“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.
“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.”
Straddles?
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
Year-Over-Year PPI Change Percent – All Commodities – 1980 to Present
Those are year-over-year price changes on a basket of commodities.
Crude 1970 Present
Gold 1970 to Present
Commodity Index 1980 to Present
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
Interesting why would UST finance in 10yr when they could finance for 30 at the same rate of interest? Seems more likely they might go to 50 or 100. I did catch that part about pumping up the dollar which is more of a first order of business. If they can catch the dollars fall then rates can stabilize, which is what all governments want, easy financing. Gundlach isnt’ calling for a bull market in commodities, its a trade and a difficult one to gauge Its not an economic prediction. ZIRP is an economic prediction.
Gold will rise as govt/socialism collapses from the periphery to the core. Inflation will be in taxes and govt over-reach as they try to save themselves.
Speaking of 1929….US treasury bonds and cash were the safe haven during the depression right?
“but I do like gold and gold miners, straight up.” …..Mish, what are your reasons for liking Gold so much at this point in time? Do you think there is going to be inflation?
The 1929 dip is the correct interpretation of where commodities are currently at. There is too much debt, and too much overbuilding (cars, structures, etc.) There is going to be little to no demand for commodities as people liquidate to cover debts.
Leg C down have five legs. Two are counter trend up. Leg 2 of C was sideways, from 2012 to 2014. Leg 4 of C is the current leg. It might be an incomplete “sharp” move up. So, commodities might move further up, for a while. Leg 5 of C will follow, trending down and there after a possibility of prolong trading range. Jeffry might have a point.
A stand alone PPI can be misleading. What did the USD do during the rise of the PPI. In the 1970’s it was Nixon dollar and Yom Kipur war. The USD was in a trading range, finding a spring board in 1978, that led to 1985 Plaza accord. In 1999, 2000, 2001 the USD had x3 tops that led to the absolute low in 2007. This was China Gilden age, feasting on commodities.
The USD found another spring board that leads to a long term dollar uptrend. The USD trend is up.
Looking at $CRB. From the peak, leg A down. Leg B up to the lower high in 2011.
It looks that way.
SPX daily beached the ma(200). SPX week on top of ma(50). Many chart form a channel tilting up, in two parallel lines. The market will recover, for a while, but not for too long.
The support line will be breached, sooner than later.
Count Mishkin win Noble Prize 2032 for his Fed waves research. High US gov deficit, or a future gov shut down, force the US treasury to switch to 5Y – 7Y, or even 10Y duration. That’s supposedly will “engineer” inflation, sending rates higher. A combination of the Fed, in the short duration + US treasury long, both sending rates up. That’s vector up. There is a huge demand for the long duration. That’s vector down. The two vectors oppose each other, nuetralizing a major increase to higher rate, sending gold + oil + commodity up, over 100%, 200%.
Only one chart will move sharply higher : the USD. Currently in a trading range, pumping muscles, ready for a lift up.
One difficulty is the long term trend in commodities is lower and the recent impressive gains were supported by gold, which is the ultimate hedge on monetary excess. What is the likely case for Iron Ore going higher while China is dumping steel? Gundlach wrote “inflation is inflationary” and its possible to have inflation without economic demand.
I agree.
We are on the verge of a sovereign debt crisis caused by rising rates and a rising dollar.
The coming rise in commodities will be due to war and reduced supply caused by crop failures associated with global cooling (yes, they will rise with the dollar and stocks, as confidence in govt implodes with their failed pension promises).
Since govt is too busy scamming new ways to tax, instead of planning for the crisis’, it is highly recommended individuals plan accordingly, which includes selling RE in northern socialist states, and never giving up your guns.
The Huge gains in the PPI occurred mostly well before the recession. I asked: where are we?
This ‘chart’ crap is the astrology of finance.
What is going on with the e mini today?
But Mish after 1960 the pattern is pretty good and those are huge gains in PPI
https://s3-us-west-2.amazonaws.com/maven-user-photos/mishtalk/economics/pY98QOHeFE2eAof6gA5bwQ/jRw_XznyQkeM7XchQ82V8g
Also I’ve got another crazy theory that investors are known to associate the rate of inflation with interest rates.
Going further, it’s quite possible that when investors believe that prices of a commodity are going to rise, they will seek to buy them in the moment to sell them at a higher price later on in time.
https://s3-us-west-2.amazonaws.com/maven-user-photos/mishtalk/economics/pY98QOHeFE2eAof6gA5bwQ/grp_U8_Q-EijRQe3l80GnQ
I’m working on this wild theory that inflation is a, albeit marginal, leading predictor of inflation expectations.