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How to Profit from Irrational Low-Inflation Exuberance

Everyday Definition of Inflation:  “Stuff costs more.”

U.S. Government Definition of Inflation:  “After extensive statistical analysis and data manipulation … yada yada yada.”

Shadowstats publishes their version of consumer price inflation.  The Chapwood Index is another version.  Both indicate real inflation rates in the U.S. are MUCH HIGHER than the official government statistics.

THE PROBLEM WITH INFLATION MEASUREMENTS:

Inflation measurements, or more properly, consumer price inflation, or expansion of the supply of currency, are dependent upon the measuring process and the observer … like evaluating stupidity.

Examples:

  • A new truck costs $50,000. Twenty years ago it cost $20,000.  But the 2017 version has been improved, so after hedonic adjustments for quality, prices have not officially increased.  You paid considerably more in 2017, but wow, supposedly there has been no inflation in truck prices for 20 years.
  • College education costs $20,000 to $100,000 per year in 2017. Several decades ago college education cost $2,000 – $10,000 per year, but the education is so much better now … and other nonsense.
  • Medical care, Obamacare, Sick care, Prescription drugs, Health Insurance and so on. We all know these prices are approaching the stratosphere.
  • In the other direction, a new computer is far more powerful than one produced ten years ago, but it still costs about the same. Officially, computer prices have experienced not only no inflation, but price deflation, according to the official narrative, because computers are more powerful.  Deflation or not, it still costs about the same number of dollars for an up to date computer as it did ten years ago.

THE PROBLEM:

  • Official numbers are “cooked” to keep the increases for Social Security payouts and other “cost of living adjustments” low. Low inflation rates also help sell the political narrative, and justify near-zero interest rates that boost stock and bond markets.
  • Consumer price inflation measurements are a matter of opinion and perspective, so there are multiple answers.
  • Skip the statistical manipulation, the hedonic adjustments that often make no sense (but occasionally are relevant) and KEEP IT SIMPLE!
  • The Louis Federal Reserve publishes M3 statistics – the quantity of currency in circulation – which is ever-increasing. Rapidly increasing currency in circulation used by a slowly increasing population suggests that prices rise on average by the adjusted increase of currency in circulation.  Otherwise prices would be relatively stable and have stayed low.

But the reality is that billions and trillions of dollars are borrowed into circulation, total debt increases, interest must be paid on that debt, M3 increases, and prices inevitably rise, some more rapidly than others.  Soap no longer sells at 12 bars for $0.49, and ketchup costs considerably more than ten cents per bottle.

SIMPLE PLAN:  Base the consumer price inflation Index on M3 instead of the “official” statistics

  • Skip the fancy statistics, the extensive data gathering and the unrealistic results. The modified consumer price inflation rate is an index based on the increase in M3 reduced by the increase in population.
  • This index is probably flawed in several ways. But are the results worse than the official statistics that insult the intelligence and day-to-day experience of most Americans who purchase food, energy, health care, prescription drugs and automobiles? We know from daily experience as well as research from Chapwood and Shadowstats, that prices increase far more rapidly than the “official” statistics suggest.

TEST THE RESULTS OF THE MODIFIED M3 INDEX:

Examine the following graph of M3 (St. Louis Fed) divided by the population of the United States – the population adjusted M3 currency in circulation or PA-M3 – and the official U.S. CPI – the consumer price index.  Note that hedonic adjustments were introduced in the mid-1990s and the CPI line on the log scale increased more slowly thereafter.  However, population adjusted M3 has exponentially increased for half a century – at about 4.7% per year.

 COMPARE POPULATION ADUSTED M3 (PA-M3) WITH PRICES:  (Index = 1.0 in 1968)

The Dow Jones Industrial Average (DJIA) has increased from under 1,000 to over 21,000 in half a century.  Adjust it with the PA-M3 Index and you have the following graph.

Crude oil prices are volatile, affected by wars, politics, recessions, discoveries and demand, but on average crude oil prices have increased along with M3. This graph shows crude oil prices adjusted with the PA-M3 Index.

Gold prices are volatile, affected by wars, politics, paper contract manipulations, inflation fears, confidence in governments, central bank sales, and more, but on average gold prices have increased for the past century.  This graph shows gold prices adjusted for PA-M3 Index.

You can make similar comparisons for the prices of postage, beer, cigarettes, average house sales, congressional payoffs, lobbyist fees, US government revenues, and Illinois pension underfunding.  The results will probably show that much of the nominal price increases comes from the increase in M3 adjusted for population growth.  Certainly college tuition, textbooks, and health insurance have increased more rapidly while the cost of new televisions has decreased, but the overall trend of higher prices is clear.

More debt and more currency in circulation produce higher consumer prices for most, but not all items.

Debt and currency in circulation have increased exponentially for over a century.  Expect that trend to continue unless the economic system crashes and resets.

Expect higher prices on average for stocks, gold, cigarettes, postage, health insurance and thousands of other goods and services.

Expect price increases to shift from paper assets (stocks, bonds etc.) into hard assets such as silver and gold.

The major U.S. stock indices trade at all-time highs in mid-2017, while gold and silver prices are far below their highs of six years ago.  Expect stock and bond markets to correct. Prices for gold, silver, and some commodities will increase.

Expect gold and silver stocks to increase in price more rapidly than the prices for the metals.  I believe the weak uptrend from December 2015 will accelerate in the next several years and we will see all-time highs in gold and silver prices, and related stocks, in 2018 or 2019.

CONCLUSIONS:

  • Governments, central banks, commercial banks, and politicians want increasing debt and currency in circulation. They will get what they want.  Prices will increase.
  • Population adjusted M3 (PA-M3) is a simple and easy measure of a modified consumer price index. Much of the increase in prices for stocks, services and commodities results from the increasing PA-M3.
  • Some prices will increase more rapidly than others, but unless the economic system resets and restores balanced budgets with minimal debt, expect continued increases in debt, currency in circulation, and PA-M3.
  • Expect – sooner rather than later – lower prices for stocks and higher gold and silver prices.

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Article written for Gold Stock Bull by Gary Christenson of The Deviant Investor

By | 2017-06-22T13:04:29+00:00 June 22nd, 2017|Gold & Silver Commentary|

About the Author:

Gary Christenson is the owner and writer for the popular and contrarian investment site Deviant Investor and the author of several books, including “Fort Knox Down!” and “Gold Value and Gold Prices 1971 – 2021.” He is a retired accountant and business manager with 30 years of experience studying markets, investing, and trading. He writes about investing, gold, silver, the economy, and central banking.

Many years ago he did graduate work in physics (all but dissertation), so he strongly believes in analysis, objective facts, and rational decisions based on hard data.