• Tag Archives Deflation
  • Reflation, Deflation and Gold

    One of the most important economic debate today is whether the economy will experience reflation or deflation (or low inflation) in the upcoming months. Has the recent reflation been only a temporary jump? Or has it marked the beginning of a new trend? Is the global economy accelerating or are we heading into the next recession? It goes without saying that it is a key investment issue because of the implications for different asset classes, including the precious metals. Let’s try to outline the macroeconomic outlook.
    As one can see in the chart below, inflation has recently risen both in the U. S. and the euro area. And inflation in the UK has really accelerated recently. It’s true that there was a slowdown in the U. S. after a peak in February, but the level of inflation rates remains much higher than in 2014-2015.
    Chart 1: The CPI rate year-over-year for the U. S. (blue line), the Eurozone (red line), and the UK (green line) over the last ten years.

    This post was published at GoldSeek on 16 June 2017.

  • “The Day Of The Dovish Hike?”

    The paradox continues: on one hand stocks continue to anticipate a reflating economy, with S&P futures hitting a new all time high overnight; on the other hand, the weaker dollar and especially Treasury yields are increasingly worried that today’s rate hike, the 4th in the past decade, will be another policy error, leading to more curve flattening and eventually a deflationary outcome.

    And while there is little doubt Yellen will hike today as Goldman, and consensus, expect, the question is what the future pace of rate hikes will look like and whether the recent disappointing CPI prints will mean and “one and done” for the rest of the year from the Fed. While there is some possibility of an unexpectedly hawkish statement from the FOMC, especially if the Fed is worried about an asset price bubble, it is far more likely that today’s announcement will be yet another “dovish hike”, which is what SocGen’s Kit Juckes previews in his latest overnight note.

    This post was published at Zero Hedge on Jun 14, 2017.

  • Why the Tech Wreck May Be a Temporary Blip

    Leadership is an important consideration in any type of market, bull or bear. When market leadership is thin and quickly changes direction, it can signal a shift in the tone of the overall market.
    The rally that has unfolded in recent months has been changing in character. Originally, the thrust began as a reflation trade, as signs of disinflation/deflation began to fade and global bond yields crept higher. The timing of this coincided with the election, which brought with it hopes of tax cuts, deregulation, and infrastructure spending. This boosted the prospects (and share prices) of cyclical companies – those that need an improving economy to do well.
    But then both of these narratives began to fade. Inflation and economic data weakened, and it caused bond yields to fall from their highs near 2.6% to current levels around 2.2%. At the same time, it became clear that very little on Trump’s agenda could be counted on … at least for now.
    This led to another shift in leadership, as technology stocks took over the show.
    Most tech firms, at least those that have been leading the way higher, are secular growth stories. This means that these firms don’t need a robust economy to do well. Instead, the products and services they sell are so unique that they’re almost always in demand.

    This post was published at FinancialSense on 06/12/2017.

  • The Three Headed Debt Monster That’s Going to Ravage the Economy

    Mass Infusions of New Credit
    ‘The bank is something more than men, I tell you. It’s the monster. Men made it, but they can’t control it.’ – John Steinbeck, The Grapes of Wrath
    Something strange and somewhat senseless happened this week. On Tuesday, the price of gold jumped over $13 per ounce. This, in itself, is nothing too remarkable. However, at precisely the same time gold was jumping, the yield on the 10-Year Treasury note was slip sliding down to 2.15 percent.
    In short, investors were simultaneously anticipating inflation and deflation. Naturally, this is a gross oversimplification. But it does make the point that something peculiar is going on with these markets.
    Clear thinking and simple logic won’t make heads or tails of things. For example, late Wednesday and then into Thursday the reverse happened. Gold gave back practically all $13 per ounce it had gained on Tuesday, while the yield on the 10-Year Treasury note climbed back up to 2.19 percent. What to make of it?
    With a little imagination one can conceive of where the money’s coming from to buy Treasury bonds. More than likely, it has something to do with central bank intervention into credit markets. Though, the Federal Reserve is not the only culprit.

    This post was published at Acting-Man on June 9, 2017.

  • The Great Commodity Bear , Is It Finally Over ?

    There is something happening in the commodities complex that has been going on for awhile now that needs to be addressed tonight. A subtle change actually started earlier this year and has been gaining momentum especially in the energy sector. I know for a lot of you, with the weak US dollar, you are thinking, ‘how could commodities be declining,’ which goes against everything you have learned about how the markets are supposed to work. If the markets always behaved like everyone thinks they should then there would be no markets, because everyone can’t be right. That’s the nature of the beast we’re trying to tame.
    Tonight I would like to show you some bearish rising wedges which have formed all over the place in the commodities complex. Many of the rising wedges took over a year to build out so that sets up a healthy decline. The bigger the pattern the bigger the move.
    This first chart tonight is the ratio combo chart using the TIP:TLT to gauge if we are experiencing inflation or deflation. Earlier this year the ratio in black formed a small topping pattern just below the black dashed trendline, then had a quick backtest, and is now starting to gain momentum to the downside. When the ratio in black is falling it shows deflation. The CRB index along with the GDX are still in a downtrend with the CRB index being weaker than the GDX, as show by the 30 week ema.
    Next lets look at some different commodity indexes to see what they may be telling us. This first commodities index we’ll look at is the old CRB index. This bearish rising wedge began to develop way back in early 2016 with the 4th reversal point taking place a year later at the top of the rising wedge. As you can see the 4th reversal point was a H&S top reversal pattern. The breakout came in March with no backtest. There was a small blue bearish rising wedge which formed in the middle of 2015 which was part of that huge impulse leg down.

    This post was published at GoldSeek on 8 June 2017.

  • The Fed’s Dangerous View of History

    A very popular doctrine maintains that progressive lowering of the monetary unit’s purchasing power played a decisive role in historical evolution. It is asserted that mankind would not have reached its present state of well-being if the supply of money had not increased to a greater extent than the demand for money. The resulting fall in purchasing power, it is said, was a necessary condition of economic progress. The intensification of the division of labor and the continuous growth of capital accumulation, which have centupled the productivity of labor, could ensue only in a world of progressive price rises. Inflation creates prosperity and wealth; deflation distress and economic decay.1 A survey of political literature and of the ideas that guided for centuries the monetary and credit policies of the nations reveals that this opinion is almost generally accepted. In spite of all warnings on the part of economists it is still today the core of the layman’s economic philosophy. It is no less the essence of the teachings of Lord Keynes and his disciples in both hemispheres.
    The popularity of inflationism is in great part due to deep-rooted hatred of creditors. Inflation is considered just because it favors debtors at the expense of creditors. However, the inflationist view of history which we have to deal with in this section is only loosely related to this anticreditor argument. Its assertion that “expansionism” is the driving force of economic progress and that “restrictionism” is the worst of all evils is mainly based on other arguments.

    This post was published at Ludwig von Mises Institute on June 8, 2017.

  • “Investors Should Be Petrified” Of The Coming Ice Age: Here Are Albert Edwards’ Scariest Charts

    Congratulations to Albert Edwards who this morning announced that he has once again placed first in the 2017 Extel Survey of analysts in the Global Strategy category, for the record 14th year in a row. As he adds “it is particularly gratifying that clients still seem to highly value our thoughts, especially during these cyclical intermissions in the Ice Age, when equities outperform government bonds.” This year’s victory appears to have been especially hard won because as he adds “you have to have a thick skin in this business, especially when our press office forwards our online press cuttings. Some of the reader abuse can get very, very personal. How do they know this stuff about me? The comments surely can’t all be from my former partner!”
    Of course, this being Albert, not even his record victory can brighten up the mood much, and the SocGen strategist then adds that “the current QE-inflated, cyclical equity bull market may have gone on way longer than we expected, but equities have only just managed to catch back up with global 10y+ government bonds (see chart below). The secular equity bear market will inevitably reassert itself and that performance chasm will open up again.”
    So, inspired by the record victory, Edwards is briefly reprising some of his favourite “Ice Age” charts, traditionally a source of rationality in an otherwise insane market, and lately, world.
    * * *
    The macro underpinning for our Ice Age thesis is the West’s slow replication of Japan’s 1990s descent into outright deflation. Each cyclical recovery sees lower highs in both inflation and nominal GDP growth rates and the inevitable recession, when it comes, wreaks increasing levels of havoc in financial markets.

    This post was published at Zero Hedge on Jun 7, 2017.

  • BofA: “If Bonds Are Right, Stocks Will Drop Up To 20%”

    This (simple yet powerful) chart from @zerohedge warrants a PhD thesis in #Finance #stocks #bonds #markets pic.twitter.com/w61rDBFkPT
    — Mohamed A. El-Erian (@elerianm) June 2, 2017

    Quickly skimming the front pages of the financial press in recent days reveals one recurring, and puzzling, story: the diverging and contradictory signals being sent by the bond (deflationary) and stock (inflationary) markets.
    Attempts at an easy reconciliation are doomed to fail as this paradoxical divergence has stumped everyone, including the person who is allegedly in charge of the US economy, Trump’s top economic advisor, former Goldman COO Gary Cohn, who last week made the “embarrassing” admission that over the long run, the bond market – with its bearish signal – will be right. Recall the following exchange last Friday captured by Pedro da Costa:
    CRAMER: What do you make of the fact that rates are going down so precipitously? Is it that trading partners keeping their currencies down and causing money to come here, or are the bond market right and we just saw a peak in employment and maybe even earnings?
    COHN: I don’t think there’s a simple answer or a simple factor here, but remember the bond market takes a longer-term view of what’s going on. I think people are taking a longer-term view on our economy, our economy growth, and where they think policy’s going.

    This post was published at Zero Hedge on Jun 6, 2017.

  • “This Only Ends When The Bond Market Pukes”

    We all get it wrong, including Bass, Yusko, Icahn, Dalio, and [insert whatever guru you want in here].
    So when you take solace in the fact the stock market is running higher without you, I would be weary of consoling yourself that you are in smart company.
    Now please don’t mistake my unwillingness to join the chorus of those warning about the dangers ahead as my belief that everything is rosy. I understand the arguments about the huge imbalances in the financial system. I don’t need a lecture about the unsustainability of the current environment. I get it, we are screwed. We have made too many promises, have not saved enough and have created a can’t win financial situation.
    Yet why is everyone so sure it will end in a deflationary bust? I hear all these gurus talking about the optionality of cash. Yeah, I understand. If you hold cash when prices collapse, you are able to buy when everyone else is selling. You listen to these hedge fund managers tell the story, and it sounds so compelling. It makes you want to sell everything, sit back and wait for the inevitable collapse.

    This post was published at Zero Hedge on Jun 5, 2017.

  • Debate: Will Shrinking the Fed’s Balance Sheet Crash the Markets?

    Following the 2008 financial crisis, the US Federal Reserve purchased trillions in toxic debt and US treasuries in order to restore confidence in the banking system.
    Academics referred to this multi-year process as quantitative easing or QE, but it was more commonly thought of as money printing, with many fearing that it would lead to hyperinflation, a collapse of the dollar, and skyrocketing gold prices.
    Though these worst-case scenarios failed to materialize, fears over hyperinflation have now been replaced by hyperdeflation (or, simply, a market crash) as the Fed engages in so-called ‘quantitative tightening,’ simultaneously raising rates while allowing their balance sheet to shrink back to normal, pre-crisis levels – something that may begin as early as this year.
    With the more popular bearish view getting louder in recent months and Financial Sense listeners emailing us in response, we decided to get Matthew Kerkhoff’s take on this debate since he correctly explained to our audience many years ago why QE wouldn’t lead to hyperinflation.
    Kerkhoff is a long-time contributor at Dow Theory Letters and the Chief Investment Strategist at Model Investing. Here’s what he had to say…

    This post was published at FinancialSense on 06/05/2017.

