Gerald Croteau's Weblog

This post is a follow on to my August 4, 2009 post regarding predictions in the capital markets.

I am currently reading: Steve Keen. I have yet to purchase his critique of Keynesian economics titled Debunking Economics published 2001, however his blog: www.debtdeflation.com/blogs is brilliant. I especially enjoyed this appearance.

Also following: Hugh Hendry, Mish Shedlock, and Peter Schiff. Peter Schiff seems to be changing his stance and now argues that there will be major deflation, and adds the caveat that this wil be when measured in Gold. I am starting to loose my conviction in the value of Gold as money through this credit stress we are experiencing and will continue to experience in the next few years. I think gold is one of the big uncertainties in my mind right now, but the major risk I see to owning gold is that it performs inverse to the US Dollar, and I ultimately believe the USD will at some point strengthen as more global deflation becomes apparent and as further economic weakness eventually leads to a commodities long squeeze.

Currently subscribing to: US Treasury bond newsletters. I see the bond yield rising in the near term, particularly until January 2010 and my target will be yield increases of 2% from now to then. Maybe the panic on the dollar will overshoot even that target, and maybe by a large amount if the dollar continues to weaken dramatically.

However, looking forward three key elements will bring deflation to the forefront of investors minds in 2010:

1) Rising tax rates. Now is the absolute worst time to be taking cash out of the economy due to the burden of servicing debt obligations in the midst of popping asset bubbles. Yet Democrats are plunging ahead on a soak the rich agenda under the guise of healthcare reform. This will primarily hit small business (the engine of job creation) due to the way many file taxes. It will also be a reason for further drops in private employment rolls.

2) Further declines in the real estate market. Due to the 5 year rollover cycle of commercial property investments (the property bubble of 2005 means debt rollover will not trigger widespread bank foreclosures until 2010, 2011, and 2012. Combined with continued declines in the residential sector. Patrick.net continues to be the best resource for enlightenment about residential real estate if you are not there yet.

3) Commodities bubble collapsing. The commodities bubble may very well be just igniting, in which case its eventual reversal (due to the lack of scarcity in the supply/demand equation) very well might overtake Stocks (circa 2001) and Real Estate (circa 2005) in catastrophic potential. Nevertheless, I do not forsee commodities like oil and gold igniting because the fundamentals of supply and demand are not there. Simply rolling over contracts is a very pricey game and therefore the safe money to be made is in storage. This does not bode well for an economy in recession where the marginal demand is weak. Copper low in December 09 was roughly 1.5 $/lb, and it is back to roughly 3. Same for Oil. It bottomed out most recently at 30, and I was predicting it would get to the 20s, however it is back into the 70s. These price levels are unsustainable because particularly with Oil, it crimps the American driver’s willingness to operate. Combined with further weakness in the employment market, the crimping of marginal demand, will lead to greater rising stockpiles and an eventual long squeeze.

Other factors to incorporate:
-China does not want the currency to rise
-US savings will continue to rise