Is it time to talk about the “D” word?
You know, deflation.
I know that inflation has been and continues to be the big worry. And that’s only logical since you’d figure that with the Federal Reserve, the European Central Bank, the Bank of Japan and other global central banks pouring money into the financial system that we will have to see inflation at some point. And I think that continues to be a real danger: At some point all that monetary stimulus will result in across-the-board asset price inflation (in contrast to the selective asset inflation we’re seeing now in areas such as residential real estate in China) and at some point all that central bank cash will start pushing up priced in general.
But we’re not at that “some point” yet. It looks like first we’ll go through a period where the trend is, surprisingly, towards deflation. Not across-the-board. I don’t think we’re looking at a global equivalent of the Japanese experience of the last 15 years where prices in general fall and then fall. But we are likely to see strong deflationary trends in huge hunks of the global economy and the trends will be strong enough so that stock prices—and investors—will notice.
Another surprise from the global financial crisis and the unprecedented experiments that global central banks are running an attempt to create a sustained recovery? You bet.
Here’s what this period of deflation will look like and why it has made this unexpected appearance. Read more
It puzzles a lot of you I know from your emails and your posts on my sites. Frankly, it puzzles me. And I’d say that anyone who says this doesn’t puzzle them has more ego than sense.
The world’s central banks have flooded the global financial markets with cash—and they’re still hooking up more and bigger hoses. The Bank of Japan alone now promises to add $80 billion to the global money supply each month.
And yet there’s no inflation. There’s no sign of inflation. Investors aren’t afraid of inflation. And inflation hedges such as gold are sinking like a stone.
Does this make any sense?
You can find a potential key to unlocking this puzzle in The Vapors 1980 hit “I’m turning Japanese I really think so.”
Let’s start by trying to understand the logic of the Japanese market at the moment. Read more
Remember a month ago when unexpectedly strong inflation numbers for February raised fears that the People’s Bank of China would start to tighten to fight inflation? Those fears took a substantial bite out of Chinese stocks, calling a halt to the rally that had begun in December.
Well, never mind.
Inflation in China rose at only a 2.1% annual rate in March, well below the 2.5% rate expected by economists surveyed by Bloomberg and even further below the 3.2% annual rate reported for February. Turns out that Lunar New Year holiday spending, which always temporarily raises food costs, was at work again this year. With the passing of February’s holiday period food costs and the inflation rate have dropped back to well below the government’s 3.5% inflation target for 2013.
Food prices climbed just 2.7% in March year over year, a big drop from the 6% rate of food inflation in February.
Producer prices, a measure of how much inflation might be in the pipeline, dropped 1.9% from a year earlier. That was the 13th straight decline in producer prices.
China’s inflation rate rose just 2.6% in 2012, which led the government to lower its target for 2013 to 3.5% from 2012’s 4%
Investors can expect a torrent of economic data from China over the next week. Read more
This morning’s U.S. inflation numbers are good news if you live in the alternative reality called the financial markets. However, if you live in the real world—you know the one where you buy things and have to make income and outgo match each month—the inflation news was remarkably bad.
The headline consumer price index climbed 0.7% in February. That’s the biggest jump in almost four years. It’s also a significant increase from January and December when headline inflation was flat. Economists had expected an increase of 0.5% for the month.
Core inflation, the number the Federal Reserve and financial markets watch, presented a much better picture. The core inflation rate, which excludes volatile food and energy costs, rose just 0.2% in February. That was actually a drop from the 0.3% increase in core inflation in January. The February core inflation number exactly matched expectations among economists surveyed by Briefing.com.
Why the big difference in the headline and core inflation rates? Two guesses—food or energy—and the first guess doesn’t count.
It sure wasn’t the result of soaring food prices. Food prices rose just 0.1% in February.
So it must have been energy, right? Yep, energy prices climbed 5.4% in February (after falling for three consecutive months) on a huge 9.1% increase in gasoline prices.
In financial world all this is reasonably good news. The core inflation measures the Fed watches showed no signs that core inflation might be on the upswing or that inflation expectations might be rising. Nothing in these numbers to suggest that the Federal Reserve, scheduled to meet next week, should consider ending its monthly $85 billion program of quantitative easing early. That’s especially true because the most likely explanation for the increase in gasoline prices—soaring prices for the credits that U.S. refineries buy so they don’t have to blend quite so much corn-based ethanol into their gasoline—can be passed off as a short-term technical problem.
On the other hand, in the real world, these inflation numbers are bad news. Read more
If you need to sell papers, you splash headlines like “Brits to leave European Union over horsemeat in lasagna” across your front page even if they’re total exaggerations.
When Wall Street wants to flog stocks, it runs out stories like “Dow Jones Average hits all time high” even if the story doesn’t mean what Wall Street wants the average investor to think it means.
So, yes, the Dow Jones Industrial Average hit an all time record high price on Monday when it briefly moved above 14,448. The Dow Transportation Average and the Russell 1000 large cap index and the Russell 3000 small cap index have all hit all time peak prices. The Standard & Poor’s 500 stock index is within 1% of its all time high price set in 2007.
I can think of four reasons why the “all-time high price” recorded yesterday doesn’t mean what Wall Street and the headlines say it means. Read more