You Say Stop; I Say Go, Go, Go

Robert Schiller November 5, 2008 Interview


If he's thinking deflation...

Jim Rogers Spiritedly Disagrees


And gives his perspectives on 1929, true facts and CNBC.

Is It Real or Not?

Time Magazine is Alerted

With the economy in the U.S. "contracting significantly" in the fourth quarter, as San Francisco Fed president Janet Yellen recently put it, an issue that was practically unthinkable three months ago is now, for the Fed, front and center: the possibility of the U.S. entering a phase of deflation, or protracted declines in the general price level. In its statement accompanying the most recent interest-rate cut, the Fed said, "In light of the declines in the prices of energy and other commodities and weaker prospects for economic activity, [the Fed] expects inflation to moderate."

Much of today's deflation anxiety results from keen awareness of the Japanese experience of the 1990s. Indeed, New York Federal Reserve governor and vice chairman of the Federal Open Market Committee Timothy Geithner was Treasury attaché in the Tokyo embassy for the first half of that decade. That's when a widespread banking crisis led to a credit crunch, an economic slump and eventually interest rates that were lowered to zero by the Bank of Japan. Even so, Japan's banks, which were in the process of repairing their balance sheets, were extremely reluctant to lend. Thus, even though interest rates were low, the economy weakened. Prices for pretty much everything declined, following a bust in the real-estate and stock markets in Japan. The country entered a decade of stagnation.

Some economists — for now a minority, to be sure — believe the U.S. is at serious risk of a deflationary spiral, even if just a quarter ago, inflation was above the Fed's comfort zone of 2% to 3%. "Compared to Japan's problem a decade ago, this crisis is unfolding much faster and spreading wider due to financial globalization," says Shanghai-based independent economist Andy Xie. A financial system unable or unwilling to lend, a tapped out U.S. consumer, and business now retrenching — and laying people off — all are a formula for possible deflation. What's so wrong with declining prices? For one thing, it makes the real cost of paying off debt that much higher — and for American consumers in hock to the tune of $14 trillion, anything that makes that debt burden more onerous is anything but helpful.

The good news is that in the U.S. now, as Richard Berner, chief U.S. economist for Morgan Stanley, writes, "The ultimate bastion of defense against deflation is a Fed committed to avoid it at all costs." And that's what we have. Study of the Japanese experience became something of a cottage industry for Fed researchers over the past eight years, and the Fed has responded accordingly: lending directly to banks, backstopping the commercial-paper market (which companies use to raise short-term money), trying to bring yields on both long- and short-term maturities down. Further, Fed chairman Ben Bernanke went out of his way recently not to object to the possibility of further fiscal stimulus from Congress. In other words, the Fed is throwing everything but the kitchen sink at avoiding a deflationary spiral, and it's doing so more quickly than its counterparts in Tokyo did a decade ago. Disinflation — diminishing inflationary pressure across the board — is healthy for the U.S. economy. Deflation is something the U.S. doesn't want to see. And the Fed knows that better than anyone.

From ThisIsMoney in the U.K.

Western powers could spiral into a period of 'sustained deflation', the International Monetary Fund warned on a day of renewed market turmoil.

The IMF said the drug of aggressive interest rate cuts is becoming less potent, and that governments need to supplement it with heavier doses of public spending.

It plans to call for a coordinated boost to state spending and tax cuts at this month's meeting of the G20 nations in Washington.

But despite government intervention, there are now 'growing risks for deflationary conditions in advanced nations', the Washington-based IMF said.

Deflation, the opposite of inflation, is one of the most destructive diseases that can afflict an economy. As prices tumble across the board, firms are driven out of business, unemployment rockets, and debts become ever-more burdensome.

It has periodically blighted Japan since the beginning of the 1990s and was last seen in the leading Western economies during the Great Depression.

The warning came as a series of aggressive interest rate cuts sent a wave of fear across world stock markets. Normally shares respond positively to cuts in official rates, but the scale of yesterday's moves stunned traders.

The Bank of England slashed 1.5 percentage points from its main rate, while the European Central Bank and its Swiss counterpart reduced rates by a half-point.

At 3%, UK rates now stand below those in the Eurozone for the first time since the single currency was introduced in 1999.

Many people will ask: 'What does the Bank know that the rest of us don't?'.' City economists expected the cautious Bank to reduce rates by a percentage point at the most.

[T]he Bank said it is now worried that a 'marked deterioration' in the UK economy could quickly drive inflation down.

The Old Lady said there are 'substantial' risks it could undershoot its 2% inflation target.

While the danger of deflation remains relatively remote, it is growing, the IMF argued.

Western powers could spiral into a period of 'sustained deflation', the International Monetary Fund warned on a day of renewed market turmoil.

And in an alarming passage, it said that the credit crunch is showing signs of becoming ' impervious' to government intervention.

Blanchard said: 'We can't be sure there are no landmines left in the field in advanced and emerging markets. So it is conceivable that we will see a flare-up of the financial crisis.'

Australia's TheAge.com

THE TD Securities-Melbourne Institute monthly inflation figure dropped 0.2% in October after an increase of 0.4% in September when the yearly headline inflation rate topped 5%. While the Reserve Bank must get some relief from such a sharp fall in the monthly figures as consumers reduce spending and the recent fall in commodity prices kicks in, it is still in uncomfortable territory and way out of the 2 to 3% target range.

As the RBA deputy governor argued last week, inflation will remain a major concern over the short to medium term, once the liquidity from the world's major economies and their central banks becomes an economic reality. Inflation may have significant implications for the Rudd Government's domestic reform agenda.

While Australia's financial system and economy is better placed than most advanced countries to ride the financial turmoil, some unique economic challenges face Australia.

Over the last year, international economic concerns have been directed to possible stagflation (lower economic growth coupled with rising inflation) due to higher consumer prices. However, with declining economic growth, falling house prices and the threat of substantial periods of high unemployment, attention has turned to "deflation".

While the world might be facing a sustained period of deflation, Australia's inflationary bubble could be about to burst, putting the Australian economy at a significant international competitive disadvantage.

I'll Trade You My World Economy for Yours

Deflationary Trade

The global shipping crash continues to get worse and this morning’s GDP data shows the US recession is already deeper than 2001 and probably 1990-91 as well.

Meanwhile the International Monetary Fund seems determined to make the whole thing worse by imposing the most ruinous strictures on supplicant nations.

Yesterday the Baltic Dry freight rate index fell below 1000 for the first time in six years and last night it fell another 40 points to 885. In June the index was 11,900, so it has fallen 93 per cent in a few months – a crash far worse than anything ever seen in the stockmarket.

The spot daily rental for a Capesize ship is now $6365, down from $234,000 per day over the space of a few weeks. Maybe that previous price was absurdly inflated, but at $6365 it is just $365 above the average daily cost of crews and fuel.

As a result the world’s ports are filling with empty ships because shipowners can’t afford to run them, as well as some full ships because the owners of the cargo won’t unload without a bank letter of credit, which banks are refusing to supply.

Shipping companies are starting to file for bankruptcy in increasing numbers as they breach loan covenants, and a shipping researcher, Andreas Vergottis of Tufton Oceanic has told Bloomberg that a fifth of the world’s dry bulk companies may soon have negative net worth because the market for second hand ships has collapsed and the value of their fleets is below outstanding debt.


From the Middle East

Deflation could well be the next major concern for economies across the world in the coming year as most global economies grapple with a grim financial and economic scenario, which is likely to deteriorate further, a senior official of Standard Chartered Bank said.

Dr Gerard Leyons, Chief Economist, Group Head of Global Research, Standard Chartered Bank, projected a further downfall specifically in the United States and the United Kingdom economies.

Leyons said in spite of some "helpful factors" in the year ahead such as correction in oil prices, a likelihood of lowered rates and cheaper mortgages, the outlook is grim. "We can't stop the recession that is about to hit us. But despite best efforts to stabilise the financial crisis, the economic situation will still deteriorate."

As further reductions in interest rates take place, worries pertaining to inflation are replaced by fears of deflation. "In fact, by this time next year, deflation may be the major concern. That is both because of the intense competitive pressure evinced in global supply chains and the deflationary pressures resulting from the financial crisis."

