the savings rate doesn't differentiate between what is being used to pay off debt and how much of it is actually being saved.

The bulltards also love to use the savings rate as proof that the consumer is now once again ready to spend. Good luck with that!

If this is the case then why is consumer spending collapsing? We have seen a record 10 straight months of dropping credit card debt. If the consumer feels so healthy after saving so much cash then why is their credit spending contracting month after month?

Lets face it folks:


If we do see a deflationary credit collapse then we will have a lost generation just like Japan did.

Housing in Japan costs the same or less in most areas today then it was back at the peak of their credit bubble.

The only way it doesn't end this way for us is if the government throws the dollar under the bus and tries to inflate out of this mess via a collapsing currency.

So how does this all end folks? Too soon to tell. I think we will likely see a combination of both at the same time. Most likely in the shorter term we will see price inflation in necessities along with asset deflation in housing.

One thing seems pretty clear to me: The government appears fully prepared to blow its head off trying to bailout their pigmen buddies and the rest of the economy. Bernanke seems obsessed with trying to prevent a deflationary depression that we saw in the 30's.

I can't help but think US default because we appear to have lack of ability to allow anything to fail. How can you come to any other conclusion when you watch the continuing onslaught of massive debt issuances via treasuries and a weakening dollar(minus today)?

I still plan on holding onto plenty of dollars as a hedge in case the Fed wakes up and realizes they need to let this credit bubble collapse via deflation.

This is a very dangerous market and the speculation I am seeing in the markets makes me think BUBBMANIA is back.

We all know how this ends.

Thursday, August 6, 2009


Since the markets were quiet today, I figured it would be a good time share this excellent documentary around inflation.

Make sure you watch the Zimbabwe section in part 2 if you don't have time to watch all of this.

Part 3 paints a frightening picture of what the future may look like based on historical hyperinflation comparisons.

What's also interesting is how real estate did not keep pace with the cost of living during Germany's bout with hyperinflation. Apparantly back then they realized it's more important to eat versus spending your money on a McMansion:)

AGRICULTURE(STOCKS AND FOOD), GOLD, AND SILVER are very important holdings at this point.


Part 1

Part 2

Part 3

Wednesday, August 5, 2009

The Perfect Storm

Many of you have been asking me about housing lately via e-mail and in the comments section. I thought today was a perfect day to discuss it because I believe we are now seeing the makings of a Perfect Storm for whats left of the housing market at the end of the year.

It all starts in the bond market.

Lets take a look at some stats. First of all, lets take a look at the treasury auction today:

Quick Take:

The bid to cover wasn't bad but look at the lack of participation by the inderects(China and the other FCB's)! Only $5 billion of the $35 billion auction was bought be the world. This is pathetic and very frightening. It tells you that they are running for the hills when it comes to buying our treasury debt!

China has been warning for weeks that they planned on diversifying out of treasuries. Folks, if we lose the indirect bidders we are going to start seeing failed bond auctions. At that point the economy will be toast.

You gotta wonder if the pullback we saw today and after hours is a result of the banks backing off on buying equities because they needed the liquidity to sell the auction. Things are getting dicey!

Fed Announces Record Treasury Sales Next Week

We also got this pleasant piece of news from the Treasury today:

"Aug. 5 (Bloomberg) -- The U.S. Treasury plans to sell a record $75 billion in its quarterly auctions of debt next week and also indicated plans to expand inflation-indexed securities next year as it finances unprecedented budget deficits.

The Treasury plans to auction $37 billion in three-year notes on Aug. 11, $23 billion in 10-year notes Aug. 12 and $15 billion in 30-year bonds Aug. 13. The amounts matched the median forecast of analysts surveyed by Bloomberg News."

So how did bonds like all of this news? As you can see not very much. Treasuries sold off hard late in the day:

My Take:

The credit markets look absolutely horrifying folks. It appears the world is quietly backing away from our treasuries as we continue to issue ridiculous amounts of debt. there is not enough money in the world to soak up $75 billion a week unless we start printing. BTW, the dollar was down once again today.

This is going to force lending rates to soar which will result in further pressure on housing prices.

Even the banks are finally starting to catch up on how bad this crisis is. Take a look at Deutsche Bank's gloomy housing report:

"Aug. 5 (Bloomberg) -- Almost half of U.S. homeowners with a mortgage are likely to owe more than their properties are worth before the housing recession ends, Deutsche Bank AG said.

The percentage of “underwater” loans may rise to 48 percent, or 25 million homes, as prices drop through the first quarter of 2011, Karen Weaver and Ying Shen, analysts in New York at Deutsche Bank, wrote in a report today.

“Borrowers may also ‘ruthlessly’ or strategically default even without such life events,” they wrote.

Seven markets in states with the fastest appreciation during the five-year housing boom -- including Fort Lauderdale and Miami, Florida; Merced and Modesto, California; and Las Vegas -- may find 90 percent of borrowers underwater, according to the report.

Home prices will decline another 14 percent on average, the analysts wrote."

Final Take:

What can I say folks I am speechless. If you bought at the top you might as well just walk away now. Save yourself the grief and pressure of trying to come up with that $4000 every month to pay the mortgage on your McMansion.

