China and Japan join Europe in deflation

The best view is always from the top of the mountain. And that’s what investors are seeing today. But look a little closer, and the rationale behind today’s euphoria seems based more on illusion than reality.


We focus on Brent as the global benchmark.

Brent had its sixth up-week in a row, finally reaching the $50 level at $50.12/bbl.

Unfortunately, the buying is hedge-fund driven rather than being based on the fundamentals of supply/demand.

There are no shortages anywhere in the world to drive prices higher, and the short-term outlook is weak as lockdowns continue. Instead, prices are being driven by the classic hedge fund play ‘Sell the US$: Buy oil‘.

In turn, this creates the illusion of a strong economy, and supports the rise in stock markets.  In reality however:

  • Global flight numbers are still around half last year’s level – with no improvement since October
  • Official EIA data shows US gasoline demand down at just 7.6mbd, 14% below last year
  • The EU increased its target reduction in CO2 emissions to 55% by 2030, versus the previous 40% level.
  • EU CO2 credits rose to a record €31/t in response, adding to short-term pressure on fossil fuel use.
  • The Biden Administration can be expected to follow Europe’s lead on the green reboot.

WATCH FOR: A dawning realisation that reality is not matching the hedge funds’ excitement

S&P 500

We focus on the US S&P 500 Index as the world’s major stock market index.

The S&P ended the week down 1%, but the VIX ‘fear gauge’ jumped 12% to 23.

Speculators were taking time off from chasing FAANMG prices higher, and needed cash to invest in the two ‘hot’ IPOs – DoorDash and Airbnb:

  • DoorDash popped 86% on its first day to a $72bn valuation, Airbnb popped 112% to a $87bn valuation
  • Those with long memories were instantly reminded of dotcom bubble insanities in 1999-2000

More serious investors, meanwhile, worried that Congress only managed to fund the government for a week, and still hasn’t renewed the pandemic support

WATCH FOR: Reality to dawn as vaccine euphoria dies down, and investors refocus on likely tax rises in 2021


We also continue our series on FAANMG valuations, using the Ben Graham formula. Netflix is next for analysis:

  • Its P/E is close to Amazon’s at 85, suggesting 38% annual growth out to 2030
  • This seems very optimistic as it faces increasing competition from Amazon and many others
  • A flat growth scenario, with a P/E of 8.5, would give it a Graham Value of $50 versus today’s $503 level

WATCH FOR: Investors to stop relying on the “greater fool” theory, that there is always someone to pay a higher price

Interest rates

We focus on the US 10-year rate, as this is the “risk-free” benchmark for global markets.

The rate reversed recent rises, falling back to 0.89%, whilst the MOVE volatility index rose another 8% to 48.

There are signs that investors are shifting back to seeing US Treasuries as “safe haven”, particularly with Brexit risks rising across the Atlantic.

WATCH FOR: Further declines to take place as investors focus on the shift to deflation.


Slowly but surely, the world’s major economies are moving into deflation, despite central banks’ efforts to create inflation:

  • China’s Producers have been exporting deflation since July 2019, and its CPI went negative last month
  • The Eurozone’s CPI went negative in August this year
  • Japan’s CPI moved into deflation in October
  • Only the US and UK are now in positive territory, but their underlying trend is negative

Ironically, it is central bank policy that is accelerating the downward moves, with their belief that stimulus will lead to economic recovery. In reality, this simply encourages investment in new capacity, adding to today’s over-supply and pressuring prices.

WATCH FOR: Deflation to start increasing the real value of debt in 2021, the opposite of inflation’s impact in the past

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This Research Note has been prepared by New Normal Consulting GmbH for general circulation. The information contained in this Research Note may be retained. It has not been prepared for the benefit of any particular company or client and may not be relied upon by any company or client or other third party. New Normal Consulting GmbH do not give investment advice and are not regulated under the UK Financial Services Act. If, notwithstanding the foregoing, this Research Note is relied upon by any person, New Normal Consulting GmbH does not accept, and disclaims, all liability for loss and damage suffered as a result. The pH Report and pH Outlook are published by New Normal Consulting GmbH.
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