So, is this Deflation?
By Jay Fenello on Nov 11, 2009 | In Economy, All
We all know inflation. We've been living with it for as long as anyone can remember. Slightly higher wages, paying for slightly higher expenses, demanding slightly higher wages. Those that did better, had wages growing faster than expenses. Those that did worse, didn't. Either way, it all felt normal.
Now apparently, things have changed. But what? The stock market is up, but so is unemployment. Houses are selling again, but prices are down. Interest rates are low, but gold is high. The news says we're rebounding, but the vast majority of small businesses that I work with are not. So what's really happening?
I believe that we are entering a long-term deflationary cascade. While many may disagree, I suspect the reason they disagree is that they expect deflation to look like inflation in reverse: slightly lower wages, paying for slightly lower expenses, leading to slightly lower wages.
Unfortunately, deflation doesn't spiral -- it collapses one market at a time. This view is consistent with those who say our economy is undergoing a great reset. Consider the following chart:
Even after residential housing started to collapse, commercial real estate continued to inflate like nothing had changed. Until it too, started to collapse. In these examples, deflation doesn't occur incrementally. It occurs in rolling collapses (aka panics, sell-offs, etc).
If this analysis is correct, then we can expect other markets to follow. While everything may appear normal, it is just a matter of time before other markets take their hit. Wages will continue to inflate, until they collapse. Commodities will continue to inflate, until they collapse.
To successfully navigate these changes, the best course of action is to move out of inflating markets before they collapse, and move into deflating markets as they approach their reset point.
In the next post, I'll continue to explore this topic with a focus on deflation in history - both causes and solutions. As a teaser, consider the following chart, paying special attention to the red line (actual wholesale prices):
As always, comments welcome.
Until next time ...
2 comments
Good idea for a blog. I agree with the brief analysis you have laid out. Isn't the proposed solution the same for all markets - buy low and sell high? Sell inflated assets and buy assets that have crashed. Unfortunately, assets can remain inflated for years. Can fundamentals justify the run of the stock market in the last few months? Well, maybe cheap money, but certainly not economic growth. How long does this go on? One more week, six months, 5 years? The timing makes the solution pretty hard to implement.I agree with the deflationary analysis, just don't know how to play it. Complicating the issue is that we are printing money which can be inflationary. Are we entering deflationary or inflationary times? Do we buy bonds or gold?
Interesting review and unfortunately most business people seem to be waiting for the commercial credit market shoe to drop. Another comment would be the stimulus which it appears most banks are hording and not applying it to its original intent. In addtion, one wonders if small business is 80% + of the businesses out there...doesn't it make sense to allows loans to occur without the stringent credit requirements? Obviously you can't be blind to credit, but it appears lenders have gone the total opposite direction and expansion, acquisition, lease money all seem to be extremely difficult to acquire. This should be a priority to prevent deflation. 
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