Sunday, September 5, 2010

Inflation/Deflation: Does it Really Matter?

I hope everyone is having a great holiday.

I wanted to start with a little advice today.  Take 45 minutes out of your life and listen to an interview with Stoneleigh from The Automatic Earth Blog.

The most important thing that a person can do is to look at the macro economic environment when one is trying to protect their finances.  This is an issue that is stressed by Stoneleigh and it's something that I try to do as well.

What happens in the short run in the markets is essentially meaningless in today's financial world that's filled with fraud and trading robots. 

I was amazed last week at the bashing of the bears after a three day rally that was pulled off during a week where we saw incredibly light volumes due to the fact that: 

1.  Many of the big players being on vacation.
2.  Investors are petrified to get involved in stocks because they have no confidence in the market.

I saw negative press on the so called "permabears" all over the Internet on Friday as the bulls rejoiced their little run.

Folks, the reality here is we saw a 3 day 400 point rally that in the long run that means nothing in the scheme of things.  We still find ourselves a tad lower for the year on the S&P 500 despite this recent rally:

My Take:

Despite the fact that stocks have gone nowhere for the past year, the bearish camp continuously gets attacked.  I really don't get it.  I guess perhaps many Americans buy into the biased financial media that continue to pump the "recovery" story.

Day after day as the economic data gets released the media immediately focuses on the "silver linings" if the data point is bad.  Why can't they just stick to the facts and tell us theeconomic data just flat out stunk?

If the data is bad then report it.  Don't try and spin it positive.  News reporters are supposed to stick to the facts.  Our press for whatever reason doesn't see it that way.  CNBC feels they have a duty to paint a "smiley face" on every data point.  Anyone with a brain has lost all respect for networks like this.

A great example of this is the jobs report.  The focus from the media was on the 67,000 jobs created by the private sector versus the overall net losses that we saw in jobs. 

This of course is a joke:

As I have said previously, anything under 150k job growth is a total failure because that's how many jobs are needed in order to show lower unemployment.

Permabears or Realists?

In my opinion the word "permabear" needs to go away.  People with bearish views are realists at this point when you see where the economy is.  The permabulls are trying to hang on to a way of life that is financially unsustainable.

I expect to see continued attacks on the bears because the elite in this country have no desire to accept the collapse of their Ponzi scheme.  I am frightened by what they plan on doing to the sheeple as the Ponzi scheme begins to fall apart.

You can expect to see higher taxes, tougher BK laws, and less public services as the elite attempt to prevent the unraveling of this bubble.  They will fail of course but that doesn't mean they won't try.  They will make our lives miserable in the process.

Deflation/Inflation Debate

I wanted to add one point before I finish.

Stoneleigh made some great points around deflation.  She called the "printing money" inflation theory basically a form of accelerated deflation versus a classic Japanese deflationary 20 year death spiral.  In her eyes the end result is the same:  An economic collapse.

Therefore, we need to ask ourselves if the inflation/deflation debate even matters anymore.

This is an excellent piece of analysis.  The endpoint is the same in either scenario.  As Stoneleigh explains:  The only difference is the collapse happens much faster during a "hyperinflation/inflation" type event.  Perhaps hyperinflation should be renamed hyperdeflation?

I mean let's play out the hyperinflationary scenario:

The price increases that would be seen during a hyperinflationary event would be unsustainable because people would not have the money to afford anything.  Demand would therefore collapse which would then send prices lower as the economy unwinds.  So essentially this then puts us right back on the deflationary train.

The Bottom Line

The bottom line here folks is the stock market has going nowhere since the beginning of the year.

The economic data continues to accelerate to the downside.  Rallying based on "better than expected" numbers that continue to tell us that  the economy is detiorating is a fools game. 

The government is using every resource they have as they attempt to pump the markets with confidence around the so called "recovery".

All I can say is don't believe the hype:  The economy continues to be in a  freefall.  Unemployment rose on Friday and home sales remain near an all time low despite historically low mortgage rates.  U6 unemployment is now close to 17% according to Friday's number.

I hope you all continue and prepare yourselves for the financial collapse that cannot be avoided at this point.

Let's discuss how you can prepare yourself for this before I finish up:

-  Pay down as much debt as you can.
-  Raise cash.
-  Avoid large purchases that will increase your debtload.
-  Diversify your portfolios for both inflation and deflation.
-  Do not buy a house...Period.

I will end it there.

Let me close by advising you to avoid the short term moves in the market.  The pigmen on Wall St will always use any rally as a marketing tool to suck even more of the sheeple into buying stocks.

What usually happens in such scenarios is Wall St uses this opportunity to sell their stock holdings on these artificial rallies to the retail investor who is then left holding the bag.

Remember:  The rallies are artificial because the economy is not recovering.  How many times have we seen this game before in the past 10 months or so.

Look back at the last 10 years and see how buying equities has worked out for you if you had followed their advice.

You will find that you would have significantly crushed Wall St's performance if you simply bought CD's and stayed in cash.

This is why I always preach preservation of capital in a market like this.  Getting sucked into stocks has been  losers game over the past 10 years if you bought and hold. 

