China’s Inflation Is About To Get Much Worse

Hey There Income Hunters,

Did you see the September inflation data in China? Producer Prices (PPI) rose 10.7%, which is the highest in 26 years.

Well, the situation in China will impact the rest of the world and it will get much worse …

We have been talking about the energy crisis a lot these days … and as you can imagine, for countries with 1.5 billion people like India and China, it is very serious.

Both countries have spent many years building up the middle class and as their per-capita numbers grow, so too does the demand for power … 

But the power supply is shrinking, so that means their costs for power are soaring.

 Check out this chart of the Coal to PPI relationship:

This is an example of how quickly inflation can get out of control.

When it gets into double digits and stays there, it can begin to destroy demand and push the economy into recession …

Today, we’ll look out the ramifications for the US and ways to capitalize on the possible China contagion …

The Effects of Double-Digit Inflation on Corporations:

      • The corporations squeeze profit margins …
      • Then lower profit margins decrease cash flow …
      • And lower cash flow leads to greater amounts of defaults …
      • This process worsens supply chains bottleneck.

So, as the higher prices are passed on to consumers, the country becomes trapped in stagflation, which is an accelerating inflation and slowing growth economic condition …

I think the US will find itself in a similarly severe stagflation condition as China, but I don’t think we will get there until next year.

However, it is critical to keep a close eye on the iShares 20+ Maturity Treasury Bond ETF (Ticker: TLT) for signs of the US getting there sooner or later.

Timing will dictate the best trades to put on, and when.

Bonds are the Predictors of the Economy

I always say Bonds are the most important asset class because they are connected to the funding markets. Funding markets are the signpost for cracks in the economy …

Right now, all signs are positive as far as liquidity in the system and strength of corporate balance sheets.

However, with debt levels so high that can change quickly …

So, right now I have bearish put spread trades on in TLT, but if TLT breaks above the $146 level on good volume, I will assume that to mean the economy is not as strong as I think.

Here is the setup for TLT 

Notice the very low volume (in the red circle) on the lowest trade this week (in the black circle), this signaled a possible turn around and we got it the following two days …

Now, notice the last volume line and trade from Thursday that just touched the $146 level … The volume was very low then as well …

So, which way the money flows into bonds over the next few days is key …  If prices keep rising, then gold is the place to be!

The SPDR Gold Trust ETF (Ticker: GLD) has had a nice move higher this week; however this is an area it has failed at multiple times before:

 

As you can see the 200-day moving average (DMA) is just above $168.40, providing resistance.

Now, gold tracks the inflation-adjusted bond returns.

So if TLT prices go higher, meaning rates go lower, that is bullish for gold ….

Lower bond rates with high inflation is the ingredient for much higher gold prices.

Take a look at the chart below that shows this correlation and where we are right now:

 

Notice how gold’s price is turning up along with the inflation-adjusted 10-year rate (inverted to show correlation) …

I hope you understand this correlation and how critical the bond/TLT trend is to gold’s next move.

Believe me, it is inevitable that the 10-year real rate will go much further into negative territory, and gold will soar. It is just a matter of when …

Bring It Home

Metals continued their move higher today, and I lightened up a bit on my gold and silver long positions.

I am looking to move back into uranium since the miners’ ETF, North Shore Global Uranium Mining ETF (Ticker: URNM), corrected a bit …

The energy crisis has a lot further to go, and switching from the ‘overbought’ sectors to the ‘oversold,’ and vice versa, can help supersize your returns.

I will alert you on any insight I can find that will give us an edge.

Until then …

Live and Trade With Passion My Friends,

 

Griff

 

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