The Inflation Era Has Arrived!

EconMatters's picture

By EconMatters   

IMF Says Inflation Pressures Non-Existent


The Federal Reserve isn`t the only one, everyone from the IMF, Bond Funds, Wall Street Analysts, Hedge Funds and the Big Banks are on the wrong side of the market both in terms of inflation already in the economy, current inflation expectations and being properly positioned or hedged for the inflation trade.   



The Wolf has Arrived, but investors ignored the Inflation Data


We have tried to warn market participants even three weeksago laying out what would happen to the CPI Data, and based upon many of the responses to our warning; the complacency on this issue regarding inflation is off the charts. The entire world is asleep at the wheel regarding bubblinginflation, when the stock market keeps putting in higher highs after a 35% year that should have been a warning sign that there is way too much liquidity in the system. 


Read More >>> Gloom and Doom Sells 

We noted that normally the market would go down on QE tapering, and the opposite caught many hedge funds off guard who tried to seasonally short the market in late April, and it is apparent that runaway inflation in terms of excess liquidity in the system is what is pushing the stock market higher. 


Above Trend Growth Equals Above Trend Inflation


But that is financial system inflation, we point to the stock market because that was a clue regarding inflation in the real economy that was well above what the trend had been the past 7 years. However, the PPI & CPI Reports for the last 4 months captured the above trend spike in inflation as well as the Employment Reports. Jan Hatzius, Goldman Sachs chief economist, says he believes the economy is now growing at an above-trend pace (see clip here). Goldman's own current activity indicator is showing its fastest growth since the crisis, according to Hatzius. Well, we really shouldn`t be surprised that above trend growth brings above trend inflation pressures into the economy.



It is obvious that everyone from the central banks to the yield chasing carry traders would want to discount inflation concerns in order to keep the proverbial party rolling along in terms of monetizing the debt at ridiculously low levels, and borrowing free money for eternity. But for every action there is a reaction, and it was only a matter of when and not if, that market forces, in this case higher inflation, would react to such an excessively loose monetary policy experiment.


The Massive Unwind & Fund Flows


Now that inflation is here the massive unwind will begin in anything from bonds, currencies used to initiate this yield carry trade, gold and silver, stocks and fund flows around the globe. There are a lot of crosswinds with markets like Gold, does it go up on inflation concerns and investors no longer chasing yield, or does it go down on rising interest rates and a strengthening dollar? This goes for stocks as well, do they continue to go up on inflation concerns and outflows out of the bond markets, or do they re-price on deleveraging of carry trades and raising rates for borrowing money?



Sell Anything with a B in it!


The no-brainer is bond yields they are going up considerably from current levels, maybe slowly at first, but this slow upward trend will be punctuated by 10 and 15 basis point jumps in yields as resistance levels get taken out, and investors are forced out of positions that they fell entirely too much in love with regarding bonds in the era of easy money. 


Key Technical Levels for the 10-Year Bond Yield


In the 10-Year we jumped from 2.59% to 2.65% today which is near the next resistance level which is 2.67% in yield. This is the key resistance level to watch in the 10-Year, once we break through this level 2.75% is the next major level of resistance. There is some resistance at 2.70% but this is a minor stop on the way to 2.75%. Once 2.75% is breached, the next resistance level on the 10 Year is 2.80%; this is the final barrier to hold before 3%. If 2.80% fails it is a straight shot to 3%, 2.80% is the last chance for any of the non-believers to get out before staring down a 3% yield in the 10-Year. 


Once we break through 3% then 3.15% to 3.25% is the next area to watch, a breakout of 3.25% means 3.5% is a strong certainty as this yield train will be rolling. Investors probably cannot wrap their minds around how poorly positioned the market is for this change in yields, we could hit 4% on the 10-Year even before Fed Rate Rises justify such a move, just on a market squeeze and overshoot alone, maybe even 4.5% is possible given that the current market positioning on the wrong side of this trade is just that massive!


