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Five Things You Need to Know: The Inflation Hysteria

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Are you paying more for gas? Yes. Are you paying more for food? Certainly. The question is what are you going to do about it.

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Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Consumer Inflation Reaching Hysteria Levels

The Consumer Price Index rose a less-than-expected 0.2% after a 0.3% gain in March, the Labor Department reported this morning. But I just bought a loaf of bread for $2.59, a gallon of milk for $4.58 and spent $80 filling up my car with gas. Clearly, all government inflation data must be a conspiratorial lie perpetuated by bureaucrats and politicians intent on keeping us in the dark about our own checkbook balances, right?

Well, far it be it from me to defend bureaucrats and politicians - certainly anyone with a stake in conjuring up votes from Americans has a vested interest in underreporting inflation - but the Consumer Price Index, flawed as it may be, is just a data a red herring, a smokescreen, a distraction. Simply put, increases and decreases in the Consumer Price Index are the least of our "inflation" problems.


2. What Is Inflation?

The real issue is that the vast majority of us don't understand what inflation really is. Now, we do understand what it means when the same trips to the gas pump in the car require more dollars to fund, or when the same amount of groceries require more dollars to carry out of the store, but these are merely symptoms of inflation.

Today we are in the midst of an episode of hysteria over the symptoms of inflation in two areas; food and gasoline. Some decry the lunacy of the Consumer Price Index, a government measure they say purposefully and willfully understates inflation. Some focus on inflation expectations, as if the mere expectation of continued inflationary symptoms was itself inflationary (this is akin to expecting hair growth to fuel hair growth).

What is inflation? It is actually very simple. It is an increase in the quantity of money and bank notes in circulation.

Where is the confusion? Ludwig Von Mises described it this way:

"[P]eople today use the term `inflation' to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation."


3. So, What Do We Do Next?

So, the question before us is not, Are food and energy exhibiting symptoms of inflation? The question is what happens as a consequence of those symptoms. And here is where we see a massive disconnect emerging.

Today's "inflation" is illusory. It is the tail end of the Federal Reserve's mirage of economic production; credit creation. The mechanism of transfer between the Federal Reserve and the consumer are banks. (It should be noted that the rise of consumer lending units, and the dependence on them (at least until late last year) by companies in the original business of selling tangible products, companies ranging from General Electric (GE) to General Motors (GM) and at one point even Target (TGT), are illustrative of the efficacy of the credit creation and transfer mechanism between the Federal Reserve and the people). And so the potential for this credit creation to fuel more inflationary symptoms is dependent entirely on the willingness both of banks to lend and consumers to borrow.

That is why this debt crisis is ultimately so deflationary. It chokes off credit at the nozzle while the hose (banks' balance sheets) itself is leaking.

Are you paying more for gas? Yes. Are you paying more for food? Certainly. The question is what are you going to do about it. Our bet is you are not going to borrow and spend more. The consequence of credit creation and a crisis of unproductive debt is deflation. This is not an event; it is a process. Step one is the process of banks unwinding debt. Meanwhile, today's symptomatic inflation in some high profile categories paves the way for tomorrow's unwinding of debt by consumers. If the unwinding of debt and tightening of credit for corporations is merely a whisper of deflation while symptoms of inflation persist, the unwinding of debt by consumers will be a roar.


4. Where We Stand

Meanwhile, inflation hysteria aside, demand remains in control of stocks.

Below is where we stand with the point and figure bullish percent indicators for equities, based on Investors Intelligence data.


5. Minyan Mailbag

Kevin,

Quick question regarding the "Where We Stand" point and figure bullish percent indicators. It "feels" like (gut feel) these indicators have been indicating Bullish for a long period. How long a period have these been positive?

Thanks,
James

Below are are the dates of the most recent Bullish Percent reversals, up and down, and the performance of their closest-related indexes. Point and figure charts are available on the Minyanville.com home page in the module on the right, halfway down the page, courtesy of Investors Intelligence.

Note that these bullish percent indexes are not timing devices, however. They simply tell us whether demand or supply is in control of those areas of the markets and require.

Each bullish percent index is equal-weighted, while the most closely-related stock index is usually capitalization-weighted, giving larger stocks more of an impact on index movement. The important thing is that when positive, and moving higher, these supply/demand indicators simply tell us the context of market movement for the average stock is positive.

  • NYSE BP, reversed up March 27: New York Composite Index (NYA), +6.73%
  • SPX BP, reversed up March 20: S&P 500 (SPX) 03/20 - 04/16 (+2.65%)
  • SPX BP, reversed down April 16, formed higher bottom, reversed back up April 25:
    SPX 04/16 - 04/25 (+2.43%); SPX 04/25 - present (+0.37%)
  • NDX BP, reversed up March 20: Nasdaq 100 (NDX) 03/20 - 04/16 (+5.42%)
  • NDX BP, reversed down April 16, formed higher bottom, reversed back up April 24:
    NDX 04/16 - 04/24 (+4.2%); NDX 04/25 - present (+4.28%)
  • RUT BP, reversed up March 25: Russell 2000 (RUT), 03/25 - present (+4.48%)
No positions in stocks mentioned.

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