Demand Trends and Deflation Watch

Global Growth

According to the latest IMF Global Financial Stability Report, “Amid huge uncertainties, a disconnect between financial markets and the evolution of the real economy has emerged. High levels of debt may become unmanageable for some borrowers, and the losses resulting from insolvencies could test bank resilience in some countries.”

Euro Zone

Prices on goods and services in Germany in September have decreased by 0.2% year-on-year following zero inflation in August.

The Euro Zone has resorted to negative interest rates to spur growth. Keynesian economists believe such action results in a “liquidity trap“when businesses do not see demand and inflation expectations, they will not increase investment, resulting in fewer jobs and less consumption. Negative interest rates and deflation become mutually reinforcing, with both households and businesses hold cash, causing deflation and a liquidity shortage.


In September, China’s Producer Price Index or factory-gate prices fell 2.1% year-on-year while the Consumer Price Index rose 1.7% year-on-year, missing the forecast for a 1.8% growth following August’s 2.4% rise. 

US Jobs

If you look at the U-6 rate (“real unemployment rate”), as it accounts for those who are unemployed, underemployed, and discouraged workers, then the unemployment rate is 10.3% vs. the official (U-3) rate of 7.9%. However, according to ShadowStats the reality is if the unemployment rate included those out of work long-term who stopped looking (Pre-1994 methodology), the rate would be 26.9% which is comparable to the rates we saw during The Great Depression.

Most unemployment measures are declining while long-term unemployment is still rising. The number of long-term unemployed – people out of work for a period exceeding six months – has ballooned. According to the Bureau of Labor Statistics, around 2.4 million Americans were unemployed for 27 weeks or more in September, up 781,000 from the previous month. The last time we saw this kind of jump in long-term unemployment was during the Great Recession. As of August, the long-term unemployed made up 5.1% of the labor force. And if the long-term unemployment rate stays high, the general unemployment rate will stay high, too. If the previous recession is any indication, reducing long-term unemployment may take a long time. 

Small Businesses

According to a study by Brookings released last month, more than 420,000 small businesses have closed their doors permanently since the beginning of the pandemic. That represents a staggaring 7.1% of all small businesses. The report states that through August, more than 18% of all US. small businesses, and more than 27% in leisure and hospitality, had not reopened. Brookings estimates 4 million jobs in the small business sector have been lost and “that will only return with the creation of new businesses.”

Poverty and the Middle-Class

The poverty level for a household of five in the United States is now $30,680. To give you an idea of how close that is to the middle class, the Social Security office has calculated that 44.79% of American workers made less than $30,000 last year, 56.46% made less than $40,000, and 65.91% made less than $50,000. That means that close to half of US workers are close to or below the poverty line. 

US Inflation

September CPI rose 1.4% over the last 12 months. Core CPI was up 1.7%. The Underlying Inflation Gauge (UIG) “full data set” is estimated at 1.3%.

The standout inflation driver since the pandemic began has been used vehicles. Since February, used vehicle prices have gained 14%. In September alone, used vehicle prices spiked 7%. Even though preowned cars and trucks account for less than 3% of the total consumer price index, it “accounted for most of the monthly increase in the seasonally adjusted all items index,” according to the BLS. As the CPI chart shows, Core CPI excluding used vehicles and housing actually fell in September.

Many goods prices that had spiked earlier on have either stopped rising or have started falling. Appliance prices fell 2% in September, while housekeeping supplies prices fell 1%. 

Perhaps most notable is the reversal in meat prices which jumped more than 13% between February and June and are now less than 4% higher than February.

The bigger worry, however, is what’s happening with the prices of services. In education, for example, prices are either flat or in outright decline.

Overall, services prices excluding energy were flat in September, while the annual inflation rate has slowed markedly. 

According to Gary Shilling, “If you think serious inflation is coming, you don’t believe in the fundamental power of excess global supply to depress prices. With globalization, Western technology is combined with cheap Asian labor to produce a vast array of goods and, increasingly, services. But Asian consumers purchase only a fraction of what they produce. China’s consumer spending is just 39% of gross domestic product, compared with 68% in the U.S., resulting in a saving glut that is highly deflationary.”

Falling prices may seem good for consumers, but they won’t be appealing if they translate into lower revenues for businesses and lower incomes for workers and investors.

Global Deflation

It’s a club that more countries may soon be joining.

Major central banks around the globe might be engaged in a manic policy of monetary and public debt INflation, but DEflation is growing. This week, banks are reporting that corporate loan demand and personal credit card use are declining, and savings rates remain high. A declining social mood appears to be fueling private debt deflation. But it’s price deflation that is grabbing attention at the moment as more countries slide into declining consumer prices.

The chart below shows the list of countries around the world where consumer prices are declining on an annualized basis (price deflation). Germany, the Euro Area and Australia are three recent additions to the club. This list of 36 countries amounts to 19% of the 185 countries that monitors. Almost one fifth of the planet is experiencing declining consumer prices.

