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"How about all the debt that is collectively owed? It gets bigger and bigger in real terms with deflation. It's sort of a problem, you see." You should differentiate between healthy deflation (silicone valley) and unhealthy (bubble liquidation). No one wants to do that. A bubble is very destructive. Hugely. Especially to the people who got caught up in it. Just curious, and I really don't have the answer for this, what is the impact of RISING INTEREST RATES ON THAT DEBT? Let us say for example that I owed 10 Trillion dollars and was financing this amount of money via short term access to the credit markets. What happens if inflation expectations increase wildly and I am forced to refinance that credit at 8%? Do you believe an increase in inflation expectations will have zero impact on the risk free rate? Or what happens to the value of an 800,000 dollar house if suddenly the ten year tbill bubble pops and shoots to 8%? Did the value of the home go up or down? Did the value of that outstanding debt increase or decrease? How about the value of a major commercial real estate portfolio. If suddenly they are forced to access credit at 12%? What impact does that inflation have on the value of that building? What about consumption -- if prices rise in aggregate and my wages do not increase will that activity have the effect of increasing or decreasing aggregate demand? If you power bill suddenly goes up to $400 dollars a month would you increase or decrease discretionary spending? The prevailing thought seems to be 'just inflate' (cause) while ignoring effect (rising interest rates). It's not so simple you see.

The most dynamic area of our economy is silicone valley. There has been long term expectation of increased quality at lower prices. It has not been disastrous to that sector of our economy.

Bernanke has repeatedly shown himself to understand economics only through the lens of monetary policy. Notice he did not stop and discuss what impact his expanding the Feds balance sheet will have on lending. Why would anyone lend long term with the Fed Chairman repeatedly promising to print money? What happens when Bernanke threatens to print -- money leaves our capital markets. There is almost zero long term lending. Bob Brinker on his radio program told his audience not to buy any bonds with longer than three months duration! This is having a VERY negative impact on our economy. Bernanke can print money - yes - but he cannot force people to lend. With no credit uptake the monetary creation goes nowhere. There is no velocity of money. He is doing more harm than good. We have literally reached the point where credit markets are virtually closed except for government agency paper. Money must circulate for it to have an impact on the economy. If he prints too much then yields skyrocket -- what impact will that have on the Federal Governments ability to roll its paper, what yield will they be forced to pay? What happens to the value of housing stock and commercial re if long term rates head towards 8-12%? They plunge furthering the crises. Americans are trusting a man who told them subprime is contained, our financial system is sound, and America will not have a recession. Go look at his past predictions -- he is the strike out king. Yet he is held up as a infallible. Liquidity will return when prices are low enough for intelligent people to take a risk with nominal (normal) rates of leverage and earn a decent return. We are reaching that point it seems in stocks. Housing seems to be bottoming (the prices at least) in the areas I watch, even Las Vegas. Employers will be willing to add staff at a low enough wage. The government wants to accomplish the opposite. It wants higher wages (increased union activity) inflated RE values, and higher regulatory costs. They will prolong the agony not end it. Inflation is not a magic bullet. What he proposes to do is harmful to Americans. Inflation is caused by lending (credit formation), and lending is a function of return ie. productivity. For nearly a decade many intelligent people have watched on the sidelines as leverage was added to goose returns -- funny money drove out the smart money. The smart money is returning. He is essentially trying to prevent the dumb money from losing their money. But this is how and when bottoms are formed. This clip shows how bottoms are formed. This man is willing to buy hotels at a 15-18% unleveraged return. Over the last few years they were priced at leverage ratios of 15/85. Of course he will be able to reduce room rents (lower prices to increase demand) which will hurt his remaining over leveraged competitors. The same thing happened with the dot com bust, the oil bust, RTC RE, etc. http://www.cnbc.com/id/15840232?video=1046179272&play=1

Sorry about that, I have both saved to my computer and attached the wrong one. That is why you don't post at one in the morning.

My main problem with commercial real estate is the supply demand picture. Our local downtown here in a midwestern city will have 40% vacancy once the buildout is completed in the suburbs. Many corporations locally built new headquarters because of the low interest rates and attractive financing terms. Those buildings are not entirely completed hence the companies have not moved. Even Mr. confidence is important Ben Bernanke said before Congress that commercial real estate will be 'a catastrophe'. Commercial real estate has sold at very low cap rates, often financed with short term bank loans, and priced at very high occupancy and rent levels. Take out financings were all the rage, similar to housing flippers in California pulling out 'equity'. There should be significant distress sales which will lead to competition from owners with buildings acquired at ultra attractive terms, hence downward pressure on rents. Speaking of Warren Buffett he has only bought one reit in his lifetimethat I know of, FR. Look at the financials of that REIT in 1998 and compare it to most commercial RE firms. He bought into a company that was able to turn a profit even accounting for depreciation, he did not buy based on Distributed Cash Flow. He has always said that depreciation is a real expense, whereas most RE buyers tend to ignore it and instead allow for the assumption that a maintained building will not lose value over time. But a building can only be depreciated at a rate of 1/39, that itself is a modest assumption. Many buildings are either torn down or completely renovated in that time frame.

Buffetts article was written in Forbes magazine in 1979. I have attached it for you.

