Keystone's Inflation Deflation Indicator Signals DISINFLATION

The markets experienced significant technical damage today.  Looking at Keystone's inflation-deflation gauge;

CRB/10-Yr Price = 300.45/100.094 = 3.00

Over 4.0 = Inflation
Between 3.0 and 4.0 = Neutral; inflationists and deflationists fight it out
Between 2.9 and 3.0 = Disinflation
Under 2.9 = Deflation

Lots of traders comment on the food inflation over the last couple years but the fact remains, Chairman Bernanke is correct when he says inflation is not a worry. In fact, with today's action, as commodities tumble lower, the economy is now slipping into Disinflation.  The last time we saw inflation was the commodities bubble top in July 2008.

This indicator is useful in projecting when Bernanke will act with QE3.  Now that we are falling into Disinflation, Bernanke will experience many sleepless nights.  When the CRB falls under approximately 290, that will usher in Deflation, and Bernanke will not sleep. QE3 will occur at some point between CRB 260 and 280, when Deflation is in full force. This is useful since trades such as shorting the dollar, longing gold and silver, and longing commodities, and of course covering all ongoing shorts, can be brought on when the CRB drifts under 280. QE1 and QE2 both occurred when Keystone's indicator was in the 2.5 to 2.7 range, which will correspond to the CRB in the 260-280 area (the 10-year price will be further up above 100). Thus, we are not in the QE3 ball park yet, but using Keystone's formula above, you can watch the scenario unfold and trade accordingly.