  • The Path to Inflation: “Helicopter Money”

    The general view in inflation is dead, essentially forever. Maybe. Maybe not. We all know real-world inflation for big-ticket expenses is far above the official rate of around 2% annually. *** Yet conventional economists are virtually unanimous that deflation is the danger and inflation is a “good thing” we need to spur so servicing existing debt becomes easier for debtors. Due to the deflationary pressures of technology and stagnant wages for the bottom 90%, the consensus sees low inflation as far as the eye can see. When the consensus is near-100% on one side of the boat, we can safely bet Reality will not conform to expectations. This leads to a question: what could cause official near-zero inflation to surprise the consensus and leap higher? One possible answer is “helicopter money”: money created by central banks that is distributed directly to households via tax rebates, debt forgiveness, or Universal Basic Income (UBI).

    This post was published at Charles Hugh Smith on MONDAY, JUNE 05, 2017.

  • The Chinese Economic ‘Death Spiral’

    China has reported annual growth rates since the panic of 2008 of between 6.7% and 12.2%, with a steady downward trend since early 2010. If China’s growth engine is running out of steam, as I’ve described, how has China managed to maintain such relatively high growth rates?
    The answer is contained in three key words: debt, deflation and waste.
    Waste is a blunt word referring to non-productive investment. The investment component of China’s GDP is about 45% of the total. Most major economies show about 25% to 35% for investment.
    But at least half the Chinese investment is wasted. It goes to projects that will never produce an adequate return, either on an absolute basis or relative to alternative uses of the funds.
    If this wasted investment is subtracted from GDP, similar to a one-time write off under general accounting principles, then 8% growth would be 6.2%, and 6% growth would be 4.7%. There are other distortions in Chinese growth figures, but wasted investment is one of the most glaring.
    A simple example will make the point. During a recent visit to China I took the high-speed train from Beijing to Nanjing and passed through the magnificent new Nanjing South train station.
    The train had the smoothest, quietest ride I’ve ever experienced even at speeds of 305 kph. The noisy clickity-clack of Amtrak’s Acela service from New York to Washington seems like a Wells Fargo stagecoach ride through the Old West compared to the Chinese railroad.

    This post was published at Wall Street Examiner on June 2, 2017.

  • Deflation, Easy Money, and the Boom-Bust Cycle

    According to the president of the Federal Reserve of St. Louis James Bullard the current level of US prices is noticeably lower than what it would be if the Federal Reserve had delivered on its 2% inflation target, calling the trend ‘worrisome.’ The yearly growth rate of the consumer price index (CPI) eased in April to 2.2% from 2.4% in March.
    Many economists maintain that a fall in prices generates expectations for a further decline in prices. As a result of this, it is held, consumers postpone their buying of goods at present since they expect to buy these goods at lower prices in the future. For most economists and various commentators a decline in the growth rate of the CPI raises the likelihood of an outright general decline in prices, which is labeled deflation and is considered to be a terrible thing.
    Consequently, this weakens the overall flow of spending and this in turn weakens the economy. A fall in consumer expenditure subsequently not only weakens overall economic activity but also puts further pressure on prices. Or so it is argued. Note that from this it follows that deflation sets in motion a spiraling decline in economic activity.

    This post was published at Ludwig von Mises Institute on June 2, 2017.

  • The Internet Helped Kill Inflation In America, Says Credit Suisse

    Whether or not San Francisco Fed President John Williams is right about US inflation and employment being about as close to the central bank’s targets as investors have seen – as he told CNBC two days ago – is irrelevant: The central bank is going to raise interest rates two more times this year no matter what happens to consumer prices, says Credit Suisse Chief Investment Officer for Switzerland Burkhard Varnholt.
    That’s because it’s pointless waiting around for prices to rise when the real reason inflation is low – and will likely remain low – has nothing to do with the Fed, but with a structural shift in the US economy that’s being driven by technology giants like Amazon and Uber. Burkdard says these companies have ‘turned most companies and sectors into price takers rather than price makers.”
    ‘Well look, inflation has been gone for quite some time and what’s really killed inflation clearly isn’t the Federal Reserve’s monetary policy but the Internet – it’s the sharing economy, the network economy it’s the uber-deflationary companies like Uber, Amazon, Airbnb and the like who have transformed most companies and most sectors into price takers rather than price makers.’

