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We remain in deflationary times

October 16, 2014

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73 Comments
    Oct 16, 2014 16:53 AM

    Hey guys, taking into account a deflationary environment, do you think this precedes a sort of “greater depression” here in the US? And that being the case, wouldn’t stocks naturally start pricing that in via sell-offs?

      Oct 16, 2014 16:37 AM

      Chips, deflation and depression are not synonymous. The greater depression is likely to be inflationary. We have already had plenty of “Austrian” inflation (rising money supply); Keynesian inflation (rising prices) is coming next.
      Yes, the “pressures” are deflationary, and have been for nearly 15 years in REAL terms, overall, but these pressures are precisely the reason that the Fed has so outrageously expanded the currency (“money”) supply.
      It seems a little odd that deflationists want to hold debt that is denominated in more debt that is created out of nothing and backed by nothing AND the supply of which is growing exponentially!
      Henry Hazlitt had it right:
      “When interest rates are kept arbitrarily low by government policy, the effect must be inflationary,” … “In the first place, interest rates cannot be kept artificially low, except by inflation. The real or natural rate of interest is the rate that would be established if the supply and demand for real capital were in equilibrium. The actual money interest rate can only be kept below the natural rate by pumping new money into the economic system. This new money and new credit add to the apparent supply of new capital just as the judicious addition of water add to the apparent supply of real milk.”
      http://mises.org/daily/6772/What-Henry-Hazlitt-Can-Teach-Us-About-Inflation-in-2014

        Oct 16, 2014 16:05 AM

        Thanks for the insight and the link. I enjoyed the article…

        [EXCERPT] We don’t exactly know where our markets should trade, because we don’t know where interest rates would be in the absence of central-bank manipulation. Natural interest rates — free-range, organic, sustainable — are what we need. Hot-house interest rates — the government’s puny, genetically modified kind — are the ones we have.

          Oct 16, 2014 16:59 AM

          Hi Chips, I finally noticed your question under one of yesterday’s interviews and just replied to it there.

            Oct 16, 2014 16:43 PM

            Yes I saw the reply, Matthew, thank you. I bookmarked the main stockcharts chartschool page and gonna make it a part of my daily study of the markets. Very interesting to me as a short-term trader.

          Oct 16, 2014 16:48 PM

          That is a very interesting comment, Chips!

            Oct 16, 2014 16:50 PM

            Hello Al, thanks. I find these segments on a regular basis very helpful in my daily routine. In my nearly 7 years trading the markets, KER has become my everyday favorite!

    Oct 16, 2014 16:55 AM

    Cory:

    Will either you or Al be attending the annual silver summit over here on the 23-24th?

      Oct 16, 2014 16:48 PM

      Hi Dai Uy,

      The little blonde lady is turning 65 on the 24th. No, I have SERIOUS business over here! Know what I mean?

        Oct 16, 2014 16:02 PM

        TUT-TUT..Al you never give a Ladys age away…..& there’s me thinking Kathy was only about 50..judging by her photo……Anyway in case I forget on the day , wish her a very happy birthday from me ….Make sure you give her a great day…X

        Oct 16, 2014 16:38 PM

        Al: Absolutely understandable. BTW: Bow down to Washington for their game last week. Will be watching the Oregon game this week-end. I look for a 27-7 game for the Dawgs.

    Oct 16, 2014 16:59 AM

    Great, money is falling from the trees and price is getting lower – economy equivalence of perpetual motion in physics. I have been wondering why people ever have to work?

    BTW, why do I have to pay more and more for what I buy. Is it an anomaly too? Can anyone give me a place that grocery price is cheaper than ten years ago?

      Oct 16, 2014 16:13 AM

      Inflation in things you need, deflation in things you don’t need. Food-electronics is a good example of this. The same is happening in Europe.

      Because it is biblical…………….a man will work with his hands……..on the other hand, a lazy man, will require the benefits of the lender later, leading to BONDAGE . , which is about where we are with the great POLITICIANS IN THE THRONES OF WASHINGTON………….

