Talk of “Super-Cycles” to Pretend It’s Not Inflation

The antechamber to Hell:
Davos, Switzerland

As predicted on the other blog, GL, officials and establishment journalists are starting to claim that falling bond prices and rising inflation is actually a sign of returning normalcy.

This morning’s example: A weird little bit of Davos cheerleading from Bloomberg. A headlined piece leads off with the following two paragraphs, if you can believe it:

For only the third time since the Industrial Revolution, the world may be entering a long-term growth cycle that will lift all economies simultaneously, driving bond yields and commodity prices higher.

The depth and scope of the expansion will be a focus for discussion at this week’s annual meeting of the World Economic Forum in Davos, Switzerland. Evidence of a broadening global recovery will enable U.S. Treasury Secretary Timothy F. Geithner, investor George Soros and 2,500 political, business and academic leaders to shift their emphasis away from crisis- fighting.

WTF?

The rise in bond yields—especially sovereign bonds—does not mean that it’s a “risk on” environment, and that happy days are here again: It simply means investors are re-allocating their capital, and hedging against the possibility of a collapsing sovereign credit market. 

It’s not quite a secret that the world’s governments are overindebted, and that the central banks of the world’s premier currencies have been printing their way into reigniting their local economies, creating a race to the bottom effect insofar as currency is concerned. 

That inflation is picking up—product of rising commodity prices, which is itself a product of this race-to-the-bottom approach to currency management—is not something particularly surprising. But it is certainly not because everything is hunky dory in the world’s economies. And talk of it actually being a sign of the beginning of a “Super-Cyle”?

Again, WTF?

The idea of the “Super-Cycle” is from the Elliott Wave Theory, created by Ralph Nelson Elliott. I have always been of two minds, with regards to technical analysis: On the one hand, it is obvious that if you study the herd, apply statistics to slightly anticipate its general direction, then follow it, you will profit—

—until of course you don’t. Until of course you follow the herd right off the cliff. That’s why I’m of two minds about it as a trading strategy. Technical analysis is really nothing more then behavioral psychology applied to the markets—which is fine. But one has to remember that if the herd happens to zag instead of zig, well, you’re zucked. 

But on a more macro level? Technical analysis and talk of “Super-Cycles” means absolutely squat. At a macro-economic level, it’s more like reading tea leaves, or appealing to an oracle, or just flat-out making shit up, than any kind of sensible analysis of the situation. 

The Bloomberg piece is near laughable in how it mixes and matches data in order to arrive at a conclusion that everything is wonderful, and that things are about to turn super-rosy. For instance, it points to Treasury bonds yields having fallen to 3.41% as of Jan. 21, compares that to the 15.8% yield of 1981 (WTF?), then says that the 2.9% yield in Treasuries at the start of December, compared to current levels, signals “momentum”. 

This is just flat out deception practiced against anyone who doesn’t know the economic history and/or the current bond market situation: First of all, in 1981, the Federal Reserve was in a death match with inflation, product of the Iranian Revolution and subsequent Oil Crisis. The Fed had deliberately forced yields up in order to reign in inflation. A year and a half before this 15.8% data point, yields had been less than half that. So no relevant, pertinent inference can be made from the fact that, in 1981, bond yields were 15.8%, compared to 3.41% today. 

And the fact that yields were at 2.9% in December and are at 3.41% today does not signal “momentum”—actually, it signals that the markets consider Treasury bonds a risky investment: After all, the Fed is outright purchasing 50% of the Federal government debt for FY 2011—yet bond yields are still rising as their prices fall. 

There’s going to be a lot more cheerleading, as the winter progresses: A lot of talk that the fall in bond prices and rising inflation is a sign of returning normalcy. 

They’re right, actually: Falling bond prices and rising inflation are definitely signs of returning normalcy—assuming of course that “normal” means that we’re all going straight to hell.