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Inflation Mega-Trend Long-term Growth Spiral Continues to Drive Stock Market Trend

Stock-Markets / Financial Markets 2010 Sep 05, 2010 - 04:33 PM GMT

By: Nadeem_Walayat

Stock-Markets

Best Financial Markets Analysis ArticleThe stock market closed up 298 points on the week at 10,448 (10,150). The bears that predominantly follow a non existant deflationary scenario, consistently and persistently fail to comprehend what drives the worlds economies and stock markets which is the inflation mega-trend. Governments and their respective central banks are engaged in a perpetual cycle of inflationary money printing policies with the sole aim of concentrating power and wealth into their own hands by stealing the wealth of savers and purchasing power of workers.


Why ? Because inflation gives the illusion of prosperity whereas Deflation acts as a tax on the government (therefore forces governments to contract in size) by increasing the purchasing power of savings and earnings thus under a deflationary environment workers can over time work less for a greater standard of living whilst wages stay constant, which is how it should be in a deflationary world because of constantly increasing productivity of workers that SHOULD result in falling prices.

However governments cannot allow for deflation because it effectively takes power away from governments and central banks and places it firmly into the hands of the people. Under deflation governments cannot spend more than they receive in tax revenues, as deficit spending would be inflationary, thus government or the state would be far, far smaller and less significant under a deflationary environment whilst under perpetual inflation, the higher the inflation rate the bigger the size of government which controls all aspects of its people employing ever increasing number of bureaucrats as it in effect taxes purchasing power of earnings and savings through inflation and then again taxes the inflation induced notional gains whereas under deflation there is NO Capital TAX as asset prices would FALL under deflation but at a slower pace than the level of general prices in the economy, so the government LOSES its power to tax earnings and assets under deflation as more wealth is transferred into the hands of savers and earners and corporations and less revenue available for governments to spend on a bloated public sector.

Therefore as the Inflation Mega-Trend ebook concluded some 8 months ago, governments just cannot allow for deflation to exist and as a consequence of which are in effect always stoking the fires of high inflation as they constantly attempt to play the goldilocks game of inflating the money supply without triggering an out of control wage price spiral towards hyper inflation, the ultimate risks is always of a spiral towards hyperinflation rather then the phony debate of deflation which is just fear mongering to ALLOW governments to fool their populations into perceiving Inflation to be Good and Deflation to be Evil. To achieve this the governments are engaged in a perpetual game of under reporting the real rate of inflation and engaged in the production of propaganda on future inflation expectation as the following two recent in depth articles illustrated -

26 Aug 2010 - Deflation Delusion Continues as Economies Trend Towards High Inflation

13 Aug 2010 - The Real Reason for Bank of England's Worthless CPI Inflation Forecasts

Whilst the inflation mega-trend continues to manifests itself in a subdued manner in the official CPI statistics, however readers should note that these are highly manipulated price indices that do not reflect reality. However despite the role of income and capital gain taxes, the reality of the inflation mega-trend cannot be hidden from the asset markets that always tend to respond as though leveraged to the official indices. Which despite inherent sentiment driven volatility is great news for it allows investors to monetize on the government induced inflation mega-trend to an extent far greater than taxes by means of investing in assets in scarce resources such as consistently dividend raising stocks, commodities, and ironically housing with more examples covered at length in the Inflation Mega-trend Ebook.

Stock Market Trend Quick Update

The Dow closed up on the week at 10,448, last weekends analysis (29 Aug 2010 - UK Economy Booms Whilst U.S. Stutters, Stocks Fail to Follow Crash Script ) concluded in an anticipated break of the downtrend channel that the Dow had been in, with the primary buy trigger at 10,200 to target the top of its trading range of 10,700. The Dow spent early week trading to the bottom end of the range of Dow 10k, before finally breaking out of the down channel on Wednesday's open at 10,060, with confirmation of the break on the rally above 10,200 (same day).

My next in depth analysis remains pending as the Dow remains within its trading range of approx 10,700 to 10,000. However my original expectations for the year remain for the Dow to target 12,000 to 12,500 by year end as illustrated by the below graph from the Inflation Mega-Trend Ebook (FREE DOWNLOAD). The longer term trend remains as I voiced right at the very bottom in March 2009 (15 Mar 2009 - Stealth Bull Market Follows Stocks Bear Market Bottom at Dow 6,470), is for the stock market to have entered into a multi-year bull market, so far the market has done NOTHING to negate this scenario.

DOW Stock Market Forecast 2010

Whilst the market remains range bound, my expectations are for an eventual breakout higher which will probably see prices ramp up quite quickly whilst the majority of analysts across the mainstream press and BlogosFear have concluded in a resumption of the so called bear market with a plethora of gobbledygook put forward that NEVER MATCHES REALITY, such as the nonsense that the stock market must fall due to expectations for REVERSION TO BELOW THE MEAN for PRICE / EARNINGS ! That is another MYTH based on analysts just regurgitating what others have written many times over.

THERE WILL BE NO REVERSION TO BELOW THE MEAN, THE S&P PRICE / EARNINGS RATIO WILL NOT FALL TO SINGLE DIGITS !

The stock market is in a long-term growth spiral as illustrated by the below graph again from the Inflation Mega-trend Ebook. We are in the consolidation phase before the next ramping up of stock prices takes places. The consolidation zone IS the time for LOW P/E's, which means today's market P/E is LOW NOT HIGH!

