Inflation is Everywhere

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We finally got “official” confirmation that inflation has already begun to take off:

The headline CPI year-over-year increase at 4.2% was the highest since 2008. Energy prices rose 25% and gas prices 50%. Rising energy prices filter through to almost everything. Used car and truck prices were up 21%. Rents rose 2.1%. If you substitute home prices for rents, that number more than doubled.

The Fed calls this “transitory”, citing lower prices in April 2020 due to lockdowns in response to the Covid-19 pandemic. The mainstream media were quick to point this out. CNBC added that the rise in prices is because the economic growth is accelerating. The problems with these apologetic excuses for rising prices are many. If these increases are solely based on the low numbers in April 2020, then why have they soared from just one month ago? If the economy is doing so well, why does the Fed continue to print ~$120bln a month and keep the Fed Funds rates at essentially zero? Why is Biden falling all over himself to spend money on everything, it seems, to the tune of trillions in additional fiscal stimulus. No, the economy is not booming, because if all of these stimuli were ended tomorrow, everything would collapse. It’s that simple.

The truth is that unemployment remains extremely high, the labor participation rate low, and we’re seeing supply shocks develop across the economy. This means fewer people producing fewer goods and providing fewer services. At the same time, dollars printed out of thin air are being pumped into the system left and right. How does giving the unemployed a check once a month while providing nothing in return not create higher prices? I apologize for the following patronizing example, but just to illustrate the point clearly:

Say you have 10 cartons of milk and $10 circulating in the economy. All else aside, what is the price of each carton of milk? $1.

Now say you increase the amount of money circulating in the economy to $20. What is the price now? $2. An inflation rate of 100%, from $1 to $2.

Now let’s say that the number of cartons of milk falls from 10 to 5. What is the price of a carton of milk now? It’s $4, because now you have $20 chasing 5 cartons. An inflation rate of 400%, from $1 to $4.

The point being that if you create more money out of thin air and at the same time reduce the amount of goods and services to purchase, prices soar. This is the real reason we’re seeing prices rise, and it’s not transitory. “Hyperstagflation” is already under way. Disagree? Check out these headlines:

Want a graph instead?

On top of all that, the CPI is widely understood to dramatically understate inflation, so the increases are much worse than the headline numbers. As I like to say, one just has to look at the performance of commodity futures over the past year, or go to Home Depot or the grocery store. It’s not rocket science. This will continue until the monetary and fiscal stimulus stops, small and medium-sized businesses return, and employment rises significantly. Don’t hold your breath, imho.

That was yesterday. Today, we got more of the same:

US Producer Prices Surge Most On Record

Both headline and core producer prices soared in April. Negating the transitory nonsense, the month-over-month increases were far higher than expected, double in the case of the headline PPI. These are the prices that filter through to consumer prices over time—i.e., the CPI is likely going even higher. 

If that were not enough, wage inflation is on the rise, too, as employers struggle to get people off the couch who can otherwise live on their stimulus checks. Checks that are unlikely to be inflation indexed. Several States have already begun or are considering a “return to work bonus” in order to get people to go back to work.

Don’t get me started on housing prices. The point being: Inflation is everywhere.

So, what happened to bond yields when these numbers came out? The 10-Year rose from 1.61% to 1.70%. The 30-Year rose from 2.33% to 2.42%. Now this may not seem like a lot, but the market was not buying the Fed’s rhetoric ahead of the inflation numbers and much of the impact was already priced in. Taking this into account, the 10-Year was 1.47% just four days ago and is now at 1.70%. That’s a huge move for bonds in such a short space of time. The 30-Year was 2.16% last Friday.

At the risk of repeating myself, the risk to the upside in the 30-Year yield is capped somewhere between 2.75-3.00%, imho:

Assuming inflation not only continues to rise but accelerates to the upside while bond yields are capped, we have an asymmetric risk to the downside in real yields. Precious metals and miners have long-term inverse correlation to real yields. Said simply, if and when real yields dump, watch Gold and the metals soar. I estimate the time for that scenario to play out in weeks.

In the meantime, Gold is undergoing a healthy pullback and setting up for a test of the 200-Day Moving Average next at 1855. Through there and new record highs are virtually a given, imho. Support is at 1800 and 1770-50. As long as we remain above the latter support, I am only looking up. I believe the bottom is in place at 1673 now that we have broken 1800, i.e., setting higher lows and higher highs. The trend is up!