Tuesday, December 16, 2008

Deflation – Cash is King

The dollar buys more stock and other assets than it did a year ago.

The price of real estate has fallen from its bubble high…
The price of oil has collapsed from its bubble high…
The prices of most commodities are down…

Generally, the prices for many of the inputs for production are down significantly and will enable producers to reduce prices during 2009.

Demand is down, forcing sellers to reduce prices.

Prices will decline for a while.

However, the Fed has poured massive liquidity into the system.
At some point that will be reflected in rising prices.

I expect deflation for about six months. Then the tide will slowly turn, and the beginning of strong inflation will become visible during 2010, and gain momentum in 2011.


At January 22, 2009 2:11 PM, Blogger Bob Mount said...

While it is nice to make a comment about tides turning it would be much nicer to know why you think that will be. I would very much like to find data that supports your statement. Historically, your scenario did not happen under very similar circumstances in the 1930's. What would help it to occur now?

Everyone I talk with, locally, is pulling in their spending to lower levels on everything. They see no liquidity uptick for themselves in the future. They see headlines telling them they are worth less and their neighbors are losing jobs. They see a very new, very large empty building in the middle of downtown unable to attract an occupant.

Meanwhile, their 401K's are down 40-50%.

Any data you can provide would be helpful. Thanks.

At February 05, 2009 12:13 PM, Blogger zephyr said...


The Fed has unleashed a tidal wave of liquidity during the last year or so. That will soon offset and then overpower the deflationary forces we are currently seeing.

The average person does not yet see it because the average person does not watch monetary policy moves. They do not see the patterns, nor do they understand the lead times. But they will see it when the wave gets here.

At February 12, 2009 7:58 PM, Blogger Boomer said...

Nice blog. I followed Bob Mount out here, but I largely hang over on Calculated Risk. So your argument is familiar to me.

My question -- and everyone else's -- is this: if cash is king now, where should it go if inflation kicks in? It seems to me that the stock market has been almost as great a con game as the last four years of the real estate market.

At February 19, 2009 1:25 AM, Blogger zephyr said...

I believe the stock market will have a nice run for a year or two after the bottom is made.

I anticipate that real estate will be a good place to be after 2010, and after inflation starts to show.


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