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"Inflation is Inflationary"

Steve Blumenthal, CIO and Executive Chairman of CMG Capital Management took notes at John Mauldin's 2018 economic conference.

He presented his notes in Jeffrey Gundlach, “Inflation is Inflationary”.

Blumenthal's opening snip caught my attention.

“I’m bullish on commodities because we are late cycle… You can argue how late we are in the cycle but we are late cycle.

The bond bulls will argue there is more room to run, but nobody is going to say we are in the first inning or the third inning of an economic cycle. The current cycle is the second longest in post war history. And every time you get late cycle going into the front-end of a recession you have a massive rally in commodities. Every time, there are no exceptions.”

Jeffrey Gundlach [CEO of DoubleLine] went on to say, “What I mean by massive is not a 30% gain, it is 100%, 200% or even 400%.” He likes baskets of commodities.

Emphasis Mine.

Twenty-Six DoubleLine charts followed. Only one of them was on commodities. It was on gold.

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"We’re also at the juncture in gold, not surprisingly, because it is negatively correlated with the dollar. We see that gold broke above its downtrend line, it’s got the same look. But now we see a massive base building in gold. Massive. It’s a four-year, five-year base in gold. If we break above this resistance line one can expect gold to go up by, like, a thousand dollars."

"Will it happen? Well it’s not happening right now, but it’s a very interesting juncture. It’s a great time to be buying gold straddles. Because one way or the other this baby’s got to break in a big way."


What happened to "every time"?

I was hoping for charts that show "every time" rallies in commodities. The score was 0-26, as in no charts. So I put some together.

Let's take a look at the PPI for all commodities, the price of crude, the price of gold, and the $CRB (Reuters/Jeffries Commodity Index).

Year-Over-Year PPI Change Percent - All Commodities - 1915 to1980


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Year-Over-Year PPI Change Percent - All Commodities - 1980 to Present

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Those are year-over-year price changes on a basket of commodities.

Crude 1970 Present

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Gold 1970 to Present

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Commodity Index 1980 to Present

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The $CRB is the Thomson Reuters/CoreCommodity CRB Index.

It currently consists of 19 commodities. The index has changed over time but petroleum always made up 33% of the index.

"All of these changes have been part of the continuing effort of Thomson Reuters to ensure that its value provides accurate representation of broad commodity price trends."

Clearly we do not get a "massive" late-cycle commodity rally "every time".

Also note that the huge gain in PPI in late 2000s was underway for many years prior, not just a "late-cycle" move.

The question at hand right now is simple: Is this more like July of 1981, July of 1990, or December of 2008 when there was one huge blast higher in oil?

I do not know, nor does anyone else but I do like gold and gold miners, straight up.

Mike "Mish" Shedlock