Category Archives: Inflation

Cue Jackson Hole Jawbone

Just setting the table for the Jaw Bone of Jackson Hole?  You know, if you look at the markets with a certain sense of humor it can be very funny.  I mean, I don’t know who da boyz is dat is behind da scenes but my late friend Jon used to know all of them; all da COMEX boyz.  He sat on dat deer COMEX after all.

Anyway, all I know is that it is awfully convenient as a table setting measure that we have no inflation effects (see, look at gold bowing below… look at commodities, look at TIP-TLT… look at silver!) as the Jawbone warms up this week.  Just the imagery alone makes me laugh.  There is no inflation!  Ha ha ha…  ZIRP infinity?



Inflation Stuff

In the previous post’s video Esther George talked about how it is difficult to know what is ahead with regard to a build up of inflationary pressure.  She rightly wants to make sure policy is out ahead of it, although I suspect that if the inflationary horse is going to get out of the barn it will not be put back in an orderly manner that catch-up policy can handle.

In this post we present a couple tools for viewing the inflationary backdrop (or more accurately, the current lack of one) and also a guest post by ‘Inflation Trader’ Michael Ashton.

First, here is the Silver-Gold ratio, which simply must bottom if commodities and the inflation trade are going to get a boost.  It is no coincidence that commodities are on a tiny bounce along with the same situation in the Silver-Gold ratio.


Next is the TIP-TLT (inflation protected vs. unprotected Treasuries) ratio, still burrowing southward…

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Inflation Expectations

Nominal TIP bottomed in September and has gently risen (in stops and starts) since.  TIP’s ratio to TLT is a better indicator of when inflation expectations are becoming acute in my opinion because it backs out the overall up move in T bonds.


TIP-TLT by daily view is in a ‘W’ bottom stance with positive divergence.  Hey, it’s a start for the inflationistas.

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Per just a few of the many charts included in this morning’s ETF update for subscribers… Inflation?

Not according to TIP-TLT (inflation protected vs. unprotected T bonds)…


Not so much, according to the commodity fund DBC, which may be breaking down from a little bear flag (which was noted in this morning’s update, pre-breakdown…

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Inflation Signals Non-Existent by TIP-TLT

Another NFTRH 287 excerpt…


It’s a busy I chart, I grant you. But these are my favorite charts because in their busy way they try to tell stories. The story told by TIP (Inflation protected Treasury bonds) vs. TLT (regular long-term T bonds) is not one of inflationary concerns. Quite the contrary, TIP-TLT shows a break down in inflation expectations.

The gold ‘community’ does not publicize this because it is antithetical to the fundamental they most often tout for gold (inflation). In the short-term, a deflationary bout may indeed be a negative. But in the longer-term, a failing ‘inflation trade’ would be what eventually builds stronger fundamentals for the sector. Again, economic contraction (with gold rising not necessarily in nominal terms but in relation to most everything else) is what the sector needs. Moderate the inflation hysterics.

The above picture would be positive for US stocks if it results in a continued Goldilocks atmosphere, but last year Goldilocks held sway with TIP-TLT gently rising but muted. It is debatable how well she would do if this indicator of deflationary pressure keeps dropping.

A Lender Carry Trade; an Old Theme Revisited

Excerpted from this week’s premium report, NFTRH 282:

Last June when tidbits about a would-be future ‘taper’ of T bond purchases (QE) were popping up in the media NFTRH 241 (June 2, 2013) put forward a theory that a tapering of bond monetization could begin to act as a delivery mechanism for inflation, with banks and lenders the key:

A ‘Carry Trade’ Returns?  (6.3.13)

QE ‘Taper’ to T Bond Carry Trade – More Thoughts  (6.11.13)

‘Taper to Carry’ is Still Loaded  (6.19.13)

‘Taper to Carry’… a Logical Chain  (7.8.13)

Gold: “Taper This”  (9.17.13)

Characteristics of the ‘carry’:

  • An incentive for the banks to finally start lending funds out into the economy due to the ‘carry’ spread (a profit mark up for lenders) between rising long-term yields and the officially held ZIRP on the Fed Funds.
  •  It could be a positive for gold and commodities as ‘price’ signals in the economy finally start to gain traction (ex. Last 2 ISM ‘prices’ data were quite elevated) as a long-bemoaned lack of ‘velocity of money’* (i.e. deflationary drag) transforms, at least temporarily into a phase where inflation drives up costs.

It’s an inflationary fix and is part of the reason we have followed the bank sector’s leadership.  They would benefit.  Precious metals and commodities could benefit as people chase price signals and think “uh oh, INFLATION!” [although is should be noted that a period of 'cost chasing' and inflationary hysterics is not the preferred long-term fundamental underpinning for gold; ongoing economic contraction is]

In short it all plays into the current theme that while things may remain positive for the economy and the stock market for a while yet, it is no longer a Goldilocks style bullishness with US stocks sucking up all of the [inflationary] benefit.

I’ll plan to do a public article on this since there are articles showing up in the blogosphere talking about the recent rise in lending, yet without illustrating what I think is the proper path of bread crumbs that were laid to get us to this point.

