It was Gary Shilling – way back in the last
century – who first woke me up to the real whys and wherefores of
deflation, with his 1998 best-seller, Deflation:
Why it's coming, whether it's good or bad, and how it will affect your
investments, business, and personal affairs. I had read various works on
deflation, but nowhere was it put together as well as Gary did it. He followed
it up the next year with Deflation: How
to survive and thrive in the coming wave of deflation, and in that one he strongly
urged his readers out of the stock market – just ahead of the 2000
dot-com bubble burst. But Gary has been so
right over the past three decades. (He recently updated Deflation with The Age of Deleveraging: Investment Strategies for a Decade of Slow
Growth and Deflation. It’s on Amazon at http://www.amazon.com/Age-
Today’s Outside the Box is a condensed version of Gary’s monthly INSIGHT newsletter, and in this one he tackles the lack of effectiveness of the Fed’s QE1 and QE2 and delves into the “strange things [that] happen in security, currency and commodity markets that don’t fit normal rules” when the Fed and other central banks take interest rates down close to zero. He notes that at the same time QE2 was fomenting a global commodity bubble and stock-market advances through 2010 and into early 2011, it was also punishing lower-income households with higher food and energy costs, and saddling them with falling home prices “that are likely to drop another 20%.” Crucially, the Fed is “pushing on a string” that, with “the depth and breadth of the financial crisis, the collapse in housing, the ongoing sovereign debt crisis in Europe, Japan’s continuing two-decade-old deflationary depression, the impending hard landing in China, etc. make the monetary policy string much more limp than usual.”
Picking up a theme from his most recent book, The Age of Deleveraging, Gary also examines the question of whether the US is headed for a deflationary depression like the one that has beset Japan for more than two decades. I won’t spill the beans on his conclusion here, but let’s just say that we have our work cut out for us.
If you appreciate Gary’s lucid analysis and want to subscribe to INSIGHT, be sure to mention Outside the Box, and you’ll get 13 issues for the price of 12, PLUS their January 2011 report in which Gary lays out his investment strategies for the year. The price via email is $275, and the address is firstname.lastname@example.org, or you can call them at 1-888-346-7444.
Your loving London but lusting for Ireland analyst,
Dr. John Hussman is no stranger to Outside the Box readers. And his recent posting has my mind reeling. In essence he is saying that if the Fed wants to stop the QE and allow rates to rise, they must either reverse the QE or bring on inflation. And he does it with numbers and his usual strong reasoning. I really did read this 3-4 times, thinking through the implications.
“There are a few possible outcomes as we move forward. One is that the economy weakens, and the Fed decides to leave interest rates unchanged, or even to initiate an additional round of quantitative easing. In this event, it's quite possible that we still would not observe much inflation, provided that interest rates are held down far enough. Unfortunately, the larger the monetary base, the lower the interest rate required for a non-inflationary outcome. T-bills are already at less than 4 basis points. In the event of even another $200 billion in quantitative easing, the liquidity preference curve suggests that Treasury bill yields would have to be held at literally a single basis point in order to avoid inflationary pressures.”
You can read his latest work at www.hussman.net .
Note on Finland. The True Finns took over 19% of the vote, with the largest party getting slightly more than 20% and the number two a little less. Basically, 15% of Finnish voters used the True Finns to register their displeasure at the bailout at the cost of Finnish taxpayers. Germany is starting to talk about “restructuring” Greek debt, another word for default. The German banks must be getting in better shape if the talk is out in the open among German leaders – much as I said a year ago. Stay tuned.
Your wondering how the Fed will pull this off (without a real problem developing) analyst,
This week’s Outside the Box is from my friend David Galland, an interview he did for The Casey Report, and it represents a philosophical train of thought more in line with Austrian economics and libertarianism than my own. But if we only read what we already think, then how do we learn? It is only when your ideas are challenged and you must determine why the other guys are wrong and you are right, that you can either become more firm in your beliefs, or change. And much of what David says in this interview resonates. (I wrote about the end of QE2 a few weeks ago.)
The guys at Casey are natural resources, commodities, and precious metals investors. Yet David argues that cash might be the wise thing now, after pounding the table for years on gold. He believes that the end of QE2 will be more important and dramatic than most think. That it is coming to an end I have no doubt, so it is important to think about what the effects, if any, will be. There are those who argue that we can live without it now. I argued (and still do) that we should have never had it. The unintended consequences are the ones I worry about. We just don’t know. It was a crazy experiment, with no understanding of what would really happen. But hoping for the best is not a strategy, so let’s think about it. David provides us with some different ways to look at the process.
You can subscribe to The Casey Report at a 20% discount for my readers, right here.
And for those who want to read more, you can get a free subscription to Conversations with Casey, which is a weekly e-letter delivered directly to your inbox every Wednesday. Contrarian investor and financial bestselling author Doug Casey talks about the economy, the markets, politics, society, and anything else that matters in life… a fireworks of informative, controversial, and entertaining viewpoints from one of the most original free-market thinkers of our time. Occasionally CWC will also feature interviews with Casey editors or “outside experts” on current market moves or important economic or political events. If you don’t like libertarian thought, be warned. You can subscribe here.
