Deflation: The Fed's Ugly Pit Bull

If you are unfamiliar with deflation, you are not alone. In fact, the past 80 years has been the antithesis of deflation.....inflation. Inflation is as American as apple pie. A right of passage from one party to another, or one Federal Reserve Chairman to another. We are not surprised by inflation, but we, the people, have come to expect inflation. In economics, we call this the expected rate of inflation. How can inflation be so ingrained in our collective psyche? Because the Federal Reserve's very ability to control assets depends on it. So why would Chairman Bernake place the entire system in harm's way?

Every so often the bankers are faced with a problem that only deflation can solve. And so enters the pit bull of the Fed. A pit bull is a ferocious and vicious defender of its owner, but non-owners beware. What is the biggest fear of Chairman Bernanke and the money center banks? Deflation! So why play the dangerous game of releasing deflation? Control is the purpose of deflation. The Federal Reserve has lost control of money due to the shadow banking system. This is NOT acceptable, thus the "pit bull of deflation".

Long term investors have been decimated these past 12 months trying to pick the lows in the financials. This, as you know, has been a bloody knife catching contest. People have been surpised as the Fedral Reserve has allowed its blood line to be sacrficed for the greater good......the Federal Reserve. With the help of the treasury, the Federal Reserve has chosen the survivors. Hedge funds, private equity, and other leveraged players have discovered that staying leveraged less than the money center banks won't keep you safe when the government decides to play hardball. Deflation is here, and it will stay here until the leveraged players are destroyed. There is one leveraged financial play I would consider as an investor......the Ultra Long Financial ETF (UYG).

When the Federal Reserve decides to chain-up its pit bull called deflation. They will feed it with the carcasses of the leveraged players. If history teaches investors anything, it's that bankers always win, but you do need to know when to go all in. Timing is everything and selection is crucial. The Federal Reserve's very existence relies on Ben Bernanke being able to make deflation heel on command. I'm convinced of one thing....Helicopter Ben knows inflation!

Disclosure: Author holds a long position in UYG

Comments

[Jorsher:]

Such clever usage of "pit bull!" It's not common to see the media mention "pit bulls." Well, except for Verizon, and the comparison of Palin, and any time there's an attack by something furry with legs.

This analogy just doesn't click for me. You see, I have a "pit bull" of my own and have been around dozens more. Unfortunately, they seem to be more preoccupied with licking than attacking. Maybe in your case, they just don't like bankers. Don't get me wrong, due to their amazing versatility they can be trained for guarding, but it isn't a natural trait.

I know I'm going to hear that "it's something people can relate to." You're right. Instead of using correct comparisons, just use ones people can relate to and continue to validate the false beliefs.

I came here to drum up views and controversy, like a reporter's "pit bull."

2008 Nov 05 03:50 AM

[MarkGillCPA:]

Jorsher, give us a break. This is a web site for investors, money managers, analysts, etc. We have no time or interest in PC statements for pit bulls. We've got bigger fish to fry (ooops, now I've offended the fish lovers).

Mark, I'm not disagreeing, but your article doesn't explain how the Fed's actions are deflationary. Also, why does that make the UYG a buy? (note - I'm long UYG as well, but for different reasons).

Isn't lowering the fed funds rate to 1 percent inflationary? Or showering cash on the financial sector? Sure, the current unwinding of leverage is deflationary, but are we setting ourselves up for a new cycle of inflation down the road?

2008 Nov 05 11:47 AM

[granger:]

great article, I enjoyed it and agree completely

when this is fone, the ensuing inflation will be almost unimaginable, get ready

2008 Nov 08 09:49 PM