If we add in the countries where the annualized consumer price inflation is below 2% (considered by major central banks to be sub-optimal), the list of countries grows by 60 to 94. We can therefore state that 51% of the planet is experiencing sub-optimal – to the banks – consumer price changes.

We can refine the analysis to take out smaller nations and economies. Looking at the world’s major economies as defined by the G20 plus Netherlands, Spain, Switzerland and Singapore, we find that 29% of countries are experiencing price deflation and 66% have consumer price inflation running below 2%.

Secular Outlook for Stocks

The historical average for P/E has been in the range of 15 to 16,, depending upon the period used for the long-term average. The high range for P/E, under low and stable inflation rate conditions, has been 20 to 25. The low range for P/E, under high inflation or material deflation conditions, has been 5 to 10.

Going forward, we should expect a new paradigm. Slower growth drives the ranges for P/E lower, which will affect future assessments of fair value. Keep in mind that, had real economic growth averaged 2% instead of 3.3% over the past century, the historical average for P/E would have been near 11—not 15 or 16.

In the future, the fair value for P/E when the inflation rate is low will be 13 to 15. With average inflation, expect P/E to be near 11. During periods of high inflation and significant deflation, expect the low range for P/E to be 5 to 8.

This is not an extreme outlook. It is simply the quantification of concepts that nearly all investors use daily. As is commonly recognized, high-tech high growth stocks have higher P/Es; lower-growth household product companies have lower P/Es.

Market Waves, Demand, and Disinflationary Trends

Stock Prices Wave – bearish

Stock Prices / Volume Waves – bearish

Stock Prices / Volatility Waves – bearish

Momentum Wave – neutral

Stock Prices Intermediate Price Trend – bearish

Economic Demand

Participation Rate

The labor force participation rate decreased to 61.4% in September 2020.


After falling steadily for months, first-time unemployment claims have been elevated since early August, hovering between 800,000 and 900,000 and leading economists to fear the jobs recovery has lost steam.

Slightly more than half the 22.1 million net jobs lost in early spring as states shut down nonessential businesses to curtail the outbreak. 

The good news is that millions of jobs that were lost in the spring were in fact temporary. The bad news is that we are not even close to a bottom in the rise in permanent job losses which is happening at a faster pace than the Great Recession.

Recovery – Permanent Jobs


Total nonfarm payroll employment rose by 661,000 in September, below its February level by 10.7 million, or 7.0 percent. Employment in leisure and hospitality increased by 318,000, accounting for almost half of the gain in total nonfarm employment in September.

In April there were 18 million more unemployed than job openings. Since then the gap has closed somewhat, there are 7.1 million more unemployed than available job openings. As a result, there were just over 2 unemployed workers for every job opening.

Middle Class Income Expectations

Middle- and lower-class people continue to experience job loss, food insecurity, unable to pay bills, and eviction or foreclosure. The Census Bureau’s latest Household Pulse Survey shows 59.2 million Americans expect someone in their household to have a loss in employment or take a pay cut ahead of the presidential elections.

AND the need for a second stimulus package is presently mixed with Senate majority leader McConnell saying that many Republican senators believe the economy has already seen enough stimulus. 


The reality is demand/GDP has been on a downtrend since before the Great Recession and we may very well had been headed for recession before the pandemic.


Euro Zone

The eurozone’s pandemic-hit economy sank into its second consecutive month of deflation in September, intensifying pressure on the European Central Bank to consider injecting more monetary stimulus.

Headline consumer price inflation fell to a four-year low of minus 0.3 per cent in September, below the expectations of economists surveyed by Reuters and down from minus 0.2 per cent in August.

It is the first time the eurozone has had two consecutive months of deflation since 2016, despite the ECB subsequently launching successive bond-buying programs totaling trillions of euros and cutting interest rates deep into negative territory.

The ECB’s money pump (bottom graph) has run at breakneck speed as total assets at rose six-fold from 1999 and then spiking above €6 trillion this year. All the major central banks put up hundreds of billions of emergency funding from early February to mid-March, providing trillions in liquidity operations.

The ECB cut interest rates an unprecedented 39 times alongside other central banks. These collective actions, though, did not underpin stocks — which collapsed 40% over that time. The view that the ECB, the Bank of England, or even the Fed can bolster stocks by printing money runs contrary to all available evidence.


In August, the Consumer Price Index (CPI) inflation fell to 0.2%. CPI excluding food prices fell to -0.4% plus energy fell to 0.1%.


Now everything depends on US stimulus: The stock market, the wealth of the wealthiest, and consumer spending – thereby not only the entire US economy but also imports from other countries, and thereby the economies of China and the rest of the world.


Since 2008 money and credit growth have been slowing.

Recently, credit card balances and other revolving credit fell “unexpectedly” by $3 billion in August, to $950 billion, the lowest since July 2017, and a level first obtained in September 2007.

