Market Going Up Because of the Government

[Paulie]

Zander I still haven't seen you post your own fundamental analysis on why you see deflation in the future.

No links to someone else's opinion, I'm interested in seeing how you came to your conclusion if you in fact utilized more than just the opinions of others.

Sorry to disappoint you, but I do not use fundamental analysis. I prefer technical analysis. I use the Elliot Wave theory. We are just beginning a wave 3 downturn. It is a remarkably accurate system. The timing is sometimes early, but the end results speak for themselves.

In my experience, fundamental analysis is wrong so often that it is shocking. For instance, at the top of the market last July most "fundamental analysts" were calling for a continuation of the bull market citing all sorts of positive fundamentals. I am sure a few were bearish, bu I don't know of any that were calling for the massive downturn that took place last Sept-March. Yet almost every Elliot wave theorist out there had predicted the downturn. Most were early (Robert Prechter had his clients out and in short term treasuries a full six months earlier - that paid off rather handsomely as the flight to quality that ensued drove up the prices of treasuries) , but I'd rather be early than late when it comes to downturns. Prechter had his clients get back into equities in early March, just before the run up. A few weeks ago he recommended going back to short term t-bills and cash. Right now the market is in the midst of a "grand supercycle" in the downard direction. I am not a market trader, I go with the long term trend. I will remain in cash and t-bills until the markets technical signals change. Best of luck to you in whatever you do.

First of all, I asked for a fundamental analysis for why you see deflation, not for what the markets are going to do. I just want to know why you think there's deflation on the horizon in the face of the current monetary base.

But regardless, as far as the markets are concerned, you were looking at what OTHERS were saying. Just because most of the mainstream economists are idiots doesn't mean you should distrust your OWN fundamental analysis.

Last July, there were almost ZERO bullish fundamental indicators. The mainstream heads were saying there were because they know most sheep trust them, and it bought time for the insiders and other big boys to exit their positions first.

The fundamentals last July showed every indication to anyone above laymen status that it was time to get out. Bank balance sheets were on the brink, the system was completely saturated with extreme amounts of debt, a recession had already begun 6 months prior to that, which most people knew without having to wait until the government finally admitted it AFTER the collapse.

The problem was trust. Regular old ordinary people trust the government and media way too much and got burned. The fundamentals of last July don't exist today in that form. While they're certainly not great, they're better and continuing to GET better. There's room for growth right now, the only thing that worries me is the extent of the government's involvement up to this point, and whether the Fed can somehow pull off a miracle and escape the inflation that seems imminent at this point.

Tell me why inflation is NOT imminent. That's what I'm dying to hear from you. I haven't heard that opinion from ANYONE, not even the media. It's a unique opinion these days, and I'd love to hear how you're coming up with it.

 

[FactFinder]

Zander I still haven't seen you post your own fundamental analysis on why you see deflation in the future.

No links to someone else's opinion, I'm interested in seeing how you came to your conclusion if you in fact utilized more than just the opinions of others.

Sorry to disappoint you, but I do not use fundamental analysis. I prefer technical analysis. I use the Elliot Wave theory. We are just beginning a wave 3 downturn. It is a remarkably accurate system. The timing is sometimes early, but the end results speak for themselves.

In my experience, fundamental analysis is wrong so often that it is shocking. For instance, at the top of the market last July most "fundamental analysts" were calling for a continuation of the bull market citing all sorts of positive fundamentals. I am sure a few were bearish, bu I don't know of any that were calling for the massive downturn that took place last Sept-March. Yet almost every Elliot wave theorist out there had predicted the downturn. Most were early (Robert Prechter had his clients out and in short term treasuries a full six months earlier - that paid off rather handsomely as the flight to quality that ensued drove up the prices of treasuries) , but I'd rather be early than late when it comes to downturns. Prechter had his clients get back into equities in early March, just before the run up. A few weeks ago he recommended going back to short term t-bills and cash. Right now the market is in the midst of a "grand supercycle" in the downard direction. I am not a market trader, I go with the long term trend. I will remain in cash and t-bills until the markets technical signals change. Best of luck to you in whatever you do.

First of all, I asked for a fundamental analysis for why you see deflation, not for what the markets are going to do. I just want to know why you think there's deflation on the horizon in the face of the current monetary base.

But regardless, as far as the markets are concerned, you were looking at what OTHERS were saying. Just because most of the mainstream economists are idiots doesn't mean you should distrust your OWN fundamental analysis.

