Inflation Breakout Looking Even More Real This Week

Includes: DIA, QQQ, SPY, UDN, UUP
by: Jay Taylor

Last week I showed that my IDW broke out above the downtrend line pictured above. I am honored to have "Seeking Alpha" pick up some of my work after it has been sent out to my paid subscribers and it was also fun to read the following comments from some Seeking Alpha readers:

Coindog: "With the Fed and other CBs involved in many markets already what are they going to do when a good correction hits, prop them more? That's why I see stagflation like I went thru in the 70s when I was just starting out in my first "real" job. it's the worst of both worlds. gold (silver) should offer protection thru it. like many assets do they may overshoot to overvalued. don't be afraid to convert some to undervalued assets when the ratios look good."

David at Imperial Beach: "I don't see hyperinflation in the cards for the dollar, but inflation is definitely here. Even the CPI and the PCE register part of it. It should be noted that the Q1 GDP result of -2.9% was nominal. That number would look even worse if inflation were taken into account. In Q2 we're seeing enough "recovery" that at least nominally we'll probably be able to avoid calling another recession. However, after adjusting numbers for inflation I doubt that the results will stay positive. Many companies will report lower earnings this quarter as increased costs will take a bite out of the bottom line. Despite the Fed's tapering, they still managed to flood the market with fresh liquidity, which had the predictable effect on asset prices. Increasingly though, commodities are now in play and share in the asset inflation, including gold, silver, platinum and palladium."

Hello David at Imperial Beach to Coindog: "Well one might hope there would be some inflation, the Federal Reserve Bank (FRB) has been working toward that end mightily. The FRB has increased the Monetary Base by nearly a factor of four since 2008. That ought to produce some inflation, not too much it is true but better than deflation."

David de los Angeles: "It seems unlikely that inflation would be about to accelerate wildly when the velocity of the M2 Stock of money is still declining [1]. It is currently at 1.533 which is the lowest level recorded. In 1964 it bottomed out at 1.65 and was not that low again until 2012 but it has been above 1.65 since. This is an indication of deflation, not inflation."

Your Editor's Reply: I am in general agreement with all three views noted above re: that if anything deflation, not inflation, is the main concern. Of course we now have both inflation and deflation, so realistically stagflation is currently our fate. And inflation, if it is to mean "the cost of living," it is much closer to John Williams 8% to 9% than to the government numbers. But powerful deflationary forces are at work now including massive debt loads, declining wages (especially "real" wages), a declining work force and still lower wage earners overseas. Of course, massive spending for the military and transfer payments which are growing rapidly with our demographics are both inflationary and deflationary dynamics. So far, most of the inflation is in asset prices, which is sharply skewed to the 1%. I'm reading now that a larger and larger number of Americans are going into debt further and further to buy food and gasoline. What happens when their credit cards get cut off and they can no longer even borrow to buy life's necessities? What happens when / if there is literally blood in the streets and what we have seen in Greece and elsewhere becomes a reality in the U.S.? Ron Paul- who has always been an inflationist- told me in a radio interview I had with him that the government will in the end send massive transfer payments to the masses, and of course, those payments will be paid by and large with printing press money. While the decline in the dollar may be a ways away, does anyone believe this kind of irresponsible monetary behavior by the American empire will last forever?

And Now for the July 4th Fireworks!

No sooner had I penned in my response to the first couple of Seeking Alpha readers than I decided to check my week ending IDW. Had I calculated the IDW before I made those remarks, I may have said something a bit different because as you can see from the chart above, this week it is looking like my measure of "inflation" is breaking out much more convincingly than it was true last week! In fact, my IDW has now hit a new high. Most responsible for the rise this week was a 5.68% rise in copper followed by two other items in our index that have not performed well since 2011, namely Chinese stocks, up 3.09%, and Indian stocks, up 2.09%.

I still agree with the opinion of the Seeking Alpha readers that the underlying dominant dynamic is deflation. Can there be any doubt that if central bankers stopped printing more money we would have a market implosion that would make the 1930s look like child's play?

Yet, who is to say what the direction of the dollar will be in the future. We assume at our peril that that Post World War II conditions will remain favorable to the U.S. and the dollar and that equity markets will continue higher as they have since 2009 and gold markets lower since 2011. It isn't what I think but what the collective wisdom of the markets is telling me. And what my broad-based asset price index is saying more clearly this week than last, is that key asset prices around the world are in a breakout mode. We would do well to pay attention.