Inflation Watch

Yesterday, based on easy Ben the inflation dove’s JEC testimony, I noted that:

"I think Gold — and most of the commodities — just got a whole lot sexier . . ."

That didn’t take long:  Gold miners are up 4% today, Gold (the metal) is up $18, and the Silver ETF (SLV) is up nearly 5%.

On K&C yesterday, Larry suggested that Gold’s modest pullback was a sign there was no inflation. I disagree.

I guess you can say my views remain the same: except for all various items going up in price (oil, food, industrial metals, housing, medical, education, insurance, precious metals, wood, building supplies) there is no inflation. 

The market is speaking loudly on the same subject today . . .

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  1. cm commented on Apr 28

    Around where I live, gas stations update their prices upwards pretty much on a daily basis, a few cents each time.

  2. RJF commented on Apr 28

    Bond Vigilantes, where be?

  3. B commented on Apr 28

    These people who say there is no inflation are clueless. Bernanke knows that. He said the CPI wasn’t reflective of inflation and they didn’t use the CPI to set policy. He also said high energy costs were a major concern. But, why ten year rates at 5%? They are just marginally higher than two years ago after cratering last year. And they aren’t what I would consider representative of the inflation we are seeing. if the bond market is all knowing, what is it saying? One of four things will likely happen with rates. Rates will continue higher signaling more inflation and strong global growth into the foreseeable future. Rates will stay low because they realize this global commodity boom is going to crater demand and slow the global economy. Rates will stay low because the big problem is deflationary pressures. Or, regardless of any other factors, rates will stay low because there is too much global liquidity chasing bonds.

    What has the bond market known all along since short rates went to 1%? A global asset explosion would happen. An asset explosion that would end badly with negative pricing pressures? That would explain very tame long term rates in the face of tremendous asset appreciation and inflation.

    I’m beginning to join the deflationary crowd since we have seen such a blow upwards in commodities. I don’t know if it will come to pass but the pressure will likely be on asset price depreciation across the board. The blow off in commodities itself has transformed my opinion that gold may be reacting to a global asset bust since it is also acts positively to deflationary pressures. One thing I will be watching is how the other metals fair in relation to gold going forward. A divergence might lend more credence to that end state. If, indeed, this is a possible outcome, raising rates even more would be the biggest mistake the Fed could make.

    All just BS at this point but something to consider.

  4. thecynic commented on Apr 28

    and no doubt the continuing sell off in the dollar is contributing to this.. i think this will continue until Bernanke assures the bond market and fx market he will be diligent on inflation. with today’s GDP coming in light, it actually may mean there is more excess liquidity that wasn’t absorbed by economic activity than the market had discounted.. also bullish for commodities.
    DXY is very oversold and 86 is providing some support but if/when it breaks it could go straight to 80 which is the multi-decade low. if that doesnt’ hold it’s sayonara baby…. unchartered territory.
    i think Bernanke is trying to play it smart and leave his options open but he may have only confused the markets even more… his credibility is crucial..

  5. getshort commented on Apr 28


    What is your definition of inflation? Things getting more expensive? I thought everyone took the Milton Friedman definition of inflation to be commonly acceppted.

    Did we have massive inflation int he 90’s because stocks were going up? Healthcare for a few years was actually getting cheaper!

    Some asset class will pretty much always be on the rise. Does that make it “inflationairy”.

    Most economists agree that even higher oil prices aren’t inflationary.

    It seems like the posters on your blog & you are confusing the deterioating standard of living (everything is getting more expensive) with inflation (an expansion in the monetary base that leads to everything getting more expensive).

    The fed has been tightening rates & printing fewer dollars (M1/M2 have declined. Why even Marc Faber points out that there is less liquidity in the system) and oil and commodes still rally because of the imbalance in supply & demand.

    They rally because they are 3 billion new capitalists in our planet and they all need this stuff.

    BTW – check out sugar. It always does better than gold or oil. Silver of course trumps gold.

