A Timely Lesson for Today’s Stock Market Investors

“The names may change, but the psychology remains the same.”
By Elliott Wave International

Have you ever compared chart patterns from history with financial markets today? Elliott Wave International can show you the unique value of doing exactly that.

Why?

Because patterns on market charts repeat themselves. It happens across the globe, regardless of time period. When a still-unfolding pattern in the present looks a lot like a chart from the past, the price action to come may well remain on that earlier path.

Which means you can anticipate what’s next. [Ed. note: this video link shows you an example]

As the book The Mania Chronicles (2009) by Peter Kendall and Robert Prechter says:

The names may change, but the psychology remains the same.

The Mania Chronicles is an account of the financial bubble between 1995 and 2008, and it illustrates the point with this September 2000 chart and commentary:

Since January [2000], the Elliott Wave Financial Forecast has been tracking the NASDAQ’s uncanny resemblance to the Japanese Nikkei-225 in 1989 and 1990. Now that it has fallen and bounced, it has acquired a look that is also very similar to the post-peak performance of the 1929 DJIA, the 1987 DJIA and the 1997 Hong Kong Hang Seng index.

In all cases, the manic final run to all-time highs was followed by an initial leg down that led to a three-wave countertrend rebound, the classic Elliott wave signature of a correction. Look closely, and you will notice that these rebounds usually start with a big up day (sometimes on a gap) that fools the bulls into thinking that a major bottom has been recorded. The rallies last mere days, though, and then prices turn down in a crash. The NASDAQ gapped higher off its May low at 3043 and then traced a three-wave move to the September 1 high of 4260. The decline since then has violated the trendline support that contained the entire countertrend rally.

…The clock is ticking for the start of the “cascading phase” of the pattern. Prices may rally briefly, but a severe decline is likely.

As we now know, the NASDAQ did cascade downward into 2002, with the entire 2000-2002 bear market consuming 78% of the index’s value.

Lately, Elliott Wave International has also been reviewing other chart formations with similarities to the present.

In July 2017, the Elliott Wave Financial Forecast showed this chart and said:

The chart shows [a] succession of tops. The bottom four panels show peaks in real estate, commodities and bonds since 2006, and an impending high in stocks. The topping sequence is similar to that which occurred during the last peak of Supercycle degree, wave (III) in 1929. The current top is a Grand Supercycle degree peak ….

 

Since we showed that chart in July 2017, yet another chart pattern surfaced in the stock market — and it’s eerily similar to 1929. EWI’s Robert Folsom reveals that pattern, in his Chart of the Day video titled “Believe Your Own Eyes: Ghost of a Stock Market Past in the Present.” Follow this link to watch the video.




An “Unprestigious” Preview of Debt Deflation

An “Unprestigious” Preview of Debt Deflation

By Elliott Wave International


Evidence: Your Bond Fund Is Riskier Than You Think

Debt deflation has taken down a huge multinational builder. Pitfalls in the bond market are growing too risky for bond investors to ignore. Learn what you need to know in a free, new report from EWI’s Murray Gunn — “Your Bond Fund: It’s Riskier Than You Think.”

Learn more and register for free!

This article was syndicated by Elliott Wave International and was originally published under the headline An “Unprestigious” Preview of Debt Deflation. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.




The Size Of The Financial Avalanche Coming Grows Larger

Inflation vs deflation. The true economic definition of “inflation” is the rate of increase in the money supply in excess of the rate of increase in wealth output. Inflation is monetary in nature. Rising prices are the manifestation of inflation. Someone I follow on Twitter posted an ingenious example from which to conceptualize the true concept of inflation using the game of Monopoly:

The players all start out with reasonable amounts of money to speculate on real estate. As the game proceeds, players collect $ 200 by simply passing Go and use this money to speculate on real estate. By the end of the game, only $ 500 dollar bills are worth anything, the whole thing blows up, and most players end up destitute. In a twist of irony, an original game board sells for about $ 50,000.

A fixed amount of real estate and continuously increasing money supply, with “passing Go” functioning as the game’s monetary printing press. The monopoly analogy is readily applied to the current real estate market. The Fed tossed roughly $ 2 trillion into the mortgage market, which in turn has fueled the greatest U.S. housing bubble in history. The most absurd example I saw last week is a 264 sq ft studio in Los Angeles listed on 10/26 for $ 550,000. The seller bought it a year ago for $ 335,000. This is the degree to which Fed money printing and easy access Government guaranteed mortgages have distorted the system.

Here is monetary inflation as it is showing up in the stock market and housing markets:

The graphic above shows rampant credit-induced monetary inflation. On the left, home prices nationally are measured by the Case Shiller index going back the 1980’s. On the right is the S&P 500 going back to 1930. According to the Fed, real median household income has increased 5% between 2008 and the present. In contrast, based on Case Shiller, home prices nationally have soared 34% in the same time period.  Expressed as a ratio of average price to average household income, home prices are, at all-time highs in the U.S. This is the manifestation of rampant inflation in credit availability enabled by the mortgage “QE.” This growth rate in money and credit supply has far exceeded the tiny growth rate in average household income since 2008.

The stock market reflects the monetary inflation of the G3 Central Banks, primarily, plus global Central Bank balance sheet expansion. Please note that “balance sheet expansion” is the politically polite term for “money printing.” The meteoric rise in stock prices have never been more disconnected from the negligible rate of growth in nominal GDP since 2008. Real GDP has been, arguably, negative if a realistic inflation rate were used in the Government’s GDP deflator.

Inflation is not showing up in the Government CPI report because the Government does not measure inflation. The Government’s basket of goods is constantly juggled in order to de-emphasize the rising cost of goods and services considered to be necessities. In addition to the increasing cost of necessities like gasoline, health insurance and food, inflation is showing up in monetary assets. This is because a large portion of the money printed remains “inside” the banking system as “excess reserves” held at the Fed by banks. This capital is transmitted as de fact money supply via the creation credit mechanisms in the various forms of debt and derivatives. The eventual asset sale avalanche grows larger by the day.

Do not believe for one split-second that the U.S. has reached some sort of plateau of economic nirvana that will self-perpetuate. To begin with, it would require another round of even more money printing just to sustain the current bubble level. Read the inflation example above if that idea is still not clear. In 1927, John Maynard Keynes stated, “we will not have any more crashes in our time.” In the October 16, 1929 issue of The New York Times, famous economist and investor, Irving Fisher, stated that “stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months.” Two weeks later the stock market crashed.