Last July, there were almost ZERO bullish fundamental indicators. The mainstream heads were saying there were because they know most sheep trust them, and it bought time for the insiders and other big boys to exit their positions first.

The fundamentals last July showed every indication to anyone above laymen status that it was time to get out. Bank balance sheets were on the brink, the system was completely saturated with extreme amounts of debt, a recession had already begun 6 months prior to that, which most people knew without having to wait until the government finally admitted it AFTER the collapse.

The problem was trust. Regular old ordinary people trust the government and media way too much and got burned. The fundamentals of last July don't exist today in that form. While they're certainly not great, they're better and continuing to GET better. There's room for growth right now, the only thing that worries me is the extent of the government's involvement up to this point, and whether the Fed can somehow pull off a miracle and escape the inflation that seems imminent at this point.

Tell me why inflation is NOT imminent. That's what I'm dying to hear from you. I haven't heard that opinion from ANYONE, not even the media. It's a unique opinion these days, and I'd love to hear how you're coming up with it.

This is a bit simplistic but it works for me.

If the wave analysis is correct then the market is going down when consumer confidence is also shaky.
Even less buying would ensue. The simple supply/demand theory kicks in and prices will have to go lower.
Now when the wave hits the up cycle....Watch out. The fed is already acutely aware of that danger. We could even find ourselves wishing for the 'good ole days' of lower double digit inflation of the Carter days.

 

[Zander]

Here is why we are facing deflation. The Credit bubble exploded last year. Fed attempts to re-inflate credit by massive injection of liquidity. Banks take new funds but still say no to new loans. Credit continues to contract albeit more slowly. Result= Deflation. The amount of currency in the USA is less than 1/100th of the amount of "Credit". The Fed can not print money fast enough to defeat the forces of deflation. It is inevitable.

 

[Paulie]

Sorry to disappoint you, but I do not use fundamental analysis. I prefer technical analysis. I use the Elliot Wave theory. We are just beginning a wave 3 downturn. It is a remarkably accurate system. The timing is sometimes early, but the end results speak for themselves.

In my experience, fundamental analysis is wrong so often that it is shocking. For instance, at the top of the market last July most "fundamental analysts" were calling for a continuation of the bull market citing all sorts of positive fundamentals. I am sure a few were bearish, bu I don't know of any that were calling for the massive downturn that took place last Sept-March. Yet almost every Elliot wave theorist out there had predicted the downturn. Most were early (Robert Prechter had his clients out and in short term treasuries a full six months earlier - that paid off rather handsomely as the flight to quality that ensued drove up the prices of treasuries) , but I'd rather be early than late when it comes to downturns. Prechter had his clients get back into equities in early March, just before the run up. A few weeks ago he recommended going back to short term t-bills and cash. Right now the market is in the midst of a "grand supercycle" in the downard direction. I am not a market trader, I go with the long term trend. I will remain in cash and t-bills until the markets technical signals change. Best of luck to you in whatever you do.

First of all, I asked for a fundamental analysis for why you see deflation, not for what the markets are going to do. I just want to know why you think there's deflation on the horizon in the face of the current monetary base.

But regardless, as far as the markets are concerned, you were looking at what OTHERS were saying. Just because most of the mainstream economists are idiots doesn't mean you should distrust your OWN fundamental analysis.

Last July, there were almost ZERO bullish fundamental indicators. The mainstream heads were saying there were because they know most sheep trust them, and it bought time for the insiders and other big boys to exit their positions first.

The fundamentals last July showed every indication to anyone above laymen status that it was time to get out. Bank balance sheets were on the brink, the system was completely saturated with extreme amounts of debt, a recession had already begun 6 months prior to that, which most people knew without having to wait until the government finally admitted it AFTER the collapse.

The problem was trust. Regular old ordinary people trust the government and media way too much and got burned. The fundamentals of last July don't exist today in that form. While they're certainly not great, they're better and continuing to GET better. There's room for growth right now, the only thing that worries me is the extent of the government's involvement up to this point, and whether the Fed can somehow pull off a miracle and escape the inflation that seems imminent at this point.

Tell me why inflation is NOT imminent. That's what I'm dying to hear from you. I haven't heard that opinion from ANYONE, not even the media. It's a unique opinion these days, and I'd love to hear how you're coming up with it.

This is a bit simplistic but it works for me.

