Inflation Is not Reflation...

This is the chart that decided the fate of Goldman’s commodities trading prop desk. This the chart that peaked alongside Putin Power. This is the chart that the Depresionistas call “deflation”.

Deflating the bubble of commodity price speculation this is, indeed (see chart). After energy prices got hammered for another -9.3% move in December, the US Producer Price Index continued its decline, albeit at a lesser rate. This month’s PPI was -1.9% versus last month’s -2.2%. That’s deflating, indeed, but at a lesser rate…

The one thing that gets us out of an asset price deflation is re-flation. FDR knew this (so he re-flated gold), and Paul Volcker knows this today. Some people think re-flation = inflation. It doesn’t have to. It’s all about what happens next.

If you show me a price tomorrow that’s higher than today’s – that’s re-flation. In order to build the confidence of the conservative American capitalist, everything needs to re-flate from an acceptably conservative price. Until we get this Crisis in Credibility to morph into the expectation of re-flating prices (like we did in late November, post Obama’s election), this market will continue to trade below immediate term support.

Keith R. McCullough
CEO & Chief Investment Officer