Wednesday, September 16, 2009

Conflicting Signals?

Two days ago, Sold at the Top posed a profound question of present economic conditions on seeking alpha. The soldish blogger asked:

“Inflation or deflation… stag-flation, stag-deflation … hyper-inflation… possibly even hyper-deflation… or maybe just a bout of frisky-flation? Never has it been so hard for the consensus to agree on the coming trend in prices”

After pondering the subsequent content of Mr. Sold at the Top's puzzle, and after reading Klaus Vogt’s article mentioned below, as well as a few other analyses along the way, including a few here on TPM, I’ve reached a conclusion about the matter:

1.) Everything you don’t really need in this life will lose value in the days ahead. This is called deflation, and it's going to happen.

2.) Everything you do really need, like say, food, will gain price in the days ahead. This is called inflation, and it's going to happen.

Is this a contradiction? Yes, but it doesn't matter, because these economic indices are just human concepts.

What's real, and what is more and more real, is what it costs you, in labor and resources, to get a loaf of bread, a taco, or a salad, or whatever.

Are you playing the market? Consider this:

According to Klaus Vogt of Money and Markets, there are three ways to determine the of value stocks that you may consider buying:

1.) the Fundamental Valuation method, which calculates the dividend yield by dividing stock price into annual dividend

2.) the Macroeconomic method, which utilizes the broad statistical indicators to infer value

3.) the Technical Analysis method, which quantitatively compares short-term and medium-term trends in the context of long-term trends.

Mr. Vogt’s general projections on the stock market as a whole, based on these approaches, are:

1.) by the Valuations method: Long-term Negative, Medium-term Meaningless

2.) by the Macroeconomic method: Long-term Negative, Medium-term Bullish

3.) by the Technical Analysis method: Long-term Bearish, Medium-term Bullish

We can surmise here another set of conflicting signals, although (let the reader understand) the "long-term" projection in all three methods is Negative (Bearish.)

Klaus concludes his presentation with this observation: “This is no time for buy and hold investors. But there are attractive opportunities for medium-term oriented investors willing to buy now and get out on a moment's notice.”

“…get out on a moment’s notice”?

We see worlds of strategic difference here between the predominant, speculative modus operandi of many (most?) investors and the substantive, Fundamental Valuations approach of traditional investors. Furthermore, we do not fail to notice in this wide gulf of equity-worldviews an indicator of our present catastrophic, bubbular problem.

The old faithful Valuations method, using profit/price ratio, has been tossed out the window. Does a real, innovative company startup have a snowball’s chance in this heated environment?

Perhaps meaningful financial reform will require something much more apocryphal than just throwing devalued dollars and new paper regs at the problem.

How many speculators are sitting on a keyboard perch trying to decide when is the optimum moment to “get out on a moment’s notice?”

How many mortgage-holders are standing in line for a job?

As Ringo once said: “This is not your father’s Oldsmobile, ” although your dad may have been piloting this same vehicle in September of ’87, or your great-grandfather in October of ’29.

Conflicting interests, conflicting signals, conflicting emotions, conflicting people. . . Get ready. Watch and pray.

Carey Rowland, author of Glass half-Full

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