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Posts Tagged ‘Japan’

Why deflation is a blessing

Posted by Danny on June 30, 2014

Average wages are stagnant in the developed countries. Which also means that consumer spending is stagnant, because in the longer term people can spend only as much as they make. So, the economy stays weak. What is the solution? Central banks are trying to create more inflation, as if that will somehow wake the developed economies out of a coma. But will it? More on that below.

Let’s first have a look at the Nasdaq (click for larger chart):

Nasdaq

Not much has changed since our previous look at the Nasdaq. The market has climbed another 50 points, but the market is still bumping into overhead resistance from the dashed grey line. And the bearish divergence continues in the Earl indicator, while the Earl2 is now clearly turning down from a top. These indicators tend to be a bit early (which is why I called them Earl), so it doesn’t mean the market has to drop immediately, but the odds for a further rise are not good.
We will also enter a new lunar red period tomorrow, so chances are we will see weakness start in the next weeks. My current estimate is for a pullback to take the Nasdaq down to ~3900 by September. What would invalidate this picture? Well, a new upside acceleration with the Nasdaq surging above 4500 would point to the start of a blow-off peak phase, and that has probably some 10-20% chance at this point.

***

So, our central banks are trying to create more inflation. Whenever there are new laws or stated policy goals there is always one important question to ask: “Who will get any better of this?” Will it be you and me? Or somebody else? Whose purposes are being served?
Suppose they succeed in creating more inflation. E.g. Prices of food and computers start going up. Does that make things any better for you? Doesn’t that mean consumers will have little choice but spend more on those items, and thus have a smaller portion of their family budget left for other purchases? That would be bad news for companies in those other sectors. We always see the same reasoning when gasoline prices go up: it will leave consumers with less money for other products. It is true, but then why would it suddenly be good news if it are e.g. food and computer prices that go up?
If they succeed to create more inflation it will depress consumption. As an example we can look at Japan already. They finally managed to drive annualized inflation up to 3.4% in May. What most news reports failed to mention is that Japanese household spending simultaneously dropped by 8% y/y , much worse than expected. Why does that surprise anybody? The Japanese are already used to see their real income decline. Now they also start feeling that life is getting more expensive (thanks to a weaker Yen and higher taxes). So, their response is to try to save even more, because that stash of Yen they always kept in the bank suddenly doesn’t look sufficient anymore to meet their future retirement needs if cost of living keeps going up like that. It’s a normal reaction. So much for stimulating the economy with more inflation. Letting prices deflate would do more good than trying to prop prices up by artificial means like QE.
Then why are central bankers so much against it? Well, they are not serving the population, they are serving the bankers and the government, and those are the entities that benefit from inflation more. Deflation is simply a sign of progress. If technology advances we can make the same product cheaper, or produce a better product for the same price. Letting deflation happen means that the benefits of those productivity gains (coming from technological progress) are spread evenly among all the participants in the economy. Everyone enjoys cheaper products, leaving him with more money to spend on other products or new products. What’s not to like? Well, bankers don’t like it. They can profit more in an inflationary environment. They have figured out that by creating inflation, the ongoing productivity gains of the economy can be made to flow mostly into their pockets. The consumer meanwhile, finds it ever more difficult to maintain his standard of living, because inflation always seems to push prices up more than his wage goes up. He then needs a loan, another mortgage, or an extra creditcard, just to keep up… And over time that pumps a significant portion of his income straight into the banker’s pockets, in the form of interest payments. What’s not to like for the banker? From his perspective, letting deflation happen is like letting his business die.
That’s why we continue to hear that higher inflation is needed. It would be terrible if the cost of living went down for the average consumer, isn’t it? These middle class people wouldn’t need loans anymore. And imagine the protests in the third world if food and housing started to become cheaper for them as well, leaving them with money for the education of their kids. What a catastrophe that would be… Noble institutions like the IMF and UN would start feeling useless…

Our society and economy has become so perverted it is probably going to be beyond belief for future historians who study our period. Our governments punish creativity and productivity with high taxes, while rewarding doing nothing with social security payments. It is as if the biggest crime in this world is to make money, because we use large fines (taxes) to discourage it. And cost of living going down (deflation) is considered bad, our economists prefer cost of living going up (inflation) and successfully promote that as being more desirable, all the while millions are lining up for soup with food coupons.
What if we did just the opposite:
1) reward creativity and productivity ( = zero or negative income taxes )
2) punish doing nothing ( = tax on money hoarding )
3) embrace the deflation that comes with improving technology

There would be no jobless and no debt. There would also be no profits for banks. Just call me crazy.

Stay tuned,
Danny

 

Posted in Financial Astrology, Market Commentary | Tagged: , , , , | 14 Comments »

QE is like free beer

Posted by Danny on June 17, 2013

We have recorded the first negative lunar green period of the year. The Nasdaq lost 59 points. Is this the start of a prolonged downturn in the stock markets?
The current lunar red period will probably give us good clues going forward.

Let’s take a look at the S&P 500 chart (click for larger image):

S&P 500

The S&P remains within a beautiful trend channel since late last year. The lower trend line got touched twice in the recent weeks, and each time we got a swift recovery.
To put this period of weakness behind us the S&P now needs to climb above 1650 and show some follow through.

But I wouldn’t bury this correction just yet.
A third test of the lower trendline would be a bad omen, and probably see the S&P drop to 1550 fast.
This means market is likely to show its hand this week or next.
I hold some 1600 put options, just in case.

If the support at 1600 holds, then we can set sights on 1750 in July.

***

As chart of the week I have chosen the long term bonds (TLT):

TLT

A short term buy signal is setting up here, as my Earl2 indicator is turning up from oversold level. So, look for an upward bounce in bonds, no matter what Ben Bernanke comes out to tell us this week.
But that will only set up for another long term shorting opportunity imo. Because we are approaching the point where more QE will turn against itself. The problem is that after a while the QE itself becomes seen as a risk factor in the market. Investors start wondering when the QE rug will be pulled from under them, and start getting out while they still can.
That’s why QE is like free beer. When it is first announced it lifts the mood of all participants, and soon you have dance and party. But then you reach the point where more free beer only leads to bigger headaches (if not upset stomachs).
That’s what is seen in Japan already. Their latest batch of record QE has driven up interest rates rather than down, because Japanese banks have used the opportunity to sell 10% of their bonds. (see: http://www.reuters.com/article/2013/06/16/us-japan-economy-bonds-analysis-idUSBRE95F0H720130616)

Good luck,
Danny

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