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Heavyweight investors - including Bill Gross, Jeremy Grantham and David Tepper - are bracing for...

Heavyweight investors - including Bill Gross, Jeremy Grantham and David Tepper - are bracing for a bout of deflation, a development that could cripple global economies. Gross: "Deflation isn't just a topic of intellectual curiosity, it's happening. It's an uncertain world that's tipping toward deflation."
Comments (32)
  • Machiavelli999
    , contributor
    Comments (829) | Send Message
    You know what's sad. This



    We are in the most deflationary environment in 80 years and yet the masses are still worried about inflation. The public doesn't get it. They don't want to get it. They'll just keep buying gold from Glenn Beck who keeps telling them hyper-inflation is just around the corner. I am sorry, but a part of me is going to laugh when gold crashes.
    2 Aug 2010, 06:20 PM Reply Like
  • Jason Tillberg
    , contributor
    Comments (1236) | Send Message
    That's interesting.


    Given the efforts already made to stop this deflation, it's proving it can't be stopped.


    .. what to do with my gold and silver now..


    i say we'll see default default and more default ..and printing printing and more printing.


    The only commercial activity left will be a maddened parasitic speculation.
    2 Aug 2010, 06:37 PM Reply Like
  • Paul Nelson
    , contributor
    Comments (225) | Send Message
    Don't forget that in the case of Gross, he is talking his book!
    2 Aug 2010, 06:37 PM Reply Like
  • Tack
    , contributor
    Comments (12972) | Send Message


    When you have started an equity fund last year, but hold massive billions of bonds you must liquidate, the last thing you're going to do is spook the flock, while you filter sales into their midst quietly.
    2 Aug 2010, 07:31 PM Reply Like
  • Stone Fox Capital
    , contributor
    Comments (5927) | Send Message
    amen...all the people buying copper are taking the other side of the trade.
    2 Aug 2010, 11:00 PM Reply Like
  • jason2713
    , contributor
    Comments (32) | Send Message
    It depends, if the fed keeps stimulus after stimulus rolling out, which is probably what will happen because Obama won't turn his back on the American people now, and creates stagflation, that would be our best case scenario. I personally don't know how you "control" inflation with stimulus after stimulus, but with the level of deflation that is possibly going on, its going to take massive amounts of money to fill the black hole, and as long as they keep money supply in check (I don't know how, like I said) could get stagflation but I'm pretty sure this is impossible. Too much deflation is happening now based on the reading I am doing.
    2 Aug 2010, 06:40 PM Reply Like
  • John Cofran
    , contributor
    Comments (224) | Send Message
    Let me start by saying i have little first hand experience with the perils of deflation. I do, however, believe we are in the early stages of what I predict will be several years of mild deflation. I do not see much of an economic recovery for several years, just a slow grind. Deflation will compound the struggle to grow this economy.


    If wages can hang in there as they have thus far, mild deflation may ultimately prove to be good for the long-term sustainability of a recovery as purchasing power will shift and favor the 95% of the population with a disproportionately low percentage of the wealth in the economy. If wages slide in any significant way, look out below. I have little faith in the current administration's stimulus policies, especially as it relates to creating and growing long term employment opportunities.


