Inflation: Dead Or Alive?

By GE Christenson – Re-Blogged From Gold Eagle

Breaking news: Silver briefly reached $18.00 and closed at $17.85. The DOW rose again to 28,645.

Inflation, Deflation, Stagflation, and Hyperinflation? So What?

Inflation: The banking cartel demands inflation of the currency supply. The cartel encourages massive debt and collects the interest and fees. They want inflation because it increases debt and repayment is easier. With global debt at $250 trillion, the cartel is successful.

Governments account for a large percentage of global debt. They spend more, buy votes, feed currency units to cronies, and borrow to cover the revenue shortfall. Inflation makes the debt load easier to tolerate.

Corporations want mild inflation to boost revenues, profits and stock prices.

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Is Stagflation Stalking?

By Gordon T Long – Re-Blogged From http://www.Gold-Eagle.com

It is important to anticipate whether Stagflation is stalking because the yield curve will start pricing it in which will place equity yields, earnings and PE growth multiples at risk.

We believe there are clear signs of stagflation already occurring and according to the recent Global Fund Manager Survey many already believe, if we don’t have elevated Inflation and an emerging period of Stagflation, we can soon expect it!

Yield Curve

What is particularly critical to the equities markets is how the yield curve will react differently regarding whether it anticipates increasing Inflation through Reflation or Stagflation. If it views reflation the yield curve will shift up but also steepen as long-term yields increase faster than short term yields. If it sees stagflation because the drivers for inflation also impede economic growth, then the yield curve also shifts upward,  but instead can be expected to flatten. The longer-term yields rise slower than the short term yields.

In both case yields rise which places pressures on equities but the shape of the yield curve has the most profound impact on equity prices. In the last 5 years  71% of equity index increases are a result of P/E multiple expansion from 10X to 18X. This places PE multiple of the S&P 500 currently in the 90 percentile of historical valuations relative to the last 40 years. Anticipating what may occur is presently of the utmost importance to smart investors.

The 10 Year US Treasury Yield lifted violently on the Trump victory and reflation policy expectations. After a brief consolidation it has again aggressively moved up but it is important to view this as part of three reasons bond yields increase – 1- Economic growth rate, 2- Inflation and 3-Creditworthiness. The current Treasury yield lift in my judgment is more about the pending US debt ceiling congressional hurdles and potential Creditworthiness factors than reflation or stagflation concerns.

Stagflation

STAGFLATION: “Is persistent high inflation combined with high unemployment and stagnant demand in a country’s economy”

Stagflation is very costly and difficult to eradicate once it starts, both in social terms and in budget deficits. It is a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high. It raises a dilemma for economic policy, since actions designed to lower inflation may exacerbate unemployment, and vice versa. Historically, inflation and recession were regarded as mutually exclusive, the relationship between the two being described by the Phillips curve.

Economists offer two principal explanations for why stagflation occurs:

First (Think: ’70’s) stagflation can result when the productive capacity of an economy is reduced by an unfavorable supply shock that causes an increase in the price of oil for an oil-importing country. Such an unfavorable supply shock tends to raise prices at the same time that it slows the economy by making production more costly and less profitable.  Milton Friedman famously described this situation as “too much money chasing too few goods”.

Second (Think today), both stagnation and inflation can result from inappropriate macroeconomic policies. For example, central banks can cause inflation by allowing excessive growth of the money supply,  and the government can cause stagnation by excessive regulation of goods markets and labor markets. Excessive growth of the money supply, taken to such an extreme that it must be reversed abruptly, can be a cause. Both types of explanations are offered in analyses of the global stagflation of the 1970s: it began with a huge rise in oil prices, but then continued as central banks used excessively stimulative monetary policy to counteract the resulting recession, causing a runaway price/wage spiral.

Let’s consider the four elements of stagflation, 1- Inflation, 2- Unemployment, 3- Demand and 4- GDP Growth to see whether this is a real possibility for the US.

1- Inflation

According to The Federal Reserve, entrusted with monitoring and managing Inflation pressures in the economy, until recently it is has been low and well below the Fed’s 2% target.  But the times they are a changing!

Since this time last year inflation expectations have  been increasing steadily and rose even more dramatically with the Trump Presidential victory. The Trump spike was a result of his proposed economic stimulus programs such as Infrastructure and Defense.

However, it is isn’t just expectations that have been increasing, but also actual price tags.

Some price increases have been much higher than how such measures as the CPI tabulates inflation.

From a long-term historical perspective (if you believe government statistics) the inflation rate is still relatively low.

