Inflation-Deflation Spread Hits 9% As Schrodinger's Cat Goes Nuts

Tyler Durden's picture

The debate over inflation and deflation has just hit a spread of almost 10%, with deflation (10 Year Yields) barely budging from near record lows, while inflation (stocks) are at a level last seen when the 10 Year was at 3.25%. In other words, one is right and one is wrong, with the convergence between the two now at almost record levels of around 9%. At this point the markets can continue diverging as 10 Year yields drop even as stocks do their irrelevant thing, or, at some point, the correlation desks can get their act together and realize that this spread makes no sense and unlike a Schrodinger Thought Experiment, you can't live in a world in which assets predict both inflation and deflation at the same time. Perhaps all it takes is for some person with a dose of common sense to "observe" this discrepancy and collapse the wave function of the insanity that our market has become. The snap back will be violent.

Long term:


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Djirk's picture

bi-flation bitches

besodemuerte's picture

You made me laugh out loud irl with that comment, thanks.  That was much needed today.

barkingbill's picture

thats it ....we need a new term for the wierdness. i laughed too. 

Ragnar D's picture

But it's a bit innocuous--doesn't convey the same malaise as stagflation does.

How about crapflation, or Chitflation, or AIDSflation?

MayIMommaDogFace2theBananaPatch's picture

Very creative...Can I use that?

centerline's picture

I am still sticking with "damnflation"

e_goldstein's picture

you are absolutely correct. next up: empire collapse.

BobPaulson's picture

I'm not super clear on these metrics but whenever there is a spread, somebody can trade the arb right? What trade does this to kill the spread and make whoever is maintaining it pay through the nose?


besodemuerte's picture

Well, market is pushing higher while yields are pushing lower....

So I'd imagine short market and long 10y would work.

barkingbill's picture

 if the market continues this rally though, then the 10 year could lose the tug of war eventually. there are some people out there who think treasuries are an incredible bubble. im not sure myself what is going on. 

Pamela Anderson's picture

No.... no..... no short the market and SHORT the 10y (if 10 y falls then yields goes up).

Hey guys what are you talking about???? No wounder you don't get girls!!!

Check the chart. The orange line represents the "market" (in reality is E mini S&P 500 futures... but let's keept thing simple here) the white line is the 10 yield. In order to meet, the orange line needs to go down (short the market) and the white line needs to move up (yields going up means 10 y falling.... that's why you short the 10y).

But there is a problem...........

"Markets can remain irrational a lot longer than you and I can remain solvent."  -- John "I'm Bernankes's Father" Keynes

So my advice for you two is..... get all your moneys out of the market don't trade... just save and buy short term corporate bonds in good companies (because yields are going to go up).... but don't trade.... ok do paper trading but with Monopoly money.

LePetomane's picture

Thanks for clarifying - shorting bonds = shorting price, not yield.  Right?

Pamela Anderson's picture

Yields move inversely to the price of the bond. If the bond price goes up then the yield that the bond pays goes down and vice-versa.

If you short the bond, you are betting that the price of the bond is going to go down, if the price moves down then the yield is going to go up.

Read this if you want to understand what is the yield --->

Again, my advice to you.... don't trade $1 of real money.... trade paper money or open a practice account with a broker that would give you fake dollars to practice....


Mactheknife's picture

The bond market is ALWAYS right.

ranrun's picture

deflation in terms of gold

plocequ1's picture

The markers reaction to all this bad news..... Fuck all this Harvard, Old fuck investor from the 80s analogy, Bens got us covered. Dig in Boys!!!

Zina's picture

Quantum physics, bitches's picture

"parallel universe" in full operational mode.

mrhonkytonk1948's picture

Your question assumes there is some sort of "connection" between the equity casino and the so-called "real world".  Like the fable of the frog and the scorpion, equity traders trade because "they can't help it, it is their nature."  Even if they kill themselves in the process.

Cognitive Dissonance's picture

Exactly. The relationship presumption is that there's a relationship. But we have seen that "reality" and "markets" are not correlated. While minute to minute we might "see" a relationship, this is an illusion.

While corporate profits may be higher than a year ago, why are they higher? Certainly not because of any sustainable relationship to well understood and recognized "fundamentals".

