4) Central Bank Balance Sheets v. S&P 500 (since 2009)
20,000 19,000 18,000 17,000 16,000 15,000 14,000 13,000 12,000 11,000 10,000 9,000 8,000
Source: ADM ISI, Bloomberg
5) S&P 500 v. Commodity prices (since 2009) S&P 500
2400 2200 2000 1800 1600 1400 1200 1000 800 600
Continuous Commodity Index
2400 2200 2000 1800 1600 1400 1200 1000 800 600
This was the late, great newsletter writer and irritant of senior central bankers, Kurt Richebacher, writing about mainstream economic thinking on inflation in 1997.
“In their eyes (mainstream thinkers), inflation begins and ends with the consumer price index. When that index rises, it’s bad, but when bond and stock prices jump, it is, by definition, a sign of economic health and absence of inflation.”
In the same newsletter, Richebacher was at pains to distinguish sustainable bull markets from dangerous bubbles. In his opinion, and we agree, it’s dependent on the absence, or existence, of broader “inflation.”
1200 1100 1000 900 800 700 600 500 400 300 200
Source: ADM ISI, Bloomberg 6)
“The answer, in short, lies in a strict distinction between two separate sources of the supply of investible funds: savings from current income versus inflation or non-savings. In healthy markets, savings are the principal source…All money flows from sources other than current savings rank as inflation.”
It hasn’t just been bonds…QE has contributed to bubbles in financial assets in general including the S&P 500 (see Chart 4).
In early 2012, the inflation in financial assets – we’ll use the S&P 500 as a proxy - began to diverge dramatically from a deflationary trend in the cost of “real stuff,” as measured by the Continuous Commodity Index (CCI) (see Chart 5).
But the tide seems to be turning…
One barometer of potential future inflation (in real stuff) is surging. Below is the 5-year Breakeven Inflation for the US (see Chart 6).
Source: Bloomberg
25 | ADMISI - The Ghost In The Machine | January/February 2017
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