Deflation Date

When QE commenced back in 2008 the expectation was that it would lead to higher inflation. As QE2, then QE3 came on stream the talk then became of it leading to hyperinflation. So what happened?

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Well, not a lot really. Yes there was an initial surge in CPI, which you would expect after a $US 20,000,000,000,000 “liquidity” co-ordinated attempt by the world’s Central bankers, but in reality it looks more like a “dead cat bounce,” with the trend now headed lower once more, as $20 Trillion is a pittance against the global debt load in place.

The reality, of course, is that whilst official CPI numbers have been muted, asset price inflation has soared, at least all asset prices initially soared, but one by one, emerging market stocks have waned, as have commodity prices, including the precious metals, and latterly bonds of all stripes have reversed direction, leaving only the senior stock averages and the real estate markets defying gravity.

The big news over the past week for Japan is that inflation rose in October by 1.1% year on year, the most in years and is allegedly giving more credence to Prime Minister Abe’s efforts to kick-start the economy and stamp out deflation. A look behind the numbers, however, reveals that after stripping out energy and fresh food costs, the rise was more like 0.3% annualised.

It’s worth a reminder of any correlation between Japanese asset prices and the inflation rate.

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There is no disputing the relationship, either during the inflationary late 1980’s bubble phase or throughout the long deflationary period that followed it. Of equal importance is that whilst the CPI has spiked of late, following the introduction of Abenomics, the judge is still out. It may be more prudent to let the chart do the talking and wait for either a breech of the 2% CPI level and/or a surpassing of the Nikkei 20,000 number before committing.

Particularly IF those asset price “hold-outs” mentioned above are about to hyper-deflate.

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