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Inflation Coming? Buy Bonds Says SocGen's Albert Edwards

Tyler Durden's picture


A few weeks ago we pointed out something curious: despite the so-called massive "slack" in the US economy - the traditional alibi used by Bernanke & Co. to justify ongoing endless QE, labor productivity has slumped while labor costs have soared at the fastest pace in 11 months. This is a result that is directly at odds with the assertion that the structural unemployment for the US is still at 5%, and indicates that the New Normal baseline jobless rate is more likely well above, perhaps in the mid to higher 7% range (which also means that the Fed will never voluntarily end QE as the unemployment will not drop to 6.5%, and as for inflation, well, there's BLS' Arima-X-12 goalseeker for that).

While the immediate implication of this is that central planning has merely broken yet one more law, that of Okun which maps productivity to GDP, a topic we have covered in the past, there is another aspect to what lies in the future, which is the topic of Albert Edwards' letter today. In it, he observes as we do, the rising labor costs, and the inherent inflationary pressures these bring, yet his thesis is that any inflation will be short-lived, and that unlike the mainstream which is advocating for a rotation out of bonds (apparently falling on deaf ears as inflows into bond funds are once more far greater than those into equities), he is suggesting to go long duration now.

On one hand...

Note the recent release of the US Productivity and Cost data shows that  the upward charge in unit labour costs is intensifying. Most economists consider unit labour costs to be the principle driver of inflation and we can see from the chart below that core CPI inflation ebbs and flows with unit labour costs (we use a 2y% ch on the labour cost data to smooth excessive volatility ? hence it misleadingly appears that CPI leads slightly). After drifting downward for the last year to below 2%, core inflation may be set to rise more rapidly as unit labour cost inflation drags it higher. This would undoubtedly hurt an already jittery bond market.


And yet...

The ebbs and flows of the economy have confounded most commentators on both sides of the argument, with regular sightings of a self-sustaining recovery followed by immediate relapse (and of course vice versa). But although the economy has bobbed along just above or below stall-speed, what is clear from the data is that the mini-cycles remain on a general downward (see chart below). And whereas we are clearly in the middle of another mini upturn, the lower lows are accompanied by data that typically precedes recessions (eg new orders ? inventory balance).



And therein lies my bullishness on bonds. Unlike the (equity) bulls who believe that the economy is strengthening and beginning to lift off, I believe we are either in recession already (as the ECRI thinks) or close to the end of the cycle, which it should be noted is already longer than average. The rise in unit labour costs, driven as it is by rapidly stalling productivity growth, is a warning to investors that cyclical gloom lies ahead. Hence in my view any rise in core inflation will prove short-lived and should not be taken as bearish for bonds, but instead the prelude for the next leg down in yields.

And now you know why the SocGen strategist is expecting near-term inflation, yet why he thinks this will be short-lived, giving way to a major drop in yields, and thus yet another deleveraging upcycle.

Of course in a time when the entire capital market and economy are one grand, and luckily terminal, monetarist experiment, all bets are off, and predictions are only made to be proven wrong as soon as they are uttered.

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Thu, 03/14/2013 - 11:35 | 3329594 unrulian
unrulian's picture

Gold Bitchez

Thu, 03/14/2013 - 11:40 | 3329607 Alpo for Granny
Alpo for Granny's picture

The only bond that this old woman is gonna buy is Gold Bond for my bosom becasue of all the sweating I do when the man with the beard prints all that money. Even Alpo is getting out of reach for me...

Thu, 03/14/2013 - 11:45 | 3329634 RichardENixon
RichardENixon's picture

Switch to generic dog food then. That's already priced into the CPI calculations.

Thu, 03/14/2013 - 12:24 | 3329692 Lord Of Finance
Lord Of Finance's picture

"Even 'alpo' will be out of reach"


   They think we are as dumb as dogs, but the opposite is true. The other man with the beard, Paul Krugman, continues to reiterate that the adherence to the Gold Bond was the major factor in the great depression, caused by the "Lords of Finance".


   Well, that history revision, as I see it, will be put to the test shortly granny. So you sit tight on that golden bosom of yours and wait just a liitle while longer. These guys believe they can keep the charade going on for as long as they wish, and that gold is barbaric relic, and that trickle down printing of paper will save the day. We who are wise, know otherwise. 


   'alpo for granny', I do sure hope that there will be 'dogshit for Bernanke.'

Thu, 03/14/2013 - 12:30 | 3329770 Alpo for Granny
Alpo for Granny's picture

Oh thank you Lord of Finance!

