Why Is Gold Not Rising?
Many are asking why gold is not rising, as just about every other commodity makes new highs in the backdrop of inflationary tailwinds.
That’s a very fair question.
Some are even saying gold is dead, a silly and “barbarous” old relic of ancient times, ancient math and ancient common sense.
Needless to say, we beg to differ, not because we are Swiss-based gold bugs, but simply…well… let’s explain.
Current Price vs. Current and Future Roles
For those who see history and math as guides rather than “barbarous” and outdated disciplines, their convictions regarding gold’s role, and even price trajectory, do not wane or rise simply due to the paper price of gold.
To some extent, and despite Basel 3, gold remains openly manipulated by a handful of central and bullion banks who are terrified of gold’s shine for no other reason than it embarrasses currencies (and mad monetary experiments) falling deeper into discredit.
But we track the movement of physical gold every day, and can say with blunt clarity that the paper trade in gold has zero to do with the those otherwise “barbarous” forces of the actual supply and demand of this precious metal.
In short, the paper price of gold has become a fiction accepted as reality, which is not surprising in a financial landscape (i.e., historically over-valued stocks, negative yielding bonds and central bankers allergic to transparency) which defies every measure of honest price discovery or basic capitalism.
As for the never-ending gold vs. BTC debate, it would be wrong to say Bitcoin hasn’t taken (or continue to take) some market share away from gold, but at less than $1 trillion, BTC is not going to destroy gold’s $10T market share.
In short, the current gold price is a less important topic than its current and future role as historical insurance against mathematically-failing financial and economic systems around the globe.
That said, we are not apologists for the falling gold prices, nor do we doubt that by the end of this decade, gold will price well above $4000 per ounce and greatly reward informed investors playing the long game rather than putting green.
More on that later.
Gold’s Three Roles
For now, let’s consider gold’s historical role as a hedge against: 1) recession risk; 2) market volatility risk; and 3) inflation/currency risk.
1. Recession Hedging
As for recessions, gold is like an emotional and mathematical barometer testing the temperature of over-heated monetary expansion.
As such, it moves higher even before policy makers add more inevitable “stimulus” (i.e., mouse-click fiat currencies) into the system.
By the time policy makers officially announce a recession, it’s far too late for most investors to react.
Fortunately, gold acts more quickly, anticipating monetary expansion even before the money printers start churning.
Long before the “COVID recession” of 2020, for example, the writing was already on the wall that markets and central bankers were getting desperate.
By late 2019, debt levels were off the charts, liquidity was drying up, the repo markets were drinking hundreds of billions of Fed dollars per month and an un-official QE to the tune of $60 billion per month was in full-swing.
Then came COVID in March. Markets and GDP were tanking and gold was already on course to see (in dollar terms) a 25% rise in 2020, after a 19% rise in 2019.
In short, as a recession hedge, gold was ahead of the central bankers in protecting investors.
By the way, the Fed’s record for calling recessions and warning investors is 0 for 10…
2. Hedging Market Volatility
We all remember March of 2020, when markets puked and gold fell along with it, primarily sold-off as a liquidity source for players facing margin costs which they were forced to pay off with gold holdings.
As in 2008 and 2009, gold initially followed the stock ship below the waterline—though not nearly as far as BTC…
But as mentioned above, gold reacted quickly, anticipating the money printing (and hence dollar debasement) to come, rising steadily for the rest of that fiscal year.
Of course, stocks rose as well, thanks to the unbelievable and historically unprecedented money creation witnessed in 2020—more QE in less than a year than all of the combined QE1-QE4 and “Operation Twist” which we saw from 2009-2015.
But thankfully, gold doesn’t just follow stock markets, it hedges them, as the past shows and the future will once again confirm.
Such monetary stimulus creates what von Mises would call a “crack-up boom,” and near-term such liquidity is just wonderful for stocks and bonds.
As we’ve written elsewhere, COVID—and the policy measures which followed– literally saved the securities bubble and made this “boom” even bigger.
But the “boom”-to-volatility to sequence to come from such risk assets reaching price levels which have absolutely nothing to do with valuation will be infinitely more painful (“crack-up”) down the road for those assets than for gold the moment when, not if, this horrific financial system implodes under its own and historically un-matched weight.
