Thoughts From The Frontline : Consumer Price Index

The Trend May Not Be Your Friend

John Mauldin — Sat, 18 Apr 2009 04:43:54 GMT

Thoughts on the Continuing Crisis
Dressing Like an Economist
The Trend Is Your Friend Until the End of the Trend
What Is Money?
MV=PQ
Newport Beach, Orlando, and Home

Two weeks ago I presented my thoughts on the current economic situation at my 6^th Annual Strategic Investment Conference in La Jolla (co-hosted with Altegris Investments). The speech was well-received, at least to judge from the comment forms. So this week and next, we are going to revisit that talk (with a few edits). Let's start with a little set-up to explain the first few paragraphs.

My speech was Saturday morning. On Friday, I wore a nice grey suit with a Leonardo tie. For those who know about Leonardo's, they are "statement" ties. I should note that Tiffani picked the tie out for me about ten years ago and persuaded me to wear it. It took some getting used to. It is 16 silk-screened colors, bright blues and pinks and grays, the central feature of which is a very vivid parrot. It is not subdued.

When my good friend George Friedman of Stratfor gave his speech on Friday, he commented rather derisively about my taste in ties, which got him a few laughs. This did not bother me too much since, while George is a brilliant geopolitical analyst, his sense of sartorial style is not exactly top-drawer. So now, let's jump into the speech.

Dressing Like an Economist

Three years ago I was here at our third conference, and my daughter Tiffani came to me in the middle of the conference and said with a very serious face, "Dad, we've got to have a talk." Oops, we have to have a talk? This was her "You've done something wrong" face. But I didn't know what I had done. Had I been speaking with my zipper down? Was something I said wrong? So I said, "Well, let's go talk right now." And she says. "No, we can do this when you get home." And I said "No, now."

So we go to another room, and I ask, "What's wrong?" And she says, "Dad, the partners wanted me to come and talk with you." Oh God, I think, what is it?

Now, Art Laffer (he of the napkin and Laffer Curve fame) had spoken earlier at that conference. If any of you have ever seen Art speak, Art dresses to the nines. He gave a speech with which I did not agree. It was brilliantly delivered, but he was just wrong. But he looked really good being wrong.

So Tiffani says, "Dad, the partners want me to talk with you. You dress like an economist. You are supposed to be a guru. We've got to get you some new clothes." And it was true, I had not bought many new clothes for years.

So this is my guru suit. Somebody at least has some sartorial taste -- Tiffani and others picked it out. You can see the evidence of true style and taste by the way she dresses, can't you? And she picked out the tie, too. (And I should point out that the one person in George's family with outstanding taste, his wife and partner Meredith, liked the tie as well.)

Thoughts on the Continuing Crisis

Ok, with that out of the way, let's talk about some of my thoughts on the continuing crisis.

This cartoon is pretty much where we are right now. The consumer is shell-shocked. That pot of gold has now become just a pot. The 401k's are now 201k's. People are trying to figure out how to go forward. Let's go back and get some sense on how we got here and what the landscape looks like and what I think the future will look like.

By the way, I started writing this speech at 1 o'clock yesterday because everyone else was saying what I was going to say, so my friend Kerri helped me create this PowerPoint yesterday. I'm making two classic mistakes that every speaker should never make, and they are: number one, if you are not a morning person, you should never speak first thing in the morning, but I had to trade places with Dennis Gartman; and number two, you should never make a speech to your most important audience that you haven't made somewhere already. So we'll see how it goes, but you guys are all my closest friends, okay? So cut me some slack.

In the beginning there were banks, and the banks were without form or regulation. That lack of regulation begat panics. You had the panic of 1807, then the 1827 panic and Andrew Jackson got rid of the Bank of the US. Then you had the panic of 1873 and the panic of 1907 And over time, the powers that be, not wanting to have any more panics, created first the Federal Reserve and then the FDIC. After World War II, there were basically no more worries about bank deposits. The FDIC covered them, and we entered a new era of "stability." This did not repeal the business cycle and prevent recessions, but it did stop major bank runs and banking panics. We can clearly have financial crises, but they will be different than those of the Depression.

The Trend Is Your Friend Until the End of the Trend

Stability, though, as we were taught by Hyman Minsky, leads to instability. The more stable things become and the longer things are stable, the more unstable they will be when the crisis hits, because we human beings learned to trade and invest by dodging lions and chasing antelopes on the African savannah. We now chase momentum and dodge bear markets. We are hard-wired to look around at our circumstances and predict trends far into the future.

We take the current trend and we project it forever. But the one thing we know about trends is that they are eventually going to end. The trend is only your friend until it ends. Trends are notoriously fickle. That stability breeds instability. Calvin Coolidge said in early 1929 that "In the domestic field, there is tranquility and contentment and the highest record of prosperity in years." The trend ended. "Apres moi, le deluge."

Now, so what happened in 1929, after this era of stability? The bubble burst and the stock market crashed.

By the way, I thought one of the great headlines in the papers from those days was, "The deluge of panic selling overwhelms the market. 19 million shares changed hands." 19 million shares changing hands caused the crash in 1929! That's about a minute today. Okay, before the Great Depression, Coolidge was telling us, at the end of his presidency, that everything was cool, and then we got Hoovered. They tried to balance the budget, and they didn't really provide any stimulus. We got Smoot-Hawley. Given the massive implosion of capital and the closing of banks, there clearly was not enough growth in the money supply. Government and the Fed just did a lot of wrong things.

So at the height of the Depression, in 1933, as Roosevelt was coming into his first term, we had 25% total unemployment; 37% (!) of non-farm workers were unemployed; 4004 banks had failed; $3.6 billion in deposits was lost. That's like trillions in dog years, okay? At least in 2009 dog years. You end up with bread lines, and the stock market just keeps going down, down, down (with a few marvelous bear-market rallies – maybe like what we are seeing today?).

Roosevelt comes along and we get the New Deal. He applied massive stimulus. By the way, his stimulus hired people. He put them to work building parks and the Tennessee Valley Authority. They were building a lot of infrastructure. He didn't put it into Democratic wish lists and permanent wealth transfers and welfare and special-interest agendas to increase the overall budget beyond what we could ever hope to actually pay for (without even more radical tax increases), which the Obama Administration is clearly doing. We'll get to the effectiveness of current policies in a moment.

