Soft-Core Deflationism

Untitled Document

by Addison Wiggin & Ian Mathias

  • About that Treasury rally, and how long it could go on
  • How to invest wisely no matter what the economy is doing
  • Housing numbers: Some skewed by tax credit, some not… Guess which ones sparked a stock rally?
  • Advice for the unemployed college grad: India on $10 a week


  If patience is a virtue, we feel especially virtuous this morning.

We acknowledged last week the sell side of our new Trade of the Decade wasn’t going to play out right away. The evidence has become even stronger since. In fact, yesterday Bill Bonner expounded upon his case for “soft-core deflationism”…

  1. There is no recovery; there won’t ever be a recovery
  2. The deleveraging period will be longer and harder than people expect…leading to spells of deflation and double…triple…dipping
  3. The feds will fight it with every weapon available
  4. However, they will not push the “nuclear button” — wanton, reckless money printing — until the bond market cracks
  5. It will not crack soon, because the feds are incompetent; they will not succeed in getting higher rates of inflation — at least not soon.
  6. The dollar will remain strong. Bonds will go up…for now…
  7. The Dow will fall…but not below 1,000…probably not below 5,000


Due to some rather extreme travel delays, our roving reporter’s account of Bill’s Vancouver speech — and the entire final day’s activities — was delayed until today. You can catch it right here.

(In kind, we’re extending the discount on the complete CD and MP3 sets of the Vancouver sessions. Grab them now if you haven’t already, because the price goes up at midnight.)

  “I know this is going to end badly,” Barry Ritholtz, author of Bailout Nation, told our Vancouver gathering last week. “I just don’t think it’s going to end badly tomorrow.” Barry was likewise suggesting our trade of the decade may, indeed, take a decade to pan out.

“The only way you can get the 10-year yielding 3% is when you have a lot of scared investors” — scared of the euro, scared of the yen, scared of everything else. “In the land of the blind, the one-eyed man is king.” And that won’t change, he says, until more people have jobs.

  In that light, Mr. Ritholtz noted on this blog this morning that 2-year Treasury yields hit an all-time low last week of 0.552%.

“The bond market is less concerned with government spending,” a Bloomberg article suggests, “than with getting the economy back on track.” And that’s not likely to change until more Americans have jobs.

  Of course, predictions can be wrong — especially when they’re about the future.

“I asked how many people thought we would have a double-dip recession in the next two years,” Chris Mayer recounts a segment of his own speech last week. “Almost everyone’s hand went up. No one thought we’d avoid that fate.

“Then I asked how many people had no idea. A few hands went up. Honest people, I say. I don’t have any idea either. It’s something that’s unknowable. There are too many shifting variables. A strong conviction on a double dip is like having a strong conviction about next week’s weather. It’s a tough call.

“But you don’t really have to know the answer to the double-dip question to invest well. Too often people think that a poor economy makes for a bad investing environment. It depends on prices.”

[Note: Chris identified seven bargain-priced stocks during his afternoon “breakout” session in Vancouver. If you weren’t there, but you’d like to get the names and ticker symbols, here’s where to go.]

  Housing prices are up 4.6% year over year, according to a Case-Shiller index seriously skewed by the last-minute rush for the homebuyer tax credit. The May numbers released this morning registered the biggest yearly gain since August 2006.

The real tell will be in two months… when we get the July numbers, after the deadline for buyers to close on their purchases and still claim the tax credit.

  Prime home borrowers are entering foreclosure at a record clip, according to a report from the firm Lender Processing Services. The number has grown 425% since January 2008, and the biggest increase came just in the last two months. That’s a whole lot of inventory that’ll be coming on the market soon. And it gets worse…

  The number of foreclosures initiated on Fannie- and Freddie-backed properties grew 21% from May to June, according to LPS Applied Analytics. That may signal the final wave of failed mortgage modifications… and extend-and-pretend tactics reaching capitulation.

  Wall Street is having one of its bipolar days.

The release of the Case-Shiller report was an early buy signal. But then came the Conference Board’s consumer confidence measure, hitting lows last seen in February. (People are gloomy about job prospects — imagine that.) Sell! As we write, the major indexes are flat compared to yesterday’s close.

  In contrast, spot gold got whacked by the housing numbers, and haven’t recovered since. An ounce of the money metal fetches $1,168.

  U.S. states face budget shortfalls totaling $84 billion for the coming fiscal year, according to the National Conference of State Legislatures.

The good news is that figure is less than half the $174 billion total state-level deficit in fiscal 2010. The bad news is the estimate assumes Uncle Sam will come through with Medicare reimbursements that so far Congress has yet to approve. Oops.