However, taking out “special” government adjustments such as “Substitution”, “Hedonics” and “Imputation” along with the other changes that have been made by the government since the early 80’s, we see the real picture.

ShadowStats.com which tracks inflation closely show that in fact if we consider inflation in terms of how the government calculated it in 1980 (before interest rates started falling abruptly) you find it approximates 10% per annum!  I personally believe this much more closely matches what the average US household would suggest they are experiencing.

CONCLUSION: We DEFINITELY have inflation and it is worse than the Federal Reserve acknowledges or is actually aware!

2- Unemployment

According to the government narrative we have low unemployment with concerns about a tight labor market. This is pure fabrication or minimally misinformation and distortion of the facts. John Williams at ShadowStats again shows the reality.

The ShadowStats Alternate Unemployment Rate for January 2017 is 22.9%.

We presently have a labor force participation level at historically low levels with nearly 100 million working age adults not in the work force and many with jobs not able to to get sufficient hours to support a middle class life style.

As Presidential candidate observed at a campaign rally in front of 30,000 people. “If the unemployment rate was really 5% do you think we would really have this many people here!” Do you believe government statistics or “your lying eyes”?

CONCLUSION: We have high a very high unemployment and under-utilization of the American workforce.

3- Demand

What we have in the US is “Artificial Demand” rather than “Stagnant Demand”. The difference being that the former temporarily camouflages the later –  but only temporarily as in reality we have “Stagnant Demand” being camouflaged by massive credit expansion and low finance rates. This only brings demand forward creating a demand void in the future.

Consider that Consumer Credit is rising rapidly in comparison to Disposable Income. In other words we are borrowing increasingly to make ongoing purchases but those purchases are not increasing. Debt is surging to buy the same amount of stuff — not more. In reality real economic demand is shrinking and is only presently artificially being supported.

CONCLUSION: We have Weak Demand being supported by high levels of credit in relationship to disposable income. 

4- Growth

How can the US current GDP levels seen to be anything other than terribly weak! Thus far this quarter 1Q17 is tracking at 1.8%

The common narrative is that the US is entering a golden age in its economy and that this growth will drive stocks ever higher.  The reality is that GDP growth has collapsed. The third quarter of last year (3Q16) was the quarter everyone thought signaled a new beginning with growth of 3.5%. However, the very next quarter’s growth (4Q16) collapsed to 1.9%.

Put simply, growth is NOT coming soon if at all. Even Trump’s top economic advisor has admitted that GDP growth of 3% is unlikely until the end of 2018.

CONCLUSION:  We have historically weak economic growth

Summary

It is hard not to conclude that we are already living in a period of STAGFLATION which the markets have yet to fully recognize (may we suggest “Cognitive Dissonance”?).

There is little way out other than praying for the Trumponomic Economic miracle that the markets are so clearly euphoric about!  Of course I have never found prayer as a reliable approach to investment strategy!

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Eurozone Is The Greatest Danger

By Alasdair Macleod – Re-Blogged From http://www.Silver-Phoenix500.com

World-wide, markets are horribly distorted, which spells danger not only to investors, but to businesses and their employees as well, because it is impossible to allocate capital efficiently in this financial environment. And with markets everywhere disrupted by interventions from central banks, governments, and their sovereign wealth funds, economic progress is being badly hampered, and therefore so is the ability of anyone to earn the profits required to pay down the highs levels of debt we see today. Money that is invested in bonds and deposited in banks may already be on the way to money-heaven, without complacent investors and depositors realising it.

It should become clear in the coming weeks that price inflation in the dollar, and therefore the currencies that align with it, will exceed the Fed’s 2% target by a significant amount by the end of this year. This is because falling commodity prices last year, which subdued price inflation to under one per cent, will be replaced by rising commodity prices this year. That being the case, CPI inflation should pick up significantly in the coming months, already reflected in the most recent estimate of core price inflation in the US, which exceeded two per cent. Therefore, interest rates should rise far more than the small amount the market has already factored into current price levels.

Most analysts ignore the danger, because they are not convinced that there is the underlying demand to sustain higher commodity prices. But in their analysis, they miss the point. It is not commodity prices rising, so much as the purchasing power of the dollar falling. The likelihood of stag-flationary conditions is becoming more obvious by the day, resulting in higher interest rates at a time of subdued economic activity.

