Bobco23

The Deflation Scam

My approach has been to barbell my portfolio. I have 55% in CDs and treasuries (bought a while ago) and 25% in safe yield stocks (PM, MO, pipelines and regulated electric utilities) in the event we deflate; and 20% in commodities that pay distributions, TNH, BPT, SJT, PCU, ARLP, etc. I probably could do better being more agressive, but I want to preserve capital, get a modest cash flow, and gain some inflation protection in the event my view that deflation is the likely outcome is wrong.


On Dec 20 09:34 AM chal wrote:

> So what does one invest in ?

The Deflation Scam

LilBob, you and I have more in common than our names.

I concur with your forecast of the end of the era of the consumer. (I might add mindless consumer).

Inflation would be a blessing, but deflation is the likely outcome. If one can envision the money supply as M3 at a size of say 10 plus a LOT of consumer credit at a size of say 100. The total of the new definition of money supply is 110. If the credit componet of 100 falls to 50, increasing M3 to 20 is not going to be inflationary. The money supply has gone from 110 to 80. Not good; deflation, recession, depression. Cash will be king.

We will indeed relive our parents (or grandparents) worst nightmare, 1932.


On Dec 19 08:18 PM LilBob wrote:

> Deflation is a function of cash-strapped consumers trying to rein
> in their debts. In order for consumer prices to rise we have to see
> a corresponding increase in wages, which isn't going to happen when
> the unemployment rate is high and competition for menial jobs is
> fierce. The Fed can print all the money they want but if most of
> it ends up sitting in the vaults of banks that are afraid to offer
> credit then it's a pointless task.
>
> The consumer based economy is over. Consumer prices will continue
> to fall. Retail will continue to suffer. Private colleges and universities
> are going to have to rein in their costs or eventually they are going
> to get hit also. American consumers will soon start acting more like
> their grand-parents. Right now is not the time to invest in consumer
> goods-especially pricier items like computers and cell-phones. Consumer
> prices will continue to fall until they have reached parity with
> the rate of wage deflation experienced by the working poor over the
> course of the last ten years (And that includes losses suffered because
> of rising health-care costs).
>
> We are on the cusp of an economic change so dramatic that-by looking
> on the posts here and on a few other websites-I don't believe most
> economists or investors can even begin to fathom the change.

How Will Temporary Decline in Oil Prices Impact Energy Sector?

I think you have the essence of the entire problem. Being green feels good, but it is inefficient, ineffective, and costly. The btu inputs relative to the btu outputs to these alternative energy solutions are greater than the current solutions.

This "green bubble" would have burst if it had had a chance to gain momentum and evolve. This recession nipped it in the bud. That saved a lot of us from making stupid momentum investments.

I don't know any more than anyone else on the severity of the recession, but in my 65 years I have never seen the economy heading down hill so fast. From that I suspect we are in for a long bear market. "Think the unthinkable." (El Arian of Pimco). We could see a multi-year recession that kills green companies and severely retards hydro carbon companies. I think betting on consolidation in the energy sector (APA, APC, DVN, MRO, OXY, etc.) is a resonable bet and that it will occur, but it could be years before you get a buy-out gain. I also believe oil and gas prices will rise, but in a world wide and severe recession (maybe a depression) it could be years before that rise occurs and translates to profits. What plausible scenario is there that would increase the demand for oil and gas in the near to medium term?

There is no where to safely invest. Capital preservation should be every investor's concerns. Good times are unlikely to return anytime soon. Investing in alternative energy solutions is a fool's game.


On Dec 07 11:57 AM auto 44 wrote:

> I worked in the home heating and air conditioning industry all my
> adult life with the exception of four years working on supersonic
> aircraft in the air force during the vietnam war. It is my understanding
> that that converting hydrocarbon fuel to electicity and pushing it
> all the way from the source to the point where it is used is an extremly
> in efficient process. It doesn't work for something as simple as
> creating heat. I find it hard to understand how this is at all green
> technology. My guess is that not only do hybrid cars cost more to
> run but that over all they are actually bigger poluters.

Obama's Stimulus Package is Morphing Into a Monster

At first I was for the bailouts, figuring they would be more cost effective. Now they don't seem effective, let alone cost effective. The concept of a "comsumer bailout" makes more sense than it did at first pass.

