First of all, I apologize for not discussing the markets too much this week. At this point in time I see no sense in doing so. The recent moves both up and down have been pretty much meaningless because there is no volume behind them. This lack of confirmation means that you must take them with a grain of salt.
The market is basically flat for the week after today. I haven't seen much T&A that has been particularly helpful in the last few weeks. Technical analysis without volume is a very dangerous game to play in a market like this.
The way I see it: The bears and bulls are both frustrated at this point. The bulls want a pullback because the entry points at these elevated levels are too pricey for even their expensive tastes. The bears also want a pullback because they are bears!
The light volume as both sides wait for a pullback has resulted in a market that is about as exciting as watching paint dry.
Lets get back to the Itulip data. Eric made some great points around inflation over there. Is the deflation we all believe we are seeing actually a mirage? Stealth inflation is the idea that you make products of lower quality and sell them at the same price as previous higher quality products.
Could it be that we are slowly sinking into third world living conditions as the quality of our products deteriorate in order to make them affordable for our battered consumer?
Are the 12oz steaks that we enjoyed last year slowly being replaced by 10 oz steaks at the same price? Or will the quality of beef eventually deteriorate without the consumer knowing it as prices remain the same. I have been hearing rumors that certian so called "Prime Steakhouses" are now buying choice beef and pricing it slightly below prime without telling their patrons.
Another question around inflation:
Will a dramatic drop in supply as factories go BK actually force prices higher as products become more scarce?
These are all excellent questions, and stealth inflation in the form of cheaper made knockoffs and smaller portions may be a serious part of the equation.
I have to believe that the fight between the deflationist's and the inflationist's will end up ending somewhere in the middle.
I compare this situation to politics. Each side makes great points but neither side is always right. The far left Democrats and the far right Republicans are both a bunch of loons. As a result, most bills that get done in Washington end up somewhere in the middle.
Here are a few graphs that support the idea that we are in a period of disinflation versus deflation(similiar to periods of the '70's):
Here is the CPI during deflation of the 1930's:
Here is the CPI in our current collapse:
The way I see it, four months is not a long enough period for the inflationist's to declare victory. To their credit, the Fed has not let them down yet as they create trillions of dollars in order to keep this bubble afloat. However, if they cannot sustain these shenanigans, will we see the collapse like the one seen above from the '30's?
One thing is certianly becoming more and more clear to me. Our living standards will steadily drop in either scenario. If we cannot afford price inflation, then we will likely see inflation via cheaper goods replacing superior goods at the same price.
I am seeing signs of the new third world America right now. Outback now has a 6oz steak for $9.99. Five years ago, America would have laughed at them if they tried to call this a "steak dinner". Today, its a reality.
The inflation/deflation debate will rage on long after I finish this post. However, I thought that Itulip made some great points today around a potential lack of supply as well as the quality of supply.
The falling dollar, a deflation obsessed Fed, and changes in quantity as well as the quality of supply are all compelling reasons to see the inflationary side of this equation.
On the flip side, bankers always lose in severe inflation because all of those dollars they own become worthless. As a result, the bankers and the Fed want some inflation but not TOO much inflation. They may decide that deflation is the only exit where they remain rich because the dollar would rise in such a scenario.
Its a tough argument folks! This is why a well diversified portfolio should be prepared for either scenario.