Yes ,Earl (God rest his soul) told me all about the evil central bankers and left me about a dozen 5 gallon buckets of nice shiny gold and silver coins that he said would protect against those naughty bearded men. I think Earl (God rest his soul) called the bearded one in charge of the big private bank (and granny does not usually talk like this so you will have to excuse her) a "blood-sucking chairsatan cocksucker". Boy that Earl (God rest his soul) really hated that young man.

Thu, 03/14/2013 - 13:07 | 3329886 Meat Hammer
Meat Hammer's picture

I just started my day schooling some central-planner-loving libtard about the CPI.  His claim was that food and energy are volatile, which is why they aren't calculalted in the inflation index.  I thanked him for the high school econ lesson on supply-and-demand, then asked him about to talk about the fall in the value of the fiat money used in transactions for food and energy.

I haven't heard back.

Thu, 03/14/2013 - 13:10 | 3329900 Lord Of Finance
Lord Of Finance's picture

'Alpo fo Granny' I just have one thing to say,  You are beautiful, AND, you made my day!


Lots of laughs! I will be laughing all day now. Even for days, weeks,months and years to come!



In fact! I am copying that response and hanging it in my home office right above my desk! Totally Awesome!

Thu, 03/14/2013 - 12:12 | 3329712 natronic
natronic's picture

and silver!!

Thu, 03/14/2013 - 11:35 | 3329595 fonzannoon
fonzannoon's picture

If we are heading into a recession then the fed will just cut rates and start some sort of bond buying program.

oh wait.....

Thu, 03/14/2013 - 11:43 | 3329626 HulkHogan
HulkHogan's picture

I have a feeling that before this is all said and done, people will be happily accepting neg rates on the 10 year. Rates will bottom out at -1%.

Thu, 03/14/2013 - 12:05 | 3329681 Comay Mierda
Comay Mierda's picture

yep.  kyle bass' prediction is that when shtf in japan, treasuries will go to negative yields.  i agree.  ironically, the fear trade will cause both treasuries and pm's to rally

Thu, 03/14/2013 - 12:17 | 3329726 DOT
DOT's picture

Makes me sick thinking about how happy BB will be selling off all the Treas. Into a greedy buying frenzy.

Monetization forever.

Thu, 03/14/2013 - 13:28 | 3329783 Lord Of Finance
Lord Of Finance's picture

Yep. I think in a few more years we will see rising treasury prices, with rising stock prices, with even higher surging commodity prices. 


When their plan backfires, they wont be able to blame the gold standard this time, or the high priests of finance. The real lords are the keynesians. They own this.


Of course when it does blow up, the sheep will be clueless and blame whichever politician is in office when it does blow. I am not saying the politicians do not deserve to be blamed, but its the liberal keynesian sentiment of proud liberals such as Krugman and the fed/financial establishment that will be the ones to escape the blame, yet again.

Thu, 03/14/2013 - 21:05 | 3331362 StychoKiller
StychoKiller's picture

(Sigh), if ONLY they had printed more, like Krugman sed...  :>D

Thu, 03/14/2013 - 14:11 | 3330127 Greater Fool
Greater Fool's picture

I would not necessarily expect pm's to rally in a deflationary panic.

Thu, 03/14/2013 - 12:20 | 3329699 Frozen IcQb
Frozen IcQb's picture

10 year yields are already neg 300bps if you factor-in "un-altered CPI inflation".

Using real life inflation and you're behind even more.



Thu, 03/14/2013 - 15:34 | 3330437 Professorlocknload
Professorlocknload's picture

  What a scheme. Lock down the assets of the prudent (saver) by scaring him with images of hell fire, while redistributing what's left of their value out the back door to the gamblers (bankers) through debasement, then on into stocks (bankers know about flations). And the bonus is, every buck that gets locked up in bonds and equities is a buck that doesn't go into things real like Au, Ag, oil, thereby further enabling the process.

  But, a pro deflation central banker is like a Vampire on a chase lounge in mid day Phoenix. Seen any lately?

  And, who or what is going to pay these dweebs to keep their depreciating paper? Oh well, I guess the whole reason fainting goats evolved that way is to make it easy on lazy predators. Maybe?

Thu, 03/14/2013 - 12:28 | 3329765 johngaltfla
johngaltfla's picture

After 15 years of Fed sponsored and actual bond buying, when this party ends it will really, really suck for the bagholders.


Oh shit. That's us.