Lets run the numbers: A trillion dollars is roughly $3,500 for every man woman and child in America (legal). Assumming 4 persons per family unit, a trillion dollar "consumer" bailout would translate to $14k per family unit. If this thing gets to be $5T, then you are talking about $90k per family.

You lay $90k on each family in America and the recession is over tomorrow.

I Would Be More Worried About Global Cooling

Sean, Derryl - Great Stuff.

Anyone touting manmade global warming is either an idiot on in on the scam.

Deflation We Win, Inflation We Win Big Time

Your article stirred a concept I have been wrestling with for a while. This is a bit simplistic, but perhaps you can flesh it out.

If we do include credit in the definition of money, then the constriction of credit reduces the total of the combined components of "money supply," i.e., cash and credit. If we print a few trillion dollars, are we not merely replacing the "lost" credit component of the "money supply?" Don't we just get back to zero at some point (from very negative), and given the unimaginable amout of credit losses is it not unlikely that we will not get above zero (inflation comes after we exceed zero) any time soon? Monetary inflation thus becomes a low probability.

When Stocks Go to Zero

If you have an investment horizon of 5 years or more I think this is an excellent strategy. If the market recovers, which is likely, you could see a double or tripple. If the market does not recover, possible but unlikely and disasterous for all asset classes including cash (e.g. Post WWI Germany), your EFT's will be next to worthless. But this is a good risk reward here for the intermediate term investor. I am averaging in on individual stocks over the next two years, focusing on dividend stocks (those that are likely to be able to maintain dividends like PM, FPL, OKS and CVX. Your plan has better diversification; mine better cash flow. I like both.


On Nov 22 01:37 PM kmne68 wrote:

> There seem to be values all over the place but with limited funds
> I am not sure which apple to pick.
>
> Anyone see a problem with just dollar cost averaging into an index
> ETF over the next few months/years so that whent the tide does come
> in I am ready?

Betting on Goldman's Future

Great post Michael. You have identified the problem and the solution.


On Nov 19 12:17 PM JasonC wrote:

> sunil - um, can you add?
>
> Goldman has a $1 trillion total asset base, and US banks routinely
> net 1% on assets in ordinary times. In the past Goldman has exceed
> that by a factor of 1.5 routinely, but ignore that. In ordinary times,
> one can expect Goldman to earn something like $10 billion. Since
> they made $11.6 billion in 2007 and $9.5 billion in 2006, this is
> clearly an achievable figure.
>
> Now, suppose they make nothing for the next 2 years. Suppose they
> never grow at all, forever. Suppose you require a 15% rate of discount.
> Then they are worth 6.67 - 1 - .85 times their typical $10 billion
> earning power or $48.2 billion. The market cap this instant is half
> of that, $24 billion.
>
> Meaning, the present price discounts a 50% chance of the above zero
> growth outcome and a 50% chance of an outright bankruptcy and value
> of zero. And returns an expected 15% on that coin toss, plus any
> growth in the event of a "heads".
>
> Or, if you want to express it as a higher discounting rate on those
> cash flow assumptions, then Goldman is currently priced at a 24%
> rate of discount, plus any growth ever achieved.
>
> The smashed to heck financials are screaming buys unless they go
> bankrupt. All the current pessimism is unjustifiable in any value
> analysis, it is the result of pure news and momentum trading perspectives,
> not value perspectives. They might go bankrupt. Or some might, and
> some might not. I sincerely doubt half of them will or that those
> that survive will never grow again, ever.
>
> Value investors are already buying. That isn't calling a bottom but
> it is calling a level.

Peak Oil's Bell Is Ringing

You got bin ladin's cell phone number? Ask his opinion on war. His goal make your "US leadership role" for peace N/A.


