Deflation and 08/24/11 Market Action

The market has had two up days in a row now. The longer term time frame (see figure 1) is still quite damaged. I would like to see the SPY break and hold above 121 for me to consider taking some small swing trades. Overall I am not seeing to many low risk/high reward setups in the individual stocks. While it is nice to see two up days I still feel it is important to be patient at this time.

Figure 1.


It will be interesting to see what happens on Friday, with regard to Bernanke's speech from Jackson Hole. The question on everyone's mind seems to be if there is going to be more monetary stimulus from the Fed. My personal opinion is that the Fed will do some form of QE3 at some point, but I do not necessarily think that they are going to announce that this Friday.

The Feds focus since the crisis from 2008 has been to prevent deflation, by pumping massive amounts of liquidity into the financial system. I would rather see deflation than the inflation they are in the process of creating. I do not think that deflation is a bad thing for the following reasons:
(1) Prices drop during deflation.
(2) Money becomes more valuable
(3) Inflation encourages consumption, which is financed by debt.

A deflation actually rewards the prudent saver. Societies and individuals become wealthy by producing and saving. Monetary stimulus and inflation just creates asset bubbles or keeps asset bubbles going that would start to deflate absent the central bank inflating the money supply.