“Never predict anything, especially the future,” as Casey Stengel wisely said. “But let’s look, instead, at the past.”

Usually, I would leave this type of post to the Steves, Jazz, Ken, Roberts, Edwards, Mikes, Thomas, etc. of Angry Bear Blog and stick to my manufacturing expertise to which flow the big bucks for me; but, this is in laymen’s terms and it makes sense to me at least.  Arend Brett’s latest article on Market Watch “Are We Ready For Deflation” points to deflation rather than the inflation as being the threat to the US economy today. Brett appears (in my best LSS lingo) to suggest deflation is a bigger threat to the US economy.

Albert Edwards at SG Securities believes one fact-based inflation indicator is undershooting the better known ones, such as the regular PCE and the CPI. He adds the indicator is undershooting both of the other indicators more over time.  The forces of potential deflation are all around us with retailers such as Staples, Radio Shack, Penneys, Macys, Sears, Aéropostale, Coldstone, etc. announcing since the start of this year they were closing stores. Some of this is to meet the move towards more internet sales; but as Brett points out it plays hell with commercial rents and retail wages. Having returned from a trip to the area around Shanghai and Shanghai itself, China; the amount of infrastructural building going on to maintain its work force is phenomenal and much of it remains empty. “China is driving down its exchange rate in a bid to keep the factories turning faster and faster.” C&U (Eight plus One) and Tontech have huge $multi-billion investments in plants which are mostly running at a small portion of potential capacity. “There is a giant sucking sound as “quantitative easing” money gets withdrawn from emerging markets, and there are alarming signs that debt bubbles in some of those markets may be about to pop (again). “

The West appears to believe deflation is something unlikely to happen very much like the collapse of Wall Street and TBTF in 2008. We did remove all the safe guards Glass Steagall and a part of the National Bank Act provided regulating banks joining with investment firms and investing on Wall Street. Who would have thought “irrational exuberance” would have been the warning of the decade coming from the man most responsible for creating it? After all, these are reasonable men, why would they endanger their livelihood?

Nobody expected the Japanese to slide into a decade or so of deflation, yet they did as the chart below shows. “The first chart today shows the consumer price index in Japan in the run-up to its ‘infamous bubble’ in the late 1980s and there after. Deflation crept up on Japan slowly. There was even a big head-fake in 1996-7, a short-term bounce in inflation before things headed down again. Maybe it’s just a coincidence, but the path of the market-based PCE here in the west in recent years looks ominously similar. “


In the 1990s the conventional wisdom in Japan was to ‘short’ the Japanese Government Bonds—betting that inflation would pick up, interest rates would rise, and the bonds would fall in price. A generation of money managers got hosed. Prices flattened, and then fell. Interest rates fell with them. Bond prices boomed.”

Could America follow suit? The same as the Japanese money managers, US money managers believe bonds are over valued and bet inflation will pick up; but with the Fed tapering it buy, bond prices have done the opposite. Treasuy Bonds have done the opposite and the yields have come down. Hey, it is a good conversational piece and minus the models.

reference: Arend Brett; Market Watch; “Are We Ready For Deflation”