What You Ought To Know About Global Deflation

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Despite currency wars, zero interest rates and world central banks outright monetization, deflation is not going away. Globally. Case and point…..

Deflation is not bad. Well, unless your economy is leveraged to the hilt and you have to rely on low interest rates and money printing to wiggle your way out of it. As is the case with most, if not all, global economies.

Can anything be done to prevent deflation at this juncture?

Sure, an outright debt and currency monetization. Something the FED has been trying to do for quite some time. Something that they have failed to do despite introducing a $1 Trillion QE and keeping interest rates at zero for way to long. That is not to say that they won’t be successful in the future, but rather, to suggest that blatant currency destruction is the only viable option they have left.

In other words, there is no possible outcome where this ends well. And while they might be successful at keeping deflation at bay for a little bit longer, eventually it will overwhelm the global economy. Just take a look at Japan and you will have a fairly good idea about how this ends.

What You Ought To Know About Global Deflation Google

March 4, 2015March 4, 2015

As Global Deflation Accelerates, What Happens Next?

deflation is here investwithalex2

Despite currency wars, zero interest rates and world central banks outright monetization, deflation is not going away. Globally. Case and point…..

Can anything be done to prevent deflation at this juncture?

As Global Deflation Accelerates, What Happens Next? Google

April 2, 2014April 2, 2014

Brazil’s Inflation Accelerates. Pick Your Poison

While the Central Bankers in the US are doing everything in their power to avoid deflation, their Brazilian counterparts can’t wrap their heads around Brazil’s accelerating inflation. In fact, the Brazilian Central Bank is widely expected to raise its benchmark Selic rate to a whopping 11% on Wednesday to try and stop accelerating 6.1% inflation. An excellent and a must read article from the WSJ in regards to Brazil if you follow their economy/markets. While my mathematical and timing work shows that deflation and inflation is cyclical in nature (as opposed to fundamental), the WSJ article below brings out a number of important points.

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WSJ Reports: With Rates Poised to Hit 11%, Brazil Offers Lessons for the World

The eyes of the world should be focused on Brazil right now — and not just because it will host the World Cup in two months’ time.

It’s also because Brazil’s struggle with rising prices is a reminder that even in this era of global disinflation, flawed policies can years later saddle countries with an intractable inflation problem.

The Brazilian Central Bank is widely expected to raise its benchmark Selic rate to a whopping 11% on Wednesday. It must do so because inflation won’t let up.

Contrast that with the European Central Bank, which Thursday will weigh whether to cut the rate its sets on banks’ deposits into negative territory, all because of data like Wednesday’s euro-zone producer price index, which was down 1.7% on the year.

Brazil is an odd man out in a world where the biggest economies are more worried about deflation than inflation. Despite having jacked up the Selic from 7.5% in the first half of 2013, the central bank last month had to increase its full-year 2014 inflation forecast to 6.1% from 5.6%. That’s well above the midpoint of its target range of 2.5% to 6.5%.

Brazilian society is paying the price for this. The economy has barely grown over the past two years.

It all seems unfair. In most countries with runaway inflation–like Argentina or Venezuela–the blame lies with a central bank that’s manipulated by growth-obsessed governments to keep real, inflation-adjusted interest rates negative. But Brazil’s central bank has for the most part been vigilant. Its rates are even higher than crisis-wracked Turkey’s, where the central bank hiked a key rate to 10% from 4.5% in January to stem outflows from its currency, the lira — both in absolute terms and in real terms.

The roots of Brazil’s problem are mostly structural. Brazilian wages and other contracts are often indexed to inflation–legacy of the hyperinflation of the 1980s and 1990s. That indexing creates a vicious cycle of tit-for-tat price increases to keep ahead of rising costs. There has been discussion for years about how to reduce indexation in the economy, but it’s hard to do so because no one wants to be the first to give up gains.

There’s also insufficient flexibility in the labor market. Despite sub-2% GDP growth for the past three years, unemployment was last cited at 5.1% in February and got as low as 4.3% in December. U.S. and European policymakers would kill for such unemployment numbers. The problem is they partly reflect rigidities. It is difficult to fire workers, which in turn leads to wage inflation.

Add into the mix some rampant government spending attached to poorly budgeted public-works projects — for the World Cup, the 2016 Olympics and port upgrades to enhance the exporting infrastructure — and you have a recipe for inflation.

This is far from Brazil’s hyperinflationary past, when the central bank printed money to finance profligate governments. But even in an era of seemingly responsible monetary policy, the central bank is in a bind.

