Guest Post by EWI
As early as 2011, our analysis warned that Europe’s deflation was coming — here’s why
For the economies of Europe, the past few months have felt like one long ice-bucket challenge that never ends: A perpetual state of shock induced by the bone-chilling fact that deflation
“…has become a reality in many European countries.” (Oct. 24, New York Times)
At last count, eight European nations are now in outright deflation, including:
Guest Post by Steve Hochberg and Pete Kendall, Elliott Wave International
Deflation Rearing its Ugly Head in Subtle and Not-So-Subtle Ways Around the Globe
The following article was adapted with permission from the November 2014 issue of The Elliott Wave Financial Forecast, a publication from Elliott Wave International, the world’s largest market forecasting firm. Follow this link for the complete article.
According to the latest figures, deflation is now perched on China’s doorstep.
In September, China’s consumer price index was up 1.6%, but its producer price index fell 1.8%. The CPI increase was its lowest since 2010.
Economic growth is also receding. It’s hard to pinpoint the exact figures, because Chinese economic data is notoriously sketchy. But in September, demand for electric power, a “bellwether for China economic activity,” fell 8.4% from the prior month, the second straight monthly decline.
“Deflation is the real risk in China,” stated the chief economist at a Hong Kong bank.
In Europe, deflation is no longer a possible risk; it’s reality.
In September, eleven of fifteen European Union members experienced lower goods prices, and the latest quarter-over-quarter Eurozone growth in real GDP is zero. The next chart shows the Eurostat Eurozone year-over-year change in goods prices, which is -0.3% in September.
Follow this link to continue reading about the latest deflation figures from the U.S. >>
Guest Post by Michael Ashton
There are many funny stories out about disinflation these days. The meme has gotten amazing momentum, even more than it usually does at this time of year (see my post last month, “Seasonal Allergies“). One of the most amusing has been the idea that the decision by the Bank of Japan to greatly increase its quantitative easing would be disinflationary in the U.S., because the yen would decline so sharply against the dollar, and dollar strength is generally assumed to be disinflationary.
The misunderstanding of the dollar effect is amazing, considering how easy it is to disprove. Sure, I understand the alarm at the dollar’s recent robust strength. Of course, such a large and rapid move must be disinflationary, right? Because who could forget the inflationary spiral of 2002-2008 in this country, when the value of the dollar fell 25%?
Guest Post by Tom McClellan
October 24, 2014
I cannot believe the volume of the news stories I am seeing in the financial media, with people worrying about impending deflation. And as any card-carrying contrarian knows, when a topic gets too popular, you are near a turning point.
As crude oil continues down today we are presented with a perfect opportunity to review why gold mining fundamentals can IMPROVE in a rising US dollar atmosphere. So many people run the equation through their heads: USD Strong = Run Away!
Guest Post by EWI
Europe: The ONE Economic Comparison That Must Not Be Named… Was Just Named
It’s happened. The one economic comparison Europe has dreaded more than any other; the name that’s akin to Lord Voldemort for investors has been uttered: “deflation.”
And it’s not just “deflation.” You can still spin that term in a positive light if you get creative enough. Say, for example,
“Falling prices during deflation actually encourage consumers to spend.”
But once you add the following two very distinct words, there’s no way to turn that frown upside down. And those words are “Japan-style” deflation.
Well, the inflation is going on globally 24/7, but it is the manifestations or effects of it that 99% of people care about. I’ll tell you what I care about. I care about the cost of my heating oil going down for one thing. And for another, I don’t much care about the price of the gold I may or may not have . So all things being equal, I’ll take declining prices for $1000, Alex.
The TIP-TLT inflation gauge has bounced a little in line with Treasury yields, and if it were to break the downtrend line recent trends in other inflation sensitive items might get a bid. But as of this moment, TIP-TLT is in a downtrend and thus, so remains the entire ‘inflation trade’. It’s not just gold, guys… are they manipulating oil, grains, uranium, REE’s, coal, platinum and now palladium and base metals too?
I just bought some T bonds after yields ramped over the last couple of weeks with the idea that recent trends will hold and inflation will remain muted for a while. My personal investment stance has little to do with inflation hysterics. And that includes my interest in the gold mining sector, which is not for inflationary reasons but is also currently compromised by incomplete fundamentals, especially in the drubbing gold is taking in ratio to the stock market.
If TIP-TLT breaks trend and starts to rise, then we can talk ‘inflation trade’.
It is rather obvious that the Silver-Gold ratio (SGR) will need to rise for any sort of inflation trade to whip up. I think we can get a bounce in commodities here because they are over sold, Uncle Buck is over bought and I might add, UUP hit the upside target of 22.10 measured off its bullish pattern. Beyond a trade however, the USD still looks bullish and commodities, not so much.
I found this old chart that tells the story of a declining SGR (post-2011) and a commodity index right in line with its dis-inflationary message. In this environment Goldilocks has lived quite comfortably and kept the stock market on track.
Three options here…
- A little inflation phase whips up and beaten down commodities and precious metals (led by silver) out perform stocks or…
- The whole mess continues to drop and dis-inflation turns to something more impulsive, taking stocks with it.
- The fairy tale goes on and on into perpetuity, with silver gently under performing gold, inflation expectations gently declining… and they all lived happily ever after. Nite nite little dreamer.
And two of the above are viable.
No matter the debates over inflation vs. deflation, increasing employment vs. sound monetary policy or systemic health vs. fragility (and whatever else is flying around in Jackson Hole this week), the CPI marches onward and upward. That is the system and it is predicated on creating enough money out of thin air while inflation signals are (somehow) held at bay.
The Straw Man* in this argument lives in the idea that inflation is not always destructive, that inflation can be used for good and honed, massaged and targeted just right to achieve positive ends to defeat the curse of deflation that is surely just around the next corner. Currently, the Straw Man is supported by the reality of the moment, which includes long-term Treasury yields remaining in their long-term secular down trend.
Indeed, right here at this very site was displayed much doubt about the promotion having to do with the “Great Rotation” out of bonds and into stocks (i.e. that the yield would break the red dotted EMA 100 this time). We noted it right at that last red arrow on the Continuum© below. Now, with commodity indexes right at critical support and precious metals not far from their own, the time is now if a match is going to be put to that dry old Straw Man and silver is going to out perform gold, inflation expectations barometers (TIPS vs. unprotected T bonds) are going to turn up and the Continuum is going to find support.