Keystone's Inflation Deflation Indicator Remains Neutral

A check of Keystone's Inflation Deflation Indicator is in order since it will help in forecasting when Chairman Bernanke will institute new QE3 strategies.

CRB/10-year price

329.55/100.69 = 3.3

Over 4 = Inflation
Between 3 and 4 = Neutral; inflationists and deflationists fight it out in no man's land
Between 2.9 and 3.0 = Disinflation
Under 2.9 = Deflation

Thus, at 3.3, we are in no man's land, favoring the deflation direction but overall in neutral terrritory with inflationists and deflationists continuing to fight. We see the gasoline and oil prices remain elevated, the food inflation still in play, and our insurance bills and college tuition rise. Conversely, we see many product prices continuing to fall, such as electronics, the back-to-school retail season was weak forecasting a weak holiday shopping season ahead, and most importantly, housing prices continue to languish, as well as wages. Thus, the standoff continues.

As time moves along, the dollar should rise which will apply further pressure on commodities. Note that despite the market bullishness last week, copper and commodities were weak.  As the CRB moves towards 300, the numerator in the equation above (the numerator is the top number and the denominator is the bottom number of a fraction if you forgot your high school math), you can see that move lower in the CRB will bring about disinflation opening the door to deflation. The 10-year yield is now around 2.05% and as the yields drop under 2% and moves lower, the price will increase. Remember, price moves opposite to yields, thus the denominator will increase to 101 and 102 and higher moving the indicator towards disinflation.

If we back track to the summer of 2010, we were firmly in deflation with the indicator at 2.5-ish, that is why Chairman Bernanke stepped in with QE2 to save the day. Bernanke is well known as a student of the Great Depression and deflation concerns keeps him up at night. As Bernanke's fast, easy money flooded into emerging markets, copper, commodities and so forth, the indicator launched into the 3's, topping out at 3.6-ish a few months ago. Note that for the commmodities bubble that popped in July 2008 the indicator was over 4 indicating that inflation ruled the day back then, but at 3.6, inflation was never an issue this year despite all the hype. Chairman Bernanke was, and is correct, in stating that inflation is transitory in nature.

Thus, Chairman Bernanke has some breathing room with QE3, Operation Twist and other stimulus strategies moving forward. Those looking for stimulus this coming Tuesday will be more than likely disappointed. Ben will not be in panic mode until he sees the indicator above fall below 3, and espeicalluy fall below 2.9, and we are not there yet. Thus, wait and watch the dollar rise, which will pressure copper and commodities, driving the CRB down towards 300. At the same time, the 10-year yield will drift lower. This outcome is deflationary and will trigger Bernanke to make a move with QE3, perhaps int he October-December time frame.

This discussion leads to a very interesting projected outcome as the Autumn leaves fall and 2011 works towards a close. Let's lay the groundwork.  The next Greece bailout decision is now delayed until October. The coordinated central bankers move last week has bought the Eurozone some time.  A far larger comprehensive plan to save Europe is being hashed out currently and should be announced in the next couple months. The BRIC countries are meeting this week to determine how they may be of help with Europe, after all, the developed nations are buying the trinkets adn beads made in the emerging countries and these countiries are not yet self-sustainable.  Keystone's indicator above is not low enough to cause Bernanke to move immediately with QE3.  What does all this mean?

Perhaps we will see the first large-scale, planet-wide, global quantitative easing program in the history of the world with the plan released as we contemplate the holiday menu. Keystone's indicator must move under 3 first, in conjunction with the equities markets tumbling creating panic, similar to the summer of 2010, so keep an eye on this useful indicator as you rake the Fall leaves.

Note Added 9/17/11 at 6:26 PM EST: Keystone received several inquiries via email concerning how to obtain the data for the above formula.  Simply use http://www.stockcharts.com for the commodities number, type in $CRB. In real-time during the trading week, reference http://www.ino.com where the CRB is listed across the top header.  For the 10-year price, use http://bloomberg.com, click 'Markets', then 'Rates and Bonds', then 'Government Bonds' and reference the 10-Year Price/Yield. Any fraction is in 32nd's, so 100-22 is 100.69. During the trading week, simply check the listing on tv on CNBC since it is displayed in real time across the top of the tv screen or reference http://www.cnbc.com under 'Markets' then 'U.S. Treasuries' and 10-Year note price is listed as a decimal. Many other sources available but these should take care of your needs. Feel free to link back to this site for others that are interested in settling, or at least providing firm facts, for their ongoing inflation-deflation debates. Keystone is looking for deflation in the coming weeks but, as always in trading, maintain flexibility and keep an open mind. For any responses or questions, simply click 'comments' below any post and the entire readership can gain from the inquiry.

Note Added 9/21/11 8:12 PM EST: The 10-year price jumped higher to 102.45 and the CRB dropped to 321. Thus, the inflation deflation gauge dropped to 3.1 now. Disinflation is confirmed under 3.0.