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The Inflation Animal


More debt makes less sense.

Yesterday Sam Zell pronounced that the U.S. is not in a recession, that it won't go into recession, and that housing has bottomed.

Today I am suggesting that the U.S. is in recession, that the recession will get deeper, and that housing has not bottomed.

There, that was easy.

There are two differences between the above statements (besides, of course, being opposite conclusions). The first is that Sam has provided not one shred of evidence backing his words. We, of course, have spent many hours discussing and analyzing the current conditions. The second is that we don't pronounce, we suggest. We understand that conditions exist and there are different ways those conditions can manifest into the future. You have to think in probabilities and we certainly allow for the fact that Sam's view may be right; we just don't put a high probability on it, especially given how the current conditions are developing.

Pronouncements are certitudes and they most often serve a political end; I suspect that Sam has his own agenda. Sam is a smart guy, no doubt. But Sam has made his money as an inflation animal: he has ridden the great wave of dollar devaluation and asset inflation like few others. Regardless of whether or not he put himself there because he recognized central bank policy long ago and was prescient or if he just got lucky (there will always be a Sam Zell who happens to be in the right place at the right time), he knows how his bread is buttered. If he gets caught in a wave of deflation he could lose everything. Again, Sam is smart so he has already sold chunks of risky assets (commercial real estate) and converted them into less risky assets (cheap newspaper/media assets), but he still has lots to lose.

Yes, we are seeing extremely strange things. The latest is we are all supposed to believe the rating agencies when they say that MBIA (MBI) is AAA. MBI cost of funds is 14%. Does that sound like a AAA company to you? If it is that means the risk free rate is 13.5%. The only way anyone can believe MBI is AAA is if either you have a gun to your head or there aren't any marbles left.

Notice the yen is getting stronger versus the dollar. The PPI was horribly scary yesterday but stocks didn't care. It is clear the Benny Gold is leaning toward hyper-inflation. But hyper-inflation if it happens (unless it already happened) almost always ends in deflation as well.

The conditions are worsening and there is little logic given the Fed's nature that it will miraculously turn around: the problem is too much debt, so creating more debt as a solution at this stage makes little sense.

Risk is getting higher.
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