Then let's look at what he did in 1937. With the economy somewhat on the mend, he tried to balance the budget, raise taxes, reduce deficit spending. And what happened? We had another deep recession and unemployment jumped back up to 20%. It was hard to pull that stimulus back out. And it's particularly dangerous to raise taxes in a weak economy.

Most of the people in this room are old enough to remember the Blue Screen of Death. Remember, you would be typing along on your computer and all of a sudden you would get this screen, saying, "You have an impossible error." (Okay, what's an "impossible" error? Clearly something happened that was possible.)

And the only thing you could do was just unplug the thing. You couldn't even turn it off -- you just had to unplug the computer. It was the Blue Screen of Death. Well, that is kind of what World War II was for the world. We unplugged the world economy, and then we started from a new base. We hit the reset button. We were at lows everywhere in the world; places were in a mess. So we began to grow from there. The bebt supercycle started. For all the recessions and bear markets, a new stability ensued, and debt and leverage began to grow.

We'll revisit that point in a moment. We are doing just what I do in my regular e-letter: I'm going to take three or four ideas, and at the end I'm going to try and tie them all together. Let's see how successful I am.

What Is Money?

Let's talk about what money is. For some people it's M-1 or M-2, and they worry that the money supply is growing too much. For some people it's gold; gold is the only real currency. I think those ideas each have their place, and there's some truths to them, but they focus us on the wrong thing.

It's a bit misleading to talk about money supply, because what money really is is roughly $2 trillion of cash and then $50 trillion in credit. Because what do the banks do? They take deposits in and then they borrow money to leverage them up. I take my credit card and I spend with it. I borrow against a house. I have an asset that rises, and I borrow against it.

We have two trillion dollars of actual cash propping up $50 trillion in credit. If we all decided to settle and pay off everything, we couldn't do it because there is not enough cash. There would be massive asset deflation. We, as a nation, are levered 25 to 1, or we were. Now, that $50 trillion is in a real sense the money supply because that is what we are all pretending is real money. I lend you money and you pretend you are going to pay me back. Then you pretend he [pointing at another attendee] is not going to call your debt for cash, and we are all going to keep the system going. Because if we all try to pay each other back at once, we are all collectively -- and this is a technical economic term -- screwed.

So we keep the system going. Now, where are we today? We are at the Great Deleveraging. We are seeing massive losses and destruction of assets, on a scale that is unprecedented. There was massive destruction of assets during the Great Depression, which caused a lot of problems, and we are seeing the same thing today. We are watching trillions simply being poofed (another technical economics term – which will drive my poor Chinese translator crazy!). We are watching people pay down their credit lines, which is one way of saying the supply of money and credit is shrinking.

This is not just in the US, but all over the world. Because when you start adding European cash-to-credit, and Japanese cash-to-credit, and Indonesian and Chinese cash-to-credit, it becomes multiple tens of trillions, and we are watching a goodly portion of that credit be vaporized. So we -- individuals and businesses -- are trying to find that $2 trillion in real cash and get some of it to pay down our debts. We are reducing that massive leveraged money supply down to some smaller number. We are hitting the Blue Screen of Death. We don't know what it is going to reset to, but we have permanently seared the psyche of the American consumer, and it is going to get reset to some lower number, about which I will speculate in a minute.

Now to give you some idea of how important credit was in our recent period of economic growth – and I keep using this slide, but it is an important slide because it shows you what would have happened in the economy without mortgage equity withdrawals. The red lines are what GDP would have been without MEWs. Notice that in 2001 and 2002 we would have had negative GDP for two years, that's 24 months. It would have been as long as or longer than the current recession. Not quite as deep, because we had the Bush stimulus and Bush tax cuts at the time. The Bush tax cuts were very important in keeping the economy rolling over in 2001 and 2002.

But notice that the recovery for the next four years would have been under 1%. We would have had under 1% GDP for four years running, without mortgage equity withdrawals, without people being able to spend more. That doesn't even count the leverage we increased on our auto loans, on credit cards -- you saw the two charts that Louie [Gave] and Martin [Barnes] used yesterday about the growth of credit, and we are now seeing it in reverse. Do you think George Bush would have stood even a small chance of being reelected without mortgage equity withdrawals?

Quarter 1-2006 we had $223 billion in mortgage equity withdrawals. Quarter 2-2008 it was $9.5 billion. Is it any wonder we were in recession by 2008? By the third and fourth quarters there was no money to keep the treadmill going That $50 trillion in credit was shrinking fast. We were imploding it. Further -- just as a little throwaway slide -- if you look at 2010 and 2011, we are getting ready for another huge wave of mortgage resets.

Now, we've gone through the last wave and we saw what happened; it created a lot of foreclosures. We are not out of the woods yet. It is going to be 2012 before we sell enough houses to really get back to reasonable levels, because we had 3.5 million excess homes at the top. We absorb about a million a year, it takes 3 years, that's kind of the math.

[Skipping some attempts at humor that you had to be there to get] ... By the way, this AIG thing and the bonuses, that's so bogus. I mean, the 40 people that created the problem were gone, they go to 40 other people and say, stick around because we've got to have somebody who actually knows what these things are to try and unwind it, and we'll give you a bonus. Some of them worked for a dollar against getting that bonus, and now we've told the world that a contract isn't a contract in the US of A, for a lousy 160 million dollars. No bank is going to want to play with the US again, because you don't want to be hauled up in front of Barney Frank.

MV=PQ

Okay, when you become a central banker, you are taken into a back room and they do a DNA change on you. You are henceforth and forever physically incapable of allowing deflation on your watch. It becomes the first and foremost thought on your mind: "Deflation, we can't have it." So let's move along to the next point, and then I'm going to tie them all together.

MV=PQ. This is an important equation; this is right up there with E=MC². M (money or the supply of money) times V (velocity, which is how fast the money goes through the system -- if you have seven kids it goes faster than if you have one) is equal to P (the price of money in terms of inflation or deflation) times Q (which roughly stands for the quantity of production, or GDP)

So what happens is, if we increase the supply of money and velocity stays the same, if GDP does not grow, it means we'll have inflation, because this equation must balance. But if you reduce velocity (which is happening today), and if you don't increase the supply of money, you are going to see deflation. Now, we are watching, for reasons we'll get into in a minute, the velocity of money slow. People are getting nervous, they are not borrowing as much, either because they can't or because the "animal spirits" that Keynes talked about are not quite there.

To fight that deflation (which we saw in this week's Producer and Consumer Price Indexes) the Fed is going to print money. A few thoughts. The Fed has announced they intend to print $300 billion. That is different from buying mortgages and securitized credit card debt -- that money (credit) already exists.

