Today the S&P 500 stock index lost more than 43 points, or 3.4%. This was a harsh repudiation of the US government bailout of Fannie and Freddie over the weekend.
Actually, this bears a bit of explanation. In the chart below of the S&P 500 I have marked three arrows. At the purple arrow, I want you to note that the market was selling off quite severely, and then, magically, at 11:00 it turned around and went powerfully in the other direction. At the time, I watched that and thought to myself, “Huh, somebody knows something I don’t.”
It wasn’t until several hours later that normal people like you and I heard the rumor that the government was planning to take over the bankrupt GSEs later in the weekend. I think this makes four rescues in a row where a well-timed rumor came out at just the right moment to rescue a rapidly failing market. This is how our markets work these days ,and it is important to understand that, because there are both positive and negative implications behind the concept of living with capital markets that are managed on an intraday basis.
Regardless, if you look at the chart carefully, you’ll note that the weekends are represented by thin double lines. The next arrow, the green one, shows the opening blast on Monday morning, yesterday, which was the openly stated targeted outcome of the Treasury department, which wanted to breathe some confidence back into the stock market. This is why they timed their main announcement to occur prior to the opening of the Asian stock markets on Sunday, and they said as much.
But today? The stock market lost 43 points today (red arrow), which more than gave up all of yesterdays miracle gains. Now we have to face the prospect that we’ve entered the second stage of the crisis – the deflationary stage. Stocks, commodities, and real estate, collectively comprising well over half of all assets, are all in full blown retreat. Our banking system is insolvent, as is the US government, and only the continued ability of the US government to borrow lots of money stands between us and actual bankruptcy. I’ll have more on this later. Bottom line is that events are moving too fast to stay on top of them all, although I am trying.
“Now we have to face the prospect that we’ve entered the second stage of the crisis – the deflationary stage”
I know you’re in the hyperinflation camp so regarding the above comment are you saying that a deflationary stage occurs before a hyperinflatinoary stage? It’s very evident that much money is being destroyed through defaults and the momentum is picking up. And I’m aware that seemingly everything costs more and more. I thought that once the deflationary ball gets rolling it’s VERY hard to stop it. I also know that Bernanke is extremely anti-deflation. So what’s up with all the mixed signals? Or do they follow a pattern that I’m completely missing? Thanks!
Jeff
Stock Markets reflect the mood and patterns of human masses, and can be accurately explained in natural wave patterns of 5 trending motive waves, followed by 3 corrective waves, according to R. N. Elliott’s principles formed in 1930’s. The change you saw on Friday S&P 500 has a more reliable explanation, based on Elliott waves.
Currently our equity markets just finished a large 310 year Grand Super-Cycle equities wave, from 1790 that topped and completed in 2000. Since then we are have begun a large corrective 3 wave movement labeled A-B-C, currently in the ‘3rd-of-3’ of the C wave down. This is a larger event than the 1929 crash, and is now entering the steepest part of the decline where bear market declines accelerate into a gut-wrenching plunge lower in a short time. What took from 1970s to now to build in 40 years of bull market mania, will be erased in the next 4 years.
A small sub wave that is a fractal of the largest wave patterns reached its 5 count down on Friday afternoon, then turned higher and completed a small A-B-C rally during the time when sentiment was mixed over F&F, and today resumed the larger trend to move over the edge of the cliff into a time history will remember as a larger financial shock than the Great Depression. This fall will change the mood of stock investors from disappointed to depressed. It will have brief, sharp rallies, but will continue to turn and slide to new lows. Get out while some else is still willing to buy your stock is my warning. This is not the time to be entering long or looking for buy and hold bargains. This is the time to cash out into something that will hold its value, and avoid the panic during the unfolding collapse.
Smart money was shorting the indexes in November 2007, then added to their positions in May, and now will add the largest amount as the decline intensifies in September. A chart would help, but not sure if that is easy to do?
Jeff - one of the greatest sources of confusion out there is what inflation and deflation mean. So let's put a definition in here:
1) Inflation = a rise in money stock in proportion to goods, services AND assets (that last one is conveniently ignored by our Fed which is the single greatest intellectual oversight/mistake that they make).
2) Deflation = a fall in money stock in proportion to goods, services AND assets.
Since we all now know that money = credit = debt, I can define deflation thusly:
2) Deflation = a fall in money stock, credit, or debt in proportion to goods, services AND assets.
