Deleverage, Deflation, and the Federal Reserve

Thanks to "Contrary Investor," the following chart further confirms my believe that the deflation through deleveraging will continue throughout 2010. The long-term average from 1980 indicates an average "House Debt as a % of GDP" of 66.4%. Currently, that percentage is approximately 95%. Reversion to the mean, anyone? I, for one, do believe that the reversion will take place, which means that deleveraging still has a long way to go.


Now, what does this mean for Fed monetary policy for the remainder of 2010? Take a look at following table.


Over the last year, the FED has purchased approximately $1.25 trillion of U.S. Treasuries, Mortgage Back Securities (MBS), and Government Agency Securities out of thin air. What is interesting about the FED purchasing $1.25 trillion of "questionable, quality assets, is that the money supply (M2) hardly increased, something like less than $50 billion. What happened? Well, deleveraging occurred. See, when deleveraging occurs, the money supply decreases; because individuals are paying off their debts. When you pay off debt, you write a check; and the money supply decreases by the amount of the check. Or, when banks write off defaulted commercial and consumer loans, money supply also declines. That is why inflation has not been a real problem because of deleveraging. The deflationary factors of deleveraging have exerted a greater influence that the FED's inflationary forces of injecting $1.25 trillion into the economy.

I firmly believe that the FED will provide another mega dose of liquidity into the economy as it tries to reflate the economy this year. The last thing that the FED wants to occur is an outright decrease in the money supply. As long as the FED provides liquidity in its attempt to stem the tide of those deflationary forces, financial assets, especially the stock market, should benefit directly as it did in 2009. The reason being is the liquidity has to go somewhere, because banks are not making loans.

Bubbles, Bubbles, and More Bubbles

Source: Market Ticker. Note: To enlarge the chart, double-click inside of it.

All financial bubbles, such as the dot.com bubble of 2000, real estate bubble of 2007, and the current stock market bubble, are in fact credit bubbles at their core. That is just another way of saying induced by credit expansion by the Federal Reserve System, which is what the above chart depicts. And, that is exactly what the Fed has done since 2008 in its attempt to re-inflate the bubble. Notice the parabolic rise in debt, which can not be sustained. Something has to give, and it will not be pretty. History tells us that all credit-induced bubbles fail. This time will be no different.

Ok, what is an equity investor suppose to do in such a bubble environment? My recommendation is to follow my exponential moving average strategy. See my post from Monday, March 22, 2010, entitled, "S&P 500 Weekly Update."

Unions Want to Take Over Your 401(k)

Gene J. Koprowski over at MoneyNews.Com reports the following news item: "One of the nation's largest labor unions, the Service Employees International Union (SEIU), is promoting a plan that will centralize all retirement plans for American workers, including private 401(k) plans, under one new "retirement system" for the United States. In effect, government pensions for everyone, not unlike the European system and regardless of personal choice."

Perfectly logical to me. Isn't it? We now have national health-care insurance. Why not nationalize all defined-benefit plans (pensions) and defined-contribution plans. What's next? Nationalized religion? I think we have that, and it is referred to as the Federal Government.

Smiley Faces

To go along with the above "Smiley Faces," listen to this music video by Gnarls Barkley.

Your Tax Dollars at Work: Don't You Just Love It?

S&P 500 Weekly Update for March 19, 2010

Note: To enlarge, double-click inside of chart.

20 Promises for $2,500: All Americans Now Await Lower Premiums Promised by Obama

Breitbart.tv » 20 Promises for $2,500: All Americans Now Await Lower Premiums Promised by Obama

Let me know when you get your $2,500 premium reduction. I am in the process of making a list on a "Post-it Note" of everyone that receives this premium reduction.

U.S. Treasury Pays More Than Buffett as U.S. Risks AAA Rating Status

Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yielded "3.5 basis points" less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson and Lowe’s Co. debt also traded at lower yields in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey calls an “exceedingly rare” event in the history of the bond market.

This is a major concern that has not drawn a lot of attention in the main-stream media. I can not remember a time when interest rates on private debt was ever lower than on Treasury debt. This is extremely alarming! The bond market is saying that, in terms of credit risk, some private companies are safer that the U.S. Government. Why? Because our government continues its way of deficit spending, especially with this "new" health bill.

From Bad to Worst and Nobody Seems to Care

Last month the U.S. posted a record $220.9 billion budget deficit. We took in $107 billion but spent $328 billion. That means we only funded 32% of all federal government expenditures. Of the $328 billion that was spent, $164 billion went for entitlements. You know, like Social Security, Medicare, Medicaid, etc. Now, this is the scary part. If we eliminate the $164 billion of entitlements, which leaves us with $164 billion for other expenditures, we still don't have enough revenue to pay for it. Because we only took in $107 billion. Folks, this can not and will not continue that much longer. We can not continue to spend our way to prosperity without the revenue to match it. I know there are those out there, especially in Washington, that believe that as long as we have checks, it must be ok to use them.

Given the theme of this post, I believe it is a good time to revisit the U.S. Debt Clock.

Productivity Up Sharply, Labor Costs Drop in Fourth Quarter 2009

What is the true meaning to the title? Answer: (1) Work harder and get more done. (2) Get paid less. and (3) Suck it up, don't complain, or you're fired. Oh, reduced labor cost (reduced pay per unit of work) simply means "deflation."