May 02, 2018

The Single Most Important Fact That 99% of Investors Are Ignoring

The single biggest issue… the one that 99% of investors continue to ignore when it comes to investing or making forecasts… is the fact that Central Bank rigged the entire financial system post-2009.

They did this by cornering the sovereign bond market.

Because sovereign bonds are the bedrock of the current fiat, debt-based financial system (the risk-free rate of return against which all risk is valued), when Central Banks did this, they literally created a bubble in Everything.

This has NEVER happened before. Never in the history of mankind have we had every major Central Bank rigging the entire financial system together.

As a result of this, it truly is "different this time" and not in a good way.

With that in mind, if you’re looking to successfully navigate the markets, you need to concentrate on what the bond market is doing.

Bonds have been the primary focal point of Central Banks, as such what bonds do provides us with insights into what Central Banks are doing and by extension what other asset classes will be doing going forward.

On that note, the bond market is currently predicting a massive inflationary development.

Perhaps the single best metric for measuring inflation vs. deflation for the bond market is the TIPs vs. Long US Treasury ratio.

In its simplest rendering when this ratio rises, it means inflation is on the rise. When it falls it means deflation is dominating the bond markets.

As you can see in the chart below, this ratio has just broken out of a 10-year deflationary downtrend. This is the FIRST confirmed breakout since the 2008 Crisis. And it signals a tectonic shift towards inflation is underway in the financial system.

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A 1-in-10 Year Shift Has Hit the Markets and No One's Talking About It

The markets are moving into their first MAJOR inflationary spike in TEN years.

Perhaps the single best metric for measuring inflation vs. deflation is the TIPs to Long US Treasury ratio. In its simplest rendering when this ratio rises, it means inflation is on the rise. When it falls it means deflation is dominating the bond markets.

As you can see in the chart below, this ratio has just broken out of a 10-year deflationary downtrend. This is the FIRST confirmed breakout since the 2008 Crisis. And it signals a tectonic shift towards inflation is underway in the financial system.

We are seeing a similar breakout in the velocity of money, which measures the speed at which money moves throughout the financial system. Here again we are seeing our first upwards breakout of a previous downtrend in ten years.

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Take note, both the BOND MARKETS and the VELOCITY OF MONEY are screaming that the financial system has made a 1 in 10 years shift.

The BAD Stage of Inflation Has Officially Hit (Prepare Now!)

The BAD stage of inflation has officially hit.

As I have noted previous, inflation enters the financial system in stages. The first stage involves a jump in prices paid by producers. This means that those firms responsible for manufacturing goods and services, suddenly see a sharp spike in the cost of basic materials they use to build/ manufacture.

That process began in early 2016 and accelerated throughout 201 into this year.

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The next round of inflation… the BAD one… occurs when these prices remain elevated long enough that firms are forced to raise the prices of their finished goods/ services in order to maintain profits.

The BIG tell on this is when you start seeing wages jump. This means that the cost of everyday items is rising fast enough that employees start demanding raises in order to afford their quality of life.

We have officially hit that point with Year over Year wages jumping 2.9% in the first quarter. This is the largest jump since Q32008, when the US was completing a MASSIVE credit cycle and about to plunge into the worst recession in 80 years.

Put simply, inflation has officially seeped into the economy in a MAJOR way. We are now at the point at which wages are rising... and the Fed is hopelessly behind the curve.

Small wonder the bond market is blowing up. Bond yields rise along with inflation. Does this chart look inflation is "contained" to you?

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We are literally at the beginning of a MAJOR change. Those who get in early on this trend will generate literal fortunes from the right positioning.

Regards.

Deo Talaverano.

Chief Market Strategist DHF.