Deflation, For the Win

Given the massive printing of money by everyone from Ben Bernanke, the Europeans, and just about every region in the world, it would seem like an obvious assumption that massive inflation is about to hit.

It probably will hit eventually. But for now, deflation is still winning out.

As former chief Merrill Lynch economist David Rosenberg writes in his newsletter of today, there are 11 reasons that deflation is the primary trend:

• Credit is contracting.

• Wage rates are stagnating.

•Money supply growth is vanishing

•The U.S. dollar is strong.

•Commodities have peaked.

•U.S. home prices are rolling over … again.

•Lumber prices tumbling (down nearly 17% from April 2010 highs)

•Wal-Mart is cutting prices on 10,000 items.

•Home Depot just cut prices on flowers, fertilizers, lawn equipment and outdoor furniture.

•Taco Bell is offering two dollar combo meals.

•The April U.S. retail sales report

The Pragmatic Capitalist agrees that a strong dollar shows deflation:

The surging dollar is a clear sign that inflation is not the concern of global investors. This is almost a sure sign that deflation is once again gripping the global economy and should be setting off red flags for equity investors around the world.

The recent action in the dollar is eerily reminiscent of the peak worries in the credit crisis when deflation appeared to be taking a death grip on the global economy and demand for dollars was extremely high. The recent 16% rally in the dollar is a sign that investors are once again worried about the continuing problem of debt around the world and they’re reaching for the safety of the world’s reserve currency – the dollar. As asset prices decline and bond yields collapse this is a clear sign that inflation is not the near-term concern, but rather that the debt based deflationary trends continue to dominate global economic trends.

This is exactly the kind of market action we saw leading up to Lehman Brothers. In 2008 the dollar rallied as signs of deflation began to sprout up. This was an instant red flag for anyone who understood the deflationary forces at work (and a total surprise for the inflationistas). The dollar ultimately rallied 26% from peak to trough. Coincidentally, the dollar had rallied 16% from trough to peak just prior to the Lehman collapse when the dollar surge accelerated.