Stock Market Crash Alert! Here's How To Invest In Deflationary Times

So what the heck took so long?

At last - deflation has returned - and markets are falling apart once again.  It was one helluva rally - we can only imagine what the next leg down of this mess will bring.

In order to review the investing protocol and keep us sharp as a sharper, nastier wave of deflation sets in, I penned a piece over at Contrary Investing that reviews how to investing during deflation.  

Where to Invest During Deflation - Maybe in Gold After All?

Gold is one of the lone green spots on the screen today, as the markets get clobbered across the board. You could cite the latest sovereign debt downgrade, but in reality, this is not exactly breaking news by any means. Any trader with a few working brain cells saw this writing on the wall...

Read the rest of this post about whether or not to invest in gold during deflation here.

A Deflation Primer: Guru Robert Prechter Explains the Basics That You Must Know

Regular readers know that while we are more sympathetic to the deflation argument, at least in the near term, we keep our ears open to the inflation camp as well. And that's not hard to do, as some inflation believers become quite hostile at the mere muttering of deflation!

For my money, the guy with the strongest argument still is Mr. Deflation himself, Robert Prechter. In this guest piece, Bob eloquently explains what you need to know about deflation, and why the Fed, contrary to popular opinion, is actually powerless to stop it...

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Surviving Deflation: First, Understand It

Deflation is more than just "falling prices."

By Robert Prechter

The following article is an excerpt from Elliott Wave International's free Club EWI resource, "The Guide to Understanding Deflation. Robert Prechter's Most Important Writings on Deflation."

The Primary Precondition of Deflation

Deflation requires a precondition: a major societal buildup in the extension of credit. Bank credit and Elliott wave expert Hamilton Bolton, in a 1957 letter, summarized his observations this way: "In reading a history of major depressions in the U.S. from 1830 on, I was impressed with the following: (a) All were set off by a deflation of excess credit. This was the one factor in common."

"The Fed Will Stop Deflation"

I am tired of hearing people insist that the Fed can expand credit all it wants. Sometimes an analogy clarifies a subject, so let’s try one.

It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing Jaguar automobiles and providing them to as many people as possible. To facilitate that goal, it begins operating Jaguar plants all over the country, subsidizing production with tax money. To everyone’s delight, it offers these luxury cars for sale at 50 percent off the old price. People flock to the showrooms and buy. Later, sales slow down, so the government cuts the price in half again. More people rush in and buy. Sales again slow, so it lowers the price to $900 each. People return to the stores to buy two or three, or half a dozen. Why not? Look how cheap they are! Buyers give Jaguars to their kids and park an extra one on the lawn.

Finally, the country is awash in Jaguars. Alas, sales slow again, and the government panics. It must move more Jaguars, or, according to its theory -- ironically now made fact -- the economy will recede. People are working three days a week just to pay their taxes so the government can keep producing more Jaguars. If Jaguars stop moving, the economy will stop. So the government begins giving Jaguars away. A few more cars move out of the showrooms, but then it ends. Nobody wants any more Jaguars. They don’t care if they’re free. They can’t find a use for them. Production of Jaguars ceases. It takes years to work through the overhanging supply of Jaguars. Tax collections collapse, the factories close, and unemployment soars. The economy is wrecked. People can’t afford to buy gasoline, so many of the Jaguars rust away to worthlessness. The number of Jaguars -- at best -- returns to the level it was before the program began.

The same thing can happen with credit.

It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing credit and providing it to as many people as possible. To facilitate that goal, it begins operating credit-production plants all over the country, called Federal Reserve Banks. To everyone’s delight, these banks offer the credit for sale at below market rates. People flock to the banks and buy. Later, sales slow down, so the banks cut the price again. More people rush in and buy. Sales again slow, so they lower the price to one percent. People return to the banks to buy even more credit. Why not? Look how cheap it is! Borrowers use credit to buy houses, boats and an extra Jaguar to park out on the lawn. Finally, the country is awash in credit. Alas, sales slow again, and the banks panic. They must move more credit, or, according to its theory -- ironically now made fact -- the economy will recede. People are working three days a week just to pay the interest on their debt to the banks so the banks can keep offering more credit. If credit stops moving, the economy will stop. So the banks begin giving credit away, at zero percent interest. A few more loans move through the tellers’ windows, but then it ends. Nobody wants any more credit. They don’t care if it’s free. They can’t find a use for it. Production of credit ceases. It takes years to work through the overhanging supply of credit. Interest payments collapse, banks close, and unemployment soars. The economy is wrecked. People can’t afford to pay interest on their debts, so many bonds deteriorate to worthlessness. The value of credit -- at best -- returns to the level it was before the program began.

Jaguars, anyone?

