Deflation is on the minds of ARK Invest CEO Cathie Wood, Bloomberg macro-strategist Mike McGlone, and many more. In a New York Fed survey, one quarter of respondents expect deflation five years from now, which is almost as many who expect inflation to remain above 4 percent for the next five years.
The Federal Reserve sees the probability of deflation changing:
McGlone says deflation will resume at a greater pace than before COVID. “It’s really unusual for people to be expecting the deflationary trends we had for the last 10 years or so to go away,” said McGlone. “They’re accelerating, potentially on the back of normal trends, demographics, human innovation and dollar strength.”
In his view, inflation will be short lived, and the phenomenon has a clear expectation. The US increased US money supply more than ever on a year-over-year basis—25% or so. Since the end of 2019 that’s a nearly 40% increase in the money supply. Now, that’s collapsing. The Bloomberg index tracking global money supply index is down to its lowest ever of -5% on a global basis.
Inflation has been on a tear for 12 months. Rent and housing have both increased on the CPI. The Bloomberg Commodity index is up about 40%
“Homes in Miami, farmland in Illinois, all went up about 40%,” said McGlone. “But that’s going away at the highest velocity ever. Housing has peaked. Interest and mortgages are going up.”
He says the “Fed sledgehammer” is pounding inflation down. Deflation will prove more enduring than inflation, says McGlone.
Oil, which McGlone calls “the world’s most significant commodity”, traded at $88 a barrel when we spoke with him. It is now trading at $86.60.
“The first time it traded at $88 a barrel was in 2007,” he notes. 15 years ago. “The main reason the price is still the same from 15 years ago, despite the fact that the world uses more of it, is the paradigm shift of the world’s most significant demand pull source importer of crude oil now being an exporter.” That being the US.
“These inflation indices that were really on the back of the government throwing money at people,” he said. “At the same time, the Fed is doing quantitative easing, and just pumping tons of money in the system. It’s all going away. The problem is when things drop from a higher plateau— that’s deflation.”
McGlone notes that last year crude oil prices went from $50 to a peak of $130. That’s up more than 100%. “It’s probably going to go back to 50.”
ISM manufacturing prices paid indexes have already fallen below 50. “The price of lumber was one of the biggest darlings of the crude oil and commodity rally, going up almost 300% from the end of 2019,” said McGlone. “It’s down now.”
“The key drivers of demand pull on the world basis for commodities last 20 years has been China,” notes McGlone, who calls the rising super power a collapsing pyramid. “Then we have strength in the dollar. Why is the dollar strong? It’s tightening.”
These predominant deflationary forces were distorted by covid-19 pandemic, and by the massive pump in the system is now going away. “But everything is going to drop and inflation will be measured from a lower plateau.”