Lately, the most frequently asked question has been as to when inflation will be a threat again and how it will affect us. Mish at Global Economics referenced an article, which succinctly addressed this problem:

Will this printing create [price] inflation? This is dependent very much on what money will do next. If banks will not lend and banks sit on that cash forever and ever like the great depression because the risk is too high and the banks do not know if the lending will end up in good assets or bad assets, and because banks are in so many bad assets now they probably will not lend at all.

A good example is what happened in Japan in 2001-2002 where the Bank of Japan pumped 300% at one stage and lending continued to collapse. I expect similar things to happen here. If lending will not increase we can conclude this will not be inflationary.

[My Emphasis]

I agree with the above. However, we’ve seen an incredible destruction of assets and wealth in general over the past 1-1/2 years, which now has been estimated at some $20 trillion. This wealth loss is far greater than the monetary expansion of the Fed and is, at least in theory, supposed to limit the effect of reflation for the time being.

In yesterday’s post, I made the argument that the dollar may not be destroyed to the degree many think because all industrialized nations are following the same theme of attempting to flood their economies with money via bailout and stimulus packages.

In other words, if we’re all doing the same thing, all currencies may be destroyed at about the same rate. If that happens, there is no longer a “reference” currency to measure the destruction against.

Same with inflation. If all major world economies are inflating at about the same rate, how will it affect the U.S. when there is no yardstick to measure against? This is where I have problems understanding the currency devaluation argument.

My conclusion is that we are entering a scenario unlike any in the past. Many comparisons have been made to the 1920s and 1930s. However, the world was not such an interconnected place as it is nowadays. Things that happened in the U.S. back then did not have an immediate effect on the rest of the world and vice versa.

I don’t think anyone has the answer or the ability to somewhat accurately forecast how these current circumstances will play out in the future. Relating these uncertainties to investing, I am more than ever convinced that being disciplined and following trends in the market place is the only way to survive in this potentially treacherous environment.

Recently, reader Robert submitted a video clip analyzing the history of money printing and its recent acceleration. Take a look at it, and then we’ll discuss some of these issues:

http://www.youtube.com/get_player

Sure, long-term, there will be an inflationary effect, and I’ll comment more on that tomorrow. But what about the dollar? Will it be sharply devalued as the effects of reckless printing will filter down into the economy over the next few years?

I am not so sure. From my non-economist view, I think the video is too one sided, because it overlooks one critical aspect, which was never applicable to any degree in the past.

The bursting of this current credit bubble has affected all industrialized countries in all parts of the world. It may have started in the U.S., but it spread like a wildfire exempting no one along its destructive path. Over the past few months, the daily headlines have read like a “who’s who” by listing country after country implementing their own version of bailout and stimulus packages.

To me, here’s where it gets sticky. If all industrialized nations follow the same path of printing money to prop up their respective economies, will that not weaken their currencies as well?

Is it not true that, if only one country engages in the reckless printing of money, its currency will lose value only when compared to those countries with a more responsible monetary policy?

This is where I believe we have entered unchartered territory. All nations are doing the same thing, which does not make it right, but I am wondering if we, as a world community, will really be suffering from a bout of currency devaluation? Somehow I can’t see how, given these circumstances, we will all be devaluing when there is no longer a standard currency to peg to.

Let’s assume that magically a major country emerges that does not participate in these money creation efforts, was not effected by the global crisis and has otherwise proven to be fiscally responsible, then our dollar would slide against that super currency. However, in relation to all others, the effect should be minimal and vary only to a small degree.

I have not heard anyone addressing this issue with the global view in mind. If you have more information on this important topic, please post your comments.

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

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

The bulls came out charging after the S&P; 500 made a 12-year low on Monday, and pulled the major indexes out of the doldrums.

Our Trend Tracking Index (TTI) for domestic funds/ETFs remains below its trend line (red) by -9.47% thereby confirming the current bear market trend.



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

To me, it’s simply amazing that masses of investors tune into financial news shows, like CNBC, and actually take the offered information as credible advice.

It’s pretty sad that serious money matters are being marketed purely based on entertainment value and not on the basis of what might really make sense in the current market environment.

The bias in these shows towards “there has to be something we can buy right now” is obvious despite that fact that a wise investment position in the midst of the worst bear market in history would be in money market on the sidelines.

Funnyman Jon Stewart took a shot at CNBC in the following video clip, which is very funny but also spot on. Enjoy it.

It was bound to happen sooner or later. No matter how deeply we are entrenched in a bear market, there will be rallies based on short covering and hope that economic improvement lurks around the corner.

That appeared to be the case yesterday, and we’ll have to wait and see if this will be a substantial rebound or just another one day event. It could have very well been a bounce of the 680 support level, since these price points are not exactly chiseled in stone.

On the other side of the spectrum, as I posted in “Looking for support,” overhead resistance lurks at the 741 level for the S&P; 500. Watch that point, if the rally should carry us that high.

Keep in mind that bear market rallies can be deceiving by their power and duration. From the November 20th closing low, we witnessed a 20% rally over 6 weeks, which many mistook for a new bull market. As we marched into 2009, the rally reversed and we’re down again, as measured by the S&P; 500, having lost 20.31% year-to-date.

One of the drivers for today’s rally was Citigroup’s disclosure that they are enjoying their best quarterly performance since 2007. Duh! Since they’ve received some $150 billion in assistance, shouldn’t they be showing some improvement?

I was scanning the news to see if Citi made a more appropriate statement to go along with their above announcement, maybe along the lines of “we’re glad we’re improving and hope that this is just the beginning so that we can start paying back the assistance you tax payers have given us.”

Anything showing a little humility and gratitude would have gone a long way to improve the negative PR; but no, I found nothing and realized that we will never hear those words, as long as the “me-me-me” corporate attitude prevails.

As almost has become a habit at the beginning of a new week, the market took another hit to the downside yesterday.

While the damage was only around 1% for the major averages, many technicians will be now slobbering over the closing numbers as the support level of 680 on the S&P; 500 was taken out.

I reported in “Looking for support,” that once the 680 level is broken to the downside, the next support will be at 600, which translates to another 11% drop from yesterday’s close. Ouch; that’s really going to hurt, for those who are still desperately holding on to bullish investments.

Economist Nouriel Roubini had this to say in a recent interview: