Inflation Bubble

Weekend inflation news round-up:

2013-10-26T10:41:00.001-07:00

“There’s a lot of risk that the Fed could overshoot and cause a pick-up in inflation at some point, and the market’s not priced for that risk." Um..... "a lot of risk," is like LOLZ OMG "DUH" in teenager-speak...
Australia inflation surprise, China rates highlight Asia price pressures.
Japan CPI Data a Real Inflation Signal, or Just Noise?
US health care costs are tumbling (down). This was expected by anyone paying attention, of course: "If Obamacare succeeds in lowering healthcare costs further then it will have important implications not only for fiscal policy, but the disinflationary impulse will also continue to provide a favorable backdrop for the Fed to maintain its über-accommodative policy stance for longer."

Inflation news round-up

2012-09-17T09:35:00.002-07:00

News round-up now that QE Infinity is baked in:

A signal the FED will tolerate higher inflation:

"The difference between yields on 10-year notes and same- maturity Treasury Inflation Protected Securities, an indicator of trader expectations for consumer prices over the life of the debt, widened to as much as 2.54 percentage points. It was the most in 16 months and compares with the average of 2.16 percentage points over the past decade. The Fed said yesterday it will purchase $40 billion of mortgage debt a month."

$40B per month is $130 per capita ($1,550 per year). That's the average buying power the dollar will lose if Ben's action goes as planned. The median would be much lower though because happily the QE events favor the top 5%. Doesn't that make you feel better?

What QE Inifinity may mean for commodities and agriculturals:

"The US open ended QE policy is exporting inflation, and therefore misery to many impoverished parts of the world. Will the continued instability in the area rapidly lead to even larger major military conflicts which we can already ill afford, not to mention the ominous oil price spike that would ensue?"

Hilarious, the US #1 export is now inflation... Bring on the global misery! Maybe more Middle East unrest even (and how much longer will they blame this on a movie?)

Are we already seeing inflation warning signs, before QE infinity has even begun?

"Newly released figures from the Bureau of Labor Statistics show that the CPI (Consumer Price Index) in all categories rose 0.6 percent in August 2012. This is the biggest monthly rise since June of 2009. Most of the increase was due to a rise in gasoline prices. Gasoline rose a full nine percent over July, as unrest in the Middle East continues to thrive. Food prices also rose slightly, up 0.2 percent. Since August of 2011, the CPI has risen 1.7 percent"

Real wages are down 0.7% in 2012 and the CPI is up 1.7% (from August 2011), so that's 2.4% more of your household budget that goes to buy absolutely nothing more than you bought one year ago. But don't worry, because that includes volatile food and gas prices, and we all know only crazy folks engage in weird, fringe activities like eating... and buying gas... Which is certainly not a concern for Uncle Ben's Bankerz crew...

Coincidence?

2011-08-10T07:57:00.001-07:00

8 silver quarters ($2) could fill a tank of gas in 1964 and 8 silver quarters ($56) can fill a tank of gas today.

To QE3 or not to QE3?

2011-05-31T09:12:00.000-07:00

Now we are one day away from the calender flipping to June, the market trading story du jour is whether the FED is considering QE3. We are already scheduled for QE2+, wherein the FED ends outright treasury purchases but still repurchases new debt with existing maturing securities. So under no circumstances is the FED balance sheet going to shrink. The only consideration is how the market reacts to the rate at which the balance sheet expansion is slowing.

News Coming in For:
The Inevitable-or-Face-Central-Bankruptcy Theory (with video!)
The "Soft Patch Case" Means QE3 is Likely
The Bernank will be "Forced to Execute QE3"

News Coming in Against:
A 10% Chance
"High Bar" Necessary to Trigger QE3

Either way, this is the highest priority fiscal news item for the month of June, trumping Greece and PIIGS news a thousand times over. If the market feels QE3 is coming, or should ibe announced as policy, then the dollar will continue to sink, commodities will rise, and markets will rise. If QE program winds down as has been previously indicated, then the opposite will occur. A soft summer sell-off would then be probable and fairly predictable.

Memorial Day Weekend inflation news round up

2011-05-29T11:14:00.000-07:00

The AP is reporting that gas tanks are draining family budgets. "For every $10 the typical household earns before taxes, almost a full dollar now goes toward gas, a 40 percent bigger bite than normal. Households spent an average of $369 on gas last month. In April 2009, they spent just $201. Every 50-cent jump in the cost of gasoline takes $70 billion out of the U.S. economy over the course of a year. That's about one half of one percent of gross domestic product. The median household income in the U.S. before taxes is just below $50,000, or about $4,150 per month. The $369 that families spent last month on gas represented 8.9 percent of monthly household income, according to an analysis by Fred Rozell, retail pricing director at Oil Price Information Service. Since 2000, the average is about 5.7 percent. For the year, the figure is 7.9 percent."

