The Keystone Speculator Inflation-Deflation Indicator Remains Mired in Great Depression-type Deflation

by K E Stone

The Keystone Speculator Inflation-Deflation Indicator crashes down to 1.04 signaling that the United States remains mired in a Great Depression-style deflation. We live in special times. The ongoing deflationary quagmire started in America in late 2014. In 2014, the US economy oscillated between a neutral posture, disinflation and deflaton and as can easily be seen in the chart, deflation wins.

The Federal Reserve and other global central bankers saved the day in early 2016 printing money like madmen; just like in March 2009 when former Fed Chairman Bernanke stepped in with QE 1 to save the stock market and protect America's elite class. The Fed's grand 11-year Keynesian experiment is a failure. The money-printing cannot create inflation but did result in making the wealthy class filthy rich. Such is the crony capitalism system.

After the QE pumps to handle the Great Recession in 2009, the economy barely tagged inflation in springtime 2011. The Chicago traders will remember those days. Everyone (except Keystone; there's always one of him in the crowd) was convinced that inflation was here to stay and the Fed had orchestrated a recovery. Unfortunately, the charts were in negative divergence back then and as expected, things quickly fell apart. The Fed got less bang for the buck after that 2016 pump. The chart line is bent over like a limp sausage. And now, over the last couple months in 2020, the Federal Reserve steps in with even more Keynesian money-printing schemes so obscene they would make Caligula blush. It is sickening. The Fed is offering up orders of magnitude more money than the Great Recession 11 years ago and it is not working yet folks. Good luck to all.

The power of the Federal Reserve and other global central bankers (ECB, BOJ, BOE, PBOC, etc...) and their Keynesian money-printing is astounding. The central banker printing presses created an 11-year stock market rally (March 2009 to February 2020), the longest rally in stock market history, rewarding the wealthy that own large stock portfolios. Common folks, however, have not benefited from the central banker largess. The middle class, now a lower middle class, and the disadvantaged and poor, are suffering through high unemployment and high debt and not benefiting from trickle-down economics. The only thing trickling down is the wealthy elite class's piss onto the huddled masses' heads. One-half of Americans do not own one single share of stock; think about that in the context of the last 11 years.

There is an ongoing battle between goods inflation/deflation and services inflation/deflation. Generally, the goods and services should track in relatively the same direction but something special has been occurring the last few years. The central bankers have destroyed all price discovery in markets due to their Keynesian intervention. Global markets are twisted into knots; no one truly knows the correct price for anything anymore.

The chart above is weighted for the goods-oriented inflation/deflation since the CRB commodities index is used in the numerator of the Keystone ratio. The internet, technology and computers are huge deflationary machines eliminating jobs and continuing to lower prices. Electronics and products such as smartphones are turning into commodities and are cheaper each passing year. Corn and wheat crops are at bumper yields. The world is awash in oil. The planet is hit with a double-whammy, an over-supply problem, glut, and a demand-shock at the same time with the coronavirus (COVID-19). When it rains, it pours.

On the services side, however, prices are flat after maintaining buoyancy the last few years. Before the coronavirus tragedy, services prices were showing signs of rolling over. Those of you paying college tuition bills see prices rise each year. Heath insurance (ACA; Obamacare) and medical costs are out of control. Prescription drugs are expensive; many Americans over 50 years old take a palm-full of pills each day. Utility bills consistently sneak higher. Haircuts cost more each year. Home prices continue rising creating the inflationary vibe. Keystone predicted that these services prices that create that slight inflationary vibe are likely going to moderate and move towards the goods deflation camp. Boom. The virus hits and markets fall apart. Deflation rules the roost.

Another reason that market participants were concerned about inflation the last few years is that the well-paid talking heads on television tout the higher services costs all the time. The reason the pundits tout inflation is because they are the ones living in the expensive homes, taking the prescriptions drugs daily, paying the high costs of insurances and saving money to pay high tuition costs for their children. Most market participants are making money and doing well in their careers so they are predisposed to believe inflation is occurring because of the costs they see in their higher-class daily lives. However, they must realize they are fortunate enjoying a higher standard of living than most other common folks across the United States.

The lower middle class, disadvantaged and poor folks instead see disinflation and deflation. Many do not have the same monthly expenses as the upper middle class and wealthier folks. Generalizing, common folks of modest means live in run-down houses or apartments, many do not have health or other insurances and they have no hope in seeing their children go to college. They do not see the services inflation that the upper middle class and wealthy tout.

The services components in inflation create the vibe that inflation exists in the economy when in reality it does not. As the chart shows, deflation is the order of the day since late 2014.