A wonderful business. WEB A wonderful business is a company that can expand volumes and raise prices in the face of inflation and not have to replace capital at the new higher costs. I am skeptical of the idea of rampant inflation. Higher inflation leads to higher real interest rates which will cause further destruction of credit, and hence money. A tremendous amount of credit is being kept afloat by the ability to refi at low short term rates. Raise those short term rates and that debt goes poof very quickly. I have no crystal ball into the future, but investors should be aware of the potential for further deflation. Inflation in my opinion is not a given like so many seem to believe. I have never seen such concensus regarding a future outcome which is why I am skeptical. The concensus is usually wrong. Nor is it bullish for equities. The lowest point in equities came in 1981 on an asset replacement basis, even lower than the depths of the Great Depression. The United States Treasury has an essay on its website detailing the economic risks posed by its stimulus packages. The worry is it won't be financed on attractive terms. http://www.treasury.gov/press/releases/tg10.htm There are some businesses that do well regardless of economic conditions. Generally companies that deal with cost sensitive consumers (recession / depression resistant) and benefit from credit driven asset inflation. Think McDonalds. During recession people trade down, during inflation the value of their real estate holdings grows while they have historically also enjoyed pricing power. Make investments that prove profitable regardless of future economic outcomes.

Maybe oldye, time will tell. My thought with the overall market is that there are really two markets. The big money market (pension funds, large mutual funds, endowments and foundations) and the small cap market. In order to see a severe correction (dow 3000) we will probably have to see that type of money go running to the exits. The weaker hedge funds have already been crushed and are selling to meet redemptions. Any area they were heavily involved in is laying bloodied. Of course much of their selling is meeting the redemptions of their not so happy institutional clients. So the question in my mind is would Calpers, Ipers, Berkshire, ISU, etc go running? If not we probably won't get the deal of a lifetime on McDonalds, Pepsi, etc. But you can find companies with exceptionally strong fundamentals and market positions in the small cap space if you look hard enough. You will probably be the only person looking at it. Very little coverage and interest from the institutions. The company I mentioned in the post above even if it were to increase 300% would do little to nothing for a major player. They would literally need 100 such opportunities to move the needle, so they don't bother. In the seventies pension funds were largely absent from the market having gotten stung in the great 'bull', I believe they didn't march back in till the eighties bull was well underway. They seem rather committed to this market still. Same is true with the 1930's, mostly it was made up of individual investors. I haven't done a study on this, but are just general thoughts. This is the first major wipe out since the emergence of large institutions as the predominant force in the overall market. They could prove more rational or less rational, time will tell.

I agree with Tbone. Rather than worry about where the market is going investors should consider the strength of their investments. I would expect that any significant rally be met with selling pressure. But if earnings of the companies I have invested in continue to grow who cares? One company I identified for my portfolio is a monopoly level business. It requires minimal capital investment to grow and operate. Free cashflow even accounting for depreciation, taxes, and interest should come in around 65-70 million this year. Been DECIMATED. This company has a track record of doing well under nearly any economic circumstances and held their own last year. Why was this priced at 185 million for a time? They actually grew their customer base last year, albeit slowly. Scrape the bottom of this market in the bombed out areas and it is amazing the deals you can find. What is even more amazing is you will get mocked for buying them.

Elsztain is quite the value investor. Saw a more detailed interview with him where he explained how during the Argentine financial crises he was able to more than double his land holdings yet only stay even in terms of his net worth. He buys hard assets like Leucadia when they are being given away.

Here are some statements that serve as guide posts of capitulation. 1873, 1907, 1929 you always had the same statements in media and by citizens: 1. People say 'buy and hold is dead' 2. Investors pray stocks rise so they can get their money back, rather than make money off fresh capital. 3. Constant predictions and fear of a market crash, after a market crash. 4. You hear the claim 'capitalism is dead' or its companion 'capitalism is not working'. 5. Wall Street is viewed as a gang of crooks. 6. Bankers are cursed. 7. Rich people are being vilified and blamed.

I agree that long dated Treasuries would be a poor choice. But people who are in a fit of panic watching their wealth evaporate before their eyes are not in a state conducive to rational decision making.

"Today, you can't get shit for yield from long Treasuries." But you do get your money back. I know a lot of people who would take Treasuries over what was / is sitting in their brokerage accounts.

Shiddler, who is not an idiot, bought 14 million dollars worth and then: http://www.google.com/finance?q=NYSE:FR He founded the company.. Leon Cooperman been touting all year and loading up, very close to the people who run it: http://www.google.com/finance?q=apl Eddie Lampert and ESL -- they are not dumb: http://www.google.com/finance?q=cit Ian Cummings bought at 14, he's been in the Subslime business before: http://www.google.com/finance?q=acf Joseph Roberts, a great distress investor, he runs the company and bought tens of millions of dollars worth: http://www.google.com/finance?q=jrt Carl Icahn I am positive understands development: http://www.google.com/finance?q=OTC:WCIMQ Richard Rainwater did his dd and lost 70 million: http://www.google.com/finance?q=tma I am NOT mocking them, just pointing out the hazard of a collapsing market. This was not caused by bad fundamental analysis, accept possibly in the case of TMA.

My friend I know people who have been in business for over 30 years who have seen significant declines in their business, especially since December. They have never been impacted by a mere recession. I notice that Joel Greenblatt has changed his approach to a more diversified portfolio. I am fairly certain he thought Office Depot was well within his 'circle'. http://www.google.com/finance?q=odp