If the wave analysis is correct then the market is going down when consumer confidence is also shaky.
Even less buying would ensue. The simple supply/demand theory kicks in and prices will have to go lower.
Now when the wave hits the up cycle....Watch out. The fed is already acutely aware of that danger. We could even find ourselves wishing for the 'good ole days' of lower double digit inflation of the Carter days.

We haven't seen that though. We've seen CERTAIN goods come down in price, but certainly not commodities. I haven't seen food prices change much since their highs in 07 and 08, and of course metals haven't changed much either, and continue to increase in price. I think a lot of companies have realized prices that the market will bear, and they know inflation is on the way and prefer to leave prices at current levels, or even raise them. We've seen many companies raising prices already. I've seen several increases lately.

I look at commodities when I think of inflation and deflation. I don't care if a pair of Nikes costs a little less today than it did in 07 or 08. I care about how much my food costs, my fuel, my rent, etc. When you look at societies necessities, prices haven't come down one bit. Gasoline has come down from its high, but that high wasn't normal anyway. We're still paying over $2 /gal on average, which is expensive considering.

Also, I define inflation and deflation as increases and decreases in the supply of money, respectively. There was a massive decrease in the supply of money over the past 12 months, and the Fed has injected massive amounts of it to counter-act this. While there may still be lingering deflationary effects in some sectors, the movements of the Fed signal inflation in the future.

And Zander, thanks for the analysis. I'd have hoped it would have been a little more comprehensive than a few broad sentences, but at least you made an effort. I'll just simply respond by saying I disagree, and I've laid out my reasons why on numerous occasions on this board.

 

[Toro]

Here is why we are facing deflation. The Credit bubble exploded last year. Fed attempts to re-inflate credit by massive injection of liquidity. Banks take new funds but still say no to new loans. Credit continues to contract albeit more slowly. Result= Deflation. The amount of currency in the USA is less than 1/100th of the amount of "Credit". The Fed can not print money fast enough to defeat the forces of deflation. It is inevitable.

Credit contraction is certainly deflationary, and the forces of deflation currently are enormously powerful.

However, even though there may be another trillion dollars written down in the financial sector, most of the credit contraction is probably over. Over a trillion dollars has been written off in the formal banking system, while the shadow banking system has imploded, taking a couple trillion dollars in credit with it.

Despite this enormous collapse in credit, consumer prices have fallen a mere couple percent.

The response by the government has been to flood the system with liquidity and support various asset markets. Loans to businesses have been declining but loans to the government have been skyrocketing. The Fed will do whatever is necessary to ensure that there is not a deflationary collapse, even if that means expanding its balance sheet to $4-$5 trillion to absorb further losses in the capital markets.

The collapse of the financial system is predictably a deflationary event. However, the government's response is unsurprisingly inflationary. It is no accident that the guy considered perhaps the world's foremost expert alive on the Depression heads the Fed. Bernanke once famously said the Fed could drop dollar bills from helicopters. I take him at his word, at least figuratively.

The markets are sniffing this out. Gold is at $1005, near its all-time highs. Gold - the ultimate store in value - is the only asset that is near its all-time high.

The forces in the economy are deflationary but the response is inflationary. Ultimately, the government will win out. Bet on the guys with the printing machines.

 

[Zander]

Here is why we are facing deflation. The Credit bubble exploded last year. Fed attempts to re-inflate credit by massive injection of liquidity. Banks take new funds but still say no to new loans. Credit continues to contract albeit more slowly. Result= Deflation. The amount of currency in the USA is less than 1/100th of the amount of "Credit". The Fed can not print money fast enough to defeat the forces of deflation. It is inevitable.

Credit contraction is certainly deflationary, and the forces of deflation currently are enormously powerful.

However, even though there may be another trillion dollars written down in the financial sector, most of the credit contraction is probably over. Over a trillion dollars has been written off in the formal banking system, while the shadow banking system has imploded, taking a couple trillion dollars in credit with it.

Despite this enormous collapse in credit, consumer prices have fallen a mere couple percent.

The response by the government has been to flood the system with liquidity and support various asset markets. Loans to businesses have been declining but loans to the government have been skyrocketing. The Fed will do whatever is necessary to ensure that there is not a deflationary collapse, even if that means expanding its balance sheet to $4-$5 trillion to absorb further losses in the capital markets.

The collapse of the financial system is predictably a deflationary event. However, the government's response is unsurprisingly inflationary. It is no accident that the guy considered perhaps the world's foremost expert alive on the Depression heads the Fed. Bernanke once famously said the Fed could drop dollar bills from helicopters. I take him at his word, at least figuratively.

