July 16, 2018

Warning: The Everything Bubble is in SERIOUS Trouble

As we noted on Friday, the official inflation metric, called the Consumer Price Index (or CPI) is designed to HIDE inflation, not measure it.

Case in point, over the last two months, the CPI has relied on the collapse in prices of various non-essential items (airline tickets, hotel rooms, etc.) to “cover up” the increase in energy, housing, and the other items we all need.

And yet, even despite this “massaging” of the data, the CPI has hit 2.9%.

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Put another way, inflation is running so hot right now that even with various gimmicks in place, the CPI is STILL closing in on 3%.

The UIG now has inflation at 3.3%.

Why does this matter?

Why is this a big deal?

Because TREASURY bond yields trade based on inflation. If inflation is soaring higher, bond yields will also rise to accommodate this.

If bond yields RISE, bond prices DROP.

And if bond prices DROP enough, the Debt Bubble bursts.

With that in mind, consider that yields on Treasuries have broken their long-term 20-year trendline.

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This is a MAJOR problem. The entire debt bubble requires interest rates to remain LOW in order for it to be maintained.

Inflation is screwing this up for the Fed... which now faces a NASTY choice… continue to support stocks or defend bonds… and unfortunately for stock investors, it’s going to have to choose bonds.

Put another way, I believe there is a significant chance the Fed will let the stock market collapse in order to drive capital BACK into the bond market to force bond yields down.

Yes, the Fed has screwed up with monetary policy. And it is doing so intentionally to try to sustain the Debt Bubble. Currently the downside target for the collapse is in the 2,300-2,450 range.

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Real Inflation Hits 3.3%... The Fed Will Have To Choose Which Bubble to Burst

Anyone who continues to claim the Consumer Price Index (CPI) actually measures REAL inflation is in abject denial.

In May of this year, the BLS managed to claim that CPI only rose a measly 0.2% due to the fact that used car prices and airfares dropped. Yes, the BLS used the drop in those two items to negate the sharp rise in healthcare expenses, energy prices, housing prices, and even food prices.

The BLS was at it again in the most recent CPI, this time using a RECORD drop in HOTEL COSTS to insure that inflation rose only 0.1% in June.

What makes this spectacularly ludicrous is the fact that the Fed’s “in-house” inflation measure, the Underlying Inflation Gauge (UIG), shows REAL inflation is well over 3%

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

Best Regards.

Deo Talaverano.

Chief Market Strategist DHF.

George Town. Cayman Islands.