INFLATION DAY OF RECKONING?
We get inflation data this week: PPI on Tuesday and CPI on Wednesday. As energy prices and yields soar, we continue to see steep discounting across retailers and autos while housing prices, and commercial real estate fall – inflation in all the wrong places and deflation in all the same places. Meanwhile, the S&P 500, despite being 40% off its highs has seen a remarkable 3 month 40% rally. The market appears to be pricing in the Goldilocks of all Goldilocks economies: not too hot and not too cold, but “juuuust right”. Owners of stocks are essentially betting that inflation won’t run wild and deflation will loosen its death grip on the assets that we own. Investors are betting that the Fed will thread the needle between inflation and deflation perfectly.
This week PPI and CPI are expected to jump from recent readings. PPI is expected to come in at 0.7% after a 0.3% reading in April. CPI is expected to come in at 0.3% after a 0.0% reading in April. It will be very interesting to see how the market responds to this data. A lower than expected reading could lead investors to believe that deflation is a greater threat than previously believed, i.e., the Fed’s reflation trade isn’t working as well as investors might think. A higher reading than expected could lead investors to believe that inflation is getting a bit ahead of the Fed and higher interest rates are in the cards.
I believe the likelihood of the Fed threading the needle is extraordinarily low. If there is anything we have learned from this crisis, it is that the Fed’s interest rate policy has been far from proactive and arguably destructive. The Fed has pumped so much cash into the system that it will be incredibly difficult to turn off the liquidity spigot once it gets started.
Unfortunately, we’re not seeing a spike in inflation because the velocity of money remains low. Consumers are still in a deflationary spiral due to massive debt levels so lending has yet to pick up. If the U.S. consumer were to rebound sharply the likelihood of runaway inflation would be unavoidable. Until then, I continue to think that consumer balance sheets will normalize and the threat of deflation will remain.
The odds of a Goldilocks scenario are very low. Instead, this looks more like a “damned if we do (print money), damned if we don’t (print money)” scenario. Will this be the week where the market begins to realize this?
I still count myself as a deflationist… I do love the short broad equity market trade. As you have pointed out, it is essentially a long straddle on the deflation/inflation, and that doesn’t seem to be a losing bet.
I want to know if short interest in stocks have risen lately. If so, it reduces the risk/reward for the trade.
My deflation outlook has certainly moderated, but the underlying de-leveraging trend is likely to remain with us for years so it’s hard to see inflation getting out of control.
Today’s downturn is certainly nice, but the volume is unbelievably light. We could easily see one of those crazy last hour melt-ups.
I actually have become more of a deflationist. Logic just dictates it. Think about it this way, the “money” that the shadow banking system created is defaulting at record paces. Thus, it’s as if $3T never existed. The fed is replacing $1T of that money. Exactly how is that inflationary?
Jim Grant said he’s not concerned about too much money chasing to few goods, he’s just concerned about too much money. Well the credit bubble destroyed $3T, so we have far less “money” out there. In fact, the fed could go crazier on the QE front before we broke even.
DEFLATION is king, and it is the only way to heal. Fed is just trying to make sure it happens slowly and not catastrophically. And I agree that is the right move. The Fed will move to make sure it can sell treasuries and that the consumer doesn’t get destroyed on commodity prices. I guarantee it.
I say screw the banks. Let them enter the FDIC process. That’s what we created it for. This isn’t 1929. We have safeguards. Why are they transferring the risks created by banks, to the taxpayers?
been reading a bit of Martin Armstrong there PTC?
sorry, TPC, you really need an edit button
(PTC is carryover from my day job….Production Tax Credits, as i finance wind farms and such
Just trying to be realistic E. What are the odds of the Fed pulling the liquidity out of the system at just the right time? The more this goes on the more it looks like they’re swapping out one problem for another….
TPC, one thought, you should open a forum on this topic. Really. It is the only investment question that has any real effect on where to put your money. Now, a week ago, I said to load up on UUP and VXX because I am a deflationist. So far, that play is bearing fruit. I am also short the financials but have chosen to go to the nonlevered pure short of SEF.
Really though, and not to toot your horn too much here, but I know that you have to be very very intelligent just based on the selection of articles. As Dostoevsky said in the Brothers Karamazov or The Idiot, can’t remember which, every paper/document is a collection of fact collected through the lens of its author, therefore, a selective presentation of the facts is inevitable. Thus, the realization of how well the facts are presented is quite revealing as to the depth of the “organizers” perception/intelligence.
With that in mind, I would love to fucking debate the inflationists all day long. I want to hear both sides of this argument. I am open to anything. BUT I WANT TO DEBATE IT WITH THESE FOOLS. That is the best way to get down to it. Anyone reading your blog has to be above the rest in the first place. So just throwing it out there. Inflationist/Deflationist. That is the only question as to how to invest, imho.
Thanks TPC, as always, we appreciate this blog and your intelligent collection and commentary. It is a must read and I recommend it to everyone I know as an authority.
Prescient,
I am tweaking things on the site every day and thinking of ways to make it better. I know a lot of people have complained about the comments section so I am looking into alternatives.
As always, your kind words and comments are appreciated. I especially like that you’re not afraid to disagree with me. I’m off for a few hours of sleep. Have a good night….Futures are down a bit as of now. Should help you sleep well.
TPC
Good night my friend, I’m mostly in cash, so I care not what happens tomorrow. Seriously though, I like the new format, etc., but if you can host a forum on deflation vs. inflation everyone would come.
That’s the only question left, imho. And I just don’t understand the inflationist point of view.
And kind words are deserving my friend, otherwise I wouldn’t say them. As always, I congratulate you on the success of this quite excellent blog.
MARKET QUOTES
THIS WEEKS MOST POPULAR STORIES
MARKET NEWS
© 2009 pragcap.com · Login.
Home · Advertise · Contact us · Disclaimer ·