The 10-year yield is currently at 2.19% printing a 21-month low at 1.65% on 2/2/15 . In early 2009, the Fed saved the stock market with QE1 beginning the obscene Keynesian money-printing scheme that continues six years later. This central banker intervention continues globally along with low rate polices and the ongoing Fed ZIRP (zero interest rates) Forever policy.
Global central bankers collude to keep stock prices high that creates vast wealth and riches for the elite class that hold large stock portfolios while the middle class and poor, that do not own stocks, are thrown under the bus. Former Federal Reserve chairmen Greenspan and Bernanke, current Fed Chair Yellen, President Obama and democrat and republican politicians impose policies and back the Fed's decisions that make the wealthy wealthier and the poor poorer. This is America in 2015 that will surely lead to social unrest as the months and years play out.
The inflation versus deflation debate rages on between traders, investors, economists, analysts, strategists, students and all market participants and enthusiasts. Each side highlights anecdotal evidence to prove their case. Inflationists tout high food, energy, oil (energy and oil now lower), insurance and college tuition costs, as well as increasing home prices, while deflationists highlight long-term weakness in commodities (oil and commodities are weaker in recent months), lack of wage growth, falling Treasury yields (now moving slightly higher) and stagnant house prices to bolster their case.
The flat to lower wages is very important. Inflation will not exist without rising wages; this is why you want to watch the wage component in the monthly jobs report the first Friday of each month. Last month the average hourly wages remain weak up a paltry +0.1%. Wages are generally remaining flat so inflation remains on a milk carton (missing). The wage data in the Monthly Jobs Report is more important than the actual headline jobs number and unemployment rate. The UK economy appeared to be in solid recovery mode but is now waning as realization sets in that wages are not increasing and noninflationary, or more correctly, disinflationary pressures are developing or remain in place globally.
In the States, the US economy slipped back into Deflation in August 2014 as per the Keystone Speculator Inflation-Deflation Indicator. During the spring time in 2014 one year ago, the inflationists were on a roll. Oil prices were rocketing higher as well as energy costs and everyone took notice of the rising food prices at the super market choosing to eat spam instead of steak. The inflation-deflation indicator was above 3.00 in the middle neutral zone where inflationists and deflationists fight it out but the indicator never moved anywhere near inflation at 3.60 and higher.
In July and August 2014, the indicator drops into disinflation playing around between 2.90 and 3.00 due to the falling 10-year Treasury yields down towards 2.30% and lower and the dropping CRB Commodity Index under 290 and lower. Keystone's indicator falls into deflation in August 2014 which always creates a huge gasp of shock and surprise from the vast majority of investors and traders that say deflation will never exist and inflation should be arriving any minute (due to the obscene Fed money printing). They are wrong.
Money managers parade across television and computer screens daily 100% guaranteeing that note and bond yields will move higher--and some have been promising that since late 2009. The consensus continues to have the Treasury yield direction wrong and stubbornly remains on the soap box for higher rates since, well, more time has passed and rates have to go up, don't they? That at least is the thinking but remember, there is no one alive now that traded through the Great Depression that can provide insight into this current epic and historic market period that perhaps only occurs at an 80-year-ish cycle period or multi-decades stock cycle period a la a Kondratiev Winter.
The Treasury yields typically move in the same direction as the equity markets since money usually moves from stocks into bonds and from bonds to stocks depending on risk-off, or risk-on, respectively. Higher yields (lower Treasury prices due to low demand) = higher stocks = a move towards inflation. Lower yields (higher Treasury prices due to high demand) = lower stocks = a move towards deflation.
In normal markets, copper and commodities will push and pull markets in the same direction but the central banker money overrules all market fundamentals. Price discovery is lost across all asset classes due to the six years of obscene central banker intervention. No one truly knows what any asset is actually worth anymore. As long as global QE and the Fed's ZIRP Forever policy continues flooding the markets with cash, the stock market floats higher. The big upward move in commodities earlier in spring 2014 is what created the inflation buzz. The CRB went from 275 at the start of 2014 to nearly 315 at the June 2014 peak so this move pushed Keystone's indicator above 3.00. The CRB then collapses from near 315 down to 207 in March this year (two months ago) an epic -34% bear market failure that quiets the inflation talk.
The economy was in disinflation and deflation for much of 2013 but this did not have a negative effect on the stock market. The Fed's easy money funds dividend and buyback programs to pump stock prices higher nullifying regular expected negative market affects. In addition, the easy money is used to help fund buyback programs, M&A and tax inversion strategies. The Fed's easy money is making the wealthy super wealthy since they own stocks at the expense of the middle class and poor that are knocking on doors unable to find a job. The Fed has created an elite society in America; the rich are richer and the poor poorer. America is now the land of the have's and have not's rather than the land of opportunity due to the Federal Reserve's policies. President Obama is in full agreement with this direction since he appointed Fed Chair Yellen, Queen of the Doves, to the FOMC. She is a Keynesian that prints money to send the stock market higher. The president and republicans and democrats in Congress are all part of the elite class and cheer money printing that makes them all super wealthy.