If you decide  to try and "trade" the markets during this period on a daily basis you also likely lost money.  The data that's available shows that 99% of people that try and daytrade the market lose money.  You never hear that side of day trading when you read the comments section of trading sites.

I know it's boring but the best option in times like these is to sit in cash and wait for the opportunities that will develop once the Ponzi scheme falls apart.

This is where the real money will be made.  Assets will be available at pennies on the dollar once the Ponzi scheme collapses ,and good stocks will offer ridiculous dividends in order to get you to invest in their companies.

Patience grasshopper patience.

Have a great holiday!


Tom said...

Hi Jeff

I think wall street has made it's money trading up and down this year. But like you say can a regular investor do that?

Any way stupid question time. If you have cash and no debt it seems like deflation would be a good thing. Is that right?

Second question to whose benefit is inflation? Everyone who is in debt? I assume the Fed and the banks
are concerned with their own interests and not ours. Would they be destoryed if they can not kept prices for everything at current levels and they could no longer use their phoney accounting methods? (They are already bankrupted right?) Sorry I know these are Econ 101 questions but sometimes the big picture gets hidden by all the noise.

Tom said...

Third question

Banks that are to big to fail. Does that mean that if the Bank of America collasped the goverrnment would not be able to backstop everyone who has an account there?

Jeff said...

Hey Tom

"Any way stupid question time. If you have cash and no debt it seems like deflation would be a good thing. Is that right?"

Yup, the dollar soars in value in a classic deflationary scenario because prices collapse.

"Second question to whose benefit is inflation? Everyone who is in debt?"

Nobody really wins with inflation. Theoretically the as the dollar cheapens you could then inflate out of the debts more easily as the dollar drops in value.

The problem with this is if you are in debt and your cost of living soars then you won't be able to service your debts.

The debt itself however becomes more managable because the currency would be worth less.

"Banks that are to big to fail. Does that mean that if the Bank of America collasped the goverrnment would not be able to backstop everyone who has an account there?"

My guess is the government would guarantee bank deposits. This would be one of the Fed's first moves because a bank run could take down a TBTF bank in a hurry.

It's tough to predict how all of this plays out.

I think you should take a good look at the bank that you have your account with.

Finding a small bank or credit union with a real strong balance sheet might be a safer place to be.

Most smaller banks are in more trouble though because they don't get treated the same as the TBTF banks so you really need to be careful.

Anonymous said...

Jeff said "Patience grasshopper, patience"

The problem with the Permabears is that they have been preaching to wait out the "imminent collapse" for years, even decades now.

Take Bob Prechter who says we are headed for a deflationary depression. Problem is, he has been saying this forever. Look at this article from 1989 where he and another permabear are debating whether Great Depression II starts in 1990 or 1991.

He has been saying the jig is up on the american ponzi scheme on and off for over 20 years now. Someone following his advice in 1989 to avoid the "imminent collapse" would have gotten out when the dow was at 2,500. That assumes they didnt follow his advice and short the market either!

There is an old saying, permabears are never "wrong" just "early" - well the problem is things can go on far longer than the permabears can anticipate. In the case of Prechter, he has been early for 21 years and even if the dow lost 70% of its value tomorrow, we would still be higher than it was the day he warned "the jig is up, get out now or lose everything!!!"

Prechters early followers have had their financial lives destroyed. Being wrong for decades is a blow from which they will never recover. The US has been playing extend and pretend in some ways for over 70 years now. We humans only have 40 or so good investing years whereby we build our nest egg. Miss too many of those years by waiting out the "inevitable collapse", and you too are pretty much done.

Jeff said...


I was long for most of those 20 years.

Been out of the market since DOW 14k. I sit here 40% higher than the permabulls who are still chasing losses.

I would have disagreed with Prechter for most of that time as well.

Permabulls are about to become the permabears as they continue to get slaughtered everytime they jump into stocks over the next generation.

Markets go in cycles they always have.

The 30 years of prosperity up until recently was preceeded by a 16 year nightmare where stocks did nothing.

The bulls will get their asses handed to them for the next 10 years just like they have the last 10.

Things change. I look forward to being a bull again. unfortunately thats a ways off.

Anonymous said...

Jeff - thats all fine and good, but you are not addressing the point. The point is, if you sit there day after day giving generalized comments, "this thing is gonna crash soon" without any idea of when that may be, you will be branded a permabear.

While we may be on the road to hell, the last 18 months has shown us, its not always on a straight down line. By continually reiteritaing the "gonna crash soon" line you missed out on one of the biggest moveups in history.

True, it may be a stopping point down to a much lower level years from now, but where is the contrarian spirit? Where is the warning, "while I remain convinced we go to hell eventually, there can be months even years long countertrend movements that will push this market higher". Take Meredith Whitney - while she is long term bearish on the financial industry, she went bullish during the stimulus spending and called that one exactly right. She may not always get it right, but her contrarian instincts helped her recognize a countertrend rally, versus some of her contemporaries who remained bearish the entire time.

Bottom line, if you just repeat the same thing day in and day out, you become branded a chicken little or pollyanna (depending upon whether you are a permabear or permabull). The world doesnt work on a straight line up or down, and neither the permabears nor the permabulls understand this - the contrarians do.