"My Moneymaking Prediction... Deflation"

[theo]

I, 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.

[Mossy]

No deflation until the printing presses melt down.

[Rodebaugh]

The phrase no one seems to disagree with: It is a Ponzi scheme and it's just about to topple.

[didou]

Price stopped increase this week for the first time since the last few month where i live. I just pick up a bag of rice today that was half the price it was a month ago. As the economics fall apart, i think we are going to see both deflation and inflation episode randomly hitting some products/group of products, i would not be surprise to see price goes up and down like crazy.
I think in the end it doesn't really matter because long term average of everything will be inflation.

But it's all possible. Depend on how debt are erased/paid. All computer created debt in virtual bank account could disappear with a button press and make a HUGE deflation. It's easier on a government for control to have deflation instead of hyper-inflation. Government today is all powerful, everything possible.

Still buying food, security and PM over here. Not going to stop me while i can, and certainly not going to sell them for cash and betting for a deflation. I don't trust any government of any country to make good decision for most people on the planet.

You can hoard Copper cents and Nickels, they can protect you against both inflation/hyper-inflation and a deflation scenario, if you want to insure you against that possibility.

[theo]

I had a few questions.

1. With all these defaults, which bonds are safe? If there is a systemic collapse of debt even "safe" bonds will turn to dust.

2. Won't a sovereign default greatly erode the value of the nation's currency? This seems to be especially true of the U.S. since I doubt that any foreign nation or bank will want to hold a our currency as a reserve asset or accept it for trade goods (like oil) if we default.


"You can hoard Copper cents and Nickels, they can protect you against both inflation/hyper-inflation and a deflation scenario, if you want to insure you against that possibility."

Good point.

[Mossy]

I had a few questions.
1. With all these defaults, which bonds are safe? If there is a systemic collapse of debt even "safe" bonds will turn to dust.

My (totally uninformed and ignorant) opinion? The only paper worth anything is going to be a deed to some farmable land owned free and clear in an area with low property tax.

[argent_pur]

I had a few questions.

1. With all these defaults, which bonds are safe? If there is a systemic collapse of debt even "safe" bonds will turn to dust.

2. Won't a sovereign default greatly erode the value of the nation's currency? This seems to be especially true of the U.S. since I doubt that any foreign nation or bank will want to hold a our currency as a reserve asset or accept it for trade goods (like oil) if we default.


"You can hoard Copper cents and Nickels, they can protect you against both inflation/hyper-inflation and a deflation scenario, if you want to insure you against that possibility."

Good point.

I'm not sure that one of the PIIGS defaulting will "bring down the house of cards"...how many countries hold Italian bonds in any significant quantity? The effects for Italians will be chaotic, but they're not the lynchpin I don't think.

But getting to your questions, Theo...I'm with you on Pt.#1, I don't understand the argument the way he puts it either. If one (or all) of the PIIGS default, bonds would only be safe assuming your country issues the bonds everyone runs to. But he says that a default by any of them could topple the whole house, in which case it would seem no bonds would be safe, at least in the short run.

Question 2: If WE defaulted, then, yes, the value of our dollar would plummet, but the vaporization of all that money would work in the opposite direction (remember it's the prodigious amounts of the stuff floating around that is causing its value to drop). The question is which effect would be larger? I would think that, on net balance, the deflationary effects of a default would be larger and our currency may actually gain value, perhaps not immediately, but eventually.

Anybody agree or see things differently?

[BamaJoe]

I 've read the deflationist's arguments and just can not buy into them.

If default is avoided and we have deflation then the already impossible to pay debt would be even harder to pay - hence default would occur anyway.

If there is default then there would be a complete loss of faith in the dollar, which by the way is the true definition of hyperinflation. Inflation is the increase of money supply and hyperinflation is the loss of faith in that currency.

I'm convinced that the government is just going to keep those presses printing until we are looking at hyperinfation or at the very least inflation that will make the Carter days look tame.

[John_doe]

Tell you what, if the frn surges against other goods I'll buy more gold/silver. When the dollar surges, real assets dip in price (typically, I'm sure some of the other members can create some compelling arguements to the contrary). If the dollar surges I go all in on commodities.

I hope your right.

[John_doe]

The phrase no one seems to disagree with: It is a Ponzi scheme and it's just about to topple.

Agree.

[John_doe]

Russia and china leading the world into dumping the dollar will probably speed it up. I don't think anyone "wants" the frn to fail, but the frn is going to fail.

Consumerism in America is done. If you aren't producing, I wish you the best of luck.

[NHsorter]

I am still counting on inflation. I'm still seeing it everywhere.

[Economist]

I'm betting the Fed will monetize as much debt as it takes to keep US bond yields in a comfortable range.

I don't think default would necessarily hurt the dollar; outright default could be a great thing, even in the short run. It would basically be the government giving up on a hopeless dream and facing reality: they can't pay this debt, at least not in dollars of constant purchasing power. Admitting it now through a technical default would be most favorable to a non-monetization (and hence non-inflationary) solution.

[theo]

I'm betting the Fed will monetize as much debt as it takes to keep US bond yields in a comfortable range.

I don't think default would necessarily hurt the dollar; outright default could be a great thing, even in the short run. It would basically be the government giving up on a hopeless dream and facing reality: they can't pay this debt, at least not in dollars of constant purchasing power. Admitting it now through a technical default would be most favorable to a non-monetization (and hence non-inflationary) solution.

While an outright default may be the most preferable among several bad options, it would still mean a decrease in the standard of living for most Americans. Most things that say "made in China" would sky rocket in price, not to mention the prices of commodities like sugar, coffee and oil.