Deflation is stalking this economy relentlessly. This article confirms that paradoxically, the "deflation pulse" has intensified ever since the Fed announced "QE Eternity". Key markers are the strength in the dollar and weakness in commodities. In other words, the Fed's hope for reflation is stalling. Wall Street of course, has been trained like Pavlov's dog and therefore assumed that reflation would axiomatically occur, no questions asked. So they took the Fed announcement in September as the latest opportunity to pile into risk assets, especially stocks, as financial leverage indicated by margin levels, reached a 16 month high.
As the author of the first article states, apparently $40 billion of monthly monetary stimulus is no longer moving the needle in the $55 trillion global equity market. He also cites the collapsing velocity of money and the unwillingness of consumers to take on more debt (go figure). These are both markers of a nascent liquidity trap. Also announced today, the Bank of England has given up on debt monetizations, citing lack of economic potency: "asset purchases may no longer have the same impact on the economy as when first introduced in 2009". In other words, asset purchases have increased UK prices, but not economic output - the worst of all outcomes.
So, in the context of the diagram above, there is already substantial downward pressure being exerted on the economy, pulling us from the reflation phase we are in now, relentlessly downwards towards the deflation. As these pressures intensify, risk appetite will wane, ultimately forcing the great risk asset unwind aka. "The Minsky Moment".
p.s. for a full description of the above diagram, read hyperinflation v.s. deflation.