    All that said, i am as defensive as i have been in some time. I was fortunate to be 400% invested at the bottom, and have moved gradually to a 30% cash position. I missed the Treasuries band wagon, and will not get on near or at the top. I have been fortunate to have shifted entirely into stable dividend payers, such as CTL, GPC, PGN, ABT, T, FE, PBI, KMB & EXC. I have also built sizable positions in HYG, JNK and PFF. I feel comfortable hiding out in names like these for the next couple years, especially if multiples compress on growth and non-dividend paying investments.
    2 Aug 2010, 11:35 PM Reply Like
  • Stoploss
    , contributor
    Comments (1727) | Send Message
    Deflation is a far more formidable force than inflation is. Once it takes hold, it is almost impossible to stop, as Ben will learn. This is a futile exercise that will not end well.
    2 Aug 2010, 06:47 PM Reply Like
  • Donald Ingram
    , contributor
    Comments (3481) | Send Message
    Yes. The Fed is out of ammunition to fight a bout of deflation. The only weapon left is the printing press which will run at white hot speed.
    We will have deflation until we don't - at that point inflation will take over, quickly morphing into hyper inflation from all the printing. Those that sell their gold during the deflationary phase, will be caught out in the cold, to be left with worthless FRNs.
    2 Aug 2010, 06:53 PM Reply Like
  • Jason K Roberts
    , contributor
    Comments (20) | Send Message
    Deflation started to set in for most of Main street in 2006 when their greatest asset, and ironically most of their debt, began losing value. Now 4 years later, nobody wants to admit that the worst thing that could happen to middle America has become reality. The backbone of our country has been nothing short of devistated because of the housing collapse. If you didnt lose your job and your house to foreclosure then you know somebody who did and their fire sale resulted in your main piggy bank being deflated. Large unsecured debt such as credit cards are gone now too. Without jobs, where will they get money to 'overspend' on anything but the necessities?


    I'm on the ground floor of the real estate sector all over the country and it sure doesnt seem like the bottom is in. Trust me, just because wall street is ignoring the news for the time being doesnt mean they get to forever. They have had the luxury of free money for a few years and in turn have been killing their main street clients with 29% interest rates. How many of you could go out and blow out earnings if you had virtually free money at your finger tips? I've seen the worst of this over the last few years.


    This isnt over either. In my book, deflation isnt coming, its been here for 4 years. Everybody else will figure it out after they jump on a fake government induced 2.7% GDP "expansion". Any guesses as to what it will actually be revised down to in the coming months?
    3 Aug 2010, 01:18 AM Reply Like
  • Tack
    , contributor
    Comments (12972) | Send Message
    Amazing what folks will believe, just because somebody says it, even if they need to ignore readily published data to do it.


    OK, if we want to discuss deflation in arcane M1, M2, M3 terms, then, maybe somebody can show that there's a downturn in "money supply." But, instead, let's examine things on a real-world practical level and see how that jibes with "deflation," as in fearful expectations of lower prices.


    First, other than housing prices, which are merely returning from a huge speculative excursion, there's not a price of anything, particularly recurring typical purchases, that's headed down. Not food, not restaurant fare, not energy, not taxes, not services, not insurance, not healthcare...."not nothin'." Somebody show me a plummeting CPI.


    Second, offering more proof of this is the fact that corporations are reporting two straight quarters (more than six months, now) of increasing revenues. In the latest quarter, revenues are up 9%, on average. How's that happening if both prices and volumes are in decline and profits are only being generated by cost containment, as the "cw" goes? The answer is that the "cw" is wrong, demonstrably wrong by hard, cold practical experience and reported data.


    So, if one is left to plan one's future investments based either on economic deflationary theory or on the hard data anyone can observe anytime they venture to the grocery store, get a bill in the mail or read a corporate report. For me, at least, an easy choice.
    2 Aug 2010, 06:56 PM Reply Like
  • Harry Tuttle
    , contributor
    Comments (2221) | Send Message
    Actually "hard data anyone can observe" mostly represents the past. Are suggesting planning for the future by using serial correlation?


    Whether or not we WILL have deflation does not necessarily hinge on whether we have had deflation.


    Furthermore, as many have commented, the Fed is trying its best to avoid deflation...just like the Japanese. Two large forces can cancel each other out. So long as they remain equally strong.
    2 Aug 2010, 07:03 PM Reply Like
  • Tack
    , contributor
    Comments (12972) | Send Message


    Sorry, but I can't anticipate the sudden "double-dip" economic reversal that all the gloomsters promote, even as corporate revenues advance. Revenues don't advance when prices and/or volumes are decreasing. If you believe the economy is suddenly now going to halt and that's your bet, fine.


    I'm positioned in this market with some equities and an array of high-yielding bonds, but including a sizable hedge in floating-rate, energy and convertible issues which would benefit from increased inflation. If that doesn't occur, and we float along in "Japanese" style, then, normal bonds will do just swell, as will the hedges, although they won't "pop" higher.