A trend of rising interest rates, which will have to be considerably more aggressive than anything currently discounted in the markets, is bound to undermine asset values, starting with government bonds. Rising bond yields lead to falling equity markets as well, which together will reduce the banks’ willingness to lend. In this new stagnant environment, the most overvalued markets today will be the ones to suffer the greatest falls.

Therefore, prices of financial assets everywhere can be expected to weaken in the coming months to reflect this new reality. However, the Eurozone is likely to be the greatest victim of a change in interest rate direction. The litany of potential problems for the Eurozone makes Chidiock Titchborne’s Elegy, written on the eve of his execution, sound comparatively upbeat. Negative yields on government debt will have to be quickly reversed if the euro itself is be prevented from sliding sharply lower against the dollar. Bankrupt Eurozone governments are surviving only because of the ECB’s money-printing, which will have to restricted, and government borrowing exposed to the mercy of global markets. Key Eurozone banks are undercapitalised compared with the risks they face from higher interest rates, so they will do well to survive without failing. There is also a growing undercurrent of political unrest throughout Europe, fuelled by persistent austerity and not helped by the refugee problem. And lastly, if the British electorate votes for Brexit, it will almost certainly be Chidiock’s grisly end for the European project

We know the powers-that-be are very worried, because the IMF warned Germany to back off from forcing yet more austerity on Greece, which is due to make some €11bn in debt repayments in the coming months. The only way Greece can pay is for Greece’s creditors to extend the money as part of a “restructuring”, which then goes directly to the Troika, for back-distribution. It will be extend-and-pretend, yet again, with Greece seeing none of the money. Greece will be forced to promise some more spending cuts, and pay some more interest, so the fiction of Greek solvency can be kept alive for just a little longer.

One cannot be sure, but the IMF’s overriding concern may be the negative effect Germany’s tough line might have on the British electorate, ahead of the referendum on 23rd of June. That is the one outlier everyone seems to be frightened about, with President Obama, NATO chiefs, the IMF itself, and even the supposedly neutral Bank of England, promising dire consequences if the Brits are uncooperative enough to vote Leave.

All this places Germany under considerable pressure. After all, her banks, acting on behalf of the government and Germany’s populace, have parted with the money and cannot afford to write it off. Greece is bad enough, but Germany must be even more worried about the effect that a Greek compromise will set for Italy, which is a far larger problem.

Officially, the Italian government’s debt-to-GDP ratio stands at 130%, and since the public sector is 50% of GDP, government debt is 260% of the Italian tax base. It is also the nature of these things that these official numbers probably understate the true position.

If the Eurozone is the greatest risk to global financial and systemic stability, Italy looks like being the trigger at its core. The virtuous circle of Italian banks, pension funds and insurance companies, funding ever-increasing quantities of debt for the government, is failing. Pension funds and insurers cannot match their liabilities at current interest rates, and importantly, the banks are under water with non-performing loans to the tune of €360bn, about 18% of all their lending. It also represents 19.4% of GDP, or because the NPLs are all in the private sector, it is 39% of private sector GDP.

Within the private sector, NPLs are more prevalent in firms than in households. And that is the underlying problem: not only are the banks undercapitalised, but Italian industry is in dire straits as well. The Banca D’Italia’s Financial Stability Report puts a brave gloss on these figures, telling us that the firms’ financial situation is improving, when an objective independent analysis would probably be much more cautious.

All financial prices in the Eurozone are badly skewed, most obviously by the ECB, which will be increasing its monthly bond purchases from next month to as much as €80bn. So far, the price inflation environment has been benign, doubtless encouraging the ECB to think the inflationary consequences of monetary policy are nothing to worry about. But from the beginning of this year, things have been changing.

Because the recent pick-up in commodity prices will begin to show in the dollar’s inflation statistics, markets will begin to smell the end of negative euro rates, in which case Eurozone bond yields seem sure to rise steeply. Given their extreme overvaluations, price volatility should be considerably greater than that of the US Treasury market. Imagine, if instead of yielding 1.5%, Italian ten-year bond yields more accurately reflected Italy’s finances, by moving to the 7-10% band.

This would result in write-downs of between 40%and 50% on these bonds. The effect on Eurozone bank balance sheets would be obvious, with many banks in the PIGS needing to be rescued. Less obvious perhaps would be the effect on the ECB’s own balance sheet, requiring it to be recapitalised by its shareholders. This can be easily engineered, but the political ramifications would be a complication at the worst possible moment, bearing in mind all EU non-Eurozone central banks, such as the Bank of England, are also shareholders and would be part of the whip-round.

