Deflation explained

Stocks rallied Thursday, with the Dow industrials nearing 10,000, after the government reported a bigger-than-expected drop in jobless claims, and a number of retailers reported improved October sales.

The Dow Jones industrial average (INDU) gained 181 points, or 1.9%, more than three hours into the session, though that is off slightly from earlier highs. The S&P 500 (SPX) gained 18 points, or 1.7%, and the Nasdaq composite (COMP) climbed 47 points, or 2.3%.

"Today's big news was that we saw fewer claims for unemployment benefits," said Mike Stanfield, chief investment officer at VSR Financial Services. "That suggests that the underlying economics are continuing to improve."

He said that this was reassuring to investors following several weeks of concerns about the pace of the recovery. It was also encouraging for investors ahead of Friday's monthly employment report.

Indeed HA beyond foolishness, its like the Emperor who went in his parade along the street naked while everyone said he was dressed in the nicest cloth on earth, until a little boy said hey look he is naked. With other words no one will say that B&B do administer the wrong medicine to cure the economy.

Toyota guides up

Cisco outperforms

Retail demand increase

Productivity gains

Unemployment claims down

Markets up

Huh, go figure

rng to help you a little: The stock market rallied throughout most of yesterday's trading session, then stumbled into the close. This pattern has become unnervingly familiar of late. It's true that the Dow has only dipped 2% since closing a notch above 10,000 on October 19, but the decline feels a bit worse than that. Maybe that's because so many midday rallies have turned into late-day selloffs.

Or maybe the market feels so weak because it IS so weak. Most of the broad indices like the S&P 500 and the NASDAQ Composite are down more than 5% from their recent highs. Meanwhile, former market leaders like the BKX Index of financial stocks have tumbled more than 10% from their recent highs. These corrections aren't devastating, just discomforting.

Every rational investor knows that the market recovered much more ground from its March lows than economic fundamentals warranted. But that doesn't automatically mean that the market is a "sell." Maybe it is just a "do nothing for a while." Only a feware agnostic on this topic. But almost no one else seems to be. When the stock market becomes as volatile as it has been lately, every stock market commentator trots out a forecast - usually based upon stock charts that show trendlines, resistance levels, Fibonacci retracement points, stochastic indicators etc.

Unfortunately, the identical price charts can yield completely opposite forecasts. Show us a trendline, and we'll show you two emphatic forecasts - one bullish, one bearish. Both forecasts will be honest and informed by experience, but only one of them will be correct.

Just don't think the party is over, unfortunately not.

PIM to bring you up to current thinking:

People tend to become overly pessimistic at the end of a recession, partly because they can see that the forces behind the last boom -- housing and mortgage lending, in this case -- won't be around for the next one. If anything, the excesses from the last boom seem likely to hold back the economy for years to come. People are left to wonder where future growth will come from.

http://finance.yahoo.com/banking-budgeting/article/108089/through-a-glass-less-darkly

The neo-classicist view is a little dated - sorry. But you can always go by Warren Buffet as a behavioral indice now that he is starting to release cash on investments,  I don't think he is to listening either. Still..you could take a collective opinion. A study conducted by the National Association for Business Economics shows that no fewer than 80% of professional economists believe the recession is over.

It is not going to be a fast recovery but it is underway and the government spending creating demand is what saved us from a deeper recession. It was and is a balance sheet recession and the only way to address that is through govt demand until the economy cycles

Know what; No matter what country we live in,Sometimes we all have to look around us and be grateful,wither we see the homeless the unemployed or the sick,we have to take a deep breath;;;;;;;;;;and think there but for the grace of god go I.

The post below is cross posted from yesterdays neoclassical "GDP Fraud." I think it is relevant to the discussion here as well.

Good point. It won't matter to the neoclassical school adherents.  Almost, everything that is done by government to try and stabilize the economy and avoid total collapse is considered a fraud or not real to this type of mindset. The problem with this type of thinking, in my opinion, is that it always makes assumptions based on full employment and rational decision making by investors. Once uncertainty enters the picture, rational choices and expectations can't be determined.  Risk can't be assessed with reasonable certainty and irrational choices are the end result. The most recent example would be derivatives trading.  