In short, gold will zig when the markets zag.
The anti-gold crowd, of course, will smirk and hug their bonds, reminding us all that gold is a yield-less relic while forgetting to confess that the “no yield” of gold is ironically preferrable to over $19 trillion worth of negative yielding sovereign bonds…
3. Hedging Inflation & Currency Risk
Which brings us to the big question of the day, why is gold not rising when it should be ripping as a hedge against what is clearly an inflationary new normal?
We are asking this ourselves, as real rates (the ideal setting for gold) fall deeper into negative depths with each new day…
…as inflation, as well as inflation expectations, are on the objective rise:
Last year, for example, gold saw this inflation coming and thus its rising, double-digit price moves reflected the same.
But this year, with real rates still diving and inflation rising, gold is showing single single-digit losses rather than gains.
The Market Still Believes the “Transitory” Meme
Our ultimate opinion boils down to this: We think the market still believes the central bank myth (i.e., propaganda) that the current inflation is indeed, only “transitory.”
We’ve written ad nauseum as to why inflation is anything but “transitory,” yet we can nevertheless respect the deflationists’ argument.
The deflation camp, for example, rightly argues that recessionary forces, if left alone, are inherently deflationist, and the signs of economic (rather than market) declines are everywhere.
But the key mistake which such deflation (or dis-inflation) narratives make is that these natural forces have not, nor will be, “left alone.”
In other words, deflationists are somehow ignoring the monetary and fiscal elephant in the room.
That is, more, not less, unnatural monetary and fiscal liquidity is entering the system at historically unprecedented levels, levels that are more than enough to quash such otherwise natural deflationary forces.
Stated even more plainly, moderation at the fiscal and monetary level died long ago.
Simple Realism—Inflation as Necessity Rather than Debate
Central banks are desperate to reach higher inflation to inflate their way out of debt without admitting the same.
This is nothing new for fork-tongued policy makers who once “targeted” 2% inflation as a ceiling, but are now effectively “allowing” 2% inflation as the new floor.
Just as Nixon said the closing of the gold window was “transitory” in 1971, or as Bernanke promised that QE would be transitory in 2009, the current lie from on high about “transitory inflation” is no less a lie in 2021 as those other lies were in 1971 or 2009.
Again, we all just kina know this, right?
Furthermore, we just need to be realists rather than dreamers to see the inflation reality now and ahead.
Central bankers, for example, may be dishonest, but they aren’t entirely stupid, just desperate and realistic.
In the U.S., for example, a staggering as well as openly embarrassing $28.5 trillion public (i.e., national) debt level quickly limits one’s options at the White House or the Eccles Building.
Not Many Options Other than Inflation
In this realistic light, let’s consider their options. Policy makers have four tools to address such debt, namely: raise taxes, cut spending, declare bankruptcy, or devalue their currencies through inflation.
The first two are already in play in the U.S., namely political efforts to raise taxes and ‘talk’ of cutting spending, both politically difficult options.
Taking bankruptcy off the table, leaves devaluing the U.S. Dollar as the favored option, which is achieved by deliberately taking real interest rates to extreme negative levels.
Allowing inflation to run while keeping rates low reduces the number of dollars needed to repay the debt.
This hurts regular folks, but as we’ve said so many times, the Fed is not interested in regular folks.
In other words, by decreasing the value of the U.S. Dollar, the U.S. is effectively paying off its current debt with devalued money. There are no permission slips needed from Congress, nor taxpayers.
Given such realism, let us be repeatedly blunt and clear: Unlike gold not rising, inflation is not, nor will it be, “transitory.”
Instead, deliberate inflation is an inherently and deliberately necessary tool used by the same anti-heroes who put us in this debt hole.
More Fed-Speak, Less Honesty
This means the Fed will come up with whatever excuses, words, phrases and lies to justify being more dovish despite publicly flirting with hawkish talk about a Fed taper.
Already, Powell is taking the Fed way beyond its mandate and talking about social and environmental activism, as these are nice phrases to justify, you guessed it: More money creation and more (not “transitory”) inflation.
As for me, hearing Powell talk about “labor market inequality” after the Fed has spent years making the top 1% richer at the expense of an increasingly poorer bottom-90% is so rich in hypocrisy that it makes the eyes water.
