Clear signs of the coming deflation

Excess cash or liquidity naturally tends to fuel inflation. This is one reason why RBI or FED increases interest rates in order to control (or try to control) inflation- Increasing rates tries to 'suck out' excess cash, tries to make availability of money more difficult.

Obviously, if excess cash is inflationary, lack of cash, or liquidity crisis or credit crunch, whatever name you give to describe the current situation will exert deflationary forces. Remember, there was a time, not long ago, maybe around May, when every other day there was a news in Business section of BBC mentioning inflation in some particular country had reached record levels in the past so many years, etc... Now you dont see that news anymore? The FED cutting interest rates to 1.5%, shows that it is not bothered much about inflation. The risk of facing a deflation is much more than the risk of stagflation. Not only FED, but RBI cut CRR by 50 basis points a couple of days ago and now we have a world wide coordinated rate cut exercise. Read this article from the BBC
Six central banks, including the Bank of England, have cut interest rates by half a percentage point in an effort to steady the faltering global economy.

We are having Job lay offs everywhere, salary hikes are now less popular and so now there is less easy cash available for households these days. Its getting worse, will keep getting worse at least for one or two quarters from the most optimistic angle. This would also make any possible deflation worse.

Be cautious about Real Estate, Gold , Steel, Retail. By now any random person on the street could also tell that real estate and retail are going to get hit very hard. i am surprised, Pantaloon Retail is still trading at a P/E of 25 (while its growth in the past one year has been negative).

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Oct 8, 2008

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