Fears of Inflation Seem Overblown 22 comments
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Yesterday on May 28, 2009, David Rosenberg, formerly of Merrill Lynch and now at Gluskin Sheff, put out a note entitled “Buying Opportunity of the Year in Bonds?” He gives several reasons for anticipating a bond rally, here is an excerpt of his most important ones[emphasis mine]:
The yield curve (2s/10s) has massively steepened to 275bps. This is unsustainable and is going to flatten but the question is how? Will it be by the Fed raising rates and taking away the carry? With the unemployment rate heading above 10%, hardly likely. The output gap is so big that the funds rate, in theory, should be closer to -5% than 0%. So which entity is going to be the one that starts to take advantage of this massive ‘carry trade’?
The banks, that’s who. They are the ones with the cash — over $1 trillion on the balance sheet, which is not only a record but more than triple what was considered a normal level in the past. At the same time, even with private sector borrowing on the decline, the commercial banks have not added anything — nada — to their cache of Treasury securities this year. But, it’s one thing to have the curve at 170bps as it was four months ago and the huge 275bps spread the market is offering today. The banks have never before had so much cash to be put to work in the most attractive carry trade in Treasuries in recorded history.
Inflationary expectations appear well-contained
Given Rosie’s comment, I analyzed the returns of gold and equities against the U.S. bond market. The chart below shows the relative total returns of gold (as an inflationary expectations indicator) and the S&P 500 (as an economic growth indicator) against the iShare Barclays Aggregate Bond Fund (AGG), which is representative of the returns of the U.S. bond market. When the line is rising, bonds are underperforming and when the line is falling, bonds are outperforming.
Despite the uproar over quantitative easing, credit concerns, etc., gold has been moving sideways against bonds since the end of 2007. During the same period, bonds have been in a relative bull and outperforming the S&P 500.
With gold in a basing pattern relative to bonds, it is suggestive that inflationary expectations are still under control. With sentiment readings overly bullish on gold (see here and here), which is contrarian bearish, it confirms my previous view that:
The day for a sustainable commodity bull and the commodity supercycle will come – but not yet.
Technically speaking, the behavior of AGG vs. the S&P 500 indicates that bonds are still in a relative bull against stocks and I have to give bonds the benefit of the doubt, for now. The alternative scenario is just not plausible: The U.S. consumer is coming back, we are starting a V-shaped recovery and investors should therefore get very long equities.
Rosenberg could be right - we may have another leg up in the U.S. bond market over the next few months.
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Weakening dollar = inflation.
No hyper inflation yet that I will give you.
We, as individuals, as corporations, and as a country, have already borrowed more than we can replay in current value dollars. We have promised substantially more in the future. These debts will be repaid in dollars worth a small fraction of current value simply because we don't have the earnings ability to pay full value. That is inflation and it's not a fear, it's a recognition of the inescapable future consequences of bad decision making.
The writing is on the wall for all to see. Rosenberg's view is through rose colored glasses. One of the "ostrich people" who prefer to deny reality and make assumptions based upon how their wishes may turn out. Just because you wish for something, does not necessarily make that goal a confirmed observation by others.
Sorry, he is way off the mark on this one! Good luck with that!
Gold moving sideways? Checked the medium and long term charts lately? Better buy some before price goes to the moon!
The last time I looked, Merrill Lynch was near extinction and one of the reasons was that they didn't know anything about responsible banking practices.
The only thing their brokers knew for certain was how to separate their clients from their money by transferring it to their own pockets.
U.S. Treasuries could tank for a number of reasons. Why be stupid and ignore them?
There is too much surplus capacity globally – look at China – do you think US is going to import all the junk that we imported from them. In US itself do we have shortage of auto or home capacity. Despite huge production cuts the capacity is still surplus. Nat gas is another very good barometer – rig count keeps going down but the inventories keep rising, and of course prices keep falling.
Green shoots are simply smoke and mirror tactics of Wall Street, meanwhile the Govt. is simply watering these weeds.
Velocity of money is dwindling as credit crunch continues, just because there is thaw in the credit markets (as measured by TED spreads) does not mean credit has increased. Credit is decreasing – both availability and demand. Money is money + credit – money may increase but if credit decreases more – net money has actually decreased.
SFP Fed had recently published a nice paper on the subject: U.S. Household Deleveraging and Future Consumption Growth
www.frbsf.org/publicat...
- L. Berstein
ludwigreport.com
On May 29 07:35 PM Ludwig Berstein wrote:
> guys- does any of this information translate into a good investment
> that we should be looking at?
>
> - L. Berstein
> ludwigreport.com
On May 29 03:34 PM redbaron wrote:
> And Real Estate has not yet bottomed, Right? And what about commercial
> real estate, which is the other shoe to fall. Oil is less than half
> of what it was last summer, and we didn't have inflation then, so
> why is the increase in oil now inflationary? Inflation eventually,
> but not yet, IMHO.
