Four Bears and Inflation
April 17, 2009
Earlier this week the Bureau of Labor Statistics (BLS) announced a Consumer Price Index number for March that showed an annualized negative number. It was tiny, a mere -0.38%. But it was the first negative annualized rate since August of 1955. Is it a hint of more to come?
Deflation has been a chronic problem in the Japanese economy since the Nikkei 225 topped out in 1989, and it was a debilitating problem during the Great Depression. There are a few economists who see deflation as a threat to the U.S. economy on the expectation of continuing unemployment and consumer deleveraging.
But the consensus seems to believe that monetary easing by the Federal Reserve is more likely to trigger the reverse problem — higher inflation. Some even foresee a return to the sustained inflation of the seventies and early eighties. This is yet another topic that demonstrates the heightened “Uncertainty Factor” in today’s economy and its imperfect reflection in the markets.
And speaking of the markets, most people think only in terms of nominal price values with little consideration of real (inflation-adjusted) performance. But over longer periods inflation and deflation are major factors. The thumbnails to the right offer a quick comparison of our Four Bad Bears chart in nominal, real, and alternate-real formats. In nominal prices, our current bear has begun to pull away from the treacherous slope that led to the Great Depression. That’s not the case in real prices, mostly because (ironically) the deflation of the earlier period makes the 1929-32 decline seem less grave. If the ShadowStats Alternate CPI adjustment has any credence, the real comparison is even more bizarre. The ShadowStats claim of understated inflation since 1982 makes the Tech and current declines significantly more severe.
Click on the small charts for a series of larger versions. Use the blue links at the top to navigate among them.
Bear Turns to Bull?
April 17, 2009 updated daily
The S&P 500 closed the week by rallying to a new high 28.5% above the March 9th low. Are we in a new bull market, or is this just another bear rally? Click here to review the previous rallies during the current bear market, and here’s a table showing the 1929-1932 Dow rallies.
We continue to be fascinated with the saga of the Four Bad Bears. In nominal terms, the latest rally puts the S&P 500 just slightly higher than Dow Crash of 1929 over the equivalent time frame. In real (inflation adjusted) terms, the Dow fares better.
The accompanying charts are intended not as a forecast but rather as a way to study the current decline in relation to three familiar bears from history.
For a better sense of how these declines figure into a larger historical context, here’s a long-term view of secular bull and bear markets in the S&P Composite since 1871.
For a bit of international flavor, here’s a chart series that includes the so-called L-shaped “recovery” of the Nikkei 225. I update these weekly.
Since inflation is a favorite topic on this website, I now regularly update a pair of charts to facilitate a comparison of the nominal and real declines. See also my logarithmic scale view of the “Four Bad Bears” comparison.
For a visual analysis of bear market recoveries, be sure to see my Bear Bottoming charts introduced in the next section.
The Mega-Bear Quartet and L-Shaped Recoveries
April 17, 2009 updated weekly
Here’s an update of the Mega-Bear Quartet. It’s especially relevant these days because of the frequent mention of L-shaped recoveries and references to the Japanese market after the 1989 bubble.
To see the mega-bear comparison more clearly, here’s musical analogy that allows you to view the similarities incrementally. Use the blue links to add the parts.
This latest update now includes an inflation-adjusted chart, which gives us a fascinating visualization of the impact of inflation on long-term market prices. The higher the rate of inflation during a bear market, the greater the real decline. Compare the peak of the Dow rally in year seven against the nominal chart. The difference is the result of deflation during the great depression.
It’s rather stunning to see the real (inflation-adjusted) decline of the Nikkei, 19 years after its crash. The current lows rival the traumatic Dow bottom in 1932, less than 3 years after its peak.
Over the past few decades, equity markets in the U.S. have had an extended bull run. These charts remind us that bear markets can last a long time. And it’s not necessary to go back to the Great