Quote:
Originally Posted by danjarch
Hey, Windy, what's your thoughts going forward on inflation. Sp far you've been on the money about continued deflation. You think it's still going to hold for awhile or are we starting to see a change?
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Nah, more deflation.
You can see the markets are still being driven by the currencies, right now I believe we are at the end of a bear market rally that has seen everything move up from the 7k'ish lows on the Dow, all precious metals, oil, all stocks, all bonds, everything. Before that everything was going down in price, all the above. When "everything" goes one way and then the other you know that it isn't the price of the assets that is changing, it is the price of the currency that is changing. Deflation is all about demand for hard cash, and despite all efforts to devalue the dollar including outright buying of Treasuries by the Fed, demand for currency is still at an all time high. Yes, traders were willing to move cash into stocks, etc, for this little bump, but we hit the ceiling on the 10k level that we traded years ago and of course haven't been able to break through it because that is the level where a lot of investors started losing money so they are willing to sell it. We have also trended up to the downward sloping trend line from the 14k highs, perfect spot to either "V" bottom or finish moving to DJIA 5000 (you read it right, five thousand). I would not bet on a "V" bottom. The S hasn't really hit the F yet, this bubble has been in the works since Reagan, you just don't undo that kind of asset price inflation in a year or two .. there are kids graduating from college now who have lived their entire lives in this financial bubble.
It is interesting to watch the precious metals and other asset prices here, however, and also most importantly to watch what the Fed does. Here's why - eventually when the deflation does end all of this is going to turn around, and that is when I think we have to worry about inflation in a huge way. Why ? Because the people who print the currency always try to take the easy way out, simple as that. On the one hand they argue that they have to expand the money supply as the deflation worsens, and on the other hand when the deflation ends and we start a recovery they say they can't tighten because they will kill the recovery. Well you just can't have it both ways. You either don't ease and let the deflation work itself out or you have to tighten once the deflation is over, you just can't have both or you screw the currency up. Yet that is exactly what they will try to do, and this bear market rally is the perfect microcosm, you can see exactly what they are going to do right now as the dollar sinks against everything else (it was so strong it had to drop a little). During the worst of the first leg down in the markets the Fed said it had to do "quantitative easing" (buying Treasuries) to pump money into the economy because banks weren't doing any lending, yet when the markets started to rally from the lows the Fed now says it can't stop all the "stimulus" because it would kill the recovery. Now imagine we've gone down another leg, that housing has gotten even worse, that people are scrambling to get their hands on every $us out there by any means necessary including firing everyone who works for them, dumping all their assets into the markets, etc, so that they don't go bankrupt ... that drives the price of $us and other currencies through the roof, what will the Fed do then ? Yes, they'll hook the energizer bunny up to the printing press and it'll keep going, and going, and going ... because nothing outlasts the energizer bunny, and nothing outlasts the progressives' belief that they can print their way out of a deflation. And then the deflation will end ... and it is goodbye currency, 20$us/gallon milk, and all the rest.
Short version - people still have mortgages to pay, they haven't quit selling stocks and other assets to raise cash yet, they've just taken a little break ... bubbles pop, that's what they do ... paper burns - first the speculative stuff like insurance and derivatives, then stocks and bonds, etc, the last paper to burn is the currency. Eventually people get religion and stop wasting their time with snake oil like quantitative easing and start doing the things that create meaningful recovery such as balancing budgets, living within their means, etc, but that is all a long ways off. Decades of spending like there is no tomorrow doesn't just stop over night, people are reluctant to take off the rose colored glasses.
Just one person's opinion, and an opinion is all it is.