Consensus Inflation (Again)

By Jeffrey Snider of Alhambra

Why did Mario Draghi appeal to NIRP in June 2014? After all, expectations at the time were for a strengthening recovery not just in Europe but all over the world. There were some concerns lingering over currency “irregularities” in 2013 but primarily related to EM’s and not the EU which had emerged from re-recession. The consensus at that time was full recovery not additional “stimulus.” From Bloomberg in January 2014:

Among countries using the euro, economic confidence rose in December to a 2 1/2-year high after an 18-month recession ended in the second quarter.

It was common to find survey data in particular reflecting the economic possibilities of 2011 or 2010. Not only was growth apparently accelerating it was, at least expressed in the mainstream, broad-based. From Bloomberg in September 2013 with regard to China:

“Growth in China has seemingly already passed the trough and looks set to recover further in the second half,” the OECD said.

From Bloomberg in December 2013 relating mainstream US economic predictions:

“This economy is getting ready to kick it up a notch,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, who correctly forecast the orders gain. “Consumers are feeling confident enough to buy the biggest of big-ticket items, the family home, and companies are seeing enough demand to buy equipment at close to record levels.”

From the consensus view of the global what the ECB did in the middle of 2014 doesn’t appear to make much sense, particularly when compared to the Federal Reserve that had shifted its narrative toward “overheating.” Why the additional European “stimulus” at that time? And why was it NIRP first rather than full QE or even other QE-like programs?

The answer to both questions was inflation. Despite uniform and ubiquitous predictions for a strengthening, confident recovery the Continent’s HICP was set to decelerate against them. From an already low level, it was just 1.4% in 2013, Europe’s central bank feared too little margin in consumer prices when in March 2014 the ECB staff projected just 1.0% inflation for calendar year 2014.

Not wanting to risk a fall below that level, the ECB decided it had to act. Though they may have preferred QE right from the start, they hesitated to go that route because of bond rates. Recognizing that interest rates are not always the “stimulus” they are claimed to be, a large program specifically buying more sovereign debt threatened to make the inflation problem, from the perspective of policymakers, worse.

Instead, they thought NIRP would help as a gentle nudge for banks to mobilize some of the useless bank reserves. The expected increase in bank lending could then work with the bond market to transmit inflation expectations without the fetter of ECB purchases and what economists believe is their effect on interest rates (they think them lower due to monetary policy). It was supposed to result in the best of all worlds, the broad-based recovery with inflation expectations and then inflation itself confirming it.

Unfortunately because orthodox Economics is predicated on such a small knowledge base of mostly past correlations, almost nothing went right from the moment the ECB acted. Inflation only continued to fall, as did bond rates anyway, and by the end of 2014 even the idea of recovery was being rethought (though reluctantly and only as a small probability at first).

Continue reading Consensus Inflation (Again)

So Yeeahhh… About That Reflation Thing

By Heisenberg




As Bloomberg writes:

While investors may return to the reflation narrative again, it’ll take more than a few political speeches to get them there. For now, traders are losing faith in rapid reflation. It’s likely they’ll continue backing away from the assets that benefited most from this concept until there are concrete developments that push them back to believing again.

The Three Ds That Spell Risk & Opportunity

By Capitalist Exploits

Yesterday we discussed the lurking dangers of a standard portfolio theory, when markets are mispricing assets.

Today, we’ll take an incisive look at the rapidly converging three “Ds” of risk, and the once in a lifetime opportunity they create:

Debts, Demographics, and Deflation.


Ever held a balloon underwater?

The further we push it down the greater the pressure.

As soon as you let it go we know what happens. The change in the size of the balloon is nonlinear and the balloon increases in size at an exponential rate.

The same thing happens when asset prices are artificially held either too low or too high. The asymmetry builds just as pressure inside the balloon builds.

The greater the mispricing of assets, the greater the asymmetry and the greater the risk to a standard portfolio theory approach. To say that assets are mispriced today would be like saying Godzilla is just a little monkey.

Global assets have never been more mispriced in history. This has to do with the fact they are priced off of benchmarks, the most notable being the US 10 year treasury. What’s important to understand is that the pricing of the US 10 year bond and in fact every sovereign bond cannot be the true market price.

