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Inflation or Deflation: Michael Burry and Seth Klarman Versus Robert Shiller

Everyone is talking about what the next "bubble" that blows up will be: Gold? China? Treasuries? Pundits now predict that the next bubble will occur in farmland. Economist and professor Robert Shiller came out as a proponent of that view on Fox Business yesterday.

However, Shiller is one of the few economists who happens to actually get a lot of calls right. In early March 2009, he stated stocks were cheap; the S&P500 is up ~100% since then. Before that, Shiller wrote Irrational Exuberance, whichir?t=valueinves08c-20&l=as2&o=1&a=076792laid bare, with remarkable timing, the speculative bubbles forming in the Internet-crazed stock market. He later predicted the next bubble in residential real estate.

What is interesting about his call on farmland is that Michael Burry, who foresaw the housing bubble and made a fortune buying CDSs, has polar opposite views from Shiller. In a Bloomberg Interview, Burry stated, “I believe that agriculture land—productive agricultural land with water on site—will be very valuable in the future,” and “I’ve put a good amount of money into that.”

Only time will tell who is right. However, people's opinions might depend on if they think inflation is more likely or deflation. Shiller recently stated that housing prices might not recover for years. He appears to be in the deflation camp.

I am no macro-economist, but I think inflation and possibly hyperinflation is more likely. With all the fiscal mess we are in—huge Federal deficit, large state deficits, massive underfunded pensions—the best way out would likely be to inflate ourselves out of the problem. Many people predicted that this was Ben Bernanke's goal of QE2, and Ron Baron stated this explicitly and thinks it is a good idea.

Furthermore, many people criticize the CPI as a flawed metric. Gas prices and food prices have skyrocketed in America, however, they conveniently are excluded from the CPI. Nearly every country in the world, including the Eurozone, is experiencing inflation now. The only major economy that does not officially have inflation is Japan, and America "officially" has very minor inflation. I believe that the inflation that we exported to the rest of the world is likely to (officially) come back to the us hard.

Seth Klarman in his 2010 annual shareholder letter, which I cannot post online; stated "Today's money printing is tinder for tomorrow's inflationary storm". He had many more statements in the letter, which discussed his worries about inflation. He also made a similar point about the CPI being flawed. He stated that if we used 1980s methodology of inflation, the current CPI would be 8.5% instead of 1.5%.

However, I would not put my money on either side despite my thoughts. Below is the interview with Robert Shiller:

Watch the latest video atvideo.foxbusiness.com

Disclosure: None

http://www.valuewalk.com/

About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

Visit Jacob Wolinsky's Website


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