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