Caution: Falling Prices


First the good news. It looks like inflation is under control. Now the bad news. Deflation looks like it could be rearing its ugly head.

Tell Tale Signs

A few tell tale signs emerged on Wednesday after new data showed consumer prices dropped at the fastest rate on record in October and new home construction was at a record low.

When you combine that data with oil prices around $55 a barrel, "it appears we are in a period of disinflation right now, where the actual level of inflation is trending lower," says Michael Sheldon, chief market strategist for RDM Financial, Westport, Connecticut.

What's Wrong With Lower Prices?

On the surface deflation sounds like a boon for the economy. Essentially it’s falling prices and who doesn’t love a bargain?

Trouble is the pattern of falling prices is hard to stop because it feeds on itself.

Here’s how it works: As prices drop would-be buyers put off purchases in hopes of getting a lower price, later. That in turn creates a drop in demand which retailers counterbalance with lower prices.

Typically deflation is attacked by dropping interest rates which pushes demand higher. But the Fed doesn’t have a lot of wiggle room on the downside, anymore.

“You have to be careful with deflation, adds strategic investor Dennis Gartman on Fast Money. “Inflation is easier to handle. Everyone feels a little wealthier when there’s inflation. But with deflation you don’t know how far prices can fall. And everybody’s net worth diminishes.”

Gartman finds the signals mentioned above extremely disturbing.

“These are the sort of circumstances that prevail in very severe recessions. It could mean 8-10% unemployment and protracted economic weakness.”

Gartman does have solutions. He says everyone is hunkering down and it needs to stop. But that only happens with the “passage of time, new incentives to buy and a turn in the housing sector.”

How should you trade it?

Not with gold. It appears the precious metal isn't the safe haven it once was. “The gold bugs have had every reason to think gold would go up, and it hasn’t."

In case you’re wondering Gartman told our producers he’s short Goldman Sachs , Simon Property Group , and the homebuilder NVR Inc..

What do you think? Tell us now.

You can find our entire interview with Dennis Gartman on the end of the Word on the Street video.

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Trader disclosure: On Nov.19, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Adami Owns (AGU), (BTU), (C), (GS), (INTC), (MSFT), (NUE); Macke Owns (SDS), (UUP), (DIS), (MCD), (WMT), (MSFT); Macke Is Short (YHOO), (TM); Najarian Owns (IYR) Puts; Najarian Owns (MER) Put Spread; Najarian Owns (CVX) Put Spread; Finerman's Firm Owns (OIH) Puts; Finerman's Firm Owns (MSFT), (SUN); Finerman's Firm Is Short (USO), (IYR), (IJR), (MDY), (SPY), (IWM), (RTH), (BBT), (VNO), (COF), (IYR)

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Gartman Owns Gold; Gartman Owns (FDO); Gartman Is Short (GS), (SPG), (NVR) with wires