Daily Equity Report

What is deflation? In a typically inflationary world, the concept of deflation is mostly foreign and difficult to grasp. It is important to understand because if economies, while stabilised, cannot move back into positive growth in the next 12 months, face the prospect of deflation.

One definition is: A sustained fall in the prices of goods and services, and thus the opposite of inflation. It should not be confused with disinflation which is a slowing down of price rises (i.e. a fall in the inflation rate). Deflation may be the result of government policy (such as a move to raise interest rates and cut money supply) or can be caused by external factors, such as intense trade competition or the collapse of an asset bubble. Deflation may have short term benefits, particularly if it is the result of greater efficiencies in the economy, but if it lasts too long, or if it is the result of weakening demand, it can be a negative, self perpetuating influence on economic activity, discouraging consumption, reducing revenue and wage levels, pushing up bad debts and increasing the rate of bankruptcy.

On the surface, and before deflation really sets in, this does not appear to be too bad – i.e. sustained fall in prices of goods and services.

There is however another definition. This from Elliot Wave.

Webster's says, "Inflation is an increase in the volume of money and credit relative to available goods," and "Deflation is a contraction in the volume of money and credit relative to available goods." To understand inflation and deflation, we must understand money and credit.

It’s the latter type of deflation that the world has experienced. i.e. contraction of money and credit that has pulled back with it the prices of real assets.

Elliot Wave says most people are unprepared for it because virtually everyone has leveraged themselves to the hilt. Unrealistically low interest rates over many years have “financed” cars, houses, furniture, etc.

Falling prices mean lower profits for companies. Consumers delay purchases, which in itself is negative for business, further exacerbating the problem.

Asset price deflation compounds the negative wealth effect.

Clearly leveraged consumers and leveraged governments don’t want deflation. There has been a concerted effort from central banks to provide liquidity and, in the US to try and keep interest rates on long bonds low. It worked for a while, but long bond rates have been steadily moving back up.

The worst situation that the US government could find itself in, is ongoing asset price deflation together with rising interest rates, which they will not be able to keep low.

The market ended up today with gold reflecting the weak US dollar. It moved up to around $957 in US dollars. The JSE ended up 1,8% to 22425

Have a wonderful weekend.

We are pleased to inform you that we have published our latest quarterly economic report on our website.

Also note that we have launched our new website last week. The site will give you a better idea of how we consult to our clients and we manage the portfolios.

So pick up the latest quarterly report on www.seedinvestments.co.za

Kind regards

Ian de Lange
info@seedinvestments.co.za
www.seedinvestments.co.za
021 9144 966