    This post was published at Zero Hedge on May 30, 2017.

  • Albert Edwards: “What On Earth Is Going On With US Wages”

    When Albert Edwards predicted in late 2016 that a surge in wage inflation was imminent, we were confused by this prediction from the world’s preeminent deflationist: after all, not only had not a single economic indicator validated a tighter labor market despite unemployment just above 4%, but as we have have repeatedly demonstrated what little wage inflation existed, was attributable to managerial-level, supervisory positions while the bulk of job creation remained with minimum-wage jobs, which have continued to see virtually no wage growth. Even Morgan Stanley, a far greater bull than Edwards, one month ago admitted that “wage growth is leveling off, may be slowing.”
    Which is why we have to give Edwards credit: some 6 months after his initial call, he had the courage to do what is never easy and admit he was wrong, and that contrary to his expectations wages are not going up after all.
    Talking about wrong, I have to put my hands up. I have been expecting US wage inflation to roar ahead over the past three months to well above 3%, yet every data release has surprised on the downside. Wage inflation, as measured by average hourly earnings, has actually levelled off at close to 2% while wage inflation for ‘the workers’ is actually slowing (see chart below)! Strictly speaking, “the workers” are defined (by the BLS) as “those who are not primarily employed to direct, supervise, or plan the work of others. Hey, that’s me!

    This post was published at Zero Hedge on May 27, 2017.

  • International Inflation Cycles Sync Up

    My friend Lakshman Achuthan, Co-Founder & Chief Operations Officer of the Economic Cycle Research Institute (ECRI), has done some really interesting work on international inflation cycles, and in today’s Outside the Box he shares it with us. This is a special treat – ECRI does not normally make its material available outside of its client base. I am truly grateful that he allows me to share this. Lakshman will be joining us at SIC this week in Orlando, to the great benefit of the attendees.
    It turns out that inflation volatility has been greatly dampened in the 11 OECD (advanced) economies in the 21st century, as compared to the late 20th century: It’s now only about a quarter of what it was then. Additionally, the domestic inflation cycles of these countries have increasingly come into sync. These two trends have made it possible for ECRI to devise a leading index of global inflation cycles that offers earlier and more accurate forecasts of cyclical turning points in international inflation.
    In concluding this short but groundbreaking piece, Lakshman adds,
    The synchronization of international inflation cycles highlights the importance of global factors in assessing domestic inflation prospects. Our analysis underscores the 21st-century reality that the timing of inflation cycles may be beyond the control of any individual central bank. Yet this very development makes it possible for ECRI to provide even earlier signals of peaks and troughs in the inflation cycle.
    Lakshman’s piece runs with an argument that my friend John Vogel wrote about this morning, highlighting another piece of research. I’ve been arguing for years that the world is basically in a long-term deflationary trend, despite all the monetary intervention and money printing. It’s a bit difficult to measure, but the cost of producing goods is dropping. Which means that the cost of living will continue to fall – at least as far as purchasing goods is concerned (as opposed to buying services like healthcare and education). As John writes (somewhat controversially):

    This post was published at Mauldin Economics on MAY 24, 2017.

  • Does the World End in Fire or Ice? Thoughts on Japan and the Inflation/Deflation Debate

    Japan has managed to offset decades of deflationary dynamics, but at a cost that is hidden beneath the surface of apparent stability. Do we implode in a deflationary death spiral (ice) or in an inflationary death spiral (fire)? Debating the question has been a popular parlor game for years, with Eric Janszen’s 1999 Ka-Poom Deflation/Inflation Theory often anchoring the discussion. I invite everyone interested in the debate to read Janszen’s reasoning and prediction of a deflationary spiral that then triggers a monstrous inflationary response from central banks/states desperate to prop up their faltering status quo.