The market level is based upon the concept of "things will get better and fundamentals will fall back in line eventually". In other words, hope. While doom and gloom might be an over reaction, the market levels are also an over reaction.

"Hope" is a dirty four letter word. But so is "drug". And we can be "sustained" on hope and drugs for a long time before our (economic and human body) system collapses and dies.

thesapein's picture

I agree that there lacks a positive correlation, but no negative correlation at all? Can finances grow without it taking anything away from other markets or the "real" economy?

Mako's picture

There is no debate over deflation or inflation.  It's like having a debate as to whether the Moon is made out of cheese.

The financial system is collapsing, the rate of collapse was slowed by the Federal government but it's still deflating.  See government action between July 2008 and April 2009.

See Federal Reserve Z1 report.  Worshipping non-existent helicopters is not going to help.

economicmorphine's picture

+1.  That is actually what is happening, regardless of whether anyone sees it or not.

barkingbill's picture

so then in your opinion marc faber and jim rogers are full of it with their talk of inflation? 

they think things are collapsing too, but they, especially faber thinks the markets can rise for a long time during that collapse.


Mako's picture

It's a fact it's not my opinion. 

You had inflation from 1945 to 2007 of 5.5-15% annually, that stopped by the end of 2007 and went negative in 2009 and continues to be negative.  It's simple a fact.

Of course, things usually don;t go in a straight line.  If the Fed and the Federal government wouldn't have gotten in the act it would have looked more like a straight line down.  

cycles and cycles within cycles.   You are looking at a collapse and liquidation process that will take place over the rest of your lifetime and probably beyond that.

What Faber is talking about is the Federal government taking on the sole creator of new credit, of course it's unsustainable... why? because the real helicopter... all lemmings requesting new credit stop flying in 2007. 

Death spiral, there is no out except through the meat grinder.

Cheeky Bastard's picture

Mako you are eloquent and backed with hard cold facts today. Good job my son. Whoever believes there is ANY pragmatic chance of inflation only needs to look and chart SIFMAs most recent data reports. You can download them here and also you can have fun Excel-ing them. The picture is ... well . you'll see. *Disclaimer data is only about SPs and Standard FI; the most important markets for this debate.

Mako's picture

I find it strange how these people think we got to this point and why what is happening is happening.


Jasper M's picture

Those committed to inflationary expectations are 'fighting the last war'. Human nature, and one of those factors that ensures differences, and thus cyclicality. 


As for equity traders still speculating because "they are unable to help themselves" . . . .I . . .  I can quit anytime I want to!

spanish inquisition's picture

After reading above, let me rephrase to see if I get it. So what we are seeing is the end of the inflation bull market created by a fiat monetary system.

It is impossible to have tight monetary control, because the system is inherently corrupt. It takes x amount of years for the corruption to work its way from the bankers to financiers, through the politicians getting bought off and settling with the man in the street. Once the man in the street figures out the game and demands his cut it is the beginning of the end. The fiat system starts as a light skim off the top for a few to creating massive amounts of debt to keep the game afloat as more players get enter the game.

And usually ends badly for the ones last in the game.


Goldinsacks's picture

As long as they keep the box closed we can't see the dead cat.  So maybe inorder to prevent this from going any further someone were to shake the fuck out of the box.

GoinFawr's picture

'Harder' and 'Colder' facts:

"Adjusted to pre-Clinton (1990) methodology, annual CPI inflation was roughly 4.3% in June 2010, versus 5.4% in May, while the SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPI reporting methodologies back to 1980, was about 8.4% (8.37% for those using the extra digit) in June, versus 9.2% in May."

Remind me again, what are price increases usually indicative of? Oh right, I forgot, it's not 2007 so this is impossible; Nothing to see here folks, blinders and earplugs back in place please, carry on...

Cognitive Dissonance's picture

The Fed is desperate to get inflation ramped up again, which explains the unlimited fiat creation. The fact that deflation is still occurring in the face of unprecedented quantities of lighter fluid being poured on the open flames without a successful flare up is what keeps Ben and company walking the halls at night.

May we live in interesting times.

