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Deflationary Psychology Versus the Fed: Here’s the Likely Winner

This indicator has been a “steadily waxing precursor to deflation”

by Bob Stokes
Updated: April 16, 2020

Weeks before the February top in the DJIA, the January Elliott Wave Theorist said:

Most economists believe the Fed can prevent financial crises and depressions. We disagree. Socionomic theory proposes that naturally fluctuating waves of social mood regulate financial optimism and the economy. They are unconscious and cannot be managed. [emphasis added]

If people's psychology shifts from expansive to cautious, there's nothing financial authorities can do about it.

That doesn't mean that central banks don't try.

On March 23, after the start of the swift financial downturn, Marketwatch had this headline:

Fed, saying aggressive action is needed, starts unlimited QE

Ironically, on that very day, the stock market declined even further.

But, looking beyond the action of the market, you can also get a good idea about the "fluctuating waves of social mood" from this chart and commentary from our April Elliott Wave Financial Forecast:

ProducerPriceIndex

Changes in producer prices, a key deflationary indicator that tends to lead consumer prices, are already negative. The chart shows the persistent long-term slowing of U.S. producer prices on what Conquer the Crash maintains has been a steadily waxing precursor to deflation and depression. Noting PPI's movement back and forth across the zero line, CTC observed that "economists have had difficulty explaining why producer prices have been so sluggish. The short answer is that deflationary psychology is creeping toward gaining the upper hand, no matter what the Fed does."

It's evident that a deflationary psychology is taking hold globally.

Consider that PPI measures from January-to-February declined in Germany, China, Japan, the U.K, South Korea, Canada, France and Italy.

The closest that the world has come to deflation in modern times was the 2007-2009 financial crisis. However, the last full-blown deflationary episode was in the early 1930s. So, deflation is rare.

Now is the time to get our complete assessment about the prospects for another major deflationary period.

Follow the link below to get our latest insights without any obligation for 30 days.

Not Since the "Peaking Process" of the Mighty Roman Empire!

In 100 A.D., the decline and fall of the "all-powerful" Roman Empire was unthinkable.

In that year -- with that empire's unmatched technological innovations and vast wealth -- financial optimism reigned supreme.

Likewise, in the U.S. and other global markets, financial optimism was pervasive at the start of 2020. Our January Elliott Wave Financial Forecast noted:

Aggregate measures of investor sentiment show multi-year optimism, which is compatible with a stock market top.

Indeed, on Feb. 12, the Dow Industrials topped and a violent volatility followed.

Before you make your next investment decision, read our flagship Financial Forecast Service, which anticipated the stock market’s downward turn.

Find out how to get started with a 30-day, risk-free trial -- just below.

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Zillow Stock Opportunity: No Clear Fundamental Picture? No Problem

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Corporate Bonds: Market Leads, Fed Follows

Back in March, in the thick of the sell-off, the Fed pledged to buy corporate bonds, as a "last-resort" measure. Investment-grade debt rallied. But Elliott waves were one step ahead. Watch our Interest Rates Pro Service editor explain using LQD, a corporate bond ETF.