Talking about the correction in oil prices, he said that oil producers were not yet suffering from the recent correction in oil prices because many countries have budgeted oil prices not too far from previous levels, or even lower.

Considering the difficulties they may face in raising liquidity, the oil producers would require to open up their markets, he added.

"Because of the financial crisis, many oil producers will find it harder or costlier to attract capital, thus pushing up the cost of production. This many oil producing counties will need to open up their markets to attract capital inflows."

Adding that official interest rates in economies such as US and the UK could be expected to decline further by 0.5 per cent and more, Dr Leyons said the outlook for Europe too was poor.


RGE Ecomonitor

The financial wildfire has turned around the stagflationary trends seen earlier this year into a vicious cycle of global deflation in debt, assets, wages, and goods. Headline consumer inflation has peaked in most of the developed and emerging world, except in places where food/fuel subsidies were recently rolled back or post-Q3 data are still unavailable.

According to the IMF’s October World Economic Outlook, the world’s average consumer prices have increased 6.2% y/y Q2 2008. JPMorgan expects world CPI inflation to slow to 2.6% y/y Q2 2009. Lower commodity prices subdued headline inflation and are expected to continue doing so on slackening global demand.

Core inflation has yet to show a significant decline but a feedback loop of debt deflation, asset deflation, commodity deflation, wage deflation, and slower global growth will likely lead to flat or lower headline and core consumer and producer prices in Q4 2008 through 2009.

But in the short- to medium-term, stag-deflation seems the most likely scenario for the world economy.

Demand Is Clearly Contracting

Andrea Rothman reports on International Air Traffic

"Air France-KLM Group, Europe's biggest airline, said profit targets will be ``difficult'' to meet as an industry report showed the first monthly decline in global passenger traffic since 2003 amid slumping travel demand."

"The Paris-based airline said the global credit crisis and slowing economic growth mean fewer tourists and business travellers, and vowed to curb capacity and freeze costs. Global airline-passenger traffic fell in September, the first drop in five years, the International Air Transport Association, or IATA, said today."

``The recession is deepening more than we expected, and the worst is yet to come'' Giovanni Bisignani, IATA's chief executive officer, said on a conference call from Istanbul. ``At this rate, losses may be even deeper than our forecast of $5.2 billion for this year'' for the industry.

The struggle at Air France, one of the world's most- profitable airlines and among the best-capitalized, may signal far worse in store for weaker carriers."

``It confirms it's a really tough year for airlines,'' said Douglas McNeill, an analyst at Blue Oar Securities in London. ``Demand is clearly contracting and airlines that managed to ride out the oil-price spike in the summer are now finding that they're faced with a fresh headache to deal with.''

"Air France fell 3.1 percent in Paris, following a 13 percent drop yesterday, after the airline said it will struggle to reach an operating-profit goal of 1 billion euros ($1.26 billion) for the year through March 2009."

"The stock fell to 11.5 euros, down 52 percent this year, giving the company a market value of 3.45 billion euros."

"Passenger-traffic grew 0.5 percent last month, the slowest rate in at least two years."

``Given the current economic climate, the company indicates that it will be very difficult to meet its operating-profit goal,'' Paris-based Air France said in its statement today. ``Nevertheless, this figure should remain clearly positive if market conditions do not deteriorate further.''

"IATA said today that passenger traffic last month -- the number of passengers multiplied by miles flown -- declined 2.9 percent from a year earlier, while freight traffic suffered a 7.7 percent decline."

"The drop in passenger travel -- down 6.8 percent in the Asia Pacific region -- was the first since an outbreak of severe acute respiratory syndrome in 2003, while the cargo drop was the first since the technology-stock bubble burst in 2001."

"Even as oil prices have tumbled to about $67 a barrel from a record of $147.27 on July 11, the financial-industry crisis has slowed demand for business-class travel, which provides the bulk of airlines' earnings. Seat occupancy rates fell 4.4 percentage points from August to 74.8 percent in September."

"North American international passenger traffic fell 0.9 percent, after steady 5 percent international growth seen earlier this year, IATA said. European carriers saw traffic drop by 0.5 percent from last year. And in the Middle East, after years of double-digit growth, passenger traffic turned to a negative 2.8 percent, Bisignani said."

China Aluminum Maker Profit Dives 92%

"Aluminum Corp of China Ltd., the world's No.3 alumina producer, said on Sunday its quarterly earnings plunged 92 percent, lagging forecasts, with its outlook clouded by high costs and sliding aluminium prices."

"As China's largest producer of the metal tries to stabilise prices and cut costs, it has cut its aluminium capacity by 18 percent and alumina capacity by 10 percent."

"But analysts say that is not enough to shore up prices of aluminium, which is widely used in the financially stressed construction and automobile industries."

"Chalco is likely to make a loss in the fourth quarter since Shanghai aluminium prices have come down to early 2003 level while costs remain high," Geoffrey Cheng, an analyst at Daiwa Institute of Research, said.

"The global aluminium market is heading for big surpluses in the next few years because smelters outside China have delayed cutting output despite weak demand and falling prices, analysts said."

"The company, also known as Chalco, reported a net profit of 182.9 million yuan ($26.7 million) in the quarter ended September, down from a restated profit of 2.29 billion yuan in the same period last year, under Chinese accounting standards."

"Its total revenue for the third quarter fell 7.9 percent to 19.08 billion yuan but operating costs surged 46.5 percent to 12.16 billion yuan."

"Threats of another round of electricity tariff hikes in China and an oversupply of aluminium clouded the company's earnings outlook, analysts said."

"We think that Chalco's operating environment is likely to remain difficult for the next 2-3 years," Macquarie said in a recent research report."

"The stock lost nearly half of its market value in the third quarter and underperformed an 18 percent drop in the blue chip Hang Seng Index .HSI. It has lost nearly 85 percent so far this year, making it the third worst performing stock on the benchmark index."

Volvo Truck Orders Plunge

"Orders at Volvo, the world’s second-largest truckmaker, fell 55 per cent in the third quarter year-on-year, and in Europe it had almost as many cancellations as new orders. Volvo recorded just 115 net order bookings for new trucks in Europe, down from 41,970 a year earlier – a 99.7 per cent drop."

“We’re heading towards the sharpest downturn I’ve ever seen in Europe,” Leif Johansson, Volvo chief executive, told analysts."

"The company said that the slowdown appeared to be spreading to emerging markets and its orders in North America had failed to recover."

“We thought North America would come back up but right now it’s not the case and its continuing to go down,” Mr Johansson said.

"European truckmakers had until last year enjoyed a long boom, driven by demand from construction and hauliers in Western Europe and fast-growing east European markets led by Russia."

"Volvo said on Friday that many of its customers were holding back on replacing vehicles because of the economic uncertainty, and some were not receiving loans to finance new trucks because of tighter credit markets."

The General Macroeconomic Trend Right Now is Deflation

Desmond Lachman write in WashingtonTimes.com:

"It is often said that generals tend to fight the last war. Judging by their continued pronouncements about inflation risks, one has to wonder whether the same might not be said of central bankers."

"Despite ever-increasing signs that the global economy is in the grips of a vicious process of financial market de-leveraging and asset price deflation, central bankers continue to fret about the threat of rising price inflation. They do so at the very time they should be worrying about the risk that a deep and prolonged recession could raise the specter of deflation of the sort that long plagued the Japanese economy after the bursting of its asset price bubbles in 1989."

"Looking in the rearview mirror, there can be no doubt that over the last year inflation has risen to levels that must give rise to concern. Indeed, U.S. headline consumer price inflation has now risen to around 5 percent or to a level not experienced in the last 25 years. Similarly in Europe, headline inflation has ratcheted up to almost 4 percent or to a level that is approximately twice the European Central Bank's inflation target of "close to but under 2 percent."

"Looking forward, as central bankers should do in setting interest rate policy, one has to be struck by the extraordinary bust in international commodity prices over the last four months. Since July 2008, international oil prices have about halved from $145 a barrel to around $70 a barrel, thereby totally reversing their earlier run-up. For their part, international food and metal prices have dropped by around 40 percent."

