Inflation: Suddenly, The Signs Are Everywhere!
For what has seemed an eternity, finding tangible signs of inflation was much harder than finding the elusive “Waldo”. Our recent piece entitled “Inflection Point (Part 5) (https://markonomics101.com/2018/09/03/inflection-point-part-5-interest-rates-inflation-and-inflection/) looked at the amazing contradictions in the available data and raised as many questions, as answers.
Suddenly, market signs of inflation are everywhere. For example, in the charts below, the two key commodity indexes, the Commodity Research Bureau Index (CRB) and the Goldman Sachs Commodity Index (GSG) have spiked sharply upward. The Dollar, as might be expected, has nose-dived. Oil, which is apparently plentiful, is approaching the $80 per barrel range for West Texas Intermediate (WTIC), the most commonly quoted benchmark.
A very good question is whether rates have started moving higher because inflation was “anticipated” or whether an actual surge in “prices” is pushing them up faster and further. Concerns that interest rates were artificially too low were described in “The Interest Rate Bomb: Is the Fuse Now Lit?” (https://markonomics101.com/2018/09/20/the-interest-rate-bomb-is-the-fuse-now-lit/). A sudden surge in commodity inflation, may make the process of raising interest rates to true market levels, faster and much more painful.
Is Gold Finally Bottoming?
The picture for Precious Metals has absolutely improved since we last looked at them, but not enough to either pound the table, nor do the Macarena. However, the change is enough to pay close attention to. So far, the metals have been “Missing In Action” but could get the fever at any moment (https://markonomics101.com/2018/09/16/inflection-point-part-6-what-precious-metals/). The Junior Gold and Silver Miners, after a very rough couple of weeks, may be forming a “Head and Shoulders” bottom pattern. GLD is right up against its sharp downtrend line. In any case, it’s a bit too early to assess the odds, but Markonomics101 never closes, so stayed tuned. At some point, the precious metals will take off and form their own bubble.
Slower Economic Growth, Higher Inflation, and Interest Rates?
Two solid signs, albeit early, are suggesting that the Inflection Process has just about ended and the era of low interest rates and substandard growth is about to deteriorate into no growth with escalating prices. The Dow Jones Utilities Average is an excellent barometer of future interest rates because their values fall when rates rise, and rise when rates fall. (The value of any future cash stream is lower when rates are higher and vice versa).
The Dow Jones Transportation Average is highly ECONOMICALLY sensitive. Fewer goods transported, equates directly to less growth, and a reduction in mutually beneficial transactions. At least a portion of reduced transactions or “trades” must be attributable to the “Trade War” but other factors could also be at play. We covered this recently in https://markonomics101.com/2018/07/09/can-anyone-win-a-trade-war/. The evidence is mounting that investors need to formulate a different game plan that will, at the very least, preserve assets. “Take Your Money Off the Table, Before The Table Takes Your Money Off of You”.
Equity Indexes on the Cusp of Major Reversals.
While nearly every major equity index has recently made a new all-time high, exceeding their previous January peaks, four of the six shown below have failed to sustain those highs. In the group shown, only the New York Composite (NYA) failed to make a new high, while the Nasdaq 100 is the only index not to have fallen below its January peak.
All six index price charts have 2 things in common which are both ominous. Each is forming an Ascending Wedge and every one has traced out “Reverse Wave” Patterns. These patterns have been discussed in some recent pieces including “Tipping Point (Part 5): For Whom The Bear Market Roars” (https://markonomics101.com/2018/09/17/tipping-point-part-5-for-whom-the-bear-market-roars).
The Federal Reserve: Says No Inflation, Sees No Unemployment
The Federal Reserve hiked short term rates for the 8th time since 2015, and several more are expected through 2019. The Fed announcement today indicated it would take a less “accommodative” stance with unemployment expected below 4% and inflation at 2% as far as the eye can see. They also raised their projection for economic growth in Gross Domestic Product to 3.1%.
But then, they don’t see the Bubble in the Financial system, either. If they did and said so openly, they would be quick to become one of those very few unemployed. If they’re wrong and this Bubble pops, there is always the good old Printing Press.