Deflation Is Here to Stay

by: Ray

I am a firm believer that this administration, along with Uncle Ben, has it out for the US dollar and both have a policy of dollar devaluation in the long term. After all, Obama likens himself to FDR, who, as anyone who actually read a history book would know, only prolonged the Depression and actually loved a devalued dollar. Uncle Ben realizes that the only way to grow the economy, pay for Obama’s crazy social plans and cover the present and past politicians reckless spending is to inflate our way out. The operative word in that last sentence is ‘inflate’ meaning inflate the monetary supply thereby creating inflation. However, that is on a much longer time frame, but between then and now it is deflation as far as the eye can see.

No matter what report you look at, the Beige book, ISM or any other industry report there is zero pricing power. As a matter of fact I just saw Old Navy, known for really cheap prices, advertising more 50% off sales and I am willing to bet, especially given the very weak YoY retail sales comps, the sales go to 60%+ very soon. That is not exactly definitive proof of no pricing power. For that you would have to go and see the other hundreds of sales going on in local and national chain stores.

Up until the last few days the only industry that had real pricing power was the energy industry and that is going away very fast. Commodities have been hit hard because of a rising dollar which is driving speculators, finally, out of the space. Oil is getting pounded which will mean lower gas prices. This is great news for Fedex (NYSE:FDX), UPS (NYSE:UPS) and you at the gas pump. Unfortunately natural gas is still holding its own and your state is sure to raise its taxes on your utility bill to cover its budget shortfall so your power bill will likely remain the same or go up, sorry. I should say tech did maintain some pricing power, but not for much longer as the consumer is not returning.

This is all evidence of deflation or lack of overall demand. Frankly, with oil especially, there was never any real demand anyhow as the economy is in worse shape than advertised. For proof, see the continually revised down GDP figures. It is unfortunate that this is the case because this lack of demand, deflation, will mean big trouble for the economy in the next few months. All those wishing, dreaming, or smoking those green shoots will be rudely awakened to the fact that deflation will lead to more jobs being trimmed and sales not meeting expectations. As I have stated many times before, we were on death's door a year ago and earnings expectations have been lowered to levels not seen in years and many companies cannot even beat those figures.

If you cannot beat EPS or revenue estimates that your firm easily beat 5 years ago, there are major problems out there. However, let’s not let the facts get in the way of a great recovery story. Well, actually, there is never really a recovery until demand comes back and with deflation in full swing it is painfully obvious that demand is dead. Just because there has been a huge melt up in stocks does not mean there is a meaningful recovery in the economy, the data disproves that theory. The market is and always has been a horrible forward looking instrument. If it was truly the forward looking oracle like people claim there would never be a correction and we certainly would not have seen 14,000 in the fall of 2007.

Regardless, until Uncle Ben and Obama can create inflation, and believe me they will do whatever they can to create it, we will not have a meaningful recovery. Ironically, they are doing what I guessed they would do, which is setting up a quasi-government banking institution with the TARP funds or a public term lending facility. I do not know what this will do to money velocity, but it will certainly distort it and either devalue the USD or inflate it to levels we have not seen before. Whether this has the desired reaction or not is also unknown, but we will find out. We need controlled inflation from competent public officials, but this government and this Federal Reserve are incompetent.