THE DEFLATIONARY SCENARIO |
Presentation to Fund Managers & Institutions – Hong Kong, June 7th 2010 | By – Peter Goodburn Table of contents
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BackgroundThis index is the original cash index that was launched in 1971, not to be confused with the Thomson-Reuters/Jefferies version that first traded in 2005. The CRB cash index is our benchmark to analyse long-term trends because we can graft this data onto its predecessors, whose origins are compiled from wholesale prices of commodities. This work was pioneered by the likes of the International Scientific Committee on Price History headed by Sir William Beveridge with published works in the 1930's. Also, Warren & Pearson of Cornell University, H.M. Stoker of New York and the seven-volume work of Thorold Rogers. The CRB cash is considered more evenly weighted than its counterpart because it relies less on the energy component – it has a 17.6% weighting whereas the Thomson-Reuters/Jefferies index has a total of 39% for petroleum and natural gas. Inflation Vs. DeflationThe CRB cash index is perfect to resolve the ongoing debate of inflation Vs. deflation. If inflation is the dominant force, we would expect to see that reflected in the price action of the chart – likewise for deflation, so let’s take a look. The data-set selected examines the historical advance throughout the most significant expansion period of the modern era, beginning from the lows of the Great Depression of 1932. A clearly visible pattern emerges, one that can be defined in Elliott Wave terminology as a five wave sequence of progression. The most significant aspect of this however is that the entire advance ends in July ’08 at 615.04. This is verified not only from the wave counting process but emphatically from the geometric ratio measurements found at its concluding high. That means the expansionary/inflationary period lasting over 76 years is already over, completed. Based upon the idea of a compensatory reaction that unfolds afterwards, behaving as the counter-balancing process of the preceding trend, then the CRB must decline during the next decade. Together with the sharp sell-off in commodity prices from the July ’08 high that followed, results in adding more evidence to suggest a multi-year downtrend has begun. And from this, we can determine the overriding force is that of deflation not inflation during the next several years. Shorter periods of what might seem to be inflationary pressures will continue until 2012 basis our cycle work, but any such rises are unlikely to trade this index back above the highs of 615.04, even though secondary attempts may get close to reaching those levels in one final bid to excite. Our thanks once again to Richard Mogey, director of the Foundation for the Study of Cycles for allowing us to use charts derived from Techsignal. To view the entire presentation, please view the accompanying document and video. Content of slides:
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