Our Curious Stock Markets: Bernanke Speaks, Markets Tank

So, what did Federal Reserve Chairman, Ben Bernanke, say that markets, bond traders and equity traders didn't already know?

Hardly a thing, except for this statement slipped neatly into the fourth paragraph of his prepared remarks:

Although overall inflation has fluctuated, partly reflecting changes in energy prices, by a number of measures underlying inflation has trended down over the past two years.

In other words, deflation, not inflation, has been the overwhelming economic force since just before the market malaise of 2008.

Now, that may come to news to some, though not to regular readers of this blog, as I've been reporting and indicating - for probably than anybody wishes to recall - that deflation has been the dominant trend since markets began their decline in August, 2007. That's three years ago, so maybe Mr. Bernanke and the minions of stock traders, analysts and "economists" (what a bunch of bozos these types have proven to be!), are just catching on, and maybe they're still behind the curve.

There are good reasons to enjoy and promote deflation, especially if you are not either wealthy, a banker or otherwise dependent on rising asset values. Those reasons include, but are by no means limited to, potential for significant capital appreciation (hard money) by correctly pricing and purchasing assets through forced liquidations, general lower prices for all manner of daily use goods and services, significant arbitrage situations, lower costs for everything from business startup to attorney fees, and the list goes on and on.

As asset values fall, as they have the past two years, and as there seems to be no end in sight for the continuance of deflation as the dominant trend, it is wise to be always in a strong cash position, with as little debt as possible, and on the look out for price dislocation.

The stock market and individual stocks have been ripe ground for wide variances (volatility) in pricing value, though stocks are not generally for individuals (until the past twenty years or so) and should only be employed for income or capital growth as a small portion of one's overall portfolio. I continue to recommend raw land, preferably arable, cash, cash equivalents, tools of trade and transportation devices, with the bulk of one's allocations in cash (anywhere from 40-80%).

If you own a home, you should be doing everything in your power to own it free and clear. Despite the headlines detailing the horror of the housing market, there have been few times better than the past six months to invest in one's own home. It is an asset, in addition to providing a secure environment for oneself and one's family, that can enhance one's overall financial position and provide leverage for any manner of transaction. All it takes is a little ingenuity, some papers supporting your strong position and a little persuasion to counter-parties of any given transaction.

But the tiny sentence in Bernanke's testimony before the US Senate Committee on Banking, Housing, and Urban Affairs apparently came as somewhat of a shock to astute followers of Fed-speak. The stock market dived and bonds improved on that phrase, and the move extended through and beyond the extent of his statement and for the rest of the trading day.

The move from the start of his testimony, at 2:00 pm ET, through its conclusion and well into his question and answer period at about 3:00 pm, took the Dow from 10,250 all the way down to 10,065, a 185-point drop, erasing Tuesday's gains and putting the Dow up just 22 points from where it ended the previous week.

Dow 10,120.53 109.43 (1.07%)
NASDAQ 2,187.33 35.16 (1.58%)
S&P 500 1,069.59 13.89 (1.28%)
NYSE Compos 6,731.16 88.88 (1.30%)

As expected, decliners overwhelmed advancers, 4497-1970, though new highs remained well above new lows, 239-106, but, for the third day in a row, NASDAQ stocks showed more new lows (56) to new highs (31), a troubling trend underscoring tight credit conditions for smaller, younger, more speculative firms. Volume was at its best level of the week, another disconcerting data point for bulls to ponder, as the previous two days of gains were on lower volume. Obviously, there is a great deal of risk intolerance in the markets.

NASDAQ Volume 2,245,542,250
NYSE Volume 5,465,722,000

Commodities felt the pinch of deflation as well, with crude, after hitting a one-month high on the expiration of the August contract yesterday, slipped $1.02, to $76.56 on the first day of the September contract. It doesn't take a genius to understand what that means, though in futures trading parlance, it's known as "backwardation," a condition wherein the cash price is higher than the futures price. It's been seen in gold and silver recently, and, though not a textbook case here, one contract ending on a high and the next day's new contract selling immediately lower, constitutes the same dynamic.

Gold was up just 10 cents, to $1,191.60, with silver higher by 11 cents, at $17.80, though both traded lower following the New York print around 1:30 pm.

Earnings reports from a wide variety of companies were mostly in line, with few surprises to either the upside or down, though Morgan Stanley (MS) was particularly outstanding, especially in comparison to their chief rival, Goldman Sachs (GS). bank of America, the nation's #1 zombie bank, fell again, losing 41 cents, to $13.36 (3%). The stock has fallen 31.4% since its high of 19.47 on April 14, 2010. Not only does BofA suffer from enormous loan losses and continuing deterioration in their loan portfolio, they are not making new loans of any substantial size and will be under pressure from the newly-passed financial reform legislation - along with most other large banking institutions - for a considerable period of time, which, were I Ben Bernanke, might easily be interpreted as meaning three to four years.