Do the Pundits Have it Wrong? Deflation on the Horizon.

Best of the Bond Market for April 17th, 2012

Tweet by @Munisrgood Research by Hoisington Investment Management 

Time to Face the Facts. We are JapanOur Take: I’ll leave it to people smarter than myself to predict where the economy is headed but what I would appreciate is a two sided debate.  Everything you read these days is about inflation with very little at least that I have seen making the other side of the argument.  This piece explains the deflationary argument as well as any I have seen.  At the crux of the argument is that all the debt we are taking on is going to choke off growth for years to come, an effect which is more likely to be deflationary rather than inflationary.  A few highlights:

  • Since 1989, Japan has provided an excellent but highly disturbing example of the debilitating effects of a prolonged period of taking on additional debt while shifting more of the debt into unproductive uses.
  •  At the end of the day, more debt and increased interest payments would translate into lower productivity, lower income, and higher unemployment”.
  • …if the U.S. economy is unable to deleverage, then the already long cycle of an abnormal, or negative, risk premium will be extended. A negatively correlated asset, such as long-term Treasury bonds, will continue to generate positive returns, while serving to minimize the volatility in a diversified portfolio.
Article by WSJ
Why the US is Not Japan  – Our Take: Since we complain about people not giving the opposite side of the inflation article here is the crux of the argument from the WSJ Marketbeat blog on why they think the US is not Japan:
“Japan made three key policy errors: it was extremely slow to recognise and then deal with asset impairment problems in the banking system, which “doubled down” on the stymieing of monetary policy; the central bank never adopted the “do whatever it takes” kind of monetary policy stance necessary to quash deflation (e.g., by engaging in sufficiently aggressive quantitative easing); and fiscal policy was put on a path of consolidation too early.”


Tweet by Lawrence McDonald (@Convertbond)
“Today, 5 largest US banks hold $8.5 trillion in assets, equal to 56% of US economy, before financial crisis, they controlled 43% of GDP” Our Take:  The one thing that we were supposed to learn from the financial crisis was that we should not allow financial institutions to become too big to fail.  Basically since then systematic risk as become even more concentrated by a large amount.


Depressed Yet?  Have a read of Barry Rithotz’s recent postA Surprisingly Upbeat view from me” and go hang out with some young entrepreneurs.


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David Waring

David Waring

David Waring was the founder of LearnBonds.com and has been a major contributor to the extensive library of investing news and information available on the site. Until the launch of Learnbonds.com in late 2011 there was no single site on the internet catering exclusively to the individual bond investor. This was true even though more individuals own stocks than bonds. Learn Bonds was launched to fill that gap.
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