Thu, 03/14/2013 - 14:10 | 3330123 Its_the_economy...
Its_the_economy_stupid's picture

That won't be me.

Thu, 03/14/2013 - 11:38 | 3329604 swabeyjw
swabeyjw's picture

Ok. If I go with being happy with a 3% long bond return. Does that line up with being happy with a p/e of 25 for the S&P.

Thu, 03/14/2013 - 11:44 | 3329631 Quinvarius
Quinvarius's picture

I doubt the people happy with 3% will be happier with 25%.  And it is going to happen.  When the Fed really decides they need to buy all that crap to retire it, they won't want to keep printing to pay top dollar.  They do that now so the US banks can unload it.  After that, everyone else is going to eat the dick.

Thu, 03/14/2013 - 11:38 | 3329606 the grateful un...
the grateful unemployed's picture

agree with your projections. imagine soon that bond buyers will buy at a premium to par which is less than the interest earned, and why would anyone do that? because losing 2% in a bond is preferable to losing 5% holding cash, and everything holding stocks. gold should also perform well but no coupon to clip unless you buy the miners (hint hint) the drop in productivity is disconcerting, since that measure is tied to technology, and means what? that firms aren't buying new technology, they're going old school (and why not if labor is cheap, why would i automate my factory?) when the new techology buildout curve tops and starts downhill then economic collapse is right behind.

Thu, 03/14/2013 - 11:39 | 3329609 smartstrike
smartstrike's picture

Unit labor costs are rising, and that is why income is falling? It makes sense?

Thu, 03/14/2013 - 11:39 | 3329610 Quinvarius
Quinvarius's picture

Peak conditioning.  Keep following that momo in a completely worthless asset class just because the Fed is still bailing it off the bankers balance sheets before they pull the rug out.  I'll take the gold, thanks.

Thu, 03/14/2013 - 11:43 | 3329623 yogibear
yogibear's picture

Double digits inflation coming baby!! The massive printing comes with a huge price.

Bubble Bernanke and the Fed can't stop QEing.

We have double digit inflation increasing while Bernanke and the Fed increases QE to over 100 billion/month.

Like pouring gasoline onto a roaring fire. Lots of people going to get burned.



Thu, 03/14/2013 - 11:46 | 3329637 Alpo for Granny
Alpo for Granny's picture




Thu, 03/14/2013 - 11:45 | 3329632 SheepDog-One
SheepDog-One's picture

'Inflation'? Seems massive in the equity markets.

Thu, 03/14/2013 - 11:46 | 3329636 Silverhog
Silverhog's picture

CNBC says were past the danger zone. That's right, were now in the holy shit WTF zone.

Thu, 03/14/2013 - 11:50 | 3329650 Seasmoke
Seasmoke's picture

Negative Rates in the on deck circle.

Thu, 03/14/2013 - 11:56 | 3329662 FLHRS
FLHRS's picture

Tyler, this morning you had a post showing equities now with equities in the 30's.  I think that the price of gold has only been able to flexuate since 1968, but is there any way to show a gold correlation with the chart this morning.  My point bitchez, is deflation appears to be the big gorilla in the room.  Bad news for you gold bugs - at least for the forseeable future.

PS How does a guy spell check here.  I'm afraid my limited public school education might be showing.

Thu, 03/14/2013 - 12:28 | 3329734 NoDebt
NoDebt's picture

It is.  And not just on spelling.

That's what SHOULD have happened.  That's what was GOING to happen starting back in 08.  Its what always happens when a debt bubble pops and everyone is scrambling around looking for good collateral that doesn't exist.  But then The Bernank and his central bank buddies around the world decided to NEVER EVER EVER let that happen.  I mean, they are for-serious about this, in case you haven't noticed.  They have decided that if there is to be death it will be by fire (inflation of the hyper variety) not by ice (deflation).  Like the Terminator, The Bernank does not feel pain.  He doesn't feel pity or remorse and he absolutely will never stop until he has accomplished his mission.

Thu, 03/14/2013 - 12:26 | 3329757 Jim in MN
Jim in MN's picture

open a new tab and web search the word you are looking for.  if you spell it almost right you'll probably find it.

Thu, 03/14/2013 - 11:58 | 3329666 yogibear
yogibear's picture

Before the US exported inflation. Now Bernanke and the Fed will trigger double digit inflation.

Their getting their wish of inflating out of debt.

Bernanke will be buying US debt to keep rates low while prices escalate at ever-increasing amounts.

