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…
Guest Post by Steve Saville
 Highly recommended because it gets to the heart of our big picture view…
Prior to 2002 the Fed would tighten monetary policy in reaction to outward signs of rising “price inflation” and loosen monetary policy in reaction to outward signs of falling “price inflation”, but beginning in 2002 the Fed became far more biased towards loose monetary policy. This bias is now so great that it seems as if the Fed has become permanently loose.
The following chart comparing the Fed Funds Rate (FFR) target set by the Fed with the Future Inflation Gauge (FIG) clearly illustrates the change in the Fed’s tactics over the past two decades. The Future Inflation Gauge is calculated monthly by the Economic Cycle Research Institute (ECRI) and should really be called the Future CPI Gauge, because it is designed to lead the CPI by about 11 months.
Guest Post by Michael Ashton
In keeping with the topic of the month, I present this chart.
Guest Post by Michael Ashton
Suddenly, there is a bunch of talk about inflation. From analysts like Grant Williams to media outlets like MarketWatch and the Wall Street Journal (to be sure, the financial media still tell us not to worry about inflation and keep on buying ‘dem stocks, such as Barron’s argues here), and even Wall Street economists like those from Soc Gen and Deutsche Bank…just two name two of many Johnny-come-latelys.
What a difference a day makes. I guess we should not be surprised in a policy massaged, black box stoked, HFT riddled market that we have. Here’s TLT bursting upward, seemingly without much fear of inflation (today)…
Here’s TIP-TLT sagging…
Guest Post by Michael Ashton
As expected, and as I’ve been saying for a long time, (a) median inflation is rising and now is at 2.3% y/y, the highest level since 2009, and (b) core inflation is converging to median inflation as the one-off effects of the sequester on Medicare payments is removed from the data.
Both will continue to move higher, with Core chasing Median until they are basically right atop each other again.
Following is a summary of my post-CPI tweets. You can follow me @inflation_guy!
If the Fed won’t stop its chronic ZIRP’ing, maybe the market will do it for them. Today the CPI (what most people think of as inflation) is indicated to have jumped per this Bloomberg report.
Equities fell earlier today as data showed the cost of living in the U.S. rose more than forecast, reflecting broad-based gains that signal inflation will move closer to the Fed’s goal. The consumer price index increased 0.4 percent, the biggest advance since February 2013, after climbing 0.3 percent the prior month.
“Probably the most troubling number for investors is the CPI number,” Mark Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott LLC, which oversees $65 billion in assets, said by phone. “Both numbers put those inflation readings around the Fed’s target policy of 2 percent. That to me suggests that the Fed, in looking at that, could say we run the risk of inflation being hot and could suggest pulling forward an increase of rates.”
Of course we have been viewing the ISM data (when ISM not screwing it up) every month and noting the pesky ‘prices’ component. Of course CPI was going to get a bump. The 2 year yield vs. the 10 year has made a 1.5 year high at least partially in response to price pressures.
This is by the way not a configuration that is friendly for gold. At least that used to be the case before policy makers became so aggressive in meddling with the system. Now, I wonder how many indicators are going to act exactly as they did before the steady diet of ZIRP, QE’s 1, 2 & 3 and all the other stunts being pulled in the US and around the globe. But stand alone and at face value, short rates rising faster than long rates is not usually friendly for gold.
It may or may not be unfriendly to the stock market. I think the market is going to stand or fall more on its own merits for a while, because it usually does not start to decline at the beginning of a rate hike cycles. But again there too, what is “usually” about the current environment?