When you buy into a stock that refuses to go up in a meaningful way (Pfizer over the past five years is a good example) you have what is known among traders as "dead money." It's just sitting there doing nothing, not earning interest, just kind of lying around.
Now, that might be a good thing during a deflationary debacle like the one we're currently undertaking, so, maybe the dead money issue isn't all that earth-shattering a concept, after all, though, if you're used to the usual 15% returns that Wall Street hucksters promise, money lying around isn't your typical bag.
For the rest of us, those smart enough to stick our money in a coffee can or inside a wall safe, it's all well and good, so long as prices don't go ridiculously higher all of a sudden. There are a slew of misconceptions about money and its uses and usefulness, most of them aimed at baby-boomers with excess cash they're supposedly saving for a child's college, or a wedding or retirement, and most of those misconceptions usually involve keeping your money at work and not lazing around in a lounge chair in the back yard getting a tan.
However, based on the trading (in)activity the past few days, the concept of dead money might just be catching on. Stocks have just undergone a pretty significant rally - first, off the lows of March 2009, and more recently, about an 11% move back to where they now have settled, and nobody seems willing to sell, or to buy. Volume has dried up rather abruptly over the past two days, leaving open the question of whether Wall Street is even relevant anymore.
It seems that the majority of Americans who don't really have a whole lot of faith in the publicly-traded equity markets and have moved, over the past two years, into largely bond-related funds, are more than content with just keeping what they have instead of risking it in stocks. With the small investor clearly out of the market, that leaves mostly professionals and the very wealthy to do most of he trading on a day-to-day basis, but even they have become significantly more risk-averse of late, which means that the bulk of the trading has been left in the rather unstable hands of hedge fund managers and high-frequency traders.
Now, when these boys slow down there's really nothing left to keep markets bubbling, creating a sea of dead money, or more in the vernacular of economists, a liquidity crunch, which is precisely what we're staring at today.
It would seem, after the worst weekly unemployment claims figures since April came out this morning, and retail sales from a wide variety of chain stores showed poorly, that stocks would be sold off rather dramatically, and that seemed to be the case early on, but, buyers stepped in midday to soak up some of the losses, leaving the markets in a rather untidy state of affairs, with all indices down slightly, spending the entire session in the red, on volume that has to be one of the lightest five days of the year.
Truly pathetic, it was.
Dow 10,674.98, -5.45 (0.05%)
NASDAQ 2,293.06, -10.51 (0.46%)
S&P 500 1,125.81, -1.43 (0.13%)
NYSE Composite 7,174.27, -7.87 (0.11%)
Market internals showed a different side of the story as declining issues ran rampant over advancers, 3898-2509. New highs managed to maintain their sizable edge over new lows, 372-92.
NASDAQ Volume 1,704,054,000
NYSE Volume 4,089,902,750
In commodities, the September light crude oil futures contract fell by 48 cents, to $82.01. Gold gained $3.50, to finish at $1,197.20. Silver was up 4 cents, to $18.31.
With the July non-farm payroll report out tomorrow prior to the open, one would have expected a little more excitement, especially in light of the dreary economic data that seems to roll onto the street every day, but there was little movement overall, suggesting that these markets are suffering from a lack of interest bordering on apathy, due to a number of factors, but mostly, distrust, fear, uncertainty of the future and having been burned once too often.
It's the same kind of thing that happens with crooked card games. In the early stages, there a pigeons a'plenty. But, once word begins to get around and a few mouthy types get taken to the cleaners, the game dries up, and the cheaters end up playing penny-ante games amongst themselves, wiling away the hours, days and weeks.
We may be witnessing the initial stages of the final collapse of the Wall Street Ponzi scheme. They may have run out of suckers.
Thursday, August 5, 2010
Wednesday, August 4, 2010
A Thousand Points of (False) Hope
Stocks on the major indices closed near their highs of the day, pushing the averages ahead for the 14th time in the last 21 sessions - about a month's worth.
Most of the upside movement since the 4th of July holiday has been on lighter-than-normal volume, and today was certainly no exception. Out of a universe of over 3000 stocks, the top five most active on the NYSE accounted for 12.5% of the volume, a skewing to the degree of magnitude of nearly 100 times normal, proving that when analysts say that most people trade the same stocks, they surely aren't lying about it.