The above commentary is from last week’s Short Seller’s Journal. Speaking of the housing market, admittedly my homebuilder short positions are crawling up my pant-leg with fangs as the housing stocks have entered into the last stage of a parabolic “Roman candle” apex and burn-out. The homebuilders appear to be cheap relative to the SPX on a PE ratio basis – approximately an 18x average PE for homebuilders vs a 32x Case Shiller PE for the SPX.  However,  in relation to their underlying sales rate, earnings and balance sheet, the homebuilder stocks are more overvalued now than at the last peak in 2005.

While the homebuilders are are squeezing higher, I presented two “derivative” ideas in recent issues of the Short Seller’s Journal:  Zillow Group (ZG) at $ 50 in late June and Redfin (RDFN) at $ 28 in late September.  ZG just lost $ 40 today and RDFN is down to $ 21 (25% gain in 6 weeks). Both ZG and RDFN are “derivatives” to homebuilders because they derive most of their revenues from housing market-related ads, primarily real estate listings. Their revenues as such are “derived” from housing market sales activity. These stocks are overvalued outright. But as home sales volume declines, the revenue/income generating capability of the ZG/RDFN business model will evaporate quickly.  With home sales volume rolling over, the decline in the stock prices of ZG and RDFN relative to the “bubble squeeze” in homebuilder stocks validates my thesis.

If you want to learn more about opportunities to exploit this historically overvalued stock market and access fact-based market analysis, click here: Short Seller’s Journal info.

Investment Research Dynamics




Deflation Basics Series: The Quantity Theory of Money

Here’s our challenge.

In order to be aware of the investment pitfalls and opportunities that deflation can bring, we must first understand the basic elements of why it occurs. So our challenge is to try and make monetary economics, a subject that most people would find duller than watching paint dry on a wall, understandable and, dare I say it, fun! It’s a big ask but we like a test, and so here is the first in our Deflation Basics Series — The Quantity Theory of Money.

The Quantity Theory of Money (QTM for short) is the very essence of the true definition of inflation and deflation. You see, most people think of inflation and deflation as the rise and fall or prices when it is actually all about the rise and fall of the quantity of money.

The QTM has its origins in the 16th century and the writings of the Prussian polymath Nicolaus Copernicus as well as followers of the School of Salamanca such as Martín de Azpilcueta. As European nations looted the Americas for gold and silver, an increase in the price of goods in general was noted as the metals were brought back to the Old World. This observation, via the writings of, among others, John Locke, David Hume, John Stuart Mill and Ludwig von Mises, led to a link between the quantity of money in an economy and the level of the price of goods.

QTM is the cornerstone of monetarist economics which was largely developed by Milton Friedman, gaining popularity during the 1970s. Put simply, the Quantity Theory of Money can be expressed as the “Equation of Exchange”:

Formula

In plain speak, the amount of money in an economy multiplied by the number of times that money is used, equals the price of stuff bought multiplied by the amount of stuff bought.

Let’s take a simple example.

If an economy has $1,000 in total and that money is turned over 3 times during a month, total spending equals $3,000 that month. If the amount of stuff bought was 100 items, then the average price of each item would be $3,000 divided by 100 which equals $30.

formula2

We can re-arrange the Equation of Exchange to solve for the price level, P:

Formula3

Therefore, in our economy:

Formula4

Now let’s assume that, the next month, money supply increases from $1,000 to $2,000, with the velocity of money and the amount of stuff bought staying the same. What would be the effect on the average price level?

Formula5

Formula6

The average price level has gone up from $30 to $60. The average price of goods has gone up due to the inflation of the money supply.

The next month, the money supply decreases from $2,000 to $500, with the velocity of money and the amount of stuff bought staying the same. What would be the effect on the average price level now?

Formula 7

Formula8

The average price level has gone down from $60 to $15. The average price of goods has gone down due to the deflation of the money supply.

This basic example shows the relationship between the level of the money supply in an economy and the average level of prices. The catch comes, of course, with the old economics chestnut, the Latin phrase ceteris paribus (all other things being equal). In the ivory towers of academic economics all other things can remain equal, but in the real world, they don’t.

So our assumptions in the example above that the velocity of money remained at 3 and that the amount of stuff bought remained at 100 would have to be challenged. In fact, one of the main criticisms of the QTM is that the velocity of money does not remain constant and changes due to the vagaries of spending impulses. However, if money supply didn’t change but the velocity of money went down instead, the effect is the same — lower prices (assuming the amount of stuff bought remained the same that is!).

Monetarists in the 1980s thought that, by targeting money supply growth, the level of goods and service prices in an economy could be controlled. However, although there is a link between the general level of prices in an economy and the amount of money, it is not rigid, and prices can move up and down for a myriad of reasons.

Nevertheless, the general relationship in the Quantity Theory of Money stands. More money in an economy (inflation) tends to lead to higher prices and less money (deflation) tends to lead to lower prices.

What You Need to Know NOW About Protecting Yourself from Deflation

The best way to protect yourself from deflation is to first understand what it is. In this free, special report, you’ll learn about this unexpected risk and what it can do to your portfolio. You’ll also get 29 specific forecasts for stocks, real estate, gold and new cultural trends, to help you prepare and protect your wealth.

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Your Bond Fund: It’s Riskier Than You Think

Quantitative Easing (QE) changed the bond markets in ways many don’t realize. And now that QE is unwinding, investing in bonds comes with pitfalls that are too risky to overlook. This new resource from EWI’s Murray Gunn offers insights you don’t want to miss. Get your free report, Your Bond Fund: It’s Riskier Than You Think.

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This article was syndicated by Elliott Wave International and was originally published under the headline Deflation Basics Series: The Quantity Theory of Money. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.




What Happens When the Fed FINALLY Reduces Its $4.5 Trillion Balance Sheet?

So, there we have it. Deflation has started.

The Federal Reserve announced last month that they would start to reduce their $4.5 trillion balance sheet in October, thereby starting the process we call Quantitative Tightening (QT). As expected, they are aiming to do it gently and quietly, by not reinvesting bonds as they mature, starting with sums of around $6 billion of Treasuries and $4 billion in Mortgage-Backed Securities (MBS). The scale of non-reinvestment will gradually increase. Once in full swing, the Fed’s balance sheet could reduce by up to $150 billion each quarter.

