If our global macro risk management process had to be boiled down to 2 words they’d be prices rule. We feel that its critical to maintain data dependence. As prices change; we better change – that’s the model.
In recent weeks, one of our Macro Themes for Q2 (May Showers) has eroded the momentum embedded in one of our other Macro Themes for Q2 (Inflation’s V Bottom). Now this doesn’t mean that the V-Bottom recoveries in the charts Darius Dale has prepared below cease to exist. It simply means that the slope of the year-over-year price moves in both US Consumer and Producer Prices is setting up to rollover in the coming months.
As market prices go, so does inflation/deflation. There is no ideology here. There are no weightings. The mathematical slope of a line is absolute. As we head into the last month of Q2, if commodity prices were to stay where they are today ($65/oil and $2.95/lb copper), Inflation’s V will most likely deflate.
Now, to be clear, inflation is like politics – its local. So what I am talking about here is all about sequential probabilities in US CPI and PPI (as Trichet trashes the Euro, the Europeans will likely see inflation rise, like the British did this week with the highest inflation reading in 17 months at +3.7%).
For the month of April, both CPI and PPI in the US ticked down by 10 basis points sequentially. Yes, even by the government’s compromised and conflicted calculations, these were still inflationary (year-over-year) readings for both the CPI and PPI at +2.2% and +5.5%, respectively. But, and this is a big but, everything that matters to our prices rule model happens on the margin. On the margin, sequential decelerations (month-over-month) in Inflation’s V, are what matter most.
From a modeling perspective, timing the Deflating Inflation’s V is critical. Don’t forget that the lowest deflationary reading of Bernanke’s said “great depression” occurred in July of 2009 at -2.1% (ooh, ahh… what a great deflation reading that was in hindsight… I know, its sad). This mathematical reality only enhances the probability that Inflation’s V starts to deflate against the last of those very easy summer of 2009 deflation compares.
Keith R. McCullough
Chief Executive Officer