    The high-risk play, in my humble estimation, is to be buying or holding medium- to long-term Treasuries with yields at all-time lows. The very fact that the yields are at record lows might suggest, at least to some, that there might be some risk in such a position. But, hey, folks thought houses could only go higher when they were at all-time highs, too.
    2 Aug 2010, 07:26 PM Reply Like
  • Donald Ingram
    , contributor
    Comments (3481) | Send Message
    "merely returning" My what a euphemistic phrase to describe the destruction of some eight trillion dollars of equity!


    - Real wages have contracted for Main Street, however the average federal worker now earns 60% more than the average worker in the private sector.
    - Of the income growth between 2001 and 2007, 66% went to the top 1% of American's.
    - Of all US stocks, 83% are in the hands of 1% of the people.
    - The bottom 50% of income earners in the US now collectively own less than 1% of the nation's wealth.


    What the people do have is lots of debt! Deflation (deleveraging) will continue until it's done. The Fed may print as much as it likes, it won't stop this process. What it will do is add fuel to the conflagration that will result. Not good.
    2 Aug 2010, 07:41 PM Reply Like
  • nmelendez
    , contributor
    Comments (1622) | Send Message
    You forgot one item, 30 trillion in real cash 1,500 trillion in derivatives. Question, who's gonna be left without a chair when the music stops. USA?
    2 Aug 2010, 08:38 PM Reply Like
  • Harry Tuttle
    , contributor
    Comments (2221) | Send Message
    I think the high-risk bet is to buy equities in the face what looks like a binary scenario.


    If you are correct, the economy will, somehow, find a way to the the good old days of 2006. Although I do not see how can they do that without the now over-leveraged American consumer and his/her Southern European and British counterparts, I do not discard that it could happen.


    On the other hand, if you are wrong, equities could fall hard (at least 50%).


    I do not think medium/long treasuries are safe either as you, in my opinion, correctly point out.


    I do not like that kind of risk/reward.


    Sometimes is better to do less.
    2 Aug 2010, 09:03 PM Reply Like
  • eatandtravel
    , contributor
    Comments (3) | Send Message
    Can they collect?
    7 Aug 2010, 01:50 AM Reply Like
  • slimyoung
    , contributor
    Comments (6) | Send Message
    When stock traders and bond traders don't agree, I've learned to bet with the bond traders. I would bet on deflation, given the yields I see, but the government has waded in so deeply, I don't feel comfortable with the clues the rates provide. Van Hoisington and Lacy Hunt at Hoisington Management have been the most prescient prognosticators I've followed, and they still like long treasuries. But as my mentor frequently said, "It's better to be out, wanting in, than to be in, wanting out." Hello, cash.
    2 Aug 2010, 07:01 PM Reply Like
  • nmelendez
    , contributor
    Comments (1622) | Send Message
    I could not have said it better!
    2 Aug 2010, 08:38 PM Reply Like
  • Harry Tuttle
    , contributor
    Comments (2221) | Send Message
    I agree that bond traders have, in general, a better understanding of macro economics.


    Equity people are about stories.
    2 Aug 2010, 09:04 PM Reply Like
  • Tack
    , contributor
    Comments (12972) | Send Message


    Good comments.


    Also, the Fed has created its own artificial "deflationary" drag on Treasury yields by having the bank money laundering merry-go-round, allowing them to borrow limitless amounts, then, promising risk-free returns by ever-more Treasury offerings. This just recycles new money back to the Government.


    Think of it this way: if the Government offered any of us money, no questions asked, at 0.5% and said we'll take it right back and pay you 3.0%, we'd all say, "give me as much as my wheelbarrow will hold." If they came back a little later and said, "how about more at 2.75%," we'd still take it because it's risk free. And, the banks don't even worry about a reversal in rates because they'd just hold the paper to maturity in that case. There's literally no risk for banks, and if they needed more funds from the Fed later for conventional lending, that'll be there, too. Not so for average retail investors.