Conventional analysis might conclude that the Fed’s balance sheet reduction (deflation) would be bad for US Treasuries and MBS — after all, those are the instruments not now being bought by the Fed. Notwithstanding the fact that we dismiss that sort of causality thinking anyway, we’re not conventional analysts, and take a different angle.

As the Insights column of our Interest Rates Pro Service alluded to last month, the Fed’s QE program has crowded out investors in the US Treasury space. The market supply of US Treasuries was reduced by the Fed’s program and so it forced bond investors to buy other instruments, such as corporate bonds. Now that more US Treasuries are going to be available for investment, those funds may be tempted to switch the corporate bonds they hold back into (“safer”) US Treasuries. The unintended consequence of QT, therefore, may well turn out to be a widening in corporate bond yield spreads.

So, what to look for? Our Bond Market Monitor tracks corporate bond spreads on a daily basis, so the first sign of stress can be seen there. We will be keeping an especially close eye on the trend of the Bloomberg Barclays Global Aggregate Credit index yield spread because, as our chart below shows, it may have found solid support at the old 2014 low.

Credit Index

Your Bond Fund: It’s Riskier Than You Think

Quantitative Easing (QE) changed the bond markets in ways many don’t realize. And now that QE is unwinding, investing in bonds comes with pitfalls that are too risky to overlook. This new resource from EWI’s Murray Gunn offers insights you don’t want to miss. Get your free report, Your Bond Fund: It’s Riskier Than You Think.

Get free, instant access

This article was syndicated by Elliott Wave International and was originally published under the headline What Happens When the Fed FINALLY Reduces Its $4.5 Trillion Balance Sheet?. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.




Why Oil Prices Can’t Bounce Very High; Expect Deflation Instead

Economists have given us a model of how prices and quantities of goods are supposed to interact.

Figure 1. From Wikipedia: The price P of a product is determined by a balance between production at each price (supply S) and the desires of those with purchasing power at each price (demand D). The diagram shows a positive shift in demand from D1 to D2, resulting in an increase in price (P) and quantity sold (Q) of the product.

Unfortunately, this model is woefully inadequate. It sort of works, until it doesn’t. If there is too little a product, higher prices and substitution are supposed to fix the problem. If there is too much, prices are supposed to fall, causing the higher-priced producers to drop out of the system.

This model doesn’t work with oil. If prices drop, as they have done since mid-2014, businesses don’t drop out. They often try to pump more. The plan is to try to make up for inadequate prices by increasing the volume of extraction. Of course, this doesn’t fix the problem. The hidden assumption is, of course, that eventually oil prices will again rise. When this happens, the expectation is that oil businesses will be able to make adequate profits. It is hoped that the system can again continue as in the past, perhaps at a lower volume of oil extraction, but with higher oil prices.

I doubt that this is what really will happen. Let me explain some of the issues involved.

[1] The economy is really a much more interlinked system than Figure 1 makes it appear.

Supply and demand for oil, and for many other products, are interlinked. If there is too little oil, the theory is that oil prices should rise, to encourage more production. But if there is too little oil, some would-be workers will be without jobs. For example, truck drivers may be without jobs, if there is no fuel for the vehicles they drive. Furthermore, some goods will not be delivered to their desired locations, leading to a loss of even more jobs (both at the manufacturing end of the goods, and at the sales end).

Ultimately, a lack of oil can be expected to reduce the availability of jobs that pay well. Digging in the ground with a stick to grow food is a job that is always around, with or without supplemental energy, but it doesn’t pay well!

Thus, the lack of oil really has a two-way pull:

(a) Higher prices, because of the shortage of oil and the desired products it produces.

(b) Lower prices, because of a shortage of jobs that pay adequate wages and the “demand” (really affordability) that these jobs produce.

[2] There are other ways that the two-way pull on prices can be seen:

(a) Prices need to be high enough for oil producers, or they will eventually stop extracting and refining the oil, and,

(b) Prices cannot be too high for consumers, or they will stop buying products made with oil.

If we think about it, the prices of basic commodities, such as food and fuel cannot rise too high relative to the wages of ordinary (also called “non-elite”) workers, or the system will grind to a halt. For example, if non-elite workers are at one point spending half of their income on food, the price of food cannot double. If it does, these workers will have no money left to pay for housing, or for clothing and taxes.

[3] The upward pull on oil prices comes from a combination of three factors.

(a) Rising cost of production, because the cheapest-to-produce oil tends to be extracted first, leaving the more expensive-to-extract oil for later. (This pattern is also true for other types of resources.)

(b) If workers are becoming more productive, this growing productivity of workers is often reflected in higher wages for the workers. With these higher wages, workers can afford more goods made with oil, and that use oil in their operation. Thus, these higher wages lead to higher “demand” (really affordability) for oil.

Recently, worker productivity has not been growing. One reason this is not surprising is because energy consumption per capita hit a peak in 2013. With less energy consumption per capita, it is likely that, on average, workers are not being given bigger and better “tools” (such as trucks, earth-moving equipment, and other machines) with which to leverage their labor. Such tools require the use of energy products, both when they are manufactured and when they are operated.

Figure 2. World Daily Per Capita Energy Consumption, based on primary energy consumption from BP Statistical Review of World Energy and 2017 United Nations population estimates.

(c) Another “pull” on demand comes from increased investment. This investment can be debt-based or can reflect equity investment. It is these financial assets that allow new mines to be opened, and new factories to be built. Thus, wages of non-elite workers can grow. McKinsey Global Institute reports that growth in total “financial assets” has slowed since 2007.

Figure 3. Figure by McKinsey Global Institute showing that growth in debt in financial instruments (both debt and equity) has slowed significantly since 2007. Source

More recent data by McKinsey Global Institute shows that cross-border investment, in particular, has slowed since 2007.

Figure 4. Figure by McKinsey Global Institute showing that global cross-border capital flows (combined debt and equity) have declined by 65% since the 2007 peak. Download from this page.

This cross-border investment is especially helpful in encouraging exports, because it often puts into place new facilities that encourage extraction of minerals. Some minerals are available in only in a few places in the world; these minerals are often traded internationally.

[4] The downward pull on oil and other commodity prices comes from several sources.

(a) Oil exports are often essential to the countries where they are extracted because of the tax revenue and jobs that they produce. The actual cost of extraction may be quite low, making extraction feasible, even at very low prices. Because of the need for tax revenue and jobs, governments will often encourage production regardless of price, so that the country can maintain its place in the world export market until prices again rise.

