"My Moneymaking Prediction... Deflation"
Posted: Sun Jul 17, 2011 6:40 pmI, of course, have strong opinions about this piece; but I wanted to get some your opinions first.
Thanks,
http://www.taipanpublishinggroup.com/tp ... 657&r=Milo
Going against the crowd is never easy. Everyone likes to say they are contrarians, but when push comes to shove and they have to place an order, it takes guts.
If you make the wrong call on a stock purchase, few notice... it's between you and Mr. Market. On the other hand, if you write for a living, and you go outside the box and make a contrarian call, it's there for everyone to see.
Now, some calls are easy to make. When the world was ending and everyone said, "Sell munis," standing up and saying "the sky isn't falling" wasn't tough. Municipalities and their debt have been my expertise for more than 25 years -- and my family's for more than three generations.
We've seen a few ups and downs, to say the least.
When everyone is screaming about inflation or even hyperinflation, however, it takes real guts to mention anything other than what is considered a foregone conclusion. And I'm happy to tip my hat to my Taipan Daily co-editor Justice Litle, who on more than one occasion has taken this bold stance and recommended folks to pay attention to the great "D"... as in deflation.
Justice and I have had several conversations about how the Fed treats deflation like a four-letter word. We agree deflation is a real possibility. The difference is I have not had the courage to put it out there for the world to read.
This ends today.
(Don't forget, you can sign up for Taipan Daily to receive all of my and fellow editor Justice Litle's investment commentary.)
So, for the record, there is a very real possibility that we will experience massive deflation before we begin to see inflation or hyperinflation.
I recognize that ALL of the experts say that with the Fed's printing press working 24/7, we must get inflation. And, if you follow the true definition of inflation, an increase in the supply of money, we're there.
The symptom of inflation, higher prices, has been everywhere. It's not hyperinflation, but if you look, you can't miss it.
The problem with the inflationary argument is that it does not take into account the bond markets. Specifically, I'm referring to the PIIGS of Europe. (PIIGS = Portugal, Ireland, Italy, Greece and Spain.)
The debt market dwarfs both stimulus packages. The Fed's adrenaline shots have proven only effective on the equity side of the equation, and we've taken full advantage of it here at Taipan. (See the numbers.)
The Fed's actions are inflationary. However, there is a very real prospect of a default from one of the PIIGS. In fact, with this week's trouble in Italy, the PIIGS are indeed squealing louder than ever.
We know the EU (along with the U.S.) is willing to prop up Greece, and even perhaps Ireland or Portugal, but a problem with Italy will bring down the house of cards.
A sovereign debt default will create nothing short of a giant slurping sound as the digital currency created by the Fed, World Bank and European Central Bank disappears into the giant black hole created when a country (pick any) decides it no longer has the obligation to pay.
You can think of it this way. One day the accounts say there is value on the banksters books (in the form of bonds) and the next day... poof, it's gone.
Trillions will disappear and the sheer size of it makes any bailout impossible.
If an increase in the money supply is defined as inflation, this destruction of money, through a default, is logically deflationary.
Don't think the central bankers don't know this. It's the reason every misstep by any sovereign is met with a more accommodating response by their lenders.
It is a Ponzi scheme and it's just about to topple.
There's another unnoticed aspect for deflation. Real wages (wages adjusted by the CPI) have fallen. We all know the unemployed have to watch every dollar, but if real wages are falling, as was recently reported by the Federal Reserve, then there are fewer dollars chasing goods.
If inflation causes prices to rise, and your wages also rise, your standard of living remains constant. However, if you have rising prices and stagnate or falling wages, people can't afford to buy anything except the necessities.
Fewer dollars chasing goods creates downward pressure on prices. The simplest example is housing. Prices are falling because few are trying to buy. There is no one that argues that housing is not in a deflationary period.
I know what you're thinking: "Great, deflation... so what do I do?"
It's common theme here, but you need to be prepared. The single biggest beneficiary to a deflationary recession is cash or cash-producing investments (bonds).
Every dollar you create jumps in purchasing power. Think about it for a moment. If you had a buck in the spring of 2007, and you were in the real estate market, that one dollar today can buy 30% to 50% more in housing.
That is the same as making a 50% return on an investment. It just so happened that you were invested in greenbacks.
