Thursday, July 2, 2009

Deflation in Markets Today

Today was an ugly day in the American financial markets. There was, simply, a lack of liquidity. Stock prices fell with no attempt at a rally. Unfortunately, gold and silver prices fell as well, as did oil, without much buying interest in Treasuries.

Another dismal (un)employment number was the excuse for today's moves. The blogosphere but not the mainstream media noted that once again, the dismal loss of as estimated nearly half a million jobs in only one month was understated. The actual measured (estimated) job loss was over 100,000 worse, due to the unmeasured adjustment called the birth-death adjustment (so called because small businesses are born and die under the radar screen). Supposedly, the small businesses not measured in the "establishment" survey created over 100,000 jobs in June and over 220,000 jobs the past 3 months. Ha! Click HERE for the table and links to more info on this obscure but important measure.

The table above shows the inflation/deflation-adjusted track of 4 major bear markets. Going back to the frenetic top of the U.S. stock market over 9 years ago, it is easy to see that the NASDAQ bubble was the worst ever, and the bubble as measured by the S&P 500 is as bad in its 10th year as any in memory.

Longer term, there is "good" news here and there. Everyone is now aware that markets can fall and stay down. There is much more rational pricing over multiple markets. And, the growth in GDP and employment on a rolling 10-year basis has reached cyclical lows similar to other major bottoms in the economy, such as 1938.

On a very long-term investing horizon (over 10 years), the current era could represent a secular low that ended up being favorable for high-quality assets, though the short-term is a very different story, it would appear.

Between random events and active manipulation of the economy and the markets by changing forces with changing and inscrutable motives, predicting the short-, intermediate-, and long-term outlook is more challenging than ever. Cast a cold eye on all forecasts. Seek out current yield equal to or above current inflation.

Investors should both stick with markets they know best, concentrate on businesses they control if possible, and have enough cash to commit either to a deeply undervalued sector should one appear or to hop on a trend if they feel it is playable (using "play" money in the latter case!).

Copyright (C) Long Lake LLC 2009

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