It’s been one heck of a week as global markets appear to be in cognitive dissonance.
One, gold appears to be in a corrective mode. And since gold for me functions as a barometer for the direction of global stocks, the recent consolidation in Gold seems to be having some transmission effects.
Some volatility seems to have emerged in parts of the world markets. Bangladesh’s Dhaka Index recently experienced a violent shakeout with a crash that incited street riots[1], but has rallied intensely to close the week down only 2%.
Where there was no crash the damage had bigger, India’s market (4.22%) fell hard alongside with China (Shanghai 1.67%, Shenzhen 4.59%) as the latter raised bank reserve requirements[2] anew. Another High flying and one of the top gainer for 2010, Peru like Bangladesh experienced substantial losses (4.96%).
On a regional basis, ASEAN and Latin American markets were mostly lower, while East Asia was mixed, whereas major markets in Europe including Portugal whom has reportedly been pressed to accept a bailout have mostly risen. Talk about markets rising as concerns over a crisis ripple.
The Portuguese government has officially declined on the need for a bailout. However like contemporaries Greece and Ireland before her, both eventually succumbed[3] to bailouts. Nevertheless Portugal successfully sold 599 million euros ($778 million)[4] on the back of European Central Bank’s aggressive buying of the Portugal’s offering, aside from declarations of support from Japan and China, may seem to have prevented an auction failure, and thus, may have mitigated the crisis from escalating.
So as we predicted the bailouts, whether direct and indirect, have become a permanent feature of the marketplace until market forces eventually undercuts government ability to do pursue with this strategy.
Some experts say that gold’s decline forebode of a rising dollar that would likewise adversely impact commodity and equity prices. I would deduce that these experts have anchored or fixated their views to the 2008 post Lehman episode.
It isn’t true that a rally in the US dollar automatically means the reversal of the price trends of commodities. In 2005, the US dollar rose alongside with commodities or even gold.
Nevertheless it may seem difficult to become structurally bullish on the US dollar in the cognizance that the US appears as not restricting bailouts on her constitutents but likewise the Eurozone and even the rest of the world.
Inflation Is here
Next, even as gold has been weakening, while emerging market equities have been mixed, commodity markets seem to have picked up momentum. Meanwhile US treasury yields remain elevated from October lows.
stockcharts.com: Surging Commodities, Elevated Yields and Strong S & P
So you have surging commodities, weakening of the US dollar rising equities and higher yields, all of which seem to highlight the return of inflation.
And we seem to be seeing more indications where inflation has been gaining ground over the global economy. Importantly this can be seen even in nations which were supposedly under threat from “deflation”.
The Casey Research[5] enumerates on some of these:
-Consumer prices in December exceeded forecasts, up 0.5%, with core inflation up 1%.
-Producer prices rose 1.1% in December.
-China’s inflation, at over 5%, is beginning to cause problems.
-Import prices into the U.S. are on the rise.
-The European Central Bank is now warning of inflation, and interest rates there continue to rise. Back in the U.S., the rise in interest rates is becoming persistent, with 10-year Treasury rates moving from 2.57% in November to 3.31% today –
And the sequence of how inflation percolates as seen in the Austrian framework as aptly described by Gerald O’Driscoll[6],
``In the Mises/Hayek theory of economic fluctuations, the transmission of monetary shocks works through producer prices and incomes, and only later consumer prices. No measure of consumer prices, and certainly not a subset of consumer prices, is an adequate gauge of inflation.”
And I would further add that Wall Street seems to be acting based on these premises as banks cut holding of US treasuries at the fastest pace since 2004[7].
All the seemingly cognitive dissonance seen in the marketplace appears to highlight on the growing recognition of inflationary forces gaining traction.
At the end of the day, we should realize that inflation and volatility are like twins.
[1] See Bangladesh Stock Market Crash: Evidence of Inflation Driven Markets, January 11, 2011
[2] Strait Times, China reserve requirements raised to tame inflation, January 16, 2011
[3] Wall Street Journal Blog Portugal Bailout Denial: Sure Sign One Is Coming Soon?, January 11, 2011
[4] Businessweek/Bloomberg Portugal’s Borrowing Costs Fall at 10-Year Bond Sale, January 16, 2011
[5] Gold-speculator.com Let Us Print Notes!, January 14, 2011
[6] O’Driscoll, Gerald Inflation Is Here ThinkMarkets.com January 13, 2011
[7] Bloomberg.com Wall Street Dumps Most Treasuries Since 2004 on Growth, January 10, 2011
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