The Keystone Speculator Inflation-Deflation Indicator Remains Mired in Deflation

The Keystone Speculator Inflation-Deflation Indicator remains mired in deflation. We live in special times. Typically, a deflationary quagmire would correspond to depressed and falling stock market prices but not in this age of obscene Keynesian money printing by the Federal Reserve and other major global central bankers. The power of the central bankers is astounding.

There is an ongoing battle between goods inflation/deflation and services inflation/deflation. Generally, the goods and services should track in relatively the same direction but something special has been occurring. The central bankers have destroyed price discovery over the years and global markets are twisted into knots; no one truly knows the correct price for anything anymore.

The chart above is weighted for the goods-oriented inflation/deflation since the CRB commodities index is used in the numerator of the ratio. The internet and computers are huge deflationary machines eliminating jobs and continuing to lower prices. Electronics and other products are cheaper each passing year. Corn and wheat crops are at bumper yields. The world is awash in oil maintaining a lid on fuel prices.

On the services side, however, prices are flat or in some cases rising. Those of you paying college tuition bills see prices rise each year. Heath insurance (ACA; Obamacare) and medical costs are out of control. Prescription drugs are expensive; many Americans over 50 years old take a palm-full of pills each day. Utility bills consistently sneak higher. Haircuts cost the same or more each year. Home prices continue rising which creates the vibe that inflation exists in the economy when in reality it does not. This gap between goods and services inflation/deflation is occurring around the world.

The expectation is that the US and the world will enter a recession at some point forward and the services inflation/deflation would be expected to roll over to the downside to join the goods deflation sitting in the basement. When the recession hits, people lose jobs, they do not spend money, prices drop. Customers begin delaying services that they routinely used before the recession. Once you lose your job, your whole life will change.

Inflation proponents need the chart above to start ramping higher to prove their thesis correct, however, that appears a tougher row to hoe. It is less likely that goods inflation will all of a sudden begin moving higher to join services rather than services dropping lower to join goods, especially with a recession on the come.

The US may remain mired in deflation for a couple more years but sure as night follows day and day night, inflation will arrive again. The last time that a notable whiff of inflation existed was back in early 2011 now six years in the rear view mirror. You will know inflation when it arrives since every day all day long, coworkers, family members and strangers will complain to each other about prices of everything including milk, gasoline, food, services, utility bills, etc....; this is not happening. After the chart moves higher in the months and years ahead, the velocity of money will kick in and the money sitting idle at banks will be put to work. A multiplier effect will accelerate business activity and inflation will leap higher and then the country will likely shoot up into hyperinflation say in the 2020-2025 time frame. That will be a different problem and a future bridge to cross. For now, deflation remains in charge.

Further discussion on inflation and deflation continues below.

Previous postings of the inflation-deflation indicator have extensive write-ups on inflation, deflation and the Fed’s shenanigans over the last nine years. Type ‘inflation’ or 'inflation-deflation' into the search box in the right hand margin to study prior articles.

Keystone’s Inflation-Deflation Indicator chart shows the markets and economy remaining mired in deflation. What is that you say!? Balderdash! Blasphemy! Wall Street proclaims, “Inflation is here! Inflation has arrived!” What is this nonsense talk about deflation?

The majority consensus on Wall Street continue to tout inflationary forces ahead. After all, the Fed is hiking rates. They have to cheer lead this line since they all are heavily invested in the banks hoping for a steeper yield curve. The Federal Reserve has called the current lack of inflation "transitory" although humorously, the so-called transitory disinflation/deflation is now running strong for four months into the fifth (from CPI data). Comically, in Chair Yellen's mind, when does transitory become a trend?

Inflation is Godot. Inflation has been pictured on a milk carton for the last few years (missing). Deflation rules the roost. The chart shows that more up in yields, and higher commodity prices, are needed for the indicator to move higher towards inflation.

Keystone's Inflation-Deflation Indicator remains in DEFLATION at 1.76. The low point on the chart above was in December 2015 at 1.70 so we are teasing those lows. The 10-year yield back then was at 2.19% and currently at 2.33%. The CRB back then was at 170.70 and now at 176.28. The Keystone Speculator Inflation-Deflation Indicator remains mired 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 100.34 (100 11/32) with a yield at 2.33%. Commodities are in the numerator. The CRB Commodity Index is 176.28. Taking a look at the numbers;

CRB/10-Year Price = 176.28/100.34 = 1.76

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 that inflation has arrived, the economy and markets instead remain mired in deflation. The main reason is the lack of wage growth. 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 +2.5% a paltry amount. When is the last time you had a substantive raise?

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. Yellen would likely perform cartwheels in the hallway of the Eccles Building if wage growth at least breached the +3% level.

The United States remains in a deflationary funk since August 2014 about three solid years. 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 back in 2008; not now. When inflation occurs, you will feel it and you will hear about it and you will be complaining about the huge costs for everything.

There is a whiff of services inflation occurring as mentioned at the top of this article. 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 2-1/2 years ago during the bad crop year. Commodities remain subdued in price. 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 (Baltic Dry Index) remains subdued.

The retail bankruptcies and store closures increase. The US is grossly overstored by a factor of 3 to 1 compared to other Western nations. The retail carnage is disinflationary since racks of clothes and other products will be sold pennies on the dollar to liquidate inventories. A recession would exacerbate this activity.

There is no demand in this sick stagnant economy that is only pumped-up by fits and starts of central banker and/or government stimulus. Deflation is defined as consumers deciding to wait for the future to buy something since they believe it will be cheaper. This mindset continues.

Another subject no one is talking about is a recession that is long overdue. Economists and analysts were polled last December on the likelihood of a recession and the consensus was only for a 30% chance or less of a recession over the next year.  Canaccord strategist Tony Dwyer proclaims that a recession is two or three years away at the earliest. That is an optimistic bunch on Wall Street. What are they smoking? They should pass it around to everyone else.

A recession will usher in deflationary behavior and is likely coming far 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 although the indicator probably does not have much further to drop. 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 again, a 170-handle on the CRB is an extremely low and deflationary number already.

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 and other states and auto manufacturers are pouring billions into this technology that will eliminate more jobs. Driverless vehicles will greatly 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 filthy rich by taking advantage of the 2008-2009 crash (easy money pumps the stock market higher) while the middle class and poor (that do not own stocks) were thrown under the bus over the last nine 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). Instead of creating jobs and buying equipment with the central banker easy money, companies use the dough for stock repurchase programs (buybacks) that artificially pump stock prices higher. Yes, they are greedy b*stards.

Watch Keystone's formula above; you can crunch the numbers to check the indicator every few weeks. It is shocking to see equity markets print new record highs against a disinflationary and deflationary back drop. It is unprecedented perhaps a 1930's redux. This behavior can only be chalked up to the amazing power of the central banker money-printing. The central bankers are the market. They are modern day money Gods in charge of the Temple. Kneel before their Power and Majesty.

The Brexit stock market crash in late June 2016 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 and will likely retreat from its gradual hiking path. The BOJ keeps implementing stimulus programs and defended the 0.10% level on the 10-year JGB last week by printing more money.

The ECB continues its QE program pumping more money into markets so the wealthy can become richer before the whole outhouse goes up in smoke. All-time highs are printing in global stock markets. The wealthy light expensive cigars and dab the ashes on the faces of 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 two and three 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 monthly jobs reports.

Think back to the last period of rampant sustainable inflation in 2006-2008; you were likely enjoying happy raises at work, right? And probably not so much from 2009 to present? 

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 8-1/2 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. Show respect to holding cash.

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 over the last few months. 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.