Is the Bond Market About to Call the Fed"s Inflationary Bluff?

Perhaps the single biggest development this year, as far as the markets were concerned, was the Fed admitting on the record that it has no idea what is going on with inflation.

This represents a kind of endgame for the Fed. Since the early ‘80s, the Fed has been actively understating inflation via a variety of gimmicks.

It first removed home prices and replaced them with “owner’s equivalent rent.” Doing that removed any sharp rise in home prices from affecting inflation data, thereby downplaying the official inflation rate.

Then in 1998, the Fed started playing around with “hedonics” (think food and energy prices). The Fed claimed that the goal was to somehow balance the deflationary forces of technology vs. the inflationary forces of hedonics items… but the reality was that this was just another gimmick to understate inflation.

Then, finally in 1999, the Fed introduced the idea of “substitutions.” Here again the Fed claimed it was trying to get an accurate read on inflation (the Fed argues here that if a consumer cannot afford steak anymore, the fact he or she can substitute hamburger indicates his or her quality of life is roughly the same as before).

And once again the goal was to understate inflation.

I realize this is getting a bit complicated, so let’s put this in simple terms…

1)   Since the early ‘80s, the Fed has been employing various gimmicks to hide the real rate of inflation.

2)   Doing this allowed the Fed to overstate GDP growth while understating the true decline in incomes/ quality of life for most Americans.

This game worked for a while, but this year the whole scheme crashed into a wall when the various gimmicks resulted in data that made no sense what-so-ever.

At a time when the NY Fed’s UIG inflation measure and the Atlanta Fed’s “sticky inflation” measure, showed inflation at 2.8% and 2.1% respectively, the Fed’s official inflation measures (CPI and trimmed PCE) were clocking in at 1.7% and 1.4%,

The Fed’s Board of Governors had a choice here:

1)   Admit the official inflation numbers were garbage

Or…

2)   Act surprised by the official rate being so low and claim it’s an anomaly.

The Fed went with #2 in what was one of the most insane Fed statements ever. According to the Fed’s July FOMC statement…

• Most participants expect inflation to pick up over the next couple years.


• Many Fed participants think inflation will remain below 2% longer than expected.


• Many Fed participants believe that inflation measures dropped recently due to “idiosyncratic factors.”


• A few Fed participants believe the Fed’s framework for forecasting inflation is no longer valid.


• Some Fed participants noted their increase uncertainty about the outlook for inflation.

Put simply: the Fed admitted that it no longer had a clue what was going on with inflation. It has since maintained this “who knows!” shtick (I note that Fed Chair Janet Yellen, in last week’s conference stated that the Fed’s understanding of inflation is “imperfect.”)

Why does this matter?

As I explain in my bestselling book The Everything Bubble: the Endgame For Central Bank Policy, US sovereign bonds (also called Treasuries) trade based on inflation expectations.

Put simply, when inflation spikes higher, so do Treasury bond yields.

When bond yields rise, bond prices fall.

When bond prices fall, the Bond Bubble bursts.

When the Bond Bubble bursts, the EVERYTHING bubble follows.

Well, guess what? The yield on 10-Year US Treasuries is spiking, having broken above its 20-year trendline.

What"s coming will take time for this to unfold, but as I recently told clients, we"re currently in "late 2007" for the coming crisis. The time to prepare for this is NOW before the carnage hits.

On that note, we are putting together an Executive Summary outlining all of these issues as well as what’s to come when The Everything Bubble bursts.

It will be available exclusively to our clients. If you’d like to have a copy delivered to your inbox when it’s completed, you can join the wait-list here:

https://phoenixcapitalmarketing.com/TEB.html

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

The Fed Isn"t "Confused" About Inflation... It WANTS You In the Dark!

The Fed claims it’s “confused” as to why inflation remains so low.

The Fed isn’t confused at all. It intentionally measures inflation in ridiculous ways to guarantee that the “official number” remains nowhere near reality.

On top of this, we have factual evidence that Fed is in fact well aware that inflation is clocking in well above its 2% "target.”

Indeed, the New York Fed’s UIG inflation measure (which includes a “full data set,” unlike the ridiculous CPI which ignores most costs of living) records inflation between 2.25% and 3%.

-the UIG measures currently estimate trend CPI inflation to be in the 2.25% to 3.00% range, with both registering above the actual twelve-month change in the CPI.

Source: the New York Fed

So the New York Fed, the branch of the Fed that is in charge of market operations, is well aware that inflation is well over 2%.

It"s not the only Central Bank is aware of this either. The Central Banks of China, Russia, and Germany also know inflation is in fact higher than the Fed claims... which is why ALL of them are loading up on Gold by the ton.

What do they see coming?

A $USD collapse like this:

Put simply, BIG INFLATION is THE BIG MONEY trend today. And smart investors will use it to generate literal fortunes.

