Inflation??.....No Deflation??....UMMM?

Today is one of those days where I could write for hours about different things as there were so many interesting cross currents. None of the major indexes violated their Friday lows keeping intact a possible multi week to multi month bottom. The VIX set a new high. Also, interestingly gold fell apart today. This is very noteworthy because the smart money is desperately trying to handicap inflation stagflation or deflationary recession/depression. Gold is very sensitive to which prevails and has been caught in a tug of war. What this means for investors could not be more bifurcated. So I was thinking the market may be saying screw inflation, here comes deflation. Then this was sent to me today which is a piece from Fleckenstein's website. Thanks goes to Ron.

While I haven't spoken to him lately, we had been communicating by email. I thought we were pretty much on the same page regarding the credit crisis, but it turns out that I was wrong. He informed me that in his opinion, there is not enough high-quality collateral around in the system to do the securitized lending that's part of the bailout facilities we've seen so far. He believes that the credit crisis is not even close to being solved, as I suggested yesterday. That's because the deleveraging under way is about to accelerate.

What would be needed, he said, is something on the order of an epic Treasury issuance, say $1 trillion, which would be monetized by the Fed, thereby allowing it to flood the system with collateral. Said differently, rather than buying decent collateral, he feels that to solve this, the Fed will have to supply cash for unsecured "trash," or high-quality liquid assets such as buildings.

WOW!!!! This echos John Burbank's comments at the Value Investing Congress last week. I had dinner with another investor last night and our discussion involved the inflation versus deflation debate. My point has been that if inflation comes, it will be the deadly inflation that sends the economy down (i.e Iceland) not the good kind that can help reinflate our way out.

Already billions in treasuries are being issued, sending yields higher, sending mortgage rates higher, which will cause housing prices to fall more, which will weaken our economy more, which will cause more problem in the financial area, which will send housing prices down more.

Of course there is the possibility, and hence the bifucation of the outcomes, that the dollar becomes toilet paper very very quickly with a massive issuance of treasuries sending hard assets skyrocketing but in a very bad way.

The bifurcation nature of this is nuts and the really smart money out there doesn't really know and can't really handicap it beyond a coin flip. Hence, the money sitting in cash.

Clarity will not come overnight. It will happen in weeks and months but when it does come, just to reemphasize, it could happen very very quickly.