Friday, September 08, 2006


Boomers And Deflation

Danielle DiMartino writes about the baby boomers and deflation." A reader suggested that immigrants are the obvious solution to the economic vacuum being created by the baby boomers leaving the workforce. Imagine for a moment that there were enough immigrants and young people to offset the number of boomers who will be retiring. If that were the case, would they have the financial wherewithal to fill boomers' shoes?"

"'To think that all the boomers have to do is sell their homes to pay for retirement and health care begets the legitimate question of 'to whom and at what price?'' Pimco's Bill Gross wrote. 'If there are fewer X'ers and Y'ers to unload even their second homes to, rudimentary supply/demand curve analysis suggests prices must adjust downward to facilitate the transfer, incorporating the ability of immigrants and future first-time buyers to afford what now seem to be unaffordable starter homes.'"

"One word is written all over the unfolding demographic picture: deflation. Right now, we're all feeling the faintest of deflationary winds."

"Doug Ingram of Dallas-based Samco Capital Markets explained: 'In mere weeks, gasoline has plunged 65 cents in some areas. In the South, where we use such expressions, we'd say that's downright deflationary.'"

"But it's bigger than an energy bubble. 'What if,' Mr. Ingram asked, 'housing, autos and gasoline all get cheaper? What will housing retreating by 10 to 20 percent and gasoline falling off 26 percent do to inflation?'"

"Deflation, or consistently falling prices, sounds good on the surface. But it's an economic spiral, in which consumers and businesses put off spending indefinitely, on the theory that everything will be cheaper if they just wait until tomorrow."

"In the end, Mr. Gross worried, it is 'too late to have babies, too politically sensitive to import more workers, too daft to recognize that the boomer winter is rapidly approaching and that our assets will not fund our liabilities.'"

"The Bank Credit Analyst suggested: 'Bonds should rally as the market discounts more aggressive Fed easing next year in response to the slowing U.S. economy and receding inflation expectations.' The BCA may be on to something. It was no coincidence that Japanese government bonds outperformed every other asset class in their battle against deflation."

Aar... this can be maddening. I waffle back and forth almost every day re: inflation/deflation scenarios. 'Sure makes it tough to invest accordingly when the "smart" bet is the polar opposite of the wrong bet.

I have to keep falling back on my gut, which is that 'banks win, and little people lose', and that's the inflationary end-game. But the deflationary argument makes a terrifying amount of sense too...

< /end hand-wringing >
IMHO both are going to happen, the question is in which order. Just for argument's sake, if I had to guess I'd say...

1) Deflation -- housing, jobs, stocks, credit crunch;
2) Hyperinflation -- Fed desperately tries to fight deflation, DC heaps on more Keynesian deficit spending;
3) Deflationary depression -- USD/UST failure, banking crisis, market collapse, paralyzed government.

Yeah, yeah... I know the USD/UST failure seems counterintuitive to the typical definition of deflation. Still, based upon the Bernanke's writings, the penchant for politicians to always do the wrong thing, and historical precedent, it's really not that much of a stretch.
Ben: I am a long time reader of housing and this blog and first time poster and thank you for educating me on both topics:

I am a relative latecomer to investing in some PM (investing in gold and gold mining ETFs) when gold was about $610-620/oz. and more recently in some gold mining companies individually with the price drop this past week. I kept the gold bullion ETF within an IRA so as to avoid any higher capital gains b/c gold even in an ETF is considered a collectible by the IRS. I am using the gold to diversify my 5% cash savings accounts, CDs, and "bear market" mutual fund holdings (some of which are already long on gold--the Prudent Bear funds).

Is deflation in housing, stocks, and the credit crunch automatically bad news for gold (as opposed to being bad news for other industrial commodities as the industrial demand weakens with the slowing economy)?

--could the cyclical upside to gold help -- I think I read that we are approaching the Indian wedding season and a time where physical demand for gold is high.

