Posted June 11, 2021
By Sean Ring
For Whom The Bell Tolls
Youve reached the weekend and deserve a nice, cold one
But before you indulge, Ive got a story for you.
No Man Is an Island, Entire of Itself
One day, I needed to grab some supplies while I was on this business trip. I had just crossed the Big 5-0 and was feeling it. Though I run three days a week and maintain my fitness, 50 was a huge psychological barrier.
So I drove to the local mini-mart, parked my car, and walked into the store.
The place was a bit dingy, but itd suffice.
I started to browse and put some stuff into my basket.
My ears pricked up. I craned my neck. Did I just hear that?
I dismissed it. Never mind.
Shampoo, toothpaste, deodorant all were thrown lazily into my basket. I just needed to get a few more supplies.
I stopped suddenly. What is that?
Am I hearing things? I know Im getting older, but shouldnt it be a less steep decline?
As I resume my walk, I notice something. For such a backward country, this store has got electronic price tags. Not the ones stick to the goods themselves. The goods themselves dont have price tags. But the price tags on the shelves above the items.
What else do I need? A bag of chips and maybe some beer.
Ok, I am hearing a bell. It is real. Im sure of it.
And out of the corner of my eye, I see the prices on the shelf tags just changed. Quickly doing the math in my head, they went up about 10% on every item. Nah, it cant be...
Excuse me, Miss, I say to the store shelf stocker. Whats that bell?
We ring it as a courtesy for our customers. Every time the bell rings, prices rise by the inflation rate. Its about 10% every 10 minutes.
Jesus! I thought as I sprinted to the cash register. I wanted to make sure I checked out before another 10 minutes had passed!
Every Man is a Piece of the Continent, a Part of the Main
My Best Man related that story to me over a cold pint of Tiger at the Penny Black pub on Boat Quay in Singapore.
He had been in Harare, Zimbabwe, on business. This was during the heady days of the reprehensible Robert Mugabe and his idiot central bank governor, Gideon Gono.
That was in the Naughties. Heres a chart to show the insane exchange rate:
And the currency idiocy that resulted from the inflation:
Zimbabwe was the breadbasket of Africa for most of its history. But poor monetary and fiscal management brought it to its knees and left it there. Unfortunately, Zimbabwe still hasnt recovered from those decades of economic mismanagement.
And thats the fear in America today.
If America Goes, So Does the Rest of the World
If a clod be washed away by the sea,
Europe is the less,
As well as if a promontory were:
As well as if a manor of thy friend's
Or of thine own were.
America is no clod. Because most of the essential goods, services, and commodities traded on the worlds markets are priced in dollars, the Federal Reserve is the worlds de facto central bank.
To maintain some sort of price stability, the Fed must maintain control of interest rates. (Yes, the libertarian argument against central banks controlling interest rates is both valid and correct. But we dont live in that world right now.)
This is why you occasionally hear non-US citizens say they deserve a vote in the US. Its because US policymaking decisions directly affect their lives. (Of course, if the leaders they chose were any better, they probably wouldnt have such a problem.)
So, if inflation gets out of control in the US, its only moments away from blowing up in other parts of the world. And thats why when the CPI jumps 5% year-on-year, the world sits up and pays attention. Thats the largest jump in the overall number since August 2008.
The core CPI number, which excludes food and energy, jumped 3.8%. Thats the most significant jump in that number since June 1992, when I graduated high school!
Any mans death diminishes me, Because I am involved in mankind.
But is it all going wrong?
As you know, Ive been a big believer in the inflation thesis. Ive encouraged you to look at gold, bitcoin, real estate, and stocks to hedge your risk. Ive also said, if not written, that bonds are dead.
Lets emulate the great traders of the world who always ask this of their trades: Whats the worst thing that could happen?
JC Parets, of All-Star Charts, asked a variant of this question, If this was really the runaway inflation the journalists keep telling us about, then why are Treasury Bonds breaking out?
As I didnt have JCs permission to use his charts, I recreated them on stockcharts.com.
Disclosure: Im a paying subscriber of All-Star Charts and think JC is a fabulous technical analyst, trader, and teacher.
As you can see from the chart above, both the mid- and long-term bond ETFs have turned up. Its fascinating because if the inflation thesis was entirely correct and the market agreed, bonds would continue their free fall. Thats just not the case.
By the way, the bond market is where the brains are. We cant ignore what its telling us if we can decipher it, to begin with.
So What does the bond market know that we dont?
Are the deflationists correct? That the Fed cant possibly print enough money to overcome the deflationary forces affecting America and the developed world:
- Senior citizens are selling stocks for cash and houses to downsize.
- The government is increasing debt to support seniors with social security, as taxes dont cover the costs. This weighs heavily on growth rates.
- Lousy demographics, as no one has children in abundance anymore.
- The incredible technological advancement were witnessing.