For Whom The Bell Tolls

Happy Friday!

You’ve reached the weekend and deserve a nice, cold one

But before you indulge, I’ve got a story for you.

No Man Is an Island, Entire of Itself

One day, I needed to grab some supplies while I was on this business trip.  I had just crossed the Big 5-0 and was feeling it.  Though I run three days a week and maintain my fitness, 50 was a huge psychological barrier.

So I drove to the local mini-mart, parked my car, and walked into the store.

The place was a bit dingy, but it’d suffice.

I started to browse and put some stuff into my basket.

Ding.  Ding.

My ears pricked up.  I craned my neck.  Did I just hear that?

I dismissed it.  Never mind.

Shampoo, toothpaste, deodorant… all were thrown lazily into my basket.  I just needed to get a few more supplies.

Ding.  Ding.

I stopped suddenly.  What is that?

Am I hearing things?  I know I’m getting older, but shouldn’t it be a less steep decline?

As I resume my walk, I notice something.  For such a backward country, this store has got electronic price tags.  Not the ones stick to the goods themselves.  The goods themselves don’t have price tags.  But the price tags on the shelves above the items.

Hmmm….

What else do I need?  A bag of chips and maybe some beer.

Ding.  Ding.

Ok, I am hearing a bell.  It is real.  I’m sure of it.

And out of the corner of my eye, I see the prices on the shelf tags just changed.  Quickly doing the math in my head, they went up about 10% on every item.  Nah, it can’t be…

“Excuse me, Miss,” I say to the store shelf stocker.  “What’s that bell?”

“We ring it as a courtesy for our customers.  Every time the bell rings, prices rise by the inflation rate.  It’s about 10% every 10 minutes.”

“Jesus!” I thought as I sprinted to the cash register.  I wanted to make sure I checked out before another 10 minutes had passed!

Every Man is a Piece of the Continent, a Part of the Main

My Best Man related that story to me over a cold pint of Tiger at the Penny Black pub on Boat Quay in Singapore.

He had been in Harare, Zimbabwe, on business.  This was during the heady days of the reprehensible Robert Mugabe and his idiot central bank governor, Gideon Gono.

That was in the Naughties.  Here’s a chart to show the insane exchange rate:

And the currency idiocy that resulted from the inflation:

Zimbabwe was the breadbasket of Africa for most of its history.  But poor monetary and fiscal management brought it to its knees and left it there. Unfortunately, Zimbabwe still hasn’t recovered from those decades of economic mismanagement.

And that’s the fear in America today.

If America Goes, So Does the Rest of the World

If a clod be washed away by the sea,

Europe is the less,

As well as if a promontory were:

As well as if a manor of thy friend’s

Or of thine own were.

America is no “clod.”  Because most of the essential goods, services, and commodities traded on the world’s markets are priced in dollars, the Federal Reserve is the world’s de facto central bank.

To maintain some sort of price stability, the Fed must maintain control of interest rates.  (Yes, the libertarian argument against central banks controlling interest rates is both valid and correct.  But we don’t live in that world right now.)

This is why you occasionally hear non-US citizens say they deserve a vote in the US.  It’s because US policymaking decisions directly affect their lives.  (Of course, if the leaders they chose were any better, they probably wouldn’t have such a problem.)

So, if inflation gets out of control in the US, it’s only moments away from blowing up in other parts of the world.  And that’s why when the CPI jumps 5% year-on-year, the world sits up and pays attention.  That’s the largest jump in the overall number since August 2008.

The core CPI number, which excludes food and energy, jumped 3.8%.  That’s the most significant jump in that number since June 1992, when I graduated high school!

Any man’s death diminishes me, Because I am involved in mankind.

But is it all going wrong?

As you know, I’ve been a big believer in the inflation thesis.  I’ve encouraged you to look at gold, bitcoin, real estate, and stocks to hedge your risk.  I’ve also said, if not written, that bonds are dead.

Let’s emulate the great traders of the world who always ask this of their trades: “What’s the worst thing that could happen?”

JC Parets, of All-Star Charts, asked a variant of this question, “If this was really the runaway inflation the journalists keep telling us about, then why are Treasury Bonds breaking out?

As I didn’t have JC’s permission to use his charts, I recreated them on stockcharts.com.

Disclosure: I’m a paying subscriber of All-Star Charts and think JC is a fabulous technical analyst, trader, and teacher.

As you can see from the chart above, both the mid- and long-term bond ETFs have turned up. It’s fascinating because if the inflation thesis was entirely correct and the market agreed, bonds would continue their free fall.  That’s just not the case.

By the way, the bond market is where the brains are.  We can’t ignore what it’s telling us if we can decipher it, to begin with.

So… What does the bond market know that we don’t?

Are the deflationists correct?  That the Fed can’t possibly print enough money to overcome the deflationary forces affecting America and the developed world:

    • Senior citizens are selling stocks for cash and houses to downsize.
    • The government is increasing debt to support seniors with social security, as taxes don’t cover the costs.  This weighs heavily on growth rates.
    • Lousy demographics, as no one has children in abundance anymore.
    • The incredible technological advancement we’re witnessing. 

All this puts enormous pressure on pricing.

I don’t know the answer.  Yet.  I suspect no one does.

But we must keep an eye on this.

The upside is that things may not be as bad as they seem.

But if things go downhill from here, at least we’re prepared.

And therefore never send to know for whom the bell tolls;

It tolls for thee.

That’s job done for today.  And a little John Donne, as well.

Have a wonderful weekend!

All the best,

Sean

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