      Oct 16, 2014 16:03 PM

      Lawrence…..Yes the Twilight Zone…haha

    Oct 16, 2014 16:21 AM

    Oil should rally a bit and that could provide relief to the markets and then oil heads down again as the drop is quite steep and looks like oil needs to bottom around 70 and further downside for the markets. Oil should give the signal for the bottom once it can hold a set price for a week or so.
    I bought GDX 3 times and sold today with minor gains as it is just dead and needs to close around 22.50 before it is worth holding.

      Oct 16, 2014 16:42 AM

      Paul i hate to tell ya but oil has a date with 78 next..Then this glen believes oil will retest 30-40 level at somepoint.. I believe all this within the next 18 months.

        bj
        Oct 16, 2014 16:12 PM

        Oil is going to get very interesting. This fracking bonanza might not last, reasons to follow and the entire Mid-East , North Africa and SW Asia when taken in total amount to an undeclared WWIII.

        The fracking will abate because as Cory showed us via charts yesterday, that the knee in the cost benefit curve for fracked oil shale sits around $80-85. But that’s only one dimension of the issue.

        Ref: AP wire referencing a report printed in the journal for Seismological Research

        Fracking is suspected of triggering increased seismic activity- in Harrison County, Ohio –Over 400 tremors on geological fault between Oct 1 – Dec 13, 2013. Ten were quakes ranging between 1.7 – 2.2 along a fault directly below three ongoing fracking operations which were suspended as per Ohio law.

        So here we go again; Privatizing profits where the risks and costs of unintended consequences will be socialized.

        In this case, it’s safe drinking water, probably conate water, that is trapped within the rock or basined by layers of impermeable rock/clay. Once that’s cracked, the lighter aromatics of petro will diffuse through the aquifers polluting public drinking water–thus requiring water purification at great expense to those who consume that water. Thus, priivatize the profits, socialize the costs and losses.

        As they say, if it’s too good to be true, then it’s probably not that good.

        I’m no treehugger, and think clean burning coal and natural gas belong in our long range national energy policy. But I like to drink clean water and do enjoy distilled spirits on the rocks from time to time, but from the hops and grains, not the compost of prehistoric life. Fracky is a game of Russian roulette–exciting and lots of fun as long as you can dodge the bullet. But it’s a numbers game you only get to lose once.

          bj
          Oct 16, 2014 16:23 PM

          Don’t say much about foreign oil because anyone who can fog a mirror and turn on the evening news should have that part of the puzzle figured out.

          Oct 16, 2014 16:53 PM

          Interesting points about fracking, bj.

          Ever seen the recent Matt Damon movie? Actually it is not a bad picture.

          Oct 16, 2014 16:09 PM

          Fracking…Is a disaster waiting to happen & a moneymaking scam…..its bad for nature, therefore it is bad for mankind

            Oct 17, 2014 17:36 AM

            Irish anything is possible before elections. Paint the picture of lower gas prices. Win some votes etc etc.. If it happened in 2008 it can happen again. What goes up must come down. The economic circle.

        Oct 16, 2014 16:50 PM

        30 – 40 level, that is interesting Glenfidish! You really think so?

          Oct 16, 2014 16:44 PM

          Deflation wins out first Al imo. We are currently experiencing the beginning of it. Im thinking she continues at a faster rate and more often then none oil prices always drop with deflation. Once the deflation has set in then inlfation will ramp higher as qe4 will have been announced far before. Its this current period of deflation midway point where miners/gold start to look very attractive. This is what most people do not realize. Many gold bugs have always believed that inflation is what drives gold.. Yes and no. For the past three years we have had lower gold prices while many harped on printing press and inflation. The setup is here and we are getting very very close. I expect gold/miners to diverge from the deflation at somepoint all the while oil headed lower. It may happen soon or could be another year. Hard to believe a al? It was not to long ago i was screaming 70’s for oil when it was above 100 and gary had higher prices. This is not a knock on gary but he changed his tune later on.

            Oct 16, 2014 16:11 PM

            glen…..the big oil guys wont allow it to drop that low…IMO

        GH
        Oct 16, 2014 16:12 PM

        Have you seen this one glenfidish? Very interesting chart:

        http://www.zerohedge.com/news/2014-10-10/why-oil-plunging-other-part-secret-deal-between-us-and-saudi-arabia

        Seems anything can happen for very short term, but those kind of prices for any amount of time would wreak utter havoc, no?