Imagine if you"d prepared your portfolio for a collapse in Tech Stocks in 2000... or a collapse in banks in 2008? Imagine just how much money you could have made with the right investments.

THAT is the kind of potential we have today. And if you"re not already taking steps to prepare for this, it"s time to get a move on.

We just published a Special Investment Report concerning FIVE secret investments you can use to make inflation pay ou as it rips through the financial system in the months ahead

The report is titled Survive the Inflationary Storm. And it explains in very simply terms how to make inflation PAY YOU.

We are making just 100 copies available to the public.

To pick up yours, swing by:

https://www.phoenixcapitalmarketing.com/inflationstorm.html

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

Looking For Inflation In All The Wrong Places

Authored by John Rubino via DollarCollapse.com,

A policeman sees a drunk man searching for something under a streetlight and asks what the drunk has lost. He says he lost his keys and they both look under the streetlight together. After a few minutes the policeman asks if he is sure he lost them here, and the drunk replies, no, and that he lost them in the park. The policeman asks why he is searching here, and the drunk replies, “this is where the light is”. — The Streetlight Effect

The drunk in the above story is an idiot, of course. But no more so than modern economists who can’t find inflation because they’re looking only at the part of the economy covered by their government’s Consumer Price Index.

But gradually, grudgingly, a handful of mainstream economists do seem to be figuring out that the soaring value of stocks, bonds, real estate, fine art, collectibles and cryptocurrencies is a legitimate sign of a depreciating currency and future instability.

Inflation, in other words. From yesterday’s Morningstar:

Lack of inflation is a global issue

(Morningstar) – The lack of inflation is a global issue. Unemployment is at cyclical lows in the US, Germany, and Japan, yet in each of these countries there is only small evidence that wages are picking up. No doubt globalisation and technology are common factors that have helped constrain wages across countries.

The de-synchronised nature of the recovery until now has also capped inflation in countries whose currencies have appreciated on cyclical outperformance. From here, however, common global uplift should help neutralise some of these inter-country effects, and allow domestic conditions to play out more powerfully.

 

Central banks have been puzzled by the lack of inflation, but have not stepped away from its management as the primary goal of policy.

 

However, they’ve responded to the way QE’s impact has been much stronger in financial markets than the real economy by making financial conditions a larger part of their thinking, even if they’ve not formalised this in policy frameworks.

 

With inflation projected to lift and financial markets strong, we expect central banks to continue to gradually tighten.

 

Year to date, bond yields have drifted lower and curves are flatter, while credit spreads have continued to tighten.

 

Valuations of fixed-income assets have moved further into expensive territory with few exceptions. Term premium is close to historic lows and credit spreads at post-GFC tights.

 

Given this backdrop, our process continues to suggest defensive positioning remains appropriate until better value is restored. We see higher inflation and/or a faster pace of policy tightening as possible triggers.

This acknowledgement that soaring asset prices are kind-of-sort-of inflation is definitely progress, though the struggle it took to get there was obviously considerable.

A single paragraph stating that asset bubbles constitute an especially destabilizing kind of inflation and therefore caution is advisable going forward would have made the point in a fraction of the time.

But it’s better than nothing. And who knows, maybe it’s the start of a trend.

The Complete Idiot"s Guide To The Biggest Risks In China

With both commodities and Chinese stocks suffering sharp overnight drops, it is hardly surprising that today trading desks have quietly been sending out boxes full of xanax their best under-25 clients (those veterans who have seen one, maybe even two 1% market crashes), along with reports explaining just what China is and why it matters to the new generation of, well, traders. One such analysis, clearly geared to the Ritalin generation complete with 3 second attention spans, comes from Deutsche Bank which in a few hundred words seeks to explain the key risks threatening the world"s most complex centrally-planned economy, and ground zero of the next financial crash.

Which, one day after our summary take on why the Chinese commodity, economic and financial crash is only just starting (as those who traded overnight may have noticed), is probably a good place to reiterate some of the more salient points.

As Deutsche Bank"s Zhiwei Zhang writes in "Risks to watch in the next six months", the key thing to keep in mind about China now that the 19th Party Congress is in the rear-view mirror, is that the government is likely to tolerate slower growth in 2018. Han Wenxiu, the deputy head of the Research Office of the State Council, said that GDP growth at 6.3% in 2018-2020 would be sufficient to achieve the Party"s 2020 growth target. And while this is a positive message for the long term, it indicates growth will likely slow in 2018. And, as DB warns, recent economic data suggest the economic cycle has indeed cooled down.

For all those seeking key Chinese inflection points, here are the three big red flags involving China"s economy:

• For the first time since Q4 2004, fixed asset investment (FAI) growth turned negative in real terms in Q3 this year.
  
  


• Growth of property sales for the nation turned negative as well in October, the first time since 2015.
  
