Deflation's Back, And Stocks Just Don't Get It

 |  Includes: DIA, QQQ, SPY, TLT
by: Graham Summers

The markets have entered a new round of deflation. The only asset class that has yet to realize this is stocks.

Here’s the 30-Year Treasury Bond:

As you can see, we’ve already surpassed the former all-time established during the nadir of the 2008-2009 Crisis. To say this is deflationary would be an understatement. Indeed, on the shorter end of the bond curve, Treasuries are yielding 0% (the 3-month), 0.02% (the six month) and 0.2% (the two year).

Put another way, investors are essentially willing to lend to the U.S. for almost nothing in return for up to two years… based solely on the notion that by doing so they’re at least “guaranteed” a return of capital.


Here’s gold:

Considering that gold is a leading indicator for stocks, and that the precious metal only breaks below its long-term uptrend in times of systemic risk, the above breakdown is a major red flag that something bad is brewing in the financial system. That something is another round of deflation.

How about agricultural commodities, which anticipated QE Lite and QE II before every other asset class?

As you can see, we’ve wiped out all of the QE II gains and are now on the verge of breaking back into a trading range that goes back to 2009. Again, deflation.

And then there’s stocks… the most clueless of asset classes, which simply don’t “get it”… yet.

While Europe’s banking system is imploding, gold has broken its long-term uptrend, and U.S. Treasuries are signaling a crisis even worse than 2008, stocks are bouncing off of support as though there’s no real danger.

This can be attributed to three factors:

  1. Light volume (fewer and fewer folks are investing in stocks, which allows Wall Street to move the market more easily).

  2. End of the year performance gaming by hedge funds and institutions (most of which have had a horrible year)

  3. Misguided hope and delusions, just like the ones we had in 2008 when stocks didn’t “get it” until the whole system was ready to collapse

In simple terms, the best analysis of today’s markets is that we are getting major red flags across the board that another round of deflation is here.

Against this backdrop, stocks are as clueless as they were in 2008. And given that most traders will be taking off early this week, those remaining will be able to move the market any way they please as volume will be even lower than the abysmal levels we’ve seen for most of 2011.

So my advice is to avoid trading this week if you can help it. There is simply too much uncertainty in the market: stocks could rally based on end of the year shenanigans, or they could just as easily collapse due to Europe or any number of other issues in the system today.

However, the larger picture indicates that deflation is back and it’s back with a vengeance. It would be wise to prepare in advance for this as stocks are always the last to “get it.” And by the looks of the recent action in gold and Treasuries, “It” is going to be something very unpleasant.