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When will the Proverbial Sand Pile Collapse or That Tequila Shot That Pushed one Completely Over the Edge?

A few nights ago I was reading a report stating the current decline in oil was inevitable given the advancements in technology and the increase in American production.  Unfortunately this report was dated December 2014 and was entirely backward looking.   Other than a few that were in the far far extremes, no one had anticipated such a dramatic collapse of prices.

Treasuries are continuing to rally with prices posting their greatest early year gains in history according to Bloomberg.  An accepted reason for the advance is anticipated ECB intervention via the European version of QE.  Germany, the world’s former foremost inflation hawk given the significance of inflation in its history, all but abandoned this hawkish position and now is fully supporting such policy to “stimulate inflation.”

Inflation is defined as too much money chasing too few goods fearing higher prices tomorrow.  Inflation is both monetary and psychological.  I ask how much stimuli is too much?  When will the proverbial sand pile collapse or that tequila shot that pushed one completely over the edge?

At some juncture this massive global stimuli will have an impact.  I ask rhetorically next January will I be reading a report talking about the recent increase in inflation was so obvious, why were the indicators/environment so ignored, similar to the oil report I read the other night?  All must remember that even as recent as November 1 the consensus view for the average price of oil for 2015 was about $100.  Two months later it is around $60.

Wow!  What a contra thought.  Yesterday’s narrative was steep in deflation.

Equity markets were very volatile yesterday thus suggesting a complete lack of conviction.  The deflationary impact of the collapse of crude and other commodities weighed upon the markets as did a potential change in US monetary policy.  Conversely earning sentiment was positive because of Alcoa’s fourth quarter report.

Today December’s retail sales are released.  How has the drop in energy prices impacted the consumer? Sales are expected to decline but this is the result of a 20% decline in gas prices.  Also released is the Fed’ Beige Book, the statistical guide utilized at the upcoming Fed meeting.

Last night the foreign markets were down.  London was down 1.94%, Paris down 0.63% and Frankfurt down 0.60%.  Japan was down 1.71% and Hang Sang down 0.43%.

The Dow should open moderately lower on growth concerns.  JP Morgan also posted profits, results that missed expectations partially because of falling commodity prices.  The 10-year is up 13/32 to yield 1.85%.

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Ken Engelke

Chief Economic Strategist Managing Director

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