When they just print the money and buy Treasuries, like the $300 billion announced, they can sop that up pretty easily if they find themselves facing inflation down the road. But that problem is a long way off.

But sports fans, $300 billion is just a down payment on the "quantitative easing" they will eventually need to do. They can't announce what they are really going to do or the market would throw up. But we are going to get quarterly or semi-annual announcements, saying, we are going to do another $300 billion, another $500 billion.

When we first started out with TALF and everything, it was a couple hundred billion here and there, and now we throw the word trillions around and it just drips off of our tongues and we don't even think about it. A trillion is a lot. It's a big number. And the total guarantees and back-ups and all this stuff we are into -- I saw an estimate of $10-12 trillion. That's a lot of money.

Understand, the Fed is going to keep pumping money until we get inflation. You can count on it. I don't know what that number is, I'm guessing $2 trillion. I've seen some studies. Ray Dalio of Bridgewater thinks it's about $1.5 trillion. It's some big number, some number way beyond $300 billion, and they are going to keep at it until we get inflation.

Side point: what happens if the $300 billion they put in the system comes back to the Fed's books because banks don't put it into the LIBOR market because they are worried about credit risks? If that happens, it does absolutely nothing for the money supply. Okay? It's like, goes here, goes back there -- it doesn't help us. If the Fed creates money which is simply deposited back with the Fed, then there is effectively no money creation. We are still faced with deflation. The Fed has got to somehow get it into the financial system. They've got to figure out how to create some movement.

Will it create an asset bubble in stocks again? I don't know, it could. Dennis [Gartman] talked about being nervous yesterday. I would be nervous about stock markets, both on the long side, as I think we are in a bear market rally, but also there is real risk in being short. Bill Fleckenstein will be here tonight. He is a very famous short trader. He closed a short fund a couple of months ago. He says he doesn't have as many good opportunities, and basically he's scared of being short with so much stimulus coming in. So it's going to work, at least in terms of reflation, but the question is when. A year? Two years?

(This is about as good a break point as I can find in the speech, so we will end here and take it up again next week.)

One note from today's data on deflation. The headline in the Wall Street Journal says China grew at 6.1% last quarter. That doesn't sound bad. But what was not in the story is that nominal growth was just 3.7%. The other 2.4% was because of deflation. To get real (after-inflation) growth you subtract inflation and/or add deflation. Growth in China is slowing down more than the headlines suggest.

Newport Beach, Orlando, and Home

I am writing this somewhere over Canada as I fly back from London. I always try and stay up on the way back so I can get on local time quickly, although I did not get enough sleep this trip. I will need to catch up this weekend. It will be good to be home.

This Thursday Tiffani and I leave for Newport Beach to attend Rob Arnott's annual conference. Each spring Research Affiliates brings together a rather special group of analysts and money managers to work through current economic issues. Harry Markowitz, Burton Malkiel, Mohammed El-Erian, Paul McCulley, and Peter Bernstein are just a few of the luminaries who will be there. I think Rob invites me for comic relief. And just like Jeremiah, he always serves some mighty fine wine (a few of you will get that).

Sunday I get back and then leave Monday to go Orlando to speak at the national Chartered Financial Analysts conference. My assigned topic will be the "state of the union" for alternative investments. If you are attending, you might want to drop into the session, as it will be at the very least provocative and for a few people rather controversial. I think the whole industry is at a crossroads, and we are going to see some real changes in the coming years.

And then? I am home for awhile. I told my London partner Niels Jensen that I would show up for his 50^th birthday party in mid-July, and maybe try to take a vacation then. And Amanda gets married in Tulsa in August. And of course the annual Maine fishing trip in early August. Oh, and Freedom Fest is penciled in for July 11, in Vegas. But not much travel in May and June, at least not yet.

Copenhagen and London were a whirlwind this week. I ended up getting asked to do CNBC Europe for about 30 minutes on a wide range of topics. I really like their Squawkbox crew. And it was good to spend time with the team at Absolute Return Partners. We had some very thought-provoking client meetings.

There is a lot of change getting ready to happen in my business, and I am grateful that it all seems to be for the good. I will be making a few announcements over the next few months that I am quite excited about. There are a lot of people in the finance world (and the world in general) that are really struggling, and I appreciate the support of my clients, my partners, and you, gentle reader. You are why I write this letter. Well, maybe you and my one million other closest friends -- but we both know it is really for you.

It's time to hit the send button, get my bags, drive home, get a good meal, and find my own bed. Have a great week!

Your happy to be home analyst,

John Mauldin

Leverage Is an 8 Letter Word

John Mauldin — Sat, 22 Nov 2008 04:52:29 GMT

Leverage Is an 8 Letter Word
If Loans Are So Cheap, Why Don't They Sell?
Deflation and Helicopters: Time for a Review
Commercial Property Loans Start to Haunt the Banks
Warren Makes a Bet
Thanksgiving, Moving, and New Orleans

Leverage is an eight-letter word, which the markets now regard as twice as bad as the two four-letter words debt and pain (or fill in your own four-letter words). This week I try to give some insight into what is happening in the credit markets, some of it below the radar screen of most analysts. We will look at the potential for deflation and the Fed's response. There is a lot to cover, so let's jump right in.

If Loans Are So Cheap, Why Don't They Sell?

I talked with a friend who runs a collateralized loan obligation fund, or CLO. There are a lot of these funds in the Shadow Banking System. Typically they buy certain types of debt, with a lot of it in the bank loan space. In the "old" days of the last few years, banks would make loans to corporations and then sell them to CLOs and other institutions, making a spread on the loan and a profit on the servicing business. Some funds would typically leverage up somewhat and make a decent return.

Today, many highly rated loans are selling for 80 cents on the dollar. There is nothing wrong with the collateral or the corporation which owes the money; there is just no one with ready cash to buy the loans. I asked my friend why he doesn't buy them, since they offer very good returns.

The problem is that his fund, and most other CLOs, have covenants in their offering documents that prevent them from buying debt at less than 85 cents on the dollar. That covenant is a good thing in normal markets, as it prevents possible mischief by the manager, but right now it means that a lot of opportunity is being missed. The only way he can buy these highly undervalued bank loans is to create a new fund, which he is in the process of doing. But getting the money is tough, as the pension funds and endowments who would normally be the investors are waiting for cash to come from their redemptions in other funds, which are of course selling whatever they can to raise money for the redemptions, including these very same bank loans. Can you say vicious circle?

