The Keystone Speculator Inflation-Deflation Indicator; 7-Year Deflationary Funk Ends; Inflation Still to Come

by K E Stone (Keystone)

After 7 long years, The Keystone Speculator Inflation-Deflation Indicator crawls out of the deflationary funk. Ever since the Federal Reserve started printing money and propping up the US stock market in March 2009 to protect the wealthy class, there has always been a fear that America would become entrapped in a deflationary quagmire a la Japan.

Keystone's Inflation-Deflation Indicator is in DISINFLATION at 2.62. The record low deflation print is at 1.04 and the indicator tagged 2.00 (deflation) during the 2008-2009 financial crisis.

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 elite 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 but yields are now moving higher across all durations. The US is putting deflation in the rearview mirror if the current path continues.

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 (Federal Reserve) and fiscal (Congress) heroin keeps the party going. Uncle Sam is main-lining the easy money junk into his veins each day buying stocks with reckless abandon. What could possible go wrong?

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 96.47 with a yield at 1.77%. The 10-year yield was above 3% in Fall 2018 and fell to 0.4% in March 2019 as the pandemic hit hard. 

Commodities are in the numerator (top number). The CRB Commodity Index had collapsed in recent years but over the last few months recovers to 252.85. Calculating The Keystone Speculator Inflation-Deflation Indicator;

The Keystone Speculator Inflation-Deflation Indicator

CRB/10-Year Price = 252.85/96.47 = 2.62

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

After 7 years, the economy and markets are no longer mired in deflation. 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.

Neither side could be proven correct because the pandemic hits sending the US into a deflationary spiral during 2019 and early 2020. Deflation bottomed and washed-out in 2020. People were still hunkered down worried about the pandemic. The virus waves keep coming and going keeping people guessing and uncertain which breeds fear and worry. People do not spend money when they are hiding under the bed so both goods and services are smacked hard by China Virus and crumble into the deflationary abyss.

The bottom in deflation occurs at the 1.00 and change level spring and summer of 2020. This is after the horrific COVID-19 wave 3 slaughtered Americans by the thousands per day. Folks were ready to move on in life sending the ratio higher. The goods inflation is kicking in bigtime as commodity prices are going through the roof.

Local building supply centers are putting people on waiting lists for plywood. Treated wood remains as rare as hen's teeth. It is ridiculous. What happened to America? Everyone walks around with their chest puffed-out telling each other how great they are when they actually suck. Store shelves are empty of some of the favorite products. The local grocer is completely out of Keystone's favorite granola bars. Oh the humanity!

The pandemic wreaks havoc on shipping goods across ocean and on land. Port workers are sick with covid. There are shortages of workers in every job along the logistics and supply lines. The infection rates are increasing in China which will create havoc around the world if they get out of control. The shipping problems delays supplies and with less supplies, people are paying more for what they want.

Inflation is too much money chasing too few goods so the other side of the perfect storm was Santa Claus Joe Biden handing out stimulus to every Tom, Dick and Harry during the pandemic. Some folks are incentivized more to not work than work. Many Americans are at home uneasy about circulating in public again due to covid or they may be taking care of a sick family member.

Adding the mess up, the pandemic, staff shortages, positive tests, and folks fearful of covid, create supply side shortages and delays. The excessive stimulus and almost 13 years of Federal Reserve money printing creates mountains of dollars sitting on the sidelines and in bank reserves ready to slosh into the system. People are home-shopping via computers, smartphones and laptops further stretching the supply chain.

No wonder inflation is on the upswing but look at the chart. The United States is in a disinflationary/neutral range and not even experiencing steady painful inflation, like the 1970's, as yet. Everything is relative. It has been so long since Americans have experienced inflation that you forget what it is like. The last serious bout of inflation was in 2007 and early 2008 at the peak of the 2008-2009 financial crisis.

The wine was flowing like water. Think back to 2007 and 2008. Everyone was working that wanted to work and not sweeping floors. People had good paying jobs driving around in brand new vehicles. There was a lot of chest-puffing back then. Prices were climbing higher on goods and services, and at the gas pump, but the boss would wink and tell you that a nice raise is coming so don't worry about it. That was then, this is now.

