Monday, December 15, 2008

Deflation And The Ski-Gear Indicator

I like to look for alternative market indicators. Previously I have explained how the humble croissant saved the day on a research report I was doing on the Asian crisis and, more recently, how my French teacher gave me the inkling that the markets were going to implode.

Today, dear readers, I approach the deflation issue sure in the knowledge that I have uncovered another little gem.

Let me first preface this eureka moment with a little background. I live in Switzerland which, although in the brown stuff just like everyone else, will probably escape the very worst of the crisis. This is mainly due to the fact that the housing market bubble here is virtually none existent.

We have cursed the fact that house prices hardly ever move here when the rest of Europe has seen meteoric rises in property values, but now it is our savior. Relatively low unemployment is the norm and fiscal conservatism is the by-word. UBS aside, we have not seen a total meltdown of our banking system and pretty much everyone is confident that although we will see a recession, it won't be as bad as elsewhere.

However, and getting back to my new market indicator, I spotted a deflationary indicator if ever I saw one. At the weekend my wife and I took my son and a friend karting in Montreux. Unfortunately we arrived early and the track was not open. Needing some ski gear for the season we headed to the commercial area and stumbled across a Reebok store going out of business.

We managed to pick up about $600 worth of gear for about $200. We went around the other stores and fond that most were deeply discounting their products. Now, bearing in mind that we are at the start of the ski season, this seemed a little odd. Of course we phoned a couple of friends and told them of the bargains on offer, their response, however, gave me fodder for today's article.

"We have heard that a few are going out of business, I think we will wait for the New Year, there are bound to be cheaper deals then" they said.

Cheaper than 70% off the sticker price is what our friends (who are not short of a bob or two) are looking for. This is not just in the latest ski-wear but they are looking to the New Year for a new car ('prices too high now' they said).

This seems to be a trend, discussing a similar situation with a friend in the UK, he said 'if you have cash on your hip right now, you're laughing'

Well, maybe for the moment. Deflation is the worse scenario we could be facing. Many say it is off the table as fiscal measures to boost the economy will cut off deflation in its tracks. I happen to disagree. When my French teacher cancelled her holidays and battened down the hatches we said we were in for a rough time and recession was looming, this was when market commentators were giving only a 50% of recession, now we know we were already in it.

The fear factor is rife with the public and this means that stores will have to discount, this will fuel deflationary affects, I am pretty sure of that, at least for the short term. Whether this cycle is going to last is less certain as money is being pumped into the system at a huge rate.

I do believe that I have a solution to all this though and it is my old nemesis, the press. We wrote an article a while ago about 'talking ourselves into recession'. The press, of course, sensationalise everything, that is their 'job'. But they have jumped on every bit of bad news and twisted it in the same way that they pumped up stocks at the highs of the markets.

I am not suggesting that they turn around and say everything is now OK go out and spend, spend, spend, but imagine if everyone did. Banks would lend more (responsibly we hope) business would generate more money and things would start to improve quicker and maybe conversations at dinner parties would not be so gloomy these days.

These dinner party topics have been a source of alternative indicators for articles I have written for many years. When non-financial friends were engrossed over canap├ęs in the latest Internet stock and recommending that I buy, I knew the game was over. When the topic of conversation turned to how many buy-to-let houses an engineer friend had bought, it was time to sell out of the UK. When enquiries from sober dinner party goers came onto the subject of how they could get into hedge funds and private equity funds, and those funds were listing, we said a top was near and now a humble outlet mall in the middle of nowhere gives up a market indictor on a micro scale that cannot be brushed aside.

No, my friends, I may have picked up a fabulous bargain (being a Yorkshireman, this is in my DNA) and will look marvelous on the slopes this year, but when previously price-unconscious friends decide that 70% discounts are not enough it is time to start considering the 'D' word.

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