The good news is that the market is (albeit slowly) responding to low prices and a market for undervalued assets. But the bad news is that it could be months before there will be meaningful recovery in asset prices. In the meantime, these and many other assets are being marked down and impairing the balance sheet of a lot of banks, funds, and institutions.

As an aside, the prices for loans made for leverage buyouts in the last few years have fallen significantly. Anybody want to buy some loans made on the Chrysler sale to private equity fund Cerberus? I think not. Just because a loan is cheap does not mean it is necessarily a reasonable value.

Commercial Property Loans Start to Haunt the Banks

As I have written for a very long time, there are two aspects to the current recession and financial crisis. The first is the fallout from the subprime crisis, which has morphed into a full-blown credit crisis. That coupled with a housing crisis has sent the nation into what looks like it will be the worst recession since 1974.

The second phase to hit banks and lending institutions is the normal recession problem of increased losses on all sorts of loans. Credit cards, home equity loans, residential mortgages, and especially commercial property mortgages all suffer during a recession. As documented a few letters ago, default rates are soaring on all types of consumer loans. That is what you would expect to happen in a recession. The problem is that many of the larger banks have already had their capital depleted dealing with the credit crisis. Now they are going to have to raise even more capital (or reduce lending) to deal with the normal loan problems that come with a recession.

Let's look at a few charts from www.markit.com which show the stress in commercial property lending. A number of very large firms come together to create a market index for commercial mortgage-backed securities, or CMBS (which is listed at market.com). They put 25 different commercial property trusts, created by JPMorgan, Merrill, UBS (the usual suspects), and so on into the index. Traders can then trade on the market value of the underlying combined assets by trading the index. In principle, this is just like trading a stock index that gives you exposure to all the stocks included in the index.

If you have bought commercial mortgages and want to hedge your portfolio, you can do so with this index, or if you want to sell protection (insurance) you can also do so. The price is determined by the spread between the coupon and (I believe) the 10-year US Treasury bond. From trading at a spread of 100 basis points in May and 200 basis points (bps) in July, the spread on AAA-rated commercial mortgages skyrocketed in the last few weeks to 850 before settling back to 667, or more than six times what it was just a few months ago.

According to the Wall Street Journal, at the peak a few days ago this meant that the AAA part of this index was trading at $.70 on the dollar. That suggests there will be losses of 70% on the lower tranches!

Every six months the 12 investment banks that help create the index build a new index comprised of recently created trusts composed of hundreds of individual mortgages. As with most asset-backed paper, these trusts are divided into different tranches, with the highest-rated tranche getting the lowest return but first call on the return of principle and interest. Lower-rated tranches take successively more risk.

There are seven different indexes on the Markit platform, from AAA to lowly BB. Each index is composed of the corresponding tranche in the 25 trusts within the index. Let's look at what the lowest-rated tranche has done.

The lowest tranche is now trading at 4,750 basis points or, if you add in the Treasury price, at over 50%! If you were an institution or fund and wanted to buy protection on a BB-rated CMBS in your portfolio, you would have to be willing to pay 50% annual interest!

On the web site, they note that they have not created a new series that was planned for October 25^th of this year, as there have not been enough new commercial mortgages created to actually build an index. Why? Because any commercial mortgages that the banks now make will have to be kept on the books of those banks, since the price to securitize the loans is prohibitive. Is it any wonder there has been a serious reduction in large commercial property loans?

On a rather sad note, look at the logos of the banks involved in creating this index, from the marketing brochure that Markit uses to inform potential buyers and sellers of the CMBS index:

Fourteen banks were involved as of a few months ago, but now? Bear, Lehman, Wachovia, and Merrill have either passed from this world or have been swallowed up. It makes you wonder who is next. (Side bet: the Treasury or Fed will inject some capital into Citibank this weekend.)

We could do the same analysis on high-yield bonds. Interest on high-yield bonds is now approaching 20%. Credit default swaps on many issues are simply out of sight. That means that if a lower-rated company wanted to issue bonds, they would have to pay 20% or more! There are very few projects that can justify 20% in a low-inflation world. And without access to capital, it will be difficult for businesses to grow. It also means they have to cut costs and jobs. As noted above, even highly rated corporate bonds are selling at steep discounts. Deleveraging is going to be a problem for a few years. We need to get used to it.

Deflation and Helicopters: Time for a Review

I wrote six years ago (November 2002) about Ben Bernanke's speech on deflation, where he tried to make a joke about beating back deflation by dropping money from helicopters. He was immediately tagged as "Helicopter Ben." My thoughts on that speech took up about half of one chapter in Bull's Eye Investing, and I still think it is a very important speech.

I have been saying for a long time that we would be dealing with deflation next year, and that has been met with a lot of reader skepticism. And when inflation hit 5.6% last July, that skepticism was understandable. But this would be a strange world indeed if you had the twin bubbles of housing and credit burst and didn't see a whiff of deflation. Recessions and the bursting of bubbles are by definition deflationary.

And I have been giving thought to the idea that we may have seen a mini-bubble in the price of many commodities, and that bubble has been bursting as well. And since commodity prices were the main cause of inflation, as they retreat the rise in the inflation rate is retreating. This week the latest inflation numbers showed a drop to 3.7% on a year-over-year basis.

But the Consumer Price Index (CPI) fell by a full 1% in October. You have to go back to the 1930s to find a one-month drop as large. And I don't think this is just a one-month anomaly caused by falling energy prices. The housing component, which is 32% of the index, is based on Owners' Equivalent Rents (OER). As I have written elsewhere, over very long periods of time this works as well as actual housing prices. You simply have to pick your basis for comparison and stick with it.

If, for instance, we had been using house prices for the last ten years, we would have seen large increases in inflation up until a year ago, and since then the index would have been in outright (and serious) deflation. But we use OER, so prices in the CPI have been more stable. But that looks like it could be changing.

OER has been rising steadily over the last decade as rents went up. The index showed a 3% rise in 2007, for instance. The recent trend has been down from there, and last month there was no rise in the cost of shelter. Given the number of houses for sale and a weakened economy, I think it is likely we will see outright reductions in the cost of rent, which will translate into a much lower inflation number.

Lower prices are a two-way street. When they result from improved productivity and efficiency, that is considered to be a good thing. But when they are the result of lower demand, that can be problematic.

