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 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 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 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 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 10:17PM
An hour earlier in this space I read that gold (and other orecius metals) had ended their run!
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 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 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.
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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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