Those five stocks - Citigroup (C), Bank of America (BAC), Motorola (MOT), Pfizer (PFE) and Ford (F) all trade for under $20 per share and have since Autumn of 2008, when the systemic financial collapse made everyone rethink valuation models. It's patently clear that investors have gotten stuck in a routine, especially in the case of Citi and BofA, two stocks which, under better-managed conditions would have been bankrupted and de-listed long ago. The pair of zombie banks consistently lead the most actives, as gamblers attempt to profit from fairly large percentage moves in what have become, essentially, penny stocks.
Another interesting side note on those top five is that all but Bank of America posted a gain, though Citigroup's was only a slim penny advance. BofA dropped by 14 cents, making the two most actively traded stocks the worst of the bunch. One can only speculate as to why so many trades occur on these two dogs, but there are, almost without a doubt, plenty of sellers, long-term holders who a quietly slipping their money out of them.
The advances over the past three days have pushed the Dow to a 1000-point gain over the past month, putting them right at (for Fibonacci fans) a 67% retracement of the 1500-point decline which commenced from mid-April to the first days of July.
At what appears to be a key inflection point, stocks face an uphill battle to surpass the April high of 12,200 on the Dow. Since the latest move has been fueled largely by excellent second quarter results from a wide swath of companies (notably, neither BAC nor C among them), the propellant seems to be missing for the final push, replaced by two key data points: Thursday's unemployment claims figures and Friday's July non-farm payroll report.
There were an equal amount of groans and cheers this morning when ADP released its own private payroll report for July, showing 42,000 new jobs being created during the month. Since the report does not include government employment, it serves as a proxy for Friday's figures, which are likely to come in only slightly on the positive side or even negative, due to layoffs from expired census employment. Thursday morning's unemployment data will provide another clue.
It's probably safe to say, barring any outsize surprise on the upside, that stocks are ready for a reversal after a month in a fantasy zone, though those of the bearish camp will contend that the stock market does not represent the US economy, and thus will continue to climb on their own.
There is some degree of truth to that argument, but if US-based companies refuse to hire US citizens, as they have for the past two years (ad for some, much longer than that), there will be bottom-line damage eventually, unless the companies in question are doing 75% or more of their business outside the USA, in which case they should be listed on another, non-US exchange. The US market is still the largest and most important, and people without jobs cannot continue to buy good and services at a steadily-growing rate. Of course, should congress deem that unemployment benefits should continue indefinitely, beyond the currently-absurd 99 weeks, companies might as well just lay off all US employees and allow the government to pick up the tab.
ISM services index rose from 53.8 in June, to 54.3 in July, eliciting another big whoop from perma-bulls, various tea-partiers and clueless analysts, who seem to be everywhere at once this summer.
Dow 10,680.43, +44.05 (0.41%)
NASDAQ 2,303.57, +20.05 (0.88%)
S&P 500 1,127.24, +6.78 (0.61%)
NYSE Composite 7,182.14, +35.15 (0.49%)
Advancing issues dominated decliners on the day, 4577-1880; new highs soared past new lows, 408-68; but volume, as previously mentioned, was the real story, well below normal levels and embarrassingly below what used to serve as average prior to the 2008 meltdown.
NASDAQ Volume 1,881,489,125
NYSE Volume 4,293,061,500
Commodity traders seemed unable to gain traction. Oil paused, dropping 8 cents, to $82.47. Gold gained $8.50, to $1,193.70, though silver did not follow on, losing 14 cents to $18.26.
With new economic data on the horizon, there appears to be no new catalyst with which to lift equities near-term, and longer-term prospects, heading into 2011, also seem pinned to dim, or even false, hopes.
Most of the upside movement since the 4th of July holiday has been on lighter-than-normal volume, and today was certainly no exception. Out of a universe of over 3000 stocks, the top five most active on the NYSE accounted for 12.5% of the volume, a skewing to the degree of magnitude of nearly 100 times normal, proving that when analysts say that most people trade the same stocks, they surely aren't lying about it.
Those five stocks - Citigroup (C), Bank of America (BAC), Motorola (MOT), Pfizer (PFE) and Ford (F) all trade for under $20 per share and have since Autumn of 2008, when the systemic financial collapse made everyone rethink valuation models. It's patently clear that investors have gotten stuck in a routine, especially in the case of Citi and BofA, two stocks which, under better-managed conditions would have been bankrupted and de-listed long ago. The pair of zombie banks consistently lead the most actives, as gamblers attempt to profit from fairly large percentage moves in what have become, essentially, penny stocks.
Another interesting side note on those top five is that all but Bank of America posted a gain, though Citigroup's was only a slim penny advance. BofA dropped by 14 cents, making the two most actively traded stocks the worst of the bunch. One can only speculate as to why so many trades occur on these two dogs, but there are, almost without a doubt, plenty of sellers, long-term holders who a quietly slipping their money out of them.
The advances over the past three days have pushed the Dow to a 1000-point gain over the past month, putting them right at (for Fibonacci fans) a 67% retracement of the 1500-point decline which commenced from mid-April to the first days of July.
At what appears to be a key inflection point, stocks face an uphill battle to surpass the April high of 12,200 on the Dow. Since the latest move has been fueled largely by excellent second quarter results from a wide swath of companies (notably, neither BAC nor C among them), the propellant seems to be missing for the final push, replaced by two key data points: Thursday's unemployment claims figures and Friday's July non-farm payroll report.
There were an equal amount of groans and cheers this morning when ADP released its own private payroll report for July, showing 42,000 new jobs being created during the month. Since the report does not include government employment, it serves as a proxy for Friday's figures, which are likely to come in only slightly on the positive side or even negative, due to layoffs from expired census employment. Thursday morning's unemployment data will provide another clue.
It's probably safe to say, barring any outsize surprise on the upside, that stocks are ready for a reversal after a month in a fantasy zone, though those of the bearish camp will contend that the stock market does not represent the US economy, and thus will continue to climb on their own.
There is some degree of truth to that argument, but if US-based companies refuse to hire US citizens, as they have for the past two years (ad for some, much longer than that), there will be bottom-line damage eventually, unless the companies in question are doing 75% or more of their business outside the USA, in which case they should be listed on another, non-US exchange. The US market is still the largest and most important, and people without jobs cannot continue to buy good and services at a steadily-growing rate. Of course, should congress deem that unemployment benefits should continue indefinitely, beyond the currently-absurd 99 weeks, companies might as well just lay off all US employees and allow the government to pick up the tab.
ISM services index rose from 53.8 in June, to 54.3 in July, eliciting another big whoop from perma-bulls, various tea-partiers and clueless analysts, who seem to be everywhere at once this summer.
Dow 10,680.43, +44.05 (0.41%)
NASDAQ 2,303.57, +20.05 (0.88%)
S&P 500 1,127.24, +6.78 (0.61%)
NYSE Composite 7,182.14, +35.15 (0.49%)
Advancing issues dominated decliners on the day, 4577-1880; new highs soared past new lows, 408-68; but volume, as previously mentioned, was the real story, well below normal levels and embarrassingly below what used to serve as average prior to the 2008 meltdown.
NASDAQ Volume 1,881,489,125
NYSE Volume 4,293,061,500
Commodity traders seemed unable to gain traction. Oil paused, dropping 8 cents, to $82.47. Gold gained $8.50, to $1,193.70, though silver did not follow on, losing 14 cents to $18.26.
With new economic data on the horizon, there appears to be no new catalyst with which to lift equities near-term, and longer-term prospects, heading into 2011, also seem pinned to dim, or even false, hopes.
Tuesday, August 3, 2010
Deflation Debate Rages as Fed Ponders QE2
Editor's Note: This is a post covering two days - Monday and Tuesday, August 2 and 3 - due to my summer schedule, which includes a late afternoon round of golf on Mondays. The market stats are for Tuesday.
For conspiracy theorists, the constant droning about deflation which began on Friday with St. Louis Fed President James Bullard appearing on "Squawk Box" in the aftermath of his paper, Seven Faces of “"The Peril”", seems ominous enough to conclude that the new master plan is to plunge the economy into a deflationary depression.
