About Me

Retired chief investment officer and former NYSE firm partner with 40 years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Saturday, June 21, 2014

Inflation Potential

The view here since last autumn is that faster liquidity growth would lead to somewhat faster
global economic growth and that such would produce some acceleration of inflation. I have
been looking favorably on oil, natural gas, gold, silver and commodities in general. Measured
yr/yr, the CPI has moved up from a depressed 1.0% for Oct. '13 to 2.1% currently. My
forward looking inflation gauges are continuing to advance as well. Consider the yr/yr rate
of change in the CRB commodities composite (top panel) CRB Weekly

However, the world is after all still trying to shake off the effects of steep global recession, so
you need to exercise some discretion here. There is still slack in global productive capacity
and in key large developed economies such as the US, wage gains have barely kept up with
inflation as slack continues in the labor markets as well. To sustain accelerating inflation in
a normal cyclical fashion, there eventually has to be follow through to wage rates or else real
incomes can be punished enough to weaken growth of demand.

Materials and commodities prices have been rising and there have been some positive cyclical
moves for traders to capture. But it is still too early in the game to pronounce the return of
substantial inflation on a more durable basis.

The CRB has recovered up to the 310 - 315 area. The model I run on commodities suggests
fair value is at 335. At that level, there would be a better balance between supply and demand.
So, there is some value in the commodities sectors but realize that economic demand has to
remain firm for an extended period to take up the slack.

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