"This extraordinarily rapid bust in international commodity prices has occurred as markets have rapidly internalized the ever-increasing signs that the global economy is more than likely headed for its worst economic recession in the postwar period."

"Sadly, a deep economic recession will hardly be confined to the United States. For a similar equity market bust and a similar vicious credit crunch has also occurred across the globe. In those circumstances, one must expect that the international commodity price bust of last four months will prove to be anything but ephemeral. Rather, one should not be surprised to see international prices drift even lower in coming months as commodity demand wanes as the global recession takes hold."

"In the same way that the earlier spike in international commodity prices caused headline price inflation to rise substantially above core inflation up until July 2008, one must now expect that the recent dramatic bust in international commodity prices will cause headline inflation to decline substantially below the core inflation rate."

"At the same time, one must expect that, over the next year, core inflation will gradually decline in both Europe and the United States as a deep recession opens up large gaps in labor and output markets. As a result, there is every prospect that headline inflation over the next year could very well be negative in the United States and Europe."

"The prospect of falling headline inflation should make both the Federal Reserve and the European Central Bank more mindful of Japan's painful experience with price deflation in the 1990s after the bursting of its asset price bubbles. More to the point, it should alert them to the folly of insisting on fighting past inflation battles when the real risk to the global economy is that of a deep and prolonged deflationary recession."


Byron King in Australia's Dailyreckoning.com.au:

"The price has bounced all over the charts lately, from the mid-$800s per ounce down to $750 and below. The thing is, the 'paper' price from gold has just plain disconnected from the price - and the availability - for the real stuff."

"Have you tried to buy real gold lately? Many dealers are just out of bullion and coins like the U.S. Gold Eagle and Krugerrand. The U.S. Mint has customers on allocation. The only way to get real gold is to pay a premium over the 'paper' price, and I don't mean the former $20 markup per ounce."

"As far as I can find out from a spokesperson, the SPDR Gold Shares does have physical gold to back up every ounce on the books. The only other way to find out is to go tour the vault and count each gold bar."

"The other gold and precious metals miners in the Outstanding Investments portfolio are all way down. It's a combination of low metal prices and the market meltdown. I know that it's frustrating to watch these gold miners decline. It's painful. What ever happened to the 'dollar down, gold up' thesis? I'm just going to wait it out. Unless I absolutely needed the money right now - and if I did not come up with the money, there would be a severed horse head in my bed - I would not sell the gold shares."

"I'd like to think that the current share prices are absolute bargains. I'd like to think that we would all kick ourselves in five years for not buying up all the shares we can get hold of right now. But then again, this market is confounding. There always seems to be another down day. So my advice is to hang in with what you've got. And buy shares only with your speculation money, not any funds that you cannot afford to tie up for a long time."

"And speaking of long times, I believe that the current banking 'bailouts' (pardon me, 'rescues') are going to be inflationary. The general macroeconomic trend right now is deflation. And the U.S. and most other central banks of the world are fighting that with inflation of the money supplies. This can only be bad news for the dollar. And it should be good for gold."


The New York Fed has dismal news on manufacturing:

"The Empire State Manufacturing Survey indicates that conditions for New York manufacturers deteriorated significantly in October. The general business conditions index dropped 17 points to a record-low -24.6. The new orders index also fell to a record low, and the indexes for shipments, unfilled orders, and inventories all declined sharply. The prices paid index eased significantly, to its lowest level of the year, while the prices received index also fell, although less sharply. Employment indexes were negative. Future indexes declined markedly with exceptionally large declines in the future new orders and shipments indexes."

"Roughly 22 percent of respondents in the current survey said that their need for borrowed funds had increased over the past year, but a larger proportion, 31 percent, indicated that their need had decreased. When asked about changes in borrowing needs since July, 20 percent of respondents reported higher borrowing needs and almost the same percentage reported lower needs."

"The prices paid index moved downward for a third consecutive month, dropping 13 points to 31.7, its lowest level in more than a year. The prices received index also fell, although to a lesser degree, shedding 3 points to reach 20.7. Employment indexes were negative. The index for number of employees, at -3.7, remained close to last month’s level, and the average workweek index fell to -9.8."

Sit Down Before They Start to Talking

Sean O'Grady writes in the Independent

"So what shoud we be worried about next? It may sound odd, in a week in which inflation rose to a16-year peak and gas prices were 49.9 per cent higher than a year ago, but the answer may be "deflation", or falling prices. Deflation is usually seen in an economic slump, which some of the most pessimistic analysts believe is heading to Britain. Although the possibility is remote, it could happen. In any event, inflation should come down sharply next year. Oil prices are already 40 per cent below the levels they peaked at in July. What would it mean? Well, it would be a looking-glass sort of world. We could no longer rely on inflation, for example, to erode the real value of our debts. A big mortgage now will remain a big mortgage. An endowment mortgage that leaves the principal unpaid will be an even bigger debt at the end of a deflationary time."

"The current psychology in the housing market – of buyers sitting on the sidelines in the hope that prices will drop even further – may become more ingrained and may even spread to other items, thus reinforcing the downward pressure on the economy. Keeping money under the mattress is not a stupid thing to do if, when you take it out, it buys you more than it did when you put it in. Soon, interest rates may well be close to zero. In those circumstances, not all prices would fall, just as not all prices are going up now; but many, possibly including property and shares, may decline or stagnate for a long time."

"The problem with deflation is that it is born of, and breeds, nervousness. Only economies where confidence has been drained away suffer from it, and it feeds on itself. The authorities can do little. Let's face it: there is no interest rate low enough – even zero – that would persuade you to invest in a property if you expected its value to fall. And there is no tax cut big enough to make you spend if you are scared that you will lose your job. Nor is deflation such an unusual phenomenon. Historians can point to many periods when general prices fell, at times dramatically. In fact, some economists were fretting about what we might describe as "nice deflation" at the start of this decade, when the prices of consumer goods, especially electronics and toys, were slashed as China joined the global economy and began exporting vast quantities of these goods. Tesco's £10 DVD player – cheaper than most discs played on it – was perhaps the apotheosis of that benign but slightly odd era. But there are more disturbing precedents. Between the two world wars, for example, prices in Britain fell more often than not, and continuously between 1926 and 1933, when they dropped by a cumulative 15 per cent."

From Armondo Duke in Access News

"Spot gold traded down below $800 and ounce in London Thursday while in New York, December gold contracts closed down over $34 per ounce at $804.50 as economic deflation took place in a global commodity sell-off."

"Silver futures were brutalized with December contracts losing 85 cents an ounce to reach a session low of $9.30 before closing up at $9.64 per ounce, which was still down 55 cents per ounce on the day. Platinum futures crossed the $900 per ounce barrier with January contracts finishing the day's trading session down 83.90 at $891.30 per ounce."

"Precious metals weren't the only commodity to get scraped on the trading room floor as December copper futures lost 13 cents to close at $2.09 per pound. Just a few months ago, copper contracts looked like they would pass the $4.00 per pound barrier when the global economy was still in a boom cycle of growth. But with the economies of the major countries of the world deflating, demand has deflated right along with it."

"Crude oil futures fell sharply as well with November contracts on the NYMEX losing $4.69 per barrel to finish Thursday's session at $69.85. Oil, like gold, is traded in dollars and while the greenback looked like it would show an upward push against major foreign currencies, it was really a deflation of those same currencies that made the buck look like a better bet."

"The EIA reported this morning that crude oil stocks in the U.S. grew by 5 million barrels last week, nearly three times the increase energy pundits were expecting. The global economic deflation worried oil ministers who are holding an emergency OPEC meeting next week to consider cutting back on production by as much as 1 million barrels per day due to the drop in demand. Critics argue the Cartel is looking to artificially boost the price of oil by cutting production back, but the global deflation of economies has also slowing demand."

Constantine von Hoffman comments on InMoneyToday.com

"Like everyone else I’m relieved that gas prices are dropping. As gas prices drop so do those of a lot of other things, like food and shipping and clothes. That’s all good, right? Yeah, unless they don’t stop dropping. When that happens you have deflation and it is very bad."

