Doctor Doom on Sign Of Impending ‘Stag-Deflation’

Nourielroubini Nouriel Roubini in Forbes:

Aggregate demand is now collapsing in the U.S. and advanced economies, and sharply decelerating in emerging markets. There is a huge excess capacity for the production of manufactured goods in the global economy, as the massive, and excessive, capital expenditure in China and Asia (Chinese real investment is now close to 50% of gross domestic product) has created an excess supply of goods that will remain unsold as global aggregate demand falls.

Commodity prices are in free fall, with oil prices alone down over 50% from their July peak (and the Baltic Freight Index–the best measure of international shipping costs–is 90% down from its peak in May). Finally, labor market slack is sharply rising in the U.S., and rising, as well, in Europe and other advanced economies.

Next question: What are financial markets telling us about the risks of stag-deflation?

First, yields on 10-year Treasury bonds have fallen by about 50 basis points since Oct. 14, getting close to their previous 2008 lows. Also, the two-year Treasury yield has fallen by about 150 basis points in the last month.

Second, gold prices–a typical hedge against rising global inflation–are now sharply falling.

Finally, and more important, yields on Treasury Inflation-Protected Securities (TIPS) due in five years or less have now become higher than yields on conventional Treasuries of similar maturity.