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Deflation Descends Onto Falling Markets


The root of the concern is at the same time economic, financial and political.

Fears of a recession in the U.S. and further credit market disruption ripped through global stock markets and put over half the world's exchanges into technical bear markets – at least 20% down from recent highs. The bloodletting began Monday:

Pan-Europe -5.7% | England -5.5% | Germany -7.2% | France -6.6% | India -7.4% | Hong Kong -5.5% | China Mainland -5.1% | Singapore -6.0% | Japan -3.9% | Korea -2.9% | Australia - 2.9% | Thailand: -2.9%

On Tuesday Asian markets continued to reel as Europe stabilized somewhat :

Pan-Europe -1.2% | England -0.3% | Germany -1.7% | France -0.9% | India -4.9% | Hong Kong 8.6% | China Mainland -7.2% | Singapore -1.7% | Japan -5.6% | Korea -4.4% | Australia -7.1% | Thailand: -3.2%

The sell-off of the past two days has been broad, showing no sector or asset class is immune from the deflationary trend Professors Depew, Shedlock and other in the 'Ville have been examining as major media outlets and central bankers fret over backward-looking inflationary data. Global stock markets are painfully beginning to price in a U.S. recession in and the resulting spill-over, and Professor Das questions whether emerging market economies are in fact 'de-coupled' from the United States.

The root of the concern is at the same time economic, financial and political. How emerging market economies fare in the coming months – and years – will go a long way to settling the question of the extent to which American consumer demand still drives the world economy. As China and India led developing nations into the global market, many believed a slowdown in the U.S. would not matter as growth in Asia, Latin America and Central Europe would make up for slackened demand. Events of the past two days have shown investors are skeptical this theory will hold true.

Since last summer, chaos has reigned in the financial markets. Higher than expected defaults on subprime mortgages and falling home prices in America kicked off wide spread dislocations in the capital markets and spurred central bankers into action. Major financial institutions have already written off have billions in bad subprime-related debt, yet Minyanville wonders if this may just be the tip of the iceberg. Last week we added "CDS" to our growing list of acrimony of acronyms, and with over $600 Trillion in financial derivatives it is likely not to be the last addition.

And finally, markets do not seem confident Washington is capable of righting the economic and financial ships. Debates rage as to whether the Fed has been too active, too passive, or just plain wrong since the summer, and in this, an election year, a fiscal solution is already in the works. $150 billion is around 1% of U.S. GDP, but as BNP Paribas economist Andrew Freris noted in the WSJ, "The Markets will look at the $150 billion figure and smile. They trade that in a morning."

We may hear from the Fed as early as this morning, they may wait until later in the day, and they may even sit out the entire session. But one thing is for certain: today will not be for the faint at heart. Minyans, bring your helmets, it's going to be wild out there.

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No positions in stocks mentioned.

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