  


• The property market boom in Tier 3 cities is also losing momentum.
  

We hope not to have lost by now all the Millennial traders who started reading this post. To those who persevered, here - in addition to the risks facing the economy - are the other two main risks facing China"s investors: (rising) inflation and (rising) interest rates.

The details:

Inflation. The benign headline CPI masks an important underlying trend. Nonfood inflation has been rising steadily – it reached 2.4% in Oct, an unusually high level compared to the historical average of 1.3%. This is largely driven by services prices, such as healthcare(7.2% yoy), education(2.8%), and domestic services(4.3%). Headline CPI inflation is expected to reach 3.1% by February 2018, with DB"s baseline is that inflation will moderate in H2 2018, but watch out for the risk scenario that it will stay above 3% through the rest of 2018.

If inflation becomes persistently high, the central bank"s hands will be tied, making any monetary loosening more unlikely, if not further tightening.

Interest rates. Interest rates are climbing around the globe, but more so in China than in the US.

Clearly it is not because of demand in the real economy, judging by weaker investment. One likely explanation is that financial deleveraging has caused NBFIs to reduce their (often leveraged) exposure to longer maturity assets. Inflation expectation may also play a role. If these are true, interest rates may face persistent upward pressure. This will in turn suppress borrowing: for example, LGFVs issue less bonds during periods of rising interest rates.

And while Deutsche"s veteran Chinese analysts have some soothing words for the world"s 25-year-old traders who have yet to see a bear market, and promise that nothing will break in China, we would disagree because as we have said for the past 3 years, the next global crisis will start in China, and with Xi"s role cemented for the next 5 years (if not for life) the smart thing would be to have the Chinese economic hiccup (because recession is clearly a taboo under central planning) as soon as possible, so the economy can recover by 2022. Judging by the tremors in the past few days, he may agree.

Who Are You Going to Trust, the Fed or $76 Trillion in "Smart Money"?

Let’s talk about inflation.

There are two types of inflation in the world… the “inflation” that you and I experience in the form of a rising cost of living induced by Central Banks devaluing our currencies…

...and the inflation that Central Banks are “targeting” in the bizarre claim that somehow hitting said targets will unleash economic growth.

Inflation #1 is depicted in the chart below. This is the reason why everything "costs" more today than it used to.

Inflation #2 is some kind of nebulous concept that Central Bankers talk about without ever admitting that they themselves change how they define “inflation” to suit their political purposes.

Indeed, hearing a Central Banker talk about how we need to target inflation in light of the above chart is like hearing a raging drunk talk about targeting an appropriate level of drinking.

Jokes aside, inflation is a painful reality for the world. And the bad news is that it’s about to worsen dramatically.

Why does this matter?

Because the Bond Bubble trades based on inflation.

When inflation rises, so do bond yields to compensate.

When bond yields rise, bond prices FALL..

And when bond prices fall, the Everything Bubble bursts.

The sovereign bond market is over $76 trillion in size. It"s the "smart" money in the financial system. So when it starts to "speak" it"s smart to listen.

With that in mind, take a look at the chart for the 10-Year US Treasury. We’ve already taken out the bull market begun in 2007. The single most important bond in the world is tracking lower just as housing prices did in 2006 before the housing bubble burst.

Put simply, BIG INFLATION is THE BIG MONEY trend today. And smart investors will use it to generate literal fortunes.

Imagine if you"d prepared your portfolio for a collapse in Tech Stocks in 2000... or a collapse in banks in 2008? Imagine just how much money you could have made with the right investments.

THAT is the kind of potential we have today. And if you"re not already taking steps to prepare for this, it"s time to get a move on.

We just published a Special Investment Report concerning FIVE secret investments you can use to make inflation pay ou as it rips through the financial system in the months ahead

The report is titled Survive the Inflationary Storm. And it explains in very simply terms how to make inflation PAY YOU.

We are making just 100 copies available to the public.

To pick up yours, swing by:

https://www.phoenixcapitalmarketing.com/inflationstorm.html

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

Riding The ‘Slide’: Is This What the Next Bear Market Looks Like?

Submitted by ffwiley.com

Even as the Fed’s decision makers are beginning to worry less about recession and more about bubbly stock prices, we’re not yet moved by their attempts to curb the market’s enthusiasm. After all, the fed funds rate sits barely above 1%, which not too long ago qualified as a five-decade low. And other indicators, besides interest rates, aren’t exactly predicting the next bear, either. Inflation is subdued, credit spreads are tight, banks are mostly lending freely and the economy is growing, albeit slowly. It just doesn’t feel as though we’re close to a major market peak.

All that being said, we’re not so much about feelings as we are about delving into history (nerds that we are) and seeing if there’s anything we can learn. Let’s look at the last 90 years to see if any bear markets began under similar conditions to those today.

