Transcript Mauldin - Investing in troubled times

Thoughts On the Continuing Crisis
The Elements of Deflation
A Presentation by
John Mauldin,
Author of Bull’s Eye Investing
And the Editor of Thoughts from the Frontline
www.2000wave.com, www.johnmauldin.com
Is the Glass Half Full…
Or is it Half Empty and Leaking?
US Headline CPI Inflation
The Elements
of
Deflation
9 Million Part Time Workers
Total “U6” Unemployment
Including Part-Time Workers is
16.8%!!!
33% Unemployed for 6 Months
Jobs Losses are Far Below Average
This is NOT a Typical Recession
A Few Data Points on
Unemployment
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If you include “discouraged workers” with U6 then
unemployment is 21.1%, and therefore more than 13%
total unemployed
Since 1999,, even as the population grew by 33 million,
the private sector has lost 235,000 jobs (BLS data)
because of job losses in the current recession.
Wages are falling and Hours Worked is at an all time low
33 hours
18 million NEW jobs will be needed in five years to get
us back to employment levels last seen in 2007
History Tells Us Without Wage
Pressure There is Little Chance of
Inflation
Mortgage Equity Withdrawal Fueled
the Economy
The Impossible Happens
The US Consumer Stops Borrowing
The Psyche of the American Consumer
Has Been Permanently Seared with the
Pain of Falling Home Prices and Stock
Prices
**************
Faced with Retirement Issues, And the
Need for Increased Savings,
Consumer Spending is Going to be
Challenged for Years
Savings Actually Explode Upward
During this Great Recession!!!
As Does The Savings Rate!
File Under Be Careful What You
Wish For!
Mortgages
It’s Not Just a Sub-Prime Problem
Housing Sales are Flat
Housing Prices are at Best Flat
Banks Have Yet To
Deal With Bad Loans
Most likely recovery is a “W” with a long tail due
to slow growth and rising mortgage rates.
Fall
2005
Housing Data Points
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Over 1/3 or Mortgages are Now
Underwater
It will be 2011 Before We Move Through
the Excess Housing Inventory
Foreclosures are Adding More Homes to
the Inventory of Unsold Homes
There May Be as Many as 500,000 Homes
in the Shadow REO Inventory
The Effect of the Stimulus
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Without the Stimulus, GDP would have
been a -6% in the Second Quarter!
Without the Stimulus, GDP Would Be Flat
to Negative this Quarter
Question:
What Happens When
the Stimulus Goes Away? Especially to
States and Municipalities?
Government Receipts Are Down
Be Careful What You Wish For
Volume of Word Trade Collapses
20%
And Thus Capacity Utilization
Falls off the Cliff
The Velocity of Money is Slowing
Y=MV
(Where Y is Nominal GDP, M is Money Supply and V is Velocity
and Y is Sometimes seen as Price times Quantity)
M2 is Flat or Falling
Since the End of February
What is Money???
M-1, M-2, gold? – Misleading
Measure
 Money is CASH + Credit
 Cash is $2 Trillion
 Backed by Credit of $50
Trillion
Destruction of Assets in the
Great Deleveraging
Deleveraging brings Deflation
DNA Changes in the FED
Governors….they become
genetically opposed to deflation
The FED is at a Major Crossroads
Allow inflation like 1970s or
Withdraw liquidity and slow recovery
The Great Experiment
Keynes
VS
von Mises
VS
Fisher
VS
Friedman
Re-Inflation?
It may take up to $2 Trillion
in new printing press money to reinflate
Like John Paul Jones, Bernanke will soon
say:
“Sir, I have not yet
begun to print!”
How did we get it
Sooo Wrong?
We taught two generations of
managers theories which were
patently absurd
We let rating agencies become too
important
We believed the trend.
The Elements of Deflation
If you add:
Rising Unemployment and Wealth Destruction
and Reduced Borrowing and Lending and
Decreased Final Demand and Increased Savings
and High Capacity Utilization and Massive
Deleveraging and $2 trillion in Bank losses and a
Very Weak Housing Market and Slowing Velocity
of Money
You Get Deflation
and
Nothing But Bad
Choices