Europe: The ONE Economic Comparison That Must Not Be Named… Was Just Named

Europe: The ONE Economic Comparison That Must Not Be Named… Was Just Named
The Continent is now teetering on the edge of a “Japan-style” deflation. Here’s our take on it.

By Elliott Wave International

It’s happened. The one economic comparison Europe has dreaded more than any other; the name that’s akin to Lord Voldemort for investors has been uttered: “deflation.”

And it’s not just “deflation.” You can still spin that term in a positive light if you get creative enough. Say, for example,

“Falling prices during deflation actually encourage consumers to spend.”

But once you add the following two very distinct words, there’s no way to turn that frown upside down. And those words are “Japan-style” deflation.

Japan has languished in a deflationary cycle pretty much since the late 1990s, its once booming economy reduced to ‘lost decades’ of stagnation. Europe is now teetering on the edge.” (Sept. 19, Associated Press)

Which begs an obvious question: Weren’t Europe’s central banks supposed to prevent this very scenario from happening via their unprecedented, 4-year-long campaign of “money-printing,” bond-buying and interest-rate-slashing?

The answer to that question is… yes. Those actions were indeed supposed to boost inflation.

What’s more, no one can say the European Central Bank didn’t utilize every available tool in their arsenal to try and accomplish that end. The problem is they were fighting a losing battle.

And, we are both happy and sad at the same time to report that from the very beginning, when the first rate cut was loaded into the save-the-economy cannon, we at Elliott Wave International foresaw that Europe’s retreat toward deflation was unavoidable.

Here’s a quick recap of what led us to that conclusion.

– 2011 –

January 2011: The “D” word is way off the mainstream radar. Soaring oil, grain, and commodity prices has fueled widespread fears of runaway inflation. Writes one January 22, 2011 LA Times article:

“Around the world, many countries aren’t confronted with the debilitating forces of deflation, but the opposite — inflation. Annualized inflation in the euro zone rose above the 2% target rate for the first time in more than 2 years.”

February 2011: The European Central Bank unveils its brand-new Long Term Refinancing Operations (LTRO), extending nearly half a trillion euros in 3-year loans to banks at negligible interest rates — to stimulate the economy (and inflation).

July 2011: U.K.’s consumer price index declines, prompting a sigh of relief, not a shudder of fear from the Bank of England, who says “we can now breathe a little easier.”

(VS.)

Our August 2011 European Financial Forecast:

“We maintain our stance, however, that the looming threat is not inflation but deflation. Far from a sense of relief, the Banks’ paramount feelings should soon develop into an unrelenting dread.”

September 2011: U.K.’s consumer price index peaks at 5.2% and officially sets the downtrend in motion.

– 2012 –

January 2012: The Bank of England adds another 50 billion pounds to its asset purchase program, bringing its 3-year campaign of “money-printing” to 325 billion. The European Central Bank is less than 14 years old, yet total assets at the ECB breach 3 trillion.

February/March 2012: U.K. producer price inflation comes in higher than expected, prompting one U.K. economist to say: “PPI: Another wake-up call for apoplithorismosphobes,” the clinical term for those who fear deflation. The economist goes on to recommend that sufferers “seek therapy.” (March 12 Wall Street Journal)

(VS.)

Our July 2012 European Financial Forecast:

“Our models say that inflation rates will keep failing until they’re again measuring the rate of deflation as they last did briefly in 2009.”

August 2012 European Financial Forecast makes the first comparison of Europe to Japan:

“European leaders,” by slashing rates and printing money “seem determined to replicate Japan’s experience. Their efforts will not stop consumer price deflation.”

– 2014 –

May 2014 European Financial Forecast:

“The chart shows that British CPI accelerated lower after falling from a counter-trend peak of 5.2% back in September 2011, with year-over-year price growth just ticks above its late-2009 low.

“More than half of the 28 EU nations either teeter on the brink of deflation or have succumbed to falling prices already.

“The following chart shows that economic stagnation has reached even Germany, Europe’s most robust economy.”

September 2014 European Financial Forecast:

“In a related phenomenon, the press has now jumped on the slew of similarities between Europe’s flagging economy and Japan’s… Clearly, the parallel paths of the two regions have become impossible for the press to ignore.

