Bussiness News
Five Things: Do We Need Debt to Recover?
By
Kevin Depew
Aug 14, 2009 2:45 pm
Why attempting to solve the crisis with the very same policies that caused the crisis is doomed to failure.
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But it is even much simpler still. Why does nominal price not matter? Think about it this way: does any producer anywhere really want the price of what they make to remain the same forever? Perhaps, if living in a vacuum. But in the real world, it is hoped that the real value of the goods they produce will increase. But this can happen regardless of nominal price levels. It can happen through productivity increases or even through changes in the psychology of consumers. It can happen as well via changes in real interest rates and the value of the currency that is being used as a medium of exchange.
Because we live in a world where the central bank has been constantly (over many decades now) increasing the supply of money in the economy, we have been conditioned to view nominal price changes (which have been mostly up for many things) as real indicators of profitability and value. The reality is that nominal prices are nothing of the sort.
The key to understanding this is to recognize that deflation is a psychological shift among consumers and businesses in time preferences and risk appetites. The Fed can make credit available, but they cannot make lenders lend, or potential borrowers take on more debt even when borrowing costs truly are inexpensive and it makes economic sense to take on more debt.
Real lending and economic activity will only begin when real savers see real value at the right risk. That will only occur in the short-run with vastly lower prices, or in the long-run with stagnant prices and the benefit of time.
4) But Don't Just Take My Word for It...
Because DeMark indicators provide the technical foundation for how I look at markets, I work backward from what they are suggesting to consider what possible macro pieces need to be at work for the indicators and exhaustion points to be fulfilled. So, let's back up for a moment and try to fit together what the larger puzzle pieces are saying.
The U.S. stock market is showing signs of long-term exhaustion as the S&P 500 needs to decline below 783.32 just to complete a TD Buy Setup...
S&P 500, Quarterly
CLICK TO ENLARGE
... while the U.S. Dollar Index Spot is currently on bar 11 of a potential 13 TD Sequential Buy Signal...
USD Index Spot, Quarterly
CLICK TO ENLARGE
... and DeMark readings on the Consumer Price Index not yet showing signs of long-term exhaustion.
CPI Year-Over-Year, Monthly
CLICK TO ENLARGE
5) Bottled Water Revisited
The Washington Post earlier this week observed that sales of bottled water have fallen for the first time in at least five years. And on Wednesday Nestle (NSRGY), the largest seller of bottled water, reported that profits fell 2.7% for the first six months of the year.
According to the Post, Americans drank 8.7 billion gallons of bottled water last year, compared with 8.8 billion in 2007 -- the first decline this decade - while per capita consumption dropped from 29 gallons to 28.5. "Jeff Cioletti, editor in chief of trade publication Beverage World, said he doesn't believe bottled water will return to galloping growth for a long while."
And I agree. But it's not for the reasons most people think. I first looked at bottled water for Five Things in 2008, and based on social mood it was relatively easy to predict the perfect storm gathering on the horizon for one of America's biggest luxury items, bottled water.
"Forbes called it "Bottlemania." BusinessWeek recently thrust the issue into it's so-called "Debate Room,": "Bottled Water IS a Big Drain, Pro or Con?" New York City Mayor Michael Bloomberg intends to co-sponsor a resolution to prohibit city spending on bottled water. Meanwhile, Americans drank more than 30,000,000,000 bottles of single-serve water
last year. What's going on here? After all, the bottled water industry is, technically, 30 years old. Suddenly, bottled water is a ripoff? A waste? Or worse, dangerous? What changed?
One thing. Social mood.
Make no mistake, there is nothing wrong with tap water, and there never has been. As the BusinessWeek article points out, we pay up to 4,000 times more for bottled water than tap water, and more than three times what we pay for gasoline; all this for water that is far less regulated and which frequently tests worse than tap water in both taste and purity. Pepsi's (PEP) Aquafina label bottled water is actually tap water. So is Coca-Cola's (KO) Dasani bottled water.
So why do we suddenly care now? Simple, as social mood continues to darken and turn against symbols of excessive wealth and consumption, the former icons of bull market glee and prosperity begin to tarnish in the public eye.
There is absolutely nothing wrong with bottled water other than its cost over tap water. For 30 years it's been fine to pay for the convenience and fashionable appearance of water in a bottle. Now, however, it's something to rail against as mood shifts. Social mood will seek to portray this as a war against waste and excessive cost, but it's actually grounded in the psychological need to vilify the old signs of overconsumption in order to accept the reality of cutting back. The acceptance of that reality is easier if we are able to manufacture something "wrong" with that which is just beyond our economic reach.
