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Sunday, October 04, 2009 12:33 PM


Janet Tavakoli: Risk of deflationary collapse greater now than in 2007


Janet Tavakoli is On The Edge With Max Keiser. Tavakoli says the Risk of deflationary collapse greater now than in 2007.

We’ve just interviewed Janet Tavakoli for our first episode of The Keiser Report. If you don’t know her, you should. She wrote a fantastic book, Dear Mr. Buffett. Max and I are on our second read of it. You really must get this book if you want to understand derivatives from one of the foremost experts on it who writes in plain English about how these financial tools became instruments for widespread fraud that then led to financial crisis. She also gives loads of positive advice and insight.

Here is a summary she provided for MaxKeiser.com on where she thinks we are today two years since the crisis began:

"Regarding the outlook, my analysis is grim. I am not a doomsayer, I follow the cash, and so far, I’ve been correct, and the government has been wrong. Here’s the situation. We are at greater risk of a total meltdown due to a deflationary collapse than we were in 2007. After the greatest Ponzi scheme in the history of the capital markets, we’ve seen history’s greatest fiscal and monetary expansion, but it hasn’t worked. Debt levels of consumers and business exceed the capacity to repay."
Travakoli makes six points about deflation. I concur with all of them. Here are three of them.

  • Our fundamental financial and economic problems, i.e. overleveraging, lack of transparency, have not been solved.
  • Since 2008, capacity utilization has plummeted; businesses have no pricing power; U.S. lost 6.7 million jobs but numbers are underreported; personal income tax receipts are down 21%; corporate tax receipts are down 58%; U.S. deficit will exceed $1.8 trillion; govt. spending is now 185% of tax receipts; 13% of mortgages are seriously delinquent and/or in foreclosure; huge decrease in personal net worth; 15 million mortgages exceed the home value. We’re on a massive debt spending spree.
  • Income on all levels is not sufficient to make debt payments.

Inquiring minds will certainly want to play the videos where she also addresses the role of derivatives.


Janet Tavakoli Part 1



Janet Tavakoli Part 2




By the way, the reason we are worse off than in 2007 is because of the Fed's, response, the Treasury's response, the Obama Administration's response, and the Congressional response.

That's quite a lethal combination.

None of the structural problems regarding consumer debt, excess capacity, or malinvestments have been addressed. Instead the government's solution is to pile on more debt and bail out failed institutions at taxpayer expense.

One cannot cure a debt problem by going further in debt. It's as simple as that.

Brett Steenbarger Book Review

Brett Steenbarger has a review in Featured Book Look: Dear Mr. Buffett by Janet Tavakoli
"At its core," Tavakoli observes, "the mortgage crisis is no more sophisticated than a schoolyard swindle, and the SEC is the principal." She effectively contrasts the imprudent use of leverage across investment banks, government sponsored enterprises, and hedge funds with the value investing philosophy of Warren Buffet, driving home the point that much of our recent economic activity has been destructive of wealth. "Price is what you pay," Buffett explained, "Value is what you get." Our recent financial system, Tavakoli asserts, has paid high prices for little value.

Her book is an excellent, readable overview and explanation of what's gone wrong and also a warning about what may be to come. She explains:

"As long as Wall Street enhances revenues with leverage to prop up kingly bonuses, as long as there are few personal consequences for CEOs (and board members and other top executives) for shoddy risk management, as long as CEOs are allowed to walk away with millions, nothing will change. The fact that shareholders are wiped out is no deterrent, and moral hazard will live on (p. 206)."
I have not yet read the book but I respect the opinion of Brett Steenbarger greatly. I am going to order a copy of Dear Mr. Buffett and read it. Meanwhile, I am adding that book to my recommended reading list, the first on my list that I have not read before placing it there.

One final thought: If you are a trader or have plans to be a trader, do yourself a favor and bookmark Brett Steenbarger's blog. He is a psychologist and discusses something no one else does, the Psychology of Trading. His book has been on my recommended reading list for some time.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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