This page has been archived and commenting is disabled.
Outlook 2015: Deflation Remains the Dominant Theme
Below is an excerpt from my last research note entitled "Outlook 2015: Deflation Remains the Dominant Theme" Happy holidays! Chris
Outlook 2015: Deflation Remains the Dominant Theme
KBRA
December 16, 2014
Since the start of the 2008 financial crisis, central banks around the world have been trying to avoid asset price deflation and debt reduction, two necessary components of the economic healing process which must inevitably follow any credit bubble. Now, under pressure from falling commodity prices, the process of deflation seems to be gathering speed. While the Federal Reserve Board and other monetary authorities have targeted a 2% annual inflation rate in their policy formulations, it is pretty clear that as 2014 ends, deflation remains the dominant theme in the global economy for the New Year in 2015.
Because of the deflationary cast to the global economy, Kroll Bond Rating Agency (KBRA) does not expect to see a meaningful increase in U.S. interest rates until at least this time next year regardless of any nearterm change in guidance by the Federal Open Market Committee. The reason: The global economic recovery remains fragile and tentative, with mixed indicators of growth, job creation and the stability of commodity and asset prices.
Even with several months of stronger job numbers, the overall employment situation in the U.S. remains mediocre by historical standards. Meanwhile, slack demand in many key consumer and industrial sectors is pushing down prices for key commodities. The housing sector is also showing signs of weakness. After three years of double-digit gains, for example, Weiss Residential Research reports that a growing number of residential homes in the U.S. are starting to decline in price.
Last week, the major U.S. equity indexes gave up substantial ground because of growing investor concerns about the outlook for the global economy. Some observers believe that the prospect for higher interest rates was behind equity market weakness. Brian Wesbury, of First Trust Advisors, notes: “At first, good November jobs data was good for stocks. Then, good news became bad when investors started to worry about Federal Reserve interest rate hikes.”
One key indicator of deflation that seems to be even more worrisome to investors, however, is global commodity prices and what commodity price weakness suggests for demand. Copper fell over 12% in 2014, largely due to slumping demand in China and other industrial economies. Natural gas prices have fallen more than 12% this year. And oil prices have fallen by over 40% due to a glut of new supply and weak demand growth in many developing economies. The International Energy Agency has cut its estimates for demand for crude five times in the past six months, The Wall Street Journal reports.
The negative impact on incomes due to the decline in oil prices is a global issue, with nations such as Russia, Nigeria and Venezuela in visible financial distress. The price of the Russian ruble has declined in tandem with oil prices, raising concerns about whether Russia will be able to service its hard currency debt. But the decline in oil prices is more than just a supply phenomenon. The lack of growth in the demand for oil, coupled with rising supplies in the U.S. and elsewhere, has raised concerns about the overall health of the global economy.
We believe that the weakness in U.S. equity and debt markets stems from a more fundamental problem than concerns about future growth, namely that investors are once again starting to seriously question the disclosure from the largest banks and investment houses regarding their credit exposure to highly leveraged borrowers. This concern is evidenced by weakness in the equity market valuations of lenders with exposure to the oil sector as well as the recent changes in the relative position of spreads in the U.S.bond markets.
Click the link below to access the full copy of the note. Free registration is required.
- advertisements -

For a while I was one of the people concerned we would see the world tumble into a massive deflationary cycle as debts went unpaid and credit collapsed. Now I have come to think inflation is getting closer every day.
This would mean the "major deflationary period" is mostly behind us and it has not been disinflation as much as inflation being kept in check because of several factors, including where the money flowed, weak demand, dropping velocity of money, and the onetime benefit of lower interest rates.
Before you discount the possibility that we will move directly from where we are into stagflation then hyperinflation please consider that hyperinflation paves the way for governments and those in power to make a transition to a replacement currency and a reset of the whole system.
http://brucewilds.blogspot.com/2014/11/deflation-i-think-not.html
A newsworthy story.
