Ok, so now that the entire world seems to think we are going to be engulfed in a deflationary spiral, I would like to call for a moment of silence.
May deflation rest in peace….and may the new monster be birthed – inflation.
I suspect within 12 months of this morning note, we will be told a few new things that will be utterly earth-shattering, ending life as we know it going forward:
Commodities will slowly bottom as supply balances with demand (painfully for many)
Oil will find its new equilibrium somewhere between the high $20’s and mid-to high $40’s
Once oil’s price plummet is controlled, we will see that it has hidden a healthy amount of inflation in other areas of the economy (don’t worry – it’s ok).
We will be told that the new “creeping inflation” will be a value killer – it will consume us – it will destroy the dollar and all asset values you own.
Oh and yes, when we do see crude oil rally a bit to find its new equilibrium noted, we will be told – unequivocally – that the rise at the pump will destroy the consumers’ appetite to shop and will “crimp the consumers ability to support retail sales growth required to keep the tepid recovery going.”
When you hear the above, please – please recall that for the last 18 months we have been told nearly the opposite – and it was bad too.
As long-term investors, I surely hope the comedy of some of this is starting to sink in.
After all, we have a ton more to worry about as the announcement today that 14 new cases of the ZIKA virus have been found.
How in the world did we survive on this planet with mosquitoes this long?
What has it been – a few hundred million years? Stunning.
A View of “Inflation”
A couple charts may drive home the point. What was the point?
The world is not collapsing.
We are not in a deflationary spiral set to consume us in a ball of fire as we drop into a black hole in space.
By now we should recognize these things move in cycles. We now move from one set of global fears to the next.
We do suffer from a new virus.
It is called “Apocalypse Now becomes Apocalypse Later.” It repeats. There is no cure.
The top chart shows you that without the impact of the volatile energy sector of the last few years as Fracking has become king and technology has flooded with world with new oil, inflation has been pretty darn steady – right on a 2% trend line – not too hot, not too cold.
The second chart will show you the last two oil shocks – now and back in the 80’s. Yes, we have had one before – and oddly enough, the world survived cheap oil then too.
Track the red line on the middle chart. Let your eye stretch backwards and you will find that we are in right about the same spot we have been for the better part of two decades!
Further, we are lower than we were in the mid-90’s – back when the DOW was – well, something like 10,000+ points lower.
Alas, the last chart is just a little add-on from the ones we chatted about in yesterday’s note: on sentiment and how dire it feels out there for the crowd.
This last one is from Citi Research and it shows their internal panic/euphoria model. You guessed it – pretty low – deep in panic zones not seen in years – and for an extended period.
This hints that the fear is deep and will hopefully continue to stick around.
It bodes well for value hunters – if we can be patient and let it all come to us….and not be eaten by all the Black Swans out there covering the pathway ahead.
There is that tough part again….ugly ugly ugly.
Get me my TUMs and my buy worksheets…..