A look at Keystone's Inflation-Deflation Indicator is informative. Taking a broad view of Keystone's chart above, the last time the United States was in an inflationary environment was in 2008 during the commodities bubble. Once the 2008-2009 financial crisis and stock market crash hit, deflation reared its ugly head. The Fed has been goosing markets for the last 6-1/2 years and the closest they came to creating inflation was in early 2011. It is absolutely shameful and bordering on criminality how the central bankers have destroyed free markets and negated the price discovery process with their obscene Keynesian money printing. The global deflation is a worrisome development since it was a hallmark of The Great Depression when sick stagnant economic activity lingered for many years.
Despite the universal consensus touting inflation, the deflation cloud lingers. Europe remains mired in deflation and the question is whether that deflation will be exported to the US this year and the answer is yes. Deflation is also imported from Asia to the US. Lower commodity prices create the deflationary affects with the CRB plummeting to record lows. In early 2009, the Fed saved the stock market with QE1; the beginning of the Keynesian money-printing schemes. This central banker intervention continues globally along with low rate polices and the ongoing Fed ZIRP (zero interest rates) Forever policy.
The inflation versus deflation debate rages on between traders, investors, economists, analysts and all market enthusiasts. Each side highlights anecdotal evidence to prove their case. Inflationists had touted higher food and energy prices but these effects proved transitory as deflation keeps biting chunks out of the economy. Inflationists will tout higher insurance and college tuition costs, as well as increasing home prices, while deflationists highlight long-term weakness in commodities (oil, copper, lead, zinc, iron ore, gold, silver, platinum, palladium and other commodities all trending lower), lack of wage growth, falling Treasury yields 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. The wage data for the Monthly Jobs Reports is arguably more important than the actual job number and unemployment rate. Wages are generally remaining flat so inflation remains on a milk carton (missing). Disinflationary and deflationary pressures are developing or occurring around the globe. The November jobs report shows a +0.4% increase in average hourly earnings which is getting the inflationists excited as Fed Chair Yellen hangs on to a glimmer of hope that her insane monetary policies will work.
The US economy slipped back into Deflation in August 2014 according to The Keystone Speculator Inflation-Deflation Indicator. During spring and summer time 2014, 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 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.
During 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 95% or more of investors and traders that universally agree that deflation will never exist and inflation should be arriving any minute (due to the obscene Fed money printing).
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 6-1/2 years of 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 during spring 2014 is what created the inflation buzz. The CRB Commodity Index went from 275 at the start of the year to nearly 315 at the June 2014 peak so this move pushed Keystone's indicator above 3.00. Now the CRB collapses from near 315 to under 200!!! The CRB is under 190!! An epic bear market failure.
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 M&A and tax inversion strategies. The free 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. President Obama is in full agreement with this direction since he appointed Fed Chair Yellen, Queen of the Doves, to the FOMC because 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.
The 10-year Treasury note price is used for the denominator of The Keystone Speculator Inflation-Deflation Indicator. The 10-year Treasury price is 99.85 with a yield at 2.27%. The 10-year yield was over 3.00% to begin 2014, 73 basis points higher. The CRB Commodity Index is 184.77. Taking a look at the numbers;
CRB/10-Year Price = 184.77/99.85 = 1.85
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 (see chart). 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.
Keystone's Inflation-Deflation 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 (only in Bernanke's opinion; Hayek rolls over in his grave) 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 as he signed autographs in 2011. 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 members have been correct about is concern over disinflation and deflation although the bozo's continue to incorrectly say 'deflationary forces are transitory'. Comically, Bernanke touted this line and now Yellen so the Fed has been saying deflation is transitory for the last four years. Pause for laughter. The FOMC is likely monitoring a similar technical presentation as explained in this article by Keystone which definitely shows the United States mired in deflation with inflation nowhere in play despite the Fed's obscene Keynesian spending for over 6-1/2 years.
Since the 2011 peak, the indicator has moved steadily lower from above 3.60 down to 1.85 (from neutral down through disinflation into deflation). The indicator signals deflation from August 2013 until January 2014 and from August 2014 to present. The United States is in a downward deflationary spiral for the last 15 months.
