The Keystone Speculator Inflation-Deflation Indicator; America Remains Mired in Historic Deflation; Near-Term Reflation Behavior Explained

by K E Stone (Keystone)

The Keystone Speculator Inflation-Deflation Indicator crashes down to 1.04 in April 2020, and recovers to 1.84 in February 2021, signaling that the United States remains mired in a Great Depression-style deflationary funk. 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 deflation and as the red circle shows in the chart above, deflation wins.

Keystone's Inflation-Deflation Indicator remains in DEFLATION at 1.84 coming off the record low print at 1.04 and remaining below the 2.05 during the 2008-2009 Great Recession financial crisis. The Keystone Speculator Inflation-Deflation Indicator remains mired in the deflation region. It is Great Depression-esque. "Hey, buddy, can you spare a dime?"

The endless money printing by the Federal Reserve (monetary stimulus) and joyful tax cuts, spending and fiscal stimulus from Congress, create 12 years of higher stock market prices rewarding the rich with great wealth. The privileged class owns the US stock market. One-half of Americans do not own one single share of stock. The Fed sits on the short end of the yield curve anchoring the 2-year yield in concrete. Yields remain at depressed levels across all durations. The deflationary funk continues for 6 years running.

At the same time the elite privileged class is shoving handfuls of easy money into their pockets, common American families are destroyed because of years of unemployment, underemployment and high debt. Such is America these days. The United States has become the land of the have's and have not's; the New Gilded Age a la the 1920's. The modern-day Great Gatsby's are everywhere courtesy of the central banker money-printing.

America is a faux free market crony capitalism financial system in its last throes. Corporate socialism is America's creed. The four central banker horseman of the coming financial apocalypse, the Federal Reserve, ECB (European Central Bank), BOJ (Bank of Japan) and PBOC (Peoples Bank of China; the communists), create the sick and dark world ahead.

In the US, the monetary (Fed) and fiscal (Congress) heroin keeps the party going. Uncle Sam is main-lining the junk into his veins each day and then buying stocks with reckless abandon. What could possible go wrong? Sadly, a local drug addict, Gary, that could not kick the heroin habit, was found dead lying in a ditch on the side of the road last week. When they turned his body over, a needle was sticking out of his forearm. Unfortunately, that is the way it always ends.

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 99.84 with a yield at 1.14%. The 10-year yield was at 2.72% in December 2018 about two years ago. Commodities are in the numerator (top number). The CRB Commodity Index had collapsed in recent years but over the last few months recovers to 184.07. Calculating Keystone's Inflation-Deflation Indicator;

The Keystone Speculator Inflation-Deflation Indicator

CRB/10-Year Price = 184.07/99.84 = 1.84

Over 4.50 = Hyperinflation

Between 3.50 and 4.50 = Inflation

Between 3.00 and 3.50 = Neutral; Inflationists and Deflationists Battle

Between 2.50 and 3.00 = Disinflation

Under 2.50 = DEFLATION

The economy and markets remain mired deep in deflation for six years. Granted, the calculation above is focused on goods inflation rather than services inflation. For many decades, you could track commodities, with the CRB, or GTX, or many other indexes, and the goods inflation and deflation dictated the overall economy's direction. As the US politicians screwed America over the last five decades, sending jobs overseas and destroying the middle class so stock prices could move higher on the slave labor, the goods production went to foreign nations while the US focused more on services as the major part of the economy.

The debate between inflationists and deflationists over the last few years has been the discussion of goods versus services inflation. The pundits looking for inflation said goods would inflate and catch-up to the rising services sector while the talking heads preaching deflation said the services inflation would drop to join the goods disinflation as the economy slumps; a recession was long overdue. The deflationists were correct and services inflation drops to become more compatible with the goods deflation. Of course, the coronavirus (COVID-19) pandemic wiped out the airlines, hotels, travel, restaurants and hospitality and leisure industries. Services are knee-capped.

Then the central banker cavalry arrives March 2020 promising to print money forever. Greenspan, Bernanke and Yellen (former Fed chairs) were already in the basement of the Eccles Building running the printing presses printing money like mad. Helicopter Ben loaded up his air machine and began hovering over Manhattan dropping money from the sky.

The world is awash in liquidity. If you place the special rose-colored Fed glasses on your head, you can see that the easy money is 3 feet (1 m) tall around the world. People are simply scooping up the money buying stocks, bonds, real estate, paintings, collectables, antique cars, art and anything else that has a heartbeat and is worth five bucks. Easy money encourages reckless spending and then when rates pop, and folks have little saved, and then lose their jobs in a recession, it's light's out.

