Loic Le Maho @LoicInv: "Back on April 12, I..."

France

Back on April 12, I posted this chart of the inflation pipeline: import prices feeding into producer prices feeding into the CPI. Two months later I have extended it with the latest data, and the picture is even clearer (see graph below). Look at the right side of the chart. In April, import prices rose 1.9% in a single month (22.8% annualized !) and producer prices 1.4% (16.8% annualized !). These are the prices businesses actually pay. Meanwhile the CPI, the number the media and the Fed wave around, printed only 0.6% (7.2% annualized). That gap is the whole story : the CPI is a watered down inflation gauge: hedonics, substitution, imputed rents. When the prices in the real pipeline explode while the consumer index stays tame, one of two things is happening. Either margins are getting crushed, or the inflation simply has not reached the CPI yet. Both are coming. And one important point I mention a lot : GDP growth is reported in real terms, nominal output deflated by a price index. If you understate inflation, you mechanically overstate real growth. Q1 came in at 1.6% and the Atlanta Fed is nowcasting 3% for Q2, which looks like a healthy rebound. Deflate that same nominal output by the PPI instead of the CPI and the rebound disappears. The "resilient economy" is in large part a measurement illusion. We have seen this movie before. The last time we had a full decade of stagflation was the 1970s. $GOLD went from around $35 an ounce to $850 by January 1980, roughly 24x. $SILVER went from about $1.50 to nearly $50, more than 30x. Over the same decade the CPI more than doubled. The metals did not merely protect against inflation, they multiplied wealth while equities went nowhere in real terms. That is what monetary debasement does, and we are far earlier in this cycle than people think. Now the part my copiers actually care about today. This is the third violent crash in precious metals since the war began, and the pattern has been identical every single time: a brutal drop, much faster than the rest of the market $SPX500, then a fast recovery. $SILVER just went from 87 to 65 USD an ounce in less than a month. Vicious. But this is not fundamentals, it is mechanics and dumb quant short term algos selling. Every time we get a hot inflation print or here a perceived "good" job figure, the algos dump $GOLD and $SILVER in unison on the basic rule "hot inflation = hawkish Fed = sell the metals". That rule made sense when a Volcker was willing to take rates to 20%. It makes no sense at all with today's debt load. They sell first, the fundamentals reassert later. I am genuinely not worried. The investment thesis has never been more solid: very negative real rates, runaway deficits, money printing, and now an inflation pipeline that is visibly accelerating. My only real concern is human. I worry that my copiers watching this drawdown turn emotional and panic out at exactly the wrong moment, right when silver still has an extraordinary amount of upside ahead. These movement are DESIGNED to provoke exactly this. If you are copying me, this is the moment to remember why you are here. The volatility is the price of admission. The drops are loud, the recoveries are quiet, and the destination has not changed. Same trade as always.

Not investment advice. The author may have financial interests in the mentioned instruments.