Deflation: Why the “Japanification” of the U.S. Looms Large
Here’s what characterizes a deflationary crash
by Bob Stokes
Updated: May 28, 2020
The U.S. faces the prospect of a Japan-like deflation.
Let's begin with a brief review of Japan.
Here's a chart and commentary from the 2020 edition of Robert Prechter's Conquer the Crash:
Japan had one of the strongest economies in the entire world, growing at a 9% rate for 20 years up to 1973, and then a pretty strong rate of about 4.5% through 1994. From there, it's averaged about 1%...
Economic growth in the United States today is weaker than Japan's was in 1989 when its bull market ended. The U.S. economy is dramatically weak relative to the amount of central-bank inflating.
Speaking of the U.S., here's a May 18 headline and sub-headline from Bloomberg:
America Is Becoming Japan, Not in a Good Way
The country could be on the brink of its own deflationary era.
Bloomberg referred to this prospect as the "Japanification" of the U.S.
But, getting back to that phrase "deflationary era" -- what would that look like? What is deflation?
Well, many people erroneously believe that deflation simply means "falling prices." Yet, it goes well beyond that.
Let's return to the 2020 edition of Conquer the Crash for a fuller explanation:
A deflationary crash is characterized in part by a persistent, sustained, deep, general decline in people's desire and ability to lend and borrow. A depression is characterized in part by a persistent, sustained, deep, general decline in production... Because both credit and production support prices for financial assets, their prices fall in a deflationary depression. As asset prices fall, people lose wealth, which reduces their ability to offer credit, service debt and support production.
Well, the U.S. has already experienced falling asset prices. Consider oil and other commodities, as well as the stock market -- which, despite the recent rally, is still well off the highs.
Plus, and most importantly, there's been a credit market contraction and slackening production.
In April, manufacturing output declined 6.3%, according to the Federal Reserve. Moreover, industrial production dropped 5.4% and Q1 GDP fell 4.6%. The Q2 GDP number could show a much bigger drop. Current estimates range from a decline of 25% to 40%.
Also in April, the Credit Managers' Index from the National Association of Credit Management slid 8.3 points. That's after a drop of 7.2 in March.
Other deflationary pressures are also in place. As examples, producer prices have been sluggish, and according to the Atlanta Fed's U.S. wage growth tracker, wage growth peaked at 3.9% in July 2019 and fell to 3.3% in April 2020.
Get the full story in our flagship investor package without any obligation.
Follow the link below to take advantage of our 30-day, risk-free trial.
What Will Your Portfolio Look Like a Year from Now?
Or, within the next six months? Or, perhaps, a month from now?
These are the bottom-line questions that most investors ask themselves.
And, our Elliott wave experts do their best to help you prepare your portfolio for what they see for financial markets in the near, intermediate and long-term.
This is from our May Elliott Wave Theorist:
The rally has been so big that momentum-based indicators are issuing signals that a new bull market has begun. All such indicators are quant-based. Absolute quantities do not capture the market's essence and can be misleading when the wave environment changes.
Get our complete analysis now. Choose one month of the Financial Forecast Service below, or get the Service for 6 months and get a FREE copy of the book referenced in the video you just watched, Conquer the Crash, in the Crash Protection Package.
Start Your Subscription Now
You can be ready for risks and opportunities that catch most investors by surprise.
Financial Forecast Service gives you a complete, useful perspective of U.S. markets that you cannot find anywhere else.
for 1 month of unparalleled market insights
"Last Chance" Crash Protection Package
This package gives you the practical tools you need to survive and thrive in this fast-unfolding financial turmoil
You get the eReader version of Last Chance to Conquer the Crash; plus for 6 months, our flagship investor package, the Financial Forecast Service, keeps you updated on the current situation in the markets and the economy.
The "Last Chance" Crash Protection Package saves you $99!
Mainstream financial advisors have made the idea of investment diversification a standard rule. But the better approach is to know the trend of markets -- not diversify for its own sake. Here's an example of how conventional investment wisdom can let investors down.
The recent move in the US Dollar/Japanese Yen has shocked currency market participants far and wide: Now see what our analysis showed subscribers.
Chinese stocks have risen strongly off their October lows. With all the political turmoil in China, many are wondering if the rally is just a flash in the pan. Our Asian-Pacific Short Term Update editor, Chris Carolan, walks you through the Shanghai Composite's Elliott wave pattern to give you an unvarnished, objective answer.