At the tail end of 2013, journalists asked money managers like myself about perceived threats to stock assets in 2014. My answer was simple: The possibility for policy missteps in the battle against global deflation might scare away risk-takers.
In truth, my commentary received a lukewarm reception. Some argued that deflation is a good thing for consumers and a bad thing for corporations. That surprised me a bit, since the well-being of a corporation’s profits and revenue streams often drive investor demand. More notably, even a rudimentary review of the “Great Depression†reveals the insidious trap associated with prices on goods and services spiraling downward.
It is one thing to dismiss my sentiments with respect to the “d†word. Then again, central banks clear across the globe typically maintain official or semi-official inflation targets. If the central banks authorities around the world value inflation targeting, it stands to reason that influential monetary authorities favor a gradual rise in the price of goods and services, as opposed to a negative central banks.
Why all the brouhaha about deflation? Do we not have clear evidence of economic improvement in developed regions like North America and Europe? That depends on the aspects of an economy one looks at. Last week, central banks Chair Janet Yellen explained that persistently low inflation poses an immediate threat to the U.S. economy. Investors interpreted her words to mean that the “Fed†will maintain its massive stimulus via its zero-percent-interest rate policy for an extended length of time to fight deflationary pressures; the SPDR S&P 500 Trust (SPY) has recovered most of its losses from a previous round of aggressive selling in early April.
More noticeably, global inflation is at its second lowest level since World War II. This is occurring in spite of $4 trillion in Fed central banks (QE). It has also occurred in spite of the central banks (ECB) cutting its benchmark lending rate to a meager 0.25% late last year. Worse yet for Europe, inflation currently runs at a paltry 0.5% year-over-year. Wage growth (a.k.a. “wage inflationâ€) is non-existent in a region where unemployment hovers near a record high of 12%. In other words, the powers-that-be in Europe will inevitably act by conventional and/or unconventional stimulus measures, weakening the central banks for the stubbornly high euro.
