February 14, 2018

As I’ve been stating for weeks now, inflation is the big theme for 2018 (Information is not Information 1/11/2018) (KEY MARKET STRATEGIES - January 3. 2018.pdf KEY MARKET STRATEGIES - January 3. 2018.pdf). Even the Fed’s ridiculous CPI measure is coming in higher than expected (though real inflation is now at 3%).

Why is this a big problem?

Because inflation is going to:

1)   Either blow up the Everything Bubble

2)   Force Central Banks to become more hawkish, thereby draining liquidity from the stock market.

As I outlined in my note The Endgame For Central Bank Policy , the Fed created a bubble in US sovereign bonds, also called Treasuries.

And because these bonds are the bedrock for the current fiat monetary system, the “risk-free rate” of return against which all risk assets are priced, when the Fed created a bubble in them, it created a bubble in EVERYTHING (stocks, commodities, corporate bonds, real estate, etc.).

This strategy worked (as far as the Fed is concerned) provided the bond market continued to remain in a secular downtrend.

This is where inflation comes in.

Treasury yields trade based on inflation (among other things).

When inflation rises, Treasury yields rise to accommodate for this.

When Treasury yields rise, Treasury prices FALL.

When Treasury prices FALL, the Everything Bubble begins to burst.

Well guess what? Treasury yields are SOARING having broken a 20 year downtrend.


Put simply, this chart is telling us BIG inflation is on the way.

Best Regards.

Deo Talaverano.

Chief Market Strategist DHF.

George Town. Cayman Islands.