What a terrible observation. Have you considered that other countries will pickup where we leave off? If you think money printing won't make prices rise, why stop at a few trillion, how about 10 or 20 trillion in freshly printed dollars backed by nothing?
I am not one to suggest the collapse of the dollar, and I've made that point here before. But that we will have inflation thanks to the Fed's monetary policy, if something doesn't change soon, you can count on it.
On May 29 06:21 PM Fighting Yoda wrote:
> Despite all the money printing deflation is taking root - CPI data
> clearly show that. CPI as usual under reports - it under reported
> inflation now under reports deflation. For inflation hawks - inflation
> is hard to come by when wages and demand fall - money printing cannot
> offset loss of income and confidence. If you believe in inflation
> you have to believe jobs will grow, and wages will rise. Does anyone
> believe that?
>
> There is too much surplus capacity globally – look at China – do
> you think US is going to import all the junk that we imported from
> them. In US itself do we have shortage of auto or home capacity.
> Despite huge production cuts the capacity is still surplus. Nat gas
> is another very good barometer – rig count keeps going down but the
> inventories keep rising, and of course prices keep falling.
>
> Green shoots are simply smoke and mirror tactics of Wall Street,
> meanwhile the Govt. is simply watering these weeds.
>
> Velocity of money is dwindling as credit crunch continues, just because
> there is thaw in the credit markets (as measured by TED spreads)
> does not mean credit has increased. Credit is decreasing – both availability
> and demand. Money is money + credit – money may increase but if credit
> decreases more – net money has actually decreased.
>
> SFP Fed had recently published a nice paper on the subject: U.S.
> Household Deleveraging and Future Consumption Growth
> www.frbsf.org/publicat...
I think inflation as never experienced by Americans in a long, long time is coming down the pike. Probably not something like Zimbabwe, but I wouldn't be surprised if we don't see a doubling of basics goods prices in 2 years. There is $2 trillion in deficit spending coming down the pike - I'm betting the fed's going to have to monetize a large portion of this deficit. Additionally, chinese held 2 year t bills are beginning to mature and the fed again is having to step in. This is all highly inflationary.
Prices going down for a few months does not deflation make, a long period of deflation will not happen and isn't happening. Regardless of velocity of money, etc. the drop in value of the dollar means we can't have deflation. we can have a ruined economy but prices will rise until we are all in the poor house. We will have capitalized banks. If you doubt a word of what I say read about iceland, their inlfation, and their economy. they had a huge contraction of GDP and inflation at the same time. There is lots of information out there, articles, and statements of the people living in iceland.
I wish the normal forces of deflation were being allowed to operate and run their way through the system so we would actually end up with a more stable economy. We weren't the bubble of Japan in the 90's where the tokyo palace was worth more than the entire state of california and hence we won;t not have the deflation they had. It is clear common sense. Greenspan attempting to fight the deflation which never happened created the housing bubble and the commodity bubble and inflation. the exact same thing is happening now, only this time it will be worse. Because the fed is hell bent on preventing any deflation at all (there is nothing wrong with controlled deflation). The very collapse the fed tried to avoid by limiting the effects of deflation will be triggered by fed policy. We have seen this happen over and over in country after country. In fact fed policy will trigger the currency crisis that triggers the inflation that happens with a contracting GDP. All to prop up banks and avoid them having to mark their assets to true value. when you force money into a system faster than it can use it the result is not productive use but collapse.
On May 29 06:21 PM Fighting Yoda wrote:
> Despite all the money printing deflation is taking root - CPI data
> clearly show that. CPI as usual under reports - it under reported
> inflation now under reports deflation. For inflation hawks - inflation
> is hard to come by when wages and demand fall - money printing cannot
> offset loss of income and confidence. If you believe in inflation
> you have to believe jobs will grow, and wages will rise. Does anyone
> believe that?
>
> There is too much surplus capacity globally – look at China – do
> you think US is going to import all the junk that we imported from
> them. In US itself do we have shortage of auto or home capacity.
> Despite huge production cuts the capacity is still surplus. Nat gas
> is another very good barometer – rig count keeps going down but the
> inventories keep rising, and of course prices keep falling.
>
> Green shoots are simply smoke and mirror tactics of Wall Street,
> meanwhile the Govt. is simply watering these weeds.
>
> Velocity of money is dwindling as credit crunch continues, just because
> there is thaw in the credit markets (as measured by TED spreads)
> does not mean credit has increased. Credit is decreasing – both availability
> and demand. Money is money + credit – money may increase but if credit
> decreases more – net money has actually decreased.
>
> SFP Fed had recently published a nice paper on the subject: U.S.
> Household Deleveraging and Future Consumption Growth
> www.frbsf.org/publicat...