The world is in recession now due to the coronavirus tragedy. The services inflation will roll over to the downside and join the goods deflation sitting in the basement. Businesses will be begging for customers. Millions of people have lost their jobs, so many that the government cannot keep up with the claims and many have yet to receive an unemployment check. The wealthy pigs feeding at the trough for 11 years, raping America for all its worth, never spent one second thinking about the end game for this ravaged beaten-down nation coming to terms with crony capitalism. Why would they since they destroyed the middle class over the last five decades and did not lose one night of sleep over it? The middle class was the fabric that held American society and the economy together but alas, that red, white and blue material is in scattered tatters laying in a muddy pothole next to a shut-down factory while the bankers, corporate executives, politicians and wealthy moguls stand around each holding a pair of scissors.

As the recession likely deepens, people lose jobs, they do not spend money, prices drop. Customers begin delaying services that they routinely used before the recession. Once you lose your job, your whole life will change. Subscription services will be cancelled as people lose jobs in the coming recession.

In the future, say after a year or two of this deflationary quagmire, the velocity of money will likely kick in and the money sitting idle at banks will be put to work. A multiplier effect will accelerate business activity and inflation will leap higher and then the country will likely shoot up into the hyperinflation range say in the 2022-2026 time frame. That will be a different problem and a future troubled bridge to cross. The Dow will be going towards 40K and 50K but the dollar will be toilet paper with gasoline at $10 per gallon and a loaf of bread for $10. These problems can be discussed down the road and folks better hope for this outcome because the other outcome is sustainable multi-decade deflation a la Japan. For now, deflation remains in charge.

Keystone's Inflation-Deflation Indicator remains in DEFLATION at 1.04 a record low print and far below the 2.05 during the 2008-2009 Great Recession financial crisis. The Keystone Speculator Inflation-Deflation Indicator remains mired in the deflation region and the low number is actually extremely problematic and worrisome. We are talking Great Depression stuff. "Hey, buddy, can you spare a dime."

The 10-year Treasury note price is used for the denominator (bottom number) of The Keystone Speculator Inflation-Deflation Indicator. The 10-year Treasury price is 108.55 with a yield at 0.60%. Dear Lord. The 10-year yield was at 2.72% in December 2018 only 16 months ago. Commodities are in the numerator (top number). The CRB Commodity Index has crashed down to 112.75. Calculating Keystone's ratio;

The Keystone Speculator Inflation-Deflation Indicator

CRB/10-Year Price = 112.75/108.55 = 1.04

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 economy and markets instead remain mired deep in deflation for over five years. As the above discussion highlights, commodities and goods are in serious deflation while the services components are now likely rolling over into deflation. As the recession hits, housing prices will fall. Services (fees and costs charged to the consumer) will likely trend lower with deflationary behavior to attract a decreasing number of interested users and buyers.

The main reason for the lack of inflation and ongoing persistent deflation is the lack of wage growth. Inflation cannot exist without wage inflation (watch the Friday Monthly Jobs Report to see if any wage inflation occurs) and wage inflation never did get off the ground, and now it is harpooned by the virus. Wage inflation was growing annually at about +3% a paltry amount, you can forget that small amount going forward. When is the last time you had a substantive raise?

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. Chairman Powell performed cartwheels of joy in the hallway of the Eccles Building when wages cracked the +3% annual level but in his heart of hearts he knew wages must inflate far higher to sustain ongoing overall inflation, and now it is not going to happen. If the 3%-handle reverts back to a 2%-handle, Powell will be crying in his cafe latte.

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 back in 2008; not now. When inflation occurs, you will feel it and you will hear about it from family, friends and coworkers. You will be complaining about the huge cost increases for everything. This vibe is not occurring. There is no inflation currently; only deflation. Inflation is Godot for the last six years.

All that oil sloshing around in storage tanks filled to capacity is oversupply and deflationary.  Commodities have crashed except for silver and gold. Gasoline is $1.93 per gallon on average in the United States down 80 cents per gallon from October 2019 to April 2020. A large increase in commodity buying and shipping is needed to prove that inflation is on the rise and that never materialized. Remember the BDI (Baltic Dry Index) chart Keystone would post time to time. The globe was in recession before the virus. The US economy was also far weaker than anyone realized. Do not believe the line the Fed is touting that the economy was in great shape. Retail Sales have been soft since late last year and they held the economy up.

The retail bankruptcies and store closures will increase. The US is grossly overstored by a factor of 3 to 1 compared to other Western nations. The retail carnage is disinflationary since racks of clothes and other products will be sold pennies on the dollar to liquidate inventories. A recession would exacerbate this activity. Stores are closing; inventories are being liquidated.

There is no demand in this sick stagnant economy that is only pumped-up by fits and starts of central banker monetary policy and/or government fiscal stimulus. Deflation is identified by consumer behavior that wants to wait for the future to buy something since they believe the item will be cheaper. Of course companies cannot maintain staff waiting for your cheap butt to buy something, so they have to lay off more workers which further exacerbates the recession and deflationary scenario. Prices drop lower and customers are only encouraged to keep waiting before buying anything since they now expect prices to drop even lower. This, folks, is a tragic deflationary spiral. It be very, very bad. Great Depression bad.

