[With unemployment above 9% and productive capacity heavily underutilized, the U.S. economy is slipping back into official recession. In a letter to clients, our friend and financial advisor Doug Behnfield has predicted that deflation is about to return with a vengeance -- presumably with bullish implications for high-quality bonds and, get this… municipal bonds. For Doug’s take on the stock market, fixed-income securities and a Baby Boomer cohort that is ill-prepared financially for retirement, read on. RA]
Over the last few weeks, stock, bond and commodity markets appear to have played “catch up” to fundamental economic changes that began early in the first quarter. In early February, 30-Year Treasury Bond yields peaked at 4.8% and started down sharply as bond prices rose. The municipal bond market did the same. The S&P 500 hit 1300 and essentially stopped rising, creating a volatile topping process that lasted until late July. Since then, the bottom has been dropping out of both stock prices and bond yields. The Fed has promised to keep very short term interest rates at 0% for at least the next two years.
The economy now appears to have rolled over early in the year. Employment and housing prices peaked in the first quarter and GDP growth was revised down to 0.4%. At year end 2010, Q1 2011 GDP growth was widely expected to exceed 3.5%. State and local governments began aggressively tightening their budgets and it seems clear that the » Read the full article
Ackerman Takes a Fresh Look at Old Foe Lira’s Ideas
by Rick Ackerman on September 27, 2011 12:01 am GMT · 46 comments
[Addendum: I misread the date on Lira's piece -- his blog is not one of my regular stops on the Web -- and it turns out that it was written a year ago in August, not last month as erroneously noted. As readers may have surmised, however, that does not weaken or change my argument. Nor would I claim that it weakens his, notwithstanding the fact that a prediction he made more than a year has not panned out. There is a lot of ruin in a global financial system, and although it sometimes seems as though ours may be no more than days from collapse, we all know how even terminal economic dysfunction, like lung cancer, can persist without producing the expected result. RA]
With deflation tightening its choke-hold on the global economy, we thought we’d drop in on our supposed nemesis, Gonzalo Lira, to see how he has been coping in these very un-hyperinflationary times. To his credit, the erstwhile arch-inflationist, bending to reality, has acknowledged forthrightly that deflation rules the economic and financial worlds right now. “Yields are low, unemployment up, CPI numbers are down (and under some metrics, negative) – in short, everything screams ‘deflation.’ ” He wrote those words a month ago in an essay entitled How Hyperinflation Will Happen, and although we are obliged to point out certain dangers in relying too heavily on the scenario he describes, readers should trust, as we do, that he has gotten the big picture right. He asserts, for one, that economic recovery is no longer remotely possible for the U.S. We agree. Nor, as he makes clear, is it a case of double-dipping into recession, as most economists and the mainstream media would have it; as Lira flatly states, we never emerged from the first recession. The inevitable result, he says – and again we concur — is that an epic financial panic centered on the dollar’s collapse is coming, and it will push the U.S. from intractable recession into full-blown Depression. » Read the full article