The UK's Daily Mail on recent food prices: Memorial Day BBQ's up 29%. "Those thinking of hosting a BBQ - even a modest one - can expect to fork out an extra $45 on food to serve a dozen guests. The total cost comes to $199, or around 29 per cent more than last year... and that's before soda and alcohol, according to the latest data for metro New York. Lettuce has sky-rocketed 28 per cent since last year's traditional BBQ, while an ear of sweet corn is now 50 cents, up from 20 cents last year. Those who don't like tomatoes are in luck though: they're up a staggering 86 per cent on last year. Nationwide the story is the same. Ground beef is up 12.1 per cent on last year and sausages are up 6.2 per cent, according to the U.S. Bureau of Labor Statistics.And don't even think about potato salad. The apple of the ground is up 13.4 per cent. Ice cream is up 5.1 per cent, beer up 2.4 per cent and coffee has increased by 13.8 per cent nationwide."

Bond Market Flashes Warning Signs

2011-02-07T08:55:00.000-08:00

"The U.S. bond market has begun sending a message that inflation risks are rising and the Federal Reserve may be too slow to act, potentially marking a significant turning point in the economic recovery.

In the past week, Treasury-bond yields have jumped to their highest levels since last spring. Yields on 10-year Treasurys surpassed 3.5% and 30-year yields broke through 4.7%, which makes some worry could mean rates will march even higher."

"Long-term rates have been gradually moving higher in response to an improving economy and rising commodity prices. But in recent days the increases in yields accelerated, a move many say is due to the worry that the Federal Reserve may be underestimating inflationary pressures in the economy, and may act too slowly to tame them. Inflation is bad for bondholders, eroding the value of their fixed returns and sending the prices of their bonds lower."

"The yield on the 30-year Treasury bond ended Friday at 4.732%, its highest since last April. Adding to the almost-panicky feel in the bond market on Friday, traders circulated a chart of 30-year-bond yields showing that the yields had broken out of a 30-year trendline—a sign that the decades-long bull market in Treasurys may be drawing to a close. Most in the market have suspected that the long bull market was likely over. Friday's move seemed to help confirm these suspicions."

"The Fed isn't even halfway through the second round of its quantitative-easing program to buy $600 billion of bonds, commodity prices are much higher, and the economic recovery has been in progress for a year. Rates are also rising because of gnawing concerns about government finances. That will be in fresh relief this week, with the Treasury planning to sell $72 billion of new notes and bonds."

Emerging Markets Pummeled by Inflation

2011-01-31T08:08:00.000-08:00

"The political turmoil in Tunisia and Egypt is a reminder of the days when emerging markets were the Wild West of investing."

"While it is easy to dismiss events in those countries as unlikely to be repeated elsewhere, especially in Asian and Latin American nations with strong economic growth, investors in emerging markets are facing a much riskier landscape as a result of inflation."

"While most of the moves in emerging markets haven't been big, they mark a change in the outlook from 2010 when their fortunes seemed much brighter than that of struggling developed markets."

"'We currently view overheating within the emerging-market complex as the greatest macro peril facing the global economy," Michael Shaoul of Oscar Gruss & Son wrote in a research note Friday."

COINSTAR MISSES - PLUNGES 25% A.H.

2011-01-13T15:16:00.000-08:00

And it wasn't even that big of a miss! They guided down from $1.85B to $1.70. This happens once in awhile, especially considering this is a high growth company. I wonder investors in other high-flyers are going to take this as fair warning, I mean, a paltry 8.4% earnings forecast revision, in the grand scheme of things, is not all that bad. If you're a NFLX investor you must be wondering right now what could happen if the pink ponies and pixel dust dries up on your position, one that has had an 800% run in 2 years. (and almost twice the P/E of CSTR, as of yesterday).

I think it would result in the Smell of Fear. And so it begins. Let's call this for what it is, the beginning of the correction?

Agriculture runs

2010-10-09T23:44:00.000-07:00

This caught people off guard: Soaring prices threaten new food crisis

Corn ran 13.3% in one day as the closely watched USDA report lowered the estimated US output by 4% which will slash US stockpiles of the foodstuff to the lowest levels since 1996. Oats, barley, soy and wheat also ran sending DBA (+6.3%), CORN (+14.6%) and others on a tear while TSN and SFD got dropped like ugly sisters.

