Many readers are concerned about the long-term consequences of the stimulus package and the various bailout programs. Reader Chris had this to say:

Great posting of the comment on the car maker bail-out.

What is an investor to do expecting deflation?
What steps to take in case of massive inflation?

Correct; Congress, the Fed and the Treasury have not given any evidence that they have any idea how to deal with the current economic situation. The usual solution of throwing good money after bad is simply doomed to fail.

My view is that, given enough time, we will experience both scenarios: First deflation and then Inflation.

Right now we are in a bear market along with tremendous deflationary forces. Trillions of financial assets have been destroyed around the world, housing is in a prolonged downward price spiral, unemployment is soaring and commodity prices have dropped sharply.

Stimulus packages and bailout programs will do nothing to stop this trend and will only cause more money to be poured down the drain in a vain attempt to quickly reverse the course.

I am not an economist, but if I assume that, say, $3 trillion in assets have been destroyed then it would seem that the Fed could conceivably increase money supply, by whatever means, by about the same amount before any threat of inflation would become reality. It would take some time to affect that change, which is why I believe that the inflation scenario is a number of years away.

This is not a forecast that is chiseled in stone; it’s merely my view right now. If some of the current facts change, I will change my mind as well.

As investors, how do we deal with it?

First, as noted in my weekly updates, my domestic and international Trend Tracking Indexes (TTIs) are in bear market territory, so we won’t take any action there until the major trends change.

Second, it is not necessary to try to determine exactly as to whether we are still in a deflationary mode or have crossed over into inflationary territory.

When following trends, all you need to do is look at the sector fund/ETF listings in the weekly StatSheet. Those will give you the best clue as to where the upward momentum is and in which areas you might want to deploy some of your assets.

Nobody can look into the future, but following trends that cover all major sectors of an economy is as good of a guide as you can find to see which direction we are headed. As time goes on, you will notice that leadership in certain sectors changes, so it’s imperative that you use trailing sell stops to either limit your losses or lock in any profits.

Trends in the market place are the only thing that is real because it can be measured. Stay away from hype and especially canned asset allocations promoted by commissioned salesmen. My old standby line is still valid: Never ever do business with someone who does not offer an exit strategy!

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

Disappointment over the lack of specifics regarding a banking rescue pulled the major indexes down.

Our Trend Tracking Index (TTI) for domestic funds/ETFs remains below its trend line (red) by -9.29% thereby confirming the current bear market trend.



The international index now remains -17.28% below its own trend line, keeping us on the sidelines.

After Tuesday’s sharp drop, the major averages tried to find some footing yesterday from which to move higher. It turned out to be a see-saw day, but we ended up slightly to the upside much to the relief of many investors. We now have to wait and see if these levels hold or if we are heading further south again.

All eyes are now on the compromise stimulus package, which will need to win congressional approval.

The big bankers faced some tough questions from Congress as to whether they’ve used the TARP funds appropriately or not. They all conceded, by putting on their politically correct face, that the economy would probably be in worse shape today if the TARP program had not been enacted in October. Yeah right, as opposed to saying that it was a complete failure?

Speaking of failures, here are some highlights from an article called “N.Y. attorney general blasts ‘secret’ Merrill bonuses:”

New York Attorney General Andrew Cuomo has accused Merrill Lynch & Co. of secretly moving up its bonus payments to assure they were paid out to the firm’s executives before fourth-quarter losses — more than $15 billion — came to light.
…
Cuomo also detailed how the bonus pool was spread among staff.

He said that while the bonus pool encompassed 39,000 employees, the lion’s share went to a relatively small number of executives. “Merrill chose to make millionaires out of a select group of 700 employees,” Cuomo said.

Cuomo’s office determined that $121 million was doled out to the biggest four bonus recipients, who were not identified by the attorney general.

“These payments and their curious timing raise serious questions as to whether the Merrill Lynch and Bank of America boards of directors were derelict in their duties and violated their fiduciary obligations,” Cuomo said.

That’s nice. It supports my view that Merrill Lynch should have been left to die a peaceful death so that other businesses would have had an opportunity to pick up the leftover pieces of value, dissatisfied clients, for example.

