Thursday, November 21, 2013

Extra Links

1---Deflationary pressures build despite record stimulus, asia confidential

Investors are focused on the possible tapering of U.S. stimulus and starting to take some money off the table after a strong equities rally year-to-date. Less attention is being paid to the biggest source of risk at present: deflation in the developed world. All of the past week's data point to heightened deflationary risks. Paltry U.S. consumer price index (CPI) figures, German producer prices undershooting and another bout of weakness in commodity prices, particularly oil, suggest deflation is winning the battle over central bank stimulus.

 Lowering the yen ....means Japan is exporting deflation...
Disinflation reigns

I've spoken of deflation so far, but it's really disinflation (falling inflation) that's occurring. A host of recent data suggests that this remains the primary threat to global economies, including:

1) The U.S. inflation rate fell to 1% annualised in October, the lowest figure in almost 50 years, excluding the 2008 financial crisis. Inflation in America peaked in 2011 and remains way below the Fed's 2% target rate. The chart below is courtesy of Business Insider.

US CPI

2) U.S. bank loan growth is showing a similar slowdown. Stimulus isn't resulting in increased lending and therefore isn't filtering through to the real economy. There's just not enough end-demand for loans as businesses and consumers remain cautious about taking on debt.

US bank loan growth

3 It's not data as such, but softening commodity prices also point to falling inflation. The correction in oil prices is particularly pertinent.
commodity-crude-oil
These are just a few of the signs that deflation remains firmly in charge.
Why Japan's largely to blame
Japan is back on the radar of investors given a breakout in its stock market and the yen reaching a four-month low. There's a larger story brewing though. And that's growing evidence that the grand experiment of Abenomics has been a complete and utter failure.
Recent third quarter GDP of 1.9% was half the level of the second quarter. More importantly, personal incomes have barely budged while the cost of living has soared, thanks to the falling yen. This week's trade figures showed imports surging 26% year-on-year (YoY) in October, versus 19% expected, due to soaring fuel imports. This overshadowed exports rising 19% YoY, more than analyst forecasts. Consequently, Japan's trade balance (difference between exports and imports) fell to the third lowest level on record....
 
Markets have largely ignored deflationary risks thus far. Stocks have surged, with few corrections, while bonds have spluttered. Given stagnant to falling GDP in the developed world and declining inflation, the bond market action has been particularly puzzling. Usually, government bond yields closely correlate with nominal (real plus inflation) GDP. If nominal GDP is falling, then so too should government bond yields.
This is why you should expect government bond yields in the developed world to head lower given the current deflationary threats. And it should also mean stocks have a further correction in the near future.
Short-term market action is always difficult to call though. Long-term trends are easier to distinguish. And on this front, little has changed. You have an ongoing battle between deflation and central bank government efforts to prevent it via QE. Deflation is winning right now, which is why you should expect more QE, not less, going forward.
 
 
 
Remains one of lowest readings in last two years
 
 Twenty percent of Americans are satisfied with the way things are going in the United States, a partial recovery from 16% in October during the government shutdown. The current reading is still one of the lowest Gallup has measured in the last two years.
Satisfaction With the Way Things Are Going in the U.S., 2012-2013
5---More monetarist remedies from Krugman: Euro edition, NYT (NYT's faux Keynesian)

6---And we’re off: the ‘Great Rotation’ gets into gear, cnbc

7---The irony of Ben Bernanke's forward guidance, cnbc

As economist Warren Mosler points out, this has an ironic consequence: forward guidance will only work if the market doubts its effectiveness.

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