          Oct 16, 2014 16:49 PM

          GH interesting article. I try very hard to stay focus on the task and not let isis and ebola and other factors deviate from what the real situation is. The real situation is deflation and job market and debt levels. You are absolutley correct that if those prices come, it will be swift and will not last long. It will be another buying opportunity of a lifetime for oil companies.

    MCALVANY………..interview with Russell Napier……..has a great article concerning the DEFLATION….but, the end results will be as the politician come into control, their means of resolving the INDEBTEDNESS OF ALL, will be INFLAT ………..
    Rick is correct NOW is Deflation…………BUT……….

    Rick………….50 years…………..who will care…………..

      Rick,,,could you have a listen to MCALVANY interview with Napier…..and give us your views on the subject………………would appreciate………..thanks Jerry……

      Oct 16, 2014 16:38 AM

      Jerry, NOBODY CARES, NOBODY CARES! That was one of my first life lessons.

    Oct 16, 2014 16:33 AM

    RICK on EUROPE I AGREE ! Day wil do anything to hide the misery of central planning ! We are communist now !

    Oct 16, 2014 16:02 AM

    Cory, gold is up twice as much as stocks and is outperforming the dollar by 3.2%, so far this year because the market is fearful right now and gold is the safest asset when liquidity becomes a concern.
    http://www.lesjones.com/www/images/posts/exter-inverse-pyramid.jpg

      Oct 16, 2014 16:05 AM

      Matthew,

      Gold is up less then 60 dollars from a long term 3 years low which we still don’t have 100% proof it was the low. Im just saying t o place some caution. Your an experienced trader but others invest on a longer term chart. The miners are up from there low a week ago but im not convinced we are headed much higher yet. I’d prefer to see fomc first and elections next before i put all my eggs in on the longer term frame. You could be right and we are building a base but id say caution and patience for some. Im seeing multiple gaps on my canadian miners when they opened after the holiday. I will bet the farm those gaps will fill just like i bet the farm hui would fill all its gapa when i was posting about it.

      Food for thought.

        Oct 16, 2014 16:27 AM

        Glenfidish, the last three years have only made the outlook for gold much better. The counter-trend move was necessary for the health of the bigger bull market.
        I do trade a lot but also speculate/invest with the very big picture in mind. I have not sold any of the GDXJ, SGDM, and other juniors, warrants, and options that I bought right down to the lows, but I have been day trading JDST when appropriate.
        Keep in mind that those gaps could get filled weeks or months from now after a good rally. I have had miners that gapped and never looked back until the bull run was over years later. Of course, I prefer that they get filled sooner rather than later.
        A close for gold above 1250 this month would be great.
        http://stockcharts.com/h-sc/ui?s=$GOLD&p=M&yr=20&mn=11&dy=30&id=p22213010418&a=367847899

      Matthew……you should swing over and listen to Napier at MCALVANY….concerning his thoughts on Deflation….which he indicates will eventually turn to inflation (everywhere) ….because of political greed.

    Oct 16, 2014 16:09 AM

    U.S. Treasuries might look good against the dollar, but gold is going to vastly outperform them over the next several years.
    The 30 year U.S. T-bond is down 72% from its 2001 top vs gold (it was down more than 80% at the 2011 low).
    http://stockcharts.com/h-sc/ui?s=$USB:$GOLD&p=M&yr=20&mn=11&dy=30&id=p93916586035&a=371787825&listNum=1

      Matthew………Napier is saying about the same thing you are saying.

      Oct 16, 2014 16:30 PM

      Matthew,

      Does this include the all the dividends that you would have made in Treasuries? Let me guess. The answer is no.

        Oct 16, 2014 16:11 PM

        JMiller, if we assume a 4.5% average yield for for the period, it would take almost 16 years to double your money (it’s been only 13). Gold went up 3.5 times (250%) when measured in the 30 year bond (at the 2011 high, gold was up 470% vs the bond). No matter how you slice it, gold smoked the debt paper.

          Oct 16, 2014 16:25 PM

          Matthew,

          I do not doubt that gold beat bonds in the time frame that you chose but don”t you think you are cherry picking your start and end dates just a little? As you know that can make a difference.

