You can’t just print money hand over fist (more on that in a sec) and expect prices will sit on their ass and not go anywhere. So, here’s a good bit of evidence that argues for a hyperinflationary blow-off now just beginning to coil up to strike:
“The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent in August on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.7 percent before seasonal adjustment. The seasonally adjusted increase in the all items index was the largest since June 2009. About 80 percent of the increase was accounted for by the gasoline index, which rose 9.0 percent and was the major factor in the energy index rising sharply in August after declining in each of the four previous months.
The food index increased 0.2 percent in August, with major grocery store food group indexes mixed. The index for all items less food and energy rose 0.1 percent for the second month in a row. The indexes for shelter, medical care, personal care, new vehicles, and recreation all rose in August. These increases more than offset declines in the indexes for used cars and trucks, apparel, household furnishings and operations, and airline fares.
The 12-month change in the index for all items was 1.7 percent in August, an increase from the July figure of 1.4 percent. The index for all items less food and energy rose 1.9 percent for the 12 months ending August, a slight decline from the 2.1 percent figure in July and its smallest increase since July 2011.”
Although this is certainly constructive for gold and stocks (inflation proxies) there has been a pullback from earlier post Fed printing euphoria of yesterday. Still, up, up, and away. Or, hyperinflation, he we come…
In yesterday’s report I outlined a (sorry) very pessimistic outlook for developments to come in the Middle East. This was reinforced this morning when the fallow-up, in-depth reports began to come out. One example is the number of reports circulating that indicate the US was warned in advance, yet did nothing. Demands by the press for a review copy of embassy security video is starting to be heard, as well.
Another angle of this is that the names of Libyans who were working with the West has apparently been compromised. As I suggested to you in the Thursday report, the whole “Islamists forward/Arab Spring” delusion has done little but allow the West to complete half of a number of theocratic revolutions. The other half – if you’re having trouble connecting dots – is in play now.
As the sun comes up over America, more protests are planned, and while it could blow over, there are more protests underway now. And the proximity of the US presidential election is becoming more important by the day.
Speaking of the impact of this week’s events on foreign policy, we must note in passing that it could lead to a major swing in favor of republican hopeful Mitt Romney. As you may have noticed, the Mittster’s main thrust in recent weeks had been calling out Obama on economic issues. That wasn’t getting much traction, however.
But now, with a policy failure – particularly with the reports of 48-hours and Washington sitting on its hands – the Romney camp is shifting gears and hitting on foreign policy blunders.
Economic Fallout: Sitting on Pins & Needles
Although much of the US market’s advance had been laid at the feet of Ben Bernanke’s Fed, which indeed did announce QE 3 – a $40-billion per month print rate for dollars (effectively), foreign policy may be the real driver here. The sea-state change is there won’t be a QE4 - this has become an open-ended policy.
Only somewhat joking, I called my friend and very good market technician Robin Landry yesterday. “Your alternative outcome looks like it will show up…we’re going to print like crazy, borrow money from ourselves, and pretend we’re still rich. So where’s the next stop?” I inquired.
“We’re not out of the woods yet. The S&P went beyond my target range (1,438-1,450) but the over thrust is still within the possibility of at least a short term top if not the top of a much larger degree. I will be looking at the correction that is sure to follow very soon which will help me determine the wave count. There’s some minor resistance around 1,478…”
Interesting for Peoplenomics.com subscribers, our trading model did just great on this one. It’s been long for many weeks now, despite my inclinations to be a Nervous Nelly and jumping on the short side. Time will tell…so I’ll be waiting for Landry’s update and looking at our indicators.
This is the hard part of investing…just like “flying the instruments” is the hard part of flying. When you’ve got vertigo, and your inner ear is screaming “Up is off over your left shoulder and behind you somewhere” it’s hard to look at the panel and trust your instruments. I watch my charts, Landry watches his proprietary indicators, pilots watch the panel.
The foreign policy blunder has caused a drop of confidence in the dollar. As I’ve showed you many times before, when the underlying valuation of the dollar goes down it takes more dollars to buy a thing. So the price shares goes up. As it did yesterday.
