The U.S. Economy: 2017 Outlook

The Threat of Global Deflation...

If the recent decline in global currency reserves is an adequate proxy for the forces of global deflation, then we are now possibly facing the most serious threat to the global bull market since it began in 2009. Central banks have a huge QE hurdle to overcome (more than $1 trillion).

I believe they will overcome it, thanks in part to the ECB and BoJ. But with the Fed missing in action from the QE battle (at least for now), let’s hope China doesn’t devalue its currency even more than it did in August, because that could drive emerging markets into a prolonged period of deflationary QT.

But then again, this is a dynamic game, so while a Fed lift-off and the lack of QE seem like a sure thing for now, that could change depending upon the gyrations of the global economy.

Europe's Largest Economy Is Officially In Deflation...

Quote of The Day: The Fed Is Concerned About A Japanese-Style Economy...

“The Fed outlook was so extreme they have to be worried about a Japanese-style no-growth deflationary environment. ”

Harvard Professor, Niall Ferguson

"The Fed has made it clear they intend to be accommodative and proactive, and now I can assume that 'short' rates will remain effectively zero for three years, rather than a year and a half."

Christopher Molumphy, Chief Investment Officer, Franklin Templeton Fixed Income.

Quantitative Easing Explained...

Why Market Risk May Be Higher Than You Think: Reason #3 of 5...

3. Deflation is already here. 

Consumer prices have fallen for 3 months in a row. And, most ominously, it's affecting wages too. The Bureau of Labor Statistics reports that, last quarter, workers earned -0.7% less in real terms per hour than they did a year ago. No wonder the Fed is worried.

In deflation, wages, company revenues, and the value of your home and your investments may shrink in dollar terms. But your debts stay the same size.

That makes deflation a vicious trap, especially if people owe way too much money.

Why Market Risk May Be Higher Than You Think: Reason #2 of 5...

2. The Fed is nervous.

In August the Fed warned that the economy had weakened, and it unveiled its latest weapon in the war against deflation: using the proceeds from the sale of mortgages to buy Treasury bonds. That should drive down long-term interest rates. Great news for mortgage borrowers. But hardly something one wants to hear when the Dow Jones Industrial Average is already north of 10000.

Japan-Like Decade of Deflation A ‘Real Threat,' Experts Say

Pullback in consumer spending and reluctant lending by banks lay the foundation for a lost decade...

By some measures, deflation in United States is no longer a question of if, but for how long and how deep.

“In a lot of ways the economy is soft and there's absolute deflation in things like computers, food and energy,” said Barnaby Levin, managing director at HighTower Advisors LLC, which controls $16 billion in client assets.

Of course, any talk of deflation these days conjures up images of Japan, where businesses and consumers have been hoarding cash since the early 1990s while prices of goods and services have steadily declined.

“I think a Japan-like lost decade is a real threat here for all kinds of reasons,” said Mr. Levin. “After the 2008 market meltdown it scared the heck out of all of us and everybody is now pulling back their spending just like our grandparents did during the depression.”
 
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Japan-Like Decade of Deflation A ‘Real Threat,' Experts Say