Skip to comments.Deflation Is Here
Posted on 09/12/2011 12:27:46 AM PDT by blam
Deflation Is Here
September 12, 2011
Ive been warning that the markets were on the verge of another round of Deflation. By the looks of things, its here with the US Dollar breaking out of its massive wedge pattern.
The ultimate target for this pattern is the mid-80s. So consider this latest breakout the first leg up of a much larger move that will affect all other asset classes in a big way.
In order for a move of that caliber to occur in the US Dollar, well need to see a full-scale crisis hit the markets (the last two US Dollar rallies occurred during the 2008 collapse and the 2010 Euro Crisis). So expect greater downside risk in stocks in the near future.
On that note, the S&P 500 has broken out of its bearish flag formation to the downside. The ultimate target for this pattern is at 1,000: 13% DOWN from here. Considering that weve already wiped out a years worth of gains in one month, this should be a MAJOR warning that were not done yet.
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The European markets are also down, the DAX is down 2.0%. See here.
SPX: Very Long-term trend - The very-long-term cycles are down and, if they make their lows when expected, there will be another steep and prolonged decline into 2014.
SPX: Intermediate trend - After last week, it is likely that the downtrend continues. It has a tentative projection to 1065.
Minute by minute, its becoming more clear that a meltdown in Europe is the most likely outcome, and investors around the world need to prepare for what I call Lehman 2.0.
I think it’s a good idea to focus on home improvement right now, while a dollar is worth a little something.
Better start stockpiling more food also.
Well, I went to cash over the summer in my biggest account, thank goodness, and a smaller account entirely in gold. The global politician class sure knows how to frighten investors. Every time Bernanke Obama opens his yap, stocks fall and gold goes up. The euro is disintegrating - its like a family with 10 teenagers, one checking account, everyone writing checks, no one making deposits.
People throw the words "deflation" and "inflation" around without a clear idea of what they mean.
The Germans were supposed to bail everybody out, the way they did with East Germany. In the case of the PIIGS, a bailout would just postpone the inevitable, and most Germans know it.
There was a bubble driven by inflationary expectations and some real inflation. Now that bubble is popping. There could also be real deflation if money supply numbers start to drop due to credit contraction.
You're right. After two "Quantitative Easings" by the Fed, and an interest rate of about zero, there's nothing here that indicates deflation.
What's going on now in the U.S. is simple "regime uncertainty." Corporate profits have rebounded since the beginning of the recession, but employers are not going to take the chance and start hiring new employees -- even though they admit they are short-staffed -- when they believe they might be hit with higher taxes and higher costs from new policies like Obamacare, Dodd-Frank, cap-and-trade, etc. Similarly, commercial banks are sitting on lots of liquidity but prefer to buy safe treasuries rather than make loans in a market whose future is still uncertain. Same applies to the potential borrower: they don't want to take on more debt given the uncertainty of future policies that may lead to losses.
None of this has anything to do with deflation.
The author is confusing the lack of velocity of money with deflation. He's also engaging in wishful thinking wanting his (demonstably wrong) predictions to come true.
The dollar "rallies" he refers to were only "rallies" as measured against other currencies. The dollar going up against other currencies has little to do with the actual buying power of the dollar. How many euros or yen a dollar buys often has no relation to how many widgets, barrels of oil, gallons of milk, ounces of gold or pairs of shoes that same dollar will buy.
To put it another way, a dollar may buy .85 euros today and may still buy .85 euros 4 years from now, yet a loaf of bread 5 years from now may cost 10 dollars or 8.5 euros. Measuring the value of the dollar against other currencies may be good for currency traders, but it's a lousy way to determine the actual VALUE of a dollar.
Do those telling us that deflation is here want us to suspend reality when we go shopping?
Yep. They're also keeping a lot of it in reserve waiting for the other shoe to drop.
When all of this "dammed up" money that the fed has been feeding the banks inevitably makes its way onto the streets, inflation will be off the hook.
Plenty of other things to prepare for, especially if you live near a major urban area or other area of high population density.
I’ve been yelling what you’ve said for two years.
Mike “Mish” Shedlock has major blog-rantings about the deflation we are headed for and are in.
What all of these bloggers are confusing is the definition of inflation/deflation and inflationary/deflationary effects.
Inflation is the increase of money supply (including credit).
Deflation is the decrease of money supply.
Inflation has both inflationary and deflationary effects in an economy. All you have to do is look for them and you’ll find them. The same is true of deflation.
After a period of massive inflation, there will be an overall trend of inflationary effects, and this is usually followed by a period of primarily deflationary effects, much like the hangover after a wild binge.
The reason that we are not seeing inflation twice as bad as we would expect after the latest rounds of QE is that the QE was in the form of credit to the primary lenders through the discount window of the Fed. The primary windows did not push this money/credit out to the street in the form of secondary loans. Instead, they’ve been investing it in the equities markets to prop them up 1. to make the economy look better than it is, and 2. because the public-sector pensions and benefits are funded largely based upon the markets. If the markets crash, union benefits and pensions also crash and we will be faced with “austerity” like in Greece. I believe the government and Fed have colluded to force this use of QE for this purpose and as a pay-off to the mega-financiers who financed the current administration.
The takeaway here is that our entire monetary system is based on nothing real and is financed by constant debt. This system must collapse eventually, as they always have and always will.
The other takeaway is that, as always, we will see inflationary and deflationary impacts in this debt spiral. Most importantly, all the assets that you thought will hold value (your home, your boat, secondary investment properties, etc.) will depreciate in value as no one has the money to purchase these things and that the cost of the necessities (food, fuel, etc.) will skyrocket.
Gold and silver will appear to skyrocket in price, but this will mainly be a sign of the dying dollar. They will hold their purchasing power relative to the dollar they were purchased with for as long as there are people to buy them.
With this in mind, I recommend people to get out of the markets, get cash, and spend it on the necessities they will need for ten years. I know, easy to say and hard to do. But it is a good idea, if at all possible, to prepare for an entirely new lifestyle, one much like our ancestors of the 19th century.
Although you can buy much, much more later, there won't be any stuff to buy.
It must have arrived since I last checked the price of the benchmark roll of toilet paper (one roll, Scott 1000 sheet single ply, $1.19).
Ditto. Additionally, there is an issue of finding a benchmark. If the benchmark for the dollar are currencies that are also being manipulated (Euro, Yen, Yuan, and now the Swiss Frank) then the outlook is almost meaningless.
The only real measure of inflation and deflation is the dollar's buying power of real goods, trying to exclude special cases affecting supply and demand. For instance if the price of bread and milk goes up, with steady supply and demand, we have inflation.
Natural deflation is essentially cost pressure as supply dwindles, and the differential is felt in a reduction of profit.
It is hard to correlate movements in the market, as they reflect expectations. Yes there is a connection, but I don't think it can be statistically quantified.
thanks for this
on gold, I liked a comment I read that precious metals are a way to try and preserve wealth, not increase it
I can store lot more (small) gold silver and even copper coins for 10 years than I can food, battereis and toilet paper .. people have and will always need some kind of “money” - so that is my (hopeful) goal
Very good post...