The markets are sniffing this out. Gold is at $1005, near its all-time highs. Gold - the ultimate store in value - is the only asset that is near its all-time high.

The forces in the economy are deflationary but the response is inflationary. Ultimately, the government will win out. Bet on the guys with the printing machines.

We will have to agree to disagree.

PS: a year ago gold was at $950/oz. now it is at $1000, a mere few percent increase over 1 year.

 

[adeel_sami]

Nearly a week ago I read an article on CNBC stating the US equity markets may shed around 7%-17% in October. In the meanwhile, the Dow registered -3.4% in the past two weeks so the Nasdaq and S&P 500 with -4% ..

Does anyone know about this, please tell us more ..

 

[Toro]

We will have to agree to disagree.

PS: a year ago gold was at $950/oz. now it is at $1000, a mere few percent increase over 1 year.

Disagreeing is what creates opportunity in the market and makes things interesting! If we all agreed, nobody would make money.

Gold not being down 40% like almost all other asset classes in the most powerful deflationary environment in 75 years is why I think that the inflation will eventually overwhelm deflation.

But you might be correct. The forces of deflation are powerful and they may overwhelm the government.

I don't think in absolutes when investing. I've seen too many people get hammered in the market thinking in certainties.

 

[Toro]

Nearly a week ago I read an article on CNBC stating the US equity markets may shed around 7%-17% in October. In the meanwhile, the Dow registered -3.4% in the past two weeks so the Nasdaq and S&P 500 with -4% ..

Does anyone know about this, please tell us more ..

Yes.

Most pundits are wrong. It is a perilous investment strategy to rely on what one person says. Instead, form your opinions based on your own research and strategy. You will do much better over the long run.

 

[Terral]

Hi Toro:

Not sure how much of this I believe of this.

Robert Reich's Blog: Why the Dow is Hitting 10,000 Even When Consumers Can't Buy And Business Cries "Socialism"

Anyone in the markets now cuckoo are playing the tables in Las Vegas. The markets have been going up, because the value of the U.S. Dollar is going down. You need 'more' dollars to buy the same stocks. :0)

[ame="http://www.youtube.com/watch?v=jN8hiIE1Dm0"]Listen to Gerald Celente[/ame]

[ame=http://www.youtube.com/watch?v=wkBRmty7fKc]Listen to Peter Schiff[/ame]

The top ten reasons that the USA is worthy of destruction appear on my Topic here, but being DUPED by Bernanke and the Rothschild/Rockefeller-owned FED ranks right up there at #1 . . .

GL,

Terral

 

[Paulie]

Here is why we are facing deflation. The Credit bubble exploded last year. Fed attempts to re-inflate credit by massive injection of liquidity. Banks take new funds but still say no to new loans. Credit continues to contract albeit more slowly. Result= Deflation. The amount of currency in the USA is less than 1/100th of the amount of "Credit". The Fed can not print money fast enough to defeat the forces of deflation. It is inevitable.

Credit contraction is certainly deflationary, and the forces of deflation currently are enormously powerful.

However, even though there may be another trillion dollars written down in the financial sector, most of the credit contraction is probably over. Over a trillion dollars has been written off in the formal banking system, while the shadow banking system has imploded, taking a couple trillion dollars in credit with it.

Despite this enormous collapse in credit, consumer prices have fallen a mere couple percent.

The response by the government has been to flood the system with liquidity and support various asset markets. Loans to businesses have been declining but loans to the government have been skyrocketing. The Fed will do whatever is necessary to ensure that there is not a deflationary collapse, even if that means expanding its balance sheet to $4-$5 trillion to absorb further losses in the capital markets.

The collapse of the financial system is predictably a deflationary event. However, the government's response is unsurprisingly inflationary. It is no accident that the guy considered perhaps the world's foremost expert alive on the Depression heads the Fed. Bernanke once famously said the Fed could drop dollar bills from helicopters. I take him at his word, at least figuratively.

The markets are sniffing this out. Gold is at $1005, near its all-time highs. Gold - the ultimate store in value - is the only asset that is near its all-time high.

The forces in the economy are deflationary but the response is inflationary. Ultimately, the government will win out. Bet on the guys with the printing machines.

We will have to agree to disagree.

PS: a year ago gold was at $950/oz. now it is at $1000, a mere few percent increase over 1 year.

You forget that gold came down to around $700 last November after the collapse, and is now back up near its all-time high with an increase of almost 50%.