    This is one of the reasons why the seemingly boundless "demand" for Treasuries is misleading, as regards some prognosticator for prices or deflation. The Treasury "game," now, is almost outside the normal playing rules. It's only the average outside non-bank investor who has huge risks because if the banking game ends, then, Treasury rates will rise rapidly and Treasury prices will head the other way. While the banks can afford to park that free money from the Fed until maturity, it's doubtful the average investor will want his funds tied up for ten years at 3% or less.
    2 Aug 2010, 09:09 PM Reply Like
  • untrusting investor
    , contributor
    Comments (9928) | Send Message
    While it is true the banks are recycling into Treasuries, please give us your estimate of how much that is. Is it maybe even $1 trillion out of $14 trillion? The big holders are China, Japan, and other central banks by a long long way. The US banks are a relatively small player in the overall Treasury picture. In fact Pimco alone could hold almost as much as all the US banks put together.So, the US banks are not really going to dictate much in the Treasury markets.
    3 Aug 2010, 12:48 AM Reply Like
  • yea
    , contributor
    Comments (75) | Send Message
    We will not see widespread deflation in this country anytime soon because they will just keep pumping money in until we have the true crises which will be the dollar crises...Banana Ben will continue spending money he does not have until we are tapped out and no one else will buy our debt...and then they will buy all our debt and keep pumping money into a system which is already dead...When this disaster is over they will be exposed for what they are but that is not anytime soon...Just keep watching the dollar die a slow death and oil rise...Speculation is king!!!
    2 Aug 2010, 07:09 PM Reply Like
  • The_Hammer
    , contributor
    Comments (3857) | Send Message
    It's called deflation when banksters want to get additional massive stimulus to prop up house prices.
    The banksters did not call deflation when avg joe public had stagnant wages the last 10 years.
    DEFLATION is not all that bad for the avg person. As a matter of fact stagnant wages and falling prices increase the avg Joe's standard of living. The banksters do not like that.
    2 Aug 2010, 07:34 PM Reply Like
  • edexter
    , contributor
    Comments (548) | Send Message
    I am under the impression that bill gross is worried about rising interest rates and he is therefore moving into dividend paying stocks.... He is getting lumped in with marc faber of the doom, boom, and gloom report in some blogs.
    2 Aug 2010, 08:11 PM Reply Like
  • D. McHattie
    , contributor
    Comments (1829) | Send Message
    Unless you specify the good, service, asset, investment, currency, etc then your discussion of inflation and deflation is over-simplified.


    Prices rise where and when money is spent.


    Consider the item and whether there is growth in the money being spent on this item, relative to the supply of the item.


    The fed's newly printed money is NOT being spent on real estate - that was last decade.


    Treasuries are near record highs because that is what the Fed is spending printed dollars on.


    Now, who else, besides the Fed, has a massive amount of USD? What are they buying now and what are they likely to buy in the future.


    China and other sovereign wealth funds are flush with USD, currently buying only US treasuries, further contributing to the bubble in UST. But their children have been watching our tv and when they grow up they will want the lifestyles we take for granted.


    First and foremost they will need food and energy. I suggest those thinking long-term (10+ year horizon) invest accordingly.
    2 Aug 2010, 10:03 PM Reply Like
  • kmi
    , contributor
    Comments (3995) | Send Message
    Think some flirtation with deflation because of dollar strength, which is fading. Dollar strength dropped costs on imported goods, energy, etc, but that's all gone now.


    If dollar keeps falling I expect another engineered 'crisis' in Europe/Euro though... Times were good for a minute out in Euroland...
    2 Aug 2010, 10:15 PM Reply Like
  • Scootger
    , contributor
    Comments (228) | Send Message
    Phil Gross went on to say that PIMCO is in the midst of launching an equity fund for the first time in the firms history.....BUY STOCKS
    2 Aug 2010, 11:05 PM Reply Like
  • bigduder
    , contributor
    Comments (34) | Send Message
    I posted before I think what we seen the last year or two is a reflection of the next 5 years at least. Some prices up , some down. All the bail out money for the banks did nothing to set off inflation. No more jet ski's, boats, 60 inch TV's, third car, motor home, etc. We're back to normal. I think the average pay where I'm at is like $10. an hour and still is, however houses have dropped back to 1990's prices.
    2 Aug 2010, 11:48 PM Reply Like
  • Speakeasy
    , contributor
    Comments (414) | Send Message
    You can debate all you want, all I know is that a can of tuna fish used to weigh 6 oz and cost 59 cents, now it weighs 5 oz and cost 75 cents! Again you can debate all you want, but reality is we are living in some sinister times when you consider the money our govn is spending in 2 law suits to fight one of our own state!