***

Read the rest of this important 63-page deflation study now, free! Here's what you'll learn:

• What Triggers the Change to Deflation
• Why Deflationary Crashes and Depressions Go Together
• Financial Values Can Disappear
• Deflation is a Global Story
• What Makes Deflation Likely Today?
• How Big a Deflation?
• More

Elliott Wave International (EWI) is the world’s largest market forecasting firm. EWI’s 20-plus analysts provide around-the-clock forecasts of every major market in the world via the internet and proprietary web systems like Reuters and Bloomberg. EWI’s educational services include conferences, workshops, webinars, video tapes, special reports, books and one of the internet’s richest free content programs, Club EWI.

Ed. note: I am a paid-up and satisfied EWI subscriber and affiliate.

Why The Market's Trend Hasn't Changed - It's Still Down (Probably)

A few weeks ago I glowingly declared that the bear was back in charge, and that the new trend was down.

Channeling Lee Corso - not so fast, my friend!

It's been a strong retracement of the Jan-Feb decline:

Markets have rebounded - from oversold in Feb, to overbought in March!

(Source: Yahoo finance)

BUT - until we see a poke above the 1150 mark, we can't say for sure that the uptrend in back in place.

So we're kind of in a state of limbo right now. The rally appears tired, and I'd say it's on it's last hurrah, but we've been seeing last hurrahs for the last 6 months. So anything is possible.

The bearish publications I follow have conceded that an upcoming decline must be swift and decisive to confirm that the downtrend is in place. So we'll see where the week takes us from here.

While Stocks Climb, The Dollar Rests

The dollar, which we believe continues to be the linchpin of the financial markets, is taking a breather from its recent assent, as stocks climb. So the formula that has been in place since roughly 2004 remains in place, and that formula is the inverse relationship between the dollar and stocks - dollar up, stocks down - stocks up, dollar down.

The dollar takes a breather - but it's still in an uptrend.

(Source: Yahoo Finance)

With the dollar still in an uptrend, and well north of it's December lows, I'm more inclined to think of this stock market rally as a correction in a downtrend, rather than vice versa.

If the dollar were to take out it's previous lows, I'd be nervous about this hypothesis. But the reality is that not only has the dollar rallied quite a bit since December - AND it also sits well north of its 2007 lows.

The dollar may be doomed in the long run, but it's running a helluva sprint right now.

Did We Mention This Stock Market Rally is Tired? Really Tired?

With the exception of last Friday (which throws a little bit of a curveball into the equation), this rally has largely taken place on declining volume, while the drops have occurred with on expanding volume - and hence more conviction.

Brian Hunt writes that the professionals aren't buying this rally...

I have a chart for you showing why many of the smartest traders I know are asking themselves this question... and why they expect the market to head lower, at least in the short term.

Below is a chart that displays how some professional traders view the market. It shows the past nine months of trading in the big S&P 500 fund (SPY). Many days, this is the most frequently traded security on the market. It moves in lockstep with the benchmark S&P 500 index.

You'll notice this chart has more to it than the simple "line charts" you often see on television or in the newspaper. This chart contains much more information, which you can use to make smarter trades.

You can read the rest of Brian's piece - and check out his price/volume chart - here.

But Don't Tell This to Mutual Funds - They're "All In"!

Bloomberg reports:

Equity mutual funds are burning through cash at the fastest rate in 18 years, leaving them with the smallest reserves since 2007 in a sign that gains for the Standard & Poor’s 500 Index may slow.

Cash dropped to 3.6 percent of assets from 5.7 percent in January 2009, leaving managers with $172 billion in the quickest decrease since 1991, Investment Company Institute data show. The last time stock managers held such a small proportion was September 2007, a month before the S&P 500 began a 57 percent drop, according to data compiled by Bloomberg.

Oh my.

(Hat tip to frequent guest author David Galland for finding this piece!)

Stephen Colbert Explores Credit for Kids: Kid-Owe!

One of our favorite financial analysts, Stephen Colbert, is back on the beat with his excellent coverage.

You may recall Colbert's astute recommendation to load your portfolio with gold, women, and sheep. (And I hope you heeded his advice!)

The new word on Stephen's mind is Kid-Owe - enjoy!

The Colbert Report	Mon - Thurs 11:30pm / 10:30c
The Word - Kid-Owe
www.colbertnation.com
Colbert Report Full Episodes Political Humor Skate Expectations

Save a Buck - By Not Saving???

Nevada Federal Credit Union is turning the business model of banking upside down - by paying customers to close their accounts! Mike "Mish" Shedlock reports on his excellent blog:

Nevada Federal Credit Union has too much money and does not know what to do with it. Worse yet, sitting in cash is costing the credit union money.