"Deflation always means hoarding because investors and buyers hold on to their money because they don’t want to invest in even the most solid of securities. Or commodities. Like oil. Or corn, whose price dropped 6 percent Monday. Gold is up for the moment, but I think that is more a sign of desperation and clinging to an old idea and won’t last."

"Very few folks around today know what a deflation is really like. My parents lived through the last great deflation in US history, but it was 1934 and they were too young to remember it. So if you have grandparents or great-grandparents around ask them about it. But do yourself a favor. Sit down before they start to talking.”

"Today’s economies are at far greater risk from deflation than they were in the 1930s. Financing is now much more integral to building than it was then so capital reserves are much lower. In a deflation, companies and people stop investing and spending because prices and profits are always going down. The less they spend, the more demand dries up and the more deflation. At least we think the economies are at far greater risk. The Fed is printing money like crazy as it did not do in the 1929-1935 period and we do not know this amount of money creation can/will/may reverse the deflation."

"How do you stop a rampaging deflation? Great question. In the 1930s, the government tried to increase demand via tax cuts and increases in government spending. In an attempt to stop the deflation and reflate the government went off the gold standard and devalued the dollar by 40%, a measure not really available to the Government today. There’s still a lot of argument over how much good, if any, that did. What is definitely true is that it took the hyper-demand generated by World War II to truly erase that deflation."

"Current theory argues for lowering interest rates. We are now the test case for that theory. BTW, did you know that during the Great Depression there were negative interest rates? And that we are near negative interest rates on government paper now and for the same reasons it occurred in the early 1930s? Sweet dreams."

Liquidating Everyting That Has Cash Value

Mandar Nimkar reports in India's Economic Times:

"Last week was the nastiest in past two decades for the global stock and commodity markets. Gold--considered a safe haven--also tumbled amid the global credit

uncertainty."

"On Saturday, gold tumbled to $859 from its high of $936.30 in July, as investors sold the yellow metal to cover losses in equity markets. Silver plunged 11 per cent. Commodity prices tumbled more than 5 per cent. Government bonds, too, were not spared."

"Reuters/Jefferies CRB Index of 19 raw materials plunged 10 per cent since Oct 6, crude oil futures fell as much as 9.3 per cent to $77 in a single day and copper slumped 14 per cent since Jan 2006."

"The falling stocks and commodities prices signal deflationary pressure as the world is going for asset liquidation to raise cash. Deflation is defined as 'a contraction of economic activity resulting in a decline in prices."

“It's a very sombre picture as there is a panic all over the world. Every one knows that we are going into a deflationary recession. People are so scared that they are looking to liquidate everything that has a cash value,” said Bhushan Triwedi, VP-Strategies, Globe One Advisory."

“On the daily charts, double bearish and shoulder has formed, neckline breakout of which gives a target of 9000 on Sensex and 2900 on Nifty. However, daily RSI is in short term oversold zone, which hints at some relief rally in coming days,” said V Bhalerao, analyst at Flexion Capital."


Chinese Vice-Minister Urges Stability:

"The international community should strengthen cooperation to maintain global economic stability, a senior Chinese financial official said on Sunday."

"Li Yong, vice-minister of finance, also urged developed countries to adopt responsible policies for world macro stability."

"The international community should jointly strive for world economic stability," he said in a statement at the 78th Development Committee of the World Bank and the International Monetary Fund."

"Major developed countries should maintain the stability of the value of international reserve currencies and ease global inflationary pressures, Li said."

"The international community should also be vigilant against possible deflation caused by a slowdown of the global economy, he added."

Dr. Housing Bubble writes on the Bailout

"Make no mistake, the government loves inflation. This is the only way we are going to get out of our $10+ trillion national debt. The worst mega nightmare that is the political economist boogeyman is deflation. Why? Well if you think about it, inflation makes the most sense from the government stand point. If we have steady inflation, that $10 trillion starts to look smaller and smaller as time goes by. If we hit deflation, then we have a fixed amount of debt that we are paying off with weaker amounts of funds."

"So even though the government is publicly saying they are trying to control inflation they are silently screaming about the prospect of deflation. Why do you think they did not hesitate to inject the world with trillions in funds which by its nature is inflationary? They don’t care. All they care about is avoiding deflation which will crack the credit markets."

"If you weren’t paying attention because of all the background noise, the CPI actually went negative for the first time in August since October of 2006. So if inflation was their true concern, the market has already corrected that. Lower fuel costs, dropping commodities, and lower home prices. Yet just look at their actions. This is not what they want."

"The bailout in this regard almost assures some inflationary reactions. So there will be an impact here. A few months ago Americans were screaming about high energy prices. Well, energy has gotten a whole lot cheaper but it also means you won’t have much access to credit. That decision wasn’t taken too well."

The Consequences Will Appear in Six to Nine Months

Marketwatch.com's Rex Nutting reports on consumer spending:

"The U.S. has slipped into a rare consumer-led recession this year. It looks increasingly likely that real consumer spending will decline for the first quarter in 17 years during the third quarter, and the fourth quarter isn't likely to be any better. The only thing that kept spending up in the first half of the year was the infusion of about $100 billion into consumer's bank accounts courtesy of Uncle Sam."

"Retail sales represent about half of all consumer spending (the remainder is mostly services such as utility bills) and about a third of total final sales in the economy.

For September, economists surveyed by MarketWatch expect retail sales to fall 0.8%, which would be the third straight decline. Excluding the huge drop in auto sales to a 16-year low, sales probably fell 0.2%."

"Same-store sales were extremely weak, with retailers reporting very soft demand for discretionary goods. "Consumer credit is hard to co me by these days, so anything that can't be bought with what's in the wallet, simply isn't bought," wrote Ellen Beeson Zentner, senior economist for Bank of Tokyo-Mitsubishi."

"Consumer demand likely softened noticeably further in September, as the chaos in financial markets and deterioration in employment and income prospects have spooked households," wrote Stephen Stanley, chief economist for RBS Greenwich Capital."

"Stanley looks for a "whopping" 2.5% annualized decline in real spending in the third quarter. "The outlook for the fourth quarter could be even worse, despite the astonishing declines in energy prices in recent weeks."

"Stanley predicts consumer spending will fall again in the first quarter of the year, the first consecutive three-quarter drop in the post-World War II era."

"The good news will come on inflation. The consumer price index is expected to rise 0.2%. The core CPI is also expected to rise 0.2%."

"Inflation has almost fallen off the Fed's radar. "There is a broad consensus among market participants that price pressures will fade abruptly going forward, with some even reviving fears of deflation," Greenwich Capital's Stanley wrote. However, he's "certainly not concerned" about deflation in prices for goods and services. "Asset prices are clearly a different matter."


China View reports on comments from Chinese Official:

"Deputy Governor of the People's Bank of China Yi Gang called for international cooperation here on Saturday to restore global financial stability."

"Our current priority is to enhance international cooperation to prevent further deterioration and spillover of the crisis and restore global economic and financial stability," Yi said.

"The deepening and widening of the U.S. financial crisis have triggered a major global slowdown and escalating uncertainty, Yi Gang said in a statement at the 18th meeting of the International Monetary and Financial Committee (IMFC) held here Saturday."

"While the advanced economies have slowed significantly since the U.S. sub-prime crisis, the emerging market economies have maintained robust growth but the deteriorating external environment is putting the resilience of their macroeconomic policies to the test, he said."

"Yi also noted that as the impact of the crisis on the real economy is much worse than expected and the recovery more protracted and difficult, the risks of deflation in some countries as a result of the credit crunch have increased significantly."

"It is imperative that the major advanced economies coordinate rapid implementation of bailout packages to avoid deflation and facilitate the global recovery," said Yi.

"However, we should be aware that the injection of liquidity from these emergency measures could be a potential source of inflation in the medium and long term," the deputy governor said.

Prof Rodrique Tremblay on GlobalResearch.ca:

"The U.S. economy may be approaching what can be called a classic situation, wherein the Fed is lowering interest rates while lending through its discount window and printing money on a high scale, however the liquid money supply figures, in real terms, are not increasing, but are rather “liquidity trap” falling. Thus, there is no immediate inflation, but the money supply is contracting as banks reduce their lending and make a rush to T-bills (their yields nearly fell to zero). The short-term result is a net deflationary effect for the overall economy and on the stock market (although the long term bond market sees inflation ahead, and long term rates are rising). —The result is stock market crashes in repetition."