We’ll consider thirteen bears, as listed in the table below. (Our list may be different to yours, mainly because we use Robert Shiller’s monthly average S&P 500 prices, instead of daily prices, but also because we reset the cycle whenever the market falls 20% from a peak or rises 20% from a trough.)

Next we narrow the list by excluding bears that began during recessions, because we don’t think the economy is recessing as I write this (or recessing imminently—see here.) That removes the first three bears—those that began in 1929, 1930 and 1932. Every other bear began as the economy was expanding, which explains why market peaks are so difficult to predict.

We also exclude the bear that crossed the 20% threshold in June 1940 and can’t be separated from geopolitics. Hopefully, modern geopolitical risks won’t explode as they did then, but we can always return to the “WWII bear” if WWIII breaks out (presuming we’re alive and blogging).

After the exclusions, nine bears remain. We examine each one to determine how many were predicted by rising inflation, one of the strongest bear-market indicators. Rising inflation erodes purchasing power, invites monetary restraint and unsettles both lenders and investors. Judging by the next chart, it helped trigger at least seven of the nine bears:

The chart shows seven bears emerging from an inflation “shock” of 3% or more (referring to an increase from twelve months before a market peak to when stocks reached the bear market threshold of –20%). In each of those cases, it seems pointless to attempt to draw parallels to today. Inflation is currently below 2% and down almost a percent from January. Without an inflation shock in sight, we shouldn’t rely on the seven “inflation bears” to predict the future.

That leaves two bears we haven’t yet considered. In one of the two—the bear that began in August 2000—inflation contributed to the market’s reversal, but monetary policy and credit conditions were more telling. Policy rates rose, credit spreads widened and bank lending standards tightened—all before the market peak. Market conditions at that time were quite different to those today, as shown in the table below (which also includes the October 2007 peak for added context):

In other words, twelve of the original thirteen bears emerged from some combination of recession, inflation, world war, monetary tightening, and troubles in credit markets. In each case, market conditions were uglier than they appear now. The twelve bears tell us to be optimistic—they’ll continue to hibernate until conditions worsen. But we’ve yet to consider the 1962 bear, which finally supplies a potential match for today.

The lead-up to the 1962 bear looks eerily similar to 2017. Commentators called it the Kennedy Slide. Before the Slide, the market hadn’t fallen 20% on a month-average basis since 1946. And the bull gathered speed after JFK won the presidency. Sound familiar? Here’s a chart comparing the S&P 500 (SPY) in the three years after Kennedy’s election to the first ten months after Donald Trump’s election (there’s a joke somewhere in the respective trajectories, but we would like to keep our G rating):

Conclusions

The Kennedy Slide offers a reasonable guide to how a future bear could develop if key indicators remain benign. Consider that the Slide defied four fundamentals you wouldn’t normally associate with falling stock prices:

• Inflation was subdued, peaking at 1.3%.


• Monetary policy was close to neutral, with the discount rate at 3%.


• Growth was strong, reaching 7.4% in Q1 1962 and 4.4% in Q2, after Q4/Q4 growth of 6.4% in 1961.


• Credit spreads were testing 18-month lows of just above 1% (for the Moody’s Baa Corporate versus the 10-year Treasury).

Surely those cozy fundamentals explain the market’s rocket-fast recovery. Stocks reached a new all-time high in September 1963, just 21 months after the prior high. That’s the shortest period on record from one all-time high through a bear market to the next all-time high—faster even than the recovery from the 1987 crash.

And what might 1962 tell us about the future?

Well, as of now, inflation, monetary policy, growth and credit are only marginally less cozy than they were then. If that continues, we would bet on a rapid recovery from a Trump Slide, should one occur. But it’s important for inflation, monetary policy, growth and credit to remain nonthreatening. Any of those fundamentals could change rapidly, and they tend to correlate. (We expect monetary policy to be a particular risk within a couple of years, as discussed here.) Should the four fundamentals deteriorate, we would ignore the 1962 bear and turn to other bears for clues about what happens next. Considering the unprecedented period of monetary stimulus, we would then expect an ill-tempered bear, one that might resemble the bears that began in 1930, 2000 and 2007.

When we pass the next market peak, in other words, four key fundamentals should tell us whether we’ll “ride the slide” or experience something much worse.

Is a Tsunami of Inflation Just Around the Corner?

The $USD continues to collapse. As we write this, it has taken out critical support and is well on its way to unwinding ALL of the gains from its 2014 bull market.

As the $USD collapses, it’s going to unleash a TSUNAMI of inflation into the financial system. Already the Fed’s sticky price inflation (the BAD kind) has risen above its target 2%. Indeed, as of its latest reading, sticky price inflation is clocking in over 3%.

This is going to be like rocket fuel for inflation trades. Smart investors will use this trend to make literal fortunes.