Insurance premiums are the culprit. On top of any deposit premium paid to customers, insurance runs .4%. Yet short term treasuries yield .25%.

Nevada Federal sees no good lending opportunities so it is paying customers to close accounts.

Sounds like a healthy economic system to me! Hat tip to friends/readers JL and Carson for the link tip on this beauty.

Another Good Way to Make Money - Sell Your Home at a Loss!

In case you weren't already in awe of the brilliance of our economic system, here's another great way for entrepreneurial-minded homeowners to make money - The New York Times reports:

In an effort to end the foreclosure crisis, the Obama administration has been trying to keep defaulting owners in their homes. Now it will take a new approach: paying some of them to leave.

This latest program, which will allow owners to sell for less than they owe and will give them a little cash to speed them on their way, is one of the administration’s most aggressive attempts to grapple with a problem that has defied solutions.

Hat tip again to friend and noted guest author Jonathan Lederer, who was ironically reading this piece when I forwarded him the following email...

Foreclosure Home Tour This Saturday!

To reserve YOUR spot, please click here - hilariously, this is not a joke - this email actually showed up in my inbox today:

Elk Grove, CA - Real Estate Broker David Jurewicz of HomeRocketRealEstate.com will be giving a tour of five high value foreclosure properties in the Elk Grove, CA area. The tour begins at a meeting place near Highway 99 and Laguna Blvd. Saturday March 13, 2010 beginning at 10:00 a.m. and lasting until 12:00 noon.

There are only 10 spots available for the tour which will keep it small and manageable. To reserve a spot on the tour, call David at (916) 682-6454. Those who call will be provided with information about where the meeting will take place as well as answer any questions. Attendees will receive a free 100-page e-book "Foreclosure Secrets," with a value of $19.95. David has also arranged well-priced financing with a local lender who can quickly pre-qualify potential foreclosure home buyers. "Most bank sellers won't even look at your offer unless you've been pre-qualified," says Jurewicz.

"This is a no-obligation opportunity for anyone seriously interested in buying a home to see what's available for their real estate dollar," says Jurewicz. "I'll choose the homes for the tour just before the tour begins to make sure the properties I show are a great value and are still for sale," he said.

I'll let you insert the punchline.

My Trading Activity - Still Short the S&P (Twice)

Ouch - it all looks obvious in the rear view mirror, so it's no use kicking myself. These shorts both looked great and perfectly timed for a little while.

I didn't want to cover them in a bear market, instead electing to "hold" all the way to the bottom. Well I may have declared the bear in control too soon...though we can't say for sure just yet.

I'm still hanging on because this rally appears quite tired, and I believe the risk from here is to the downside. We'll see!

Still double short the S&P...though these positions used to look much sexier!

The S&P has - almost - retraced it's swift decline. A poke above the 1150 mark would indicate it's still a bull market...for now at least.

(Source: Yahoo finance)

Have a great rest of the week in the markets! Comments are always welcome and very much appreciated.

Portions of this article (or the whole thing if you can't get enough) may be republished on your website, blog, or email newsletter - all we ask for is proper attribution, and a backlink to our site with the original article!

A Look Into Record High Trading Volume...And What It Says About Investor Confidence

The following article was adapted from the November 2009 Elliott Wave Financial Forecast and reprinted with permission here.

Steve Hochberg and Pete Kendall produce stellar analysis for Elliott Wave International - two of my favorite guys in the biz - here, they take a look at trading volume, and what it says about investor confidence. Read on, and enjoy!

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Finance's Euphoria: The Epilogue -- What Record High Dollar Volume of Trading Says About Confidence

November 6, 2009

Until Nov. 11, you can read the rest of this brand-new report for free, during Elliott Wave International's FreeWeek of U.S. forecasts. Learn more about FreeWeek, and download the rest of this report and others for free here.

By Steve Hochberg and Pete Kendall

When Wall Street’s total value of assets rose to a “mind-boggling 36.6 percent of GDP” in late 2006, The Elliott Wave Financial Forecast published a chart of U.S. financial assets literally rising off the page.

The Financial Forecast observed that financial engineers had “found a new object of investor affections—themselves” and asserted that “the financial industry’s position so close to the center of the mania can mean only one thing; it is only a matter of time” before a massive reversal grabbed hold. Financial indexes hit their all-time peak within a matter of weeks, in February. The major stock indexes joined the topping process in October 2007 and in December 2007 the economy followed. Subscribers will recall that one of the most important clues to the unfolding disaster was the level of financial exuberance relative to the fundamental economic performance.

This chart of the value of U.S. trading volume (courtesy of Alan Newman at www.cross-currents.net) reveals that the imbalance is far from corrected.

