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Five Themes You Need to Know for 2008: Final Report Card


It was a bear of a year, literally.


Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

With 2008 now quickly drawing to a close, it's time to revisit the Five Themes for 2008 we outlined at the close of 2007. Below are those Five Themes, along with my assessment of how they fared this year.

Theme One: Deflation

"If 2007 was the year of inflation worries and stagflation nightmares, 2008 will be the year of deflation. A common misunderstanding is that falling prices causes deflation. No. Deflation causes prices to fall, falling prices do not cause deflation. And while the price of crude oil, gold and other commodities has certainly been a trend follower's dream, the trend is only your friend until the end. We have deflation right now, it's just that no one is talking about it.

A decrease in the supply of money or credit and a decrease in the demand for goods related to the inability to access credit is a perfect deflationary cocktail. You will know it in financial markets characterized by a rising dollar, falling interest rates, and ultimately a declining stock market. Looking ahead, we will be talking about deflation by the end of 2008, not inflation."

There is no question deflation is front and center on almost everyones' radar when the word is showing up with increasing frequency in major newspapers such as the New York Times and USA Today.

Grade: A

Theme Two: Consumer Recession

"It hasn't happened since 1991, but after 16 years prepare for a "consumer recession" to make headlines."

Now that the recession has been formally announced, it's time to begin thinking about what emerges on the other side. In addition to the changes being seen and felt in social mood, there will be a host of different attitudes toward consumption, debt and finance that show up and influence an economic recovery.

Grade: A

Theme Three: The Coming Cleansing

"Granted, a common theme for every new year is "getting in shape," and "kicking vices," etc. but I like the metaphor of this week's cover story in Time Out New York, "Get Clean!"

It covers everything from ridding one's body of antidepressants, religion, codependency, sugar, to being late and, of course, the obligatory drugs and alcohol advice. Alas, there is no mention of financial "cleansing," but perhaps by June there will be. After all, deflation is simply the cleansing process by which malinvestments are liquidated and destroyed."

Expect the "Cleansing" theme to gain even more traction throughout 2009. It will become an operative word in rebuilding the financial infrastructure that has been destroyed by too much debt and too little savings.

Grade: B

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No position in stocks mentioned.

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