Introductory Remarks by PT

We have discussed the proprietary Incrementum Inflation Indicator in these pages on previous occasions, but want to quickly summarize its salient features again. It is a purely market-based indicator, this is to say, its calculation is based exclusively on market prices and price ratios derived from market prices.

However, contrary to most measures of inflation expectations, the Incrementum Inflation Signal is not primarily focused on yield differentials, such as is e.g. the case with 5-year breakeven inflation rates.

 

The 5-year breakeven inflation rate is derived from the differential between 5-year treasury note yields and 5-year TIPS yields. Interestingly, it has recently begun to tick up as well after declining sharply for several months.

 

The Incrementum Inflation Indicator instead focuses on the prices of traditional inflation beneficiaries (several of them are mentioned below), many of which tend  to lead CPI by a considerable margin.

The indicator has recently switched from “falling” to “rising inflation”, which has important implications for investors. Below follows the official announcement of the shift by our friends Mark J. Valek and Ronald-Peter Stoeferle, the co-managers of the Incrementum fund family.

 

The Incrementum Inflation Signal Reverses – by Mark J. Valek and Ronald-Peter Stoeferle

Growing Concerns About Economic Growth

As of the beginning of January, our proprietary inflation indicator has switched from “FALLING INFLATION” to a full blown “RISING INFLATION” signal.

The reversal was triggered by the latest development in the gold/silver-ratio, which has weakened from 87 to currently 83. Moreover, gold mining stocks (HUI) broke out vs. the broad equity market (SPX) and gold itself also switched to a long signal. Only the broad commodity market (BCOM) still shows a somewhat lackluster performance, but seems to be in the process of building a base as well.

In our view, one can make a reasonable argument that gold is entering the next stage of its bull market. Miners seem to have put in quite a solid bottom, too. Our assumption was confirmed by the most recent surge in M&A activity (Randgold & Barrick, Newmont & Goldcorp).

We think the strong move in precious metals is the proverbial “canary in the coal mine” for a weaker USD environment, a rise in commodities and ultimately increasing price inflation.

As we have discussed in various publications, we still take the view that the Fed will eventually have to make a “monetary U-turn”. This will include falling interest rates, the end of QT and sooner or later another round of QE.

Quite recently growth concerns have increased globally. Central bankers are increasingly worried about faltering growth and it seems that a synchronized economic downturn might be on the horizon. In fact, the ECRI’s Weekly Leading Index is nearing decline rates that have foretold either recessions or, in the post 2008 world, incremental Fed/Central Bank liquidity injections.

 

ECRI Weekly Leading Index – Growth Rate (%). The WLI growth metric is quite useful as a leading economic indicator. For details on its construction see here. It currently sits at a 6-year low. [PT]

 

Running Out of Wiggle Room

Therefore, the global economic situation hardly provides much leeway for too many more rate increases, especially in combination with QT which has moved to its full extent of 50bn USD per month as of October 2018. Since then, financial markets have already felt the tremors of collapsing liquidity.

As has been pointed out quite frequently, the yield curve has steadily flattened, which indicates that the rate hike cycle may be coming to an end sooner rather than later.

 

US 2yr & 10yr note yields and recessions. The spread between 2 year and 10 year yields as a proxy for the steepness of the yield curve. [PT]

 

Chances are, that we are now entering an environment of stagflation which we have been warning about for a long time. Once it is obvious that the normalization process of the Fed is faltering, we expect the long overdue depreciation of financial assets relative to real assets to begin.

 

S&P 500 (left hand scale) & Bloomberg Commodity Index (right hand scale). An enormous gap has opened up between the valuations of “paper assets” and “real assets”. This is reminiscent of the late 1990s. [PT]

 

Stimulus is Already Underway

On the back of this development the price action of gold is looking very healthy and rising financial market risk will present a significant driver for gold demand.

Moreover, recently commodity prices in general also seem to show some signs of life. As we have outlined in last years “In Gold we Trust Report” a suspension (or even a reversal) of the rate hike cycle would be huge news for the commodity and especially the precious metals sector.

Moreover, we have been pointing out the potential of a slowdown of the Chinese economy that has already caused the PBoC to intervene aggressively. Also, China now seems to be implementing fiscal stimulus as well.

As was just announced, tax rates on individuals and corporations— as well as VAT — will be cut. The Ministry is even considering ways to reduce social security fees to ease pressures on small companies. We believe that Western central banks and governments will (have to) follow the lead of China soon!

 

Investment Impact

We are currently increasing our allocation toward the precious metal sector, which has undergone a pronounced phase of creative destruction. Considering the recent change of momentum, we are looking at gold miners, with a slight overweight in mid-tier companies as well as silver miners. Furthermore, we are building positions in commodity currencies (CAD, AUD, RUB), diversified commodity investments (BCOM) and some EM exposure.

Ladies and gentlemen, we believe that current valuations in inflation sensitive assets are a tremendous buying opportunity which we want to take advantage of.

