The real worry is inflation

As investors realize the market's deflation phantoms aren't real, they'll notice a potentially fearful rise in inflation. That will give the bond market jitters.

By Bill_Fleckenstein Jan 18, 2013 3:09PM

Inflation © Nick Koudis/Getty ImagesEarlier this week, outgoing Eurogroup President Jean-Claude Juncker attempted to jawbone the euro lower when he said that, "the euro foreign-exchange rate is dangerously high."


So we now live in a world where not only are central banks intent on producing inflation, but the G-7 industrialized countries also all want their currencies lower. Paradoxically, the conclusion of the bond market is to worry about deflation when the logical result is inflation.


I, for one, think that game has ended. But the bond market certainly has not begun to factor in success of the central banks in debasing their currencies, or making them decline against the value of goods and services, something that has occurred even as the world has yapped about deflation.


Think of it as extra-mild deflation

On that score, an article by Anjli Raval in Wednesday's Financial Times headlined, "Labour shortage holds back builder Lennar" was most instructive. Raval began: "Lennar (LEN) said labour shortages and higher construction material and land costs were challenges for the US homebuilder even as it reported a surge in fourth-quarter earnings."


The writer went on to note, "The scarcity of construction labourers, as well as plumbers, electricians and carpenters among others that are the backbone of the residential construction industry, has resulted in projects facing delays . . . . The company said additional charges and higher prices for construction materials such as lumber, drywall and concrete had increased the average cost of building a new home by $1,600."


With housing at the epicenter of the economic debacle of the last few years, I ask you, is that what one would expect to see a major builder saying if we were experiencing unbridled deflation?


I have made the point many times that we haven't experienced deflation, but we have had a bear market in housing, though in some places and at some price points it has ended (keeping in mind, we could still have another leg down prospectively when interest rates rise).


Regular readers know I have been quite adamant about all roads leading to inflation, which is in part due to the fear of deflation. But how people can continue to beat the drum for the latter, given what is occurring across a broad front, including the housing market, I really don't know.


The 'mental' side of 'fundamentals'

Meanwhile, people need to remember that psychology (i.e., "money of the mind," as Jim Grant of Grant's Interest Rate Observer has named it) plays an important though not analyzable role in how folks perceive inflation, deflation and the purchasing power of their currencies.


They have been willing to overlook all sorts of cumulative inflation and currency abuse over the years as they have piled into bonds at ridiculously low rates. If I am right that the bond bull market has ended (as the deflation fear trade has), the next step would be toward pricing in "no deflation," then, ultimately, inflation.


If that psychology is in the process of changing, it will take some time, but it will be extremely powerful when the masses realize they need to do something and that they have been tricked into owning their third radically mispriced market in the past 15 years (equities, then real estate and now bonds).


Folks are going to lose gigantic amounts of money in bonds, as they did in our two bubbles, and, at some point, that may add a new group of buyers to the precious metals market. Unfortunately, those people who are the last to move into the metals market will find a fourth way to lose money, but that is getting way too far ahead of ourselves.


King World News

In my latest interview with Eric King, I was a bit more animated than usual, if I do say so myself. Interested readers can listen to it here.


At the time of publication, Bill Fleckenstein did not own or control shares of any company mentioned in this column in his personal portfolio.

Jan 19, 2013 8:49AM

Inflation is the enemy, manipulated monetary policy and keynesian policy for decades has set up our current modern world for a financial blood bath party.  Owning precious metals have some protection but the back drop and unfolding will be cruel.  In retirement for several years a gentleman told me his income has fallen 2 / 3 from 2006 / 07.  Returns on his money funds leaves his portfolio income devastated.  He lost nearly all his so called "safe" investments in 2009.  Inflation is, has and will continue to crush savers, it has caused all government levels to be short of money for operations.  Taxes must be increased due to a lower dollar value and inflationary trends in goods and services.  While the "official" government indicator tells the sheeple inflation is low, realize this simple fact: the dollar has lost more than 1 / 4 of its purchasing power since the turn of the century.  Hyperinflation is slow to start but after it begins all efforts to end it will be futile.  I could give many more reasons why this will unfold badly, instead I will pray.   

