ARE WE ABOUT TO SINK INTO A DEFLATIONARY HOLE?
Despite a 50% rally in equities and the recent surge in gold prices there continue to be little to no signs of inflation in the economy. Consumer credit is still collapsing and banks are still hoarding cash. Perhaps most importantly, the velocity of money actually continues to decline:
SocGen’s Albert Edwards believs the ECRI’s leading indicators are forecasting a drastic and devastating decline in core inflation:
But it is collapsing core inflation that poses the greatest risk to the global economy going forward. We highlighted last week that core CPI inflation descends rapidly, with a lag, after the recession ends. If core US CPI inflation falls by around the 3% shown in the chart below over the next year, that will take the yoy rate to minus 1.5%! Hence the growth in nominal
quantities (e.g. corporate revenues) is set to see disappointing lower highs in this upturn after lower lows. And that, in our view, is just a prelude to a 2010 collapse into outright deflation.
All of this makes you wonder just how real the rally in stocks has been and how much of it has been purely based on government stimulus and the return of confidence – perhaps overconfidence.
Source: SocGen
TPC, this is purely something I read on some conspiracy web site and I know I shall get a 1 star rating for this comment…BUT…there was a guy in like mid-2007 who said that the illuminati (people in charge) is going to crash markets and oil prices then things will rise again and then they will crash them again. Something about establishing a new world order and hurting the arabs and russians.
It sounds crazy…I mean, I remember hearing these conspiracy theorists go on and on about a new world currency in 2003! I thought it would be impossible. Now they are talking about a new currency almost daily…
Something is up. Someone wants to change the way things are and how things will be. Go on give me 1 star
I don’t buy all these prognostications about inflation or deflation. Let’s face it, governments can create either one if it desires. Even in a normal recession there has alwways been deflation in salaries and inflation in some assets. Even in a great economic triumph there has been deflation in assets (oil, computers) and inflation in salaries. We are likely to have deflation in US salaries and non-productive US assets (houses) … this is long delayed as emerging markets have been trying to export salary deflation for 20 years since the fall of the Wall (too many smart Indians and Romanians) … now it will accelerate. You will see inflation in commodities, global assets, and enduring global business franchises. Can you just imagine what will happen when India and China are deregulated? Then they will start exporting inflation and they will be joking about how cheap US workers are undercutting their margins!
jt26- Inflation or deflation has nothing to do with asset prices. It has everything to do with the money supply and the prices of goods and services. An increase in the money supply limits the ability of an economy to expand without higher prices for goods and services.
Asset prices rise and fall on their own accord. Granted, the extreme money printing of late may flow into the markets (as it has), but this is a symptom of an increase of the money supply, not inflation itself.
@ James…i’ll take 1 star too…i heard the same thing…the extreme irrationality with the way the market’s are behaving i’m not sure i’m so easy to dismiss such wild theories…(btw i think the interview was w/ Aaron Russo..)
@ndmaster – agree 100%
I agree with cvienne to a certain extent. This type of data, while interesting, can be interpreted multiple ways. Also it doesn’t go back over a long enough time to make it very meaningful, in my opinion. Furthermore, it doesn’t include any deflationary time periods like the one we are currently going through.
Having said that, I do feel that it is going to be much more difficult than it was in 2007 and 2008 to make money on the short side going forward because of all the govt intervention in the markets. I instead feel that a safer area to invest in is gold related assets, which should continue to do well given the Fed’s stance on avoiding deflation at all costs. There are some good articles at http://www.goldalert.com that discuss the prospects for the gold price in light of the government’s money printing efforts, and the inflationary consequences that may develop as a result of these efforts.
Otter, I gave you 5 stars! Anyway, we are so easy to dismiss conspiracy theorists but I go on a message board (abovetopsecret) and they were talking about a new currency and financial chaos long before anyone else was. Conspiracy theorists have been talking about a new world currency for about 20 years now. And now the UN, China, Russia and everyone else wants a “new reserve currency” and also China wants the IMF to be involved.
“Let’s face it, governments can create either one if it desires.”
This is a totally misguided belief by both investors and governments. Nothing cures price like price. It is the decision and buying habits of the populace that actually determine inflation or deflation through purchasing habits.
Its the people who decide. Not idiotic governemnets.