We are printing more money of a currency the world doesn't want to hold and we compensate by printing more money. Add to that an insolvent banking system and you tell me how it is going to end because to me it is clear and very painful. When it happens they are going to say it was a tsunami you could imagine would happen (a six sigma event) just like the credit and banking crisis (which they were warned about). All for two reasons. So politicains don't have to say they made a difficult decision, and so the gravy train to wall street keeps on flowing. After all wall street has paid a lot of money to ensure this unfolds exactly the way I am saying it will.
On May 30 12:33 PM dcb wrote:
> the first mistake you made is believing anything that comes out of
> the fed. The second error all over the place is the assumption that
> inflation requires recovery. As I mentioned Argentina, iceland, and
> the asian currency crisis prove that isn't the case. Zimbawae proves
> this isn't the case. The markets are showing signs of inflation every
> day in front of you, oil is rocketing upwards, commodites going higher.
> The taxi driver knows he is paying 30% more for gas than just a few
> months ago.
> Prices going down for a few months does not deflation make, a long
> period of deflation will not happen and isn't happening. Regardless
> of velocity of money, etc. the drop in value of the dollar means
> we can't have deflation. we can have a ruined economy but prices
> will rise until we are all in the poor house. We will have capitalized
> banks. If you doubt a word of what I say read about iceland, their
> inlfation, and their economy. they had a huge contraction of GDP
> and inflation at the same time. There is lots of information out
> there, articles, and statements of the people living in iceland.
>
>
> I wish the normal forces of deflation were being allowed to operate
> and run their way through the system so we would actually end up
> with a more stable economy. We weren't the bubble of Japan in the
> 90's where the tokyo palace was worth more than the entire state
> of california and hence we won;t not have the deflation they had.
> It is clear common sense. Greenspan attempting to fight the deflation
> which never happened created the housing bubble and the commodity
> bubble and inflation. the exact same thing is happening now, only
> this time it will be worse. Because the fed is hell bent on preventing
> any deflation at all (there is nothing wrong with controlled deflation).
> The very collapse the fed tried to avoid by limiting the effects
> of deflation will be triggered by fed policy. We have seen this happen
> over and over in country after country. In fact fed policy will trigger
> the currency crisis that triggers the inflation that happens with
> a contracting GDP. All to prop up banks and avoid them having to
> mark their assets to true value. when you force money into a system
> faster than it can use it the result is not productive use but collapse.
>
On May 30 11:52 AM Steven Hansen wrote:
> we have laid the foundation for inflation. if there is no recovery
> i agree that inflation may not be a problem (L shaped recession).
> but when recovery happens inflation will occur.
Once again - inflation is a monetary phenomena - but you have to measure money correctly - credit is the critical piece. As credit implodes - demand contracts - leads to deflation.
China etc demand - US consumer demand is higher than China, India, Brazil, Russia combined. If this demand goes down 10% (it is likely going down more than that) - BRICs cannot offset.
On May 30 12:33 PM dcb wrote:
> the first mistake you made is believing anything that comes out of
> the fed. The second error all over the place is the assumption that
> inflation requires recovery. As I mentioned Argentina, iceland, and
> the asian currency crisis prove that isn't the case. Zimbawae proves
> this isn't the case. The markets are showing signs of inflation every
> day in front of you, oil is rocketing upwards, commodites going higher.
> The taxi driver knows he is paying 30% more for gas than just a few
> months ago.
> Prices going down for a few months does not deflation make, a long
> period of deflation will not happen and isn't happening. Regardless
> of velocity of money, etc. the drop in value of the dollar means
> we can't have deflation. we can have a ruined economy but prices
> will rise until we are all in the poor house. We will have capitalized
> banks. If you doubt a word of what I say read about iceland, their
> inlfation, and their economy. they had a huge contraction of GDP
> and inflation at the same time. There is lots of information out
> there, articles, and statements of the people living in iceland.
>
>
> I wish the normal forces of deflation were being allowed to operate
> and run their way through the system so we would actually end up
> with a more stable economy. We weren't the bubble of Japan in the
> 90's where the tokyo palace was worth more than the entire state
> of california and hence we won't not have the deflation they had.
> It is clear common sense. Greenspan attempting to fight the deflation
> which never happened created the housing bubble and the commodity
> bubble and inflation. the exact same thing is happening now, only
> this time it will be worse. Because the fed is hell bent on preventing
> any deflation at all (there is nothing wrong with controlled deflation).
> The very collapse the fed tried to avoid by limiting the effects
> of deflation will be triggered by fed policy. We have seen this happen
> over and over in country after country. In fact fed policy will trigger
> the currency crisis that triggers the inflation that happens with
> a contracting GDP. All to prop up banks and avoid them having to
> mark their assets to true value. when you force money into a system
> faster than it can use it the result is not productive use but collapse.
>