Deflation Storm Raging Globally

Thursday, February 4, 2010, may be a date to mark down as a pivotal one in the global economic cycle. As companies, consumers and nations struggle to rebound and refocus from the financial catastrophe of 2008 (actually the end result of decades of loose credit), more and more negative signs point to continued deterioration in capital, labor, commodity and equity markets.

What set the wheels in motion for a disastrous trading day in almost every global stock market, was the failed bond auction in tiny Portugal on Wednesday. The country failed to sell an expected 500 million Euros worth of one-year notes, as participation yielded the sale of only 300 million.

Early in the morning on Thursday, Moody's downgraded the outlook on the government of another tiny Eurozone nation, Lithuania, to negative, citing increased pressure due to a long-lingering recession and high debt-to-GDP ratio.

The two nations join Greece on the European list of sick economies, with no relief in sight. The global credit crunch continues to hamper the governments of smaller countries to borrow and spend. Fewer and fewer participants in government bond functions is like a loud bell clanging the death knell of debt-financed capitalist nations. Despite efforts by the US media to paper over our own failures in the bond market, news is gradually emerging, primarily from sources such as Robert Prechter of Elliott Wave and Jim Willie of Golden Jackass, that the entire US bond-debt function is a colossal sham, with government bonds being purchased by primary dealers and then repurchased by the Fed within a week's time.

The Chinese have virtually ceased participation in anything but the shortest-duration auctions, and other foreigners have followed suit. The Fed's policy of "quantitative easing" (printing money with no backing) was supposed to have ended in November, and, according to the Fed, it has stopped outright purchases of Treasuries, but the quiet, behind-the-scenes purchases of bonds from primary dealers - who cannot sell what they bought - works out to being exactly the same thing in practice.

All of these events are part of the positive feedback loop caused by the over-extension of credit without controls or proper risk analysis. What began in 2007 as the sub-prime mortgage crisis has extended to prime loans, commercial loans, junk bonds, corporate bonds, and finally all the way up the food chain to government bonds. Both Prechter and Willie predict that US Treasury bond defaults are bound to occur, though not until significant damage is done to other nations, particularly in Europe, already well underway.

What our "best and brightest" economists fail to either understand or are unwilling to admit, is that all of this nasty unwinding of credit and economy is the natural outcome of failed credit policies. Everyone, from college students all the way to the federal government, borrowed too much and now servicing the interest and principle payments are killing them. Residential and commercial real estate defaults are continuing to rise, another natural outcome of a bloated (by easy credit), overextended, mythical real estate boom. Today's global events are just another symptom of the same sickness, only to a greater degree.

Barely noticed amid the pre-market futures meltdown caused by another horrific reading of initial jobless claims - 480K - were the postponment of a pair of IPOs that were supposed to have priced overnight and sold into the market today. FriendFinder Networks (FFN) and Imperial Capital Group Inc (ICG) both were supposed to have gone off this week, but, due to weak market demand, neither went ahead with their offerings. Meanwhile, Ironwood Pharmaceuticals priced its offering of 16.7 million shares for $11.25 after its offering at $14 to $16 per share had met with considerable resistance. At the lowered price, Ironwood raised only 75% of their expected amount.

IPOs are having a truly difficult time coming to market. Investors are already highly risk-averse, and new issuance is seen as too risky. This is yet another deflationary signal as assets of all variety are put under microscopes and downgraded.

Then there's the firestorm surrounding Toyota. Problems keep propping up for the world's leading automaker. First, sticking gas pedals have forced a gigantic recall, and now, the brakes on their premium "green" maching, the Prius, are under scrutiny after having been the proximate cause for at least four US crashes. It's interesting speculation, but worth noting in an age of skulldruggery at the highest levels, that these problems should be happening to a foreign automaker just as American car companies find themselves in severe economic conditions. Most of the accidents are occurring in the US, where, incidentally, the parts, and, to some extent, the entire vehicles, were manufactured.

The next case is commodities. Oil, gold and silver are being hammered yet again, though this should come as no surprise. Oil consumption continues to be driven down by slack demand, in addition to artificial overpricing, and, while gold and silver are fine hedges against inflation, they can't escape the inevitable vortex of deflation. Like any other asset, they will be devalued, especially gold, which has been on a tear to the upside for the past decade. All those companies which were advertising "cash for gold" are going to end up just like buyers of overpriced homes in Southern California, upside-down and hopelessly in debt, though some may fare better than others as the metals are at least a somewhat reliable store of value, better than beanie babies, stocks or lawn furniture, though neither, in their raw investment form, have any functional purpose.

All of this sent investors scrambling on Thursday in advance of Friday morning's Non-farm payroll data. Anyone with half a brain is getting out of the way today, selling shares in anticipation of yet another disappointment.

Here's another mention of Great Depression II, only this time, it's in the mainstream.

I sold all my gold today before it went any lower. I received a good price, all cash, and now will watch as its price erodes. Cash is KING!

On Wall Street, they're beginning to run scared. All the talk this AM on CNBC (pays to watch it so you know what NOT to do) was about retail sales, and how the major chain stores reported better-than-expected results for January. But, let's ask, better than what? Last January, which stuck to high heaven? Exactly, and nobody bothered to mention that people who are shopping at Kohl's, Macy's et.al. are idiots with free money from unemployment, SS, disability, etc. The real carnage came from unemployment and the Sovereign Debt crisis mentioned at the beginning of this post.

Here's how stocks looked at the end of the day:

Dow 10,002.18, -268.37 (2.61%)
NASDAQ 2,125.43, -65.48 (2.99%)
S&P 500 1,063.11, -34.17 (3.11%)
NYSE Composite 6,787.86, -254.76 (3.62%)

Those are some pug-ugly numbers, and the volume was elevated, meaning the rush for the exits has begun. You, and your silly 401k or retirement plan, are trapped. Get ready for another colossal blow to your dreams and aspirations, because it's coming and this time it has been telegraphed loud and clear. Declining issues trampled all over the few gainers, 5566-828, a huge 7-1 ratio. And, as I've been saying would happen the past few weeks, the new highs-new lows indicators finally rolled over. There were 117 new lows and just 96 new highs. Folks, it's OVER.

NYSE Volume 6,857,842,500
NASDAQ Volume 2,819,441,000

The Dow finished at its lowest level since November 4, 2009, almost exactly 3 months. The S&P broke through key support levels at 1071 and 1065 and appears doomed for a return to 960 in short order. The NASDAQ didn't do any better, finishing just above its November 6 close.

Commodities were savaged as investors sold to raise cash. Oil lost $4.01, to $72.97. Gold fell $48.00, to $1064 per ounce. Silver shed 99 cents - an enormous 7% decline - to finish at $15.33.

What's truly frightening this time around is that this is only the beginning. All talk of the V-shaped recovery is now being laughed right out of town. Owning anything - stocks, bonds, homes, commercial real estate, art, gold, silver, barrels of oil, sports cards, you name it - may prove fatal to your financial health.

Here's a tip: If you're buying anything today, look at the price, offer 25% less, and you just may get it. One caveat, it still may not be a good deal six months from now. Be careful.

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