Inflation

Bonds moved higher in August but did not make new highs. However, it is only a matter of time. Most of our inflation work is still cool, but this month we present one of our tools that is mildly disturbing. The commodity spot price diffusion index seems to be on the rise, although not yet in negative territory.

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Bonds held their own in July but did not make new highs. However, it is only a matter of time. We don’t expect much in August but look for a move below 7% for T-bonds by year end.

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Bonds rallied strongly in June but did not make new highs. However, it is only a matter of time. Look for a test of the highs in July. Also, introducing “Inflation Watch,” a new regular feature that will report on our ongoing inflation research work.

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Examining five of our Early Warning inflation analytical tools, we currently find little if any indications of an inflation resurgence. In a strong economy, inflation could run to 7% next year, but the serious inflation danger lies down the road.

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Regardless of the recent reported upticks in the GNP Deflator and CPI, our Early Warning Inflation work provides little if any evidence that inflation is beginning to accelerate. Five of our inflation analytical tools are presented and discussed, along with the risks of Deflation.

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Examining our early warning inflation tools, we currently find few indications of an inflation resurgence. Only the CPI momentum work is somewhat disturbing. Herein we review this work, and also discuss the inflation outlook for 1985. In a strong economy, inflation could run to 7% next year, but the serious inflation danger lies down the road.

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At this point there is no indication inflation may be about to accelerate. Some may recall that in the early spring of 1984, this work led us to conclude that 1984 inflation might be a lot lower than most then thought at the time. This section also includes comments on the possibilities of deflation and what might be expected if it does occur. It probably would not be the disaster some seem to think.

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It seems that once all of Wall Street becomes aware of an indicator or historic market pattern, the damn things no longer seem to work. Is this now true of the Presidential election cycle? Well, don’t give up on this yet. According to Arthur Merrill’s research, the market so far in 1984 has been acting just like it is supposed to. The fireworks come in the last two quarters of the year.

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Most of our inflation momentum work has improved significantly in the past month. The big surprise in the last half of 1984 may be that inflation is not going to accelerate. The 7% inflation many seem to be expecting this year end now looks very unlikely to us. The question is, will the bond market believe it?

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The cyclical bull market, exploding over a year ago, looks healthy. The 4-5 month corrective phase may be over. The excesses have been worked off and the next up-leg is due momentarily. On a secular basis, the stock market is probably about two-thirds of the way through the move beginning in 1974.

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The one-year diffusion index of 90 commodities is indicating a resurgence of inflation may be right around the corner. We think it is wrong. Our other tools don’t confirm. However, the past record of this tool cannot be ignored.

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A preview of this issue’s “In Focus” feature on the relative attractiveness of “Zero” Treasury securities. Also, an Inflation Watch update: The caution flag is still up, but our monitoring tools are in no worse shape than a month ago. Actually, a few are just a shade less ominous.

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Inflation Watch - Will inflation accelerate significantly in the next 12 months? Some indicators are again looking more ominous. Gold for Pension Funds? We have been long-time believers in individuals holding gold as a form of insurance protection against possible future hyperinflation. Why not for pension funds, too?

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Long-Term Capital Gains Pressure: In the last month or so several have commented that the stock market will be subjected to significant selling pressure in late summer, early fall. Inflation Watch: Things are looking better. The possibility of any significant uptick in inflation in the last half of 1983 now looks very remote. However, 1984-1985 is another matter.

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An updated graphic and statistical comparison of the current bull market with bull markets of the past. It still appears the current inflation complacency will be upset in coming months. The public is clearly stampeding back into the equity arena, to a large degree via mutual funds.

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Others are also beginning to think 1983 inflation could surprise on the upside. From the market’s standpoint, the fear may be as significant as the fact. This could be the “reason” for a stiff stock market correction.

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“How to Beat the Stock Market?” In a bubbling high-tech market, a strong dose of low P/E enforcement is good for the soul. So, in mid-March, my wife and I had dinner with good friend, David Dreman. “Inflation Watch – Time for Some Caution?” Today, with most inflation measures under 4%, we are approaching what has historically been an environment of moderate inflation, perhaps even price stability.

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An update of our historic research tracking all years of significant inflation acceleration and deceleration since 1900. If inflation does rise to 6% by year end 1983, the stock market outlook is not so bright.

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Comments on current farm conditions, inflation measures, DJIA 1982 earnings calculations, “Whoops” bonds, California script, and Minnesota’s new oil field.

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Science & Technology and Inflation Hedge (natural resource) stocks led the market in January. Near term rise in some commodity prices does not indicate high inflation returning. Longer-term measures still at comfortably low levels and most trending down. Don’t panic.

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