If the dollar heads back up, however, which it’s likely to do in a pullback, stock prices and gold ought to both come down roughly in tandem.
Gold’s Further Problem
A number of people are putting their street creds on the line, expecting this to have just been a short-lived overthrust. Bob Prechter (see his Elliottwave notes, updated daily, bottom of this page above the chart) admits the upside case is possible, but he’s still in the bearish – could all fall apart here – camp.
Then there was the note from the Economic Fractalist, Gary Lammert: He’s figuring that a top for gold is either in, or close at hand:
“George, if the old grizzled fractalist were a speculator, (he is not) he would have purchased the US dollar near the end of the Thursday 13 September 2012 trading day. The herd follows the news, George; the scientist with his pattern-recognition organic gray-matter computer(and likely the low level Sequoia equivalent computers of Wall Street) follow the asset debt systems’ time based quantum asset valuation fractal patterns. And asset-debt saturation macroeconomics is … a patterned science equal to physics, chemistry, and biology…… Remember this … during the euphoria that represents this short time era for equities (exactly like early October 2007)and for the old yellow relic …. for every buyer(debtor) there is a smarter seller(lender) …. Saturation Economics prospectively picked 13 September as the 11 Oct 2007 secondary valuation high for the Wilshire and for the XAU … ‘
The details of his rationale is in the article “The Historical Gold Crash (after 13 September 2012). The New Quantum Science of Lammert Asset-Debt Saturation Economics.“
Which leaves little guys (like me) in a pickle: Do I sell my one gold coin in here, and believe that this is just the bounce top off the decline from all-time highs? Or, with the Fed publicly admitting to $40-billion a month in print-ourselves-rich overcome that? Damn….where’s my crystal ball?
An Instrument Check & And the Paradox Laid Out
In times like this – when the data and outlooks seem conflicting – I try to remember to “fly the numbers.” More tomorrow morning for Peoplenomics subscribers, but please notice that the Fed’s M1 money supply is edging up today hyperinflationary rates, being printed in the last 3-months at a 15.4% annualized rate while the broader M2 is going up ()basis the last 3-months) at a 6.5% annualized rate.
Since both of these are well above 12-month rates, and since deflation has been somewhere between 1.5 and 4.5%, we can assume the Fed is running the “print to win” play here, which argues for higher prices to come. We’ll update our trading model after the close today and roll it out for subscribers tomorrow on the Peoplenomics site.
For today…it’s a blow off top – this morning’s CPI is not a bummer. It’s inflationary. But as Landry notes, it will be the pullback that tells the tale of where we’re going long-term, but a double top at the old all-time high may be in the cards or event a Dow around 16,000. Just depends.
The paradox being:
Weak Obama >> No response >> falling dollar >>>rising gold and equity prices is one track. The other is:
Strong Obama >> Huge response >> rising dollar >>> falling gold and equity prices.
So if you’re wondering why Obama is playing it weak? There’s the answer in dollars and cents. Falling dollars push up gold (and stock) prices. A moderate response by Obama may be cynically calculated to ensure that when a presidential response comes on the foreign policy level, we will ONLY see a pullback in stocks to the recent breakout range (*1,450 on the S&P).
Of course, there’s also an indecisive muddle-through, too…
Synthesizing it all: Obama’s quiet over the weekend. Dollars falls more to mid next week, gold and silver advance. Since stocks are “things” they pop up 100-400 points from here. Then the US responds sometime next week (or the week after) once the printing glee fades, and the market pulls back as the dollar gains value again. Gold, silver, and equities fall.
The response and timing (as should be obvious) should be managed to keep the S&P safely above 1,430 through elections. After that? Doesn’t matter. Washington’s idea of long-term right now is 53 days. Muddle to there is the major care.
If the US gets testosterone up? I’d want to be short stocks and out of levered gold positions…but this ain’t investment advice, of course.
Halliburton Goes Hunting
A 7-inch radioactive probe is missing somewhere out near Pecos according to reports.
Yep, it’s true. the Security State has gone so far overboard that now we have camera watching (I can’t make this up) cameras.
The Friday Shakes
Nothing big on the seismo’s but there’s a volcano popping in Guatemala.
More after this…