@anecdotal Wall Street consensus -- trotsky (), 11:07:18 08/17/06 Thu
one can get a fairly good idea of the WS consensus on stocks by watching WS strategists on TV. the current consensus seems to be : "a bit worried about the short term, but bullish for the long term". everybody , his auntie, and their dog, recommends buying financials and energy stocks. well, funny that. all of a sudden, WS is in love with energy. recall that they recommended SELLING energy stocks throughout 2003 and 2004, but now that they're trading between 100-200% higher, they're considered to be the sector most worthy of buying (on average, nearly 75% of all WS ratings on energy stocks are of the 'buy' variety - which makes the sector the MOST loved on WS). at the same time, crude oil hasn't really gone any higher for the past year, while NatGas has suffered a pretty steep decline. CAVEAT EMPTOR.
as for the 'short term cautious, long term bullish' consensus, THAT idea strikes me as the exact opposite of what looks likely to happen. currently, a lot of money is in Rydex bear funds, and there have been sharp spikes in put/call ratios since the May high, and everybody knows that the 4-year cycle low is due. at the same time, the bursting housing buble and inverted yield curve both suggest that a recession is coming, so the bears have a good point. it's just that there are too many of them right now.
the most likely resolution of this situation is SHORT TERM STRENGTH followed by a LONG TERM bear market. in fact, a long term bullish outcome seems nearly impossible in view of the extremely low cash-to-assets ratio of mutual funds. this indicator has a striking statistical record - in 12 of 13 cases extreme lows in this ratio have led to lower stock prices in 6-12 months. not exactly a big surprise, since in order to push prices higher, cash is needed. when the funds don't have any cash to speak of, no higher prices are possible.
however, we should still expect short term strength - driven mainly by short covering, and probably characterized by distribution.
smythe@inflation/deflation -- trotsky, 10:34:06 08/17/06 Thu
it is in fact difficult to imagine a GENUINE deflation (=shrinking money supply) to occur in a fiat money system. Japan's deflationary era was NOT a genuine deflation at all, as money supply continued to climb (albeit at a slow pace) throughout it. this was achieved by the BoJ monetizing massive amounts of government debt.
it is true that the effect of inflation on prices is uneven, and that huge monetary inflation such as occurred in the US during the 1990's need not necessarily mean that prices of goods and services rise strongly. however, what it ALWAYS means is that resources are misallocated. THAT is the primary negative effect of monetary inflation.
so how is a deflationary era defined in a fiat money system?
once again, Japan is instructive. for instance, bank credit contracted for 60 months running at one point, and money velocity plunged. the BoJ's quantitative easing policy (lowering reserve requirements to a minimum, and stuffing the money markets with 'free' money) only led to a lot of money sloshing about in the system that NO-ONE WANTED TO BORROW. the only big spender in the economy (i.e., the only big borrower of the fiat splurge from the BoJ's printing presses) was the government, which duly wasted the money on bridges to nowhere, not only keeping existing malinvestments afloat, but adding new ones in copious amounts. this exacerbated the pressure on the pool of real funding and deepened and lengthened Japan's depression unnecessarily (similar policies had already been tried in the US during the 1930's depression, to the very same effect).
is it possible for the money supply to actually shrink in a fiat system? it is conceivable, based on the idea that the central bank is unlikely to radically alter its modus operandi (for fear of losing its power by destroying the currency it issues). the biggest part of the US debtberg is the huge private sector debt, a lot of which could be the subject of default in an economic crisis. normally, money and credit are distinct, but not in a fiat money system, where 'new money' is always borrowed into existence. it follows that it can also be defaulted out of existence. if monetization of State debt manages to outrun the contraction in private debt (such as happened in Japan), the money supply as such will continue to rise, but prices may well begin acting AS IF it were declining. |
