The dollar (NYSEARCA:UUP) could have much more downside to go. We think the huge amount of Fed liquidity that has not shown up in growth will show up in inflation. We will show the simple math based on Janet Yellen's comments. That will hit the dollar and drive import prices among other core causes. We think this is early on and has already begun.
We have been pointing out for some time how the dollar is in a downtrend and recently officially sold the dollar.
More downside to come
The US dollar, while up recently is in a multi decade downtrend.
You can see the above chart for DXY has lower highs and lower lows here for 50 years. We could be at another longer term peak going lower.
Currently the dollar, even though it is in a downtrend longer term, is about in the midpoint of its last 30-year range.
Inflation has been low but, we think it's about to pick up which will hit the dollar
Here's the inflation history.
The last peak in inflation in 1980 coincided with a trough in the dollar. The above chart shows CPI which has been low and steady for almost 30 years.
The recent peak of CPI in 2008 corresponded with the recent low in the Dollar.
CPI is at its lows right now. We have already seen inflation measures picking up. We think this could reverse the dollar.
Some key measures of inflation picking up are as follows.
Import prices picking up.
The import price number is a big jump in May annualized at 16.8%.
PCE is picking up.
CPI is picking up.
Oil moving up is helping most of these measures rise.
US inflation is bad for the dollar. Plus the dollar is up a lot off of its lows and into a much longer term downtrend.
A huge supply of dollars added to the system will convert to inflation. We think the Fed is saying so.
Follow us here. We think that the huge amount of money that the US Federal Reserve has added to the system will be converted into inflation.
It's a little bit strange that the Fed didn't see this coming but the Fed is saying that one reason that monetary ease is not working is demographics. They didn't know that ahead of time?
Here's what Janet Yellen said at the press conference of her last FOMC meeting, "You know, obviously, there is a lot of uncertainty about what will happen to productivity growth, but, productivity growth could stay [low] for a prolonged time and we have an aging, aging societies in many parts of the world."
The aging she is talking about is a peak in the baby boomers that has further to go for quite some time.
The 1957 bulge of baby boomers is (next year) people turning 60. A major part of our population is retiring, as we know, which is reducing productivity, shrinking the work force. Can you say pushing on a string? All that monetary stimulus was for what, to find out it wouldn't work because our population is getting older? We could have probably better anticipated that.
Investing without an equal payback is low productivity.
We'd say the productivity formula should look like this.
Input + productivity = Output
I + P = O, fair?
Take this with you, we are about to prove that we think inflation is going to be off the charts.
Let's take you through the steps to see how Yellen is saying that their moves have been inflationary.
1) Right now there has been mounds of monetary input and slowing output, telling us that productivity is going negative.
2) Worse, we think that money has an impact on the economy. What does more currency mean for the economy? If not growth, inflation. This is not new, only that the Fed is now coming forth and saying it in a backwards way called productivity.
3) What would be an example of negative productivity? You input more, it costs you more and you get less.
You spend more and get less, what's that called?
NEGATIVE PRODUCTION SHOULD EQUAL INFLATION. We're all together? If not go back up a couple of steps to be with me.
Do we all agree? Great, hold that thought. (Spending more to get less is inflation)
The Fed says all of their stimulus has us pushing on a string to negative productivity, or, said a different way...
You may ask, "But Elazar, CPI is below mandate, they said?"
They said but that but CPI recently is at or above mandate and the non-farm payrolls that spooked the Fed (in that same time frame) are below mandate.
Again, more input, less productivity, we believe that is the formula for inflation.
We expected inflation to start to pick up May 16th after oil picked up and the dollar went down. Now the dollar is feeding on its own problem.
I + P = O
How much I (input) did the Fed pump into the economy?....
Let's look. The yellow line (that Elazar groupies are fond of) is the amount of reserves the Fed took on (the essence of their name Federal Reserve). As their balances go up, money in the system in different forms goes up. That's the I (input) in our formula.
MOUNDS OF I + PRODUCTIVITY = OUTPUT (let's remember the formula). Here's the I chart.
How much I? Mounds. That yellow line is I or Uy Yuy. (I = Uy Yuy)
I + P = O right?. What's "Oh"? "Oh" is right. It's GDP. More like "Oh no." The formula should be I + P = Oh No.
Above is the Oh no chart.
All that I (Uy Yuy) + P = Oh no.
Let's solve for P, and that will tell us the potential for inflation because remember above we said negative P means inflation.
I'm a little rusty here but to solve for P we have to move (Uy Yuy) over to the (On no) side of the equation. To do that we need to subtract (Uy Yuy) from each side so it cancels out itself on the left side. Let's see what we're left with.
P = Oh no (very small right?) - (minus) (Uy Yuy) (very large right?)
Help me here?
What is very small MINUS very large? A very large negative number, right?
What did we say P is if it's negative? Inflation.
So P is a Very large negative number.
We just did the math to tell you that the Fed is mathematically expecting ....
INFLATION TO BE A VERY LARGE POSITIVE NUMBER.
(That's solving for P).
When Yellen talks about slowing productivity for a "prolonged time" she means until that boomer chart works out. Oh, just another 20 years or so (look at the chart yourself to see what prolonged time of low productivity means). Ouch, c'mon.
Low productivity will equal inflation for a prolonged time unless the Fed reverses the mounds of "I" (Uy Yuy) from the economy. That's the formula. Until then we see LARGE POSITIVE INFLATION NUMBERS for a "prolonged period of time." No good.
That's bad for the dollar and it's bad for the markets.
When inflation is up (in blue) the markets are typically down (see above chart). So up inflation means down dollar and down markets.
We've said it many times that the Dollar diverged from the market and we think it means the markets will trade down (see here).
We do not think the Fed holds all the cards. We've shown how their monetary moves have incredible force on the stock market (see here). That said, they may have driven the market higher but they did not drive the intended economic growth with their mounds of stimulus.
The Fed is now talking about weak productivity until we work through the baby boomer cycle (oh just another 20 years or so) which, as we have shown, likely means higher prices (for another 20 years or so?).
We've said that the Fed's hands are tied to raise rates because they know that if they tighten they may crash the stock market (see here and here for proof that they know that fact). If they do not tighten that "I" we see the only outcome as inflation, which they do not control without tightening.
The market now officially deserves the double whammy Elazar rating. If they tighten, it hits the markets. If they don't, inflation hits the markets.
We see this as a negative omen for the dollar, inflation and the stock market. We are short S&P 500 (NYSEARCA:SPY) futures and the Dollar.
Good luck and please be in touch. All of your comments teach US a ton.
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