That ~50% gain from the $700 is attributed to the inflationary response from the government. Gold always tells the real story. It always has, and there's no reason to believe it ever won't.

 

[KittenKoder]

Gold is still going up for one major reason, a lot of it is used in technology.

 

[Zander]

Credit contraction is certainly deflationary, and the forces of deflation currently are enormously powerful.

However, even though there may be another trillion dollars written down in the financial sector, most of the credit contraction is probably over. Over a trillion dollars has been written off in the formal banking system, while the shadow banking system has imploded, taking a couple trillion dollars in credit with it.

Despite this enormous collapse in credit, consumer prices have fallen a mere couple percent.

The response by the government has been to flood the system with liquidity and support various asset markets. Loans to businesses have been declining but loans to the government have been skyrocketing. The Fed will do whatever is necessary to ensure that there is not a deflationary collapse, even if that means expanding its balance sheet to $4-$5 trillion to absorb further losses in the capital markets.

The collapse of the financial system is predictably a deflationary event. However, the government's response is unsurprisingly inflationary. It is no accident that the guy considered perhaps the world's foremost expert alive on the Depression heads the Fed. Bernanke once famously said the Fed could drop dollar bills from helicopters. I take him at his word, at least figuratively.

The markets are sniffing this out. Gold is at $1005, near its all-time highs. Gold - the ultimate store in value - is the only asset that is near its all-time high.

The forces in the economy are deflationary but the response is inflationary. Ultimately, the government will win out. Bet on the guys with the printing machines.

We will have to agree to disagree.

PS: a year ago gold was at $950/oz. now it is at $1000, a mere few percent increase over 1 year.

You forget that gold came down to around $700 last November after the collapse, and is now back up near its all-time high with an increase of almost 50%.

That ~50% gain from the $700 is attributed to the inflationary response from the government. Gold always tells the real story. It always has, and there's no reason to believe it ever won't.

That is true. We had a nice deflationary drop in November, and continued government intervention has bounced it back up to $1000. When every jack-off on TV is telling you to "BUY GOLD" I get very bearish. I see gold moving lower, possible much lower before inflationary concerns push it to new highs. Deflation may be short lived, but it must happen before any inflation can occur.

The US Credit contraction problem is far worse that most people realize. The total Credit market Debt as percent of GDP in U.S. balooned to 373% at the end of the first quarter of 2009. The figure was at 352% at the end of the first quarter of 2008. Lets put this in perspective -the total credit market debt as percentage of GDP in 1980 was 161%, in 1952 it was 128. So in the last 29 years (the period of Greenspan and Bernanke), the Credit Market Debt has more then doubled from its levels in 1980!! Remind you of any other bubbles??? As the U.S. government leverages further in order to prevent deflation and sustained economic slowdown, the Credit market Debt is expected to increase further. Like all other bubbles, this bubble has to go bust one day. The question is now "when" , not "if". It will happen. It is unstoppable even if Helicopter Bernanke drops $1,000,000 bills from the sky. SOURCE

 

[Paulie]

We will have to agree to disagree.

PS: a year ago gold was at $950/oz. now it is at $1000, a mere few percent increase over 1 year.

You forget that gold came down to around $700 last November after the collapse, and is now back up near its all-time high with an increase of almost 50%.

That ~50% gain from the $700 is attributed to the inflationary response from the government. Gold always tells the real story. It always has, and there's no reason to believe it ever won't.

That is true. We had a nice deflationary drop in November, and continued government intervention has bounced it back up to $1000. When every jack-off on TV is telling you to "BUY GOLD" I get very bearish. I see gold moving lower, possible much lower before inflationary concerns push it to new highs. Deflation may be short lived, but it must happen before any inflation can occur.

The US Credit contraction problem is far worse that most people realize. The total Credit market Debt as percent of GDP in U.S. balooned to 373% at the end of the first quarter of 2009. The figure was at 352% at the end of the first quarter of 2008. Lets put this in perspective -the total credit market debt as percentage of GDP in 1980 was 161%, in 1952 it was 128. So in the last 29 years (the period of Greenspan and Bernanke), the Credit Market Debt has more then doubled from its levels in 1980!! Remind you of any other bubbles??? As the U.S. government leverages further in order to prevent deflation and sustained economic slowdown, the Credit market Debt is expected to increase further. Like all other bubbles, this bubble has to go bust one day. The question is now "when" , not "if". It will happen. It is unstoppable even if Helicopter Bernanke drops $1,000,000 bills from the sky. SOURCE

I understand where you're coming from, and I don't rule out the possibility. I mention another bubble all the time around here. But a new one has to inflate itself first, and that's where this excess liquidity comes into play. Inflation will foster another bubble, and the result of the burst will be more deflation. Significant deflation likely will not happen UNTIL that point.

