[quote]We’re in a massive deflationary cycle right now. $30T lost in the markets, $3T lost in housing equity, $50T or more in CDS,etc…. I count credit as part of the money supply. So we’ve lost a huge amount of it in the last year. Look around. Commodities down about 75% accross the board. Homes around the country are about 25% down.[/quote]
I prefer the term “panic”. There is a lot of irrational fear in the markets. Mining companies like Rio and Freeport-McMoran trading below book. Blue-chip industrials like GE dipping into single digit P/E’s. Houses selling below rent and replacement value, purely because people are afraid to buy. Fear feeds on itself. We’re in a massive fear cycle.
But people don’t change easily. They might cut down on spending temporarily because their 401k’s drop 20% in one month. But that does not suddenly make them frugal in the long run. 6 months later, a stock-market rally might make their portfolios rise 20% and they will go on a shopping spree. People don’t cancel decisions to buy new cars because the economy is bad – they merely delay them. Everyone still needs to drive to work. A dip in new car sales in 2008 will be matched by a spike above the trendline in 2009 or 2010. If GM and Chrysler aren’t around to provide the supply of new cars, Toyota and Honda will make a killing – and so will everyone who buys TM and HMC today, when the night seems darkest.