While that may or may not be so, there are some views that make future prospects - even with the deflation element added in - not quite so frightening, such as Jim Rickards' thought-provoking response to Paul Krugman that deflation can actually benefit the economy, though Gary North's Economic Warnings From Niall Ferguson and Nassim Taleb and the Golden Jackass (Jim Wilie CB) Kindergarten Double Dip Recession Economics offer less-rosy scenarios.
Of course, here at Money Daily, my position has been consistent - that we've been deflating since August of 2007 - running diametrically-opposed to the views of Puru Saxena, who boldly penned, Debunking the Mainstream Economists Deflation Myths, while neither establishing economic realities as "myths" nor debunking any deflationary tendencies.
For whatever it's worth, the view here is that deflation is a soluble way out of the financial conundrum and relatively painless for regular people who would like their dollars to stretch a little further. For those invested in non-liquid assets with malleable price structures, the result of prolonged deflation might not be so pretty, and could actually be quite messy, ending up in bankruptcy court, where, indeed, many of the mal-investments of the past 20 years belong.
Since the non-stop talking heads on CNBC can't seem to leave the topic alone, it's probably a good sign that deflation is well underway. Either that, or they're purposely trying to scare investors, for whatever nefarious purpose they or their corporate masterminds may have concocted. It wouldn't be the first time that the on-air talent at CNBC was so far behind the curve that it appeared as a straight line, nor will it be the last. One only has to recall the archives from the Fall of '08 for some fresh views of the then-shocked and dismayed countenances witnessing the market meltdown in unanticipated awe.
If deflation truly takes hold and begins a spiral downward - something oil certainly seems not to want to do - day-to-day changes in stock or market indices will become more and more irrelevant over the near term, as will the generally feeble attempts by the Fed to do anything about any part of the economy, except, that is, to make it worse.
A paragraph from Jim Wilie's latest article (linked above) sums up the current catastrophe nicely:
What seems clear is the Fed's desire to re-inflate via Quantitative Easing once again, a plan that has largely failed once and continues to do so, with what has become known as QE2. Should the Fed decide to expand its purchases of Treasuries, agency and mortgage slush, the result will be more of the same: banks will hoard cash, consumers won't spend and the dollar will be reduced in value against other currencies, which, naturally, may be the Fed's plan in a nutshell.
Debasing the greenback may (probably) not stimulate the US economy, but it will have the effect of improving our trade balance if only by making exports cheaper. That benefit accrues mostly to multi-national corporations, the very same ones that have been reporting stellar second quarter results while the real world wallows in a sea of debt, fear and uncertainty.
They'll probably do it, and it will probably fail, deflation will rule, and the brainy folks who call themselves economists can all go scratch their collective heads. While inflation, according to Milton Friedman, is always a "monetary event," deflation will prov to be a global fiscal event with long-lasting implications.
On Monday, traders sent stocks soaring like the Yankees had just won the World Series, based upon some very suspect ISM numbers, which actually fell from the previous month and were only buoyed by the artificial stimulus of public sector (government) spending.
Tuesday saw no visible follow-through, a hint that the massive Monday rally was only a trading ploy, designed to maximize profits from shorting into Friday's non-farm payroll report. Stocks plummeted right off the open and spent the rest of the day underwater, partially recovering.
Dow 10,636.38, -38.00 (0.36%)
NASDAQ 2,283.52, -11.84 (0.52%)
S&P 500 1,120.46, -5.40 (0.48%)
NYSE Composite 7,146.99, -27.91 (0.39%)
Decliners led advancers, 4000-2430; new highs lead new lows, 361-73. Volume was downright pathetic, even for August.
NASDAQ Volume 2,011,883,125
NYSE Volume 4,551,798,500
Oil continued to confound, gaining $1.21, to $82.55, an overshoot of dramatic proportions. Gold gained $1.80, to $1,185.20, while silver was unchanged, at $18.41.
For conspiracy theorists, the constant droning about deflation which began on Friday with St. Louis Fed President James Bullard appearing on "Squawk Box" in the aftermath of his paper, Seven Faces of “"The Peril”", seems ominous enough to conclude that the new master plan is to plunge the economy into a deflationary depression.
While that may or may not be so, there are some views that make future prospects - even with the deflation element added in - not quite so frightening, such as Jim Rickards' thought-provoking response to Paul Krugman that deflation can actually benefit the economy, though Gary North's Economic Warnings From Niall Ferguson and Nassim Taleb and the Golden Jackass (Jim Wilie CB) Kindergarten Double Dip Recession Economics offer less-rosy scenarios.
