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Re: The American Bond Crisis
This is why iTulip took the "buy gold" position in 2001. Indebted governments don’t want interest rates to rise above the rate of inflation, and whenever they suppress the natural tendency of markets to price inflation risk into bond prices inflation goes through the roof. All you have to do to trade the gold market is note the direction of the spread between the 10 year and inflation. Even the phony gov’t inflation numbers will do for this purpose. The big spike in commodity prices noted above correlates to the 10yr and inflation parting ways in 2003.
We're selling as soon as we get the impression that 10 yr bond yields are going to rise above the rate of inflation. Last time this happened inflation expectations were so deeply embedded in contracts after more than 10 years of inflation that the Volcker Fed had to raise rates until the 10 yr yield was 9% over the official inflation rate CPI-U before money exited hard assets for financial assets. Inflation is not as bad this time, yet, but we don't see how the Fed can try to push long rates even to parity with the inflation rate with $6 trillion in debt leverage in the financial markets and the economy already in recession. As a matter of fact, by providing all of this liquidity they are doing the opposite.
Originally posted by kelton56
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Inflation adjustment of wages is necessary on account there has been so much inflation as shown here in commodity prices.
From Rick Ackerman's "Inflation's Last Gasp" Commentary:
"Eric argues that commodity price-inflation is a leading indicator of wage inflation, and that wages are therefore all but ordained to play catch-up. Our response is that this commodity inflation is very different from all others before it simply because it has been fueled, not by physical demand, but by torrents of speculative capital fleeing rapidly deflating financial assets. If ever there were a trend that could not continue for long and which is likely to end in a crash, this is it."
"Eric argues that commodity price-inflation is a leading indicator of wage inflation, and that wages are therefore all but ordained to play catch-up. Our response is that this commodity inflation is very different from all others before it simply because it has been fueled, not by physical demand, but by torrents of speculative capital fleeing rapidly deflating financial assets. If ever there were a trend that could not continue for long and which is likely to end in a crash, this is it."
My comment: It would appear that Rick Ackerman believes the chart above to be the sole result of speculative froth entering the commodities markets - only recently - hence the "but this time it's different" argument. Clearly the chart shows the most recent commodities surge to have begun in 2002 or so, which, of course, long predates "torrents of speculative capital fleeing rapidly deflating financial assets" as hysterical hedge fund managers belatedly realize Jim Rogers was right about commodities in 1999.
As the chart clearly illustrates, a long run-up in the 1970s was followed by 20 years of bull-bear appreciation/correction, but for the most part held a significantly higher plateau comapred with prior to 1973.
As the chart clearly illustrates, a long run-up in the 1970s was followed by 20 years of bull-bear appreciation/correction, but for the most part held a significantly higher plateau comapred with prior to 1973.
I do not disagree with Ackerman that there could be exciting swings above and below the current price levels of commodities given an ample amount of speculation in the past year, but more likely is the global-demand-based possibility of sustaining a new plateau at much higher price levels, which, eventually, always will result in wage inflation. Think of those who entered the workforce after college in the late 1970s, probably at about $10K a year, only to see that jump to $30K- $40K within 5 years or so as the rampant inflation of the era worked its way through the economy.
I also think that China, with all that potential for social unrest over food and fuel prices and shortages, and all those U.S. dollars it owns devaluing daily, will be more than happy to put the greenbacks to work buying some social stability.
Unless every American renounces consumerism and returns to three-generations living together in thousand-square-foot housing and no cars, I think we're gonna see inflation.
We're selling as soon as we get the impression that 10 yr bond yields are going to rise above the rate of inflation. Last time this happened inflation expectations were so deeply embedded in contracts after more than 10 years of inflation that the Volcker Fed had to raise rates until the 10 yr yield was 9% over the official inflation rate CPI-U before money exited hard assets for financial assets. Inflation is not as bad this time, yet, but we don't see how the Fed can try to push long rates even to parity with the inflation rate with $6 trillion in debt leverage in the financial markets and the economy already in recession. As a matter of fact, by providing all of this liquidity they are doing the opposite.
Stocks Up Sharply After Fed Credit Plan
Tuesday March 11 2008 (Joe Bel Bruno, AP Business Writer)
Wall Street Moves Sharply Higher After Fed, Other Central Banks Move to Ease Credit Crisis
NEW YORK (AP) -- Wall Street rebounded sharply Tuesday after the Federal Reserve and other central banks said they will pump $200 billion into the financial markets to help ease the strain from the credit crisis. The Dow Jones industrials surged nearly 230 points.
Tuesday March 11 2008 (Joe Bel Bruno, AP Business Writer)
Wall Street Moves Sharply Higher After Fed, Other Central Banks Move to Ease Credit Crisis
NEW YORK (AP) -- Wall Street rebounded sharply Tuesday after the Federal Reserve and other central banks said they will pump $200 billion into the financial markets to help ease the strain from the credit crisis. The Dow Jones industrials surged nearly 230 points.
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