Self-fulfilling expectations are now entrenched among the population, which believes that inflation — and its corollary, high interest rates — will continue. Business models are built around returns to be derived from those higher rates. There’s also a dependence on funds from abroad as speculators borrow at near-zero rates in dollars, euros or yen andplow that money into far higher-yielding Brazilian reals. This inflow keeps important price-setting sectors of the economy, such as real estate and rents, in a frothy state. It has also begun to bolster what had been a stubbornly weak real, now up 8% versus the dollar from early February — and that’s not good news for the country’s commodity exporters, which have struggled because of a slowdown in China, their biggest market.

Four years ago, the government moved to curtail these dangerous “hot money” inflows by raising taxes on foreign-exchange rates. But it backfired, starving Brazil of foreign capital right when a global slowdown coincided with an exodus from emerging markets as the U.S. Federal Reserve started talking about easing back on monetary stimulus. The policy also gave the central bank an excuse to lower rates, which meant that inflation crept back into the economy.

For those sins — modest as they are — Brazil is now paying the price. The solution does not lie with the Brazilian central bank, but with a government that needs to modernize its labor laws, rein in fiscal excess and dismantle indexation.

How well it achieves that could provide a valuable lesson for others. Once the stimulus policies employed in the advanced countries finally generate the inflation they seek, they will need to ensure that regulations and other structural components of their economies don’t create inefficiencies that breed Brazil-like problems down the road.

March 18, 2014

Inflation….What Inflation?

Core inflation dropped to a 10 Year low of 1.1% Y-O-Y or 0.1% in February. Bad news for Gold Bugs expecting Zimbabwe type of an inflationary environment. I have been a strong proponent, since about 2002, that we are in a deflationary environment as opposed to an inflationary one. Massive bad debt we have in our system must be liquidated, which is deflationary. The reason we see resemblance of inflation is due purely to FED’s efforts.

By pumping a tremendous amount of credit into our financial system the FED was able to create an illusion of inflation. However, most of this inflation went right into the stock market and the real estate market. Creating massive bubbles in both today and in 2007. Today’s low CPI is another confirmation of that. As the FED slows QE even further it won’t be long before net positive CPI number turns into a negative one.

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Inflation….What Inflation? Google

The Labor Department has released its latest report on retail inflation via the Consumer Price Index (CPI). Prices in February were up 0.1% on the headline CPI. Core inflation, excluding food and energy, rose by 0.1% as well. Bloomberg had estimates of 0.1% on the headline and 0.1% on the core inflation reading.

The end result is that prices were up only 1.1% from a year ago. What stands out here is that this is the weakest 12-month gain in about six months, but furthermore it remains well under the Federal Reserve’s inflation target of 2% — the same day that an FOMC meeting is starting. The core inflation was up by 1.6% from a year ago.

Food prices were up by 0.4%, but energy prices were down by -0.5%. The gain in food was the most in over two years, which may be partly driven by that West Coast drought. Lower gasoline prices around the country offset higher heating bills in the Midwest and Northeast.

Stock futures surged Tuesday morning on Putin’s comments that he does not want to enter other parts of Ukraine. Tuesday’s CPI report has not taken any noticeable gains away.

March 10, 2014March 10, 2014

Massive Inflation About To Hit?

In your dreams…. As CNBC Report below indicates “Perfect Storm For Inflation Could Rock The Market”. It shocks me how incompetent our financial media is. This should not come as a surprise since a pretty face, fake boobs and a good quoting/teleprompter reading skills seem to be the only job requirements.

We are already having massive inflation you mindless monkeys of CNBC. However, instead showing up in wages, goods or commodities it is showing up in the stock market and the real estate market. The FEDs have been pumping a tremendous amount of credit into our financial system since 2008, hoping it would spur inflation in every sector of the economy. To their surprise, that didn’t work. Instead, the money flowed towards the stock market and other speculative endeavors. Blowing up massive speculative bubbles in the process.

When the stock market continues its bear market of 2014-2017 you should see the evidence of the underlying deflation instead of inflation. Yes, we will eventually have massive inflation, but that day is way off in the future. First, a deflationary collapse is a must.

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Massive Inflation About To Hit? Google

Perfect storm for inflation could rock the market

As investors cheer the good news for job growth that came with the February employment report, they may be overlooking a troublesome dynamic: A tightening jobs market, in combination with rising commodity costs, could stir inflation, cutting into corporate profits and forcing the Federal Reserve to become more hawkish.

On Friday, the nonfarm payrolls measure showed an increase of 175,000 jobs in February, well above the weather-dampened expectations. And though the unemployment rate ticked up to 6.7 percent from 6.6, the broadest measure of unemployment, the U-6, dropped slightly from 12.7 percent to 12.6 percent—the lowest reading since it was at that level in November 2008.