Last, a housekeeping item. I “fat-fingered” my inbox and lost about a hundred emails from the last three months or so, which I planned to get around to, but now they are buried in about 25,000 deleted files. (It’s what happens when you don’t touch-type and have to look at the keyboard. Yes, I know…) One way to clean out your inbox I guess, but if I owe you something, you might want to drop me a note again.
Your already buried with 75 new emails in a few hours analyst,
Long-time readers of Outside the Box are familiar with the names Dr. Lacy Hunt and Van Hoisington. They are a regular feature here, as quite frankly, anything that Lacy writes or says I pay serious attention to. This is their regular quarterly report, where they outline seven things that are likely to retard US growth. An easy read, but take the time to think this through.
Hoisington Investment Management Company (www.hoisingtonmgt.com) is a registered investment advisor specializing in fixed-income portfolios for large institutional clients. Located in Austin, Texas, the firm has over $4 billion under management, composed of corporate and public funds, foundations, endowments, Taft-Hartley funds, and insurance companies.
And now let's jump right into the essay.
Your loving wi-fi on the plane analyst,
Before we get into this week’s outstanding Outside the Box, I want to comment on QE2 and the efforts by some Republican economists to urge legislators to get involved to stop it (see the front page of Monday’s Wall Street Journal). That pushes my comfort zone a little too much.
First, I am not a fan of QE2. Never have been. If it had been my call, I would have punted and told the guys in the Capital that the ball was in their court to get their fiscal house in order, because that is the main source of the problem. But Bernanke and the Fed felt they had to “do something,” to demonstrate they got the seriousness of the situation. If the only policy tool you have left is the hammer of printing money, then the world looks like a nail.
Second, I doubt it works. It might be interesting to see what would happen (theoretically) if they decided to print $3-4 trillion. Now that would have a (probably very negative) impact. But it would show up on the radar screen. I think $600 billion just gets soaked up in bank balance sheets, sloughed off to world emerging markets (that don’t want it) and other hot spots, with some drifting into the stock market. But does it increase real final demand, which is what the Keynesians are so seemingly desperate for? I doubt it. And I just don’t see the transmission mechanism for QE2 to produce new employment of any statistical significance.
Third, targeting the middle of the yield curve is about as benign a way as you can do it, as far as QE goes. It certainly is not bringing down mortgage rates (so far). This is not exactly shock and awe QE.
Now, if the real plan, which no one can mention in polite circles at G-20 meetings, is to weaken the dollar, then QE2 just might work at doing that. But do we want it to? Do we want our input prices to go higher? A weaker dollar cuts both ways. And Germany seems to be able to work with either a strong or a weak euro. Are they that much better than us? Really? I sincerely hope we can take Bernanke at his word that this policy is not meant to weaken the dollar. Currency manipulation is not what we need from the world’s reserve currency, nor will we hold that status much longer if we embark down that path.
Back to the Republican sortie against QE2. As long as it stays on a debate level, or even as a resolution, then fine. There is considerable room for debate, and some very serious economists on both sides of the issue. This is new territory and deserves to be debated vigorously. This is, after all, affecting the public. Fed policy is too important to be talked about only inside a conference room with a few appointed governors and economists.
But I do not want to see anything that would reduce the independence of the Fed from the political process (any more than it already has been reduced). I don’t want Republicans dictating Fed policy. Or Democrats. Or the President, beyond his power to appoint. That is the path to becoming a banana republic.
If We the People want to change Fed policy, then we need to realize it is important who we elect as president, because he appoints the chairman and the governors. Ideas matter and have consequences. How many times do presidential candidates get asked about their views on monetary policy in national debates? Are you a proponent of Keynes? Or Friedman? Fisher? von Mises? Which of these four dead white guys have you read and studied? These elections of ours are more than taxes and health care. The Senators who sit on the committees have the right to review appointees, though few understand the real issues regarding the Fed, I am afraid. (Wouldn’t it be fun to have Rand Paul on that committee? He could tag team with his dad in the House. Just a thought.)
Final thought. Maybe the reason for a less than shock and awe QE is that the Fed can get to the end of it and say, “Look, we tried. But the money just went back onto our balance sheet. Printing more doesn’t seem to be advisable.” (Especially if the public pushback gives them some cover.) Then they can back off and let Congress know that they have no intention of monetizing their fiscal profligacy and that Congress must get its house in order before the bond markets react negatively.
And then again I may be wrong. Maybe QE2 does do something. No one really knows because this is truly uncharted territory. We’ll find out in the coming months. And this Friday, in my weekly letter, we’ll look at the prospects for the economy going forward. I get back home tonight and will be home for two weeks. I am looking forward to catching up on my reading.
Now, for this week’s OTB I offer a review of Gary Shilling’s brand new book, The Age of Deleveraging: Investment strategies for a decade of slow growth and deflation.
Gary has long been a proponent of the idea that we are in for a period of deflation, and was writing as far back as the ’90s about the coming deflation. I am already into the book and am enjoying his wonderful prose, but must admit I skipped ahead to see his predictions, some of which are in the review below. You can buy the book at http://www.amazon.com/deleveraging.
Have a great week. And think about a few more fun things than QE2 every now and then.
Your loving the La Jolla weather analyst,