“The central bank’s latest deflation-fighting contrivance is a €400 billion package of targeted LTRO loans, which are designed to compel banks to lend to ordinary business owners. Also like Japan, the ECB has slashed its main refinancing rate to 0.15% and now charges for banks’ overnight deposits. The result? Shown below, Europe’s largest economy, Germany, just contracted 0.2%; French economic output has ground to a halt; and Italy just entered its third recession since 2008.

The world has finally woken up to the possibility of a Japan-style deflation in Europe — years after the writing was already on the wall.

Now, our newest European Financial Forecast provides you with objective, ahead-of-the-turn analysis of what’s to come.

The best part is, Elliott Wave International’s Investor Open House is still underway.

Meaning: You have until October 1 to get instant free access to the complete latest European Financial Forecast, with its critical insights into the next wave of sea changes in store for the economies across the pond.

Don’t miss out on this amazing opportunity to read EWI’s premier subscriber reports FREE >>


This article was syndicated by Elliott Wave International and was originally published under the headline Europe: The ONE Economic Comparison That Must Not Be Named… Was Just Named. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

When World Order Becomes Disorder

Is the post-Cold War global boom over?

Since the fall of Bolshevism, the world has seen remarkably sustained growth in international cooperation, brought about by freer trade and new technologies. Financial assets have generally performed well, increasing prosperity across most of the world. There were just two major interruptions—the tech crash in 2000, and the financial crash in 2008.

The world warmed up fast after the Cold War. Prices of most commodities rose, despite major corrections:

  • Oil climbed from $15 per barrel to as high as $140. It collapsed with the crash, but climbed back swiftly to near $100.
  • Corn climbed from $2 to as high as $8 before sliding to $3.60.
  • Copper climbed from 80 cents to $4.30 before sliding to $3.
  • Gold shot up from $350 to $1,900 before pulling back toward $1,200.

So what’s happening with commodity prices now? Is this just another correction, or has the game really changed?

Commodity prices have risen against a backdrop of falling interest rates:

The US ten-year Treasury yielded 8% as recently as 1994, and as low as 2.1% during the crash. Recently the consensus target was 4%—before fears of outright deflation drove it to 2.4%. Bond yields have fallen below 1%. Even the bonds of the southern members of the Eurozone yield Treasury-esque returns.

Remarkably, those low yields persist even as major geopolitical outbursts have ended the mostly benign post-Cold War era. The foundations of global economic progress are being shaken by geopolitical earthquakes from Russia and Ukraine to Syria and Iraq, where a new caliphate has been proclaimed.

It seems bizarre, but the world is heading toward a revival of both the Cold War and the Ottoman Empire.

Unfortunately, these concurrent crises are occurring at a time when the great democracies’ leaders bear scant resemblance to those leaders responsible for the end of the Cold War and the launch of global cooperation and free trade: Reagan, Thatcher, and George HW Bush. Mr. Obama won his nomination by voting against the invasion of Iraq. He ran on the promise of ending wars, not starting them. Now, faced with sinking popularity in an election year that could give Republicans complete control of Congress, he naturally fears dragging America into the ISIS chaos—or Ukraine.

Obama is also haunted by the collapse of his most daring and creative foreign policy achievement—the reset with Russia. Last week, Mr. Putin doubled down on his Ukrainian attacks by warning that Russia should be taken seriously, because it is a major nuclear power and is strengthening its nuclear arsenal. Those with long memories recall Khrushchev banging his shoe at the United Nations and shouting, “We will bury you!”

Meanwhile, Western Europe’s leaders show few signs of being prepared for either crisis. Angela Merkel, raised in East Germany, is cautious to a fault. British Premier David Cameron is struggling to prevent Scottish secession and to deal with the likely return of hundreds of ISIS-trained British citizens. (Military analysts generally agree that well-funded returnees with ISIS training are much greater threats than Al Qaeda ever was… yet Cameron has failed to convince his coalition partner to support restraining their re-entry into British Muslim communities.)

The backdrop for long-term investing has, in less than a year, swung from promising to promises broken by wars and threats of more-terrifying wars.

Another unlikely threat is deflation.

DEflation?

When central bankers have been running the printing presses 24/7?

Most economists, strategists, and investors would have deemed deflation a near-impossibility with government debts at all-time highs, funded by money printed at banana-republic rates. Who thought that the Fed would quadruple its balance sheet? And who dreamt that such drastic policies would be sustained for six years and would be accompanied by outright deflation in much of Europe and minimal inflation in the USA?

