Tuesday, August 18, 2009

Is Deflation Winning the War?

This remains one of the hottest topics among the pundits.

We saw another little bullgasm in the markets today as the DOW rallied closing up 83 points.

Futures are down after HP's earnings which met expectations. Despite today's little rally, I still believe that sentiment is slowly changing back to doom and gloom. Investors are tired of hearing about earnings beats that were basically achieved as a result of companies slashing costs. Investors now want real growth!

Less bad is no longer cutting it anymore because the markets have moved up 50% from the lows. In order for the markets to continue and rally, earnings and top line revenue growth must start growing. If they don't, stocks are going to start to look highly overvalued because they got way ahead of themselves after a 50% relief rally based on nothing.

Lets get real here: We all know there is ZERO chance for sustainable growth because the consumer remains suffocated in debt. There is no reason to believe that an economic recovery is coming anytime soon.

Signs of economic destruction are everywhere. Commercial real estate, job losses, housing foreclosures, underfunded pensions, massive state deficits, massive USA deficits...Need I go on?

Whats been startling to me lately is the price destruction that's starting to pop up everywhere around me. I see it in restaurants, housing, and consumer products(I still can't believe I paid $360 for a computer the other day).

What I am starting to wonder is this: Is the government starting to lose its battle versus deflation?


The chart below says yes:


My Take:

As you can see above, we are seeing the largest bout of deflation in our economy since WWII. Seeing inflation below zero is a rare occurrence in the history of this nation folks.

What we need to be concerned about given the most recent data is a Japanese style deflationary collapse.

I have discussed this subject many times before. The powerful deflationary forces that we are currently witnessing have to make you wonder if the Fed might be starting to lose the war with deflation.

My biggest fear here is how the Fed reacts to the obvious signs that deflation is beginning to overwhelm the economy. Do they react by doing something reckless like devalue the dollar in a desperate attempt to inflate their way out of this? Let's hope they aren't that stupid.

As you can see in the chart above, the last deflationary death spiral seen in the US was The Great Depression. It was a long and painful 10 years before WWII came along and pulled us out of it. If the war hadn't created millions of new jobs who knows how long this could have lasted.

Japan STILL hasn't recovered from their deflationary death spiral and that began about 30 years ago! Their stock market peaked at around 38,000. It now sits at 10,000 today.

The Bottom Line:

The Fed is praying for inflation but so far its not happening folks. If these trends continue, your investment strategy should be refocused on shorts and hoarding as many US dollars as you can.

I still plan on holding my metals because I am worried that the Fed might be stupid enough to destroy our currency in an attempt to stave off deflation.

The jury is still out, but a deflationary depression could very well be in the cards.

12 comments:

Anonymous said...

Jeff,

Did you see the article about the "Pay Czar" approving a $7 million salary for the new AIG CEO?

http://finance.yahoo.com/techticker/article/305860/Another-AIG-Outrage-or-Bargain-New-CEO-Gets-$7M-Salary

This country is one f*cking joke! Once a great nation, now it is ruined by thieves and crooks.

On a positive note, Kim Kardashian is now pregnant according to CNN headline. Now everything will be OK. Yeah!

Anonymous said...

Here is another article to prove my point. Millionaire ex-CEO (HP) plans to run for the Senate seat.

http://politicalticker.blogs.cnn.com/

As you clearly see, the people of this country are f*cked. Their government is no longer for the people. Rather, their government officials are bitches for the elitist/rich class.

American people need to wake up. It is about time we start a Second American Revolution!

CT-Hilltopper said...

I think that by now we have figured out that there isn't going to be any major traumatic event that projects us into hell.

Our descent will be slow, and it will be painful. More like the boiled frog theory.

Now I'm more concerned about me than I am about you, Jeff. Sudden swift crashes I can handle. I've handled them before and I seem to be wired to be able to deal with that kind of thing.

Slow, tedious, is a horse of a different color. I have no patience. That's my fatal flaw.

My kids have taught me to have a little patience, but it's a precious little patience.

I was battling between deflation and inflation, until I saw Nathan's charts in the post I linked to yesterday. All of those charts together worked as a primer for me and led me to see that no matter how much the Fed spends, they can't fight the wave of deflation that's coming.

I think Christmas will open a lot of people's eyes. I can't believe how many people are being - I don't even know how to put this- willfully blind? That's about as generous as I can be.

But everything seems to be just slllllllowly rolling out. Unless China decides not to buy ANY treasury bonds,or something else happens to put us in crisis mode,we just keep sliding into the boiled frog mode.