          Let us look at a longer term chart and see:

          http://www.marketminder.com/img/gold-stocks-bonds-comparison-fisher-investments.jpg

            Oct 16, 2014 16:27 PM

            Yes, I did “cherry pick” the start date. My point is simply that gold outperforms during an economic contraction. Real GDP has been falling for about 14 years. Gold went nowhere from 1980 to 2000 because real interest rates were positive and the economy was expanding.
            The chart you linked to looks like cherry-picking too. If we start with Nixon’s move to end the dollar’s peg to gold, August 15, 1971, gold has blown away stocks and bonds. Choosing the date of that radical move can hardly be considered cherry-picking.
            Since then, gold is up more than 35 fold while the Dow is up almost 18 fold.

            Oct 16, 2014 16:21 PM

            “Yes, I did “cherry pick” the start date.”

            Noted….(for the record).

            Oct 16, 2014 16:47 PM

            Context is everything, listener, and it was perfectly appropriate to choose the example I did. I was transparent too. Did you notice that I said “…T-bond is down 72% from its 2001 top…” Note the word “TOP.” There was nothing misleading about my comment.
            Real GDP peaked and bonds plunged vs gold.

            Oct 16, 2014 16:12 PM

            Sorry Matthew but I disagree with your returns for stocks and gold. The difference between the two are not as great if you include dividends. The SP500 price is up about 1950% and gold up about 3200% since Aug. 15, 1971. The SP500 was at 95.69 on that date. Gold was around $38. The SP500 return of course does not include dividends. About one-fourth of the annual stock market gains since 1971 are because of dividends. And most people reinvest their dividends, something you can’t do with gold. If you included reinvested dividends the SP500 is up about 75 fold since 1971 and blows away gold. $1.00 grew to $75.58. Please use this Compound Annual Growth Rate calculator.

            http://www.moneychimp.com/features/market_cagr.htm

            Now of course you probably will argue that the total return of the SP500 should include dividends but not include the huge gains if they are reinvested which would blow gold out of the water. But these dividends that are not reinvested in the SP500 should at least receive some interest in Cd’s or bonds over that time period. When it comes down to it the return on stocks and gold over the long term are about the same.

            Oct 16, 2014 16:21 PM

            Matthew wrote: “Yes, I did cherry pick the start date.”

            Thanks for the laughs. I just love reading that sentence. Again and again.

            Oct 17, 2014 17:22 AM

            Matthew,

            You also stated that the chart I linked to looks like cherry-picking too. Sorry but that is not the case. I tried to find a chart that started in 1971 but could not. This was the closest one.

            http://www.marketminder.com/img/gold-stocks-bonds-comparison-fisher-investments.jpg

            From the footnote of the chart it states that the Gold spot price and S&P 500 Total Return Index are for 11/1973 – 06/2013. Bonds are represented by the US 10-Year Treasury Total Return Index (Constant Maturity) from 11/1973 – 05/2013.

            While stocks had good gains the last quarter of 1971 and the full year of 1972, they had a bad year in 1973. So the start date of the chart probably does benefit stocks. However please take notice that the chart ends 06/2013. From this point until today stocks have outperformed gold by 15%. So the end date of the chart benefits gold. So since the start date benefits stocks while the end date benefits gold, I figured it was a fair enough chart to use. At least I can say that stocks have performed as well as gold if not better.

            Your thoughts?

            Oct 17, 2014 17:58 AM

            You are wasting your time JMiller. Matthew admitted in a recent September post that HE DOES NOT EVEN BUY GOLD!!!!! It is utterly incredible anybody listens to the guy. He also wrote that “Now is the time to buy silver” right before it did a face plant. Matthew is absolutely the WORST analyst of gold and silver markets that I have ever read (except maybe Sinclair is worse). What is hilarious is that some people here are still impressed with his charts and graphs when that damn fool drove some of the readers to near bankruptcy with all the blowing of sunshine.

            Hey Matthew! What about it? You don’t even buy gold!!!!! Why all the pushing like a drug dealer since you yourself do not participate?

            You admit it in your posts. You admit you cherry pick time periods. You admit you are not a buyer. Please explain to all the readers why you push dope when it is falling in price. We also want to know why only you mysteriously make money when all others who are long are going down.

