Is This Definitive Proof That The Crisis Never Ended?

In a world distorted by central bankers' constant tinkering with interest rates and overall monetary policy, the theme of "The Crisis Never Ended" comes up again and again. The idea here is that the 2007-2009 financial crisis was never allowed to resolve naturally. Central Bank interventions around the world, if initially appropriate, haven't let up since. While their initial actions may have saved the world from Great Depression II, their subsequent QEs and recent negative interest rates only served to prevent the excessive air of the pre-crisis bubble(s) from properly deflating. Instead, the reflation has blown up what previously almost blew up the world's financial system into the "mother of all bubbles." And thus we now face not another crisis, but really an extension of the last crisis. Hence "The Crisis Never Ended."

One of the key elements of the currently brewing crisis (whether a new one, or an extension of the last one) has been deflation. The battle between deflation and inflation isn't unique to our time. Most of the time one side of the other takes the field, only to be rebuffed. Rarely does one side claim victory. But we may just have seen the scales irrevocably tip, as it appears grocery prices are tanking.

In a startling development, almost unheard of outside a recession, food prices have fallen for nine straight months in the U.S. It’s the longest streak of food deflation since 1960 -- with the exception of 2009, when the financial crisis was winding down.

Until now, proponents of one or the other of inflation or deflation had to acknowledge the strength of other side. The collapse of the oil price, the closing of some large and famous hedge funds, the threatened demise of Italy's third largest bank, and the Germany's largest, headlining a slew of indicators favored deflation; but you had to acknowledge the force of inflation in the record-setting pricing of stocks and bonds, a recovering real estate market, and, on the most mundane level, grocery prices that had people shaking their piggy banks to fill the kitchen pantry. However, it now seems, grocery prices have given up the ghost, giving deflation at least a temporary leg up.

“The severity of what we’re seeing is completely unprecedented,” said Scott Mushkin, an analyst at Wolfe Research who has studied grocery prices around the country for more than ten years. “We’ve never seen deflation this sharp.”

(For the last few years, one of our favorite analysts would ask, in reference to those who say "there's no inflation," whether they've been to the supermarket lately. What will he say now in light of this news?)

You can expect the usual cheerleaders to trumpet this news as an indicator that an economic boom, or at least a bounce, is just over the horizon. People will have more money to spend, they'll say. Indeed, that's just what they said when the price of oil dropped. That was supposed to serve as the tinder to ignite the bonfire of economic growth. Neglected was the effect of falling prices of oil on the businesses that sell the stuff. Companies laid off tens of thousands, and entire communities built on the recent, all-too-temporary oil boom began to fall apart as high-paying jobs disappeared. The subsequent inability of these companies to service loans that subsidized their business models now threatens the junk bond market, with possible spill-over into the credit markets in general. But what, you may wonder, could be bad about lower prices at the supermarket?

At first, falling prices helped grocers. Low-cost commodities pushed down the tab for meat and packaged food and boosted profits. Now, deflation has turned ugly for the industry. Led by Wal-Mart, retailers are pushing down prices, eating away at their profit margins.

Always remember that, in the case of falling food prices, one man's profit is another man's loss. An exception would be if the economy were already booming, and/or if the population were growing dramatically. The demand for more and better food might make up in volume what was lost in profit margin. But that's not what we've got here. Let's hope we can all agree that the economy - despite all the attempts to sugar-coat reality - is decidedly not booming. As for the population, while not negatively trending as is the case in Japan and some European countries, growth remains tepid.

If deflation is gaining a temporary upper hand with falling grocery prices, what happens if/when the stock market finally corrects...or worse. Never mind the bond market, which continues to elicit fear and trembling from those experts who have called for the demise of the bond bull since 2007. One or the other may be the nail waiting to be driven into our shaky financial system, with spill-over into our chronically weak economy.

So agree with "The Crisis Never Ended" or not, with falling food prices - assuming they continue - the faltering gait of our economy may be slowing yet one more step as deflation's grip tightens.