Of course, here at Money Daily, my position has been consistent - that we've been deflating since August of 2007 - running diametrically-opposed to the views of Puru Saxena, who boldly penned, Debunking the Mainstream Economists Deflation Myths, while neither establishing economic realities as "myths" nor debunking any deflationary tendencies.
For whatever it's worth, the view here is that deflation is a soluble way out of the financial conundrum and relatively painless for regular people who would like their dollars to stretch a little further. For those invested in non-liquid assets with malleable price structures, the result of prolonged deflation might not be so pretty, and could actually be quite messy, ending up in bankruptcy court, where, indeed, many of the mal-investments of the past 20 years belong.
Since the non-stop talking heads on CNBC can't seem to leave the topic alone, it's probably a good sign that deflation is well underway. Either that, or they're purposely trying to scare investors, for whatever nefarious purpose they or their corporate masterminds may have concocted. It wouldn't be the first time that the on-air talent at CNBC was so far behind the curve that it appeared as a straight line, nor will it be the last. One only has to recall the archives from the Fall of '08 for some fresh views of the then-shocked and dismayed countenances witnessing the market meltdown in unanticipated awe.
If deflation truly takes hold and begins a spiral downward - something oil certainly seems not to want to do - day-to-day changes in stock or market indices will become more and more irrelevant over the near term, as will the generally feeble attempts by the Fed to do anything about any part of the economy, except, that is, to make it worse.
A paragraph from Jim Wilie's latest article (linked above) sums up the current catastrophe nicely:
The chain of ignominy includes gaping blind spots, blatantly wrong forecasts, minimized ignitions that spread crisis, misguided focus on goofy indicators, outright removal of important indicators, sloppy deception of monetization efforts (see last week's article), clumsy justification of Wall Street welfare, backwards perception of Too Big To Fail banks, and lying before the USCongress. The nation is dominated by fools who profess the lasting benefits of 'Hand to Mouth' approaches like tax rebates, purchase credits, jobless insurance extensions, and helicopter drops. Their worst investments are their biggest investments, like Fannie Mae and AIG nationalizations travesties. Harken back only to last winter, when economists were talking about a second half recovery, running all the red lights and stop signs. Then they shifted the klapptrapp to claims of a jobless recovery, which should evoke laughter from its impossibility. The economic counsel has forgotten what capital formation means, while they prepare for their next tourniquet to be applied to hemorrhages. The objective of monetary policy and banking policy is not recovery, but instead very clearly to retain power.
What seems clear is the Fed's desire to re-inflate via Quantitative Easing once again, a plan that has largely failed once and continues to do so, with what has become known as QE2. Should the Fed decide to expand its purchases of Treasuries, agency and mortgage slush, the result will be more of the same: banks will hoard cash, consumers won't spend and the dollar will be reduced in value against other currencies, which, naturally, may be the Fed's plan in a nutshell.
Debasing the greenback may (probably) not stimulate the US economy, but it will have the effect of improving our trade balance if only by making exports cheaper. That benefit accrues mostly to multi-national corporations, the very same ones that have been reporting stellar second quarter results while the real world wallows in a sea of debt, fear and uncertainty.
They'll probably do it, and it will probably fail, deflation will rule, and the brainy folks who call themselves economists can all go scratch their collective heads. While inflation, according to Milton Friedman, is always a "monetary event," deflation will prov to be a global fiscal event with long-lasting implications.
On Monday, traders sent stocks soaring like the Yankees had just won the World Series, based upon some very suspect ISM numbers, which actually fell from the previous month and were only buoyed by the artificial stimulus of public sector (government) spending.
Tuesday saw no visible follow-through, a hint that the massive Monday rally was only a trading ploy, designed to maximize profits from shorting into Friday's non-farm payroll report. Stocks plummeted right off the open and spent the rest of the day underwater, partially recovering.
Dow 10,636.38, -38.00 (0.36%)
NASDAQ 2,283.52, -11.84 (0.52%)
S&P 500 1,120.46, -5.40 (0.48%)
NYSE Composite 7,146.99, -27.91 (0.39%)
Decliners led advancers, 4000-2430; new highs lead new lows, 361-73. Volume was downright pathetic, even for August.
