- Inflation at 30-year highs… but there’s more fuel on the fire
- Gold and USD catch a bid for different reasons
- Inflation is a ‘poor man’s tax’ – as real wages fall
Inflation is easy to explain:
It’s excess money chasing too few goods.
That’s it.
Milton Friedman put it like this: “it has always been (and always will be) a monetary problem”.
To that end, look no further than the Fed with money creation.
And from there, the (excessive) spending and borrowing they effectively enable.
That’s the ‘gas’ being thrown on the inflation fire.
And there’s more to come.
But here’s a question:
Is the unwanted inflation we’re experiencing today more than transitory?
And if so, for how long?
That’s a question no-one can answer with accuracy – but it’s something markets are likely to grapple with well into 2022.
Let’s start with today’s market moving news…
CPI Hits a New 30-Year High
Today we learned CPI for October hit a new 30-year high at 6.2% YoY.
Nov 10 2021
This was not new news for the market… inflation was always coming in “hot”.
That said, bond yields, gold and the dollar all spiked (I will share the charts shortly).
However, I don’t think 6.2% is the end of it.
Inflation is likely to keep rallying as we:
- Release trillions in new federal public spending;
- Work through global supply chain issues; as
- The Fed continues with its ultra-easy monetary policy.
Not to mention – we have the uncertainty regarding oil prices.
Far lower supply coupled with strong demand is pushing prices to six year highs… with WTI Crude likely to challenge $100+ this winter (something that could have easily been avoided).
I’m sure consumers can’t wait to see the impact at the pump.
Nov 10 2021
So what to make of this inflation read?
Well, I hate to say it, but inflation is actually higher than what is shown in the 6.2% print.
For example, take housing.
It’s up something like 20% YoY (entirely a function of ultra-easy money) – but this isn’t factored into the print.
But it was the services component which should raise an eyebrow… as labor costs are spiking.
And as we know, labor costs are less transitory.
But if you look at inflation ex-food and energy – that was up 4.6% on an annualized basis.
All of this is the result of Fed policy.
Yes, it’s compounded by ongoing global supply chain issues (mostly as a result of forced government lockdowns)…
But at the end of the day – you need to look at the enablers of money creation – central banks.
Central banks have engineered a bubble (more than one) as they try to ‘thread the inflation needle’
We will see how their giant monetary experiment goes…
As I say, central banks will exaggerate both the ‘boom and bust’ cycle with (excessive) interventionist policies.
This won’t be an exception.
The only impossible to thing to predict is timing… extend and pretend can always go longer than you think.
Nominal 10-Year Jumps…
The Fed – not panicked by near-term inflationary pressure – talked down bond yields last week with no immediate plan to raise short-term rates.
However, following today’s news, long-term bond yields surged 15 basis points (or more than 10%)
Put another way, they are less certain of Powell’s ongoing dovish commitments.
Nov 10 2021
My (long-held) view is should nominal 10-yr yields start to challenge the zone of 2.00% (~45 basis points higher) – equities will face selling pressure.
And who knows… maybe it will only take one or two more months like October?
Today, we saw higher multiple (growth) names get hit. On the other hand, lower multiple (‘value’) names caught a bid.
This is what happens when yields rise… as future cash flows are discounted.
Given we were on the subject of gold… let’s see what impact today’s inflation read had on the metal.
Bugs Get Excited… For Now
With real yields fractionally lower (opposite higher inflation) – gold caught a bid.
But it wasn’t just gold… so did the US dollar (and Bitcoin)
Nov 10 2021
From a technical perspective – gold has broken above its near-term resistance (~$1,840)
This was the move I was looking for post a “hot” inflation print.
For now, the bulls have taken back control.
From here, gold will not only need to defend this level – it needs to challenge $1,920.
From mine, that will depend on what we see with real yields. As I explained yesterday, lower real yields will send gold higher (and vice versa).
However, my expectation is real yields will move higher in 2022… as the Fed is forced to act.
That said, in the near-term, I would not be surprised to see it challenge the $1,920 highs we saw in May of this year.
US Dollar Bulls also Optimistic
As I say, it was not just gold catching a bid.
So too was ‘King Dollar’
Now over the long run – gold and the US dollar index compete as currencies (forming an inverse relationship)
Both the dollar and gold caught a bid… which happens from time to time.
However, in the case of the dollar index, it’s on expectations that the Fed is going to have to move sooner than expected on rates.
Nov 10 2021
I am a dollar bullish here… especially whilst the 10-week EMA trading above the 35-week EMA
I am also bearish the Euro… which is also driving the dollar higher.
But first and foremost, I think the Fed is ‘behind the curve’.
As a result, I see the US dollar index continuing its run higher – as the Fed raises rates at least twice next year (sending yields higher).
This is combination with asset tapering is dollar bullish.
Putting it All Together
Before I close, one last comment on inflation….
There are some significant social issues to be mindful of here…
Whilst I can talk to trading / investing implications (opposite stocks, gold, the dollar etc) – there are some problems rearing their (ugly) head as a result of both monetary and fiscal policy (i.e. government borrowing and spending).
Here I’m talking about wages in real-terms…
Whilst wages are said to be up year-on-year (good news) – what’s more relevant is their increase (or decrease) adjusted for inflation.
I say this inflation is more likely to hurt middle-to-lower income earners (typically not those speculating in stock markets).
For example, the US Labor Department reported last week that average hourly earnings increased 4.9% annualized in October.
Good news right?
Well no…
Not if you consider that inflation increased 6.2% for the month – meaning consumers are going backwards in terms of their purchasing power.
Translation: wages fell 1.3% annualized.
But here’s the thing:
This is going to be the case for at least the next 6+ months.
There is a lot more “gas” being thrown on the inflation fire… both in terms of monetary and fiscal policy (most notably the latter).
From mine, it’s little wonder consumer confidence is waning… and it could get worse.
Average US households are going to feel it where it hurts most… their hip pocket.
How will that bode for growth / confidence?
Mmm…