Inflation Monitor – March 2016

Inflation Monitor Summary – Composite Ranking

Inflation Monitor - March 2016 Summary


* The Inflation Equilibrium is a quick summary for the whole data series of the inflation monitor. If you don’t like statistics, this is the chart for you.


Inflation Monitor – March 2016 – Introduction


The first quarter of 2016 has been an interesting one. It started off with a significant bout of volatility and risk-off investing. Then after the stock market bottomed in mid-January and re-tested those levels a few weeks later, it has taken off like a rocket. It was almost as if the global economic troubles didn’t exist anymore. Unfortunately they do… It was almost as if someone (the Fed) waved their magic wand and all the problems of the world just disappeared.

Magic is a wonderful thing. Easter is coming soon. Kids are eagerly awaiting the day where they get chocolate eggs and toys from the magical bunny. What a wonderful thing to believe in magic and illusion.

While many of you don’t believe in the Easter bunny, you probably believe in magic. Earlier this year the markets swooned based on poor economic data, then the Fed told a magical story of how they are data dependent (but only when they want to be) and lowered rate hike expectations and without further consideration the market believed it and started to rise.

Spoiler Alert for those of you who still believe in the Easter bunny, he isn’t real, and neither is this stock market rally.

Sure the prices confirm that stocks and commodity prices have been rising in the past few weeks, but what has really changed? Have US or global economic conditions improved? The only thing that has changed significantly in the past 3 months has been the stock market. So does the Fed’s data dependency include stock prices? Maybe I missed that Fed meeting where they discussed how stock prices determined monetary policy.<end sarcasm>

The Fed’s stated target of four interest rate hikes in 2016 communicated to the public that US economic conditions were strong enough to attempt to return to historically normal rates… At least those were the expectations communicated by the Fed.

At the last Fed meeting, Fed Chairwoman and magician Janet Yellen indicated that the number of rate hikes may be closer to only two. Like magic, the markets rose to greet the new bullish expectations. Apparently four rate hikes was too much and two was just the right amount. The Fed has a notoriously poor track record of predicting the future of interest rates and inflation, but in this case there may be another motive.

The Fed has another magic trick in their act other than changing the fed funds rate and printing money. With a few carefully placed words they can change the direction of the stock market. All market participants want to know what the Fed says. They hang of every word uttered by Fed board members. Yet what the Fed actually does is very little. One meeting they predict 4 rate hikes and the next they reduce it to 2. They have not changed any of the underlying conditions, but like magic, they have made everything all right again in the markets.

This is one of the Fed’s greatest tricks…

Read More…

Inflation Monitor – March 2016 Read More »

Inflation Monitor – January 2016

Inflation Monitor Summary – Composite Ranking

Inflation Monitor Summary December 2015

* The Inflation Equilibrium is a quick summary for the whole data series of the inflation monitor. If you don’t like statistics, this is the chart for you.


Inflation Monitor – January 2016 – Introduction


Happy New Year. I hope you enjoyed your holidays with lots of eggnog and holiday cheer.

2016 has started with a bang… or rather a thud. The US equity markets have had their worst start to the new year ever. I guess you could say that the thud has not happened yet since the US stock markets are still falling. The Chinese stock markets have gotten all the blame, but I think the drop in equities is overdue.

In week one, S&P 500 (-6%), NASDAQ (-7.3%), and Dow (-6.2%). Gold surprised to the upside +3.1%.

End of week two, S&P 500 (-8%), NASDAQ (-10.4%), and Dow (-8.2%). Gold is still up 1.8%.

If you have been following this Inflation Monitor for the past year you will know my thoughts on the markets. We saw strong deflationary data last year. Not surprisingly, no one noticed. The fact that it took the equity markets this long to react to this data is really the only surprise I see.

If you have not read my 2015 recap, then now is a good time to read it. Last year the S&P 500 ended with a performance of -0.7%, which is surprising since many blue chip companies were down between -10% & -20% for the year. If you did nothing but look at the index, you would have missed the large dislocation of the index performance and the performance of the underlying stocks.

The risk you should consider this year is contagion. This is the risk of assets selling off because other assets are selling off, having very little to do with underlying fundamentals. For example, if the high yield bond market continues to sell off or worse yet, crashes, then the investment grade corporate bond market may also sell off. This in turn could lead to a sell off in equities and other assets. The spread of this contagion is not knowable, but you should be aware of this risk.

Read More…

Inflation Monitor – January 2016 Read More »

Why You Should Worry About Japan Deflation?


Is the U.S. becoming Japan?

Japan has long been known as an example of what can happen when you allow deflation to happen in an economy which is highly reliant on persistent inflation to sustain itself. What is happening in Japan is one of the reasons that the Federal Reserve is trying so hard to avoid deflation in the US.

Japan is in a challenging economic situation. This is mainly due to their demographics. They have an aging population, where the amount of elderly people is quite a bit larger than the younger generations. Anecdotally, in 2011 sales of adult diapers exceeded the amount for baby diapers.10. The chart below shows the demographics of Japan during 3 periods of time with approximately 50 years in between. A shrinking population can become a problem in an economy because it is a strong deflationary force. Japan has an aging population which will only continue to shrink over the next few decades. While other developed nations have stagnant or slow growing populations, this is not ideal for an expanding economy.

japan deflation

Read More…

Why You Should Worry About Japan Deflation? Read More »

Inflation Monitor November 2014

inflation monitor

Inflation Monitor November 2014 – Introduction

This is the second issue of the Innovative Advisory Group Inflation Monitor. We have received a lot of positive feedback on our first issue of that Inflation Monitor. As you will notice, we have taken some of this feedback and made some minor adjustments to our issue this month. As always, please contact me to send your feedback on how I can make this monthly Inflation monitor a better tool or resource for you.

This month I have added the following indicators:

  • The Rogers International Commodity Index®,
  • US 10 year TIPS,
  • Personal Expenditure Consumption Index,
  • Real median income to the list for reference.
  • US Debt as a percentage of GDP

In this month’s issue I will be discussing Japan, Deflation, US Oil production, Gold and Silver. Given the most recent US market sell off, I think it would be a good time to discuss the other side of inflation… Deflation.

Thank you for reading and I hope you enjoy this month’s issue – Inflation Monitor November 2014.

Kirk Chisholm

Read More…

Inflation Monitor November 2014 Read More »

Scroll to Top