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  • Signals of Inflation

    Posted on February 17th, 2009 No comments

    Okay, so the chatter around the media surrounds ‘deflation.’ First off, the media has it wrong, we are NOT in a deflationary environment, instead we are experiencing disinflation. It’s important that we all understand the difference between the two words.

    Disinflation is a decline in the rate of increase in average prices. For instance, between 1981 and 1983, the annual rate of increase in the consumer price index (CPI) in Canada declined from about 12 per cent to about 4 per cent. Again, from 1990 to 1992, the annual change in the CPI dropped from 5 per cent to 2 per cent.

    Deflation refers to a sustained fall in prices, where the annual change in the CPI is negative year after year. The best known example of deflation in Canada was during the 1930s when prices fell more than 20 per cent over a four-year period.

    Why I keep hearing “deflation” really bothers me. Is the media trying to make us believe we are really living with deflation? Fact is, we aren’t. We are experiencing disinflation, end of story.

    Now the reason why I’m writing this article is because around January 20th, I have reason to believe that we have begun our entrance into the inflationary zone. Does this mean we might be at the bottom of the S&P? No, we still can move lower (6500-7000) before people realize we are making our move. With the constant stimulus packages around the world, the money supply is exploding. A few indicators that have really peaked my interest is the break on the BDI Index and the break away of hard commodities (gold, silver).

     

    Gold & Silver Break away from S&P around January 20th.

    Gold & Silver Break away from S&P around January 20th.

    As you can, around January 16th, gold and silver started to make their trend upwards in comparions to the S&P. For quite some time, Gold and Silver have idled around $1000 and $12 per ounce in Canadian currency, but that isn’t true anymore. The prices have finally started inflating. This is one signal that peaks my interest. More below…

     

    The Baltic Dry Index (BDI) increases over 100% since January 20th.

    The Baltic Dry Index (BDI) increases over 100% since January 20th.

    Another indicator I watch closely is the BDI index. As you can see from the chart above, the shipping and trade index is showing its first signs of strength in quite some time. 

    On the treasury end of things, it looks that bubble might be bursting.  I’ve added a position in TBT, a short on the 20 year bond. You’ll see the gap between TBT and TLT closing in, another indicator that the cash is starting to move again.

     

    A 20 Year Bond (TLT) vs a 20 year bond short (TBT)

    A 20 Year Bond (TLT) vs a 20 year bond short (TBT)

    So what does this all mean?  The 3 charts I’ve shown above are all indicating that things are slowly starting to break, which will utimately lead to the inflationary environment that we are all anticipating. With governments around the world injecting constant cash into our economies, it’s not a question IF inflation will happen, its a question of WHEN it will happen. My guess is much sooner then later…