A Big Forest of Historical Knowledge


It is human nature to extrapolate recent history and postulate this trend going forward, or in other words to think entirely far too micro in terms of missing the big picture and lessons of history. Ben Bernanke has been extremely guilty of this with his “Not in his lifetime thinking” in terms of normalized rates. 


Fundamental Laws of Nature Always Prevail in the End


At any rate, Interest Rates are going higher, whether people and investors like it or not, it is how markets work, even highly manipulated markets, because there are bigger fundamental truths that eventually play out called “Unintended Consequences”, and you can ignore them and even downplay them for a while, but eventually and as sure as the fundamental law of nature that everything has a cost, they make their presence known, and demand Center Stage, the Inflation Era has arrived!  


© EconMatters All Rights Reserved | Facebook | Twitter | Email Subscribe | Kindle

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
NoWayJose's picture

The real problem is that the Great Central Bank Experiment has so skewed selective portions of the economy that traditional definitions of inflation and deflation can no longer be applied to the situation we have today. It is clear that we will have inflation and deflation at the same time, on different things, while on our way to a global depression and currency re-set that will topple governments.

Cthonic's picture

Concur, except that it isn't 'selective portions' of the economy affected, it is every dollar denominated contract every time they open their fucking mouths.

JRobby's picture

Continuing "argument" about "what it is" in a substantially lowered level of demand marketplace.

madbraz's picture

Bank of America, is that you there?  Or is it Kevin Henry.  Or is it Steve Liesman.


If manipulators were able to short the 10yr to the 4% yield predicted by this bozo, perhaps 50% of all financial assets would migrate to the 10 year bond (and 30yr).  High yield would collapse, demand for stocks would collapse (not that there is any real retail demand anyway when the dividend yield is 1.8%), commodities (who earn no interest) would crash.  In a world where safe haven countries grow 0-2% (with manipulation) a treasury bond that paid 4% would anihilate demand for anything else.


Bid to cover on treasury auctions would be 6x1.  The immense treasury collateral shortage for the repo market (and idiotic rehypothecation supported by the FED) would become unsustainable as holders of US bills, notes and bonds would far outnumber rentiers (idiots who rent collateral to gamble on risky stuff).


And inflation, oh inflation, would rise from what?  From a hat?  From loss of faith in the currency by our supermarket owners (Costco, Walmart, Safeway etc)?  From rising labor costs?  From booming imports?  From the 1% of the population who own stocks that would buy all the steaks and fruits in supermarkets?


This is all so idiotic that it pains me to conclude that zerohedge may become just another mouthpiece for the establishment propaganda. 


I gave up reading the Wall Street Journal long ago, when it became evident that not one single article was investigative financial reporting without a serious bias - it became unreadable.  Fear the same might occur here.


By the way, saying that "interest rates are going higher because that's how markets work" is not a logical argument if you don't explain the mechanism to justify it.  There actually isn't any logic behind it because long term interest rates are not preset on a specific number - they are a function of real growth and issuer risk.  You may manipulate the short term higher or lower, but you will not succeed in manipulating the long end for very long - the cash flows associated with servicing debt need to be in line with the growth of the issuer, otherwise it is not sustainable in the medium to long term.   


The yield curve (2-10) is as steep as it has been since 1980 and I would venture to guess that it doesn't stay there for much longer (it has been above 2% since 2010).


The only likely issue here is that massive yield curve flattening trend is probably killing one of the TBTF banks bets in interest rate derivatives and the NY FED/ECB is aware of this.  This talk of policy, taper and all is very cute, but in the end of the day all that matters to them is to protect their masters and their gigantic bets in derivatives.





gmak's picture

"Now that inflation is here the massive unwind will begin in anything from bonds, currencies used to initiate this yield carry trade, gold and silver, stocks and fund flows around the globe."


I'm sorry. But, isn't that the definition of a DEFLATIONARY event - it begins with an unwind of prices in the credit markets and spreads to other asset classes.  Fear not, unless you are up to your eyeballs in debt. For the rest of us, prices move before wages. enjoy!

