My Primary View: In short, I feel deflation began with the 2007 stock market peak. I believe the stock markets will make a new low maybe two coming in the weeks and months ahead (early 2009), and that low will serve as a bottom for a while and the markets and later the economy will begin a multi-month rally into 2010.
It's at this point when this anticipated rally ends (markets peaks) that I believe the stock market will provide a significant confirmation we are in deflation. I'm looking for the stock market to make a lower high (no where near the 2007 peak) on the monthly charts. Lower lows and lower highs are a classic sign of bear market conditions, and I believe on a monthly chart, that condition will confirm deflation. After that peak forms, we will begin a deflationary spiral into 2012-14 (I'm leaning towards 2014). If that does happen, the technical analysis would suggests significantly low prices in the major stock indexes.
In essence, the problem is there will not be enough government assistance and future economic activity to pull us out of the deflationary problems we have today, and everything the government does will only partially re-inflate the economy and the stock markets. It will serve as a band aid, and essentially draw out this deflationary period.
When the markets and economy elevate, it will falsely convince most that we have put the damage behind us and that once again our government has come to the rescue like prior recessions. And if this were a mere recession, it would most likely work again. You might even hear pundits comment on how the risk of deflation is dead.
Unfortunately, this is deflation, and when we start the deflationary spiral from those lower highs in the stock markets, the economy will soon follow and the problems we have today will be larger and more significant the next time around. Real estate will take another big hit and include all types of real estate more widely, the stock markets will take another big hit, business failures will mount, unemployment will dwarf anything we see in 2009, and state and local government budget short falls will be far more significant.
AND, when this deflationary spiral begins, there will be potentially two new problems not baked into the pie. The first and obvious one is higher taxes. Our tax rates are essentially at the low end of the historical range. If we could not raise taxes in good times to pay for our over spending, we will mostly likely have to raise them in bad times when tax receipts at the local, state and federal level decline sharply. Higher tax rates are not factored into stock or real estate values yet, so when it becomes apparent taxes are going up, it will adversely affect those asset values.
I believe if we don't crash and burn, then the exact opposite will happen. With all the bad news out, if we hold the line, than perhaps on Monday this will instill a false sense of confidence.
The 200 "month" simple moving average? Wow, that is a stretch.:nuts:
