News Coverage on Deflation

Half Million People Watch Millionaire Status Go -- Poof

The plunge in stock market values has left the U.S. with far fewer millionaires.

Here's an excerpt from a May 24 Bloomberg article titled "America's Millionaire Ranks Shrink by 500,000 in Record Time":

At the close of 2019, there were an unprecedented 11 million American millionaires, a reflection of the longest bull market in history thanks to ultra-low interest rates and tax cuts.

Fast forward just a few months and it's a starkly different picture. The number of households in the U.S. above that threshold has dropped by at least 500,000 as of Friday [March 20], according to research firm Spectrem Group.

The tandem financial and health crises wrought by Covid-19 have disproportionately eroded the fortunes of the wealthy, who are more likely to own equities than the overall population. At the end of 2019, the top 1% of households owned 53.5% of equities and mutual fund shares, according to Federal Reserve statistics.

The losses affected the rich at every level, from the mass affluent to those worth more than $25 million, according to the report. The wealth destruction at the very top has been especially steep.

The world's 500 richest people have lost almost $1.3 trillion since the start of the year, according to the Bloomberg Billionaires Index. That's equivalent to a 21.6% decline in their collective net worth. Americans on the ranking, who currently number 180, have lost $433 billion.

This brings to mind what Robert Prechter in his book, Conquer the Crash:

Only a very few owners of a collapsing financial asset trade it for money at 90% of peak value. Some others may get out at 80%, 50% or 30% of peak value. In each case, sellers are simply transferring the remaining future losses to someone else. In a bear market, the vast majority does nothing and gets stuck holding assets with low or non-existent valuations. The "million dollars" that a wealthy investor might have thought he had in his bond portfolio or at a stock's peak price can quite rapidly become $500,000, $50,000, $5000 or $50. The rest of it just disappears. You see, he never really had a million dollars; all he had was IOUs or stock certificates. The idea that it had a certain financial value was in his head and the heads of others who agreed. When the agreement about price changed, so did the value. Poof! Gone in a flash of aggregated neurons. This is exactly what happens to most investment assets in a period of deflation.

Elliott Wave International's analysts believe that you should prepare for what they see ahead.

Japan’s GDP: “Sharpest Contraction Since 2014"

Many Japanese have been shunning "retail therapy."

This slowdown in shopping has contributed to Japan suffering a sharp economic reversal.

Bloomberg provides additional details in this March 8 article excerpt:

Japan's economy contracted last quarter more than initially estimated, underscoring its vulnerability even before the coronavirus threatened to push the country into recession.

Gross domestic product shrank an annualized 7.1 percent from the previous quarter in the three months through December, as consumers slashed spending after a hike in the sales tax and businesses cut investment the most since the global financial crisis.

For the economy as a whole, it was the sharpest contraction since a previous tax increase in 2014, revised data from the Cabinet Office showed Monday. Analysts projected a 6.6 percent decline. The government's initial estimate was a 6.3 percent drop.

The coronavirus has snuffed out any hope of an economic rebound early this year following the fourth quarter's largely tax-triggered slump. The epidemic's impact has spread from exports and supply chains to something that's also hitting domestic consumption, the tourism industry and investment.

A growing number of analysts see the economy shrinking more than 2 percent again this quarter, a problem for Prime Minister Shinzo Abe, who already unveiled a stimulus package late last year. The prime minister is expected Tuesday to give details on new emergency economic measures, but it's unclear what can be done to stoke growth amid an epidemic that is keeping shoppers home.

Yes, Japan's economy began to shrink before the coronavirus became big news.

The same thing happened with other global economies, as Elliott Wave International's monthly Global Market Perspective emphasized in the March issue:

In Germany, the world's fourth largest economy, year-over-year GDP growth fell to 0% in the fourth quarter of 2019. In December, Germany's contraction was clearly accelerating, as industrial production fell 6.8% from December 2018. A report confirmed, "Europe's largest economy was stagnating even before the coronavirus outbreak began." The coronavirus will undoubtedly figure into the economic contraction, because Germany is heavily reliant on Chinese supply chains, as are many other countries.

Then, of course, there's China, the world's second-largest economy. The February issue of the [Elliott Wave Financial Forecast] discussed evidence showing "that China's economy was well on its way to a hard landing long before the virus emerged in December." On March 2, The Wall Street Journal reported that the latest economic numbers depict an outright "freeze" that dates to late January. Automobile sales tell the story. According to China's Passenger Car Association, they fell 80% in February. The latest reports from Chinese purchasing managers tell a similar tale. According to the National Bureau of Statistics, the Chinese Purchasing Managers Index contracted to 35.7 from 50.0 in January, "below even the lowest level recorded during the global financial crisis," says the Journal. The services PMI contracted even further, to 29.6, "suggesting weakness in construction, transportation, restaurants and tourism."

The Chinese government says that the coronavirus is now contained and that the economic impact will be minimal, but pocketbook indicators disagree. Suddenly, deflation is a very real part of everyday life for many Chinese.

And, speaking of deflation, Elliott Wave International's analysts encourage you to learn all you can about this topic so you can prepare for what they see ahead.

You may want to start with the free report, "What You Need to Know Now About Protecting Yourself from Deflation."

Lebanon Faces First-Ever Bond Default

Many people may not be aware of Lebanon's historically high standing in the world of banking.