Börjesson's picture

"Once the reverse repo grows in line with the rate of QE, the monetary base and the price level should be linked again. Inflation in the US should pick up soon."
- Victor the Cleaner, June 5

meterman's picture

Read up on Iceland's policy on criminal banksters. If only that could happen here.

orangegeek's picture

And retail numbers were in the tank in April and May.


So prices are going up and fewer are buying.


Deflation folks.  There are only so many spare holding tanks for oil and other energies.


JerseyJoe's picture

Banks and government hate in lew of more printing, Janet will likely "go negative" as she perfers.   She could very well flush over $3T into the economy and inflation will blast off - possibly well beyond the control of the lever pullers.  

TheReplacement's picture

Do not forget Belgum when calculating the money printing.

TeethVillage88s's picture

IMF, ECB, OECD, Fed, as capitalist they seem to Omit much data as they "Control the Narrative".

Why should we believe official data simply because it is "Official"?


FED Sequestered Inflation in major asset Classes in their always "Lagging" analysis, just as IMF, ECB, OECD always lag behind any important economic trend and always "Fail" to protect the most important parts of the Economy.

We can go back and forth on what are the most important parts of the economy, but will agree that Main Street will probably pull out the Pitch Forks over stuff the Fed ignores.

We know we don't have all the data and the system is getting more and more complicated, linked, and opaque. Their Definition of terms simply hides the misery just as controlling the press and turning Mainstream Media in to Big Corporate Enterprises does. And just as Lobbying also controls information and turns it into "Spin".

We know Janet Yellen said we are missing a normal tail wind in our Economy, Housing (since the 2005 Housing Bubble started collapsing, we can't enjoy an economic boost from housing sales)

And I tend to have very broad approach to Inflation since normally every year federal budgets get an inflation factor added on to increase funding (standard budgeting). My interpretation of federal budgets since after 9-11 is mostly increases across the board except for job training and HUD. This was doubled down under all continuing resolution actions since 2009.

All kinds of things have inflated, but our banking culture has sequestered them from much scrutiny under the term "Inflation". It is perhaps no coincidence that these areas of inflation also appear to be part of "Economic Looting"

- Exploding Public & Private Compensation for Executives
- Exploding Tuition
- Exploding Health Care costs
- Systemically high Drug Costs
- Stock market
- Debt & Credit
- Foreign Owned Assets in the USA
- Federal Budget (Looks like 40% Increase from June 2007 - Mar 2014, is that the right way to interpret this?)

Sure we have bailouts & bankruptcy after the Fed is blind for 10 years to Housing, Financial Markets, Private banking, Derivatives, possible systemic fraud sold to pension or other funds, oh and high risks from non-standard accounting practices & Financial Ratings rife with conflicts of interest.

After Bailout & the accompanying Affordable Care Act, then we go back to being BLIND.

-No one remembers that in 1990s & 2005 they pushed through tougher laws on Bankruptcy for Individuals.
-Does SNAP, WIC and aid to mothers add to Inflation calculated by the Capitalist?
-Does payment of $60 Billion a year in Unemployment Benefits add to inflation by the Capitalist?
-If prices are going up and they are paid for by Government Social Programs, perhaps we need more apprenticeship programs, more incentives for small business creation, more jobs training, more free education in science, materials, agriculture, organic farming, water & produce purity, Waste & Recycling Management

AdvancingTime's picture

I contend the primary reason that inflation has not raised its ugly head or become a major economic issue is because we are pouring such a large  percentage of wealth into intangible products or goods. If faith drops in these intangible "promises" and money suddenly flows into tangible goods seeking a safe haven inflation will soar. Like many of those who study the economy I worry about the massive debt being accumulated by governments and the rate that central banks have expanded the money supply.