Continue reading The Three Ds That Spell Risk & Opportunity

Inflation: Here’s What the Wrong Way Bet Looks Like

By Elliott Wave International

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This article was syndicated by Elliott Wave International and was originally published under the headline Inflation: Here’s What the Wrong-Way Bet Looks Like. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Even With a Crisis, No Deflation Coming

By Michael Ashton

That is the world we are now living in: higher highs to inflation on each subsequent peak, and higher lows in each subsequent trough

Recently I’ve been thinking a lot about what might happen in the event of a banking crisis redux. While I’m not very concerned about US banks these days, there is a ‘developing situation’ in China that could well eventually lead to crisis (although the state might prevent outright collapses), and of course ongoing gnashing of teeth over Deutsche Bank’s capital situation if it is fined as heavily as some have suggested they will be.

I am not yet really worried about the banking side of things. But there are plenty of sovereign issuers who are clearly heading down unsustainable paths (not least of these is the US, especially if either of the leading Presidential candidates really implements the high-cost programs they are declaring they will), and when sovereigns tremble it is often banks that bear the direct brunt. After all, you can’t form a line outside of the sovereign to withdraw your money.

But, in a spirit of looking forward to anticipate potential crises, let us pretend we are confronting another banking crisis. The question I often hear next is, “how deflationary would it be to have another crisis when inflation is already low?”

Unpeeling the onion, there are several reasons this doesn’t concern me much. First, inflation is stable or rising in most developed nations. Yes, headline inflation is still sagging due to energy prices, but median inflation is 2.6% in the US and core inflation is 0.8% in Europe and 1.3% in the UK. To be sure, all of those are lower than they were in mid-2008. But remember that in 2009 and 2010, median (or core) inflation never got below 0.5% in the US, 0.8% in Europe, and 2.7% in the UK. Japan of course experienced deflation, but that wasn’t the fault of the crisis – as I’ve pointed out before, Japan has been in long-running deflation due to the BOJ’s inability or unwillingness to grow the money supply.

So, if the worst crisis in 100 years didn’t take core inflation negative – a major, major failure of Keynesian predictions – then I’m not aflutter about it happening this time. Heck, in 2009 and 2010 core inflation wouldn’t even have been as low as it was, had the cause of the crisis not been the bursting of the housing bubble. The chart below (source: Bloomberg) shows the Atlanta Fed’s “sticky” CPI (another way to measure the underlying inflation trend) ex-shelter. Note that in 2010, the low in this measure was about 1.25%…it was actually lower in 2014 and 2015.


Continue reading Even With a Crisis, No Deflation Coming



Alice's_Adventures_Under_Ground_-_Lewis_Carroll_-_British_Library_Add_MS_46700_f45v“If I had a world of my own, everything would be nonsense. Nothing would be what it is, because everything would be what it isn’t. And contrary wise, what is, it wouldn’t be. And what it wouldn’t be, it would. You see?” –Alice in Wonderland

Silver out performs gold as both rise with Treasury bonds, which are in turn rising with stocks, as Junk bonds hit new recovery highs while USD remains firm as inflation expectations are out of the picture. This is highly atypical, maybe even unprecedented.

Some, deeply dug into their particular disciplines and biases, might say it is dysfunctional, as this backdrop simply does not make sense using conventional methods of analysis. Why again did I name this service Notes From the Rabbit Hole?

When the S&P 500 was robo rising month after month, year after year as it did from 2011 to 2015, you did not need the market report with the funny name because all was linear and as it should be. The same actually, could be said for gold. It was linear and as it should be in its relentless downtrend. Casino patrons simply ride the trends!

But today things are making sense simply because we don’t have a need to make them make sense as linear thinkers would do; we go with the indicators and charts.

As I watch the macro burp up all kinds of paradoxes and inconsistencies, I can’t help thinking back to the day that the ‘Hero’ announced Operation Twist, which in turn got me announcing “they are painting the macro”. When Ben Bernanke took the bold step into the great unknown of extreme and unconventional policy I felt the markets had been disconnected from commonly accepted wisdom maybe not for good, but for as long as the system and its current modes of operation are in effect.