(b) Everyone “knows” that oil and other commodities will be needed in the years ahead. Because of this, there is no point in stopping production all together. In fact, the cost of production is likely to keep rising, putting an upward push on commodity prices. This belief encourages businesses to stay in the market, regardless of the economics.

(c) There is a long lead-time for developing new extraction capabilities. Decisions made today may  affect extraction ten years from now. No one knows what the oil price will be when the new production is brought online. At the same time, new production is coming on-line today, based on analyses when prices were much higher than they are today. Furthermore, once all of the development costs have been put in place, there is no point in simply walking away from the investment.

(d) Storage capacity is limited. Production and needed supply must balance exactly. If there is more than a tiny amount of oversupply, prices tend to plunge.

(e) The necessary price varies greatly, depending where geographically the extraction is being done, and depending on what is included in the calculation. Cost are much lower if the calculation is done excluding investment to date, or excluding taxes paid to governments, or excluding necessary investments needed for pollution control. It is often easy to justify accepting a low price, because there is usually some cost basis upon which such a low price is acceptable.

(f) Over time, there really are efficiency gains, but it is difficult to measure how well they are working. Do these “efficiency gains” simply speed up production a bit, or they allow more oil in total to be extracted? Also, cost cuts by contractors tend to look like efficiency gains. In fact, they may simply be temporary prices cuts, reflecting the desire of suppliers to maintain some market share in a time when prices are too low for everyone.

(g) Literally, every economy in the world wants to grow. If every economy tries to grow at the same time and the market is already saturated (given the spending power of non-elite workers), a very likely outcome is plunging prices.

[5] As we look around the world, the prices of many commodities, including oil, have fallen in recent years.

Figures 3 and 4 show that investment spending spiked in 2007. Oil prices spiked not long after that–in the first half of 2008.

Figure 5. Monthly Brent oil prices with dates of US beginning and ending QE.

Quantitative Easing (QE) is a way of encouraging investment through artificially low interest rates. US QE began right about when oil prices were lowest. We can see that the big 2008 spike and drop in prices corresponds roughly to the rise and drop in investment in Figures 3 and 4, above, as well.

If we look at commodities other than oil, we often see a major downslide in prices in recent years. The timing of this downslide varies. In the US, natural gas prices fell as soon as gas from fracking became available, and there started to be a gas oversupply problem.

I expect that at least part of gas’s low price problem also comes from subsidized prices for wind and solar. These subsidies lead to artificially low prices for wholesale electricity. Since electricity is a major use for natural gas, low wholesale prices for electricity indirectly tend to pull natural gas prices down.

Figure 6. Natural gas prices in the US and Canada, indexed to the 2008 price, based on annual price data provided in BP Statistical Review of World Energy, 2017.

Many people assume that fracking can be done so inexpensively that the type of downslide in prices shown in Figure 6 makes sense. In fact, the low prices available for natural gas are part of what have been pushing North American “oil and gas” companies toward bankruptcy.

For a while, it looked like high natural gas prices in Europe and Asia might allow the US to export natural gas as LNG, and end its oversupply problem. Unfortunately, overseas prices of natural gas have slid since 2013, making the profitability of such exports doubtful (Figure 7).

Figure 7. Prices of natural gas imports to Europe and Asia, indexed to 2008 levels, based on annual average prices provided by BP Statistical Review of World Energy, 2017.

Coal prices have followed a downward slope of a different shape since 2008. Note that the 2016 prices range from 32% to 59% below the 2008 level. They are even lower, relative to 2011 prices.

Figure 8. Prices of several types of coal, indexed to 2008 levels, based on annual average prices provided by BP Statistical Review of World Energy, 2017.

Figure 9 shows the price path for several metals and minerals. These seem to follow a downward path as well. I did not find a price index for rare earth minerals that went back to 2008. Recent data suggested that the prices of these minerals have been falling as well.

Figure 9. Prices of various metals and minerals, indexed to 2008, based on USGS analyses found using this link: https://minerals.usgs.gov/minerals/pubs/mcs/

Figure 9 shows that several major metals are down between 24% and 35% since 2008. The drop is even greater, relative to 2011 price levels.

Internationally traded foods have also fallen in price since 2008.

Figure 10. Food prices, indexed to 2008 levels, based on data from the United Nations’ Food and Agricultural Organization.

In Item [4] above, I listed several factors that would tend to make oil prices fall. These same issues could be expected to cause the prices of these other commodities to drop. In addition, energy products are used in the production of metals and minerals and of foods. A drop in the price of energy products would tend to flow through to lower extraction prices for minerals, and lower costs for growing agricultural products and bringing products to market.

One surprising place where prices are dropping is in the auction prices for the output of onshore wind turbines. This is a chart shown by Roger Andrews, in a recent article on Energy Matters. The cost of making wind turbines doesn’t seem to be dropping dramatically, except from the fall in the prices of commodities used to make the turbines. Yet auction prices seem to be dropping by 20% or more per year.

Figure 11. Figure by Roger Andrews, showing trend in auction prices of onshore wind energy from Energy Matters.

Thus, wind energy purchased through auctions seems to be succumbing to the same deflationary market forces as oil, natural gas, coal, many metals, and food.

[6] It is very hard to see how oil prices can rise significantly, without the prices of many other commodities also rising.

What seems to be happening is a basic mismatch between (a) the amount of goods and services countries want to sell, and (b) the amount of goods and services that are truly affordable by consumers, especially those who are non-elite workers. Somehow, we need to fix this supply/demand (affordability) imbalance.

One way of raising demand is through productivity growth. As mentioned previously, such a rise in productivity growth hasn’t been happening in recent years. Given the falling energy per capita amounts in Figure 2, it seems unlikely that productivity will be growing in the near future, because the adoption of improved technology requires energy consumption.

Another way of raising demand is through wage increases, over and above what would be indicated by productivity growth. With globalization, the trend has been has been lower and less stable wages, especially for less educated workers. This is precisely the opposite direction of the change we need, if demand for goods and services is to rise high enough to prevent deflation in commodity prices. There are very many of these non-elite workers. If their wages are low, this tends to reduce demand for homes, cars, motorcycles, and the many other goods that depend on wages of workers in the world. It is the manufacturing and use of these goods that influences demand for commodities.

Another way of increasing demand is through rising investment. This can eventually filter back to higher wages, as well. But this isn’t happening either. In fact, Figures 3 and 4 show that the last big surge in investment was in 2007. Furthermore, the amount of debt growth to increase GDP by one percentage points has increased dramatically in recent years, both in the United States and China, making this approach to economic growth increasingly less effective. Recent discussions seem to be in the direction of stabilizing or lowering debt levels, rather than raising them. Such changes would tend to lower new investment, not raise it.