When you control the printing press, and you have a goal of fighting deflation, you can fight it and eventually win, until the bubble you created bursts.

But it's also naive to think current gold prices are a product of people on TV talking crap. The price of gold is realized by the actions of investors all around the WORLD, amongst a host of other market forces. China is buying a lot of gold. The smart money is in gold for a REASON.

If gold drops to the 800's and breaks 800, then we'll talk. Otherwise, gold never lies.

 

[Zander]

You forget that gold came down to around $700 last November after the collapse, and is now back up near its all-time high with an increase of almost 50%.

That ~50% gain from the $700 is attributed to the inflationary response from the government. Gold always tells the real story. It always has, and there's no reason to believe it ever won't.

That is true. We had a nice deflationary drop in November, and continued government intervention has bounced it back up to $1000. When every jack-off on TV is telling you to "BUY GOLD" I get very bearish. I see gold moving lower, possible much lower before inflationary concerns push it to new highs. Deflation may be short lived, but it must happen before any inflation can occur.

The US Credit contraction problem is far worse that most people realize. The total Credit market Debt as percent of GDP in U.S. balooned to 373% at the end of the first quarter of 2009. The figure was at 352% at the end of the first quarter of 2008. Lets put this in perspective -the total credit market debt as percentage of GDP in 1980 was 161%, in 1952 it was 128. So in the last 29 years (the period of Greenspan and Bernanke), the Credit Market Debt has more then doubled from its levels in 1980!! Remind you of any other bubbles??? As the U.S. government leverages further in order to prevent deflation and sustained economic slowdown, the Credit market Debt is expected to increase further. Like all other bubbles, this bubble has to go bust one day. The question is now "when" , not "if". It will happen. It is unstoppable even if Helicopter Bernanke drops $1,000,000 bills from the sky. SOURCE

I understand where you're coming from, and I don't rule out the possibility. I mention another bubble all the time around here. But a new one has to inflate itself first, and that's where this excess liquidity comes into play. Inflation will foster another bubble, and the result of the burst will be more deflation. Significant deflation likely will not happen UNTIL that point.

When you control the printing press, and you have a goal of fighting deflation, you can fight it and eventually win, until the bubble you created bursts.

But it's also naive to think current gold prices are a product of people on TV talking crap. The price of gold is realized by the actions of investors all around the WORLD, amongst a host of other market forces. China is buying a lot of gold. The smart money is in gold for a REASON.

If gold drops to the 800's and breaks 800, then we'll talk. Otherwise, gold never lies.

Ok Paulie, Ask yourself, where can inflation come from? Wage and pricing power are non-existent; the U.S. Treasury can print all the cash it wants, and the Fed can create additional reserves ad nauseum out of thin air, but the banks are not lending against devalued assets, and nobody wants to borrow to expand or create a business in this environment! We have a "defensive" credit market. A defensive credit market can scuttle the Fed’s efforts to get lenders and borrowers to agree to transact at all, much less at some desired target rate. If people and corporations are unwilling to borrow or unable to finance debt, and if banks and investors are disinclined to lend, central banks cannot force them to do so. During deflation, they cannot even induce them to do so with a zero interest rate! Sound familiar?

This is not an output gap or the topping of an inventory cycle -- this is deflation, deleveraging of credit, a psychological phenomenon. This is a deep recession with millions of Americans having lost their jobs, millions of homes for sale (at much reduced prices), millions of credit cards and mortgages in delinquency, tens of millions of square footage of commercial real estate standing empty, tens of millions of square footage of empty warehouses. Trust me Paulie, this is a false recovery. Round two of deflation is heading this way, and another crisis is coming. Move your assets to T-Bills and cash......

 

[Paulie]

That is true. We had a nice deflationary drop in November, and continued government intervention has bounced it back up to $1000. When every jack-off on TV is telling you to "BUY GOLD" I get very bearish. I see gold moving lower, possible much lower before inflationary concerns push it to new highs. Deflation may be short lived, but it must happen before any inflation can occur.

