Central Banks' Battle of the Bulge

On January 10, 2016, Chicken Little warned of a deflationary depression. Within a few weeks of Chicken Little's deflationary warning, exactly the opposite happened -- prices of everything including oil, gold, and stocks and bonds began rising. 

Just today (Oct 30, 2016), the Wall Street Journal printed a front page headline "Inflation, Long Quiescent, Begins to Stir," writing "markets and central bankers alike will be relieved that the world is no longer skirting a deflationary abyss."

Did Chicken Little make the mistake of crying deflation just at the beginning of an inflation? 

The snake you can see, sometimes does bite.

1. 2016: a bull market in everything. 

Every single asset tracked by Chicken Little has gone up in price this year including stocks, bonds, and commodities. The biggest winner has been been oil;the rally has been global and included all asset classes. 

A global bull market in stocks, bonds & commodities.

symbolJan 10 2016Oct 2016% up
US - Dow Jones Industrials16,34618,16111.1%
International stocksEFA$54.93$57.795.2%
Emerging Markets stocksEEM$29.51$36.9325.1%
Dow Jones TransportsDJT6,9468,01915.4%
Russell 2000 (small cap)IWM$103.81$118.0313.7%
Long-term US TreasuryTLT$123.36$130.455.7%
Oil ($/barrel, West Texas Int.) $32.88$48.6648.0%
Gold ($/ounce)$1,106$1,27615.4%
Copper ($/pound)$2.04$2.197.4%
Table: 10/10 assets tracked by CL have gone up in price.

2. The last big push by Central Banks. 

The 2016 monetary mania is the Central Bank equivalent of the German offensive in World War II called 'the Battle of the Bulge'. 

Toward the end of World War II, the Germany army put all its resources into a massive offensive aimed at sweeping west across Europe. 

Chicken Little says "nuts" to Central Banks
In 2016, global Central Banks have pursued the loosest money in history to stave off collapse. Amidst the declines in financial markets in early 2016, the US Federal Reserve panicked and renounced its planned interest rate hikes.  

Other central banks are not even considering raising rates, but rather have cut interest rates into negative territory. In addition, foreign central banks increased the scale of their massive money printing (known as "quantitative failure".)  

The Germans made little progress in their efforts (making only a 'bulge' in the lines). Because the military was depleted by the attacks, the strategy backfired and hastened the fall of Germany. 

Central Bank Collapse

Similarly, central banks have made only a bulge in the deflationary glacier.  The 2016 rally has recovered only one-quarter of the losses of the global bear markets. 

After taking in account recent gains, almost all markets continue to show large losses that have been going on for many years. The bear market in non-US stocks, for example, is closing in on a decade. 

symbolPeak DatePeakcurrent% Declinetime since high
US - Dow Jones IndustrialsAug 201618,61418,161-2.4%2 months
International stocksEFAOct. 2007$86.10$57.79-32.9%9 years
Emerging Markets stocksEEMOct. 2007$55.67$36.93-33.7%9 years
Dow Jones TransportsDJTJan 20159,2038,019-12.9%23 months
Russell 2000 (small cap)IWMJune 2015$129.01$118.03-8.5%16 months
Long-term US TreasuryTLTJuly 2016143.62$130.45-9.2%3 months
Oil ($/barrel, West Texas Int.) May 2008$147.27$48.66-67.0%8 years, 5 months
Gold ($/ounce)Sept. 2011$1,921$1,276-33.6%5 year, 1 month
Copper ($/pound)Jan 2011$4.62$2.19-52.6%5 years, 9 months

While the Wall Street Journal argues "that the world is no longer skirting a deflationary abyss," Chicken Little believes exactly the opposite. 

The world sits on the verge of a deflationary collapse, and the last gasp efforts of Central Banks have failed. 
Deflation! Deflation! Deflation!

No comments :

Post a Comment