Friday, November 9, 2012

Keystone's Inflation-Deflation Indicator Signals DISINFLATION

In May, Keystone's indicator dropped into Deflation. The stock market rally from June thru October boosted the indicator back up thru Disinflation and into the Neutral zone (above 3) as the broad indexes peaked over the last month.  However, the markets are now stumbling lower with money moving from stocks to Treasury's.  This results in lower yields and higher note and bond prices. The note price is used for the denominator of Keystone's equation. The 10-year yield is 1.60% with a price at 100.297 as this missive is typed. The CRB (Commodities Index) languished at 270 on the cliff edge during June but recovered, moving back above 300 but now is at 291.87.  Taking a look at the numbers;

CRB/10-Year Price = 291.87/100.297 = 2.91

Over 4 = Inflation
Between 3 and 4 = Neutral; inflationists and deflationists fight it out
Between 2.9 and 3.0 = Disinflation
Under 2.9 = Deflation

Chairman Bernanke announced QE1 in 2009 and QE2 in 2010 as the country became mired in deflation with Keystone's indicator in the 2.5-2.6 range. The indicator dipped into this area in May of this year but then recovered when the central banksters started talking stimulus from 7/26/12 forward. The oddity was that the ECB's OMT Bond-Buying program and the Fed's QE3 announcements in early September occurred when the stock market was already elevated; this thru a wrench in Keystone's prognostications at the start of the year.  The prior stimulus measures (QE1, QE2, Operation Twist, LTRO 1 and 2) all occurred when the markets slipped into deflation (under 2.9) so that expected trend was broken.  It smacks of despiration, a 'throw the kitchen sink at it' approach. An approach that failed. The broad markets are now under where Bernanke announced QE3 and where Draghi announced the OMT bond-buying program in early September. Bernanke fears deflation, a la the Great Depression and Japan's continued two-decade funk. With the CRB now at 291 and drifting lower, he is well served by worrying about deflation.  Keystone's indicator above shows that the markets are on the verge of falling into Deflation.  The central bankers will have to step in with happy stimulus talk even if their bazooka's already appear to be shooting blanks.

The U.S. is in Disinflation on the verge of Deflation.  The pundits talking Inflation are very premature. Inflation will likely not appear until two, three, or even more years down the road. That will be a new and intense problem but for now, the disinflationary and deflationary scenario's are far more important. Look at Japan's funk for the last twenty years; deflation can be nasty.  Large-scale layoffs are now occurring in the U.S. with more frequency. The stagnant wage growth screams of deflation.  Technology, computers and the Internet are huge deflationary machines.  Robots continue to replace human's on the job. The coming months will provide epic economic and market drama. Watch Keystone's formula above, you can plug in the numbers to check on the indicator every few days. Markets are in big trouble when the indicator drops under 2.90 since it indicates a deflationary spiral is at the doorstep, and a Japan scenario is in play. As they said in the 1930's disinflationary and deflationary funk, "hey Buddy, can you spare a dime?"

3 comments:

  1. Key, what do you think this portends for silver and gold?

    Sean

    ReplyDelete
  2. Sean, that is a tough call since the PM's will react to a lot more than inflation potential. Gold moves up on QE talk since the dollar moves lower. Any money debasing helps gold since it is a store of value. The mining riots and turmoil are wreaking havoc on pricing, especially in the platinum mines. If the call is correct where disinflation and deflation continues for a couple years, with a ten-year yield moving sideways as well, stagnant sick growth period, gold and silver may move sideways. The huge spike will come for PM's when the hyperinflation hits due to all the money printing. Many think that inflation will hit at anytime, some have looked for it since late 2009, the hyperinflation may not hit until 2014, 2015, maybe later, it will hit, however, and gold will be 2K, 3K, and higher, maybe 5K in 2020. So if you are a long term holder of gold simply do not look at the day to day price, ignore and it look at it in a couple years or more down the road. If a shorter term trader you want a lower price so you can accumulate for that fifth wave parabolic coming in a few years. Perhaps gold can be picked up somewhere between 700 and 1300 over the coming year or so.

    ReplyDelete
  3. Many thanks for your thorough reply and insight!

    Sean

    ReplyDelete

Note: Only a member of this blog may post a comment.