It will most likely be worth 50% of what it was when you bought at the peak when this is all said and done. It will be even worse in the bubble areas mentioned above.

The Bottom Line:

Trying to chase down a foreclosure at this point is still a fools game. The speculators are once again flying into the stock market thinking the recession is over(yeah riiiight). This is probably carrying over into the housing market to a point.

Whats further threatening the housing market is the fact that the first time buyer home credit expires at the end of the year.

I spoke to a mortgage analyst at a large financial firm and he explained to me that in some areas, 90% of the deals they are doing are first time home buyers who are taking advantage of the $8000 tax credit.

He also explained to me that jumbo loans now require 20-30% down payments because no one wants to touch the paper. Minimum credit scores for all mortgages are also rising. Fannie/Freddie now want a 700 credit score. FHA now wants 620 up from 580. This sharply shrinks the potential pool of buyers.

The real estate market according to this analyst is absolutely petrified as to what happens to the housing market when this tax credit disappears.

That's the problem with stimulus folks. Its a one time high similar to what a crack head experiences after he shoots up. The problem is the high wears off and the fundamentals once again appear.

Whats frightening here as this "high" wears off at the end of the year, the fundementals will be significantly worse. IMO, we will be heading straight into The Perfect Storm which is:

Higher lending rates as a result of our Ponzi style deficits

Elimination of the Tax Credit at the end of 2009

Millions of current homeowners begin walking away

Rapidly Rising Defaults leading to further foreclosures on current loans

Even tighter lending standards requiring higher down payments and better credit scores.

Rising foreclosure inventories as banks continue to flood the market with their "Shadow Inventory"

Still want to buy after reading all this? I hope not but good luck if you do! If you MUST buy, stay on the lower end (under300k) because the inventories aren't that bad.

WARNING: I suspect inventories in this price range will rise sharply once again at the end of '09. I say this because the tax credit focused on this end of the market because first time buyers usually buy the lower end.

Stay on the sidelines folks. The housing time bomb is about to explode, and my guess is the fireworks start to go off when the tax credit disappears at the end of the year.

I think you will see a very different housing market down the road with much lower prices even several years from now.

Tuesday, August 4, 2009

Americans Say "No Thanks" To Stocks

Good Afternoon Folks

I am a little early today because I am busy this evening. Stocks are pretty flat as I type. It appears the new battleground for the bulls and bears will be S&P 1000.

As you all know, I have been very a huge skeptic of this artificial "bailout" rally over the last few months. Several weeks ago I made the comment that the TARP money was nothing but a $700 billion buy order on the S&P. This article I came across this morning in The USA Today has only heightened my suspicions:

"The stock market may be roaring, but mutual fund investors are snoring. The Dow Jones industrial average has soared 9.9% since June 30, and gains like that usually attract big inflows to stock funds. Not this time. In fact, fund investors are far more interested in bonds than stocks.

Investors bought a net $2.3 billion of stock funds the week ended July 22, according to the Investment Company Institute, the funds' trade group. Net purchases for July 1 through July 22, the latest figures available: $4.1 billion. But investors remain far more interested in bonds, which have fared far better than stocks the past decade. Total purchases for bond funds from July 1 through July 22: $28.8 billion., which tracks fund flows, estimates that another $5.2 billion has flowed into stock funds the past five days — more than in the previous four weeks combined.

But even that figure is dwarfed by's estimate of $12.3 billion that sloshed into bond funds the past five days.

At Vanguard, the pattern was the same in July: $3.9 billion to stock funds, $7.6 billion to bonds. "It was the strongest month of the year for bond funds," says Vanguard spokesman John Woerth.

Flows to stock funds remain well below their 10-year average of $7.8 billion a month."

My Take:

Alrighty folks, someone tell me how the market has rallied 50% from the lows without J6P contributing money into mutual funds in his 401k? This is one of the largest sources of money for the stock market.

The numbers in the article above are staggering. In the first three weeks of July, investors threw $4.1 billion into mutual funds versus investing a whopping $28.8 billion into bond funds.

This is pretty shocking considering the market has been soaring the last few weeks. Usually inflows into mutual funds soar when the market is flying. Why isn't it happening this go around? Perhaps investors have lost all trust in the stock market?

Do you think maybe everyone feels like they have been gamed as this casino rises and falls over 50% in less than a year? Volatility like this is not healthy and only makes investors shy away from the market because they don't understand what in the hell is going on.

The Bottom Line:

When I see data like this it only strengthens my belief that America has had it with stocks. Their portfolio's have been destroyed twice by our bubble blowing stock market.

This also reinforces my belief that this rally has been articially created using our taxpayer bailout money that was donated to them by the Fed. The banks then turned around and used it to buy every stock under the sun.

This is not sustainable IMO, and disaster #3 for the average investor is right around the corner when the trading desks at the banks run out of funds trying to rally the market without the help of the retail investor.

Let's not forget that Wall St has already infuriated the investors that got out at S&P 666 out of fear that they may lose everything. You think they might be a little frustrated and confused right now after losing 50% of their money only to see the market get manipulated back up?