Incredibly, total dollar trading volume is even higher now than it was in 2007 when the economy was humming along. In June 2008, dollar trading volume also defied an initial thrust lower in stocks and the economy, eliciting this comment from the Financial Forecast:

The chart of dollar trading relative to GDP shows how much more willing investors are to trade shares in companies that operate in an economic environment that is anemic compared to that of the mid-1960s. A basic implication of the Wave Principle is that the public will always show up at the end of a rally, just in time to get clobbered. This chart shows that it is happening in a big, big way now because the market is at the precipice of the biggest decline in a long, long time.

Total dollar volume continues to rise despite further fundamental financial deterioration. Yes, GDP experienced a one-quarter, clunker-aided uptick of 3.5 percent in the third quarter. But the economy is in far worse shape than it was when we made the above statement. In fact, its recent performance on top of the decades-long economic underperformance (which is discussed extensively in Chapter 1 and Appendix E of the new edition of Robert Prechter's Conquer the Crash) means that industrial production just experienced its worst decade since 1930-1939. Total manufacturing employment slipped to 11.7 million people, its lowest level since May 1941 when it was 33 percent of all jobs. According to Bianco Research, manufacturing now accounts for only about 9 percent of the workforce. Finance anchors the economy now, which makes it far more susceptible to non-rational dynamics.

As Prechter and Parker explain in “The Financial/Economic Dichotomy” (May 2007, Journal of Behavioral Finance), a financial system is not bound by the laws of supply and demand in the same way that an industrial economy is. In finance, confidence and fear rule decisions. “In the financial context,” say Prechter and Parker, “knowing what you think is not enough; you have to try to guess what everyone else will think.”

We do know one thing: When everyone is thinking the same, the opposite will happen.

Right now, record high dollar volume of trading shows that confidence, at least on this basis, has reached a new historic extreme.

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Read the rest of the 10-page November 2009 Elliott Wave Financial Forecast now, when you signup for Elliott Wave International's FreeWeek of U.S. forecasts. FreeWeek ends Nov. 11, so please act now to get an enormous wealth of current market analysis and forecasts -- for free. Learn more about FreeWeek, and download the rest of this report and others for free here.

Steve Hochberg and Pete Kendall are co-editors of the Elliott Wave Financial Forecast.

Get Ready for 19 Years of On/Off Deflation If History Rhymes

We keep hearing how US households are paying off their debts. The important question is - how much debt is left to be paid off?

For some insights into how much painful deleveraging may be left - I'd like to share what Bill Bonner wrote in today's Daily Reckoning (an excellent free email newsletter by the way):

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Harvard professor Ken Rogoff says it will take 6-8 years for households to reduce their debts to a more sustainable level. Let's see. We reported on Friday that the big upswing in credit over the last 60 years added about $35 trillion in excess debt to the system. But not all of that is private debt.

Taking the period of the bubble years, in 2000 total debt in the United States came to $26 trillion. Now, it's twice that amount - $52 trillion, of which $38 trillion is private...or more than two and-a- half times GDP. At this level, the private debt absorbs roughly one out of every seven dollars in consumer earnings - in interest and principal payments.

If the private sector undertook to reduce debt back to 2000 levels, it would mean eliminating all the debt accumulated during the bubble years - or about $19 trillion. How long will it take to pay down, write off, inflate away and otherwise shuck $19 trillion? Well, inflation is running below zero - so that is not now a source of debt reduction.

Between write-offs and pay-downs, about $2 trillion has already been cut - over, very roughly, the last 2 years. At least the math is easy.

At that rate, it will take 19 years.

Now, let's go back and look at the Japanese. How long have they been deleveraging? Gosh all mighty...19 years. From 1990 to 2009.

***

For more on deflationary possibilities, here's a case study we did last week on debt deflation.

When Will Debt Deflation Turn Into Hyperinflation?

We know that, right now, we are most likely in a period of "debt deflation." Wages are falling. Prices also appear to be falling - though this is open for debate, as there are smart people who believe prices are steady or even rising. For example, Marc Faber recently said he's surprised that prices are not falling faster during this downturn, which may be an ominous sign for inflation.

But for the sake of argument, let's say that at this moment in time, we are experiencing debt deflation. When, then, will the printing of money create price inflation? Tomorrow? Next month? Next year?

I read a great explanation today in Agora's 5 Minute Forecast, where they quote guru Rob Parenteau:

When it comes to the fate of the U.S. dollar, “Two tsunami waves are crashing in to one another,” Rob Parenteau told us last night, “debt deflation on one side, and policy inflation on the other.” Rob delivered quite a speech at our first ever meeting of the Richebacher Society, amid the spectacular views of the hotel’s rooftop lounge. Our highlight came during a period of open dialogue between Rob and Riche Society members when he was asked how will we know when deflationary period is over and inflation -- or hyperinflation -- begins?

