Fighting Yoda

A Third Way in the Current Inflation / Deflation Debate (But It's Even Scarier)

America has to change to survive, it is unwilling to make the sacrifice, actually still believing in its resilience etc. This is what will complicate the issues - and likely lead to its downfall. US has to get back to basics – save, invest, produce; rather than borrow and consume philosophy we have been following last couple of decades.

Meanwhile it is deflation - govt. can't spend enough to compensate for lack of consumer spending- after all it is US - 70% of GDP is consumer spending.
TIPS currently prices only 0.6% inflation expectations for 5 years. Fed is more worried about deflation rather than inflation.

Berkshire Hathaway: Proof That the CDS Market Is Irrational

1. CDS markets are thin, can lead to obvious distortions. However CDS markets have been totally right about all the companies, equity markets have followed. We have seen it far too many times recently. Don’t blame the bears – they are simply making their bets. CDSs will start trading on ICE from Monday, lets see what chnages come about.
2. Short sellers have completely vindicated themselves in these markets; they are the ones that have been right. Even Chris Cox finally officially admitted – banning short selling was the worst decision of his tenure – markets fell the most during that period. Short selling ban has since been revoked – markets continue to fall but at a lower and more orderly pace.
3. Buffet/CDS: Hard to say what the situation is with BRK. He has made bad bets – derivatives, selling S&P puts. Again boils down to lack of transparency – there I is no disclosure about these puts – at what level of S&P they have been written. All we hear are vague things – European style puts, decade duration, etc etc. There are people who find it easy (and cheap) to assume the worst. Right now he has booked a mark-to-market loss of $6.9B. GE CDSs are trading very high - any takers of GE - likely not.
4. All of Buffets financial holdings may be under water, if AXP goes to 9 (it very certainly will shortly) – even that would be under water. So he may lose a lot , 60-70% of his life time earnings in this episode. It is anyone’s guess where markets would go next.

So yes CDSs may be quite right – time will tell.