Insight Into The Debate Of Deflation-Inflation 2020

May 28, 2020

Deflation is Here

With more data coming in, it is more likely that severe deflation is here already despite the hectic printing of currencies in all major countries. The specter of high inflation due to printing may be false.  The reason is the velocity of money circulation is now at a historical low.  People are unwilling to spend money, even though they are given free money through the government stimulation programs. The future to them is not good.

The question we need to explore is:  how severe is the current deflation triggered by the Convid-19 virus pandemic?

The LUV Deflation Scenarios

There are three schools of thought on the recovery from the current deflation/depression:

  • L-Shaped Recovery – a very slow process like the Great Depression model and the recovery will take years.
  • U-Shaped Recovery – a medium time process and the economic activity level will reach in 3-4 years.
  • V-Shaped Recovery – a quick bounce back to pre-Virus level in 1 to 2 years.  This scenario is only supported by very few segments, including the Trump administration and some Wall Street analysts.

We believe that the L-shaped scenario is the most likely case.  In this article, we focus on the de-Globalization phenomena as the main reason for the long deflation.  Some analysts even call this the Greater Depression.  Time will tell.

“Islands” from De-Globalization

The rapid growth of trades in the world literally changed since the financial crisis of 2018.

The current de-globalization process is deeply aggravated by the Convid-19 pandemic.  Not only at the country level but also at the state and local community levels, isolated islands have been created.  It will be hard to undo the damage even if there were virus cures and vaccine available very soon.

Chart 1 – The Ratio of Global Exports to Output Decrease since 2018 Crisis

Baltic Dry Exchange (BDI) as Leading Trade Indicator

The Baltic Dry Index (BDI) is a shipping and trade index created by the London-based Baltic Exchange. It measures changes in the cost of transporting various raw materials, such as oil, coal and steel.  It is a leading indicator of trade and economic activities around the world.  We will explore its relation to the equity market Dow and the hard asset market Gold.

BDI Index & DOW

Both BDI and Dow are leading indicators of global trades and economic activities. In principle, they should show the same trends.

Chart 2 – BDI and DOW – Their Correlation

BDI Index & GOLD

Chart 3 – BDI and GOLD – Their Independent Relationship

Summary

This article reported our insights into the future economic scenario based on BDI trading exchange index.  A very deep and long depression is a likely case.  However we are hopeful of the rainbow on the other side.  We again remember the love of those health workers who had given their life for us.

There is a wonderful bible verse:  no greater love to give up life for a friend.  Two thousand years ago, we remember the One who had given up life for our eternal recovery.

Meanwhile let us do our best to care for and protect our family and also our country.

We are not certified or qualified financial advisors.  Please consult your certified financial advisors for actual trading and investing.

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F.T. Dao is a private investor and recently left the corporate world for technical analysis of stock markets.  He holds a PhD degree in physics and has done technical analysis of the market on the side for many years.  He welcomes constructive discussion and can be reached at:  [email protected]  , [email protected]

A sheet of gold can be made thin enough to be transparent

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