Signs of Deflation - Are We Here?

Today there was a lot of mixed trading as we saw the Dow teeter-totter from red to green throughout the day. The Dow dipped as low as 8376 but ended a bit higher (still down) at 8448. I was pretty surprised to see the resistance today, especially since there was really not that bad of news today, and even a little good news. This is really telling of the bear motivation in the market right now and that the momentum is definitely downward. In fact, another day of selling tomorrow (I'd say more than 100 points), we could be on a steep path downward. Obama may not provide as big of bump as some people hoped, although I do still feel there will be some green next week.

It's looking more and more that Citi will be splitting up their different branches. Quite frankly, I don't know how Citi is going to survive this year. If it were not for the government having their back, they would have been gone a while ago. At any case, we should probably expect some serious job cuts, everywhere. I'm sure sites like RiseSmart.com (Job Finders for $100K + jobs) are probably spilling with business as more and more executives are looking for jobs.

One issue that seems to be more and more of an issue is the risk of deflation that, in my opinion, is very near if not already here. I feel we are going to start experiencing some serious deflation and then catapult straight into inflation. Anyway, here are some signs of deflation, how it effects us, and some of my plans to hedge against it.

As you can see from the chart, the increase in wealth destruction has been monumental. Sure, Obama and company are working hard to try and put together a stimulus that can try and fix some of our liquidity problems. The only problem is they have a big obstacle in their way called deflation. And with numbers like these, they should be very worried. Here are some reasons why I believe deflation is here.

First, as you can see from the graph, the wealth destruction is far greater than any bailout plan that has been proposed. At the rate we're going, we can expect a $7.8 trillion in total wealth loss, which would be about 8 times larger than the biggest stimulus that has been proposed thus far. You can very well expect deflation to creep up with those numbers as upcoming stimulus plans won't put dents in that number.

Another factor is that government programs are showing that they are not doing much good. The first $600 per person stimulus was quickly swallowed up by paying off debt or buying a plasma. The $700 billion hasn't shown its face or made any change to the lending markets. These signs can also contribute to a deflationary market.

One of the biggest signs is the huge amount of debt liquidation that has been going on. We are especially seeing big activity in the short-term commercial paper. In Q3 of 2008 mortgage debt outstanding lessened at an annual rate of $317 billion, while corporate bonds lessened at an annual rate of $755 billion! They call this a credit crunch, but a better term for it is debt liquidation. Instead of creating debt, we have destroyed it. In turn this is what is killing the residential and commercial property prices.

Lastly, we have already been experiencing pricing deflation. Copper -66%, Oil -73%, lead and nickel -73%, and platinum -66%. Ya, so that pretty much proves that point. These deflationary prices are also what contributed to the Dow downfall. At any rate, I believe the signs are here and deflation is inevitable.

To help hedge against deflation, I plan on picking up some UUP (US dollar Index Bullish Fund). As the dollar gains on competing currencies, this fund is bound to get some bounce. Hopefully, I can profit off this as well as my short inverse funds, as we are bound to continue to see severe job loss and turmoil in the financial and real estate markets. Forexmentor.com can be a great tool for those interested in trading currencies. It can get confusing, but a lot of money can be made, especially in this market.

Well, tomorrow will be a telling day for the market. There has been a lot of bearish movements and if this continues into tomorrow, we could be heading down for a while. In the end, I still expect to see gains from FXP, SRS and SKF as we head down a bit more. It will be interesting to see if we start to retest some bottoms that we saw back in October. Have a good night everybody, Happy Trading and We'll see you tomorrow.

4 comments:

  1. John Says:

    list of all 3x etfs bull and bear

    http://www.direxionshares.com/etfs

    and other etfs for bonds , forex etfs

    http://direxionfunds.com/products.html

    is UUP ok but the DXDBX 2.5X dollar bull is nice

    or the dollar bear 2.50X DXDDX

    this are funds not etfs NOTE

  2. John Says:

    Ewave 5 has start to the downside

    say hello to DOW30 Target 5,800-6,000
    next before we see A nice bear rally to go long till then watchout below
    we are in a large Blackhole event in world markets.Keynote yes USA, Japan, china, UK and all other parts of the World is in this Rain of blood. And Yes Sky is falling cnbc and other tv chs will not tell you this.

    say what obama taxing stocks, bonds,etfs,funds,futures,per trades what % 10-20% ?????????????????
    Is He nuts doing this a fullblowout bearmarket.

    Market update xlf down 5.95% and the dow 30 or $indu Down Only 3.27%
    that = the dow30 being down 600pts
    so expect a close like this today.

    I told you in my last post man its Raining Blood in japan keynote that was not a joke.

    when ever I post now I try to spell good so the people here happy!Takes up more of my time but thats fine.

    My last words cheers to the Bears
    go some buy beer or better some highend Red Wine!!

  3. QUALITY STOCKS UNDER 5 DOLLARS Says:

    Deflation is not as bad as deflation.

  4. Leather iPhone 6 Plus Cases Says:

    You can increase the field of view by moving the phone/D-EYE closer to the eye, without changing the focus. Our suggestion is to go as close as you can to the eye to get the best field of view.