Thoughts On the Continuing Crisis The Elements of Deflation

1. Thoughts On the Continuing CrisisThe Elements of Deflation A Presentation by John Mauldin, Author of Bull’s Eye Investing And the Editor of Thoughts from the Frontline www.2000wave.com, www.johnmauldin.com

2. Is the Glass Half Full…

3. Or is it Half Empty and Leaking?

4. US Headline CPI Inflation

5. The Elements of Deflation

6. 9 Million Part Time Workers

7. Total “U6” Unemployment Including Part-Time Workers is 16.8%!!!

8. 33% Unemployed for 6 Months

9. Jobs Losses are Far Below AverageThis is NOT a Typical Recession

10. 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

11. History Tells Us Without Wage Pressure There is Little Chance of Inflation

12. Mortgage Equity Withdrawal Fueled the Economy

13. The Impossible HappensThe US Consumer Stops Borrowing

14. The Psyche of the American Consumer Has Been Permanently Seared with the Pain of Falling Home Prices and Stock Prices**************Faced with Retirement Issues, And the Need for Increased Savings, Consumer Spending is Going to be Challenged for Years

15. Savings Actually Explode Upward During this Great Recession!!!

16. As Does The Savings Rate! File Under Be Careful What You Wish For!

17. MortgagesIt’s Not Just a Sub-Prime Problem

18. Housing Sales are Flat

19. Housing Prices are at Best Flat

20. Banks Have Yet To Deal With Bad Loans

21. Most likely recovery is a “W” with a long tail due to slow growth and rising mortgage rates. Fall 2005

22. 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

23. 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?

24. Government Receipts Are Down

25. Be Careful What You Wish For

26. Volume of Word Trade Collapses 20%

27. And Thus Capacity Utilization Falls off the Cliff

29. The Velocity of Money is SlowingY=MV(Where Y is Nominal GDP, M is Money Supply and V is Velocity and Y is Sometimes seen as Price times Quantity)

30. M2 is Flat or Falling Since the End of February

31. What is Money??? M-1, M-2, gold? – Misleading Measure Money is CASH + Credit Cash is $2 Trillion Backed by Credit of $50 Trillion

32. Destruction of Assets in the Great Deleveraging

33. Deleveraging brings Deflation DNA Changes in the FED Governors….they become genetically opposed to deflation

34. The FED is at a Major Crossroads Allow inflation like 1970s or Withdraw liquidity and slow recovery

35. The Great Experiment Keynes VS von Mises VS Fisher VS Friedman

36. Re-Inflation? It may take up to $2 Trillion in new printing press money to re-inflate It will work, but what then?

37. Like John Paul Jones, Bernanke will soon say: “Sir, I have not yet begun to print!”

38. How did we get it Sooo Wrong? We taught two generations of managers theories which were patently absurd We let rating agencies become too important We believed the trend.

39. 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 High Capacity Utilization and Massive Deleveraging and $2 trillion in Bank losses and a Very Weak Housing Market and Slowing Velocity of Money

40. You Get Deflation and Nothing But Bad Choices