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 into the present day. In addition, the PBOC (China), the BOE and ECB are all pumping the stock markets with easy money as well.
The current 1.85 reading is the lowest since 2009 and the line is falling off the chart; the deflation is uber serious sending a shiver down every Wall Street spine that a Great Depression redux definitely remains on the table (despite over 6-1/2 years of obscene Fed Keynesian money printing). 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. This behavior drove Greece into the toilet where that financially troubled nation continues to float.
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, vintage cars and collectibles (all are asset bubbles). The central bankers threw the kitchen sink at markets over the last two years but the US continues to slip-slide into deflation anyway. Deflation is a powerful force and perhaps it needs to extract its pound of flesh. Deflation was cheated and not permitted to play out in March 2009 when Bernanke stepped in with QE1.
An over leveraged economy like 2006-2008 needs to result in failures so the slate can be cleared as capitalism dictates. Markets were never allowed to clear. 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. At best, the United States is a pseudo-free market system. 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 (when stocks go up). So the Fed tries to paper over the problems using time to its 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 in 2009 (free markets were destroyed as the bad side of capitalism was not allowed to take place to clear the markets properly in early 2009). America is now left with a pseudo-fee market and semi-capitalism system; it is shameful. Austrian economists solemnly hold their heads in their hands cursing the sick central banker behavior. The United States is not a free country; it is simply more free than most other countries.
The pundits and analysts that say Inflation and even hyperinflation are at the doorstep are premature. Inflation and even hyperinfation is definitely expected in the years ahead but it may be years away still yet. 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. 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 rates would rise substantially. As low as Keystone's chart is now, in the 2020's the chart will likely be up in the hyperinflation zone.
The expectation remains that Treasury yields should move sideways and even leak lower for the next year or three. The 18-year bear stock market cycle should raise its ugly head moving forward for the last three years of its cycle (now through 2018). Judging from history, it would not be surprising to see the stock market down say 3 of the next 4 years to finish the 18-year secular stock market cycle.
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. A downward deflationary spiral occurs since companies fire workers that are no longer needed due to falling product demand; now these people without jobs cannot buy products and the cycle repeats. Europe is on the verge of falling into a deflationary funk a la Japan's lost two decades.
Long-time readers of Keystone's missives fully anticipated and expected the current global deflation to occur despite the consensus saying that deflation would not occur.
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.
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.
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 days. 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.
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 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 one and one-half 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. 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 as is occurring now with corn and wheat prices falling. Fewer folks are complaining about high food prices anymore except for eggs due to the bird flu epidemic.
What does all the above 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. After nearly six 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's Greenspan and now controlled by Chair Yellen, as well as dovish Fed members such as Evans, may be 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. Remember this; "cash is king in deflation." History may repeat. The bums standing on a street corner holding a tin cup in the 1930's would ask a passerby, "hey buddy, can you spare a dime?"
With this devastating deflationary funk ongoing, ridiculously, Fed Chair Yellen plans to raise rates for the first time in a decade on 12/16/15. That would be hilarious if it was not so tragic. The end game may be nigh for the Fed and other central banker money printers. If the Fed hikes in December only having to quickly reverse course in January or February to return to ZIRP, due to a weak economy, all credibility in the Fed would be destroyed. If the Fed balks on 12/16/15 and does not hike after creating the expectation that the hike would occur, credibility would be immediately lost. The Fed's Keynesian games only work if investors maintain confidence in the Federal Reserve. If credibility is lost, all is lost and the 'Emperor is exposed as not wearing any clothes' (Hans Christian Andersen).
Many analysts argue against the overall ongoing global deflation hypothesis saying the view on services versus goods must be explored in more detail. Services are experiencing some inflationary effects while goods are in a severe deflationary downtrend. Although this is true, services will likely follow the trend lower in goods rather than goods immediately inflating higher.
On 8/28/15, notable economist Marty Feldstein proclaims that deflation is not a problem dismissing that it ever posed any real threat. Feldstein says a deflationary outcome is "certainly not true now." Feldstein reflects the majority consensus of market participants; no one wants to mention the troubling "D" word. Perhaps Feldstein wants to take back his words from three months ago.
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