April 03, 2018

The First Wave of Inflation is Already Here... the Next One is the BAD One

The Prices Paid Index just rose for its fourth straight month to 78.1: its highest level since April 2011.

Why does this matter?

Because it’s a MAJOR warning that inflation is coming.

You see, when inflation hits, it doesn’t hit all at once. Instead it rolls out into the economy in stages.

The first stage occurs at the “production” level of the economy. In this stage, managers at large manufacturers/production companies will see a spike in the cost of goods and services they buy in order to supply their firms.

This cost is measured by the Prices Paid Index. Below is a chart from Investing.com which shows this metric. The trend here is obvious: UP.

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Initially, corporations will “eat” these increased costs by continuing to sell their goods and services at the same prices (despite the fact that their costs are increasing).

However, if the Prices Paid Index continues to rise, eventually corporations are FORCED to rise prices on the goods and services they sell.

THAT’s when inflation starts appearing on the retail side of the economy in the price consumers pay for things.

By the look of things, we're already there. As I noted yesterday, several of the Fed’s OWN in-house inflation measures are roaring.

The New York Fed’s UIG inflation measure is currently clocking in at 3.06%.

The Atlanta Fed’s “sticky” inflation measure is growing at an annualized rate of 2.2%.

Even the Fed’s heavily massaged Personal Consumption Expenditures (PCE) metric is growing at 1.8% on an annualized basis, only slightly below the Fed’s so-called target rate of 2%.

Even worse, the bond market has picked up on this. The yield on the 10-Year Us Treasury (the most important bond in the world.

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This is not an isolated issue either..

The yields on the 10-Year German Bund, 10-Year Japanese Government Bond, and 10-Year UK Gilt are all rising to test their long-term downtrends.

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If these trendlines break (as I expect they will in the coming weeks) it will mark the beginning of the end for The Everything Bubble.

All told, there is over $199 trillion in debt outstanding and an additional $500+ trillion in derivatives trading based on these bond yields.

So when this bubble bursts (as all bubbles do) we will experience a crisis many magnitudes worse than 2008.

Suffice to say, the opportunity to make MASSIVE gains from this trend is HUGE.

The Inflationary "Needle" Just Hit the Everything Bubble

The Fed is lying about inflation.

How do I know?

Because several of the Fed’s OWN in-house inflation measures are roaring.

So when I read that “inflation is subdued” or isn’t “rising fast enough” to warrant concern, I know the Fed officials claiming this aren’t even bothering to look at the Fed’s own data.

Even if you don’t believe the Fed’s data, the $199 TRILLION Bond Market is SCREAMING inflation.

The yield on the all-important 10-Year US Treasury has made a confirmed break above its long-term downtrend.

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Bond yields trade based on inflation. And this chart is telling us that inflation is spiking higher.

This is not an isolated issue either..

The yields on the 10-Year German Bund, 10-Year Japanese Government Bond, and 10-Year UK Gilt are all rising to test their long-term downtrends.

If these trendlines break (as I expect they will in the coming weeks) it will mark the beginning of the end for The Everything Bubble.

All told, there is over $199 trillion in debt outstanding and an additional $500+ trillion in derivatives trading based on these bond yields.

So when this bubble bursts (as all bubbles do) we will experience a crisis many magnitudes worse than 2008.

Suffice to say, the opportunity to make MASSIVE gains from this trend is HUGE.

How to Play the Final Blow Off Top

As I noted yesterday, stocks still have some life in them.

Calling the precise top of a bubble is all but impossible. This is particularly true when you have a White House that openly admits it views stocks as a “report card.”

Rarely does the one being graded have the ability to manipulate the results of his or her “report card.” In this case, the White House does.

Having said that, my current blueprint for what’s to come is as follows:

1)   The Tertiary Bubbles burst (has already happened).

2)   The Secondary Bubbles burst (coming later this year likely during the summer).

3)   The Primary Bubbles burst (late 2018/ early 2019).

The Tertiary Bubbles were bubbles based on specific investing strategies in stocks (as opposed to stocks themselves). I’m talking about “shorting volatility” and “risk parity” fund strategies.

That bubble blew up in February, erasing years’ worth of gains in a matter of days.

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Investors, still crazy about risk, were willing to see this as a “mulligan” and piled back into stocks (the Secondary Bubble). Given how bullish sentiment remains, I believe we’ve going to see a final push higher for a “blow off top” in stocks running into this summer.

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This “blow off top” is based on the breakout above the long-term channel that has determined the stock market's price action since the 2009 low. Investors, emboldened by this development, will push stocks to a final parabolic move higher.

Regards.

Deo Talaverano.

Chief Market Strategist DHF.