Sunday, September 25, 2011
Warning — Trend changingMy gut feeling from ingesting a lot of information, the particulars of which I am not going to cite in this short opinion piece, is that the trend is swiftly changing from a disinflationary environment to a deflationary one. Significantly for markets, this is also becoming the perception.Convergence of perception and reality may presage big changes in behavior. This could spark the second leg down in the GFC that began with the collapse of Bear Stearns and hit crisis mode with the failure of Lehman Bros. In the interim three years, the prevailing philosophy of TPTB has been "extend and pretend." Converging factors in the US, UK, EZ, Japan, and China are now conspiring to make extend and pretend no longer credible as the financial malaise further undermines the global economy and the hope of any sort of timely recovery is evaporating as a rescue plan.I highlighted this paragraph in Mike Norman's article because it seems to hit on the head what a few people have been preaching the past couple of years but with hope of change. However, the global ruling elite is still firmly fixated on perpetuating the status quo, making it impossible to address the causes of the crisis, which lead by debt overhang due to Ponzi finance. The ruling elite is still adamant about making themselves whole by squeezing the rest. This is not working as global effective demand dries up, along with confidence. Deflation threatens to set in, and it becomes established as money is hoarded, e.g., as a safety measure and in expectation of falling prices.This appears to be the beginning of the next stage in unwinding of the Ponzi stage of the long financial cycle. If this is the case, expect debt deflation, recrimination, denial, rushes for the exit, and naked pursuit of self-interest to dominate at the top, with confusion, anxiety, and pain increasing at the middle and bottom, as well as political instability and social unrest rising due to this.I wish I could be more positive about this, but it is not possible to be more sanguine given the prevailing narrative. As the situation worsens and panic sets in, the story is likely to devolve even more as everyone tries to improve their own position at the expense of others instead of increasing adaptive rate by exploring options cooperatively and attempting to coordinate a solution that benefits all. Of course, I could be surprised and would like to be.