The key reason attributed to the shortage was a convergence of adverse weather around the world this year (hot, dry, wet, etc), though this can hardly be a surprise. In the world of infinitely fast information and literally hundreds of millions of individual market players, what are the chances someone didn't say "hey, maybe crop yields will be 4% lower this year?" We here at inflation bubble are looking for signs of global monetary policies (such as US-QE) showing up as price inflation, which it inevitably has too (unless "this time it's different" ... my favorite phrase).

So, if the price of corn just rose 13% in one day, does this count?

Looking back a bit here, assuming interest rates 'had to rise' (especially in the near term) is one of the most painful calls of my life (the other was betting heavy that GS and MS were going to fall in Oct-2007, I missed this one by 1 lousy year!)... It is obvious now that the Feds can, and will, manipulate interest rates to all time lows and keep them there (for the time being), but this does not mean that inflation will not be seen elsewhere.

IT IS POSSIBLE TO EXEPERIENCE INFLATION WITHOUT RISING INTEREST RATES. Case in point, all this hoopla around the currency wars, essentially a game of international musical chairs of sorts: a race to the bottom before there is no longer any more ink in the press and this whole debt charade goes (potentially literally) nuclear. However, this can take a Frustratingly. Long. Time (the Feds have a shitload of ink). But let's not miscalculate anything here: gold is at $1,350 for a reason, up 350% from 2003, which was coincidently the time that "banks" began rubber stamping NINJA loans to anyone who could fog a knife. After gold, I predicted agriculture would be next. Now that it turns out I might be right, I have stepped out of the woods, shaved the beard, shaken off the $20k in unfortunate late-summer losses (really it was all about money management and not picks-- getting greedy and all), and put my mountain-manned soul-searched being of the past two months to work for the common good.

So with that I'll thank my lucky stars for being long CORN (stock) and DBA Jan11-28 calls and look forward to what next week brings. A crash back down means more hibernation on the inflation bandwagon, but a further run is reason to watch very, very carefully. The times are potentially, as they say, 'a-changin.'

So on to next week and beyond, one initial point to contemplate on the prognostication front: DBA left a nasty "evening star"-esque candlestick pattern back in June 2009. This is indeed troubling as the last few months mirror the run-up to this previous one closely. However, overlay this chart with gold and something eerie is seen: a divergence around that same point in time, Agriculture went down and sideways as gold soared. If one of these plays catch up to the other, then something is going to move, and soon.

Is the hibernation over?

FFO versus Au

2010-09-22T09:49:00.000-07:00

Can someone please explain this?:

Some serious decoupling going on around January 2003. Isn't this when the housing bubble was in full swing?

(Source data on fed rate and gold)

Left axis is gold multiplied by the Fed rate (as a hard integrer, not as a percent). On the right is gold divided by the Fed rate.

Whatever this means, were off in the "10,000 units" zone again. Zooming in on the last few years:

Wanna guess where there first purple point ticks off the baseline? Answer: October 2008.

But remember, the Fed keeps the rates low because there is no inflation. At least, that is what you're being told, and the government always tells the truth, so move along ...

Some recent trading activity and thoughts - Last weekend of August, 2010

2010-08-28T17:35:00.000-07:00

These are my current TBT and TLT positions:

TLT:

1) 10 Sept-110c (these are meant to capture any further appreciation in treasuries should they still be mid-rocket-rise like Dec 2008, when TLT hit 122+).

2) 4 Jan11-100p (would anticipate rolling these to 105 if TLT should go over 115 this month)

TBT:

3) 60 Sept 35 calls

4) 10 Sept 45 calls (old position that never got rolled down, not expected to make jack here)

5) 5 TBT Sept 40/33 put spread (short the 40 puts, long the 33 puts). This position used to be 10 contracts and I had to shrink it back. Looking to kill the trade off over the course of the month due to disliking short puts on leveraged funds (more on that below)

I also have two more TBT plays I would consider LEAPS (these suck because one of the epiphany's I've had recently is that long term investments in leveraged funds is a non-starter). I'm looking to close these on any near term bounce:

6) 10 Jan11-43c, and

7) 10 Jan12-75c

Suprisingly, should interest rates continue to fall, even after Friday's treasury pullback, I would only need TLT to reach ~113.50 in order to break even on the short term plays (considering also that much of the loss has been factored into the the rolls from August, hence the -$15k bitch-fest in a comment following my last post). So either, treasuries need to go way WAY up (TLT 115+, less preferable scenario), or follow Friday's march much lower (TBT 36+, more preferable scenario).

