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.

113Comments
Feb 7, 2013 3:19PM
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Ever wonder who these  nit-wits are who click thumbs down on the inflation comments?  Do they not believe in the inflation taking place as we speak?
Do they not believe the undeniable documented history of every country who tried printing their way to prosperity?  Do they just think it quaint that back in 1969 I bought a brand new car for $3100.00 and now thirty-one thousand dollars will buy an average sedan?

Inflation is your enemy. Government is THE cause of inflation. We are in a terrible mess and the next generation are the victims that will suffer most.

Feb 2, 2013 1:07PM
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I HOPE THAT I SURVIVE ALL THE OMENS OF DESPERATION I HAV BEEN READING,  ANMD CONTINUE AS I HAVE FO 80+ YEARS
Jan 21, 2013 5:43PM
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Billy boy's been performing this song and dance about inflation for 4 or 5 years now. Check out some of his old columns. If he keeps up the Johnny one note routine he may someday be right. The real worry is..............can you say.......... "D E F L A T I O N"  Bill?  Deflation was what made the Great Depression great.......... from 1930 -33.
Jan 21, 2013 5:03PM
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Mr. Fleckenstein, I always enjoy your articles, and this one is thought provoking too.  I'll offer two possible reasons why inflation won't be coming anytime soon.  1) There is significant slack in capacity.  Inflation will not return until we are nearing full capacity.  2) The money being printed is not returning to the real economy, i.e., plants are not being expanded and few loans are being made.  Instead, the excess money is being absorbed by banks and investment houses to buy stocks and commodities.  This achieves the goal of the Fed and Treasury to reflate assets.  This is not directly inflationary.  But, it does mean there continues to be a bubble in asset prices.  As long as this situation exists, the biggest risk is for asset deflation through stock market corrections and commodities sell-offs, and not inflation.  The 'easy money' is not going into the hands of the consumer so there will be little inflationary pressure on prices, outside of those caused by weakening the dollar.
Jan 21, 2013 2:19PM
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In order to have real inflation, not stagflation, you have to have full employment, unemployment less that 6%. So how can we start the inflation FUD when we're still at almost 8% and nobody predicting it going lower than 7% anytime soon? The labor shortage FUD by homebuilders is just an excuse to raise their product prices. There's no way we should have a shortage of laborers in this age of home construction that is more like using Legos than it was 10-20 years ago.
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Thank you Bill.  You are the only one who tells the truth.  There is NO deflation.  Modest income folks like me are being murdered.  Rents are up.  Food is up (portions down though) Healthcare is up.  Utilities are up. Gasoline is up.  Heating Oil is up. Transit fares are going up.

What is down?  My salary.  My work hours.  My standard of living.
Jan 21, 2013 2:04PM
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I think every Obama voter  should be required to invest their life savings in US Bonds...  Then we will see how much they like Obama...


Jan 21, 2013 1:51PM
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Let's see, my current bond fund has an average 5 yr duration of bonds in it.   A 5% rise in rates means a 25% decrease in my bond fund value.    That's not pretty.   Better pay attention to this fund.
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Inflation is caused by one of two factors -- high Federal Reserve rates -- which are not going to happen any time soon as they do not want to totally trash the economy. (Sure I know they claim that high rates fight inflation but we all know it fuels inflation as people raise their prices to pay the higher interest rates at the bank and higher costs as everyone else is raising prices for the same reason)

 

Just look at the mild inflation we have had with zero percent interest from the Federal Reserve if their inflation being inversely tied to the Federal Reserve rate was true we should be seeing 1,000 percent inflation right now but we are not so the idea inflation is tied to lower Federal Reserve rates is totally wrong.

 

The other factor in inflation and of which we are suffering is the fall of the dollar pushing the prices of foreign goods higher as they try to recover their costs of production.

 

The US will suffer through some more deflation before the dollar collapses later this year due to two factors the increase in US debt to all time highs and the rest of the world abandoning the dollars as the world reserve currency. China is making this move and has talked most of the world into trading in yuan and not dollars even Europe and Great Britain are switching over to yuan based trading.

 

So we are going to have deflation in regards to American produced goods as the dollar will lose value and thus US goods will lose value and we will have hyper inflation in imported goods

 

Which means get ready for huge oil and food bills as we import 40 percent of the food we eat and the food we grow here is based upon fertilizer made from oil. Pretty much forget about cars and working by the end of the year that will be part of the American dream that dies this year.

Jan 21, 2013 11:54AM
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I have said this many times and the anti american Obama at any cost progressive socalist just call me raciest ect.  Obama said from the very start that he was going to "transform" america the minorities, poor and underinformed middle class thought that ment "getting" the rich. taking them down and taking everything away from the rich and giving it to them. that is what Obama keeps eluding to by the "pay your fair share" retorick.

    But alot of us saw what Obama's real goal is and that is to destroy america or at least take us way, way down the path of socalism and mabey even communism. The strong central government that tells people what the can and cannot have or own. Tell you what or if you can drive or tell you where to live.

    Even his strongest supporters who would never question anything he does (these are the most uninformed) will eventually wake up but by then it will be to late. If Obama continues down this path of destroying the US dollar and forcing prices on everything higher and higher untill the system collapses.  The masses will have no choice but to trurn to the transformed "strong central government".

