INFLATION OR DEFLATION ?

I keep hearing people worrying about inflation when deflation seems to be what is occurring.

It is being observed that interest rates on Treasuries are falling (including the 30-yr which is now below 4%, I believe) and have been for some time which is deflationary, not inflationary. What is their time frame for inflation? Do they think it will happen, for example, before the end of the year? What will trigger it?

The employment picture is not good, which is a deflationary sign not an inflationary sign. Interest rates are falling, on CDs and Savings Accounts as well as on Treasuries, which is not an inflationary sign. Public confidence is falling which is not an inflationary sign. Financial sector loans on real estate are falling which is not an inflationary sign. Corporations are banking money which is not an inflationary sign. Housing sales seems to be in a double dip which is hardly inflationary. There are increasing cries for Federal and state fiscal austerity which is not inflationary. In fiscal austerity, government employees (teachers, policemen, firemen, Civil Servants, etc.) get laid off, contracts with companies get canceled and new ones are curtailed, etc., which is deflationary, not inflationary.

I think people look at all that deficit spending by the Federal government and think it MUST mean inflation. It seems reasonable. But what all that deficit spending seems to be doing is to keep the present situation from being much worse than it is. Well, I have been expecting runaway inflation since 2001, but no longer speculate when it will occur. As for me, I'm going with deflation and finally became convinced of it just a few months ago and have been investing accordingly, e.g. such as buying a block of 30-yr Treasury bonds at 4.5% interest a few months ago. With the fall to 4% interest, the value of the bond has increased by about 7.5%. There are those who speculate that the interest rate will fall to about 3%.

MOMENT OF PEACE (Poem)

The early morning mist is gone.
The sun, still low, jets through the trees
Whose trunks' deep shadows cut across the green.


The air still fresh remains.
The creek still winds down to the seas
Between steep banks of mud and stone.


A fragile scene, calm and quiet.
A phantom scene forgotten soon,
As life sweeps past this moment of peace.




Originally written in 1962 and published in 1996 in Stevens, C.A. (ed), Carvings in Stone, National Library of Poetry, p. 528 (Library of Congress: ISBN 1-57553-066-X)

IF IT WASN'T SO TRAGIC, IT WOULD BE FUNNY

The BP Deepwater Horizon oil well disaster has brought out some of the contradictions of life that would be funny if the situation wasn't so tragic. In Louisiana, Alabama and Mississippi, you have three very conservative states where people believe in small government; yet, with the BP oil spill these people can't seem to get enough of the Federal government (http://www.whitehouse.gov/deepwater-bp-oil-spill/). They want more from the Federal government, and they want it faster, though in the Exxon Valdez oil spill in Alaska, the Federal government did not get involved at all. After eight years of an administration engaged in dismantling Federal government regulatory functions, there are now cries that the government regulatory bodies involved in the BP spill didn't do their jobs. So you may believe in a minimal Federal government, but, it turns out that when disaster strikes, you want your Federal government to have regulated it and then to fix it.

And then when it was said that President Obama wanted BP to put up a $20 billion fund* run by an independent manager and to discontinue their dividend out of respect for the disaster, first people said he can't do that. But, when BP did do these things voluntarily, there was an outcry against our president being a strong president, rather than admiration for his strength. I don't recall any outcry when President Truman sized the railroads in 1946, although this was to break some unions and not regulate a company. Again in 1952, President Truman nationalized the steel industry, once more to break a union strike. In this case, the Supreme Court ruled he did not have the authority to do so. However, in President Obama's case, BP voluntarily complied. The person to oversee the dispersal of the $20 billion fund - Kenneth Feinberg - is the same man who oversaw the 9/11 Victims Compensation Fund and is highly regarded (http://www.nola.com/news/t-p/frontpage/index.ssf?/base/news-14/1276756264251880.xml&coll=1).

*This fund will not be filled all at once, but at $5 billion/yr for four years so the company will not be seriously impacted.

IS BP TOO BIG TO FAIL OR CUT ITS DIVIDEND?

From a post on Motley Fool about the BP Deepwater Horizon spill: ...it's only a matter of time before we hear the refrain "well, we can't let BP fail, they're too big and would collapse the global economy". In fact, we're already hearing rumblings of that, if you read the reports about BP alone representing 13% of all FTSE dividend income.

