Is Stagflation a Potential Threat?

The Incrementum Fund held its quarterly advisory board meeting on October 3 (the transcript can be downloaded below). Our regular participants – the two fund managers Ronald Stoeferle and Mark Valek, advisory board members Jim Rickards, Frank Shostak and yours truly –  were joined by special guest Grant Williams this time. Many of our readers probably know Grant; he is the author of the bi-monthly newsletter “Things That Make You Go Hmmm…”, as well as one of the founders of Real Vision TV.

 

1-stagflationCharacteristics of stagflation: economic growth goes into reverse, but price inflation rises  anyway. This scenario was completely unexpected by the Keynesian consensus when it hit the economy in the 1970s. Keynesian theory ended up discredited for a while as a result. Not surprisingly though, as a theory that provides a “scientific” fig leaf for statism and interventionism, it has been resurrected since then. Today it once again is an important part of mainstream economic orthodoxy; the monetarist school has retained a certain degree of influence as well, but its policy prescriptions are just as misguided in our opinion.

 

The focus of the discussion was a contrarian topic – namely, the question whether amid widespread fear over an allegedly looming deflation threat, the time might actually be ripe for stagflation to make a comeback.

Although none of the participants expected a particularly strong surge in price inflation in the short term (apart from base effects becoming noticeable in headline inflation numbers in coming months), there are certainly more and more signs that the loose monetary policy of central banks is beginning to succeed in producing at least some price inflation.

There can be very large time lags between excessive money supply expansion and rising prices, but in the longer term is seems certainly possible that many currently wide-spread consensus expectations regarding future price inflation and market trends could turn out to be quite wrong. The proprietary Incrementum Inflation Signal definitely indicates that the trend in price inflation remains up:

 

2-incrementum-inflation-signalThe Incrementum Inflation Signal continues to indicate that a period of strengthening price inflation has begun. The inputs used to calculate the signal are all market-based – click to enlarge.

 

Oil Prices

One of the topics under discussion in this context was the price of oil. It seems possible that market participants are underestimating the potential for crude oil prices to advance further in the long term (from a fundamental perspective, the market is actually much tighter than is widely perceived). It should be noted though that the oil market has to contend with two sizable obstacles that are likely to put pressure on prices in the near term.

One is the seasonal trend discussed by Dimitri Speck (see “Crude  Oil has Entered a Seasonal Downtrend” for details). The other is the fact that the speculative net long position in crude oil futures has climbed back to a rare extreme, which strongly suggests the need for a shakeout:

 

3-crude-oil-cotsThis chart shows the net position of commercial hedgers in WTI crude oil futures, i.e., the inverse of the net speculative position. The current level of 408,000 contracts is one of the highest on record. Even higher readings  were only seen in early to mid 2014 – and that certainly didn’t end well for oil longs – click to enlarge.

 

In short, it is important to keep time frames in mind. Commodity prices have turned up, and the long term uptrend in nominal commodity prices – including crude oil prices – may well have resumed. However, even if that is the case, short term setbacks should be expected and in the case of crude oil both the seasonal trend and the positioning of speculators suggest that one of those is now underway.

While the potential for a stronger rise in oil prices over the long term was not dismissed, the near term prospects for oil were actually seen as limited by participants, and there was also consensus on the inability of OPEC to influence prices. Frank Shostak continues to expect a significant decline in oil prices next year based on his econometric model.

 

4-wtic-dailyA decline in oil prices has begun right in line with the seasonal trend (which is pointing down between mid October and mid February); given the extremely large speculative net long position, there is potential for this correction to become quite sizable – click to enlarge.

 

Complacent Bond Markets

The point remains though that rising oil prices and a surge in price inflation are currently quite far from the radar screens of the majority of investors and economists.

In particular, bond market participants have become extremely complacent. The idea that central banks will always be able to manipulate yields lower has become deeply ingrained. Negative yields-to-maturity are no longer recognized for the absurdity they actually are.

This idea is essentially a textbook example of bubble rationalization. Central banks do of course influence prices with their policies, but the notion that they have certain markets “under control” couldn’t be more wrong.

Anyone familiar with financial markets should be aware of this. Simply put, if central banks could actually “control” markets, there would never be any crashes or bear markets. Nothing terrifies the bureaucrats more than “volatility” (code-word for rapidly falling asset prices).

