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Several months back there was an excellent article in Barron's showing the
correlation of stock market performance and the impact of inflation or
deflation on valuations. (This may not be quite precise, but for the purposes
of this note its close enough.) What was shown was that there is a narrow
range between inflation and deflation in which stock market performance is
excellent, i.e., stock prices rise nicely. If the economy slips out of this
range into an infationary or deflationary period, stock prices get pummeled.
We've seen the inflationary impact in the USA in past markets but we've not
seen any recent major deflationary reactions other than the crash of 1929.
All we've seen is recessionary retrenchment.
Well maybe the time is ripe for deflation. (It'll take 1 or 2 years to know
for sure.)
Some evidence is emerging. Shipping rates (volume of goods moving) has all
but collapsed in the Far East verifying the collapse of the local economies.
And the very real possibility of deflation in that area. This statement,taken
from commentary by Bill Wolman on CNBC, is supportef by the collapse of the
stock prices of the major USA paper companies which are heavy onto liner
board and corrugated paper used in shipping cartons. Even though these
companies have mothballed capacity, new capacity coming on stream in the Far
east will have a devistating effect on prices world wide if the volume is not
absorbed in local consumption.
Further, the local economic collapse will terminate any near term (and
possibly longer) expansion that had been going on in infrastructure
expansion. With that, the export of into these countries of equipment from
the USA will collapse. Earth moving equipment, telephonic equipment, ad
nauseum.
Basis economics dictates that business activity AT THE MARGIN has heavy
influence on prices and profitability of most corporations especially the
capital intensive, high fixed cost companies. Net - net of all of this Asian
"contagion" effect on our stock markets experienced this week may be only the
beginning. We could very well be importing deflation from the Far East along
with our chips and micro computers.
Today, Elaine Gazzarelli made a cogent observation that Fed Chairman
Greenspan may have a concern about possible deflation, but if he does, there
is no way he can utter such a thesis. I suggest we listen carefully to the
economists of the major investment banking firms.
In any event, Caveat Emptor based on economic possibilities rather than
DeMark's sequenti.... posted several months ago which predicted a major
decline.
Personally, I'm getting ready. Including the dumping of my real estate
holdings and collectibles while prices are still high and people still have
currency.
Jim Barone
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