February 22, 2010
Here is a 25 year chart of the month-to-month per cent change in the “Consumer Price Index, Less Food and Energy” which was released by the government this past Friday. Yes, Food and Energy are part of everyone’s budget, but as both these elements can be extremely volatile on a year to year basis (due to weather, for example), regarding inflation, the Fed is more interested in understanding what the underlying trend truly might be…And the CPI, Less Food and Energy, more generally known as the “Core Rate”, is essentially the best overall gauge they have of what prices are doing at the all important consumer, or finished goods, level.
To be more specific, the right side of this graph has had 4 straight down months in spite of 5.7% GDP growth in the 4th Quarter of 2009, a 65% increase in the Dow and a decline from 10.1 to 9.7% in the unemployment rate. Yes, we all know the economy is by no means “roaring” back to life, but the fact remains the stats are improving, and, in the midst of these advances, that inflation has gone negative is highly significant…
From a trading standpoint, this immediately points me in several directions:
One, that this seemingly unanimous opinion that “Long term interest rates HAVE to go up, and Treasury Bonds HAVE to go down” is dead backwards. There is nothing more important to Treasuries than inflation, and DEFLATION, which is usually a non-existent factor, is extremely bullish for Treasury Bond prices.
Two, All the talk about needing Gold as an “inflation hedge” is a story that $1100 buyers of Gold are doomed to regret…for YEARS.
I continue to recommend Buying Treasury Bonds, while Shorting Gold and Silver and various other commodities, with Soybean Oil still being at the top of that list.
And here’s how to do it the smart way…
Give me a call if you’re interested…