Deflation is Coming

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Inflation or deflation – or Both? Mish vs. Dr. Doom

Which is the greater threat, inflation or deflation?In Marc Faber and Michael “Mish” Shedlock, we found two market watchers ready (and able) to champion both sides of this great debate.Shedlock, an investment advisor with SitkaPacific Capital and author of the economics blog, MISH’S Global Economic Trend Analysis, made the case for deflation: Credit is contracting, despite Ben Bernanke’s best efforts to flood the financial system with liquidity.”The money supply is just sitting there as excess reserves on bank balance sheets,” Mish says. “Bernanke can print this money but unless it makes its way into the real economy we’re not going to see inflation.”In addition, he predicts “another leg down” in housing and commercial real estate, more consumer loan defaults, and notes state and local governments are (finally) cutting back on spending in the face of falling tax receipts and budget deficits. All these trends will contribute to the deflationary force of credit contraction, Mish declares.But Shedlock is missing one critical factor says Faber, publisher of the Gloom, Boom and Doom Report: “When the economy’s bad, governments pile up these fiscal deficits and they print money” to offset the deleveraging of the private sector, he says. “They’re going to print and print and print.”If the economy sours again and especially if deflationary forces take hold, we’ll have “even more stimulus packages and even more printing,” Faber says. “That will bankrupt western governments – not just in the U.S. but everywhere. “And by that, he means the dollar and other western currencies will collapse, leading to a bout of rising (if not hyper-) inflation around the globe, which will spur all manner of societal unrest and geopolitical strife. Now you know why they call him “Dr. Doom.”

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U Shaped or Double Dip – Economic Risks Are Rising

U.S. Growth Outlook:  Still Anemic and U-Shaped but Risks of a Double-Dip Recession Are Rising

by Nouriel Roubini

A slew of poor economic data over the past two weeks suggests that the U.S. economy in 2010 is headed for – at best – a U-shaped recovery. The macro news, including data on consumer confidence, home sales, construction and employment, actually suggests a significant downside risk even to the anemic 2.7% growth which RGE forecast for H1. With the positive effects of the historic levels of fiscal stimulus due to fade this year, the U.S. faces at best a 1.5% growth rate in H2, which looks too close for comfort to a tipping point of a double-dip recession.

40%-50% Chance Stocks Will Crash To New Low, Says Gary Shilling

Last summer, our guest Gary Shilling of A. Gary Shilling & Co. predicted that stocks would fall 30%.  That hasn’t happened yet, but the extraordinary bull run that made idiots out of many of Wall Street’s greatest gurus last year has now finally reversed, and Gary is sticking by his bearish guns.

At Dow 10,000, Gary says, stocks are still priced to reflect a strong economic recovery throughout 2010 and 2011.  And that’s not going to happen.  Consumers still account for more than 70% of the spending in the U.S. economy, and consumers are retrenching.  The value of their assets has plummeted, so they’re finally saving again.  They’re unemployed.  They’re tapped out.  Put all that together, and consumer spending will continue to be weak, and the overall economy will only grow 2% a year.

When the market finally realizes that its dream of a v-shaped recovery is too optimistic, stocks will go lower–perhaps much lower.  In fact, Gary thinks there’s a 40%-50% chance they’ll crash right through the bear-market lows set last spring.

So what’s an investor to do?

Buy Treasury bonds, Gary says.  Contrary to the concerns of they hyper-inflation crowd, the world is awash in excess capacity.  We have too much production capacity, too many houses, too much labor.  Overcapacity leads to deflation, not inflation.  So today’s 4.5% long-term Treasury yield will go to 3%, making bondholders 25% in the process.

And buy the dollar.  At the end of last year, everyone agreed that the dollar was going to continue to collapse.  That was your queue to get the heck out.  It’s not that we don’t have serious problems with deficits and debt in the U.S., Gary says–it’s that our problems are less bad than the problems facing the Euro.  Gary thinks the dollar will rise back to parity with the Euro, a major move from the ~$1.35 it takes to buy a Euro today.

And sell commodities.  China is overheating, and as it corrects, it will take global commodity demand down with it.

In short, Gary says, do exactly the opposite of what everyone was telling you to do at the end of last year.

Wave of Debt Payments Facing U.S. Government

NY Times

WASHINGTON — The United States government is financing its more than trillion-dollar-a-year borrowing with i.o.u.’s on terms that seem too good to be true.

But that happy situation, aided by ultralow interest rates, may not last much longer.

Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed.

Even as Treasury officials are racing to lock in today’s low rates by exchanging short-term borrowings for long-term bonds, the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages. Continue reading

Stephen Roach says, U.S. Consumer Deleveraging is Just Beginning

Stephen Roach

Stephen Roach

Stephen Roach: “The market is in for a rude awakening,” said the chairman of Morgan Stanley Asia, whose grim outlook seems to remain constant wherever he’s domiciled. “This will be an usually weak recovery,” Roach said. “The damage done to the system [will be] lasting – we are not even close to healing. It’s ‘game over’ for the U.S. consumer. Deleveraging is just beginning.”

Jim Rogers Says, Gold Will Hit $2,000 and USA Will Lose Status As The World’s Reserve Currency

Good Time To Buy Gold

Good Time To Buy Gold

Famed investor Jim Rogers is “quite sure gold will go over $2000 per ounce during this bull market.”Rogers’ confidence gold will continue to rally stems from a view the U.S. dollar is on its way to losing status as the world’s reserve currency.”Is it going to happen? Yes,” Rogers says. “I don’t like saying it [and] I’m extremely worried about it but we have to deal with the facts. America is not getting better [and] the dollar is going to be replaced just like pound sterling [was].”Rogers didn’t offer a timetable, and it’s likely gold would exceed $2000 per ounce if the dollar were to lose its reserve status.Still, “I wouldn’t buy gold today,” Rogers says. “I think I’ll make more money in other commodities, which are cheaper,” as discussed in more detail here.Among many others, Rogers is “worried about the fact the U.S. government is printing huge amounts, spending gigantic amounts of money it doesn’t have,” the investor and author says. “People are very worried [and] skeptical about paper money [and] looking for places to protect themselves. The best way is to buy real assets. [That] has always protected one during currency turmoil, and it will again.”

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