The title’s quote is one of many eminently quotable messages I had the pleasure of receiving over a few years of contact with a late, great and a very interesting man* named Jonathan Auerbach, who headed a unique specialty (emerging and frontier markets) brokerage in NYC called Auerbach Grayson.
Jon was an honest and ethical man. He was also a gold bug (in that descriptor’s highest form) who innately understood the Kabuki Dance that has been ongoing by monetary authorities since the ‘Age of Inflation onDemand‘ (what guest poster Bruno de Landevoisin calls the Monetized New Millenium) started its most intense and bald faced phase in 2000.
Yesterday the minutes were released from the last (FOMC) meeting of official interest rate manipulators and surprise surprise, they are found to be hand wringing about the strong dollar. A strong dollar is going to take direct aim at US manufacturing among other exporting businesses, after all.
“Over the intermeeting period, the foreign exchange value of the dollar had appreciated, particularly against the euro, the yen, and the pound sterling. Some participants expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the U.S. external sector.”
And the money line…
“At the same time, a couple of participants pointed out that the appreciation of the dollar might also tend to slow the gradual increase in inflation toward the FOMC’s 2 percent goal.”
In an inflated construct (cue the chart for what seems like the 1000th time), there is no way out other than inflation “all the way”.
So while we twittle our charts and manage markets in the here and now as if we are conventional market participants, we (well I, anyway) are anything but that. What I do is have some fun along the way with graphical representations of the falseness that is the underpinning of the Age of Inflation onDemand; and the humor too. Every time the Fed rolls over on making real and sound policy and/or speaks out of both sides of its mouth the reaction is either comical or sad, depending on how you look at it. I choose both, it’s comical and sad…
“There is nothing wrong with your television set. Do not attempt to adjust the picture. We are controlling transmission. If we wish to make it louder, we will bring up the volume. If we wish to make it softer, we will tune it to a whisper. We will control the horizontal. We will control the vertical. We can roll the image, make it flutter. We can change the focus to a soft blur or sharpen it to crystal clarity. For the next hour, sit quietly and we will control all that you see and hear. We repeat: there is nothing wrong with your television set. You are about to participate in a great adventure…”
Nothing has changed since 2000, when Alan Greenspan began this most adventurous experiment in inflation. What we have had are boom and bust cycles. The current cycle has simply emboldened the worst kind of trend followers and touts in an ‘In
Greenspan err, Bernanke, err… Yellen we trust!’ continuum of greed and ignorance. Today, the worst of us hold sway in promoting fantasies that newer and more gullible arrivals on the financial scene will pay for one day.
The FOMC minutes released yesterday prove that they are trying to inflate, they want inflation and that in this “monetized new millennium” it is asset appreciation above all else; especially above the saving that a chronically strong dollar would promote among the population. Saving after all, is necessary for real and sustainable economic cycles.
That is not what we have going here. What we have here is a one-way ticket to the Outer Limits or Wonderland or (pick a popular culture reference)…
* Among other things, Jon was pals with New York Dolls guitarist Johnny Thunders, attended a Mets game with Iggy Pop, was involved in the 1960’s NYC film and arts scene and even advised President Clinton on economic issues. “Did he take your advice?” asked I. “Ha ha ha… no” said Jon. Like I said… interesting. He was also NFTRH’s very first subscriber, a fact that to this day keeps me trying to live up to his standards.
Guest Post by Bruno de Landevoisin
 Bruno has a parallel take on biiwii’s ‘Age of Inflation onDemand’, 2000 – ? (brother’s from different mothers?)
I’m certain that the Pompom waving Stock Market fanatics and official Federal Reserve cheer-leading squad will have a hard time accepting this, but fortunately, despite their fantasy football gymnastics, facts remain facts. As such, I will categorically point out that even with its substantial sell off, Gold remains by far the best performing asset class of the Monetized New Millennium. That veritable fact is as startling, as it is significant.
Most of the excitable equity equestrians will undoubtedly brush off this striking statement as insignificant, and simply discard it as the typical cherry picking of particular price data during exceptional periods of performance. Well, ok, but that entirely misses the most critical and crucial point here. Namely, that the dubiously debt driven asset-bubble based economy ushered in by the Monetized New Millennium shows no signs of relenting.
QE or no QE, ZIRP lumbers on. They can talk about it all they want, but until they actually let interest rates normalize it’s just talk, simply more hot air spewing from the blathering bogus balloon blowers. The Fed can keep reflating the captured capital markets via zero cost funds to their preferred multinational banking institutions, they can keep encouraging the selling of naked digital shorts to contain the Gold market, and they can massage all the economic data they want. However, what they are utterly unable to conjure up out of thin air is legitimate, productive and sustainable economic growth at the ground level for the average American.
Guest Post by Michael Ashton
Why So Many Inflation Market Haters All of a Sudden?
The inflation market offers such wonderful opportunities for profit since so few people understand the dynamics of inflation, much less of the inflation market.
One of the things which continually fascinates me is how the inflation trade has become sort of a “risk on” kind of trade, in that when the market is pricing in better growth expectations, reflected in rising equity prices, inflation expectations move with the same rhythm. The chart below (source: Bloomberg) shows the 10-year inflation breakeven rate versus the S&P 500 index. Note how closely they ebb and flow together, at least until the latest swoon in inflation expectations.
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.
The tiny little bounce continues as the curve rises again today, with all maturities declining. A little risk off’y here.
May as well throw in a couple other indicators while we’re at it. TIP vs. TLT indicates that a little counter trend support could be setting for a bounce in precious metals, commodities, etc. Depending on what USD does with its over bought status. Junk bonds are weak but still showing a bullish hint vs. Treasury (and Investment Grade) bonds.
Folks, this chart is from yesterday’s close. Commodities are down hard again today. They are also deeply over sold, yet I still want nothing to do with them (note to self… don’t let silver drop too far with those calls still in hand). 500 is the key level per this weekly NFTRH chart we have used since well before CCI’s breakout early in the year.
It is time to be considering that the age of inflation or more accurately its cost-effects may be over.
It is time to be considering that inflation gurus set up a cottage industry in scaring everybody about hyper inflation.
It is time to be considering that for now the US economy and stock markets benefit from a transitional Goldilocks phase.
It is also time to consider the message that commodities may be sending for a day when that pendulum (the lack of inflation expectations) swings too far.
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’.
A constant struggle in writing about the precious metals is in trying to be clear about the differences between the gold stock sector and other sectors when it comes to inflation. That is because there are two types of bullish environments for gold stocks…
- The ‘play’, where all the inflatables rise with inflation expectations; this would be the ‘gold is silver is copper is oil is hogs is corn’ trade. This is the play where the inflation and commodity gurus tell you to buy resources to protect yourself from the US dollar crash that is going to happen any day now. A problem is that in this environment many resources often out perform gold, thus hurting miners’ fundamentals.
- The other is a longer trade or dare I say it, investment. This is where commodity prices are declining and the USD is firm. Gold is stronger than silver and the inflation oriented gold bugs get bearish because they can’t understand how gold will not go down with oil and indeed, inflation expectations.
I have often called #1 a ‘SELL’ on any strong rally that results. #2 is a more difficult animal because it can be a grind as it sets up. That grind would be the misperceptions game kicking in where the majority gets fooled into thinking if copper goes down so will gold. After all, China’s gonna decelerate again!
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.