By Steve Saville
“…central bankers are thieves. They are stealing our deflation.”
If you listen to the top central bankers of the world talk for long enough you will come away with the impression that central banks are attempting to give us “price inflation”, as if rising prices were beneficial. However, nobody wants to pay more for stuff. In fact, rational people prefer to pay less, not more. Therefore, when central banks claim to be giving us “price inflation” what they are really doing is stealing the “price deflation” from which we would otherwise benefit.
We are told that a general expectation of rising prices is important, because if people start expecting prices to be lower in the future then they will curtail their spending in the present. This, apparently, will lead to an economically-disastrous downward spiral in which the general expectation of lower prices leads to reduced spending and reduced spending leads to even lower prices.
The economic ‘logic’ contained in the idea that expectations of higher prices are needed to promote present-day spending explains why companies like Apple can never sell anything. After all, who in their right mind would buy an Apple product today when they can be sure that a better product will be available at a lower price by this time next year?
And just imagine how bad it would be if prices trended lower throughout the entire economy the way they do in the computing and mobile communications industries. There would be almost no spending anywhere! That operation to save your life that you have scheduled for next week could be postponed until healthcare charges have declined to much lower levels. And all of the eating you were planning on doing over the next few months could be delayed indefinitely in anticipation of more attractive food prices. And there would never be a good reason to buy a house or a car because each year you did without these things, the more of a bargain they would become and the better off you would be for not having bought earlier.
Also, try to imagine how bad it must have been before there were central banks to guarantee a continuous rise in the general price level. If expectations of rising prices are needed to promote spending and growth, then in pre-central-bank days, when money often increased in purchasing-power from one year to the next, there must have been almost no spending anywhere in the economy. That is, there must have been relentless economic contraction. Thankfully, we now have people like Ben Bernanke, Janet Yellen, Mario Draghi and Haruhiko Kuroda to save us from such a predicament.
The point that hopefully hasn’t been totally obscured by my sarcasm is that central bankers are thieves. They are stealing our deflation. It isn’t fair to compare them with common burglars, though, because common burglars don’t claim to be doing you a favour while they make off with your valuables.
We harp on it all (and I do mean all) the time in NFTRH. There is most likely no end to the commodity-adversarial deflationary phase until silver is bid higher than gold. People intellectualize things that they see with their own eyes like rising costs in the economy, and think inflation is coming. I think it is too, but market signals will tell when the market is ready.
As it stands, silver is getting bid down worse than gold and that has been a trend since the last inflation phase blew out in 2011. There is no signal.
You remember the end of the last cycle, I am sure. It was called nearly to the week by Bill Gross’s short of the long bond (loudly broadcast across financial media) due to inflation expectations. We had a different view; one that stated ‘maybe, but let’s tap the breaks for a moment and see if we can break the Continuum first…’
We didn’t. We simply added the 2nd to last red arrow on said Continuum…
Have a nice weekend folks.
I just got done with an extensive multi-market subscriber update over at NFTRH.com, concluding with this…
“Very generally, for a real (as opposed to a day trader’s) positive view we’d look forward to the prospect of gold topping out vs. silver and the gold-silver ratio’s fellow Horseman, the USD capping its mega rally for a correction. I think these things are coming but too many people have been calling for a commodity rally and inflation. The deflation story is very long in the tooth, but it could end in some fireworks as opposed to just gently expiring in favor of a new inflationary backdrop.”
So being on watch for the end of the deflation backdrop that has held sway since 2011’s ingenious inflation sanitizer, Operation Twist, this article at Bloomberg caught my eye.
Everything Except Headline Inflation Is Saying the Same Thing About Inflation
As a point of reference, they provided this chart.
I noted this effect some time ago after having my garbage hauler increase prices despite utterly bombed out oil prices. He cited rising administrative costs, fees, etc. in the chain. We note each month the firm upward trend in healthcare services and increasingly now, other services, like the oh so vital hospitality and leisure. From Bloomberg…
“The carnage in the commodities complex is putting a large amount of downward pressure on the headline inflation rate. Other measures of inflation that remove outliers or food and energy prices are considerably higher, thanks to the pace of price increases in medical care services and shelter.”
They include a graphic of some rising prices to make the point. With each employment report, we review and break down the Payrolls data to see an economy servicing itself now. Strong dollars buy a hell of a lot of energy and food right now. But there is an elephant in the room and his name is Services. Here again is the most recent payrolls (by industry) breakdown from the wonderful Floatingpath.com.
As much as I poke fun at them, the Fed is not stupid. Its various members know full well that there is a price to pay for the 24/7, 365 inflationary fire hose routine. Sophisticated market players see this as well, but sometimes their brains work more efficiently than the markets, which are chugging along at their own pace.
Watch the Gold-Silver ratio folks. It still has upside likely, which means it does not yet look like time to go into an inflation trade. But when the GSR blows out, put your thinking caps on.
More and more it looks like our long-term target for Copper is going to come about. That is and has for years now, been a buck 50 a pound. That level, which has seemed coded into what eventually became a global deflationary situation, could be the house call needed for players to finally anticipate an ‘inflation trade’ bounce or cyclical bull market.