With it Bernanke and the Fed cannot stop buying US debt.

Meanwhile Obama and the government is on a spending and debt binge.



Thu, 03/14/2013 - 12:10 | 3329708 SheepDog-One
SheepDog-One's picture

And also throwing a total tantrum fit over not being able to get their sticky little fingers on a tiny 3% spending increase. 

Thu, 03/14/2013 - 12:00 | 3329668 Abraxas
Abraxas's picture

When I saw the word "inflation" in the title, the first thing that occurred to me was "Bonds". So, I got this urge to buy as much debt as I can. I also have had this urge to buy stocks ever since I heard the rumor that the FED might exit QE. It's not important for me to know why, it just IS.

Thu, 03/14/2013 - 11:58 | 3329670 Bingfa
Bingfa's picture

Another potential SNL skit.....

On a serious note...Buy a wind generator instead

Thu, 03/14/2013 - 12:10 | 3329709 the grateful un...
the grateful unemployed's picture

its only when asset prices fall faster then personal income that the economy will recover in any way. asset prices may collapse, but the cost of bringing the product to market will make up the difference in value. think of a gold mine, and gold is $10, rock bottom, but the cost of mining that gold is $1000 and oz. and people still want it. that becomes the price $10 plus $1000. check out the 1970s, it was all about pricing power. if credit becomes tight, the Fed may still be selling 0 APR bonds, but the private sector will price their bonds according to risk and credit availability, and the ability of companies to have pricing power. gold is darned expensive to mine, which is why the miners are a good play. (and right now nobody likes them) 

Thu, 03/14/2013 - 16:36 | 3330646 Professorlocknload
Professorlocknload's picture

 My concern with miners is, in the 09 equity contortion, VGPMX followed the crowd down.

 If one looks at miners circa after 1933, the money went there because it couldn't go into physical. The stocks were the only proxy available. Wasn't 'till 1974 that citizens could legally own bullion again.

  Now, if confiscation reincarnated, shares might be of interest again, depending on general market sentiment.

  Trading, sure. Same in Vegas, but drinks are free. As a store of value, not so sure.




Thu, 03/14/2013 - 12:14 | 3329719 SmallerGovNow2
SmallerGovNow2's picture

Even the CBO (slap me now) doesn't project UE to be below 7% until 2016...

Thu, 03/14/2013 - 12:14 | 3329721 Jason T
Jason T's picture

I concur with edwards.. either in recession or very close to one.

Thu, 03/14/2013 - 12:19 | 3329729 NoDebt
NoDebt's picture

But stawks are paying higher yield than bonds are now.  Am I right?  I'm right, aren't I?  Some dude on CNBC told me so and he was wearing a suit so..... like, he's gotta know what he's talking about.


Thu, 03/14/2013 - 12:24 | 3329744 Jim in MN
Jim in MN's picture

Corporate bonds, bought singly and held to maturity....maybe.

Bond funds?!?!?!?!?  Oh hell no.  Churn and burn is all that is.


And hey, do you know how to buy a paper corporate (not Treasury) bond and hold it to maturity?  Didn't think so.  Very, very few people do.

Thu, 03/14/2013 - 12:34 | 3329776 NoDebt
NoDebt's picture

Ooo!  Ooo!  Ooo!  I do!  I do!  I do!  I did it once before with bonds from GM.  A little while later...... <sniff sniff>..... bad men came and they took me away and hurt me and touched me in bad places.

Can I take a toy from the good-boy drawer now, teacher?

Thu, 03/14/2013 - 13:31 | 3329980 machineh
machineh's picture

'Do you know how to buy a paper corporate (not Treasury) bond and hold it to maturity?  Didn't think so.'

Lock in today's crappy low yields, PLUS bet on a corporate borrower keeping its credit rating for years to come?

Sounds like something I wouldn't touch with a ten-foot pole, Jim. With all due respect.

Thu, 03/14/2013 - 14:43 | 3330244 Jim in MN
Jim in MN's picture

You don't need them to have a certain credit rating.  Just be in business.

The yields are above zero real, which is all you're going to get from paper assets bought in bulk (AKA equity and bond indices/funds). 

So, you can lose on stocks or a bond fund if you want to put your pole in those.  Or, you can make a couple percent by holding a corporate issuance to maturity. Mind you, I like cash and hard stuff myself.  Just saying, if you want paper to park in, holding bonds to maturity is the way to go.

Now, again, to get that paper bond certificate itself.....in your hand.....no answers yet on that.

