Guest Post by Michael Ashton
[biiwii edit: Inflation protected vs. unprotected T bonds and declining yield curves have been indicative, no?]
Here is a summary of my post-CPI tweets. You can follow me @inflation_guy or (if you’re already following me on Twitter or seeing this elsewhere) subscribe to direct email of my free articles here.
- Complete shocker of a CPI figure. Core at +0.01%, barely needed any rounding to get to 0.0. Y/y falls to 1.73%. Awful.
- Zero chance the Fed does anything today, anyway. The doves just need to point to one number and they win.
- Stocks ought to LOVE this.
- Core services dropped to 2.5% y/y from 2.6% and core goods to -0.4% from -0.3%.
- Accelerating major groups: Food/bev. That’s all. 14.9% of basket. Everything else decelerating.
- I just don’t see, anecdotally, a sudden change in the pricing dynamics in the economy. That’s why this is shocking to me.
- Primary rents to 3.18% from 3.28%. Owners’ Equiv to 2.68% from 2.72%. Both in contravention of every indicator of market tightness.
- Apparel goes to 0.0% from +0.3% y/y. That’s where you can see a dollar effect, since apparel is mostly manufactured outside US.
- Airline fares -2.7% versus -0.2% y/y last month and +4.7% three months ago. It’s only 0.74% of the basket but big moves like that add up.
- Medical care: 2.09% versus 2.61% y/y. Now THAT is where the surprise comes in. Plunge in ‘hospital and related services.’ to 3.8% vs 5.5%.
- …we (and everyone else!) expect medical care to bounce back from the sequester-inspired break last year. I still think it will.
- core inflation ex-housing at 0.91% y/y, lowest since August 2004. Yes, one decade.
- core inflation ex-housing is now closer to deflation than during the deflation scare. In late 2010 it got to 1.08% y/y.
- Needless to say our inflation-angst indicator remains at really really low levels.
- Interestingly, the proportion of CPI subindices w y/y changes more than 2 std dev >0 (measuring broad deflation risk) still high at 38%.
- To sum up. Awful CPI nbr. Housing dip is temporary & will continue to keep core from declining much. Suspect a lot of this is one-off.
- …but I thought the same thing last month.
- Neil Diamond said some days are diamonds, some days are stones. If you run an inflation-focused investment mgr, this is a stone day.
- Interestingly, Median CPI was unchanged at 2.2% this month. I’d thought it fell too much last month so this makes sense.
I am still breathing heavily after this truly shocking number. This sort of inflation figure, outside of a crisis or post-crisis recovery, is essentially unprecedented. Lower prints happened once in 2010, once in 2008, three times in 2003, and once in 1999. But otherwise, basically not since the 1960s.
TIP-TLT is breaking the short-term downtrend line, while Uncle Buck remains very over bought on a short-term basis. That is all…
Well, the inflation is going on globally 24/7, but it is the manifestations or effects of it that 99% of people care about. I’ll tell you what I care about. I care about the cost of my heating oil going down for one thing. And for another, I don’t much care about the price of the gold I may or may not have . So all things being equal, I’ll take declining prices for $1000, Alex.
The TIP-TLT inflation gauge has bounced a little in line with Treasury yields, and if it were to break the downtrend line recent trends in other inflation sensitive items might get a bid. But as of this moment, TIP-TLT is in a downtrend and thus, so remains the entire ‘inflation trade’. It’s not just gold, guys… are they manipulating oil, grains, uranium, REE’s, coal, platinum and now palladium and base metals too?
I just bought some T bonds after yields ramped over the last couple of weeks with the idea that recent trends will hold and inflation will remain muted for a while. My personal investment stance has little to do with inflation hysterics. And that includes my interest in the gold mining sector, which is not for inflationary reasons but is also currently compromised by incomplete fundamentals, especially in the drubbing gold is taking in ratio to the stock market.
If TIP-TLT breaks trend and starts to rise, then we can talk ‘inflation trade’.
It is rather obvious that the Silver-Gold ratio (SGR) will need to rise for any sort of inflation trade to whip up. I think we can get a bounce in commodities here because they are over sold, Uncle Buck is over bought and I might add, UUP hit the upside target of 22.10 measured off its bullish pattern. Beyond a trade however, the USD still looks bullish and commodities, not so much.
I found this old chart that tells the story of a declining SGR (post-2011) and a commodity index right in line with its dis-inflationary message. In this environment Goldilocks has lived quite comfortably and kept the stock market on track.
Three options here…
- A little inflation phase whips up and beaten down commodities and precious metals (led by silver) out perform stocks or…
- The whole mess continues to drop and dis-inflation turns to something more impulsive, taking stocks with it.
- The fairy tale goes on and on into perpetuity, with silver gently under performing gold, inflation expectations gently declining… and they all lived happily ever after. Nite nite little dreamer.
And two of the above are viable.
Dialing in the theme from Friday’s post to a shorter-term view, the 2 year yield has more than compensated for the rise in CPI over the last year, as the CPI-2yr ratio shows. That earlier post had shown a bigger picture in which the 2 year yield had declined dramatically vs. the CPI, but is in a gentle incline lately. Flipped over and dialed in time-wise, that gentle incline (decline) is not so subtle. Goldilocks lives there.
No matter the debates over inflation vs. deflation, increasing employment vs. sound monetary policy or systemic health vs. fragility (and whatever else is flying around in Jackson Hole this week), the CPI marches onward and upward. That is the system and it is predicated on creating enough money out of thin air while inflation signals are (somehow) held at bay.
The Straw Man* in this argument lives in the idea that inflation is not always destructive, that inflation can be used for good and honed, massaged and targeted just right to achieve positive ends to defeat the curse of deflation that is surely just around the next corner. Currently, the Straw Man is supported by the reality of the moment, which includes long-term Treasury yields remaining in their long-term secular down trend.
Indeed, right here at this very site was displayed much doubt about the promotion having to do with the “Great Rotation” out of bonds and into stocks (i.e. that the yield would break the red dotted EMA 100 this time). We noted it right at that last red arrow on the Continuum© below. Now, with commodity indexes right at critical support and precious metals not far from their own, the time is now if a match is going to be put to that dry old Straw Man and silver is going to out perform gold, inflation expectations barometers (TIPS vs. unprotected T bonds) are going to turn up and the Continuum is going to find support.
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?
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…
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.
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…
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.