Credit card balances and other revolving credit fell a devastating 9.5% from a year ago.

Money velocity has dropped over 30% year over year through September 30th.


A 2nd stimulus will obviously prolong the temporary recovery. Temporary in the sense that the jobs that haven’t returned by now will not be coming back means that the more reasonable U-6 unemployment rate combined with low productivity will continue to dampen consumer demand and inflation, short, intermediate, and long-term. The only question remains when will deflation hit the US.

Secular Outlook

The charts above reflect deflationary headwinds and thus increased downward pressure lies ahead for prices.

Stocks should trend lower due to deflationary concerns, and below-average returns are ahead of us as the larger secular bear unfolds.

Market Trends and Secular Outlook

Short-Term Price Wave Trend bearish

Intermediate-Term Price Golden Cross Trendbearish

Momentum Wave Trendbearish

Volume Wave Trendbearish

Volatility Wave Trendbearish

Wave Trend is measured by the Elliott Wave Oscillator. See details

Secular Outlook


The chart below shows the degree of Non-Financial Corporate Debt to GDP and Baa Corporate Bond Yield. As you can see up until around 2012, there was a relationship between the two. Then corporate debt took off while yields have kept declining. Ordinarily, this would give off an impression of being a profoundly strange circumstance and likely unsustainable. The undeniable instance of Japan comes into view where rates and bond yields fell during the 1990s, joined by the start of private debt deflation. A comparative circumstance could be growing now with U.S. Debt. Another reason it is currently an ideal time to deflate.


Last Thursday’s arrival of the Core Personal Consumption Expenditures Price Index (PCE) for August indicated a year-on-year pace of progress at 1.6%. Given this proof of higher prices, one may believe the Fed keeping loan fees unaltered for the following three years may begin to change. However, both the 3-month Eurodollar futures and the 2-year Treasury yield were unchanged as the snooze-fest in the front end of the yield curve continues. Keep an eye on Core PCE by all means, but don’t expect the Fed to do anything on rates until well after short-end market interest rates have moved significantly higher.

Income & Spending

August nominal personal income growth declined by 2.7%. Real disposable personal income fell 3.5%. The decrease in income was largely due to the end of the $600/week supplemental unemployment insurance benefits.

Personal spending rose 0.8%.

Source: ZeroHedge


Here is the problem: lower-income coupled higher spending in a time when the vast majority of Americans were looking forward to more stimulus meant that US consumers rapidly burned through savings. As per the BEA, in August, the measure of annualized savings amount tumbled by $723 billion to $2.435 trillion, the lowest since March and far below the $6.4 trillion peaks in annualized personal savings hit in April.

Source: ZeroHedge

Simultaneously, the personal savings rate crumbled by 17.7% to 14.1%: this implies an astounding 60% of the personal savings built up in the aftermath of the COVID fiscal stimulus tide has now been spent.

Source: ZeroHedge


The charts above reflect deflationary headwinds and thus increased downward pressure lies ahead for prices.

As the following chart reflects, inflation below 1% is bearish for P/Es and thus stock prices.

Source: Crestmont Research

Market Wave Trends and Secular Outlook

Short-Term Price Wave Trend bearish

5 Day SMA – 35 Day SMA, Trimmed Mean 20%

Intermediate-Term Price Golden Cross Trendbearish

Current – 200 Day SMA, Trimmed Mean 20%

Momentum Wave Trendbearish

5 Day SMA – 35 Day SMA (Cap vs Equal Weight), Trimmed Mean 20%

For more on Cap Weight as a Momentum strategy, read:

Volume Wave Trendbearish

5 Day SMA – 35 Day SMA, Trimmed Mean 20%

Volatility Wave Trendbearish

5 Day SMA – 35 Day SMA, Trimmed Mean 20%

Wave Trend is measured by the Elliott Wave Oscillator. See details


Previously we have discussed in the post We now have much in common with this country the role demographics and lower GDP in pressing in interest rates and inflation.

Additionally, we find that Money Velocity (M2V) which runs 16-18 months ahead of PCE, projects a significant deflation in prices.

While money-related easing can prop up asset prices such as stocks it has not been able to combat disinflation/deflation. It basically has failed to help its economy and keep inflation steady to promote economic growth and rising wages.

Late in August, the Fed at long last conceded that it had done everything incorrectly. As Fed vice chair Richard Clarida said while talking about the Fed’s new approach “framework” of Flexible Average Inflation Targeting (or no FAIT), this was “a powerful development in the Federal Reserve’s strategy system and mirrors the truth that econometric models of most extreme business, while basic contributions to money related arrangement, can be and have been off-base.” His view is evident in this chart.

What’s Ahead

Disinflation/deflation will continue to put downward pressure on inflation and P/Es. This all means stocks should move lower, and below-average returns are ahead of us as the larger secular bear unfolds.

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