[7] In many countries, falling export revenue is adversely affecting demand for imported goods and services.

It is not too surprising that the export revenue of Saudi Arabia has fallen, with the drop in oil prices.

Figure 12. Saudi Arabia exports and imports of goods and services based on World Bank data.

Because of the drop in exports, Saudi Arabia is now buying fewer imported goods and services. A person would expect other oil exporters also to be making cutbacks on their purchases of imported goods and services. (Exports in current US$ means exports measured year-by-year in US$ , without any inflation adjustment.)

It is somewhat more surprising that China’s exports and imports are falling, as measured in US$ . Figure 13 shows that, in US dollar terms, China’s exports of goods and services fell in both 2015 and 2016. The imports that China bought also fell, in both of these years.

Figure 13. China’s exports and imports of goods and services on a current US$ basis, based on World Bank data.

Similarly, both the exports and imports of India are down as well. In fact, India’s imports have fallen more than its exports, and for a longer period–since 2012.

Figure 14. India’s exports and imports of goods and services in current dollars, based on World Bank data.

The imports of goods and services for the United States also fell in 2015 and 2016. The US is both an exporter of commodities (particularly food and refined petroleum products) and an importer of crude oil, so this is not surprising.

Figure 15. US exports and imports of goods and services in US dollars, based on World Bank data.

In fact, on a world basis, exports and imports of goods and services both fell, in 2015 and 2016 as measured in US dollars.

Figure 16. World exports and imports in current US dollars, based on World Bank data.

[8] Once export (and import) revenues are down, it becomes increasingly difficult to raise prices again. 

If a country is not selling much of its own exports, it becomes very difficult to buy much of anyone else’s exports. This impetus, by itself, tends to keep prices of commodities, including oil, down.

Furthermore, it becomes more difficult to repay debt, especially debt that is in a currency that has appreciated. This means that borrowing additional debt becomes less and less feasible, as well. Thus, new investment becomes more difficult. This further tends to keep prices down. In fact, it tends to make prices fall, since new investment is needed to keep prices level.

[9] World financial leaders in developed countries do not understand what is happening, because they have written off commodities as “unimportant” and “something that lesser-developed countries deal with.”

In the US, few consumers are concerned about the price of corn. Instead, they are interested in the price of a box of corn flakes, or the price of corn tortillas in a restaurant.

The US, Europe and Japan specialize in high “value added” goods and services. For example, in the case of a box of cornflakes, manufacturers are involved in many steps such as (a) making cornflakes from corn, (b) boxing cornflakes in attractive boxes, (c) delivering those boxes to grocers’ shelves, and (d) advertising those cornflakes to prospective consumers. These costs generally do not decrease, as commodity prices decrease. One article from 2009 says, “With the record seven-dollar corn this summer, the cost of the corn in an 18-ounce box of corn flakes was only 14 cents.”

Because of the small role that commodity prices seem to play in producing the goods and services of developed countries, it is easy for financial leaders to overlook price indications at the commodity level. (Data available at this level of detail; the question is how closely it is examined by decision-makers.)

Figure 17. Various indices within US CPI Urban, displayed on a basis similar to that used in Figure 7 through 11. In other words, index values for later periods are compared to the average 2008 index value. CPI statistics are from US Bureau of Labor Statistics.

Figure 17 shows some components of the Consumer Price Index (CPI) on a basis similar to the trends in commodity prices shown in Figures 7 though 11. The category “Household furnishings and operations,” was chosen because it has furniture in it, and I know that furniture prices have fallen because of the growing use of cheap imported furniture from China. This category shows a slight downslope in prices. The other categories all show small increases over time. If commodity prices had not decreased, prices of the other categories would likely have increased to a greater extent than they did during the period shown.

[10] Conclusion. We are likely kidding ourselves, if we think that oil prices can rise in the future, for very long, by a very large amount.

It is quite possible that oil prices will bounce back up to $ 80 or even $ 100 per barrel, for a short time. But if they rise very high, for very long, there will be adverse impacts on other segments of the economy. We can’t expect that wages will go up at the same time, so increases in oil prices are likely to lead to a decrease in the purchase of discretionary products such as meals eaten in restaurants, charitable contributions, and vacation travel. These cutbacks, in turn, can be expected to lead to layoffs in discretionary sectors. Laid off workers are likely to have difficulty repaying their loans. As a result, we are likely to head back into a recession.

As we have seen above, it is not only oil prices that need to rise; it is many other prices that need to rise as well. Making a change of this magnitude is almost certainly impossible, without “crashing” the economy.

Economists put together a simplified view of how they thought supply and demand works. This simple model seems to work, at least reasonably well, when we are away from limits. What economists did not realize is that the limits we are facing are really affordability limits, and that growing affordability depends upon productivity growth. Productivity growth in turn depends on a growing quantity of cheap-to-produce energy supplies. The term “demand,” and the two-dimensional supply-demand model hide these issues.

The whole issue of limits has not been well understood. Peak Oil enthusiasts assumed that we were “running out” of an essential energy product. When this view was combined with the economist’s view of supply and demand, the conclusion was, “Of course, oil prices will rise, to fix the situation.”

Few stopped to realize that there is a second way of viewing the situation. What is falling is the resources that people need to have in order to have jobs that pay well. When this happens, we should expect prices to fall, rather than to rise, because workers are increasingly unable to buy the output of the economy.

If we look back at what happened historically, there have been many situations in which economies have collapsed. In fact, this is probably what we should expect as we approach limits, rather than expecting high oil prices. If collapse should take place, we should expect widespread debt defaults and major problems with the financial system. Governments are likely to have trouble collecting enough taxes, and may ultimately fail. Non-elite workers have historically come out badly in collapses. With low wages and high taxes, they have often succumbed to epidemics. We have our own epidemic now–the opioid epidemic.

 

 

Republished with permission by Our Finite World.




Inflation Continues to Trend Downward in May

The inflation rate in a core CPI excluding shelter has been -0.2 percent over the last three months.

Inflation in both the overall and core Consumer Price Index (CPI) showed evidence of slowing in May. The overall CPI actually fell by 0.1 percent in May, driven by a 2.7 percent drop in energy prices. The overall CPI is now up by 1.9 percent over the last year. The core index rose by 0.1 percent. It has increased by 1.7 percent over the last year.

