Dear Friends,

I am being thoroughly amused today in reading the comments from some of the “experts” in the bond market who are explaining that bonds have value down at current levels because “inflation is tame”. I have to wonder where the reporters find some of these aliens since it is evident that they must be living on a different planet than myself.

Copper put in an all time record high closing price in today’s trade while palladium is gravitating towards $800. Sugar put in a 30 year high today. Even Lumber, the Laggard, is moving inexorably higher. Meanwhile, the CCI, the Continuous Commodity Index is within a whisker of making an all time high and this is without the active participation of the energy markets which are still rather contained. The price of both food and metals used in industrial production are rocketing higher and we actually have some pundits who insist that “inflation is tame” and bonds are a good buy here. I try to keep my emotions in check while reading some of these things since markets are made by those whose opinions vary but even at that, it is difficult from wondering whether some of these people are just willfully ignorant.

Within 4-5 months, if not sooner, the surge in costs at the wholesale level for food and for metals is going to be reflected in the retail side. When that occurs, consumers across the nation, both personal and business, are going to learn firsthand just how “tame” inflation is.  Keep in mind this will be against a backdrop where wages are flat and the unemployment and underemployment remain stubbornly high. More of that income going to essentials leaves less for discretionary purchases. That is just simple math.

To further make a mockery of the bond market, we have the equity markets soaring into a new high for year. One would think that all such developments are negative for bonds, especially longer-dated bonds. Nope – the Fed is in there buying as part of their QE nonsense and hoping to trick the investment world into believing that inflation fears are misguided because the long bond is moving higher and rates are going lower. “See”, they comfortingly assure us, “if inflation was a real threat, the bonds would not be moving higher”. I can easily visualize a great cartoon with the FOMC pumping furiously upon the bellows trying to inflate a balloon as the air comes out of a series of holes scattered all around its perimeter. The caption – “Don’t worry; we’ll have this hot air balloon up in no time whatsoever”.

So we have a day here today in which the commodity sector is a whisker from an all time high and the equity markets have just made a new high for the year. Yet bonds are seeing lots of buying from those eager to lock up their money for 20+ years at these low levels because “inflation is tame.” Good luck – bond buyers – that should turn out to be the investment of this new decade.

Look at some of the following charts and tell me if you think fears of inflation are unwarranted. Incidentally, crude oil is working on putting in its HIGHLY CLOSE in 26 months. Yep – no inflation anywhere in sight. Time to load the boat with long term bonds and lock in that magnificent yield while we can.

Click any of the charts below to enlarge in PDF format with commentary from Trader Dan Norcini