Skip to main content

The ONE PERCENT's Significance

In August consumer prices dropped 0.1% from the previous month. In September it was unchanged. The just released figure for October saw a 1% drop from September. This one percent month on month decline is very significant. Firstly, forget about inflation, we now have to seriously talk about deflation. We are only starting to see consumer prices feeling the effects of months of real estate price plunge and stock price decimation. A trend once established is hard to reverse. You people know how difficult prices take to come down. When it goes up, it goes up quickly.

When trade slows, when inventory builds up, consumer prices are very sticky in coming down. The fact that it did not just ease down is highly critical. One percent month on month decline has never been registered in the US, except during the Great Depression. Take a few seconds to reflect on that one percent now.

Proper tracking of consumer prices only started in 1947, and this one percent was the largest ever since tracking started. Deflation has many implications - the one percent decline shows how serious every sector is facing the crisis, it is felt in every sector basically. Consumers are delaying purchases in a deflationary environment. That's no good. The Fed is now setting its interest rate target at 1%, and there is a very good chance we could see zero interest rates before things turn around.

When I studied economics, zero inflation is not a good thing. It indicates that things are not moving, things are dying, industries will constrict, there will be cost cutting, there will be layoffs, there will be a great incentive to hoard and save.

The positive would be the one percent will cause the Fed to speed up spending policies. The Fed would be moved to lower rates faster than it need to. The Fed will have to pump liquidity into the system with more urgency.

Usually even in a downturn the consumer prices would be easing down month on month, not by the one percent we just saw. That indicates that the trend has just started and will see at least a few months of negative consumer prices month on month. That one percent will be enough to cause all commodities producers to drive down inventory, sell at all cost, even at losses, stop plants functioning, even if it means lowering capacity utilisation and incurring losses. 7,300 here we come. CPO prices, Rm1,200 here we come.

p/s photo: Grace Park


easystar said…
I think the need to inflate forever did not really occured until early 1900. Throughout history of man, there are interchanging periods of inflation and deflation and the price level of the entire period (I think until about 1500), hardly change.
(then we had the great spanish caused inflation)

Falling electronics prices etc does not stop us from buying an ipod now. Falling food prices isn't going to stop us from having to eat now.

One can even argue that we can do away with the 20th pair of shoes in the cupboard and measure our economic welbeings against something more tangible and focus our energy on, say space exploration rather than making the next iPod.

Deflationary scared is purely psychological and as I am in the telecom business which suffered from pride deflation for the past 10 years, things are just fine. Falling prices were made up by much higher volumes.
easystar said…
And with Helicopter ben Quantitive easing now in full force, I can't see deflation to stay as the monetary based has exploded.
virtualmystic said…
Your arguement that deflation or zero inflation is bad is based from a pure economic point of view. With the world's resources in real danger of being depleted and the proof of man's contibution to the destruction of our planets ecosystems isn't it better that this "correction" be allowed to occur naturally? We as a human races will still be here. People will find a different niche to get an income. Remember the lesson of the business man and the fiherman who was resting the whole day after going out to sea in the morning?

Popular posts from this blog

My Master, A National Treasure

REPOST:  Its been more than two years since I posted on my sifu. This is probably the most significant posting I had done thus far that does not involve business or politics. My circle of close friends and business colleagues have benefited significantly from his treatment.

My Master, Dr. Law Chin Han (from my iPhone)

Where shall I start? OK, just based on real life experiences of those who are close to me. The entire Tong family (Bukit Kiara Properties) absolutely swear that he is the master of masters when it comes to acupuncture (and dentistry as well). To me, you can probably find many great dentists, but to find a real Master in acupuncture, thats a whole different ballgame.

I am not big aficionado of Chinese medicine or acupuncture initially. I guess you have to go through the whole shebang to appreciate the real life changing effects from a master.

My business partner and very close friend went to him after 15 years of persistent gout problem, he will get his heavy attacks at least…

PUC - An Assessment

PUC has tried to reinvent itself following the untimely passing of its founder last year. His younger brother, who was highly successful in his own right, was running Pictureworks in a number of countries in Asia.

The Shares Price Rise & Possible Catalysts

Share price has broken its all time high comfortably. The rise has been steady and not at all volatile, accompanied by steady volume, which would indicate longer term investors and some funds already accumulating nd not selling back to the market.

Potential Catalyst #1

The just launched Presto app. Tried it and went to the briefing. Its a game changer for PUC for sure. They have already indicated that the e-wallet will be launched only in 1Q2018. Now what is Presto, why Presto. Its very much like Lazada or eBay or Alibaba. Lazada is a platform for retailers to sell, full stop. eBay is more for the personal one man operations. Alibaba is more for wholesalers and distributors.

Presto links retailers/f&b/services originators with en…

How Long Will The Bull Lasts For Malaysia

Are we in a bull run? Of course we are. Not to labour the point but I highlighted the start of the bull run back in January this year... and got a lot of naysayers but never mind:

p/s: needless to say, this is Jing Tian ... beautiful face and a certain kind of freshness in her looks and acting career thus far

I would like to extend my prediction that the bull run for Bursa stocks should continue to run well till the end of the year. What we are seeing for the past 3 weeks was a general lull where volume suddenly shrunk but the general trend is still intact. My reasons for saying so:

a) the overall equity markets globally will be supported by a benign recovery complemented by a timid approach to raising rates by most central banks

b) thanks to a drastic bear run for most commodities, and to a lesser extent some oil & gas players, the undertone for "cost of materials" have been weak and has pr…