Both indices are showing lower rates of increases in May than they had earlier in the year. The year-over-year change in the overall CPI peaked at 2.8 percent in February and has fallen sharply over the last three months. Core inflation was slightly over two percent at the end of 2016 but also has been trending lower in recent months. The annualized rate of inflation in the core index has been just 0.7 percent, comparing the average for the price index in the last three months with the average for the prior three months.

If the shelter component is taken out of the core, the numbers are even more striking. The core CPI excluding shelter has risen just 0.6 percent over the last year. The annualized rate of core inflation excluding shelter, in the last three months compared with the prior three is actually -0.6 percent. In other words, core inflation would be negative if not for the rise in rental prices.

Year-over-Year Growth in Core CPI and Core CPI minus Shelter, 2011 to 2017

Even in the case of rental inflation, there appears to be some slowing. The year-over-year increase in the owners’ equivalent rent index was 3.3 percent in May. It had peaked at 3.6 percent in December. The annualized rate comparing the last three months with the prior three months is just 3.3 percent, indicating a substantial slowing. The index for rent proper has risen somewhat more rapidly over the last year, increasing by 3.8 percent year-over-year. This increase is likely due to the fact that the rent proper index also includes some utilities, which might have risen rapidly in price in many areas.

It is difficult to find any major components showing serious inflationary pressures. The price of medical care services have risen by 2.5 percent over the last year and actually fell by 0.1 percent in May. The index for educational tuition and fees rose by a modest 2.3 percent over the last year and 0.2 percent in May. Prescription drug prices have risen by 3.9 percent over the last year and rose 0.3 percent in May, but this is just 1.4 percent of the CPI.

New car prices have risen by 0.3 percent over the last year and fell by 0.2 percent in May. They continue to be held down in part by a glut of used cars on the market, a legacy of the proliferation of repossessed cars that has resulted from subprime car loans gone bad. Used car prices fell 4.3 percent year-over-year and fell by 0.2 percent in May.

There is also no evidence of any inflationary pressures building at earlier phases of production. The price index for final demand in the Producer Price Index (PPI) has risen 2.4 percent over the last year and was unchanged in May. The index for final demand for goods, excluding food and energy, has risen by 2.2 percent over the last year and by just 0.1 percent in May. The core index for final demand (including services) rose by 2.0 percent over the last year, although it did rise 0.3 percent in May.

The price reports for May indicate that inflation is actually decelerating slightly rather than accelerating. This is in spite of the fact that the unemployment rate is below the level that most economists consider to be the NAIRU. Of course, since wage growth also appears to be slowing, this pattern in prices is less surprising. The Fed seems determined to increase interest rates today, but with inflation below the Fed’s 2.0 percent target (with the PCE deflator as the measure) and heading downward, future rate increases will be hard to justify.

This article has been republished with permission by CEPR granted via a Creative Commons Attribution 4.0 International License. This work is also licensed under the same Creative Commons Attribution 4.0 International License. Creative Commons License




Deflation: There’s an App for That

Once in a while I see a financial news headline so obviously ridiculous, I feel I should look at the writer with pity in my eyes and pat them on the head, the way you might comfort a child that just dropped his ice cream cone on the floor.

“Inflation is Right Around the Corner, Yellen Insists.”

Of course it is…

In defense of the columnist who wrote the story, these weren’t necessarily his views. He was simply relaying the Fed Chair’s comments from Wednesday.

My real pity is reserved for Ms. Yellen herself. If she actually believes that inflation is on the horizon, she’s clearly not very good at her job. She might even be delusional.

Yellen believes that a firming job market will lead to higher wages and a general increase in prices. And 20 years ago, that would have been true. A tight labor market leads to rising wages, which in turn forces companies to raise their prices to maintain profitability.

But what Janet Yellen fails to understand is that, in this age of technological disruption, labor becomes disposable as soon as it gets pricey.

Consider the unglamorous world of fast-food.

Over the past decade, labor activists have aggressively pushed the “fight for $ 15,” or a nationwide minimum wage of $ 15 per hour. This directly affects fast-food restaurants. They tend to hire young or low-skilled workers who earn minimum wage (or close to it).

Hey, I get it. They’re looking out for the little guy. But in pushing for higher wages, they are simply speeding up the inevitable death of entry-level jobs.

Take Panera Bread and McDonald’s.

Both companies have made major investments in kiosks that allow customers to skip the line, and most of their major competitors have either already started doing the same or intend to start soon. (Your local grocery store may have been doing this for years, too.)

It doesn’t stop there.

Starbucks has an iPhone and Android app that lets you order coffee and even pay for it on your phone.

I can order from my neighborhood Domino’s on a mobile app and have my pizza waiting for me in less than 10 minutes.

All of these cases have one thing in common: Cheap technology has replaced a human cashier or order-taker.

When Ms. Yellen talked this week about inflation on the horizon, I also wonder if she’s never shopped on Amazon or one of its online competitors.

As more shopping shifts online (first-quarter e-commerce sales in 2017 increased 14.7% year-over-year, for example), there’s far less demand for physical retail stores… and the army of clerks and cashiers than man them.

Amazon is also quickly making the delivery boy redundant with aerial drones… and driverless cars and trucks will soon squeeze out millions of truck and taxi drivers. All of this works to lower costs, not raise them.

And it’s not just entry-level workers on the chopping block. Goldman Sachs made news this week by announcing that it’s using technology to automate some of its more labor-intensive investment banking tasks.

No one is going to cry over the sight of unemployed investment bankers. But if banking jobs can be automated away, then why not attorneys or even doctors?

You might laugh, but Cologuard, the company behind the do-it-yourself colon cancer test, now allows a cheaper lab technician to screen samples. That’s a lot less expensive (not to mention more comfortable for the patient) than having a highly-trained proctologist perform a colonoscopy.

And the trend applies to music and media too.

Cable TV is dying a slow death. Cheaper streaming options like Netflix have turned the economics of the business inside out. And younger consumers are so accustomed to getting music for free (or close to it), that getting them to pay for it is next to impossible.

You get my point.

Today, more than at any time since the Industrial Revolution, technology is eliminating expensive labor. This is deflationary, not inflationary. And it’ll contribute to the great deflation Harry sees ahead.

It’s also, ultimately, a very positive thing. Efficiency creates a higher standard of living over time, even if the transition can be painful to live through.

That’s a longer story for another day.