    -Get Short

    ps, the deflation argument is intriguing. I’m betting that even if we have deflation you’ll see growth in commodities. No matter what, the world will continue to run out of oil and the rest of these commodities are very scarce.

  6. thecynic commented on Apr 28

    B – in re to the 10YR note yield i think you have to remember a couple of things:
    the yield has actually risen 100bps in the last 6 months and has now un-inverted when the Fed finally got the repo rates above the coupon rates which started driving the negative carry..
    and i think it’s more important to look at the 2s/10s spread v the nominal 10YR yield. i view the curve as doing the Fed’s work for them. when they are too tight, curve narrows to ease. when they are too easy, curve widens to tighten. when the Fed started tightening in 2004 and the 10YR yield didn’t rise everyone was screaming conundrum but no one mentioned the fact that 2s/10s was about as historically wide as it gets at 250bps. so as the Fed started draining liquidity the bond market started to anticpate the need to ease and the curve flattened, plus the flatteners were profitable because carry was almost free and the spread was so wide.. now we have a situation where the Fed appears to be ending the tightening, presumably because they are worried about housing. the only problem is that liquidity still seems to be running high. so coming off an inverted curve, the 2s/10s spread starts to widen in anticipation of the Fed not being tight enough.. this is the same reason the dollar is falling and commodities are rallying.

    so the question now becomes where will 2s/10s have to go to turn off the liquidity spigot? i’m thinking at least 100bps which puts the 10YR yield around 6% assuming the 2YR remains near current levels.. it may have to steepen even more, maybe back to 250bps, but bond traders aren’t going to sit there and watch commodities rally and the dollar fall and keep the curve flat.. there is no free lunch.

  7. DJ commented on Apr 28

    I think inflation is limited to assets, including housing and commodities, and is not really hitting consumption. To figure out why you just have to ask yourself who has all this excess liquidity. Some exceptions where consumers do have higher prices are industry specific: Gasoline, Health-Care, Education – but that does not equate to widespread consumer inflation.

    The result of this “conundrum” is that there isn’t much the Fed can do to resolve it because the supply-side is fighting inflation & the demand-side is fighting deflation. It can only be resolved through fiscal policy.

  8. DJ commented on Apr 28

    I think inflation is limited to assets, including housing and commodities, and is not really hitting consumption. To figure out why you just have to ask yourself who has all this excess liquidity. Some exceptions where consumers do have higher prices are industry specific: Gasoline, Health-Care, Education – but that does not equate to widespread consumer inflation.

    The result of this “conundrum” is that there isn’t much the Fed can do to resolve it because the supply-side is fighting inflation & the demand-side is fighting deflation. It can only be resolved through fiscal policy.

  9. thecynic commented on Apr 28

    you’re right M2 has been declining since the Fed started raising rates but it is still high relative to economic output and thus liquidity still ample..
    the difference between ’90s bull market and now is that the ’90s bull market occurred with a strengthening dollar as opposed to today’s rally that occurs with a weakening dollar. like today, if your stocks go up 1% but the dollar falls by 2% you didn’t make any real money.. at least that’s the way i look at it

  10. B commented on Apr 28

    Can you point me to a link where we have less copper, iron ore or coal in the world? We have more copper than we could use in a million years. Ditto iron ore. Coal is more abundant than at any time in the world’s history. Even oil? Especially since the US has more oil than all of the Middle East in shale. And it really isn’t that expensive to get at either. And Canada more than Saudi Arabia and we didn’t even know it existed a few decades ago? Or that Venezuela now has proven reserves greater than anyone in the Middle East except Saudi Arabia? Or that Mexico just found the biggest oil field in its history?