NASDAQ Volume 2,011,883,125
NYSE Volume 4,551,798,500
Oil continued to confound, gaining $1.21, to $82.55, an overshoot of dramatic proportions. Gold gained $1.80, to $1,185.20, while silver was unchanged, at $18.41.
Friday, July 30, 2010
Limited Market Reaction to 2Q GDP
Released an hour prior to the opening of the markets on Friday, the Bureau of Economic Analysis, U.S. Department of Commerce said second quarter GDP in the US was running at a 2.4% annual growth rate.
That was unsurprising. What did raise some eyeballs was the revision, by an entire percentage point, from +2.7% to +3.7%, of first quarter GDP. The large increase was likely due to the annual three-year revision the BEA undertakes each July. Since 2007, 2008 and 2009 were mostly revised downwardly, that made the first quarter of 2010 look better than it actually was, since the increase was based from lower overall figures.
It's a nice accounting trick, though in real terms, it means that the first half of the current year was hardly worthwhile. Real, unadjusted growth was likely negligible once one wades through the various modeling and statistical fudging done to the numbers.
Oddly enough, the whiz kids on Wall Street didn't quite know what to make of it all, settling instead to just churn stocks around the flat line after rebounding from a nearly 1% loss at the open. Being the final trading day of July, it was a little too neat to take seriously. The best that could be said is that nobody was in a mood to panic, at least not just yet.
Dow 10,465.94, -1.22 (0.01%)
NASDAQ 2,254.70, +3.01 (0.13%)
S&P 500 1,101.60, +0.07 (0.01%)
NYSE Composite 6,998.99, +4.42 (0.06%)
Market internal were a whole other matter, as advancers clocked past decliners, 3708-2708, and new highs were once again well ahead of new lows, 280-90. Volume was just a touch under average for mid-summer.
NASDAQ Volume 2,168,665,750
NYSE Volume 4,697,753,000
Oil finished another 59 cents higher, at $78.95, for the September contract. Gold added $12.20, to $1,183.40, and silver tacked on 38 cents to close at an even $18.00 in New York.
For all the emphasis put on the first GDP estimate for the second quarter, the resulting trade was anything but exciting. The Dow traded in a range of 160 points top to bottom, but mostly in a tight pattern which deviated less than 30 points in either direction off the previous close.
One can safely assume that markets will experience more volatility come Monday and in ensuing sessions, as current market conditions remain quite unsettled.
That was unsurprising. What did raise some eyeballs was the revision, by an entire percentage point, from +2.7% to +3.7%, of first quarter GDP. The large increase was likely due to the annual three-year revision the BEA undertakes each July. Since 2007, 2008 and 2009 were mostly revised downwardly, that made the first quarter of 2010 look better than it actually was, since the increase was based from lower overall figures.
It's a nice accounting trick, though in real terms, it means that the first half of the current year was hardly worthwhile. Real, unadjusted growth was likely negligible once one wades through the various modeling and statistical fudging done to the numbers.
Oddly enough, the whiz kids on Wall Street didn't quite know what to make of it all, settling instead to just churn stocks around the flat line after rebounding from a nearly 1% loss at the open. Being the final trading day of July, it was a little too neat to take seriously. The best that could be said is that nobody was in a mood to panic, at least not just yet.
Dow 10,465.94, -1.22 (0.01%)
NASDAQ 2,254.70, +3.01 (0.13%)
S&P 500 1,101.60, +0.07 (0.01%)
NYSE Composite 6,998.99, +4.42 (0.06%)
Market internal were a whole other matter, as advancers clocked past decliners, 3708-2708, and new highs were once again well ahead of new lows, 280-90. Volume was just a touch under average for mid-summer.
NASDAQ Volume 2,168,665,750
NYSE Volume 4,697,753,000
Oil finished another 59 cents higher, at $78.95, for the September contract. Gold added $12.20, to $1,183.40, and silver tacked on 38 cents to close at an even $18.00 in New York.
For all the emphasis put on the first GDP estimate for the second quarter, the resulting trade was anything but exciting. The Dow traded in a range of 160 points top to bottom, but mostly in a tight pattern which deviated less than 30 points in either direction off the previous close.
