Global commodities remain weak and the deflation that
Keystone has talked about for the last few years remains a thorn in the economy’s
side. With all the exuberance over inflation since Donald Trump won the presidential
election on 11/8/16, it is a good time to visit Keystone’s Inflation-Deflation
Indicator to see if it can shed light on the ongoing inflation-deflation
debate.
The last posting of the inflation-deflation indicator has an extensive
write-up on inflation, deflation and the Fed’s shenanigans over the last eight
years. Type ‘inflation’ into the search box in the right hand margin and the
March 27, 2016, article should come up if you are looking for further reading
on the subject.
Keystone’s Inflation-Deflation Indicator chart shows the markets and
economy remaining mired in deflation. What’s that you say!? Balderdash.! Blasphemy!
President-elect Trump promises to cut taxes, reduce regulations and provide
stimulus for physical and virtual infrastructure projects including a wall
along the Mexican border. Traders view the platform and spending plans as
inflationary so the US dollar index and Treasury yields run higher. Wall Street
proclaims, “Inflation is here! Inflation has arrived!” What is this nonsense talk
about deflation?
The majority consensus expects inflation to rise here on out and says deflation
is in the rearview mirror. After all, the Fed is hiking rates. Keystone’s chart
does not agree. The chart shows that more up in yields, and higher commodity
prices, are needed for the indicator to move towards inflation.
Keystone's Inflation-Deflation Indicator remains in DEFLATION at 2.02 but
at least it has risen out of the cellar. The low point was…. wait for it….. keep
waiting for it since it is interesting…..1.70 exactly one year ago. That is the
extent of this year’s inflation a small move on the indicator from 1.70 up to
2.02. That is hardly runaway inflation in fact the indicator remains 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
94.86 with a yield at 2.59%. Commodities are in the numerator.
The CRB Commodity Index is 191.43. Taking
a look at the numbers;
CRB/10-Year
Price = 191.43/94.86
= 2.02
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, the economy and markets remain mired in deflation and inflation is no
threat currently. The main reason is the lack of wage inflation. 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
+2.6% a paltry amount. 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.
When was the last time you had a
raise? The United States remains in a deflationary funk
since August 2014. 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 in 2008; not now. When inflation
occurs, you will feel it.
There is a whiff of services inflation occurring. 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 a couple years ago during the bad crop year. Commodities remain
subdued. 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 remains subdued.
Retailers are punched in the face this weekend in the States. This
weekend is the largest sales days of the entire year but much of the United
States is hit with nasty winter weather. People are staying home so retailers
are crying into their empty cash registers. The retail bankruptcies coming in
2017 are going to knock your socks off.
The US is grossly overstored and will cut back in a big way beginning the
New Year. Consumers would be smart to wait until January to buy expensive gifts
since prices will likely be far cheaper as stores ditch inventory before they
close the doors for good. The retail carnage coming is an untold story on Wall
Street. This is deflationary since it will drop prices as inventory is
liquidated.
There is no demand in the sick stagnant economy that is only pumped by
fits and starts of central banker and/or government stimulus. If consumers
decide to wait for the future to buy something since they believe it will be
cheaper; this is the very definition of deflation.
Another subject no one is talking about is a recession that is long
overdue. Economists and analysts were polled on the likelihood of a recession
and every one said there was a 30% chance or less of a recession over the next
year. That is an optimistic bunch. What are they smoking?
A recession will usher in deflationary behavior and is likely on the come
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. 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. You should be getting a feel for what moves the
indicator up and down and perhaps you are not as enthusiastic about inflation
appearing now and forever forward?
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. 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 wealthier taking advantage of the 2008-2009 crash while
the middle class and poor (that do not own stocks) were thrown under the bus
over the last eight 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!).
Watch Keystone's formula above; you can crunch the numbers to check the
indicator every few weeks. 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.
The Brexit stock market crash in
late June 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. The BOJ keeps implementing stimulus programs. Last week,
the ECB announced an extension of the QE program pumping more money into
markets so the wealthy can become richer before the whole outhouse goes up in
smoke. All-time highs print in the stock market. The wealthy light expensive
cigars and dab the ashes on 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 a couple
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 jobs report on
1/6/17.
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? Food price increases tend to be
seasonal and weather-related and work through the system over time. Fewer folks
are complaining about high food prices anymore.
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 eight 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.
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 to end the year. 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.