   This is why the republicans want a balanced budget, this is why the tea party was formed and why Obama had to discredit them. Anybody ever hear anything the tea party really did that hurt anybody? No but the Obama bloggers never let up on the "old white raciest" . Obama can not afford to be exposed yet he can still be stopped.

   If Obama is allowed to keep printing money at will , open our borders and "start" the process of disarming the country.  If he can destroy the constitution one piece at a time then nobody will see this comming.

Jan 21, 2013 10:57AM
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Big government is what pulled us up in the early 1980's. We tripled the debt and put the money into the economy to jump start it.

 

Mc Donald/Douglas Boeing Ect.....how quickly we forget.

Jan 21, 2013 10:43AM
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32 YEARS AGO TODAY, WE STARTED ALONG A PATH THAT RESTORED THE USA. BUT,

AT THE BEGINNING THINGS GOT REALLY NASTY..INFLATION...HIGH INTEREST RATES...GOLD HIT $850 (A LITTLE EARLIER)  AND ON AND ON. NOW, WE HAVE COME FULL CIRCLE, EXCEPT THIS "CYCLE" WE ARE A COUNTRY DEEPLY DIVIDED WITH NOT $1.5 DEBT BUT A $16.4 DEBT AND ANNUAL DEFECITS OF THE TOTAL AMOUNT WE OWED BACK THEN. WE WILL "MOVE FORWARD" BUT AT WHAT COST ? THERE WILL BE FINANCIAL "PAIN". I HOPE AND PRAY THAT IT IS ONLY FINANCIAL IN NATURE..........BUT......I FEAR IT WILL BE MUCH WORSE.......MAY GOD CONTINUE TO BLESS THIS COUNTRY AND ITS LEADERS WITH WISDOM. AND REMEMBER THE 32 YEARS AGO THING ?????? IF WE EVER BECOME A NATION NOT UNDER GOD, WE WILL BECOME A NATION GONE UNDER............BIG GOV'T IS NOT THE SOLUTION...... IT IS THE PROBLEM !!!

GET OUT OF THE WAY !!!!!

Jan 21, 2013 10:16AM
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The inflation train left the station quite some time ago.  It just takes some time to get the momentum rolling.  How else do you think we will (attempt) to pay off the debt?  How's 20 cents on the dollar sound?  A good businessman wouldn't turn that down.  Of course, there will be some collateral damage known as the U.S. resident.  They have been dealt a hand that will slice and dice - his well-being, his buying power, his future and his family's future. 
Jan 21, 2013 10:04AM
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Guns N Gold  Both overpriced. Only a fool buys guns and ammo when a Dem is in office. The name of the game is to buy low and sell high. The Gun dealers are laughing at you guys and running to the bank.
Jan 21, 2013 8:55AM
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I've written many times here, Bill, that I own counter-cyclical sub-economic enterprises. I can tell you first hand that inflation is selective and as specific as certain brands, quality or availability. Our retail stores burgeon with facsimile products or knock-offs no one wants at any price. The iconic brand that cheapened too much goes stagnant as well. Seekers (like me) have been clever and efficient. When we find the good old stock, typically it's on clearance so we buy all of it. The transition has not favored "big" at all. An iconic brand item that then- stocks a cheapened item with an inflated price sees it instantly stagnate because of the new price. When I then offer my stock, I paid way less and get the advantage of the inflated store price. Mine sells out in record time or in pulses, undermining "big" with their own goods purchased retail out of their own box. Some call it arbitrage. There are millions like me and we have all of the old stock as inventory. That means broad inflation is improbable because we can counter it. You we get from that is-- a sub-economy that thwart current controllers and manipulators or-- anti-Wall Street retail that is fully legal. It's not a "let them eat cake" thing, it's a "let them inflate" thing. Doing so kills off organized financial and platform businesses simultaneously. The worst thing the Establishment did was to under-estimate the citizen consumer. They did, it will bite them in the nuts. It's also why gold and all traditional commodities aren't good investments... there is a sub-economic factor that compromises all over-invested wagons.
Jan 20, 2013 10:56PM
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Bill

 

No argument here! The worse of inflation is yet to come and I suspect it will be just in time so Obama can leave office in discrace. Sometime between now and the end of Obozo the uninformed public will discover inflation and then, hld on to your hat..

 

I'm into Guns and Gold, but by Gold I mean precious metals, and I think we can't just abandon stocks. I believe we have to research equities and determine what will benefit in the future. Starting with stocks that pay a decent dividend that increases a bit each year and is covered by earnings. Then we have to pick and choose among didfferent industries. I like some tech, but certainly the water industry, companies that will rebuild the infrastructure, railroads, and oil & gas companies, upstream, downstream and companies that serve the oil & gas industry.

 

And after that it can't hurt to pick another gun and some more ammo!

Jan 20, 2013 4:37PM
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No doubt about it, pretty soon there will be an inflation that US has not seen before, actually it has started, but in thoses items that government does not use to calculate the official inflation rate. I have no doubt an inflation of close to 400% next 10 years.
Jan 20, 2013 4:15PM
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Let me see...My automobile insurance is $1000, my home insurance $4000, and my health insurance is $13,000.  I spend $18,000 out of the gate on insurance alone. My income is only $17,000.  I'm effectively paying income taxes with my savings now.  You say it's going to get worse?
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If all the world economies are trying to devalue their money, how will that benefit anyone except the tax collectors?
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ABOUT BILL FLECKENSTEIN

Image: Bill Fleckenstein, MSN money

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

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