When the Fed and Congress tag-teamed in March and April 2020 with trillions in stimulus, no one even pays attention to the numbers anymore, it is $3 to $4 trillion over the last year, the United States stock market, the S&P 500, SPX, took off like a rocket and prints another new all-time high at 3937.23 on Friday, 2/12/21. Sound the Seven Trumpets! The dollar trails lower for many months sending commodities, the CRB above, higher. Gold and silver have also enjoyed the dollars weakness.

Interestingly, the outcome that no one was considering, where services inflation would die on the vine while goods inflation took off like a banshee, is the actual outcome after the big money pump by the Fed and Congress. The low-income folks are out of jobs since their work cannot be performed from home. The services economy experiences deflation. Goods, however, are starting to gain traction to the upside. Overall, however, as the indicator and chart show, the US remains stuck in the deflationary quagmire. A further rise in commodity prices and rise in yields will send the indicator higher.

The big stock market rally this year off the lows is inflationary, the rise in commodity prices is inflationary and rates sneak higher which is inflationary. Commodities are rallying to beat the band over the last few months after several years of lagging the market. There is lots of talk about 'reflation' nowadays for these reasons mentioned but the expectations are likely premature.

The main reason behind the recent reflation scenario is the rise in wages. The lack of inflation and ongoing persistent deflation for many years is due to the lack of wage growth. Inflation cannot exist without wage inflation which has not occurred for many years. Then wages were harpooned by the virus. Once the Fed and Congress stepped in to save the stock market in March of last year, however, an interesting shift in the wage equation occurs.

For several years, wage inflation was growing annually at about +3% a paltry amount. When was the last time you had a substantive raise? The high wage earners can work from home during the pandemic. Meetings are conducted via Zoom Video and other platforms and the work is mainly performed in front of a computer. The upper middle class and wealthy elite did not miss a paycheck during this ongoing tragic pandemic.

Conversely, the lower middle class, poor and disadvantaged are unemployed and underemployed. Jobs are scarce. There was a big jump in people starting a business last sprint and summer, but that luster is off the rose. Most lost their shirts. New businesses plummet over the last couple months since demand for any business, product or service remains weak. Only stupid people go into business now while a pandemic is ongoing and demand is absent. The lower wage earners are gone from the wage calculation so it is heavily weighted in the high wage earner camp; hence the annual earnings climb 4%.

On the first Friday of each month, the US Monthly Jobs Report provides the wage data on a monthly and yearly basis. The last report has average hourly earnings at about a +4% annual pace the highest in many years. Since the high wage earners have not lost their jobs, but the low-wage earners are toast, the wage inflation number jumps higher to 4%.

Wages are not moving up steadily and strongly due to an economy that is expanding and strengthening. Wages pop because of covid which, when combined with the bump higher in the average workweek, creates the mini-whiff of inflation that feeds the reflation chatter. Once the lower income folks return to the restaurants, hotels, bars and cruise ships, the wage percentage will come back down and so will the reflation chatter.

The Federal Reserve needs to see the annual wage growth at +4.0% to +4.5% to create overall inflation. This is a dirty little secret that the Federal Reserve will never confirm. Although the higher wage inflation helps push the story towards the Fed's overall 12-year-running inflation goal, Chairman Powell would likely admit that the bump in inflation, the reflation narrative, will likely be short-lived. The Federal Reserve's obscene 12-year Keynesian money-printing experiment continues and the ending remains a mystery.

The wage inflation push due to the pandemic canning the low-wage earners, and the push higher in commodity prices on the falling dollar, create the inflation buoyancy and reflation narrative. The household sector is deleveraging right now so that is not conducive to inflation. Rent is a large part of core CPI and is a lagging indicator; watch it closely if you want to gauge inflation.

Lots of pundit are touting 'pent-up demand' as a big driver of future inflation. When the pandemic is over, Americans will run from their houses, rip off their clothes and buy every product, and use every service they can possibly get their hands on. Well, maybe not the ripping off of the clothes part. And, maybe not the heavy buying of products and increase in services expected either.

The pandemic is now a cancer. Those that have cared for ill loved ones, or perhaps you that are dealing with that Big C bastard right now, know the daily drudgery. When facing a devastating illness, there is no thinking that things will return to the way they were, because you know things will never be the same, but there is strong hope and optimism that one can learn to live with and manage the disease. And you definitely can! Cancer becomes an endemic disease. The covid pandemic is becoming endemic.

