(Picture of the Dollar worried about going down in value based on Elazar's "Inflation Formula")
While the world expects deflation we've been reporting about inflation creeping into numbers. Greenspan confirmed this view in a recent interview. Inflation, we think will drive rates higher, drive gold (NYSEARCA:GLD), and hit markets (NYSEARCA:SPY).
First: review to those who want to switch gears from deflation-sayers [Elazar term] to inflation-istas [market term].
May 16th: Our first call for inflation to come
May 17th: Next day, CPI picks up
June 1st: "Scary Jump in Inflation"
June 12th: "Stagflation" (The combination of stagnant growth with inflation)
June 14th: "Inflation up 16%"
June 15th: "FOMC Stagflation Expectations Rise"
June 16th: "CPI and Jobless Claims: Steps To Stagflation"
June 20th: "Buy Rating Gold, Buy Rating Soybeans, Inflation Cycle"
June 21st: "Inflation Formula Shows Prolonged Dollar and S&P Selling"
June 21st: Yellen speaks to the Inflation Formula with weak productivity being the main reason for slow US growth.
Greenspan recent quotes to Bloomberg
"The fundamental problem in the US and all OECD is productivity growth...led by aging populations."
In "Inflation formula" we showed how slowing productivity will lead to inflation.
In Stock Market Bottoms End Of 2017 we show the aging population's impact on stock prices.
"More and more people to produce less and less."
We also showed in "Inflation Formula" that inputting more and getting less, by definition, is inflation.
"M2 money is always a critical indication of inflation. It [the growth rate] tilted up last several months."
In "Inflation Formula" we show that the mounds of Fed and global stimulus spending sprees that has not ended up in growth ends up in inflation.
"We should worry now, this economy ends with inflation."
We have shown that inflation data is picking up in the last few months. The Fed raised their inflation targets but didn't speak about it. ("Fed Mulls Market Float")
"Next unexpected move is inflation."
We think we're already seeing it but so many deflation-sayers are knee deep in theory. ("Fed's Key Inflation Measure +16%")
That core Fed inflation measure, PCE will report June 29th.
Negative Rates Not A Reality For Long. Inflation Will Reverse Rates
We think as inflation goes up rates will go up.
If central banks around the world remain stubborn without taking rates up with inflation we will see a major jump in credit spreads.
Market rates and credit spreads will have to price in inflation. When credit spreads jump markets get hit. That was an early warning sign in the 2008 meltdown.
Gold is not just a safe-haven to down markets, it is a hard asset store of value against inflation.
We recently recommended gold after seeing that we may be in a multi-year inflation cycle. Given the amount of liquidity from banks and the lack of it driving actual growth, inflation is in the offing. If it happens, there will be no protection for inflation except inflationary assets like food, grains, and gold.
Reversing Rates Back Up Will Hit Markets Especially From Zero
We wrote that we think the Q1 crash happened because the Fed raised rates 100%. A move from 25bp to 50bp is a 100% jump in the interest rate. 100% jump in rates is the type of news you expect from an under-developed nation. But the US was the provider of the 100% jump. We think that helped crash markets.
Infinite Rate Hike
A move off zero, by definition is an infinite move. As countries are forced by market rates to raise rates because of inflation, we think markets will get hit, as we saw in the US in Q1. IF a "100%" jump in rates caused a Q1 crash, imagine an "infinite" rate jump.
Conclusion: We have a catalyst
The theory that markets go up forever in the face of deteriorating fundamentals has truth until there is a catalyst. Inflation may be the catalyst to force central banks to have to reverse course, despite slowing growth. If central banks don't end up reversing course, market rates will any way. We are bearish.
Elazar Advisors, LLC specializes in earnings and predicts, analyzes and reacts to earnings and earnings events as well as developing current company and macro stories with a hedge fund perspective.
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Disclosure: I am/we are short ES, WHICH CAN CHANGE AT ANY TIME.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.