The Dow is only 7% from its bull market peak. The Dow is STILL in its corrective trading range that continues to work off the preceding 13 months bull run, 4 months so far, with my last in depth analysis (16th May 2010 - Stocks Bull Market Hits Eurozone Debt Crisis Brick Wall, Forecast Into July 2010 ) concluding that the corrective sideways trend could extend all the way into early October, so far the Dow is pretty much following the script, the more time the stock market spends within its corrective trading range the more powerful will be the eventual breakout, then those waiting for corrections to enter will be waiting all the way to Dow 12,000+!

And then we have the flash crashers with their ever expanding H&S necklines, for how long will they keep extending this pattern that was busted nearly 2 months ago? and not forgetting our Hindenburg Omen friends, don't they know that all airships these days use helium? :)

Bottom Line - Nothing new to report short-term the Dow remains in a corrective trading range of approx 10,700 to 10,000. Everybody tells you that September is usually one of the the worst months for stocks. I say its in a range with probability favouring a break higher.

Pakistan Continues to Suffer in Silence

The crooks in the Pakistan Cricket Team and the irrelevant gossip obsessed bigger crooks in the mainstream press have completely wiped out coverage of the crisis in Pakistan from all mainstream media.

The facts are 17 million people continue to be affected by the floods and its aftermath, with a staggering 8 million requiring immediate life saving aid (more than the population of Afghanistan). The floods have destroyed or damaged 1.5 million homes, with more than 6 million homeless with tents just for 1 million. That SHOULD be what the so called press should be concerning themselves with! Not floor to wall coverage of 3 bat and ball hitting idiots and broadcasting the utterances of some senile corrupt counsellor officials.

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Comments and Source: http://www.marketoracle.co.uk/Article22462.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-10 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

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Comments

Paul
06 Sep 10, 04:56
housing

Nadeem

Read with interest your comment in the weekend bulletin re investing in,amongst other assets, housing.

I know it is the British way to see the value of property rise > get hooked on the feel good factor > borrow to the hilt on the back of that (be it a new car, kitchen, bigger house, etc..), and thus fuel the never ending cycle of debt.

Am I being too simplistic or is it right to assert you mean housing in terms of a straightforward alternative investment vehicle as opposed to someone's live in 'home'?

Regards

Paul


Nadeem_Walayat
06 Sep 10, 09:24
UK housing market

Hi

housing is a long-term inflation hedge, the advantage is that the house you live in is free of capital gains tax.

Best

NW


Ryan Emery
06 Sep 10, 16:20
Thanks

Just wanted to say you write fantastic articles and I am learning a

lot as a result. Thank you so much for your insightful in depth

analysis that is well written and as always a great pleasure to read.

Sent from my iPhone


Paul
07 Sep 10, 06:12
Housing Intrigue

Ok I think I get it, for inheritance purposes.

Otherwise if you are selling with the intention to buy again, unless it's a cash purchase or you are smart with financial chicanery, you'd still remain pretty much locked into the inflationary/debt cycle.


Nadeem_Walayat
07 Sep 10, 06:15
housing

its to protect and grow your wealth.

Overtime your mortgage debt gets devalued whilst your asset (house) appreciates in value.

20 years ago the average house was about £45k with mortgages about £35k, now its £175k with mortgages £140k.

So those that retained the 35k mortgage have seen it devalued against the asset that has risen from £45k to £175k.

The housing ebook will cover all this at length.....


mandy
07 Sep 10, 15:29
your articles

Hi Nadeem,

Thanks for sharing


Nadeem_Walayat
07 Sep 10, 15:46
yw

your welcome Mandy.


Ram
07 Sep 10, 16:36
Currency

Hi Nadeem,

This is probably not directly related to this article. Which currency(other than gold!) would you advocate as the safest bet today to convert your savings to - am looking at the swiss franc and yen that have been rising..


Nadeem_Walayat
07 Sep 10, 17:25
Currency deposits

I personally would not put more than 30% of savings into other currencies, the risks of unforseen currency movements is too high. I just don't like the Yen, falling population and 200% debt, I just don't like it. My preferance is always for stable GROWING economies i.e. Canada and Austrailia fit the bill.

Citibank operate a number of currency deposit accounts that I utilise.

Note - this is NOT short-term trading but long-term monies on deposit, we are talking years.

and I still hold a sizeable amount in dollars (10%).

NW


Alex
08 Sep 10, 08:49
face

Thanks for the comments Nadeem. Always interested to read about them!

Can I ask is there a picture of you somewhere so that maybe readers can put a face to the writings? It's always good to have that connection.


Marcus
09 Sep 10, 16:11
Dollar

Hi Nadeem,

Thanks for your insightful and interesting analysis of the markets. Would you be able to share your view on the US dollar, particularly against the Yen, as it's near all time low.

Many thanks

Marcus


Nadeem_Walayat
09 Sep 10, 17:41
us dollar

Hi Marcus

I'll bring forwaqrd analysis on GBP and US Dollar to next week.

Best.

NW


Marcus
14 Sep 10, 13:51
US Dollar

Hi Nadeem,

Thanks very much for your update on the UK housing market. I was wondering if you have had any chance to think about the currency analysis.

Many thanks again

Kind regards

Marcus


Nadeem_Walayat
14 Sep 10, 14:02
dollar / sterling

Hi

My next indepth analysis is on uk interest rates, but to achieve this I have to analyse GBP first, so probably work out as two articles one on the dollar and GBP this week.

Best

NW.


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