Jan 18, 2013 10:42PM

If there are no jobs than consumers have no money.  The people can not pay more when they have no pay. The middleclass is being robbed by obamacare and other obama taxes e.g. euro bailout. 


The feds will suck up middleclass money leaving the economy in decline.  There will be a lot of paper which will be globalized,  Americans will see no benefit.


Obama will continue to ruin the economy and nothing can stop him.

Jan 18, 2013 11:03PM
This story is long overdue.  With the wild deficit spending by almost all the developed countries, wild inflation is the obvious end result.  The question isn't if  fast/large inflation increases start, it is when they will start.  A person with high debt today, at a fixed rate, will be in a great position to pay off that debt with very cheap dollars in the future.  A person with bonds or with a fixed income has no hope.
Jan 19, 2013 9:03AM

Inflation is termed a stealth tax.  Keynesian policy followers ignore a link in what is actually part of the equation.  Keynes actually loathed inflation.  He realized it meant utter destruction in the form of monetary exchange, in our case the dollar.  The stealth tax steals from savers and redistributes to non saver entities ie; government.  The banking world knows what is going on, they have the ability to borrow at 0%, loan at 5% and pay the private investor (savers at 1%).  Moreover the banking mortgage market has avoided leveraging in the housing market by still selling mortgages to fannie / freddie and offering 2.5% 30 year plans.  Guess who will eventually gets creamed when this unfolds.....

Higher taxes at all levels will surpass consuming 50% of working middle class wages in the next couple of years.  When the people wake up and realize this, the party will be well underway and the hang over will be unpleasant.    

Jan 19, 2013 10:20AM

Inflation, which Fleck has already pointed out, is almost entirely produced these days by the Fed printing massive amounts of money.  It’s effectively an additional tax on savers and investors because it devalues the purchasing power of their money. It also translates into real taxes when assets are transferred because it creates phantom nominal gains which are taxed as income.

Imagine the hypocrisy of a government that tells everyone they must take responsibility to save for their retirement, and then prevents them from having a safe way of doing it by manipulating the monetary system. That’s the system we are plagued with today in the good ol’ USA.  You can’t have a sound economy without a reliable monetary base. But, the Fed under the guidance of its Wall Street masters is doing everything in its power to destroy that base. 

Jan 18, 2013 11:10PM
And how else will the housing market get back in line with wages?  Houses doubled in price while wages stayed the same.  So now do these people have to sell their houses for half what they paid for them.  Or do they wait until inflation catches up to them?  Incompetent bank regulators, i.e. the federal reserve bank is either really stupid or made this mess on purpose.  For the second I haven't figured out why yet. 
Jan 18, 2013 10:14PM
 "The scarcity of construction labourers, as well as plumbers, electricians and carpenters among others.."  Yet we have a real unelyment rate if 18%? 
Jan 19, 2013 8:24AM
The Japanese have experienced deflation (price declines) for 15 years ... and the people like it!  They have a high savings rate, and they are used to not having automatic pay increases (when prices decline, you don't need "cost of living" adjustments).

But ... the government and the central bank don't like stable or declining prices - so the Bank of Japan is raising its inflation target from 1% to 2% (i.e. - they are going to start monetizing their debt like the United States is doing).


More than 80 percent of respondents in a released this month who noticed rising prices last year said it was bad. More than a third of those who said prices fell were happy about it. Even so, the BOJ next week will adopt the government’s desired 2 percent inflation target, according to 21 of 23 economists surveyed by .

Ending consumer price declines would give companies and households more incentive to borrow, and boost revenue for businesses and the government in a nation that saw its in 2012. The danger: prolonged deflation has altered behavior across the economy, from entrenching declines in pay to driving more than . ..."

That's a pretty blatant admission - inflation gives people the incentive to borrow (become servants to debt), and less incentive to save.

Furthermore - people like declining prices.