The US Credit contraction problem is far worse that most people realize. The total Credit market Debt as percent of GDP in U.S. balooned to 373% at the end of the first quarter of 2009. The figure was at 352% at the end of the first quarter of 2008. Lets put this in perspective -the total credit market debt as percentage of GDP in 1980 was 161%, in 1952 it was 128. So in the last 29 years (the period of Greenspan and Bernanke), the Credit Market Debt has more then doubled from its levels in 1980!! Remind you of any other bubbles??? As the U.S. government leverages further in order to prevent deflation and sustained economic slowdown, the Credit market Debt is expected to increase further. Like all other bubbles, this bubble has to go bust one day. The question is now "when" , not "if". It will happen. It is unstoppable even if Helicopter Bernanke drops $1,000,000 bills from the sky. SOURCE

I understand where you're coming from, and I don't rule out the possibility. I mention another bubble all the time around here. But a new one has to inflate itself first, and that's where this excess liquidity comes into play. Inflation will foster another bubble, and the result of the burst will be more deflation. Significant deflation likely will not happen UNTIL that point.

When you control the printing press, and you have a goal of fighting deflation, you can fight it and eventually win, until the bubble you created bursts.

But it's also naive to think current gold prices are a product of people on TV talking crap. The price of gold is realized by the actions of investors all around the WORLD, amongst a host of other market forces. China is buying a lot of gold. The smart money is in gold for a REASON.

If gold drops to the 800's and breaks 800, then we'll talk. Otherwise, gold never lies.

Ok Paulie, Ask yourself, where can inflation come from? Wage and pricing power are non-existent; the U.S. Treasury can print all the cash it wants, and the Fed can create additional reserves ad nauseum out of thin air, but the banks are not lending against devalued assets, and nobody wants to borrow to expand or create a business in this environment! We have a "defensive" credit market. A defensive credit market can scuttle the Fed’s efforts to get lenders and borrowers to agree to transact at all, much less at some desired target rate. If people and corporations are unwilling to borrow or unable to finance debt, and if banks and investors are disinclined to lend, central banks cannot force them to do so. During deflation, they cannot even induce them to do so with a zero interest rate! Sound familiar?

This is not an output gap or the topping of an inventory cycle -- this is deflation, deleveraging of credit, a psychological phenomenon. This is a deep recession with millions of Americans having lost their jobs, millions of homes for sale (at much reduced prices), millions of credit cards and mortgages in delinquency, tens of millions of square footage of commercial real estate standing empty, tens of millions of square footage of empty warehouses. Trust me Paulie, this is a false recovery. Round two of deflation is heading this way, and another crisis is coming. Move your assets to T-Bills and cash......

I understand your point, believe me. We're in a liquidity trap right now. The excess bank reserves that the Fed has created via security purchases over the past year or more are likely still sitting mostly in reserve.

Until lending starts up in force again, that newly created money is not entering the economy. I understand this, and this is something that a lot of anti-Fed people don't understand. The Fed can not directly put money into circulation. They have to rely on banks to lend. If they're not lending at .20% interest, then there's not really much more they can do.

This is when you turn to fundamentals, and analyze the economic situation on the ground. Is the economy ripe for recovery in some fashion, and thereby more lending and borrowing? Not yet. It is a slow process, and there may actually be some deflation in asset prices again while we wait on that.

I'm still not sure that you're right about how MUCH deflation we may see. If inflation is inevitable, whenever it finally happens, then why would you want your cash out on the sidelines taking a chance on missing the boat?

This is why you diversify among asset classes, and always keep a portion of your portfolio in cash. I think you're off base in suggesting that people liquidate EVERYTHING. That would be irresponsible investing in my opinion.

Deflation may come, but it will not be as long lived as the inflation that will eventually be to follow. I'd rather be in for the inflation, while my portfolio loses a little during a pullback, then try to time such a seemingly impossible change in the market and miss out on the ride up.

At some point, cash is going to lose a lot of value. If it somehow doesn't, that means the Fed must have been able to pull off a miracle that they've frankly never gotten right in HISTORY.

 

[Toro]

You forget that gold came down to around $700 last November after the collapse, and is now back up near its all-time high with an increase of almost 50%.

That ~50% gain from the $700 is attributed to the inflationary response from the government. Gold always tells the real story. It always has, and there's no reason to believe it ever won't.

That's my thesis exactly.

In a deflationary environment, gold will fall. The gold bugs who tell you that gold will do well in deflation are wrong, IMHO. So when the credit markets were imploding, gold collapsed, as one would expect.

