Friday, August 22, 2008

2nd AM Post: The Deflation Monster

Trout Fishing, Yangshou, China
by Jacob Halaska

A Rally With Serious Muscle


A plethora of technical indicators tells me that the great bull market that began in the early 1980s is still intact, and that new highs are coming, maybe not immediately, but in the weeks and months ahead.

On May 4 I wrote a post entitled "New Tablets from the Dow Theory Gods". The quote above was from that post--and it was from an article in Barron's (see post for link). If you'd like me to e-mail you that article--get your people to contact my people at, and I'll send it to you.

One of the most satisfying things about blogging is that you keep a rather easily indexed source of "stuff". It's easy to set up a blog, and you can make it private so no one but you sees it. You, too, can then write what you like and then search for it easily.

I've not seen this rally yet. Now, I see some rather dour news from Russell as quoted in Barron's (again, if you want this article, rinse and repeat from above).

"From what I see, the markets are telling us to prepare for hard times, and a global spate of the worst deflation to be seen in generations. This is why gold has been sinking, this is why stocks have been falling -- big money, sophisticated money, is cashing out, raising cash, preparing for world deflation," Russell writes.

The Inflationary Fever Is About to Break


As a lay person, I've tried to wrestle over these past three years (2 years publicly on this blog), and I think mostly successfully, with market concepts that are foreign to my education and experience. I've been feeling for a while that we were at a crossroads of our global economy choosing hyperinflation v. deflation. My particular feeling was that hyperinflation was unlikely given that the Central Bankers could not duplicate the amount of liquidity (well, perhaps fractionally). Regardless, it seemed to me that investment strategies under either scenario were markedly different and that choosing wrongly could be trouble for one's portfolio.

Deflation is not a pretty prospect with respect to those heavily invested in assets that will deflate. My own vacillation has been expecting that with money supply tight, interest rates would go up. But given that everything is valued on a relative basis, I may rethink that.

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