    I like all of these arguments. But they aren’t supported by reality. It’s the same group of people who are these gold bugs coming out of the woodwork after being stuck in the closet in a worthless investment for 25 years. Now is their time to shine. At least present an argument that there is increased demand and very temporary supply concerns in metals. I wouldn’t buy that either but at least it is defensible with some facts. Btw, inflation is an increase in the money supply……… THAT RESULTS IN LESS PURCHASING POWER. So, we expect inflation. That is why the Fed has a mandate to keep it under control not to obliterate it. Some inflation is healthy. A technical argument could actually be made that inflation never ended in Japan during their deflationary cycle. But those discussions are silly semantics. Let’s be practical. There is purchasing power erosion due to price increases that is well outside of what the Fed wants. Period.

  11. B commented on Apr 28

    I don’t disagree with what you are saying but the reality is long rates were very close to where we are now back in 2004. Yes, they have risen dramatically recently because people finally realized the Fed was going higher? Or is it because of a concern of inflation?

    If long term inflation was a major concern, I would have to argue that long rates have to go much higher regardless of the 2-10 spread. That was my point. Don’t you agree? If not, how do you see long term inflation a problem when the long bond is sitting at 5%?

  12. thecynic commented on Apr 28

    i do agree on bond yields needing to go higher, but i was pointing out that just because the nominal 10YR yield was low didn’t mean the bond market wasn’t worried about inflation and the falling dollar because the yield curve was so wide.. i think once this selling (due to inflation fears/easy Fed) gets in motion the Fed will be forced to go along for the ride and will need to continue to hike later this year or next year. barring a complete puke factor collapse in housing, i think the markets will force the Fed’s hand. remember 10YR note yields are more alligned with inflation expectations and those expectations can rise much further.. i was a child in 70s but i recall Volker was forced to raise the funds rate because 10YR yields were so high due to inflation expectations.. at that time the bond market was in charge of the Fed which is what Bernanke risks by playing chicken. the best way to cool these commodity prices and falling dollar would be to jack the funds rate to 6% in May.. that would crush these crazy markets, but i don’t think he has Volker’s nuts.
    anyone remember the Volker situation better please correct me if i’m wrong…

  13. getshort commented on Apr 28


    I’m basing my facts on commodities based on Jimmy Rogers and the books he’s written and the different
    studies I’ve read about the lack of mines and mining

    Rogers says that there is an abundance of coal, oil (in the form of shales) and plenty of metals to be found.
    But the time to find them takes about 10-15yrs. During this time we hit shortages because of our limits in refining, mining etc…

    So there is still a fundamental supply vs demand problem with commodities.

    Car prices have declined, consumer electronics have declined, food prices have also held stable. Most studies on food prices show people only spend more on groceries if they’re going after the luxury items (bottled water, organic foods).

    I’m a long term commodities bull. I also think the dollar is going to be toast in a few years.

    I think when the recession comes and Bernanke fires up the printing press we will see REAL inflation. You’ll notice that a loaf of bread & pound of chicken are way too expensive.

    You’ll also see out of control values for M1 & M2.

    Remember M3 is largely due to all the different “innovations” that have happened in banking.
    It is very much out of the Fed’s control to reign
    it in or expand it.

    Of course those “innovations” may be ticking time bombs.

    I don’t know why barry keeps saying we’re having inflation. It just doesn’t make any sense.

    Expensive != inflation

  14. thecynic commented on Apr 28

    you also have to remember that one of the main reasons we haven’t seen the massive inflation in consumer goods is because we import from countries that are pegged to the dollar.. if we lost 30% v Yuan (like v Euro), shit at WMT would be 30% more expensive. dollar/Yuan is basically unch’d even though the dollar is near a historical low.
    we can only exploit cheap manufacturing because of the currency.. someday US manufacturing will return but it will be becuase our dollar is so weak it will no longer be profitable to outsource

  15. B commented on Apr 28

    Quit making my arguments for me. :) This is not the late 70s yet. It may get there in a few cycles but we are still 1974.