If you’re not taking steps to actively profit from this, it"s time to get a move on.

We just published a Special Investment Report concerning a secret back-door play on Gold that gives you access to 25 million ounces of Gold that the market is currently valuing at just $273 per ounce.

The report is titled The Gold Mountain: How to Buy Gold at $273 Per Ounce

We are giving away just 100 copies for FREE to the public.

As I write this, there are 19 left.

To pick up yours, swing by:

https://www.phoenixcapitalmarketing.com/goldmountain.html

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

ECB Preview: A Trapped Mario Draghi Makes A Decision

After a barrage of media trial balloons (as recently as today) meant to temper the enthusiasm of Euro bulls now that the EURUSD is back to 1.20 and threatening European corporate profitability, Mario Draghi"s Sintra hawkishness is a distant memory.

And so, with the ECB"s policy decision less than 12 hours from now, a "trapped" Mario Draghi finds himself in a quandary: with less than 4 month left until the formal expiration of the ECB"s €2.3 trillion QE program, he will likely start laying the groundwork for the central bank"s stimulus reduction - after all the ECB is rapidly running out of bonds to purchase - but without revealing too much as that will send the EUR surging, and he will also hold off on any major commitment, as an explicit backing off his recent hawkishness could collapse the EUR and send Bunds right back into NIRPatory.

Which path will he take?

With that in mind, courtesy of RanSquawk, here is a full preview of what to expect (or not) from the ECB president tomorrow.

Rate Decision due at 1245BST/0645CDT and Press Conference at 1330BST/0730CDT

• All rates and the current pace of asset purchases are expected to be left unchanged


• Staff will update macroeconomic projections; impact of EUR likely to weigh on inflation outlook


• Key focus for press conference will be on recent EUR strength and possible QE exit


• Click here for a link to an overview of ECB rhetoric since the last meeting

RATE/ASSET PURCHASE EXPECTATIONS

• DEPOSIT RATE: Forecast to remain unchanged at -0.40%. The rate was last adjusted in March 2016, when it was cut by 10bps.


• REFI RATE: Forecast to remain unchanged at 0.00%. The rate was last adjusted in March 2016, when it was cut by 5bps.


• MARGINAL RATE: Forecast to remain unchanged at 0.25%. The rate was last adjusted in March 2016, when it was cut by 5bps.


• ASSET PURCHASES: Forecast to maintain the pace of asset purchases at EUR 60bln per month until December 2017. Last December, the ECB reduced the size of purchases by EUR 20bln per month, and extended the purchase horizon by nine months.

PRESS CONFERENCE

CURRENT ECB FORWARD GUIDANCE

• RATES: “The Governing Council continues to expect the key ECB interest rates to remain at present levels for an extended period of time, and well past the horizon of the net asset purchases.” (ECB statement, 20/Jul)


• ASSET PURCHASES: “Net asset purchases, at the current monthly pace of €60 billion, are intended to run until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.” (ECB statement, 20/Jul)


• GROWTH: “The risks to the growth outlook are broadly balanced.” (ECB statement, 20/Jul)


• INFLATION: “While the ongoing economic expansion provides confidence that inflation will gradually head to levels in line with our inflation aim, it has yet to translate into stronger inflation dynamics. Headline inflation is dampened by the weakness in energy prices. Moreover, measures of underlying inflation remain overall at subdued levels. Therefore, a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to gradually build up and support headline inflation developments in the medium term.” (ECB statement, 20/Jul)
  POTENTIAL ADJUSTMENTS TO FORWARD GUIDANCE/ROADMAP TO EXITING LOOSE POLICY


• RATES: No adjustments expected


• ASSET PURCHASES: Consensus is for no change expected to exact phrasing above. Commerzbank suggest ECB could add ‘or at a lower pace’ into the above statement.


• GROWTH: No adjustments expected (although impact of firmer EUR could be reflected in latest economic projections).


• INFLATION: No adjustments expected (although impact of firmer EUR is expected to be reflected in latest economic projections).

EUR APPRECIATION

Given the EUR’s 13% advancement against the USD this year, a key focus of the market’s view on ECB monetary policy has been on the appreciating currency. Despite this ultimately reflecting a resurgence in the Eurozone economy, the ECB will be wary of the potential impact on the Eurozone’s inflation path. As such, markets will be looking to see if Draghi talks down the currency with recent source reports (Aug 31st) highlighting EUR is worrying a growing number of ECB policymakers, adding that EUR concerns increase chance of delay in QE decision, or a more gradual exit from asset purchases. Furthermore, the minutes from the previous meeting also highlighted concerns about overshooting and as such given Draghi’s decision to not comment on the currency at Jackson Hole, markets will be highly sensitive to any potential verbal intervention by the President. **Note that existing rhetoric states ‘the ECB does not target the exchange rate’.* *

That said, ECB’s Nowotny (Sep 1st) has warned markets not to over-dramatize EUR gains vs. USD and ECB’s Hansson (Aug 23rd) also came out and downplayed the issue last month. Despite Hansson and Nowotny being two of the more hawkish policymakers at the Bank and thus in-fitting with their stances, it highlights a lack of unanimity at the ECB.

