Research & Commentary

Evidence Proves: Central Banks Are Powerless Against Developing Deflationary Trend

During the past nine years, global central banks made an unprecedented effort to inflate. One of the markets that should have skyrocketed is commodities. Yet, commodity prices have declined. Look at this chart of a “critical economic bellwether.”

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[Editor’s note: The text version of this video is below.]

Investors have been expecting inflation.

This chart shows a big reason why:

EWI’s May 2017 European Financial Forecast explains:

In 2017, the aggregate balance sheet of the world’s six largest central banks — the Fed, the European Central Bank, the People’s Bank of China, the Bank of Japan, the Bank of England, and the Swiss National Bank — pushed north of $18 trillion, up from about $1 trillion back in the year 2000. Since the 2008 financial crisis, central bank balance sheets have more than quadrupled, and on April 21, Zerohedge, reporting on an article by Michael Hartnett at Bank of America, noted that in the first four months of 2017, the European Central Bank and the Bank of Japan have purchased $1 trillion of financial assets, “the largest [central bank] buying on record.”

In other words, despite “more and more and more” fiscal stimulus from the world’s biggest central banks, inflation remains conspicuously subdued.

This brings to mind what Robert Prechter mentioned in his 2014 edition of Conquer the Crash:

Investors almost universally take news at face value — rather than paradoxically, as they should. So they believed the Fed’s QE actions would be bullish for commodities. But–ironically yet naturally–every launch of a new QE program provided an opportunity to sell commodities near a high. … Are commodities just late in responding and poised to soar? I don’t think so.

Overall commodity prices have continued to trend lower since that comment published. Indeed, over the past nine years since central banks’ began their unprecedented effort to inflate, the Thomson Reuters CRB Index of commodity prices is down 60%.

This chart from the May 2017 European Financial Forecast is yet another hint at the developing deflationary trend:

The chart depicts this year’s reversal in iron ore prices, a critical economic bellwether due to its relationship with construction activity. Prices are off more than 30% after reaching a countertrend peak above $90 dollars per tonne in February 2017.

Investors and the public-at-large have heard the word “inflation” for so long that they’re conditioned to think that way.

But, as EWI sees it, an epic shift is underway.

Let’s return to the May European Financial Forecast:

The end of rock-bottom interest rates will coincide with the beginning of one of the longest periods of economic stagnation in history.

EWI suggests that you learn all you can about deflation before the trend fully matures.

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