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Thursday, January 29, 2015 4:15 AM

Asset Price Deflation Coming Up? Food Prices About to Drop? CPI About to Go Negative? Credit Deflation?

When inflation alarmists want to convince everyone the dollar is about to become worthless, they post this chart of the CPI.

CPI - Urban Consumers - All Items - Index

Inflationists claim that is a trend to oblivion. And actually it is. But it's a slow trend towards oblivion with intermittent disruptions as the following chart shows.

CPI - Urban Consumers - All Items - Percent Change From Year Ago

As measured by consumer prices, inflation went negative from December 2008 until October 2009.

CPI - Urban Consumers - All Items - Percent Change Detail

The CPI hit a record low of -1.959 in July of 2009.

My prediction made in 2005 or so, was and still is "The US would go in a and out of deflation a number of times over a long period of time".

I was speaking in terms of "credit deflation", but that occurred as well. Either way, I was correct and the inflationists who predicted hyperinflation before deflation were simply dead wrong.

Oil vs. CPI

I got to thinking about this again recently given the plunge in oil. Let's take a look at oil prices in relation to the overall CPI.

Clearly there is a correlation over longer periods of time but the amplitude of oil in both directions is much greater. That makes sense because housing is the largest component of the CPI, not energy.


An article on Yahoo Finance on January 16 caught my eye and I bookmarked it: Yes, you ARE paying more for food.

I am not here to dispute that chart. In fact I agree with it. Worse yet it has been persistent, especially with beef, and for more than a year.

Mish Food Shopping Experience

From approximately 2000 until 2010 or perhaps 2011, the sale price of prime rib was $4.99 a pound. Now the sale price is $7.99 a pound, if you are lucky.

Pork is different though. I picked up center cut pork chops on sale last week for $2.49 a pound. That is roughly the same sale price for 10 years.

I have written about this many times. For example, on April 26, 2006 in A Look At Hyperinflation, I stated "Center cut pork chops not on sale are $5.49 lb. Phooey. Who needs that? At least once a month they are on sale for $2.29 lb or less. Seriously, we are talking 1970's prices [on chicken]. I know because I worked as assistant manager in a grocery store back then. Heck I have no idea how they can even raise chickens at .49 lb. If you know then please tell me!"

Chickens were a loss leader at $0.21 a pound in 1970. They were $0.49 when I wrote that.

In regards to pork chops, I have made similar claims in 2007, 2008, and 2011. And here we are again, back at $2.49. But what about beef?

Live Cattle

Beef prices are high because cattle prices are high. But, for the first time since the beginning of 2013, prices are down two consecutive months, and there is plenty of room to drop.

Why are pork chops back to $2.49 again?

Lean Hogs

Here we are once again. From 2011 until the beginning of 2014, center cut pork chops sale prices were higher, in the range of $2.79 to $3.29 a pound.

Welcome back $2.49. We missed you.

Not on sale? Don't buy them, or buy them sparingly.


Wheat is back to where it was in late 2006.


Soybeans are back to where they were in late 2007. There's considerable room for prices to drop to 2006 levels like the other food commodities.


Buy a freezer an use it! It is crazy to pay $5.49 for chops when you can get them for $2.49. It is equally crazy to pay $10.99 for prime rib when you can get it for $7.99. Butter, bacon, and cheese all freeze well. Cheese is often half-price, so is bacon. If you are a vegetarian you have a harder time, but I hazard a guess a freezer or pantry can still come in very handy. Learn to shop!

Where To From Here?

No one can say, but it is pretty clear that food commodity prices are falling and food prices should drop with a lag.

If rent prices drop as well (I do not expect that, but it easily could happen), then the CPI could turn negative once again, even if oil prices head back up.


My preferred consumer price measure is HPI-CPI a self-designed index that includes actual home prices instead of rent. By that measure, we will be soon back in price deflation if housing prices drop, and I believe we are on the cusp of another housing decline.

I last wrote about HPI-CPI on September 24, 2014 in Housing Prices, "Real" Interest Rates, and the "Real" CPI

Here's the chart. See the article for discussion.

Credit Deflation?

The important thing is credit deflation, not the myopic central bank focus on consumer prices. I do expect credit deflation and a tightening of lending standards once elevated asset prices plunge.

The plunge in US treasury yields in the face of expected Fed hikes lends credence for the above analysis.

One more point: Please don't tell me about shadowstats CPI. It's a thoroughly discredited model.

For analysis, please see Wading Through Molasses: "Did the Real Economy, Not Counting Government, Expand in Last 20 Years?"

Mike "Mish" Shedlock

Wednesday, January 28, 2015 4:29 PM

Slope of Hope vs. Reality: Greek Assets Hammered, 3-Year Yield Near 17%; Worst Day Ever for Greek Bank Stocks

Investors who plowed into Greek assets ahead of Mario Draghi's QE €60 billion a month bond-buying spree figuring the ECB could paper over this mess have been pounded almost nonstop recently.