So sit back with a tall glass of refreshing tap water and enjoy the rush to disassociate from yet another fading idol of the bull market.
Because we live in a world where the central bank has been constantly (over many decades now) increasing the supply of money in the economy, we have been conditioned to view nominal price changes (which have been mostly up for many things) as real indicators of profitability and value. The reality is that nominal prices are nothing of the sort.
The key to understanding this is to recognize that deflation is a psychological shift among consumers and businesses in time preferences and risk appetites. The Fed can make credit available, but they cannot make lenders lend, or potential borrowers take on more debt even when borrowing costs truly are inexpensive and it makes economic sense to take on more debt.
Real lending and economic activity will only begin when real savers see real value at the right risk. That will only occur in the short-run with vastly lower prices, or in the long-run with stagnant prices and the benefit of time.
4) But Don't Just Take My Word for It...
Because DeMark indicators provide the technical foundation for how I look at markets, I work backward from what they are suggesting to consider what possible macro pieces need to be at work for the indicators and exhaustion points to be fulfilled. So, let's back up for a moment and try to fit together what the larger puzzle pieces are saying.
The U.S. stock market is showing signs of long-term exhaustion as the S&P 500 needs to decline below 783.32 just to complete a TD Buy Setup...
S&P 500, Quarterly
CLICK TO ENLARGE
... while the U.S. Dollar Index Spot is currently on bar 11 of a potential 13 TD Sequential Buy Signal...
USD Index Spot, Quarterly
CLICK TO ENLARGE
... and DeMark readings on the Consumer Price Index not yet showing signs of long-term exhaustion.
CPI Year-Over-Year, Monthly
CLICK TO ENLARGE
5) Bottled Water Revisited
The Washington Post earlier this week observed that sales of bottled water have fallen for the first time in at least five years. And on Wednesday Nestle (NSRGY), the largest seller of bottled water, reported that profits fell 2.7% for the first six months of the year.
According to the Post, Americans drank 8.7 billion gallons of bottled water last year, compared with 8.8 billion in 2007 -- the first decline this decade - while per capita consumption dropped from 29 gallons to 28.5. "Jeff Cioletti, editor in chief of trade publication Beverage World, said he doesn't believe bottled water will return to galloping growth for a long while."
And I agree. But it's not for the reasons most people think. I first looked at bottled water for Five Things in 2008, and based on social mood it was relatively easy to predict the perfect storm gathering on the horizon for one of America's biggest luxury items, bottled water.
"Forbes called it "Bottlemania." BusinessWeek recently thrust the issue into it's so-called "Debate Room,": "Bottled Water IS a Big Drain, Pro or Con?" New York City Mayor Michael Bloomberg intends to co-sponsor a resolution to prohibit city spending on bottled water. Meanwhile, Americans drank more than 30,000,000,000 bottles of single-serve water
last year. What's going on here? After all, the bottled water industry is, technically, 30 years old. Suddenly, bottled water is a ripoff? A waste? Or worse, dangerous? What changed?
One thing. Social mood.
Make no mistake, there is nothing wrong with tap water, and there never has been. As the BusinessWeek article points out, we pay up to 4,000 times more for bottled water than tap water, and more than three times what we pay for gasoline; all this for water that is far less regulated and which frequently tests worse than tap water in both taste and purity. Pepsi's (PEP) Aquafina label bottled water is actually tap water. So is Coca-Cola's (KO) Dasani bottled water.
So why do we suddenly care now? Simple, as social mood continues to darken and turn against symbols of excessive wealth and consumption, the former icons of bull market glee and prosperity begin to tarnish in the public eye.
There is absolutely nothing wrong with bottled water other than its cost over tap water. For 30 years it's been fine to pay for the convenience and fashionable appearance of water in a bottle. Now, however, it's something to rail against as mood shifts. Social mood will seek to portray this as a war against waste and excessive cost, but it's actually grounded in the psychological need to vilify the old signs of overconsumption in order to accept the reality of cutting back. The acceptance of that reality is easier if we are able to manufacture something "wrong" with that which is just beyond our economic reach.
So sit back with a tall glass of refreshing tap water and enjoy the rush to disassociate from yet another fading idol of the bull market.
No positions in stocks mentioned.
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