To review, Operation Twist forced changes upon the macro because it “sanitized” (the Fed’s actual word for it) inflation expectations right out of the picture. The mechanics of this sanitization were the Fed selling short-term Treasury bonds (putting upward pressure on short-term yields) while simultaneously buying long-term Treasury bonds (putting downward pressure on long-term yields). The yield curve was changed from out of control (up) to in control (and down trending). From the Calculated Risk blog (…

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The Hyperinflation and Deflation Arguments Are Both Wrong

By Steve Saville

[biiwii comment: that’s our preferred theme…]

The evidence could change, but what it currently indicates is that the signs of “price inflation” will become more obvious over the coming 12 months. No deflation, no hyperinflation.

Most rational people with some knowledge of economic history will realise that the US$ will eventually be the victim of hyperinflation. The hard reality is that whenever money can be created in unlimited amounts by central banks or governments, it’s inevitable that at some point the money will experience such a dramatic plunge in its purchasing power that it will be at risk of soon becoming worthless. However, knowing this is only slightly more useful than knowing that the star we call the Sun will eventually die.

The relevant question is never about whether hyperinflation will happen; it’s about the timing, and at no point over the past 20 years (including right now) has there been a realistic chance of the US experiencing hyperinflation within the ensuing two years. Furthermore, the same can be said about deflation. A sustained period of deflation (as opposed to a short-lived deflation scare) will eventually happen, but at no point over the past 20 years (including right now) has there been a realistic chance of it happening within the ensuing two years.

So, when I say that the hyperinflation and deflation arguments are both wrong I mean that they are both wrong when dealing with practical investment time-frames. They are both actually right when dealing with the indefinite long-term.

By the way, when considering inflation/deflation prospects I only ever attempt to look ahead two years, partly because two years is plenty of time to take protective measures and partly because it is futile to attempt to look further ahead than that.

How do I know that neither hyperinflation nor deflation will happen in the US within the coming two years?

I don’t know, but I do know that neither will happen without warning. We are not, for example, going to go to bed one day with government and corporate bond yields near multi-generational lows and wake up the next day immersed in hyperinflation. Also, central banks are not going to be rigidly devoted to pro-inflation monetary policies one day, to the point where theories/models are never questioned and failure is viewed as the justification for ramping-up the same policies, and the next day be willing to implement the sort of monetary policies that could lead to genuine deflation.

Some people are so committed to the “deflation soon” forecast that they ignore any conflicting evidence. It’s the same for people who are committed to the idea that hyperinflation is an imminent threat to the US economy. However, an objective assessment of the evidence leads to the conclusion that it currently makes no sense to position oneself for either of these extremes. The evidence includes equity prices, corporate bond yields, credit spreads, the yield curve, commodity prices, the gold price, and future “inflation” indicators such as the one published by the ECRI.

The evidence could change, but what it currently indicates is that the signs of “price inflation” will become more obvious over the coming 12 months. No deflation, no hyperinflation.

A Path Toward Inflation

By Biiwii (as posted at

Yes, it’s another inflation post going up even as inflation expectations are in the dumper and casino patrons just cannot get enough of Treasury and Government bonds yielding 0%, near 0% and below 0%.

Feel free to tune out the lunatic inflation theories you’ve found at over the last few weeks. But if by chance you do want to look, here’s a visual path we have taken to arrive at the barn door, behind which are all those inflated chickens, roosting and waiting. All sorts of animals will get out of the barn if macro signals activate.

Gold led silver ever since the last inflationary blow off and blow out in early 2011. The gold-silver ratio rose through global deflation, US Goldilocks, good times and bad. There was no inflation problem, anywhere. Then early this year silver jerked leadership away from gold and now for the second time the ratio of gold to silver has broken below the moving average that has defined its trend (it did so in 2012 as well).


Why is this significant? Well, try on 2010 for size (see chart below). I for one happily managed the gold-silver ratio up spike in 2008, buying gold miners as they crashed. As gold (monetary, risk ‘off’) topped vs. silver (commodity/monetary, relatively risk ‘on’) we expanded the bullish view to commodities as well. But then came the bottoming pattern that was not a bottoming pattern. To this day I believe that the macro was preparing for a next leg up and some serious new destruction before Ben Bernanke, the “Hero”, sprung into action and ruined the beautiful Inverted H&S pattern that long-time NFTRH subscribers will remember me making a big deal about at the time.

