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Wednesday, August 25, 2010

Guest Post, John Chinnock


I first want to thank Murf for letting me post on his blog. For those who don't know, Murf is an extremely busy person, and yet he always finds time to maintain and update his site, all just for the benefit of passing his knowledge and research on in an attempt to help others. Great job Murf!

As for Murf's latest post about resources vs. the U.S. Dollar, and our differences of opinion, he and I probably won't see things differently for too long. We just have a difference of opinion for the course of the next 1-3 years (ok, maybe a little longer even). Also, Murf might very well turn out to be right. Every time I have had any faith in the government doing the right thing as opposed to kicking the can of problems down the road, I have always been proven wrong, while Murf has been correct.

For my current thesis favoring deflation and a flat to strong U.S. Dollar, I just feel that we had our 20-30 years of hyperinflation already. Now a period of deflation should ensue that is longer than just 1-3 years. Think of housing as an example. In the 80's, many houses were around $50K. In 25 years, many appreciated 1000%+, ending with a blow-off bubble top. The same can be said for the Nasdaq's bubble top in 2000. I just don't feel that we're on a course to repeat these same types of performances over the next 25 years, either in stocks or in housing.

I have long thought that we would follow the model of Japan after their decline. They have had two decades of low interest rates and stagnant or deflating prices. My best guess is that the same thing happens here in the U.S. High unemployment, the contraction of lending and credit, along with changing consumer attitudes towards spending will all work together to overpower any attempts by the government to reflate. For those who doubt, look how the government just spent trillions in reflation efforts that are already failing. Further money spent will only have even more diminishing returns.

For those people who like to invest contrary to the masses, pretty much everyone thinks the U.S. Dollar is doomed at some point. I think many will be surprised. A question that many fail to ask is, doomed vs. what other currency? As bad as it is here, the U.S. has it far better than nearly everywhere else. Therefore I think that the U.S. Dollar will basically hover or slightly appreciate vs. other world currencies, and I believe that asset values (stocks and housing) will remain probably remain in a choppy directionless grind over the next five to ten years, if not even longer. What we saw was a generational peak in lending and credit which fueled a housing boom. I would not be at all surprised to see prices in the U.S. stagnate for an entire generation. In this type of environment, fixed income guaranteed investments like CDs and Treasuries will be a safe and good bet.

Again, it's all just my opinion. Murf's opinions are also very valid, and should be carefully considered by any reader.

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