US flirts with deflation as prices fall by largest since financial crisis

World's largest economy sees prices fall by 0.4pc in December, with yearly inflation crawling up after oil collapse

But, when measured on a monthly basis, consumer prices fell by 0.4pc compared to November, the biggest drop since December 2008. 

The decline can be largely attributed to the continued descent in world commodity prices, with the price of oil declining by more than $1 per gallon, according to the US Bureau of Labour Statistics. 

A measure of core inflation, which strips out the effect of energy and food, was also flat at 0pc. It is only the second time since November 2010 that the core reading has remained unchanged.

The Bond Market Is Warning of Huge Trouble Ahead

How else can you explain the fact that the yield on the U.S. 30-year bond hit a record low of 2.4 percent on Wednesday? Or that Japanese and German 10-year yields are plumbing record lows? Or that five-year yields of bonds issued by Eurozone safe havens Finland, Germany and Switzerland are in outright negative territory?

For the U.S. 30-year yield, current levels have dropped below the lows set during the 2008 financial panic and 2012 pre-QE3 slowdown. And this is down from the post-recession high of 4.85 percent set in 2010 and a recent high of nearly 4 percent set in late 2013. 

With stocks not far from late December's record highs, with job growth surging, investor confidence at extremes, consumer and small business confidence high, GDP growth strong and the Federal Reserve telling everyone it's preparing for its first interest rate hike since 2006, the bond market's message comes off as downright weird. 

And it's warning that we're in trouble. The problem is threefold: 

• The evidence is building that the global economy is slowing, led by weakness in Asia and Europe. The JP Morgan Global Manufacturing PMI, which measures factory activity, last month dropped to its lowest level since August 2013. Activity is declining outright on a month-over-month basis in China, Greece, Austria, Italy and France.

• This comes as the developed world governments, reacting to the blowup of private sector debts (mostly real estate), recession and the risk to the financial system in 2008-2009, have piled on public debt. China is in the mix here too, with local government and private credit exploding higher, fueling fixed-asset investment bubbles, overcapacity and now an unresolved bad debt problem that we got a quick taste of in early 2014. In Italy, the government debt-to-GDP ratio has grown from 104 percent in 2008 to 133 percent, with no signs of slowing. 

• All this is occurring at a time of low global inflation, tipping into outright deflation in some areas. Prices at Chinese factory gates have been dropping for months. The Eurozone is expected to have fallen into outright deflation in December. Capital Economics expects consumer price deflation in the United States for January.

DYI COMMENTS:  Deflation looming here, recession and depression in Central Europe, Russia blowing up financially, China with a massive debt bubble about to burst it is strange that all the talk is of the Fed's to rise short term interest rates, including the Fed's!  If long term rates continue to drift down will the Fed's by moving short rates higher risk an inverted yield curve throwing the U.S. back into recession?  Strange indeed!  What I do know is this is a very expensive stock market as compared to sales, earnings or dividends. It is historically overvalued so caution with a low stock to bond asset allocation is recommended.  How high is high?  Going back to 1871 the average price to dividend is 23 and today is trading at 51 times dividends.  (51 - 23) / 23 x 100 = 122% above the average price to dividends. That is simply above the average or fair value.  To obtain a bargain in the classic sense one would prefer to buy when the price to dividend ratio is BELOW the average.  That is a long way down; to nullify 122% requires a 61% drop just to get back to fair value.  With the monstrous and outright scandalous sub atomic low interest rates policies the Fed's have "jack up" this market in its extreme.  A 45% to 60% decline is possible and very well probable.  This time is NOT different nor has it been at any other market extremes including the 1907, 1929, 1968, 2000, 2007.

Caveat Emptor!

DYI