- “Early warnings” of a 1970s-style runaway inflation
- Bond market sniffing out inflation even before Trump’s election…
- … and now comes his infrastructure spending spree
- Welcome back to the days of “deficits don’t matter”… until they do
- Post-election winners: Financials, biotech, defense… and private prisons?
- Lawsuit-happy prince’s change of heart on Trump… The 5 accused of “weaseling” out… the latest on India’s botched currency ban… and more!
“We are not yet at the stage of 1970s-style runaway inflation, but some early warnings are in the air.”
Jim Rickards wrote that on Tuesday to readers of Rickards’ Strategic Intelligence while voters were still going to the polls. Now that we know who will be the next president, those “early warnings” are even more insistent.
“One of the great mysteries of the past eight years,” says Jim Rickards, “is why there has not been more consumer price inflation despite the fact that the Federal Reserve has printed over $3 trillion in new money.”
But it’s no mystery once you remember that inflation requires both a high supply and low demand for money. It’s what economists call “velocity.”
“Most of the money printed by the Fed was simply deposited with the Fed by the big banks in the form of excess reserves,” Jim explains. “That money was never borrowed or spent. Therefore, it never had the kind of velocity needed to produce price increases.”
And while consumer inflation has been largely dormant, asset inflation is another matter. The S&P 500 bottomed at the infamous 666 level in March 2009; as we write this morning, it’s 2,155. Bubbles have also reappeared at times in real estate and commodities.
“Now,” says Jim, “we may have reached a turning point where consumer price inflation is kicking in.”
The bond market has been sniffing that out for weeks. Below is a chart of the “10-year breakeven inflation rate.” It’s a gauge of investor expectations for average annual consumer price increases over the next 10 years. (If you want to be precise, it’s the yield spread between 10-year Treasury notes and 10-year TIPS — Treasury Inflation Protected Securities.)
While it’s still very low… last week, it reached the highest level since July 2015…
With the ascension of Donald Trump, those inflation expectations are only growing.
Already, the Financial Times has taken to calling it Trumpflation — “as investors anticipate a program of large-scale fiscal stimulus that could ultimately spur stronger inflation and higher interest rates.”
“Large-scale fiscal stimulus” is wonk-speak for the yuuge public works program Trump surely wants to pass in the first 100 days.
It was the first policy statement out of his mouth during his victory speech: “We are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools, hospitals. We’re going to rebuild our infrastructure, which will become, by the way, second to none. And we will put millions of our people to work as we rebuild it.”
And don’t kid yourself: A Republican-controlled Congress will go along with it. They’ll find plenty of “shovel-ready projects.”
Yeah, a few backbenchers will pay lip service to whether Uncle Sam can afford it. And then they’ll get steamrolled by the feckless phony fiscal conservatives like House Speaker Paul Ryan — who we called out years before it was trendy to do so.
It’s going to be like Bush 43’s first term again. Remember Dick Cheney’s infamous phrase “Deficits don’t matter”? That’s what we’re going back to. Small-government Republicans will get bought off with pork projects for their districts… and those who refuse to sell out will suddenly face well-funded primary opponents.
Trump’s infrastructure program will play right into the hands of the global elites — who are desperate to create more inflation. It’s an ideal form of what central bankers call “helicopter money.”
“Helicopter money results when governments run larger deficits and central banks print the money to cover the deficits,” Jim Rickards explained here in June. “Central banks have been printing money since 2008. The problem is banks won’t lend it and people won’t spend it.
“Helicopter money cuts out the middleman. Governments just borrow and spend the money directly without waiting for the banking system to do the job. Central banks pick up the tab.”
Here’s the thing: Deficits don’t matter… until the moment they do. And markets are already sniffing that out.
During yesterday’s wild market action, Treasuries sold off hard. When bond prices fall, yields rise… and the yield on a 10-year note sailed above 2% for the first time since January. That’s the market saying Uncle Sam might not be such a great credit risk going forward.
Back to the Financial Times: “What’s causing acute consternation is how this will play out after almost a decade of ultralow levels of interest rates, and central bank purchases that have encouraged record levels of debt and pushed investors to buy bonds with longer maturities.”
Those ultralow interest rates since 2008 have been terrible for savers… but they’ve been great for Uncle Sam.
The national debt has nearly doubled under Obama, from $10 trillion to $19.8 trillion… but the cost of servicing that debt is actually lower. In 2008, Uncle Sam’s interest expense was $451 billion. In the fiscal year that ended just a few weeks ago, the total was $433 billion.
If interest rates rise, that convenient arrangement comes to an end. The deficit starts blowing out… the market pushes interest rates higher still… which piles even more interest onto the national debt… and so on. And inflation takes off.
“This is dangerous because it feeds on itself,” Jim warns. “Once inflation starts, individuals expect more. They start to change their behavior by borrowing and accelerating purchases. As expectations switch from deflation to inflation, it is difficult to switch them back again.”
That’s what happened in the 1970s. We’re nowhere near there now. But the helicopters are already firing up to lead the way.
To the markets, where the Dow industrials might well set a record by day’s end. As we write, the Big Board is up more than 150 points, to 18,743.
The 10-year Treasury yield is approaching 2.1%. Gold has sunk more than three-quarters of a percent, to $1,268. Crude pushed well past $45 yesterday, but today has sunk back to $44.68.