Day after day of the same-o, same-o. Hope is on the horizon but each day looks like the day before and then it turns out to be tomorrow. Virus-fatigued and weary people wonder if things will ever change. They ponder if the disease will ever go away. Will coronavirus become part of life, and manageable, something to live along with, rather than cure, as many cancers are? Is there pent-up demand coming from folks already learning to accept and live along with the pandemic in their daily lives?

The pent-up demand story may not be as big a deal as expected. Everyone has 25 tubes of toothpaste in the medicine cabinet and 400 rolls of toilet paper stored in the downstairs closet, six cases of bottled water and of course the lifetime supply of soup in the pantry.

Most folks are going through life as always. Instead of stopping at the grocery store three days a week, you now may go once per week, donning a mask of course, and you buy three times as many greasy bags of potato chips and packages of hotdogs. You have to eat so nothing has changed there. Maybe a little more gasoline will be used as people return to the office more.

If the washing machine broke, you are not sitting on the sofa watching Oprah reruns wishing for an end to the pandemic so you can wildly run out to purchase a new one. You had it replaced already. Sure, some folks may have put off a car purchase, and that is a big ticket item, but overall, the pent-up demand theory may be overblown. People do not buy cars that do not have jobs.

Some folks may book a trip but that is for the wealthy class. Regular folks will be hesitant to run out and board a once covid-infected cruise liner. Travel will remain a hassle. 80% of Americans are obese critters; they are not missing any meals. It is a gluttonous life as usual for most Americans, covid or not. Pent-up demand, schment-up demand.

The drivers of inflation are jobs (lower unemployment), pent-up demand, ZIRP (zero rates) policy and a weak dollar. The economy is likely hitting a rough patch which means jobs will be scarce. The airlines will probably be canning thousands of workers over the next few months. The pent-up demand may be overrated as explained. ZIRP remains in play. The weak dollar has been ongoing but has bottomed over the last few months and is showing signs of a rally. If so, commodities will retreat and the reflation story will be placed in the circular file.

Even though the push of inflation will likely not continue in the near-term, we are getting close to that take-off point ahead. The stock and bond charts hint at a move lower in rates, and sell off in the US stock market, starting now and ongoing for several weeks ahead, say well into and through March.

However, all of you touting the reflation scenario do not place it in the circular file. Instead, place those reflation thoughts on the side table and put the snow globe paperweight on top. In two or three months, you will likely want to dust off that reflation stuff and put it to use then. Inflation may be on the way but it is likely a back-half of 2021 story and then from there forward. There is likely more deflationary and disinflationary fun on tap for at least a couple-few months more.

Just think, in a few years, the chart above will be way up there on the upper right hand side in the hyperinflation zone. That is when the Dow will be over 50K, the SPX will be 10K or more, a gallon of gasoline will be $10 or more, a loaf of bread will be $7 or $8. The stock market will be hugely higher, however, the US dollar will be toilet paper. That will be a whole new set of fun when the velocity of money kicks in but for now, we likely have a few more weeks, or months of deflation, and disinflation, and perhaps a move into the neutral area summertime and beyond.

On the wage inflation, Sleepy Joe Biden and Queen of the Doves Janet Yellen are performing a sneaky tag-team approach that few have thought about. Actually no one has mentioned what the partners in crime are up to. Biden and Yellen are pushing hard for that $15 per hour minimum wage. They want wages to be pushed higher. After reading the above, you understand why. That is the way to overall inflation which the Federal Reserve has failed at for 12 years. The Fed has succeeded at making the privileged class filthy rich. The 300 million huddled masses in America will remember this as the class war begins.

Biden and Yellen figure they can get credit for helping the little people in America with the higher minimum wage but more importantly they want that to help drive inflation higher. They also know that the low-wage earners will be returning to work dragging the wage inflation number lower in future jobs reports and it will fall away from that 4.0% to 4.5% area needed to create overall inflation. So look for Sleepy Joe and the Queen of the Doves to keep cheerleading the higher wages.

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 back then. When inflation arrives, you will feel it, and talk about it, and hear about it, you will know it. You will be complaining about prices increasing. This vibe is not occurring to any great extent. There is the reflation backdrop currently but deflation, or disinflation rules the day. Inflation is Godot.

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 12-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. The Fed rode in on their white horse in March 2020 to save the day again.

After the QE pumps to handle the Great Recession in 2009, the economy barely tagged inflation in springtime 2011 (green circle). 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. Kind of like now. But that was the peak in inflation in 2011.