As it turned out, taxpayers are now supporting their questionable marriage to Bank of America, and I have no doubt that this alliance is doomed to fail.

Did you notice it yesterday morning? I sure did.

The sun was shining just a little bit brighter, the birds were chirping just a little bit louder and the wind was blowing just a little bit gentler. I felt calm and relaxed and assured that the world is now a better place. Strange feelings indeed, and then I realized what caused them: We now have a new stimulus package and all troubles are over.

Yeah right! It was only a dream.

Wall Street had no uncertain feelings as the deadly duo, the bank rescue plan along with the Senate’s approval of a huge stimulus bill, hit a brick wall and sent the bulls scrambling for cover. When all was said and done, the major indexes had lost 4% to 5% on the day, which wiped out just about all of February’s gains.

This sell-off can now almost be considered a reliable indicator as the markets reacted to the latest attempt to stabilize the economy the same way as they did the last eight times the government unveiled ideas to stem the crisis. Could there be a message here? Maybe doing nothing would be a better and cheaper option and would allow the markets to sort out things for themselves with the weak and insolvent companies falling by the wayside and the strong being able to utilize new opportunities.

For more on this insanity you might want to read Mish Shedlock’s article “Insanity Prevails.”

Just as you thought the markets were making some headway to the upside, a reality check pushed the major indexes back deeper into bear market territory. This is why my suggestion still holds that you always need to work with a sell stop should you have the overriding itch to engage in bottom fishing.

Seeking Alpha featured “Have We Reached a Historic Buying Opportunity?” Here are the last two paragraphs:

The main thing I can say about the current environment, Matt, is though I can’t tell you what is running when or if we’re stuck in a 1-year rut or a 5-year rut, what I do know is that the general area we’re in is a historical buying opportunity: a once-in-your-lifetime chance to get your asset allocation plans squared away and really make sure you’re saving what you need to be.

Because we may go down more… we may not even have hit a bottom (though I, like Matt, do think we have), but anyone coming in anywhere down here is not going to be hurting at the current cost basis, if you’ve got a 10- or 20-year horizon, and I don’t care if you’ve got a value tilt, a growth tilt or are 50/50 on your U.S./international weighting.

It’s simply amazing to me that this author continues to harp on a once-in-your-lifetime buying opportunity by getting asset allocations set up and using a 10 to 20 year horizon.

Has nothing been learned from last year’s disaster? I wish the author would take the time and talk to some investors who saw their portfolios cut in half during 2008. These investors will have to spend the next 8 to 10 years just trying to make up losses. To ask them to return to mindless buy and hold investing while we’re still in the midst of a bear market simply borders on ignorance.

While you can get away with buy-and-hold for a while during bull markets, the problem always remains that there is no exit strategy involved to save your bacon if the markets tank. We’re on the dark side of the biggest credit bubble in history and to think that all is smooth sailing from here is simply not being in tune with reality.

I feel part of my job is to point out useless articles like the one above so that investors don’t make the same mistake again of trying to get front row seating on the Titanic.

The WSJ summed up last week’s market optimism in “It’s All Good, Right? Right?”

The indefatigable optimism of Wall Street is something to behold at times. The market has just been treated to the largest one month of layoffs since the dreary 1970s, which was on the heels of a slew of other global indicators that underscore the depth of the worldwide economic decline. And yet, markets have handled the news reasonably well over the past few days, putting together its strongest week so far this year.

“I think we’re going to carry on getting a relentless slew of extremely poor data, but as you know in these bear markets, people latch on these things and get a bear market rally going, and then the weight of bad news crushes it again,” says Albert Edwards, global strategist at Societe Generale in London.

[Emphasis added]

That’s my belief as well as I pointed out in Friday’s commentary. If you get sucked into this rally, get your ego out of the way and be big enough to admit that you could be wrong by using a sell stop on your positions to minimize losses should the trend head back south again.

Once realization sinks in that this stimulus package will have little effect on pulling the economy out of its doldrums, the drop in the market will be fast and furious. Remember the first $350 allocation of TARP money? Down the drain with nothing measurable to show for.