Nooo, I am sure they don't feel like they have been gamed(scarcasm off).

Congratulations Wall St! Your have now officially scared almost everyone out of the market. Good luck trying to keep this rally going now that the average investor has picked up their toys and decided they no longer want to play in your sandbox anymore!

Let me use a baseball analogy: When this last rally fails it will be three catastrophic strikes in 10 years for the average investor's portfolio. We all know what that means: YOU'RE OUT!

Monday, August 3, 2009

The Dollar Showdown

Rally On!

Whoa! The speculators had a field day today. Stocks soared once again today as investors continued to chase the rally. I have said this 100 times but I will say it again: There is really no fundemental reason for this rally. However, no one on Wall St seems to care!

This is one of those hold your nose and buy moments if you are a bull. The mutual funds can't afford to not participate as stocks continue to surge because they risk trailing their competitors. At the same time, retail investors start jumping back in again thinking the bull is back! At this point IMO, jumping in now seems pretty foolish after a 50% move because you missed it.

If you are conservative(like myself) and jumped the sidelines when the DOW touched 14,000, you need to put this move into perspective. You are still looking down and laughing at the bulls because they still trail you by 30% even after this move. 9+K is a long ways from 14K. You are still way ahead even if you got out at 11,000!

The Dollar, The Bond Vigalantes, and the Big Showdown

This is scary folks. Take a look at the dollar collapse over the last few days:

My Take:

I have been thinking a lot about the bond market and deficits lately, and after reading a great piece on this topic by The Daily Reckoning, my thoughts around what I think is going on became much more clear.

What I found interesting in the TDR piece was understanding who the real bond vigilantes are in this cycle: It's the Chinese and their massive treasury holdings.

We are headed for a huge showdown folks. A very smart influential Wall St executive friend of mine has always told me that the next war will be a financial one versus a war fought on the battleground. His biggest fear has always been China. He believed that a financial war was brewing between the US and China, and the result would decide which country would be the kings of the world financial markets moving forward.

I wasn't so sure about this idea when he shared it with me at the time, but I am starting to believe that he was right.

I believe the plummeting dollar is about to force a financial showdown between China and the US. A falling dollar will eventually lead to catastrophic inflation(look at oil and the commodities the last few days) if the US doesn't stop the spending and shrink its deficits.

China has consistently told our government that they will not tolerate inflation via a crashing US currency because it destroys the value of their massive US treasuries holdings. The US on the other hand is willing to tolerate inflation because they believe they MUST keep spending and bailing because they believe(foolishly so) that this will eventually result in an economic recovery.

If the US keeps spending and creating inflation, China may go tell them to pound sand and stop buying treasuries. This would then unravel any hopes for a US recovery because treasury yields would soar, and our ability to borrow would sharlply shrink unless we printed.

This tense situation basically puts both countries on a collision course with each other with the financial system hanging in the balance!

The Bottom Line:

The US has promised to reduce their deficits once a recovery begins. The problem is we are not recovering fast enough and this is putting massive pressure on the dollar. IMO, there is no possible way for us to recover fast enough to the point where we could start paying back these deficits without putting the economy in the crapper again because there is no catalyst for future growth!

The idea that the US thinks it can grow itself out of a $14 trillion deficit before inflation hits is ridiculous. This is now being reflected in the dollar and commodities. You can guarantee that China is not happy with what is going on with the shrinking dollar.

Making matters worse is the fact that tax revenues are collapsing which further reduces our ability to pay down debt. This was just released a few monutes ago by the AP:

"WASHINGTON (AP) -- The recession is starving the government of tax revenue, just as the president and Congress are piling a major expansion of health care and other programs on the nation's plate and struggling to find money to pay the tab.

The numbers could hardly be more stark: Tax receipts are on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression, while the federal deficit balloons to a record $1.8 trillion.

Other figures in an Associated Press analysis underscore the recession's impact: Individual income tax receipts are down 22 percent from a year ago. Corporate income taxes are down 57 percent. Social Security tax receipts could drop for only the second time since 1940, and Medicare taxes are on pace to drop for only the third time ever.

The last time the government's revenues were this bleak, the year was 1932 in the midst of the Depression."


Take a look at our debt versus tax revenue that we have to pay it back:

Back to the Bottom Line:

As unemployment rises, our 70% consumer based consumption economy will not turn around because the consumer barely has a pulse. People do not have the ability to spend like they once did because their access to credit has evaporated. They are also saving more in order to both pay off their debts and ride out this nasty recession/depression.

There is no way we can create a recovery in time to please the Chinese when you look at how dire the USA's balance sheet is. This means the Fed doesn't have the ability to make good on their promises to China to reduce the defecit unless they decide to end the stimulus in order to control inflation.

The problem with this solution folks is this likely puts us in a deeper deflationary depression then the one we saw in the 1930's.

If we ignore the Chinese and keep spending(the most likely scenario in my view) then the dollar will continue to collapse and inflation will eventually cripple the economy.

Get ready for $150 oil, its right around the corner if the US doesn't back down from China.

Stay Tuned!