To many observers, deflation was a thing of the past in the wake of the QE3. The Fed’s asset purchases, which drove down bond yields to record lows, were thought to have tamed the global deflationary problem once and for all. What they didn’t count on was the floodtide of deflation breaking through the dikes and barriers carefully constructed by the world’s central banks.
The increasing deflationary pressure is most visible in Europe and Asia but will soon wash up on U.S. shores in the near future. A general deflationary trend is already visible in equity markets in several major countries, a consequence of the final descent of the 120-year Kress cycle. As that cycle approaches its final bottom in late 2014 we can expect to see an increase in some of the problems we’re just starting to see right now in the global economy.
(Hear more: Russell Napier: Emerging Markets Faltering, Foretelling Deflation Ahead)
One of the most conspicuous victims of the deflationary Kress cycle is China. China has in fact led the recent malaise in global markets starting with an 11% surge in short-term interest rates in China. China’s overnight repo rate increased by an incredible 25%.
As analyst Bert Dohmen commented, “China is extremely important for all business leaders and investors….Because whatever happens to China will tremendously influence the world economy and your investments. Many large U.S. and European companies depend on China for a significant portion of their sales and profits….A crisis in China will have global repercussions.”
(Hear more: Puru Saxena: China’s Real Estate Bubble Is a Disaster Waiting to Happen)
China’s Shanghai Composite Index has been in a bear market since peaking in mid-2009. It’s remarkable when you consider that as the rest of the world has experienced a measure of recovery for the last four years, China’s stock market has been in decline. In fact the Shanghia index is on the verge of testing its 2008 credit crisis lows, as you can see here.
One of the most fundamental pillars of market analysis is that the stock market always predicts future business conditions. What is this telling us about China’s business and economic future? The message can’t be interpreted as anything but negative for the nations of the world that depend on China’s manufacturing sector.
Then there is Russia. Not that Russia is of any great importance to the global economy by itself, but Russia has long been a benchmark for deflationary pressures. Since much of Russia’s economy is tied to oil and natural resources, any sustained decline in the price of oil will automatically exert a negative impact on the country. Remember back in 1998 when oil prices collapsed to /barrel? Russia’s financial sector went into collapse and its economy was in shambles. It took an oil price recovery in the last decade to allow Russia’s economy to bounce back and grow for nine straight years. Without the artificial oil price inflation, thanks in large part to the Fed and other central banks, Kress cycle deflationary forces would have long since wiped out Russia.
Here’s what the Market Vectors Russia ETF (RSX) looks like over the last four years. Note the bear market pattern visible in this chart since 2011. Any further decrease in the price (and demand for) oil won’t bode well for Russia and will only hasten the country’s economic demise.
What about the other BRIC countries? India’s stock market is currently probing a 4-year low and the country’s debt market had to be shut recently as yields increased beyond trading bands. Brazil, which was the rising star of the emerging markets not long ago, is slowing economically and has been described recently as “dysfunctional.” Not surprisingly, the natives are growing restless. As Reuters reported on June 24, “More than a million Brazilians have taken to the streets this past week in the largest mass demonstrations since the impeachment of President Fernando Collor de Mello in 1992.”
Brazil’s stock market, as reflected in the MSCI Brazil Capped Index Fund (EWZ), has broken down from a bearish triangle pattern – a pattern much similar to the one visible in the Russia ETF shown above. This could be a preview of what’s to come for other emerging markets in the not-too-distant future as we draw closer to the 120-year cycle bottom.
Gold
After jumping 17.48 percent the previous week, net non-commercial positions in gold declined 7.13 percent during the week of June 11 to 60,227 contracts. Non-commercial long positions in gold have declined 56 percent, its lowest level in 12 months, as investors continue to the exodus from global bonds and commodities.
(Read more: John Kaiser: Western Mining Industry in Serious Crisis)
According to Barclays, net redemptions of gold-backed ETFs have slowed, with an outflow of 15 tons in the first half of June compared to 48 tons in the first half of May. Cash-negative gold positions have also fallen to fewer than 70 tons, according to Sharps Pixley. Most of the “smart money” capitulation selling by hedge funds and institutional investors has likely been completed; the latest decline in gold therefore likely represents the final “dumb money” capitulation phase of the bear market where smaller investors unload their holdings.