The massive injection of capital into the banking and financial sectors was intended to stabilize and reflate asset prices. We can argue whether it is good or bad policy, but the net effect is that asset prices have in fact risen. The bigger concern, is the speculation that is going on by the carry trade, and in effect the  over inflating asset prices. Irrational behavior will in fact create a bubble, but it is not all a  result of misguided policy. The very same traders that created the derivatives and mortgage backed securities instruments are at it again. Talk about irrational exuberance. The fact that the government is politically paralyzed from making necessary reforms that would rein in the derivatives market  and enforce  naked short selling violations, will make the bubble pop, it is only a matter of when and how bad the fallout becomes. This next round of near economic collapes will be the catalyst for true regulatory reform. No one, not even the populist conservatives will be worried about the government taking control of insolvent financial "too big to fail" entities. These companies should have been put into receivership and liquidated in an orderly fashion the first time around. Political cries of socialism and state intervention in the "free market" precluded the proper course of action then. Hopefully, it won't happen this time around. If it does, and the insistence is let the market sort it out, you won't like the outcome.

In other economic news: 10 years ago today the congress repealed the Glass Stegal Act. Funny how history has a way of repeating itself. This repeal had broad bi-partisan support and was signed into law by President Bill Clinton.

''The world changes, and we have to change with it,'' said Senator Phil Gramm of Texas, who wrote the law that will bear his name along with the two other main Republican sponsors, Representative Jim Leach of Iowa and Representative Thomas J. Bliley Jr. of Virginia. ''We have a new century coming, and we have an opportunity to dominate that century the same way we dominated this century. Glass-Steagall, in the midst of the Great Depression, came at a time when the thinking was that the government was the answer. In this era of economic prosperity, we have decided that freedom is the answer.''

''I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010,'' said Senator Byron L. Dorgan, Democrat of North Dakota. ''I wasn't around during the 1930's or the debate over Glass-Steagall. But I was here in the early 1980's when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.''

Senator Paul Wellstone, Democrat of Minnesota, said that Congress had ''seemed determined to unlearn the lessons from our past mistakes.''

''Scores of banks failed in the Great Depression as a result of unsound banking practices, and their failure only deepened the crisis,'' Mr. Wellstone said. ''Glass-Steagall was intended to protect our financial system by insulating commercial banking from other forms of risk. It was one of several stabilizers designed to keep a similar tragedy from recurring. Now Congress is about to repeal that economic stabilizer without putting any comparable safeguard in its place.''
source: Digby's Hullaballo

Deflation?

So are you telling us that the prices for goods are going down that inflation has fallen below the zero rate.

Down here in Asia we still have inflation could some one confirm that there is no inflation in USA or Europe at present and the prices on the shelf are decreasing?

PIM's is your head lines correct that your really explaining deflation here because I am totally and utterly confused. What is the deflation % at this moment in USA? 

Oh I get it your saying that deflation is going to happen, well no not on a rising stock market and not when consumer spending is improving and no not when the prices are going up in the super markets. But of course it could happen?

Very pessimistic indeed plus that your looking at the USA from the outside and do not shop or pay utility bills there at a guess. Nor do I so that's why I am asking Americans the question of are you prices for services for goods going down? 

Stock markets today looks like the present trough is on its recovery to day but it will take a day or so of trading to show the way the wind is blowing. 

Deflation in the US? No. CPI still creeping up. New release due Nov 18:

Consumer Price Index October 15, 2009

On a seasonally adjusted basis, the CPI-U increased 0.2 percent in September after rising 0.4 percent in August. The index for all items less food and energy increased 0.2 percent in September after increasing 0.1 percent in August

Most competent economists also state that the current govt spend to stimulate the economy will combat the deflationary risk.The problem is when you apply old economic models like blunt monetarism, inflate the consumer-GDP ratio so can't correctly calibrate demand and liquidity, and discount international connectivity you don't see the patterns of new economic paradigm.  That is why many old school economists are behind the eight ball on calling what's happening. The deficit hawks will push this line until they have to correct their position. Give them a qurter or so to catch up.

Competent economist are scares there are not many around today anymore. Greenspan and Bernanke don't belong to that category. Economics is not a science and that makes it more complicated. Good points are scored above, in the lively discussion, and that is already a good advance. The basic line still is, if there were not made stimuli how would the state of economy be to day? Certainly is would be in defaltion mode, probably not everywhere, but at least in the indiustrilazed world were consumption was the main drive in growth. The stimuli cannot go on forever, there will be a physical limit, estimated around the end of the first quarter in 2010 or so. Then the proof can be drawn whether the economy remains sustainable. If not the stimuli has been a waste of money and time. Everyone can judges for himself by then. Stock values today are heavily influenced by the stimuli and that is scary in its own.

It is a good post Pim. Interesting Opinion.