The inflation catches the attention of Americans but it is not as bigtime as people think. The interest rates remain low the 10-year yield around 1.8%. At the inflation level back in 2007 and 2008, the CRB was up at 480.

If 480 was in the numerator now, the US would be at 5.00 and in hyperinflation. The real trouble has not even begun. As they say in the hills of Kentucky, "you ain't seen nuttin' yet." Commodities have a lot further to run and it is not clear that the straight line upside seen on the chart will continue. Nohting goes up in a straight line, so a pull back and relaxation would be expected for a few months.

Do not discount the possibility of deflation reappearing. If the stock market crashes and folks lose confidence in the economy, markets and pandemic response, stocks will be thrown overboard and Treasuries actually bought, which would send yields lower not higher. So stay tuned and do not be lured by the siren song that inflation is here and guaranteed forward. One, as the chart shows, inflation is not yet here, and two, nothing is guaranteed going forward.

The deflationists were more correct than the inflationists in recent years as the services inflation drops to become more compatible with the goods deflation. Of course, the coronavirus (COVID-19) pandemic is the reason. It wiped out the airlines, hotels, travel, restaurants and hospitality and leisure industries. Services are knee-capped.

The world is awash in liquidity form the central banker money printing. People are scooping up the easy 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 is light's out. Deflation is typically this outcome.

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 2020, 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 not as plentiful as touted unless you want to clean bedpans, flip burgers or turn sheets.

On the first Friday of each month, the US Monthly Jobs Report provides the wage data on a monthly and yearly basis. The last few reports have average hourly earnings at about a +4.0% to +4.5% 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 skews higher above 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 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 rise in wages create inflation. The other reasons mentioned above play a key role as well.

Different scenarios fell into place all creating inflation but it is still nothing to panic about. The Fed dropped the language about inflation being transitional but there is potential for things to roll back over to the downside and for a disinflationary and deflationary funk to continue, especially if the stock market crashes. The Federal Reserve's obscene near 13-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.

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 $10. 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 weeks or months of sideways sputtering as markets determine if inflation is the way forward, or, if deflation rears its ugly head again as the stock market collapses.

The United States was in the 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 every hour of every day. This vibe is not occurring to any great extent right now. You have not seen anything yet. The reflation story is occurring currently. Inflation was Godot for 7 years but unlike the famous play, Godot did finally show up.

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. And also in 2020 when the Federal Reserve fired off money bazooka's showering the country with stimulus dollars due to the pandemic.

The Fed's grand near 13-year Keynesian experiment may finally be creating the elusive inflation it has desired for a decade but the jury remains out. The money-printing has succeeded 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 and the elite class rides away with most of the money.

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 in 2020 at 1.04.

The chart above is weighted for the goods-oriented inflation/deflation since the CRB commodities index is used in the numerator of the 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. These deflationary forces, however, have been negated by the pandemic with supply constraints reversing the picture.

On the services side, prices are flat after maintaining buoyancy for many 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. 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 was in recession due to the coronavirus tragedy but it was short-lived as the government fiscal stimulus creates a rocket ship ride of growth. The services inflation in the US rolled-over to the downside to join the goods deflation but the commodities have bottomed and have been exploding higher into multi-year record levels. The CRB is up to 253 and the GTX is at 3090.

In the future, 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 13 years. Such is the rigged corrupt crony capitalism system.

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 corrupt 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 they are paying too much in taxes. Capitalism does not exist; it is only a theoretical concept in business textbooks. America is a corrupt crony capitalism system.

America is best described as 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. The noble scholar George Carlin would quip, "It's a big club, and you ain't in it."

Crony capitalism fails because of two simple reasons; human greed and lack of transparency. It's not rocket science, and Keystone knows rocket science. All ism's fail over time for the same reasons.

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 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 DISINFLATION moving into NEUTRAL territory. As much as everyone says inflation is here and will only get worse, nope, we will get there but we are not there yet.

Inflation is likely in 2022 and 2023 but do not consider it a done deal. Deflation may reappear especially if the stock market crashes. Hyperinflation remains a worry for a future day; there is enough ugliness in the present.