Deflating a Common Stock Market Myth About Inflation
By Nico Isaac
Most people are confident they can recognize a myth when they hear one: Wearing a hat causes baldness; eating a bunch of carrots gives you perfect vision; 'light' cigarettes are better for your health than the regular kind.
But what about this sentence: Inflation is the number one threat to the US economy? Ask the mainstream experts, and this statement is in no way a fabrication of the truth; it is truth itself. Case in point, this recent insight from a reputable news source:
"Given the extraordinary amounts of government spending, we believe inflation is likely to rear its ugly head."(CNBC)
It looks reliable. It sounds reliable. But the reality is different. That fact is the subject of Chapter Three in Club EWI's free educational eBook Market Myths Exposed, aptly titled "Myth No. 3: Worry About Inflation Rather Than Deflation."
With groundbreaking insight from EWI's president Bob Prechter, this chapter reveals how the most vital financial players have been led right up to the water of easy money. Yet, like the saying goes, no amount of incentive -- be it record low interest rates or trillions of dollars in federal bailouts -- has gotten them to "drink." Here, the "Market Myths" chapter sheds light on this global leverage fast:
- Banks: The premier dispensers of credit are about "95% invested in mortgages," which can fall in dollar value at the start of a crisis. Also, a chart of Credit Standards At All Banks since 1997 reveals a new trend of tighter lending criterion. Both are deflationary.
- Consumers: The premier devourers of credit are paying off their balances. See: chart of Total Consumer Credit (Annual Rate of Change) since 2000. This is deflationary.
- Private Equity: "Of the ten largest leveraged buyout deals since 2007, four have defaulted and two are in distress. Just in this small group, there is nearly one-half a trillion dollars worth of loans headed for the dump."
- Small Businesses are self-liquidating; meaning, they create profits to pay back loans versus consumers. YET, "Market Myths" Chart of Bank Loan Availability to these small Enterprises contains a big, black arrow pointing DOWN. This is deflationary.
- Home owners: Real estate values continue to fall, foreclosures continue to soar. Mortgage delinquencies are rising, and more and more people are walking away from their properties. All of these conditions are deflationary.
Six pages of riveting charts and commentary later and there's no putting the pieces of this shattered myth back together: One by one, the key players in the creation and expansion of credit are adopting a stance of conservation and conservatism. This ultimately leads to a decline in the value of outstanding debt -- a precondition of deflation, not inflation.
Believe it or not, this is just the beginning. In all, Market Myths Exposed throws light on the TEN most common financial misconceptions via excerpts and charts from EWI's most popular editorial material of the last decade. Such as:
- Myth No. 1: Earnings Drive Stock Prices
- Myth No. 5: To Do Well In Investing, You Have To Diversify
- Myth No. 8: Bubbles Can Unwind Slowly
The complete, NO-COST report is just a Club EWI sign-up away. Simply click here to get started.
Nico Isaac writes for Elliott Wave International, a market forecasting and technical analysis firm.
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