In this opaque light, the notion of “Fed independence” is a complete and utter fiction.
Instead, the Fed is slowly crossing the line into becoming the direct financier to the entire nation—and the only way it can do this is via monetary expansion and deliberate (as well as much higher) inflation, which is a tax on the poor and bullet to the heart of the U.S. Dollar. Period. Full stop.
It’s All About Debt
Again, this all comes realistically back to debt.
When there’s too much unpayable debt (be it at the zombified corporate level or the embarrassed national level), rising rates becomes fatal.
The Fed has learned since 2018 that even a slight rise in rates kills the debt-saturated markets whose capital gains taxes are about all that Uncle Sam can declare as income in a nation whose GDP was sold to China years ago.
And yet… and yet… the markets somehow wish to believe the fantasy (and Fed-speak) that inflation is only “transitory.”
We strongly think differently.
As blunt realists, we see the Fed perhaps raising rates nominally, but when adjusted by openly deliberate (yet openly denied) inflation, real rates will fall deeper as inflation rises higher.
This is because the simple reality (and choice) of nations with their backs against a debt wall is always the pursuit of inflation by design, not deflation.
As I recently wrote, nothing is real anymore, and all taboos are broken. The Fed, through QE and/or the Repurchase Program, will print more money as fiscal policy rises alongside—a veritable double-whammy for more “liquidity” to come.
This, of course, is crazy and ends badly.
The Fed, along with the White House, have tried since Greenspan to outlaw natural market forces and needed austerity in order to bloat markets, keep their jobs or win re-election.
Since we can never grow or default (?) our way out of the greatest debt hole in our history, the realistic playbook ahead is negative real rates—i.e., inflation rising higher and faster than repressed Treasury yields.
Once this becomes obvious rather than “debated,” gold will rise along side the money supply to levels well above it’s current, yet admittedly, low price.
Slowly, but surely, the $19 trillion in negative-yielding sovereign bonds will see outflows from that discredited asset and hence inflows into the “barbarous” asset: Gold.
For now, we are patient realists rather than apologists, as the market seemingly continues to price gold for only “transitory” inflation.
But once inflationary reality rises above the current “transitory” fantasy, gold will not only surge in price, but serve its far more important role of hedging against undeniable inflation and the equally undeniable (i.e., destructive) impact such inflation will have on global currencies in general and the U.S. Dollar in particular.
Gold: Biding Its Time
Despite such signposts from math, history and Real Politik, gold is currently under attack for not “doing enough,” despite two years of double-digit rises.
Gold investors, however, are not greedy, they are patient, and they hold this physical rather than paper asset for the long game, as previously described.
And as for that long game, the inflation ahead, as well destruction of the currency in your pocket today and tomorrow, means today’s gold price is not nearly as relevant an issue as gold’s role in protecting far-sighted investors from what’s ahead.
In the end, gold’s primary role is acting as insurance for a global financial and currency system already burning to the ground.
But for those naturally asking about price, forecasting and models, as any who worked in a bank know, such models are as complex as they are useless.
We keep things simpler and humbler.
By just tracking monetary growth rates with certain regressions, a realistic price target for gold based upon inevitable monetary expansion suggests gold at well past $4000 by the end of this decade.
That may or may not seem sexy enough for those chasing returns today, but when those returns convert into losses too hard to imagine as markets reach new highs, we must genuinely remind you that even with Fed “support,” all bubbles do the same thing: “Pop.”
We are not here to tell you when, as no one can.
We are simply suggesting you prepare, rather than react.
Sat, 09/25/2021 – 10:30
The ‘Maestro’ Is Why Jay Powell Keeps Seeing (inflation) Ghosts
See, this is backward. And while it may seem overly pedantic, getting it right is actually a crucial insight (lack thereof) into pretty much everything….
See, this is backward. And while it may seem overly pedantic, getting it right is actually a crucial insight (lack thereof) into pretty much everything. Its purpose is to maintain a different sort of money illusion (the original relates to how workers focus on nominal rather than real levels of compensation). This other money illusion relates to the hidden nature of money itself.