The answer, said Mr. Parenteau, is found in credit and wages. No matter how inflationary the government may be, true hyperinflation can’t be had until the consumer has access to excessive credit and his wages rise as the value of money falls. In the current environment, where credit is tight and wages are falling, rapid inflation would only be possible if there were a true crisis of confidence in the dollar. If that were to happen, he assured us, it’d be pretty obvious.

So while the current deflationary environment exists, what do we do with our money? Here's a guest article from Mr. Deflation himself, Robert Prechter, who shares 10 Things You Should and Should Not Do During Deflation.

And if you're looking for more ideas, Tom Dyson has a few as well. Tom writes the 12% Letter, an excellent publication that digs out high income ideas. Yesterday in DailyWealth, Tom had this to say about deflation:

Airline fares are also down. I just bought a nonstop ticket from Florida to Las Vegas for $120 on Southwest. This peak summer-season ticket probably would have cost twice that much last year.

Local retailers are offering big discounts, too. Last weekend, I saw three retailers advertising liquidation sales with entire store discounts of at least 50%.

Even Internet retailers are using heavy discounts. I bought some bicycle equipment online last week. I got a 40% discount on the retail price... then another 20% discount as part of a Fourth of July sale.

The Federal Reserve may be inflating our currency, but when it comes to the prices of the goods and services I use, I only see deflation.

Cheap credit is the cause. Credit's been too cheap – on and off – for the last three decades. Cheap credit caused savers to spend more than normal and entrepreneurs and businesses to borrow and build more than normal. It led to overinvestment in production and service capacity.

Last year, we reached the peak of the credit and price boom... and now prices are falling. We're in what economists call a "debt deflation."

To read Tom's full article, click here - and I'd also recommend you check out the 12% Letter if you enjoy his insights.

Centrally Planned Entrepreneurship, More Anecdotal Deflation

On Thursday, I gave a pitch for my startup (Chrometa, auto time capture) at a business innovation showcase here in Sacramento.

A traditional business plan pitch is fairly formulaic - you talk about the pain point you're addressing, your solution, your market, why your team can get it done, etc. Big focus on the market in something like this - how big is it, how can you reach and sell to it.

What really struck and nauseated me on Thursday were the number of companies that talked about their alignment with current government initiatives. At least half. One presentation even had a head shot and quote from Obama about his push for green energy or some crap like that.

I'm not knocking the entrepreneurs...they can run their companies how they choose. What bothers me is the free market taking a back seat to centrally planned government initiatives.

Why not build a product that people or businesses want and sell it to them? That is SO 20th century. This day in age, you pick out an important federal initiative - green, clean, healthcare, etc - and step on up to the trough of stimulus hand outs.

Dear reader, this is not healthy economic behavior. This, I'd imagine, is how you'd run a startup in the old Soviet Union.

This is not the first time, of course, that I've noticed this pandering going on in startup circles - which are traditionally more or less bastions of pure capitalism - but this is the most extreme I've seen it to date. Seems like everyone wants to get their hands on stimulus funds or grants.

When in Rome, I guess...or maybe when in Moscow.

Bulls who are waiting for small businesses to innovate and lead us out of the recession may be waiting longer than usual. There's a lot of effort being wasted in chasing these centrally planned initiatives.

Is This Blog the Ultimate Contrarian Indicator?

To say that I was wiping the egg off my face this week after this bearish post from last Sunday would be an understatement. Lately I have been forecasting less often, as I try to weigh different positions, and ultimately use the charts to see if they support a hypothesis. Perhaps you should take my forecasts and start trading against them!

For what it's worth, I do remain bearish on nearly everything in the medium term here. We still have not seen commodities decouple from stocks and currencies - hence if you believe the market is ultimately heading lower, than caution should also be exercised when looking at these other markets as well.

Uncorrelated markets suddenly traded in perfect harmony when the Great Deleveraging hit - and if we see another bout of it, I can't see a reason why anything will be spared, at least in the short term.

Yes, people will still need to eat, and we'll keep an eye on the food complex in particular - but caution is still the order of the day for me.

More Anecdotal Deflation

Our office in downtown Sacramento gives us a bird's eye view of the continuing unfolding

disaster here in the People's Republic of California. It is fascinating, amusing, and sad, all at the same time.

While intriguing to see a socialist experiment blow up right before my very eyes, with helpless government officials continuing to turn a bad situation worse, there are real people and businesses affected, which is not so cool...at least in the short term.

The state recently added a 3rd furlough day - so state workers now have been handed a forced 15% pay cut, in return for 3 Fridays off a month. Most would not make that trade if given the choice themselves.

