Posted on 10/25/2014 10:13:02 AM PDT by Kaslin
There's some interesting discussion points in the UK-based Absolute Return Partners October 2014 Letter, by Niels C. Jensen, most of which I agree with, others not.
Japan-Style Deflation in Our Backyard?Deflation and "Willingness To Do Something"
It is no secret that we have been long-standing believers in deflation being a more probable outcome of the 2008-09 crisis than high inflation. What has changed over the past six months is that the world has begun to move in different directions. Whereas rising unit labour costs in the U.S. make outright deflation in that country quite unlikely, the same cannot be said of the Eurozone.
Japan-style deflation across the Eurozone is no longer an outrageous thought. As you can see from chart 1, there is a close link between CPI and demographics. That has certainly been the case in Japan and I don’t see any reasons why it should be any different in Europe. The negative demographic trends are perhaps not as acute in Europe as they were in Japan in the early to mid 1990s, so one might expect a less dramatic outcome here, but the writing is on the wall. Furthermore, Japan’s problems were multiplied due to an almost complete lack of political recognition and willingness to take drastic action. At least, with Mario Draghi in charge of the ECB, there seems to be a willingness to do something.
Japan piled on debt, built bridges to nowhere, and engaged in other wasteful spending, all of which made matters worse. Taking on debt to fight deflation is insane. Yet that is exactly what France and Italy want now!
Japan's QE certainly did not help either. Both policies addicted Japan to 0% interest rates forever (until of course Japan blows up).
To suggest that the ECB can do something meaningful with European demographics being what they are, the flaws in the euro being what they are, and lack of willingness for France and Italy to initiate badly-needed structural reforms, is simply wrong.
Holding down interest rates and state-sponsored stimulus will have the identical result as in Japan.
As for wages, they are actually rising not only in the US, but also in Europe as I pointed out in European Service Prices Plunge at Steepest Rate Since January 2010; Reflections on Keynesian Stupidity.
In the US, the Fed did stave off for now, another round of price deflation. However, that came at the expense of creating monstrous asset bubbles.
The bursting of asset bubbles is inherently deflationary, and much more damaging than falling prices because of the impact asset prices have on asset-based loans.
I propose falling prices should be welcome across the board.
Behind the Curve?
Is the Fed Falling Behind the Curve?Behind the Curve? Which Way?
As mentioned earlier, the picture in the U.S. – and to a degree also in the UK - is quite different. The Fed increasingly looks like it is behind the curve with the Fed Funds rate remaining unchanged despite a significant rise in unit labour costs.
Not only does that suggest a meaningful rise in the U.S. policy rate over the next couple of years – and therefore also possibly a further rise in longer term rates - but it also suggests a relatively strong U.S. dollar. Forward rates on the Fed Funds rate suggest it will reach 1.50% by June of next year; however, if the latest estimates for unit labour costs are painting a true picture of inflation in the pipeline, one could argue that the Fed Funds rate could go substantially higher.
Which Equity Markets Offer Most Potential?Japanese Equities and the Yen
One area I have not elaborated on yet is Japan. There are strong indications that Japan has finally turned the corner economically. At the same time, return on equity has returned to pre-crisis levels in Japan, but valuations have not.
Japanese return on equity is back to an all-time high
With a more or less fully priced U.S. equity market and a Federal Reserve Bank at risk of falling seriously behind the curve, and a Europe where it is hard to see where growth is going to come from (ex. U.K.), Japan looks remarkably interesting, and I expect it to be one of the better performing mature equity markets over the next few years. Just don’t forget to hedge your currency risk. I am not saying that the Yen will fall, but there is enough uncertainty surrounding the Yen that I would rather not have to worry about that aspect.
Investors (well, most investors) continue to pile in to equities, as if they are the solution to their return challenge.Disconnects
Pension funds are one example of such investors. If such pension funds have fixed obligations (called defined benefit plans in the UK), they currently struggle to generate the level of re turns they need to meet their obligations.
Even if there are good reasons to believe that the prolonged rally can continue for a little longer, there are equally good reasons to believe that the current equity bull market may end in tears. Such is the disconnect between stock valuations and economic fundamentals in some markets.