There is the likelihood that the Fed will lower rates to 50 basis points, and some major and very seasoned economists are now predicting a zero percent Fed funds rate early next year. Given that Fed funds are actually trading at 38 basis points, a drop to 50 basis points would change nothing on a practical level. (Can we say Japan?)

With that in mind, let's revisit Bernanke's speech. Every central banker is mindful of Japan and the 1930s in the US. Deflation is something that will not be allowed. But what if the Fed lowers interest rates to zero and demand does not pick up, along with a little inflation? Quoting Ben:

"To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system -- for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities. Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation."

Just a thought here. We could see real drops in the CPI next year. We could also see a US government deficit approach $1 trillion and go right on through that heretofore unthinkable number. As I wrote last week, a reduced trade deficit means that there will be fewer dollars abroad to buy our debt. The difference will have to be made up by either increased savings in the US or higher rates to attract buyers OR the Fed monetizing the debt.

I think the Fed would be highly reluctant to monetize debt in a period of inflation like we have been in, no matter what problems we face. But in a period where we could be facing deflation? It is very possible they would consider monetizing the debt, as will central banks all over the world.

We are in unprecedented times. A (1) deep recession coupled with (2) financial institutions deleveraging, added to (3) a consumer who is going to be forced to save more and spend less while (4) commodity prices are falling, on top of (5) a serious slowdown in the velocity of money, and you have the makings of a perfect deflationary storm. The Fed would be forced to fight it.

What would they do if lowering the Fed rate to zero was not enough? As Bernanke stated, they would simply set the rates for 1- and 2-year notes and further out the curve if they felt they needed to. And if Goldman Sachs is right in its latest revised forecast, the economy is going to need some help:

"Goldman said it now expects U.S. GDP to fall 5 percent in the current quarter, with unemployment rate reaching 9 percent in the fourth quarter of 2009. It also forecast the 10-year yield to fall to 2.75 percent by the end of the first quarter of 2009, as compared to previously estimated 3.5 percent.

" 'The combination of weaker real activity and slower inflation means that profits of U.S. companies will fall even more sharply than we had previously expected,' Goldman said in a note to clients. Goldman now sees economic profits falling 25 percent in 2009 on an annual average basis, the biggest drop since 1938. It had earlier expected a fall of 20 percent. Goldman expects unemployment rates to further go up in 2010 as well, as there is little chance of the economy returning to trend growth by that year."

Other mainstream economists think GDP might fall this quarter by as much as 5%. That does not bode well for retails sales this Christmas.

Warren Makes a Bet

And let's close on this note brought to my attention by Bill King.

"MSN Money's John Markman: Shares of Warren Buffett's insurance holding company are on the ropes this month, plunging 30% in part because the famed investor dabbled in an area of the market he has long publicly derided: derivatives. And due to a tangled web of financial relationships, they may be taking Goldman Sachs shares down with them. Investors are concerned about a $37-billion bet that Buffett made last year that U.S. and world equity values would be higher in 15 to 20 years than they were then, when the Dow Jones Industrials were trading around 13,000. Through his firm, Berkshire Hathaway, Buffett sold option contracts, known as "naked puts" to an undisclosed group of investors for around $4.85 billion, reportedly using Goldman as broker...

"Because of its solid-gold credit rating, Berkshire Hathaway was not required to put up collateral to make this trade. But now rumors are flying on Wall Street that the owners of the contracts have demanded that broker Goldman Sachs put up collateral for the rest of the amount due. Since the value of the trade could be infinite, the collateral demands are said to be large, and fears that Goldman will struggle to make good on its obligation has panicked shareholders. Indeed one theory making the rounds this week is that Buffett put $5 billion into Goldman at around $125 per share in September not as an investment but to help provide funds for the collateral.

http://blogs.moneycentral.msn.com/topstocks/archive/2008/11/20/buffett-s-huge-derivatives-bet-proves-costly.aspx

"Isn't this the oracle that called derivatives, 'financial weapons of mass destruction'?"

I personally think that Warren made a very good bet. I would be shocked if the Dow was not at 13,000 in 20 years. Inflation will do most of that heavy lifting. But it does make for an interesting discussion now.

Thanksgiving, Moving, and New Orleans

Tiffani has decreed that I am going with her to New Orleans in a month to spend four days huddled away from the office, pouring over the research for our new book Eavesdropping on Millionaires and getting started on the actual writing. Somehow, she thinks I will be distracted if I am in the office.

I am looking forward to Thanksgiving next week. Most of my kids and some of my family will be coming to my apartment. I will be cooking all morning, preparing prime, lots of mushrooms and veggies, and more. I really get into it when I get the chance. And a very thoughtful reader has sent Tiffani and me some really great wines, which we will uncork.

Hopefully, this year we can avoid a fire in the building and having to carry my 91-year-old mother down 21 flights of stairs. And then the next day we pack everything up and move a few miles away to a house that will become my office a few weeks later. I am really quite excited about the move, as I really do like the house and am really enamored of the thought of a ten-second down-the-hall commute. Ask me in three years how I like it.

Congratulations are in order to my assistant of the last three years, Sommer Dooley, who has passed the exams for her nursing degree. She will be leaving us soon. She has been a real help the last few years and will be missed.

Next week I am going to write a special letter on why I am optimistic that we will come through this whole financial mess, but now it is time to hit the send button. Have a great week and enjoy your family and Thanksgiving! I think it is my favorite holiday.

Your thinking life is really pretty good analyst,

John Mauldin

Whip Inflation Now

John Mauldin — Sat, 14 Jun 2008 05:06:39 GMT

Whip Inflation Now
Where Can We Get Help on Inflation?
The Patient Died Anyway
Inflation in Asia and Europe
There Are No Good Solutions

President Nixon instated price controls on the 15^th of August, 1971. Inflation was a little over 4% at the time. Price controls manifestly did not work (resulting in shortages of all sorts and a deep recession) and were rescinded a few years later. President Ford went to Congress with programs to fight inflation that was running closer to 10% in October of 1974, with a speech entitled "Whip Inflation Now" (WIN). He famously urged Americans to wear "WIN" buttons. That policy too was less than effective, and the buttons, in a history replete with silly gestures by governments, should stand on anyone's top ten list of such silly gestures.

Cynics more thoughtfully wore the buttons upside down and said the inverted letters (which looked like NIM) stood for "No Immediate Miracles." They were right. There was no miracle, just eventual pain and lots of it. Ultimately, Paul Volker defeated inflation, but at the cost of two serious recessions and a lot of economic misery, with unemployment levels over 10% for nine months in 1983.