The effects on the city economy are very real. Shop owners and employees I've spoken with on "Furlough Fridays" are bummed out - the coffee shop guy next door to my office described yesterday morning as "very slow". My favorite tea shop in town has also experienced a notable drop off on Fridays - half of their customers are state workers, the owner told me.

This is deflation, no doubt about it. Wages are cut. Businesses are hit. They keep prices steady or lower then to lure in bargain shoppers, who have less money to spend.

In a case like the one I'm seeing unwind right before my eyes, the inflation scenario sounds like an academic exercise.

While the state goverment has its hands tied, because it cannot print money, the Federal government is the only entity that could reverse this trend. I suppose if they printed money, restored workers full pay, and made up the different with the newly minted currency, that would eventually be inflationary.

That's the only way I can see the Fed getting this new money into the system. Banks will not lend it, and that doesn't seem likely to change anytime soon. Only public works projects that are paid with newly minted money seem like the only option.

Still, can they print it fast enough to stave off the credit deflation we're seeing left and right? I'm starting to think not.

Quick Reader Survey - Please Share Your Thoughs!

I tossed together a quick 3-question reader survey, and I'd appreciate it if you could take a minute or two to share your thoughts and suggestions with me using the survey link here.

It's always great to connect with you, and your feedback and input help me figure out where to focus my energies...namely on stuff you like, and stuff you'd like to see more of.

The Week's 3 Most Popular Posts...

1. Why 650 is a Generous Fair Value Estimate for the S&P 500
2. Uh Oh - Leading Indicator Baltic Dry Index Turns Down
3. The Outlook for Crude Oil From a Top Industry Exec
   

Positions Update

Still scared...

Current Account Value: $27,511.18

Cashed out: $20,000.00

Total value: $47,511.18

Weekly return: 0%

2009 YTD return: -45.8% :(

Prior year's results: --> Don't try this at home...this is what is known as wreckless trading

2008: -8%

2007: 175%

2006: 60%

2005: 805%

Initial stake: $2,000.00

Return on Capital? How About Return OF Capital!

I've come to the conclusion that in roughly March of 2008, the general tide shifted from inflation to deflation for the first time since World War II. Since that shift, everything we have seen has been pretty much deflationary.

Oil is half of where it was about a year ago. Ditto for corn and soybeans. Gold, after pushing $1,000 last summer, is now languishing just above $900.

The dollar, meanwhile, has rallied - and is perched much higher than it was a year ago. And that's after a year of solid "quantitative easing"...who would have guessed!

What I'm getting at is that the common wisdom last summer was that the dollar was screwed, and that we'd see deflation for a little bit, then wild inflation as a result of the money printing. I bought into this hypothesis whole hartedly myself...it seemed to make sense. Perhaps too much sense.

Well I can now safely say that I was either early, or wrong - and in trader's parlance, that's the same thing!

I thought that if inflation reared it's head, the commodity markets would be the first to know about it. And a few months ago, I thought we may have been experiencing a mini inflationary boomlet.

Now in retrospect, perhaps this was all just a standard fare bear market bounce.

In any case, I now can't find anything that indicates we're not still in a deflationary environment. Gold, as mentioned, can't break through $1,000. Wake me up when that happens.

And the US dollar...maybe the sickest currency in the history of the planet...actually is behaving just fine. Can you believe that?

The US dollar looks...just fine, actually!

(Source: Barchart.com)

Folks, I never thought I'd say this...but I think cash...specifically US dollars...are the place to be for the moment.

Now I could be wrong - I'll be the first to admit. So how will we know? If the dollar starts to really fall out of bed, it's crucial that we have our fingers on the trading triggers. A move down could happen swifty and violently.

But until further notice - I think the trade to be in...is no trade at all. Just cold hard cash.

Right now, it's all about "Return OF Capital" - it's the new "Return On Capital"...for the 4th Turning!

Quick Reader Survey - Please Share Your Thoughs!

I tossed together a quick 3-question reader survey, and I'd appreciate it if you could take a minute or two to share your thoughts and suggestions with me using the survey link here.

It's always great to connect with you, and your feedback and input help me figure out where to focus my energies...namely on stuff you like, and stuff you'd like to see more of.

The Week's 3 Most Popular Posts...

1. Why 650 is a Generous Fair Value Estimate for the S&P 500
2. Looks Like Another Wave of DE-flation...Here's What To Do
3. BBQ, Beer, and Contrarian Investment Indicators

Positions Update

Got killed this week...and I am out! Here's my new positions...so much for diversification:

Current Account Value: $27,511.18

Cashed out: $20,000.00

Total value: $47,511.18

Weekly return: -9.8% :(

2009 YTD return: -45.8% :(

Prior year's results: --> Don't try this at home...this is what is known as wreckless trading

2008: -8%

2007: 175%

2006: 60%

2005: 805%

Initial stake: $2,000.00

Looks Like Another Wave of DE-flation...Here's What To Do

Uh oh, looks like a nasty wave of deflation may be coming back to the markets in a big way!

