Weekend Market Commentary: Special Edition

Written by

Weekend Market Commentary For 06-28-2014

UPDATED: 0910 EST 2014-06-28

Inflation is the talk around financial circles lately and most think they have it right. Some claim that the Middle East is going to have oil production issues driving up consumer prices and ultimately inflation. Others say that US inflation pressures will accelerate if/when velocity of M2 money picks up.

My feeling is that inflation will not be an important issue for the 2014 business cycle, but it will be an important talking point for many who have nothing in it except to stir the pot and upset the 'Sheeples'.

Follow up:

For one thing, the velocity of M2 money still a headwind for now as the recession plus a huge expansion in the money supply have decelerated money to its slowest pace on record.

Even higher oil prices will hit drivers this summer, but that too is unlikely to impact growth (CPI) as any loss of export will be corrected pronto according to Cliff Wachtel.

Inflation is a monetary phenomenon under the control of a currency's central bank and the Fed WILL do anything necessary to control inflation and according Ms. Yellen, she is not at all concerned.

According to Wikipedia:

"In economics, the money supply or money stock, is the total amount of monetary assets available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits (depositors' easily accessed assets on the books of financial institutions). It is easy to confuse the amount of spending money in the economy with the amount of money in the economy."

Cliff Wachtel writes in his article below that yes there will consumer price increases in the short term, but that they are unlikely to change Fed Chair Yellen mind on Fed Policy.

Oil, Gold, Inflation: Connecting The Dots

  • Higher oil prices will soon be felt on the consumer level, though it's unlikely they'll impact growth yet. If fighting in Iraq even threatens the southern region, however, there is a chance of much higher prices. That said, whoever is in charge will want oil exports restored ASAP.

  • Oil and gold are moving in sync, probably reflecting concerns about currency values or coming inflation as that is the primary driver of gold.

  • Rising short term inflation is unlikely to influence Fed policy. Even if inflation does establish a long term uptrend, inflation is only one factor that in Fed policy considerations. It could well tolerate higher inflation if it believes low rates continue to support job growth.

Paulo Santos admits that "the signs that there's looming inflation aren't yet very strong" still thinks that all this printing of money is the main factor in driving the markets upwards and inflation is probably the main roadblock towards the rally continuing and I would agree.

Inflation Is Rearing Its Ugly Head


  • There are some signs inflation is showing up, after years of money printing.

  • This is happening both in the U.S. and globally.

  • With money printing being the main factor driving markets upward, inflation is probably the main roadblock towards the rally continuing.


Kevin Flynn feels that the stock market is overvalued and any recent Geo-political scares only ends up fueling the markets to move higher. Inflation is a worry that may or may not be valid and the outcome is certainly not 'preordained' without a fight from Mr. Market.

Inflation, Growth And The Stock Market

I would suggest the following conclusions: one, that without further supply shocks, inflation will not get traction in the current business cycle. This is in large part due to two, general inflation will continue to be constrained by diminished purchasing power, low real wage growth, and moderate economic growth overall. While we will surely see some better quarters for growth rates than the last one, including its cyclical opposite, the economy is unlikely to move from five years of low growth to five years of higher growth without interruption or significant change in the current economic structure.

Three, until the next credit contraction comes to pass, asset inflation will continue in select areas, including high-end real estate, collectibles, fine art, and equities. Though the recent low in stock market volatility will not last, one should expect a transition period of occasional outbursts rather than a sudden discontinuity (though geo-politics can change this).

Finally, the real threat for the end of the current cycle resides not so much in interest rates rising to still-low levels, but that asset inflation continues to widen the divergence between select price levels, particularly equities, and the general price level dictated by the real economy. Should the business cycle reach a natural end at a time when asset prices - encouraged by the usual failures of global worries to morph into global disasters - have climbed back to historically maximal deviations from the mean, their return to the mean (and typically beyond) is far more likely to cause the credit system disaster that the stock market and central banks fear, than would a modest increase in the level of real rates.

Basically, all this talk of inflation moving the markets is just talk and inflation is at least not a near term event. But what it does imply is that the markets are facing a headwind because of it.

Inflation Fears And The Fed

  • Last week's Consumer Price Index (CPI) release spooked a few people with a month to month change of 0.4%, the largest since February 2013.

  • The Fed chair, Janet Yellen, is far less concerned about inflation and less worried about last week's CPI report than most.

  • Other inflation measures do not point to a jump, or even a modest rising trend, in inflation.

  • What does all this mean for Fed policy? Very little. However, we are likely to hear a lot more nervous talk about inflation during the summer.


(Follow Closing Market Averages at end of this article)

WTI oil closed Friday at 105.75 (down -0.10 or -0.09%)

Brent oil closed Friday at 113.21 (even 0.00 or 0.00%)

Copper closed Friday at 3.164 (down -0.009 or -0.27%)

The Demon The Gold Bears Are Mistakenly Overlooking

Gold closed Friday at 1316.90 (down -0.10 or -0.01%)

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Friday's Market Numbers

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Written by Gary

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