Why don’t the Japanese want to have sex and make babies?
Greedy, selfish? Maybe they figure kids are too expensive to raise. There's lots of people here who bought into that notion, except here they have the sex and then kill/abort the babies.
Talk is cheap but prices keep rising.
Bacon, hot dogs chuck steak over $5 a pound - that's not deflation.
they keep printing and the money becomes worth less and less which shows as prices rising
Stagflation.
Good one!
I think I’ll go Japanese.
...Bacon, hot dogs chuck steak over $5 a pound - that's not deflation.
imho this is the real problem --not the beef price, the talk; too many people have decided they know it all. We're hearing on this thread that it income cuts, falling gas prices, nothing matters if beef prices went up because rising beef prices mean inflation no matter what. At the same time we're hearing on this thread that beef prices can go up even when the jump brings up over-all averages --and it's not inflation if "supply and demand" are involved.
What's happening in the U.S. is that for a couple of months now average general prices are down, and that's deflation. OK, so food prices are up, but most spending is for stuff w/ prices falling enough to make up for food. Deflation is deadly to economic growth, and on top of that policy makers who should know better often let public opinion cloud their judgment.
The women are telling the guys to bugger off.
There are now more adult diapers sold in Japan that there are infant diapers. Says a lot.
See, they should just throw open their borders like us and let anyone that wants just stroll in.
Government CPI numbers are a hoax as long as they don't include food and energy.
The government doesn't include either because they are "too volitile".
Isn't price volatility what the CPI purports to measure?
Items like LED TVs might be down in price but people might buy one every five years or so.
We buy food, fuel and electric every day.
Every type of meat is sky high - most double or more.
Gasoline is still almost $3.00 a gallon.
In the weeks before Obama was first elected I bought it for $1.50 to $1.59.
Electricity is constantly going up and that is an intentional increase by the administration.
Obama said he would shut down coal mines and coal generation and he has done just that, driving prices up and up.
But that doesn't show on the CPI either.
Yes you are hearing that. Inflation is a reduction in the purchasing power of the monetary unit (dollar). That has nothing to do with a reduction in the quantity of goods available, that IS supply and demand.
I'm not arguing that their isn't inflation, just that you understand it even less than I do.
Japan has a set of regional/county borders that allocate votes. The farmers in one county may have up to ten times the representation of the city voters.
And one of their actions has been extreme protection of the Japanese agricultural sector - including preventing construction of housing on agricultural land.
I met a ham radio operator from Japan who explained you could either have a wife and kids or a ham radio room in Japan, unless you were rich to have both. Housing is UBER-expensive for many Japanese as a result, which has a contraceptive effect. You might manage one kid in a rabbit hutch apartment, but not two.
Reason is very expensive in Japan right now to raise a family
Sounds great and we got a deal. We say it's inflation and we end the conversation even while you think poorly of my expertise --is this a great forum or what!?!
That's what lots of folks say --I've even heard Rush Limbaugh say that on the air. fwiw, this is from the bls.gov site
Has the BLS removed food or energy prices in its official measure of inflation?
No. The BLS publishes thousands of CPI indexes each month, including the headline All Items CPI for All Urban Consumers (CPI-U) and the CPI-U for All Items Less Food and Energy. The latter series, widely referred to as the "core" CPI, is closely watched by many economic analysts and policymakers under the belief that food and energy prices are volatile and are subject to price shocks that cannot be damped through monetary policy. However, all consumer goods and services, including food and energy, are represented in the headline CPI.
Most importantly, none of the prominent legislated uses of the CPI excludes food and energy. Social security and federal retirement benefits are updated each year for inflation by the All Items CPI for Urban Wage Earners and Clerical Workers (CPI-W). Individual income tax parameters and Treasury Inflation-Protected Securities (TIPS) returns are based on the All Items CPI-U.
http://useconomy.about.com/od/pricing/f/Inflation.htm
would seem to agree with you, at least by one of the three definitions of inflation it gives, so I will defer to your expertise.
Great link --thanks! The links popping up on the pages were fun too:
What Is Deflation? Definition, Causes and Why It's Bad
Inflation Rate Targeting Why a Little Inflation Is a Good Thing
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