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Inflation Hounds

Last summer, I used the following chart to help gain clues as to what was happening in our inflation-fueled equities markets. Given that gold stocks have had a leadership position in the broader stock market, both to the upside as well as down, I have found the HUI's relationship to the S&P 500 very useful.


Chart courtesy of stockcharts.com

What this chart tells me now is that the miners are in danger of signaling a deflation scare that means business. Should that trend line break, the miners would provide a convenient early warning system for a potential greater decline in the general equities markets. Arguments for the deflation impulse? The dollar has grappled with its much ballyhooed bottoming process and the Fed continues its orderly pace of tightening the funds rate. The bond market remains comatose, which would normally (emphasis on normally) indicate that there is no inflation problem.

The gold miners should be sniffing out inflation if it is in the system in excess, whether from obvious sources or more covert origins. The chart above says they have not yet found it during the current short term cycle, but it doesn't yet say they won't. This is one chart among many tools to consider when trying to flesh out the correct short term macroeconomic trends.

I remain of the opinion however, that the long term trend is man-made inflationary pressure overlaid on top of a righteous and economically organic DEFLATIONARY trend that is responsible for progress in the form of productivity, efficiency and ongoing economic health. In short, the need to meet and deal with the natural deflationary impulse is a root driver of progress.

Regardless of whether we have a deflationary blip, or something longer lasting, it is obvious that the words inflation and deflation are little more than good headline material. We have had, and will continue to have both in the longer run; a deflationary global labor arbitrage which allows the bond market to pretend inflation doesn't exist (or is at least, cancelled out), as well as a creeping inflation in the things that can't be arb'd, automated or outsourced, like healthcare and education along with food, material and energy commodities.

Any deflation scare we have now is likely to one day be met with more liquidity creation, or put another way, more inflation. It is just a matter of timing. To people still speculating in this casino, er, stock market, the short term twists are very important. I have heretofore been in the asset inflation/hyperinflation camp, and still am for the longer term. For the short term, I am keeping an eye on that green line.

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