Since the U-6 counts all unemployed workers, plus marginally attached workers and workers employed part-time for economic reasons, it could be a better measure of the remaining supply in the labor market. The decrease in the U-6 could thus indicate that the “slack” in the labor force—which allows companies to hire more workers without paying more—is decreasing. Once the slack is gone, wage inflation tends to follow.

“Measuring slack is not an easy thing, but an unemployment rate of 6.7 tells you there’s a lot less slack than there used to be,” said Peter Boockvar, chief market analyst at the Lindsey Group. “The idea that all of the people who dropped out of the labor market will magically come back just doesn’t make sense—particularly for the low-end worker who is now enjoying a lot of government benefits. Therefore, the labor market is getting tighter than the Fed thinks.”

As a result, “the inflation trend is going to start moving higher. It’s not a single event that will happen—it’s a process. But it’s definitely worth watching,” he said.

The other factor that could contribute to this trend is the recent rise in commodity prices. The CRB commodity index, a broad measure of prices, has risen some 10 percent this year. It’s at its highest level in over a year, due to tough agriculture conditions and winter weather issues that have sharply increased the prices of many commodities. More recently, the crisis in Ukraine seems to have boosted prices of commodities such as wheat and corn.

“Increasing commodity prices will drive a rise in inflation,” predicted Kathy Lien, managing director of FX strategy at BK Asset Management. “It’s a natural reaction to the recent growth as well as the geopolitical uncertainly that is happening in the global economy.”

A broad measure of inflation for the month of February will come on Friday, when PPI-FD is released. This recently revamped version of the Producer Price Index tracks changes in the “final demand” prices paid to producers for goods and services. And because it looks at inflation being experienced by producers, rather than consumers, it is considered an early gauge of the extent to which inflation will be experienced by consumers.

The consensus estimate is for the PPI to show a 0.2 percent month-over-month percentage change for February, while the PPI with food and energy stripped out is expected to come in at just 0.1 percent, according to FactSet.

“Even with the change in methodology, you’re going to start to see the commodity prices moves in these numbers, potentially,” Boockvar said.

Higher commodity prices and faster-than-expected wage growth are actually the two risk factors that legendary bull Jeremy Siegel pointed out in an interview Tuesday in CNBC’s “Futures Now.” He warned that the labor market “could be tighter than we think,” which will create a serious dent in corporate earnings, given that companies will need to pay more to their workers. And the Wharton professor cautioned that if commodity prices continue to rise, then the Fed will need to rethink its dovish activities.

After all, the continuation of the Fed’s shrinking quantitative easing program and maintenance of its ultra-low federal funds target rate are premised on low inflation. One major concern about stimulative policies is always that they could spur inflation if used irresponsibly.

In fact, if inflation rises to 2 percent and the headline unemployment rate drops by just another 0.2 percent (to 6.5), then both parts of the Fed’s quantitative guidance regarding what will make the central bank raise the federal funds rate target will be satisfied. And a higher federal funds rate will likely mean higher bond yields across the board, potentially making equities less attractive by comparison.

“The broad consensus is that there’s no inflation. But if there’s one thing that mucks up Fed policy, it’s a faster-than-expected uptick in inflation,” Boockvar said. “If that happens, the Fed isn’t just behind the curve—they’re behind 10 curves.”

That’s why Brian Stutland of the Stutland Volatility Group will be watching PPI so closely, especially as it relates to gold, which is considered an inflation hedge.

“If you see the PPI number start to creep up, that’s maybe the only reason I start to become more bullish about gold,” Stutland said.

However, he adds that if the measure comes in low, as he expects, “that’s going to give me more confidence that the stock market is the place to invest right now.”

February 6, 2014February 6, 2014

How To Make A Killing In A Deflationary Inflation

Today’s 5-10 Minute Podcast Covers The Following Topics:

Topic: Inflation or Deflation Over The Next 5 Years? How To Allocate Capital To Make A Killing -OR- How To Make A Killing In A Deflationary Inflation.

Inflation or Deflation….what will win over the next 5 years?
Why it is incredibly important for your overall portfolio.
How you should position yourself now.
What steps to take to make a killing over the next 5 years.

Please tweet me your questions @investwithalex

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February 6, 2014February 6, 2014

Revealed: Who Will Win The Inflation-Deflation Battle And Make A Killing

Business Insider Writes: BILL GROSS ‘Be Careful

In his February investment letter, Bill Gross, the manager of the biggest bond fund around at PIMCO, warns investors to “be careful.”

Why? Gross believes the rally has been fueled by ever-expanding debt.

