The Keystone Speculator Inflation-Deflation Indicator; US Remains Mired in Deflation Despite the Inflation Hoopla

Global commodities remain weak and the deflation that Keystone has talked about for the last few years remains a thorn in the economy’s side. With all the exuberance over inflation since Donald Trump won the presidential election on 11/8/16, it is a good time to visit Keystone’s Inflation-Deflation Indicator to see if it can shed light on the ongoing inflation-deflation debate.

The last posting of the inflation-deflation indicator has an extensive write-up on inflation, deflation and the Fed’s shenanigans over the last eight years. Type ‘inflation’ into the search box in the right hand margin and the March 27, 2016, article should come up if you are looking for further reading on the subject.

Keystone’s Inflation-Deflation Indicator chart shows the markets and economy remaining mired in deflation. What’s that you say!? Balderdash.! Blasphemy! President-elect Trump promises to cut taxes, reduce regulations and provide stimulus for physical and virtual infrastructure projects including a wall along the Mexican border. Traders view the platform and spending plans as inflationary so the US dollar index and Treasury yields run higher. Wall Street proclaims, “Inflation is here! Inflation has arrived!” What is this nonsense talk about deflation?

The majority consensus expects inflation to rise here on out and says deflation is in the rearview mirror. After all, the Fed is hiking rates. Keystone’s chart does not agree. The chart shows that more up in yields, and higher commodity prices, are needed for the indicator to move towards inflation.

Keystone's Inflation-Deflation Indicator remains in DEFLATION at 2.02 but at least it has risen out of the cellar. The low point was…. wait for it….. keep waiting for it since it is interesting…..1.70 exactly one year ago. That is the extent of this year’s inflation a small move on the indicator from 1.70 up to 2.02. That is hardly runaway inflation in fact the indicator remains in the deflation region.

The 10-year Treasury note price is used for the denominator of The Keystone Speculator Inflation-Deflation Indicator. The 10-year Treasury price is 94.86 with a yield at 2.59%. Commodities are in the numerator. The CRB Commodity Index is 191.43. Taking a look at the numbers;

CRB/10-Year Price = 191.43/94.86 = 2.02

Over 4.40 = Hyperinflation

Between 3.60 and 4.40 = Inflation

Between 3.00 and 3.60 = Neutral; Inflationists and Deflationists Battle

Between 2.9 and 3.00 = Disinflation

Under 2.90 = Deflation

Despite all the hoopla and trumpets blaring, the economy and markets remain mired in deflation and inflation is no threat currently. The main reason is the lack of wage inflation. Inflation cannot exist without wage inflation (watch the Friday Monthly Jobs Report to see if any wage inflation occurs) and wage inflation is not occurring. Wage inflation is growing annually at about +2.6% a paltry amount. The Federal Reserve needs to see the annual wage growth at +4.0% to +4.5% to be comfortable knowing that inflation has taken hold and will be sustainable going forward but this is a dirty little secret they will not discuss in public.

When was the last time you had a raise? The United States remains in a deflationary funk since August 2014. Think back to the summer of 2008 if you want to relive the feeling of rising inflation. Rising prices were a common daily complaint at office water coolers, supermarkets and dentist offices in 2008; not now. When inflation occurs, you will feel it.

There is a whiff of services inflation occurring. The bulk of this is due to rising medical insurance (Affordable Care Act; ACA; Obamacare) and prescription costs, increasing college tuition and rising accounting, attorney and professional service fees. Home prices have also been inflationary but have been peaking and topping off lately perhaps ready to subside. Lower house prices would dampen inflation expectations.

The world is awash in oil and the OPEC and non-OPEC nations are colluding to limit production to artificially drive prices higher. All that oil sloshing around is oversupply and deflationary. People are not complaining about food prices like a couple years ago during the bad crop year. Commodities remain subdued. A large increase in commodity buying and shipping is needed to prove that inflation is on the rise and that is not occurring. The BDI remains subdued.

Retailers are punched in the face this weekend in the States. This weekend is the largest sales days of the entire year but much of the United States is hit with nasty winter weather. People are staying home so retailers are crying into their empty cash registers. The retail bankruptcies coming in 2017 are going to knock your socks off.

The US is grossly overstored and will cut back in a big way beginning the New Year. Consumers would be smart to wait until January to buy expensive gifts since prices will likely be far cheaper as stores ditch inventory before they close the doors for good. The retail carnage coming is an untold story on Wall Street. This is deflationary since it will drop prices as inventory is liquidated.

There is no demand in the sick stagnant economy that is only pumped by fits and starts of central banker and/or government stimulus. If consumers decide to wait for the future to buy something since they believe it will be cheaper; this is the very definition of deflation.

