Inflation And Recent Technical Damage
Lance Roberts | Oct 23, 2014 10:40AM ET
Inflation Goal Elusive For A Decade
I have written previously about the Federal Reserve's real worry, which is a rise in deflationary pressures:
"The biggest fear of the Federal Reserve has been the deflationary pressures that have continued to depress the domestic economy. Despite the trillions of dollars of interventions by the Fed, the only real accomplishment has been keeping the economy from slipping back into an outright recession.
Despite many claims to the contrary, the global economy is far from healed which explains the need for ongoing global central bank interventions. However, even these interventions seem to be having a diminished rate of return in spurring real economic activity despite the inflation of asset prices.
Despite the ongoing rhetoric of those fearing inflation due to the Fed's monetary interventions the reality is that such actions have, so far, failed to overcome the deflationary forces of weak global demand."
What is quickly being realized on a global basis is that injecting the system with liquidity that flows into asset prices, does not create organic economic demand. Both Japan and the Eurozone's interventions have failed to spark inflationary pressures as the massive debt burden's carried by these countries continues to sap the ability to stimulate real growth. The U.S. is facing the same pressures as continued stimulative measures have only succeeded in widening the wealth gap but failed to spark inflation or higher levels of economic prosperity for 90% of Americans.
When interest rates spiked in 2013, and many calls for the "death of the bond bull" were being made, I was one of thescreaming that this would not be the case. The reason for my steadfast belief was simply the lack of the three catalysts required to spark inflation: rising commodity prices, rising wages and increased monetary velocity.
(Read this for more on the construction of the index)
The reason I am dredging all of this history is to reiterate the point that Central Bank interventions have been proven NOT to be inflationary NOR effective in stimulating actual organic economic growth.
As stated by Bloomberg:
"Inflation expectations have plummeted in the past three months, with yields of Treasuries implying consumer prices will rise an average 1.5 percent annually through the third quarter of 2019. In the past decade, those predictions have come within 0.1 percentage point of the actual rate of price increases in the following five years, data compiled by Bloomberg show."
Get The News You Want
What Bloomberg is addressing is that both the drop in Treasury yields, along with the decline of "Breakeven Inflation Rates" (the spread between equivalent treasury and inflation-adjusted rates), are suggesting that inflationary pressures are nowhere on the horizon. It also suggests that expectations for 3% economic growth over the next several quarters is also likely to come up short.
The Recent Rally May Not Last
That is the title to an article by Michael Kahn at Barron's, which has extremely similar tone to a piece I wrote earlier this week entitled, "Be Cautious: Correction May Not Be Over ."
Michael makes a couple of good points that confirms much of my analysis, to wit:
"Since the steadiest part of the bull market began two-years ago, every pullback was very sharp and very quick. Some call them 'V' bottoms although that term is really reserved for the end of bear markets, not market dips. However, the meaning is similar as the market’s mood turned on a dime from fear to greed."
"There is something profoundly different about the rebound this week versus prior rebounds. This time, it occurred below the bull market trendline. When a major trendline such as this is broken to the downside, strict interpretation of the technicals says that the bull is over. Therefore, rebounds now take place in the context of a flat or even falling market, not a bull market."
The recent correction has inflicted a good bit of technical damage to the market that is unlikely to be cleared on an extremely short-term basis. While anything is certainly possible, the ability of the markets to make a run at new highs is much more suspect given the extraction of the Fed's liquidity driven support next week. This is a set-up we have seen previously as I pointed out in my analysis earlier this week.
"With the Fed's liquidity support now ending, the markets have once again plunged below the bullish trendline. The current rally, like every other time, is most likely a short-lived rebound from extremely oversold short-term conditions."
"Importantly, the deterioration in the internal dynamics of the market also suggest that the current rebound is not the resumption of the current bull market cycle, but rather a bounce that will likely be used to liquidate holdings. This will likely lead to a retest of lows, or even perhaps the setting of a new low, before a bullish trend can be re-established."
Michael sums the current situation very well stating:
"But for now, all we have is hints and possibilities. The rally from last weeks low does not have enough merits on its own to continue much higher so the bears may be resurrected from the depths of short-covering hell."
Interesting Thought Of For The Day
My friend Michael Gayed recently penned a very interesting thought :
"I believe that the Last Great Bubble is bursting — faith in central banks to solve all problems."
I agree with Michael. The mantra has been over the last five years that you "do not fight the Fed." The problem, as discussed above, is that the Bank of Japan, the ECB and the Fed have all failed in accomplishing their objective of "reflating" the global economy.
The issue that has been consistently ignored is the massive, and expanding, debt burdens that act as a deflationary drag on economic growth and inflation. Despite statistical economic headlines , the underpinnings of the domestic economy remain far too weak to create the level of consumption needed to support stronger economic growth. The bond market has already recognized that inflation isn't coming, Japan and the Eurozone economies are slipping quickly back into recession, and even China's seeming inexhaustible growth has begun to drag. These aren't the drivers of a "secular" bull market.
As Michael concludes:
"A growing economy coincides with rising inflation expectations. A healthy bull market coincides with rising inflation expectations. Fight the Fed? You sure they are going to get that inflation target when the market itself is screaming they won't, at the same time quantitative easing is ending?"
Or, maybe this time really is different?
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