New (Public) Content

The primary reason I dug this old subject back up in NFTRH is this post by Sober Look (with contributing views from Barron’s and ISI Research), a blog you will find linked on the right side bar of our site.  That means I respect what I have seen of this author, FWIW.  Here is the post in question…

What’s behind the sudden improvement in US loan growth?

The subject matter caught my eye after an NFTRH subscriber sent me a link to it.  Finally, the funds are getting out there into the economy!  Well, who’s surprised?  With due respect to the author, there is nothing sudden about this situation.  Per the first link above from June 3, 2013 and NFTRH 241 dated June 2:

“The Bank Index ratio to the S&P 500 (BKX-SPX) is breaking out to the upside in defiance of a bear case in stocks.  The BKX has modestly led the SPX since 2011.  We have noted that this is a necessary bullish factor for the financialized economy, which is quite different from a real or organic economy.

Remember the ‘carry trade’ of the Greenspan era?  That would be the same carry trade that helped bloat the banking sector, putting its big, fat too big to fail hands in just about every cookie jar in America.
The banks love rising long-term yields because they basically receive free money from the Federal Reserve as the first users of newly created funds on the short end, which is being held down by ZIRP.  They then roll these funds into loan products, mark them up per long-term yields and voila, instant profits courtesy of a ‘borrow short, lend long’ gimmick.
Let’s see how this develops, but we should note that Bernanke has not created anything new under the sun.  The great carry trade of last decade was just another unnatural systemic stress that led to the 2008 resolution.
Do you suppose that Fed officials are ready to let the banks do the heavy lifting, now with the incentive (carry) to get the funds ‘out there’ to the public?  This condition came hand in hand with an inflation problem last decade and now that everybody seems to know there is no inflation, would not a new phase of rising inflation expectations go well right about now?”

Per Sober Look:

“It’s worth mentioning that the bottom in loan growth just happened to correspond to the start of Fed’s taper. Coincidence?”


“The key to this change in trend is that improvements in loan growth have been primarily driven by a sudden jump in corporate lending.  Why is corporate America increasing its borrowing all of a sudden? The most likely answer is the improvement in capital expenditures (capex), which is evidenced by firmer capital goods spending by US companies.”

In my opinion that is the tail wagging the dog.  A frustrating aspect of the entire recovery out of 2009 has been lenders’ refusal to lend sufficiently for the economy to gain traction.  It was not so much a demand (for credit) problem as creditor reluctance or even outright fear.

It is not corporate CapEx that is the driver but very simply, the ability for corporations to gain access to plentiful funding with a now incentivized banking sector.

“Thus the similarities in timing of the bottoming of loan growth in the US and the start of Fed’s taper may not be a coincidence after all.”

No not at all.  The trail of bread crumbs was visible over 9 months ago as the Fed started to leak a coming QE taper, which would be the ultimate kick start to the activation phase of the inflation, where the banks are now incentivized to get the inflation ‘out there’, right down Main Street, USA.

 * A review of the current Velocity of Money graphs shows an indicator still burrowing lower.  This is a measure of the number of times one dollar is turned over in economic transactions.  In other words, it is probably a laggard to the front line credit and lending just starting to get going.  Since an inflationary economic recovery is not expected to be a lasting economic recovery, it is highly debatable as to whether the Velocity of Money will ever get untracked and into an uptrend. | Notes From the Rabbit Hole | Free eLetter | Twitter

Inflation Fears? TIP-TLT Says Not Yet

The economy and the stock market depend on inflation. Get serious giddy stock bulls, they inflate, you make money.  They fail to inflate and the tide turns deflationary, your gains go poof, money heaven.  I’ll dig out some of those policy-profits-S&P 500 corollary charts again soon enough.

The relationship between TIPS (inflation protected) and TLT (regular long-term T bonds) is one indicator of inflation expectations and while it seems to have spent the last 2.5 years in bottoming mode (allowing Goldilocks to pig out on porridge) it is still going nowhere.


TIP-TLT ratio weekly, from NFTRH 277

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Hyperinflaton & Capital Controls

Guest Post by Steve Saville


The US will eventually experience hyperinflation, but “eventually” could be long after we are all dead. Therefore, rather than making the case that hyperinflation will eventually happen, it is more useful to ask the question: What is the probability of hyperinflation happening in the US within the next two years? We have asked that question every year for more than ten years, and up until now the answer has always been: So low as to not be worth worrying about. We are now asking the question again.

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Deflation or Inflation? Long Bond at the Limit

This chart was put up a while back as the USB stabbed down below the supportive weekly EMA 350.  With copper, oil and other commodities plunging one wonders about the ‘D’ word.  At least this one wonders about it.


The long bond is at a critical point right now.  Given some improving technicals on the US dollar and negative ones in commodities (and their currencies; seen the Aussie and the Canada dollar lately?), what the bond does at this juncture will be telling.

Everybody’s ready for the ‘Great Rotation’ out of bonds and into stocks, especially with anticipated Fed QE tapering being Thing 1 to start the year.  The title asks whether deflation or inflation lay ahead.  Of course we could have more of the same, with Goldilocks eating her just right porridge for another year, but I don’t think that is the most likely scenario.