Deflation: Just Another Economic Term to Ignore?

Question everything you read and everything you hear. Then spend some time in silence and let your inner voice tell you what you know is "your" truth.

I just finished reading a 1980 primer on Deflation authored by the editors at Hard Money Digest. What I found so interesting about this discourse was that much of the discussion focused on interest rates which at the time were close to twenty percent. I don't think the authors back then could have imagined that thirty years later we'd be taking about another round of deflation but with zero interest rates. I don't think that would have worked in their equation.

It just goes to show that economics, just like the stock market, is best understood when you stick to the basics. After reading the book this morning, I spend another 45 minutes educating myself on deflation on the web by reading blog posts and comments. It just took those short 45 minutes to convince me that, although well intentioned (like me), everyone is full of crap (in a nice way) because they're all guessing. It's seems that in past that even the highest paid, most respected economist in the world get it wrong most of the time. The same could be said about the Wall Street geniuses that were blind to the long term moving average "trend breaks" that screamed the warning signals of a trend change. What ever happened to hedging? Why did the biggest guys on Wall Street get it wrong? (The smartest guys on Wall Street did get it right, but they were the pint-sized minority who went short)

The news, more then ever, is again full of speculation on a new set of negative economic and market predictions that in the context of good trading are completely irrelevant and are actually harmful for me to entertain.

ECON 101 converted to trend
Technically the major indices are in an intermediate downtrend and demand is shrinking across the board for goods and services because unemployment is rising, credit is tightening and people are holding on to the current cash they have. If corporate profits fall and future short term projections are negative then stock prices will continue to fall. Those are the basics. I will continue to follow any data that would counter those facts, but the sum of the above points to continued GDP contraction. In other words, the GDP is trending down. That's all I personally need to belief about the current economic conditions, why should I complicate it? When the GDP starts trending up I will re-evaluate.

As I trader, my primary objective is to follow a system that will give me consistent profits.

Trend, support and resistance. That's my basic system and it works because it keeps me trading in the direction of what's happening and not what "I think will happen." Moving averages are the best way I've found to keep me on the right track. If the moving averages are sideways, I sit on the sidelines until a new trend develops.

We're in a consolidation mode right now and a wedge type pattern has shown up on the RUT. Wedge patterns are typically a continuation pattern and as history will show, they typically DO continue the current trend. However, I will wait for the market to show it's hand, but I will not be the contrarian here and try to fight the trend. I will be patient and let my rules dictate where I get in, where I put my stop and where I put my first target.

The title I read this morning"Deflation: The Greater of Two Evils," was written at time of prolonged "inflation" and the authors suggested that the warning signals were starting to appear for a period of deflation in the 80's. The book was on the right track and the early 80's did see disinflation (a decrease of inflation). I applaud the authors for sending the warning signals to their readers. There are many time in the book where they make it a point to disclose that they are not saying that "deflation" will happen, but they are being prudent and proactive in outlining what could happen and what one can do to in the event that it does happen.

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Not to get on a rant here, but where were the professional money managers when the longer term uptrends broke? Did they hedge? Did they advise their clients that there might be a possibility of a prolonged downtrend? Did they contact their clients and suggest any hedge strategies? Just another example of so-called experts getting it all wrong. They were apparently indoctrinated with the fallacy that the stock market always goes UP over the long haul. Have you looked at a 20 year monthly chart lately?

SPX 20 Year Monthly Chart:



Although the market was closed today, index futures did trade and closed lower with the TF closing below an important 440 support level. If it holds there could be a nice bounce next week, but if it breaks the evidence of a new move down starts to mount.

If you're not well versed on deflation, you may want to spend some time getting an overview from several different sources and then make your own decision on what you want to follow or not follow from an economic standpoint.

As it has been often said, "Price discounts everything," meaning that "price" takes everything into account so you can forget about all the data, all the rumors and all the speculation, the talking-heads, the bull contingent, the bear contingent and the astrologer's reference.

Will believing the market will go down make you money? Will believing the market will rally from here really make you money? Are you trading a system that can take advantage of either direction? Do you have a neutral strategy? Only you can trade your system and only you can answer those questions. My hope is that you are able to clear your head from all the noise and speculation out there right now and trade your system which in turn will produce consistent profits for your account.

Price is true.