 

Best regards from Liechtenstein,

Mark J. Valek & Ronald-Peter Stoeferle

 

Charts by: St. Louis Fed, Advisor Perspectives/Doug Short, Incrementum

 

Chart captions by PT

 

 

 

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: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

14 Responses to “Incrementum Inflation Signal Update – A Reversal To “Rising Inflation””

  • No6:

    Obviously something is very wrong. No update regarding the site or health issues is a poor prognostic sign.

    Hoping for the best.

  • All-Your-Gold-Are-Mine:

    Sorry to hear of your poor health! Your site is full of great articles, and you’ve helped so many to understand the financial markets. Thank you very much and hope you gain back full health as soon as possible… take care Pater.

  • oroboros:

    Wishing you the best, Pater. I hope you’re doing well.

    “Hopefully our missives helped you navigate the treacherous waters of the financial markets this year. As our low posting frequency attests to, we unfortunately continued to be incapacitated by our poor health. Nevertheless, we did our best to chronicle the growing cracks in the bubble edifice.” – Pater Tenebrarum, December 24th.

  • Treepower:

    Missing your wit and wisdom, PT. Hope you’ll be back on form soon. The absurdities are piling up.

  • Hans:

    There is certainly no inflation of threads on
    Actingdead-man.com.

    I am afraid the end is hear.

    Now disconnecting bookmark.

    Sad, very sad to lose you. Thank you Pater and Mr Gordon.

    • M.N. Gordon:

      I wouldn’t count PT out just yet. I’m confident he’ll return soon enough with his vast insights and sharp wit. In the interim you can follow my latest postings (minus PTs charts, images, and annotations) at: https://economicprism.com/.

      • Hans:

        Thank you, Mr Gordon. It is three weeks now
        since a thread has been posted. I hope Pater is
        ok. I will be visiting your website soon. Tanks for
        the linky.

      • Hans:

        The bastards have blocked your website, Mr Gordon!!

        Google claims it is a credit card scamming site. Blocked by
        FF and Brave browser as well. I even pressed the go-ahead
        bottom at your own risk and it took me to a site call Share Point.

        I filed a report with Google and stated your website was safe.

        I believe it was taken down because you are Conservative. I will
        try my Tor browser and see what happens.

        • Hans:

          Deceptive site ahead

          Firefox blocked this page because it may trick you into doing something dangerous like installing software or revealing personal information like passwords or credit cards.

          Advisory provided by Google Safe Browsing.

          Mr Gordon, this is what I got yesterday and today !! WTH!!
          Also, could not reach your site even with Tor browser.

          • M.N. Gordon:

            Hans, Thank you for your interest and patience.

            It was a rough week at the Economic Prism headquarters. The Economic Prism website was hacked on February 20 to automatically redirect to a questionable site. With the help of several outside experts, the site has been fully cleaned and restored, and additional security measures are being taken to prevent future attacks.

            The site is back up and is being cleared by the various browsers.

            MN Gordon

  • Wombat:

    AUD is compared to what? USD
    Looks like AUD about to break to upside with strong reversal likely by this months end after being in strong downtrend since 2011.
    I am not a prophet

  • philc2:

    I fail to see how the authors see an opportunity in investing in the Australian dollar. As an Australian I am aware that our country’s wealth depends on our exports and the top five exports and their contribution to our total exports were as follows (2017 figures):

    Iron ore – 23%
    Coal – 19%
    Liquid fuels – 9.6%
    Gold – 6.2%
    Aluminium – 2.7%

    The main customers of these commodities (apart from the gold) are China, Japan and South Korea. All of these are in economic trouble and any drop-off in demand for these exports will have a significant effect on the Australian economy and hence the Australian dollar.

    A second factor is that the real estate market here is now weakening, prices are falling and the Government is getting worried that people are losing confidence. There is now a mood in the market that the Reserve Bank will drop interest rates to slow the fall in activity in the real estate market and keep prices stable. This must be a factor in deciding whether the Australian dollar is worthy investment material.

    I wonder if the authors have considered these points? Or perhaps I have misunderstood their strategy quoted as “we are building positions in commodity currencies (CAD, AUD, RUB)” and they really mean they are shorting them?

    • TheLege:

      Phil, I agree with you that the picture is not as straightforward as the authors paint.

      Their position is that the price of commodities is on its way up and therefore the currencies will do the same — they are going Long the commodity currencies, zero doubt. This trade would have been standard fare in the past but I don’t necessarily think it works this time round because commodity prices might well be rising into a global recession (IMO), with demand (paradoxically) dropping off as prices rise (stagflation as the authors suggested).

      The Long Commodity Currency trade also assumes upward pressure on interest rates, which in Australia’s case would be yet another nail in the coffin for the housing bubble (already under the pump, as you say). Once investors realise the RBA are trapped at close to the lower interest rate bound, you would assume any enthusiasm for the AUD would wane pretty quickly and it would tank. Both government and RBA policy from here on will concentrate almost entirely on trying to prop up the property bubble which is bad news (all day long) for the AUD.