One can safely assume that markets will experience more volatility come Monday and in ensuing sessions, as current market conditions remain quite unsettled.
Thursday, July 29, 2010
The "D" Word
Geez, the cat is finally out of the bag.
No sooner does Federal Reserve Bank of St. Louis President James Bullard utter the word "deflation," then the whole market gets all quivery and queasy. It's as though nobody wants lower prices or even a temporary restraint on runaway excess credit expansion.
Well, here's the news: We've been experiencing deflation - depending on how loosely you wish to interpret the definition - since about August of 2007.
Really? You ask, stunned by not being aware of current financial conditions. Yes, really, since August, 2007, like three years, when stocks began to deflate (or, go down). And real estate prices deflated. Remember when they called residential real estate prices a bubble? What happens when you prick a bubble? It deflates. If there's any indication of deflation, just ask homeowners in vast areas of California, Michigan, Florida or Nevada, where home prices have fallen by as much as 60% or more.
Technically speaking, there are two definitions of deflation, though since economics is more art than science, the two are often blended into one, such as this definition from Investopedia: "A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending."
Over on Wikipedia, deflation is described as. "a decrease in the general price level of goods and services." Pretty simple, and correct, though some economics adherents will insist that deflation is a decrease in the supply of money.
There are very good discussions on both of the above linked references, and each of them makes salient points which overlap and intersect in such a way as to make my argument - that we've been in deflation since August, 2007 - pretty darn accurate.
So, let's take a look at conditions since the summer of 2007, and see how we Americans are doing on the deflation scale. First, we know that houses aren't as expensive as they were back then, so the residential housing market is definitely deflated.
How about other assets, like stocks? Well, the Dow Jones Industrials were tickling the 14,000 mark back then, and are barely able to maintain a level over 10,000 today. Sounds like about a 30% deflation there.
Here's one nobody gets: wages, which haven't generally risen since 2002 and even before that were pretty stagnant. So, if you're an employer, you like deflation - or, at least stagnation - in the price of labor.
As for money supply, it may have been increasing, though according to these charts from Shadowstats.com, the rate of growth of the various popular money supply definitions (M1, M2, etc.) seems to have been slowing, so that would qualify, technically, as "disinflation," not deflation. Hey, I can't be 100% right all the time, no?
And, lest we forget, the Spring and Summer of 2008, when gasoline prices hit upwards of $3 and $4, so, since everything doesn't all go down at once, and some prices actually have gone up (like gold, or silver), I believe it's safe to say that deflation has been the dominant economic theme for the better part of past three years.
If you're unconvinced, just try raising prices on consumer goods and see how quickly your customers will become those of your competitors. Deflation, while it isn't an evil thing (in fact, it's probably preferable to inflation), is not regarded as generally good for businesses, especially the kind whose stocks are traded on Wall Street, who have to keep increasing their profits every quarter, which, when you think about it, is a pretty absurd concept. Most people who own small businesses are fairly happy just making the same profit over and over and never becoming billionaires, just "comfortable."
Deflation really scares the bejesus out of Wall Street types and with god reason. The companies they hype will die in a prolonged deflationary environment.
As for how the markets responded to the dreaded "D" word, the response was rather muted. Being fairly bright people, many traders already know that deflation has already been in effect for some time, and they also don't jump the shark and sell everything on the word of one Fed President, so the markets did a little dip, then rose, then sold off at the close, producing a chart probably more closely related to fears of what the second quarter GDP estimate will be tomorrow morning than anything else.
Dow 10,467.16, -30.72 (0.29%)
NASDAQ 2,251.69, -12.87 (0.57%)
S&P 500 1,101.53, -4.60 (0.42%)
NYSE Composite 6,994.57, -4.61 (0.07%)
Advancing issues barely beat decliners on the day, 3296-3093, and new highs continued to dominate new lows, 280-85. Volume was better than average.
NASDAQ Volume 2,332,617,500
NYSE Volume 5,247,904,500
The forces of deflation seemed to have little effect on commodities. Oil surged $1.37, to $78.36 per barrel. Gold was up $8.10, to $1,170.50 per ounce, with silver gaining 18 cents, to $17.62.
Initial unemployment claims came in slightly lower than the previous week, though still unacceptably high, at 457,000.
