Signs Of Inflationary Reflation Running Low On Gas

Summary

• We anticipated a summer "cool down" in inflation expectations well in advance.
• As we enter August, the cool down is still in effect.
• This would act as a lever where not long ago the Fed fretted audibly about the inflation it created, but now is being given license to inflate anew.
• We could be looking out toward a new inflationary round into 2021 or the market could have other ideas. But in the here and now, inflation hysteria is fading fast.

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The summer (inflation) cool down continues…

We anticipated it in NFTRH well ahead of time using the (monthly 30yr yield) Continuum as a visual guide. The idea was that the inflation uproar of Q1…

Image from my Twitter feed:

…needed to be tamped down, preferably to a roughly symmetrical right side shoulder to the one on the left side of a would-be inverted H&S.

All charts below from my chart list at stockcharts.com:

While the macro is still in that process, other macro signals are also in decline along with the right side shoulder above. Let's dial in and look at a few using daily charts. We took a look at Copper/Gold in the previous post. Let's look at some other signals flashing during the summer cool down.

The yield curve had been steepening under inflationary pressure and now it is flattening due to dis-inflation or at least a moderation of that pressure. When it steepens again folks, there is no assurance whatsoever that the steepener will be inflation-driven as before. It's important to remember that inflation or deflation can drive a curve steepener (with very different implications, obviously).

Credit spreads (e.g. junk/investment grade shown here) are bailing out of the speculative mindset driven by… oh yeah, the Fed's inflationary operations of 2020.

Inflation expectations are certainly not inspiring at the moment.

My personal Canadian credit spread (of sorts), the speculative TSX-V vs. the senior TSX abdicated the inflationary view about the same time the yield curve (above) did. It is and has been a negative macro warning on the fly.

Finally, the daddy of all indicators (well, along with the Continuum) in my world, the Gold/Silver ratio has been flashing a potential base from which it could turn up. Let's flip it over to its Silver/Gold ratio version and see a picture that could turn nasty. If it does and the US dollar regains its composure after the roads & bridges (etc.) bailout last week the macro could abort not only the cyclical inflation, it could get flat out nasty.

I am not presenting this stuff to be some kind of doom-saying blogger. I am presenting it because whether you subscribe to NFTRH or not, if you visit nftrh.com, you see presented some of what NFTRH works on consistently. At important junctures like this I think it is appropriate to have the site be of value to those who are not one-way casino patrons trying to always make coin.

The above danger signals may also act as levers. After all, when beginning the summer cool down thesis, we presented it as just that, a cool down, a temporary way station from the inflationary hysteria. These levers could jerk the Fed out of its stance of fretting audibly about inflation (that was soooo July) and into a new inflationary production mode. We just don't know.

Image publicly available at Wikipedia:

The Fed needs permission, after all. The Vampire needs to be invited into your (macro) house. There's nothing like a deflating macro to do that trick. Then the question becomes, will they be effective at renewing the inflation in any sort of an orderly way if the massive thing they built in 2020 starts cascading down?

Thank you for taking the time to hear out this thought experiment.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.