Thu, 03/14/2013 - 12:58 | 3329858 Village Smithy
Village Smithy's picture

I like his reasonong but he needs to be careful how much he reads into the unit labor cost and labor productivity data. With all the manipulation of the data that the BLS is doing how can you derive anything meaningful from it. My fear is that if labor is artificially boosted but productivity is not, then it looks like more workers are doing less work and thus productivity is falling. This just does not jive with reality, the people that I know with jobs start every Monday with a pit in their stomachs worrying if this is the last week. They will work as long and hard as they are asked because they need the cash and they need to keep management happy with them. Labor has no clout right now. 

Thu, 03/14/2013 - 13:07 | 3329889 orangegeek
orangegeek's picture

Bonds?  Why bonds?  Dow Jones is up 126 points.  Buy stocks!!!!!  Yippeeee!!!!

Thu, 03/14/2013 - 13:49 | 3330044 WhiteNight123129
WhiteNight123129's picture

When credit is the engine of expansion, overheating and rise in price based on credit expanding too fast it is self defeating because margins and profits shrink and make the credit harder to repay. So in fixed monetary regime, the overheating of credit is actually the cause of its demise, pushing it into deflation.

However when the engine of expansion is money, and inflation comes from base money moving, higher inflation does not hurt the engine of the expansion (that is base money starting to move), on the contrary base money moves even faster when the curve steepens and inflation expectations rise.

Expansion on money need Fed inflicted recessions to stop the base money from movin in all at once (hyperinflation). This is the ~Go-stop-Go like in the 70s~ that soros refers to in his latest Davos interview. When expansions have credit as their engine, they do not need managed interest rates to go into recession (XIX century is the proof) credit would contract on its own as some point.

The problem that we had with Greenspan is not to let the credit contraction go deep enough and clean enough bad credit, so the Fed tried to stop the clean up of bad debt too early and encouraged leverage (with lower rates) before the system had enough time to get rid of the bad credit. The result is a continuous increase in leverage for 25 years.

This expansion is not based on credit but on money, so the reasoning applying to expansion based on credit do not work.



Thu, 03/14/2013 - 14:42 | 3330242 alfbell
alfbell's picture



I'm not an economist, fund manager, trader, etc. I'm just a lay person without any financial or economic background, trying to understand what is going on, and trying to figure out what the correct strategy for my future should be.
What an earlier poster wrote, regarding our current circumstances, really summarizes the situation. To paraphrase... "We know a big earthquake is inevitable, but we don't know the place where it will happen and the time when it will occur."
From what I've read thus far about economic history, as it relates to our situation here in the USA, it seems the most prudent thing to do is to stay nimble and liquid. To hold onto cash. Because the first phase of a collapse or bubble pop is deflationary. And THAT is the time when you take out your checkbook (at the bottom) and buy hard assets: farm land, income properties, blue chip stocks of companies that supply needed staples, gold, etc. and then ride the inflationary wave upwards.
When the balloon pops, the seams split, the pail starts leaking, the floorboards open up, etc. etc. that is when the mal-investments, printing, intervention, false media, delusion, corruption, etc. all come home to roost. We had a small taste of this in 2007 (and look at how badly we were ravaged). The coming deflationary forces will be overwhelming and not even 1,000 Bernankes and CBs will be able to stop it.
In that deflationary phase (a true bottom)... BEFORE they turn on the printing presses full bore in utter desperation, and drive us into massive inflation (maybe even hyper-inflation)... THAT is when you get out of the USD and into tangibles at the best bargain prices you'll ever see in lifetimes.
I think we know that this is going to happen because Bernanke and all world CBs, being Keynesians, are terrified of deflation and would rather die, would rather destroy the economy and the currency, then allow deflation to take hold.
That's my take on it and the strategy I am following, unless future education or insight influences me to change it.
I liquidated all of my assets a few years back. I'm all in cash and using it all now to generate more cash through private lending. I'm in amassing cash mode. The returns I'm making are well above the current inflation rate (which I consider to be about 9-10%) which justifies what I'm doing.

I welcome any devil's advocate, challenges, advice, support, references, etc. because this is the subject to debate upon and learn about since economics comprises 9/10ths of our lives.

Thu, 03/14/2013 - 14:50 | 3330277 JohnnyBlaze
JohnnyBlaze's picture

The big question is will the hard assets be there for you to buy.  If so holding cash is the right play.  If you cannot buy those assets during the deflation your what I call "proper fucked".



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