 

European Banks

Another topic was Deutsche Bank and the European banking industry in general. At the time of the meeting, the share price of DB had just declined to a multi-decade low and credit default swaps on its senior unsecured debt were in a noticeable uptrend (in which they incidentally remain).

The troubles of Italy’s banking industry are well known, and the question is whether the European Bank Recovery and Resolution Directive (BRRD) will be strictly enforced if push comes to shove. This obviously entails considerable economic and political risks. One conclusion was that while European decision-makers were likely to want to avoid a “Lehman moment”, they may well get one anyway.

With respect to DB, we want to highlight one remark of Jim Rickards in particular: as he noted, there has been a rapid reduction in the notional value of Deutsche’s derivatives book, which could be a sign that counterparties are either not renewing expiring contracts or are trying to get out of existing ones. At the moment things have obviously quieted down a bit again, but we would contend that the basic problems have not gone away.

 

5-dbOn a monthly chart the recent small recovery in DB’s share price is barely visible – click to enlarge.

 

US Elections

Readers should keep in mind that the conference call took place before the infamous video of Trump’s “locker room talk” surfaced and a number of women came forward to accuse him of improper behavior. While we deem these accusations not particularly credible for a variety of reasons (best articulated by Stefan Molyneux here), it seems clear that this development has harmed his election chances.

Nevertheless, the observations we have made regarding the unreliability of polls in this election remain applicable (mainly due to oversampling of Clinton supporters and the “Bradley effect”). Several participants agreed that Trump’s chances to win the election were underestimated. This very likely remains the case, even if recent events have diminished his chances somewhat.

One must keep in mind in this context that the den of corruption administered by the Clintons is a gift that keeps on giving, mainly in the form of emails published by Wikileaks and others. Collections of questionable emails which the FBI keeps bumping into have recently re-entered the mix as well, with thousands of previously “lost” emails found in a most surprising place (an alleged pedophile serial exhibitionist appears to have a bunch of them stored on his laptop).

 

trumpDonald Trump – his chances to win the election are probably still a lot better than the polls suggest.

Photo credit: Mark Wallheiser / Getty Images

 

Market Outlook

At the end of the meeting, participants as usual discussed their market outlook and investment ideas for the coming months. The markets haven’t really moved a whole lot since then, so these ideas and forecasts are not overly dated yet and may still serve as an inspiration.

One regret is that we didn’t get Jim Rickards’ recommendation of AMZN as a potential short candidate out earlier, as the stock was recently hit quite hard after announcing disappointing earnings.

 

Download Link:

The transcript of the meeting can be downloaded here: Incrementum / AEGO Advisory Board Meeting (PDF). Enjoy!

 

Charts by: Incrementum, StockCharts, SentimenTrader.

 

 
 

