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Mike Shedlock, a Deflationist Lashing Out at Nouveau Inflationists?

Economics / Deflation Nov 26, 2009 - 09:41 PM GMT

By: Nadeem_Walayat

Economics

Best Financial Markets Analysis ArticleI recently wrote an article as part of a series on my new inflationary scenario and outlook for the world economies and markets (Deflationists Are WRONG, Prepare for the INFLATION Mega-Trend ), which drew the attention of Mike Shedlock who quotes and responded to the following text -


Dubai debt Defaults, Deflation In Action, Watched Pot Theory Revisited

Nov 18, 2009 - 12:58 AM

The jist of the deflationists argument is that debt deleveraging MUST trigger huge consumer and asset price deflation. Whilst we have all witnessed huge asset price deflation and some consumer price deflation during 2008 and into 2009. However we have also witnessed unprecedented government and central bank actions of this year, which have ignited asset price inflation with more to come that is now starting to feed into consumer price inflation.

Why do deflationists have it wrong ?

It is that focusing on the deleveraging of the the debt mountain is a red herring, taken on its own then yes it DOES imply deflation as the debt bubble 'should' contract. But given the asset price reaction of 2009 that is NOT what is actually taking place! the Debt bubble is NOT deleveraging, the bad debts are being dumped onto the tax payers! The huge derivatives positions that act as the icebergs under the ocean as compared to the asset price tips that we see above water are not contracting but expanding!

The DEFLATIONISTS ARE DEAD WRONG !

The last 8 months have proven it to be so ! But STILL they cling on as though they have blinkered visions as a function of presumably not having to put their own money on their deflation calls. What will there position be in another 8 months - it will be to REINVENT HISTORY TO IMPLY THEY SAW IT COMING ALL ALONG!

Mike Shedlock's response:

What's amazing is how hyper inflationists who have blown the call for 10 years running now accuse deflationists in advance of rewriting history.

Here's the deal. Deflation happened, the only debate is how long it lasts. It is more than premature to proclaim the end of it on the basis of an 8 month period. Things do not progress in a straight line and a rebound after a 51% plunge in the S&P 500 and 10 year treasury yields close to 2% was expected.

That rebound is a much proof of the end of deflation as any of half a dozen 50-100% rebounds in the Nikkei over the last two decades, or the massive rebound in the DOW in 1931 before it plunged to new lows.

Many of those pointing to 8 month timelines as if that is what matters ignore an even bigger timeline in which stocks fell that 51%. If this rally is proof of inflation the the plunge must be proof of deflation.

The reality is neither is true. What is true is that in a credit based fiat economy, what matters is ability of the Fed and Central Banks in general to foster bank lending. And that is not happening.

I have a great deal of respect for Mike so I will just make one single point, and that is my inflationary outlook is a NEW conclusion born out of current analysis that I am only now during November in the process of writing up as first a series of articles, which given the depth of evidence and complexity of trend projections the whole scenario will have to resolve into an ebook (that I will make available for free this year).

Therefore the point is that I was never a hyperinflationist of any sorts, far from it, my analysis of key major market and economic trends correctly and accurately concluded in DEFLATIONARY outcomes that culminated towards a projected deflationary spike lower into Mid 2009 for asset and consumer prices such as the stocks bear market projected low of Dow 6,600 which was confirmed in March 2009 as the following excerpts indicate :

Asset, Commodity and Consumer Price Deflation Projections :

Aug 2007 - UK Housing Market Crash of 2007 - 2008 and Steps to Protect Your Wealth

The UK Housing market is expected to decline by at least 15% during the next 2 years. Despite the 2012 Olympics, London is expected to fall as much as 25%. UK Interest rates are either at or very near a peak, as there is an increasingly diminishing chance of a further rise in October 2007. After which UK interest rates should be cut as the UK housing market declines targeting a rate of 5% during the second half of 2008. The implications for this are that the UK economy is heading for sharply lower growth for 2008.

Jul 2008 - Crude Oil Parabolic Move Driven by Inflation Hedging that Could Unwind

Crude Oil is well into a parabolic up move that has been driven higher by inflation hedging which had fed upon itself, the potential exists for a near imminent cascading mainstream interpretation of future economic conditions to suggest lower future inflation which would lead to a fast paced decline in oil prices targeting a move back towards the September 2007 breakout point of $80. With stop-gaps along the way of $135, $110, $100 and $85. Therefore I continue to remain bearish on the prospects for crude oil during the next 3 to 6 months or so barring a BLACK SWAN event.

Oct 2008 - Stocks Bear Market Long-term Investing Strategy

Current State of the Bear Market and Trend Conclusion

The sum of the previous analysis suggests that we can discount a 1930's style wipeout of the stock market, and viewing a volatile sideways trend for at least the next 6 months to be followed by an gradual upward curve. In the meantime the credit chaos events will undoubtedly see much volatility that will see several spikes higher and lower in the 10% region, with a high probability that we will see the recent lows breached at least once between now and June 2009 as the most probable outcome is something that is reminiscent of the 1970's which suggests that the stock markets are headed towards the 2003 lows. Which given the recent sell off implies a further decline from recent lows in the order of 10%.

