Alan's Alert 7-13-2021

 

Panic might not be the right word but when I see charts like this cross my screen:

I know something is up. That is a whole lot of contracts changing hands in the gold futures market.

The Consumer Price Index (CPI) was posted this morning and traders made some knee-jerk moves. Gold wasn’t the only one to see some wild swings. Needless to say, the CPI was shockingly high.

It came in at 5.3% on a year-over-year basis. That is an increase of 0.9% month-over-month (that’s 10.9% annualized!). This is well above the forecast of 4.9% year-over-year. Hence the knee-jerk

reaction by traders. This is the 6^th month in a row that the CPI has printed higher than the month before. When the “core” CPI is teased out. It printed at a spicy 4.5%. Remember, the “core” CPI is the CPI without those pesky food and energy numbers. This is the largest 12-month increase in the core CPI since November of 1991. Just looking at energy, it was up 24.5% year-over-year and food was up 2.4% in the same comparison. Here’s the Bureau of Labor Statistics’ (BLS) full breakdown.

Another item that stood out to me was that used vehicles continued their rise. I anticipate that those categories that are hot now will cool and the categories that have been slow (food especially), will begin to get hot. Inflation doesn’t attack every component at once. It moves higher in a stop-and-go fashion. This is one of the reasons that the common man has such trouble figuring out what is going on. Few can detect that the reason the prices are going up is that the money in their wallet is worth less. It still looks like a $20 bill but when you compare what it can buy, you realize something is wrong.   

In the grand scheme of things, we are very early on this trend. It takes a special individual to be able to; see a trend, know it will take place, get in position for it, and… sit tight. That last part is the hardest. It was described exceptionally well in Edwin Lefevre’s “Reminiscences of a Stock Operator” which was inspired by the life of stock trader Jesse Livermore.

“It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine--that is, they made no real money out of it. Men who can both be right and sit tight are uncommon.”
― Edwin Lefèvre

I’m of the mind that we have seen a trend coming. We are now getting confirmation that it will be taking place. I think we have some good positions to take advantage of it (though I’m looking at a few more) and then we have to “sit tight”.

The Bureau of Labor Statistics (BLS) will be releasing the Producer Price Index (PPI) tomorrow. I do not believe that it is a coincidence that we have Fed Chair Powell in front of Congress on the same day. In fact, I’ve got a man on the inside. He gave me a preview of what Jerome is going to say.

The Fed has to come out and tell everyone they have it under control. If they don’t, there would be panic and chaos. This would not be conducive to a slowly rising stock market and lower unemployment figures. Privately they could be frightened of losing control but they have to put on a good face for the public. They have to say things like; this inflation is transitory, it is well within our new framework, we see no reason to worry. Otherwise, the jig is up.

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Alan's Alert 6-10-2021

 

Just as Jan Brady got frustrated at her sister getting all the attention, sometimes I feel that inflation is all I ever talk about.  Inflation in China, inflation in the US, inflation in wages, inflation, inflation, inflation…  bah.

 The investing world’s eyes were glued to their screen at 5:30am pacific time for the Fed’s most anticipated release for the week, the consumer price index.  Investopedia tells us that the CPI “measures the average change in prices over time that consumers pay for a basket of goods and services” and “that the CPI is the most widely used measure of inflation”.  The problem with the CPI is that pesky “basket of goods” stuff.  See, the government has been tweaking that basket since the mid-90s.  The Bureau of Labor Statistics said that these changes in the basket’s makeup were necessary because “consumers change their preferences or new products and services emerge”.  My difficulty with these changes are that they always find that inflation is overstated and the basket is changed in favor of lower inflation numbers.  The Feds cook the books to pretend that inflation is lower than it really is.  This makes them look good and gives them license to keep the printing presses running.

Recently Zerohedge dug deeper on this issue and found in their article “The Fed’s Most Convenient Lie: A CPI Charade” that the Fed and the BLS “reports consumer inflation as honestly as Al Capone reported taxable income.”  They reference ShadowStats.com.  A guy who tracks consumer inflation the way the government originally tracked it in the 80s.  He shows “true” inflation around 10%.

Now, I’m not one to have blind faith in government statistics.  I’m also not one to have blind faith in a guy who runs a website.  I think the truth probably lies somewhere in-between.

 

So, when the government released their CPI data it came in at .6% on a month-over-month basis which is 7.2% on an annualized basis.  Remember, the Fed wants to target 2% but have said that they are ok with it going over target as we have been under target for so long.

Looking at the CPI on a year-over-year basis doesn’t help the Fed either, as that came in at 4.9%.  The government likes to tease out food and energy because they state these are more volatile.  This little trick didn’t help this month as the “core” CPI came in higher at .7% m/m.  So what was the market’s reaction?  Futures immediately dropped under the assumption that the Fed would react and raise interest rates, then immediately rebounded when they realized that the Fed couldn’t spot inflation if it hit them in the face as all inflation is now “transitory”.

Gold and silver both traded lower until 5:30 this morning where it looks like they bounced off a springboard.  Oil traded sideways overnight and now is starting to push higher past $70/bbl.  I expect Fed members to make the rounds on TV, continuing their “transitory” talk but what I see with my eyes and what my wallet feels is that this is not “transitory” but only time will tell but as a famous horse once said…