You are correct about the number of participants during downturns tends to decrease and ownership concentration increases. There is an old phrase amongst investors which speaks to this, “the passing of ownership from weak to strong hands.” As prices decline value investors begin to enlarge their holdings as others sell out. The bottom of large bear markets occur when the market is dominated by value investors who do not care about price momentum and economic factors, but only that the stream of cash flows that can be delivered to investors over time is quite high.

Or, as my partner says the real winners in the markets are those who have enough money to buy when things get really bad, not who does better in any given year. We strive to be those people, and are prepared to be patient until then.

What is more important in my opinion is low volume, which means that the people in the market are just waiting … What  may also be true (how can this be checked), is that the total number of participants who own stocks could be decreasing, so that the market is “owned” by less and less people/institutions, who own a larger and larger share of th e market. At any time, the volume could increase, upwards or downwards.

I, for one, am willing to forego 5-10% in these uncertain times.

Gordon

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Re: the second – given that I have had numerous discussions with several respected minds that fall on either side of the deflation/inflation debate, I am concentrating on individual names which will do fine in either environment. My favorites right now are NVO and ATRI.

Were you asking what I do personally for a living? Or what one is to do in this investment environment, given the divergence in ultimate outcomes for overall markets that depends on the highly uncertain emergence of inflation or deflation?

However, I do believe that we face inflation down the road due to the increase in spending by the government. As deleveraging slows (probably in 2013) the vast increase in government issued liabilities will lead to inflation. That is down the road.

That doesn’t mean the size of the monetary base relative to interest rates isn’t worrying to me, it is. Small changes in interest rates could lead to wild swings in demand for financial assets as John Hussman has shown. This can lead to volatility in inflation and interest rates that could be very destabilizing. However, in terms on average inflation over time it is the amount of government issued liabilities that worries me, not what form they are held, which is mostly what the Fed controls.

Great discussion guys. Some great points all around. I am sure we will all have to adjust our views on these questions over the next few years as outcomes test them stringently.

Pacioli, what do you do?

I agree with you that the actual definition of “inflation” is of utmost importance. I also agree with you that the “best” way to define it is in terms of monetary and credit benchmarks. This is highly preferable IMO, versus simply pointing to “price levels” (which readings are notoriously difficult to measure in a meaningful way). The reason I went that direction in my prior comment was only due to your referring to CPI readings in your 11/11/2011 comment.

If we view the situation through the lens that we both seem to agree is superior (i.e. monetary metrics and credit outstanding – not y-o-y price changes in this or that item), I am even more convinced that deflationary dynamics abound.

Mish’s blog does a good job of explaining various factors that lead to this conclusion:

http://globaleconomicanalysis.blogspot.com/2011/08/yes-virginia-us-back-in-deflation.html

Some could argue that that post is 3 months old and things have changes since then. Maybe – but I would still hold that market forces have been deferred from exerting themselves, even now.

Specific to your point re: the “monetary base going from $800 billion to $2.8 trillion”, this seems to be a common reprise among ‘inflationists’. What I have not seen anyone explain clearly is why this matters in and of itself. To me, it seems that what really matters in terms of inflation/deflation implications is VELOCITY, not just the BASE. I.e. – regardless of how much the monetary base grows, if it does not result creation of credit outstanding, then it does not create inflationary forces. See below for a chart of trends in velocity.

http://research.stlouisfed.org/publications/mt/page12.pdf

Nor is agreeing to something the same as giving up sovereignty similar to a US State, especially since there is no enforcement mechanism.