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.