Are We in Inflationary or Deflationary Environment?

Just watched a complementary promotional video by Jeffery Kennedy, Chief Commodity Analyst at Elliott Wave International (EWI). Towards the end of the video – @ 10:10 minutes mark – he explains Elliott Wave principle using CRB Index. I have tried to recreate the chart below – weekly on log scale.

According to Kennedy, CRB Index is in the corrective wave since July 2008:

The down ‘Wave a’ is the first of the 3-wave correction.

This was followed by the up ‘Wave b’, which consisted of a 3-wave pattern:

  • The first up ‘Wave A’ has a 5 sub-wave form
  • The down ‘Wave B’ has a zigzag form
  • The last up ‘Wave C’ has also a 5 sub-wave pattern – it is 1.382 times of the ‘Wave A’

Now we are in the ‘Wave c’ the final part of the a-b-c corrective pattern. Kennedy expects this to last for the remainder of 2012 and carry CRB Index to new low.

InterMarket analysis tells us that the inflationary environment is usually positive for commodities and the deflationary environment is usually negative. The reverse of this is that if commodities are falling then the prospects of inflation are low and deflation may be present.

If inflation does not rear its ugly head and if the deflationary pressures become real then it means that Federal Reserve can still use measures like QE to give an impetus to the economy, to increase employment.

Another observation relates to the emerging markets – BRICS etc.. Most of the growth in these countries is due to infra-structure and export, which affect the commodities prices. If CRB index sees big fall then emerging markets stocks may not perform well.

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