The 10-year Treasury note price is used for the denominator of The Keystone Speculator Inflation-Deflation Indicator. The 10-year Treasury price is 99.844 with a yield at 2.15%. The 10-year yield was at 3.00% to begin 2014 about 85 basis points higher. The CRB Commodity Index is 231.46. Taking a look at the numbers;
CRB/10-Year Price = 231.46/99.844 = 2.32
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
The last time that rampant inflation existed in the US was from 2006 into 2008 as the stock market peaked out. During the Fall 2008 market crash into early 2009, commodities collapsed and investors ran to the perceived safety of US Treasuries driving yields lower. The pundits pound the table currently that low oil and commodity prices lead to great things ahead but it did not work out that way in 2008-2009. Instead, lower commodity prices was a harbinger of deflation and a stock market crash.
The indicator collapsed into deflation in early 2009. Former Fed Chairman Ben Bernanke is labeled as a 'student of the Great Depression' and his main takeaway is that the Fed did not provide enough stimulus quickly enough to prevent the depressionary malaise that developed through the 1930's. Therefore, Bernanke fired the huge QE1 money bazooka in March 2009 to save the country from a deflationary spiral. As the chart shows, the quantitative easing programs did work sending the indicator up into the neutral zone headed towards inflation. Bernanke must have been proud with his chest puffed out as he signed autographs. However, the US budget crisis and other economic softness created more concern in 2011 which led to the August 2011 stock market waterfall crash.
In May 2011, the indicator was above 3.60-3.70 signaling the existence of inflation but it was very brief. If you blinked you missed it. The indicator peaked out in 2011 and quickly retreated (inflation was very noticeable but it did not have staying power) as the stock market collapsed. The Fed has received a lot of heat over the last few years for remaining worried about disinflation and deflation but the chart clearly shows the Fed is correct to worry. The only thing the Fed has been correct about is its ongoing concern over disinflation and deflation. The FOMC is likely monitoring a similar technical presentation as explained in this article which definitely shows a country mired in deflation with inflation nowhere in sight despite the obscene Keynesian spending (the goal of the Federal Reserve's money printing scheme is to create inflation).
Since the 2011 peak, the indicator has moved steadily lower from above 3.60 down to 2.20 (from neutral down through disinflation into deflation) in April 2015.
Chairman Bernanke announced QE1, QE2 and Operation Twist to stop the free-fall into a deflationary spiral from 2009-2012. In late 2012, the Fed threw the kitchen sink at the markets with the promise of QE3 Infinity, timed with the ECB's OMT Bond-Buying program, and also QE4 Infinity and Beyond (which replaced Operation Twist with outright purchases), when the stock markets were already somewhat elevated (the QE3 and QE4 pumps are now simply referred to as the QE3 Infinity program). This orgy of Fed quantitative easing, along with the BOJ bludgeoning the yen (sending dollar/yen currency pair and Japanese and US stocks higher), creates the bullish equity markets all through 2013 adn 2014. In addition, the PBOC (China's central bank), the BOE (UK) and ECB (Europe) are all pumping the markets with easy money as well. The ECB announced and began its quantitative easing program this year in January which is pumping global stock markets higher.
The current 2.32 reading matches the level to begin the year coming off th euber low 2.20 in April one month ago. The chart sends a shiver down the spine that a Great Depression redux definitely remains on the table despite six years of obscene Keynesian spending. Keep in mind that the majority of strategists and analysts now proclaim that deflation is officially a thing of the past and will never occur--they are wrong. Folks continue to tighten their spending to stretch family budgets. Purchases are delayed since store discounts are increasing and the item will be cheaper in a couple weeks (a hallmark sign of deflation). A cash society is growing in the US since common folks can avoid paying government taxes putting more money in their pockets.
The wealthy, made wealthier by the Fed with obscene stock market gains are spending their winnings on luxury goods, high-priced real estate (creating a house price bubble), art (creating an ongoing art bubble), vintage cars and collectibles (all asset classes are in bubbles despite traders, investors, analysts, strategists and the media and pundits refuting this claim). The central bankers threw the kitchen sink at markets over the last 2-1/2 years but the US remains mired in the deflation quagmire anyway. Deflation is a powerful force that extracts pounds of flesh for prolonged periods of time. Japan is mired in deflation for the last two decades. Will the United States suffer a similar fate? Deflation was cheated and not permitted to play out in March 2009 when Bernanke stepped in with QE1. The stock market was never permitted to properly wash out in 2009 as capitalism dictates. Therefore, capitalism and free markets are a farce and actually do not exist in America. The central bankers are the market.