FUTURE PATH OF QE PROGRAMME

Aside from the firmer EUR, another key source of focus for the market will be on any clues as to when the ECB could begin tapering its QE programme given recent economic developments and concerns over bond scarcity. Ultimately, consensus amongst analysts suggest that this meeting will be too early for the bank to outline its plans for tapering at this stage with October seen as a more likely platform for the ECB to provide concrete policy actions; a view back by last month’s (Aug 16th) ECB source reports that suggested the council will hold off on debating the issue until Autumn. Furthermore, the minutes from the July meeting revealed the aim to ‘gain more policy space and flexibility to adjust policy and the degree of monetary policy accommodation, if and when needed, in either direction’; thus suggesting that the central bank will continue to hold off; as highlighted by Lloyds. Commerzbank also highlight the issue of bond scarcity given the current pace of monthly purchases which could cause a headache for the bank. However, Commerzbank suggest that it is unlikely the ECB would be willing to raise the limits on purchases from individual issuers and as such scarcity will have to be addressed as part of a larger policy move.

Although no explicit announcements are expected this time round, Nordea expect the ECB to comment on the preparatory work on September 7th, subsequently hinting at a decision on October 26th. However, Pictet suggest that markets may have to wait potentially longer than October with the ECB looking to avoid a disorderly exit from policy by proceeding in a cautious manner. This would be achieved by eventually scaling down purchases (avoid explicit mentioning of tapering), no mentioning of ending asset purchases initially or referring to actions as outright monetary tightening. Although it is likely that few details will be revealed during this meeting regarding how the ECB will manage their exit from current policy, the above is worth noting if Draghi et al elude to potential announcements next month.

ECB STAFF MACROECONOMIC PROJECTIONS

INFLATION: Likely to be downgraded given the appreciation of the EUR with June projections made under an assumed rate of 1.09 in 2018-2019. Nordea expect the new assumed rate to climb to 1.18 in 2018-2019 and as such, would imply lower annual inflation in 2017-19 by 0.1-0.3% points. However, Nordea also highlight that improving employment prospects in the Eurozone (which could imply higher wages) and the future oil profile could limit the extent of inflation downgrades.

REAL GDP: There is potential for 2017 growth to be upgraded given recent firm PMI data and consumer confidence, according to Nordea. However, Pictet suggest that longer-term forecasts are likely to be little changed given the possible headwinds of the firmer EUR with ING’s base case for downward revisions for 2018/19 amid FX effects.

MARKET REACTION

In terms of a potential market reaction, given the focus on EUR appreciation, FX markets will be mostly centred around any potential verbal intervention by Draghi on the currency. If Draghi is overtly cautious on recent EUR strength this will likely lead to pressure on EUR, whereas, if Draghi downplays the bank’s focus on targeting the FX rate this could provide further fuel to the EUR rally. Elsewhere, the other main source of traction will be hints on when the ECB will curtail bond purchases. It is likely that Draghi won’t offer too much on this front. However, if details are provided or Draghi is forceful about a potential unveiling of details next month, this could lead to selling pressure in fixed income markets, equities and upside in EUR. Furthermore for fixed income markets, traders will also be looking out for any potential reference to the bank’s view on bond scarcity and any possible measures which could be used to counter this issue. However, such actions are unlikely to be made this time round.

RBA Preview: No Change, But Statement Likely To Be On The Positive Side

By Rajan Dhall of FXDaily.co.uk

Since the last RBA Statement, we have seen some positive factors feeding into what should be another cautiously optimistic outlook on both the global and domestic economy.  With much reference to the near term revival in Chinese demand for raw materials, we have seen a strong rise in industrial metals, where Copper in particular has caught the eye, but with the recent wave of construction, there may be some references to a temporary pass through affect.  Australia recognises the challenging economic shift in China, and has and will continue to maintain expectations for slower growth, and therefore demand next year.  

Closer to home, the labour market has been healthier, and whilst most central banks are wary of slow wage growth, steady gains in jobs are expected to see some pick up eventually.  On the broader theme of inflation, core rates have dipped a little,  but are expected to pick, and are likely to continue with this outlook as capacity utilisation picks up.  

More recently, the components for Q2 have been very strong, and all point to good number on Wednesday, with over 9% growth in construction work, as well as CapEx very likely to see consensus forecasts of 0.8% rise met - if not, exceeded. Despite these positive factors, the RBA will are more than likely to remain on hold, but governor Lowe has said in recent weeks that the next move is more likely to be up, and with other central banks also reining in loose policy, the board may set out to further highlight this shift in sentiment, but with as measured communication.  

