Saturday, November 15, 2008

Deflation, Inflation, The U.S. Banking System, Consumerism...

The World is in the grip of Deflation.  Most of us, including the Federal Reserve, the ECB, the Bank of Japan, and the rest of the Central Banks missed this over the past year, and those that thought it was in the cards did not really know when or how much - or they would have bet BIG.

The various Central Banks, the U.S. Treasury and the rest of The Powers That Be have thrown ALMOST everything at the problem.  They have yet to pull the rip cord of MASSIVE TAX CUTS or government spending (I can't wait to hear the justifications and rationalizations from the LEFT when Obama is forced to cut taxes "for the rich".  Of course it will be OK if Obama does it; if GWB does it it only proves that he is the Anti-Christ.  Hypocrisy knows no bounds).

There are only 2 possible outcomes:
  1. TBTB succeed in causing inflation (massive inflation), or;
  2. TPTB fail, and the world continues on the Deflationary spiral we are now on.
In the past, one would have had to think that TPTB would succeed.  Until now, I thought it would be a slam dunk.  Now, I am not so sure.  

I think contingencies must be made for both outcomes.

In the absence of a significant FISCAL stimulus plan (so far we have had only monetary stimulus), I give TPTB only a better than even chance of succeeding in 2009-2010.  Yes, they may succeed EVENTUALLY without the fiscal stimulus many years out, but that is a lot like "we cured the fever but the patient died".

The Left, which now controls EVERYTHING at the federal level, has been promising their constituents some powerful punishment of "The Rich" with confiscatory tax policy.  That is how they got elected.  They are going to need some funding to pay off their supporters (not picking on the Left here, the Right does the SAME S--T).  The economy desperately needs fiscal stimulus in the form of tax cuts and targeted tax credits (we don't need a single new bridge - maybe maintain the ones we have... we do need electric rail).  Unfortunately, neither Pelosi, Frank, Reid nor Obama have EVER started their own business, expanded it, and met a payroll.  Easy!  I am not picking on our new President, to whom I wish every success, just pointing out that the sensibilities of the people running the party in power.  They do not come from the TAX PAYER side of the aisle.  Their constituents are TAX RECEIVERS.  Cutting taxes as the vehicle to save our economy would seem a stretch for these folks, but hey - you never know.

If the fiscal stimulus is not forthcoming - immediately - I think our deflationary spiral might continue throughout 2009.  And that would not be good, if I may make use of the understatement.  Said deflationary spiral would destroy the remaining equity in American's homes, and would turn most of the commercial property owners up side down as well.  Corporate bonds would default in record numbers, and the equity market would collapse.  At some point, it would become too late to work the fiscal magic, at least for this generation. 

So we got that going for us.

Now maybe I am just gloomy today.  Or maybe I just got up on the wrong side of the bed.  Whatever.  I think that folks with a lifetime of savings and investments need to understand the potential outcomes, and the best course of action for any given case.  I think caution and a deep skepticism of the communications coming from our officials is in order, because so far they have not been particularly good at reading the tea leaves or speaking frankly.

Keep a close eye on the weekly Oil import data at the EIA's website, the U.S. Treasury's bond auctions, the Fed's money supply numbers, and the business conditions in your own backyard.  As you know, I am particularly keen on the Oil import numbers because, if they continue to fall (and I believe that to be the most likely outcome), all of our questions will have been answered. And we are not going to like the answers.  

Good luck!

Mentatt (at) yahoo (d0t) com


Anonymous said...

I just read in the WSJ that G20 have come up with nothing to report from their much awaited meeting. You may want to add that to your reasons for concern. I would expect that the stock markets will do another leg down. I don't know what people expected, a second Bretton Woods, a gold backed currency, a simultaneous interest cut, Osama Bin Ladens head on a stick. Whatever that was they didn't get it. So the markets will be selling off. On the other hand, who the heck knows nowadays. Nothing makes sense in the markets. As you said it already - the insane are running the asylum.

Meantime, all is fairly quiet in the bond markets (which are much bigger then equities). Sort of a calm before the storm. You get a feeling we are in the eye of the hurricane. It is about time to be slapped on the other cheek.

Have a great week.

Best regards,
Chuck H.

Greg T. Jeffers said...

Short term, the market might be happy that the G20 did not do anything crazy. Over the next 5 years I am very, very concerned about the OECD economies and the method of storing value.

I find low leveraged energy companies attractive, as well as gold and silver bullion and miners.

Everything else leaves me cold.

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