US Headline CPI Inflation

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Thoughts On the Continuing CrisisThe Elements of
Deflation
A Presentation by John Mauldin, Author of Bulls
Eye Investing And the Editor of Thoughts from
the Frontline www.2000wave.com,
www.johnmauldin.com
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Is the Glass Half Full
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Or is it Half Empty and Leaking?
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US Headline CPI Inflation
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• The Elements
• of
• Deflation

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History Tells Us Without Wage Pressure There is
Little Chance of Inflation
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Jobs Losses are Far Below AverageThis is NOT a
Typical Recession
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Total U6 Unemployment Including Part-Time
Workers is 16.8!!!
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9 Million Part Time Workers
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33 Unemployed for 6 Months
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A Few Data Points on Unemployment

• If you include discouraged workers with U6 then
  unemployment is 21.1, and therefore more than
  13 total unemployed
• Since 1999, even as the population grew by 33
  million, the private sector has lost 235,000 jobs
  (BLS data) because of job losses in the current
  recession.
• Wages are falling and Hours Worked is at an all
  time low 33 hours
• 18 million NEW jobs will be needed in five years
  to get us back to employment levels last seen in
  2007

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The Impossible HappensThe US Consumer Stops
Borrowing
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The Psyche of the American Consumer Has Been
Permanently Seared with the Pain of Falling Home
Prices and Stock PricesFaced with
Retirement Issues, And the Need for Increased
Savings, Consumer Spending is Going to be
Challenged for Years
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Savings Actually Explode Upward During this Great
Recession!!!
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Housing Data Points

• Over 1/3 or Mortgages are Now Underwater
• It will be 2011 Before We Move Through the Excess
  Housing Inventory
• Foreclosures are Adding More Homes to the
  Inventory of Unsold Homes
• There May Be as Many as 500,000 Homes in the
  Shadow REO Inventory

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Most likely recovery is a W with a long tail
due to slow growth and rising mortgage rates.
Fall 2005
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The Effect of the Stimulus

• Without the Stimulus, GDP would have been a -6
  in the Second Quarter!
• Without the Stimulus, GDP Would Be Flat to
  Negative this Quarter
• Question
• What Happens When
• the Stimulus Goes Away? Especially to States and
  Municipalities?

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Government Receipts Are Down
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Be Careful What You Wish For
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Volume of Word Trade Collapses 20
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And Thus Capacity Utilization Falls off the Cliff

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Bank Lending to Business Plunges
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M2 is Flat or Falling Since the End of February
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The Elements of Deflation

• If you add
• Rising Unemployment and Wealth Destruction and
  Reduced Borrowing and Lending and Decreased Final
  Demand and Increased Savings and Very Low
  Capacity Utilization and Massive Deleveraging and
  2 trillion in Bank losses and a Very Weak
  Housing Market and Slowing Velocity of Money

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• You Get Deflation and
• Nothing But Bad Choices

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Bernanke

• Gentlemen,
• I have not yet Begun to Print

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Nothing But Trillion Dollar Deficits as Far as we
Can See!!!!
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GDP C I G (E-I)

• Basically, Savings equals Investments
• If the Government Dis-saves then the
  difference must be made up by Consumers, Business
  and Foreigners.
• But government spending has a multiplier of
  essentially nothing, and taxes have a multiplier
  of 3! And if you raise taxes?!?!?!

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Japanese Disease?

• Total Japanese debt to GDP is about where it was
  20 years ago, but the government debt to GDP has
  risen from 51 to 178 and rising fast.
• What did they get for all that debt? The Japanese
  have not added any jobs for two decades, and
  their nominal GDP is where it was 17 years ago