The Dow Jones Industrial Average hit a low point back in March of this year after which it bounced back up sharply. The trajectory that the trend is on is now arcing down. From my experience this new downtrend will come close to sending the Dow back to the neighborhood of that previous low. I'm not sure if it will come close and not surpass it or actually blow past it but the result will be traumatic either way. For me the Dow is a barometer of the overall health of the American psyche. When the Dow is soaring, American confidence is as well. When the Dow is spiking down, Americans are in a state of panic. So as I talk about the Dow losing 1,500 points in the near term, one could expect the same kind of atmosphere that we had back when things looked more dire. It is conceivable that sentiment could get much worse as it will appear as though the magic of Fed Chairman Bernanke's injections and Obama's stimulating are not working. And speaking of not working, Americans enduring the highest unemployment since the Depression will become a much bigger story. How can the economy turn around when American spending is non-existent? Expect further deflation of prices as retailers slash prices in effort to attract any existing buyers rather than suffer rotting inventories or inabilities to pay their leases. This is good news if you've got cash. As a Jamaican co-worker of mine used to say "cash is king in chaos." Cash will be the only asset which will hold its value during this deflationary time. This view of mine, that deflation will occur vs. inflation goes contrary to most of the libertarians, economists and most of the people that I know. They think that because the Federal Reserve has inflated the monetary base (the true definition of inflation) that rising consumer prices will be the result. Ordinarily they would be correct however this is no ordinary time. We have had a serious prick to the credit bubble. Credit acts just like money as long as everyone believes in it. As soon as it is called into question it works in reverse. The United States was operating on mountains of credit which has, for the most part, dried up considerably. This is akin to sucking out from the total money supply half of what existed. The efforts of the Fed to re-inflate this liquidity have been largely for naught since they can't replace credit. They can't replace confidence in credit. The phrase "pushing on a string" aptly illustrates what is going on now as it did during the Depression when in an exchange between then Fed Chairman Eccles and a Congressman Goldsborough, Eccels pointed out that nothing coud be done, from a central planning standpoint to remedy this situation:
Governor Eccles: Under present circumstances, there is very little, if any, that can be done.
Congressman Goldsborough: You mean you cannot push on a string.
Governor Eccles: That is a very good way to put it, one cannot push on a string. We are in the depths of a depression and... beyond creating an easy money situation through reduction of discount rates, there is very little, if anything, that the reserve organization can do to bring about recovery.
The reason we don't have consumer inflation is because the banks, who received the lion's share of the injections are not lending out their reserves. Instead they are holding their money in the safe haven of the Federal Reserve and only receiving a paltry .5% for it. They're scared to lend this money out to consumers and businesses because they are afraid it won't come back and they are afraid that they themselves may face insolvency (if they're not there already) so it's best to keep that money on hand in case they need it.
So the Dow's going to drop now and consumer sentiment is going to get worse and more layoffs are going to occur and people won't be hired and prices are going to go down and shops will shutter (I've seen a lot of this already in my neighborhood). Oil, gold, and all other commodities will drop.
If you can sell non-productive assets, now is the time to do it. If you can get rid of some inventory, do it now. Hold on to your cash. March was not the bottom. This next go-round may prove to be more painful. And to those who say inflation is coming I ask, "how's that working out for you?" The trend is deflationary. The trend will be down for a bit more. I'll let you know when I've changed my mind about inflation but for now I'm sticking with the trend.