Another position I entered recently was 10 SDS Jan11-32p. This is a 2X leveraged fund that rises when the S&P500 drops. I am not necessarily bullish on the market, but have certainly noticed a trend in the price action of leveraged funds in general. EVERY THING ELSE BEING EQUAL, PUT OPTIONS ON LEVERAGED FUNDS ARE PREFEREBALE IN THE LONG RUN. This is simply due to the premium the fund must pay to remain properly leveraged. When the market falls in the short term I lose on SDS, but if it stagantes or rises slightly, the puts outperform the calls due to decay in the long term (even if the market drops a little this still works out).

I'm not going to try to dig it up now but last year I noticed something funny about two leveraged funds that were both 2x (or 3x) the US financial sector in opposite directions. OVER 2 YEARS THEY WERE BOTH DOWN, one about 60% and the other 90%. That is, if you had bought puts on both you would've been guaranteed a profit regardless of market direction. This type of 'free money' does still exist and needs to be exploited.

Hyperinflation

2010-08-28T16:59:00.000-07:00

Here's a good twin set (original and Part 2 follow-up) blog article pair that lays out a case for American hyperinflation, with a particularly good execution mechanism that ultimately comes around to the following four conclusions:

1) A hyperinflationary event will happen, following the crash in Treasuries.

2) Commodities will be the go-to medium for value storage.

3) All asset classes will collapse in short order.

4) Most importantly—civil society will not collapse along with the dollar. Civil society will stumble about like a drunken sailor, but eventually right itself and carry on with a new normal.

Forbes editorial

2010-08-15T17:05:00.000-07:00

Adding some color to the announcement of QE2:

"I expect the coming doses of quantitative easing will finally spark adverse reactions, first in the dollar and later in the bond market. When a falling dollar forces consumer prices and long-term interest rates to rise, the Fed’s actions will be rendered impotent. The Open Markets Committee will have to make a horrific choice: fight inflation by tightening policy into a weakening economy, or fight recession by allowing inflation to burn out of control. I think it’s obvious that they will choose inflation, all the while pretending that it doesn’t exist."

My question is when?? TBT is killing me. Everyday, interest rates GO DOWN MORE! I'm bleeding tremendous losses and have exacerbated a chasing strategy that has hurt me in the past... the very point of which tracking decisions through a blog was originally intended to help cure.

This week I expect to make some changes. The key is to stay focused, to not panic, and take control instead of losing it.

Bubble forming in bonds

2010-08-02T08:48:00.000-07:00

Even Forbes is getting in on it now:

“Have Americans ever been satisfied with earning a steady but low rate of return? What we have in American history is rolling from bubble to bubble, whether it’s stocks, real estate, commodities, emerging markets, time shares . . . when one bubble bursts they are moved to the next one.” Lee implies that the bubble currently forming is in bonds.

Inflation, not economy, now principal risk

2010-07-29T10:16:00.000-07:00

Inflation is the 800 pound gorilla in the room, but it is a ghost of a gorilla because you sure cannot see it when mortgage rates are at an all time low (4.54% ?!?!?). This is the point of maximum opportunity. Go short treasuries!

Option Expiration Friday

2010-07-16T08:36:00.000-07:00

Ug. Black Friday. Expiries... I've got a few....

Here's Thursday's (7/15) action first:

- Sold 3 (of 4) GOOG Jul-500c @ 8.70 near EOD - not real hopeful of earnings upside but kept 1 call on hand for it (up 5.68, +188%).

- Sold 20 TBT Jul-36p @ 0.17 (-55% - in hindsight, this cash-in was premature, and a good hedge against poor GOOG earnings and a down Friday was lost ....)

- Day traded 10 QQQQ Jul-45c (in at 0.44 out at 0.74, +68%)

Friday's Expiry list: (all of these are -100%)

GOOG: 1 x 500c (-3.02), 2 x 540c (-1.85), 8 x 560c (-2.03)

LEN: 6 x 15c (-0.79)

TBT: 10 x 37c (-0.69), 10 x 34p (-0.12)

$302 + 370 + 1624 + 474 + 690 + 120 = 3,580 total loss.

Action items: roll -10 TBT 40p to August. Clear out NSM near EOD, if over 14.

Monster Money Printing Pre-Holiday week trading

2010-06-29T08:58:00.001-07:00

This latest market downtown and negatively-spinning market data practically ensures that Uncle Ben's deflation protectionist policy will slip by the JECK Feds (the austerity-measurists Kansas, Richmond, Philadelphia, and Dallas Federalists).

