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Stock Ideas Investors Daily Edge The “D” Word Part 4: “Are We There Yet, Daddy?”
Stock Ideas Investors Daily Edge The “D” Word Part 4: “Are We There Yet, Daddy?” 
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| The “D” Word Part 4: “Are We There Yet, Daddy?” |
| Wednesday, 24 September 2008 | ||||||||
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American, as well as global, economic woes are now dominating the headlines. Even the Presidential candidates are finally hinting about how bad things are. Are we now in a depression? Many of you read my three part series early this year about the D” word (2-27-08, 3-5-08 & 3-12-08). We were then analyzing depression scenarios while the feds were denying recession. You don’t need me to tell you that nothing but bad things have transpired since then. You have to be compromised in one form or another not to know how serious this is. Once again, here’s a common definition of a depression: A sustained economic recession in which a nation's Gross National Product (GNP) is falling and marked by low production and sales and a high rate of business failures and unemployment. The last piece of the puzzle, business failures, has fallen into place since first quarter 2008. The US now fits the classic definition of a depression to a tee. The answer to the children’s continual question…“Are we there yet, Daddy?” is a resounding yes. We’ll likely be ‘there’ the next several times the question is asked as well. This one is going to last a while. The charge of your IDE editors is to project what the future will bring. Dissecting past events is best left to others. We’re in a depression from my perspective and there’s little need to bore or torment you with the details. If this isn’t a depression, I’d hate to see one. How’s it going to play out? In many ways, I think a “depression” is the best-case scenario. Ominous signs abound. In my last “D” Word article in March, I stated…. “If the American populace doesn’t borrow and spend, the system is toast.” How easy is borrowing and spending these days? Not as easy as you might think.
I recently had to jump through unimaginable hoops to secure a simple home equity line for purposes of liquidity. This from a bank I’ve done a lot of business with for twenty years. We wanted a ten percent line of credit on a home that is paid off. You’d have thought we were applying to take over the bank. The bank told me they were just making sure my finances were in order. I assured them my personal balance sheet looked a lot better than theirs did (Wachovia). After providing several years of tax returns, an attorney opinion and untold backup documents, the line of credit was finally approved. Sheesh, what if we really wanted to borrow some money? What happened to the days when pets could buy houses? They’ll have to settle for voting, along with the dead, in the coming election. How can the American people borrow and spend when banks are hesitant to give credit to their best customers? Does that sounds like an extreme credit contraction to you? What type of depression is this one? I stated in the last article… “It’s going to be an inflationary depression. Some call it stagflation like in the 1970s. That doesn’t do it justice. The ‘70s were the good-old days compared to this monstrosity. Central banks across the globe will attempt to print their way out of our current mess. A debt implosion looms.” Not so fast, McDougal. You left out a key word here. Better to state… it’s eventually going to be an inflationary depression. I got the debt implosion spot on. This implosion has brought us to a deflationary phase of this depression. Asset prices have been falling pretty much across the spectrum. You can have an inflationary depression or a deflationary depression. The Great Depression was deflationary in nature. The entire credit system is jammed up right now. The inflationary phase will have to wait its turn. It will come. You well know that nothing is more inflationary than bailouts. Not even war, though it comes a close second. Quite the one-two punch for sure in the present American dilemma. Right now real estate, stocks, commodities and even precious metals (now rebounding) have fallen in price. Experts will classify these events as deflationary. I won’t argue that point, but we need a long-term standard with which to weigh overall deflation vs. inflation. Truth be told, both inflation and deflation can take place at the same time in different asset classes. One super indicator to watch is the True Money Supply (TMS) as projected by the Ludwig von Mises Institute (http://mises.org/). “The TMS consists of the following: Currency Component of M1, Total Checkable Deposits, Savings Deposits, U.S. Government Demand Deposits and Note Balances, Demand Deposits Due to Foreign Commercial Banks, and Demand Deposits Due to Foreign Official Institutions.” Inflation is a monetary phenomenon. Prices eventually rise when excess money finds its way into circulation. The chart clearly shows more and more True Money Supply entering the system. I don’t understand how the chart above fails to show a current recession, much less a depression. Let’s check it again in the coming months. You can rest assured the Fed will do everything within its power to avoid deflation. A large part of the problem with fiat money is that it can be created at will. Inflation, even hyperinflation, remains the inevitable result. That is your future once the current anomaly plays out. You can protect yourself with ownership of physical precious metals, which remain on sale right now. You might also take a look at Harry Browne’s Permanent Portfolio, which is designed to protect capital in either inflationary or deflationary times. Invest Resourcefully, Rusty P.S. There was no recession or depression in sight at the Ryder Cup last week. The PGA staff could hardly keep up with the demand for souvenirs and food. Maybe we can settle some global disputes through golf matches? Bummer for the war lobby. P.P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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