PCE, GDP: Stagflation Confirms Down Cycle To 2017

| About: SPDR Gold (GLD)

Summary

The combination of rising inflation and slowing growth continues.

Policy makers say inflation is good.

We say inflation could be a need to raise rates in the face of slowing growth.

We are bearish on SPY, bullish on Gold.

Possible trend to 2018 or 2023.

We've been showing for over a month that inflation is picking up while growth is slowing. Today's PCE, which is the Fed's core inflation measure, and yesterday's GDP confirm this trend.

We think this ends with inflation ("Greenspan Confirms Elazar Inflation Prediction") continuing to rise which will cause market interest rates to rise, squeezing the economy further. This will have a negative impact on the market (NYSEARCA:SPY) but is good for gold (NYSEARCA:GLD).

Here's the latest PCE numbers reported today.

PCE Dec Jan Feb Mar Apr May 3 Mo Avg 3 Mo Annualized
Current Dollars 0.1 0.1 0.2 0.0 1.0 0.4 0.5 5.6
Chained Dollars 0.2 0.0 0.3 -0.1 0.6 0.3 0.3 3.2
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You can see the trend picking up in April and May.

The reason for the jump, we think is the rise in oil and the fall in the dollar. We've been reporting this developement since May 16th.

While inflation is clearly on the rise, growth is slowing.

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GDP for Q1 was 1.1% which was revised up from .8%. You can see, despite the revision, GDP peaked in 2014 and has been coming down.

On the one hand the Fed says they expect growth to remain slow, but on the other hand, to congress last week, they said their expectations are not reliable.

We think the trend is a better gauge.

Trajectory Expectations Call For Stagflation

While the Fed says that their expectations are less reliable we think the trend is a key guide.

The last three months saw inflation up.

The last two years saw GDP slow.

The Fed is increasingly talking about longer term cyclical issues in productivity holding back GDP.

We don't see the economy climbing out of these trends in the near term.

We don't see another round of QE

We think thanks to the creep in inflation, this will hold the Fed back from an additional QE program.

As we've reported, we feel the Fed knows they've done too much and are limited to ease from here.

Fed Chair Yellen has now consistently cited that we are already at the rate's "lower band." That means that we are close enough to zero interest rates that we don't have room to lower.

When adding that to the rise in inflation, we think the Fed is on hold.

Ultimately good for gold

The data so far this week confirms a steady lift in inflation which we think is good for gold. We think the slowing of the economy is also a plus for gold as a safe-haven.

Inflation will eat away at future interest payment values.

That hits principal values which hits markets.

As for the markets, we think that interest rates may ultimately rise as inflation eats away at future interest payment values. Higher inflation makes future cash flows worth less.

Lower future value of payments lowers the value of principal amounts today. As principal amounts go down, we think that takes market values down.

Central banks may not be the first ones to raise rates but may have to follow markets as market rates follow inflation's pick up.

Conclusion: Cycle until 2023

We don't expect a change in these trends so soon. The Fed has told us the slower growth is due to slow productivity. Slow productivity is caused in large part to demographics, which don't change in a major way until 2023, as we wrote (it takes a breather in 2018).

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The chart above shows that 50 year olds are on the decline until 2023. That is the major secular drag on the economy. (See more here and here)

For the time being, until then we are bullish on gold and bearish on markets.

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