More and more I find that my newsletter is a specialty thing and that I do not speak to anything even resembling a majority of investors. While I am loath to tout NFTRH with a typical 'try our monthly subscription for more insightful blah blah blah...' I will say that if you are looking for something different with a track record of remaining on the right side of events, check it out. Some might consider it a good thing that the letter does not speak to the majority. We are setting up for a great opportunity in the gold stock sector after all, and for that opportunity to play out, a counter party must exist.
Inflation Impulse?
You may have seen my 2005 conversation about deflation with Rick Ackerman noted on
the blog recently. That was probably about the time I came up with the term “deflation
impulse”. It was a way of illustrating the view that systematic and ongoing inflationary
policies are periodically interrupted by the need of the economy, markets and financial
system to purge themselves of the toxins routinely injected by policy makers on a
Keynesian business-as-usual continuum of diminishing returns.
The diminishing returns are of course measured in our gold ratios like Dow-Gold, for
example, in which the Dow has endured a sustained bear market in ‘real’ terms. Since
the inflationary saturation point in 2000, the anchor to real money – gold – has acted as a
light of truth shone upon the people who control ‘official’ money and thereby attempt to
control asset markets. I think I once wrote an article comparing gold to the kid in 5th
grade who used to sit in the front row, hand up and ready to give every answer – not to
mention tattle on other kids for a few more brownie points. That is gold’s role in the
sordid world of modern money.
Not that it matters much to our analysis, but when reviewing the long-term monthly chart
of the yield on the 30-year bond, it occurs to me that it is probably more appropriate to
view our often-watched exponential moving average 100 as the deflationary ‘backbone’
that has firmed up Greenspan, Bernanke, Summers and Geithner over decades of
inflationary monetary policy ON demand.
Each time long-term interest rates have risen toward the EMA 100 – attended by bouts of
rising inflation fears – they have been repelled (red arrows), as economies and/or markets
have weakened and talk of deflation once again hits the media. This is the ‘Prechter
fright mask’ theme I sometimes have fun with on the blog. This dynamic is critical to
policy makers’ ability to keep the game going. No stable T-bond, no ability to monetize
confidence in the bond.
We are on a deflationary continuum against which monetary policy is eased in various
ways and with varying degrees of intensity backed by the confidence implied by the
EMA 100 backbone; there is implied confidence in the Treasury because each time there
is a bout of deflationary activity, ‘investors’ run en masse to US Treasuries. Early
subscribers may remember the ‘Lyin’ Larry’ theme that NFTRH came up with at the end
of 2008 when Mr. Summers very publicly cajoled the fearful masses to buy the safety of
US Treasury bonds, right into the teeth of an oncoming inflationary impulse that brought
the yield on the long bond all the way back to the EMA 100. The fearful lemmings were
summarily blown up as inflation players once again went full tout.
So is this it, the final deflation? If so, a world of assets is going to decline hard and
opportunity is going to present for the ‘D Boys’ to finally buy all those assets from all
those frightened and naive inflation believers.
Or are policy heroes preparing a mother of an inflation yet to come, with the recent
decline in yield from the EMA 100 and the confidence (and mandate to inflate) that
would come with a continued decline? The chart tunes out the inflation/deflation debate
and simply states that for now at least, it is business as usual.
Nothing has changed over decades – although the impulsiveness of the 2008 decline can
be read as a warning that things may have become more unruly in the macro markets.
But even here, this begs the question of whether that was an initial downward thrust
toward deflationary resolution or a harbinger of an equal and opposite inflationary
reaction?
As has been the case since the ‘Hope 09’ rebound got strongly underway, I am not going
to read too much into either potentiality. Rates have neither strongly declined nor busted
our EMA 100 ‘back bone’ or ‘inflationary line in the sand’. Until one or the other
presents, we remain on the business as usual continuum where implied confidence
remains with our policy makers and they can be expected to do as they have done
throughout the continuum; they will sell treasury bonds and monetize the debt in an
attempt to keep business-as-usual intact.
Smart investors stopped listening to Lyin’ Larry long ago and got off the modern
financial Ponzi grid. It is really so simple… pay off debt, own insurance in the form of
gold, have ample cash as long as confidence remains in fiat currency (don’t fool
yourselves, this confidence remains embedded), become involved in productive endeavor
whenever possible, and with an inner smile that comes from knowing you’ve done your
best to get your house in order, go forth and speculate if you so choose.
To summarize the NFTRH stance, I would say that the structure of the macro situation is
that of a deflationary continuum against which free license is given to policy makers to
continue their regime of inflation on demand. Every time there is stress in the system
(US credit contraction in 2008, European one in 2010 for example) inflation – in the form
of debt-based money supply ramp up – is brought forth. This cannot continue forever but
it takes a greater thinker than myself to be able to call it a wrap right here and right now.
Eliminate debt, own value and pursue productive endeavor.
