Unimaginable #2: Will Inflation Really Remain Elusive?

Unimaginable #2: Inflation remains elusive such that rates stay low and bonds continue to rally AND economies compete to lower taxes! Published 6 December 2017

There is a good possibility that the unimaginable of inflation remains elusive stays unimaginable as more and more predict “stagflation” on the horizon, BUT economic dynamics may be pointing to growth without accompanying inflation! The desire for higher inflation may actually reflect more wishful thinking (implies greater volatility).

In this article from XIIID Research (WHAT I LEARNED THIS WEEK): there is the counter intuitive discussion of Quantitative Tightening rather being inflationary as QE has been deflationary! Take a look at the top chart below – it illustrates that peaks in Velocity of Money Stock (red circles) proceeds CPI (green circles). One could conclude that the current increase in the Velocity of Money Stock should push inflation (CPI) higher. Some will also say the recent strengths of the oil price and the stock market despite the volatility could spark rising inflation or CPI (the 2nd chart below). The Chart below that shows the falling interest rates since 1982 (with a temporary blip upwards in 1984) and the oil price, which as you can see from the 5th chart was highly correlated to the stock markets until late 2014. The article from XIIID Research says the oil weakness was a result of the fall of the Soviet Union and at one point, late November 1998, oil fell to just under $11 a barrel due to Russian dumping it! If oil remains in the current range or weakens, then inflation will remain elusive, but economic and margin growth may still occur (4th chart below) with productivity gains discussed in this IAV post (https://www.invest-a-vision.com/wp/are-productivity-growth-and-the-stock-market-about-to-become-correlated/).

US CPI (red) vs. US Velocity of M2 Money Stock (blue) 1970 – Jan2018

Source: St. Louis Fed / 13d.com

US CPI (blue) vs. US CPI w/out Food&Energy (green) vs. Oil (black) vs. S&P500 (red)

Source: Bloomberg

Oil (black) vs. US 10 yr Yields (blue) vs. US 2 yr Yields (orange) 01JAN1970-13Feb2018

Source: Bloomberg

US GDP yoy Growth (green) vs. S&P500 (blue) vs. US National Assoc. of Home Builders (NAHB, black) JAN1970 – Present

Source: Bloomberg

Oil (black) vs. S&P500 (blue) vs. DAX (green) 01Jul1986-13Feb2018

Source: Bloomberg

BP is estimating peak demand in Liquid Petroleum now… if oil prices climb as many speculate, it will not be driven necessarily by transportation demand…

 

Welcome to the world of constant transformation!

 

 

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