The first estimate of second quarter GDP will be announced at 8:30 am on Friday.
No sooner does Federal Reserve Bank of St. Louis President James Bullard utter the word "deflation," then the whole market gets all quivery and queasy. It's as though nobody wants lower prices or even a temporary restraint on runaway excess credit expansion.
Well, here's the news: We've been experiencing deflation - depending on how loosely you wish to interpret the definition - since about August of 2007.
Really? You ask, stunned by not being aware of current financial conditions. Yes, really, since August, 2007, like three years, when stocks began to deflate (or, go down). And real estate prices deflated. Remember when they called residential real estate prices a bubble? What happens when you prick a bubble? It deflates. If there's any indication of deflation, just ask homeowners in vast areas of California, Michigan, Florida or Nevada, where home prices have fallen by as much as 60% or more.
Technically speaking, there are two definitions of deflation, though since economics is more art than science, the two are often blended into one, such as this definition from Investopedia: "A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending."
Over on Wikipedia, deflation is described as. "a decrease in the general price level of goods and services." Pretty simple, and correct, though some economics adherents will insist that deflation is a decrease in the supply of money.
There are very good discussions on both of the above linked references, and each of them makes salient points which overlap and intersect in such a way as to make my argument - that we've been in deflation since August, 2007 - pretty darn accurate.
So, let's take a look at conditions since the summer of 2007, and see how we Americans are doing on the deflation scale. First, we know that houses aren't as expensive as they were back then, so the residential housing market is definitely deflated.
How about other assets, like stocks? Well, the Dow Jones Industrials were tickling the 14,000 mark back then, and are barely able to maintain a level over 10,000 today. Sounds like about a 30% deflation there.
Here's one nobody gets: wages, which haven't generally risen since 2002 and even before that were pretty stagnant. So, if you're an employer, you like deflation - or, at least stagnation - in the price of labor.
As for money supply, it may have been increasing, though according to these charts from Shadowstats.com, the rate of growth of the various popular money supply definitions (M1, M2, etc.) seems to have been slowing, so that would qualify, technically, as "disinflation," not deflation. Hey, I can't be 100% right all the time, no?
And, lest we forget, the Spring and Summer of 2008, when gasoline prices hit upwards of $3 and $4, so, since everything doesn't all go down at once, and some prices actually have gone up (like gold, or silver), I believe it's safe to say that deflation has been the dominant economic theme for the better part of past three years.
If you're unconvinced, just try raising prices on consumer goods and see how quickly your customers will become those of your competitors. Deflation, while it isn't an evil thing (in fact, it's probably preferable to inflation), is not regarded as generally good for businesses, especially the kind whose stocks are traded on Wall Street, who have to keep increasing their profits every quarter, which, when you think about it, is a pretty absurd concept. Most people who own small businesses are fairly happy just making the same profit over and over and never becoming billionaires, just "comfortable."
Deflation really scares the bejesus out of Wall Street types and with god reason. The companies they hype will die in a prolonged deflationary environment.
As for how the markets responded to the dreaded "D" word, the response was rather muted. Being fairly bright people, many traders already know that deflation has already been in effect for some time, and they also don't jump the shark and sell everything on the word of one Fed President, so the markets did a little dip, then rose, then sold off at the close, producing a chart probably more closely related to fears of what the second quarter GDP estimate will be tomorrow morning than anything else.
Dow 10,467.16, -30.72 (0.29%)
NASDAQ 2,251.69, -12.87 (0.57%)
S&P 500 1,101.53, -4.60 (0.42%)
NYSE Composite 6,994.57, -4.61 (0.07%)
Advancing issues barely beat decliners on the day, 3296-3093, and new highs continued to dominate new lows, 280-85. Volume was better than average.
NASDAQ Volume 2,332,617,500
NYSE Volume 5,247,904,500
The forces of deflation seemed to have little effect on commodities. Oil surged $1.37, to $78.36 per barrel. Gold was up $8.10, to $1,170.50 per ounce, with silver gaining 18 cents, to $17.62.
Initial unemployment claims came in slightly lower than the previous week, though still unacceptably high, at 457,000.
The first estimate of second quarter GDP will be announced at 8:30 am on Friday.
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