Deflation’s Chinese Water Torture

by Rick Ackerman

The tedious price action that ended Wall Street’s week paradoxically left denizens of the Rick’s Picks chat room as keyed up as I’ve seen them in a long while. Opinion seemed evenly divided on the question of whether stocks are about to blast off into hyperspace, or tumble into a deflationary abyss as deep and destructive as the 1930s Depression. I cast my vote resolutely with the latter, although I would have to concede that a blowoff spike sending the Dow Industrials above 20,000 is at least theoretically possible. For where else is an investor, or a dot-com company with a mountain of idle capital, to turn with yields on 40-year bonds heading toward 2% or lower, and returns on shorter-term paper at zero and sinking? This poses quite a problem for the leviathans of the investment world — pension funds and insurance companies in particular, since they are on the hook to pay out sums in the future that will overwhelm today’s meager returns.

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