    Your argument is that the long bond rate has to rise. Does it really? Is the inflationary crowd so focused on the short term that they cannot see the end state? Again, rates haven’t moved on the long end in two years. Yes, they’ve gyrated up and down and now they are where they were two years ago but if the end game is an inflationary enviroment, long bond rates will follow. Or maybe should have already followed if long term inflation is going to be a problem. Volcker had to raise to get inflation under control because of action in the long bond market that has not taken place and may not take place this cycle depending on the end state. Think about it. If a housing bubble and a global real estate bubble is your end state prediction is that an inflationary or deflationary environment? It was short term inflationary with an end state being deflationary. Hence, that would possibly support a long term low rate environment. Long term inflation is not a foregone conclusion. It is a rational interpretation of the data. But, at 5%, if rates don’t head higher, the end state may be just the opposite of what you are expecting. A deflationary cycle.

    Look, if we can get commodities up hundreds and hundreds and even over a thousand percent in some instances and oil is up hundreds of percent and we are still at 5% long rates which is where we were two years ago, where is the LONG term inflation creeping into the long bond? It may come and it may not. Because the end state may be an asset bust. If global real estate is going to enter a marginally deflationary cycle or a full blown deflationary cycle, it makes logical sense that commodities will follow because the build out, in general, will likely bust. So, a blow off in commodities does not portend long term inflation necessarily. Just like a blow off in equities in 2000 did not portend and continuation of the existing trend.

    As far as the dollar goes, it could also be signaling something other than what one interprets with esoteric information. I was on your side of the argument until I witnessed moves in commodities that have not been seen in fifty years. That has led to me adopt a more open view of what the markets may be telling us. If long rates don’t head appreciably higher from here, I’m voting for a whiff of global deflationary pressures. And wouldn’t that fit in with all of the overcapacity being built to service a finite market: the American consumer? Especially when the American consumer may start to revert back to a mode of saving instead of overspending. If so, a pause to look at future data is not such a bad thing. The Fed can get off of this foolish 25bps game and crank it to 50bps or more if the future data supports inflationary versus deflationary pressures.

    It will be an interesting to watch things unfold.

  16. thecynic commented on Apr 28

    and that’s what makes this cycle so complicated. no doubt when the credit bubble implodes there will be shit for sale at cheap prices and deflation will be a reality. my only problem is i’m watching the weakening dollar pushing the yield curve wider and thus long rates higher. granted you’re right, the dollar has decoupled from commodities over last few months/year, but the fx market is about 100x commodity market so you can get much larger fluctuations. how much money does it take to drive gold 1% higher v the Euro 1% higher? 1 billion v 100 billion? i don’t know, but it’s big…
    i think the dollar could be playing catch up with commodity markets and near term we could have a dollar melt down which drives more inflation fears.. this will drive rates higher and then you’ll get your deflationary bust…
    get liquid, convert to euros and when shit unravels convert back to dollars and you’ll be the richest guy in town, picking up the pieces at 80% discount after making 50% on the currency swap.
    (wish it could be that easy)
    question is, does it take 6 months or 6 years?

  17. RP commented on Apr 28

    In what way can US rates for *borrowing* impact what China is willing to pay for commodities? China doesn’t have to borrow to buy…the rates only impact what borrowers can afford to buy.

  18. me2 commented on Apr 28

    I think we are sitting in the calm before the storm.

    Thus far inflation hasn’t fed into CPI very much, save energy. But it is hard to argue that we aren’t experiencing inflation of commodities and real assets and sooner or later those are going to feed into CPI, one way or another. It is inevitable. You can’t buy things that are made of or with steel, copper, silver, sugar or oil and not have the price go up or the producers go broke. In this regard we have our heads in the sand thus far.

    I think the housing situation is much more dire than people realize. The market just topped a few months ago. The fact it was a bubble is now undeniable. Consumers are just realizing this and as of yet not many have really done anything to get out of their bad RE investments. But given their high debt loads and rising interest rates, it is inevitable that either by foreclosures or firesales there is going to be just as much RE trading hands as the market collapses as when it was booming. Think about that. That is a lot of RE.

    What frightened me this week was that 71% of demand came from the consumer and consumer spending rose by 5.5%. Where the heck is that coming from ? I’m expecting consumer spending to decline sooner or later because the house ATM is broke.

