Agoracom

Posted this on a couple of other boards that I follow as I think that Dan has an absolute handle on what is taking place and the eventuality of the impact the bond market has YET to have on inflation.

Excellent piece IMHO

Gold shrugged off overnight weakness due to follow through selling from the previous session as both the Euro and crude oil recovered from yesterday's bout of weakness.

In the process, it snapped above the power downtrend line and recaptured some of its previous bullish momentum before the usual gang of thieves beat up on it again. We now have a mini range trade established with resistance at this week's highs and support at yesterday evening's low.

The Dollar has resumed its disappearing act and is on course for its worst week in two months. While there is no doubt that the Fed's monetary policy along with the structural problems that beset the US economy due to its runaway budget and trade deficits, not to mention the ongoing derivatives debacle, are the main factor in the Dollar's shellacking, part of the blame for the weak Dollar can be placed firmly on the shoulders of the bond market. As long as Treasury yields refuse to rise and compensate foreign buyers in particular for currency-related risks, the Dollar will find NO support and will continue to sink into oblivion. With real yields on Treasury paper in negative territory and stubbornly refusing to correct that untenable situation, there is little incentive to bid the dollar higher. One has to wonder what exactly is so mystical about the 4% level in the 10 year that whenever yields threaten to break through that level and move to more reasonable levels, they reverse faster than a politician on the campaign trail.

From my perspective, the action in the bond market is simply reinforcing weakness in the dollar which in turn reinforces strength throughout the entire commodity complex, crude oil and energy in particular. That in turn feeds into the stagflation scenario which then reinforces further weakness in the Dollar and further strength in the commodity sector. In other words, without yields on Treasuries moving higher, I see no end in sight to Dollar weakness. You will recall in the late 70's and early 80's, Chairman Volcker killed inflation and derailed commodities for a long time but the medicine required to do so was extremely harsh even though necessary. Today's leaders do not have the courage and conviction of Volcker but seem instead to be passively standing by for fear of upsetting the US stock market and aggravating the woes in the housing sector, not to mention upsetting the apple cart of the investment banks and their insanely stupid credit derivatives. If as I suspect the US monetary authorities have been surreptitiously buying along the yield curve to artificially keep long rates low, then they have created a situation conducive to runaway inflation at both the consumer and wholesale levels.

Too many people have erroneously believed that the surge higher in energy costs was temporary and that crude along with gasoline and diesel prices would soon subside. Many businesses and suppliers therefore were willing to absorb some of the losses associated with higher input costs on the notion that such would only be a temporary situation and that by so doing they could retain their market share. A grim and sobering realization that these higher prices are no longer temporary but are becoming ingrained is leading many of these same entities to reconsider their marketing policies and product pricing. In so doing, they are coming to realize that in order to retain profitability they have no choice but to begin passing on these higher costs (Did you see that American Airlines is considering charging air travelers for check-in bags now – additionally – how long do you think trucking firms and carriers such as UPS are going to be able to restrain from raising their fares). As they do, more and more of the public is going to become extremely cognizant of the fact that EVERYTHING is going up in price. In other words, inflation expectations are becoming entrenched. All of this is occurring against a backdrop of a sinking bond yields which makes matter all the more perverse. I submit that this situation in the bonds is becoming untenable and cannot continue indefinitely. Sooner or later that market must respond to the fact that inflation is flaring out of control.