The timetable on which economic events unfold is often quite uneven and this supports the possibility of an inflation scenario. A key issue being one of timing. If the price of gas jumps to $8 a gallon overnight do you buy gas and not make your car payment or stop driving the twenty miles to work? Answer, it could be months before your car is repossessed so you buy gas. It is important to remember that debts can go unpaid and promises be left unfilled. Is this possible and if so where would that leave us? Chaos and major disruption would result from such a scenario. As we have seen from the economic crisis of 2008 and following many other unsettling developments legal actions can continue to drag on for years.  More in the article below.


disabledvet's picture

I think the wind down of stimulus will now continue at pace...if not post haste. we shall see tomorrow. this is not inflationary and will result in very slow growth if not an outright if mild "double dip recession" as pricing powers begin to truly wane here.

the amount of liquidity build up in the rallies of equities, debt and real estate simply defy description. The United States has never experienced a financial boom of this type ever in her history...across pretty much EVERY asset class no less.

The danger remains that prices fall and fall sharply as simply put demand has failed to materialize and We the Consumer are all totally broke right now. This fact is prima facie btw.

The backdrop to this obvious fact is an even more extraordinary "opening of the Oyster" of the Eastern Roman Empire and the Black Sea well as Libya and the "interior regions of northeast Africa." This is having immediate and dramatic impacts on markets as the dollar looks in desperate need right now and the best way to create them is to start producing in near "slave like" costs what ever the market desires. I will be keeping an eye on import prices to see if they start to fall here.

Already legislators are trying to "price support" steel by going after Russia.

JerseyJoe's picture

The Fed will act in the best interest of the banks.   So how will all the hundreds of trillion of derivatives fair if the Fed allows rates to spike?   If the answer is: "Not good", then we know the Fed will move to protect the banks.  This could include pausing tapering.  

So how many states will be forced to cut back, raise taxes or both in order to pay the increased interest costs of what is discussed above?  And what of the USG interest payments as short term debts rolls over?   

Let's not forget, Yellen favors negative rates and the Fed has over $3T on it's balance sheet that could flood the market with liquidity to force it into bonds...or stocks...or gold...

Point is, we are at a point of instability and while the Fed may try to postpone any new action, eventually something will happen whether by market forces or by last desparate attempts at manipulation but a safe bet is that whatever the Fed decides, will protect the banks first.  

MathWins's picture

The entire world is not asleep at the wheel.  A lot of us everyday people (you know, the ones that don't have millions invested in the market) are well aware of what's going on.  We are just sitting back waiting for the bubbles to POP.

dontgoforit's picture

The wave will be difficult to survive, no matter how well prepped or capable.  It will be a matter of luck in most cases.  But, I believe in helping yourself out.  We have a network with resources and an ageement to 'tribe' together pooling labor, security and resources.  I fear it won't matter though.  The government will make a point to appropriate those resources for spreading to the most in need (yeah right).  And IMHO, they will be willing to leave you dead to do so.

SgtShaftoe's picture

The Central Banks will under no circumstances allow deflation.  All one needs to do is read the work of Bernank, and Yellen.  Yellen wanted MOARRR printing over the last 7 years.  They will inflate until it explodes.  Nothing has changed really since 2008 except for the increasing size of the pending detonation that humanity won't soon forget. 

We're getting pretty close now.  The next year or two should be very interesting.  Permaculture, resilience, and community bitchez. 

litemine's picture

It's just too bad that the Private Bankers that control not only the American Economy but most of the World are protectected from their Criminal Activitys... Talk about Insider Trading.  Jail is too good for these who are in positionsof trust and Abuse that Position./  The force that makes Obama toe the Bankers line could snap if WE THE PEOPLE take back the Republic our families fought and died for.   Just wait till the Tax Man uses our money to hurd many into camps Jailing the most vocal without even a trial. The Guards so filled up on Steroids will just toy with inmates.............get ready to bend and your whole Family. 

JRobby's picture

"Jail is too good for these who are in positions of trust"

Exactly, so......  

Of course there are many that are non-violent and I admire and applaude that. In that case I suggest: BANK RUN!

Pemaquid's picture

We can only hope.