We’re told central bankers are it, therefore everything must be related to central bank monetary policy. If the dollar’s falling, the Fed accommodated. If it’s rising, Fed tightening. Rates go down because, everyone says, Jay Powell bought bonds. Yields go up because of rate hikes after the bond buying is over.
You go to the bathroom in the middle of the night, the FOMC must’ve voted for it.
It all goes back to before Greenspan, though it was the “maestro” who most clearly articulated the gross illiteracy and unsupported conceits behind much of Economics.
CHAIRMAN GREENSPAN. It’s really quite important to make a judgment as to whether, in fact, yield spreads off riskless instruments—which is what we have essentially been talking about—are independent of the level of the riskless rates themselves. The answer, I’m certain, is that they are not independent.
Risky spreads are, according to this view, in a sense controllable from monetary policy even from only the short end. Why? Because all riskless rates, Greenspan also said, were nothing more than a “series of one-year forwards.”
It was, in theory, all so easy and neat; the Fed from its single position could conduct all the instruments in the symphony as it wished, however and whenever wished. Thus, maestro.
Why, then, all the constant “conundrums” and “inflation puzzles” ever since? Dear Alan said he was certain, and he’s certainly been wrong.
The yield curve is no series of one-year forwards, nor are risky spreads utterly dependent upon hapless Economists at the Fed (see: swap spreads, as a start). Those at the Fed instead have repeatedly shown they have no idea how even short run interest rates work (see: SOFR) which means they can’t be literate in money like economy.
What do they do?
Influence public opinion via financial media. To wit:
The unquestioned assumption embedded here is palpable anyway; nominal rates are rising (“worst year for fixed-income since 2005” BOND ROUT!!!!) because inflation is “hot enough.” Reported like its some foregone conclusion, this inflation certainty dictated to the bond market via a suddenly hawkish Federal Reserve.
This is, at best, incomplete; most often, just plain backward. Thanks, Maestro.
Had the yield curve behaved recently like it had earlier in this same year, this would be plausible. The yield curve, on the contrary, is performing very differently negating any chance for this to be the case.
Bond yields aren’t reacting to anything; they’ve helpfully sorted CPI’s for us all along. As I wrote earlier today, the yield curve has expertly, consistently interpreted the money Economists and central bankers can’t understand so as to accurately predict – for longer than a century – what is and will be inflation.
This often leads to conflict; central bankers say it’s one thing and bonds declare another, often the opposite. This differing viewpoint not just a post-2007 development, either, also noted today, bonds vs. Economists has been a one-way contest going back before 1929.
Our current case, therefore, very much like previous cases.
A flattening yield curve, conspicuously so, is the bond market recognizing: 1. It isn’t inflation, just transitory price factors, meaning lack of heat in the economy; 2. Policymakers repeatedly have shown they have no clue how or where to even begin figuring one way or the other; 3. Because they are clueless, they have likewise displayed a consistent tendency to make egregious forecast errors, such as 2018 or 2013; 4. Therefore, very much independent of the Fed, bond yields are instead disagreeing with Powell’s mistake by pricing a scandalously flattening yield curve with nominal rates already contradictorily low (tight money).
Bonds – not the Fed – have already sorted the inflation question. The problem is, as usual, the answer isn’t to the liking of mainstream Economics which can only interpret yields from the “certitude” of Greenspan. In that sense, inflation is a foregone conclusion. In the dream-world of media, the theme this year is solidly inflation. In monetary reality, unambiguously deflationary.
Just in time for Halloween, Jay Powell is back to seeing ghosts.
US stock close mixed on Powell’s hawkish remark
Dow Jones closed higher while S P 500 and Nasdaq drifted on Friday October 22 after Fed Chair Jerome Powell s tapering remarks weighed on investors…
Dow Jones closed higher, while S&P 500 and Nasdaq drifted on Friday, October 22, after Fed Chair, Jerome Powell’s tapering remarks weighed on investors’ sentiment. However, the optimism over the robust earnings has pushed the indices towards their third consecutive week of gains.
The S&P 500 was down 0.11% to 4,544.90. The Dow Jones Industrial Average increased by 0.21% to 35,677.02. The NASDAQ Composite Index fell 0.82% to 15,090.20, and the small-cap Russell 2000 was down 0.21% to 2,291.27.
