Why You Should Expect “Price Deflation” Just Ahead
The annualized change in M2 Velocity has “collapsed”
by Bob Stokes
Updated: July 09, 2020
Many people, including a lot of financial journalists, believe that deflation is defined as simply falling prices. Even some economists will echo this notion.
However, Webster's gives this definition:
Deflation is a contraction in the volume of money and credit relative to available goods.
So, the dictionary does not define deflation as falling prices.
Having said that, falling prices are an effect of "a contraction in the volume of money and credit relative to available goods."
Indeed, a specific indicator is predicting falling prices.
Murray Gunn, EWI's Head of Global Research, showed this chart in the recently published July Global Market Perspective and said:
The chart shows that the annualized change in M2 Velocity has collapsed, as not only has M2 Money Stock expanded, but the economy has contracted.
Now look at its relationship with the Core Consumer Price Index... Over the past 20 years there has been a distinct relationship, with the change in M2 Velocity leading Core CPI by around 7 quarters. Therefore, if this relationship holds, we must anticipate a huge drop in the year-on-year rate in Core CPI over the next 18 months or so.
Of course, as you probably know, the Fed has been trying to ward off deflation through its quantitative easing efforts. But, contrary to popular belief, all this "money printing" since at least late 2008 has not lead to price inflation. In fact, "in 7 of the last 12 years, the Fed has been unable" to meet its own inflation target of 2%. (Kitco NEWS, July 1, 2020)
And not just the Fed. Our new, July Global Market Perspective goes on to provide this summary of other economies:
A two-month uptick in Europe's PMI data simply cannot mask the wider economic destruction that will take place over the second half of 2020. At -11.5%, Britain will suffer the worst GDP hit out of the 15 largest economies that the Organization of Economic Cooperation and Development (OECD) just studied. Not far behind, the French, Italian and Spanish economies will each contract at more than 11%.
Yet, a June 24 Reuters article quotes the chief economist of a Munich-based economic think tank:
"We have passed the economic trough, the low point is behind us and things are looking up again."
However, EWI's global analysts disagree with this assessment.
Get more global insights, including analysis of 40-plus markets worldwide, with zero-obligation for 30 days.
Follow the link below for your instant-access, risk-free review of our new, July Global Market Perspective.
The Global Investment Battle is Half Won When …
...you know the main trend of the financial market in which you are interested.
Most global investors do not possess this basic knowledge. Their strategy is usually akin to "buy, hold and pray."
On the other hand, the Elliott wave model helps investors to identify the main trend -- an absolute must before any investment decision is made -- in any global market.
Yet, this is just the first half of the investment "equation." Even if you've reached a high-confidence identification of the main trend, you need to have a good idea of the juncture at which this trend will likely change.
That's the other half of the strategy for winning the global investment battle. Here, too, the rules and guidelines of the Elliott wave model will help you.
Our global Elliott wave experts cover 50+ worldwide markets and they've done the research. They tell you about the main trends -- plus, they tell you what the Elliott wave model indicates about trend turns.
These markets include stocks (key global indexes and individual stocks ready for big moves ), bonds, currencies (including crypto-), energy (crude oil and natural gas) and more. Plus, you get economic analysis of a long list of nations, including the U.S., China, Japan, South Korea, India, Australia, Germany, France, Great Britain and Italy. There are many more.
The publication which brings you all of this financial and economic coverage is the monthly Global Market Perspective , which was once reserved exclusively for institutional clients.
See the difference independent analysis makes.
Heavy buying of U.S. stocks by this group of investors has usually served as an “excellent indicator.” A historical chart provides a case in point. Get the insights you need to know – and learn why these insights are relevant now.
In early May, Jeffrey Kennedy showed a chart of NIO and said the stock was in the early stages of a powerful third wave: See for yourself what unfolded next.
EMLC is a fairly exotic market instrument reflecting the values of… other fairly exotic market instruments. It's an ETF that tracks bonds issued by emerging market governments. Can a market like that reflect accurate Elliott wave patterns? Watch our Interest Rates Pro Service editor explain.