Must Have Titles for the Deflation Section of Your Financial Library

Deflation by A. Gary Shilling (Paperback - 2002)

Deflation: How to Survive and Thrive in the Coming Wave of Deflation by A. Gary Shilling (Paperback - 1999)

Deflation: Why It's Coming, Whether It's Good or Bad, and How It Will Affect Your Investments, Business, and Personal Affairs by A. Gary Shilling, 1998

After the Crash : Recession or Depression : Business and Investment Stategies for a Deflationary World by A. Gary Shilling (Paperback - Mar 1988)

The World Has Definitely Changed by A. Gary Shilling ( Hardcover - 1986)

Is Inflation Ending: Are You Ready? A Sober Look At the Prospects for a Decline in Inflation by A. Gary Shilling and Kiril Sokoloff (Hardcover - Mar 1983)
20 Used & new from $0.01

The Fuel for a Speculative Rally but Not a Recovery

At some point we may stop confusing asset bubbles with economic growth.

In the meantime, we might expect the shallow and immature stewardship of the economy to continue, unreformed and unconstrained. We may get quite a bear market rally in the first quarter of 2009. Whether it is the bottom or a bottom will remain to be seen.

Without a sustained increase in the median hourly wage and significant reform in the financial system and a sustainable construct for international currency exchange and trade there can be no sustained recovery in the real economy.

Excess liquidity and a corrupt financial system provides the fuel for a speculative rally, but it is also the fuel for a greater crisis to come, the longer we maintain this monetary charade. The Fed is pouring gasoline on damp wood.

Still, we ought not to underestimate the power of the Fed, having recently witnessed a counter trend reflationary rally after the Crash of 2000-2 that lasted three years and reached new stock market highs, and a housing bubble that almost crashed the world economy. They appear to have a lot of fuel, from a variety of unconventional sources, and Bernanke has the willingness to use it.

Cash at 18-Year High Makes Stocks a Buy at Leuthold
By Eric Martin and Michael Tsang

Dec. 29 (Bloomberg) -- There’s more cash available to buy shares than at any time in almost two decades, a sign to some of the most successful investors that equities will rebound after the worst year for U.S. stocks since the Great Depression.

The $8.85 trillion held in cash, bank deposits and money- market funds is equal to 74 percent of the market value of U.S. companies, the highest ratio since 1990, according to Federal Reserve data compiled by Leuthold Group and Bloomberg.

Leuthold, Invesco Aim Advisors Inc., Hennessy Advisors Inc. and BlackRock Inc., which together oversee almost $1.7 trillion, say that’s a sign the Standard & Poor’s 500 Index will rise after $1 trillion in credit losses sent the benchmark index for American equities to the biggest annual drop since 1931. The eight previous times that cash peaked compared with the market’s capitalization the S&P 500 rose an average 24 percent in six months, data compiled by Bloomberg show.

“There is a store of cash out there that is able to take the market higher,” said Eric Bjorgen, who helps oversee $3.4 billion at Leuthold in Minneapolis. “The same dollar you had last year buys you twice as much S&P 500 as it did a year ago.”

Leuthold Group, whose Grizzly Short Fund returned 83 percent in 2008 thanks to bets against equities, said in its December bulletin to investors that stocks offer “one of the great buying opportunities of your lifetime...”

The ratio of cash on hand to U.S. market capitalization jumped 86 percent in the first 11 months of the year, the biggest increase since the Fed began keeping records in 1959, as the U.S., Europe and Japan fell into the first simultaneous recessions since World War II.

So-called money of zero maturity, the central bank’s measure of U.S. assets available for immediate spending, is mostly held by households, according to Richard G. Anderson, an economist at the Federal Reserve Bank of St. Louis....

Any recovery will depend on a rebound in corporate profits and the economy after $30 trillion was wiped out from world equities this year, according to Frederic Dickson, chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. (At that's the rub, a speculative rally fueled by excess liquidity will fizzle and die if it is not accompanied by a recovery in real corporate profits, and that depends on an increase in consumption that is not dependent on additional consumer debt - Jesse)

Jobless claims reached a 26-year high this month, while economists surveyed by Bloomberg estimate household spending will fall 1 percent next year, the most since the aftermath of the attack on Pearl Harbor. A 13 percent slump in the median home resale price in November from a year earlier was likely the largest since the 1930s, the National Association of Realtors said last week, damping speculation the housing market is close to a bottom.

‘Biggest Cannon’

Analysts estimate profits at S&P 500 companies will shrink 10.3 percent in the first three months of 2009 and 5.8 percent in the second quarter, bringing the stretch of earnings declines to a record eight quarters, Bloomberg data show. Gross domestic product will contract in the first half of the year before growth resumes in the third quarter, according to a Bloomberg survey of economists.

“The fuel supply is there, but people have to have a reason to use it,” said Dickson, who helps oversee about $19 billion. “The Fed fired the shot out of the biggest cannon they know. Now the question is, will it hit the right mark?”

This year’s slump has left S&P 500 companies valued at an average of 12.6 times operating profit, the cheapest since at least 1998, monthly data compiled by Bloomberg show...

