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Schwab strategist sees mild deflation ahead

Even as the government uses “unprecedented tools” to liquefy the economy, the huge surge in the monetary base is unlikely to be inflationary, according to Liz Ann Sonders, chief investment strategist at Charles Schwab & Co. Inc. of San Francisco.

Even as the government uses “unprecedented tools” to liquefy the economy, the huge surge in the monetary base is unlikely to be inflationary, according to Liz Ann Sonders, chief investment strategist at Charles Schwab & Co. Inc. of San Francisco.
“I think we’ll be in a period of mild deflation for a long time. The problem is not inflation, because the money multiplier is extremely low,” she said, referring to the measure of the extent to which government-created credit spreads through the economy.
“Banks are holding money, and it’s not going anywhere,” Ms. Sonders told advisers today at the Investment Management Consultants Association’s New York Consultants Conference today. IMCA is based in Greenwood Village, Co.
At some point, Ms. Sonders said, the government will have to pull back on monetary creation to head off inflation, but that is not an immediate concern given the sluggish economic environment and slower loan demand.
The economy is unlikely to hit a “V-bottom” and rebound quickly, although “we’re likely to see less severe numbers in 2009,” she said.
“We won’t know we’re out of the worst of it for a long, long time,” Ms. Sonders said. “Unemployment is not improving anytime soon and could reach 9%.
While declining to forecast market performance, Ms. Sonders noted that $8.85 trillion sits in cash, bank deposits and money market funds, which equates to 74% of the market value of U.S. equities.
High investor cash levels, record-low Treasury yields and various historical indicators that show markets rising before the economy turns around all indicate “a better-than-even chance that the Nov. 20 price lows hold,” Ms. Sonders said.

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