Dec 2008 - UK CPI Inflation, RPI Deflation Forecast 2009

The UK is heading for real deflation during 2009 as the below graph illustrates in that the RPI inflation measure is expected to go negative and spike lower around June / July 2009 as the RPI is sensitive to falling mortgage interest rates. The CPI will also continue to fall sharply into May 2009, which is targeting a rate of just below 1%. However the more money the government borrows as the difference between spending and tax revenues then the greater will be the eventual resulting inflation as there is no such thing as a free lunch, that will reverse many of the trends we have observed during the past 6 months and will continue to see during virtually all of 2009. However I am only expecting a mild up tick in inflation late 2009 due to the deflationary nature of economic contraction.

Jan 2009 - Dow Jones Stock Market Forecast 2009

In Summary, I do not know at precisely what price level the Dow will make a low during 2009, my best estimate at this time is 6,600, but I am expecting that it will mark the start of a multi-year bull market that will eventually make 2008-2009's price action appear as a mere minor blip, much as the 1987 crash appears on today's price charts.

Feb 2009 - UK Recession Watch- Britain's Great Depression?

In the final analysis, the projected course of the recession over the next 2 years is as illustrated by the below graph in that the severe recession is expected to bottom at an annualised rate of -4.75% GDP in the fourth quarter of 2009 (small quarterly gain on the 3rd quarter), which will be followed by a recovery as the rate of annualised GDP contraction improves as government stimulus measures announced to date and deep interest rate cuts as well as future stimulus during 2009 kick into gear. The UK economic recovery is expected to continue into the fourth quarter of 2010 i.e. after the general election. The total recession from peak to trough is expected to see GDP contract by 6.3% and therefore this will be the worst recession since the 1930's Great Depression.

Mar 2009 - Stealth Bull Market Follows Stocks Bear Market Bottom at Dow 6,470

In Summary - We have in all probability seen THE stocks bear market bottom at 6470, which is evident in the fact that few are taking the current rally seriously instead viewing it as an opportunity to SELL INTO , Which is exactly what the market manipulators and smart money desires. They do not want the small investors carrying heavy losses of the past 18 months to accumulate here, No they want the not so smart money to SELL into the rally so that more can accumulated at near rock bottom prices! Therefore watch for much more continuous commentary of HOW this is BEAR MARKET RALLY THAT IS TO BE SOLD INTO as the Stealth Bull Market gathers steam.

Sep 2009 - UK Inflation Forecast, Will RPI Deflation Return to Inflation?

The trend into Extreme UK Deflation as measured by RPI has come to an end, forward inflation is expected to rise at a subdued rate as result of the economic recovery into the 2010 general election with RPI targeting +1% so Yes RPI Deflation will come to an end, but thereafter the high risk of a double dip recession expectation suggests the shallow uptrend in inflation will come to a halt during 2010 despite further quantitative easing and arm twisting of the banks to LEND into 2010 as the Bank of England attempts to increase the velocity of money by all means with even the option of negative interest rates to force the banks to take risks rather than park their tax payer bailout money at the BoE to earn risk free interest on.

However as i warned in November 2008 Bankrupt Britain Trending Towards Hyper-Inflation?, that Britain could be put on to the path of hyper inflation if it proceeded to follow the mainstream academic economist suggestions of printing money to monetize debt in ever escalating amounts as a consequence of the deficit spending and bailing out of the bankrupt banks, which is the path that Britain has subsequently embarked upon during 2009.

Britain is Not bankrupt and not likely to go bankrupt in the immediate future, however Britain is on the path towards Bankruptcy if it goes on the projected borrowing spree that lifts real debt to £3.2 trillion and is forced to take on banking system liabilities of £5 trillion, under such a situation the country would be bankrupt as the currency would collapse, and we would not be able to service the debt much of which would be denominated in foreign currencies given Britain's position in the global financial system. Though the more probable outcome of stagflation for many years (low economic growth, high inflation and interest rates) that erodes the value of domestic debt and savings would in itself be a bad outcome for Britain. The only real solution is to limit the growth of real public debt by cutting back on public spending and bringing public sector pensions inline with the private sector, both of which will be positive signals to the UK debt market and banking system.

I suspect today's deflationists will eventually be forced into changing their views over the coming years in the face of the failure of expected trends to materialise, just as a 60% stocks rally occurred whilst some die hard deflationists focus remained fixated on the preceding 51% drop.

For more on my NEW INFLATIONARY scenario, ensure your subscribed to my always free newsletter to get the full implications in your in box as it will be one of my seminal pieces much more so than even the Stocks Stealth Bull Market Scenario of March 09 and Crude Oil Top of July 08, or the UK Housing Market August 07 Top and Bear Market were before it amongst many others.

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-09 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 400 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

killben
05 Dec 09, 22:29

Nadeem,

Do you really feel that the stock market can go up even after the Fed starts raising interest rates.

The signs of rise in interest rates is already there .. Australia, Isreal and now Eurozone..

What unfolds would be interesting .. so many bubbles are waiting ...


Nadeem_Walayat
05 Dec 09, 23:08
Inflationary mega-trend

Hi Killben

At this point in time I am working on the inflationary mega-trend, once complete i will next focus on the stocks mega-trend in Jan, and then the uk housing market mega-trend in Feb,

accurate forecasts are borne out indepth analysis, as the inflationary mega-trend conclusions will feed into the stocks mega-trend analysis.

Rising interest rates would be bearish for stocks - ON THEIR OWN ! But I have to look at more than one items to determine trend.


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