An over leveraged economy like 2006-2008 needs to result in failures so the slate can be cleared as capitalism dictates. Free markets and capitalism are dead in America since the government now saves companies from failure; especially the corrupt banksters that are in bed with the politicians. Society, especially the elite class, does not want to experience the negativity and pain associated with the cleansing side of capitalism. People only want to experience the happy side of capitalism (a rising stock market). The Fed tries to paper over the problems using time to an advantage but as time goes on, the chart above says the Fed's grand experiment is failing.
The lackluster action in the Baltic Dry Index (BDI) and shippers indicate a global slowdown is ongoing. Ditto the drop in commodities and weak copper. It is interesting to watch the power of the central bankers as they pump equity markets higher but without the global economy kicking into gear it will be all for naught. The debt created will only end with a more drastic fall from grace than late 2008 early 2009 since a healthy market bottom was never allowed to occur (free markets were destroyed as the bad side of capitalism was not allowed to take place to clear the market in early 2009).
The pundits and analysts that say Inflation and even hyperinflation are at the doorstep are incorrect. Inflation and even hyperinfation is definitely expected in the years ahead but it may be years away still yet (perhaps sometime in 2018-2025). Keystone is thinking that inflation will occur in sync with the 18-year stock cycle of 1964 (bear), 1982 (bull), 2000 (bear), and 2018 (bull). So the thought is that inflation and hyperinflation are perhaps two to four years away (2017-2020). Even if the 18-year stock cycle left translates a couple years, that would be 2016 still many months and a year or two away before Treasury rates would rise substantially.
The expectation remains that Treasury yields should move sideways for the next year or three. The 18-year bear stock market cycle (2000-2018) should raise its head moving forward for the last four years of its cycle (now through 2018). Judging from history, it would not be surprising to see the stock market down 3 of the next 4 years to finish the 18-year secular stock market cycle. It is very common to have sharp and strong cyclical bull rallies (2003 to 2007 and 2009 to present) within a secular bear market.
Deflation is nasty and will surely affect everyone's lives. Since prices drop precipitously in deflation, consumers do not spend money since next week the price will be even cheaper. This economic behavior leads to a stagnant and very sick economy with businesses closing doors due to the lack of demand. Companies are hanging on currently with skeleton work forces hoping for business to pick up. Note that top line sales and revenue numbers for all companies across all sectors have been flat to lower for the last two years and more. A downward deflationary spiral occurs since companies fire workers that are no longer needed due to falling product demand. Europe is on the verge of falling into a deflationary funk a la Japan's lost two decades. This is why ECB President Draghi began Europe's obscene Keynesian QE program this year to try and create inflation and the easy money is stimulating the economy.
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 the accidents that have occurred are all the fault of other drivers. Last week, Google commits to expanding its driverless vehicle program. 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. 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, are enriching themselves taking advantage of the 2008-2009 stock market crash (with QE and ZIRP) while the middle class and poor (that do not own stocks) are thrown under the bus.
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!). These deflationary signals are ignored in the media. At some point, everyone will have to utter the 'D' word, deflation, and show respect to the 900-pound gorilla sitting on the living room sofa.
Watch Keystone's formula above, you can crunch the numbers to check on the indicator every few weeks. It is 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.
Inflation is not in sight despite the inflation-deflation indicator moving a touch above 3.00 in early 2014 due to rising food and beef costs. Corn and wheat prices have plummeted back to earth. Crops are producing yields at record highs over the last 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 1-1/2 year 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. 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? Correct? Food price increases tend to be seasonal and weather-related and work through the system over time. Note how corn and wheat prices fell drastically back to earth during 2014. Folks are no longer complaining about high food prices.
What does all of Keystone's 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 fight it. After six years of obscene Fed and other central banker money-printing, the economy is mired in deflation proving that Bernanke's grand Keynesian experiment, blessed, implemented and continued by Fed Chair's Greenspan and Yellen, as well as dovish Fed members such as Evans, is likely tragically failing. 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. Make sure you have plenty on hand. History may repeat. The bum standing on a street corner holding a tin cup in the 1930's Great Depression would ask a passerby, "hey buddy, can you spare a dime?"
Note Added 8:22 AM EST on Tuesday morning, 5/19/15: UK CPI is -0.1% in deflation missing the zero estimate. The UK falls into deflation for the first time since 1960.
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