There are signs in the latest data of decelerating growth and inflation. This is confirmation of the US markets moving further into Stage 4 deflation in the weeks ahead.

 

I’ll explain …

 

You see, Power Income Trader views the market from a macro perspective in order to identify the stage of inflation that we are trading in.

 

This has never been more important as we head into a Fed tightening cycle that may trigger a deeper correction.

 

Here is a quick review of the 4 stages of inflation and growth.

 

1. 1. 1. Goldilocks: We call Stage 1 goldilocks because conditions are “just right” for corporations. In Stage 1, inflation is decelerating and growth is accelerating, meaning business costs are decreasing while sales and growth are increasing. 
         
      2. Reflation: Stage 2 is known as the explosive stage of the market as growth accelerates AND inflation accelerates. This is a very bullish stage for many stocks … but not good for bonds or the dollar. The US was in Stage 1 for most of last year.
         
      3. Stagflation: Stage 3 is the opposite of Stage 1. This is when inflation is accelerating and growth is decelerating. Corporations really struggle in a stagflation environment as raw material costs are rising and business is shrinking. 
         
      4. Deflation: Stage 4 is the opposite of Stage 2. Deflation is when both growth and inflation are decelerating. It is a classic bear market and can be as explosive as Stage 2 – except most equities and commodities go down.

 

(Mark Sebastian’s money flow approach is a great example of how to profit in these times. Catch the replay of his event from last night here.)

 

Today, I’ll share supporting data that confirms a slowdown in growth and a potential peak in inflation.

 

Percentage of Supply Deliveries Slowdown

 

We are beginning to see inflation and growth data slowing, and remember these are backward-looking numbers from December activity.

 

What I use for the Power Income Trader system analysis is more current by taking rate-of-change effects from one period to the next to create “now cast” data. 

 

As you can see in the chart below, the rate of change in supply delivery times is rolling over, indicating supply chain disruptions are subsiding.

 

 

A continuation of the relief in deliveries will bring some relief from higher prices. And the large increase in inventories should help on the inflation front as well. 

 

On the flip side for inflation, owner equivalent rent (OER) will lift inflation in the next 2-3 months, which will give the Fed confidence to initiate the rate hikes (barring an equity market meltdown). 

 

The growth story shows that the consumer is not confident. That matters a great deal since they represent 60% of GDP.

 

You can see below the lack of any confidence for improvement in real income levels …

 

 

 

Finally, let’s take a look at the S&P earnings yield adjusted for inflation. 

 

This is probably the most significant sign of a deeper correction ahead. Each time the indicator went negative, a deep correction followed. Two times the index dropped 40% and the other two it dropped 20%.

 

 

Bring It Home

 

These are all important indicators for gauging how the economy is doing as we head into the Fed tightening cycle.

 

The unfortunate issue is that the Fed is only focusing on inflation because that and full employment are their mandate.

 

So, unless the market drops substantially the Fed will keep tightening. 

 

I think inflation will hold on longer than growth. As you can see above, the market does not have enough value to withstand the tightening that is being proposed..

 

This month’s data will give us a much better idea but the point is we are locked in to a Stage 4 environment and right now QQQs and MTUM are at an excellent location to put on bear strategies. 

 

My Power Income Trader system can put you in position to win there.

 

Live and Trade With Passion My Friends,

Griff