This week we were given the data that inflation as measured by the Consumer Price Index (CPI) over the last year was 4.2% and unemployment is now 5.5%. Some call for the Fed to raise rates so that we do not have to experience another lost decade like the '70s and then ultimately see some future Volker forced to raise rates and drive unemployment back to 10%. Others suggest that "core" inflation is what should be paid heed to, and urge caution.

This week we look at the cost of what could be a renewed effort to Whip Inflation Now, not just here but in countries worldwide. Will Trichet in Europe raise rates even as the European economy seems to be slowing down? If you think inflation is bad in the US and Europe, take a peek at Asia. And I ask, "What will Ben do?" It should make for an interesting letter.

Whip Inflation Now

Nixon and his advisors thought inflation at 4% was serious enough to institute price controls. Headline inflation in the US is now 4.2%. What kind of economic policy should we pursue to bring inflation back into the Fed's comfort zone of 1-2%? Would it work and would it be worth the pain? To get a handle on the question, let's go to the data from the Bureau of Labor Statistics and see where inflation is coming from.

And let me note, this is the same exercise we could do for a host of countries. The answer will be roughly the same: there are no easy solutions.

Core inflation, or inflation without food and energy, grew at 2.3%. Inflation without food costs was an even 4% and without energy was 2.7%. Clearly energy was the leading contributor to inflation in the past year.

But the recent trend in rising inflation is even more worrying. If you look at just the last three months of data and compute an annualized rate of inflation, you find that overall inflation has risen to 4.9%, energy inflation is running at a staggering 28%, and food costs have risen 6.2%. Meanwhile, core inflation during that period dropped to 1.8%. You can see all the data at http://www.bls.gov/news.release/cpi.nr0.htm.

Now, gentle reader, let's think about these numbers. Food (over 14%) and energy (over 9%) combined make up roughly 24% of the CPI, yet were responsible for over 60% of the recent three-month trend in inflation. By the way, housing was up 4.9% and transportation up 8.7%, so it was not just food and energy.

What would it take to drop headline inflation back to under 2%? Well, one way would be for food and energy prices to fall. Let's look at the possibilities.

As Donald Coxe has noted, North America has had an 18-year run of remarkably good weather in our growing season. You have to go back 800 years to get a string of years that were that good. Yet today food reserves of all types are at decades-long lows. There is very little room for any type of problem.

This growing season is not off to a good start. It looks like the yield on the corn crop will be lower than normal, and that is if we get very benign weather this fall. Given how late much of the US corn crop was planted, and how torrential rains in the corn belt have devastated crops (not to mention flooding cities, and our thoughts and prayers go out to those who have lost their homes to flooding), an early frost would be disastrous.

Because we have devoted so much of our arable land to corn (in a very misguided policy to turn food into ethanol), we have less for soybeans, which is putting upward price pressure on beans and other grains that are used to feed cattle, hogs, chickens, etc. In fact, it costs so much to feed livestock that ranchers are shrinking their herds.. This means more meat is coming into the system now, which is dampening prices. Increased supply will reduce prices in the short term, but next fall we will find that supplies of all types of meat will be short. That will potentially send meat prices soaring. Cereal and bakery products are up 10% over the last year. They could continue to rise in the fall if the corn crop does not yield more than currently projected. It will cost even more to feed your household and feed the animals we need for meat.

Food is the most basic of commodities. Demand is fairly consistent, and supplies may come under pressure. Looking for food inflation to drop back by the fall to 2% is not realistic in the current environment.

What about energy? There is some more hope there, at least on the oil front. High prices have reduced demand in the US, with gasoline usage down about 4%.

I think we have reached a tipping point. The psyche of the US consumer has been permanently scarred. Slowly, this country is going to replace its fleet of cars with smaller, more fuel-efficient cars. Over time, we will see demand continue to fall. We could see further drops in the demand for gas in the next few months.

Much of Asia used to subsidize oil prices to their consumers. That is changing, as Indonesia, Sri Lanka, and Taiwan have announced they are decreasing their subsidies, as the cost is simply too much. Malaysia now spends 25% of its budget on oil subsidies, and must raise prices or cut other services - or watch inflation get worse. India is now contemplating how to cut its subsidies. Even China is likely to start to raise costs after the Olympics. These countries are going to go through their own price shocks. All this will reduce world demand for oil.

And while there are those who are convinced the high price of oil is due to speculators, there are reasons to think the real culprit is still demand. Refiners are paying anywhere from $5-7 more per barrel than futures prices for "light sweet" crude (oil with low sulfur content) and $7 less for heavy sour crude. Much of the oil from the Middle East is of the latter variety, and supplies are increasing. There is not enough refinery capacity for heavy sour crude. That is why you see OPEC representatives say there is enough supply. For the crude they produce, there is. Spot prices are reacting to supply and demand and not speculative futures prices.

Over time, reducing demand should reduce price. I would expect to see oil get back to $120 or lower by the end of the year. But by year-over-year comparisons, inflation will still be ugly for some time. Oil prices have risen approximately 90% in the last 12 months (the actual percentage is highly dependent upon which measure you use). The bulk of that has been in the last four months. For energy inflation to go down on a year-over-year basis, we would need to see oil drop below $100. How likely is that in the next two quarters?

Where Can We Get Help on Inflation?

So, the two main sources of inflation are unlikely to drop in the next two quarters. If we want to get overall inflation down to 2%, we will need to look for help in other areas of the economy. How about medical care? Not likely. Education costs? Get real.

Housing costs make up 42% of the CPI, and thus are the biggest component. That is broken down into several categories: owners' equivalent rent for those who own their homes (32%), actual rent for those who do not (around 6%), utilities, furnishings, etc.

Rents have been up by 3.5% over the last year and owners' equivalent rent by 2.6%. If rent increases were to drop to zero, that would just about get us to 2% overall inflation. But let's think about that. Such a low number would mean an economy on its heels and a lack of buying power on the part of consumers. The only way that happens is with serious unemployment.

You can go to http://www.bls.gov/news.release/cpi.t01.htm and look at the various components of the CPI. Spend some time thinking about what costs are likely to drop. New and used vehicles are now dropping year over year, but only by a little, and that is only 7% of the index. Most items are rising at least a little.

Now, in a second thought exercise, think about what would happen if Bernanke decided to raise rates. A rising Fed funds rate is unlikely to have much effect on oil or food prices, unless he raises them enough to put the US and world economies in a serious recession.

