Saturday, September 29, 2007
Decide what Definitions you feel comfortable in describing what will be coming in the next 6 to 9 months.
Inflation: Economic condition characterized by an increase in prices and wages, and declining purchasing power.
Deflation: Deflation is the opposite of inflation. For economists especially, the term has been and is sometimes used to refer to a decrease in the size of the money supply (as a proximate cause of the decrease in the general price level). The latter is now more often referred to as a 'contraction' of the money supply. During deflation the demand for liquidity goes up, in preference to goods or interest. During deflation the purchasing power of money increases.
Stagflation: Stagflation occurs when the economy isn't growing but prices are, which is not a good situation for a country to be in. This happened to a great extent during the 1970s, when world oil prices rose dramatically, fueling sharp inflation in developed countries. For these countries, including the U.S., stagnation increased the inflationary effects. A decrease in the general price level over a period of time.
Devaluation of the Dollar: For the United States, however, the devaluation serves as a double-edged sword for the US economy.With a devalued dollar, US products are more competitive on the international market, which will cut down its trade deficit and contribute to the further recovery of the US economy.However, another side of the coin is that the confidence of international investors will be severely hurt if the dollar's slump is not curbed.It may result in international capital exodus and dumping of US treasury bond in the market.In that case, Bush's economic policies, which features major tax cuts, may probably fail its target, causing a worse imbalance in the US economy.From the global perspective, devaluation of US dollar will bring about some positive influences.With their currencies rising against the US dollar, European countries and Japan will become less competitive on the international trade market.As a result, they may probably resort to economic restructuring to stimulate their long-sluggish domestic demand.China has obviously suffered a lot from the dollar devaluation. The United States, Japan and European countries have taken advantage of US dollar devaluation to pressure China to revalue renminbi. They have provoked a series of trade rows as a result with China. And with two thirds of its foreign exchange reserve denominated in US dollar, China has seen remarkable losses in dollar devaluation.
Bear Market: A market condition in which the prices of securities are falling or are expected to fall. Although figures can vary, a downturn of 15-20% or more in multiple indexes (Dow or S&P 500) is considered an entry into a bear market. "A recession has always meant a full blown bear market in the stock market (an average drop of over 40%). But even if there is a recession, there may be reason to argue that the large cap market indexes will not see as severe a drop as has been the case in the past." - John Mauldin
Bull Market: A financial market of a certain group of securities in which prices are rising or are expected to rise. The term "bull market" is most often used in respect to the stock market, but really can be applied to anything that is traded, such as bonds, currencies, commodities, etc.
Stock Market Crash: A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market. Crashes are driven by panic as much as by underlying economic factors. They often follow speculative stock market bubbles.
Recession: An extended decline in general business activity, typically two consecutive quarters of falling real gross national product.
Depression: A period of drastic decline in a national or international economy, characterized by decreasing business activity, falling prices, and unemployment.
Economic Expansion is an increase in the level of economic activity, and of the goods and services available in the market place. Typically it relates to an upturn in production and utilization of resources. Economic recovery and prosperity are two successive phases of expansion.
In a prior post on September 12th I related in this blog:
From Barry Ritholtz and a book by Thomas Gilovich How We Know What Isn't So "...In all too many ways: Humans have a tendency to see order in randomness. We find patterns where none exist. While that trait might have helped a baby recognize its parents (thereby improving the odds for its survival), seeing patterns where none exist is counter-productive when it comes to investing."
Personally, I feel that I see a pattern that leads me to believe (the summary below) - an "order in randomness...and "find patterns where none (may) exist."
My Personal feelings - we are facing: Stagflation, Devaluation of the Dollar, Bear Market and a Recession in the next 6 to 9 months.
There are may who feel that our current economic situation - is a pause in Economic Expansion and that we will avert Recession and a Bear Market and that Inflation will be slight.
Maybe it is the Classic - Optimist vs. Pessimist clash - of course - time will tell
If I ask the question - How do you feel? Most people would say they are not sure - or muddle through a combination of concepts that do not rhyme in sequence. Unfortunately, these times do not allow a person the comfort of Indecision.
I guess nothing is ever clear - in the middle of a "happening" but will be very clear looking back
A final statement which could cause - certain changes we have never seen before:
From John Mauldin's weekly newsletter:
"This week, the Chinese announced they are going to let one of their larger mutual funds invest outside of China. Local Chinese investors will be able to start to diversify and businesses will start to be able to take their capital and employ it abroad. This is just the start of the process. I expect that in just a few years Chinese will be able to buy a wide range of funds and investments"
Although the dollar is severely lower against other currencies - not the Chinese currency which is tied to the dollar by the Chinese government.
The Chinese have driven up their markets to an enormous bubble - and it is opined that the Chinese love to gamble in markets - and this change may allow them to invest in our markets.
So how do we combine this with - inflation/deflation - bull market/bear market/economic expansion - lots to think about for sure.
Some say that investing in large international companies are the best investment - as they are tied to the international monetary systems rather than the dollar.