            Only on the internet man. All BS’ers like you mean nothing.

            Oct 17, 2014 17:07 AM

            To JMiller: Obviously my point here is that Matthew is promoting the fantastic virtues of gold over the stock market even as he admits he does not buy gold. He brings up endless charts and graphs to make his point even as we all know he does not participate.

            Does that strike anyone else as strange?

            Why would he make so much effort to promote that which he does not even buy? Every person who reads this site daily needs to ask themselves that simple question and then come to their own conclusions.

            I believe he is running an agenda. If Al will forgive me I will repeat that I think he is an gold Troll and a pumper who cares not for the losses sustained by an adoring pack. It is horrible that he has been allowed to keep dispensing bad advice for three years while metals fell relentlessly.

            But this is not my site and I don’t make the rules.

            Matthew needs to come clean with all the readers.

            Oct 17, 2014 17:17 AM

            BM, I have stated numerous times that I own gold but am not buying it. The gold chart should be looked at by anyone invested in silver and/or the pm miners as well. This should be obvious to you.
            I am not promoting the “fantastic virtues” of gold over stocks. I am simply pointing out that it has been extremely good at preserving purchasing power over the long term and that it is at its best when the economy is doing poorly.
            You don’t even own gold, so why do you come here at all other than to cause problems?
            You drain value from this site with every comment.

            BIRD…….WELCOME BACK….ONE note………KER REPORT…”exclusive asset based investing”,….. title in the banner at the top. With that said why wouldn’t this site be filled with HARD ASSET INVESTORS…………?…or trolls ………The real secret is to see who is giving you information that you might profit from…..Everyone must do his own DD……………..thanks for reading, if you read,(red)…………lol…………….j.

            Oct 17, 2014 17:03 AM

            JMiller, the composition of the Dow and S&P500 have changed a lot since 1971. Since there were no index funds back then (I think the first one was the Vanguard 500 in 1976), stock picking a portfolio added the risk that some holdings would run into performance-killing problems (like Eastman Kodak). Barring this risk, since the average yield for stocks was probably about 3% over the last 42 years, they would probably come out ahead of gold.
            I have nothing against stocks, but gold’s performance has been interesting and eye-opening. The time will come when I will sell most my pm portfolio and buy stocks again.

            Oct 17, 2014 17:15 AM

            Matthew,

            Thanks for the reply. All I know is that gold does not dramatically outperform stocks over the long term to the extent that you first stated and I think you now agree that the returns are much closer. I had thought that the risk/reward for gold and stocks were fairly close based on several papers that I had read in the past.

            Welcome back Birdman. Hi Jerry.

            Oct 17, 2014 17:54 AM

            JMiller, I have to point out that I don’t “now” agree. We haven’t discussed anything new to me.
            Since gold should really be compared with centrally controlled and issued money substitutes, it has performed extremely well. Stocks come with many risks (market [profit/loss], managerial [fraud, incompetence], brokerage [hypothecation, re-hypothecation, fraud, etc. —MF Global], etc.) If you buy “The Market” and not individual stocks, then, yes, overall risk comes way down. The guy who accumulates gold month in and month out can very safely ignore the markets altogether if they don’t interest him and retire well ahead of most people. Considering the risks and effort, a well-diversified stock portfolio should offer a more appealing potential advantage if one is going to choose stocks instead of gold for the long term without regard for cycles.

    ANYBODY……………following platinum?

      Oct 17, 2014 17:30 AM

      Not really.. What do you see?

        I see when Platinum is equal to or less than gold………platinum historically is a better buy………………………..j…………………

    Oct 17, 2014 17:59 AM

    J good to know. thx.

      High net worth individual ….(women)….usually like platinum over gold in jewelry, and have always paid more……plus, coins are valued more….just my observation of more than 40plus yrs.

    bob
    Oct 18, 2014 18:58 AM

    Hi Rick. I’m bearish this market 2-3 years out but not sure about near term. What are your thoughts on the advance decline line reaching new highs in September? I know before previous bears it topped out at least 3-9 months before. 1987, 2000, 2007. Do you know any instances where we had a sustainable downward move in the equity markets without the advance decline declining first?