"In fact, this is precisely what has happened over the last few weeks, not only in the United States, but also in the U.K and in other European countries. This is a very dangerous development for the real economy, because money data in real terms are a leading indicator of the future course of the economy. Six or nine months down the road, the consequences of the credit crunch will appear in production and employment declines, because the credit crunch has the effect of placing a serious squeeze on most companies. Since the credit contraction really began in June (2008), the early part of 2009 is bound to show severe economic weakness."

"On Friday, September 19 (2008), the Bush administration announced its solution to the growing banking crisis. It made public the $700 billion Paulson plan (US Emergency Economic Stabilisation Act, EESA) that primarily focused on creating a government market for some of the bad mortgage-backed securities on the banks' books. —But this was only half of the problem. The other half of the problem was the need to stop the money supply from declining, by restoring bank credit lending and allowing companies to have access to working capital financing. The goal here is to prevent banking problems from morphing into a general contraction of consumption and capital investment plans, thus slowing down production and raising unemployement in the coming months."

"For this to happen, however, banks must be allowed to find badly needed new capital. But in a time of crisis, with stock markets declining, it is doubtful that much private capital can be found. The recent association of Warren Buffett with Goldman Sachs may be more of an exception than a rule."

"When private capital is not available, the government has no other choice but to inject equity (by buying the banks' preferred shares) into the national banking system, while taking steps to safeguard the public interest by obtaining common share warrants that can be resold profitably later, when the situation stabilizes."

"In conclusion, we may ask if it is possible to avoid a repetition of the U.S. Great Depression of the 1930s or the more recent Japan's protracted recession of the 1990s, both the result of a similar severe banking crisis? The answer is yes, if the vicious cycle of asset price decline, banking credit crunch and money supply contraction can be avoided, or, at the very least, stopped and reversed. —In economics, as in medicine, it is never too late to do the right thing."

Should You Look for a Bottom?

Mish's Recent Deflation Comments

If you care about your financial future and are not yet following Mike Shedlock's excellent Economic Analysis blog, I suggest you do.

From September 5, 2008:
"Deflation is Not Coming, Deflation is Here."

• "Credit is contracting by any reasonable measure. It would be contracting at a stunning rate if marked to market. And from a practical standpoint marked to market is how it must be considered, even if there is no direct measure (which I might add is on purpose). Instead it is still hidden in marked to fantasy level 3 assets and in SIVs and other off balance sheet vehicles. See Not Practical To Tell The Truth for this line of reasoning. M3 is simply not a reasonable measure of credit, nor is MZM. Inquiring minds will want read Bank Credit Is Contracting for more details.
  
• Trillions of dollars of housing wealth has been wiped out, yet laughably some still talk of hyperinflation. There has never been a hyperinflation in history where land prices have fallen like they are now. In fact, there has never been hyperinflation where land prices have declined at all, barring some obscure war zone perhaps.
  
• Bank writeoffs have hit $500 billion and $2 Trillion is coming. "Yes, That's $2 Trillion of Debt-Related Losses", says Nouriel Roubini."

The only question now is how long deflation lasts, not whether it gets here. For more on deflation, please see Deflation In A Fiat Regime?"

From October 10, 2008:
"Given that deflation is here right now, I concur that deflation is the bigger threat, except that "threat" is the wrong word. Necessity is more like it, because the malinvestments and excesses of the previous cycle must be purged and the pool of real savings replenished before there can be a sustainable recovery."


Nicholas Von Hoffman reports on NY Metro:

"This is one of those weeks your financial adviser never told you about. The Dow Jones Industrial Average drops below 10,000, taking with it the savings of millions. How the money runs out and goes who knows where!"

"Below 10,000 is below a magic line, the line the hard-times barbarians were not supposed to breach. Since the Dow ascended the heights above the line in 2004, it has been an article of faith that it would not go below 10,000 again in our lifetimes."

"The price of stocks is not the only thing that is going down. The price of everything is heading south. Corn is down 46 percent. Oil is down 39 percent, which means you will see the price at the pump continue to slide. But take no solace from that; there will be less money with which to buy gasoline."

"This is deflation, a word with which we may become as familiar as we are with inflation. Deflation usually comes as a result of the bursting of very large inflationary bubbles, with resulting strings of bankruptcies, foreclosures and failures. The last major deflation in the United States occurred during the Depression, when prices dropped much as they have begun to do now."

"Deflation is a dragon, a wealth-destroyer, a fire-breathing eater of money. As it drives down prices, wealth simply vanishes as an estimated $3 trillion of people’s investments have already disappeared over this period of decline and fall."

"Thankfully we have a few brakes — such as bank account deposit insurance. We have an unemployment compensation system up and running and other such assists for people injured by deflation. But we have not found the tools to stop the downward fall itself."

"Faced with a similar crisis in the early 1930s, President Franklin Roosevelt took the country off the gold standard and even devalued the dollar by 40 percent. Dramatic though these steps were, they did not seem to have had much of an effect on prices."

"But all bad things must end. Sometime in the coming days or weeks or months — let’s hope not years — a point of financial and emotional exhaustion will be reached, a price floor will then be established and we can begin to climb back out of the hole."

Capitalism Depends on Mild Inflation

Thea Alberto reports from the Phillipines

President Gloria Macapagal-Arroyo allayed fears anew that the Philippines would be affected by the US economic meltdown, saying that local banks were stable and only had little exposure to the bankrupt investment firms in the US.

"The US financial crisis appears deeper than most anticipated. Any slowdown or even recession in the US is not good for the global economy. That said, the Philippines appears in relatively good shape," said Arroyo.

"The potential exposure of our banking sector to the asset deflation triggered by the sub-prime mortgage losses in the US accounts for less than one percent of the total system assets here in the Philippines; This exposure is fully reserved our banks are well capitalized and the innate conservatism of our bankers is matched by the prudence of our regulators," she added.

Arroyo claimed that despite the unstable US market, the government has continued to work hard to manage inflation.

"We have been working hard on all fronts to manage inflationary pressures," said Arroyo, noting how the country’s inflation rate continues to level off.

Michael A. Fletcher writes in the Washington Post

"It was just a few months ago that everyone was obsessed with inflation. Now it's deflation," said Bill Gross, co-chief investment officer at Pimco, an investment management company. "I think it's a possibility."

The value of a wide range of assets, from commercial real estate to stocks and bonds, has declined over the past year. Concerns about falling asset prices are compounded by a banking and credit crisis that has quickly become a global contagion.

For now, even as Gross and many other analysts see declining prices as cause for concern, they are reluctant to say the country has entered a deflationary period. And if prices fall much further, they said, the Federal Reserve has been given the tools necessary to stave off disaster.

"Right now, the declining supply of money for investment and credit is a reality," said Jacen A. Dinoff, managing partner of KCP Advisory Group, a financial consultancy. "We have lending institutions who are being very careful. They are closely scrutinizing new loans and tightening belts on existing ones. Could deflation be around the corner? It could be."

Some economists note that a period of price adjustments does not necessarily signal the start of a deflationary spiral.

"Deflation is not the problem we should be worrying about," said Adam Lerrick, an economist at Carnegie Mellon University. "A drop in the level of prices for some goods must be distinguished from a continuous fall of prices. Oil is down to $90 from $140, but does anyone expect it will be $55 a year from now and $35 in 2010?"

Analysts said that a few months of price declines should not be a problem for the economy.

But if prices continue to fall across the board for a prolonged period, the declines will weigh heavily on businesses and consumers, particularly those juggling a lot of debt, which must be paid back even as money is harder to come by.

"For a few quarters, I say bring it on, but not for too much longer," Gross said of deflation. "Capitalism depends on mild inflation. Unless we get it, the dynamics of capitalism sort of move in reverse."

Japan is the cautionary tale that economists point to when it comes to deflation. Beginning in the 1990s, the nation spent a decade wrestling with flat growth as consumer prices declined about 1 percent a year. The result was not only painfully slow growth, but also rising joblessness -- a problem that economists said was fed by the slow response by Japanese central bankers to a stock and real estate crash that sparked the downward spiral.

