Dr. O

Why Stagflation Has Already Begun

>>Money printing is not getting transmitted to the consumers - job losses and pay cuts prevent that. Tax cuts and stimulus (Govt. consumption) have been too small to offset loss of private consumption. All tax cuts and and some was saved by US consumers last month - so the Govt. stimulus is not working.<<

Yes, the US is in a job destroying, asset destroying, recession. Demand is relatively weak, and capacity is still relatively high, so-called slack in the system.

The Federal Reserve is monetizing the debt, and the Government is spending incomprehensible amounts of money. Hence, regardless of demand, the value of the US dollar is declining, which is inherently inflationary. Witness the price of oil.

Other countries are printing lots of money too to monetize their debt and prevent a depression. On the other hand, the countries with current account surpluses and good growth like the BRIC countries are likely "spreading around their wealth" by converting their worth-less dollars and Treasuries into things they need like food, energy, and other hard assets.

And that is driving demand for hard assets even though aggregate demand world-wide is lower than it has been for some time.

Asset Inflation and Dollar Devaluation

Today we had a 1%+ counter-trend rally in the dollar, with a 3% decline in various commodities, particularly oil, gold, silver, and natural gas. Likewise, the commodity currencies like the Brazilian Real, the Canadian Loonie, and the Australian Aussie declined a couple percent each.

As I noted just yesterday in the article above, all these charts were over-bought, with daily RSI 14s in the 70s. We'll give the dollar it's rally from DXY 78 or so, up a few percent, allowing the USD to work off some over-sold conditions, and the foreign currencies and commodities to work off over bought conditions.

That should take a few days to a week or so, then it's time to step back in and reload FXA, FXC, BZF, SLV, and GLD. If EWZ or other BRICS come down enough, they're a buy too. But after the March rally I'm more inclined toward wealth preservation through currency conversion and precious metals than I am to chase return by buying ETFs up 50-100% from their March lows.