For now, suffice it to say that inflation won’t be a problem any time soon. If you’re betting on higher bond yields or higher commodity prices, you’re likely to be sorely disappointed.

In an environment of stable or falling prices, current income is the name of the game. And I write a newsletter dedicated to finding exactly that.

In Peak Income, I look for outstanding income opportunities that are off Wall Street’s radar, and produce consistent returns to help you accomplish your goals. Click here to learn what investments I’m recommending right now.

Charles Sizemore
Portfolio Manager, Boom & Bust Investor

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Charles Sizemore – Economy and Markets ()




The Great Deflation, Gold, and the Dollar

The coming GREAT DEFLATION will impact the value of Gold and the Dollar much differently than what most analysts are forecasting. Unfortunately, most analysts do not understand the true underlying value of gold or the U.S. Dollar, because they base their forecasts on information that is inaccurate, flawed or imprecise.

This is due to two faulty theories:

  1. monetary science
  2. supply-demand market forces

While some aspects of monetary science and supply and demand forces do impact the prices of goods and services (on a short-term basis), the most important factor, ENERGY, is totally overlooked. You will never hear Peter Schiff include energy when he talks about the Federal Reserve, Commercial Banks, money printing or debt. Schiff, like most analysts, is stuck on studying superficial monetary data that does not get to the ROOT OF THE PROBLEM.

Furthermore, the majority of folks who believe in the Austrian School of economics, also fail to incorporate ENERGY into their analysis. For some strange reason, most analysts believe the world is run by the ENERGY TOOTH FAIRY (term by Louis Arnoux). Without cheap and abundant energy, monetary science and supply-demand forces are worthless.

That being said, as the debate on whether the world will experience, inflation, hyperinflation or deflation will continue to go on and on, I guarantee we are going to experience the MOTHER of all DEFLATIONS. Again, this will be due to the disintegrating energy sector and its inability to provide sufficent profitable net energy to the market.

The falling net energy and declining EROI – Energy Returned On Investment, are totally gutting the entire market. This can be seen quite clearly as the U.S. added $ 4 of debt for each $ 1 of GDP growth in 2016. According to the Zerohedge article, It Took $ 4 In New Debt To Create $ 1 In GDP:

As a reminder, according to the latest BEA revision, nominal 2016 GDP was $ 18.86 trillion, an increase of $ 632 billion from 2015; the question is how much credit had to be created to generate this growth. Well, according to the Z.1, total credit rose to a new record high $ 66.1 trillion. This was an increase of $ 2.511 trillion in the past year. It means that in 2016, it “cost” $ 4 in new debt to generate just $ 1 in new economic growth!

2016 Change in Credit vs Change in GDP

As we can see, adding $ 4 of debt to create $ 1 of artificially inflated GDP is not a long-term sustainable business model. I get a laugh hearing “Conspiracy Theorists” explain how the ELITE have been planning this take-over all along and have the markets totally under control. While conspiracies do indeed take place, the ELITE have been SHOOTING FROM THE HIP and WINGING IT just to keep the entire market from imploding.

For those who believe that the elite want to crush the market to buy assets for pennies on the Dollar, I am here to tell you… it CHAIN’T gonna happen. When the Ancient Roman Metropolis collapsed from a population of one million people down to 12,000, I can assure you, the majority of the ELITE were wiped out… KAPUT.

Real Estate values and revenue streams in Ancient Rome evaporated into thin air. There was no “RECOVERY” or “PLAN B.” Death had come to the once great Roman Empire… for good.

Regardless, the coming GREAT DEFLATION will destroy the value of most assets shown in the chart below:

Global Mainstream Asset Universe 2015

Of the $ 369 trillion in global asset values (2015), gold and silver accounted for $ 3.1 trillion or 0.8%. That’s correct, not even 1% of total global assets. Savills Research, who put together the data shown in the chart above, recently published figures on Global Real Estate Investment:

Global investment by region (less China land deals)

Now, this chart does not represent total Real Estate values, but rather shows how much money is being invested in the Global Real Estate Market (minus China). Interestingly, global real estate investment has never regained its previous peak set back in 2008. Furthermore, the data shows that global real estate investment has rolled over and declined since the first quarter of 2016. This is not a good sign.

This means, deflationary forces may already be taking place in the global real estate market.

How The ‘GREAT DEFLATION’ Will Impact Gold & The Dollar

To understand how the coming GREAT DEFLATION will impact gold and the U.S. Dollar, we must throw out the window all preconceived notions about economics and money. Any individual who continues to believe in the standard orthodox economic theory, you might as well also accept that the EARTH IS FLAT and GROWTH on a finite planet is possible.

Unfortunately, the U.S. educational system and alternative media continue to misinform the public about the role of MONEY. So, the blind continue to lead the blind as Rome burns… so to speak.

The GREAT DEFLATION is coming due to the disintegration of the U.S. and global oil industry. As I mentioned in a precious article, the top three U.S. oil companies slashed their Q1 2017 capital expenditures (CAPEX) by 40%, versus the same period last year. Furthermore, the world only found 2.4 billion barrels of new oil in 2016 while it consumed 25 billion barrels:

Global Oil Consumption 2016 versus Discoveries

I hate to be a broken record, but precious metals investors better WAKE UP. How many new barrels of oil do you think the global oil industry will find in 2017 as they continue to slash their CAPEX spending even greater than last year??

Regardless, the Fed and Central Banks are propping up the market with more money printing and asset purchases than ever. This will not solve our financial and economic problems, however it is a last ditch effort to postpone the inevitable.

To truly understand what will happen with the value of Gold and the U.S. Dollar, we have to grasp the data shown in the chart below:

Gold Cost vs Price & $ 100 Bill Cost vs Face Value

To produce an ounce of gold in 2016 (top two gold miners – Barrick & Newmont), it took $ 1,113. Thus, the top two gold miner’s total production cost was 89% of the gold market price ($ 1,251). This is why gold stores wealth. Stored wealth has always been “STORED ECONOMIC ENERGY.” Gold has been the King Monetary Metal because of its rarity in the earth’s crust and its ability not to corrode or tarnish like many other metals.

On the other hand, the U.S. Treasury Department of Engraving and Printing produced a new $ 100 bill for a mere 13.4 cents. Thus, the U.S. Treasury’s $ 100 bill cost of production was 0.13% of its face value, versus 89% for an ounce of gold.