A recession was long overdue. A recession will usher in deflationary behavior. Treasury yields fall as investors seek safety in notes and bonds (price up yields down). Keystone’s indicator 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 ratio number lower as well; a 113-handle on the CRB is an extremely low and deflationary number.

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 pattern of 'more tech--less human's' will continue. Fast-food restaurants, such as Mickey D's, use kiosks that eliminate more jobs. Automation and technology 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, make themselves filthy rich by taking advantage of the 2008-2009 crash (easy money pumps the stock market higher) while the middle class and poor (that do not own stocks) are thrown under the bus over the last decade. The Fed members perform the bidding of the investment banks since they are rewarded with lucrative speaking gigs after they leave public office; a quid pro quo for their loyalty in maintaining easy-money conditions that send stock prices higher and benefit the elite class.

It is disgusting watching the privileged wealthy class take advantage of the rigged crony capitalism system raping America for all its worth starting with sending middle class jobs overseas in the 1970's and 1980's. The greedy politicians and corporate executives kept eliminating middle class jobs in favor of slave labor overseas. The lower expenses drive up stock prices making all of them filthy rich over the last few decades. A lot of that family and generational wealth you see is blood money. The wealthy class, about 20 million strong, spit on the other 310 million Americans over the last five decades. The best part is that the elite class makes millions off the rigged system they control then they turn around and complain to America that they pay too much in taxes. You have to love the pseudo free market crony capitalism system. Capitalism does not exist; it is only a theoretical concept in business textbooks. Crony capitalism fails because of two simple reasons; human greed and no transparency. It's not rocket science. All ism's fail over time for the same reasons.

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). Instead of creating jobs and buying equipment with the central banker easy money, companies use the dough for stock repurchase programs (buybacks) that artificially pump stock prices higher. Yes, they are greedy b*stards only concerned about increasing their own wealth.

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 against a disinflationary and deflationary back drop but now markets are starting to make more sense. The current market behavior is unprecedented; perhaps a 1930's Great Depression redux.

The amazing power of the central banker money-printing is God-like. The central bankers are the market. They are modern day money Gods in charge of the Temple. Kneel before their Power and Majesty. The Fed, ECB, BOJ, PBOC, the whole Hee-Haw gang, will keep printing money like madmen it is the only thing they know how to do. They are sick, one-trick ponies. They will print money until the whole system collapses and as the chart shows, the Fed keeps printing orders of magnitude more money to bailout the markets but receives less and less bang for the buck. When confidence and belief in the Fed is lost, all will be lost.

The Brexit stock market crash in late June 2016 was stopped by the BOE promising easy money. The PBOC keeps pumping China’s economy and markets. The Fed has remained accommodative with low rates, and now back to ZIRP, over the last 11 years. The BOJ keeps implementing stimulus programs. The ECB keeps flapping its dovish wings. It is all so nauseating. Do these humans look themselves in the mirror and ask, "What have I done? What has become of me?"

The central bankers create the all-time record highs in the global stock markets. The world is awash in central banker liquidity and all that money sloshing around has to go somewhere so it pumps-up all asset classes, hence the latest stock market rally in late March into the early April 2020 top.

The wealthy were dancing with glee as stock, bond, art, vineyard, real estate, collectibles and classic car prices leaped higher on central banker easy money. The wealthy light expensive cigars and dab the ashes onto the faces of the once-middle-class. America is in a new Gilded Age a la the 1920's. The divide between rich and poor is the widest in 50 years. A nasty, and likely violent, class war is likely on tap for America in the months and year or two ahead likely triggered by the recession. As Betty said, "Fasten your seat belts, its going to be a bumpy ride."

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 monthly jobs reports.

Think back to the last period of rampant sustainable inflation in 2006-2008; you were likely enjoying happy raises at work each year, right? And probably not so much from 2009 to present? Correct? In fact, for many of you, it feels like you are working for the same amount of money for the last 11 years.

All this windbag mumbo-jumbo aside, what does the 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 around the corner. After a decade 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 then pursued by former Fed Chair Yellen, and now further implemented by Chairman Powell, as well as dovish Fed members such as Evans, is tragically failing. It did succeed, however, in making America's wealthy class filthy rich.

The deflationary quagmire may be sticky for a while. All of you inflation enthusiasts do not fear, however, inflation will arrive soon perhaps in the 2021-2022 time frame and then hyperinflation in 2022 and beyond. That will be a whole new set of problems, that is if we survive this ongoing bout with deflation. Pray that it does not develop into a deflationary spiral a la the Great Depression.If we manage to avoid the deflationary spiral, in a couple years rampant inflation will develop as the velocity of money ramps higher. This will then lead to out-of-control inflation, hyperinflation, in the 2020's decade. There is nothing but minefields ahead of us.

In a nutshell, the United States remains mired in DEFLATION as it has been for nearly 6 years.