Note that nowhere did I mention prices of anything. It is entirely possible to have both deflation AND rising prices for some items just as it is possible to have inflation AND declining prices for some things. For our banking system prices are largely irrelevant. The continued expansion of credit/debt is the most important thing and this is why deflation is the most feared outcome for the overseers of the money system.
The general pattern I subscribe to was rather brilliantly proposed some years back by Erik Jantzen (of iTulip.com fame) which he calls "the KaPoom theory". In brief, it calls for an inflationary blow-off to a credit cycle that then falls into a deflationary hole for a while only to resolve into a massive hyperinflationary epoch when (not if) the monetary authorities panic and begin attempting to repair all the bad credit with fresh money.
I am not convinced that applying a label like inflation or deflation to our current economic mess is a useful distinction, especially since our money supply is in the control of central banks. We will have what they give us, and the only things I know are that, in the past, fiat money has always lost its value, and that more and more of the world’s population will have trouble buying basic necessities, and that likely includes me. However, I do appreciate the information, as our economic ship doesn’t turn on a dime and, no matter what happens, I hope to have at least a little warning. This site is an excellent source of information. Thanks, Chris!
There is plenty of evidence of a deflationary forces taking over the economic landscape (gold is a barometer, has just broken technical support) and the hyper-inflationary resolution that itulip expects may not necessarily happen because of the sheer size of debt out there. At the moment the Fed starts to hyperinflate, bond vigilantes will dump bonds countering the Fed’s move i.e. credit will dry up almost immediately. The bottom line is that this fiat currency fractional reserve system has passed the point of sustainability and now it will shrink till it gets down to manageable levels. Given that the fractional reserve system is essentially a leveraged system, one can argue that the deflationary collapse will be huge and we as a nation are going to be forced to revisit our priorities. This will be very painful in our complex society with many who embrace the entitlement mentality with a strong conviction. Your thoughts appreciatied…
Chris–I belive you are correct…what was a 80/20 risk of an inflation/defaltion scenario is heading closer to 50/50…Most know what where to invest when it comes to inflation…but i believe many would appreciate reminders on investment possibilities from you for a defaltionary environment as this makes progress…JMHO…Jerry
Cash is king during a deflation. A basket of Swiss/Yen/Eur/Yuan like the Evergreen Bank CD is excellent. Have no debts. Even gold falls with deflation.
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John
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Expect the best - Prepare for the worst.<br/ > http://www.can-offshore.com
Hi Chris -
I postulate that the public perception of Deflation / Infaltion / Hyperinflation (in M1 and M2) will all be nearer-term events, as measured and expressed in the (bogus) CPI and even real statistics, and that they will occur in that order. Your thoughts appreciated -
Deflation, as measured in M1 and M2 (money supply in normal, small-deposit & generally non-financial organization exchange) is now, and will first occur, as the free-flowing “money” of Central Banking system attempts to prop-up Bank asset books. The TSF window and other such inflating mechanisms may be loose credit and increases in the digital money supply between Banks (M3), but such supply is not intended as an exchange-medium for general distribution. It IS intended to form a false “asset base” for the Financial institutions - i.e., shore-up the Bank books. As such, it will not produce easier credit in the open market (i.e., easing credit for private individuals wanting loans from Banks).
But “pushing a rope” is not easy. Without private borrowing beyond the Banks (Once the Bank Assets have been “credited”), the US Treasury and Bond markets will begin to reflect the “loss of faith” from overseas. At this stage, the CB’s will need to go into overdrive. This, I believe, is when observable (M1 & M2) inflation begins in earnest.
Eventually, should the multi-Trillion $USD overseas (US Treasuries, Bondholders and Petrodollars) be considered unworthy, they may come flooding back home, and/or out into the open worldwide, causing a huge devaluation of the $USD, with local hyperinflation within the USA.
Your thoughts?
Rather then bailing all these companies out maybe we should let them go under, the airlines surely never got any bailouts when they filed for bankruptcy and we still fly around today never noticing any difference. I didn’t even know that WAMU was bought out by jp morgan until their automated phone system mentioned it. My moneys still in the bank. Rather then bail out all these companies why not bail out the home owners pay off their homes let the companies get the money and pay the government back. I[ve got quite a bit of money in stocks i’ve been online stock trading for years and i dont have a need for that money so whatever happens to it im not concerned but i do have most of it in over seas markets that are doing much better then ours.