    So… I’m thinking gold is the refuge. When China sees the US bonds aren’t good investments, they will flock to gold. When the petro exporters get tired of holding US dollars, they will flock to gold.

    Ben has no choice but to get to 7% and fast. It has to be done for the following reasons:

    a) get the consumer to stop going into more debt
    b) slow consumption, thus reigning in inflation
    c) encourage savings to start reversing the trade deficit
    d) prop up the US dollar
    f) demonstrate that inflation will not be tolerated.

    I know he doesn’t want to do it. It WILL pop the housing bubble. But he doesn’t have any choice.

    I was very surprised to hear his “it might be time to pause” speech. I was expecting a “we might need to go more than 25 bps” speech.

    I think things are about to get out of control. The dollar is going to fall. Gas will hit $4 a gallon shortly. ARMs are coming due and that can’t be pretty. Housing inventory is climbing and I think people are starting to see that they have to unload. Bond yields are going to climb.

    It will stop when consumption falls and savings starts. I think that is going to take interest rates of 7 to 9%. If Ben is smart he will put it there now. If Ben is not smart he will wait and the market will make him put it there. In the meantime gold is going to skyrocket.

    The US has to deal with its issues this summer. Prior to this the housing market allowed us to live in dream land, but no more.

  19. B commented on Apr 28

    China doesn’t have to borrow to buy? I think you have current account deficits confused with debt. You are buying too much of the argument that China lending us all of this money. The same is said of Japan as the world’s largest creditor via its current account surplus that ends up recycling as dollar denominated investments.

    Debt. Japan is one of the most indebted nations on earth. As a percent of GDP they are much more so than the US. China ain’t far behind. Actually, if we could get some realistic statistics out of a communist country, you would find China is teetering on the precipice. The difference with China and Japan is that Japan has cleaned up its massive, massive nonperforming loans and reformed its banking system. Where were all of those massive loans concentrated? Uh, same place they are concentrated in China. But as bad as Japan was, at least it was a semi-capitalistic society. China has nonperforming loans that make up a significant amount of its economy. If the government were to call them in and clean them up, because the bank is the government in China, the economy would fall off of a cliff. China is one big mound of nonperforming DEBT. Tick, tock, tick, tock, tick, tock, KABOOM!

    This horsesh*t that America is going to hell in a handbasket while China is headed towards global economic domination is about as truthful as hell is freezing over. Of course, tomorrow it might. That would be when the Chinese “miracle” is exposed as a house of cards.

  20. Robert Campbell commented on Apr 28

    Here’s how I see everything unfolding if Bernake doesn’t keep raising rates …

    The U.S. dollar will fall, making the price of imported oil rise. The falling dollar will also force interest rates higher.

    This combination of higher rates and higher gas prices will put a choke hold on consumer spending, cause ARM resets to increase mortgage payments by 30 to 50%, put the U.S. economy into recession, and put the housing market into steep downcycle.

  21. me2 commented on Apr 29

    “This combination of higher rates and higher gas prices will put a choke hold on consumer spending, cause ARM resets to increase mortgage payments by 30 to 50%, put the U.S. economy into recession, and put the housing market into steep downcycle.”

    That is what I mean. Either Bernanke raises rates or the bond market will do it for him. Either way housing is toast and there is a recession on the horizon. Gold is probably going up either way because I’ll be he doesn’t raise rates as much as they should be raised to fully combat inflation, in an effort to try to minimize the pain for the housing bubble.

  22. day4night commented on Apr 30

    Does anyone know where to get current M3 numbers? As I understand it, the Fed stopped publishing the figure, but still publishes the components, leaving it up to us…

  23. Econbrowser commented on May 16

    Commodity price inflation

    Commodity markets have been a little too exciting recently for my quiet tastes.

  24. Ames Tiedeman commented on Oct 4

    How high does Gold go?

    Some say $1,000, others say $2,500?

    What do you think?

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