It will not have gone unnoticed that the EUR has taken off in anticipation of an ECB move, so given concerns over currency appreciation, we expect a balanced statement with the familiar caveats of household debt levels restraining consumption, already hampered by sluggish earnings pick.  Indeed, housing credit growth has outpaced income growth, so as long as this remains the case, the RBA will err on the side of caution.  

Rhetoric on the AUD per se should again be confined to further appreciation from current levels generating a slower pick up in activity along with inflation, which is pretty much par for the course.  The Board will also again highlight USD weakness impacting on AUD exchange rates, and this has helped support the spot rate to some degree, which looks unlikely to see any major volatility in the aftermath of the announcement - if anything, a modest skew to the upside.

This Chart Might Make You Rethink The Adage "Stocks Always Come Back"

Authored by Jeff Clark via GoldSilver.com,

It was a pretty simple inquiry on my part: Mike Maloney predicts the stock market is facing the mother of all crashes - if he’s right, then how long before the average stock investor would get back to even?

I wanted to know not only for myself, but because I have a daughter just starting in her career. I also have a wife with a 401k and over a decade to retirement. I have a son in college. I handle my retired parents’ money. And I have other family and friends who follow traditional brokerage advice and have 60% of their portfolios in stocks (or more in some cases).

So, if the stock market crashes, how long does history say it’ll take for their stock holdings to return to pre-crash levels… months? Years? Or—gulp—decades?

It’s an important question, because the answer will tell you how to invest depending on your timeframe. And if the answer ends up being “a long time”, well, you might consider sidestepping the stock market altogether if you, too, are nervous about its frothy nature.

At this point the average stock broker will pull out a looong term chart of the S&P and show that over time—despite numerous crashes and corrections and bear markets—the stock market ultimately marches higher. History does show this to be true on a nominal basis, further bolstered by the investor who is dollar cost averaging and reinvesting dividends (though these charts always exclude commissions and fees).

But when I saw one of those charts from my broker many years ago, I did notice one thing: over the past 100 years or so, there were a handful of crashes that not only looked like the Grand Canyon, they took a long time to recover. “What if that happened to my portfolio?” was the question I immediately muttered to myself.

Years later, after recalling my Dad’s grumbling about inflation in the late 1970s, I had a second question: if the Dow did end up taking a protracted time to get back to even, wouldn’t inflation erode my real rate of return? If it took a portfolio-killing ten years, for example, I might have earned back that $20,000 I lost, but now the car I’d planned to buy with that money cost not $20,000 but $30,000. Or $40,000. Show me all the long-term charts you want but I still can’t afford to buy that car.

So here was my inquiry: in the biggest market crashes, how long has it historically taken the S&P to return not to its pre-crash price, but to the inflation-adjusted level? By asking this question, I felt like I’d be better equipped to not just handle a major downturn but decide if I should be in the market at all.

Here’s what I discovered. In the four biggest stock market crashes since 1900, the inflation-adjusted recovery periods were all measured in decades.

Inflation rates obviously varied during each period, but even low inflation adds up over time. So even when the nominal price of the S&P climbed back to the prior peak, it had taken so long that that amount of money would no longer buy as much. Your brokerage statement might show a gain, but in real terms you’d still be underwater. It’s a sobering realization, one that dawns on most people only when they go to actually spend the money.

Here’s the breakdown of each recovery period:

• Beginning in 1906, it took the S&P 500 index 20 years to get back to its inflation-adjusted, pre-crash level. No wonder; the total amount of inflation during that time period was 74.0%.


• Deflation was the name of the game in 1929, of course, with inflation readings registering as low as -10.3% during the Great Depression. But the S&P had fallen so far that inflation returned before it could recover… inflation totaled 48.7% during the 26-year time span, resulting in the S&P not reaching breakeven until 1955.


• From 1973 to 1987, inflation totaled a whopping 104.0%. High inflation rates combined with the depth of the crash made stocks “dead money” during that 14-year span.


• And those “low” inflation readings we’ve had since the new millennium? It totaled 35.2% over the first decade and a half, and led to the S&P taking 14.5 years to regain its full purchasing power. This silent erosion kept unsuspecting investors in the red, on a real basis, until 2015.


• It’s worth pointing out that the Nasdaq still has not recovered from the bursting of the internet bubble. It lost 78% of its value in the crash, and adjusted for inflation is still down 17.6% (as of 6-30-17) from its March 2000 peak! In other words, almost two decades later, tech stocks are not back to the same level of purchasing power, despite the index being higher on a nominal price.

Clearly, the biggest stock market crashes in history have been big enough that inflation played a key role in their recovery.