The last time cash accounted for a larger proportion of market value was 1990. The ratio peaked at 75 percent in October of that year, after the savings and loan industry collapsed, Drexel Burnham Lambert Inc. was forced into bankruptcy and the U.S. fell into a recession. The S&P 500 rallied 23 percent in six months and almost 30 percent in a year...

Dollar Assets and Liabilities in the International Banking System Update

On 2 October 2008 in The Dollar Rally and Imbalances in the US Dollar Holdings of Overseas Banks we said that:

When a multinational company deposits US dollar receipts from an export business in their domestic banks those deposits are frequently held in dollars... If those dollar assets decline because of a financial event as we are seeing today, the depositors may choose to withdraw their dollar deposit from the bank as they mature. This places the bank in an awkward position since the corresponding assets have deteriorated in value, but the nominal value of the certificate of deposit liability remains the same with the requisite interest accrual. As a result, a demand for dollars can be generated in the foreign country that is artificial but very real in terms of day to day banking operations. This is the 'artificial dollar short'

In the chart below we have updated the data from the BIS report to June of 2008, and the DX dollar index to today. In our October blog entry we forecasted that:

The resulting sharp rally in the US dollar is therefore likely to be an anomaly which will correct, and perhaps quite sharply, once the effect of the short term imbalances dissipates.

Although it is too early to say with certainty, it does appear that the hypothesis may be valid, and that the correlation is significant. The recent dollar rally was as the result of an artificial short squeeze resulting in an anomalous demand for dollars primarily in Europe.

The actions by the Federal Reserve and the foreign central banks to open their swap lines to relieve the dollar liquidity short squeeze appears to have been successful. We will see in the next series of BIS data how effective that effort has been, and if it will need to be continued as the imbalances are worked out of the system. As the ECB announced on September 13:

In order to facilitate the functioning of financial markets and provide liquidity in dollars, the Federal Reserve and the European Central Bank (ECB) have agreed on a swap arrangement. Under the agreement, the ECB would be eligible to draw up to $50 billion, receiving dollar deposits at the Federal Reserve Bank of New York; in exchange, the Federal Reserve Bank of New York will receive euro deposits of an equivalent amount at the ECB. The ECB will make these dollar deposits available to national central banks of the Eurosystem, which will use them to help meet dollar liquidity needs of European banks, whose operations have been affected by the recent disturbances in the United States.

We assume that at some point the ECB and BIS will take steps to modernize the international currency system to remove its exposure to the fluctuations of a single currency and the need for ad hoc arrangements to facilitate the proper functioning of international trade. Although a crisis has apparently been averted for now, it serves to expose the artificiality of the existing currency regime which may exist but not be as noticeable or measurable under more common conditions.

Madoffed: Kevin Bacon and Kyra Sedgwick

Why do people trust enormous sums of money to a stranger without due diligence, often on the word of another person who they may know only indirectly?

A good part of it is reputation and past performance, and who that person knows.

So Kevin Bacon and Kyra Sedgwick, in a lapse of sound portfolio theory, entrusted a sizable share of their wealth to Bernie Madoff, and are now apparently regretting that decision.

The average person likes to read about celebrity events. It provides an excitement to what might otherwise be a dull period of life. It also makes the ordinary person seem fortunate, smart, to hear of the misfortunes of the rich and famous. Misery loves company, and there is a bit of the voyeur in all of us.

Who would trust their wealth to an opaque and inherently arbitrary store of wealth, based solely on past performance and general reputation?

You would of course.

Don't believe it? Check you wallet and you bank accounts. Where is the majority of your wealth being held, if not in US dollars and dollar related financial assets?

Its not the same thing eh? Let's see how you feel about it at this time next year when Zimbabwe Ben has the monetization machine up to ramming speed.


New York Magazine
Madoff’s Latest Victims: Kevin Bacon and Kyra Sedgwick
12/30/08 at 10:15 AM

...We'd heard that along with Hollywood boldfacers Jeffrey Katzenberg and Steven Spielberg, Bacon and his wife, Kyra Sedgwick, lost money in Madoff's devastating $50 billion Ponzi scheme, and Bacon's rep, Allen Eichorn, confirmed it for us.

"Unfortunately, your report is true," he wrote. He wouldn't elaborate on whether, as we'd heard, they'd lost everything except for their checking accounts and the land they own. "I can confirm that they had investments with Mr. Madoff — no further specifics or comment beyond that," he said, adding: "Please, let's not speculate or rely on hearsay."

But we can't help but speculate! Just think about it: Footloose money: gone. Wild Things residuals: gone. The Singles stash: obliterated. If there's anyone in Hollywood who didn't deserve this, it's Kevin Bacon and Kyra Sedgwick. Those two have worked. It sincerely pains us. At least they have The Closer to fall back on. (For the record I take absolutely no joy in their misfortune. They seem like fine people. I feel genuinely saddened by their misfortune, in the same way I would feel sorry for your misfortune if I knew you. They have a strong cash flow and will recover. You may not be as lucky. Take away a message. Diversify. - Jesse)