So why have Brent oil prices fallen from $125 in two years despite production outages in Syria and Libya and repeated cutbacks in Nigeria? Are Teslas taking over the world?

The answer is that the US is once again #1 in oil production, thanks to fracking (in states that allow it). Mr. Obama likes to boast about the new US oil boom, but he has been a bystander to this petro-revolution. According to an oil company executive interviewed in the New York Times last week, without fracking, global oil prices might be at $200 a barrel, and the world would be in a deep recession. He’s a Texan and thus inclined toward hyperbole, but his point is directionally valid.

US frackers—deploying advances in science and technology with guts and skill—have averted fuel inflation. And farmers, using the tools of modern agriculture—GMO and hybridized seed, farm machinery equipped with GPS and logistics, and carefully monitored fertilizers—have combined with Mother Nature to unleash record crops of corn and soybeans. So much for food inflation.

Capitalism is doing its job: to expand output of goods and services, thereby preventing shortages from derailing recoveries through inflation. That success story means central bankers can keep printing away.

So what should investors do? The S&P’s rally has been sustained through near-zero-cost money used to:

  1. Buy back stock to enrich insiders and please activist hedge funds which have borrowed big to buy big;
  2. Prop up the overall market because investors have learned that buying on margin when the costs are minimal—and below dividend yields—just keeps paying off. Stein’s law says, “If something cannot go on forever, it will stop.” Too bad it doesn’t say when.

Gold loses its luster when:

  1. Inflation seems to be as remote as a pot of gold at the end of the rainbow;
  2. Even a concatenation of crises fails to send investors rushing into the time-tested crisis consoler.

2014 has become the year of increasing geopolitical risks. We see geopolitical risks expanding from here—not contracting. Given global instability and rish the broad stock market is precariously valued.

We have entered an era when wise investors will devote as much time to reading the foreign news as they allocate to reading the investment section.

Knock, Knock. It’s Deflation. Deflation Who?

(Video) Knock, Knock. It’s Deflation. Deflation Who?
The Elliott Wave Financial Forecast warns that the contracting U.S. economy signals deflation ahead

By Elliott Wave International


In June, the U.S. government, revising its previous number, reported that the economy shrank by 2.9% in the first quarter of 2014.

The steep plunge caught the bulls by surprise.

It was substantially worse than the preliminary forecast
for a 1.0% contraction, which itself was a far cry from the
initial 0.1% growth forecast in April.

As you can see on this chart, the last time the economy shrank was Q1 of 2011 (a 1.3% dip).

The [2.9%] decline was the sharpest since growth tumbled 5.4% in the first quarter of 2009 during the Great Recession. It was also one of the worst falloffs outside of a recession since 1960.

USAToday, June 25

The Elliott Wave Financial Forecast, the monthly
report issued by Elliott Wave International, the world’s largest
financial forecasting firm, which is well-known for calling
into question many mainstream forecasting methods, holds a
drastically different outlook from the government. If you
too don’t trust the government projections, EWI is a good
source of contrarian-minded research and analysis.

Financial Forecast co-editors Steve Hochberg and
Peter Kendall warn that investors are dangerously discounting
the potential for a market selloff. They say the economy is
slowly contracting and winding its way toward outright deflation,
and the recent government revision is evidence of deflation
in action. In their recent issues of the Financial Forecast,
they have documented more than two dozen measures of extreme
investor optimism, a classic reversal indicator for technical
analysts.

After the government’s Q1 revision, the stock market hovered in positive territory. What’s more, the Consumer Confidence Index registered a six-year high.

But Hochberg and Kendall believe, in spite of all the optimism, that this latest revision should raise concerning questions among investors about the sustainability of today’s exuberant psychology — especially now that economic growth is inconsistent with the prevailing psychology. When so many sentiment indicators align in one direction, it’s a good time to check in on what the opposite side of the trend might look like. After all, markets never go in the same direction forever, and they tend to reverse alongside extremes in sentiment. Investors who are aware of and prepare for such turning points dramatically increase their chances of surviving them.

For specific forecasts and analysis from Hochberg and Kendall’s latest, July Financial Forecast, click here. You will get free access to a big chunk from their latest issue, complete with labeled technical charts.

This
article was syndicated by Elliott Wave International and
was originally published under the headline (Video) Is That Deflation Knocking on the Door?.
EWI is the world’s largest market forecasting firm. Its staff
of full-time analysts led by Chartered Market Technician
Robert Prechter provides 24-hour-a-day market analysis to
institutional and private investors around the world.