Traders were convinced that rates would go up and up and up and the Fed created inflation because of quantitative easing (QE 1). The bond yield charts were in negative divergence back then and as expected, things quickly fell apart. The Fed got less bang for the buck after the 2016 pump. By 2017, the chart was going flaccid like a limp sausage. The low point of deflation occurs last March almost one year ago.

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. 

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. Services inflation collapses and comes down to join deflation. The pandemic was the catalyst.

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 attending Ivy League schools.

Most market participants (traders, money managers, television pundits, analysts, strategists, investors, fund managers, hedge funds, etc...) are making big 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. They have no idea about how the rest of America, the majority of the country, lives.

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 on television. The lower middle class, disadvantaged and poor, the majority of the country, do not have those same bills to pay as the wealthy class that control the airwaves, businesses, politics and government comprising the crony capitalism system.

The world is in recession now due to the coronavirus tragedy. The services inflation in the US has rolled-over to the downside to join the goods deflation but the commodities have bottomed and begin moving higher which sends the chart higher. Businesses are begging to be allowed to stay open during the pandemic but many of them see the writing on the wall. They are zombie companies that will fold like cheap suits over the coming months and people will lose jobs.

If you are working a job and are not that busy, get ready, because you will probably be canned over the coming weeks of months and then probably will not get another job for a year or two. Start planning now. If you can get a job at a company that seems to be growing, as long as it is not tied directly to the economy, consider taking it rather than working at a zombie company that will likely fail later this year.

10 millions people remain unemployed. Others are no longer counted in the statistics. There are probably 20 million Americans that are unemployed or underemployed willing to work but the pandemic has shattered everyone's lives. China's Wuhan Flu bioweapon packs a punch.

In the future, say after a few months or year of this deflationary quagmire finishing-up, the velocity of money will 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 2023-2026 time frame. It will be a different brand off craziness. The Dow will be going towards 40K and 50K but the dollar will be toilet paper with prices for all products and services going through the roof. 

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 12 years.

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. Note that no one talks about Yellen's big speaking fees she has received and now she is back in government ready to perform her master's bidding. 

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 (slave labor) drive up stock prices making all of them filthy rich over the last few decades, and now their families are generationally rich, all from the rigged system.

A lot of that family and generational wealth you see is blood money. The wealthy class, including the upper middle class sycophant's that service the wealthy, are about 30 million strong. They spit on the other 300 million Americans over the last five decades. The best part of the crony capitalism system is that the elite class makes millions off the rigged game they control, then they turn around and complain to America that are paying 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.

America is a faux free market crony capitalism system which worships corporate socialism. It is a great system if you are part of the club; not so much if you are not. 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.

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 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 continues into February 2021.

The wealthy dance with glee as stock, bond, art, vineyard, real estate, collectibles and classic car prices leap higher on central banker easy money. The wealthy light expensive cigars and dab the ashes onto the sullen 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 on tap for America in the months and perhaps years ahead.

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-plus 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 Chairman 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. The Fed's money-printing did succeed, however, in making America's wealthy class filthy rich. This is okay for the Fed members since once they retire and return to private life, they will receive their kickback quid pro quos (for maintaining dovish monetary policy) for speaking at token luncheons. Isn't the crony capitalism system great?

The deflationary quagmire may be sticky for a while. All of you inflation enthusiasts do not fear, however, inflation will arrive soon perhaps later this year or early 2022. This near-term reflation scenario will likely subside. Rates may drop for a few weeks and then place a substantive bottom in the spring or summer. This behavior may firmly identify the end to the four-decade bond bull market (higher prices lower yields for almost 40 years).

Inflation is likely in 2022 and 2023 and the real worry is when will hyperinflation kicks in. Considering the money sitting on bank balance sheets, the velocity of money will be a moon shot. Interestingly, in the chart above, if you extrapolate the trend since March 2020 and continue that black line vertical, we would hit inflation in 2023-2024 and hyperinflation in 2025-2026 but there will be many twists and turns before then.

In a nutshell, the United States remains mired in DEFLATION as it has been for 6 years. Deflation is the answer to the often-asked dinner party question on the inflation/deflation topic. Keystone is hoping he is invited to different parties that do not discuss inflation.

Note Added 5:40 PM EST: Using the latest numbers, the 10-year yield is at 1.21% with the note price at 99.22. The CRB Index is at 185.29. The push higher in yield came late day yesterday. Thus, 185.29/99.22 = 1.87. Whoopie. The reflation activity gains three more notches higher.