Last time we saw this movie, just about everything except for the US dollar was completely ravaged.

I sold my two remaining futures positions this morning, and now have moved most of my assets into cash. Now may be a good time for you to do something similar - might be time for us to cash out and just head to the beach for the rest of summer.

Last summer/fall, I wish I had done this...but of course I tried to trade my way through things (big mistake).

Well if deflation really is back, what should we do? I thought it'd be the perfect time to check in with Mr. Deflation himself, Robert Prechter.

I started reading Prechter's insights recently, and not a moment too soon - he has saved me considerable short term pain over the last few weeks.

I was turned onto Prechter by a very sharp fellow in our local investment group, who credited Prechter's newsletter for keeping him out of gold and equities during the last bit of deleveraging. (He's the only one in our group who didn't get slammed last year).

So I hope you enjoy and learn from this mini "deflation survival guide" from Dr. Prechter.

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10 Things You Should and Should Not Do During Deflation
July 8, 2009

This article is part of a syndicated series about deflation from market analyst Robert Prechter, the world’s foremost expert on and proponent of the deflationary scenario. For more on deflation and how you can survive it, download Prechter’s FREE 60-page Deflation Survival eBook, part of Prechter’s NEW Deflation Survival Guide.

The following article was adapted from Robert Prechter’s NEW Deflation Survival eBook, a free 60-page compilation of Prechter’s most important teachings and warnings about deflation.

By Robert Prechter, CMT

1) Should you invest in real estate?

Short Answer: NO

Long Answer: The worst thing about real estate is its lack of liquidity during a bear market. At least in the stock market, when your stock is down 60 percent and you realize you’ve made a horrendous mistake, you can call your broker and get out (unless you’re a mutual fund, insurance company or other institution with millions of shares, in which case, you’re stuck). With real estate, you can’t pick up the phone and sell. You need to find a buyer for your house in order to sell it. In a depression, buyers just go away. Mom and Pop move in with the kids, or the kids move in with Mom and Pop. People start living in their offices or moving their offices into their living quarters. Businesses close down. In time, there is a massive glut of real estate.

– Conquer the Crash, Chapter 16

2) Should you prepare for a change in politics?

Short Answer: YES

Long Answer: At some point during a financial crisis, money flows typically become a political issue. You should keep a sharp eye on political trends in your home country. In severe economic times, governments have been known to ban foreign investment, demand capital repatriation, outlaw money transfers abroad, close banks, freeze bank accounts, restrict or seize private pensions, raise taxes, fix prices and impose currency exchange values. They have been known to use force to change the course of who gets hurt and who is spared, which means that the prudent are punished and the thriftless are rewarded, reversing the result from what it would be according to who deserves to be spared or get hurt. In extreme cases, such as when authoritarians assume power, they simply appropriate or take de facto control of your property.
You cannot anticipate every possible law, regulation or political event that will be implemented to thwart your attempt at safety, liquidity and solvency. This is why you must plan ahead and pay attention. As you do, think about these issues so that when political forces troll for victims, you are legally outside the scope of the dragnet.

– Conquer the Crash, Chapter 27

3) Should you invest in commercial bonds?

Short Answer: NO

Long Answer: If there is one bit of conventional wisdom that we hear repeatedly with respect to investing for a deflationary depression, it is that long-term bonds are the best possible investment. This assertion is wrong. Any bond issued by a borrower who cannot pay goes to zero in a depression. In the Great Depression, bonds of many companies, municipalities and foreign governments were crushed. They became wallpaper as their issuers went bankrupt and defaulted. Bonds of suspect issuers also went way down, at least for a time. Understand that in a crash, no one knows its depth, and almost everyone becomes afraid. That makes investors sell bonds of any issuers that they fear could default. Even when people trust the bonds they own, they are sometimes forced to sell them to raise cash to live on. For this reason, even the safest bonds can go down, at least temporarily, as AAA bonds did in 1931 and 1932.

– Conquer the Crash, Chapter 15

4) Should you take precautions if you run a business?

Short Answer: YES

Long Answer: Avoid long-term employment contracts with employees. Try to locate in a state with “at-will” employment laws. Red tape and legal impediments to firing could bankrupt your company in a financial crunch, thus putting everyone in your company out of work.

If you run a business that normally carries a large business inventory (such as an auto or boat dealership), try to reduce it. If your business requires certain manufactured specialty items that may be hard to obtain in a depression, stock up.

