Getting a Grip on Deflation

It's been widely reported that while Fed chairmen, such as Ben Bernanke and his predecessor, Alan Greenspan, dread inflation, what really keeps them up at night is the opposite, deflation. There's probably more than just a kernel of truth to that nugget, and while it can be safely assumed that Greenspan, pushing 90, generally gets plenty of rest, Bernanke is probably having more sleepless nights than he would have ever imagined.

The irony for "Helicopter Ben," who got the nickname when he once opined - when a lowly Fed governor and not head of the whole shooting match - that the US has the ultimate hedge against deflation, a printing press, and that the Fed could "drop money from helicopters" if that was needed to stem a serious slowdown in the economy. Ironic, indeed, because Bernanke has used all the tools at his disposal, and then some, to halt what began as a "contained" subprime mortgage brush fire in 2007, and morphed into a worldwide credit conflagration in 2008 - and none of it has worked.

Today's rise on the US stock markets was nothing more than noise in the middle of a vicious bear market environment. Nothing goes straight up or down, but the Dow seems stuck permanently below the 9000 mark and the other indices haven't gotten much traction either.


Dow 8,761.42, +70.09 (0.81%)
NASDAQ 1,565.48, +18.14 (1.17%)
S&P 500 899.24, +10.57 (1.19%)
NYSE Composite 5,631.07, +108.61 (1.97%)

Ben Bernanke has presided as the Fed Chairman over the worst decline in stocks and the most gargantuan evaporation of wealth EVER. Note, that's not "since the Great Depression," but of all time. An estimated $13 trillion dollars has vanished from the brokerage accounts of citizens, bank balance sheets and real estate values in just the last 16 months, much of it disappearing in just the last three.

The Fed has slashed interest rates, opened its lending facility to more than just member banks, helped Treasury give away a couple hundred billion more to banks on the brink and continues to watch over a global economy that every day sinks lower and lower down the deflation ladder. Home prices, stocks, bond yields, commodities and everything else is being repriced lower on nearly a daily basis. That today and other days are more encouraging that the days of steep losses is insignificant noise in the grander scheme. All asset classes are being treated the same: as worth less than yesterday.

Deflation's specter need not alarm everyone. In fact, as stated in previous posts, for many, deflation is a kind of blessing, giving consumers massive discounts on everything from fish to bread to DVDs. Those who worry about the effect of deflation are anyone with large sums of money, especially if those sums are invested in stocks, art, bonds, real estate or businesses. Of course, some items, like rent, for instance, or taxes, are not falling as quickly as others, if at all, but that day will come. It has to, as a part of the economic cycle, along with decreases in wages (or, more the more commonly-used substitute today: layoffs) and other basic costs, expenses and wealth measurements.

So, the real point is that as long as you have income of some kind, sufficient to meet your needs, you should be fine. If your income is shut off, you will more than likely be unable to replace it in whole (in other words, if you lose your job, your next one is likely to pay less). Those are the real sufferers. Not the banks, bankers, brokers, dealers, etc. The pain is being shared by the unemployed or underemployed and businesses who have lost access to that spending power.

In a truly democratic society, which the USA, is, of course, not, economic cycles would be eliminated by shared pleasure and pain. All wages would go up or down by the same percentage, as would taxes and prices. Naturally, in a capitalist world, that is impossible. while there is pain for some, there still is gain for others, though the two are unequal and unbalanced.

On the day, more stocks gained than lost, 4537-2149. The number of new highs to new lows remained almost static with 191 new lows to just 13 new highs. Volume trended lower than what it has been recently. Whatever rallying mood there was in the AM, dissipated badly in the afternoon, with the Dow briefly sinking into negative territory after 2:00 pm.

NYSE Volume 1,305,271,000
NASDAQ Volume 1,987,494,000

Oil gained $1.45 to close at $43.52. Gold was up $34.60, to $808.80. Silver was higher by 35 cents, to $10.20 per ounce. All of these commodity traders, especially those in precious metals markets are still insisting that theirs is the only "true" currency, that gold should soar to $2000 any day now. They are sorely mistaken. Gold is a great hedge against inflation. Against deflation, it is just another asset waiting to be devalued.

One item of note was today's Monthly Wholesale Trade Report. [PDF], which showed wholesale inventories and sales diverging at an alarming pace, year over year. while sales were lower on a month-to-month basis (-1.1%), they were actually higher than a year ago (+2.7%). Inventories were down 1.1% from September to October, but up 8% from a year ago. The ratio of inventory to sales is rising rapidly, and considering that the data is already more than a month old, is likely to be rising even today. Growing inventory during a sales slump is not a problem most businesses wish to encounter, but it is the prevailing environment today. Obviously, product is moving at a slower pace off wholesalers' shelves, another sign of the times. Consumer spending is grinding to a halt. After the holidays, it will get worse.

OK, that's today's lesson on How to Survive the Second Great Depression. Have a steak for dinner tonight. Beef is cheap.