The “D” Word

I was waiting for the last bullet in the Central Banks’ guns to be fired: a concerted rate cut. They did that tonight. As a result, the ES gyrated up and down, and the 30-Year Bonds tanked. For the first time, I am starting to feel that the word recession is too weak to describe the coming events.

For some time now, some commentators I respect have been suggesting we shall be entering a deflationary/stagflationary phase where stocks, commodities, and real estate drop while interest rates rise. Initially I gave the deflation scenario low probability occurrence – recession yes, deflation, unlikely.

But the FED performance has been so inept that I am starting to have second thoughts. I was looking for a repeat of the 1966 to 1982 scenario rather than the 1929 to 1936 one. Now I think the 1929 scenario is at least possible.

I think the jury is still out but I have to admit the ‘D’ phase has become more probable.  Still we still have some bright spots.

One bright spot on the horizon has been gold. If it can continue to rally, then we may just get away with a recession. The other bright spot has been the ability of Crude Oil to hold above 82 to 85. As long as the levels hold, this may still be a 12-month (yearly trend) correction.

If Gold and Crude Oil can rally, then the deflation scenario becomes less likely.

By the way, don’t you find it interesting that rates are cut and the 30-year Bonds tank? What is the bond market telling us about the prospect of inflation in the months to come?

5 thoughts on “The “D” Word”

  1. Ray

    Perhaps the TV sessions on CNBC today may give us some light:

    FTSE 100 Seen Heading Lower
    According to the charts, the FTSE 100 is likely to head lower, says Ray Barros, CEO of Ray Barros Trading Group. He also gives his technical analysis on the Kiwi-Aussie, dollar-yen crosses and the Jakarta Composite.

    http://www.cnbc.com/id/15840232?video=881700907

    Charting Australia & HK
    Ray Barros, CEO of Ray Barros Trading Group pulls out the charts on the S&P/ASX 200 and the Hang Seng Index.

    http://www.cnbc.com/id/15840232?video=881696611

    Charting Wall Street’s Course
    Charting where the Dow and the S&P 500 are headed, with Ray Barros, CEO of Ray Barros Trading Group.

    http://www.cnbc.com/id/15840232?video=881678893

    Mark Konyn
    CEO of RCM Asia Pacific.

    http://www.cnbc.com/id/15840232?video=881705471

    Overweight on China
    Mark Konyn, CEO of RCM Asia Pacific is overweight on China, especially its utility sector. He explains his bullish outlook on the Chinese markets to CNBC’s Maura Fogarty. Ray Barros, CEO of Ray Barros Trading Group also charts the Shanghai Composite.

    http://www.cnbc.com/id/15840232?video=881686572

  2. Hi Ray, Your website is great and I will be ordering your book. Although I have been trading the markets for many years, I am always keen to read insightful books by others as there is always more to learn! I read your Oct 8th comments and believe the next 5 to 10yrs will be most similar to the 1966 to 1982 time period as detailed on my blog http://www.marketkarma.blogspot.com
    Kind Regards,
    MK

  3. Ray, look at the TIP’s spread. inflation doesn’t seem to be a concern in the near term. I am curious why oil is still above 80 while grains and base metals are flat on their face. Gold is going to get flushed out when the panic ends, it will make a new low.

  4. Hi MK

    Thanks for your kind words.

    I had a peak at your website. Interesting that you are a Gann Man. I have never been able to make that discipline work for me despite my best endeavours. I’ll make your site a regular stopover in an effort to learn.

  5. Hi Tim

    Thanks for the comment. I guess it depends on what you mean by near term inflation: if you mean 3 – 6 months out, you’ll get no disagreement from me. I follow the ECRI advance indicators and there, inflation is not yet on the horizon.

    On the other hand, there is no disputing that since Bear Stearns, the M3 has gone from 8% to 17% (and this without the current excesses).

    M3 takes about 18 months to work into CPI and other inflation numbers. So if I am right, the ECRI advance indicators will be flashing amber by end Jan to first quarter 2009.

    I’ll also be watching the 30-yr bonds, Gold and the 82 level on Crude with interest.

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