What the government will love about the boiled frog mode is that things will happen so slowly it gives them more time to lie about it.

CT-Hilltopper said...

BTW, how could you guys forget about McDreamy's sex video with his wife and another woman?

The sheeple have enough to keep them entertained. Why should they worry about any of this stuff?

Jeff said...

Anon

Thanks you just made me vomit! lol

It gets more and more disgusting everyday.

Thanks for the links.

We are down to two classes : The Oligarchy and the serfs.

What a damn shame.

Jeff said...

CT

I love your boiled frog analogy.

I think thats exactly whats happening.

I think the slow burning fire will become a raging inferno when everyone comes out of denial and realizes the crap is hitting the fan.

I predict you will see everyone all run for the exits at once just like George Costanza did in that Seinfeld episode:).

Let the boiling continue!

Peter said...

I'm with you Jeff. For the immediate future deflation is here. None of the money the Fed has printed has found its way into circulation. People just can not spend. The only way to inflate will be to send every American a check for $10,000. Then again they might do that within the month.

Great point CT. This is like Chinese water torture. It's so obvious yet those in power are doing everything they can to deny it while the sheeple are too disinterested to care. I have no patience for this either.

I was talking to a friend today who made a great point. With regard to the eventual deflation/inflation issue we must assume the government is going to end up doing what we have no clue they are going to do. Did anyone ever think they would make shorting illegal? There's no way to know what they will do, but suffice to say whatever it is will be a fiasco.

jeff said...

Peter

Your concerns about the government are exactly why I refuse to sell my metal ETF's.

I am sure there is an exit plan if this whole thing caves in and I am afraid to hear what it is.


I don't care if gold sinks to $500 an ounce, I will not sell because I don't trust any of these people.

I am holding lots of dollars for deflation as well. This whole thing just sucks.

Its almost impossible to find any way to grow you nest egg in this environment.

If we inflate out you get pummeled if you hold your investments in US dollars.

If we deflate, metals in the short term get pummeled.

How do you win?

CT-Hilltopper said...

There's no win-win play here, Jeff.

I wish there were.

I listen to people who's word I admire, people like Karl, and even Peter Schiff, whom I admire for the courage of his convictions, but even they don't have "the" bulletproof answer.

Schiff is just amazing to watch. He barely lets his counterpart on CNBS or Fox or whatever he happens to be on get two words out of their mouth before he pounces on their arguments. I mean, I haven't seen anyone on the bullshit network beat him yet. He nails LIESman's ass to the wall every time he's on CNBS, so everytime I hear his name, I run for the TV. I'm usually never disappointed.

I just don't agree with every word that comes out of his mouth regarding this crisis, no matter how amused I am at his handling of the supposed "talent" at CNBS.

I have his books now, and I plan on reading them when I have some quiet time...whenever that might be, LOL. I just have never seen it come out of his mouth that we are going to have deflation first.
I think it's going to be a one-two punch - deflation to start, and inflation at the end.

I could be wrong. I'm not Steve LIESman, I freely admit that I AM an armchair economist. LOL

I don't do this for a living( thank God). If I did, I'd be pulling my hair out by now.

I wish I were like the sheeple and could hold on to that dogged optimism, or blindness to facts, or whatever you call it.

Jeff said...

CT

I just know one thing.

This is going to end in a very ugly way.

I like Schiff but think he is too obsessed with gold.

He may very well be right with decoupling in the long run.

He does carry himself well on the networks. I think thats why they keep inviting him back

flipdippy said...

Schiff is also running for the Senate (well, most likely will, he's got his 'exploratory committee').

I fail to see any deflation...who is actually seeing deflation in their day to day lives? People don't buy new residences yearly and they don't buy durable goods yearly.

In my day to day life...

Property taxes up
Electricity up
Grocery bill way up
healthcare way up
childcare way up
car insurance up
credit card interest rates way up
banking fees (ATM, use of teller, etc) up
wine up
beer up
gas back up again (for now)
commute costs (tolls) up
dry cleaning costs up
diapers up
HOA fees up
window replacement for govt stimulus payback later up (thank you for nothing obama)

here's what's gone the other way:

cell phone bill down
home tv/internet down
TiVo down
fast casual meals down
new clothing down
home pc/laptop down
savings account/money market yields way down
nat gas bill (washer/dryer) down

and other less frequent purchases:

swim club way up
new washer + dryer surprisingly down
vacation home rental down

Jeff said...

Flip

Great stuff.

I agree.

All of the mixed signals make this market difficult to navigate.

Another up day today. I thought we would retrace today.

It's a challenge!