However, as the government began reflating the economy, gold rose, even as stock and bond markets continued to get hammered. Again, if the government were to be successful at its attempt to reflate the economy, this is what one would expect to happen.

 

[Zander]

I understand where you're coming from, and I don't rule out the possibility. I mention another bubble all the time around here. But a new one has to inflate itself first, and that's where this excess liquidity comes into play. Inflation will foster another bubble, and the result of the burst will be more deflation. Significant deflation likely will not happen UNTIL that point.

When you control the printing press, and you have a goal of fighting deflation, you can fight it and eventually win, until the bubble you created bursts.

But it's also naive to think current gold prices are a product of people on TV talking crap. The price of gold is realized by the actions of investors all around the WORLD, amongst a host of other market forces. China is buying a lot of gold. The smart money is in gold for a REASON.

If gold drops to the 800's and breaks 800, then we'll talk. Otherwise, gold never lies.

Ok Paulie, Ask yourself, where can inflation come from? Wage and pricing power are non-existent; the U.S. Treasury can print all the cash it wants, and the Fed can create additional reserves ad nauseum out of thin air, but the banks are not lending against devalued assets, and nobody wants to borrow to expand or create a business in this environment! We have a "defensive" credit market. A defensive credit market can scuttle the Fed’s efforts to get lenders and borrowers to agree to transact at all, much less at some desired target rate. If people and corporations are unwilling to borrow or unable to finance debt, and if banks and investors are disinclined to lend, central banks cannot force them to do so. During deflation, they cannot even induce them to do so with a zero interest rate! Sound familiar?

This is not an output gap or the topping of an inventory cycle -- this is deflation, deleveraging of credit, a psychological phenomenon. This is a deep recession with millions of Americans having lost their jobs, millions of homes for sale (at much reduced prices), millions of credit cards and mortgages in delinquency, tens of millions of square footage of commercial real estate standing empty, tens of millions of square footage of empty warehouses. Trust me Paulie, this is a false recovery. Round two of deflation is heading this way, and another crisis is coming. Move your assets to T-Bills and cash......

I understand your point, believe me. We're in a liquidity trap right now. The excess bank reserves that the Fed has created via security purchases over the past year or more are likely still sitting mostly in reserve.

Until lending starts up in force again, that newly created money is not entering the economy. I understand this, and this is something that a lot of anti-Fed people don't understand. The Fed can not directly put money into circulation. They have to rely on banks to lend. If they're not lending at .20% interest, then there's not really much more they can do.

This is when you turn to fundamentals, and analyze the economic situation on the ground. Is the economy ripe for recovery in some fashion, and thereby more lending and borrowing? Not yet. It is a slow process, and there may actually be some deflation in asset prices again while we wait on that.

I'm still not sure that you're right about how MUCH deflation we may see. If inflation is inevitable, whenever it finally happens, then why would you want your cash out on the sidelines taking a chance on missing the boat?

This is why you diversify among asset classes, and always keep a portion of your portfolio in cash. I think you're off base in suggesting that people liquidate EVERYTHING. That would be irresponsible investing in my opinion.

Deflation may come, but it will not be as long lived as the inflation that will eventually be to follow. I'd rather be in for the inflation, while my portfolio loses a little during a pullback, then try to time such a seemingly impossible change in the market and miss out on the ride up.

At some point, cash is going to lose a lot of value. If it somehow doesn't, that means the Fed must have been able to pull off a miracle that they've frankly never gotten right in HISTORY.

Excellent post. I agree that if you have a LONG time perspective, going all cash is probably not a great idea. Also, most investors lack the nerve and knowledge of when to jump back in! Those investors would do well to just buy and hold while systematically adding to their investments. Personally, that is the exact strategy I followed for 20 years. The last 4-5 years I have been using Elliot Waves to time the market with much success. I move in and out of asset classes as the trends dictate and right now the trend is for a serious decline in equities and commodities. I will be ready to buy back in when the appropriate time comes.

PS- I will be more than happy to share my prognostications here!

 

[garyd]

With all due respect to Mr. Reich all this stimulus has done is to paper over a lot of problems and defer the rest. By the way no one is paying down much in the way of debt or truly saving much of anything in fact a hell of alot of people I know are dipping into what savings they have just to survive.

Mr Reich can continue in his silly attempt to paint a rose on a pig's ass as much as he wishes but it still remains the end of the pig from which the crap descends and we are all about to get buried in it.

 

[Chris]

If Government regulates properly, the market will always go up.

Must monitor the crooks !