The Sucking Sound of Deflation | ETF Trends

Note: This article is part of the ETF Trends Strategist Channel

By Rick Vollaro

Risk assets have had a rough run in 2016, and there are many cross currents adding to the confusion regarding what has been driving the unprecedented volatility. Our distilled view of what is occurring is simple: An aged and overvalued bull market has finally hit the wall of a poor technical environment.

But digging a bit deeper into the message of the markets, we find a common theme driving risk assets down in 2016—that theme is the sucking sound of deflation that is sapping pricing power across the globe. There are many areas that one can point to that reflect deflationary dynamics, but a few simple ETF charts reveal the big picture.

China (GXC-Chinese Equities)



One look at Chinese equity ETFs warns that ‘all is not well’ in the region. China is the number two economy in world, and their economic engine is decelerating fast as they try to work off a secular overreliance on investment at the same time that they are faced with a cyclical slowdown in the economy. As the economy has ground down and the stock market bubble has busted, China is now unleashing the sucking sound of deflation across the globe.

A Commodity Bear Market

A strong dollar is disinflationary, and it has mixed with the supply shock in commodity markets to create a vicious bear market in the overall commodity complex. Lower commodities and generalized inflation can be good for consumers, but the disinflationary global impulse that they reflect has also been weighing on pricing power for companies around the globe. Even strong U.S. multinational companies are caught in a vulnerable phase for earnings. Oil and mining companies are in the middle of a profits depression, and many companies in these industries are now adding default risk to the equation, which amplifies the deflationary impact across the globe.

Commodities/US Dollar (DJP-Commodities Futures)