  Now some friendly advice for parents whose kids are wondering where to go to college. You want high pay? Go for Harvey Mudd College, an engineering school in Claremont, Calif.

A survey by reveals Mudd graduates earn $126,000 a year by the time they reach midcareer — better than the Ivies, MIT, Stanford, you name it. In general, engineering, science and math majors have the most earning power, according to the survey.

Of course, we regularly ignore when we hire and train new employees.

  But if it’s too late for your college-age child to make that choice, here’s a suggestion for unemployed graduates: Move to India. That’s what a 2009 political science grad from Fordham did.

“Most of my college friends still live at home,” writes Andrew Dana Hudson in the prestigious Chronicle of Higher Education, “and many of those who have moved out are borrowing money from their parents to eat and pay rent.

“I help out doing a little photography, a little feature writing and a lot of copy editing.”

Hudson is working for an English-language newspaper in the state of Sikkim. “Native-level English proficiency is a rare skill in much of the developing world. I take garbled press releases from local nongovernmental organizations and government departments, and equally garbled correspondent reports from remote districts of the state, and fix the punctuation, syntax, usage and spelling to turn them into real news stories.

“The cost of living here is so cheap that, with my room and board taken care of, I can live comfortably on around $10 a week. If I were back in the United States, even with the most austere lifestyle, I would be costing my family far more than that by just eating their groceries, running their utilities and burning their gas.”

As popular as the sentiment appears to be among readers, we suspect more than a few students will be following Hudson’s footsteps in the years ahead.

(We suggested a few years ago that young American women would be seeking domestic work in Chinese middle-class homes before the great money migration to the East was over. That went over like a lead balloon too.)

  “Not so fast,” warns a reader taking issue with a similar sentiment expressed yesterday. “Over this decade, China will face trouble keeping its labor costs down. It’s already started on the coast (Foxconn, Honda, etc.). The fact is that the virtually infinite pool of migrants from the countryside has practically run dry.

“Add that the self-inflicted demographic tragedy of the one-child policy, and it doesn’t seem that China will be able to sustain its past growth. It will likely mature sooner than other industrialized countries without raising the standard of living like them.”

The 5: It’s astounding how confident you can be in facts you can’t possibly know, isn’t it? We don’t count ourselves out. In fact, we explore these very labor issues in the upcoming beta issue of Apogee Advisory. We understand your argument. But in the end, conclude wage growth is a positive trend for China… and the West.

The next beta Apogee reader will be out this week. If you’d like to get the issue as soon as it comes out, we’re still welcoming new beta testers.

  “Your math amuses me,” writes another reader, this one in reply to the reader who, perhaps falsely, envisioned huge economic benefits from cutting the defense budget 95%.

“What do you do with the 500,000 laid-off defense workers you produced by using defense funds to employ retired military? They are the highest educated and most skilled, and have produced the science that provides the Internet, GPS, etc.”

  “Of course, you realize,” chimes in another, “that $700 billion would never be returned to us peons.

“Instead, it would be spent on new programs that suddenly have funding or, heaven forbid, just used to reduce the deficit. Either way, no multiplier, no economic growth, no benefit, except possibly to some tinhorn dictator who suddenly is our military equal.”

  “You obviously did not learn,” adds a third, “the lesson of the Iraq war on the disenfranchisement of the Iraq army. They all (90%) became the ‘enemy combatants’ of our policy in Iraq. They were the majority of the opposing force using IEDs, etc. 

“They had no means of supporting their family, therefore they went where someone cared, or appeared to. There is no employment opportunity for our armed forces if it is disbanded.

“Where are you on the ‘jobs created’ by the Obama? It would take years for the Obama government to free up dollars for the private enterprise to create jobs for these ‘unemployed armed forces personnel.’

“Get a life!”

The 5: Facts are such stubborn things, we often like to say. We’re just curious where you got yours.


Addison Wiggin
The 5 Min. Forecast

P.S. “We’ve had a trend for most of the past 200 years,” Marc Faber began as he summed up his remarks in Vancouver. “The GDP of countries like China and India went down while the West surged. That’s now changed. Emerging economies will go up, and your children in the West will have a lower standard of living than you did.


“We won’t sink to the bottom of the sea. But other countries will grow much faster than us. The world is very competitive, and the odds are stacked against us. Americans, with their inborn arrogance, will not let it go that easily, so there will be lots of tension going forward.

If you’d like investment advice on how to position your portfolio for these long-tail events, you can get every one issued at last week’s symposium by taking advantage of our discounted offer for the CDs and MP3s of the event.

As we mentioned above, because of the extreme weather in the Midwest over the weekend, most our travel and publishing schedule got pushed back a day. Your discount offer remains intact until midnight tonight.


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