Oh man, inflation! You've got me really worried about it now. I am shaking from it. Yeah, the gold bugs got me all juiced about it. Natural gas hounds have me all worried. Cold rolled steel fans have me seeing inflation everywhere I look. Oh, yeah, inflation, that's the ticket. Wrong!
Of all of the stupid, harebrained, no-account, nothing worries I have seen, it is the belief that the economy is about to overheat if the
Fed does any more to stimulate it. What a pile of hogwash. I want to point you to two stories on our site that will explain why
deflation, not inflation, is on my mind, and why we can bet that there will be no turn in stocks prices
if the Fed doesn't start focusing on what is really going on with the economy.
The
first story is by
Peter Eavis. If you don't know Eavis' work by now, you are missing the kind of work that
Alan Abelson did before he became a mean old crank filled with contempt for the long side and anyone who makes money. Eavis is reasoned. He relies on some of the bears out there, notably the overly-bearish Charles Peabody (instead of the reasoned Tom Brown, I would add) and today I see he invokes the bears' best friend, Carol Levenson, a top-notch analyst if you are in a recessionary environment. Bears can be impeccable sources in bad times like, well, now! Eavis has been flagging stories about
Xerox (XRX Quote - Cramer on XRX - Stock Picks) and
Lucent (LU Quote - Cramer on LU - Stock Picks) and today he flags
Motorola(MOT Quote - Cramer on MOT - Stock Picks). All three of these companies could have problems with debt repayment, although people are only worried about Xerox and Lucent.
The
second story is by the always-reasoned
Brett Fromson, and it has to do with a fully-funded company named
Level Three (LVLT Quote - Cramer on LVLT - Stock Picks) that is raising $3 billion because it is not fully funded. No, you did not read that sentence wrong. That's the way it is.
What do these stories have to do with deflation? Simple; if you take all of this telco and telco-related debt, you are talking about a giant sum of money, maybe a sum that would equal the squashing of all of the savings and loan debt that we had in the late 1980s. Maybe more. All of the money is interconnected. If Lucent doesn't get its money,
Winstar (WCII Quote - Cramer on WCII - Stock Picks) doesn't get its money. If Level Three doesn't get its money,
Cisco(CSCO Quote - Cramer on CSCO - Stock Picks) might not get its money. I could spin this a million different ways, because, frankly, the companies have done the same. (Anyone on the Winstar call yesterday would understand how interconnected things are. Anyone reading any of the capital expenditure stories out there knows how interconnected things are. Anyone who saw the
WorldCom(WCOM Quote - Cramer on WCOM - Stock Picks) debt downgrade Tuesday has to be thinking this, too.)
When all of this debt was created, it was highly inflationary. High-coupon debt rushing a build-out of 14 different companies full-speed-ahead regardless of costs? That's the definition of inflation. What's the definition of deflation? The collapse of that edifice. When you lend someone $100 and they come back with $30 or even $20 -- no, $0 dollars -- that's what I call deflation. So does the Fed. The crunching of debt is hugely deflationary.
When you get this debt-crunching (that I now think is a foregone conclusion because these indebted phone companies don't have enough business), you are going to have a deflationary mess on your hand as capital is simply vaporized. Now, take that capital vaporization and layer it on the capital vaporization in the
Nasdaq and you have two of the most potent deflationary trends I have ever seen. Heck, they overwhelm the meaning of cold rolled steel and nat gas and the price of coal. They make a mockery of such concerns.
Yet some of these knucklehead Fed folks act as if everything is just hunky-dory and others are so worried about inflation that they got us into this fix already by insisting on using dum-dum bullets when they shot the Naxx last year with six rate hikes. Then they dawdled in November and December as the Ciscos of the world saw business fall off a cliff. Their next act? To let the deflationary spiral play out before they save us.
Stop worrying about inflation; deflation is the enemy. And it is at the gates. Right now.
Jim Cramer
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