--When the effects of the housing bubble on the economy becomes apparent to the market, and investors flee stocks, industrial commodities, etc. could the housing bubble collapse with rising foreclosures, buyers of MBSs demanding banks to buy back MBS when fraud was involved quickly scare investors from staying in cash because banks may begin to get ino trouble? Could such a fear of the liquidity of banks then turn them onto the traditional store of value in times of uncertainty--gold?

--Is there not also an international currency component to this? Once the economic indicators for Q3 show that the economy is slowing dramatically, will not demand for US dollars, US debt etc. not decrease causing a devaluation in the US dollar and maybe a boost to gold?

In other words, will the above factors prevent gold's value from deflating before its value will start increasing once TJ & the bear's scenario 2 of hyperinflation starts?

Those are all good questions we debate regularly here and at THBB. If you learn the answers, could you please tell us? ;-)

That's a lot to consider. IMO, a primary gold position is like life insurance. Some is neccesary but too much is wasteful (opportunity costs, etc.)

I'm not talking about speculating on gold, but a core amount of gold insurance for those situations none of us hope will happen (much like life insurance, again.) Speculating is a seperate matter and appropriate for some people.

Also, IMO, that core gold position may prove useful in deflationary or inflationary situations. Both are very destabalizing for an economy, and that is precisely when gold may have it's highest value. I also am a believer in holding that core amount physically.

Start posting/reading over here more often and I think you'll find we touch on many of the questions you raise.
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Looks like we are in for a possible dip again as Asian mrkts are down as we speak. PM's that is..Gold under 6
silver under 12.....
Do you guys know of especially the GG board is the most active..lots out bailouts from the yahoo boards and more intuitive...Anyway they had talked about a correction so I bailed from my dogs on Tuesday morn so am ready to buy at a possible dip again...They warned late May to take cash...wish I did..
Anyway some helpful fellows over there. Taking advice from strangers is a bit risky but they have been right on. Anyway, I loaded up on QEE as a spec ,and will buy back SLW after I see what happens tomorrow. Have your "insurance" but also " no balls,no blue chips " the PM markets are really jumping but long term can the dollar remain strong?
I'm not betting on it....

...sorry I corrected late May, I had wrote June which was Really ! too late at that point..
Hey guys long time no see !!

IMHO the deflation scenario is just a ploy by the GOV'T - once the elections are over right back up with inflation we go. (except housing - that will be the only deflating asset class IMO)

The issue of immigration is starting to become clear to me, in regards to housing anyways. Let em come here, pay taxes, get that slice of the American Dream they crave, and most importantly....keep the ponzi sceme going. Now - it is not going to save the housing market - but it willkeep it from deflating too far.

PPS - still long and strong with a TON of gold. I'm getting my azzz kicked but I stand behind my FEB 06 prediction of $810 X-Mas gold. Prices drop below $600 (and they will) it wil be a good time to stock up. I have an order in already at $575 for the equivalent of 20 ounces....

PPPS - John in VA still post here?
Silver getting absolutely hammered -- $11 even overnight. What the heck happened?

Man, Six Flags hasn't got a rollercoaster anywhere to compare with the PM markets!! :-)
I always laugh at the "deflationary sprial" stuff.

First off, many things you can't wait until tomorrow to purchase like food, gas electricity etc.

Who ever heard of someone waiting forever to buy a computer/DVD/VCR/Ipod/Cellphone because the price was going down? You buy when the price is right, and if you're confident the price is going to go even further, you can afford to spend more today since your paycheck isn't getting eaten up by inflation.

The country had stable currency for 150 years with steady deflation due to technology - the deflation is bad stuff is CRAP.

What they mean is that credit implosion is bad. When people owe so much money that a 10% pay cut will bankrupt them THAT is bad. It's the CREDIT/DEBT that makes deflation scary. People don't stop buying when prices go down they stop buying when they're too far in DEBT.

As far as boomers go, they can just work a few years longer with the improved health that we're buying them with medicare. No big deal.

It's the money/debt problem, not demographics. We have enough technology to solve most problems of older boomers.
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