So - an economy has done just fine for 15 years of deflation - and the people like it.  Who doesn't like it?  Banks lose loan business, and government can't monetize their debt by the hidden inflation tax.

It is pretty clear who dominates American monetary policy - government and Goldman-Sachs (and the banking peers of Goldman-Sachs).

Jan 19, 2013 11:18AM
     Prices of things never have dropped. What DID happen was that we've kept paying for what we are getting. Here's how it worked. You can now go to walmart and buy a chinese made lawn sprinkler for $6.99 which is pretty cheap. The problem is that the cheap $6.99 lawn sprinkler is only going to last you about a week. In order for you to buy a lawn sprinkler that will last you for years, you'll have to spend $50.00 to $100.00 for it and thats quite a bit more than you paid 25 to 30 years ago for it . Prices havn't stayed the same or declined but the quality of goods sure has taken a dump. How many plastic faucets did you see in your house 40 years ago?                                                                                                                
Jan 19, 2013 10:27AM

Living on a fixed income causes me to worry about inflation..

When everything cost more I don't have as much money to spend..

That means I have to cut back on food, fuel, Dr. visits, electric and natural gas usage..

Medicine and many other things not listed here...FYI

Think This would worry ANY American..But Don't count on Ben at the FED..HE  Don't Care..!

Jan 19, 2013 2:15AM
Thanks a lot, Herr Obama.  Your administration really effed up this country.

Jan 19, 2013 12:21AM
Sovereign states hoard gold deposits while statist lemmings hold worthless paper
Jan 18, 2013 8:28PM
After reading your article I ask myself why should I invest in stocks or bonds.  I think I will wait till the markets implode and buy the left over pieces.  Why would anyone get in front of a speeding bullet?  Thank you for not recommending something to buy right now.  I would not have listened anyway.  Those of you that are giving me a thumbs down, don't come crying to me when you lose most of your money.
Jan 19, 2013 9:35PM
Inflation? Is that all. Folks you better wish inflation was all that is going to happen. Ever hear of hyper inflation. That is exactly what is going to happen when this economy implodes. No entity can survive the debt this country has incurred and it is only going to increase 4 or 5 trillion more in the next 48 months. When you have to have a wheel barrow full of currency to purchase a loaf of bread you will understand what it is. Get ready for extremely hard times.
Jan 19, 2013 5:01AM
its all in the price of crude oil nothing good at 95 needs to be back at40
Jan 18, 2013 8:51PM
Fleck is absolutely brilliant but there's one thing I am questioning:  Why would the bond market get jitters? Won't the Fed just buy up any amount that is necessary to keep it from going down? 
Jan 19, 2013 8:56PM
Too many people spending too much money to get a college degree in something like 'far eastern comparative religions' that may make you a more rounded, better educated person but it doesn't have a financial future to justify the cost.  If you're looking for a future income stream you need to study technology (science, math, engineering, etc.) or learn a trade (electrician, plumber, etc.)  If your purpose in going to college is to prepare you for a future income stream, choose a course of study that has a financial future
Jan 18, 2013 10:17PM
An hour earlier in this space I read that gold (and other orecius metals) had ended their run!
Jan 19, 2013 1:25PM
Government says our national debt is 16.4 trillion but what they don't want you to know is that it's really close to 100 trillion....Can you say "bankruptcy"...hahaha  Hope you morons who voted for Obama are happy now that your taxes are going up and medical premiums will double.

Doesn't anyone think it is a bad idea to keep their life savings in the hands of people the likes of those who have just cut their savings in half?


The wolves who fed off of us all after they lobbied enough to have deregulation enough to make billions of dollars directly from us for nothing but parasitic behavior???


Why would any thinking person...after that crash...hearing how it happened...STILL let those parasites feed off of them...their life savings rather.  Fill up the trough again????????????


Make your own decisions...Be in the present. Don't take advice from people who are making money off you...they seem to have unquenchable greed, and no Moral Compass. 

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Image: Bill Fleckenstein, MSN money

This column is a synopsis of Bill Fleckenstein's daily column on his website,, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.



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