Emigrate While You Can... Learn More

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • How to Stick It to Your Banker, the Federal Reserve, and the Whole Doggone Fiat Money System
      Bernanke Redux Somehow, former Federal Reserve Chairman Ben Bernanke found time from his busy hedge fund advisory duties last week to tell his ex-employer how to do its job.  Namely, he recommended to his former cohorts at the Fed how much they should reduce the Fed’s balance sheet by.  In other words, he told them how to go about cleaning up his mess.   Praise the Lord! The Hero is back to tell us what to do! Why, oh why have you ever left, oh greatest central planner of all...
  • India: Why its Attempt to Go Digital Will Fail
      India Reverts to its Irrational, Tribal Normal (Part XIII) Over the three years in which Narendra Modi has been in power, his support base has continued to increase. Indian institutions — including the courts and the media — now toe his line. The President, otherwise a ceremonial rubber-stamp post, but the last obstacle keeping Modi from implementing a police state, comes up for re-election by a vote of the legislative houses in July 2017.  No one should be surprised if a Hindu...
  • Moving Closer to the Precipice
      Money Supply and Credit Growth Continue to Falter The decline in the growth rate of the broad US money supply measure TMS-2 that started last November continues, but the momentum of the decline has slowed last month (TMS = “true money supply”).  The data were recently updated to the end of April, as of which the year-on-year growth rate of TMS-2 is clocking in at 6.05%, a slight decrease from the 6.12% growth rate recorded at the end of March. It remains the slowest y/y growth since...
  • What is the Buffet Indicator Saying About Gold?
      Chugging along in Nosebleed Territory Last Friday, both the S&P 500 and the Nasdaq composite indexes closed at record highs in the US, with the Dow Jones Industrial Average only a whisker away from its peak set in March. What has often been called the “most hated bull market in history” thus far continues  to chug along in defiance of its detractors.   Can current stock market valuations tell us something about the future trend in gold prices? Yes, they actually...
  • The 21st Century Has Been a Big, Fat Flop
      Seeming Contradiction CACHI, ARGENTINA – Here at the Diary we have fun ridiculing the pretensions, absurdities, and hypocrisies of the ruling classes. But there is a serious side to it, too. Mockery makes us laugh. And laughing helps us wiggle free from the kudzu of fake news.   Is it real? Is it real? Is it real? Above you can see what the problem with reality is, or potentially is, in a 6-phase research undertaking that has landed its protagonist in a very disagreeable...
  • A Cloud Hangs Over the Oil Sector
      Endangered Recovery As we noted in a recent corporate debt update on occasion of the troubles Neiman-Marcus finds itself in (see “Cracks in Ponzi Finance Land”), problems are set to emerge among high-yield borrowers in the US retail sector this year. This happens just as similar problems among low-rated borrowers in the oil sector were mitigated by the rally in oil prices since early 2016. The recovery in the oil sector seems increasingly endangered though.   Too many oil...
  • Will Gold or Silver Pay the Higher Interest Rate?
      The Wrong Approach This question is no longer moot. As the world moves inexorably towards the use of metallic money, interest on gold and silver will return with it. This raises an important question. Which interest rate will be higher?   It’s instructive to explore a wrong, but popular, view. I call it the purchasing power paradigm. In this view, the value of money — its purchasing power —is 1/P (where P is the price level). Inflation is the rate of decline of...
  • Rising Oil Prices Don't Cause Inflation
      Correlation vs. Causation A very good visual correlation between the yearly percentage change in the consumer price index (CPI) and the yearly percentage change in the price of oil seems to provide support to the popular thinking that future changes in price inflation in the US are likely to be set by the yearly growth rate in the price of oil (see first chart below).   Gushing forth... a Union Oil Co. oil well sometime early in the 20th century   But is it valid to...
  • Warnings from Mount Vesuvius
      When Mount Vesuvius Blew   “Injustice, swift, erect, and unconfin’d, Sweeps the wide earth, and tramples o’er mankind” – Homer, The Iliad   Everything was just the way it was supposed to be in Pompeii on August 24, 79 A.D.  The gods had bestowed wealth and abundance upon the inhabitants of this Roman trading town.  Things were near perfect.   Frescoes in the so-called “Villa of the Mysteries” in Pompeii, presumed to depict scenes from a...
  • A Bumper Under that Silver Elevator – Precious Metals Supply and Demand
      The Problem with Mining If you can believe the screaming headline, one of the gurus behind one of the gold newsletters is going all-in to gold, buying a million dollars of mining shares. If (1) gold is set to explode to the upside, and (2) mining shares are geared to the gold price, then he stands to get seriously rich(er).   As this book attests to, some people have a very cynical view of mining...  We would say there is a time for everything. For instance, when gold went ...
  • Silver Elevator Keeps Going Down – Precious Metals Supply and Demand
      Frexit Threat Macronized The dollar moved strongly, and is now over 25mg gold and 1.9g silver. This was a holiday-shortened week, due to the Early May bank holiday in the UK. The lateral entrant wakes up, preparing to march on, avenge the disinherited and let loose with fresh rounds of heavy philosophizing... we can't wait! [PT]   The big news as we write this, Macron beat Le Pen in the French election. We suppose this means markets can continue to do what they wanted...
  • The Knives Come Out for Trump
      A Minor Derailment GUALFIN, ARGENTINA – Yesterday, stocks fell. And volatility shot up.   When too many people have too many knives out at once, accidental cubism may result   Reports Bloomberg:   The Dow Jones Industrial Average tumbled more than 370 points, Treasuries rallied the most since July and volatility spiked higher as the turmoil surrounding the Trump administration roiled financial markets around the globe. Major U.S. stock indexes...

Support Acting Man

Austrian Theory and Investment

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com