The production cost figures for the U.S. Federal Reserve Notes came from the U.S. Treasury Department of Engraving and Printing, shown in the table below:

BEP Printing Costs

It cost the U.S. Treasury $ 134.14 per thousand of $ 100 bill’s printed. While the U.S. Treasury spent more money to produce the lower denomination bills versus their total face value, 71% of the $ 213 billion of Federal Reserves Notes printed in 2016 were $ 100 bills.

If we are able to understand the information presented above and are able to do some “CRITICAL THINKING”, then it is easy to understand that the U.S. Dollar will suffer signficantlyu during the GREAT DEFLATION….. not gold.

We also must remember, a “NOTE”, as in the “Federal Reserve Note”, means an “OBLIGATION” or “DEBT.” Money is not supposed to be an obligation or debt. Money is supposed to be a store of value and medium of exchange.

Thus, when the GREAT DEFLATION arrives, the value of the U.S. Dollar has a much farther way to fall versus gold. Why? Because the value of most things, always reverts back to their COST OF PRODUCTION. The innate value of a $ 100 bill is a mere 13.4 cents…. so, its value still has room to fall 99%+.

Again… the innate value of most things are based upon their cost of production, not supply and demand. What’s the use of being in the business of producing goods at a loss????

Here is one last example. In 2016, total global gold mine supply was worth $ 103.6 billion. This figure was based on the of 3,222 metric tons of gold mine supply (GFMS 2017 World Gold Survey), multiplied by the average spot price of $ 1,251. The estimated cost to produce this gold was $ 92.2 billion:

Total Gold-Cost-Value vs $ 100 Bill Cost-Face Value

Here we can see that the gold market price, was based on its cost of production. On the other hand, the U.S. Treasury was able to print $ 151.7 billion in $ 100 bills for the total cost of $ 235 million ($ 0.235 billion). Which means, the U.S. Treasury’s production cost was only 0.13% for the $ 151.7 billion of new currency (fake money) it issued last year.

People need to realize the U.S. Dollar’s value is backed by U.S. debt, which is being propped up by burning energy. Thus, ENERGY = MONEY. The huge increase in U.S. and Global Debt means the quality of energy that runs everything is rapidly declining. Which means, the more debt that is added, the lower interest rates have to go. It is a one way street.

Analysts who think interest rates need to normalize to a much higher level, have no idea about ENERGY…. ZIP, NADDA, ZILCH. They look at the markets as if the ENERGY TOOTH FAIRIES run everything. There are only a small handful of analysts who understand the energy dynamics. The rest are the blind leading the blind.

The coming GREAT DEFLATION will destroy the value of most STOCKS, BONDS, REAL ESTATE and PAPER CURRENCIES. The reason Real Estate prices will plummet below their cost of production is due to their 20-30 year financing and their inability to function during the disintegrating energy environment. The same will be for automobiles and many other assets and items.

Investors need to understand how ENERGY and the FALLING EROI- Energy Returned On Investment, will impact the value of most assets going forward. Most assets will collapse in value, while a few will hold or gain in value. Gold and silver will be two of the few that will hold or gain in value during the GREAT DEFLATION.

Precious Metals News & Analysis – Gold News, Silver News




HARRY DENT: Our Money Velocity Sucks

Harry Dent

Harry Dent

Dr. Lacy Hunt has been featured more than any outside speaker at our IES conferences. Why? Because he’s the only classical economist I fully admire and he is a successful bond investment manager in the real world that understands the trend towards deflation, despite unprecedented money-printing.

I love the gold bugs for being realistic and honest about the debt and financial asset bubble we’re in, especially when most mainstream economists and analysts are blind to it.

What kills me about the gold bug types is that they always see hyperinflation from unprecedented money-printing, and they don’t go back and analyze what actually happens when debt bubbles finally burst and deleverage…

DEFLATION!

There is no other cure for excessive use of financial drugs, and that is what excessive use of debt is – plain and simple. Debt is a financially-enhanced drug that has major costs down the road.

Heroin Economy and Markets
It’s like detox for heroin addicts.

It is ugly, but it purges the system of the drug and allows it to be healthy and grow again. There is no easy way around that once you are highly addicted and toxic from it. And we are witnessing the greatest debt and financial asset bubble since the early 1970s, more so than 2000!

Lacy is a classical, Austrian economist that totally gets how debt and financial bubbles build and how they deleverage and burst. Only Steve Keen in Australia (now London) garners a similar respect from me for such research.

Lacy has the “voice of God,” as Rodney calls it, and always has interesting charts and research. His bond fund at Hoisington Investment Management has continued to be a long-term winner betting on deflation, not inflation, showing he puts his money where his mouth is.

But my favorite of all of his charts – and the most unique – is his chart on money velocity, going back to 1900.

Chart Money Velocity 1900 - 2016See larger image

This chart clearly shows a major cycle in rising and falling money velocity. And money velocity has everything to do with the expansion of our money supply from leveraged bank lending against 10% deposit and capital reserves.

Money is created like magic. But it also disappears just as fast when things go south… now you see it, now you don’t!

It is Lacy’s explanation of this chart that sets him apart from other clueless economists, and even the best gold bugs.

Note that average trend line across the chart, at a money velocity of about 1.74 times. That is normal. When money velocity is rising faster than that, it is a sign that businesses (and consumers and governments) are making productive investments in new capacity that raise profits, wages and so on.

It’s a win-win for the economy and most everyone.

When money velocity starts falling however, as it did after 1918 and after 1997, it is a sign that investment is going into more speculative pursuits that don’t create productive capacity and returns – like stock buybacks and mergers and acquisitions for businesses, or like flipping tech stocks or condos for households.

That shows you are entering a bubble economy, like the Roaring 20s or the Roaring 2000s (as I termed it in my 1998 book title).

Flapper 1920s Economy and Markets
But when you start falling below that long-term average of money velocity you are entering a deflationary or deleveraging stage, which we did from 2008 forward… but such deleveraging and deflation has been simply covered over by endless QE and money-printing.

Despite such “something for nothing” stimulus, money velocity continues to decline. That’s why we aren’t getting inflation, nevertheless hyperinflation, and why we won’t in the future!

Deflation is the only trend for the next several years and no one understands that better than Lacy Hunt. I may have a little debate with him on the rising odds of a near-term spike in Treasury yields before we head towards even lower rates again.

DON’T miss him at our October 20-22 IES conference in Palm Beach!

Harry
harry_dent_sig

 

 

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Harry Dent – Economy and Markets ()