In the United States, policymakers have been much quicker to respond to deflationary threats. Five years ago, as inflation approached 1 percent, spawning deflation concerns, Alan Greenspan, then the Federal Reserve chairman, cut the Fed's benchmark lending rate to 1 percent and the threat was never realized. It is an outcome that gives assurance to some economists.

"As long as governments print money and run deficits, you cannot have deflation," Lerrick said.

William Pesek comments on Bloomberg

The big powers of the day cut interest rates this week to avoid another Great Depression. Joining the Federal Reserve, European Central Bank, Bank of England and Bank of Canada was the People's Bank of China.

Yesterday, South Korea, Taiwan and Hong Kong also got into the act, trimming interest rates. All Japan, which pretty much has nothing to cut, could do was pump 2 trillion yen ($20 billion) into the financial system.

What can be made of this flurry of Asian activity? Two things come to mind. One, the inflation concerns that dominated the region just a few months ago are swinging toward deflation. Two, the balance of economic power in Asia is shifting faster than many observers expected.

The spreading financial panic is leading to a realization of how vulnerable these countries are. As the $14 trillion U.S. economy slows, it will take much of Asia with it. Asia is highly dependent on the spending patterns of Americans who have yet to feel the fallout from the global credit crisis. The coming recession will change that, and fast.

Hence China's move to cut its key rate 0.27 percentage point, the second reduction in a month. The Bank of Korea and Taiwan's central bank lowered their rates by a quarter of a percentage point and Hong Kong cut its benchmark to 2 percent. Those moves followed the Reserve Bank of Australia's biggest rate cut since a recession in 1992.

'Set to Collapse'

The aggressiveness of Australia's one percentage-point cut to 6 percent was a surprise to just about everyone except Rory Robertson, an economist at Macquarie Group Ltd. in Sydney, who predicted a bigger-than-consensus action.

With unemployment heading higher, oil prices coming down, wage and price pressures subsiding, U.S. consumer-price inflation is ``set to collapse over the coming year, from about 5.5 percent at present to maybe 1 percent or less,'' Robertson says. "Within a year, U.S. discussions will again have turned to the growing risk of deflation.''

Not everyone agrees, least of all Aaron Smith, managing director of Superfund Financial Singapore. Smith's concern isn't so much the U.S.'s $700 billion bailout of the credit markets, but the Fed's historic efforts to pump liquidity into the economy.

"The commodity that may do the best is cotton,'' Smith says. "Why? U.S. dollars are made of cotton, and Ben Bernanke has been printing dollars like crazy.''

The Main Economic Policy Challenge

Andy Sing comments in Seeking Alpha:
Last week's 700 plus point drop in the Dow seems like a distant memory and a much bigger sequel looks to be in the works. The world has caught up to the US, and the domestic credit crisis has officially become a global one. Who knew that struggling home owners in Flint, Michigan facing foreclosure due to ARM resets could impact the financial well being of people living in Seoul, South Korea, so heavily and so quickly? The doom and gloom news is pervasive in the media today and here are some that have really got me worried:

Bailout Failure: U.S. stock futures tumbled Monday as the world's financial crisis didn't appear to be repaired by the $700 billion rescue plan. Since the bailout plan was approved the Dow has dropped more than 6%. So if the bailout plan fails to stem the tide, what is plan B? Do we even have a plan B?

A vicious deflationary cycle is about to ensue: Banks worldwide, stung by $588 billion in write-downs related to toxic assets -- especially mortgage-related securities -- will further reduce the flow of credit, strangling growth. That will push house prices lower, forcing additional losses and making banks even more reluctant to lend. As the credit crisis worsens, businesses will find it almost impossible to raise prices. They will then be forced to close or start laying off employees, which will in turn reduce consumer demand and thus create a vicious downward economic spiral.

Full of doubts, U.S. shoppers cut spending. This will be the final nail in the coffin that is the US economy. Consumers have already cut back spending, and further cutbacks coming into the holiday season (which account for more than 50% of retail sales) will mean big job losses and a deep recession in the new year.

Oil drops below $90 a barrel for the first time since February, and commodity prices plunge the most in 50 years. Normally this would be good news and a time to cheer. Unfortunately this is just a confirmation that global demand is expected to slow and as a result the demand for oil and other commodities is expected to fall dramatically. Commodity rich countries like Canada, Australia and South Africa have seen much sharper falls in their markets and currencies than here in the US.


The Straights Times reports from Singapore:
The United Nations called on Tuesday for tougher regulation of financial markets to deal with the 'crisis of a century' and warned the global policy response risked creating a prolonged deflationary downturn.

Adding its voice to those blaming the free-market model of the United States and Britain for the crisis, the United Nations Conference on Trade and Development (UNCTAD) said considerable public intervention was now needed to avoid greater damage to the financial system or real economy.

'The market-fundamentalist argument against stronger regulation based on the idea that market discipline alone can most efficiently monitor banks' behavior has clearly been discredited by this crisis,' it said in a policy brief.

UNCTAD said the global policy response was confused, with US efforts to revive its economy contrasting with reactive, even contractionary, moves in other big countries.

The European Central Bank was providing liquidity but retained a hawkish monetary stance at a time when fiscal policy remained bound by the EU's stability and growth pact, it said.

Policymakers have failed to grasp the full implications of the acceleration of the US deleveraging process - depreciating toxic assets and reducing debt, the weak dollar and the uncertainty of Americans, it said.

'Such forces can have tremendous negative implications for the world economic outlook as a whole,' UNCTAD said.

The painful effects of unwinding unsustainable debt must be compensated for by a policy stimulus from surplus countries such as Japan and some large Eurozone members reducing their surplus to avoid recession or a depression, it said.

UNCTAD said inflation concerns were misguided.

'The risk of a prolonged downturn or depression is far more important, as the slowdown will further reduce commodity prices... Deflation, not inflation, may actually be the main economic policy challenge,' it said.

Nadeem Walayat writes in the Market Oracle:
Global deleveraging is taking place as financial intuitions are forced to liquidate assets such as property and stocks and bonds to cover losses on huge derivatives positions is intensify as evidenced by the Iceland government instructing their financial institutions to repatriate wealth by liquidating over seas assets in defence of the Icelandic Krona as the country faced bankruptcy.

The Prime Minster of Iceland, Geir Haarde, on Monday warned: "In the perilous situation which exists now on the world's financial markets, providing the banks with a secure life line poses a great risk for the Icelandic nation," Haarde said in a televised address to the nation. "There is a very real danger, fellow citizens, that the Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool and the result could be national bankruptcy."

The more forced selling takes place the lower asset prices fall which triggers even more forced selling as derivatives positions both on exchanges and over the counter which nearly always tend to be on margin of as much as X30 exposure against the the capital deployed are hence either being forced to liquidate positions are meet margin calls. Therefore deleveraging is intensifying as the only way to finance margin payments is by selling assets as the traditional avenues for short-term money are frozen.

This also means that the impact of interest rate cuts will be muted as it will not induce the banks to lend more because they will not have any available funds to lend, nor are able to borrow money from other banks at as the interbank market freeze hits a new extreme where the only source for both liquidity and capital is now from the central banks and governments. Any capital injections will be utilised to cover losses and not be utilised to provide new mortgages or other lending as the banks face a wall of defaults on existing loans.

Britain is facing the the PERFECT STORM of DEFLATION as the housing bear market erodes home owner equity by several thousands of pounds every month, and INFLATION in the input and output prices surging to 20 year highs. This has meant that instead of taking action to save the economy, save the housing market, the Bank of England has been paralysed since April of this year into inaction.The fact is the Bank of England did not have a clue of what to do so sought to do nothing as the situation is far more complex than it appears on face value given the previously hidden fact that most of the banks are bankrupt, insolvent !, its just that no one was going to tell the public until they started to go bust, instead the banks coasted from quarter to quarter announcing ever larger bad debt provisions and calls for government tax payers cash in exchange for near worthless mortgage backed illiquid toxic putrid slime that has to smeared itself right across the whole financial and economic system and brought the UK financial system to the brink of collapse and therefore pushing Britain towards a deep dark stagflationary recession.