B9K9's picture

Mish, Denninger & TAE have been right about this all along. The total value of credit vs money in the aggregate credit-money system is orders of magnitude greater than money. I think Steve Keen mentioned last year that the Fed would have to print $25T to even begin making a dent. At this point, it could conceivably be $100T.

So what happens if Ben prints anything near the levels required? Well, it's simple arithmetic: if he increases the money supply by 10X, we should expect to see monetary (not credit eg home) prices increase by 10X. So gas would be $30/gallon, etc.

All this QE talk is pure nonsense - it's just jawboning. Money printing does nothing absent a desire by hundreds of millions of individuals to resume engaging contracts for credit (ie going into debt).

I think Ben's jawboning is a signal to the insiders that the jig is just about up. Some final gunning of the equities markets in (false) anticipation of printing, then the collapse. Printing does nothing for those who have already cashed out. TARP and the other programs instituted over the last 2 years made sure the power-elite got out & were made whole.

What do people desire when holding cash? For prices to drop. A Republican majority which embraces & implements "austerity" is exactly what the power-elite want. What they want is what they will get. Their only gamble is whether we go 1789 on their asses. Wake me when repudiation is on the table.

Mr Lennon Hendrix's picture

When the whole doelarrs are fractionalized it becomes enough to matter.  The doelarr is finished as a currency.  New ones will be appropriated shortly.

qussl3's picture

I'm no pro, and agree witht the broad conclusion that the absolute magnitude of credit>>>>>money, but I have a question.

What is to stop the liquidity that comes from Fed monetization from finding its way into smaller markets like commodities and driving inflation from the supply side?

I believe an example of this was the explosive 147/bbl run up in crude in 2008, what's to stop something similar from happening?

Jasper M's picture

The credit thus created is subject to market valuation. Since it can't conceivably be fully paid back, that value will be reduced from 'par', both of it and the rest of identical credit. 


The actual money is not only in vastly shorter supply, but harder to make quickly (it would take decades to physically print enough FRNs to fill this hole) which is why they prefer credit creation.


   The run up in crude you cite happened in market conditions of easy credit. With default looming for ALL credit classes, even sovereign, interest rates Will be higher, specs have no free money to play with. 

curbyourrisk's picture

Simple....true inflation is brought about by wage increases.....not price increase.  Price increases are a result of inflation....not a cause of it.  When wages rise, people feel good about themselves, hence they buy more and contribute to inflation (the perception).  The problem is, during the 1990's and 2000's it was not rising wages that caused inflation, it was excess credit.  people had more credit (money) so they felt good about themsleves.  the PEOPLE WERE TRICKED.....  Nice one Ben...  Fool us once, shame on us....fool us twice.....I DON'T FUCKING THINK SO......


Your a snake and your minions deserve a slow painful a thousands cuts..... 

Oh regional Indian's picture

Well said CYR.

Easy credit engenders an un-earned sense of entitlement.

Not a good thing.


traderjoe's picture

Inflation: tuition, health care, food, oil, taxes

Deflation: wages, house prices, consumer discretionary

Aggregate deflation => deflation => hyper-inflationary currency collapse

Amos Moses's picture

"Inflation: tuition, health care, food, oil, taxes"


Prime examples of why over time, subsidies are bad for the consumer.

Dr. Acula's picture

You are wrong: the inflation rate is positive, not negative.

>You had inflation from 1945 to 2007 of 5.5-15% annually, that stopped by the end of 2007 and went negative in 2009 and continues to be negative.  It's simple a fact.

No, it is positive:

Note that price inflation is not an objective measurement (the ratio of objective exchange values of any two economic goods may fluctuate). But whether you believe the government or John Williams (I lean toward the latter), the values are both positive.

And if you look at the money supply - an objective measurement - it's skyrocketing:

The problem you face, Mako, is to explain how the federal government with $100 trillion debt, and printing presses, will keep its monetary sphincter clenched and avoid pinching off more fiscal stimuli and bailouts. Yes, institutions will collapse. The structure of production will be wrecked. But the politicians will act to delay the government's own collapse: erelong we will be awash in a sea of green toilet paper.


ATG's picture

FedZ Q1 2010 found Household credit contracted -2.4%, Business 0%, State increased +4.3%, Fed increased +18.5%. Great time to have a Fed job...