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Parabolic Asset Prices Are A Precursor For Deflation, Not Inflation



-- Posted Friday, 12 November 2010 | | Source: GoldSeek.com

Recently, many commodity prices have undergone parabolic increases leading market participants to conclude that high inflation is on the horizon.  However, history suggests otherwise as parabolic price increases have always led to parabolic price declines. 

 

As shown below, in 2008, oil ascended to $150 in parabolic form.  During that time, peak oil, global growth, and easy money by the Federal Reserve were the only talk on Wall Street.  Of course, in hindsight, the surge in price was merely the result of speculation.  The collapse in the price of oil reinforced the deflationary pressures already affecting the global economy, culminating in a banking crisis just months after oil’s peak.  The story of oil demonstrates that investors focus on inflation and growth as prices rise and on deflation and recession as prices collapse.    

 

 

The charts below of the Dow Jones in 1929, the Nikkei in the 1980s, gold in the late 1970s, and the Nasdaq in the late 1990s tell the same story as oil’s 2008 chart.  In each case, rising prices captured the attention of the investment community and encouraged optimistic claims about the future that proved entirely wrong as prices imploded.

 

Source: Barry Bannister, Stifel Nicolaus

 

Today, surges in commodity prices are being attributed largely to the Federal Reserve’s second round of quantitative easing.  We believe the parabolic increases in commodities, such as silver and cotton, may be indicative of a deflationary scare in the near future. 

 

Silver – 25 Year Chart

 

 

Although silver has not surpassed its all time high, the long term chart shows that previous parabolic increases have been followed by collapses.

 

Silver – 35 Year Chart

 

 

Cotton

 

 

By the summer of 2008, mortgage bonds were crashing, Bear Stearns had failed, and Fannie and Freddie were in trouble, yet investors made the costly mistake of positioning themselves to take advantage of loose monetary policy by the Federal Reserve.  Today, economic conditions are poor in the United States and most of Europe.  The economic backdrop should be the basis for investment decisions yet investors are focused only on the Federal Reserve’s easy money.  Now that several asset prices have experienced parabolic moves higher, which will likely be followed by dramatic declines, deflationary fears that crippled markets at various times during the past few years should soon reemerge.

 

Daniel Aaronson - daaronson@continentalca.com
Lee Markowitz - lmarkowitz@continentalca.com
 
http://www.continentalca.com
 
Continental Capital Advisors, LLC
Continental Capital Advisors, LLC was formed to offset the destruction of wealth caused by the global devaluation of currencies by central banks. The name Continental Capital symbolizes the 1775 US Currency, "the Continental", which was backed by nothing and quickly became devalued.

Disclaimer: The above is a matter of opinion and is not intended as investment advice.  Comments within the text should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities.  Certain statements included herein may constitute "forward-looking statements" within the meaning of certain securities legislative measures. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the above mentioned companies, and / or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Any action taken as a result of reading this is solely the responsibility of the reader.


-- Posted Friday, 12 November 2010 | Digg This Article | Source: GoldSeek.com




 



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