Ruff wrote:
poptart wrote:My approach is one of buy and hold
Whole lotta $$$ stayin in the market.
In the big picture, that may not be an accurate prediction - here's why;
The first waves of baby boomers are retiring now -
as they retire they will be converting (selling) their stocks and mutual funds (including 401K) into cash.
Just like any supply and demand scenario,
there will be more sellers than buyers given the population decrease since the boomer generation.
The only scenario I could see that equaling out in would be if foreign buyers stepped in to pick up the slack.
In the market's today Gold and oil both spiked.
I think the Oil stocks (and Oil company prices will both pull back)
I think Gold is going much higher.
A Trader today made this observation on why Gold is ramping up:
Very simple answer to your question - market is pricing in deflationary recession (which will
eventually convert into depression). Three consequences -
(i) Deflationary recession means fed will lower interest rate - so bonds rise.
(ii) If interest rates go down, dollar becomes less attractive to other currencies- so
money runs out of dollar and dollar falls. Other currencies and gold rise.
(iii) Deflationary recession means commodities are less attractive. So, oil and copper do not rise
as much as gold/silver this time.
For anyone wondering what a deflationary recession is:
Deflation in the United States
There have been two significant periods of deflation in the United States. The first was after the Civil War.
"The Great Sag of 1873-96 could be near the top of the list. Its scope was global. It featured cost-cutting and productivity-enhancing technologies. It flummoxed the experts with its persistence, and it resisted attempts by politicians to understand it, let alone reverse it. It delivered a generation’s worth of rising bond prices, as well as the usual losses to unwary creditors via defaults and early calls. Between 1875 and 1896, according to Milton Friedman, prices fell in the United States by 1.7% a year, and in Britain by 0.8% a year.[4]
The second was between 1930-1933 when the rate of deflation was approximately 10 percent/year. The first was possibly spurred by the deliberate policy in retiring paper money printed during the Civil War; the second was part of America's slide into the Great Depression, where banks failed and unemployment peaked at 25%. Both were world-wide phenomena.
The deflation of the Great Depression did not occur because of any sudden rise or surplus in output. It is generally thought that, because there was an enormous contraction of credit and the money supply into an environment of high asset prices, an ordinary downturn in business was turned into a catastrophic drop in production. The lack of liquidity generated bankruptcies created an environment where cash was in frantic demand, and the Federal Reserve did not adequately accommodate that demand, so even sound banks toppled one-by-one (because they were unable to meet the sudden demand for cash— see Fractional-reserve banking). From the standpoint of the Fisher equation (see above), there was a concomitant drop both in money supply (credit) and the velocity of money which was so profound that deflation took hold despite the increases in money supply spurred by the Federal Reserve.
This is from a speech Ben Bernake gave in 2002
http://www.federalreserve.gov/boardDocs ... efault.htm
Deflation: Its Causes and Effects
Deflation is defined as a general decline in prices, with emphasis on the word "general." At any given time, especially in a low-inflation economy like that of our recent experience, prices of some goods and services will be falling. Price declines in a specific sector may occur because productivity is rising and costs are falling more quickly in that sector than elsewhere or because the demand for the output of that sector is weak relative to the demand for other goods and services. Sector-specific price declines, uncomfortable as they may be for producers in that sector, are generally not a problem for the economy as a whole and do not constitute deflation. Deflation per se occurs only when price declines are so widespread that broad-based indexes of prices, such as the consumer price index, register ongoing declines.
The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand--a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers.1 Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending--namely, recession, rising unemployment, and financial stress.
However, a deflationary recession may differ in one respect from "normal" recessions in which the inflation rate is at least modestly positive: Deflation of sufficient magnitude may result in the nominal interest rate declining to zero or very close to zero.2 Once the nominal interest rate is at zero, no further downward adjustment in the rate can occur, since lenders generally will not accept a negative nominal interest rate when it is possible instead to hold cash. At this point, the nominal interest rate is said to have hit the "zero bound."
Deflation great enough to bring the nominal interest rate close to zero poses special problems for the economy and for policy. First, when the nominal interest rate has been reduced to zero, the real interest rate paid by borrowers equals the expected rate of deflation, however large that may be.3 To take what might seem like an extreme example (though in fact it occurred in the United States in the early 1930s), suppose that deflation is proceeding at a clip of 10 percent per year. Then someone who borrows for a year at a nominal interest rate of zero actually faces a 10 percent real cost of funds, as the loan must be repaid in dollars whose purchasing power is 10 percent greater than that of the dollars borrowed originally. In a period of sufficiently severe deflation, the real cost of borrowing becomes prohibitive. Capital investment, purchases of new homes, and other types of spending decline accordingly, worsening the economic downturn.
Although deflation and the zero bound on nominal interest rates create a significant problem for those seeking to borrow, they impose an even greater burden on households and firms that had accumulated substantial debt before the onset of the deflation. This burden arises because, even if debtors are able to refinance their existing obligations at low nominal interest rates, with prices falling they must still repay the principal in dollars of increasing (perhaps rapidly increasing) real value. When William Jennings Bryan made his famous "cross of gold" speech in his 1896 presidential campaign, he was speaking on behalf of heavily mortgaged farmers whose debt burdens were growing ever larger in real terms, the result of a sustained deflation that followed America's post-Civil-War return to the gold standard. 4 The financial distress of debtors can, in turn, increase the fragility of the nation's financial system--for example, by leading to a rapid increase in the share of bank loans that are delinquent or in default. Japan in recent years has certainly faced the problem of "debt-deflation"--the deflation-induced, ever-increasing real value of debts. Closer to home, massive financial problems, including defaults, bankruptcies, and bank failures, were endemic in America's worst encounter with deflation, in the years 1930-33--a period in which (as I mentioned) the U.S. price level fell about 10 percent per year.
Beyond its adverse effects in financial markets and on borrowers, the zero bound on the nominal interest rate raises another concern--the limitation that it places on conventional monetary policy. Under normal conditions, the Fed and most other central banks implement policy by setting a target for a short-term interest rate--the overnight federal funds rate in the United States--and enforcing that target by buying and selling securities in open capital markets. When the short-term interest rate hits zero, the central bank can no longer ease policy by lowering its usual interest-rate target.5
Because central banks conventionally conduct monetary policy by manipulating the short-term nominal interest rate, some observers have concluded that when that key rate stands at or near zero, the central bank has "run out of ammunition"--that is, it no longer has the power to expand aggregate demand and hence economic activity. It is true that once the policy rate has been driven down to zero, a central bank can no longer use its traditional means of stimulating aggregate demand and thus will be operating in less familiar territory. The central bank's inability to use its traditional methods may complicate the policymaking process and introduce uncertainty in the size and timing of the economy's response to policy actions. Hence I agree that the situation is one to be avoided if possible.
I had not considered the possibility of a deflationary recession, probably since the last one was in 1930
But considering the massive debt load of the nation, business and the consumer, it is not beyong the realm of possibility