That's the line spoken by Dirty Harry in Magnum Force right after he blew away his crooked boss. I also personally use that line to curb any tendency toward hubris I might have. For example, if you put me and Greg Morris in the same room, there is no doubt who is the smartest guy in the room, and it ain't me. But I never doubt that I can bring a useful perspective to the table. In particular, Greg doesn't think we can usefully apply technical analysis to economic charts. (My apologies to Greg if I haven't quite gotten that right.) In the strictest sense, I probably agree, but I also think there are cases where the technical brain will gain some insight.
Here is a chart of the Velocity of Money*, which is the number of times one dollar is spent to buy goods and services per unit of time. The frequency of currency exchange can be used to provide some insight into whether consumers and businesses are saving or spending their money. If it is increasing, there is inflation risk, and deflation risk is implied if it is falling. We can see that it was relatively flat from 1960 to 1990, it increased into 2000 where it peaked, and notably, it has been trending downward since then. Two decades! The sharp drop this year has gotten all the news coverage, but the longer-term down trend signifies (to me) a marked tendency toward deflation.
As investors we want to accomplish two basic things:
(1) Determine the trend and condition of the market, and (2) select stocks that will ride that tide.
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How is this useful information? Here's another quote attributed to Mark Twain that I like to use:
It ain't what you don't know that get's you into trouble. It's what you know for sure that just ain't so.
All we hear lately is inflation, inflation, inflation! But here is evidence that deflation may have been creeping up on us for two decades. I don't know how this is all going to work out, but it is possible that the Fed's powers may be less than adequate to handle the ultimate outcome. In any case, my solution for either outcome is the same -- reduce and eliminate debt. That is an especially good strategy for deflation, but I can't think of any situation where "it just ain't so" that being debt free is not a good thing.
Happy Charting! - Carl
* The definition of the Velocity of Money was partially plagiarized from the Federal Reserve website (fred.stlouisfed.org), which I think doesn't actually constitute plagiarism.
Technical Analysis is a windsock, not a crystal ball.
Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
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