May 22, 2018

Let me let you in on a little secret...

Central Bankers don’t actually WANT inflation.

The Fed’s “inflation target of 2%” is a giant ruse. The Fed has no clue how to create or control inflation. They even admitted this in the minutes of the July 2017 FOMC meeting.

So if the Fed has no clue how to create or control inflation… why even bother with a target to begin with?

Because having a “target” gives the Fed some goal that it can claim to pursue, while it papers over declining living standards in the United States.

Put another way, the inflation is a distraction from the real scheme that has been playing out since the early ‘70s.

That scheme involves issuing endless amounts of debt and credit to cover up the fact that incomes are not rising in line with costs of living in the US.

We see this all the time (why are two parents required to work to makes end meet when one parent could cover an entire family back in 1970?) but because the erosion of “quality of life” is so gradual, no one ever flips out.

The problem with this scheme (issuing endless debt and credit) is that if it persists long enough… REAL inflation hits.

And that is a MASSIVE problem for the Fed.

Why?

Because bonds trade based on inflation. When inflation rises, bond yields rise to account for it.

When bond yields RISE, bond prices FALL.

When bond prices fall, the Bond Bubble bursts.

When the Bond Bubble bursts, the EVERYTHING bubble follows.

Which brings us to today...

As I write this, the yields on Germany’s, the United States’, and Japan’s government bonds are ALL breaking out to the upside having broken multi-year trendlines.

1jpg

This is a MASSIVE deal. It is telling us that it is getting harder and harder for these countries to service their debt loads.

Eventually this is going to trigger a debt crisis. And when it does, the crisis will be far larger than that of 2008.

Let's Cut Through the BS About Central Bank Balance Sheet Reduction

There. Is. No. Exit.

Once a Central Bank begins to employ ZIRP and QE for years at a time, there is no going back. If you don’t believe me, take a look at Japan.

Japan is ground zero for Central Bank monetary insanity. The Fed first employed ZIRP and QE in 2008. Japan went to ZIRP in 1999. It launched its first QE program in 2000.

And it never looked back.

There were brief periods in which the Bank of Japan would NOT employ QE. But as soon as Japan’s economic data turned south… you guessed it… MORE QE... and not for a month or two... this has been going on for 18 years.

The end result is that today the Bank of Japan’s balance sheet is roughly the size of the country’s GDP.

2jpg

The BoJ now owns MORE Japanese stocks than foreign investors do. It is a top shareholder in 90% of the Nikkei’s largest 225 companies and owns an astonishing 74% of Japanese ETFs.

Worst of all... this is where the Fed, ECB, BoE, and SNB will all be heading as soon as the next crisis hits.

I realize I probably sound insane saying this, but consider the following…

Back in 2003, if someone had suggested the Fed could cut rates to ZERO and hold them there for SEVEN YEARS while engaging in over $3.5 TRILLION in QE, they (the person suggesting this as a possibility) would have been called insane.

Fast forward to today, and here we are, with the Fed having only just raised rates to 1.75% (roughly where rates usually BOTTOM when the Fed eases during a recession) and with a balance sheet the size of Germany’s GDP.

And mind you, the next crisis is going to be even bigger than that of 2008.

The 2008 crisis was triggered by debt deflation in mortgage-backed securities… a relatively junior level debt instrument.

The coming crisis will be triggered by debt deflation in SOVEREIGN bonds… the SENIOR-most debt instrument on the planet and the bedrock of the current financial system.

The time to prepare for this is NOW before the carnage hits.

Best Regards.

Deo Talaverano.

Chief Market Strategist DHF.

George Town. Cayman Islands.