Now, due to a combination of smaller government deficits and tapering of the Federal Reserve’s quantitative easing program, the rise in debt is slowing, which Gross argues is bad news for risky assets like stocks and good news for bonds.

“Bull markets are either caused by or accompanied by credit expansion. With credit growth slowing due in part to lower government deficits, and QE now tapering which will slow velocity, the U.S. and other similarly credit-based economies may find that future growth is not as robust as the IMF and other model-driven forecasters might assume. Perhaps the whisper word of “deflation” at Davos these past few weeks was a reflection of that. If so, high quality bonds will continue to be well bid and risk assets may lose some luster.”

Read The Rest Of The Article Here

Bill Gross is, of course, right on the money.

The one question that gets left behind is whether or not we will have inflation or deflation over the next 5-10 years. That is an incredibly important question. A correct answer should greatly impact your overall portfolio allocation over the next couple years. Getting it right would mean outperformance, getting it wrong would only yield severe losses.

Gold bugs, inflationist and hyper inflationist would lead you to believe that hyperinflation is just around the corner, your dollars won’t be worth the paper they are printed on and that gold is about to surge to $100,000 an ounce.

Deflationist would lead you to believe that we are on a verge of an economic collapse, credit collapse, market collapse, great depression and that all asset prices are likely to decline to the tune of 90-95% over the next few years. If this scenario does indeed come true, it would be prudent to invest into a stockpile of canned food, a small arsenal of guns and a container load of ammo.

Who is right?

No one. The reality is somewhere in the middle. Technically we are in a deflationary environment due to a massive credit expansion and the subsequent collapse of that credit throughout our economic system. Basically, we are still feeling the impact of 2007-09 credit defaults, with more defaults coming up over the next few years (due to upcoming recession).

On the other hand, the FEDs have been printing money like crazy over the last couple of years and distributing it though various channels of the economy. Mostly through financial institutions, speculation and asset price appreciation.

That is why we are seeing the evidence of both inflation and deflation throughout the economy. Which one will win out over the next couple of years and how to invest in such an environment?

Please listen to today’s podcast in order to get your answer.

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Revealed: Who Will Win The Inflation Deflation Battle And Make A Killing Google

September 17, 2013September 17, 2013

Inflation or Deflation. What’s Next For The US?

Bloomberg Writes: Japanese Ask, What’s Wrong With a Little Deflation?

As Haruhiko Kuroda tries to spur Japan (JGDPAGDP)’s inflation rate, he faces a worrying question: What if his Bank of Japan predecessor was right about why he will fail?

In June 2011, then-BOJ Governor Masaaki Shirakawa faced extreme pressure to double the monetary base, a step Kuroda took just days after replacing him in March. When Shirakawa, a University of Chicago-trained economist, was asked why he’d refused to budge, he offered a surprising excuse: Japan’s aging population, whose fixed incomes would be eaten away by rising prices. Politicians thought the rationale was a copout. Shinzo Abe’s first act as prime minister was to dump Shirakawa.

“The only easy part is starting to print the money because it does not hurt anyone for the first year,” Schulz says. “But after that, when prices start to go up, it really depends on the view at that time: Will people only see the higher costs, or will they see the brighter future that the government is selling with its money? If they don’t, a turn in public opinion will stop the BOJ before expectations have changed enough to get the economy on an inflationary track.” Kuroda could yet prove his predecessor wrong, but he’s going to need help from his prime minister — and soon.

Read The Rest Of The Article Here

A superb article on deflation and I definitely recommend reading it in full.

I have been a proponent that the US has been in a deflationary environment since at least the early 2000’s. I know there are a lot of people running around screaming inflation, but we must first define what inflation and deflation is. While there are many definitions, mine is …..Inflation is expansion of credit, while deflation is contraction of credit. Simple as that.

The reason most people believe we are experiencing or will experience inflation and/or hyperinflation is because of FED’s massive infusion of credit into the system over the last 10 years. Without it, we would have already seen concrete evidence of deflation all over the place.

Here is the situation. Deflation is destruction of credit and subsequent decline of prices due to defaults, overcapacity and the self feeding trend it generates. We have already started the process of deflation in two very important areas as % of GDP. Financial and real estate sector in both 2000-2003 and 2007-2009.

However, due to the FED’s crazy insistence on inflation they did paper over any sign of deflation by infusing massive amounts of credit and money supply into the US Financial system. What you have to understand is that such a move didn’t fix anything, it only made things worse and the upcoming recession more severe. Now with velocity of bailout money slowing down, more defaults and deflation is unavoidable.

That is where we find ourselves today. So, will the US experience a Japan style deflation? Yes and No. I will talk about it in more detail in my future writings.

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