On Friday, the Federal Reserve Chair, Jerome Powell said that the central bank should start dialing back its asset-buying program soon while suggesting that the interest rate shouldn’t be increased as of now. While the strong earnings results have lifted the investors’ confidence in recent weeks, the remarks from the Fed Chair raised concerns of the investors.
The Fed has reassured that the interest rate will be kept at the “near-zero” level until the economy returns to its expected employment and the inflation would come under the Fed’s expectation level of 2%. Meanwhile, the supply-chain disruptions and the rising costs of the raw materials indicated that inflation is likely to stay above the level for some time.
The financial and the real-estate sector topped the S&P 500 index on Friday, with communication services and consumer discretionary sectors as the bottom movers. Eight of the 11 critical sectors of the S&P 500 index stayed in the positive territory.
The stocks of Cleveland-Cliffs Inc. (CLF) gained 12.10% in intraday trading, after reporting better-than-expected quarterly earnings on Friday, before the bell. The company has reported record revenue of US$6 billion in Q3, FY21, while its net income came in at US$1.28 billion.
The shares of American Express Company (AXP) rose 5.50% after the company has reported strong quarterly earnings results as more people used their cards for traveling, dining, and other leisure activities. The total revenue of the company surged around 25% YoY to US$10.92 billion, while its net income was up 70% from the previous year’s same quarter to US$1.82 billion.
The stocks of Honeywell International Inc. (HON) plunged 2.90% after the company has lowered its full-year sales forecast due to the bottleneck supply constraints. The company’s sales rose 9% YoY to US$8.47 billion in Q3, FY21, while its EPS was up 68% YoY to US$1.80 apiece. However, the company has lowered its sales forecast to be between US$34.2 billion and US$34.6 billion from its previous forecast of US$34.6 billion and US$35.2 billion.
In the financial sector, JP Morgan Chase & Co. (JPM) increased by 1.15%, Bank of America Corporation (BAC) rose 1.27%, and Morgan Stanley (MS) surged 1.54%. Citigroup, Inc. (C) and Goldman Sachs Group, Inc. (GS) gained 1.28% and 1.65%, respectively.
In real-estate stocks, American Tower Corporation (AMT) advanced 1.86%, Equinix, Inc. (EQIX) jumped 1.52%, and Public Storage (PSA) soared 1.21%. Digital Realty Trust, Inc. (DLR) and SBA Communications Corporation (SBAC) ticked up 1.03% and 1.71%, respectively.
In the communication sector, Alphabet Inc. (GOOGL) decreased by 3.13%, Facebook, Inc. (FB) fell 5.91%, and Walt Disney Company (DIS) declined by 1.10%. Twitter Inc. (TWTR) and Snap Inc. (SNAP) plummeted 4.15% and 25.99%, respectively.
Futures & Commodities
Gold futures were up 0.71% to US$1,794.60 per ounce. Silver increased by 0.86% to US$24.378 per ounce, while copper fell 1.24% to US$4.5018.
Brent oil futures increased by 1.55% to US$85.92 per barrel and WTI crude was up 2.06% to US$84.20.
The 30-year Treasury bond yields was down 2.47% to 2.075, while the 10-year bond yields fell 1.91% to 1.643.
US Dollar Futures Index decreased by 0.17% to US$93.602.
Do Bonds Accurately Price Inflation? Since Before Any of Us Were Born
Many, likely the vast majority believe that the recent wave of consumer price increases is going to stick around. It’s already painful and even if it…
Many, likely the vast majority believe that the recent wave of consumer price increases is going to stick around. It’s already painful and even if it isn’t inflation, they’re thinking, it soon will be. Maybe not 1970’s bad, not yet, at the very least something like then.
The bond market doesn’t just disagree, it keeps doing so vehemently. Nothing new, bond yields have signaled distrust and skepticism each and every time we go through one of these inflation panics. There was 2008’s fiasco today remembered for ending up more like the thirties than the seventies; renewal under QE “money printing” which very quickly deflated by 2011 and forgotten; then 2014’s “best jobs market in decades” simply vanished; finally, the 2018 “globally synchronized” comedy of hawkish errors.
Low yields aren’t just expressing some cynical opinion that we can quantitatively measure, the implications have been repeatedly proven true because those prices are largely made by those inside the shadows doing all the money. Or not enough, as the case has been.