Remember that Uncle Ben was prepared to bail-out up to $5T and he's at a measly $1.8T so far. We're just scratching the surface.

Now, having said that, even IF these bail-outs are applied, and when, the effect on inflation is easily 18 months out, providing credence to the unprofitably of my recent maniacal TBT buying spree, however, it is an eventuality and needs to be factored into any portfolio.

PS - my opinion is, further bail-puts are more of a 'when' than an 'if' because the US will never sacrifice its the dollar's global hegemony via deflation.

Fed Rate News today

2010-06-23T07:16:00.001-07:00

Headlines focusing on 'double dip recession' talk. Inflation a million miles away from the dialogue at this time.

Contrarian point

2010-06-22T08:59:00.001-07:00

Beware the inflation hypsters!

It's hard to fight the 20-year chart in that link. TBT buyers beware! (but I'm still in for now....)

Tuesday Profit taking

2010-06-09T09:22:00.001-07:00

I'm not bearish, just currently over-bullish and taking a little off the top from the recent bounce. Trades are in the comments.

YES DRUDGE - Did you save me????

2010-06-08T21:40:00.000-07:00

DRUDGE GOES POSTAL WITH $19.6T FRONT PAGE POST.

If TBT doesn't move up 4% tomorrow I throw in the towel and join the deflation movement.

Looming "Third Bubble" about to go ............. Pop!

2010-06-06T20:30:00.000-07:00

First equities (2000), then credit (2006) and now bonds (20XX????).

Don't hold your breath, but don't wait too long to get in either. Always be protected out there (TBT!).

Friday Action (6/4)

2010-06-04T10:13:00.000-07:00

No trades on Thursday. Working. The benefit of a balanced portfolio is being comfortable taking a day to a 3 weeks off without fear or much concern.

Friday June 4:

IN:

TBT short put spread, sold 10 Jun-41 puts at 2.31 and bought the 32's at 0.03 [possibly hold to expiry]

OUT:

sold ZQK at 4.87

2010-06-02T09:13:00.001-07:00

June 1 action:

- 4 GOOG-560c at 3.10. [Hold for run-up to earnings, roll to August expiration if necessary]

- TNA, 100 shares, in at 46.24 (out at 47.07), re-entry at 46.24, [holding overnight for market bounce]

- 1000 SH C at 3.93. [Long-term hold]

- ZQK 400 sh @ 4.59 [hold for the week]

Google Play

2010-05-31T22:00:00.000-07:00

Around 2/28/2008 GOOG's 50-day MA fell below the 200-day (price: 473). Over the next 19 days the stock lost about 7% (439) before going on a 44 day run to 600 (+37%, including an earnings event in April).

On 5/27/2010 it looks like the 50-day has once again dropped below the 200 day, usually a bearish sign. However, if GOOG we're to repeat the price performance from 2 years ago, it could be setting up nicely for a contrarian play. Using the price on the May 28th close of 485, and similar price action this time around, a drop to 450 is possible (around 6/15), and then a run to 615 by July 29th. August options are not available, so using July options as of Friday's close, and assuming most of the run this time around will be captured by the July earnings event (and the earnings release falls before options expiration, which they usually do with GOOG), this has the following profit potential per $1000 invested:

This analysis would recommend the 560 to 580 strike range (a paltry 1,700+% gain). The July 560, 570 and 580 calls closed at 3.32, 2.50 and 1.75, respectively. These actually seem pretty cheap considering the VIX is still rattling around 30+. It would be nice to see volatility fall before getting into this position, but not at the expense of any upside on GOOG if they've already turned the corner. If the volatility remains high this may be a good straight stock play but you lose the leverage and eat up margin.

Now, it's obviously a fool's errand to try and time 37% moves in stocks over a month and half timeframe, but in this case you would only need to be right once every 18 times in order to break even. If you were right, say, only 1 in 10 times you are still making 80% a year....

So anyway, this seems like a relatively good risk/reward, as far as GOOG goes in my opinion. Obviously the lower strikes are 'safer.' Even without the herculean run up to 600+, the 520 calls are 10.50 and would "only" need GOOG to run to 542 in order to double in value, and still has the potential to turn into $9,000 if the run-up were to occur. July might not be far enough out and this position may need to be rolled into August during a good bull run but those are good problems to have.

I was looking to scale into this position during the first week or two of June. I've also been looking at C, with Bill Ackerman's big surprise call-out and all, but at $114 B Market Cap... dunno... really hard to imagine this thing back at $300 B or more any time soon, but maybe worth scaling into a straight stock position in the next several weeks as a long-term hold.