The ratio got destroyed as the Bernanke Fed jammed a risk ‘on’ phase into gear with QE 2 and a great money making phase was on. Casino patrons, momos, black boxes and substance abusers could not help but make money, gurus pimped everything from Rare Earth Elements to Lithium to Copper.

Continue reading A Path Toward Inflation

What the Bond Market is Telling Investors

By Norman Mogil of SoberLook

Biiwii comment:  Yes indeed, the gentleman’s view is opposite my own…

Over the past month, the global bond markets have been sending out signals that all is not well with the global economies. Initially, the surge in negative nominal rates in Europe and Japan rattled many investors in both the fixed income and equities markets. This historic development suggests that large-scale investors are anticipating low growth and disinflation for many more years. Simultaneously, the yield curve, especially in the US, has been flattening, again signalling that growth is slowing, giving the policy makers considerable pause in their deliberations on the course of future interest rates. This blog examines both these developments to help the reader understand the signals coming out of the bond markets around the world.

Nominal and Real Rates of Interest

For more than a year, short to medium term rates of interest in many countries have landed in negative territory. The ECB instituted negative overnight lending rates in an effort to discourage commercial banks from depositing excess reserves with the ECB; instead, these funds should be made available to their borrowers in the hope of stimulating loan demand throughout the region. More recently, the ECB started to buy, initially, longer dated sovereign debt from member countries in the expectation that long-term rates would fall to stimulate investment growth. Now, the ECB has expanded this quantitative easing program to include investment grade corporate bonds. Purchases of both types of debt exceed 80 billion euros a month, as the ECB pulls out all stops in pursuing its goal of re-inflating the EU economies. The result of this combined effort is shown in Table 1 which reveals that major  European countries and Japan now live under a regime of negative long-term rates.

Of more significance is the measure of real rates of interest— nominal rates minus the rate of inflation. In some countries, real rates have turned negative ( e.g. Japan, Switzerland, and Canada) and in other countries, the real rates are barely in positive territory ( e.g. Germany and France). The key takeaway from Table 1 is that the industrialized nations now offer 10-year bonds at real rates that are less than 1 percent, well below the long term historic rate of 2 percent.

Flattening Yield Curve   

The yield curve represents what investors are willing to accept by holding debt over short, intermediate and long-term periods. A typical yield curve is sloping upwards since longer term investors normally require a greater return to compensate for the risks of holding debt over many years. The extra return – referred to as the term premium – reflects the investor’s view of future economic growth and inflation among other considerations.  A rising term premium reflects concerns over excess supply of debt, credit quality, and higher inflation in the future; a falling term premium has these factors moving in the other direction. Over the past year or more, the term premium has fallen significantly, hence the fall in long-term rates.

Continue reading at TalkMarkets →

Inflation With Deflationary Overtones?

By Michael Ashton

So you should cheer for the “good” sort of deflation. At least, you should cheer for it if you are still earning wages.

The Employment report was weak, with jobs coming in below consensus with a downward revision to prior months. It wasn’t abysmally weak, and not enough to change the a priori trajectory of the Fed. If the number had been 125k below expectations or 125k above it, then it may have had implications for the FOMC. But this is a number that has big swings and is revised multiple times. Getting 160k rather than 200k isn’t cause for celebration, but neither is it cause for panic. So whatever the Fed was getting ready to do didn’t change because of this number.

To be sure, no one knows what the Fed was planning to do, so this mainly has implications for the day’s volatility…which is to say that the market quickly went to sleep for the day.

Now, interestingly the Average Hourly Earnings number ticked higher to 2.5%, continuing the post-crisis upswing. At 2.5%, hourly earnings growth is slightly higher than median inflation and thus potentially “supportive of the inflation dynamic” from the standpoint of the Committee. Yes, wages follow inflation but not in the Fed models – so, while I don’t think this has any implications for future inflation it will eventually have implications for Fed policy. But this is a dovish Fed, and 2.5% earnings growth is not going to scare another tightening out of them…unless they were already planning to tighten.

Continue reading Inflation With Deflationary Overtones?