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Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Tuesday, April 14, 2020

Deflation Pressure

I have used an inflation directional pressure gauge for nearly 50 years with good results. It
became a deflation pressure gauge over 2008 - 10 and that is what it has turned into again
recently. Basically, I watch the longer term momentum of commodity price composites along
with measures of economic slack focused on capacity utilization rates. The deflation pressure
gauge is signalling the rapid development of downward price pressure currently. So far, the
readings have not been as serious as in 2008 - 09, but we could still be early in the game. Back
in 2008, the vulnerable credits were short term, such as asset backed commercial paper. Over
$2 trillion in short term credits were wiped off the books back then with large bailouts needed for
finance companies and insurers. This time the weakness is in longer term credits ranked  BBB
and lower.

Here in the US, the Fed has jumped in and is providing massive amounts of liquidity to the
money and credit markets. Companies across a wide range of industries are also drawing down
their lines of credit at the banks. Fortunately for now, banks have maintained ample liquidity, so
there is private sector credit still available to worthy borrowers. On top of that, fiscal policy is
providing credit to smaller borrowers.

So, as I read through my e-inbox, I see a decent level of investor confidence that the Fed and
fiscal policies will provide sufficient back-stopping to ward off a spiral of deflation induced
debt liquidation .

This situation still demands close monitoring as programs to open economies may prove far
more complex and time consuming than we can readily foresee, with the consequence that
default risk may increase more rapidly than we now envision.

My 12 yr. long pressure gauge is also evidencing deflation pressure as few economies  have
been able to run flat out for long, with this coupled with the fact that the CRB Commodities
Index is now trading nearly 70% below its 2008 peak. I hope not, but there could be some
debt chickens from way back when that may come home to roost.

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