Deflationary Forces are Here; If they Continue...LOWER Interest Rates will Soon Follow!

Retail prices fall at fastest rate since records began

High street prices in the UK dropped 3.1pc in January, as retailers continued to slash prices to win over consumers

The supermarket price wars are proving beneficial for UK consumers, as new data from the Office for National Statistics (ONS) show a 3.1pc fall in prices in January compared to last year. 

This was the greatest decline since records began in 1997. 

Shoppers rushed to take advantage of the low prices, driving up retail sales by 5.4pc year-on-year, the ONS said.

Here in the U.S.

Producer Price Index: Headline and Core Go Negative Month-over-Month

The Headline Finished Goods for January came in at -2.13% MoM and is down -3.31% YoY. Core Finished Goods were up 0.16% MoM and 1.49% YoY.

Now let's visualize the numbers with an overlay of the Headline and Core (ex food and energy) PPI for finished goods since 2000, seasonally adjusted. The plunge over the past several months in headline PPI is, of course, energy related -- now at its lowest level since 2009. Core PPI has remained quite stable over the past year.

DYI Comments:  Deflationary forces appear to be on their way to the U.S.  If this is the case then anticipate lower interest rates in the near future with 10 year and 30 year Treasuries bonds bottoming out under 1% and under 2% respectfully.

Vanguard Readies ‘Ultra-Short-Term’ Bond Mutual Fund

The actively managed Vanguard Ultra-Short-Term Bond Fund will own high-grade bonds, including money markets, government and corporates, and will carry an estimated duration of about one year, according to the firm’s press release. It will be Vanguard’s 12th actively managed taxable bond fund. Gregory S. Nassour, and David Van Ommeren will serve as portfolio managers.

DYI Comments:  Current deflationary forces are in play for DYI's cash holdings we will continue to use Vanguard's Short Term Bond Index as it simply will pay more. However, at the end of this decade as Boomer's begin to exit the work force (but still consuming) a labor shortage will developed causing wage push inflation.  Along with wages pushing up costs so will the Fed's attempt to hold down interest rates (they will rise) as the
Treasury borrows massively to pay for Social Security and Medicare for the ageing Boomer's. The 2020's will be marked by high taxes, high inflation, and a labor shortage.

Short Term Bonds have Not Bottomed Out

Market Sentiment

Smart Money buys aggressively!
Capitulation
Despondency--Short Term Bonds
Max-Pessimism *Market Bottoms*MMF
Depression
Hope
Relief *Market returns to Mean* 

Smart Money buys the Dips!
Optimism--Gold
Media Attention
Enthusiasm

Smart Money - Sells the Rallies!
Thrill
Greed
Delusional---Long Term Bonds
Max-Optimism *Market Tops*--REITs
Denial of Problem--U.S. Stocks
Anxiety
Fear
Desperation

Smart Money Buys Aggressively!

Capitulation

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION -  2/1/15

Active Allocation Bands (excluding cash) 0% to 60%

85% - Cash -Short Term Bond Index - VBIRX

15% -Gold- Precious Metals & Mining - VGPMX

 0% -Lt. Bonds- Long Term Bond Index - VBLTX

 0% -Stocks- Total Stock Market Index - VTSAX
 0%-REIT's- REIT Index Fund - VGSLX

[See Disclaimer]

The Great Wait Continues
DYI