A Financial Storm Approaches

It is so easy for a country to print money… Said another way, it is so easy for a government to create inflation.

Because it’s so easy, nobody believes that DEFLATION – the opposite of inflation – is possible.

But it is

Financial StormEarlier this week, Republican politicians proposed a bill that would limit the powers of the Federal Reserve.

We are all for limiting the powers of government… But if the Fed’s powers are limited, its ability to print money would be limited… If this happens, persistent deflation could be an outcome – and that could trigger a financial storm that nobody is expecting.

“The most likely path of the Federal Reserve policy in the years ahead is the continuation of massive money printing to fend off deflation,” Jim Rickards writes in his excellent book The Death of Money. However, “the Fed may reach the political limits of printing.”

This is a scary thought for the Fed.

“Deflation is the Federal Reserve’s worst nightmare for many reasons,” Rickards explains. The new bill proposed by the Republicans is an example of the Fed reaching the political limits of money printing.

For one, “Deflation increases the value of government debt, making it harder to repay. If deflation is not reversed, there will be an outright default on the national debt, rather than the less traumatic outcome of default-by-inflation.”

Even worse, deflation “feeds on itself and is nearly impossible for the Fed to reverse.”

If deflation actually takes hold, how can we get out of it?

Rickards explains it: “The only way to break deflation is for the United States to declare, by executive order, that gold’s price is, say, $7,000 per ounce, possibly higher.”
Deflation can be broken when the dollar is devalued against gold, as occurred in 1933 when the United States revalued gold from $20.67 per ounce to $35.00 per ounce… If the United States faces severe deflation again, the antidote of dollar devaluation against gold will be the same, because there is no other solution when printing money fails.”

To be clear, Rickards isn’t actually predicting deflation…

He says we’re in an epic battle between inflation and deflation… where the government desperately wants to create inflation.

Conventional wisdom dictates that the government will succeed in creating inflation. But Rickards’ book describes an eye-opening, credible argument on deflation could actually take hold.

The actions this week by House Republicans suggest that Rickards is right – there is a legitimate risk that the Fed “may reach the political limits of money printing.”

We highly recommend you pick up  The Death of Money… It will open your eyes…

Death of Money

“The world is witnessing a climactic battle between deflation and inflation,” Jim Rickards writes in his excellent new book The Death of Money.
“It is just a matter of time” before this battle comes to a head.

inflation_vs_deflationAt some point, the U.S. economy will experience “an earthquake in the form of either a deeper depression [from deflation] or higher inflation, as one force rapidly and unexpected overwhelms the other.”

Which one will win? And what are the potential outcomes? Rickards goes over each of those in his book…

Inflation is the easy one to understand… For the most part, the government creates this one… by “printing” trillions of dollars.

Deflation is less easy to understand… For starters, we “have no living memory of it.” The last episode of persistent deflation was in the Great Depression. Rickards calls deflation “the Federal Reserve’s worst nightmare.” For one, deflation “increases the value of government debt, making it harder to repay.”

Because of fear of deflation, the Fed can’t stop its money printing. If it did stop, “deflation would quickly dominate the economy, with disastrous consequences for the national debt, government revenue, and the banking system.”

Which will win – inflation or deflation?

Rickards explains that “the most likely path of Federal Reserve policy in the years ahead is the continuation of massive money printing to fend off deflation.” The Fed assumes it can later deal with inflation that it might create.

I agree with him. Governments have proven for centuries that – while they might be pretty bad at most things – one thing they’re pretty good at is creating inflation through printing money.

The easy conclusion is that inflation will win… but many times, the easy conclusion isn’t necessarily the right one.

In his book, Rickards builds a strong case for how deflation could win as well.



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Whether inflation or deflation wins this battle, Rickards makes a strong case for a higher gold price.

If inflation wins, then it will take more paper dollars to buy an ounce of gold. And if deflation wins, then the price of gold will move higher to break that deflation…

The only way to break deflation is to declare by executive order that gold’s price is, say, $7,000 per ounce… the purpose would be not to enrich gold holders but to reset general price levels. Such moves may seem unlikely, but they would be effective… there is no other solution when printing money fails.

Our money is on inflation winning the battle – ultimately – but we think it could take a few years for the clear winner to emerge. In the meantime, we are likely to see short terms swings between deflation and inflation.