Chart of The Day: Deflation's Daddy

On the heels of last week’s deflationary US Consumer Price report (-2.1% y/y for July), we just got one of the most deflationary Producer Price reports ever. Yes, by our math, ever, is a long time…


July’s PPI print came in at an eye opening negative -6.8% y/y.


When we talk about the dynamics of y/y price deflation in Q3 versus what we expect to see in Q4, this is the point. Most people forget that last year’s PPI compares are some of the hardest ever. Look at the 2 year snapshot of this picture, then consider it in the context of the 60 years of PPI data that Andrew Barber compiled with our macro team in the chart below.


So, there are three very important points to take away here:


  1. From a Cost of Goods Sold perspective (for some producers) Q309 Earnings are going to be even more impressive than Q209
  2. Deflating costs at a faster pace than y/y revenue growth = economic leverage
  3. This all ends mid-September


Why mid-September? That’s when you are going to get the August PPI report, and that should mark the low in deflationary reports. From there, you’ll see what we have coined Reflation’s Rotation into Q4. This simply means y/y Q3 price deflation will morph into y/y Q4 price inflation.


If you’re short this market right here – you’re short a lot of things that I wouldn’t be short until September. Duration mismatch (thesis versus timing) is really dangerous for a short seller – take it from a short seller who has learned this lesson the hard way.


Deflation is Bernanke’s Daddy. Until Daddy’s music stops, Bernanke will keep hearing the voices of a Depression. Until that stops, he won’t signal a rate hike. Until he signals a rate hike, the Reflation trade will live on…



Keith R. McCullough
Chief Executive Officer


Chart of The Day: Deflation's Daddy  - a1


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