Higher market volatility usually follows the Fed policy decisions for the next 2-3 days, one way or the other. Hedge funds position themselves for volatility in advance of announcement, then spin it to benefit their book. Some will say that the Fed is doing the right thing fighting deflation and providing more liquidity for the banks to make loans ("BUY"), other side will say that "unexpected" QE2 / QE-lite shows that the Fed sees more serious trouble / double-dip / recession for the economy ("SELL")...
It's summer time; the heat is on, the volume is low, and the "market" has been starving for some volatility. Throw in erratic liquidity on stock exchanges and HFTs or possible PPT intervention and... I think it's best to ignore the short-term "market signals" and explanations by the "experts" on the news in the few days following all Fed policy announcements. People will speculate about the sizeIt's an excuse / opportunity for a few trades that don't say much of anything more than the decision itself.
Deflation. Falling asset prices.
Yep, could be toxic - vicious circle, self-fulfilling prophecy psychology change. Bill Gross of Pimco and some other active bond managers are positioning their portfolios for deflation. That's more important to understand than the direction of the stock market in next few days of volatility.
"The deflation should be comparatively benign, but it's still worrisome given the fact that unemployment currently stands at 9.5% and we see a one-in-three chance that the deflation will be accompanied by a recessionary double dip," Zandi of Moody's tells Barron's. Once an economy succumbs to deflation, it's often hellishly difficult for a nation to escape the trap. Companies and consumers alike tend to defer their spending on the assumption that prices for goods and services figure only to get cheaper in the future. Real interest rates spiral higher, making debt burdens all the more onerous. Forced collateral liquidations result, driving asset prices ever lower. ..... Deflation is anything but an errant concern, despite the U.S.'s long post-World War II history of the opposite — endemic inflation. Prices during the first three years of the Great Depression fell some 10% a year. Commodity prices during that period fared even worse. And Moody's econometric models are signaling that the U.S. might slip into deflation, albeit temporarily, by late this year or in early 2011.
Bernanke is trying to avoid another "Japan," which had "lost two decades" to deflation already. But the Fed's monetary policy has never been a panacea against the destructive Keynesian "spend it and forget it" Congress and administration's fiscal and regulatory policies.
Bernanke is copying Japan, not avoiding it. So is Congress.
Debt is deflationary. To escape deflation you have to lower your outstanding debt.
The traditional, ethical way to do this is to “Liquidate, liquidate, liquidate.”
Of course, the MBA kiddies think that they can outsmart the System by printing enough money to devalue the currency.
Won’t work. The only that works is if you have a criminal mindset and are counterfeiting Dollars...because otherwise there is debt being created to introduce each new Dollar into circulation, and that new debt is just as deflationary as any other.
At some point, you accumulate so much debt that the deflationary drag from all of your debt overwhelms any short-term potential inflationary gains from spending, anyway.
Debt sticks around, it accumulates...whereas spending is very short-term, temporary.
The net effect is that the “print money now” MBA kiddies will simply end up copying Japan’s precise response to deflation in Tokyo from 1989 to date.
Instead of outsmarting the System, they will be mired in its deflationary trap.