The return of the phantom of deflation

Commentary: The sequel is scarier than the original

By Todd Harrison
NEW YORK (MarketWatch) -- Albert Einstein once said that the definition of insanity is doing the same thing over and over again and expecting a different result.
We've covered numerous topics in our time together, including the cumulative imbalances in the global marketplace, the shifting social mood, the sovereign sequel to the first phase of our financial crisis and the Phantom of Deflation. Read Minyanville's "A Five Step Guide to Contagion."
That last dynamic is perhaps most daunting; between the bear market in China, uncertainty in Europe, stateside budget gaps, upward taxation and austerity measures, it would appear we're on a collision course with an inevitable destination. To that end, I will draw from three of my past columns with hopes of providing some context for our forward path.
The first article was written on June 21, 2006; I was reminded of those thoughts when I picked up The Wall Street Journal last week and saw "Inflation at 44-Year Low splashed loudly across the front page. Read Minyanville's "The Phantom of the Market."
As I wrote at the time,
"I won't pretend that all is well in the world or that the worst is behind us. I'm simply looking to shake shekels from the tree and pocket them before the Phantom returns to his rightful home.
Who is this Phantom I speak of and what does he want? For me, it's a simple yet unpleasant answer; the type of discussion that nobody wants to have until we actually see his shadow.
He is Deflation; painful, all-consuming, watershed Deflation. While the mainstream media continues to monitor inflationary pressures--and yes, this exists in some corners of the economy--this particular Phantom won't discriminate between victims. The weakness we've seen is the probability of this demon being priced into the collective mindset."
To be sure, after that column posted and following an additional 15% haircut for commodity prices, asset classes across the board enjoyed a spirited sprint higher. We know now that was the "blow off" phase of the rally, the "panic" portion of the denial-migration-panic continuum that defines all market moves; we all know what happened next.
On Feb. 20, 2008, we offered that policymakers were navigating the increasingly complex landscape in a manner that would further crush the middle class. Read Minyanville's "Our Wishbone World."
And I quote,
"Let's look at both sides of the great debate. To the left is the socialization of markets, nationalization by governments and a road to hyperinflation. To the right, we have asset class deflation, risk aversion and the unwinding of the debt bubble.
If the Northern Rock nationalization is the first in series of similar steps, we could conceivably see the stateside assumption of mortgage debt by the U.S government. This would hit the dollar and spike equities, at least until interest rates rose to levels deemed attractive as an alternative investment.
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