On Nov 16 09:16 AM ferguson wrote:

> The New York Times lead editorial this morning (11/16/2008) calls
> for a military restructuring and buildup to deal with a different
> but still dangerous world. As we look at the real world around us,
> the editorial has a lot merit.
>
> On the other hand, even if all of the advocated steps are taken and
> we are able to battle the forces of evil to a draw, the result will
> still be disastrous for the simple reason that war has now become
> a distraction from the real problems facing the world which include
> global warming, environmental degredation, food and water shortages,
> population growth and (last but not least) peak oil.
>
> War and the preparation for war is one of the least (perhaps the
> very least) productive uses of time and energy on the planet. The
> world as a whole (and we have to think in these terms) simply cannot
> afford a future where a large percentage of resources are spent on
> national defense, war and the aftermath of war.
>
> The clear interests of the entire world and its inhabitants are in
> finding a way to move beyond war. As the world's mightiest war machine,
> the U.S. should take the lead in this direction.

The Real Unemployment Numbers

notmuchhope, your post is the most profound of the day. We are indeed in a new order and root cause lies much deeper than mis-reported unemployment numbers, big government, or (for those who insist on ranting), George Bush. The shift in global power has some similarities to the fall of the British economy beginning in the late 1800s. We have created a competetive world that has successfully challenged us. The future will be either a continually diminishing standard of living or a radical new approach that the entire county embraces as a new economic culture. Bet on the former.

It certainly is sad to see my country fail, but after I get over reality, I (and you) having some capital left, need to consider how to prosper in this new paradigm.

What Obama's Victory Means for the Defense Sector

So, Silverslut; do you have any investment ideas to contribute or is this just a format for you to rant?

Two Strong Energy Rebound Candidates

Canadian trusts come with a future tax uncertainty, Canadian withholding, a declining Canadian dollar, and no potential for increased production. Check out the U.S. counterparts, BPT, PBT, SJT, and CRT and hold them in your self-directed IRA's if you can. I own all four. I did own HGT, PVX, and HTE. I hit a double with FDG on a take out by TCK, but the impending tax hit on closing forced my sale on the market at a discount. Canadian trusts come with a lot of unappreciated surprises. My advice is to stay away and seek comparble US entities.

1930's Redux? Possible Global Post-Meltdown Scenarios

No one knows what the future holds, but we all suspect it is not good. On the other hand there may be some benefit in a poorer world. A collapse in oil prices may or may not result in a more belligerent Russia. The (first) collapse of the Soviet empire resulted in an emasulated Russia unable even to get it's ships to sea or pay it soldiers. $25 oil will defund Iran and Saudi Arabia and their surrogate, Al Qaeda. Islam may be put back in its box by the coming depression and collapse of petro dollar funding. Ironic. Oh well, I'd rather be broke and alive, than rich and dead.

American Express to the Sell Block - Cramer's Mad Money (10/2/08)

Oil and gas royalty trusts are not just a liquidation of assets play where the only upside is price. The stocks sell on a discounted cash flow model of price times estimated or proven reserves. As price rises, the pool of reserves increases. This is the result of price now justifying bringing on-line, previously "unprofitable reserves" (higher cost to develop into producing wells) excluded in the prior cash flow model into the "useable reserves" catagory and a new cash flow model. In a rising oil and gas market the trusts shares move up on yield (distributions) and reserve increases.

When oil and gas prices decline, you have a great opportunity to buy cash flow and appreciation. Check out CRT, BPT, SJT, as well as PBT.

Amazingly price increases supply. I think I have heard that somewhere before.

Why Mark to Market?

Accounting statements are intended to provide "useful" information to statement users. In an attempt to provide useful information and prevent lawsuits and dismemberment ala Arthur Anderson, the FASB and the accounting industry opted to support the MTM principal. Like a lot of things in life, it did not go as planned. When the market locked up, this methodology gave ridiculous numbers for the value of financial instruments. "Models", which have been given such a bad image by the media, turn out to be better indicators of value when markets are inefficient. A standard model, frequently used in M&A as well as plain vanilla commercial real estate transactions, is to value the asset at the contracted cash flows discounted by the prevailing interest rate. An allowance based on recent historical results is used to reduce overall portfolio value for anticipated defaults (net of collateral salvage value). The MTM concept in an illiquid market is like taking your own single hone mortgage note out on the street and trying to sell to passerbys. Likely there will be no takers. Does that mean the mortgage note is worthless? Of course not. A portfolio of collateralized mortgage notes has some value. The goal is to find a reasonable number that is "useful." Zero is neither reasoable nor useful.