I'm sputtering. I'm aghast. I really don't know what to say. The above comment only summarizes what I was hearing yesterday about how a company that has caused the hugest (words fail me) environmental disaster in our countries history shouldn't even lower its dividend because it would hurt too many people. And the disaster is still going on. It shouldn't even be in business.

Where was the outcry, for example, when GE cut its dividend? It too is a huge company, and I presume it paid dividends to lots of widows and orphans. Whatever may happen to GE in the future, I believe it has yet to have a negative quarter for earnings. When I sold my GE stock, I took one of the largest losses of my investing career, and I had bought the stock many years ago between $20 and $25/share, which hardly seemed exorbitant.

Standard Oil was broken up. ATT was broken up. What has happened to us that BP is too big to be broken up. Here is a company that kills its employees (15 with something like 170 injured in 2005 and 11 more this year which is 26 within five years).

I just can't believe what I am hearing. I have never bought BP stock because I believe they are a rogue company.

Maybe I should have done all the above in caps! I'm screaming!

...............................................................................................

Turns out that on June 3, 1979 the Ixtoc I exploratory well blew out 600 miles south of Texas in (where else) the Gulf Mexico. The spill is rated as the third largest ever (http://en.wikipedia.org/wiki/Ixtoc_I_oil_spill). It spilled 10s of thousands of gallons per day for 9 months and was finally capped on March 23rd of 1980. In the case of Ixtoc, most of the oil stayed far out to sea although there were major bird kills. Texas did take large precautionary measures.

Note this well was being drilled in water only 50 m deep, and it still took more than 9 mo to cap it. Also note that the famed Red Adair was involved in trying to stop the well flow. And note that the well continued to flow for three months even after the relief well made contact. No one knows where all this will end. Considering the Itex well experience, I wouldn't bank too much on the relief well stopping the flowage from Deepwater Horizon. So I wouldn't get my hopes up too much for Deepwater Horizon oil flow stoppage in the foreseeable future.

I would like to think that modern technology has improved so a better job will be done on Deepwater Horizon than on the Itex spill, but I don't know. The sequence going on in the Deepwater Horizon spill sounds awfully similar to the Itex spill, and you have to deal with a mile deeper water situation. Also the environmental damage from the Itex spill was very minor compared to Deepwater Horizon. I think that BP is in lawsuit city.

(The above is based on several posts on Motley Fool. These post are #330577 and #33076 in the Industrial Analysis Clubs/Macro Economic Trends and Risks; post 6365 in the Investment Analysis clubs/Dividend Growth Investing.)

CORPORATIONS ARE POLITICAL ENTITIES

There has been a good deal of discussion lately about Federal govenrment bailouts of industries. The AIG bailout may be the largest, but it is hardly unique. Some of us may recall that in 1979, Jimmy Carter bailed out Chrysler which actually paid off the loan early. Also a duty was put on Japanese imported automobiles which raised their cost by about $2,000 to make the U.S. automakers more competitive but hurt American consumers.

There was also a railroad bailout, in 1959 of the Great Northern Northern RR. In a recent article in the WSJ (06-10-2010), the headline reads Bernanke Expects "AIG To Repay Aid." And in a hearing, the CEO of AIG Robert Benmosche "...said taxpayers are 'going to get your money back plus a profit.'" So eventually this may turn out all right.

I think that there is a great misunderstanding about what corporations are. They are political organizations that are supposed to play by the rules set out by the government. Of course, they develop a life of their own and do their best to get around the rules all they can. One of the biggest political aspects of corporations are that stock holders are not liable for losses sustained by a corporation. We like to fantasize that there is some macho aspect to corporations that they are tough guys who live or fall by their own merits. Actually they are political organizations that go to the government whenever they are in trouble and continually try to skew the laws in their favor.

More common are indirect bailouts, such a tariffs. Just within the last decade, tariffs were put on imported steel and Canadian lumber to bail out the American steel and lumber companies. And of course, an infamous one is the tariff put on imported sugar cane ethanol, mainly from Brazil, to make such importation uneconomic so that the American corn ethanol agribusiness is profitable but again at a cost to the consumer.