thoughts on the continuing crisis the elements of deflation a presentation by john mauldin, author...
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Thoughts On the Continuing Crisis
The Elements of Deflation
A Presentation byJohn Mauldin,
Author of Bull’s Eye Investing And the Editor of Thoughts from the Frontline
www.2000wave.com, www.johnmauldin.com
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Is the Glass Half Full…Is the Glass Half Full…
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Or is it Half Empty and Or is it Half Empty and Leaking?Leaking?
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US Headline CPI Inflation US Headline CPI Inflation
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The Elements The Elements
of of DeflationDeflation
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9 Million Part Time Workers9 Million Part Time Workers
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Total “U6” Unemployment Total “U6” Unemployment Including Part-Time Workers is Including Part-Time Workers is
16.8%!!!16.8%!!!
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33% Unemployed for 6 33% Unemployed for 6 MonthsMonths
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Jobs Losses are Far Below Jobs Losses are Far Below AverageAverage
This is NOT a Typical Recession This is NOT a Typical Recession
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A Few Data Points on A Few Data Points on Unemployment Unemployment
If you include “discouraged workers” with U6 then If you include “discouraged workers” with U6 then unemployment is 21.1%, and therefore more than unemployment is 21.1%, and therefore more than 13% total unemployed13% total unemployed
Since 1999,, even as the population grew by 33 Since 1999,, even as the population grew by 33 million, the private sector has lost 235,000 jobs million, the private sector has lost 235,000 jobs (BLS data) because of job losses in the current (BLS data) because of job losses in the current recession.recession.
Wages are falling and Hours Worked is at an all Wages are falling and Hours Worked is at an all time low 33 hourstime low 33 hours
18 million NEW jobs will be needed in five years 18 million NEW jobs will be needed in five years to get us back to employment levels last seen in to get us back to employment levels last seen in 20072007
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History Tells Us Without Wage History Tells Us Without Wage Pressure There is Little Chance Pressure There is Little Chance
of Inflation of Inflation
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Mortgage Equity Withdrawal Mortgage Equity Withdrawal Fueled the EconomyFueled the Economy
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The Impossible HappensThe Impossible HappensThe US Consumer Stops The US Consumer Stops
BorrowingBorrowing
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The Psyche of the American The Psyche of the American Consumer Has Been Permanently Consumer Has Been Permanently
Seared with the Pain of Falling Seared with the Pain of Falling Home Prices and Stock PricesHome Prices and Stock Prices
****************************Faced with Retirement Issues, And Faced with Retirement Issues, And the Need for Increased Savings, the Need for Increased Savings,
Consumer Spending is Going to be Consumer Spending is Going to be
Challenged for Years Challenged for Years
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Savings Actually Explode Savings Actually Explode Upward During this Great Upward During this Great
Recession!!!Recession!!!
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As Does The Savings Rate! As Does The Savings Rate! File Under Be Careful What You File Under Be Careful What You
Wish For!Wish For!
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MortgagesMortgagesIt’s Not Just a Sub-Prime It’s Not Just a Sub-Prime
ProblemProblem
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Housing Sales are FlatHousing Sales are Flat
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Housing Prices are at Best Housing Prices are at Best FlatFlat
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Banks Have Yet To Banks Have Yet To Deal With Bad LoansDeal With Bad Loans
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Most likely recovery is a “W” with a long Most likely recovery is a “W” with a long tail due to slow growth and rising tail due to slow growth and rising
mortgage ratesmortgage rates. . Fall2005
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Housing Data Points Housing Data Points
Over 1/3 or Mortgages are Now Over 1/3 or Mortgages are Now UnderwaterUnderwater
It will be 2011 Before We Move It will be 2011 Before We Move Through the Excess Housing InventoryThrough the Excess Housing Inventory
Foreclosures are Adding More Homes Foreclosures are Adding More Homes to the Inventory of Unsold Homesto the Inventory of Unsold Homes
There May Be as Many as 500,000 There May Be as Many as 500,000 Homes in the Shadow REO InventoryHomes in the Shadow REO Inventory
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The Effect of the StimulusThe Effect of the Stimulus
Without the Stimulus, GDP would Without the Stimulus, GDP would have been a -6% in the Second have been a -6% in the Second Quarter!Quarter!
Without the Stimulus, GDP Would Be Without the Stimulus, GDP Would Be Flat to Negative this QuarterFlat to Negative this Quarter
Question: Question: What Happens When What Happens When
the Stimulus Goes Away? Especially to the Stimulus Goes Away? Especially to States and Municipalities?States and Municipalities?
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Government Receipts Are Government Receipts Are DownDown
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Be Careful What You Wish Be Careful What You Wish ForFor
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Volume of Word Trade Volume of Word Trade Collapses 20%Collapses 20%
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And Thus Capacity Utilization And Thus Capacity Utilization Falls off the CliffFalls off the Cliff
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The Velocity of Money is The Velocity of Money is SlowingSlowingY=MVY=MV
(Where Y is Nominal GDP, M is Money Supply and V is Velocity(Where Y is Nominal GDP, M is Money Supply and V is Velocity and Y is Sometimes seen as Price times Quantity) and Y is Sometimes seen as Price times Quantity)
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M2 is Flat or Falling M2 is Flat or Falling Since the End of FebruarySince the End of February
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What is Money???
M-1, M-2, gold? – Misleading M-1, M-2, gold? – Misleading MeasureMeasure
Money is CASH + CreditMoney is CASH + Credit Cash is $2 TrillionCash is $2 Trillion Backed by Credit of $50 TrillionBacked by Credit of $50 Trillion
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Destruction of Assets in the Destruction of Assets in the Great DeleveragingGreat Deleveraging
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Deleveraging brings Deflation
DNA Changes in the FED DNA Changes in the FED Governors….they become Governors….they become genetically opposed to genetically opposed to deflationdeflation
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The FED is at a Major Crossroads
Allow inflation like 1970s or Allow inflation like 1970s or
Withdraw liquidity and slow Withdraw liquidity and slow recoveryrecovery
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The Great Experiment
Keynes Keynes
VSVS
von Misesvon Mises
VSVS
FisherFisher
VSVS
FriedmanFriedman
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Re-Inflation?It may take up to $2 TrillionIt may take up to $2 Trillion
in new printing press money to in new printing press money to re-inflatere-inflate
It will work, but what then?It will work, but what then?
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Like John Paul Jones, Bernanke will soon Like John Paul Jones, Bernanke will soon say:say:
““Sir, I have not yet Sir, I have not yet begun to print!”begun to print!”
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How did we get it Sooo Wrong?
We taught two generations We taught two generations of managers theories which of managers theories which were patently absurdwere patently absurd
We let rating agencies We let rating agencies become too importantbecome too important
We believed the trend.We believed the trend.
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The Elements of DeflationThe Elements of Deflation
If you add:If you add:
Rising Unemployment and Wealth Rising Unemployment and Wealth Destruction and Reduced Borrowing and Destruction and Reduced Borrowing and Lending and Decreased Final Demand and Lending and Decreased Final Demand and Increased Savings and High Capacity Increased Savings and High Capacity Utilization and Massive Deleveraging and Utilization and Massive Deleveraging and $2 trillion in Bank losses and a Very Weak $2 trillion in Bank losses and a Very Weak Housing Market and Slowing Velocity of Housing Market and Slowing Velocity of Money Money
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You Get Deflation You Get Deflation
and and
Nothing But Bad Nothing But Bad ChoicesChoices