It is really hard to make a case for deflation when the price of just about everything is going up right now. My previous post was about $4 gas (up 25% in a year). Likewise, commodities and precious metals have been soaring over the past year and have been in long bull markets for the better part of a decade now.
But what if I was to tell you that we are actually in a deflationary environment right now. Deflation is defined as a contraction of the money supply, it is achieved by banks lending out less money and credit being destroyed in the marketplace.
If you look at the housing market and the credit markets, they are screaming deflation right now. Yesterday, the Case Schiller Home index says that housing values fell by 2.2% in March! That's on top of a 2.6% drop in February (revised up). That's almost a 5% loss in two months! Annualized out that's a 30% drop in home values.
The value of housing in America is about $20 trillion. That means we lost $440 BILLION in housing wealth in March alone. We lost nearly $1 TRILLION in housing wealth in those 2 short months!
Can the price increases were seeing in food and energy possibly offset that gap?
Oil prices have risen from $80/barrel to $135/barrel in the past 6 months. America consumes 20 million barrels of oil a day. That means we are spending $1 BILLION a day more on oil than we did last year. That's only $30 Billion a month in inflationary pressure against that giant wall of deflation coming down from the housing market.
When you consider the fact that the energy market is bigger than any other commodity, and it has moved up much more than any other commodity over the past 6 months, it's easy to conclude that commodity inflation is no match for housing deflation.
The housing market is too big. Even when you add in the inflationary pressure from a falling dollar, it doesn't appear to be enough to overpower the losses in the housing market.
Just today there was a major move down in commodities and oil. I'm thinking most of these markets are overbought at this point and we will see a pretty good pullback over the next few months. That's deflationary, too.
In deflation, cash is king. People scramble to unload their assets at greater and greater losses. Those with the cash can buy up this stuff for pennies on the dollar. I still think this is the end scenario, but we may not see it until after the election.
The losses in the housing market are almost unfathomable they are so huge!
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