    This post was published at Charles Hugh Smith on MONDAY, MAY 22, 2017.

  • BofA Finally Asks “Is The Tech Bubble Happening Again?”

    While not nearly in the same ballpark as what is taking place right now with bitcoin, and its various alt-coin peers, the ~30% YTD move higher in tech stocks has been just as impressive, and is beginning to result in warnings of “deja vu” among at least among some bank analysts. One such growing skeptic, is BofA’s Michael Hartnett who writes that US growth stocks have just surpassed the 2000 ‘bubble’ highs vs global value stocks and wonders if “the [next] tech bubble has started.”
    Asking rhetorically ‘Alexa, how high can markets fly?’ Hartnett writes that 2017 has seen big global stock (10%) and bond gains (4%), as well as the dramatic resumption of a bullish ‘deflation’ trade. Leadership in stock markets has reverted to the ‘growth’ theme, while leadership in bonds has reverted to the ‘yield’ theme. For example:
    Nasdaq Internet index annualizing a 80% total return CCC rated junk bonds annualizing an 18% gain, while EM sovereign bonds (EMGB) annualizing a 17% gain. Pointing out something we showed one month ago, namely that in a world awash with central bank liquidity “nothing matters”, Hartnett laments that “the lack of tax reform, lack of strong economic growth, no oil recovery, more geopolitical tension, China credit fears, none of it has mattered thanks to the ongoing central bank ‘Liquidity Supernova’: central banks have purchased a whopping $1.1tn of asset YTD.”

    This post was published at Zero Hedge on May 22, 2017.

  • How Will The ‘GREAT DEFLATION’ Impact Gold & The Dollar?

    The coming GREAT DEFLATION will impact the value of Gold and the Dollar much differently than what most analysts are forecasting. Unfortunately, most analysts do not understand the true underlying value of gold or the U. S. Dollar, because they base their forecasts on information that is inaccurate, flawed or imprecise.
    This is due to two faulty theories:
    monetary science supply-demand market forces While some aspects of monetary science and supply and demand forces do impact the prices of goods and services (on a short-term basis), the most important factor, ENERGY, is totally overlooked. You will never hear Peter Schiff include energy when he talks about the Federal Reserve, Commercial Banks, money printing or debt. Schiff, like most analysts, is stuck on studying superficial monetary data that does not get to the ROOT OF THE PROBLEM.
    Furthermore, the majority of folks who believe in the Austrian School of economics, also fail to incorporate ENERGY into their analysis. For some strange reason, most analysts believe the world is run by the ENERGY TOOTH FAIRY (term by Louis Arnoux). Without cheap and abundant energy, monetary science and supply-demand forces are worthless.

    This post was published at SRSrocco Report on MAY 18, 2017.

  • The Germans Are Coming… And Their Groceries Will Cost Up To 50% Less Than Wal-Mart

    Back in February we reported that as America’s deflationary wave spread through the grocery store supply chain, the scramble for America’s bottom dollar was on, and it prompted America’s largest low-cost retailer Wal-Mart to not only cut prices, but to squeeze suppliers in a stealthy war for market share and maximizing profits, a scramble for market share which is oddly reminiscent of the OPEC 2014 price fiasco and is certain to unleash a deflationary shock across wide portions of the US economy.
    As Reuters reported at the time, Wal-Mart had been running a “price-comparison” test in at least 1,200 U. S. stores and squeezing packaged goods suppliers in a bid to close a pricing gap with German-based discount grocery chain Aldi and domestic rivals like Kroger. Citing vendor sources, Reuters said that Wal-Mart launched the price test across 11 Midwest and Southeastern states such as Iowa, Illinois and Florida, focusing on price competition in the grocery business that accounts for 56% of the company’s revenue.

    This post was published at Zero Hedge on May 18, 2017.