Tuesday, October 5, 2010

Inflationary Signals in More Places

While savers continue to receive, incredibly, shrinking interest rates on money market-type deposits, the money-printing that Dr. Bernanke has been pouring down the gullet of a thirsty Street has been working its usual magic. A case in point is seen in the accompanying graph of a Markit index that relates to commercial mortgage-backed securities. (Click on image to enlarge. Click on AA.4 on the linked Markit web page for this specific index, or click on any other index for a similar price-time display.)

It would appear from this and other charts available on the Markit site that commercial real estate prices, or at least prices of securitized mortgage pools, have joined gold and silver in strong uptrends, or, in the case of CRE, in the reversal of a strong downtrend. Relativistically it's sort of the same thing.

The increase in the money supply over the past few years is working its way gradually through the economy. Wages and employment are reacting slowly, given all the malinvestment that occurred in the U. S. Thus what I suggested in my Fire and Ice post of January 2009 might happen is happening. Here is a quote from that post:

. . . we must consider the possibility of a mixed inflation-deflation. Houses and municipal bonds, which you may own, can continue down in price and the cost of a haircut or cereal, which you purchase can go up. You can lose both ways.

Fire and ice.

The fire of price increases is becoming apparent in the food stores of America. There is nothing more fundamental than food and water (still mostly free) to staying alive, so of course there is no justification for excluding it from measures of living costs. And since so much food Americans eat is processed, the prices we pay for food have relatively little to do with so-called "volatile" costs of the underlying foodstuff. Increases in food prices have everything to do with packaging and transportation costs, lack of "deflation" in total compensation including taxes and benefits, and profit margins.

This blog repeatedly pointed to the "deflation" talk in the media the past months as a deliberate diversion (to use a favorite word of the President) to hide the money-printing that was going to ensue once again. How the 2-10 year Treasury complex keeps trending down in yield is incomprehensible if yields were responding to a free market or unless the "market" knows that something is going to blow, such as BofA pulling a Bear or Lehman. In which case gold is to the moon (and probably Treasuries as well), with the dollar probably moving in an opposite direction.

Once again, the broad stock averages continue in their downtrend compared to gold. Within the stock market, though, divergences in relative value have continued to appear and allow certain stocks to represent good value, it being understood that the flood of "money" that the Fed has created is so large that arguably no important financial asset is truly "good value".

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