Guest Post by Tom McClellan
October 24, 2014
I cannot believe the volume of the news stories I am seeing in the financial media, with people worrying about impending deflation. And as any card-carrying contrarian knows, when a topic gets too popular, you are near a turning point.
Guest Post by EWI
Europe: The ONE Economic Comparison That Must Not Be Named… Was Just Named
It’s happened. The one economic comparison Europe has dreaded more than any other; the name that’s akin to Lord Voldemort for investors has been uttered: “deflation.”
And it’s not just “deflation.” You can still spin that term in a positive light if you get creative enough. Say, for example,
“Falling prices during deflation actually encourage consumers to spend.”
But once you add the following two very distinct words, there’s no way to turn that frown upside down. And those words are “Japan-style” deflation.
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.
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.
[note] If you are experiencing issues with the site it is due to problems with the host server. Posting will probably be light until this can be resolved. Thanks for your patience.
I actually think this guy is a fairly sharp cookie, but I think he is getting a little clumsy on the subject of deflation.
Why the Fed fears Uber
Personally, I don’t think the Fed fears any disruptive technology or service with regard to deflation. Nor should anyone else, aside from those getting disrupted (like Taxi Drivers in this case). Automation (i.e. how I made my living in my old life) in a modern society is progress, has saved whole industries and opened up other channels for resources.
“This brings us to why the Fed is afraid of Uber. As the company (and similar entities) become part of our daily routine, a whole class of workers likely disappears if the ultimate direction is to automate driving. Don’t get me wrong. Technology and cost-saving, combined with higher efficiency, is a big positive for the economy longer term, but technology is inherently deflationary as human labor gets replaced.”
Progress is progress. It is not deflationary, and it should never be thought of as a bad thing. It could well be that technology is piling up more and more of the population like sedentary cord wood, while fewer people benefit. But the dynamic is no different than when the first guy holding a round tube with gun powder, a wick and a ball in it blew the head of another guy (holding a sword) right off. Or Henry Ford and the production line… or 3D printing – which Wall Street hyped to no end – and its ability to print complex geometries from CAD models. It ain’t stopping because it’s progress.
These savings through efficiency can be reallocated elsewhere in the economy. Talk of inflation or deflation should not blame efficiency or the lack thereof. Talk of inflation or deflation is strictly within the monetary realm. Deflation is only perceived as a bad thing because for the current system, which relies on debt creation and periodic money printing, deflation is indeed a bad thing because once taking root, it could unwind the system by bringing all those debits in line.
Imagine that? We have come to think of cost savings and efficiency as somehow being tied up with something commonly thought to be negative.
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.
One is dropping below its MA 50’s and the other is popping above, after the ECB sat on its hands with rates but made a lot of Jawboning about ‘unconventional’ stimulus in the battle against the dreaded deflation.
It is unbelievable the degree to which people still have confidence in these clowns (including the ones packed into the little clown car here in the US), but apparently they do.
The TIP-TLT ratio has been in decline from a resistance point since late last year. The ratio tends to generally rise and fall with inflationary and deflationary concerns, respectively.
That little bump up (that ended up failing at the trend line) was probably in line with the explosion in certain outlier commodities like Agriculturals. People need to eat food after all. But the Fed’s introduction to the discussion of a Fed Funds rate hike out in the 2015 distance (“you know, that sort of thing”) has wrung any inflation concerns right out of this market.
A great gig they have going; with ZIRP intact indefinitely they continue to inflate, but with a few words, the market gets right back in line and in full servitude mode.
This morning’s article at MarketWatch, How Yellen’s gamble screwed up gold has some content that is right on the money. Specifically about rising ‘real’ interest rates being bad for gold. They are, no ifs ands or buts.
But then it goes off course, just like so many people who manage gold’s price for the wrong reasons. The whole concept that Yellen did something ‘wrong’ as applies to gold is off base. The old Velocity of Money and Deflation arguments come into play as well…