January 23, 2018

Central Banks Are Going to Have to "Pull the Plug" on Stocks

It’s no secret that Central Banks have been funneling liquidity both directly and indirectly into stocks. However, what most investors don’t realize is that this liquidity pump is about to end.

Why?

Because the endless streams of liquidity (Central Banks continue to run QE programs of $100+ billion per month despite the global economy stabilizing) have unleashed inflation.

Forget the “official” date. That stuff is all propaganda. Take a look at what is happening in the bond markets which trade based on inflation in the real world.

When inflation rises, bond yields rise. And right now, sovereign bond yields are rising around the world.

The yield on the US 10-Year Treasury has broken its 20-year downtrend.

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The US is not alone… the yield on 10-Year German Bunds has also broken its downtrend.

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Even Japan’s sovereign bonds are coming into the “inflationary” crosshairs with yields on the 10-Year Japanese Government Bond just beginning to break about their long-term downtrend.

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Because if bond rates continue to rise, many countries will quickly find themselves insolvent.

Globally the world has added over $60 trillion in debt since 2007… and all of this was based on interested rates that were close to or even below ZERO.

Central Bank cannot and will not risk blowing up this debt bomb. So they are going to be forced to “pull the plug” on liquidity and “let stocks go.”

Put simply, if the choice is:

1)   Let stocks drop and deal with complaints from Wall Street…

Or…

2)   Let the bond bubble blow up, destabilizing the entire financial system and rendering most governments insolvent…

Central Banks are going to opt for #1 Every. Single. Time.

Warning: The Financial System Just Made a Tectonic Shift

Perhaps the best tool for anticipating major shifts in the financial system is the ratio between Treasury Inflation Protected Securities (TIPS): and the Long-Term Treasuries ETF (TLT).

In its simplest form, when this ratio rallies, the financial system is anticipating IN-flation. When this ratio falls, the financial system is anticipating DE-flation.

Below is a 10 year chart for this ratio. And as you can see, it has just broke out of a 10-year deflationary channel.

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This is an absolute game-changer.

If this breakout continues, then we have a confirmed shift in the entire financial system away from fearing deflation to EXPECTING inflation.

The impact this will have on all asset classes will be massive. And it’s about to blow up the Everything Bubble.

Bonds trade based on inflation.

If inflation rises, so do bond yields.

When bond yields Rise, bond prices FALL.

And when bond prices FALL, the massive debt bubble begins to burst.

On that note, the yield on the most important bond in the world: the 10-Year Treasury, has already broken above its 20-year trendline.

Warning: The Financial System Just Made a Tectonic Shift

Perhaps the best tool for anticipating major shifts in the financial system is the ratio between Treasury Inflation Protected Securities (TIPS): and the Long-Term Treasuries ETF (TLT).

In its simplest form, when this ratio rallies, the financial system is anticipating IN-flation. When this ratio falls, the financial system is anticipating DE-flation.

Below is a 10 year chart for this ratio. And as you can see, it has just broke out of a 10-year deflationary channel.

Globally the world has added over $60 trillion in debt since 2007… and all of this was based on interest rates that were close to or even below ZERO.

All of this is at risk of blowing up courtesy of this spike inflation.

Best Regards.

Deo Talaverano.

Chief Market Strategist DHF.

George Town. Cayman Islands.