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June 8, 1990
In the absence of meaningful economic data this week, the bond market wandered peacefully. Some relaxation was just what we needed to prepare for spending next week on the fine edge of panic.
Next Wednesday brings Retail Sales, Thursday has the Producer Price Index, and Friday the Consumer Price Index, Industrial Production, Capacity Utilization, and Trade deficit data. It is unusual to have so much key information released in such a short time, and the markets will react with appropriate hysterics.
The improvement in rates in May is due to weak employment statistics; in order for rates to continue to improve, next week's new data must confirm the weak jobs data. If the inflation numbers are poor, lock in everything in sight. If they are good, get ready for a pleasant ride to single digit mortgages. There is a financial whodunit on stage, and the murder victim is gold. It's a complicated plot: there are several butlers, and they all look nervous.
Gold is usually a pretty good predictor of inflation, but its recent crash in value has happened faster and gone farther than any of the inflation indexes. Gold peaked at $420/oz in the spring inflation scare, and is trading in the $350s only 60 days later. One day had a $23/oz freefall.
Butler number one holds that it's all a Russian scheme. Their economy is falling apart, and they have been forced to dump gold in order to pay their bills. This Red Scare is flawed: the Soviet economy has been falling apart for twenty years, and they are expert gold traders, not dumpers.
Butler number two says that gold doesn't have anything to do with inflation any more, and is just an industrial commodity. Nice try.
Butler three testifies that new taxes, the S&L costs, real estate trouble, and a credit panic at banks have the economy on the edge of deflation, and gold is predicting a depression. Maybe so, but a little too dramatic.
Butler four fidgets and sweats. He says the Saudis have done the big selling because they have inside dope on the future of oil prices. When the price of oil falls, gold goes right with it. Who knows more about oil pricing than the Saudis? Who would more like to unload big gold holdings before the price fell more?
When gold topped at $420, oil was supposed to be in the process of screaming up through $25/bbl. Surprise, surprise. Oil closed this week under $17/bbl, and falling.
Maybe it isn't the Saudis. But no matter who is responsible, good inflation news is likely to be close by.
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