In the Basement and in the Tank

Coldwell Banker Announces a 10-day, 10% off sale:

Starting on October 10, 2008, Coldwell Banker will kick-off its first-ever national "10-Day Sales Event" - during which participating home sellers from across the United States will reduce the listing prices of their homes by up to 10 percent. The 10-Day Sales Event will run nationally through October 19, 2008.

"Despite the difficult headlines regarding our overall economy, the residential real estate market has been showing several positive signs over recent months that could be signaling a tipping point," said Jim Gillespie, president and chief executive officer, Coldwell Banker Real Estate LLC.

"Yet our research and discussions with our brokers and sales associates shows that in many markets sellers remain reluctant to list their homes at the proper prices necessary to attract buyers," continued Gillespie.

In a recent survey of 3,379 Coldwell Banker real estate professionals in markets across the United States, 56 percent said that listing prices in their market remain above where they need to be to attract qualified buyers. Additional findings of the survey include:

• 77 percent agreed that the majority of sellers in their market still have unrealistic expectations regarding the initial listing price for their homes
• 79 percent agreed that homes in their market that are priced appropriately are attracting more buyers and moving more quickly
• 76 percent feel that a 10 percent or less reduction in listing prices in their area is all it will take to help push these homes over the "tipping point" to a sale

"Our brokers and sales associates agreed that, even in the current climate, it will not take much movement to attract those buyers who have been watching and waiting," noted Gillespie. "Depending on the market, a price reduction of just 10 percent or less just may make the difference in both satisfying sellers and bringing buyers to the table."

Totally Tanked Stock Prices from NASD100.com

There are very few survivors to date.

The above link takes you to their October 2, 2008 S&P 500 table. Navigate around to find the DJIA and NASDAQ data, then update the prices. (With this bloodbath, it's not difficult.) These tables would be an excellent place to start when you are looking to re-build your portfolio.

Year to date, there in only ONE component (WMT) of the Dow Jones Industrial Average that is positive. Let me rephrase that: 29 out of the 30 DJIA stocks are down year to date.

Only 35 of the S&P 500 stocks are positive YTD. Let me rephrase that: 465 out of the 500 S&P 500 stocks are down year to date. Let me rephrase that: 93% S&P 500 stocks are down year to date.

You can do your own math on the NASDAQ 100.

This is astonishing.


Axel Merk writes on The World in Crisis

Where are the safe havens?

We have been warning for some time that “there is no such thing as a safe asset anymore, you have to take a diversified approach to something as mundane as cash.” Unfortunately, the current crisis shows that we may be right. Physical gold is attractive to many investors because of its lack of counter party risk. The only counter party risk with gold held in your personal vault is that someone may break in and steal it. However, even staunch gold bugs rarely hold all their net worth in gold, but diversify if for no other reason that it is impractical to have essentially all your net worth in gold. And while gold is currently fulfilling its role as sound money, it often trades in tandem with other commodities; this can result in stomach-twisting volatility. As a result, many hold gold as insurance, but few truly live on their personal gold standard.

In our analysis, we have not seen the end of the crisis; we expect continued volatility in the days, weeks and months to come. While we have been critical of U.S. institutions for not acting fast enough, there is progress. The remaining large financial institutions may be too large to fail; institutions from Bank of America to Citigroup; from Goldman Sachs to General Electric have been swallowing tough medicine to strengthen their respective balance sheets in a market when capital is expensive. In Europe, financial institutions still have a lot of work ahead of them; however, it does look like European governments are waking up to the seriousness of the situation. Without passing judgment whether bailouts should have taken place, European governments have shown both will and ability to act. What makes us more positive about Europe than many is that, ultimately, European economies are less fragile because of – with some regional exceptions - much healthier consumers and less elevated home prices. European governments may also be more willing to nationalize banks or force capital injections to protect the system than U.S. regulators are. Ultimately, it is capital that is missing more than anything; and then there’s the value of homes that triggered all of these – in the U.S., home prices continue to be too expensive, posing further risks to the U.S. economy and the dollar. Finally in Asia, while Japan is ironically shining, the region has yet to see the full impact of weaker sales to the U.S. and potential shocks to their real estate markets.

We don’t have a crystal ball either. But being active in parts of the money markets both domestically and abroad, we are concerned at what we see. There is a significant risk that the U.S. dollar resumes its downward trend. As a result, investors may want to consider diversifying to take this risk into account.

A Mirror Image of 1979

AsiaNews.it reports:
Asian markets showed a few signs of life on Tuesday but analysts fear deflation, recession and depression. Still the day ended in small losses compared to yesterday’s, which some have started to call Black Monday.

Main indices in South Korea, Singapore and Taiwan all edged higher after the Reserve Bank of Australia slashed its key rate to 6 per cent. Sydney’s index gained 1.7 per cent. Japan's Nikkei 225 index erased some of its early losses to close down by 3 per cent after plunging over 5 per cent to below 10,000 for the first time in almost five years.

Earlier in the day the Bank of Japan injected another trillion yen (S$14.5 billion) into the money market to stabilise lending among banks

Investors remain jittery that sinking banks might cut into growth and drag down prices.

Many prices have already dropped.

Oil, copper and wheat have seen the largest decline in 56 years. Copper lost 4.7 per cent yesterday. A barrel of crude oil is now under US$ 90 for the first time since February.

The Reuters/Jefferies CRB Index of 19 raw materials tumbled 10.4 per cent, that of 19 commodities fell 43 per cent from its July 3 peak, a loss larger than their total worth two years ago.

The Baltic Dry Index, a measure of commodity shipping costs, has dropped 75 percent since May.

Randall W. Forsyth writes in Barron's:

The Fed's current effort to stave off debt deflation is a mirror image to its inflation fight started 29 years ago.

ON OCT. 6, 1979, THE FEDERAL RESERVE made the biggest change in a generation in its monetary policy.

Twenty-nine years later to the day, the U.S. central bank announced the latest in the radical revamping in how it conducts policy.

Both changes were born in crises. And the latest shift marks a near-complete reversal from 1979.

Back then, under the chairmanship of Paul Volcker, the Fed said it would henceforth target the money supply and let the federal-funds rate settle where it may. The monetarist approach, as espoused by the late Milton Friedman, was adopted in an all-out effort to bring down the double-digit inflation raging then.

Monday, the Fed announced the latest in its series of changes in its policy procedures, which are of more than academic interest. Between what has been publicly disclosed and what's reportedly in the works, the latest changes would be radical actions to thaw the deep freeze in the global money markets.

But the most dramatic actions may be coming, perhaps as early as Tuesday. According to various published reports, the Fed, in conjunction with the Treasury, are working more radical measures to get credit moving, including making unsecured loans, an almost heretical notion.

Now there may be a big expansion to unsecured lending, according to various reports. The Fed's press release on paying interest on reserves noted the central bank is mulling "ways to provide additional support for term unsecured markets." That would include the commercial paper and interbank loan markets, both of which have virtually locked up in the past week or so. The President's Working Group on Financial Markets echoed that in a statement Monday, so it's fair to assume something along those lines is in the works.

Unlike collateralized lending, unsecured loans would pose credit risks to the Fed, which might absorbed via a backup from the Treasury. Goldman Sachs economists point out that, while collateralized lending limits risk to the Fed, but also limits the amount of aid the central bank can provide a troubled institution.

From the standpoint of economic history, the current proposals provide an interesting symmetry to the historic changes of October, 1979.

Then, in theory, the supply of money was to be rigidly controlled, which meant interest rates fluctuating widely, in order to bring inflation under control.

Now, the supply of money and credit is, in theory, being made highly elastic, with short-term interest rates held within prescribed bounds, in order to stave off a worsening debt deflation.

What's likely to be similar this time is that the policies will take time to bear fruit. In the meantime, there was a nasty bear market. History does indeed rhyme.

Joseph Lazzaro writes in BloggingStocks:

Most investors / readers know about inflation -- an increase in the price of a good or service not connected to an improvement.

But fewer know about its flipside -- deflation -- a decline in prices.

