Despite a 50% rally in equities and the recent surge in gold prices there continue to be little to no signs of inflation in the economy. Consumer credit is still collapsing and banks are still hoarding cash. Perhaps most importantly, the velocity of money actually continues to decline:
SocGen’s Albert Edwards believs the ECRI’s leading indicators are forecasting a drastic and devastating decline in core inflation:
But it is collapsing core inflation that poses the greatest risk to the global economy going forward. We highlighted last week that core CPI inflation descends rapidly, with a lag, after the recession ends. If core US CPI inflation falls by around the 3% shown in the chart below over the next year, that will take the yoy rate to minus 1.5%! Hence the growth in nominal
quantities (e.g. corporate revenues) is set to see disappointing lower highs in this upturn after lower lows. And that, in our view, is just a prelude to a 2010 collapse into outright deflation.
All of this makes you wonder just how real the rally in stocks has been and how much of it has been purely based on government stimulus and the return of confidence – perhaps overconfidence.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.