View Full Version : Deflation Hoax

mick silver
14th November 2008, 09:16
The markets continue to bounce along the lows in what seems to be a base-building period. On Thursday, strong buying came in during the last hour of US trading and this reversed the day's losses, resulting in huge gains. At the close of the session, the Dow Jones, S&P500 and Nasdaq were up by more than 6%. Now, it is too early to say whether we have seen the lows of this bear-market, but the benefit of the doubt can be given to the upside for as long as the US markets remain above the intra-day lows recorded on 10 October 2008.

In my view, the economic news will continue to disappoint in the months ahead, business activity will remain sluggish and corporate earnings will shrink. However, the financial markets are a discounting mechanism and I suspect most of the bad news has already been absorbed by this market. Furthermore, investor sentiment is horrendous today and we have witnessed genuine distressed selling in the past few months. So, I wouldn't be surprised if we get a rally from these oversold levels. Now, whether or not this rally will fail in a few months time is anybody's guess but I suspect the financial markets will be significantly higher in 4-5 years from now. I must admit that I don't have a clue about the short-term prospects (neither does anybody else) but I do know that stocks are now poised for above-average long-term gains.

Central banks and governments are printing TRILLIONS of paper currencies around the world, the US has now become a socialist society and all this money-creation should result in a huge inflationary tsunami in the future. In my opinion, those who are forecasting deflation, don't understand our monetary system. What we have seen in the recent past is not deflation but a contraction in asset prices due to liquidation. Today, governments and central banks have the ability and motive to expand the supply of money ad infinitum and you can bet your house that paper currencies will lose tremendous purchasing power over the next decade. So, cash and fixed income assets will probably turn out to be the worst assets to own. In fact, I would argue that US Treasuries are grossly overvalued today and they are likely to crash somewhere down the road. In a few years from now, long-term interest rates in the US will go through the roof as the US Dollar and its overvalued bond-market collapses.