So, if you think the stock market is at risk of a crash—and there are plenty of signs pointing to that being the case—then you may want to consider stepping aside for a time being, and look to start buying again after the crash.

Perhaps a more effective solution is to buy the one asset that is not just inversely correlated with stocks (meaning it tends to rise when stocks fall), but is also one of history’s best inflation hedges, even in hyperinflation.

If the stock market crashes and inflation kicks in, this asset just might be one of the few offensive weapons left in your portfolio. History says now is a good time to put that hedge in place.

Is This Why FANG Stocks Rebounded This Morning?

Friday saw the FANG (Growth) dream briefly crushed, and that pain continued through the opening this morning. But then something happened that sent the Nasdaq surging...

Perhaps this is why...

U.S. consumer inflation expectations declined last month to near the lowest levels in the four-year history of a survey conducted by the Federal Reserve Bank of New York. As Bloomberg reports, the median respondent to the May survey of consumers reported an expected inflation rate of 2.47 percent three years from now, down from 2.91 percent in April and just above the 2.45 percent low recorded in January 2016 in a series that goes back to 2013.

The data may add to concerns over a recent decline in U.S. inflation, which has led investors to take a skeptical view toward additional Fed interest-rate increases.

And as the chart above shows, Value-over-Growth has been tracking inflation expectations lower for years (i.e. as inflation expectations tumble, investors are willing to bid for anything that is "growing") and thus - this morning"s print reinforced the longer-term trend and sparked a rebound bid for FANG et al...

Chinese Producer Prices Miss, Slide For Second Month As Burst Commodity Bubble Spills Over

With the entire world"s focused on the last remaining reflationary dynamo in the world, China, today"s inflation data out of Beijing, fabricated as it may be, was closely watched.  After all, just one month ago, UBS declared China"s reflationary phase over, and a dark, deflationary era of negative credit impulse-driven deflation would soon be unleashed on the world. Again.

It wasn"t quite so dramatic.

After surging to almost 8% at the start of 2017, the fastest pace in 9 years, PPI declined for a second consecutive month, slowing to just 6.4% YoY in April, down 0.4% from March, and missing expectation, confirming (as if it was needed) that China"s commodity boom is now in the rearview mirror.  The accelerating producer price plunge has been all too obvious to those who have watched the recent crash (most recently previewed here) in Chinese iron ore and coal prices, which tumbled after rising sharply on a construction boom, or rather bubble, that drove China"s strongest economic growth since 2015.

At the same time consumer prices rose fractionally more than expected, although CPI remained at just 1.2% YoY, up from 0.9% in March. This was driven entirely by non-food inflation which jumped 2.4%, while food inflation plunged 3.5% from a year ago.

And in the backward logic of the "good is good and bad is great" world, the burst commodity bubble (declining PPI)  and lower purchasing power (rising CPI) allowed the  PBOC to be a little more generous with its liquidity, ending the three drought of no reverse repos, even if the central bank still drained a net of CNY80 billion today, and so Chinese stocks are higher... for now.

The Markets Just Gave a Wake Up Call... Few Are Listening

I keep pounding the table and screaming about inflation… but people still don’t get it.

Hopefully yesterday’s inflation data was a wake up call.

For those who missed, US wholesale inflation posted its largest monthly jump in four years yesterday. Core Producer Price Index rose 0.4%; only 0.2% was expected. And Fed Chair Janet Yellen blatantly hinted at another interest rate hike in March… despite clear evidence the US economy is rolling over.

If this doesn’t SCREAM “inflation” to you, nothing will.

The fact is that the Fed realizes it has let the inflation genie out of the bottle. The inflation rate is already well above the Fed’s desired target of 2%, having moved a total of 3% higher in the last 18 months.

Gold and Silver have already "figured it out." They"re up 6% and 11% thus far year to date.

Look, the potential to see triple digit gains from inflation hedges is here.

If you’re not taking steps to actively prepare your portfolio for this, you need to so now.

We just published a Special Investment Report concerning a secret back-door play on Gold that gives you access to 25 million ounces of Gold that the market is currently valuing at just $273 per ounce.

The report is titled The Gold Mountain: How to Buy Gold at $273 Per Ounce

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To pick up yours, swing by:

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Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

Global Inflation 'Surprise' Index Spikes To Highest Since 2011

The specter of global stagflation is looming ever larger as inflation across the world is beating analysts’ forecasts (even before the potential effect from Donald Trump’s economic policies) but economic growth expectations remain stagnant.

As Bloomberg notes, the global Citi Inflation Surprise Index, which measures price surprises relative to market expectations, is at the highest in more than five years.

The reading turned positive in December -- meaning inflation data were higher than expected -- for the first time since 2012.

However, in its Keynesian-Krushing way, economic growth expectations are not tracking higher - flashing red warnings signs for global stagflation.