Reply to thread

Gold and silver are normally proxies for inflation. Silver (to date) has simply not confirmed the move in gold. A further indicator of inflation are Treasury Inflation Protected Securities or TIPS. They and gold are highly correlated. 

[ATTACH=full]106470[/ATTACH] 

So certainly 'inflation' is in issue. There was this link placed on another thread: https://themarket.ch/interview/russell-napier-central-banks-have-become-irrelevant-ld.2323

[ATTACH=full]106464[/ATTACH]

Only partly true. The inflation of the 1970s was caused by:

(a) Nixon defaulting in August 1971;

(b) Two oil shocks;

(c) COLAs within Employment contracts and strong Unions;

(d) Food based commodity shock;

(e) Hot war in Vietnam.

The 'unemployment' was not a cause, it was a consequence of strong labour Unions reducing volume of employment through overpricing the cost of employment. Therefore the current unemployment rate is more likely to lead to disinflationary pressures than inflationary ones, certainly in the US.

[ATTACH=full]106465[/ATTACH] 

This is the question (which has historical precedent and is addressed in the article).

[ATTACH=full]106475[/ATTACH] 

This is different (this time). The Fed has gone outside of its mandate, 1913 Act, and loaned directly to businesses, rather than being simply the 'lender of last resort' to the Banking system. Therefore, while in the GFC, the QE programmes never ignited the inflation torch, possibly, lending directly into the non-financial world, the effects could be different.

Disinflation was created by China and improving and increasing technology in the production process, much like the Industrial Revolution was disinflationary. In addition we had the end of the Cold War (Soviets) that was also disinflationary.

So inflationary pressures:

(a) Cold War II (if it escalates will be inflationary) as the forces of globalisation will be stunted;

(b) The news from the oil patch is not great. While it may/may not represent an oil shock to the upside yet, it may;

(c) Significant money creation world-wide. The US creates more because it is the primary Reserve Currency, which paradoxically can be disinflationary as it keeps zombie companies alive adding to supply;

(d) Employment costs is a non-issue, Trade Unions are (pretty) powerless currently;

(e) What will the Fed do?

[ATTACH=full]106476[/ATTACH] 

Actually the Fed. has been pretty hot on inflation (Bernanke and Powell, Yellen slower) raising the discount rate. It is however a risk that inflation gets away for a period of time until it is recognised.

In part the other thread was pondering what could be done to protect the portfolio from rising/rampant inflation. The general theory was gold/silver. Which is fine for silver, it is nowhere near its previous highs, but gold has already moved to its all time highs.

The question and the big risk is: what happens if the Fed. finds another Volcker? Gold and silver will be absolutely crushed. They perform really woefully in a rising interest rate environment. We also know (highly likely) that in a similar way to the gradual exit from the GFC, rates rose, so again, will rates rise. Bonds and PMs will fall. Due to duration, long dated bonds have greater volatility. Going short 20yr Treasury will pay if rates rise.

[ATTACH=full]106466[/ATTACH] 

This is TTT the x3 inverse of TLT. There will be some bang for the buck as rates normalise (over time). If there is inflation and rates move like they did in the late 1970s, well, this will explode. Further, this is pretty much the bottom. Powell has signalled very strongly that the US will not go negative. If so, welcome to the bottom.

 [ATTACH=full]106469[/ATTACH] 

Dr Copper is signalling that world trade is on the mend. Which means that oil consumption will rise. POO is largely driven by China or was previously, due to the US shale production. That looks crippled for the near term. As economies re-open there is the possibility of an oil shock (higher) due to the reduction in supply. There could also be a war in Libya for control of its oil. Depending on what the US dollar does, that could be inflationary to the US. Rising rates attracts foreign capital flows: stronger dollar, but weaker Bond prices at the long end.

[ATTACH=full]106471[/ATTACH] [ATTACH=full]106472[/ATTACH] [ATTACH=full]106473[/ATTACH] [ATTACH=full]106474[/ATTACH] 

Commercials positions from last week.

jog on

duc