Another subject no one is talking about is a recession that is long overdue. Economists and analysts were polled on the likelihood of a recession and every one said there was a 30% chance or less of a recession over the next year. That is an optimistic bunch. What are they smoking?

A recession will usher in deflationary behavior and is likely on the come faster than anyone realizes. Treasury yields will fall as investors seek safety in notes and bonds (price up yields down). Keystone’s indicator then drops as the price in the denominator moves higher. Likewise, demand for commodities decreases in a recession so the CRB index drops and a lower numerator in the indicator will send the number lower. You should be getting a feel for what moves the indicator up and down and perhaps you are not as enthusiastic about inflation appearing now and forever forward?

The structural unemployment problem remains in the U.S. and the current stagnant wage growth (wage deflation) reinforces an ongoing deflationary and disinflationary theme. Technology, computers and the Internet are huge deflationary machines. Robots continue to replace human's on the job.

The GOOGL driverless vehicle technology already has trucks operating on the road in California for several months and only one accident has occurred--and that was comically a human driver that hit the driverless vehicle. Just think of the impact to the trucking industry. Trucks could transport goods driverless allowing companies to drop-kick more workers across the parking lot. The pattern of 'more tech--less human's' will continue. Fast-food restaurants are introducing kiosks that eliminate more jobs. Automation is deflation.

The structural unemployment problem will continue in the US for years and perhaps decades forward. The unemployed and underemployed create a burden on the economy over time. The wealthy on Wall Street, in bed with the Fed, made themselves wealthier taking advantage of the 2008-2009 crash while the middle class and poor (that do not own stocks) were thrown under the bus over the last eight years.

Companies are meeting EPS (earnings-per-share) by laying off workers and squeezing more production out of existing workers (as evidenced by flat to lower top line revenues for companies across all sectors for the last couple years!).

Watch Keystone's formula above; you can crunch the numbers to check the indicator every few weeks. It was shocking to see equity markets print new record highs in recent months against a disinflationary and deflationary back drop. This behavior can only be chalked up to the amazing power of the central banker money-printing.

The Brexit stock market crash in late June was stopped by the BOE promising easy money. The PBOC keeps pumping China’s economy and markets. The Fed had remained accommodative all year long keeping stocks elevated. The BOJ keeps implementing stimulus programs. Last week, the ECB announced an extension of the QE program pumping more money into markets so the wealthy can become richer before the whole outhouse goes up in smoke. All-time highs print in the stock market. The wealthy light expensive cigars and dab the ashes on the lower middle class.

Inflation is not in sight currently. The inflation-deflation indicator moving a touch above 3.00 in early 2014 was due to rising food and beef costs. Corn and wheat prices have plummeted back to earth. Crops are producing yields at record highs this year so the food inflation will continue subsiding. The cheaper grain prices will bring down the cost of beef especially as herds increase after the culling due to drought a couple years ago.

Stagnant wages in America will prevent inflation from occurring. When wages rise, that will tell you inflation is coming fast and Treasury yields will then rise strongly. As long as wages remain flat or lower, inflation will not exist. Focus on the wage data in the jobs report on 1/6/17.

Think back to the last period of rampant inflation in 2006-2008; you were likely enjoying happy raises at work, right? And probably not so much from 2009 to present? Food price increases tend to be seasonal and weather-related and work through the system over time. Fewer folks are complaining about high food prices anymore.

What does all the wind-bag mumbo-jumbo above say in a nutshell? The current answer to the ongoing inflation-deflation debate is DEFLATION as much as everyone tries to ignore it and say that inflation is here to stay. After eight years of obscene Fed and other central banker money-printing, the United States economy remains mired in deflation proving that Bernanke's grand Keynesian experiment, blessed and implemented by Fed Chair Greenspan, and now controlled by Fed Chair Yellen, as well as dovish Fed members such as Evans, may be tragically failing.

It is prudent to prepare yourself and your family by raising as much personal cash as possible and paying off debt. Avoid taking on new debt. Cash is king in deflation.

Many analysts argue against the overall ongoing global deflation hypothesis saying the view on services inflation versus goods inflation must be explored in more detail. Services are experiencing some inflationary effects while goods are in a deflationary trend. The Trump enthusiasm is creating the bump in inflation to end the year. The chart above hints that the deflationary funk will likely continue. All of you inflation enthusiasts do not fear, however, inflation will arrive soon perhaps in the 2018-2020 time frame and then hyperinflation in 2020 and beyond. That will be a whole new set of problems, that is if we survive the last of the disinflation and deflationary environment over the next couple years.