“It’s Inflation All the Way, Baby!”

The title’s quote is from my late friend Jonathan Auerbach, who was the founding/managing partner of Auerbach Grayson in NYC, a brokerage specializing in global investment.

“It’s inflation all the way, baby!”  he wrote to me in an email exchange as we were preparing to capitalize on the Q4 2008 meltdown of the financial system or more accurately, what was to come next. Amid the terror of the moment we prepared for what was coming next.

What came next was balls out inflationary efforts by the Bernanke Fed that ultimately blew the next bubble, which persists to this day. The Fed will always inflate because that is their job. The periodic deflationary or disinflationary episodes along the way of the Continuum ™ (the 30yr yield and its monthly EMA 100 ‘limiter’)…

…have consistently served to reload the Fed’s inflation gun. The limiter has been pierced several times in the past, but the reason I call this a “continuum” is because it has been a long and consistent journey from high (rates) to low. Low rates have implied little inflation for the Fed to worry about as it… inflates!

You see?

I present this chart so often not to state that the limiter is going to ultimately hold again as it has for decades but instead to state that it has held for decades. What’s more, if it were to break this time something will have happened that has not happened in decades.

All of this is a preamble to an article by Steve Saville, who I believe has studied von Mises and Austrian economics to a great extent. Check it out and tell me if this does not sound like von Mises’ Crack Up Boom, the potential for which I have associated with a would-be break of the Continuum’s limiter.

The Ultimate Financial Crisis Will Be Inflationary

“The bottom line is that regardless of its other details, if the next crisis involves deflation or a deflation scare then it will be just another bump in the road. It will prompt another bout of aggressive money-pumping that will alleviate the perceived shortage of money and eventually inflate new investment bubbles. Only a crisis that entails a decline in the desire to hold the official money can be an existential threat to the monetary system.”

The Continuum shows the trend, which has been orderly and contained inflation since the big blow out in 1980. It also shows why market participants’ expectations may be going linear toward another deflationary event. And I for one am not nearly discounting that possibility because of the recent massively bullish sentiment readings for the long bond (bearish for the yield, which would keep the Continuum intact). But I think it is a healthy question to ask; will it be different this time and if so, how best to cope with it?

Finally, check out this report by way of Twitter (thanks Joe) by inflation specialist Lindsay Politi (pdf).

Lessons From the Origins of the Great Inflation for Today

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