Views about the stock market and economy

First, the most important point we must establish is that of inflation and deflation. We will probably see a period of deflation, the contraction of credit. Recent headlines (1 , 2) point to contracting debt in spite of the government taking on trillions in debt.

Furthermore, with capacity slack we will unlikely see the tightness in production needed for producers to raise prices. The final piece of evidence is that of rents in the United States are decreasing. This will show in the OER which is a huge weighting on the CPI. This will counteract any CPI increase due to commodities.

Most likely, the path of least resistance is that of deflation. But whether consumer prices go up or down a lot is not the main driver of the market. The main driver is the contraction of credit. We're going to see credit contract and a lot of these debts won't be paid off due to people can't pay for their homes and businesses going bankrupt. This debt destruction will suck up all the extra dollars the fed has pumped in and more. We can see this happening already despite government actions to take on more debt.

What does this mean for the markets? Simply, demand for dollars is outpacing supply due to debt destruction. The dollar will most likely increase in value, and thus risky assets will have a hard time in this environment.

In the future, I don't see the Fed able to increase liquidity without backlash. Already the public is skeptical of the Fed creating more dollars so any more money created will be met with scrutiny. Short of another systemic failure or economic recession, I don't see massive credit creation in the future. Keep in mind, the Fed in it's most recent meeting has indicated that it will be stopping purchase of treasury securities, so it seems as if they are starting to slow down the liquidity programs.