      The only question in my mind is how much inflation the RBA is willing to ensure before they feel compelled to raise rates.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • A Surprise Move in Gold
      Traders and Analysts Caught Wrong-Footed Over the past week gold and gold stocks have been on a tear. It is probably fair to say that most market participants were surprised by this development. Although sentiment on gold was not extremely bearish and several observers expected a bounce, to our knowledge no-one expected this:   Gold stocks (HUI Index) and gold, daily. As noted in the annotation above, a Wells Fargo gold analyst turned bearish at the worst possible moment...
  • May Away
      May Gone in June... Yes, now that June is here, it is indeed the end of May. Theresa May, to be precise, the henceforth former British Prime Minister. After delivering her unparalleled masterclass in “how to completely botch Brexit”, British cartoonists are giving her a well-deserved send-off, which we are documenting below. But first, in case you don't know anything about Ms. May's heroic “Brexit”-related efforts, here is an explanation of how she tried to finagle the best...
  • US Money Supply Growth and the Production Structure – Signs of an Aging Boom
      Money Supply Growth Continues to Decelerate Here is a brief update of recent developments in US true money supply growth as well as the trend in the ratio of industrial production of capital goods versus consumer goods (we use the latter as a proxy for the effects of credit expansion on the economy's production structure). First, a chart of the y/y growth rate of the broad US money supply TMS-2 vs. y/y growth in industrial & commercial loans extended by US banks.   At...
  • Elizabeth Warren’s Plan to Bamboozle American Voters
      A Plan for Everything! The run-up to the presidential primaries offers a funhouse reflection of American life.  Presidential hopefuls, hacks, and has-beens turn to focus groups to discover what they think the American electorate wants. Then they distill it down to hollow bumper stickers. After that, they pump their fists and reflect it back with mindless repetition.   A plea for clemency from Mr. 1/1024th crow. [PT]   Change We Can Believe In.  Feel the...
  • The Ugly End of Globalization
      The Ugly End of Globalization Sometime in the fall of 2018 a lowly gofer at the New York Stock Exchange was sweating  bullets.  He had made an honest mistake.  One that could forever tag him a buffoon.   Art Cashin the living hat-stand, going through a succession of DJIA milestone hats. He promised was going to crack a smile for the Dow 27,000 hat photo, alas, it was not to be. [PT]   After trading sideways for most of the spring, the Dow Jones Industrial...
  • Gold vs. Silver - Precious Metals Supply and Demand
      Is Silver Still Useful as a Monetary Metal? The price of gold jumped a whole twenty bucks last week. We imagine that the marginal gold bug is relieved to be rid of his gold, in this opportunity afforded by the highest price since early April. OK, all kidding aside, the price of silver went up a penny.     The gold-silver ratio keeps hitting new highs recently (this is actually a long-term trend, frequently interrupted by strong rallies of silver against gold). Is silver...
  • Fed Chair Powell’s Plan to Pickle the Economy
      A Loose Relationship The Dow Jones Industrial Average made another concerted run at the elusive 27,000 milestone over the last several weeks.  But, as of this writing, the index has stalled out short of this psychosomatic barrier.  By our estimation, this is for the best.   Since early 2018 the DJIA has gone nowhere, albeit in interesting ways... [PT]   While not always apparent, the stock market generally maintains a loose connection to the underlying...
  • Paul Tudor Jones Likes Gold
      Gold is Paul Tudor Jones' Favorite Trade Over the Coming 12-24 Months In a recent Bloomberg interview, legendary trader and hedge fund manager Paul Tudor Jones was asked what areas of the markets currently offer the best opportunities in his opinion. His reply: “As a macro trader I think the best trade is going to be gold”. The relevant excerpt from the interview can be viewed below (in case the embedded video doesn't work for you, here is a link to the video on...
  • The Italian Job - Precious Metals Supply and Demand
      Lira Comeback? The price of gold jumped 35 bucks last week, and that of silver 48 cents. The dollar is now down to 23 milligrams of gold. Keith is on the road this week, so we will just comment on one thing. If Italy is serious about moving back to the lira, that will make the euro less sound (to say nothing of the lira). That will drive people mostly to the dollar, but also to gold.   Italian deputy prime minister Matteo Salvini (as the leader of the Lega party he is...
  • Bitcoin: What is the Best Day of the Week to Buy?
      Shifting Patterns In the last issue of Seasonal Insights I have discussed Bitcoin’s seasonal pattern in the course of a year. In this issue I will show an analysis of the returns of bitcoin on individual days of the week.   Bitcoin, daily – since bottoming in early December, BTC has advanced quite a bit. It remains an excellent trading sardine. [PT]   It seems to me that Bitcoin is particularly interesting for this type of study: it exhibits spectacular price...
  • Silver Remains a Monetary Metal - Precious Metals Supply and Demand
      Silver Price Driven by Reservation Demand The price of gold went up a buck last week, but the price of silver dropped back 13 cents. And the gold-silver ratio marches further upwards. Keith spoke at a conference this week, about how to analyze the fundamentals of supply and demand in gold and silver. He talked about the basis of course.   Silver coins – silver prices are partly influenced by an industrial demand component, but the fact that they move most of the time with...

Support Acting Man

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

Dog Blow

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

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]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!