I know I'll get a tremendous amount of reader response for this deflation call. I welcome it at joseph@taipandaily.com.
Thanks,
http://www.taipanpublishinggroup.com/tp ... 657&r=Milo
Going against the crowd is never easy. Everyone likes to say they are contrarians, but when push comes to shove and they have to place an order, it takes guts.
If you make the wrong call on a stock purchase, few notice... it's between you and Mr. Market. On the other hand, if you write for a living, and you go outside the box and make a contrarian call, it's there for everyone to see.
Now, some calls are easy to make. When the world was ending and everyone said, "Sell munis," standing up and saying "the sky isn't falling" wasn't tough. Municipalities and their debt have been my expertise for more than 25 years -- and my family's for more than three generations.
We've seen a few ups and downs, to say the least.
When everyone is screaming about inflation or even hyperinflation, however, it takes real guts to mention anything other than what is considered a foregone conclusion. And I'm happy to tip my hat to my Taipan Daily co-editor Justice Litle, who on more than one occasion has taken this bold stance and recommended folks to pay attention to the great "D"... as in deflation.
Justice and I have had several conversations about how the Fed treats deflation like a four-letter word. We agree deflation is a real possibility. The difference is I have not had the courage to put it out there for the world to read.
This ends today.
(Don't forget, you can sign up for Taipan Daily to receive all of my and fellow editor Justice Litle's investment commentary.)
So, for the record, there is a very real possibility that we will experience massive deflation before we begin to see inflation or hyperinflation.
I recognize that ALL of the experts say that with the Fed's printing press working 24/7, we must get inflation. And, if you follow the true definition of inflation, an increase in the supply of money, we're there.
The symptom of inflation, higher prices, has been everywhere. It's not hyperinflation, but if you look, you can't miss it.
The problem with the inflationary argument is that it does not take into account the bond markets. Specifically, I'm referring to the PIIGS of Europe. (PIIGS = Portugal, Ireland, Italy, Greece and Spain.)
The debt market dwarfs both stimulus packages. The Fed's adrenaline shots have proven only effective on the equity side of the equation, and we've taken full advantage of it here at Taipan. (See the numbers.)
The Fed's actions are inflationary. However, there is a very real prospect of a default from one of the PIIGS. In fact, with this week's trouble in Italy, the PIIGS are indeed squealing louder than ever.
We know the EU (along with the U.S.) is willing to prop up Greece, and even perhaps Ireland or Portugal, but a problem with Italy will bring down the house of cards.
A sovereign debt default will create nothing short of a giant slurping sound as the digital currency created by the Fed, World Bank and European Central Bank disappears into the giant black hole created when a country (pick any) decides it no longer has the obligation to pay.
You can think of it this way. One day the accounts say there is value on the banksters books (in the form of bonds) and the next day... poof, it's gone.
Trillions will disappear and the sheer size of it makes any bailout impossible.
If an increase in the money supply is defined as inflation, this destruction of money, through a default, is logically deflationary.
Don't think the central bankers don't know this. It's the reason every misstep by any sovereign is met with a more accommodating response by their lenders.
It is a Ponzi scheme and it's just about to topple.
There's another unnoticed aspect for deflation. Real wages (wages adjusted by the CPI) have fallen. We all know the unemployed have to watch every dollar, but if real wages are falling, as was recently reported by the Federal Reserve, then there are fewer dollars chasing goods.
If inflation causes prices to rise, and your wages also rise, your standard of living remains constant. However, if you have rising prices and stagnate or falling wages, people can't afford to buy anything except the necessities.
Fewer dollars chasing goods creates downward pressure on prices. The simplest example is housing. Prices are falling because few are trying to buy. There is no one that argues that housing is not in a deflationary period.
I know what you're thinking: "Great, deflation... so what do I do?"
It's common theme here, but you need to be prepared. The single biggest beneficiary to a deflationary recession is cash or cash-producing investments (bonds).
Every dollar you create jumps in purchasing power. Think about it for a moment. If you had a buck in the spring of 2007, and you were in the real estate market, that one dollar today can buy 30% to 50% more in housing.
That is the same as making a 50% return on an investment. It just so happened that you were invested in greenbacks.
I know I'll get a tremendous amount of reader response for this deflation call. I welcome it at joseph@taipandaily.com.
