"Helicopter" Ben Bernanke appeared before Congress for his semiannual visit July 21. Given the near hysteria sweeping the financial world about possible deflation, I expected to see the Federal Reserve chief's feet put to the fire more than they were regarding when the next round of quantitative easing might begin.
Because he is on record as promising that deflation will not occur on his watch, he has dug himself a bit of a hole in terms of how -- and how quickly -- he must respond to the fear of deflation, let alone the reality, which some believe is already here.
The only thing we have to fear . . .
What many people seem to be missing is that the fear of deflation itself is perhaps the main reason more money printing by the Fed -- that's in essence what quantitative easing is -- is all but guaranteed. And that money printing will lead to inflation, not deflation (but for now, that is not the conventional wisdom).Inflation does not mean the price of everything must go up uniformly. For example, let's pretend the Fed instantly doubled the amount of dollars everywhere. You don't have to be very clever to realize that the value of those dollars ought to have dropped in half. In reality, that would not precisely be the case, as all markets, and products, would respond differently.
When money is printed, it works itself through the system in odd ways. It can ultimately create jobs, but doesn't necessarily. The irrefutable fact is that the value of our lovely green paper has been reduced. That is what inflation is, the printing of money and consequent debasement of that same currency, not what the badly flawed Consumer Price Index shows.
The CPI is, of course, influenced by money printing, but anyone expecting to see inflation show up in there, given how tortured that statistic is, might be waiting for a long time, even as the price of goods and services in general ratchets up.
'Eek' Pluribus Unum
Looking at the stock market action from more of a week-to-week, rather than minute-to-minute, perspective, I'm reminded that quite often during the tail end of the real-estate bubble, in 2007 and 2008, I used to refer to the stock market as "all one trade." That is, it was going to be able to levitate until it collapsed, which is essentially what happened.Since the 2009 low, it seems to me the all-one-trade phenomenon has become even more pronounced. The motion precipitated by computer-driven quantitative trading, trend-following systems and fast-money types makes the daily machinations noticeably more schizophrenic than in the past, and I think folks who try to interpret what the market's moves mean have to be much more judicious in drawing conclusions.
On July 16, when the market plunged more than 3%, it looked like the world was coming to an end. That carried over into the next week, when it seemed we would fall into the abyss as the market opened Tuesday. But by the time the closing bell rang, happy days were here again. Then Wednesday and Thursday saw some more wild Jekyll-and-Hyde action. Good luck ferreting out what all that motion meant.
In any case, I expect we will see more mindless careening about for a while, and I also think there is a high probability that the market will continue to trade in a wide range, frustrating both bulls and bears. Over time, the manic volatility in a market that ultimately goes nowhere will chew up lots and lots of quant funds, and I believe that eventually the math-oriented types will go out of business, leaving Wall Street safer for investors. But that is probably quite a way down the road, and in the interim the noise level is liable to stay extraordinarily high.
As for deflation versus inflation, in the near term we will probably continue to find ourselves in a period where we have symptoms of both.
At the time of publication, Bill Fleckenstein did not own or control shares of any company mentioned in this column.