How much would he have to raise rates to really slow the rest of the economy down? If you push up rates by 2% with the economy either in recession or close to it, you risk putting the economy into a much deeper recession.

Look at the yield curve below. This is exactly what the banks and financial services lend. They like to have a nice positive differential between the cost of their deposits and what they can charge for lending.

If you raise rates by 2%, you would more than likely invert the yield curve, making it that much more difficult for financial service companies to be able to recover. Given that they are already in trouble, and therefore less able to lend to businesses and consumers, do you really want to make things worse?

Look at the banking index below. This is an ugly chart. Another inverted yield curve would do serious damage to an industry already reeling. We are going to see more write-offs from banks. This chart will get uglier, but it will collapse without a positively sloped yield curve. (chart courtesy of www.fullermoney.com)

Further, raising rates would make it more difficult for consumers whose mortgage rates are tied to short-term rates. Is that what a housing industry needs right now?

Bottom line, Bernanke is in a very difficult position. Inflation by any standards is too high. But the cause of the inflation is not something in the Fed's control. To bring inflation back to 2%, he would have to savage the economy, perhaps at least as much as Volker did. Do you want to see unemployment go to 8-10%?

Volker was dealing with wage inflation. Everything had cost of living adjustments (COLAs) back in the late '70s and early '80s. Spiraling wages were one of the primary causes of inflation, if not the most important. A higher Fed funds rate could do something about rising wages by increasing the unemployment rate. Tough love, but effective.

Volker had to kill inflation expectations. Today, that is not (so far) Bernanke's problem. If you look at the implied inflation in the TIPS market, which is the difference between a ten-year treasury note and the ten-year TIP rate, it has only risen from a recent low of 226 bps on May 1 to 249 bps on June 10. Look at the following chart from Asha Bangalore of Northern Trust. Note that inflation expectations are not at recent highs.

The Patient Died Anyway

An expected inflation rate of 2.5% is well within "contained." It would be irresponsible to put the economy into a serious recession under such a set of circumstances. My Dad had a saying, "The operation was a success, but the patient died anyway." Raising rates in any serious manner would whip inflation but would kill the economy at this point. Rates will need to go back up at some point, but not until the economy shows signs of a rebound. I think the chances of the Fed raising rates by the 75 basis points, by January, that the market has priced in, is quite low.

What will happen is that over time the annual comparisons will begin to be less problematic. The cure for high prices is high prices, as the true cliché goes.

Sadly, we may get some help on the housing inflation component. Foreclosure filings last month were up nearly 50% compared with a year earlier. Nationwide, 261,255 homes received at least one foreclosure-related filing in May, up 48 percent from 176,137 in the same month last year and up 7% from April, foreclosure listing service RealtyTrac Inc. said Friday.

The prices of homes in many areas are going to fall to the level at which they can be rented. As more homes come onto the market for rent, the pressure on rent prices will fall. And the measure of owners' equivalent rent will fall along with it. Mark Zandi, chief economist of Moody's Economy.com (and an adviser to Republican John McCain's campaign), wrote earlier this week that "the Bush administration's efforts to encourage loan modifications and delay foreclosures are being completely overwhelmed."

Separately, a Credit Suisse report from this spring predicted that 6.5 million loans will fall into foreclosure over the next five years, reaching more than 8 percent of all US homes. (AP) That is going to keep pressure on housing prices for several years at the least.

Thus, it is likely that Bernanke and company will continue to talk tough on inflation. But, as noted above, I also doubt that they will raise rates this year, and probably not until well into the next.

The only reason to raise rates would be to protect the dollar from a serious collapse. I think it more likely the Treasury would intervene in the markets to prevent such a collapse. Dennis Gartman, at dinner Wednesday night, suggested that if the administration really wanted to get the market's attention, they could intervene in the currency markets and release oil from the Strategic Petroleum Reserve at the same time. While it would only be a temporary fix, it would make speculators nervous. However, they might consider such an experiment preferable to having the Fed raise rates during the middle of a slowdown/recession.

And the dollar seems to have found at least a temporary bottom, and we could see further strengthening next week, as Ireland voted today to reject the proposed European central government. Since it takes an absolute 100% consensus among all member nations, that kills the deal. Europe now has a very odd shape. They have a commercial union. Some of the members share a currency. Some of them share actual membership in the EU. Some of them are in NATO. They have competing and very different needs for monetary policy.

In fact, it will be hard to get anything done in Europe apart from commercial treaties, etc., as any one country can veto any particular item which is not to their advantage. Over time, this is going to be seen by the world as an issue for the euro. And given the demographic and pension problems of "Old Europe," the currency is going to come under increased pressure from competing needs for funding, taxes, and an easy monetary policy.

Six years ago I talked about the euro rising to $1.50, but I also noted that by the middle of the next decade it is likely to come back to par. We are halfway on that journey, and I still think we will arrive at my predicted point.

I think it is possible that the dollar could rise 10% or more this year against the euro, which would help inflationary pressures. Import prices into the US are up 17.8% year over year. A stronger dollar will help alleviate that.

Inflation in Asia and Europe

Countries throughout Asia would love to have a 4.2% inflation rate. Indonesia is at 10.4%, almost twice what they were a year ago. Vietnam would love to have such mild inflation, as its own level is up over 25%. Inflation in China is 8%. Inflation is up throughout the continent. And oil and food are the culprits.

Korea is particularly strained. Korea has seen its import prices rise by almost 45% in the last 12 months. Read this note from Stratfor:

"South Korea is among the most vulnerable of Asia's top economic players to global price increases due to its heavy reliance on imports for many of life's basic essentials - including oil, wheat, corn and coarse grains. At least 96 percent to 100 percent of its annual consumption in each of these items is imported. With global supplies in these basic necessities set to tighten, South Korea's inflation and the associated social unrest can only rise. (Protests in South Korea can draw hundreds of thousands of marchers.)

"Interest rate hikes are one of the most readily available tools for fighting inflation and for propping up a weak currency. In theory, raising rates would help attract foreign money into South Korea by raising the rate of return on investments in the country, thus helping to increase the value of the local currency and to contain rising energy import costs and inflation. But just June 12, South Korea's central bank decided to keep interest rates frozen at 5 percent. This was because the potential economic slow-down an interest rate increase could trigger is too politically risky for the government, and because there are less controversial means to bolster the won.

"If interest rates were raised to tackle the problem of increasingly expensive imports, the access of Korean businesses and households to credit to fund their operating costs or mortgage payments would shrink. This would make the government of President Lee Myung Bak even less popular."