    Arizona Sheriff: ‘Our Own Government Has Become Our Enemy’
    Cybercast News Service, by Penny Starr


    Pinal County (Ariz.) Sheriff Paul Babeu, whose deputies patrol a county along the U.S.-Mexico border, is hopping mad at the federal government. Babeu told that rather than help law enforcement in Arizona stop the hundreds of thousands of people who come into the United States illegally, the federal government is targeting the state and its law enforcement personnel. “What’s very troubling is the fact that at a time when we in law enforcement and our state need help from the federal government, instead of sending help..
    2 Aug 2010, 11:53 PM Reply Like
  • Syncopated
    , contributor
    Comments (20) | Send Message
    Japan is a terrible comparison, we have a completely different political dynamic, Japan is a nation of savers who quiver at the thought of any inflation eroding savings and they fund their debt internally, along with a large chunk of the U.S.'s debt, the U.S. is a nation of borrowers who would be crushed by the growing real value of our debt in a deflationary environment. It is largely about expectations, and with the current debate over deflation we've got a lot of generals fighting the last battle, we've definitely have more room for expectations revisions on one side rather than the other....what exactly is stopping the FED from creating a increasing price level in any environment? nothing....pile on enough idle cash and watch for a change in the demand for real money balances by firms and consumers, if this doesn't work, rinse and repeat until it does...maybe there is some impediment to this creating a stable to rising price level, such as extreme excess capicity, but people have been talking about potential output as if it is a given constant value, it is not, and the last person I've heard even acknowledge this was Dean Maki when he said he estimated NAIRU at around 7%, up from probably around 4.5-5% in the golden years.....I tend to agree with reality, and I see no prices falling anywhere, falling capacity, increased frictions by regulation and increasing local and state governemnent charges (such as the bridge tolls in the bay area) and a lot of people much more on their toes after a long period of me it is more of a monetary question rather than a economic activity question, the $ is only 39 years old as we know it today, and over that period the U.S. has not had one year of excess production over consumption, until I see a path to correct the huge imbalances created by ever increasing amounts of $'s accumulating abroad I will remain extremely skeptical about the real purchasing power of our currency going forward....I'm not saying I know the answer, but too many people are overly confident in their predictions and need to acknowledge that we have seen two of the largest asset bubbles (probably THE biggest) in history within my lifetime and I'm young....undoubtedly, something is amiss with the monetary system, and what is the most likely resolution to the imbalances given the debt and political dynamics? Think probablistically please and stop talking like we can draw deterministic conclusions, the world is a complex place.....even Buffett is willing to acknowledge a possibility of increased future inflation and he is notoriously wary of any macro talk...and yes, total revenue equals price times quanitity, so it is a sound conclusion that if revenues are rising while volume is down prices must also have been rising in the past....I see no deflation, as of yet, in Cali and we have been clobbered big time, yet our governor still has time to go act in some stupid new movie with a bunch of old hollywood hacks.....
    5 Aug 2010, 01:36 PM Reply Like
  • mweaver
    , contributor
    Comments (201) | Send Message
    in 1938 henry morganthau, fdr;s treasury sec, said of the persistent
    lackluster economic hangover of 1932-33. "we've thrown everything
    we can at it, and nothing is working". this downturn began in 2000
    after the bubble burst and has continued unabated. the
    housing bubble was a desparate attempt to reflate the party. sort of
    like bringing out another punchbowl or extending the bar hours at a wedding reception. we still have a few years to go. bill seidman
    said it took eight years to recover from the savings and loan crisis of the mid eighties. figure at least 2012-2013 before significant
    job growth coupled with economic recovery. until then, stay vigilant.
    6 Aug 2010, 07:40 AM Reply Like
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