Inflation, real inflation which lasts, is always and everywhere a monetary phenomenon. There hasn’t been the money for a long time, therefore there hasn’t been inflation. Instead, consumer prices, at times, have increased even jumped if only due to other factors which uniformly get verified as transitory.
That’s why I (and a very few others) become remorseless about being obsessively specific and demand full accuracy as to whether or not to call something inflation. Without the money, it won’t be so whatever else has to be responsible for consumer prices can only ever be transitory.
This time is different, everyone now says. Screw bonds! Sure, they’ve been on the spot predicting the Fed’s downfall since before 2008 (see: below) but more and more of late the Federal Reserve itself says you can’t rely on yields if or when the real inflation their QE policies have been desperate to inflict does arrive.
There’s been a curious uptick in scholarship purporting to study the best inflation prediction combinations. Most of them are just absurd fantasy, transparent attempts to discredit policymakers’ bond market nemesis. I’ll even give you a recent example, just a few days ago, published by the Cleveland Fed.
The study’s findings unsurprisingly disparage consumers, estimating that consumer surveys of inflation are the least helpful. Those conducted from businesses aren’t really any better, according to the Cleveland branch, while, predictably, the authors extol the virtuous capacities of “professional forecasters” as modern-day inflation oracles.
Professionals who just so happen to be – pure coincidence, I’m sure – formally trained Economists like the researchers in Cleveland and the rest of the Federal Reserve.
One other inflation predicting method included “financial markets.” This didn’t score so hotly, according to the paper:
Based on in-sample and out-of-sample predictive exercises, we find that the expectations of professional economists and businesses, as demonstrated by the Blue Chip and Atlanta Fed measures, have provided substantially more accurate predictions of CPI inflation one-year out compared to those of households. The accuracy of the Cleveland Fed inflation expectations model, which could be viewed as reflecting the expectations of the financial markets, is somewhat behind these other two measures.
Wait, back up; the Fed’s branch used an “inflation expectations model?” This is supposed to be a proxy for financial markets, but instead is:
Inflation expectations of financial markets, as captured by the model behind the one-year-ahead Federal Reserve Bank of Cleveland inflation expectations series. The Cleveland model (Haubrich, Pennacchi, and Ritchken (2012)) estimates inflation expectations using data that include nominal yields from US Treasury securities, survey forecasts, and inflation swap rate data.
It’s bad enough they’ve thrown a bunch of things into the wash and hope to extract something useful via subjective stochastics, but one of those things purportedly of financial markets is “survey forecasts.” I absolutely hate having to point out the implication of what sure seems like an intentional act of dirty pool.
Truth is, we don’t need all the fancy econometrics to evaluate these things; after all, these Economists have been employing exactly those for a very long time and they understand, appreciate, and can usefully forecast less and less by the year. On the contrary, we’ll just draw some simple charts and rely on nothing more than our eyes and common sense.
And we’ll start back in history with the last true bout of unbridled inflation, the supposed template for what so many people have been led to believe is about to make its ugly reappearance: The Great Inflation.
This part is exceedingly easy and straightforward since the bond market does all the work; you just need to be freed from the grasp of illiterate Economics.
Yields went down, not up, during the Great Depression (not pictured but I went into detail why here). They did so because of generally tight money (interest rate fallacy) that the Federal Reserve and its bank reserves (even based on gold flows) couldn’t manage. Banks, not central banks, are where the money comes from.
This deflationary situation did not change through and after World War II. Even during those three periods when consumer prices surged (sounds familiar), to the left of the red arrow above, bond yields didn’t budge an inch (I’ve already covered how it wasn’t the Fed’s yield caps which had kept yields low here). The financial market looked past those as temporary deviations which wouldn’t last because they weren’t actual inflation.
Transitory supply shocks don’t bother yields especially at the long end of the curve which measures money conditions through the prism of longer run inflation and growth perceptions. If it isn’t money, therefore transitory, longer bonds don’t price it.
Starting in the second half of the fifties, though, yields began at first gently rising (late fifties, eurodollar?), indicating that the tide was turning and whatever leftover remainders from the deflationary Great Depression were finally, mercifully being overcome.