What to do? Each country will try its own particular witch's brew. China is raising interest rates, increasing bank reserves, and allowing its currency to continue to rise. But make no mistake, there are no easy answers. Each choice has its own unintended consequences.

But a large part of the problem in Asia is food and energy. And monetary policy alone cannot address world supply imbalances. To a greater or lesser degree, every country is faced with the same conundrum. Do you risk higher unemployment and your economy to fight inflation that is not strictly speaking a monetary problem? If food is rising 40% in Vietnam, its workers will have to make more in order to eat? Will such a price increase force higher wages and perhaps a wage increase spiral like the US saw in the '70s? If you increase the value of your currency too fast, you risk losing your competitive price advantage and thus losing business and jobs.

There Are No Good Solutions

Over in Europe, I noted last week that one Jean Claude Trichet, the president of the European Central Bank, virtually promised the markets a series of rate hikes. This sent the dollar into the tank and the euro back to new highs. Gold loved it.

But this week has seen a very unusual set of speeches by fellow ECB members disavowing Trichet's promise, and even Trichet had to try and "explain" away what he had said. "We aren't talking about a series of rate hikes. Maybe, just possibly, we would raise in the event of more inflation." Confusion reigns. There is clearly not consensus at the ECB.

You can bet Trichet heard from various finance ministers in the countries whose economies are weakening. They are not interested in a stronger euro or higher rates. What one person called the PIGS countries are surely objecting (Portugal, Italy, Greece and Spain, whose economies are not exactly robust).

And their objections are the same ones that would be made here. What good would a rate hike do? How much more oil or corn would be produced? Why increase our pain when there could be no positive result?

The central banks of the world got by for years with easy monetary policies (think Greenspan) because of rising productivity, cheap energy, increased international trade, a disinflationary environment because of cheap Asian labor and imports, etc. Now that economic regime has come to an end. Stability had bred instability in a very uncomfortable Minsky Moment.

There are no good solutions. There will only be a choice of how much and what type of pain. The US, Europe, and Japan are entering Muddle Through World. The rest of the world is faced with increased volatility. This is a tough environment in which to be a central banker.

New York, "Chicago," and Wedding Showers

It looks like I am going to have to go to New York and Philadelphia the first week of July for a day of meetings with partners. Larry Kudlow has asked me to come on his show July 1, and that sounds like fun. And then I am looking forward to the annual Maine fishing trip hosted by David Kotok of Cumberland Partners. A lot of good friends will be there. And I get to go with my youngest son Trey, who always catches more fish than I do. Maybe this year I can manage to at least stay competitive.

Tomorrow is Tiffani's wedding shower, and it looks like there will be a lot of friends at my home. Her wedding is August 8, and it gets closer every day. There is so much that has to be done. While I am not doing any of the heavy lifting, I am amazed at how much the coordination resembles the Normandy invasion.

I will be speaking at the National Association of Business Economists at the Dallas Fed this next Wednesday, on the assigned topic of how I use earnings forecasts in my economic analysis. That portends to be a very contrarian speech, as long-time readers know my view of the value of stock analysts and the reliability of their forecasts.

On a very sad note, I am distressed to learn that Tim Russert passed away. I have thoroughly enjoyed his analysis and interviews over the years. He has been like an old friend coming into my home each week, and I will miss him. Rest in Peace.

On a lighter note, this Sunday evening The Doobie Brothers and Chicago are in town for a concert, and I am going to go for a little nostalgic evening. Can you believe it has been almost 40 years? Where has the time gone?

Let me say thanks to Pierre and Guy Casgraine, who hosted your humble analyst, Martin Barnes and Dennis Gartman, and a few friends in Montreal on Wednesday. It was an exceptionally fine evening. I so enjoy good food and wine and great friends and conversation. It is one of the true pleasures of life.

Enjoy your week, as I know I will. And look for a major announcement from me this Tuesday, as Tiffani and I need your help on a new project. (No, not the wedding!)

Your getting ready to be an old rocker for a weekend analyst,

John Mauldin

How do You Spell Stagflation?

John Mauldin — Sat, 17 Nov 2007 04:16:26 GMT

In This Issue: How do You Spell Stagflation? Cooking the Inflation Books Gaming the Producer Price Index Consumer Spending is Up, but then Again, It May Be Down A Two Dimensional Problem Saudi Justice New York, Toronto, Europe and Thanksgiving This week...(read more)

Sea Change at the Fed

John Mauldin — Fri, 21 Sep 2007 08:12:00 GMT

Sea Change at the Fed "Of his bones are coral made: Those are pearls that were his eyes: Nothing of him that doth fade, But doth suffer a sea change Into something rich and strange" (The Tempest - Shakespeare) The term "sea change"...(read more)

The Mortgage Pig in the Python

John Mauldin — Fri, 03 Aug 2007 08:06:00 GMT

The Mortgage Pig in the Python Inflation is Baked into the CPI Numbers The Mortgage Pig in the Python Housing Starts Look to Stop A Few Thoughts on the Recent Credit Crisis Half of All Hedge Funds Gone? Golf, Weddings, and Europe With the economy increasingly...(read more)

Draw the Curve, Then Plot the Data

John Mauldin — Fri, 30 Mar 2007 07:34:00 GMT

Introduction This week we look at something which has far more potential to hurt the economy than subprime loans - the US Congress. We muse on inflation data and why the economy may do better than I think. But first, and quickly, my young assistant Micah...(read more)

Trim Inflation Now

John Mauldin — Fri, 29 Sep 2006 06:56:00 GMT

Introduction It's been a random walk through the data fields this week. The headlines say that inflation rose a mere 0.1% in August. The markets liked that. But digging deeper, the data is not as sanguine. We had the depressing Philly Fed manufacturing...(read more)

Central Bankers of the World, Unite Again!

John Mauldin — Fri, 09 Jun 2006 06:29:00 GMT

Introduction Is the Fed right to be worried about inflation, or is that so last quarter? What do musty old academic papers suggest about Fed policy? And can we translate that into something that gives us a clue as to why markets around the world are in...(read more)

Smoothing Out Inflation

John Mauldin — Fri, 14 Oct 2005 05:04:00 GMT

Introduction How can inflation be so low over the past few years if we see rising energy prices, ever-increasing medical costs and especially the cost of housing rising so dramatically? Today, for the first time we see inflation actually showing the results...(read more)