PUBLIC ENEMY #1 - DEFLATION

From......Financial Perspectives from the Mountain Top.....

Hi guys, this post was originally penned for the Slope of Hope site by Tim Knight. He was nice enough to take my contribution and suggest that you read his stuff daily if you are a trader. As you know, I try to give you the macro view of the economy to set up trade targets for investments that will tend to last longer than 30 days, but Tim's site can help with examining shorter time frames or turns within the month. Please check out the site at The Slope of Hope.

In previous posts in my blog Goat Mug we've outlined the role the Federal Reserve has played in causing each asset bubble in recent memory. Each crisis evokes the same Pavlovian response from our central bankers in that they reduce interest rates and flood the market with easy money. In the most recent economic event our Federal Reserve pulled out all the stops and intervened with unprecedented measures to buttress the financial system and save us from collapse. We heard over and over again that stabilizing housing would save us and all efforts and letters of the alphabet were employed to prop up declining markets with asset purchase programs and low interest rate give aways.

Why does the Federal Reserve seem to desire inflation and fear deflation so much? Please find a 2002 speech given by our own Federal Reserve Chairman Ben Bernanke. If you ever wanted to know the play book of team Fed, here it is. As we read through the text it is now clear that they have used every bullet he described. As investors and traders it is critical for us to understand that the Fed will never give up and accept a deflationary scenario. Even eight months into a dramatic equity market rally, comprehending the Bernake strategy will provide us a concepual foundation for finding trades that will benefit from his unrelenting effort to inflate.......Read the entire article.