It is and will be the dominant theme for some time to come.
I don't see how the government can pull off inflating debt away when real inflation adjusted income is dropping. All inflation will do when income is flat will make everything more expensive. They will have to send the printed money directly to the bottom.
"Since the start of the 2008 financial crisis, central banks around the world have been trying to avoid asset price deflation and debt reduction, two necessary components of the economic healing process which must inevitably follow any credit bubble. Now, under pressure from falling commodity prices, the process of deflation seems to be gathering speed."
Parabolics do gather speed.
Bernanke is going to have a lot of explaining to do when his "making sure deflation doesn't happen here", happens.
And consider...for all the crowing about the US making Russia bend, there seems to be little regard for the amount of product that Russia has been purchasing from China.
China is already said to be in free fall and this will make it worse. When the US pokes Russia, it is felt by China. So China, which had those fun "sea games" with Russia a few years ago where they coordinated their military's and had war "games," has a very serious interest in Russia's best interests. China also is said to be close to North Korea. That line up looks like this:
China +Russia +North Korea
against
Obomao (except that he is only "obomao" in the US where he gets all the advantages of the capitalist momentum. In China, they'd have him in the fields behind an ox:)
There also seems to be little regard for the future; do those making these calls in the US (to destroy and Russian rouble) understand that these people have very long memories. They aren't turning off the light at the end of the day to watch some stupid show like How To Get Away With Murder...(so stupid, so stupid).
Congress just passed a trillion dollar spending bill for 9 months. I find it hard to imagine outright deflation in the USA. Certainly with the collapse in oil prices one could argue a significant disinflation has appeared. But the USA is a massive energy consumer...especially if we're talking Government consumption. I don't see that changing anytime soon so oil will find support at some point here.
The bigger problem I think is the Fed, the dollar and imports. Interest rates have nowhere to go but up, the dollar has been VERY strong for well over a year now and imports are now surging. So far this hasn't been passed on as "dramatic price decreases" at all save for fuel.
When I see a gallon of milk at a buck and a dozen eggs at 49 cents I'll get back to you....
Price controls. More signs on the way: "We sell at the lowest price the law allows". Cigarettes, milk, and now the rest of everything we buy? Yes, they can be that stupid.
"Congress just passed a trillion dollar spending bill for 9 months. I find it hard to imagine outright deflation in the USA."
In 1999, it was difficult to imagine the NasdaQ at 1,100 again. It was difficult to imagine 46 million people on food stamps or 92 million people not working. It was difficult to imagine the FED leveraged up over 50 to 1. It was difficult to imagine ZIRP and QE. It was difficult to imagine no doc home loans. It was difficult to imagine Citi would have 60 trillion in derivatives exposure and get a second guarantee to be bailed out by the tax payers.
When the coming outright deflation happens, it will no longer be difficult to imagine.
Correction: over 100 million people not working. Yeah, it rose by about 10 million since this time last year. Hard to keep up with how fast everything continues to deteriorate.
"Now, under pressure from falling commodity prices, the process of deflation seems to be gathering speed. "
No truer words have been spoken...
http://www.globaldeflationnews.com/inflation-vs-deflation-part-1which-on...
because it's a bubble...
http://www.globaldeflationnews.com/anatomy-of-a-bubble-how-the-federal-r...
....investors are once again starting to seriously question the disclosure from the largest banks and investment houses regarding their credit exposure to highly leveraged borrowers. This concern is evidenced by weakness in the equity market valuations of lenders with exposure to the oil sector as well as the recent changes in the relative position of spreads in the U.S.bond markets.
Wow, investors r dumb!
"....investors are once again starting to seriously question the disclosure from the largest banks and investment houses regarding their credit exposure to highly leveraged borrowers."
The current bull market began after FASB was to to allow the banks to lie about the value of assets. Why would investors be concerned now, when they haven't cared for the last 5 years?