Assuming it survives the embarrassment of its own rescue, the ECB will eventually face a policy choice. It can continue to buy up all loose sovereign and corporate debt to stop yields rising, in which case the ECB will be signalling it has chosen to save the banks and member governments’ finances in preference to the currency. Alternatively, it can try to save the currency by raising interest rates, giving a new and darker meaning to Mario Draghi’s “whatever it takes”. In this case insolvent banks, businesses and the PIGS governments could go to the wall. The choice is somewhat black or white, because any compromise risks both a systemic failure and a collapse in the euro. And there is no guarantee that if the banks fail, the euro will survive anyway.

The ECB is likely to opt for supporting the banks and over-indebted governments, partly because that is the mandate it has set for itself, and partly because experience after the Lehman crisis showed it could expand money supply without destabilising price inflation. But the danger, once it dawns on growing numbers of investors and bank depositors, is stagflation. In other words, rising goods prices, falling asset prices, and interest rates not being allowed to rise enough to break the cycle, all combining to further undermine the euro’s purchasing power.

Financial and economic prospects for the Eurozone have many similarities to the 1972-75 period in the UK, which this writer remembers vividly. Equity markets lost 70% between May 1972 and December 1974, cost of funding was reflected in a 15-year maturity UK Treasury bond with a 15.25% coupon, and monthly price inflation peaked at 27%. There was a banking crisis, with a number of property-lending banks failing, and sterling went through a bad time. The atmosphere became so gloomy, that there was even talk of insurrection.

This time, the prospects facing the Eurozone potentially could be worse. The obvious difference is the far higher levels of debt, which will never allow the ECB to run interest rates up sufficiently to kill price inflation. More likely, positive rates of only one or two per cent would be enough to destabilise the Eurozone’s financial system.

Let us hope that these dangers are exaggerated, and the final outcome will not be systemically destabilising, not just for Europe, but globally as well. But a wise man, faced with the unknown, believes nothing, expects the worst, and takes precautions.

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Japan: An Economy Of Zeros

By Michael Pento – Re-Blogged From http://www.Silver-Phoenix500.com

The red sun on the flag of Japan symbolizes its position as the land of the rising sun. However, during WWII that round shape was pejoratively referred to as a zero. And now, since Japans economy is emitting so many zeros it can, unfortunately, once again be referred to as the land of zeros.

Prime Minister Shinzo Abe’s economic plan known as Abenomics consists of three arrows. The 1st Arrow is aggressive money printing known as QQE in order to bring about yen depreciation. The 2nd arrow is massive deficit spending. And the 3rd arrow is structural reform, which is political claptrap for feckless growth proposals like increasing workforce diversity.

Therefore, the core strategy of Abenomics is to derive growth by increased government spending and flooding the world with the yen. If Abenomics were only about yen depreciation it would be considered a huge success. The yen lost 35% of its value between 2012-2015. Likewise, if the goal were to run huge deficits Abenomics has also achieved its goal. Since December of 2012 fiscal deficits have ranged between 6-8% of GDP.

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Time to Invest for Stagflation

By Michael Pento – Re-Blogged From http://www.PentoPort.com

Whether you call it a 1970’s style stagflation or, as we call it, a recessflation, investors need to prepare their portfolios to profit from a protracted period of rising prices in the context of zero growth. Here are some facts: Growth in the U.S. has averaged just 2% since 2010. However, Q4 2015 GDP growth grew at a 1.4% annualized rate and the Atlanta Fed model has Q1 GDP growth slowing to just 0.4%. The simple truth is that the rate of growth is slowing towards 0%, just as asset prices continue to rise to record levels due to vast intervention from central banks.

The U.S. is now in the process of moving away from an environment of disinflation and slow growth, to one of inflation and recession. Indeed, the entire global economy is careening towards an epic recessflation crisis.

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A Tale of Two Currencies

By Alasdair Macleod – Re-Blogged From GoldMoney

There is a widespread and growing feeling that financial markets are slipping towards another crisis of some sort.

In this article I argue that we are in the eye of a financial storm, that it will blow again from the direction of the advanced economies, and that this time it will uproot the purchasing power of major currencies.

The problems we face have been created by the major central banks. I shall assume, for the purpose of this article, that a second financial and monetary crisis will not have its origin in the collapse of China’s credit bubble, nor that Japan’s situation destabilises. These are additional risks, the first of which in particular is widely expected, but are subject to the control of a command economy. They obscure problems closer to home. Instead I shall concentrate on two old-school economies, that of the US and the Eurozone, where I believe the real dangers lie.

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