Tag Archives: inflation

Inflation Market Haters…

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.[1] 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.

beistocks

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Ugly CPI

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.

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Yield Curve, etc.

The tiny little bounce continues as the curve rises again today, with all maturities declining.  A little risk off’y here.

10.5.2
10, 5 & 2 year yields from Bloomberg

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.

tip.tlt

Attn: Inflation Traders…

TIP-TLT is breaking the short-term downtrend line, while Uncle Buck remains very over bought on a short-term basis.  That is all…

tip.tlt

Commodities and Inflation

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.

cci

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.

tip.tlt

Where’s the Inflation?

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’.

gld.dbc.tip.tlt

Gold Miners & Inflation

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…

  1. 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.
  2. 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!

tip.tlt.gdx

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Silver, Gold, Inflation & Goldilocks

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.

sgr

Three options here…

  1. A little inflation phase whips up and beaten down commodities and precious metals (led by silver) out perform stocks or…
  2. The whole mess continues to drop and dis-inflation turns to something more impulsive, taking stocks with it.
  3. 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.

The All Everything Phase

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.

cpi.2yr

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Deflationary Straw Man

straw.manNo 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.

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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?

gold