Today alone, Greek bank shares plunged 22-29%, and yield on the 3-year Greek treasury hit 16.97%.

Worst Day in History for Greek Bank Shares

Bloomberg reports Greek Markets Hammered as Fears Grow Over New Government.

Greek bank shares suffered their worst one day loss on record on Wednesday, as anxiety grew over the new government’s plan to renegotiate Greece’s €240bn bailout.

The country’s four biggest lenders saw their stock prices plummet by an average of more than 25 per cent just two days after Alexis Tsipras, leader of leftwing party Syriza, was sworn in as prime minister. It was the third day of double-digit share slides for the banks.

In the space of a few hours, the yield on three-year Greek bonds jumped 2 percentage points to almost 17 per cent, as investors wondered whether Greece would honour its debts in the near term.

Shares in Piraeus, Greece’s largest bank by assets, whose stock price has halved over the past month, plunged 29 per cent. National Bank of Greece and Eurobank each fell 25 per cent and Alpha Bank 26 per cent.

Greek banks have been tapping the European Central Bank’s “emergency liquidity assistance” facility to replenish funds in the face of withdrawals by depositors and foreign banks’ reluctance to lend.
A few charts will confirm the above picture.

Greek 3-Year Bond

Greek 3-Month Bond Yield

Greek Yield Curve

  • 3-Month: 4.530%
  • 3-Year: 16.970%
  • 5-Year: 13.666%
  • 10-Year: 10.865%
  • 15-Year: 10.342%
  • 30-Year: 8.635%

The yield curve may look strange to some, but here's the three-part explanation:

  1. Mid-range bonds will be hammered the most in any haircut deal. 
  2. Yield on the 3-month bond spiked since the end of December. 
  3. The market is pricing in the possibility of a default, but not within 3 months.

National Bank of Greece 15-Minute Chart

Shares of National Bank of Greece closed about 22% lower today. At one point they were down about 28%. Let's investigate the broader picture for this fine company.

National Bank of Greece Monthly Chart

NBG has plunged from 67.60 in September of 2007 to 1.03 today. That's a plunge of 98.5% 

Greece FTSE 20 Index

Slope of Hope vs. Slope of Reality

In June of 2012 the Greek-20 hit a low of 8.77. It hit a high of 25.76 in March of 2014. It was downhill from there, much faster than it went up. Today's decline was a modest 11.61%.

Run on the Banks

From Bloomberg (link above):

Deposits have declined by an estimated €12bn since December from a private-sector deposit base of about €164bn in November, according to Moody’s.

Those deposit declines looks like the start of a run on Greek banks. If so, it is necessary to get out before Greece imposes capital controls or the ECB shuts down the ELA (Emergency Liquidity Assistance) program for Greece.

Repeat Warning

Once again I repeat my January 9 warning regarding Greece: Another Run on Greek Banks Begins; Get Out While You Still Can; Buy Gold

Mike "Mish" Shedlock

1:25 PM

MarketWatch Infomercial: Can Millennials Finally Afford a Home?

The Outside the Box MarketWatch Opinion of Damian Maldonado is Millennials Can Finally Afford Homes with New Mortgage Rules.

Let's start with a look the new rules.

New Rules

  1. The administration earlier this month cut the premium that borrowers with a Federal Housing Administration loan must pay for mortgage insurance to 0.85% from 1.35%. The half a percentage point reduction will reduce the cost of the average FHA loan by about $1,000 per year.
  2. Fannie Mae and Freddie Mac last month dropped the minimum down payment to 3% from 5% on some of its mortgages. FHA requires a 3.5% down payment.
  3. Grant programs, such as CHFA in Colorado, allow home buyers to purchase a home with as low as a $1,000 down payment.

Hoop Jumping

Maldonado jumps through all sorts of hoops to justify the new rules, pretending that "new regulations, should stop the problems that led to the subprime mortgage crisis".

He concludes "Perhaps this will be the year this generation will leave their expensive rentals, or their parents’ basements, and move into their own homes and live the American Dream."

I propose that after this relentless rally in home prices, the above "new rules" are too risky. Low down payments would have made more sense actually at the bottom of the market, when standards tightened.

This is typical regulatory BS, lowering lending standards when they should be tightened, and tightening them when arguably they could be lowered.

The cure in this case is to get rid of Fannnie Mae, Freddie Mac, and the FHA, all useless organizations that have done nothing but raise the cost of housing by promoting houses as the "American Dream".

Nonetheless, I offer this musical tribute.

Link if above video does not play: Andy Williams - The Impossible Dream (The Quest)


Before you get too teary-eyed over the American dream, let's investigate two questions.

Question Number 1: Who is Damian Maldonado?

Answer Number 1: Damian Maldonado is CEO and co-founder of national mortgage lender American Financing.

Question Number 2: Why the hell is MarketWatch running infomercials for American Financing?

Mike "Mish" Shedlock

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