Originally published on Reno Gazette Journal’s website, http://www.rgj.com/story/money/business/2015/02/06/financial-media-fixated-threat-deflation/23010819/
As a financial markets economist, my job is to survey the economic landscape and identify trends and issues that might have a significant impact on economic activity (and then to worry about what those trends and issues mean for client portfolios). Normally, over the intermediate time horizon, such economic trends manifest themselves in financial asset prices. But that is not true in the daily price gyrations on Wall Street, and it definitely wasn’t true in January.
In fact, from its all-time closing high on December 26 (18053.71), the Dow Jones Industrials fell 4.9% (888.76 points) over the following 23 business days to the end of January. To show the volatility, in January, the average daily high to low was 272 points, a 1.5% average intraday fluctuation. Then, like magic, the first week in February erased most of these losses. Talk about volatility!
Negative news
Part of the reason for such volatility was that, during January, the financial media was fixated on negative news, with the “deflation” theme being the major worry. Despite the significant benefits to U.S. consumers, the falling price of oil and commodities was at the core of the “deflation” fixation. As part of the negative news cycle, there were also concerns expressed in the Wall Street Journal as late as the January 31 weekend edition that the economy had hit a speed bump, that there was a lack of wage growth which explained why consumption wasn’t rising, and that the Savings at the Pump are Staying in Wallets (WSJ 1/30/15). As the data below shows, none of these are true.
What about the facts – Deflation?
Let’s look around the world at this “deflation” issue:
For 2014, the following countries had rates of inflation (CPI) in excess of 4%: Brazil, India, Russia, South Africa, Indonesia, and Turkey. Russia’s was greater than +11%, Turkey’s and Indonesia’s greater than +8%; India’s greater than +4%. Here are some others: China +1.6%, Japan +2.4%, Canada +1.5%, Australia +1.7%, Norway +2.1%, the U.S. +0.8%, and South Korea +0.8%. It is true that some European countries showed signs of deflation: Spain -1.0%, Portugal -0.4%, Greece -1.3%, and Italy 0.0%. But other significant European Union countries had low inflation (Germany +0.2%, France +0.1%, and the UK +0.6%), not “deflation.”
You can see from the list that except for a few scattered issues in the EU, “deflation” is not a real threat to the world. And I suspect that the €1 trillion of money printing announced on January 22 by the European Central Bank (ECB) will go a long way toward eliminating that issue. In fact, there is a plethora of recent evidence that Europe is already coming out of its malaise (and its equity market is up 8% for the year).
The fact is, in many more places, “inflation” is a more of a serious problem than “deflation.” In the U.S., services comprise 80% of private sector economic activity, and inflation in services has been consistently running near 2.5% for several years. There just is no threat of “deflation” in the U.S. anytime soon.
What about the facts – Wages and consumption?
The negative news cycle continued the last weekend of January despite the fact that on Friday, January 30, the Bureau of Economic Analysis released its preliminary Q4 GDP report in which wages and salaries were estimated to have grown 4.4% in Q4, up from 3.7% in Q3 and 2.9% in Q2. That same report also showed that real consumer spending rose 4.3% in Q4, way above media-depressed market expectations. Then, on Friday, February 6, the worrisome average wage report came out showing 4%+ wage growth in January and revising upward the data from the past few months. The “lack of wage growth” story is simply a myth.
In addition, all of the recent consumer sentiment surveys show ebullience. For example, the University of Michigan’s Consumer Sentiment Index for January (released January 30) came in at its highest level since January ’04 with all of the sub-categories (age, income) showing large positive jumps. In the survey, expectations for business conditions one year hence jumped to 132 in January from 116 in December. That measure was at 88 in the third quarter of ’14. The sub-index, which shows plans to purchase a vehicle, registered its highest level since January ’05; and the index regarding plans to purchase a home is near its ’03 level.
Finally, Friday’s jobs report not only showed 257,000 new jobs, but the prior two months were revised upward by more than 140,000.
Conclusions
So the financial media’s fixation on the negative probably presented a buying opportunity in the equity markets in the last week of January. I don’t think it is a coincidence that equity prices began rising on Monday, February 2, after the GDP and Consumer Sentiment data releases on Friday, January 30. Clearly, investors can read and interpret the data reports without media spin. The media’s worry about “deflation,” lack of consumer spending, or non-existent wage growth have simply been overdone and misplaced.
As with everything media driven, these issues will pass. In fact, judging from the equity market reaction this past week, these may already have. But negative news sells, and there are real issues to deal with including Greece (again), political turmoil (Russia and Ukraine), and the continuing threat of terrorism. So, it is likely that we haven’t yet seen the end of market volatility.
Robert Barone (Ph.D., Economics, Georgetown University) is a Principal of Universal Value Advisors (UVA), Reno, NV, a Registered Investment Advisor. Dr. Barone is a former Director of the Federal Home Loan Bank of San Francisco, and is currently a Director of AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Company where he chairs the Investment Committee. Robert is available to discuss client investment needs. Call him at (775) 284-7778.
Statistics and other information have been compiled from various sources. Universal Value Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information. A more detailed description of the company, its management and practices is contained in its “Firm Brochure” (Form ADV, Part 2A) which may be obtained by contacting UVA at: 9222 Prototype Dr., Reno, NV 89521. Ph: (775) 284-7778.