Moreover, while inflation is a serious problem -- it erodes purchasing power and makes it hard for businesses to project and plan for costs, moving forward- - deflation is an even bigger menace.

That's because deflation decreases the amount of money flowing to businesses for their products/services, reducing the money needed to keep commercial activity alive and the economy growing.

With the financial crisis that's squeezed credit in the U.S. now beginning to affect Europe, Bloomberg News reported Monday, are we approaching the danger of deflation? Economist David H. Wang says all of the symptoms are there. "We have falling commodity and raw materials prices, falling home prices, a pull-back in consumer spending, slowing GDP growth just about everywhere, and the worst credit conditions in several generations. These are all characteristic of a deflationary cycle," Wang said.

If commodity prices continue to decline and consumer prices do as well, "the Fed will have to cut rates, so will Europe and other central banks" to prevent the aforementioned deflation spiral, Wang said.

"On the fiscal side, increased government borrowing risks the danger of rising inflation. But that increase in spending has to be seen against a backdrop of a U.S. and now a global de-leveraging that's putting a downward pressure on prices," Wang said. "It's clear now the greater risk and danger is deflation, and that's what the Fed and other central banks should be fighting."

Monetary / Economic Analysis

What the U.S. -- and the world -- wants to avoid is a protracted period of declining prices. There always the risk that long-term inflation will rise, but policy makers must focus on preventing deflation, even it means higher inflation later, in order to prevent the serious damage that deflation would cause to the economy.

Going Over a Cliff

Benjamin Ong at The Financial Standard reports:

Taking lessons from the past, a shock response from the world's major central banks in the form of big interest rates reductions - in the order of say 50-100 basis points each time - might assist reducing the magnitude and length of the coming recession, if not a 1930s-style depression.

The RBA may indeed cut interest rates by 50 basis points today. In turn, we might eventually see the US Federal Reserve adopt the BoJ's policy of zero percent interest rates. The Reserve Bank of Australia (RBA) will have a lot to digest when its Board meets today to deliberate on the country's monetary policy setting. However, the RBA has only one critical decision to make - by how much does it need to CUT interest rates.

Barely three days (including the weekend) after the US enacted its rescue package, Europe is, itself, trying to fend off the impact of the credit squeeze. Last night, Germany announced plans to insure all private deposit accounts; the European Central Bank decided to loosen its securities quality rules to facilitate the bailout of German firm Hypo Real Estate; the government's of Belgium and Luxembourg sold their respective 75 per cent and 67 per cent share of Fortis' assets to BNP Paribas; to shore up its capital ratio, Italian bank UniCredit asked its shareholders for 3 billion euros and ‘implemented a series of cost-cutting measures, and the execution of other extraordinary transactions currently underway or envisaged.'

All these are happening against the backdrop of a worldwide slowdown that has steadily gained traction.

The problem here is that the current credit crunch had sparked a mutually reinforcing chain reaction of cutbacks by excessively leveraged borrowers and loss-ridden lenders. This is different from the crunches of the 1970s when all that was needed were short-lived adjustments to cool accelerating inflation. This time, a longer-term process of deleveraging is needed.

This is more akin to the traditional debt deflation processes seen before the second World War. These kinds of finance-driven downturns were difficult to get out of - as the US Treasury and the Fed have now learnt.

Certainly the package will help reliquify banks and other financial institutions, but with investors now dumping their stocks and earnings decelerating, banks would still need to cut back their lending and sell more assets to increase their capital-asset ratios. The way things are, banks now could sell their assets to the government. Banks would not need any help cutting back on their lending as well. Consumers and corporations are already reducing their demand for loans - debt deflation.

There really is no easy way out at this point in time. The looming global recession must run its course in order to purge the system of its past excesses.

Taking lessons from the past, a shock response from the world's major central banks in the form of big interest rates reductions - in the order of say 50-100 basis points each time - might assist reducing the magnitude and length of the coming recession, if not a 1930s-style depression.

The problem this time is that while the RBA and some other major central banks still have scope to lower interest rates, benchmark rates at the world's two biggest central banks - the US Federal Reserve and the Bank of Japan - are already close to the floor. The fed funds target rate is at 2 per cent and the BoJ discount rate is at 0.5 per cent.

The RBA may indeed cut interest rates by 50 basis points today. In turn, we might eventually see the US Federal Reserve adopt the BoJ's policy of zero percent interest rates.

John Frayer at Bloomberg reports Deflation Threat Returns:

As Federal Reserve Chairman Ben S. Bernanke and his global colleagues fight the worst financial crisis since the 1930s, one danger is looming larger by the day: deflation.

With asset markets tumbling, commodity prices plunging the most in 50 years and banks keeping a tighter grip on credit, the ingredients for a sustained period of falling prices are coalescing.

A global recession is already looking more likely, with the credit freeze stirring memories of Japan's decade-long struggle with deflation in the 1990s. So European Central Bank President Jean-Claude Trichet and Bank of England Governor Mervyn King may be forced to follow Bernanke, whose Fed has chopped its benchmark rate by 3.25 percentage points since August 2007 to 2 percent -- its most aggressive round of easing in two decades.

The deflation scenario might go like this: Banks worldwide, stung by $588 billion in writedowns related to toxic assets -- especially mortgage-related securities -- will further reduce the flow of credit, strangling growth. That will push house prices lower, forcing additional losses and making banks even more reluctant to lend. As the credit crisis worsens, businesses will find it almost impossible to raise prices.

Aggressive Easing

Trichet said Oct. 2 that European policy makers have considered reversing their decision in July to raise their benchmark rate by a quarter point to 4.25 percent. Forty-six of the 61 economists surveyed by Bloomberg News expect the Bank of England to cut its key rate by at least a quarter point Oct. 9 from 5 percent.

The Fed has already responded to one deflationary scare this decade. With inflation approaching 1 percent in 2003, then- Chairman Alan Greenspan slashed its rate to a 45-year low of 1 percent and kept it there for a year, which its critics say helped fuel the property and credit boom that is now unraveling.

Former Fed Governor Lyle Gramley says that while deflation is a risk ``if we were to go into a very, very prolonged recession and nobody did anything about it,'' he is ``not worried,'' because he's confident the Fed will act ``very, very, very aggressively.''

Deflationary Consequences

``The risk we must be careful not to underestimate is the deflationary consequences of the credit crisis,'' Bank of England Deputy Governor John Gieve said last month.

In the U.S., prices manufacturers paid for materials last month plunged the most since at least 1948, with the Institute for Supply Management's index dropping 23.5 points to 53.5 points.

The breakeven rate on U.S. 10-year Treasuries, a measure of price expectations, dropped to 1.4 percent from 2.6 percent in July. Japan is the only country whose bond market implies a lower inflation rate than the U.S. The rate represents the pace of inflation investors expect over the life of the securities.

All this is likely to make the Fed resume rate cuts, says Robert Dye, a senior economist at PNC Financial Services Group in Pittsburgh, Pennsylvania.

``If we're going over a cliff, we're not going to go over a cliff with a 2 percent federal funds rate,'' he says. ``What's the point of holding back?''

PIMCO Urges Fed:

Bill Gross, head of the world's largest bond fund, on Monday urged the U.S. Federal Reserve to take more dramatic steps to jump-start paralyzed credit markets, including direct purchases of commercial paper.

"A systemic delevering likely requires a systemic solution, which moves beyond cyclical interest rate cuts, liquidity provisions, or even the purchase of subprime mortgage-backed bonds," Gross, chief investment officer at Pacific Investment Management Co, wrote in his October letter to investors released Monday afternoon.

Gross, who oversees more than $812 billion in assets at Pimco, said the Fed must make the bold step of outright purchasing of commercial paper.

Furthermore, the Fed must now act as a "clearing house," guaranteeing that institutional transactions are cleared and counterparty obligations are honored, Gross said.

Interest rate cuts are also in order, Gross said.

"They should also cut interest rates to 1 percent, because we are experiencing asset deflation, and the threat of headline inflation is long past," Gross said.

The Dow Jones industrials .DJI settled Monday below 10,000 -- the first time since October 2004 -- down 369.88 points.