Inflation Is Popular

“In spite of the cost of living, it’s still popular.”

-Kathleen Norris

That’s what Kathleen Norris had to say about inflation in the Roaring 20’s. She was a romance novelist from California. Writing books between 1911 (“Mother) and 1941 (“The Venables”), Norris made more money than most female authors of her time. She was well known for her San Francisco perspective on living the upper-class lifestyle. To this day, inflation remains popular at the high end of America’s society.

After WWII, inflation has been a popular short-term market solution for easy money politicians. With the exception of the late 1970’s and early 1980’s, most of the revisionist economists advising Washington have been able to get away with pretty much anything on this front. The US government has changed the calculation for inflation 9 times since 1996, so we’ve pretty much made this popularity-fest permanent.

If you are wealthy and fully invested right now, inflation has to be popular with you. The politicized Federal Reserve is keeping interest rates at an “emergency” rate of ZERO percent, so that the bankers get paid while savers in America pay the bill. We call this the Piggy Banker Spread and the US government underwrites it. At +285bps wide this morning (10-yr yield minus 2-yr), it is within 0.08% of its all-time widest spread ever. Oink, oink.

If you are poor and fully committed right now, inflation is not popular with you. It’s your cost of living. You feel it at the pump. You feel it in your wallet. No matter where you go, there it is. Don’t even try thinking about saving either; you wouldn’t be making any money on those treasury bonds or cash-savings accounts anyway. So you may as well buy yourself another scratch bingo card and hope to live another day; the rest of us will buy iPads.

In the moment, Ben Bernanke is popular amongst many politicians and long-only market participants. Sadly, Greenspan was too. Since Volcker left, Washington has had zero credibility in proactively managing inflation risk.

Most mathematicians understand that the global economic system and the prices born out of it are leading indicators. Bernanke is a historian trapped in his own confirmation bias. If you are in the inflation ‘doesn’t bother my cab ride to work’ camp (only the cab driver’s margins), you won’t agree with this morning’s reality. Inflation is a leading indicator that is marked-to-market every day. Here are some global inflation readings to consider this morning:

  1. After shooting up another +7.8% last week, oil prices are hitting 17 month highs ($85.35/barrel).
  2. After melting up another +5.9% last week, copper prices are hitting 20 month highs ($3.61/lb).
  3. 2-year US Treasury  yields are up +37% in the last month and hitting new highs again this morning at +1.10%
  4. Russian stocks are up again this morning, inflating their petrodollar stock market to +12.1% YTD
  5. Japanese stocks were up again overnight, inflating their currency debased stock market to +7.5% YTD
  6. Turkish inflation for March was reported at +9.6% year-over-year growth

Now if you aren’t living in Istanbul, you probably don’t see the inflation that 73 million people in Turkey do. If you wake-up on Park Avenue and take the US Government’s word for it, you probably don’t see the +18% food inflation that 1.2 billion people in India aren’t paid off to be willfully blind to ignore.

Wall Street is funny and sad altogether this way. While the revisionist historians are getting well versed on the sovereign debt chapters of Reinhart & Rogoff’s “This Time Is Different”, they don’t seem to be spending a whole lot of time getting what will be born out of Piling Debt Upon Debt Upon Debt - INFLATION.

For 7% of the price some of these analytical savants are willing to pay for an iPad, they should buy the book and focus on chapter 12. That’s where the boys show you the risk embedded in Reactive Fiat Currency Management. Inflation is not new. According to the Reinhart & Rogoff data, the 5-year moving average for all countries (for the years 1500 through 2007) is currently breaking out to the upside.

Now you might say that wage inflation in America is low, because in Friday’s hawkish employment report, it was. I have a simple question in response to that – what is a poor person in this country to do then as their wages remain low and everything they buy goes up in price?

I suppose this is why Ben Bernanke is overseeing the highest percentage of Americans living on food stamps since WWII (11%). Almost 1 in 4 American children are forced to eat off that same program. I don’t see any Piggy Bankers eating off those troughs and I doubt Kathleen Norris would write a best-selling romance novel about this either.

Even though we disagree with the conflicted and compromised government calculations, our forecast is that we are going to see a meaningful sequential acceleration in both global and US inflation for the months of March and April.

All the while, the Keynesians at Groupthink Inc. will be parroting what those who never see inflation until it’s too late always do: “This Time Is Different.”

Sadly, there is nothing different about this at all. This is the high-low society that politicians from Moscow to Mumbai have been paid to create as their political powers maintain an explicit mandate to keep inflation popular.

I shorted the SP500 for an immediate term TRADE on Thursday at 1180. My immediate term support and resistance lines are now 1170 and 1182, respectively.

Best of luck out there today,

KM

Inflation Is Popular - pic