Why Inflation?

The simple answer is that is what they are doing, inflating.

The slightly less simple answer is that they inflated in 2001 and it worked (for gold, silver, commodities and eventually stocks, roughly in that order). It also worked in 2008-2009 (for gold, silver, commodities and eventually stocks, roughly in that order).

The more complicated answer is that we are down a rabbit hole of debt and the hole appears bottomless. What’s a few more trillion on top of un-payable trillions? As long as confidence remains intact in our monetary and fiscal authorities – and COVID-19 or no COVID-19, stock mini-crash or not, confidence to my eye is intact, speaking of my country, anyway – they will inflate, and what’s more, they will be called upon to inflate.

Confidence may be failing in other parts of the world but the average American is behind this thing they don’t even really understand, known as the Fed. The average American expects the bailout checks from the fiscally reflating government too. Angst, of which there has been plenty lately, is much different from lack of confidence.

I can’t include here all the ways and means the Fed has (frankly, I don’t know about them all) to prop the system, but if you go to the St. Louis Fed website you will find a whole slew of Keynesian egghead stuff. They are on it!

Graphic links to the St. Louis Fed website…

And that is what future inflation fears will be built on because though it seems like deflationary end times to some right now, the COVID-19 scare is going to pass and we will be left with monetary and fiscal bazookas having been fired. That ammo cannot simply be recalled when pent up (albeit stimulated) demand reconstitutes.

Deflation will kill demand you say? Deflation will cause hording of cash you say? Well, in the moment that is how it feels. We are all huddling in our homes with the great question of the day being ‘why do people prioritize toilet paper over every other household item during a crisis?’. No sports to distract us. No rancorous presidential race. No nothing. Just binging on streamed TV shows and COVID-19, 24/7.

Tomorrow will not be like today. Monetary and government authorities have seen to that as the policies they have decreed and set in motion, supported fully by the American people, will alter the social, political and financial/economic landscapes for years to come. The policies are designed to cheapen money, eliminate saving (hording of cash) and ultimately, boost asset prices… just as in the post-2001 and post-2009 periods.

As during those periods, this will not be seen for what it is in real time because in real time workers are being tossed out onto the street and many businesses are impaired. Many of those not manufacturing and distributing toilet paper (okay, work with me here, I still shake my head at that panicked rush for TP above all other items) are slowing if not grinding to a halt. We as humans processing information in real time factor what we see; deflation, declining prices under the pressure of massively declining demand.

Into that massive void has stepped a heroic Fed and both sides of the political aisle with exponential emergency measures, of course including some pork for their pet interests. The inflation is happening now but it will not be apparent until some future time. My guess is that we will start to see the green shoots of the coming inflation hysteria well before the end of 2020. Sometime in 2021 or 2022 we will see the balls out effects of it.

I often write about the 30 year Treasury bond yield Continuum, spanning decades and flashing deflationary signaling that has allowed routine and systematic inflation by policy makers. The red dashed monthly EMA 100 (limiter) being the backbone of the current system that begs inflation at every hard drop. In late 2018 we talked a lot about the yield’s attempted break above the limiter as the reason the Fed was hawkish.

Of course the herds were dumbfounded, and that included herds of market watchers and financial experts. I know, because I observed them in real time railing against the Fed for not attending to the stock market’s correction in Q4 2018 (resolved in the Christmas Eve massacre). The Fed was not going to incinerate itself in the inflationary bonfire a breakout in long-term Treasury yields would have signaled.

The stock market needed to tank at that time because it has been the prime beneficiary of the massive inflation that began at the time noted by the first blue arrow on the chart above. That correction tamped down the yield and since then it has been the Trade War first and Coronavirus next, driving the yield to an even more dire (deflationary) extreme. Enter the Fed (and government) on steroids. Bernanke ain’t got nothin’ on this.

The 30yr yield Continuum has logically gone hand in hand with another Continuum spanning decades; the one in consumer prices rising under the current system so firmly in place since gold was deleted from the official macro picture in the early 70s. Declining interest rates have allowed credit creation at every sign of trouble. Today is a massive sign of trouble and so a massive credit operation is in play. Money created out of nothing will eventually show up as rising prices somewhere or more likely, nearly everywhere.

The current crisis will paint a new grey area (recession) on the CPI graph. CPI will pull back, people will fear deflation and then when it’s ready, stimulated demand will be released and CPI will continue on its upward way.

We should be ready to capitalize as the herd thunders that way but the macro is likely to go this way. 2001 was a slingshot for gold > silver > commodities > stocks. 2008 was a slingshot for gold > silver > commodities > stocks. 2011 was a pivot from inflation to global deflation (with Operation Twist and its yield curve flattening directive to “sanitize” * inflation signals, being the symbolic if not fundamental kick off).

Under the last operation, with inflation signals altered by decree of man (Op/Twist) global deflation and US Goldilocks (pleasantly absent inflation signals that were so prominent into 2011) US stocks were preeminent. The next inflation could fan out to precious metals, commodities, global stocks and certain US sectors. Our goal now is to survive the deflation scare intact and be patiently ready for the coming inflation.

* It bears repeating that ‘sanitizing’ inflation was the Fed’s word, not mine.

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