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The only problem with this thesis is that it's hard to identify when one
hits a deflationary environment. Inflation, interest rates, and commodity
prices have been declining hand in hand with increasing equities since the
early 80s'. Over the years of this bull market, it became a mantra that
declining interest rates meant rising equities. Whenever I mentioned that
there were long periods of market history when rates and equities moved in
opposite direction (most of 30's and 40's, and fair part of 50's and 60's),
I was accused of not recognizing the new paradigm. I see the deflation
situation as a mixed bag and it is therefor hard to nail a good correlation
with rates. While commodity prices continue to deflate, the service economy
(all the items Ira mentions and more) is inflating at an increasingly rapid
rate and the world's central banks are printing money as fast as the presses
will run.
I personally feel that there may be more useable information content in the
relationship between bonds and the US$. We are currently in a rare period of
negative correlation.
Earl
-----Original Message-----
From: Bill Bancroft <bbancroft@xxxxxxxxx>
To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
Date: Monday, January 25, 1999 9:55 AM
Subject: Re: (no subject)-Deflation?
>You're right---it doesn't matter what the economy is doing, it matters what
>the markets are doing. My point is that in a deflationary enviroment, a
>trader can not look for weakness in the bond market to foreshadow stock
>market weakness. Instead, we should watch for STRENGTH in the bonds to
>foreshadow weakness in stocks.
>
>If you use a system that counts on the weakness in the bond market giving
>you an advance warning of a coming stock market sell-off, the system will
>not give you any such warning in this economic enviroment.
>
>Bill Bancroft
>
>Ira wrote:
>
>> I don't know. Does logic overcome chart patterns or does money flow
>> really
>> tell the story? If the last two years have been a deflationary
>> environment
>> with all the commodities going down, then your thesis is incorrect.
>> Both
>> stocks and bonds rallied. If you are a member of this society that pays
>> for
>> health care, prescriptions drugs, has a child going to college, goes to
>> a
>> sports event buys a car, needs auto or home owners insurance, plays golf
>> or
>> goes to a movie it is an inflationary society. In that case you are
>> wrong
>> because bonds are rallying with the stock market. So don't worry about
>> the
>> economy, it all depends where you are coming from that gives you
>> inflation
>> or deflation, what you are really interested in is " how do I make a
>> living
>> trading the current conditions shown on the charts". For that you need
>> a
>> plan and a system that works. I wish you luck. Ira
>>
>> Bill Bancroft wrote:
>>
>> > Is there a consensus on this forum regarding the US economy and
>> > deflation?
>> > Is our economy now deflationary vs. inflationary?
>> > Furthermore, if the economy is now deflationary, doesn't that change
>> the
>> > relationship between stocks and bonds?
>> >
>> > Here's why I ask: Compare the recent action in the daily chart of the
>>
>> > Dow Jones Industrial Average to the daily chart of the yield on the 30
>>
>> > yr treasury bond.
>> > They look the same! They both clearly show a bearish
>> head-and-shoulders
>> > pattern that is close to breaking the neckline!
>> >
>> > Isn't this relationship consistent with a deflationary economy rather
>> > than an inflationary one? Anyone familiar with Gibson's paradox? "In
>> a
>> > deflationary enviroment stock prices move inversely to bond prices."
>> > Are we there now?
>> >
>> > Bill Bancroft
>
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