If you are an employer, start making plans for what you will do if the company’s cash flow declines and you have to cut expenditures. Would it be best to fire certain people? Would it be better to adjust all salaries downward an equal percentage so that you can keep everyone employed?

Finally, plan how you will take advantage of the next major bottom in the economy. Positioning your company properly at that time could ensure success for decades to come.

– Conquer the Crash, Chapter 30

5) Should you invest in collectibles?

Short Answer: NO

Long Answer: Collecting for investment purposes is almost always foolish. Never buy anything marketed as a collectible. The chances of losing money when collectibility is priced into an item are huge. Usually, collecting trends are fads. They might be short-run or long-run fads, but they eventually dissolve.

– Conquer the Crash, Chapter 17

6) Should you do anything with respect to your employment?

Short Answer: YES

Long Answer: If you have no special reason to believe that the company you work for will prosper so much in a contracting economy that its stock will rise in a bear market, then cash out any stock or stock options that your company has issued to you (or that you bought on your own).

If your remuneration is tied to the same company’s fortunes in the form of stock or stock options, try to convert it to a liquid income stream. Make sure you get paid actual money for your labor.

If you have a choice of employment, try to think about which job will best weather the coming financial and economic storm. Then go get it.

– Conquer the Crash, Chapter 31

7) Should you speculate in stocks?

Short Answer: NO

Long Answer: Perhaps the number one precaution to take at the start of a deflationary crash is to make sure that your investment capital is not invested “long” in stocks, stock mutual funds, stock index futures, stock options or any other equity-based investment or speculation. That advice alone should be worth the time you [spend to read Conquer the Crash].

In 2000 and 2001, countless Internet stocks fell from $50 or $100 a share to near zero in a matter of months. In 2001, Enron went from $85 to pennies a share in less than a year. These are the early casualties of debt, leverage and incautious speculation.

– Conquer the Crash, Chapter 20

8) Should you call in loans and pay off your debt?

Short Answer: YES

Long Answer: Have you lent money to friends, relatives or co-workers? The odds of collecting any of these debts are usually slim to none, but if you can prod your personal debtors into paying you back before they get further strapped for cash, it will not only help you but it will also give you some additional wherewithal to help those very same people if they become destitute later.

If at all possible, remain or become debt-free. Being debt-free means that you are freer, period. You don’t have to sweat credit card payments. You don’t have to sweat home or auto repossession or loss of your business. You don’t have to work 6 percent more, or 10 percent more, or 18 percent more just to stay even.

– Conquer the Crash, Chapter 29

9) Should you invest in commodities, such as crude oil?

Short Answer: Mostly NO

Long Answer: Pay particular attention to what happened in 1929-1932, the three years of intense deflation in which the stock market crashed. As you can see, commodities crashed, too.

You can get rich being short commodity futures in a deflationary crash. This is a player’s game, though, and I am not about to urge a typical investor to follow that course. If you are a seasoned commodity trader, avoid the long side and use rallies to sell short. Make sure that your broker keeps your liquid funds in T-bills or an equally safe medium.

There can be exceptions to the broad trend. A commodity can rise against the trend on a war, a war scare, a shortage or a disruption of transport. Oil is an example of a commodity with that type of risk. This commodity should have nowhere to go but down during a depression.

– Conquer the Crash, Chapter 21

10) Should you invest in cash?

Short Answer: YES

Long Answer: For those among the public who have recently become concerned that being fully invested in one stock or stock fund is not risk-free, the analysts’ battle cry is “diversification.” They recommend having your assets spread out in numerous different stocks, numerous different stock funds and/or numerous different (foreign) stock markets. Advocates of junk bonds likewise counsel prospective investors that having lots of different issues will reduce risk.

This “strategy” is bogus. Why invest in anything unless you have a strong opinion about where it’s going and a game plan for when to get out? Diversification is gospel today because investment assets of so many kinds have gone up for so long, but the future is another matter. Owning an array of investments is financial suicide during deflation. They all go down, and the logistics of getting out of them can be a nightmare. There can be weird exceptions to this rule, such as gold in the early 1930s when the government fixed the price, or perhaps some commodity that is crucial in a war, but otherwise, all assets go down in price during deflation except one: cash.

– Conquer the Crash, Chapter 18
……….

For more on deflation, download Prechter’s FREE 60-page Deflation Survival eBook or browse various deflation topics like those below at www.elliottwave.com/deflation.

• What happens during deflation?
• Why is deflation bad?
• Effects of deflation
• Deflationary spiral
• And much more in Prechter’s FREE Deflation Survival Guide.

Robert Prechter, Chartered Market Technician, is the world's foremost expert on and proponent of the deflationary scenario. Prechter is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.