What followed a double dip recession in 1958 then 1960 was a few years of low inflation. Yet, even during those, bond yields were moving higher anticipating what was about to come.
The 3-month bill rate bottomed out in July 1961 while longer end Treasuries would gently increase from January 1963. These then accelerated sharply in July 1965 well ahead of the first main eruption of consumer prices by February 1966.
That’s not all; a near-recession in 1967 granted a minor reprieve to consumers, a slowdown (slack) which Economists and central bankers mistakenly judged the end of the inflationary trend. The bond market, by contrast, picked up on the renewal of inflation three-quarters of a year ahead of time (bills almost half a year).
Bonds vs. Economists isn’t a new thing in the same way the Harlem Globetrotters didn’t just start pounding the Washington Generals yesterday.
Adding the Fed’s Discount Rate policy to the above chart (below) just highlights how bonds were way ahead as policymaker actions repeatedly fell behind:
The whole process repeated during and following the 1969-70 recession, too. LT yields bottomed out in March 1971, began moving higher even as the CPI leveled off and continued to decelerate for another fifteen months until June 1972.
Furthermore, this upward move in yields presaged a spike in consumer prices around early 1973 which itself predated the OPEC embargo’s painful inflationary oil contributions later that same year. As you can see on the chart above, bond yields incorporated the inflation part of the 1973 jump while trading underneath (CPI rates above yields) the embargo/crude oil components of it; in the same way as yields undercut those earlier pre-inflation supply shocks after WWII.
In other words, the bond market neatly and expertly compartmentalized inflation from other consumer price factors at the same time as helpfully foreseeing the former.
Contrary to what some Economists have claimed, the “financial markets” of little more than simply Treasury yields absolutely nailed the Great Inflation even as policymakers and experts fumbled around searching for answers and clues they would never find. Then-Federal Reserve Chairman Arthur Burns in August of 1971 had the nerve to say to Congress:
The rules of economics are not working in quite the way they used to.
The rules were always fine; Burns and those like him just didn’t understand how the monetary system had changed the way money worked within them. The bond market, the banks doing all the money, they had no problem sorting everything out.
OK, fine. This was a half century ago. What about something closer to today, the 21st century?
To start with, we’ve got yields moving higher in the middle of 2003 a year before the Fed’s eventual “rate hikes” which only then created confusion (“conundrum”) for Alan Greenspan when bond long end rates began to bunch up in anticipation of the decidedly high deflationary probabilities of the late eurodollar mania period.
The yield curve flattened, and then nominal rates began to fall by June 2007 long before any minus signs showed up in the CPI early in 2009.
What’s perhaps most powerful about the chart above is how the bond market (correctly) has treated each of the subsequent consumer price deviations dating back to the monetary breakdown during 2007: first in 2008, then again in 2011, and now in 2021.
Like those temporary supply shocks caught in the CPI’s of the immediate post-war aftermath, or the peak CPI created by the oil supply shock of 1973-74, bond yields also undercut each of those post-2007/broken eurodollar consumer price spikes…and are doing so yet again in 2021.
To really drive home this point, here are the two main charts one after the other, each one expertly sorting inflation from not-inflation by way of shadow money.
Quite simply, if it is actual inflation, yields go up as the market will price the real thing before it makes it into the CPI levels.
If there isn’t money for inflation, and those trading Treasuries know about shadow money that central bankers and Economists don’t and haven’t for more than half a century, then bond yields won’t chase these other CPI’s because those spikes aren’t inflation meaning they must be something else which, without the money, won’t last.
One of the key mistakes that Cleveland researchers and indeed all Economists make is treating all CPI increases as if they are the same; they keep searching for the best way to predict the annual CPI, rather than the proper way to sort out consumer prices! The reason officials keep committing such an egregious error is that Economics doesn’t even consider money. How could Economists? They haven’t taken the monetary system seriously since the Great Inflation shoved their ignorance into the limelight (criminally, the very same money ignorance the Great Depression had paraded before the world in a different way just a few decades earlier).
In lieu of this great deficiency, Economics has made it seem as if inflation is some voodoo mystery only its priestly class can describe from complicated mathematics rituals. You don’t need any of that, or them. All of this is publicly available, data, prices, everything, and it doesn’t take anything more than common sense divorced from that corrupted worldview.
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