4 Horsemen of Deflation

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While the stock market loves inflation, deflation impedes stock prices, as we have already witnessed with energy-related stocks. Unfortunately, deflation continues to spread around the globe, mainly because of the excessive money pumping by central banks.

chart: Quantitative Easing Across the Globe

Now, the Bank of England and the U.S. Federal Reserve have both turned off their respective money pumps and stopped all quantitative easing. But Japan continues to pump money into its financial system, and the European Central Bank (ECB) recently decided to implement a 60 billion euros ($51.9 billion) per month quantitative easing program.

No central banker wants deflation. So, the purpose of the latest rounds of quantitative easing is to stimulate inflation, end deflation and ignite GDP growth. Unfortunately, all of this excessive money pumping is not working. In fact, economist Ed Yardini recently revealed the “four horsemen of deflation:”

  1. Globalization: This has increased worldwide outsourcing and competition, which effectively helps to keep a lid on both price and wage inflation despite a growing number of consumers around the world.
  2. Technological innovation: Through the process of “creative destruction,” technological innovation constantly puts downward pressure on profit margins.
  3. Demographics: As longevity increases, an aging population like Japan and much of Europe tends to be less prone to buy, even if inflation emerges.
  4. Ultra-Easy Money and Quantitative Easing: Both have boosted government debt and crowded out private borrowing so much so that even mortgage lending in the U.S. has been restricted.

So, all of this excessive money pumping is only creating a worldwide limbo contest where everyone is a loser and respective currencies are destroyed. Just to demonstrate how bad it has gotten, Barron’s recently reported that $3.6 trillion of government bonds (i.e., Japanese and European bonds) traded at negative yields in the last week of January. This is truly an extraordinary development since deflation is continuing to envelope Japan and the eurozone.

What’s interesting is that 10-year government bonds in Japan and Germany now yield only 0.27% and 0.3%, respectively. And in the desperate search for yield, foreign capital continues to pour in America, first flattening our yield curve and then eventually migrating to the S&P 500, which ironically now has a higher yield that the 10-year Treasury bond.

Falling interest rates actually stimulate big stock market rallies. In fact, in the three times prior when the 10-year Treasury bond yield fell below the dividend yield on the S&P 500, the S&P 500 was 33.4%, 35.7% and 25.4% higher on year later. Obviously, this is an incredibly bullish signal for the S&P 500 — and I continue to think our best defense for deflation is to stay fully invested.

Louis Navellier is the editor of Blue Chip Growth.


Article printed from InvestorPlace Media, https://investorplace.com/2015/02/deflation-sp-500-inflation-quantitative-easing/.

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