As you can see, only AAA rated bonds are performing well. This is strong evidence that we are not in a period of "disinflation" as some claim. In a disinflationary environment, one would expect risk premiums to drop not rise. Action here is consistent with rising default risk, which is what one should expect in deflation.

Those harping about prices of consumer goods, food, services, etc., are missing the boat about what deflation is and what one should expect in deflation. Trillions of dollars of debt are being wiped off the books via bankruptcies and foreclosures while inflationistas worry about the price of eggs going up by 35 cents.

Aggregate demand is now collapsing in the U.S. and advanced economies, and sharply decelerating in emerging markets. There is a huge excess capacity for the production of manufactured goods in the global economy, as the massive, and excessive, capital expenditure in China and Asia (Chinese real investment is now close to 50% of gross domestic product) has created an excess supply of goods that will remain unsold as global aggregate demand falls.

Commodity prices are in free fall, with oil prices alone down over 50% from their July peak (and the Baltic Freight Index--the best measure of international shipping costs--is 90% down from its peak in May). Finally, labor market slack is sharply rising in the U.S., and rising, as well, in Europe and other advanced economies.

...yields on Treasury Inflation-Protected Securities (TIPS) due in five years or less have now become higher than yields on conventional Treasuries of similar maturity. The difference between yields on five-year Treasuries and five-year TIPS, known as the break-even rate, fell to minus 0.43 percentage points.

This is a record. Since the difference between the conventional Treasuries and TIPS is a proxy for expected inflation, the TIPS market is now signaling that investors expect inflation to be negative over the next five years, as a severe recession is ahead of us.

So goods, labor, commodity, financial and bond markets are all sending the same message: Stagnation/recession and deflation (or stag-deflation) is ahead of us.

Excess Reserves of Depository Institutions (EXCRESNS) went from $60.051 billion in September to $267.902 billion in October. That is a 346.13% increase in just one month or a 4153.49% annualized increase. That is also 1.9% of GDP (2007). From June up to September, Excess Reserves hovered around the $2 billion mark. This rather large and sudden jump can signify only one thing: BANK HOARDING. Having completely ‘done their asses’ by extending cheap and easy credit to anybody and anything that could fog a mirror, these super-star banksters are now sitting on their cash, paralyzed by fear. They also know that their sham accounting can only postpone the inevitable and they are clearly gearing up to take further significant losses on their balance sheets.