The big earnings number this morning is Macy’s. It missed expectations, but it’s up 7% because it “guided higher” on sales going into the holidays. It also announced plans to redevelop 50 stores.
Engineering firms are adding to yesterday’s gains in anticipation of all that federal money from a Trump infrastructure program. Financials are also solidly in the green again; the Street is hopeful Trump and a GOP Congress will scale back the 2010 Dodd-Frank Act.
Biotech is also enjoying a post-election glow.
“In a tweet that roiled the market last year,” Ray Blanco reminds us, “Hillary Clinton recommended implementing pharmaceutical price controls, and continued to make it a political focus throughout her campaign. Naturally, fresh off the heels of a Trump win/Hillary loss, investors started snatching up shares in the biotech sector left and right.”
It didn’t hurt that Californians rejected Proposition 61. The measure would have capped drug prices for state health care programs at the same levels paid by the federal VA — which negotiates with drugmakers for lower prices. Big Pharma spent a ton of money on commercials warning of potential shortages if the referendum passed.
“It’s possible this biotech pop is the beginning of a return to market sanity for the sector,” Ray concludes, “and could signal more big moves in the months ahead.”
Defense stocks are also enjoying a Trump bump — ITA, one of the big defense ETFs, has jumped from $130 to $138 in the last day and a half.
Hmmm… Maybe Trump doesn’t really mean it when he talks about pulling back from America’s vast military obligations worldwide.
During the campaign, he said he’d pull U.S. forces out of South Korea unless the South Korean government helped foot more of the bill. But according to the South Korean press, Trump has already called President Park Geun-hye and promised to stick to Washington’s existing commitments.
And holy moly, the private prison stocks.
CoreCivic (CXW) — the new name for Corrections Corp. of America, which we’ve written about in the past — soared 43% yesterday. GEO Group (GEO) leaped 21%.
That’s a stunning development in light of all the marijuana ballot measures that passed on Tuesday; going forward, many fewer people stand to be locked up for simple possession.
But the Street seems to be betting that Trump’s general law-and-order stance — and his specific pledge to crack down on illegal immigration — will keep America No. 1 among all nations when it comes to the percentage of its population behind bars. USA! USA!
What a difference an election makes. Barely a year ago, Saudi Arabia’s playboy billionaire Prince Alwaleed bin Talal put out the following tweet…
Guess that’s all bygones now.
Really, these guys are birds of a feather — at least when it comes to filing frivolous litigation. Prince Alwaleed got some virtual ink here in The 5 a few years back when he sued Forbes for low-balling his net worth on the magazine’s list of the 400 richest people in the world.
Alwaleed sued in Britain, whose libel laws have a lower standard of proof — something Trump has publicly praised. Two years after Alwaleed filed, it was settled on terms neither party would disclose.
“Don’t be a weasel,” a reader writes after yesterday’s episode.
“Rickards deserves credit for the call on the election and a big fat brickbat for the call on the market swoon. That was a whiff of major proportions. Just admit it.”
“Jim called it right,” writes another, “but it was only overnight, so by the time I was able to do anything, the market had already recovered by the time it opened in the U.S.”
“What happened to ‘plus plus plus’?” writes a third. “I saw no gains but a lot of minuses, even though I had the day off and made trades as quick as I could.”
Your editor was not purposely glossing over the performance of Jim’s recommended trades. The market was moving very fast — faster than I was keeping up with on less than four hours of sleep, having stayed up late watching the returns.
That’s an explanation, not an excuse. Heh…
As for the trades, “markets moved exactly as we expected,” says Jim. “What was not expected was that the drawdown and the bounce-back would happen in hours, not days.”
“We were disappointed,” adds Jim’s chief analyst Dan Amoss. “But we remain confident that the models behind our trades are very effective and will deliver readers a series of profits over time.”
“It seems that this is not the typical war-on-cash move,” a reader writes of the news from India noted here yesterday. “They’re not outlawing larger-denomination bills.
“This sounds more like an effort to remove bogus bills from circulation to replace them with bills that will be more difficult to counterfeit.”
The 5: It’s not the usual playbook. But Prime Minister Modi is crystal clear about the intentions — to crack down on “black money” cash transactions that can’t be taxed and corral more Indians into the banking system.
And the decree is being executed with the usual efficiency we’ve come to expect from governments everywhere…
The 5 Min. Forecast
P.S. CNBC reports that President-elect Trump’s advisers have considered JPMorgan CEO Jamie Dimon for Treasury Secretary.
Jamie. Freakin’. Dimon.
How’s that hopey-changey stuff workin’ out, 36 hours after Trump’s victory speech?
This development is exactly the sort of thing our David Stockman worries about now that Trump’s been elected — enough that he’s willing to send you a free copy of his hot-off-the-presses book Trumped! A Nation on the Brink of Ruin — and How to Bring It Back. It’s your essential guide for the next four years. Claim your copy right here.
P.P.S. Out of nearly 700 U.S. counties that went for Obama in 2008 and 2012… 209 voted for Trump this year. Exit polls uncovered substantial numbers of Americans who voted for Obama and then for Trump.
What will they do when Trump also turns out to be a disappointment?
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