Daily Investment Interpretations

July 29, 2010

2010-7-29:  Stocks ended the day down a little, but not drastically lower: Stocks end red, off lows. the NASDAQ Composite down 12.87 points (-0.57%) to finish at 2,251.69. The Dow lost 30.72 points (-0.29%) to close  at 10,467.16, and the S&P 500 fell 4.6 points (-0.42%) to end at 1,101.53. Oil ended at $78.28 a barrel, while Gold ended at $1,169 The VIX closed at 24.13.
    "The U.S. is closer to a Japanese-style outcome today than at any time in recent history," said James Bullard, the president of the St. Louis Federal Reserve Bank, in a research paper: Bullard says U.S. close to Japan-style deflation. What got everyone's attention today is the fact that James Bullard has been a deficit hawk, calling for fighting inflation by raising interest rates. Other Fed players such as Charles Plosser and John Williams (Fed's Williams sees bump, not swerve, in recovery) are still deficit hawks, and are vocal in belittling the chances of deflation.But as explained in Monetary policy, the majority of voting members of the Fed, including John Williams boss, Janet Yellen, are worried about deflation, and when the Fed meets again week after next, might possibly announce plans for "Quantitative Easing". Or the Fed may choose to wait longer to see whether or not deflation is in the cards. As shown below, inflation is currently quite low, but it's still north of zero.

    Economist Gary Schilling is also predicting deflation: Gary Shilling: Investing Advice for a Deflationary Economy.
    For an alternative perspective: Why Deflation Fears Are Overblown.  
    In the meantime, I'm waiting to see what will happen with tomorrow's GDP number: Recovery is spelled G-D-P
    Stock market futures are down a little tonight.  
2010-7-29 (Noon):  After rising 1% on opening, stock indices fell about 2% from their peaks this morning: U.S. stocks fall on reports of Fed deflation talk, What to believe? bonds or equities (video)? and disappointing results for a few staples stocks. The first article refers to the fact that the Federal Reserve's president, James Bullard, reiterated that the Fed might need to buy Treasury bonds, etc., if deflation continued to threaten. (This is like your three-year-old saying, out of the blue, "Everything's all right. There's nothing wrong. I'm just fine.") The second article says, that the bond market is signaling deflation, while the stock market is pointing toward a subdued but continuing recovery. In the past, the bond market has usually had better predictive value because it was populated with professional traders, but by now, retail investors have fled the equity markets, leaving them also dominated by professionals.  
    The unemployment number was 457,000 this morning compared to 464,000 last month, and Irwin Kellner's forecast  of 460,000. (His forecast for tomorrow's 2nd-quarter GDP is a 2.0% bombshell compared to the consensus forecast of  2.5%.)