Along with this hysterical bottom in the inflation trade (top in deflation) we’d expect to see things like Silver start to out perform Gold (Gold-Silver ratio has higher to go along with Uncle Buck, first) Palladium and Platinum shore up, Agriculture to bottom and of course, Energy as well. Very interesting times out ahead; maybe weeks, maybe months still. But coming. Cu 1.50 awaits.
By Michael Ashton
Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy or sign up for email updates to my occasional articles here. Investors with interests in this area be sure to stop by Enduring Investments. Plus…sign up to receive notice when my book is published! The title of the book is What’s Wrong with Money?: The Biggest Bubble of All, and if you would like to be on the notification list to receive an email when the book is published, simply send an email to [email protected]. You can also pre-order online.
- +0.2% on core CPI…as expected…waiting for breakdown
- With Median CPI running 2.5% as of last month, we should be expecting 0.2% as the “normal” core going fwd.
- 20% was core to 2 decimal places. 1.91% y/y. [ed note: mistweeted as 0.19% first]
- Note that the next two months, we roll off +0.08% and +0.06% from last year. This means core will be about 2.2% by dec CPI.
- (Though there’s some evidence of missed seasonality in core CPI these days, through airfares e.g.)
- Primary Rents 3.74% vs 3.71%. OER unch at 3.09%. So Housing roughly unch at 2.12% y/y
- Medicinal drugs 2.95%, up a bit, but Hospital Services 4.87% vs 3.28% and Health Insurance 2.99% vs 1.74%.
- No big surprise that there’s a jump in medical care services if you’ve looked at your bills recently! Probably not temporary.
- core services at +2.8% mainly due to medical; core goods -0.7%, weakest since Jan.
- Apparel -1.91% vs -1.37%, a non-negligible part of core goods.
- New vehicles also soft: +0.14% from +0.47%. Some will say this is a VW effect, but also a general dollar effect.
- The dollar effect, overall, is very small but in a few categories like Apparel it is large and in cars it is measurable.
- First cut at Median, looks to me like ~0.21%, unchanged at 2.5% y/y. That’s the number that matters but not due out for hours.
- I think I mistweeted the core to 2 decimal places…was 0.20%, not 0.19%. still 1.91% y/y, I just typoed. Why? It’s a mistwee. [ed note: har har!]
- Summary is there’s still no sign of deflation! The pop in medical services inflation joins housing as concerns to the upside.
- The rise in Medical care will also tend to make PCE catch back up with core, since it has 3x the weight in PCE as in CPI.
- I don’t care about PCE, but the Fed does.
Continue reading Post-CPI
I am being a bit of a wise guy with the title above. A couple effects of non-stop inflation have popped up in the economy in the form of healthcare and rents. This bolsters the case for the dreaded Fed rate hike in December.
Looking into Treasury yields, which are central to the inflationary economic growth theme, we find…
The Continuum (monthly chart of the 30 year yield) still with plenty of upside before long-term yields are capped at the limiter (AKA the 100 EMA).
And 10 year yields still in a downtrend while 2 year yields march upward.
This configuration is gold-adversarial no matter how much those pumping easy analysis, conspiracy or any other rationalizations deny it.
The bottom line is that the Fed is perceived to be in control and market participants are still orderly and subservient. Right at the moment, anyway.
By Steve Saville
This post is a slightly-modified excerpt from a recent TSI commentary.
The Federal Reserve has monetised a few trillion dollars of bonds over the past seven years without creating much in the way of what most people call “inflation” (a rise in the general price level). How could this happen?
One popular explanation is that the Fed’s Quantitative Easing (QE) adds to bank reserves, but not the economy-wide money supply. According to this line of thinking, the ‘money’ created by the Fed to purchase bonds remains trapped in reserve accounts at the Fed. However, this explanation can be immediately eliminated, because as previously explained every dollar of QE adds one dollar to bank reserves at the Fed AND one dollar to demand deposits within the economy. The fact is that the economy-wide money supply is now a few trillion dollars larger thanks to the Fed’s QE.
Continue reading Why Hasn’t the Fed’s QE Caused “Inflation”?
By Michael Ashton
A reader pointed out to me today a piece by Amy Higgins and Randal Verbrugge on the Cleveland Fed’s website entitled “Is a Nonseasonally Adjusted Median CPI a Useful Signal of Trend Inflation?” I will let readers draw their own conclusions about the new measure that Higgins and Verbrugge are proposing, but I wanted to point out the research because I often cite Median CPI as the best way to look at the central tendency of inflation (what the researchers call “trend inflation”) and this article confirms and reinforces that point of view.
And it is worth looking, therefore, at the recent movements in Median CPI. Yes, I know you’ve seen this over and over from me, but take a look anyway (chart is sourced from Bloomberg).
Continue reading Median Inflation vs. Mediocre Growth
By Steve Saville
Why Governments Can’t Just Print the Money They Need
Due to the nature of modern money, it would technically be possible to adjust the way the monetary system works such that governments directly print all the money they need. If this change were made then there would be no requirement for the government to ever again borrow money or collect taxes. This would have an obvious benefit, because it would result in the dismantling of the massive government apparatus that has evolved to not only collect taxes but to monitor almost all financial transactions in an effort to ensure that tax collection is maximised. In other words, it would potentially result in greater freedom without the need to cut back on the ‘nanny-state services’ that so many people have come to rely on. So, why isn’t such a change under serious consideration?
Continue reading Why Governments Can’t Just Print the Money…