Friday, September 17, 2010

Deflation again a no-show

Once again deflation has failed to show up in the numbers—it's the dog that didn't bark. I think the equity rally we've seen so far this month has been all about deflation failing to show up and a double-dip recession failing to materialize. The market didn't need good news to rally, it just need the absence of bad news. In other words, the market was priced to the expectation that the news would be bad, and when it wasn't, the market had to reprice upwards. Imagine what might happen if the news were to actually turn positive ...

Then again, perhaps the market is up because the odds of Congress extending the Bush tax cuts are improving.

Whatever the case, it looks like the CPI numbers have seen the low, at least for now. On a 3-month annualized basis, both the headline and the core CPI measures are up more than the year over year numbers (1.7% and 1.4%, respectively).

Meanwhile, corporations continue to make money, and many of them continue to report surprisingly strong profits. Commodity prices are rising across the board. Global trade is expanding. Credit spreads have narrowed significantly and default rates are coming down. Monetary policy all over the world is accommodative. Not one central bank or government is trying to rein in growth, while nearly all are trying (whether intelligently or not) to stimulate growth. Yet despite all these positive signs—and the absence of policy negatives—investors are so afraid of a double-dip recession that they are willing to forego all gains in order to enjoy the safety of cash.

I remain very bullish.


septizoniom said...

why would someone always bullish feel the need to trumpet it endlessly and tirelessly. why not just profit off of you convictions and spend the time you otherwise spend saying the same thing over and over on this blog helping the less fortunate?

Benjamin said...

You could also label this post "Inflation Again a No-Show," or "Inflation Deader Than Dodger Pennant Hopes."

The core rate is now around one percent, according to the chart Scott Grannis provided, and is sinking steadily. I like it when Grannis puts on the trend lines, which he mysteriously did not on this chart.

According to Boskin's landmark 1996 study, due to consumers and businesses constantly migrating to better or less-costly goods and services, the CPI probably overstates inflation by 0.5 percent. Given the incredibly rapid rate of new product introduction (thanks to the private sector, not government), and globalization, I bet 1 percent is the figure today.

I mean, my cell phone is cheaper and better than my old land lines, and I can call Thailand for a penny per minute using a calling card.

The National Federation of Independent Businesses (NFIB) reports their members are cutting, not raising prices, and have been for 21 months in a row.

The Fed, most say, should target inflation in the 2 percent range, probably higher in times of slack.

That means the Fed has the field wide-open to stimulate this economy, and is not minding its business or charter if it merely dithers away. But it is dithering away, following in the footsteps of Japan's central bank.

Japan's central bankers have pettifogged about inflation incessantly over the past two decades. They are now deep into deflation, have an economy that underperforms statist France (!), and have seen property and equity values plunge 75 percent. This is not a future I wish on my children.

I know that demons past possess people to worry about inflation at this juncture. But given the trendlines, I think deflation is a concern, and the equities markets do know what happened in Japan.

Benjamin said...

Well, this is how Reuters played it:

TREASURIES-Bond prices up on Fed easing hopes
Published September 17, 2010 | Reuters

By Ellen Freilich

NEW YORK (Reuters) - U.S. government securitiesprices rose Friday after a report that core U.S. consumer prices were flat in August appeared to offer the Federal Reserve even more leeway to ease monetary policy further.

A rise of 0.1 percent in the core Consumer Price Index had been forecast.

"This just gives the Fed room to do quantitative easing,"said John Canally, economist and investment strategist at LPLFinancial in Boston. "This should put downward pressure on bondyields."

The benchmark 10-year Treasury note was up 9/32in price, its yield falling to 2.73 percent from 2.76 percentThursday.

The 30-year bond , which fell 30/32 Thursday,was up 15/32 Friday after the CPI was released. Its yieldeased to 3.90 percent from 3.93 percent on Thursday.

The tendency toward soft numbers across almost every major component of the August CPI "leans in the direction of supporting further QE (quantitative easing) action," said AlanRuskin, global head of G10 FX strategy at Deutsche Bank in NewYork.

A Fed move toward more quantitative easing would reflectits mandate to promote maximum employment, stable prices, andmoderate long-term interest rates, he said.

Though the Fed has played down deflation risks, if theprice trends evident in August persist into the November andDecember Federal Open Market Committee (FOMC) meetings, theywill likely be used to support the case for a strategy to avert the risk of entrenched deflation, Ruskin said.

Public Library said...

Inflation averaged 7.6% from 1976 - 1985 while the DOW barely squeaked out a positive inflation-adjusted return and housing managed +5% based on median numbers.

So for a decade you really didn't earn a darn thing. Isn't the fiat paper system just the greatest thing ever!

John said...


Because this is what Scott is very good at. I would submit to you that Scott is providing a most valuable service, free of charge, to anyone who cares to pay attention. I have seen institutions and many large investors pay significant sums annually for this kind of data and its interpretation.

In my cheap opinion, this blog is an excellent example of selfless service to others. I speak only for myself, but I am most grateful for it.

Bill said...

septizoniom: Why would someone like you bother to read a blog such as this? And why dont you take your negative attitude and get lost.

ronrasch said...

Because Scott uses data to form and support his analysis and has built an outstanding forecast history he would likely attract some criticism.
I choose to ignore it. Thank you for your world class analysis, Scott and for a blog that celebrates freedom and free enterprise.

dave said...

I think it would be very useful if you would explain the difference between contraction and deflation for the folks who read your blog.

They seem to be confusing the two.