Kevin Feltes, an economist for the Jerome Levy Forecasting Center, solicited my opinion on a couple of their recent articles.

Levy comes down on the side of deflation, as do I. However, the devil is in the details, as always. I will go through one of their articles in a point-by-point fashion, stating where I agree and disagree with their analysis.

This is a long post. Please give it some time.

Please consider Widespread Fear of the Wrong Kind of Price Instability.

read The Catalyst for a Move Higher HERE‘

Stay away from Treasurys as they’ve been rallying since 1981 – equivalent to a 19-year bull run, said Marc Faber, editor & publisher of The Gloom, Boom & Doom Report.

“I think that there isn’t much upside potential in Treasurys unless it’s for the short term. But if I look 10 years ahead, where do I want to have my money, then certainly not in USTs,” the renowned bear told CNBC on Tuesday.

Faber said the U.S. federal deficit is likely to continue ballooning under the Obama administration, which could make interest payments on government debt unbearable.

He also warned against using foreign demand for Treasurys as a litmus test.

“In 1999 and 2000, foreigners (bought) the Nasdaq and what happened afterwards was a major collapse. I would not look at foreign buying as a very intelligent leading indicator,” Faber said.

But for investors looking for the safety that U.S. debt provides, he recommends buying short-dated instruments as long-dated ones do not offer much upside potential.

Faber continues to be bullish on commodities, particularly farmland, agriculture and gold [XAU=X  1232.7     3.45  (+0.28%)       ].

“I’ll rather buy an asset class, whatever it is, that has been in a bear market for 10 or 19 years,” Faber said.

In a news article a couple weeks ago Bloomberg reported that Berkshire Hathaway had been shortening the duration of their bond portfolio. Unlike maturity, duration considers the sensitivity of interest rates and expresses the effective time the bond will be paid back, inclusive of coupon payments.

Bloomberg wrote that the holdings due to mature in less than a year were increased from 16% in 2009 to 21% this past quarter. Though not a significant increase, it was consistent in his Buffett’s comments from late last year; “the United States is spewing a potentially damaging substance into our economy – greenback emissions, unchecked greenback emissions will certainly cause the purchasing power of currency to melt.”

Bonds have a precise inverse relationship with interest rates. An increase in interest rates will lead to a decrease in bond prices and vice versa. The logic is simple. If the Treasury was issuing 3% 30 year T-bonds this year and interest rates shoot up to 6% next year, those holding the bonds paying 3% will be stuck with that coupon payment for the next 29 years. The new batch of T-bonds will be offered at the going rate; 6% and demand for 3% bonds will naturally decrease. So in Berkshire reducing the the duration of their bond portfolio, they reduce the risk that interest rates increase and they’re left with holding longer dated bonds that would have diminished in value.

Buffett has mentioned the difficulty in predicting where interest rates will go. He mentioned much about this in the early 1980’s annual reports. That may explain the relatively minor changes to the bond portfolio. The deflationary threat is more imminent at the moment, but far too often we forget who is manning the Federal Reserve. Ben Bernanke has shown as deep a concern about deflation as any economist. He earned the nickname “helicopter Ben” because of his reasoning (borrowed from Milton Friedman) that deflation could be fought by dropping money from helicopters. Though I wouldn’t speculate and short bonds, I think the case for a stagnant, 0% inflation Japan-type economy is overdone. In the 1980’s the Volcker Fed successfully squashed inflation. If the economy were to dip into a steady deflationary rate, I can’t imagine the Bernanke Fed sitting on their hands.

Disclosure: Holding share of Berkshire Hathaway

Article from Guru Focus

Today I managed to annoy two billionaires. It wasn’t my intention, it just happened. The first, we’ll save for a future discussion. The second was Mark Cuban.

In this morning’s discussion of sentiment (Celebs’ & Billionaires’ Economic Warnings ?) after dissecting the surprise economic warning from Tony Robbins, I also mentioned Mark Cuban’s “Put your money in a bank” comments.

Mark responded in a comment. He raises valid points I wanted to address, then clarify what I wrote, and respond to his challenge.

…..read the response HERE