Research & Commentary

The Emerging Power of Deflation is Felt Around the Globe

Forget inflation.

The next big monetary event will be deflation, despite unprecedented stimulus programs from central banks around the globe.

Right now, an elevated social mood is holding back deflation’s full force, but evidence of a worldwide contractionary mindset is already being felt in a wide swath of business sectors.

Global bond defaults are rising and many clients of creditors are now way behind with their payments.

A deflationary mindset has taken hold across much of Europe, Australia, Japan and even in a country as far-flung as Mongolia.

The September 2016 Elliott Wave Financial Forecast warns that deflation still has a long way to go. Here’s an excerpt:

Deflation Is Here but Not Here
As we emphasized last month, the spreading global real estate meltdown reveals the emerging power of deflation. But deflation is also evident in other areas. Stories now acknowledge its influence in everything from a ratings downgrade of the Kroger Co. supermarket chain to British and Australian grocery store price wars. “The current deflationary environment in food retail—particularly in the midst of an otherwise healthy economy—is a nearly unprecedented event in recent industry history,” reports Supermarket News. “Epic Fall in Food Prices Brings No Joy to Farmers or Grocers,” says a Tuesday headline in The Wall Street Journal. Japan’s consumer prices fell in July by the most in over three years, while Spain’s August CPI decline of -0.1% was the 13th consecutive month with no inflation. Russia now faces “Deflation for the First Time in 5 Years.” As global bond defaults rise, small businesses scramble to pay bills, because “customers, who once paid on time, settle up late.” PAYDEX, a Dun and Bradstreet index that measures the timeliness of credit payments, fell 3% in the first half of 2016. “Clients who used to pay on time like clockwork all of a sudden are 30 or 40 days late.” In June, we argued that consumers were adopting a “deflationary mindset.” Luxury and restaurant sales now confirm that this behavioral shift is taking place. “Weakening demand in key markets is hurting high end brands,” says Bloomberg. Hugo Boss is the latest luxury goods maker to close stores. Over the next 18 months, it will shutter 40 of its 443 stores. Prada’s first-half profits fell almost 25%. Citing “excessive discounting,” Ralph Lauren, Coach and Michael Kors Holdings, offered “gloomy forecasts” in early August. The resulting industry chaos is apparent by luxury brands’ efforts to extricate themselves from slack sales: some plan to expand “their footprint in Asia,” while others will shrink it. In response to a similar sales shrinkage, restaurants are furiously adjusting their menu offerings. Burger King is “the latest to report slowing sales growth [despite extensive menu changes], sounding another warning bell for the entire restaurant industry.” Americans are discovering it is much cheaper to eat at home, and the “New Eating Habit Is Crushing the Restaurant Industry.” McDonald’s CEO adds that the gap between eating at home and away from home “is clearly impacting the whole eating out industry.” The Elliott Wave Theorist has identified a decline in the popularity of restaurants and a preference for home cooking as a bear market social trend.

But social mood is still elevated, so deflation’s full scourge will hold off awhile longer. With the Dow Jones Industrial Average near record highs, forward-looking headlines continue to play down the deflationary potential. Here are some prime examples from recent weeks: “Bosnia’s Deflation Slows,” “Higher Oil Prices Could Save Asia From Deflation,” “The End of Deflation in China Will Be Felt Around the World” and from World Economics, “Price Deflation in Mongolia Eases Further In August.” Phew! That was close. As far as we know, no reporter has yet realized that deflation’s very existence in such far flung places is evidence of its tightening grip. Instead, some observers seem to go out of their way to avoid even using the word. For instance, the Slovak Spectator on August 5 said that “year-on-year inflation stood at minus 0.9% in July.” Such tiptoeing is just another sign of how far deflation has to go. When the bear market swings into full force, deflation’s days of relative anonymity will be over.

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