Great Depression Online Archive Issue:

A Tent City Bull Market

Great Depression Online
Long Beach, CA
July 28, 2009

Inside This Issue You Will Discover…

*** Impossibly Frequent
*** More on Deflation and Inflation
*** A Tent City Bull Market
*** And More

Impossibly Frequent

The work of a central banker is that of the weather man…it consists mainly of hunches, conjectures, and inferences.  Looking at the data before them, they scratch their head, and hold their licked index finger up to the wind.  Then they guess what tomorrow’s economic climate will bring.

If they perceive the cool winds of deflation blowing, they cut rates to warm thing up.  If the economy’s overheating, they raise rates to cool things off.  Impossibly, however, the impossible often happens…

A black swan appears at the shores of a pond or it snows in Los Angeles in July.  In finance this is called a six sigma event…where there’s a price drop of six times the volatility (or standard deviations) of an asset.  Statistically, this is likely to occur once every 2,500,000 days – or once every 6,850 years.  But, inevitably, in markets six sigma events occur quite frequently…

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With you in mind, financial analyst Robert Prechter scoured thousands of pages of his warnings and teachings about deflation.  He then handpicked his most important deflation writings and compiled them into a special, unedited, 60-page Deflation Survival Guide.  If you haven’t yet given Prechter’s deflation argument your full attention, you should know now that yesterday was the best time to do so. Download Your 60-page Deflation Survival Guide Now Free.

~~~~~~~~~~~~~~~~~~~~~~~~~

The 1987 stock market crash, the Mexican Tequila Effect of 1994, the Asian Financial Crisis of 1997, the Russian Devaluation of 1998, the Internet bust in 2000, and the popping of the latest housing bubble…these are just some of the recent six sigma events.

So what’s a central banker to do when the economy’s decline is triggered by a six sigma event?

They do what they always do, of course…they flood the financial system with money.  Most of the time this works…but sometimes it doesn’t.

More on Deflation and Inflation

“Traditionally, the work of a central banker has been simpler: lower your benchmark rate to counter a recession and raise it when the economy recovers to prevent inflation,” explained Bloomberg last Friday.  

“The current crisis shows the limits of that approach.  Even after the U.S. federal funds rate was cut to zero late last year, the economic slide worsened.  U.S. gross domestic product fell at a 5.5 percent annual rate in the first quarter of 2009.”

What gives?

Since taking over the helm of the nation’s central bank in early 2006, Bernanke’s more than doubled its balance sheet to over $2 trillion.  In other words, it took Bernanke less than three years to do what it took all other Federal Reserve Chairman – and 93 years – to accomplish.

But that’s not all…

On the fiscal policy side, the Obama administration’s running a $1.8 trillion budget deficit this year alone…four times last year’s record deficit.  With all this phony money being pushed into the economy where’s the inflation?

This may just be one of those times when the central bank is unable to give its money away and the government is unable to create positive economic growth through massive spending.  Such a scenario does occasionally occur – though not often.  It happened in the U.S. between 1930 and 1946 and it happened in Japan between 1990 and the present.

Still, it’s too early in the bust and recovery cycle to tell if deflation or inflation will ultimately prevail.  For now, however, we expect deflation to maintain the upper hand.  Here’s one example of why… 

A Tent City Bull Market

“Some 540,000 Americans are expected to fully exhaust their unemployment benefits by the end of September,” reported U.S. News & World Report last week, “and another 1.5 million by the end of the year, according to an analysis by the National Employment Law Project.”

Regrettably, a job is as hard to come by these days as water in the Death Valley.  And with unemployment benefits set to expire for more and more of those out of work, things could really get ugly fast.  That’s when the consequences of this depression will become strikingly apparent.

For example, just last week we were prospecting a potential bridge replacement job with some business associates.  To get a good look at the existing seismically deficient structure we climbed down the river bank, and hiked well below the 1,100 foot extent of the bridge.  The river’s flow, this time of year, was but a trickle down its center.

As we hiked inward, shielded from the view of the upper road way, we stumbled across a burgeoning tent city…at least 20 tents in total – or more – were clustered together.  One guy opened his tent and poked his head out to see what we were doing.

Out of common courtesy, our initial reaction was to ask: “How’s it going?”

But already knowing the answer, we asked if there were any fish in the low flow channel. 

“Catfish,” he replied.

We don’t have any hard data to support this, but based on a hunch, and our own empirical verification, we suspect we’re still in the early phases of a tent city bull market. 

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  Since the real estate top in 2005, deflation has festered its way into almost all asset classes, ravaging the portfolios of millions.  If you’ve been spared from deflation’s mighty jaws, you surely know someone who hasn’t.  Access here for free the Deflation Survival Guide.

 

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