As the Economist recently noted, the nation has been called the "Switzerland of the Middle East" for its snowy mountain peaks and sophisticated banking sector.

However, Lebanon's finances have taken a big turn for the worse. Indeed, it appears the country faces its first-ever bond default.

Here's a CNBC article excerpt (Feb. 24):

Investors holding Lebanese bonds are expecting the worst, as years of financial mismanagement may well push the country to default on its debt for the first time in its history.

International Monetary Fund officials have been called in to help find a solution to manage Lebanon's overwhelming debt -- some 160% of GDP, the highest ratio in the world -- amid the worst financial crisis since the Mediterranean country's brutal 1975-90 civil war and months of popular protests.

Lebanon was hit with a double downgrade over the weekend by two of the world's largest ratings agencies, dragging its sovereign credit rating further into junk territory. Moody's and S&P Global Ratings downgraded Lebanon's long-term foreign currency rating to Ca and CC, respectively -- both of which are ten levels below investment grade. The country is now rated lower than Argentina and the Democratic Republic of Congo.

"As a consequence of severe fiscal, external, and political pressures, we believe a distressed exchange or unilateral default on Lebanon's commercial debt is virtually certain at this point," an analyst report from S&P Global said last week...

As the deadline looms for Lebanon's $1.2 billion Eurobond, maturing March 9, the bond's price has whipsawed from 90 cents in the dollar in early February to a record low 53 cents last week, with the yield on those eurobonds surpassing 1,000%. The lira, officially pegged to the dollar, has plummeted 40% on the black market as local banks ration dollars necessary for imports of food, medicine and other essential goods.

As the 2018 edition of Conquer the Crash warned:

Consider that only $4 trillion worth of total global debt is AAA. That's only 2%; 98% of the debt is graded lower. This fact portends a slew of defaults...

This is the time to prepare for what Elliott Wave International's global analysts see ahead by reading the free report: What You Need to Know Now About Protecting Yourself from Deflation.

Belief in Fed’s Ability to Manipulate Economy Remains Strong

Let's start with what Robert Prechter wrote in the first edition of Conquer the Crash (2002):

The primary basis for today's belief in perpetual prosperity and inflation with perhaps an occasional recession is what I call the "potent directors" fallacy. It is nearly impossible to find a treatise on macroeconomics today that does not assert or assume that the Federal Reserve Board has learned to control the credit supply, interest rates, the rate of inflation and the economy.

That belief in the Fed's ability to manipulate the economy remains true in 2020, as reflected by a major news organization's headline (Reuter's, Feb. 21):

In next downturn, Fed may opt for quick, strong action

Here's an excerpt from the article:

In the next economic downturn, the Federal Reserve and other central banks may need to roll out their big guns sooner and use them more aggressively, or risk getting mired in growth-sapping deflation or worse.

That was the argument laid out Friday by a group of veteran monetary policy analysts and Federal Reserve Governor Lael Brainard, who called for using now-familiar policy tools like forward guidance more forcefully, and adopt new ones like capping interest rates to bolster the Fed's clout.

The broad approach appeared to have some support among other policymakers grappling with the how the Fed and other central banks should prepare to fight a future recession. If there is disagreement, it is not over the general idea that tools like massive bondbuying - or "quantitative easing" - are now a staple of central bank practice; it is over how specifically the Fed should spell out its future crisis-fighting plans in advance.

Intense efforts are underway at central banks globally to develop new ways to fight shocks amid low inflation and low interest rates that make conventional responses, like simply reducing a target borrowing rate, less potent than previously...

Brainard's call for expanding the Fed's policy arsenal to battle coming shocks came in response to a paper showing that the central bank's bond-buying and forward guidance deployed during the last crisis had only mixed results and that argued those tools could have been more effective had they been used more decisively.

However, the widely held belief that central banks can prevent deflation is just as Conquer the Crash described -- a fallacy. 

Japan's Economy Slams on the Brakes

It's Japan's biggest economic slowdown in six years -- and way slower than economists forecast.

Other nations in the Asian-Pacific region also experienced economic weakness.

CNBC provides more details (Feb. 16):

Japan's gross domestic product (GDP) shrank an annualized 6.3% in the October-December period, government data showed on Monday, much faster than a median market forecast for a 3.7% drop and the first decline in five quarters.

It was the biggest fall since the second quarter of 2014, when consumption took a hit from a sales tax hike in April of that year.

The weak data also comes amid signs of struggle in the wider region with the coronavirus and a broader softness in demand clouding the outlook.

Singapore cut its economic growth projections for 2020, Thailand posted its slowest expansion in five years and China's home prices rose at their weakest pace in almost two years.

Elliott Wave International's Global Market Perspective shed further light on why an overall global economic slowdown may very well be in the cards. Here's a chart and commentary:

January's mini-drop in stock prices did nothing to dislodge the rosy outlooks for the global economy, but various market-based indicators are not as sanguine. This chart shows spot aluminum, crude oil, copper and shipping indexes, which have been declining for months and are at or approaching new lows. In addition, silver, an industrial metal as well as precious metal, made its most recent high over five months ago. Market-based measures foretell a slowing economy.

Prepare for what Elliott Wave International's analysts see ahead by reading the free report, What You Need to Know Now About Protecting Yourself from Deflation.