Right now, there's a lot of intense interest in this, and it's one reason why a lot of market participants are short in a big way. I wrote about this last week trendvue.com
And this is the balance of it, which was for subscribers only:
"What really got me was this chart, as if these statistics somehow prove that falling prices in some sectors equals deflation. Maybe it’s something else. Particularly close to my heart is the last line of the chart, with the whopping drop in personal computer prices. I don’t know about you, but the last I checked, almost everyone has one, and it’s at the point that unless one is die-hard gamer, there’s no reason to upgrade anymore. We all have enough computing power to surf the Net until Kingdom Come. And who stores data on their hard drive anymore? The Internet changed all that. We’ll come back to computers later. Let’s look at the rest of this list. From Economics 100, we note that almost all of the items have what is known as elastic demand, meaning discretionary items that consumers don’t need to get by and/or price makes a big difference to how much we buy. These days, people have other stuff that they really want or have to buy, items with INelastic demand such as plasma/LCD TVs (the video games look much better on one of these, really!), real estate (it's the only thing going up and you can live in it too), alcohol (driving us to drink), baby food (the kid can't starve), diapers (who wants to wash the cloth ones?) and cigarettes (stress).
To move things with elastic demand, price has to be adjusted. In particular, let’s take a look at the computer industry. First, the S-Curve. I can’t go into this in detail, so you should read Jerry Jordan’s and James Hart’s articles as backgrounders. The bottom line is that once almost every household has one, and usage of the device has stabilized, people don’t buy new ones anymore. Unless you’re me, but that’s another story. I use them in a growing business, and the declining prices have caused me to buy a bunch of them lately. I’m living proof that computers have elastic demand! As for the other items, perhaps an unseasonally warm winter has dropped demand for oil, or people are simply sick of shopping.
The next sentiment that I want to address is the pervasive belief that the U.S. will somehow pull a post-1990 Japan. In the year before the NASDAQ crashed, we said that the entire dot com boom was a Japan bubble waiting to burst. At that time, no one believed it. We were labelled cynical, the most polite term that I can find to describe our “fan mail”. It’s curious how nearly three years after the crash, how the majority now believes this is inevitable. Pardon me, but I thought the market already crashed. Years ago. If our economy dies from here, it’s hardly news, and if we have not made ourselves bullet proof, isn’t it too late now, since most investors have lost their money, and therefore, have no option other than to endure whatever lies ahead?
The Liquidity Trap is what many people fear, where lower interest rates do not revive the economy. That’s why there have been serious discussions as to the panic factor of the Fed by lowering rates by one-half percent this week. Now, what if they do have a plan, as Greenie told us on TV. It was reported last weekend in Wall Street Journal that the Fed had extensive discussions back in 1999 to formulate a plan to deal with this exact situation. What if they haven’t told us that their real plan is to allow the Dollar to drop and drive interest rates well into negative territory simultaneously to force cash out into the economy, to punish savers? Wouldn’t that be cute? And certainly, no one is thinking about this diabolical scenario. Maybe this is why bonds are having problems going up so far?" |
